Peabody Energy Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013, compared with the three months ended March 31, 2012. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise. The interim financial statements are unaudited.
Business context
Peabody is a global coal producer and trader, with mining operations in the U.S. and Australia. Its principal reporting segments are Australian Mining, Western U.S. Mining, Midwestern U.S. Mining, and Trading and Brokerage. Management attributed the weaker quarter mainly to lower global coal prices and lower U.S. sales volumes, despite improved indicators in some coal markets.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $1,748.0 | $2,020.7 |
| Operating profit | $88.8 | $351.3 |
| Operating margin | 5.1% | 17.4% |
| Continuing-operations result, after tax | Loss of $10.3 | Income of $183.0 |
| Net result attributable to common stockholders | Loss of $23.4; diluted EPS loss of $0.09 | Income of $172.7; diluted EPS of $0.63 |
| Adjusted EBITDA | $280.1 | $511.5 |
| Cash provided by operating activities | $271.7 | $395.5 |
Revenue fell 13.5%; total tons sold declined 6.8%, to 57.2 million. Adjusted EBITDA margin was approximately 16.0%, compared with 25.3% a year earlier. The quarterly dividend declared was $0.085 per share.
- Cash and liquidity: Cash was $629.5 at March 31, up from $558.8 at year-end. Reported available liquidity was approximately $2.2 billion, including $1.4 billion of revolver availability and $195.3 of available receivables-securitization capacity.
- Debt: Total debt was $6,145.7, down from $6,252.9 at December 31, 2012. Cash less total debt implies net debt of approximately $5,516.2. The company prepaid $100.0 of term loans during the quarter and committed to further $99.4 of voluntary repayments in Q2.
- Balance sheet: Current assets were $2,452.1 and current liabilities $1,660.2, a current ratio of approximately 1.48. Total assets were $15,471.9 and total equity $4,904.0.
Material changes and management commentary
Australian Mining revenue decreased 13.6% and adjusted EBITDA fell 66.0%, primarily due to lower seaborne coal prices and foreign-exchange impacts, partly offset by higher sales volumes and cost reductions. Wet weather in Queensland and roof falls at Metropolitan Mine also affected operations. Western U.S. Mining revenue declined 15.9%, with tons sold down 13.4%, as customers drew down inventories; cost controls partly cushioned the EBITDA decline. Midwestern U.S. Mining EBITDA was broadly stable. Trading and Brokerage revenue and EBITDA decreased amid lower physical-shipment pricing, expired brokerage contracts, and unfavorable trading-position changes.
Operating cash flow declined by $123.8 year over year, reflecting lower EBITDA, timing of customer receipts and lower trading-margin inflows, partly offset by working-capital timing and lower inventory builds. Investing cash use was $68.3, compared with $203.1, while financing cash use increased to $132.7, mainly because of debt repayments. Cash increased by $70.7 during the quarter.
Outlook, risks, and contingencies
- 2013 targets: Australian coal sales of 33–36 million tons, including 15–16 million tons of metallurgical coal and 11–12 million tons of thermal exports. U.S. volumes were targeted at 180–190 million tons, with essentially all 2013 volumes committed and priced. Management expected U.S. realized pricing per ton to decline 5%–10% from 2012 and U.S. unit costs to decline modestly.
- Costs and investment: Australian operating costs were expected to rise in 2013 for mine-transition, overburden, production-mix, and carbon-pricing reasons. Planned 2013 capital spending was $450–$550, versus $996.7 in 2012; some growth projects were deferred. Management said available liquidity and operating cash flows should meet anticipated 2013 requirements and those of the foreseeable future.
- Market outlook: Management described near-term coal markets as challenging because supply remained high and prices pressured, while citing improving demand indicators and a positive long-term outlook, particularly in Asia-Pacific. Outlook depends on coal prices and demand, customer inventories, natural-gas competition, steel demand, weather, operations, transportation, regulation, and foreign exchange; actual results may differ materially.
- Tax assessment: In April 2013, Australia’s Tax Office issued a $78.9 assessment, including $54.8 of additional tax and $24.1 of interest and penalties, related to financing transactions. Peabody plans to litigate and could be required to deposit up to 50% in Q2.
- Legal matters: Wambo received an adverse Australian court ruling on dividend entitlements; finalized orders set the amount at $32.2 plus interest. Peabody intends to appeal and continued to reflect $34.3 of previously allocated earnings to the noncontrolling interest at quarter-end. Patriot bankruptcy-related benefit disputes and possible black-lung exposure of up to $150 were also disclosed. The company is cooperating with an SEC investigation concerning development of the Prairie State Energy Campus.
- Other exposures: Guarantees and other off-balance-sheet instruments totaled $2,267.5, including $1,242.5 of self-bonded reclamation obligations. Recorded environmental cleanup liabilities were $45.7. Management stated it believed reserves were adequate and did not expect material losses from guarantees or other off-balance-sheet arrangements.
Important facts for investors to verify
- Whether coal prices, customer inventory drawdowns, and U.S. shipment volumes developed in line with management’s 2013 assumptions.
- Progress against the Australian and U.S. sales targets, cost-reduction plans, and $450–$550 capital-spending target.
- Cash generation, liquidity availability, debt repayments, and compliance with debt covenants.
- Outcomes and potential cash requirements from the Australian tax assessment and Wambo appeal, plus developments in Patriot-related proceedings and the Prairie State SEC investigation.
- Potential changes in reclamation, environmental, pension, and black-lung exposures, including self-bonding and guarantees.