Peabody Energy Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; filed May 7, 2010. Amounts are in U.S. dollars unless stated otherwise. Peabody reported U.S. and Australian coal mining, trading and brokerage, and corporate activities. Results include certain businesses classified as discontinued operations.
Financial results and liquidity
| Metric | Q1 2010 | Q1 2009 | Change / context |
|---|---|---|---|
| Total revenue | $1,515.6 million | $1,453.0 million | Up 4.3% |
| Operating profit | $242.2 million | $219.7 million | Up 10.2%; operating margin approximately 16.0%, versus 15.1% |
| Income from continuing operations, after tax | $137.1 million | $141.2 million | Down 2.9%; diluted EPS was $0.50 versus $0.50 |
| Net income attributable to common stockholders | $133.7 million | $170.0 million | Down 21.4%; diluted EPS was $0.50 versus $0.63 |
| Adjusted EBITDA | $357.2 million | $325.4 million | Up 9.8% on the consolidated reconciliation basis |
| Operating cash flow | $164.0 million | $191.5 million | Down $27.5 million; continuing-operations cash flow was $170.6 million versus $220.2 million |
| Investing cash flow | $(112.7) million | $(106.0) million | Higher capital spending and equity investment, partly offset by no comparable federal coal lease spending |
Revenue growth reflected higher Australian coal volumes and higher U.S. pricing. Australian Mining revenue rose 23.9% and Adjusted EBITDA rose 48.2%; Trading and Brokerage Adjusted EBITDA fell 50.5%, principally with lower trading margins. The segment EBITDA subtotal before Corporate and Other was $437.7 million versus $399.0 million; Corporate and Other Adjusted EBITDA was $(80.5) million versus $(73.6) million, producing consolidated Adjusted EBITDA of $357.2 million.
Net income comparisons were affected by discontinued operations: Q1 2009 included approximately $37 million of coal excise tax refund income, while Q1 2010 recorded a $0.4 million discontinued-operations loss. The 2010 income tax provision rose to $56.1 million from $30.2 million, including non-cash Australian tax-account remeasurement expense.
At March 31, cash was $1,025.4 million, total current assets $2,248.6 million and current liabilities $1,167.0 million (working capital $1,081.6 million; current ratio approximately 1.93). Long-term debt, including current maturities, was $2,749.0 million, little changed from $2,752.3 million at year-end; cash less reported debt was approximately $(1,723.6) million. Management reported $2.51 billion of total available liquidity, including cash and $1.5 billion of available borrowing capacity under the senior unsecured credit facility, which matures September 15, 2011. Dividends paid were $18.8 million; dividends declared were $0.07 per share.
Changes, outlook and management commentary
- Total coal tons sold declined 2.0% to 58.3 million. Australian tons sold increased 40.9% to 6.2 million; Western U.S., Midwestern U.S. and Trading and Brokerage volumes declined.
- Management cited improving global and U.S. demand, utility stockpile drawdowns, and stronger Asia-Pacific metallurgical coal demand. It also emphasized cost control, productivity and capital discipline. Results for the quarter are not necessarily indicative of full-year results.
- As of April 22, 2010, full-year sales targets were approximately 185–195 million tons in the U.S., 27–29 million tons in Australia and 240–260 million tons total. U.S. sales were fully contracted at planned production levels; unpriced second-half Australian volumes included 4.5–5.0 million tons of metallurgical coal and 5.0–5.5 million tons of export thermal coal.
- 2010 capital expenditures were expected to be $600–$650 million. Bear Run Mine was expected to ship first coal in Q2 2010 and reach about 8 million tons of annual capacity at full production. The Newcastle coal terminal began shipping in April 2010.
- On April 15, 2010, Peabody submitted a proposal to acquire a controlling interest in Macarthur Coal and was in discussions with Macarthur. The proposal remained subject to customary approvals and other terms; if completed, funding was expected from cash and new debt and/or equity.
- Peabody expected approximately $28 million of 2010 discretionary pension contributions, including $16 million contributed in Q1. Capital expenditure purchase commitments were $68.2 million. A possible NCIG financing shortfall could require Peabody to fund up to A$85 million (approximately $78 million).
Risks, contingencies and unusual items
- Key business risks include coal demand and pricing, customer and counterparty credit, mining and geological conditions, transportation and port performance, fuel and other input costs, foreign exchange, access to credit and surety markets, and environmental regulation and litigation. Management warned that cost inflation, production disruptions or coal-to-gas switching could pressure margins.
- The Navajo Nation litigation seeks at least $600 million in actual damages, at least $1 billion in punitive damages, and changes to coal leases; the Hopi Tribe also seeks damages and lease relief. Peabody said the potential loss could not be reasonably estimated and that it did not expect a material adverse effect based on information available.
- In Gulf Power litigation, the court had ruled on liability for alleged coal-supply shortfalls; a damages trial occurred in February 2010 and a decision was pending. The potential loss could not be reasonably estimated.
- Environmental cleanup liabilities for identified sites were $48.8 million, undiscounted, at March 31, 2010. The filing notes uncertainty around additional claims and ultimate costs. Other disclosed matters include Oklahoma lead litigation and greenhouse-gas-related lawsuits.
- Coal trading positions expose the company to market and counterparty risk. At March 31, 44% of coal-trading credit exposure was with non-investment-grade counterparties. Certain events could require collateral posting; disclosed potential collateral calls included $55.8 million following a material adverse event and an estimated $9 million following specified credit downgrades.
- Off-balance-sheet and bonding arrangements included $2.049 billion of self-bonds, surety bonds and letters of credit supporting reclamation, lease, workers’ compensation and other obligations. Management did not expect material losses from guarantees and off-balance-sheet instruments.
- The IRS appeals process remained open regarding accrued interest income of a foreign subsidiary. Peabody expected to reduce unrecognized tax benefits by approximately $21 million within 12 months, subject to IRS approval.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Australian volume growth and U.S. contract pricing continue to offset weaker trading margins and volume declines in some U.S. operations.
- Full-year sales, unpriced Australian coal volumes and realized pricing against the stated 2010 targets and market benchmarks.
- Cash generation, working-capital movements, planned capital spending, pension contributions and available credit capacity, including the September 2011 facility maturity.
- Funding and approval status of the Macarthur proposal, and any resulting debt or equity issuance; also NCIG’s financing needs and Peabody’s potential contribution.
- Developments and potential exposure in the Navajo Nation, Gulf Power, environmental and other legal matters, for which several losses were not reasonably estimable.
- Coal-trading valuation and counterparty exposure, collateral requirements, and the timing and realizability of the trading portfolio’s reported fair value.