PEABODY ENERGY CORP quarterly report, Q2 FY2010

Peabody Energy Corporation — Q2 2010 Form 10-Q

Reporting period: Three and six months ended June 30, 2010; unaudited. Peabody operated coal-mining businesses in the U.S. and Australia, plus trading and brokerage activities. Comparisons are with the corresponding 2009 periods.

Financial performance

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Total revenue	$1,661.4 million	$1,338.2 million	$3,177.0 million	$2,791.2 million
Operating profit	$324.4 million	$215.4 million	$566.6 million	$435.1 million
Income from continuing operations, net of tax	$214.7 million	$90.0 million	$351.8 million	$231.2 million
Net income attributable to common stockholders	$206.2 million	$79.2 million	$339.9 million	$249.2 million
Diluted EPS attributable to common stockholders	$0.76	$0.29	$1.26	$0.93
Adjusted EBITDA, including Corporate and Other	$440.4 million	$326.2 million	$797.6 million	$651.6 million

Q2 operating margin was approximately 19.5%, compared with 16.1% a year earlier; net income attributable to common stockholders was approximately 12.4% of revenue, versus 5.9%. For the first half, operating margin was approximately 17.8% versus 15.6%, and common-stockholder net margin was approximately 10.7% versus 8.9%.

Q2 sales volume was 59.7 million tons, up 0.5%; first-half volume was 118.0 million tons, down 0.8%.
Australian Mining drove much of the improvement: Q2 revenue rose 93.3% and segment Adjusted EBITDA rose 75.1%, reflecting higher metallurgical coal prices and volumes. Western U.S. Mining EBITDA also improved; Trading and Brokerage EBITDA declined 59.7% in Q2 and 53.8% for the half.
Q2 interest expense was $57.9 million versus $48.2 million; first-half interest expense was $107.9 million versus $99.3 million. Higher depreciation and corporate costs partly offset operating gains.

Cash flow, balance sheet and financing

First-half operating cash flow was $456.4 million, compared with $231.5 million; continuing-operations operating cash flow was $466.3 million versus $226.4 million.
Capital spending on property, equipment and mine development was $187.5 million, compared with $81.9 million. Simple operating cash flow less this spending was approximately $268.9 million; this is not a company-defined free-cash-flow measure.
Cash was $1,157.0 million at June 30, up from $988.8 million at year-end. Current assets were $2,330.2 million and current liabilities $1,216.4 million, giving a current ratio of approximately 1.9.
Total debt was $2,762.8 million, compared with $2,752.3 million at year-end; cash less debt implies net debt of approximately $1,605.8 million. Long-term debt fair value was estimated at $2,826.5 million.
Management reported $2.4 billion of available liquidity, including cash, revolving credit capacity and receivables securitization. The new unsecured $2.0 billion credit facility, entered June 18, includes a $1.5 billion revolver and $500 million term loan, both maturing June 18, 2015. At quarter-end, $243.9 million of letters of credit were outstanding and revolver borrowing capacity was $1.2 billion. The term loan rate was LIBOR plus 2.50% (2.85% at quarter-end).
The company paid $37.6 million in dividends during the first half; declared dividends were $0.07 per share for Q2. No 2010 repurchases were made under the buyback program; $700.4 million remained authorized.

Material changes and unusual items

Revenue increased 24.2% in Q2 and 13.8% in the first half. Management attributed growth principally to stronger Australian metallurgical coal demand, prices and shipments. First-half common-stockholder net income increased less than continuing-operations income because 2009 included a coal excise-tax refund benefit of about $35 million in discontinued operations.
The June refinancing replaced a prior $1.8 billion revolver and refinanced the existing term loan. It generated $21.9 million of capitalized financing costs and $9.3 million of refinancing charges, primarily related to cancellation of an interest-rate swap.
Q2 tax expense included a $15.2 million benefit from reducing unrecognized tax benefits after completion of the IRS examination of the 2005 federal tax year. A separate 2006 tax issue entered the formal IRS appeals process, expected to take one to two years.
First-half comprehensive income was $234.7 million, well below net income of $350.9 million, principally reflecting a $132.2 million after-tax decline in the fair value of cash-flow hedges. Management cited a weaker Australian dollar and lower fuel prices.
Coal trading revenue was $52.9 million in Q2 versus $34.1 million, but $108.9 million for the first half versus $143.4 million. Trading positions and hedge valuations are exposed to market-price, valuation and counterparty risks.

Outlook, risks and contingencies

Management described improving global and U.S. coal markets, while noting continued weakness in the Atlantic market. As of July 20, 2010, 2010 sales targets were 185–195 million tons in the U.S., 27–29 million tons in Australia and 240–260 million tons total. U.S. production was fully contracted at planned levels; some fourth-quarter Australian coal remained unpriced.
Expected 2010 capital expenditures were $600–$650 million. Peabody anticipated total 2010 pension contributions of about $28 million, including approximately $6 million of additional discretionary contributions.
Bear Run Mine shipped first coal in May. Management expected 3.0–3.5 million tons of sales in 2010, rising to 8 million tons in 2012. The Newcastle export facility’s first stage began shipping; Peabody committed an estimated $52 million U.S. share toward a stage-two financing shortfall. Prairie State and GreenGen also entail continuing investment commitments.
Risks highlighted include coal demand and pricing, competition from natural gas, production and geological issues, transportation and port delays, fuel and currency volatility, customer and trading-counterparty credit, pension funding, access to capital and surety capacity, and environmental regulation. The Dodd-Frank Act may increase compliance and hedging/trading costs. Australia’s proposed minerals resource rent tax was not yet law; if enacted as proposed, it could affect Australian operations.
Significant litigation includes Navajo Nation and Hopi claims seeking substantial damages and lease changes; Gulf Power’s contract dispute, for which liability had been decided against a subsidiary but damages remained pending; Oklahoma lead-site litigation; and climate-related claims. The company said future losses in several matters could not be reasonably estimated and believed the matters were unlikely to have a material adverse effect. Environmental cleanup liabilities for specified sites were $47.2 million at June 30.
Reclamation, lease, workers’ compensation and other support arrangements totaled $2.04 billion, including $888.9 million of self-bonding. The company also disclosed potential collateral requirements tied to derivative positions and significant off-balance-sheet guarantees.
Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The filing provides no formal full-year earnings or EPS guidance.

Key facts for investors to verify

Whether Australian coal prices and shipments, and U.S. demand and inventory trends, support the stated 2010 sales targets.
How much of the $2.4 billion reported liquidity is practically available after facility conditions, letters of credit and securitization renewal requirements.
Whether planned capital spending, project commitments and pension contributions remain consistent with operating cash generation.
Potential outcomes and financial exposure from the Navajo/Hopi, Gulf Power, environmental and other legal matters, including liabilities not currently estimable.
Exposure to hedge-value volatility, trading counterparties, proposed Australian tax changes and evolving U.S. environmental and derivatives regulation.