Peabody Energy Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Comparisons are with the three months ended March 31, 2010, except balance-sheet figures, which compare March 31, 2011 with December 31, 2010.
Business context and performance
Peabody operates U.S. and Australian coal mines and a coal trading and brokerage business. Management cited tight global coal supply and rising metallurgical and thermal coal prices. Australian flooding and damage to rail and port systems constrained production and shipments.
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $1,744.9 million | $1,515.6 million |
| Operating profit | $294.3 million | $242.2 million |
| Income from continuing operations, after tax | $179.6 million | $137.1 million |
| Net income attributable to common stockholders | $176.5 million | $133.7 million |
| Diluted EPS | $0.65 | $0.50 |
| Adjusted EBITDA, including Corporate and Other | $416.2 million | $357.2 million |
| Operating cash flow | $220.6 million | $171.8 million |
Revenue rose 15.1%; common-stockholder net income rose 32.0%. Operating margin was approximately 16.9%, versus 16.0% a year earlier. The company declared dividends of $0.085 per share, compared with $0.070.
Segments and material changes
- Australian Mining: Revenue increased 30.0% to $580.6 million and Adjusted EBITDA increased 54.5% to $190.5 million, primarily from higher realized pricing. Volumes fell 9.7% amid Queensland flooding, geological challenges, lower longwall production, and weather-related costs.
- Midwestern U.S. Mining: Revenue increased 18.6% to $367.0 million and Adjusted EBITDA rose 48.3% to $109.9 million, reflecting higher volumes and prices.
- Western U.S. Mining: Revenue rose 6.3% to $703.7 million on higher volumes, but Adjusted EBITDA fell 13.7% to $179.4 million amid lower realized prices and higher repair, labor, and other costs.
- Trading and Brokerage: Adjusted EBITDA declined to $26.8 million from $32.4 million. Trading revenue was a $9.9 million loss, versus $56.0 million of revenue in Q1 2010, including unfavorable movements in international trading positions following market volatility associated partly with the Japan earthquake.
Management reported total segment Adjusted EBITDA of $506.6 million, up 15.7%; the $416.2 million consolidated measure also includes Corporate and Other Adjusted EBITDA of negative $90.4 million.
Cash flow, liquidity and debt
- Operating cash flow was $220.6 million. Investing cash outflow was $211.2 million, including $107.2 million of property, plant and mine-development additions and $100.0 million of short-term investment purchases. Financing cash outflow was $31.4 million. Cash declined $22.0 million to $1,273.2 million.
- At March 31, cash and cash equivalents were $1,273.2 million and short-term investments were $100.0 million. Reported available liquidity was $2.8 billion, including $1.5 billion available under the revolver and $20.4 million of remaining securitization capacity.
- Total debt was $2,740.4 million, compared with $2,750.0 million at year-end; current maturities were $261.5 million. The company reported compliance with debt covenants at March 31.
- On April 15, 2011, after quarter-end, Peabody redeemed $218.1 million principal amount of 5.875% notes using cash, at 100.979% of principal plus accrued interest; it recognized $1.7 million of related costs.
Outlook, risks and contingencies
- Capital spending: 2011 capital expenditures were expected to be $900–$950 million, including $500–$550 million for new mines, expansions, and extensions. The company had $535.4 million of capital-expenditure commitments, $517.5 million due within 12 months. It expected available liquidity and operating cash flow to meet anticipated requirements.
- Market outlook: Management described the long-term global outlook as positive, citing expected growth in coal demand and elevated seaborne prices. As of April 15, 2011, some 2011 Australian sales and substantial 2012 Australian sales remained unpriced; U.S. unpriced volumes were also disclosed for 2011–2013. No quantified earnings or EPS guidance was provided.
- Operating and market risks: Coal demand and prices, weather, transportation constraints, geology, labor and input costs, competing natural gas, customer and counterparty credit, and foreign exchange may affect results. April 2011 geological difficulties at Twentymile Mine prompted an interim MSHA-approved plan to resume longwall production, subject to continued monitoring and no further geological problems.
- Policy and regulation: Potential Dodd-Frank derivatives rules could increase compliance and transaction costs. Proposed Australian minerals resource rent tax legislation, then expected to take effect July 1, 2012 if enacted, could affect Australian taxes. The company said the effects of potential emissions regulation could not be reasonably predicted.
- Legal and other exposures: Navajo Nation litigation seeks at least $600 million in actual damages, at least $1 billion in punitive damages, and lease-related remedies; the company said the possible loss could not be reasonably estimated and believed resolution was unlikely to materially harm it. Environmental cleanup liabilities were $50.9 million. Off-balance-sheet financial instruments supporting obligations totaled $2.101 billion, including $938.4 million of self-bonding; management did not expect material losses from guarantees and similar arrangements.
- Trading exposure: Coal trading credit exposure was 54% with non-investment-grade counterparties. The company disclosed potential collateral postings of approximately $150 million if a material adverse event occurred, and $194.9 million of exchange variation margin at quarter-end.
Most important facts for investors to verify
- Whether Australian production, logistics, and costs recover from flooding and other operating disruptions, and whether the higher coal prices translate into sustained earnings.
- Trading and brokerage results, derivative valuations, collateral and margin needs, and counterparty credit exposure.
- Execution of the $900–$950 million capital-spending plan, Prairie State funding, and liquidity after the April note redemption.
- Developments in the Navajo litigation, environmental claims, Twentymile mine plan, and potential Australian tax and emissions-related regulation.
- Whether reported operating cash flow is sustainable given working-capital movements and the company’s use of receivables securitization.