Peabody Energy Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Financial statements are unaudited. Peabody operates coal mines in the U.S. and Australia and has Trading and Brokerage operations.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2,035.9 million | $1,864.7 million | $5,788.8 million | $5,041.7 million |
| Operating profit | $375.7 million | $444.7 million | $1,128.4 million | $1,011.3 million |
| Income from continuing operations | $283.5 million | $237.6 million | $756.1 million | $589.4 million |
| Net income attributable to common stockholders | $274.1 million | $224.1 million | $735.4 million | $564.0 million |
| Diluted EPS attributable to common stockholders | $1.00 | $0.83 | $2.71 | $2.08 |
| Adjusted EBITDA, consolidated | $504.4 million | $571.3 million | $1,500.1 million | $1,368.9 million |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $1,190.5 million | $892.2 million |
Revenue grew 9.2% in Q3 and 14.8% year to date. Operating profit fell 15% in Q3 but increased 12% for the nine-month period. Net income attributable to common stockholders rose 22% and 30%, respectively; the improvement also reflected lower income tax provisions, including the absence of prior-year tax expense on foreign earnings repatriation. Approximate operating margins were 18.5% in Q3 2011 versus 23.9% in Q3 2010, and 19.5% year to date versus 20.1%.
Q3 consolidated Adjusted EBITDA declined 12%, despite higher revenue. Australian Mining was the main quarterly pressure: its segment Adjusted EBITDA fell to $243.3 million from $323.2 million, as lost production, difficult geology, currency effects and cost inflation outweighed higher realized coal prices. Year-to-date segment Adjusted EBITDA increased 9.8%, led by Australian pricing and improved Midwestern U.S. results. U.S. demand remained weak, while Australian seaborne coal prices and Asian demand were supportive.
Financial position and liquidity
- At September 30, cash and cash equivalents were $1,401.6 million; current assets were $3,005.0 million and current liabilities $1,441.3 million.
- Total debt was $2,502.4 million, down from $2,750.0 million at December 31, 2010. The company redeemed $218.1 million of 5.875% Senior Notes in April. Long-term debt fair value was estimated at $2,645.3 million, above its carrying amount.
- Management reported available liquidity of $2.9 billion, including cash, $1.5 billion available under the revolving credit facility and $61.9 million available under the receivables securitization program. The company said it was in compliance with debt covenants.
- Year-to-date operating cash flow was $1,190.5 million. Investing used $756.8 million, including $616.2 million for property, equipment and mine development; financing used $327.3 million. Cash increased $106.4 million from year-end.
- Equity was $5,322.5 million, versus $4,689.3 million at year-end. Dividends declared were $0.085 per share in Q3 and $0.255 year to date.
Material changes, outlook and risks
- Macarthur acquisition: The all-cash offer became unconditional after PEAMCoal acquired more than 50.01% of Macarthur’s shares. As of November 2, PEAMCoal held a 75.5% relevant interest. The offer was A$16.00 per share, potentially rising to A$16.25 if the 90% threshold was reached by November 11. The company intended to fund the transaction with cash and new borrowing. A $1.0 billion term loan facility was signed October 28; $1.0 billion was outstanding as of November 3. A bridge facility commitment was reduced to $1.0 billion, with no borrowings reported as of November 3. The filing cautions that acquisition financing, integration, additional leverage and currency exposure could adversely affect results.
- Operating outlook: Management expected Q4 2011 to benefit from higher volumes and strong Australian coal pricing, with U.S. volumes also expected to remain strong. North Goonyella’s recovery from a roof fall and longwall relocation was challenging; full operations were expected in mid-November. The company targeted 2011 metallurgical coal sales of 8.5–9.5 million tons. Most 2011 U.S. coal was committed and priced, while 10%–15% of 2012 U.S. coal remained available for pricing. Management described the long-term global coal outlook as positive but noted a soft U.S. market and a third-quarter decline in commodity prices.
- Costs and capital: Management forecast 2011 capital expenditures of $900–$950 million. It identified labor, materials, fuel, royalties, geology and transportation as cost or execution pressures. Capital expenditure purchase commitments were $521.4 million, including $477.6 million due within 12 months.
- Hedges and trading: Cash flow hedge fair-value changes reduced year-to-date comprehensive income. Management expected approximately $230 million of foreign-currency hedge gains and $36 million of diesel hedge gains to be reclassified into earnings over the next 12 months, partly offsetting forecast costs; approximately $76 million of coal-trading hedge losses were also expected to be reclassified. Coal trading revenue was $29.0 million in Q3 versus $62.1 million a year earlier and $34.3 million year to date versus $171.0 million.
- Unusual items and contingencies: The company recorded a $24.5 million provision for the Navajo Nation settlement, which concluded the litigation. A court awarded Gulf Power $20.5 million plus requested prejudgment interest of $6.9 million; Peabody appealed and had recorded no liability, believing it would prevail. Environmental cleanup liabilities were $53.4 million. Total disclosed off-balance-sheet instruments and guarantees were $2,075.9 million, including reclamation self-bonding of $936.9 million.
- Regulatory and counterparty risks: Potential Australian minerals resource rent tax and carbon pricing, U.S. emissions rules, and financial-derivatives regulation could increase costs or affect coal demand and trading. MF Global UK entered administration after quarter-end; Peabody reported approximately $39 million of funds remaining there as of October 31, with recovery subject to claims resolution. Management also cited mining, weather, supply-chain, customer credit, foreign-exchange and financing-market risks.
Important facts for investors to verify
- Final Macarthur ownership, purchase price, funding mix, incremental debt and post-acquisition leverage.
- North Goonyella’s production recovery and the effect of Australian volumes, costs and exchange rates on margins.
- Whether operating cash flow can sustain planned capital spending, Prairie State funding, dividends and acquisition-related debt service.
- Resolution and financial exposure from the Gulf Power appeal, environmental claims and reclamation obligations.
- Recovery of the approximately $39 million held at MF Global UK and the cash-flow impact of hedge and trading positions.