Peabody Energy Corporation — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012. Peabody operates coal mines in the U.S. and Australia and conducts coal trading and brokerage. Results include Macarthur Coal (PEA-PCI), acquired in late 2011, so comparisons with 2011 are affected by the acquisition.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1,998.2 million | $1,980.5 million | $4,036.8 million | $3,723.6 million |
| Operating profit | $277.9 million | $479.3 million | $628.1 million | $793.6 million |
| Income from continuing operations | $215.3 million | $307.8 million | $397.6 million | $502.4 million |
| Net income attributable to common stockholders | $204.7 million | $284.8 million | $377.4 million | $461.3 million |
| Diluted EPS attributable to common stockholders | $0.75 | $1.05 | $1.39 | $1.69 |
| Adjusted EBITDA, consolidated | $453.4 million | $599.1 million | $966.0 million | $1,034.4 million |
- Revenue rose 0.9% in Q2 and 8.4% year to date; operating profit fell 42% and 21%, respectively. Operating margins were approximately 13.9% in Q2 (24.2% prior year) and 15.6% year to date (21.3% prior year).
- Cash provided by operating activities was $675.5 million for the first half, versus $615.6 million. Investing activities used $515.9 million; property, plant and equipment additions were $427.6 million. Financing activities used $469.5 million.
- Cash and equivalents were $489.2 million at June 30, down from $799.1 million at year-end. Management reported available liquidity of $1.9 billion, including $1.4 billion available under the revolver; the receivables securitization program had no remaining capacity.
- Total debt was $6.385 billion, down from $6.658 billion at year-end. Cash less total debt implies net debt of approximately $5.896 billion, slightly above the year-end figure of $5.858 billion. The current ratio was approximately 1.48, versus 1.65 at year-end.
- Dividends declared were $0.085 per share for Q2 and $0.17 per share for the first half. The company repurchased $99.9 million of shares during Q2 and repurchased $241.6 million principal of senior notes, recognizing a $2.8 million debt-extinguishment loss.
Changes versus the prior comparable period
- Q2 common-stockholder net income declined 28%; first-half net income declined 18%. Higher interest expense and depreciation, largely related to the PEA-PCI acquisition, and weaker Australian mining performance pressured earnings.
- Q2 consolidated Adjusted EBITDA fell $145.7 million. Australian Mining Adjusted EBITDA fell $156.1 million, while Western and Midwestern U.S. Mining improved. First-half consolidated Adjusted EBITDA declined $68.4 million.
- U.S. coal demand was weak amid mild weather, slower economic activity and coal-to-gas switching. Q2 benchmark prices were down 36% for metallurgical coal and 12% for thermal coal year over year. Lower Australian realized prices and higher mining costs offset acquisition-related and expansion-driven volume growth.
- First-half sales volume was essentially flat at 119.1 million tons. Australian Mining volume rose 22.3%, while Western U.S. volume fell 3.7%.
Outlook, commentary and risks
- Management expected 2012 U.S. sales of 185–195 million tons, fully committed and priced; 2012 metallurgical coal sales of approximately 13–14 million tons; Australian thermal exports of 11–12 million tons; and total Australian production of 31–34 million tons. As of July 24, 2012, 25%–30% of planned 2013 U.S. production remained unpriced.
- 2012 capital expenditures were forecast at $1.0–$1.2 billion, reduced from the prior $1.2–$1.4 billion range; $600–$700 million was earmarked for growth projects. Management said liquidity and operating cash flows should cover anticipated capital needs.
- Risks highlighted include coal and natural-gas prices, demand and customer shipment reductions, mining and geological challenges, contractor performance, transport constraints, cost inflation, integration of PEA-PCI, foreign exchange, and environmental and regulatory changes. Australia’s minerals resource rent tax and carbon-pricing framework took effect July 1, 2012; estimated initial fugitive-emissions costs averaged about A$2 per ton produced annually.
- Patriot Coal filed for Chapter 11 on July 9, 2012. Peabody said it could face up to $150 million of possible black-lung liabilities if Patriot cannot meet its obligations.
- Notable contingencies include a Gulf Power award of $20.5 million plus $6.9 million prejudgment interest, which Peabody was appealing and for which it recorded no liability; and Monto-related claims seeking at least A$1.193 billion, whose potential loss Peabody said could not be reasonably estimated. The company stated it believed these matters were unlikely to materially affect its financial position, results or cash flows.
- Peabody had recovered $20 million of the $52.1 million margin held by MF Global UK; the remaining claim was included in receivables, and the company could not reasonably estimate a reserve. Management also cited a $59.7 million Q2 tax benefit from restructuring PEA-PCI tax entities.
Investor verification priorities
- Track U.S. coal demand, planned shipment reductions, 2013 pricing exposure and the impact of natural-gas prices on utilization.
- Assess whether Australian coal prices, production, contractor performance and PEA-PCI integration support management’s volume and capital-spending targets.
- Verify cash generation and liquidity against capital expenditures, federal coal lease payments, debt service and the lack of unused securitization capacity.
- Monitor the potential Patriot black-lung exposure and developments in the Gulf Power, Monto and MF Global UK matters.
- Separate recurring performance from acquisition-related costs, the $59.7 million tax benefit, trading results and other unusual items when assessing earnings quality.