Peabody Energy Corporation — Q1 2014 Form 10-Q
Business context and period. Peabody is a global coal producer and trader with mining operations in the U.S. and Australia. This unaudited report covers the three months ended March 31, 2014, compared with the same period in 2013. Dollar amounts are in millions unless stated otherwise.
Financial results and key metrics
- Revenue: $1,626.8, down 6.9% from $1,748.0. Lower global realized coal prices and fewer Australian metallurgical-coal sales outweighed increased Western U.S. volumes.
- Profitability: Operating profit was $2.9, versus $88.8; operating margin was approximately 0.2%, versus 5.1%. Net loss attributable to common stockholders was $48.5, or $0.18 per diluted share, compared with a $23.4 loss, or $0.09 per share.
- Adjusted EBITDA: Consolidated Adjusted EBITDA was $176.9, down from $280.1. Segment Adjusted EBITDA was $252.5 before Corporate and Other’s $75.6 loss. Australian Mining fell to $1.8 from $100.4; Western U.S. Mining rose to $173.9 from $160.5; Midwestern U.S. Mining declined to $78.7 from $112.3; Trading and Brokerage swung to a $1.9 loss from $16.0 income.
- Cash flow: Operating cash flow was $54.1, versus $271.7, including $72.8 of cash used in discontinued operations. Investing activities provided $39.7, versus using $68.3; financing activities used $29.7, versus $132.7. Cash increased $64.1 to $508.1.
- Liquidity and debt: Available liquidity was approximately $2.1 billion, comprising $508.1 cash, $1.5 billion available under the revolver and $61.8 of securitization capacity. Total debt was $5,998.2, nearly unchanged from year-end 2013. Current assets were $1,910.2 and current liabilities $1,599.6.
- Other: The quarterly dividend remained $0.085 per share. Comprehensive income attributable to common stockholders was $77.4, mainly reflecting a $121.8 after-tax gain on cash-flow hedges, despite the net loss.
Material changes and drivers
- Australian Mining revenue declined 17.1% and Adjusted EBITDA dropped $98.6. Lower prices, North Goonyella longwall technology commissioning, a scheduled longwall move and higher contractor costs were significant pressures; owner-operator savings and improved productivity partly offset them.
- Western U.S. Mining revenue increased 6.5%, supported by a 10.4% increase in tons sold amid cold weather, higher gas prices and lower customer stockpiles. Midwestern U.S. revenue and EBITDA declined due to lower prices, adverse weather, mine sequencing and reserve depletion at Viking-Corning Pit.
- Total tons sold increased 7.2% to 61.3 million. Consolidated revenue nevertheless fell as realized prices and Australian metallurgical sales weakened.
- The income-tax benefit was $52.5, versus a $3.7 provision, but included a $42.6 valuation allowance against certain Australian deferred tax assets. An Australian tax audit settlement reduced unrecognized tax benefits, interest and penalties by $28.9.
Outlook, commentary and risks
- 2014 targets: Australian coal sales of 35–37 million tons, including 16–17 million tons of metallurgical coal and 11–12 million tons of Australian thermal exports. U.S. volumes targeted at 185–195 million tons; management expected U.S. realized prices per ton to decline 4%–7% year over year.
- Management expected U.S. per-ton operating costs to decrease 1%–3%; Australian costs were expected in the low-to-mid-$70-per-ton range. Capital spending guidance was reduced to $250–$295, down from the prior $275–$325 range and 2013 spending of $328.4. Federal coal lease expenditures were expected to be approximately $280 during 2014.
- Management described seaborne markets as well supplied and prices as weak, while citing expected demand growth in China and India. Its outlook depends on coal supply and demand, steel production, customer contracting, weather, natural gas prices, transport and operating performance. These are management expectations, not assured outcomes.
- Peabody noted that sustained adverse coal-price trends could trigger future impairment; Australian mines with shorter remaining lives and mining-related investments totaling $249.4 were identified as particularly price-sensitive. North Goonyella commissioning and mine operating conditions also remain execution risks.
- Material matters include the $23.4 Eagle Mining arbitration award, for which Peabody recorded an additional $15.6 charge and sought partial vacatur; the Monto litigation seeking A$1,193.2 million plus interest and costs, whose loss was not reasonably estimable; and the appealed Sumiseki dividend ruling, supported by $48.4 of cash security described as readily available.
- The Patriot/UMWA settlement requires total payments of $310 through 2017; $90 was paid in January 2014, with $220 scheduled for 2015–2017. Related credit support was $141.5. Off-balance-sheet financial instruments totaled $2,479.4, including reclamation self-bonds, surety bonds, bank guarantees and letters of credit; management did not expect material losses from these arrangements.
- Environmental and climate-related regulation remains a demand risk. The Supreme Court upheld the Cross-State Air Pollution Rule in April 2014; other EPA greenhouse-gas rules and challenges remained in process. Management also disclosed a one-notch credit-rating downgrade by one agency in May 2014, citing continued seaborne coal-price weakness.
- Management said liquidity and operating cash flows should meet anticipated 2014 needs, assuming continued access to a substantial portion of revolver capacity. The filing cautions that market access and actual results may differ from expectations.
Important facts for investors to verify
- Whether coal prices, Australian production and North Goonyella commissioning improve enough to support the company’s 2014 volume, cost and EBITDA expectations.
- Cash generation and liquidity quality, including reliance on the revolver and receivables securitization, cash tied to litigation security, and the timing of Patriot settlement payments.
- Debt-service capacity and the effects of the May 2014 credit downgrade, including any change in borrowing access, pricing or collateral requirements.
- Developments in the Eagle award, Monto and Sumiseki matters, environmental proceedings, and the potential for further asset impairments if coal-market weakness persists.
- The assumptions supporting the Australian deferred-tax-asset valuation allowance and the reported tax benefit, as well as whether the benefit is repeatable.