Peabody Energy Corporation — Q2 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009; filed August 7, 2009. Amounts are in U.S. dollars unless otherwise stated. Financial statements are unaudited.
Business context
Peabody described itself as the world’s largest private-sector coal company, with operations in the Western and Midwestern U.S. and Australia, plus coal trading and brokerage. Results reflect lower coal demand amid the global economic downturn. Patriot Coal-related operations are reported as discontinued operations.
Financial performance and liquidity
- Q2 revenue: $1.341 billion, down 12.2% from $1.527 billion. Sales revenue was $1.209 billion versus $1.419 billion; other revenue increased to $131.6 million from $108.0 million.
- Q2 earnings: Operating profit was $211.9 million versus $345.1 million; income from continuing operations was $87.7 million versus $244.3 million. Net income attributable to common stockholders was $79.2 million, down 66.1% from $233.3 million. Diluted EPS was $0.29 versus $0.85.
- First-half results: Revenue was $2.801 billion, up 0.3%; operating profit was $430.6 million versus $528.0 million. Income from continuing operations was $228.2 million versus $322.4 million, and net income attributable to common stockholders was $249.2 million versus $290.3 million. Diluted EPS was $0.93 versus $1.06.
- Margins: Q2 operating margin was approximately 15.8%, compared with 22.6% a year earlier; continuing-operations net margin was approximately 6.5%, compared with 16.0%. These are calculated from reported figures.
- Segment performance: Q2 segment Adjusted EBITDA was $386.0 million, down 23.5%; consolidated Adjusted EBITDA, after corporate and other costs, was $323.6 million versus $446.9 million. Australian Mining segment EBITDA fell 47.3% to $125.1 million; Midwestern U.S. Mining increased 77.5% to $73.3 million.
- Cash flow: First-half cash from continuing operations was $222.6 million versus $329.8 million; total operating cash flow was $229.4 million versus $264.3 million. Investing activities used $208.3 million and financing activities used $24.8 million. Cash ended the period at $446.0 million, down $3.7 million from year-end.
- Balance sheet and liquidity: Current assets were $1.858 billion and current liabilities $1.312 billion, a current ratio of approximately 1.42. Total debt was $2.783 billion, including $16.4 million current maturities; long-term debt fair value was estimated at $2.624 billion. The company reported $1.5 billion of available borrowing capacity under its senior unsecured credit facility, net of letters of credit; the facility matures September 2011.
- Other metrics: First-half sales volume was 119.1 million tons, down 1.4 million tons (1.2%). Inventories rose to $447.5 million from $277.7 million, mainly due to deferred Australian shipments. Dividends declared remained $0.06 per share quarterly.
Material changes and unusual items
- Q2 revenue declined primarily because of lower Australian metallurgical coal volumes and export prices that took effect April 1, 2009, and because Q2 2008 included a $56.9 million coal-supply-agreement revenue recovery. Midwestern U.S. pricing and shipments partly offset the declines.
- Australian Mining’s first-half shipments were affected by lower demand and three first-quarter longwall moves. Western U.S. results also faced higher royalties and sales-related taxes, unplanned equipment repairs, and increased labor costs. Midwestern results benefited from higher prices and shipments.
- The first-half $29.0 million income from discontinued operations included an approximately $35 million after-tax coal excise-tax refund recorded in Q1. About $58 million of related cash was received in Q2; it is a cash-flow item, not a Q2 operating earnings gain.
- Accounting standards adopted in 2009 led to retrospective presentation changes, including treatment of noncontrolling interests, convertible debt, and EPS. The company also reported that its controls and procedures were effective and that there were no material quarterly changes to internal control over financial reporting.
Outlook, risks, and contingencies
- 2009 targets: U.S. production of 185–190 million tons, Australian production of 20–23 million tons, and total sales of 225–245 million tons. Management said production could be adjusted further as demand changes. U.S. production was sold out for 2009; 10–20 million U.S. tons remained unpriced for 2010.
- Capital spending: Forecast at $400–$450 million for 2009, excluding federal coal reserve lease payments; plans include approximately $100 million for Bear Run Mine development and approximately $60 million for Prairie State Energy Campus investment.
- Management cited weak global steel production and lower U.S. power-sector coal demand. It estimated that reduced U.S. electricity generation, industrial use, and exports could require 115–125 million tons of lower coal demand in 2009. The company expected the downturn to temper near-term pricing and demand, while expressing a positive long-term view of coal demand.
- Management identified lower shipments or contract renewals, customer and counterparty credit risk, rail and port constraints, mining and equipment issues, cost inflation, currency movements, and access to capital and surety as risks. Proposed U.S. and Australian greenhouse-gas policies could increase costs or reduce coal use; timing and effects were uncertain.
- Derivative positions could require collateral of up to $133.2 million following a material adverse event and up to $18.9 million following specified credit downgrades. Environmental cleanup liabilities were recorded at $44.2 million, with ultimate costs potentially differing from reserves.
- Significant litigation includes Navajo Nation claims seeking at least $600 million in actual damages, potentially trebled under RICO, plus punitive damages and lease remedies; Gulf Power contract litigation; Oklahoma lead-site claims; and the Kivalina climate-change suit seeking $95–$400 million for relocation and property damages. Peabody said losses for these matters could not be reasonably estimated and generally expected no material adverse effect, but outcomes remain uncertain.
Most important facts for investors to verify
- Whether 2010 unpriced volumes, Australian demand, and customer shipment deferrals developed in line with the stated outlook.
- Whether inventory accumulation and working-capital movements continued to constrain operating cash flow.
- Whether segment performance and pricing—especially in Australia and the Midwestern U.S.—recovered or deteriorated further.
- Availability and terms of the $1.5 billion credit capacity, facility maturity, debt covenants, and potential derivative collateral calls.
- Developments in the major legal and environmental contingencies and any changes to recorded reserves or expected exposure.
- How much first-half earnings and cash flow depended on the nonrecurring excise-tax refund and other unusual items.