Peabody Energy Corporation — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2019, compared with the same periods in 2018. Peabody operates coal mines in the U.S. and Australia and reports five mining segments. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,106.4 million | $1,412.6 million | $3,506.0 million | $4,184.7 million |
| Operating profit (loss) | $(36.8) million | $130.3 million | $227.2 million | $534.8 million |
| Net income (loss) attributable to common stockholders | $(82.8) million | $71.5 million | $78.5 million | $291.8 million |
| Adjusted EBITDA | $150.3 million | $372.1 million | $632.2 million | $1,105.6 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $552.6 million | $1,260.8 million |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $407.4 million | $1,195.3 million |
Adjusted EBITDA margin was approximately 13.6% in Q3 2019 versus 26.3% a year earlier, and 18.0% for the first nine months versus 26.4%. Total tons sold fell 9% in Q3 and 11% year to date. The filing defines Adjusted EBITDA and free cash flow as non-GAAP measures.
At September 30, cash and cash equivalents were $759.1 million and available liquidity was $1,349.5 million. Debt carrying value was $1,352.8 million; debt at par was $1,413.6 million. Total assets were $6,792.5 million, total liabilities $3,807.5 million, and equity $2,985.0 million. Cash declined from $981.9 million at year-end 2018.
Material changes versus prior periods
- Revenue declined 22% in Q3 and 16% year to date, primarily from lower sales volumes and realized prices. Seaborne metallurgical revenue fell 42% in Q3 and 34% year to date, reflecting North Goonyella’s shutdown and other production constraints; Shoal Creek partially offset lost volume.
- Q3 common-stockholder results shifted to a loss from income. Nine-month common-stockholder income also fell; the prior-year comparison included $102.5 million of preferred-stock dividends, which reduced 2018 income attributable to common stockholders.
- Adjusted EBITDA fell 60% in Q3 and 43% year to date. Seaborne metallurgical, seaborne thermal and Powder River Basin were weaker; Western U.S. Mining improved.
- Operating cash flow and free cash flow were substantially below 2018. The filing cites weaker mining cash generation, working-capital changes and the prior year’s $323.1 million collateral release; North Goonyella insurance proceeds partially offset the decline.
- Financing uses included $300.2 million of share repurchases and $243.9 million of dividends in the first nine months, including a $200 million supplemental dividend. The September credit-agreement amendment increased the revolver commitment to $565 million and extended $540 million of commitments to 2023.
Outlook, risks and unusual items
- Outlook and capital spending: The filing provides market commentary, not a numerical earnings or EBITDA forecast. Management reduced expected 2019 capital expenditures to $300–$325 million from the previously disclosed $350–$375 million range. It reported no significant change to its long-term outlook.
- North Goonyella: Following the 2018 mine fire, operations remained suspended. Management expected no meaningful volumes for at least three years, with development coal targeted for the second half of 2020. A revised access plan was subject to regulatory approval; estimated re-ventilation costs were $12–$15 million and potential 2020 project capital was $50–$75 million, subject to mine assessment and management and Board approval. The company recorded a $125 million insurance recovery and, after quarter-end, an additional equipment-loss provision of approximately $60 million. If no future mining occurs, further impairment charges of up to approximately $272 million may be possible, in addition to other idling or closure exposures.
- Other operating changes: The Wildcat Hills mine had a $20 million impairment charge and was expected to close in Q4 2019. Cottage Grove and Kayenta shipped their final tons during Q3. Middlemount operations were suspended following a highwall failure, weakening equity-affiliate results.
- Joint ventures: The proposed Peabody-Arch PRB/Colorado joint venture was in regulatory review, anticipated to conclude in the first half of 2020. Completion also depended on financing-related conditions; exchange of control could result in a significant accounting loss. The United Wambo venture with Glencore remained subject to approvals and other contingencies.
- Risks and contingencies: Coal pricing, declining U.S. coal demand, rail disruptions, mine safety and operating risks, reclamation funding, regulation and climate-related demand pressures remain material risks. Asset retirement obligations were $760 million, supported by surety bonds and letters of credit. A Queensland lawsuit seeks up to A$1.1 billion plus interest and costs; Peabody disputes the claims. Patriot-related liabilities and other legal matters also remain. Management stated it did not expect material losses from guarantees beyond recorded liabilities.
- Other notable items: The company adopted lease accounting in 2019, recognizing operating lease right-of-use assets and liabilities; management said adoption materially affected the balance sheet but not results or cash flows. The company reported compliance with debt covenants at September 30.
Investor verification priorities
- Confirm the North Goonyella recovery schedule, regulatory approvals, post-quarter provision and potential remaining impairment or closure costs.
- Assess whether lower coal prices and volumes, particularly in metallurgical coal and the Powder River Basin, persist and how they affect cash generation.
- Reconcile the reported $1.35 billion available liquidity with revolver and receivables-facility commitments, letters of credit, reclamation assurances and future cash needs.
- Review the Arch and Glencore joint-venture approvals, financing conditions, timing and potential accounting consequences.
- Track the A$1.1 billion Monto litigation and Patriot-related obligations, including the uncertainties around ultimate liability and cash payments.
- Evaluate the sustainability of dividends and repurchases given lower operating cash flow, debt restrictions and the company’s stated gross-debt target of $1.2 billion.