Welcome to the Peabody Q4 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then one on your touch tone phone. To withdraw your question, please press Star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Karla Kimrey, Vice President of Investor Relations. Please go ahead.
Good morning, and thanks for joining Peabody's earnings call for the 4th quarter of 2022. With me today are President and CEO, Jim Grech, and CFO, Mark Spurbeck. Within the earnings release, you'll find our statement on forward-looking information as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there along with our public filings with the SEC. I'll now turn the call over to Jim.
Thanks, Karla, good morning, everyone. Before we get started this morning, I'd like to take a moment and welcome Karla Kimrey to her new role as Vice President of Investor Relations and Communications for Peabody. Karla has over 25 years of experience in investor relations, with seven of those in the coal industry. In the Q4 and full year of 2022, Peabody's diverse portfolio produced substantial, and in many cases, record-breaking results. We had record Free Cash Flow in the quarter and record net income attributable to common stockholders. This performance enabled us to retire all our remaining senior secured debt, which was a key milestone in the execution of our anticipated shareholder return program, which we expect to be implemented in the near future. We did have weather challenges in the quarter that we had to overcome in both the U.S. and Australia.
In the U.S., the extreme cold weather in December resulted in a substantially disrupted rail service for the PRB. In Australia, the intense rainfall during the quarter impacted production, sales, and in turn, costs. We did feel the impact of greater than anticipated inflation across all our operations, and we're working diligently to control those costs. Before I go into the discussion on markets and our platform, I speak for our entire management team as we would like to sincerely thank our global employees for their continued hard work and their focus on working safely. In 2022, we had our lowest annual global injury rate ever, and three of our mines reported zero incidents. Dedication and commitment of our employees allowed us to deliver the strong results we're announcing today.
As we look forward, the diversity of our platform from a product standpoint to a geographic one has allowed us to take advantage of favorable market conditions while safely managing through the operational challenges. Now, turning to the global coal markets. Seaborne coal prices remain volatile, with near-term markets being driven by shorter-term issues, such as an abnormally warm European winter, reduced coal production levels during the wet season in Australia and Indonesia, and the trade flow of LNG. Market focus is now on the reopening of China's industrial activities post their stringent COVID-19 suppression efforts. This is expected to set the trajectory of China's energy requirements in the near term, and early indications suggest an increase in demand for seaborne thermal coal. During January, Australian thermal coal producers began supplying coal to China, the first time in over 18 months.
Elsewhere, there is evidence of economies taking measures to ensure adequate supply of scarce seaborne thermal coal, such as India, where a new minimum import requirement for domestic power stations has been set for 2023. Overall, we anticipate continued near-term market volatility as coal demand fluctuates and supply remains constrained across the globe. Global thermal coal markets remain fundamentally sound, with pricing above historical levels. This takes into account recent downward trends in seaborne thermal prices that are in response to a warm European winter, leading to higher gas storage levels and coal inventories. Within the seaborne metallurgical market, steel output remains subdued, but there are signs of increasing output in response to improved steel prices in some markets.
Even under these conditions, the supply of key metallurgical products has remained constrained due to geopolitical issues and production disruptions from wet weather and coal operation outages, which have led to a further tightening of the market resulting in higher prices. The metallurgical coal market is also expected to be supported by increased import demand for steelmaking raw materials as China increases steel production rates in response to an anticipated rebound in economic growth. In the United States, overall electricity demand increased more than 3% year-over-year, positively impacted by weather and economic activity. Electricity generation from thermal coal has declined year-over-year due to coal conservation by utilities, transportation issues impacting coal deliveries, and higher renewable generation. In 2022, coal inventories at utilities declined approximately 6% or 5 million tons.
Natural gas prices have come off due to a combination of very mild winter weather and near record gas production levels. U.S. natural prompt gas prices are approximately $2.50 per MMBtu the lowest level since January 2021. The EIA is currently forecasting that the Henry Hub natural gas spot price will average approximately $3.40 per MMBtu for 2023. Moving on to the Q4 . Our operations generated record Free Cash Flow in the quarter despite ongoing recovery from heavy rains in Australia and weather related rail disruptions in the PRB.
