Peabody Energy Corporation — FY 2018 Form 10-K
Business context and period. This annual filing covers the fiscal year ended December 31, 2018; the supplied filing also reports fourth-quarter results. Peabody mines and markets thermal and metallurgical coal in the U.S. and Australia. It acquired Alabama’s Shoal Creek metallurgical mine on December 3, 2018, and included results from December 4 onward. Comparisons with 2017 require care: Peabody emerged from Chapter 11 in April 2017 and adopted fresh-start accounting, creating non-comparable Predecessor and Successor periods. The company combines those periods for certain operating comparisons.
Financial performance and position
| Metric | FY 2018 | Prior comparable information |
|---|---|---|
| Revenue | $5.582 billion | $5.579 billion combined 2017; up 0.1% |
| Operating profit | $661.6 million; 11.9% of revenue | $876.3 million combined 2017 |
| Continuing-operations net income | $645.7 million | $517.6 million combined 2017 |
| Net income attributable to common stockholders | $544.4 million; diluted EPS $4.43 | $498.6 million combined 2017; diluted EPS $3.67 |
| Adjusted EBITDA (non-GAAP) | $1.379 billion; 24.7% of revenue | $1.487 billion combined 2017; down 7.2% |
| Coal produced / sold | 182.1 / 186.7 million tons | 191.5 million tons sold in 2017; down 2.5% |
| Operating cash flow | $1.490 billion | 2017 is split across Successor and Predecessor periods and is not directly comparable |
| Free cash flow (non-GAAP) | $1.360 billion, including an add-back for the Shoal Creek acquisition | $720.0 million for April–December 2017; not a full-year comparison |
| Cash and liquidity | $981.9 million cash; $1.319 billion available liquidity | Cash was $1.012 billion at year-end 2017 |
| Debt | $1.367 billion carrying amount, including capital leases and net of debt issuance costs | $1.461 billion at year-end 2017 |
Operating cash flow was supported in part by $323.1 million of collateral returned after Peabody replaced it with third-party financial assurances. Investing cash outflows included the $387.4 million Shoal Creek purchase and $301.0 million of capital additions. Financing outflows included $834.7 million of common-stock repurchases, $59.6 million of dividends and $85.0 million of debt repayments.
At year-end, total assets were $7.424 billion, total liabilities $3.972 billion and stockholders’ equity $3.452 billion. Current assets were $1.956 billion versus current liabilities of $1.059 billion. Asset retirement obligations totaled $750.2 million; the postretirement benefit liability was $580.4 million and net pension liabilities were $31.1 million.
Material changes and operating developments
- Revenue was nearly flat, but Adjusted EBITDA declined. Total tons sold fell 2.5%; U.S. Powder River Basin sales fell 3.8%, and seaborne metallurgical sales fell 6.0%.
- Powder River Basin revenue decreased 9.4% and Adjusted EBITDA 23.2%, reflecting lower realized prices as higher-priced legacy contracts rolled off, lower demand-related volume, and higher fuel and explosives costs.
- Seaborne thermal Adjusted EBITDA rose 18.3%, primarily from improved realized pricing. Seaborne metallurgical Adjusted EBITDA fell 15.8% despite stronger prices, mainly because of North Goonyella disruption, a longwall move and higher maintenance and operating costs.
- Peabody recorded $66.4 million for expected North Goonyella equipment losses and $58.0 million of containment and idling costs. Q4 continuing-operations income included a $125.5 million actuarial mark-to-market gain; the quarter also included $17.1 million of the North Goonyella equipment-loss provision and $4.9 million of Shoal Creek acquisition costs.
- The remaining Series A convertible preferred shares converted into common stock in January 2018; the conversion generated a $102.5 million non-cash preferred dividend charge for the year. Peabody repurchased $1.010 billion of shares through year-end and had $490.1 million remaining under its program.
