Peabody Energy Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Peabody is a U.S. and Australian coal producer, marketer and broker, reporting Seaborne Thermal, Seaborne Metallurgical, Powder River Basin, Other U.S. Thermal, and Corporate and Other activities. Financial statements are unaudited.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $671.0 million | $1,106.4 million | $2,143.9 million | $3,506.0 million |
| Operating profit (loss) | ($15.8) million | ($36.8) million | ($1,620.2) million | $227.2 million |
| Net income (loss) attributable to common stockholders | ($67.2) million | ($82.8) million | ($1,741.1) million | $78.5 million |
| Adjusted EBITDA | $95.4 million | $159.2 million | $155.6 million | $643.3 million |
| Free cash flow | Not provided for quarter | Not provided for quarter | ($191.5) million | $407.4 million |
Q3 revenue fell 39% year over year, while Adjusted EBITDA declined 40%. Common-stockholder loss narrowed by $15.6 million. For the first nine months, revenue fell 39% and Adjusted EBITDA fell 76%; the net loss largely reflects a $1,418.1 million impairment charge. Adjusted EBITDA and free cash flow are non-GAAP measures.
- Sales and segments: Q3 tons sold were 34.7 million, down 23%. Seaborne metallurgical mining generated Q3 Adjusted EBITDA of ($27.3) million; Seaborne Thermal generated $35.3 million, Powder River Basin $78.3 million and Other U.S. Thermal $51.6 million. Nine-month seaborne metallurgical results were particularly weak, with Adjusted EBITDA of ($96.1) million versus $127.0 million in 2019.
- Cash and liquidity: September 30 cash was $814.6 million. Reported available liquidity was $860.1 million at September 30 and $828.0 million at October 31, versus $1,275.8 million at December 31, 2019. At September 30, revolver availability was only $5.1 million and receivables-program availability was $40.4 million. Operating cash flow for the nine months was negative $32.1 million, versus positive $552.6 million a year earlier.
- Debt and balance sheet: Debt carrying value was $1,600.1 million, all classified as current; total debt at par was $1,646.9 million. Current liabilities of $2,374.4 million exceeded current assets of $1,536.4 million. Total equity was $1,100.8 million, down from $2,672.5 million at year-end 2019. Debt’s estimated fair value was $886.9 million, compared with its $1,600.1 million carrying amount.
- Capital spending: 2020 capital expenditures were expected to be approximately $200 million. Nine-month additions to property, plant and mine development were $131.9 million.
Material changes and unusual items
- The $1,418.1 million impairment related to the North Antelope Rochelle Mine in the Powder River Basin, reflecting reduced expected sales amid U.S. coal-fired generation declines, low natural-gas prices, plant retirements and renewable generation. Approximately $1.1 billion of other assets were identified as especially sensitive to coal prices, costs, demand, customer concentration and future viability; no further impairment was recorded at September 30.
- Q3 revenue and volumes were pressured by COVID-19-related demand disruption and lower realized prices. Nine-month U.S. coal-fueled generation declined 24% year over year and represented 19% of generation. Lower costs and production efficiencies partly offset revenue weakness.
- Peabody recorded $31.1 million of restructuring charges for the first nine months, primarily associated with workforce reductions. It announced a temporary multi-month idling of Shoal Creek Mine on October 5, citing customer demand and elevated costs.
- A September postretirement-plan change reduced the accumulated benefit obligation by $174.5 million, while a $13.0 million mark-to-market expense was recorded. Effective January 1, 2021, Medicare-eligible retirees will no longer receive subsidized medical costs or life insurance; other eligible retirees will receive a health reimbursement arrangement.
- The proposed Peabody-Arch PRB/Colorado joint venture was terminated effective September 30 after a federal court granted the FTC’s preliminary injunction request.
Outlook, liquidity risks and contingencies
- Going concern: Management stated that the combined effects of operating losses, market conditions, collateral demands and likely year-end covenant noncompliance raise substantial doubt about the company’s ability to meet obligations for one year after issuance and continue as a going concern. The statements remain prepared on a going-concern basis.
- Although compliant with debt covenants at September 30, Peabody said noncompliance with its first-lien leverage-ratio covenant at December 31 was probable absent successful mitigating actions. Default could permit acceleration of revolver debt and trigger cross-default or termination provisions affecting notes, receivables financing and leases. Consequently, debt and relevant lease liabilities were classified as current.
- Surety providers had made approximately $800 million of additional collateral demands. A November 6, 2020 transaction support agreement with providers covering 99% of the surety portfolio contemplated $75 million of initial collateral (at least $40 million in letters of credit), second liens on approximately $200 million of mining equipment, and further annual collateral of $25 million through 2025, subject to additional triggers. Participating sureties agreed to a standstill, but the TSA depends on separate debt restructuring transactions being completed by December 31, 2020, with a possible extension to January 29, 2021. Failure to reach agreements or implement other measures could require an in-court restructuring.
- Peabody was pursuing covenant relief, debt maturity extensions, asset sales and cost improvements; success was not assured. The TSA also contemplated foregoing dividends and share repurchases during its standstill period. Dividends had been suspended in 2020.
- Market outlook remained uncertain: seaborne coal demand and prices were below pre-pandemic levels, while U.S. coal demand faced longer-term pressure from competing fuels, plant retirements and policy. Management could not estimate the pandemic’s full financial effect. Approximately $3.8 billion of fixed or reasonably estimable contracted revenue remained to be recognized, about 43% expected within twelve months; actual amounts may vary, and this excludes contracts with prices not reasonably estimable.
- North Goonyella remained suspended after its 2018 fire. Peabody was evaluating alternatives and warned of potential additional impairment of up to approximately $300 million if no future mining or commercial alternative is available, in addition to possible idling, closure and take-or-pay costs.
- Other exposures include $1.2 billion of take-or-pay commitments, $1,628.7 million of surety bonds and $334.8 million of outstanding letters of credit. A securities class action filed in September 2020 alleges misleading statements relating to North Goonyella; Peabody disputes the claims and intends to defend itself.
Most important facts for investors to verify
- Whether the separately negotiated debt restructuring was completed on time, including covenant relief, maturity extensions and treatment of the 2022 Notes; confirm the resulting debt maturities and covenant requirements.
- Whether the surety TSA closed, collateral and equipment liens were posted, and the standstill and replacement-bond arrangements remain effective.
- Subsequent liquidity, cash burn, revolver and receivables-program availability, letters of credit, collateral calls and covenant compliance.
- Assumptions supporting the North Antelope Rochelle impairment and the recoverability of the approximately $1.1 billion of other at-risk assets; also track North Goonyella’s disposition and any additional charges.
- Coal prices, realized segment margins, sales volumes and customer demand, particularly seaborne metallurgical and U.S. thermal markets, alongside COVID-19 impacts and Shoal Creek’s status.