Our seaborne thermal segment had its highest quarterly sales volume for the year as Wilpinjong and Wambo bounced back from the prior quarter's heavy rains, which continued into the Q4 , resulting in a quarterly rainfall which was about 40% higher than the historical 10-year average for the Q4 . Our seaborne met segment benefited from 22% higher realized prices over the Q3 2022 realizations. We successfully completed a longwall move at Metropolitan and are ramping back up to full production in the Q1 of 2023. In the U.S., PRB sales volumes were negatively impacted in the quarter primarily because of the abnormally cold weather in late December, which significantly restricted rail movements in the basin. We had two cold snaps in December. During the first one, our PRB operations only had 8 or 9 trains a day versus the planned 18.
During the second cold snap, we only had 1 train a day when 18 were planned. Our other U.S. thermal mines performed well. Gateway and Bear Run produced strong volumes and ramped up as expected. While Bore opened 2 new pits, enabling us to sell some higher priced coal, albeit at higher cost to produce, but at much better margins. We were able to extend the life of our operations in New Mexico with a new 8-year contract extension at attractive terms. We are essentially sold out at all of our U.S. domestic operations for 2023, and the railroads are focusing on improving service levels from last year's challenges, including weather and staffing levels. I'm proud to say that in 2022, our company's operations had very effective reclamation efforts.
In the US, we were able to reclaim 1.5 acres for every acre disturbed and 1.25 acres overall, including our Australian operations. At North Goonyella, we have begun the initial redevelopment efforts and expect to spend approximately $120 million in 2023. Our drilling program is underway with 2 rigs operating 24 hours a day to support the re-ventilation and planned re-entry to a previously sealed area called Zone B. We are commissioning the main ventilation fan, and that is targeted to start operating in the very near future. Orders have been placed for critical equipment, including 2 new continuous miners, shuttle cars, conveyors, and electrical installation equipment. As a reminder, North Goonyella is a premium-grade hard coking coal longwall operation in Queensland, Australia, with over 70 million tons of reserves.
This operation's grade of coking coal is considered to be the cornerstone of coking coal feedstocks globally. North Goonyella is expected to meaningfully increase Peabody's metallurgical coal production and generate approximately 25% returns at historical long-term prices in this initial phase. We continue, along with other companies, to urge the Queensland government to roll back their extreme royalty structure. This is resulting in discouraging investment and the loss of jobs and local business opportunities that we can deliver to local communities. I am proud to say we had a terrific 2022, setting the stage for another strong year with a significantly improved balance sheet, which allows us to focus on implementing shareholder value return programs. I'll now turn it over to Mark to cover the financial details.
Thanks, Jim, good morning, everyone. In the Q4 , we recorded net income attributable to common stockholders of $632 million or $3.92 per diluted share and Adjusted EBITDA of $501 million. We reported record Free Cash Flow of $580 million and had $1.3 billion of cash at December 31st after repaying all of the remaining senior secured debt. For the full year, we had record net income attributable to common stockholders of $1.3 billion, a 260% increase over the prior year. Adjusted EBITDA more than doubled to $1.8 billion. Our strong financial performance allowed us to retire all $545 million of the remaining senior secured debt in the Q4 , completing the repayment of over $1.1 billion for the full year.
We are actively addressing the reclamation surety agreement to arrive at a sensible, straightforward path to pre-fund all final reclamation costs and eliminate the remaining restriction on shareholder returns. We are optimistic this will be completed in the near future. Turning now to Q4 and full year results. In the quarter, seaborne thermal recorded Adjusted EBITDA of $209 million, a 22% increase over the Q3 as export volumes increased 700,000 tons to $2.3 million. Cost per ton were 12% lower due to higher volumes and lower sales price-sensitive costs. The segment generated $648 million of Adjusted EBITDA for the full year, an increase of more than 80% compared to 2021. Adjusted EBITDA margin per ton more than doubled, resulting in margins of 48%.
The Seaborne Metallurgical segment generated $188 million of Adjusted EBITDA in the Q4 , up 66% from the prior quarter, driven by 22% higher realized pricing and 200,000 additional tons. Costs increased $14 per ton due to higher sales price sensitive costs and a longwall move at Metropolitan. For the full year, Adjusted EBITDA was $782 million, up over 330% from 2021. Adjusted EBITDA margin was 48%, nearly two times that of the prior year. The U.S. Thermal Mines delivered eighty-two and a half million of Adjusted EBITDA in the quarter and $310 million for the full year, both higher than the prior year comparable periods. The PRB mines generated $24.7 million of Adjusted EBITDA in the quarter and $68.2 million for the year.
