PEABODY ENERGY CORP quarterly report, Q2 FY2015

Peabody Energy Corporation — Q2 2015 Form 10-Q

Business context and reporting period. Peabody is a coal producer and coal and freight trader, with mining operations in the U.S. and Australia. This unaudited filing covers the quarter and six months ended June 30, 2015; comparisons are with the same 2014 periods unless stated otherwise. Segment results were recast following a change in the chief executive officer, who became the chief operating decision maker.

Financial performance and position

Amounts are in millions of dollars except per-share data, percentages and volumes.

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Total revenue	$1,339.3	$1,758.0	$2,877.2	$3,384.8
Operating profit (loss)	$(975.8)	$32.8	$(973.6)	$35.7
Net loss attributable to common stockholders	$(1,045.3)	$(73.3)	$(1,221.9)	$(121.8)
Basic and diluted net loss per share	$(3.84)	$(0.27)	$(4.51)	$(0.46)
Adjusted EBITDA	$87.0	$213.1	$252.6	$390.0
Operating cash flow	Not provided separately for the quarter	Not provided separately for the quarter	$(56.4)	$80.3

Q2 revenue fell 24%; first-half revenue fell 15%. Total tons sold declined 16% in Q2 and 9% in the first half.
The $900.8 asset impairment charge drove the reported operating loss. It included $527.0 for Australian metallurgical mining, $8.2 for Australian thermal mining and $365.6 for corporate and other, including impaired equity-method investments and Middlemount loans.
Adjusted EBITDA declined 59% in Q2 and 35% in the first half. Segment Adjusted EBITDA was $264.5 in Q2 and $601.7 for six months; Corporate and Other was $(177.5) and $(349.1), respectively.
Q2 operating costs and expenses were $1,198.8, versus $1,467.6; selling and administrative expense was $41.6, versus $59.2. The filing does not provide a comparable consolidated operating margin measure; reported operating results include the impairment charge.
Cash and cash equivalents were $487.1 at June 30, up from $298.0 at year-end 2014. Current assets were $1,694.0 and current liabilities $1,528.4. Total debt was $6,305.2, up from $5,986.8; the filing estimates its fair value at $3,000.3.
First-half investing cash outflow was $36.1, compared with $43.4 of inflow in 2014. Financing provided $281.6, chiefly reflecting the second-lien note issuance and repayment of 2016 notes. Capital expenditure additions were $50.9.

Material changes versus the prior period

Coal markets weakened amid lower steel production, reduced Chinese imports and U.S. coal-to-gas switching. Seaborne benchmark prices were down year over year, and U.S. coal-fired generation fell 13% in Q2 and 15% in the first half.
Revenue declines reflected lower realized prices and volumes. U.S. mining tons sold fell 14% in Q2 and 7% in the first half; Australian metallurgical revenue was down 32% in Q2, while Australian thermal revenue was down 21%.
Impairments, $21.2 of restructuring charges, higher interest expense and $67.8 of first-half debt-extinguishment loss worsened reported results. First-half discontinued operations included a $34.7 Patriot credit-support charge and a $7.6 charge for Wilkie Creek litigation.
Peabody issued $1.0 billion principal amount of 10% secured second-lien notes and used part of the proceeds to tender for and redeem all $650.0 of its 2016 senior notes. The credit facility was amended to provide greater covenant flexibility, while adding collateral and restrictions.
Quarterly dividends were reduced substantially; the board suspended the dividend beginning in Q3 2015. The declared dividend was $0.0025 per share for Q2 2015, compared with $0.085 a year earlier.

Outlook, management commentary and risks

Management targeted 2015 U.S. sales of 180–190 million tons, substantially fully priced at June 30; 2016 volumes were 60%–70% priced. It expected 2015 U.S. realized prices per ton to decline 3%–5% from 2014.
Australian 2015 coal sales guidance was 34–36 million tons, including 14–15 million tons of metallurgical coal and 12–13 million tons of thermal exports. Metallurgical guidance had been reduced by 1 million tons.
2015 capital spending guidance was reduced to $160–170 million. Federal coal lease expenditures were expected to be approximately $280 million, mostly in the second half. Management expected lower per-ton operating costs in both the U.S. and Australia.
Available liquidity was approximately $2.1 billion: $487.1 cash, $1.5 billion available under the revolver (net of letters of credit) and $18.2 of securitization capacity. Management expected liquidity to meet anticipated capital requirements through 2016, assuming continued access to a substantial portion of revolver capacity. First-half operating cash flow was negative, and the company warned continued weak markets could cause further outflows.
Debt covenants were reported in compliance at June 30, but sustained weak results could constrain borrowing capacity or threaten covenant compliance. All three major rating agencies downgraded the company in 2015; counterparties had notified Peabody that some bilateral credit lines would not be renewed. A $34.5 letter of credit was posted in August to support surety bonds.
Patriot’s 2015 bankruptcy increased the recorded credit-support liability to $91.4. Peabody also faces uncertain secondary exposure for Patriot-era black-lung liabilities. A July 2015 UMWA pension-plan lawsuit seeks a ruling on withdrawal liability and alleges at least $767 million is owed; Peabody disputes the claims. The filing says any loss cannot currently be reasonably estimated.
Other material matters include a Wilkie Creek port-services ruling requiring a proposed contract with annual minimum payments of about A$11.8 million through 2026, which Peabody is appealing; the company recorded $7.6 million at the low end of its probable-loss range. Environmental remediation liabilities for legacy sites were $66.2 million undiscounted.
Regulatory and market risks include the EPA’s Clean Power Plan, announced August 3, 2015, which management said could materially adversely affect future results, financial condition and cash flows depending on state implementation. Management’s longer-term coal-demand outlook is more positive but depends on anticipated Asian demand growth and supply constraints.
After the quarter, the board proposed seeking shareholder approval for a reverse stock split at a ratio between one-for-eight and one-for-20. The filing also identifies NYSE minimum-share-price compliance as a risk.

Important facts for investors to verify

Whether coal prices, customer demand and production volumes stabilize, and whether cost reductions offset continued price pressure.
Actual cash generation, revolver availability, covenant headroom and refinancing access, including the April 2016 securitization-program renewal.
The assumptions and potential further write-downs underlying the $900.8 impairment, particularly Australian assets and Middlemount-related loans.
Potential cash exposure from Patriot credit support, black-lung liabilities and the UMWA withdrawal-liability lawsuit, as well as the outcome of the Wilkie Creek appeal.
Final state implementation and legal challenges to the Clean Power Plan, and any resulting changes in U.S. coal demand.
Whether 2015 sales, capital spending and federal lease-payment guidance are achieved, and the shareholder vote and board decision on the proposed reverse split.