Peabody Energy Corporation — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2013, for a global coal producer and trader with mining operations in the U.S. and Australia. Comparisons below are with the corresponding 2012 periods unless noted.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1,725.3 million | $1,981.1 million | $3,473.3 million | $4,001.8 million |
| Operating profit | $26.4 million | $276.7 million | $115.2 million | $628.0 million |
| Income from continuing operations, after tax | $101.4 million | $214.5 million | $91.1 million | $397.5 million |
| Net income attributable to common stockholders | $90.3 million | $204.7 million | $66.9 million | $377.4 million |
| Diluted EPS, net income | $0.33 | $0.75 | $0.25 | $1.39 |
| Adjusted EBITDA, consolidated | $254.3 million | $450.1 million | $534.4 million | $961.6 million |
- Revenue fell 12.9% in Q2 and 13.2% for the first half. Management attributed the decline principally to lower realized coal prices and weaker Trading and Brokerage results.
- Q2 operating margin was approximately 1.5%, versus 14.0% a year earlier; consolidated Adjusted EBITDA margin was approximately 14.7%, versus 22.7%. Margins are calculated from reported figures.
- Operating cash flow was $331.4 million for the first half, down from $675.5 million. Investing cash use was $106.2 million, versus $515.9 million; financing cash use was $266.1 million, versus $469.5 million. Cash declined $40.9 million to $517.9 million.
- At June 30, total debt was $5,988.0 million, down from $6,252.9 million at year-end 2012. The company repaid $167.0 million on term loan facilities and repurchased $32.4 million of Australian private placement bonds during the first half.
- Available liquidity was approximately $2.0 billion: $517.9 million cash, $1.4 billion available under the revolving credit facility (net of letters of credit), and $133.7 million available under the receivables securitization program. The company reported compliance with debt covenants.
- Current assets were $2,249.2 million and current liabilities $1,670.8 million. The filing also identifies significant liquidity sources beyond balance-sheet cash, including the revolver and securitization program.
Material changes and drivers
- Q2 total tons sold increased 6.3% to 60.8 million; first-half tons sold decreased 0.5% to 118.0 million. Australian Mining volume increased, while U.S. mining volumes were mixed.
- Australian Mining Adjusted EBITDA fell to $112.5 million in Q2 from $240.4 million, primarily reflecting lower seaborne coal prices, partly offset by higher sales volumes and cost controls. Western U.S. Mining EBITDA was $154.9 million, down from $165.4 million; Midwestern U.S. Mining was broadly stable at $106.8 million.
- Trading and Brokerage reported a Q2 Adjusted EBITDA loss of $41.0 million, compared with income of $45.4 million. The filing cites weaker trading results, unfavorable fair-value movements and a $20.6 million Gulf Power litigation charge.
- The Q2 effective tax benefit was $184.7 million despite a pretax loss of $83.3 million. Benefits included a $25.5 million release of a U.S. capital-loss valuation allowance, foreign tax-account remeasurement, and Australian minerals resource rent tax-related benefits. Adjusted income from continuing operations, which excludes certain impairment and tax remeasurement effects, was $85.8 million versus $200.7 million.
- Other notable items included a $40.3 million gain on sale of Kentucky coal reserves and surface lands, a $21.5 million impairment of Winsway equity securities, and $20.6 million of Gulf Power damages plus $6.9 million prejudgment interest. First-half comprehensive loss attributable to common stockholders was $364.1 million, largely reflecting hedge and foreign currency movements.
Outlook, risks and contingencies
- Management described near-term global coal markets as challenging: seaborne markets were well supplied and prices remained weak, while U.S. coal consumption improved but utility stockpile drawdowns constrained shipments. Management’s long-term outlook remained positive, particularly for Asia-Pacific markets, but acknowledged uncertainty.
- 2013 targets included Australian coal sales of 33–36 million tons, metallurgical coal sales of 15–16 million tons, Australian thermal exports of 11–12 million tons, and U.S. volumes of 180–190 million tons. Management expected U.S. realized pricing per ton to decline 5%–10% and U.S. unit operating costs to decline 2%–3% versus 2012.
- Targeted 2013 capital spending was reduced by $100 million to $350–$450 million. The company planned to defer some growth projects and expected $277.1 million of federal coal lease expenditures, principally in the second half. Management said liquidity and operating cash flows were expected to cover anticipated 2013 capital requirements.
- Key business risks include coal prices and demand, competition from natural gas and renewables, customer inventory levels, mine operating and geological issues, transportation and input costs, foreign exchange, environmental and mine-safety regulation, pension obligations, and customer and counterparty credit risk.
- Contingencies include an Australian tax assessment of $70.2 million, which the company is contesting after making a $35.1 million advance deposit; Patriot bankruptcy-related potential black-lung exposure of up to $150 million; and Australian Monto Coal litigation seeking at least A$1,193.2 million. Management stated it did not expect these matters to have a material adverse effect, while noting the Monto loss could not be reasonably estimated.
- The Gulf Power judgment was affirmed on appeal; the company said it intended to pay it in Q3 2013. A separate Wambo shareholder dividend ruling involved $34.8 million of cash posted as security while the subsidiary pursued an appeal.
- A fatal haulage incident at the Wildcat Hills mine occurred July 2, 2013, after quarter-end. The mine was temporarily idled and returned to full production August 2 following adoption of an MSHA safety requirement. The filing also notes an SEC subpoena concerning development of the Prairie State Energy Campus; the company said it was cooperating.
Important facts for investors to verify
- Whether coal pricing and Australian segment margins stabilize, and whether higher production volumes translate into improved cash generation.
- Progress against 2013 sales, cost, and capital-spending targets, including the effects of customer inventory drawdowns and planned project deferrals.
- Cash flow quality and sustainability: first-half operating cash flow declined sharply, and securitization activity is a working-capital funding source.
- Debt repayment capacity, liquidity availability, covenant compliance, and exposure to collateral or margin requirements.
- Resolution and potential financial effects of the Australian tax dispute, Patriot-related claims, Monto litigation, environmental liabilities, and other legal matters.
- Potential impact of environmental rules and the July 2013 mine fatality and related safety actions.