Peabody Energy Corporation — 2014 Form 10-K
Business context and period. This filing reports the fiscal year ended December 31, 2014; fourth-quarter figures are identified where relevant. Peabody mined thermal and metallurgical coal in the U.S. and Australia and also traded and brokered coal and freight. It reported four principal operating segments: Western U.S. Mining, Midwestern U.S. Mining, Australian Mining, and Trading and Brokerage.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $6.792 billion | $7.014 billion |
| Operating profit (loss) | ($135.1 million) | ($324.8 million) |
| Loss from continuing operations, after tax | ($749.1 million) | ($286.0 million) |
| Net loss attributable to common stockholders | ($787.0 million) | ($524.9 million) |
| Diluted loss per share | ($2.94) | ($1.97) |
| Adjusted EBITDA | $814.0 million | $1.047 billion |
| Operating cash flow | $336.6 million | $722.4 million |
| Capital expenditures | $194.4 million | $328.4 million |
| Cash and cash equivalents at year-end | $298.0 million | $444.0 million |
| Total debt, including capital leases | $5.987 billion | $6.002 billion |
| Total stockholders’ equity | $2.727 billion | $3.948 billion |
Revenue fell 3.2%; management attributed the decline principally to $602.6 million of lower realized mining prices, partly offset by increased mining tons sold. Adjusted EBITDA fell 22.3%. The reported operating loss equates to an approximately 2.0% operating margin, calculated from reported revenue and operating loss. The filing does not provide a consolidated gross-margin figure.
Coal sold totaled 249.8 million tons, down 0.8%; mining-segment tons sold rose 4.4% to 229.6 million, while Trading and Brokerage tons fell 36.3% to 20.2 million. Segment Adjusted EBITDA was $770.4 million for Western U.S. Mining, $301.4 million for Midwestern U.S. Mining, $74.4 million for Australian Mining, and $14.9 million for Trading and Brokerage. Corporate and Other Adjusted EBITDA was negative $347.1 million.
Available liquidity was approximately $2.1 billion at year-end: $298.0 million cash, $1.5 billion available under the revolving facility (net of letters of credit), and $204.0 million available under the receivables securitization program. Current assets were $1.711 billion and current liabilities $1.863 billion. The company reported $5.987 billion of total debt and $428.2 million interest expense. Its $1.65 billion revolver had no borrowings outstanding, though $114.9 million of letters of credit were outstanding.
Material changes and unusual items
- Australian Mining Adjusted EBITDA fell from $316.6 million to $74.4 million, mainly due to lower realized coal prices; Western U.S. Mining improved to $770.4 million, while Midwestern U.S. Mining declined to $301.4 million.
- Asset impairment and mine-closure costs were $154.4 million, down from $528.3 million in 2013. The 2014 charge included $78.6 million in Australian Mining and $68.4 million for non-strategic U.S. coal properties, plus $4.7 million for marketable securities.
- Income tax expense was $201.2 million, compared with a $448.3 million tax benefit in 2013. A $569.4 million increase in valuation allowances on deferred tax assets was a key adverse factor. The Australian MRRT repeal led to a $70.1 million deferred-tax-asset write-off; the company also wrote off related MRRT tax assets and valuation allowances.
- Fourth-quarter 2014 revenue was $1.685 billion and net loss attributable to common stockholders was $514.6 million. The quarter included impairment charges, restructuring and pension-settlement charges, a $52.3 million equity-affiliate tax valuation charge, and a $280.1 million increase in U.S. deferred-tax valuation allowance.
- Operating cash flow fell by $385.8 million year over year, reflecting weaker operating results, $90 million in Patriot settlement payments, and receivables-program and customer-collection timing, partly offset by working-capital timing and lower trading-margin outflows.
- The Australian carbon pricing framework was repealed retrospectively from July 1, 2014; Peabody reported $25 million of related 2014 expense and anticipated modest future cost improvement. MRRT repeal also eliminated tax assets and produced a write-off.
Outlook, risks and contingencies
Management described seaborne coal markets as pressured by excess supply and weak demand growth, while U.S. thermal-coal demand was broadly stable. For 2015, it targeted U.S. sales of 190–200 million tons, with about 95% priced at December 31, 2014; Australian sales of 35–37 million tons, including 15–16 million tons of metallurgical coal and 12–13 million tons of thermal exports; and capital spending of $180–$200 million. Management forecast lower per-ton operating costs in both the U.S. and Australia, but U.S. realized pricing was expected to decline 2%–4%. It projected U.S. utility coal consumption would fall 70–80 million tons, while expecting Southern Powder River Basin consumption to remain stable. These are forward-looking targets, not guarantees.
Peabody expected 2015 cash flows and liquidity to meet anticipated requirements, assuming continued access to a substantial portion of its revolving facility. Each of the three major rating agencies downgraded its corporate credit rating by one notch in 2014. A February 2015 credit-facility amendment, after the reporting date, relaxed certain maintenance covenants and permitted second-lien debt subject to conditions, while tightening restrictions on dividends and other restricted payments. The quarterly dividend was reduced from $0.085 per share to $0.0025 for the first quarter of 2015.
- Fixed commitments: contractual cash obligations totaled $16.680 billion, including $2.827 billion of rail and port take-or-pay obligations (with terms up to 25 years), $9.201 billion of long-term debt principal and interest, and $3.150 billion of other long-term liabilities.
- Patriot: Peabody committed to $310 million of payments through 2017; $90 million was paid in January 2014, with $75 million due in each of 2015 and 2016 and $70 million in 2017. It also had $122.2 million of credit support outstanding at year-end. Peabody could face certain pre-spin-off black-lung liabilities if Patriot cannot meet its obligations.
- Legal and environmental matters: significant disclosed matters included the Sumiseki dividend dispute, the Eagle Mining arbitration award, a customer contract-pricing rebate of $68.7 million, Queensland Bulk Handling litigation, and environmental claims involving dormant subsidiary Gold Fields. Management said it had recorded what it considered adequate reserves and did not expect pending matters to have a material adverse effect, while noting uncertainty in some estimates.
- Industry and regulatory risks: coal-price volatility, competition from natural gas and renewables, steel and electricity demand, rail and port performance, labor relations, mine operations, foreign exchange, and evolving emissions and permitting rules could affect sales, costs, asset values, and access to capital. The EPA’s proposed limits on carbon emissions from existing power plants could materially reduce U.S. coal demand if adopted and implemented as proposed.
- Asset and funding risks: further coal-price weakness could trigger additional impairments. Self-bonded reclamation obligations were $1.361 billion, and surety bonds, bank guarantees, and letters of credit were also substantial. Deferred-tax-asset realization depends on future taxable income; the filing reported a $1.169 billion income-tax valuation allowance.
Investor verification priorities
- Confirm the drivers and sustainability of the sharp decline in Australian Mining profitability and consolidated Adjusted EBITDA, including coal-price assumptions and reported cost savings.
- Review cash generation, revolver availability, covenant headroom under the February 2015 amendment, and the effect of lower dividends and possible additional financing needs.
- Assess take-or-pay commitments, upcoming debt maturities, federal coal lease payments, and the ability to renew or utilize transportation capacity.
- Track deferred-tax-asset valuation allowances, future taxable-income assumptions, MRRT-related tax effects, and the possibility of further impairments.
- Monitor Patriot payment and credit-support obligations, black-lung exposure, and the status and potential financial effect of material legal and environmental matters.
- Compare 2015 sales, pricing, cost, capital-spending, and production targets with subsequent results; the filing does not guarantee that management’s forecasts will be achieved.