Business context and reporting period
Peabody Energy Corporation is a coal producer and trader operating mines in the United States and Australia. This unaudited Form 10-Q reports results for the three months ended March 31, 2016, compared with the first quarter of 2015. The company reported 42.5 million tons sold, down 30% year over year.
After quarter-end, on April 13, 2016, Peabody and most U.S. subsidiaries filed for Chapter 11 protection; Australian operations and other international subsidiaries were not included. The financial statements do not reflect the bankruptcy’s effects. The shares were suspended from the NYSE and began trading over the counter as BTUUQ.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total revenue | $1,027.2 million | $1,537.9 million |
| Operating profit (loss) | $(102.7) million | $2.2 million |
| Net loss attributable to common stockholders | $(165.1) million; $(9.03) per share | $(176.6) million; $(9.81) per share |
| Adjusted EBITDA | $30.1 million | $165.6 million |
| Operating cash flow | $(439.0) million | $3.4 million |
| Cash and cash equivalents | $745.6 million | $261.3 million at Dec. 31, 2015 |
| Total debt | $7,187.2 million | $6,241.2 million at Dec. 31, 2015 |
| Stockholders’ equity | $811.3 million | $918.5 million at Dec. 31, 2015 |
Operating loss was approximately 10% of revenue; Adjusted EBITDA was approximately 3% of revenue. Current assets were $1,952.1 million against current liabilities of $8,124.4 million. These figures include $84.9 million of restricted cash in current assets. Nearly all debt, $6,820.2 million, was classified as current at quarter-end; the company’s estimated fair value of current and long-term debt was $1,702.6 million.
Financing activities provided $936.2 million, including $947.0 million borrowed under the revolving credit facility. Investing activities used $12.9 million. No dividends were declared in Q1 2016.
Material changes versus the prior comparable period
- Revenue fell 33%, while tons sold declined 30%. Management attributed the decrease to lower coal prices and sales volumes amid weaker demand.
- Adjusted EBITDA declined $135.5 million. Segment Adjusted EBITDA fell to $141.3 million from $337.2 million; Australian Metallurgical Mining moved to a loss, and Trading and Brokerage also recorded a loss.
- Operating costs and expenses decreased $401.4 million, and selling and administrative expenses decreased $15.4 million, reflecting lower activity and cost-containment efforts. These reductions did not offset the revenue decline.
- Net loss improved by $11.5 million, despite a greater pretax loss, principally reflecting a $65.8 million income tax benefit and lower discontinued-operations losses. The prior-year quarter included a $59.5 million loss on early debt extinguishment.
- Operating cash flow deteriorated by $442.4 million. The company cited weaker operating cash generation, unfavorable working-capital movements and $100.2 million of cash becoming restricted as reclamation collateral.
Outlook, commentary, risks and unusual items
- Market outlook: Peabody projected a 175–210 million ton decline in total U.S. coal shipments in 2016 and a 75–100 million ton decline in U.S. utility coal consumption. It cited low natural-gas prices, coal-to-gas switching, mild weather, weak exports and continued softness in China and seaborne markets. This is management’s outlook, not a guarantee.
- Bankruptcy and liquidity: The filing made obligations under the credit agreement and certain debt indentures immediately due, subject to the bankruptcy automatic stay, and the revolving facility could no longer be used. In April, the court approved interim DIP financing; Peabody borrowed $200 million under a facility of up to $500 million. Final approval was pending at the report date. The company reported approximately $865 million of liquidity as of May 4, 2016, including cash, and said it expected available cash, operations and DIP borrowings to fund anticipated needs through the cases, while warning needs could be higher.
- Reorganization uncertainty: Peabody said it needed a significant balance-sheet restructuring to continue as a going concern. A reorganization plan could materially change asset and liability amounts and creditor and shareholder rights. The filing warned that existing equity could be cancelled without recovery; common stock had moved to the OTC market.
- Financing and operating constraints: DIP financing includes liquidity, EBITDA and capital-spending covenants and restructuring milestones. The accounts-receivable securitization program’s continuation required court approval; the agent could terminate it if a final order was not entered by May 28, 2016. Supplier credit, customer contracts and access to bonding and letters of credit were also identified as risks.
- Reclamation assurances: Self-bonding was $1,272.6 million at March 31 and $1,145.9 million as of April 13. Illinois required replacement of about $92 million of self-bonding within an extended 120-day period. Failure to secure replacement assurances could pressure liquidity and operations.
- Legal and contingent exposures: A UMWA pension plan dispute asserted $644.2 million of withdrawal liability; Peabody disputed the claim and was pursuing administrative review and arbitration. Recorded Patriot-related black-lung liability was $130.6 million, with estimated annual cash costs of $10–15 million. The QBH dispute concerning Wilkie Creek could entail annual minimum payments of approximately A$11.8 million under a potential contract. The filing states that some ultimate exposures cannot be reliably estimated.
- Unusual items: Results included a $68.1 million gain from settling Patriot/UMWA VEBA obligations, $12.1 million of restructuring charges, $17.2 million of asset impairment and $14.3 million of debt-restructuring-related administrative expense. Derivative counterparties terminated corporate hedges after the bankruptcy filing; the net settlement liability had not been finalized.
Important facts for investors to verify
- Progress and court approvals for the Chapter 11 plan, DIP financing and accounts-receivable securitization program, including covenant and milestone compliance.
- Actual unrestricted liquidity, cash burn, vendor payment terms and ability to maintain customer and supplier relationships.
- Debt treatment and creditor recoveries under any confirmed plan, including the potential cancellation or dilution of existing equity.
- Replacement of self-bonding and renewal or availability of surety bonds, bank guarantees and letters of credit.
- Resolution and potential cash impact of the UMWA withdrawal-liability claim, black-lung obligations, QBH litigation and terminated hedge contracts.
- Whether coal prices, sales volumes, operating costs and segment performance support management’s 2016 outlook.