Business context and reporting period
Peabody Energy Corporation’s unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the same 2013 periods. The company operates coal mines in the U.S. and Australia and also conducts coal trading and brokerage. Management cited oversupply and weak seaborne coal prices as continuing pressures.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1,722.9 million | $1,797.6 million | $5,107.7 million | $5,270.9 million |
| Operating profit | $36.2 million | $112.2 million | $71.9 million | $227.4 million |
| Net loss attributable to common stockholders | $150.6 million | $26.1 million | $272.4 million | Net income $40.8 million |
| Basic and diluted EPS | $(0.56) | $(0.10) | $(1.02) | $0.15 |
| Adjusted EBITDA | $216.3 million | $312.0 million | $606.3 million | $846.4 million |
- Revenue fell 4.2% in the quarter and 3.1% year to date. Operating margin, calculated from reported operating profit and revenue, declined to approximately 2.1% from 6.2% in Q3 2013.
- Quarterly loss from continuing operations was $154.0 million, versus income of $24.0 million a year earlier. The nine-month continuing-operations loss was $270.3 million, versus income of $115.1 million.
- Lower Australian coal prices were a major headwind: Australian Mining Adjusted EBITDA fell to $16.9 million from $74.8 million for Q3 and to $30.9 million from $287.7 million year to date. Western U.S. Mining Adjusted EBITDA improved year to date, while Midwestern U.S. Mining declined.
- Q3 income tax expense was $79.4 million. The company recorded a $80.6 million valuation allowance on certain Australian deferred tax assets in the quarter and wrote off $70.1 million of deferred tax assets following repeal of Australia’s MRRT.
Cash flow, debt and liquidity
- Cash from operating activities was $250.1 million for the first nine months, down from $544.0 million. Continuing-operations cash flow was $345.8 million versus $577.6 million; discontinued operations used $95.7 million.
- Investing activities used $89.6 million, compared with $260.1 million used in 2013. Financing activities used $138.0 million. Cash increased $22.5 million to $466.5 million.
- At September 30, 2014, debt was $5,991.1 million, nearly unchanged from $6,002.4 million at year-end 2013. Cash less reported debt was approximately $5.5 billion net debt. Interest expense was $114.5 million for Q3 and $323.0 million year to date.
- Current assets were $1,931.4 million and current liabilities $1,700.3 million, implying a current ratio of about 1.14. Available liquidity was approximately $2.3 billion: $466.5 million cash, about $1.5 billion available on the revolver and $247.4 million available under the receivables securitization program.
- Capital expenditures were targeted at $200–$220 million for 2014, reduced from the prior guidance of $210–$250 million and 2013 spend of $328.4 million. Federal coal lease expenditures were expected to total approximately $280 million in 2014.
Material changes, outlook and risks
- Coal prices remained under pressure amid excess seaborne supply and sluggish demand growth. Q3 benchmark prices for premium hard coking coal and Newcastle thermal coal were down year over year. U.S. coal generation increased, but mild summer weather and poor rail performance constrained demand and shipments.
- Management targeted 2014 Australian sales of 36–38 million tons, including 16–17 million tons of metallurgical coal and 12–13 million tons of thermal exports. U.S. sales guidance was 185–190 million tons. U.S. realized pricing was expected to decline 2%–4% per ton; U.S. unit costs were expected to fall 1%–3%, and Australian costs were expected to be about $70 per ton.
- Management said operating cash flow and available liquidity should cover anticipated capital needs for the remainder of 2014 and 2015, assuming continued access to a substantial portion of revolver capacity. All three major rating agencies had recently downgraded the company by one notch, citing in part weak seaborne coal prices.
- Coal-price weakness could lead to future asset impairments if adverse pricing trends persist. The filing reported no impairment charge from the September 2014 review of sensitive assets, which had a combined carrying value of $199.7 million.
- Unusual items included $15.6 million of additional expense for the Eagle Mining arbitration award, $10.6 million of Q3 interest expense related to the Sumiseki litigation and Eagle arbitration, and a $3.2 million after-tax gain from terminating the proposed Wilkie Creek sale. Wilkie Creek sale terms had contemplated about $70 million cash, but the buyer failed to close.
- Key contingencies include a coal-pricing arbitration expected to be resolved in January 2015; a Sumiseki dividend ruling upheld on appeal, with leave to appeal sought; and claims involving the Monto joint venture and Wilkie Creek port services. The company disputed or was defending these claims. It also had $70.3 million in recorded environmental cleanup liabilities for historical operations and $2.46 billion of disclosed off-balance-sheet guarantees and financial instruments, including self-bonding.
- The Patriot/UMWA settlement requires total payments of $310 million through 2017; after the $90 million paid in January 2014, scheduled VEBA payments include $75 million in each of 2015 and 2016 and $70 million in 2017. A $0.085-per-share dividend was approved for payment in November 2014.
Important facts for investors to verify
- Whether weak Australian and international coal prices, production costs and sales volumes continue to erode segment EBITDA and cash flow.
- Whether tax-asset valuation allowances, the MRRT repeal and future tax outcomes create further charges or cash-tax pressures.
- Progress on the January 2015 contract-pricing arbitration, Sumiseki appeal and other material legal matters, including potential exposure beyond recorded reserves.
- Continued access to revolver and receivables-securitization capacity following credit-rating downgrades, and compliance with debt covenants.
- Delivery against 2014 sales, cost and capital-spending targets, and the risk of impairment if coal-market weakness is sustained.