Peabody Energy Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Peabody is a U.S. and Australian coal producer and trader. It emerged from Chapter 11 in April 2017 and adopted fresh-start accounting; consequently, some 2017 comparisons are not directly comparable. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 comparable period | Change |
|---|---|---|---|
| Revenue | $1,309.4 | $1,258.3 | +4% |
| Operating profit | $165.3 | $152.6 | +8% |
| Net income | $116.4 | $98.7 | +18% |
| Net income attributable to common stockholders | $113.7 | $(20.2) | Prior period included $115.1 of preferred-stock dividends |
| Diluted EPS attributable to common stockholders | $0.90 | $(0.21) | — |
| Adjusted EBITDA | $369.6 | $317.8 | +16% |
Q2 operating margin was approximately 12.6%, versus 12.1% a year earlier; Adjusted EBITDA margin was approximately 28.2%, versus 25.3%. Adjusted EBITDA is a non-GAAP measure.
- Six-month results: Revenue was $2,772.1, up 7% from combined 2017 periods of $2,584.5. Adjusted EBITDA was $733.5, up 11% from $659.1. Net income was $323.4; 2017 combined net loss was $113.0. These comparisons span predecessor and successor accounting periods.
- Cash flow: Six-month operating cash flow was $915.4; investing cash outflow was $18.0; reported free cash flow was $897.4. Operating cash flow included return of $323.1 in collateral, so the period’s cash generation was not solely from operations. Capital expenditures were $125.6.
- Liquidity: Cash and cash equivalents were $1,451.7 at June 30, up from $1,012.1 at year-end 2017. Reported available liquidity was $1,775.9, including cash and availability under the receivables securitization program. Current assets were $2,468.4 and current liabilities $1,083.9.
- Debt: Total debt carrying amount was $1,403.0, down from $1,460.8 at year-end; cash exceeded debt by approximately $48.7. The debt included $1.0 billion of secured notes due 2022 and 2025 and a term loan due 2025. The company amended the term loan in April, lowering its rate to LIBOR plus 2.75% and extending maturity to 2025; it repaid $46.0 in connection with the amendment.
- Capital returns: Six-month financing outflows included $374.5 of common-stock repurchases and $29.3 of dividends. By June 30, the company had repurchased about 15.0 million shares for $549.9 under its program, with $450.1 remaining. Preferred shares were automatically converted into common shares in January; the resulting $102.5 preferred dividend charge was non-cash.
Changes and operating trends
- Australian Metallurgical Mining was the strongest contributor: Q2 revenue rose 45% and Adjusted EBITDA more than doubled, reflecting recovery from prior-year Cyclone Debbie and a longwall move at Metropolitan Mine.
- Powder River Basin revenue declined 12% in Q2, with lower realized prices and sales volumes; segment Adjusted EBITDA fell 27%. U.S. utility coal consumption was down about 5% year to date amid retirements and competition from natural gas and other generation.
- Australian Thermal Mining Q2 revenue rose 12%, supported by pricing, but first-half performance was affected by Wambo Mine production issues. First-half segment Adjusted EBITDA declined 7%.
- Q2 corporate and other revenue reflected $48.1 of unrealized hedge losses. First-half results also included $29.0 of net gains on asset disposals and a $12.8 reorganization credit related to settlement gains. The company reported no asset impairment charges in the 2018 period.
Outlook, risks and contingencies
- Management described strong Asian seaborne thermal-coal demand and solid global steel production, but noted that Chinese policy, supply constraints and market prices could change. U.S. coal demand remained pressured by low natural-gas prices, plant retirements, and renewable and nuclear generation. No specific company-wide full-year earnings or production guidance is stated in the provided filing text.
- At June 30, fixed or reasonably estimable customer contracts represented approximately $6.3 billion of expected future revenue; about 45% was expected to be recognized over the following 12 months. Actual results may vary with price and volume adjustments, optionality and force majeure; this estimate excludes contracts with prices that could not be reasonably estimated.
- Key risks include coal-price and demand volatility, customer and trading-counterparty credit, mine operating and transport costs, permitting and environmental rules, reclamation bonding, pension and postretirement obligations, and restrictions under debt agreements. The company had $1,587.9 of surety bonds and bank guarantees and $276.1 of letters of credit supporting obligations; increased cash collateral requirements could reduce liquidity.
- Significant contingencies include a Queensland lawsuit seeking up to A$1.8 billion plus interest and costs, for which the company said a potential loss could not be reasonably estimated; a recorded $135.5 liability for certain Patriot-related black-lung claims; and a discounted $48.8 liability for the UMWA pension settlement. The company is contesting the claims as described in the filing.
- After quarter-end, Peabody began seeking noteholder consent for proposed indenture amendments that would expand permitted restricted payments. Approval was not established in this filing. It also completed a sale of metallurgical coal resources in July and expected to record an approximately $22 gain in Q3.
Most important facts for investors to verify
- How much of the $915.4 first-half operating cash flow and $897.4 free cash flow is recurring, given the $323.1 collateral return.
- Whether Australian Metallurgical Mining’s improved results are sustainable and whether Wambo Mine production issues persist.
- The company’s realized coal prices, sales volumes and U.S. demand exposure, particularly in the Powder River Basin.
- Progress on share repurchases, dividends and the proposed note indenture amendments, including remaining covenant capacity.
- Developments in major litigation, black-lung and pension liabilities, reclamation assurance requirements and related liquidity needs.