Peabody Energy Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. Filed November 3, 2016. Peabody and most wholly owned U.S. subsidiaries were operating as debtors-in-possession in Chapter 11, filed April 13, 2016; Australian operations and most other international subsidiaries were not included in the filings.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $1,207.1 million | $1,418.9 million | $3,274.5 million | $4,296.1 million |
| Adjusted EBITDA | $108.3 million | $129.0 million | $188.9 million | $381.6 million |
| Operating loss | $21.6 million | $20.4 million | $232.0 million | $994.0 million |
| Loss from continuing operations | $95.6 million | $144.4 million | $488.1 million | $1,316.0 million |
| Net loss attributable to common stockholders | $135.5 million | $304.7 million | $536.1 million | $1,526.6 million |
Loss figures are shown as losses. Q3 revenue fell 15% and nine-month revenue fell 24% year over year. Coal sales volumes were down 10% in Q3 and 21% year to date. Management attributed the revenue decline mainly to lower prices and volumes. Nine-month Adjusted EBITDA fell 50%; Australian Metallurgical Mining and Trading and Brokerage were notable areas of weakness. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: For the first nine months, operating cash outflow was $276.8 million, investing cash outflow was $199.7 million, and financing provided $1,383.0 million. Cash increased $906.5 million to $1,167.8 million, primarily reflecting borrowings, including prepetition revolver draws and DIP financing.
- Liquidity: Reported available liquidity was approximately $1.2 billion, substantially cash. The 2013 Revolver was in default and unavailable after the bankruptcy filing. Cash transfers between debtor and non-debtor entities were restricted in certain circumstances. The company warned that liquidity needs could exceed expectations.
- Debt: Reported total indebtedness was $8,094.7 million, including $7,601.6 million classified as liabilities subject to compromise and $493.1 million as current debt. The $500 million DIP term facility had a reported carrying amount of $470.5 million. DIP borrowing carried interest at LIBOR plus 9% or base rate plus 8%, subject to stated terms.
- Balance sheet: Total assets were $12,235.2 million and total liabilities $11,711.3 million at September 30. Liabilities subject to compromise were subject to adjustment through the bankruptcy process. Management said a significant balance-sheet restructuring was needed to continue as a going concern.
- Margins and costs: Mining-segment gross margin per ton varied materially: Q3 Australian Metallurgical Mining was negative $10.59 per ton, while Powder River Basin was $3.76. Operating cost reductions helped offset weak demand and pricing, but did not prevent lower overall EBITDA.
Material changes and unusual items
- Chapter 11 filing accelerated prepetition debt obligations, which became subject to the automatic stay. Most prepetition contractual interest was not recorded after filing; adequate-protection payments to certain first-lien creditors were recorded as interest expense. Q3 reorganization expense was $29.7 million; nine-month expense was $125.1 million, including $75.2 million of derivative termination losses and professional fees.
- Compared with 2015, losses improved substantially, largely because 2015 included $900.8 million of asset impairments and significant Patriot-related charges. The 2016 nine-month results also included a $68.1 million gain from a settlement of Patriot/UMWA obligations and $17.2 million of impairment charges.
- All corporate foreign-currency and diesel-fuel hedge contracts had been terminated following the bankruptcy filing. The company estimated that accumulated hedge losses of approximately $68 million for foreign currency and $50 million for fuel could be reclassified to earnings over the next 12 months.
- The New York Stock Exchange delisted the common stock after the filing; it traded over the counter under ticker BTUUQ. The filing said existing equity was likely to be cancelled in a confirmed reorganization plan, with no assurance of any recovery.
Outlook, commentary and risks
- Management reported a sharp improvement in seaborne coal prices in late 2016, citing stronger Chinese imports and supply constraints. It also noted uncertainty over whether China’s domestic production restrictions and import demand would persist.
- Peabody projected U.S. utility coal consumption to decline approximately 50–65 million tons in 2016 versus 2015, while expecting U.S. thermal coal supply and demand to rebalance in 2017. No company-level earnings or revenue guidance was provided in the supplied filing text.
- The DIP facility imposed liquidity, EBITDA and capital-spending requirements and restructuring milestones. The filing described plan-related deadlines, including a plan filing deadline tied to the CNTA dispute and December 14, 2016, and a disclosure-statement approval deadline of January 31, 2017.
- Key uncertainties include confirmation and execution of a reorganization plan, the treatment of creditors and equity, access to liquidity and vendor credit, coal demand and prices, customer contracts, reclamation bonding, and litigation. Management cautioned that it could not assure successful emergence from Chapter 11.
- Potential claims and contingencies include an asserted UMWA pension claim of $642.7 million, environmental claims exceeding $2.7 billion that Peabody said it would contest, and other legal matters. The company stated that exposure to some claims could not be reasonably estimated.
- On November 3, 2016, a subsidiary agreed to sell the Metropolitan mine and related terminal interest for $200 million cash, subject to adjustment and regulatory approval, with contingent price-linked consideration. Peabody expected an after-tax impairment charge of approximately $180 million in Q4 2016.
Important facts for investors to verify
- Current bankruptcy-plan status, court milestones, and the eventual priority, recovery and treatment of each debt class and existing equity.
- Cash availability by debtor and non-debtor entity, DIP covenant headroom, financing requirements, and the ability to maintain supplier and customer relationships.
- Resolution of the CNTA collateral dispute and its impact on creditor recoveries and the restructuring plan.
- Actual coal prices, sales volumes, segment costs and cash generation relative to the late-2016 market improvement described by management.
- Outcome and potential financial effects of the UMWA pension arbitration, environmental claims, reclamation-bonding requirements and other material litigation.
- Completion and final proceeds from the Metropolitan sale, including regulatory approval, adjustments, contingent consideration and the expected impairment.