Peabody Energy Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Figures are unaudited; dollar amounts are in millions unless stated otherwise. Peabody is a U.S. and Australian coal producer with five mining segments and coal trading activities.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,149.0 | $1,309.4 | $2,399.6 | $2,772.1 |
| Operating profit | $79.5 | $165.3 | $264.0 | $404.5 |
| Income from continuing operations, net | $42.9 | $120.0 | $176.2 | $328.3 |
| Net income attributable to common stockholders | $37.1 | $113.7 | $161.3 | $220.3 |
| Diluted EPS attributable to common stockholders | $0.34 | $0.90 | $1.48 | $1.72 |
| Adjusted EBITDA (non-GAAP) | $228.0 | $369.6 | $481.9 | $733.5 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $377.0 | $915.4 |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $315.4 | $897.4 |
Q2 revenue fell 12%, operating profit 52%, common-stockholder net income 67%, and Adjusted EBITDA 38% year over year. Calculated operating margin was approximately 6.9%, versus 12.6% in Q2 2018. Total tons sold declined 9% in Q2 and 13% in the first half.
At June 30, cash and cash equivalents were $853.0; total debt carrying value was $1,355.6, including $28.5 current and $1,327.1 long-term. Cash less carrying-value debt was approximately $502.6. Current assets were $1,799.8 and current liabilities $991.7. Reported available liquidity was $1,201.9, including cash and available revolving and receivables-facility capacity. The $350.0 revolver had $70.8 of letters of credit outstanding and no borrowings; the receivables program had no borrowings and $129.9 of letters of credit.
Cash and cash equivalents declined from $981.9 at year-end 2018 to $853.0 at June 30. First-half financing cash outflows included $229.3 of dividends, including a $200.0 supplemental dividend, and $156.0 of share repurchases. First-half capital spending was $96.8.
Material changes versus the prior comparable period
- Lower sales volumes and realized prices reduced revenue. Seaborne metallurgical revenue fell 30% in the first half, with no North Goonyella production and mine sequencing and longwall disruptions partly offset by Shoal Creek volumes.
- U.S. flooding and rail disruptions reduced Powder River Basin and Midwestern shipments; lower U.S. electricity demand, coal plant retirements, and low natural-gas prices also pressured coal demand. First-half PRB tons sold declined 14%.
- Middlemount equity-affiliate income fell to $13.5 for the first half from $47.7, reflecting production issues. Prior-year gains on asset disposals and bankruptcy claim settlements also affected comparisons.
- Offsets included lower operating costs, a $125.0 North Goonyella insurance recovery (collected in full), and lower selling and administrative costs. The recovery was partly offset by a $24.7 first-half equipment-loss provision and ongoing mine idling costs.
- The first-half 2018 common-stockholder result included $102.5 of preferred-stock dividends; all convertible preferred shares had been converted by January 2018.
Outlook, commentary, and risks
- Capital spending: 2019 capital expenditures were projected at $350–$375, reduced from the prior $375–$425 estimate. Management targeted approximately $110 of North Goonyella capital, including previously planned longwall equipment, and expected cash outlays for leased-equipment settlements.
- North Goonyella: Mining remained suspended following the September 2018 fire. Peabody re-entered the first re-ventilated zone in July 2019 and was assessing access alternatives; it suspended mine-specific production and cost guidance and expected to complete its evaluation within three months. If no future mining occurs, potential additional charges include approximately $290 for the mine’s remaining carrying value and $5 for additional leased equipment, plus possible take-or-pay and closure costs.
- Market outlook: Management described subdued seaborne thermal conditions and weaker U.S. coal demand, while citing growth in steel and metallurgical-coal demand. Premium HCC spot pricing was $160 per tonne on August 2, down from $194 at June 30; Premium PCI was $105, down from $122. These are market indicators, not company realized prices.
- Contracted sales: Approximately $5.4 billion of future revenue was estimated for customer contracts with fixed or reasonably estimable prices and volumes; about 45% was expected over the next 12 months. Variable-price contracts are excluded, and actual revenue may differ due to pricing, volume, and force-majeure provisions.
- Strategic transactions: A proposed PRB/Colorado joint venture with Arch would give Peabody a 66.5% economic interest, subject to regulatory, financing and other closing conditions. The proposed Wambo/United venture with Glencore remained subject to approvals. The Arch transaction could require amendments to existing debt agreements and may not close.
- Other exposures: Reclamation obligations were $762.8, supported in part by $1,359.9 of surety bonds and $110.5 of letters of credit. Off-balance-sheet instruments included $1,572.0 of surety bonds and $202.2 of letters of credit. A Queensland regulatory process changes financial-assurance and rehabilitation requirements.
- Contingencies: A Queensland lawsuit involving Monto-related entities seeks up to A$1.1 billion plus interest and costs; Peabody disputes the claims and was defending the case at trial. The filing also discusses Patriot-related black-lung and benefit liabilities, climate-related lawsuits, and other legal matters. Peabody said it believed reserves were adequate and did not expect other pending matters to materially adversely affect results, but outcomes remain uncertain.
- Other risks: Coal pricing, customer concentration and credit, mine safety and operating disruptions, transport availability, regulation and permitting, environmental and reclamation costs, joint-venture execution, and debt restrictions could affect results and liquidity. Management reported compliance with debt restrictions and covenants at June 30 and subsequently.
Important facts for investors to verify
- Progress, timing, costs, impairment exposure, and revised production guidance for North Goonyella, including the treatment of insurance proceeds and remaining equipment losses.
- Whether the Arch joint venture closes, required debt amendments and approvals, potential termination fee of up to $40.0, and expected synergies and accounting effects.
- Coal prices and realized pricing, production and shipment recovery after flooding, and operational performance at Middlemount and metallurgical mines.
- Available liquidity after dividends, repurchases, capital spending, reclamation assurance needs, and any debt or covenant changes.
- Developments in the Monto litigation, Patriot-related liabilities, regulatory matters, and the estimate and funding of reclamation obligations.
- Whether management’s $350–$375 capital-spending outlook and $5.4 billion contracted-revenue estimate remain achievable; both are subject to operating, market, contractual, and regulatory uncertainty.