Peabody Energy Corporation — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009; unaudited. Peabody mines and markets coal in the U.S. and Australia and operates a coal trading and brokerage business. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $1,667.0 million | $1,889.6 million | $4,458.2 million | $4,667.1 million |
| Operating profit | $220.3 million | $496.6 million | $655.4 million | $1,027.6 million |
| Continuing income, net of tax | $113.2 million | $383.2 million | $344.4 million | $707.6 million |
| Net income attributable to common stockholders | $106.8 million | $369.5 million | $356.0 million | $659.8 million |
| Diluted EPS attributable to common stockholders | $0.40 | $1.35 | $1.32 | $2.42 |
- Margins: Calculated from reported figures, operating margin was approximately 13.2% in Q3 2009 versus 26.3% a year earlier; nine-month operating margin was approximately 14.7% versus 22.0%.
- Adjusted EBITDA: Segment Adjusted EBITDA was $428.0 million in Q3, down 36.9%, and $1,215.6 million year to date, down 17.6%. Including Corporate and Other, the filing reports consolidated Adjusted EBITDA of $341.1 million and $992.7 million, respectively.
- Cash flow: Nine-month operating cash flow was $658.0 million, versus $692.5 million; cash from continuing operations was $664.2 million, versus $798.5 million. Investing activities used $276.5 million and financing activities used $40.4 million. Cash increased $341.1 million to $790.8 million.
- Liquidity and debt: At September 30, cash was $790.8 million and current assets were $2,089.1 million against current liabilities of $1,323.4 million. Available borrowing capacity under the senior unsecured credit facility was $1.5 billion, net of letters of credit; the facility matures September 15, 2011. Total debt was $2,776.9 million, slightly below $2,793.6 million at year-end 2008.
- Other: Dividends declared were $0.06 per share for Q3 and $0.18 per share for nine months, unchanged from 2008. Stockholders’ equity rose to $3,784.7 million from $3,119.5 million, in part reflecting improved cash-flow hedge values.
Material changes versus 2008
- Q3 revenue fell 11.8% and nine-month revenue fell 4.5%; sales volume declined 3.2% in Q3 and 1.8% year to date.
- Lower Australian export contract prices effective April 1, 2009, softer demand and lower shipments were the principal revenue and earnings pressures. Australian Mining Adjusted EBITDA fell 74.4% in Q3 and 52.3% year to date.
- U.S. mining results improved: Western U.S. and Midwestern U.S. Adjusted EBITDA increased in both periods, supported by higher realized prices and lower commodity costs. Trading and Brokerage EBITDA declined amid lower market price volatility.
- Lower segment earnings, lower gains on asset disposals, reduced equity-affiliate income and higher depreciation weighed on continuing income. Lower interest expense partly offset these effects. Nine-month tax expense included foreign tax-account remeasurement effects.
- Discontinued operations contributed $23.6 million of income for nine months, compared with a $42.1 million loss in 2008. The 2009 result included an approximately $35 million after-tax coal excise tax refund; approximately $59 million of cash was received.
Outlook, risks and unusual items
- Management outlook: 2009 production targets were approximately 190 million tons in the U.S. and 21–23 million tons in Australia; total sales guidance was 235–245 million tons. Expected 2009 capital expenditures were $325–$375 million, excluding federal coal lease payments. Management said it could adjust production to demand and expected near-term cash flows and available borrowing capacity to be sufficient.
- As of October 20, 2009, Australian 2010 volumes still unpriced included 5.5–7.0 million tons of metallurgical coal and 7.5–8.0 million tons of export thermal coal. Management described the long-term coal outlook as positive but noted near-term uncertainty from the global downturn and elevated U.S. utility inventories.
- Key operating and market risks include weak coal and steel demand, contract pricing and renewal, mine geology and longwall performance, labor and input costs, transportation constraints, customer and counterparty credit, access to financing, and Australian-dollar exchange rates. Potential greenhouse-gas regulation in the U.S. and Australia could affect coal demand.
- Legal and contingency matters: In the Gulf Power contract case, the court granted partial summary judgment to Gulf Power on liability on September 30, 2009; a damages trial was scheduled for February 2010, and Peabody’s reconsideration motion was pending. The company said the loss could not be reasonably estimated and believed resolution was unlikely to materially harm it. Navajo Nation litigation seeks substantial damages and lease remedies; the company likewise said the outcome could not be estimated. Recorded environmental cleanup liabilities for Gold Fields-related sites were $47.3 million.
- Derivatives could require up to $73 million of collateral following a material adverse event; an additional estimated $20 million could be required after certain credit downgrades. Other commitments include $61.5 million of outstanding capital expenditure commitments and various guarantees and letters of credit.
- Unusual non-cash effects included a $321.2 million after-tax increase in the fair value of cash-flow hedges in other comprehensive income for the nine months, primarily associated with Australian-dollar strengthening. An IRS audit adjustment reduced net unrecognized tax benefits by $80.6 million in Q3.
Important facts for investors to verify
- Whether Australian coal pricing, production performance and shipment volumes recover, and how unpriced 2010 sales are ultimately contracted.
- Whether U.S. demand, utility stockpiles and Peabody’s production and sales targets develop as management expected.
- The outcome and potential financial exposure of the Gulf Power, Navajo Nation, environmental and other litigation, including matters the filing says cannot be reasonably estimated.
- The availability and terms of credit-facility capacity, annual renewal of the securitization support commitment, and potential collateral calls under derivatives.
- How much reported earnings and cash generation depend on nonrecurring items, including the coal excise tax refund, asset-disposal gains and hedge-related valuation movements.