Peabody Energy Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. Comparisons are with the corresponding 2012 periods. Dollars in millions except per-share data.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $1,797.6 | $2,058.8 | $5,270.9 | $6,060.6 |
| Operating profit | $112.2 | $266.5 | $227.4 | $894.5 |
| Income from continuing operations | $24.0 | $122.9 | $115.1 | $520.4 |
| Net income (loss) attributable to common stockholders | $(26.1) | $42.9 | $40.8 | $420.3 |
| Diluted EPS, continuing operations | $0.06 | $0.46 | $0.40 | $1.89 |
| Diluted EPS, net income (loss) | $(0.10) | $0.16 | $0.15 | $1.55 |
| Adjusted EBITDA | $312.0 | $467.6 | $846.4 | $1,429.2 |
Adjusted EBITDA is a non-GAAP measure. Nine-month operating cash flow was $544.0, down from $1,291.5; investing cash outflow was $260.1 and financing cash outflow was $291.4. Cash ended the period at $551.3, versus $558.8 at year-end 2012. Additions to property, plant and equipment and mine development were $228.7; federal coal lease expenditures were $89.5.
At September 30, total debt was $6,007.5, including $34.2 current maturities; long-term debt was $5,973.3. Current assets were $2,287.8 and current liabilities $1,659.5. Reported available liquidity was approximately $2.2 billion, including $1.6 billion of revolver capacity net of letters of credit, cash, and $148.3 of securitization capacity.
Changes versus prior periods
- Revenue fell 12.7% in Q3 and 13.0% for the first nine months, primarily from lower realized coal prices, lower U.S. volumes, and weaker Trading and Brokerage contributions. Total tons sold increased 3.8% in Q3 and 1.0% year to date, with Australian growth offsetting U.S. declines.
- Adjusted EBITDA declined 34.2% in Q3 and 37.8% year to date. Australian Mining was most affected by lower coal prices and North Goonyella geologic issues; Western U.S. results also weakened. Midwestern U.S. Adjusted EBITDA improved, while Trading and Brokerage declined.
- Higher depreciation, depletion and amortization and interest expense further reduced earnings. Nine-month results included a $21.5 impairment of the Winsway investment and a $40.3 gain on sale of non-strategic Kentucky reserves and surface lands.
- Q3 discontinued-operations loss was $43.1, including a $45.2 pre-tax impairment charge for the held-for-sale Wilkie Creek mine. The comparable 2012 period included charges related to the Air Quality Mine shutdown.
- Cash from operations decreased substantially year over year, reflecting weaker operating results, unfavorable trading-margin cash flows, and timing of payments and customer receipts; lower inventory builds and discontinued-operation spending partly offset the decline.
Outlook, management commentary and material risks
- Management described global coal markets as oversupplied and prices as constrained, while noting growth in seaborne demand. The filing gives 2013 targets of 34–36 million Australian coal tons, including 15–16 million metallurgical tons and 11–12 million thermal export tons; U.S. volumes of 185–190 million tons, essentially all committed and priced; and capital spending of $350–$400 million. Management expected U.S. realized pricing to decline 5%–10% per ton versus 2012.
- As of September 30, 75%–85% of projected 2014 U.S. volumes were priced. Management expected full-year 2013 U.S. per-ton operating costs to decline 2%–3% year over year, citing cost controls and productivity efforts.
- The September 2013 refinancing created a $1.65 billion secured revolver and a $1.20 billion term loan, with the term loan due in 2020. The revolver had no borrowings and $1,555.3 of remaining capacity at quarter-end; the company was in compliance with its financial covenants. Management said there were no significant debt maturities until 2016 and expected liquidity and operating cash flows to meet anticipated capital requirements.
- Credit-rating agencies downgraded the company one notch during Q3, citing prolonged weakness in coal markets; outlooks remained stable. The company reported no additional margin requirement resulting from the downgrade. Risks include coal-price and demand weakness, customer inventory drawdowns, operating and geologic disruptions, transportation and input costs, currency exposure, regulation, leverage and covenant limits.
- After quarter-end, Peabody entered a definitive Patriot bankruptcy settlement: $310 million in payments through 2017 and approximately $140 million of credit support, conditional on bankruptcy-court processes and Patriot’s emergence. The filing estimated a future $120–$140 million settlement charge if effective and potential black-lung exposure of up to approximately $150 million. The agreement was approved by the bankruptcy court on November 7, 2013, after quarter-end; the company had not recorded settlement charges as of September 30.
- Other notable matters include an Australian tax assessment of $70.4, with a $35.2 advance deposit paid while the company pursued negotiation or litigation; a pending Australian Monto Coal claim seeking at least A$1,193.2 million plus interest and costs, for which the loss could not be reasonably estimated; and an SEC investigation concerning development of the Prairie State Energy Campus. Management stated it was cooperating with the SEC.
- Management reported that disclosure controls and procedures were effective and that no material change in internal control over financial reporting occurred during the quarter. Forward-looking estimates and targets are subject to the risks described in the filing.
Investor verification priorities
- Track realized coal prices, Australian mine performance and whether customer inventory drawdowns affect U.S. shipments and subsequent pricing.
- Verify Patriot settlement effectiveness, payment schedule, credit-support requirements, and resulting accounting charge and black-lung exposure.
- Follow the Australian tax dispute and the Monto Coal litigation, including any changes to recorded reserves or potential exposure.
- Assess operating cash flow, available liquidity, debt service and covenant headroom against planned capital spending and federal coal lease payments.
- Review the effects of environmental and power-generation regulation on coal demand, including U.S. emissions rules and Australian carbon-pricing policy.