Business context and reporting period
Peabody Energy Corporation’s unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The company mines coal in the U.S. and Australia and operates a coal trading and brokerage business. Results include Macarthur Coal (PEA-PCI), acquired in late 2011, so period comparisons are affected by the addition of those operations.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $2,058.8 million | $1,980.6 million | $6,060.6 million | $5,666.1 million |
| Operating profit | $266.5 million | $385.5 million | $894.5 million | $1,177.5 million |
| Income from continuing operations, after tax | $122.9 million | $291.2 million | $520.4 million | $791.3 million |
| Net income attributable to common stockholders | $42.9 million | $274.1 million | $420.3 million | $735.4 million |
| Diluted EPS attributable to common stockholders | $0.16 | $1.00 | $1.55 | $2.71 |
- Calculated operating margin was approximately 12.9% in Q3 2012 versus 19.5% in Q3 2011, and 14.8% for the first nine months versus 20.8%.
- Calculated net income attributable to common stockholders margin was approximately 2.1% for Q3 2012 versus 13.8%, and 6.9% for the first nine months versus 13.0%.
- Consolidated Adjusted EBITDA, a non-GAAP measure, was $459.9 million in Q3 2012 versus $508.5 million, and $1,421.5 million for nine months versus $1,538.4 million. Four operating segments generated $604.5 million in Q3 Adjusted EBITDA; Corporate and Other was negative $144.6 million.
- Declared dividends were $0.085 per share for Q3 and $0.255 per share for the first nine months, unchanged from 2011.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $1,291.5 million, compared with $1,190.5 million in 2011. Investing cash outflow was $921.8 million and financing cash outflow was $520.8 million.
- Capital spending on property, plant, equipment and mine development was $732.1 million; federal coal lease expenditures were $247.9 million. Cash and cash equivalents declined from $799.1 million at year-end 2011 to $648.0 million at September 30, 2012.
- Total debt was $6,363.1 million, down from $6,657.5 million at December 31, 2011. Cash less total debt implies net debt of approximately $5.7 billion. The company reported approximately $2.2 billion of available liquidity, including $1.4 billion available under its revolver and $153.1 million of securitization capacity. It was in compliance with debt covenants.
- Current assets were $2,654.7 million and current liabilities $1,789.8 million at September 30, 2012.
Material changes versus prior periods
- Revenue rose 3.9% in Q3 and 7.0% year to date, but operating profit, continuing income and common-stockholder net income declined substantially. Common-stockholder net income fell 84.3% in Q3 and 42.8% for the nine-month period.
- Total tons sold increased 5.9% in Q3 and 2.2% year to date. Australian Mining revenue benefited from acquired PEA-PCI operations, higher volumes and mine expansions, but lower seaborne coal prices, cost inflation and contractor challenges reduced segment Adjusted EBITDA. Western U.S. Mining benefited from higher contract prices; Trading and Brokerage Adjusted EBITDA declined.
- Higher depreciation and interest expense following the PEA-PCI acquisition weighed on earnings. A $59.7 million tax benefit from Australian tax restructuring supported nine-month results.
- Discontinued operations produced an $81.3 million Q3 loss and a $92.7 million nine-month loss. These included the September closure of the Air Quality Mine in Indiana and associated after-tax charges of $75.0 million, including a $68.8 million impairment.
Outlook, commentary and risks
- Management described near-term coal markets as challenging, citing weak U.S. demand, low natural-gas prices, slower global growth and lower international coal prices. It targeted 2012 U.S. sales of 188–192 million tons, fully committed and priced; Australian production of 31–33 million tons; metallurgical coal sales of 13–14 million tons; and Australian thermal exports of 11–12 million tons.
- As of October 22, 2012, 15%–20% of planned 2013 U.S. production was unpriced. Management expected 2012 capital expenditures of $1.0–$1.1 billion, below the prior $1.2–$1.4 billion range, and expected 2013 spending to be lower. It expected liquidity and operating cash flows to cover anticipated requirements through 2013.
- Cost-reduction programs targeting workforce, outside services and contractors were expected to begin benefiting results in Q4 2012. Management warned that operating, geological, transportation and cost pressures could limit production or margins.
- Regulatory and policy exposures include Australia’s carbon pricing framework, the minerals resource rent tax and increased Queensland coal royalties effective October 1, 2012; U.S. environmental rules; and evolving U.S. and European derivatives regulation. The company estimated the initial Australian fugitive-emissions carbon price impact at an average of A$2 per tonne produced, subject to mine-specific factors.
- Contingencies include possible Patriot Coal black-lung liabilities of up to $150 million and a new benefits-plan lawsuit; a Gulf Power judgment of $20.5 million plus $6.9 million prejudgment interest under appeal, for which no liability was recorded; and Monto joint-venture claims seeking at least A$1,193.2 million, whose potential loss the company said could not be reasonably estimated. The company stated it did not expect these matters to have a material adverse effect based on information then available. Recorded environmental cleanup liabilities were $48.7 million.
- Off-balance-sheet instruments and guarantees totaled $2,295.1 million, including $1,221.9 million of self-bonded reclamation obligations. Management did not expect material losses from these arrangements.
Important facts for investors to verify
- How lower seaborne coal prices, Australian contractor performance and cost inflation affect margins and the 2012 volume targets.
- Whether the planned cost reductions and lower 2013 capital spending are achieved without impairing production or growth projects.
- The cash-flow and liquidity effects of federal coal lease payments, capital commitments, debt service and the receivables securitization program, which extends to May 2013.
- Developments in the Patriot-related exposures, Gulf Power appeal, Monto litigation and environmental liabilities, including changes to management’s loss estimates.
- Final purchase-accounting allocations for PEA-PCI and the effect of Australian taxes, carbon costs and Queensland royalties on future earnings.