Peabody Energy Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited; comparisons are with Q1 2018 unless otherwise noted. Peabody operates U.S. and Australian coal mines across seaborne thermal, seaborne metallurgical, Powder River Basin, Midwestern U.S. and Western U.S. segments.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $1,250.6 million | $1,462.7 million; down 15% |
| Operating profit | $184.5 million | $239.2 million |
| Income from continuing operations, net | $133.3 million | $208.3 million; down 36% |
| Net income attributable to common stockholders | $124.2 million; diluted EPS $1.12 | $106.6 million; diluted EPS $0.82 |
| Adjusted EBITDA (non-GAAP) | $253.9 million | $363.9 million; down 30% |
| Operating cash flow | $197.6 million | $579.7 million |
| Free cash flow (non-GAAP) | $161.9 million | $573.3 million |
| Cash and cash equivalents, March 31 | $798.1 million | $981.9 million at December 31, 2018 |
| Total debt carrying amount, March 31 | $1,361.7 million | $1,367.0 million at December 31, 2018 |
| Available liquidity, March 31 | $1,114.1 million | — |
Operating profit equaled approximately 14.8% of revenue, versus 16.3% in Q1 2018; Adjusted EBITDA equaled approximately 20.3% of revenue, versus 24.9%. These ratios are calculated from reported figures and are not company-presented GAAP margin measures. Lower revenue chiefly reflected a 16% decline in total tons sold, including reduced metallurgical and Powder River Basin volumes. Common-stockholder income and EPS increased despite lower continuing-operations earnings largely because Q1 2018 included $102.5 million of preferred-stock dividends.
At March 31, current assets were $1,860.7 million and current liabilities were $1,049.2 million. Total liabilities were $4,025.4 million. The company paid $214.4 million in dividends, including a $200 million supplemental dividend, and repurchased $98.8 million of common stock during the quarter.
Material changes and segment results
- Seaborne Thermal revenue rose 25% to $251.0 million and Adjusted EBITDA rose to $94.7 million, supported by higher volumes and improved Wambo performance.
- Seaborne Metallurgical revenue fell 30% to $324.5 million and Adjusted EBITDA fell 48% to $85.8 million. North Goonyella’s suspension, Millennium mine sequencing and other production issues weighed on results; Shoal Creek, acquired in December 2018, partly offset the decline.
- Powder River Basin revenue fell 26% to $287.3 million and Adjusted EBITDA fell 51% to $36.4 million, principally due to severe flooding and rail disruptions, as well as weaker realized pricing.
- Middlemount equity-affiliate income declined to $3.8 million from $22.2 million, reflecting production issues.
- Operating cash flow and free cash flow were substantially below the prior-year period. Management cited lower cash from mining operations, a smaller release of collateral arrangements and less favorable working-capital movements. Q1 2018 cash flow benefited from a $214 million collateral release.
Outlook, unusual items and risks
- North Goonyella: Mining has been suspended since a September 2018 fire. In Q1 2019 Peabody recorded $36.9 million of containment and idling costs, a further $24.7 million equipment-loss provision, and a $125 million insurance recovery, the policy maximum above a $50 million deductible. The company reported collecting the full recovery by the filing date. Re-entry work had progressed, but a Queensland Mine Inspectorate directive caused a multi-week delay. If plans proceed as contemplated, management expects about 2 million tons of production in 2020; it expects $30–$35 million of quarterly idling and re-entry costs for the rest of 2019 and approximately $110 million of North Goonyella capital. If no future mining occurs, additional charges could include about $275 million for the mine’s remaining carrying value and $10 million for leased equipment, plus other potential costs.
- Capital spending: 2019 capital expenditure guidance was reduced to $350–$375 million from the prior $375–$425 million range because certain projects were deferred.
- Markets: Management described U.S. thermal coal demand as pressured by lower natural gas prices and coal-plant retirements; flooding disrupted PRB rail shipments. Seaborne thermal demand and pricing were subdued, while management expected 2019 metallurgical coal import growth of 5–10 million tonnes globally, with supply increases largely expected from Australia. These are forward-looking expectations, not guarantees.
- Debt and liquidity: The company reported compliance with debt restrictions and covenants. The $350 million revolver was used for $106.5 million of letters of credit, not borrowings; the receivables securitization facility had no borrowings and $131.7 million of letters of credit. Reclamation obligations and financial-assurance requirements could increase cash, surety or letter-of-credit needs.
- Contingencies: A Queensland claim involving Peabody subsidiaries seeks up to A$1.1 billion plus interest and costs; trial began in April 2019. Other matters include Patriot-related black-lung and pension obligations, climate-related litigation, and regulatory and permitting matters. The filing describes management’s positions and, where stated, its belief that claims are not meritorious; outcomes remain uncertain.
- Other items: Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; it materially affected the balance sheet but not results or cash flows. Shoal Creek contributed $116.2 million of Q1 revenue and was still undergoing review of its internal controls.
Important facts for investors to verify
- Progress, regulatory clearance, timing, costs and production assumptions for North Goonyella re-entry, and whether further impairment or closure costs arise.
- Whether lower U.S. coal demand, PRB transportation disruptions and metallurgical mine sequencing persist, and how segment volumes, realized prices and per-ton margins develop.
- Cash generation after the unusually high prior-year comparison, upcoming dividends and repurchases, capital spending, and available liquidity after financial-assurance needs.
- Developments in the A$1.1 billion Queensland litigation and other material legal, reclamation, pension and environmental exposures.
- Final purchase accounting and integration of Shoal Creek, including internal-control assessment and its contribution to metallurgical results.