Peabody Energy Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017; filed November 3, 2017. Amounts are in U.S. dollars. Peabody emerged from Chapter 11 on April 3, 2017 and applied fresh-start accounting. Accordingly, Q3 2017 Successor results are not fully comparable with Q3 2016 Predecessor results.
Financial results and key metrics
- Revenue: $1.477 billion for Q3, up 22% from $1.207 billion a year earlier. Australian metallurgical mining was the largest contributor to the increase, reflecting stronger realized coal prices.
- Profitability: Operating profit was $202.9 million, versus an operating loss of $21.6 million in Q3 2016. Net income was $230.0 million, compared with a $135.8 million net loss. Net income attributable to common stockholders was $201.4 million, or $1.48 per basic share ($1.47 diluted), after $23.5 million of preferred-stock dividends. The quarter included an $84.1 million income-tax benefit and a $12.9 million loss on early debt extinguishment.
- Adjusted EBITDA: $411.3 million, versus $130.2 million in Q3 2016. This is a non-GAAP measure; reported operating profit and net income are affected by fresh-start accounting and other items.
- Cash flow: For the Successor period April 2–September 30, operating cash flow was $330.3 million, investing cash outflow was $34.9 million, and financing cash outflow was $424.1 million. Financing outflows included $300.0 million of term-loan repayments and $69.2 million of share repurchases. These are six-month Successor-period figures, not Q3-only amounts.
- Liquidity: Available liquidity was reported as $942.7 million at September 30, including $925.0 million of cash and cash equivalents. Restricted cash collateral of $530.3 million was not included in available liquidity.
- Debt: Carrying value of current and long-term debt totaled $1.659 billion, including $1.0 billion of secured notes due 2022 and 2025, a $645 million secured term loan due 2022, and capital lease and other obligations, net of debt issuance costs. The term-loan rate was amended to LIBOR plus 3.50%, with a 1.00% floor.
- Shareholders’ equity: $3.391 billion. Series A preferred stock accrues dividends at 8.5% annually, payable in additional preferred shares. Its conversion and dividend features may dilute common shareholders.
Changes versus the prior comparable period
- Q3 revenue and Adjusted EBITDA increased substantially year over year, led by improved Australian metallurgical and thermal coal pricing. Australian metallurgical mining’s Q3 Adjusted EBITDA rose to $143.1 million from a $34.5 million loss.
- U.S. segments were mixed: Powder River Basin and Midwestern U.S. mining Adjusted EBITDA declined, while Western U.S. was broadly flat. Australian thermal mining improved, with higher pricing partly offset by Wambo Mine volume constraints.
- Peabody’s emergence from bankruptcy replaced its prior capital structure and eliminated liabilities subject to compromise. Fresh-start valuation lowered property, plant and equipment and created contract-related intangible assets and liabilities; these accounting changes limit comparisons with predecessor periods.
Outlook, risks and unusual items
- Market outlook: Management expected U.S. coal consumption for electricity generation to be broadly flat for full-year 2017. It projected 2017 seaborne thermal coal demand growth of approximately 10–15 million tonnes and seaborne metallurgical coal demand growth of approximately 10 million tonnes versus 2016. Management cited Asian demand and supply constraints, while noting U.S. demand pressure from mild weather and gas-market conditions.
- Capital and shareholder returns: Management targeted approximately $800 million of liquidity, gross debt of $1.2–$1.4 billion over time, and $500 million of debt reduction by December 2018. A $500 million repurchase program was authorized; approximately $69.2 million was spent in Q3, with a further $37.7 million of repurchases through October 30. Management said it was targeting commencement of a sustainable dividend program in Q1 2018, subject to financial conditions and debt restrictions.
- Operational and market risks: Coal prices, customer demand, natural gas competition, weather, production disruptions, transportation costs, regulation, reclamation funding and counterparty performance could affect results and liquidity. The company had no diesel-fuel derivatives outstanding at quarter-end; Australian-dollar exposure remained partly hedged with options.
- Contingencies: A Queensland joint-venture dispute seeks damages ranging from A$15.6 million to A$1.8 billion; management said any loss could not be reasonably estimated. The filing also describes potential Patriot-related black-lung liabilities, with $125.4 million recorded for specified retired or otherwise non-active workers, and other environmental, permitting and mine-safety matters.
- Legal and regulatory developments: A federal appeals court remanded a decision concerning four Powder River Basin coal leases for further environmental analysis; the company reported no immediate effect on mining. Review challenges to the Clean Power Plan remained on hold, and EPA reported it had proposed repealing the plan. Queensland was considering mine-safety and reclamation changes that could affect costs and financial assurance requirements.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of a material weakness in controls over reconciliation of tax-basis balance sheets to deferred-tax balances. The filing says the identified misstatement was corrected and remediation was underway, with completion expected before year-end 2017.
Investor verification priorities
- Assess the effect of fresh-start accounting and preferred-stock dividends on earnings comparability, common-share dilution and per-share results.
- Verify the sustainability of coal prices, Australian production and margins, and management’s market-demand assumptions.
- Review cash availability after restricted collateral, reclamation obligations, debt service and future capital spending.
- Track progress toward debt-reduction and liquidity targets, and confirm repurchases or any dividend remain permitted under debt covenants.
- Monitor remediation and testing of the deferred-tax control weakness, and developments in significant litigation, lease, environmental and mine-safety matters.