Peabody Energy Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Peabody operated mining and coal trading businesses in the U.S. and Australia. Results were pressured by weak coal markets, lower realized prices and subdued demand.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenue | $1,537.9 million | $1,626.8 million; down 5.5% |
| Operating profit | $2.2 million | $2.9 million |
| Loss from continuing operations | $164.4 million | $44.3 million |
| Net loss attributable to common stockholders | $176.6 million; diluted loss per share $0.65 | $48.5 million; diluted loss per share $0.18 |
| Adjusted EBITDA | $165.6 million | $176.9 million; down 6.4% |
| Cash from operating activities | $3.4 million | $54.1 million |
- Operating costs and expenses declined $73.2 million and selling and administrative expenses declined $10.1 million, reflecting cost controls and lower activity costs. Lower revenues and unfavorable results in Australian Mining offset these savings.
- Cash and cash equivalents were $637.1 million at March 31, up from $298.0 million at year-end. Available liquidity was approximately $2.2 billion, including $1.5 billion available under the revolver and $34.1 million of securitization capacity.
- Total debt was $6.392 billion, versus $5.987 billion at December 31, 2014. Current and long-term debt were $104.1 million and $6.288 billion, respectively. Total liabilities were $10.643 billion and equity was $2.509 billion.
- Capital expenditures were $25.1 million. Cash from investing activities was a net use of $35.7 million; financing activities provided $371.4 million, principally reflecting the new notes issuance and debt repayment.
- Coal trading revenues were $16.7 million, compared with $21.0 million. The filing reports no separate consolidated gross-margin figure.
Material changes versus Q1 2014
- Mining-segment sales volumes rose 1.3% to 56.6 million tons, but total tons sold, including trading, declined 1.1% to 60.6 million. Lower realized pricing was the primary reason total revenue fell.
- Australian Mining revenue decreased 10.4% to $548.2 million and Adjusted EBITDA moved from positive $1.8 million to a loss of $24.5 million. Lower coal prices were partly offset by improved mine performance and volumes; foreign-currency and diesel hedging losses contributed to the segment loss.
- Western U.S. Mining revenue rose 1.1% to $689.3 million and Adjusted EBITDA increased to $182.6 million. Midwestern U.S. Mining revenue fell 9.0% to $275.7 million, with lower volumes and pricing.
- Interest expense increased to $106.6 million from $103.3 million. A $59.5 million early debt-extinguishment charge, primarily tender premiums, contributed to the larger net loss.
- Discontinued operations recorded an $8.9 million loss, versus $0.2 million of income. Q1 2015 included a $7.6 million accrual related to Wilkie Creek port-services litigation.
- Other comprehensive loss was $70.7 million, largely reflecting losses on cash-flow hedges and foreign-currency translation.
Outlook, risks and contingencies
- Management targeted 2015 U.S. sales volumes of 180–190 million tons, with volumes essentially fully priced at quarter-end; approximately 50%–60% of expected 2016 volumes were priced. It expected U.S. realized pricing per ton to decline 3%–5% in 2015 versus 2014.
- Australian 2015 sales targets were 35–37 million tons overall, including 15–16 million tons of metallurgical coal and 12–13 million tons of thermal coal exports. Management expected lower per-ton operating costs in both the U.S. and Australia.
- 2015 capital expenditure guidance was reduced to $170–$190 million from $180–$200 million. Federal coal lease expenditures were expected to be approximately $280 million, mostly in the third and fourth quarters. Management expected cash flows and available liquidity to meet anticipated capital requirements through 2016, assuming continued substantial access to the revolving credit facility.
- Management cited weak seaborne coal demand, declining steel production, China’s import restrictions, excess supply, low U.S. natural-gas prices and coal-to-gas switching. It projected U.S. utility coal consumption for power generation to decline 80–100 million tons in 2015. Long-term demand growth in Asia was described as positive, but remains subject to market and policy uncertainty.
- In March, Peabody issued $1.0 billion of 10.00% second-lien notes due 2022 and used proceeds in part to repurchase $566.9 million of 2016 notes; the remaining $83.1 million was redeemed in April. The February credit-facility amendment eased certain financial covenants but added collateral and tightened restrictions, including a $27.5 million annual cash-dividend limit. Two rating agencies downgraded the company during Q1; a customer required a $65 million letter of credit following the downgrades.
- Key exposures include debt service and covenant compliance, potential restrictions on financing, coal-price and demand volatility, derivatives and collateral requirements, pension and postretirement obligations, and reclamation and bonding commitments. Off-balance-sheet financial instruments and guarantees totaled $2.683 billion, including $1.383 billion of self-bonding for reclamation.
- In the Wilkie Creek case, an Australian court ruled that a new port-services agreement could require annual minimum payments of approximately A$11.8 million through 2026; Peabody appealed. The company recorded $7.6 million at the low end of its probable-loss range and said additional exposure could arise. The filing also describes environmental, historical-operation and Patriot-related contingencies.
- Management reported no impairment charge at March 31 after reviewing approximately $475 million of particularly price-sensitive Australian mining assets and mining-related investments. Sustained adverse coal-price trends could require future impairments.
Important facts for investors to verify
- Whether coal prices, sales volumes and Australian Mining profitability improve, and whether management achieves its 2015 volume, cost and capital-spending targets.
- Liquidity, revolver availability, covenant headroom and the company’s ability to fund debt service and approximately $280 million of expected federal coal lease expenditures.
- The effect of the 10.00% second-lien debt, the 2016-note refinancing and subsequent credit-rating changes on interest costs, collateral needs and financing access.
- The outcome and potential financial exposure of the Wilkie Creek appeal, environmental claims and Patriot-related obligations.
- Whether continued weakness in coal markets triggers impairment charges or further pressure on pension, reclamation and other obligations.