Peabody Energy Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Peabody operates coal mines in the U.S. and Australia and also conducts coal trading and brokerage. The company emerged from Chapter 11 in April 2017 and adopted fresh-start accounting; accordingly, 2018 “Successor” results are not fully comparable with 2017 “Predecessor” results.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $1,462.7 | $1,326.2 | +10.3% |
| Operating profit | $239.2 | $212.5 | +12.6% |
| Operating margin | 16.4% | 16.0% | +0.4 percentage points |
| Income from continuing operations, net of tax | $208.3 | $124.3 | +$84.0 |
| Net income | $207.0 | $120.2 | +$86.8 |
| Net income attributable to common stockholders | $106.6 | $115.4 | −$8.8 |
| Diluted EPS attributable to common stockholders | $0.82 | $6.21 | Not directly comparable |
| Adjusted EBITDA (non-GAAP) | $363.9 | $341.3 | +6.6% |
| Adjusted EBITDA margin | 24.9% | 25.7% | −0.8 percentage points |
| Cash from operating activities | $579.7 | $256.1 | +$323.6 |
| Free cash flow (non-GAAP) | $573.3 | $271.2 | +$302.1 |
Common-stockholder earnings included $102.5 million of preferred-stock dividends associated with the preferred shares’ mandatory conversion. Thus, higher consolidated net income did not translate into higher net income attributable to common stockholders. Q1 2018 included $30.6 million of net gains on disposals, a $12.8 million reorganization credit, and $22.0 million of income from equity affiliates.
Balance sheet, liquidity and capital allocation
- At March 31, 2018, cash and cash equivalents were $1,416.6 million; total debt carrying value was $1,455.2 million, including $87.1 million current. Cash less reported debt was approximately negative $38.6 million.
- Available liquidity was reported as $1,652.5 million, comprising cash and cash equivalents and availability under the receivables securitization program. The company had no borrowings under that program and $176.3 million of related letters of credit outstanding.
- Current assets were $2,577.5 million and current liabilities were $1,146.5 million. Total liabilities were $4,364.1 million and stockholders’ equity was $3,650.5 million.
- Operating cash flow benefited from $214.0 million of returned collateral, among other working-capital movements. Capital expenditures were $53.7 million; investing cash flow was a net use of $6.4 million.
- The company repurchased $175.5 million of common stock and paid $15.0 million in dividends during the quarter. It had repurchased approximately 10.2 million shares for $350.9 million through March 31. The board expanded the repurchase authorization to $1.0 billion on April 25, 2018.
- Debt comprised $500 million of 6.000% senior secured notes due 2022, $500 million of 6.375% notes due 2025, a $444.3 million term loan, and capital lease and other obligations, net of debt issuance costs.
Material changes and operating trends
- Total tons sold rose 4.8% to 48.3 million. Australian metallurgical tons increased 36.4%, while Australian thermal tons fell 17.4%.
- Australian metallurgical revenue increased 41.7% to $466.2 million and segment Adjusted EBITDA rose 51.8% to $166.4 million, reflecting improved volumes, pricing and prior-year operating disruptions.
- Adjusted EBITDA declined in the U.S. mining segments: Powder River Basin fell 18.8%, Midwestern U.S. fell 37.6%, and Western U.S. fell 36.0%. Management cited pricing, costs, weather, mine sequencing and timing of settlements, varying by segment.
- Australian thermal Adjusted EBITDA declined 18.5%, principally on lower sales volumes and mine costs, partly offset by improved pricing. Trading and Brokerage Adjusted EBITDA declined to $1.2 million from $8.8 million.
- Corporate and Other Adjusted EBITDA improved to negative $3.0 million from negative $44.4 million, reflecting improved hedging results and asset-sale gains, among other items.
Outlook, risks and unusual items
- Management described seaborne thermal and metallurgical markets as supported by demand growth and constrained supply, while U.S. coal demand remained pressured by low natural-gas prices and renewable generation. No quantified company-wide earnings or production guidance was provided in the supplied filing text.
- Peabody estimated approximately $6.0 billion of future revenue from customer contracts with fixed or reasonably estimable volumes and prices; about 50% was expected to be recognized over the next 12 months. This estimate excludes contracts with prices that cannot be reasonably estimated and may vary with contract adjustments, volume options and force majeure.
- Management expected U.S. power-sector coal demand to be affected by gas prices and renewable generation, and estimated plant retirements could reduce base demand by 25–35 million tons. It noted that a $0.20/MMBtu change from 2017’s average gas price of $3.02/MMBtu corresponds to an approximate 25-million-ton change in annual U.S. coal demand, subject to regional factors.
- On April 11, 2018, the term-loan amendment lowered the interest spread to LIBOR plus 2.75%, removed the LIBOR floor, extended maturity to 2025 and eliminated certain capital-expenditure restrictions. The company also repaid $46.0 million of principal after quarter-end.
- Key exposures include coal-price and demand volatility, mining and transportation costs, customer and trading-counterparty credit, reclamation and other financial-assurance requirements, environmental and safety regulation, pension and postretirement obligations, and debt covenant restrictions. The company reported $699.2 million of asset retirement obligations supported by bonds, guarantees, letters of credit and collateral.
- Contingencies include a recorded $134.9 million liability for certain Patriot-related black-lung obligations and a $47.4 million discounted balance for the UMWA pension settlement. A Queensland Monto joint-venture lawsuit seeks damages ranging from A$15.6 million to A$1.8 billion; Peabody said any potential loss could not then be reasonably estimated. Other disclosed matters include climate-related lawsuits, an appeal involving Powder River Basin coal leases, and a review of the Wilpinjong extension approval.
- Unusual items included a $20.6 million gain on surplus Queensland land and a $7.1 million gain on the Red Mountain joint-venture sale. The company stated that its Q1 results are not necessarily indicative of future periods.
Important facts for investors to verify
- How much of the strong operating cash flow and free cash flow reflects recurring operations versus the $214.0 million collateral release and working-capital movements.
- Whether Australian metallurgical strength can offset weaker results in several U.S. and Australian thermal segments, and how realized coal prices and sales volumes develop.
- The effect of the $102.5 million preferred-stock dividend charge and the conversion-related increase in common shares on per-share earnings and future dilution.
- Liquidity available after letters of credit, collateral needs, reclamation requirements, debt service and any further share repurchases or dividends.
- Developments in the Monto litigation, Patriot-related liabilities, coal-lease and environmental matters, and Australian safety and rehabilitation regulation.