Peabody Energy Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Peabody produces and markets thermal and metallurgical coal in the U.S. and Australia. Results reflect sharply weaker coal demand and prices amid COVID-19 disruptions, as well as the continuing decline in U.S. coal-fired power generation.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $626.7 million | $1,149.0 million | $1,472.9 million | $2,399.6 million |
| Operating profit (loss) | $(1,510.9) million | $79.5 million | $(1,604.4) million | $264.0 million |
| Net income (loss) attributable to common stockholders | $(1,544.2) million | $37.1 million | $(1,673.9) million | $161.3 million |
| Diluted EPS attributable to common stockholders | $(15.78) | $0.34 | $(17.16) | $1.48 |
| Adjusted EBITDA (non-GAAP) | $23.4 million | $230.0 million | $60.2 million | $484.1 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(53.1) million | $377.0 million |
| Free cash flow (non-GAAP) | Not separately provided for the quarter | Not separately provided for the quarter | $(168.7) million | $315.4 million |
- Q2 revenue fell 45% year over year; first-half revenue fell 39%. Total tons sold declined 28% in Q2 and 20% in the first half.
- Q2 and first-half results include a $1,418.1 million impairment charge, primarily for the North Antelope Rochelle Mine. The charge drove the reported net loss; Adjusted EBITDA excludes it and is a non-GAAP measure.
- At June 30, cash was $848.5 million, versus $732.2 million at year-end 2019. Total debt carrying value was $1,607.9 million, up from $1,310.8 million. The company borrowed $300 million on its revolver during Q2.
- Available liquidity was $926.1 million at June 30, down from $1,275.8 million at December 31, 2019; it was approximately $822 million at July 31. The filing attributes the decline in facility availability to borrowing, additional letters of credit and lower eligible receivables.
- Total assets fell to $4,948.8 million from $6,542.8 million, largely reflecting impairment; total stockholders’ equity declined to $989.3 million from $2,672.5 million.
Material changes and operating performance
- Segment Adjusted EBITDA for Q2 was $27.7 million in Seaborne Thermal, $(36.1) million in Seaborne Metallurgical, $39.3 million in Powder River Basin, $32.9 million in Other U.S. Thermal, and $(40.4) million in Corporate and Other.
- Seaborne Metallurgical was particularly weak: Q2 tons sold fell 48%, and the segment recorded negative Adjusted EBITDA. Lower demand and prices, inventory write-downs, Shoal Creek conveyor-upgrade costs and a Metropolitan longwall move contributed.
- U.S. thermal volumes were also pressured by reduced demand and mine closures. Lower sales volumes and production efficiencies reduced operating costs, but did not offset weaker revenue.
- Management recorded $23.0 million of restructuring charges in the first half, primarily related to workforce reductions. The prior-year comparison included a $125 million North Goonyella insurance recovery; no comparable recovery occurred in 2020.
Outlook, risks and contingencies
- Management expects continued COVID-19-related disruption and weak demand and prices. It described near-term seaborne demand as uncertain and U.S. thermal coal conditions as especially challenging, citing low gas prices, high customer inventories and competition from gas and renewables. The filing provides no specific earnings or revenue guidance.
- Expected 2020 capital expenditures were reduced to approximately $200 million from approximately $250 million. Fixed or reasonably estimable customer contracts represented approximately $4.1 billion of future revenue at June 30; about 43% was expected to be recognized over the following 12 months. This estimate excludes contracts with prices that cannot be reasonably estimated and remains subject to contract provisions and other risks.
- Peabody warned of significant risk of breaching its credit agreement’s first-lien leverage ratio in the second half of 2020 absent successful mitigating action. A breach could trigger acceleration and cross-defaults under senior notes and certain leases. Potential actions include seeking a waiver or amendment, asset sales, or repaying revolver borrowings and cash-collateralizing letters of credit; success is not assured and could further constrain liquidity.
- The FTC’s challenge to the proposed Peabody-Arch PRB/Colorado joint venture remained unresolved. The filing reported court proceedings and a decision expected in Q3 2020; the venture was subject to regulatory and other closing conditions.
- North Goonyella remained suspended following a 2018 fire. Peabody said it could incur up to approximately $300 million of additional charges if the mine has no future use or commercial alternative, plus possible take-or-pay and idling or closure costs.
- Approximately $850 million of assets across several segments were identified as especially sensitive to coal pricing, costs, demand and customer concentration; management reported no further impairment was required at June 30.
- Other exposures include $1.2 billion of take-or-pay commitments, $1,589.4 million of surety bonds and $283.6 million of letters of credit. The company stated it did not expect material losses from guarantees beyond recorded liabilities. Dividends were suspended in 2020.
Most important facts for investors to verify
- Whether Peabody obtained a waiver or amended its credit agreement, and whether it remained compliant with the leverage covenant in the second half of 2020; also track liquidity after July 31.
- Whether coal demand, realized prices, sales volumes and segment margins stabilized, particularly in seaborne metallurgical and U.S. thermal markets.
- Whether North Antelope Rochelle and the approximately $850 million of other at-risk assets required further impairment, and what ultimately happened at North Goonyella.
- The outcome and timing of the FTC proceeding and whether the proposed PRB/Colorado joint venture was completed.
- Whether committed contract revenues converted to shipments and cash as expected, given volume flexibility, pricing adjustments and force majeure provisions.