Outlook, risks and contingencies
- 2019 operating outlook: Peabody targeted capital expenditures of $375–$425 million, including about $200 million for extension projects and $175–$225 million of sustaining capital. It targeted approximately 140 million tons of U.S. thermal production, with 90–95% of projected U.S. thermal production priced at planned production levels; targeted sales were approximately 20 million tons of seaborne thermal and 10 million tons of seaborne metallurgical coal. These are management estimates, not earnings guidance.
- North Goonyella: The September 2018 mine fire suspended operations, with the timing and feasibility of recovery uncertain. Management targeted re-ventilation and re-entry work beginning in Q1 2019 and described a scenario of limited 2019 output and about 2 million tons of sales in 2020. Expected idling and re-entry costs were $30–$35 million per quarter in 2019, with Q1 expected above that range; planned capital was about $110 million, in addition to possible leased-equipment settlements. Insurance coverage had limits of $125 million above a $50 million deductible; recovery amount and timing were uncertain. If mining does not resume, the company estimated possible additional charges of about $285 million for mine carrying value and $16 million for leased equipment, before other exposures.
- Customer concentration and mine closure: Five largest customers generated 25% of coal-supply-agreement revenue. The largest individual contract, about $327 million of 2018 revenue, expires in 2019. Kayenta Mine depends exclusively on Navajo Generating Station, whose owners did not intend to operate it beyond December 2019; Peabody anticipated Kayenta production and sales could cease in Q3 2019 absent a buyer or continued plant operation.
- Contractual and financial commitments: Australian and U.S. rail and port take-or-pay commitments totaled $1.253 billion, with terms up to 24 years. Total contractual cash obligations were $6.330 billion. Reclamation bonding requirements were $1.239 billion in the U.S. and $225.4 million in Australia; access to bonds, letters of credit and other financial assurance is important to maintaining permits.
- Market and regulatory exposure: Coal prices, competing natural gas and renewables, electricity and steel demand, transportation, operating costs, environmental rules, permitting, reclamation requirements and climate-related financing or divestment actions could affect demand, costs, liquidity and asset values. Management reported no long-lived-asset impairment in 2018, but identified Australian metallurgical assets as especially sensitive to near-term pricing.
- Legal and other matters: A Queensland lawsuit seeks up to A$1.1 billion plus interest and costs; trial was scheduled to begin in April 2019. Other disclosed matters include climate-related suits, disputes over Wyoming oil leases and an appeal relating to confirmation of Peabody’s bankruptcy plan. The filing says management believes the appeal and several claims lack merit, but outcomes remain uncertain. Queensland also enacted new rehabilitation financial-assurance and progressive-rehabilitation rules, whose application to Peabody’s mines was still being assessed.
- Other unusual items: Peabody reported a $2.094 billion tax valuation allowance, substantially against U.S. and Australian net deferred tax assets, and disclosed an unresolved Middlemount tax audit position. The auditor gave an unqualified opinion on the financial statements and internal controls; however, the internal-control assessment excluded Shoal Creek, acquired in December 2018.
The board declared regular quarterly dividends during 2018. After year-end it declared a $0.13 per-share dividend and a supplemental $1.85 per-share dividend, payable in March 2019, subject to the filing’s stated terms and restrictions.
Important facts for investors to verify
- North Goonyella re-entry progress, actual recovery costs, insurance proceeds and whether the mine can resume production on management’s stated timeline.
- Kayenta’s customer and plant status after December 2019, including any replacement buyer and the consequences for mine closure and reclamation.
- 2019 realized coal prices, volumes, segment margins and the extent to which seaborne pricing offsets U.S. thermal weakness and operating-cost inflation.
- Liquidity after dividends, repurchases, capital spending and collateral requirements; debt-covenant capacity and the refinancing or maturity profile.
- Reclamation bonding availability and the cost and implementation of Queensland’s new financial-assurance and rehabilitation rules.
- Final purchase accounting and internal-control integration for Shoal Creek, plus developments in material litigation and tax matters.
- Comparability of reported trends: 2017 fresh-start accounting split the year into Successor and Predecessor periods, and Adjusted EBITDA and free cash flow are non-GAAP measures.