The story for the Q4 was weather further impacting already challenging rail performance. Severe winter weather in December resulted in the loss of approximately 1.1 million tons. Together with higher black lung excise taxes from the Inflation Reduction Act, costs were temporarily higher, squeezing margins to $1.17 per ton in the Q4 . The other US thermal mines generated $57.8 million of Adjusted EBITDA and $242.4 million for the year, an increase of nearly 50% compared to the prior year. During the quarter, we shipped 5 million tons, beating prior guidance. For the year, the segment increased shipments by 1.5 million tons and improved Adjusted EBITDA margins to 25%. Now happily turning to the balance sheet.
At December 31st, we had $1.3 billion of cash after repaying all of the remaining senior secured debt. Accounts receivable stood at $465 million, reflecting strong Q4 shipments and robust realized prices. At December 31st, we had $255 million of cash margin posted for the remaining 552,000 metric tons of Wambo coal hedges that will settle in the H1 of 2023. We also increased our cash collateral for final reclamation to $150 million. Let's turn to our outlook for 2023. seaborne thermal volumes are anticipated to be 15 million tons, including 9 million-10 million export tons. Exports are increasing 1.5 million tons compared to 2022 as production shifts towards higher quality Wambo tons and away from lower cost Wilpinjong tons.
Approximately 1.5 million export tons are priced on average at AUD 206, which includes the remaining hedges at AUD 84 per metric ton. We are expecting to ship 5.5 million tons to domestic Australian customers, inclusive of the recent New South Wales domestic supply requirements. Costs are projected to be AUD 52-AUD 57 per ton, reflecting higher export tons, a greater mix of Newcastle quality Wambo tons, and higher sales price sensitive costs. While unit costs are expected to increase about AUD 10 from 2022, we will see substantial margin expansion from the additional export tons. Q1 seaborne thermal export volumes are expected to be 1.8 million tons, less than ratable due to a longwall move at Wambo and recovery from heavy rains in the quarter.
Related costs per ton are also expected to be temporarily higher at $60-$65 per ton. seaborne metallurgical volumes are projected to be 7 million-8 million tons, an increase of nearly 1 million tons over the prior year, primarily driven by the completion of the Moorvale South project and Shoal Creek's continued progression through tough geological conditions. Approximately 900,000 tons are priced on average at AUD 216. Costs are expected to remain at AUD 120-AUD 130 per ton as lower sales price sensitive costs are offset by continued inflationary pressures. Q1 seaborne metallurgical volumes are expected to be lower than ratable at 1.4 million tons due to heavy rain in Queensland and challenging conditions at Shoal Creek.
Costs are expected to be temporarily higher at $140-$150 per ton. Middlemount results for 2023 are expected to be ratable to the just completed quarter. In the PRB, we are projecting volumes up to 95 million tons, with 92 million tons priced on average at $13.60. Costs are expected to be $11.25-$12 per ton, about $0.50 lower than last year as higher volume and lower strip ratio more than offset higher royalties and black lung taxes. Adjusted EBITDA margins per ton are expected to double from the margins realized last year. Other US thermal volumes are expected to remain at current elevated levels of 18 million tons-19 million tons.
We have 18.6 million tons priced at an average of $50.50. Costs are expected to be $38-$42 per ton. Capital expenditures are estimated at $325 million, including $200 million of high return project capital, which includes $120 million for the development of North Goonyella and $40 million for the Shoal Creek longwall kit. The remaining sustaining capital of $125 million is at the low end of our previously announced run rate. In summary, the company continued to generate substantial Free Cash Flow from our unique diversified portfolio, finished the year with $1.3 billion of cash and no secured debt, and made prudent progress toward a revised agreement with our reclamation surety providers.
Together, Peabody has set the foundation for a financially resilient company with an unmatched opportunity to return Free Cash Flow to shareholders. I'd now like to turn the call over for questions. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. We'll take our first question from Lucas Pipes at B. Riley Securities. Please go ahead.
