Peabody Energy Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with the three months ended March 31, 2019 unless otherwise noted. Amounts are in U.S. dollars.
Business context and financial performance
Peabody is a coal producer with mining operations in the United States and Australia. Its reportable segments are Seaborne Thermal, Seaborne Metallurgical, Powder River Basin, Other U.S. Thermal, and Corporate and Other. Q1 results reflect sharply weaker coal demand and pricing, lower sales volumes, and the emerging effects of COVID-19.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $846.2 million | $1,250.6 million |
| Operating profit (loss) | ($93.5) million | $184.5 million |
| Net income (loss) | ($131.5) million | $129.9 million |
| Net income (loss) attributable to common stockholders | ($129.7) million | $124.2 million |
| Diluted EPS attributable to common stockholders | ($1.33) | $1.12 |
| Adjusted EBITDA, a non-GAAP measure | $36.8 million | $254.1 million |
| Net cash from (used in) operating activities | ($4.7) million | $197.6 million |
| Free cash flow, a non-GAAP measure | ($41.8) million | $161.9 million |
Revenue fell 32%, and total tons sold declined 12% to 35.6 million. Approximate net margin was negative 15.5%, versus positive 10.4% a year earlier; Adjusted EBITDA margin was approximately 4.3%, versus 20.3%.
At March 31, 2020, cash and cash equivalents were $682.5 million, total current assets were $1.419 billion, and total current liabilities were $806.0 million. Debt was $1.360 billion at par and $1.307 billion net of issuance costs and discounts. The company reported $1.188 billion of available liquidity at quarter-end. In early April it borrowed $300 million under its revolver, citing financial flexibility amid market uncertainty; after the draw, revolver availability was $192.4 million.
Material changes versus the prior period
- Adjusted EBITDA decreased $217.3 million, and continuing-operations results after tax declined $262.6 million.
- Lower realized coal prices and volumes drove the revenue decline. Seaborne Metallurgical revenue fell 40%, Other U.S. Thermal revenue fell 43%, Seaborne Thermal fell 20%, and Powder River Basin fell 7%.
- Seaborne Metallurgical Mining recorded an Adjusted EBITDA loss of $32.7 million, compared with $85.8 million of Adjusted EBITDA in Q1 2019. Weaker pricing, lower volumes, and a longwall move at Metropolitan contributed.
- Other U.S. Thermal sales were affected by demand-based volume reductions and the 2019 closures of Kayenta and Cottage Grove. Total mining-segment sales volumes declined 13%.
- The prior-year comparison included a $125 million North Goonyella insurance recovery and a $24.7 million provision for equipment losses. These unusual items make the year-over-year earnings comparison less representative of ongoing operations.
- Operating cash flow moved from $197.6 million provided to $4.7 million used. Cash declined $49.7 million during Q1 2020, to $682.5 million.
Outlook, risks, contingencies, and unusual items
- COVID-19 and markets: Management said the pandemic’s duration and full financial impact were not estimable. It cited weak seaborne thermal demand, curtailed steel production, low U.S. natural-gas prices, reduced electricity demand, and elevated utility coal inventories. U.S. customer 2020 volume nominations had fallen about 8% from the start of the year. Seaborne benchmark prices had fallen further by April 30, 2020.
- Outlook: The filing gives no quantified full-year earnings or production guidance. Management warned of possible significant year-over-year demand declines and continued pressure on U.S. thermal coal. It reported approximately $4.0 billion of committed future customer revenue for which volumes and prices were fixed or reasonably estimable; about 46% was expected to be recognized over the next 12 months. This estimate excludes significant contracts with prices that cannot be reasonably estimated.
- Cost actions and capital returns: Peabody recorded $6.5 million of restructuring charges in Q1 and cut approximately 250 additional positions in April, with further Q2 restructuring charges expected. Management paused debt-reduction activity. Dividends were suspended for 2020; share repurchases had been suspended in 2019 and none were planned.
- North Goonyella: The mine remained suspended following a 2018 fire, and management expected no meaningful production for three or more years. A commercial process could result in a partner, joint venture, sale, or no transaction. If future mining does not occur and no commercial alternative is found, Peabody could record additional charges of up to approximately $300 million, plus possible take-or-pay and other idling or closure costs. Rail and port commitments were renegotiated, with holding costs expected to fall to about $5 million per quarter by the second half of 2020.
- Asset sensitivity: Approximately $2.1 billion of assets were identified as particularly sensitive to coal prices, costs, demand, and customer concentration. No further impairment was recorded at March 31, 2020.
- Proposed Arch joint venture: The FTC challenged the proposed PRB and Colorado operations joint venture. Federal court proceedings were scheduled for July 2020 and an FTC administrative hearing for October 2020, subject to possible COVID-related delays. Completion remained contingent on favorable resolution and other conditions; fair-value accounting at transfer of control could result in a significant loss.
- Commitments and legal matters: Take-or-pay commitments totaled $945 million, with approximately $105 million due within one year. Reclamation asset retirement obligations were $758.7 million and were supported by surety bonds and letters of credit. The filing describes ongoing litigation and regulatory matters, including Patriot-related liabilities and California climate-related lawsuits; management did not expect other pending matters to materially affect results, based on information available.
- Debt market valuation: Estimated fair value of debt was $793.5 million at March 31, 2020, compared with $1.271 billion at December 31, 2019, despite debt at par of $1.360 billion. The filing attributes valuation estimates to market prices and other assumptions; investors should consider the significant difference when assessing market conditions and debt value.
Most important facts for investors to verify
- Subsequent coal prices, customer nominations, volumes, and the extent to which COVID-19 disruptions affected demand and collections.
- Cash use, revolver borrowing and remaining availability after the April draw, covenant compliance, and liquidity needs under prolonged weak markets.
- North Goonyella’s regulatory, commercial, production, and impairment prospects, including the potential for up to approximately $300 million of additional charges.
- Progress and outcome of the FTC proceedings and whether the Arch joint venture closes, is delayed, or is abandoned.
- Whether sensitive assets require impairment and whether the company can meet its reclamation, take-or-pay, and other contractual obligations.
- Underlying operating trends apart from prior-year insurance recovery and equipment-loss items, including the limitations of non-GAAP Adjusted EBITDA and free cash flow.