Peabody Energy Corporation — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. Peabody mined and marketed thermal and metallurgical coal through U.S. and Australian operations and its Trading and Brokerage segment. The company produced 227.5 million tons and sold 250.6 million tons. Results include Macarthur Coal from the October 26, 2011 acquisition and control date.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $7.974 billion | $6.740 billion |
| Operating profit | $1.593 billion | $1.354 billion |
| Income from continuing operations, net | $1.011 billion | $826.6 million |
| Net income attributable to common stockholders | $957.7 million | $774.0 million |
| Diluted EPS from continuing operations | $3.76 | $2.93 |
| Adjusted EBITDA | $2.129 billion | $1.839 billion |
| Cash provided by operating activities | $1.633 billion | $1.087 billion |
| Cash used in investing activities | $3.808 billion | $703.6 million |
| Cash provided by / (used in) financing activities | $1.679 billion | $(77.1) million |
| Cash and cash equivalents at year-end | $799.1 million | $1.295 billion |
| Total debt, including capital leases | $6.658 billion | $2.750 billion |
| Total stockholders’ equity | $5.516 billion | $4.689 billion |
Revenue increased 18.3%; operating profit rose 17.6%, and continuing-operations income rose 22.2%. Operating margin was approximately 20.0%, compared with 20.1% in 2010; continuing-operations net margin was approximately 12.7%, versus 12.3%. Adjusted EBITDA is a non-GAAP measure defined by the company.
Year-end current assets were $3.006 billion and current liabilities $1.824 billion. Available liquidity was approximately $2.3 billion, comprising $799 million of cash, $1.5 billion of revolving capacity net of letters of credit, and $41.7 million of available receivables-securitization capacity. Management stated liquidity and operating cash flow were expected to cover anticipated capital needs.
Material changes versus 2010
- Australian Mining revenue increased 28.4% to $3.081 billion, primarily from higher weighted-average prices; Macarthur contributed $152.9 million of revenue after acquisition. Segment Adjusted EBITDA rose 22.2% to $1.194 billion.
- Western U.S. Mining revenue rose 7.2%, but segment Adjusted EBITDA fell 6.2% to $766.0 million as higher labor, maintenance, materials, litigation and commodity costs offset volume and price gains.
- Trading and Brokerage revenue increased 63.2% to $475.1 million and segment Adjusted EBITDA rose to $197.0 million, largely reflecting improved brokerage margins. Trading revenue by instrument totaled $145.6 million, down from $158.7 million.
- Operating cash flow increased, while investing outflows rose sharply, principally due to $2.757 billion net cash paid for Macarthur and higher capital spending.
- Debt increased by about $3.9 billion, mainly to finance the acquisition. The company issued $3.1 billion of senior notes and borrowed $1.0 billion under a new term loan facility.
- Macarthur generated a $47.9 million net loss from acquisition and control through year-end, excluding acquisition costs and acquisition-financing interest. The preliminary purchase-price allocation remained subject to final valuation.
Outlook, commentary and risks
- 2012 outlook: Planned capital expenditures were $1.2–$1.4 billion, including $800–$950 million for growth projects, with about 75% of growth and expansion spending targeted to Australian projects. Management targeted U.S. volumes broadly in line with 2011 and 2012 metallurgical coal sales of approximately 14–15 million tons; Australian thermal exports were targeted at 12–13 million tons.
- As of January 24, 2012, essentially all remaining 2012 metallurgical production was unpriced; 40%–50% of Australian seaborne thermal volumes were available for pricing. Management expected market conditions to influence remaining metallurgical pricing.
- Macarthur was expected to contribute less than $100 million of EBITDA in 2012, reflecting spending to address overburden deficiencies and deferred repairs at Coppabella and Moorvale. Management said the work was intended to support better productivity and costs in 2013.
- U.S. coal markets faced weak electricity generation and low natural-gas prices, with coal-to-gas switching and possible customer requests to defer or cancel contracted volumes posing risks. Management noted contractual remedies but said it might negotiate settlements or extensions in selected cases.
- Other material exposures include coal-price and steel-demand volatility, Australian-dollar movements, mine geology and equipment, transport and port constraints, labor negotiations, customer and counterparty credit, and regulatory changes affecting coal use. Australian carbon pricing was scheduled to start July 1, 2012; Peabody estimated an initial fugitive-emissions cost of A$2.00–A$3.25 per ton produced, before other impacts.
- Unusual costs and events included $85.2 million of Macarthur acquisition costs, a North Goonyella roof fall and longwall recovery that reduced 2011 results, and a $24.5 million provision for settled Navajo litigation. The fourth quarter included $76.1 million of acquisition costs and a reported $111.8 million adverse North Goonyella impact.
- Significant legal matters include a Gulf Power award of $20.5 million plus $6.9 million prejudgment interest, which Peabody appealed and for which it recorded no liability; and Monto-related claims seeking at least A$1.193 billion, which the company disputed and said could not be reasonably estimated.
- Management and the auditor concluded that internal control over financial reporting was effective, but the assessment excluded Macarthur, acquired in October 2011. Macarthur represented $5.3 billion of assets and $152.9 million of revenue in the reported year.
Most important facts for investors to verify
- How Macarthur’s cost remediation, integration, production and expected EBITDA develop, and whether the preliminary acquisition accounting is finalized without material adjustments.
- Debt-service capacity and covenant headroom following the increase in debt to $6.658 billion; also monitor the company’s large committed capital program and take-or-pay obligations.
- Realized 2012 metallurgical and thermal coal prices, U.S. contracted-volume performance, and exposure to customer deferrals or cancellations.
- Whether the Gulf Power appeal, Monto litigation, and other environmental or historical claims lead to additional losses beyond recorded amounts.
- The effect of Australian carbon pricing, currency movements, transport constraints, labor negotiations and mine operating issues on margins and cash flow.
- Macarthur’s financial reporting controls: its controls were not included in the 2011 internal-control assessment, with inclusion planned for the 2012 assessment.