Thank you very much, operator. Good morning, everyone. Jim , First, congratulations on the good work. It sounds like you are really close to a capital return announcement. I wondered if you've given some thought as to what the structure could look like. Across the industry, we've seen frameworks where almost all of the Free Cash Flow is paid out. We've seen others where 35-50% is paid out and kind of the payout ratio is stepped up as balance sheet milestones are reached. How do you think about the magnitude of capital returns once you have the final nod? Thank you very much for your perspective.
Good morning, Lucas, and thank you for those kind words. You know, we are in active negotiations right now with the sureties. It's, you know, we don't wanna get too far ahead of ourselves with details, but we did make some comments at Investor Day about some of the concepts we were looking at. Mark, you wanna elaborate on some of those, please?
Yeah, sure. Good morning, Lucas. Good to be with you this morning. You know, as we mentioned at Investor Day, any shareholder return program that we're looking at is certainly gonna be proportional to Free Cash Flow, and it's gonna be flexible to return cash to shareholders through both buybacks and dividends. When we look at a broad spectrum of companies with shareholder returns, programs, those companies that, return the most, and utilize both dividends and buybacks have performed best over time. So that's not lost on us. You know, closer to home, we like what we've seen, from some in our industry and, we have a few good templates to use and improve upon.
You know, as Jim mentioned, you know, we're not ready to share any more details with you today. Expect more in the near future.
Very helpful, Jim and Mark. Thank you for that perspective. For my second question, I wanted to turn a little bit to the domestic market. It's been roughly six weeks since natural gas prices corrected very meaningfully. Wondered first, how has this impacted your outlook, if at all? As you look to the 2024 domestic book and the PRB and other domestic thermal, how are price negotiations going? How are contract negotiations going? Could you share what you have currently priced at the price, if possible, for 2024 in the domestic segments? Thank you very much.
Lucas. For 2023, you know, we have a solid sales book. As we stated, we are completely sold out both in the PRB and our other U.S. thermal mines. We have a really strong hand there. So far, you know, the shipments have been going, you know, the nominations have been there and the demand has been there. Our customers, particularly our PRB customers, are still short of their target inventories, even though they're burning less coal. They're still short of their inventory. The demand is there. The challenge we're having is with rail service in the PRB, which was a challenge we had last year and has continued into the start of this year.
Still with crew shortages, also there's been some tough weather in the PRB. We are expecting to see that turn around here in the coming months. Both railroads have additional crews coming on in February this month, we're expecting to see some improvements in the rail performance. At the moment, that really Lucas is nothing that I would say that we're seeing from the customer side. It's more of a transportation issue, which is a carryover from last year. The question you had about 2024, you know, we again have a very strong sales book for 2024. In the PRB, we're sold to around 80% of that midpoint of our 2023 guidance.
In our other, U.S. operations, we're sold around to about 60% of that midpoint of our 2023 guidance. You know, those were all locked in last year. I would say, you know, in terms of pricing, we don't discuss specific pricing going forward, at that time. Since they were locked in last year, I would just say that, you know, the pricing is what we would consider to be favorable.
That is super helpful. Jim, Mark, and team, your team, continued best of luck. I really appreciate the details.
Thanks, Lucas.
Thank you, Lucas.
Ladies and gentlemen, as a reminder, to ask a question, please press star then one. Our next question comes from Nathan Martin at The Benchmark Company. Please go ahead.
Hey, good morning, everyone. Congrats on getting the senior secured debt paid down, and thanks for taking my questions.
Good morning. Thank you.
Yeah, thanks. Maybe looking at a bigger quick picture question to start. Jim Grech, you made a couple brief comments on this in your opening remarks, but how does China's reopening to, you know, Australian coal specifically affect Peabody? You know, how much of an opportunity does that possibly present to you guys?
Nate, if I could, I'd like to answer that in the scope of maybe a bigger view of the market in total, which would encapsulate Peabody and China. you know, the market in total and the international markets, we've said and still are saying that there is a significant barriers to entry on the supply side. When market demands increase, you know, the supply side does not respond because of these high barriers to entry.
