PEABODY ENERGY CORP annual report, FY2010

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Peabody Energy Corporation — 2010 Form 10-K

Reporting period: Fiscal year ended December 31, 2010. Although the request identifies 2010 Q4, this filing reports full-year results; fourth-quarter figures are noted separately below. Amounts are in U.S. dollars unless stated otherwise.

Business context and reporting period

Peabody was a large private-sector coal producer, with majority interests in 28 mines in the United States and Australia and a global coal trading and brokerage business. Its principal segments were Western U.S. Mining, Midwestern U.S. Mining, Australian Mining, and Trading and Brokerage. The filing also reports Corporate and Other.

Financial and operating performance

  • Full-year revenue: $6.860 billion, up 14.1% from $6.012 billion in 2009. Australian Mining revenue rose 50.2% to $2.520 billion, primarily on higher prices and shipments; Trading and Brokerage revenue fell 25.5% to $291.1 million.
  • Profit: Operating profit was $1.326 billion, versus $844.8 million. Income from continuing operations was $805.1 million, versus $457.9 million; net income attributable to common stockholders was $774.0 million, versus $448.2 million. Diluted EPS from continuing operations was $2.86, versus $1.64.
  • Margins: Operating margin was approximately 19.3% versus 14.1% in 2009; continuing-operations net margin was approximately 11.7% versus 7.6%.
  • Adjusted EBITDA: $1.815 billion, up from $1.290 billion. This is a company-defined non-GAAP measure. Segment Adjusted EBITDA increased 32.7% to $2.170 billion; Australian Mining rose to $953.8 million, while Trading and Brokerage declined to $77.2 million.
  • Cash flow: Cash provided by operating activities was $1.087 billion, compared with $1.050 billion in 2009. Investing activities used $703.6 million and financing activities used $77.1 million. Cash and cash equivalents ended the year at $1.295 billion, up from $988.8 million.
  • Liquidity: Total available liquidity was $2.7 billion. The company reported $2.958 billion of current assets and $1.514 billion of current liabilities. It said cash, operating cash flow and available liquidity were expected to cover anticipated requirements over the next 12 months and foreseeable future.
  • Debt and equity: Total debt, including capital leases, was $2.750 billion, broadly unchanged from $2.752 billion in 2009. Stockholders’ equity rose to $4.689 billion from $3.756 billion. The company reported no Revolver borrowings and $1.4 billion of remaining Revolver capacity, net of letters of credit, and said it complied with debt covenants at year-end.
  • Fourth quarter: Revenue was $1.818 billion, operating profit $314.4 million, income from continuing operations $215.7 million, and net income attributable to common stockholders $210.0 million. Diluted EPS from continuing operations was $0.77. The filing attributes fourth-quarter operating pressure to Queensland flooding and weaker Trading and Brokerage results.

Material changes versus the prior comparable period

  • Revenue increased $847.6 million and income from continuing operations increased $347.2 million year over year, reflecting stronger coal markets, higher Australian pricing and increased Australian shipments.
  • Total tons sold rose 0.9% to 245.9 million. Australian Mining sales volume increased 21.1%; Midwestern U.S. Mining fell 6.6%, and Trading and Brokerage volume fell 13.6%.
  • Australian Mining’s weighted average sales price increased 23.9%, and metallurgical coal shipments rose 42% to 9.8 million tons. Late-year Queensland flooding disrupted production and rail and port throughput.
  • Trading and Brokerage Adjusted EBITDA fell 60.1%, mainly due to lower brokerage revenue, unfavorable freight-market movements and shipment deferrals.
  • Operating cash flow increased modestly, while investing cash outflow increased as capital spending rose, including investment in the Bear Run Mine and the NCIG export facility.
  • In 2010, Peabody issued $650 million of 6.5% senior notes due 2020 and used the proceeds, together with cash, to retire $650 million of 6.875% notes due 2013, extending maturity and lowering the coupon.

Outlook, commentary, risks and unusual items

  • Outlook and investment: Management described the long-term global coal outlook as positive, citing anticipated demand growth, particularly in Asia. Planned 2011 capital expenditures were $900–$950 million, including $500–$550 million for new mines and expansion or extension projects; approximately 70% of growth and expansion capital was targeted for Australia.
  • Pricing exposure: As of January 25, 2011, 7–8 million tons of targeted 2011 metallurgical coal volumes and 6–7 million tons of planned seaborne thermal coal volumes remained to be priced for the last three quarters of 2011. Management cautioned that production could be adjusted with demand and that cost increases or operating and transport problems could pressure margins.
  • Unusual operating and tax factors: Queensland flooding adversely affected late-2010 production and shipments. The 2010 tax provision included $84.5 million related to foreign earnings repatriation. Foreign-currency hedge fair value increased about $434 million during 2010, largely reflecting Australian dollar strength.
  • Policy and regulatory risk: The proposed Australian Minerals Resource Rent Tax was not law at filing; if enacted, it was intended to take effect July 1, 2012 and could affect Australian operations. The company also cited uncertainty around U.S. and international environmental and greenhouse-gas regulation, including potential effects on coal-fired generation demand.
  • Operational and financial risks: Key risks include coal-price and customer demand volatility, weather, mine geology and equipment, rail and port capacity, input costs, labor relations, counterparty credit, foreign exchange, hedging collateral needs, and access to surety bonds and letters of credit. Postretirement benefit and pension obligations were significant: the postretirement benefit obligation was $1.031 billion and the net pension liability $109.4 million at year-end.
  • Legal and safety matters: The Navajo Nation sought at least $600 million in actual damages and at least $1 billion in punitive damages in a dispute over coal leases; the company said a potential loss could not be reasonably estimated and believed the case likely would not materially adversely affect it. MSHA notified Peabody of a potential pattern of violations at Willow Lake Mine in November 2010. The company reported no U.S. mine fatalities in the 2010 MSHA disclosures.
  • Controls and audit: Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Whether Australian coal prices and volumes, including unpriced contract exposure, supported results after year-end, and how flooding affected production and delivery commitments.
  • Whether planned 2011 capital expenditures, mine expansions, Prairie State and NCIG projects stayed on budget and schedule, and how take-or-pay commitments affected cash generation.
  • Liquidity availability and covenant headroom, including reliance on the revolving facility, receivables securitization, letters of credit and surety support.
  • Potential earnings and cash-flow sensitivity to coal demand and regulation, Australian tax changes, Australian dollar movements, and pension and retiree-benefit assumptions.
  • Developments in the Willow Lake MSHA matter and material litigation, including the Navajo Nation claims; the filing does not provide a clear estimate of a potential loss for the Navajo litigation.