Peabody Energy Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Peabody is a coal producer and trader operating in the U.S. and Australia. On April 13, 2016, the company and most U.S. subsidiaries filed for Chapter 11; Australian operations and most other international subsidiaries were not included. The company continued operating as a debtor-in-possession. Figures below are in U.S. dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $1,040.2m | $1,339.3m | $2,067.4m | $2,877.2m |
| Operating loss | $(107.7)m | $(975.8)m | $(210.4)m | $(973.6)m |
| Net loss attributable to common stockholders | $(235.5)m | $(1,045.3)m | $(400.6)m | $(1,221.9)m |
| Adjusted EBITDA | $50.5m | $87.0m | $80.6m | $252.6m |
| Net cash used in operating activities | — | $(431.8)m | $(56.4)m |
- Revenue declined 22% in the quarter and 28% year to date, reflecting lower coal prices and sales volumes. Total tons sold fell 23% and 27%, respectively.
- Quarterly common-stockholder loss improved substantially versus 2015, principally because the prior-year period included $900.8m of impairment charges. The 2016 quarter included $95.4m of Chapter 11 reorganization items. The comparison is not evidence of a return to profitability.
- At June 30, cash and cash equivalents were $1,274.3m, with another $47.1m classified as restricted cash. The company reported available liquidity of approximately $1.3bn, substantially cash; cash held by debtor entities was $749.7m and transfers between certain entities were restricted.
- Total debt carrying value was $7,905.8m, including $7,423.5m classified as liabilities subject to compromise. The latter category also includes other prepetition claims; total liabilities subject to compromise were $8,205.8m. Total liabilities were $11,444.7m and stockholders’ equity was $620.5m.
- The $500m DIP term loan was fully drawn by May 19. DIP borrowings bear interest at LIBOR plus 9% (with a 1% floor) or the base rate plus 8%, and the facility carries liquidity, EBITDA, spending and restructuring milestones.
- Cash from operations was negative despite financing inflows: six-month financing cash flow was $1,379.1m, including borrowing proceeds. Capital additions were $38.1m. No dividends were declared in 2016.
Operating trends and changes from prior periods
- Adjusted EBITDA fell 42% in Q2 and 68% for the first half. Mining-segment Adjusted EBITDA was $118.0m in Q2 versus $264.5m; Australian Metallurgical Mining recorded a $(49.2)m segment result, while Trading and Brokerage recorded $(40.3)m.
- U.S. demand weakness drove substantial volume reductions, especially in Powder River Basin mining. Australian Metallurgical results were pressured by pricing, lower volumes and mine operating impacts. Australian Thermal volumes rose, but lower pricing reduced results.
- Management cited cost control and operational efficiencies; operating costs and expenses were down $202.6m in Q2 and $604.0m for the first half year over year. Cost savings did not offset weaker segment earnings.
- Australian Metallurgical gross margin was negative $13.65 per ton in Q2, versus negative $0.12 a year earlier. Other mining-segment per-ton margins also weakened in several regions.
- Prior-year comparisons also include large impairment charges and 2015 early debt-extinguishment costs. The company recorded $17.2m of impairment in the first half of 2016, versus $900.8m in the first half of 2015.
Outlook, management commentary and material risks
- Management described recent improvement in seaborne coal prices and demand, citing stronger Chinese imports, tighter supply and improved steel production. It nevertheless characterized coal markets as pressured and volatile.
- For 2016, Peabody projected U.S. utility coal consumption to decline approximately 85–105 million tons and total U.S. coal shipments to decline 185–215 million tons. It expected U.S. thermal coal supply and demand to rebalance in 2017 as gas prices rise and utility stockpiles fall. These are management estimates, not guaranteed outcomes.
- The company said it needs significant balance-sheet restructuring to continue as a going concern long term. Its ability to continue depends on profitability, adequate liquidity and a confirmed and implemented Chapter 11 plan; no assurance of successful emergence was given. A plan could materially change asset and liability amounts and classifications.
- Peabody’s common stock was delisted from the NYSE after the bankruptcy filing and traded OTC under BTUUQ. The filing warns that existing equity may be cancelled and holders may receive no recovery.
- Prepetition debt defaults accelerated obligations, while enforcement is generally stayed in bankruptcy. The revolving credit facility could no longer be used. DIP financing, vendor credit, customer relationships, cash transfers and compliance with court and lender requirements remain important liquidity risks.
- Reclamation assurance is a significant contingency: the company had $1,140.3m of self-bonding and $997.6m of third-party surety bonds, bank guarantees and letters of credit. Illinois required replacement of approximately $92m of self-bonding, with the deadline extended to October 31, 2016. State bonding settlements were awaiting court approval as of the filing.
- The amended Wilpinjong customer arrangements require cash collateral of A$50m by September 15, 2016, with A$20m posted by June 30, and compliance with production and cash-flow covenants; failure could permit the customer to appoint a receiver. Peabody reported compliance as of August 5, 2016.
- Hedging counterparties terminated corporate currency and fuel hedges after the bankruptcy filing. The company disclosed exposure to Australian-dollar and diesel-price movements; estimated annual sensitivity was about $94m for a US$0.05 change in the Australian dollar and about $30m for a $10-per-barrel crude-oil change.
- Other notable exposures include the disputed extent and priority of secured claims, a $644.2m UMWA pension withdrawal-liability assessment (disputed and stayed), Patriot-related black-lung liabilities of $131.7m, and ongoing litigation and environmental obligations. The filing states some potential losses cannot be reasonably estimated.
Important facts for investors to verify
- Progress and court approval of a reorganization plan, creditor recoveries, and the ultimate treatment of existing equity.
- Cash availability by debtor/non-debtor entity, ongoing operating cash burn, DIP covenants and milestones, and access to trade credit.
- Replacement or maintenance of reclamation bonding, including Illinois requirements and the status of state settlements.
- Coal-price, volume and segment-margin trends, particularly U.S. demand and Australian metallurgical operations.
- Wilpinjong covenant compliance and whether the customer exercises step-in rights; also monitor the secured-claim dispute and material contingent liabilities.