Taking that into account, that there is no quick supply-side response, if we just start looking at the seaborne met markets and where they are now and what the potential impact of China could be on that, you know, the prices right now are currently 88% above 2022 lows, so sitting in that $380 range versus $203. That's because demand right now is solid and is showing some signs of increasing. Demand in India, Japan, Korea, and even some in Europe has increased. At this point in time in January, we had more metallurgical coal floating in the seaborne markets at any time since July of last year. The metallurgical demand has been good and is increasing in some of these markets.
You throw China into that mix, and then you add in the weather disruptions that have occurred in Australia, and that's why you're seeing these current prices with the strength they have, with potential for those prices to be sustained or maybe even improve, depending on how quickly China, you know, gets back into the market and starts pulling coal out of the market. Seaborne thermal, maybe we're at the opposite end at the moment in the market right now. The prices are lowest that they've been since January of last year, mainly due to the mild winters in Europe and the Eastern US. You know, the same, Nate, the same fundamentals exist in the seaborne market, maybe even more severe when it comes to the barriers of entry than metallurgical coal.
There's no quick supply response, if at all. We think with the growing return to normal weather, we think there's gonna be growing energy demands. You see the increased demand for metallurgical coal, with some signs of increased energy demand. You add China into that mix, and we see the thermal prices rebounding, international thermal prices rebounding later this year.
Very helpful, Jim. Appreciate those comments. Maybe sticking with your Aussie operations for a second. I think you guys touched on this a little bit, but the seaborne thermal cost guidance for 2023, you know, higher than expected, up about, it's like $7-$12 year-over-year, to a range of $52-$57, if my math's correct. I mean, can you be a little bit more specific around what's driving that increase? Is it something in particular at Wambo or Wilpinjong? Just any additional color would be great.
Nate, it's really driven by the mix, and it's really the shift of production to Wambo, both the open cut joint venture with Glencore as well as the underground mine in Wambo. Again, that produces a Newcastle quality thermal coal, and away from Wilpinjong. Wilpinjong is gonna produce less. That's our lowest cost mine in the portfolio, and one of the lowest cost seaborne thermal producers in all of Australia. Less production at Wilpinjong. More importantly, though, is the increase in the export tons. Those export tons, you know, increasing 1.5 million tons. We're gonna see some substantial margin expansion given those additional export tons. They come along with a little bit higher cost. Wambo, particularly the underground, a higher cost structure, as you can imagine.
Also need to wash some additional coals at Wilpinjong, as well as the port and rail costs for those export tons. That's really driving it. There's some higher sales price sensitive costs as we look at realizations as well. I'll gladly take, you know, $10 higher cost for another 1.5 million export tons in that margin expansion.
Appreciate that, Mark. Then maybe while I have you know, you gave us some good guidance last quarter on the other operating cost line item. Again, I know that's kind of lumpy with trading and brokerage. You also called out, I think, another $200 million of hedges, looking to roll off in the H1. Any thoughts on how that line item or the hedges could look like over the next few quarters?
Yeah. Two things. One, remember, in the Q1 of 2022, we had realized about $35 million of hedge losses. That's really just weather-related production delays, and delivering some of those hedge tons, you know, later in the year. In the Q3, if you remember, we delivered a portion of those tons, when the average price was $420 per metric ton, versus, you know, the $264 in the Q1. We recorded about a $27 million gain in coal trade on the Q3. Again, in a similar fashion in the Q4 , we delivered the remainder of those tons, when the average price was $380, realized another $24 million in coal trading profits in the Q4 .
Uh, as we go into, uh, next year, we're seeing, uh, o-opportunities for, uh, uh, uh, in a-- in our blending program and in our coal trading program. So, uh, as we've typically done, we see some of that as well as delivering some of the, uh, fixed price tons that we have. So I'd expect a, a decent quarter here in the Q1 for coal trade, uh, again.
Perfect. I'll leave it there for now. Appreciate the time, guys. Best of luck in 23.
Thanks, Nate.
Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Mr. Jim Grech for any additional or closing remarks.
Thank you all for joining us today. I'd especially like to thank our employees for remaining focused on safety and for continuing to execute on our various initiatives. I'd also like to thank our customers, investors, insurance providers, and vendors for your continued support. Operator, that concludes our call.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.