Peabody Energy Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; filed November 5, 2010. Amounts are in U.S. dollars unless noted. Financial statements are unaudited.
Business context and results
Peabody operates coal mines in the U.S. and Australia and reports Western U.S. Mining, Midwestern U.S. Mining, Australian Mining, Trading and Brokerage, and Corporate and Other. Results reflect Patriot Coal and certain divested or held-for-sale operations as discontinued operations.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $1,864.7 million | $1,667.0 million | $5,041.7 million | $4,458.2 million |
| Operating profit | $444.7 million | $220.3 million | $1,011.3 million | $655.4 million |
| Income from continuing operations, net | $237.6 million | $113.2 million | $589.4 million | $344.4 million |
| Net income attributable to common stockholders | $224.1 million | $106.8 million | $564.0 million | $356.0 million |
| Diluted EPS from continuing operations | $0.83 | $0.41 | $2.09 | $1.23 |
| Consolidated Adjusted EBITDA | $571.3 million | $341.1 million | $1,368.9 million | $992.7 million |
Q3 operating margin was approximately 23.9%, versus 13.2% a year earlier; nine-month operating margin was approximately 20.1%, versus 14.7%. These are calculated from reported operating profit and revenue.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $883.8 million, up from $667.3 million. Investing cash outflow was $423.3 million, including $291.3 million of property, plant and mine-development additions; financing cash outflow was $81.8 million.
- Cash and cash equivalents were $1,367.5 million at September 30, 2010, up from $988.8 million at year-end 2009. Total assets were $10,972.6 million and stockholders’ equity was $4,478.9 million.
- Total debt was $2,756.1 million, compared with $2,752.3 million at year-end. Cash exceeded debt by approximately $1.39 billion, before considering other obligations.
- Management reported available liquidity of $2.8 billion, including cash and availability under the revolving credit facility and accounts-receivable securitization program. The $1.5 billion revolver had no borrowings and $240.7 million of letters of credit outstanding; reported remaining borrowing capacity was $1.3 billion.
- The company generated $592.5 million of operating cash flow in excess of property, plant and mine-development additions, before other investing expenditures and financing flows.
Changes versus comparable periods
- Q3 revenue rose 11.9%; nine-month revenue rose 13.1%. Management attributed growth principally to Australian Mining, where higher sales volumes and prices reflected recovering Asian demand and stronger metallurgical and thermal coal markets.
- Segment Adjusted EBITDA increased 54.3% in Q3 and 32.8% for nine months. Australian Mining Adjusted EBITDA rose to $323.2 million in Q3 from $108.2 million and to $670.1 million for nine months from $319.1 million. Trading and Brokerage nine-month Adjusted EBITDA declined to $91.0 million from $145.2 million.
- Total tons sold were 64.0 million in Q3, up 0.8%, and 182.0 million for nine months, down 0.2%. Australian volumes increased; Midwestern U.S. volumes fell 10.0% over nine months.
- Net income attributable to common stockholders rose 109.8% in Q3 and 58.4% for nine months. The 2009 nine-month comparison included $23.6 million of discontinued-operations income, primarily related to a coal excise tax refund; 2010 reported a $2.2 million discontinued-operations loss.
Debt, taxes and other notable items
- In August, Peabody issued $650 million of 6.5% senior notes due 2020 and used the proceeds, with cash on hand, to retire $650 million of 6.875% notes due 2013. Management said the refinancing extended maturity and lowered the coupon. It recorded $8.4 million of debt-extinguishment costs.
- A new $2.0 billion credit facility, including a $1.5 billion revolver and $500 million term loan, replaced prior facilities and matures in June 2015. The term loan requires quarterly principal payments beginning December 31, 2010. The company reported compliance with financial covenants; the agreement includes leverage and interest-coverage tests.
- Q3 income tax expense included $84.5 million related to intended repatriation of certain foreign earnings. This was partly offset by a $69.3 million release of valuation allowances, including $63.7 million for alternative minimum tax credits. The IRS examination of 2005 taxes led to a $15.2 million reduction in unrecognized tax benefits; a separate 2006 issue proceeded to formal IRS appeals.
- Foreign-currency hedge fair values and other comprehensive income were significantly affected by Australian-dollar appreciation. Management noted that hedge values can fluctuate with currency, commodity and interest-rate movements.
Outlook, risks and contingencies
- As of October 19, 2010, management expected 2010 sales of 240–260 million tons: approximately 185–195 million U.S. tons and 27–29 million Australian tons, including 9.5–10.0 million tons of metallurgical coal. Planned 2010 production was fully contracted.
- Planned 2010 capital expenditures were $600–650 million. Management expected operating cash flow and available liquidity to cover anticipated capital needs for the next 12 months and foreseeable future.
- Management described stronger Pacific coal demand and higher seaborne prices, while identifying operating costs, weather, geology, equipment, transportation, labor, customer demand and credit access as risks. It cautioned that production below optimal levels or cost increases not matched by sales-price gains could pressure margins.
- Management expected the Dodd-Frank Act to increase compliance and transaction costs for hedging and Trading and Brokerage activities. Australia’s proposed minerals resource rent tax was not yet law; if enacted, it could affect Australian operations from its proposed July 2012 effective date.
- Significant litigation includes Navajo Nation claims seeking at least $600 million in actual damages, at least $1 billion in punitive damages and lease changes. The company said the loss could not be reasonably estimated but believed resolution was unlikely to materially affect its financial condition, results or cash flows. Hopi claims were settled and dismissed in October 2010. The Gulf Power court awarded zero damages, but Gulf Power moved to alter or amend the judgment.
- Recorded environmental cleanup liabilities were $47.5 million at September 30, 2010. The company noted uncertainties around environmental and historical-operations claims and stated that it believed they were unlikely to have a material adverse effect.
- Other capital commitments include a projected $250 million total share of Prairie State construction costs and approximately $60 million for GreenGen. The company also reported $2.08 billion of letters of credit, bonds and guarantees supporting reclamation, leases, workers’ compensation and other obligations.
Most important facts for investors to verify
- Whether Australian coal prices, shipment volumes and mine productivity sustain the large year-over-year improvement in Australian Mining earnings.
- How much cash generation remains after the stated $600–650 million 2010 capital-spending plan and funding commitments for Prairie State, NCIG and GreenGen.
- The quality and durability of reported liquidity, including reliance on receivables securitization and the annual renewal of its supporting letter-of-credit commitment.
- Tax effects of foreign earnings repatriation, tax-credit valuation allowances and the unresolved IRS appeals matter.
- Developments in major litigation, environmental exposures, Australian resource-tax proposals and coal-related regulatory changes.
- The filing reports a 21% increase in the quarterly dividend to $0.085 per share, payable in November 2010; verify subsequent payment and any changes to capital-allocation plans.