Peabody Energy Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Peabody is a U.S. and Australian coal producer, with trading and brokerage operations. The company emerged from Chapter 11 in April 2017 and adopted fresh-start accounting; comparisons with pre-emergence periods are therefore not fully comparable. The nine-month 2017 comparison below combines successor and predecessor periods where indicated by the filing.
Financial performance and position
| Metric | Q3 2018 | Comparable period / context |
|---|---|---|
| Total revenue | $1,412.6 million | Down 4% from $1,477.2 million in Q3 2017 |
| Operating profit | $130.3 million | Down from $209.5 million |
| Net income | $79.8 million | Down from $230.0 million; Q3 2017 included an $84.1 million tax benefit |
| Net income attributable to common stockholders | $71.5 million; diluted EPS $0.59 | $201.4 million; diluted EPS $1.47 in Q3 2017 |
| Adjusted EBITDA | $372.1 million | Down 10% from $411.3 million |
| Adjusted EBITDA margin | Approximately 26.3% | Approximately 27.8% in Q3 2017; calculated as Adjusted EBITDA divided by revenue |
Q3 operating margin was approximately 9.2%, compared with 14.2% a year earlier. The decline in earnings also reflected a $49.3 million provision for North Goonyella equipment losses. Lower interest expense and depreciation, and higher gains on asset disposals, partly offset the pressure on results.
- Nine-month results: Revenue was $4,184.7 million, net income $403.2 million, and Adjusted EBITDA $1,105.6 million. Adjusted EBITDA was up 3% from the combined 2017 comparison of $1,070.4 million; revenue was up 3% from $4,061.7 million.
- Sales volumes: Q3 total tons sold fell 6% to 49.1 million. Powder River Basin volumes declined 6%, Australian metallurgical volumes 20%, and Australian thermal volumes 8%.
- Segment trends: Q3 Australian thermal Adjusted EBITDA rose to $145.3 million from $97.8 million, largely on higher realized prices. Australian metallurgical Adjusted EBITDA fell to $90.7 million from $143.1 million, affected by the North Goonyella longwall move and lower volumes. U.S. mining segments also reported lower Q3 Adjusted EBITDA.
| Liquidity and balance sheet | September 30, 2018 |
|---|---|
| Cash and cash equivalents | $1,371.0 million |
| Available liquidity | $1,694.6 million |
| Total debt, net of debt issuance costs | $1,376.2 million |
| Current assets / current liabilities | $2,306.9 million / $1,124.2 million |
| Total liabilities / stockholders’ equity | $4,232.1 million / $3,288.6 million |
Cash flow, nine months: Operating activities provided $1,260.8 million; investing activities used $65.5 million; financing activities used $863.1 million. Management-reported Free Cash Flow was $1,195.3 million. Operating cash flow included $323.1 million of returned collateral, so cash generation should be assessed with that item in mind. Financing outflows included $699.6 million of common-stock repurchases, $44.6 million of dividends paid, and $73.0 million of debt repayments.
Debt consisted principally of $1.0 billion of senior secured notes due 2022 and 2025, plus a senior secured term loan. Debt declined from $1,460.8 million at December 31, 2017. The term loan was amended in April 2018 to lower its rate to LIBOR plus 2.75% and extend maturity to 2025.
Material changes and developments
- Revenue fell year over year in Q3 mainly because of lower sales volumes, including a North Goonyella longwall move; higher Australian realized pricing partly offset the decrease.
- North Goonyella experienced elevated gas levels followed by a fire. Mining was suspended, and access to parts of the mine remained restricted. The company recorded $9.0 million of related costs and a $49.3 million equipment-loss provision.
- Peabody agreed to acquire the Shoal Creek metallurgical coal mine in Alabama for $400 million, subject to customary adjustments, approvals and other conditions. The company expected to fund the acquisition with available cash.
- The company repurchased approximately 22.8 million shares for $874.9 million through September 30. The board subsequently expanded the repurchase authorization to $1.5 billion on October 30. A quarterly dividend of $0.13 per share was declared in October.
- Peabody adopted the new revenue-recognition standard in 2018; the opening retained-earnings adjustment was a $22.5 million reduction. Management said the overall adoption impact was immaterial.
Outlook, risks and contingencies
- Operating outlook: Management described seaborne thermal and metallurgical coal markets as supported by demand in China, India and other Asian markets. It also noted U.S. coal demand pressures from low natural-gas prices, coal plant retirements and increased renewable generation. The filing did not provide a specific company-wide earnings or production guidance range.
- North Goonyella uncertainty: Management estimated $20–$25 million in fourth-quarter containment, monitoring and planning costs, plus approximately $15–$20 million per quarter to keep the mine idle. If mining does not resume, potential additional charges include approximately $284 million for the mine’s remaining carrying value and $61 million for additional leased equipment, plus possible take-or-pay and idling or closure costs. The company is pursuing insurance under policies with $125 million of combined property-damage and business-interruption limits above a $50 million deductible; recovery amount and timing are uncertain.
- Acquisition conditions: Shoal Creek’s expected fourth-quarter 2018 closing depended on approvals and, among other conditions, a new collective bargaining agreement replacing multi-employer pension-plan participation with a 401(k) plan.
- Contracted revenue: The company expected approximately $5.8 billion of revenue from customer contracts with fixed or reasonably estimable volumes and prices; about 47% was expected over the next 12 months. This estimate excludes contracts with variable prices that cannot be reasonably estimated and remains subject to price, volume and force-majeure provisions.
- Other exposures: The filing describes significant reclamation and mine-closure obligations, surety bonds and guarantees, and legal proceedings. A Queensland claim related to a mine project seeks up to A$1.8 billion plus interest and costs; Peabody disputes the claim and said any potential loss could not be reasonably estimated. Recorded Patriot-related liabilities include $135.9 million for black-lung claims and $35.3 million for the UMWA pension-plan settlement balance.
- Market and regulatory risks: Key risks include coal-price and demand volatility, customer and trading-counterparty performance, Australian-dollar exposure, fuel costs, mine safety and geology, permitting and environmental rules, labor relations, and the cost or availability of reclamation financial assurances. The filing reports no diesel-fuel derivatives outstanding at quarter-end.
- Safety: A haul-truck driver at the Bear Run Mine was injured in an incident in September and later died. The investigation was ongoing.
Key facts for investors to verify
- Progress on North Goonyella containment, mine access and potential restart; updated costs, impairment exposure, take-or-pay obligations and insurance recovery.
- Whether Shoal Creek closes on the expected terms and timing, and the resulting cash use and operating contribution.
- Whether coal prices, sales volumes and segment margins—particularly U.S. thermal and Australian metallurgical—remain consistent with management’s market commentary.
- Cash-flow quality, including the effect of returned collateral, and the funding impact of repurchases, dividends, capital spending and the acquisition.
- Debt repayment requirements, restricted-payment covenant capacity and the effect of reclamation bonding or other assurance requirements on available liquidity.
- Developments in the material legal and regulatory matters, including the A$1.8 billion claim, and any changes to recorded liabilities or contingencies.