Peabody Energy Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2017, compared with Q1 2016. Peabody operates coal mines in the U.S. and Australia and also trades and brokers coal. The quarter-end statements reflect the company as a debtor-in-possession; Peabody emerged from Chapter 11 on April 3, 2017. That reorganization materially changed its capital structure and requires fresh-start accounting, so post-emergence results and balances will not be directly comparable with the historical statements.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $1,326.2 million | $1,027.2 million |
| Operating profit (loss) | $198.1 million | ($102.7 million) |
| Net income (loss) attributable to common stockholders | $122.1 million | ($165.1 million) |
| Diluted EPS attributable to common stockholders | $6.57 | ($9.03) |
| Adjusted EBITDA | $357.9 million | $30.1 million |
| Cash from operating activities | $238.4 million | ($439.0 million) |
| Cash and cash equivalents at quarter-end | $1,068.1 million | $745.6 million |
Revenue increased 29% year over year, reflecting stronger coal pricing and sales volumes. Net income improved by $287.2 million. Results benefited from higher revenue, $93.3 million lower interest expense, better equity-affiliate results, and a $19.7 million gain on the sale of Dominion Terminal Associates. These gains were partly offset by higher operating costs, $41.4 million of reorganization items, and a smaller income tax benefit. Adjusted EBITDA is a non-GAAP measure defined by the company and should not be treated as a substitute for GAAP results.
Mining-segment gross margin per ton was $2.95 for Powder River Basin, $11.12 for Midwestern U.S., $14.92 for Western U.S., $50.06 for Australian Metallurgical, and $16.38 for Australian Thermal. Australian metallurgical revenue rose substantially on pricing, but segment sales volumes fell 33%; Australian thermal volumes fell 12%. Total tons sold increased 8% to 46.1 million.
Operating cash flow improved materially, supported by stronger mining cash generation and a favorable year-over-year change in securitization-related cash flows. Investing activities provided $15.1 million, including $24.3 million of asset-sale proceeds and net joint-venture cash flows. Financing activities used $57.7 million, including $55.4 million of deferred financing costs. Capital expenditures were $32.8 million.
Debt, liquidity and capital structure
At March 31, total reported indebtedness was $8.737 billion, of which $7.768 billion was classified as liabilities subject to compromise in the bankruptcy proceedings. The balance sheet reported $8.417 billion of total liabilities subject to compromise and $494.9 million of stockholders’ equity. Cash and cash equivalents were $1.068 billion; a separate $1.000 billion of restricted cash represented Successor Notes proceeds held in escrow, not unrestricted cash. Management reported available liquidity of approximately $1.1 billion at quarter-end.
On emergence, the old prepetition debt instruments were canceled and discharged, subject to specified exceptions. The successor financing included $500 million of 6.000% secured notes due 2022, $500 million of 6.375% secured notes due 2025, and a $950 million secured term loan due 2022 at LIBOR plus 4.50% (with a 1.00% LIBOR floor). The company also extended and expanded its receivables facility to a purchase limit of up to $250 million, including certain Australian receivables. The notes’ proceeds were used to repay predecessor first-lien obligations upon emergence.
The reorganization replaced prior common shares and equity awards. The plan issued new common and preferred shares and warrants; assuming full preferred conversion and warrant exercise, the filing estimated approximately 137.3 million common shares, excluding shares underlying unvested incentive awards. Q1 EPS uses the pre-emergence share structure and is not representative of the reorganized company’s per-share results.
Material changes and management outlook
- Peabody emerged from Chapter 11 on April 3, 2017, after plan confirmation on March 17. Management said emergence, exit financing, liquidity at emergence, and financial projections alleviated the conditions that had raised substantial doubt about going concern, while noting liquidity remains dependent on successful operations and expense and capital-spending management.
- Management projected U.S. utility coal consumption to rise approximately 30–40 million tons in 2017 versus 2016, primarily on gas-to-coal switching. It cautioned that lower-than-projected natural-gas prices could reduce coal consumption.
- Coal-market outlook was affected by strong Chinese import demand and Queensland supply disruption from Cyclone Debbie. The company reported that the cyclone damaged rail infrastructure and that industry shipments could be affected by approximately 20 million tons through June 30, 2017. Metallurgical benchmark negotiations were deferred. China’s import demand and domestic production policies remained uncertain.
- There were no significant changes to the company’s long-term outlook versus year-end 2016; the filing provides no specific company earnings or EPS guidance.
- The planned sale of the Metropolitan mine to South32 did not close: South32 terminated the agreement on April 18, 2017, after Australian competition approval was not obtained, and Peabody retained the deposit. The company had sold its 37.5% interest in Dominion Terminal Associates on March 31 for $20.5 million, recording a $19.7 million gain.
- Key risks include coal-price and demand volatility, competition from gas and renewables, operating and geologic interruptions, transportation constraints, customer and counterparty credit risk, currency and fuel costs, regulatory and permitting changes, reclamation bonding and collateral needs, pension and postretirement obligations, and the ability to maintain liquidity and service debt.
Contingencies and unusual items
Q1 included $41.4 million of net reorganization expense, including $42.5 million of professional fees. Peabody recorded a $30.5 million impairment related to terminated Midwestern U.S. coal leases. It reported $1.765 billion of financial instruments and other guarantees, including $894.7 million of self-bonding and $475.3 million of surety bonds; $364.6 million of cash collateral supported these instruments. U.S. reclamation bonding requirements were $1.243 billion, compared with $476.7 million of U.S. GAAP asset-retirement obligations.
Notable legal and legacy exposures include a Queensland joint-venture dispute seeking damages ranging from A$15.6 million to A$1.8 billion, for which the company said a potential loss could not be reasonably estimated; environmental liabilities of $62.8 million for historical operations and indemnities; and $124.1 million of recorded Patriot-related black-lung liabilities. A $75 million settlement with the UMWA pension plan is payable in installments. The filing states that other pending or threatened proceedings are expected to be resolved without material adverse effect based on current information.
Important facts for investors to verify
- Review the confirmed reorganization plan and post-emergence filings for the final debt terms, treatment of claims, preferred-stock conversion terms, warrants, and fully diluted share count.
- Reconcile the $1.068 billion of reported cash with restricted cash, collateral requirements, securitization availability, and post-emergence liquidity.
- Assess whether coal prices, Chinese demand, natural-gas prices, and Queensland rail recovery support the company’s market outlook, and monitor subsequent operating results against it.
- Track the fresh-start accounting adjustments and distinguish post-emergence performance from the pre-emergence Q1 figures.
- Monitor reclamation bonding and collateral needs, the major legal and environmental exposures, and the Metropolitan sale termination and retained deposit.