Peabody Energy Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Dollar amounts are in millions unless noted. The company mines and markets coal, principally through Australian Mining, Western and Midwestern U.S. Mining, and Trading and Brokerage.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $1,758.0 | $1,725.3 | $3,384.8 | $3,473.3 |
| Operating profit | $32.8 | $26.4 | $35.7 | $115.2 |
| Continuing operations, after tax | $(72.0) | $101.4 | $(116.3) | $91.1 |
| Net income (loss) attributable to common stockholders | $(73.3) | $90.3 | $(121.8) | $66.9 |
| Diluted EPS attributable to common stockholders | $(0.27) | $0.33 | $(0.46) | $0.25 |
| Adjusted EBITDA | $213.1 | $254.3 | $390.0 | $534.4 |
Q2 operating margin was approximately 1.9% of revenue, versus approximately 1.5% a year earlier; first-half operating margin was approximately 1.1%, versus 3.3%. Adjusted EBITDA is a non-GAAP measure. Segment Adjusted EBITDA, before Corporate and Other, was $310.4 million in Q2 and $562.9 million for the first half; Corporate and Other reduced consolidated Adjusted EBITDA.
- Cash flow: First-half cash from operating activities was $75.3 million, down from $331.4 million. Investing activities provided $48.4 million, compared with $106.2 million used in the prior-year period; financing activities used $69.3 million versus $266.1 million. Cash increased $54.4 million to $498.4 million.
- Liquidity: Available liquidity was approximately $2.1 billion at June 30, comprising $498.4 million cash, $1.5 billion available under the revolving credit facility (net of letters of credit), and $94.6 million available under the receivables program.
- Debt: Total debt was $5,994.0 million, nearly unchanged from $6,002.4 million at year-end 2013. Long-term debt fair value was estimated at $6,055.2 million. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $13,692.2 million, down from $14,133.4 million at year-end; total liabilities were $9,687.8 million, down from $10,185.5 million. Current assets were $1,877.8 million and current liabilities $1,504.7 million.
- Dividends: $0.085 per share declared for Q2; $46.1 million paid in the first half. A further $0.085-per-share dividend was approved for payment in August 2014.
Material changes versus prior period
- Q2 revenue rose 1.9%, but first-half revenue fell 2.5%. Lower Australian realized coal prices were the principal headwind: Australian segment revenue declined $37.4 million in Q2 and $163.6 million in the first half. Higher U.S. Western Mining revenue and volumes partly offset the decline.
- Consolidated Adjusted EBITDA fell $41.2 million in Q2 and $144.4 million in the first half. Australian Mining Adjusted EBITDA declined sharply, while Western U.S. Mining improved; Midwestern U.S. Mining weakened.
- U.S. demand and shipments benefited from weather, higher natural-gas prices and customer inventory drawdowns. Australian production volumes improved, but lower prices, higher contractor-mine costs and inflation outweighed volume and cost-reduction benefits.
- First-half operating cash flow fell substantially, reflecting weaker operating results and the $90 million Patriot/UMWA settlement payment, partly offset by the timing of customer receipts.
- Income taxes were a major year-over-year earnings swing. The company recorded valuation allowances on Australian deferred tax assets of $75.7 million in Q2 and $124.7 million year to date; 2013 results included substantial tax benefits, including a U.S. capital-loss valuation-allowance release.
Outlook, risks and unusual items
- 2014 targets: Australian coal sales of 34–36 million tons, including 15–16 million tons of metallurgical coal and 11–12 million tons of Australian thermal exports. U.S. volumes were targeted at 185–190 million tons; essentially all 2014 U.S. volumes were priced, and 70%–80% of targeted 2015 volumes were priced as of June 30.
- Management expected 2014 U.S. realized pricing per ton to decline 4%–7% from 2013, U.S. unit operating costs to decline 1%–3%, and Australian costs to be in the low-$70-per-ton range. 2014 capital spending was reduced to a target of $210–$250 million, from a prior $250–$295 million range and $328.4 million spent in 2013.
- Management described seaborne coal as oversupplied and prices as pressured, while expecting demand growth and supply cutbacks to improve conditions over time. It planned to reduce Burton Mine metallurgical coal production by approximately 1.5 million tons annually. Long-term expectations depend on demand growth, supply discipline and regulatory outcomes.
- Management expected operating cash flows and available liquidity to cover anticipated 2014–2015 capital requirements, including approximately $280 million of federal coal lease payments in 2014. This expectation assumes continued access to a substantial portion of revolving-credit capacity. Two rating agencies had downgraded the company by one notch; further deterioration could make financing more costly or less available.
- Debt and other obligations: A June debenture amendment removed mandatory and optional interest-deferral provisions; the company paid $10.1 million in consent fees and incurred $1.6 million in related professional fees. The Patriot/UMWA settlement requires $310 million of payments through 2017; $90 million was paid in January 2014, with further payments of $75 million in 2015, $75 million in 2016 and $70 million in 2017.
- Contingencies: The Monto Coal litigation seeks A$1,193.2 million plus interest and costs; management said the potential loss could not be reasonably estimated. A Queensland port-services claim seeks A$113.1 million plus interest and costs. The company is defending both. A $23.4 million Eagle Mining arbitration award resulted in a $15.6 million additional charge; the company petitioned to partially vacate or modify the award. It also disclosed environmental cleanup liabilities of $60.6 million and potential exposure relating to Patriot black-lung liabilities if Patriot cannot meet its obligations.
- Asset and regulatory risks: Sustained adverse coal prices could trigger future impairment; $227.4 million of particularly price-sensitive Australian mining assets and investments was reviewed at quarter-end with no impairment recorded. The U.S. EPA’s proposed rules for existing power plants could materially reduce coal-fired generation demand if adopted as proposed. Australia’s Senate voted in July to repeal its carbon-pricing legislation, which management expected to modestly reduce future operating costs.
- Other unusual items include a $43.2 million Q2 revenue benefit from finalized pricing on a Western U.S. customer contract and the sale agreement for Wilkie Creek for approximately $70 million cash plus assumption of specified obligations, subject to closing conditions.
Most important facts for investors to verify
- Whether seaborne coal prices and Australian segment profitability stabilize, and whether the announced Burton production reduction and cost measures deliver expected savings.
- Whether U.S. shipment, pricing and inventory trends support the 2014 volume target and management’s 2015 pricing position.
- Cash generation and liquidity after Patriot settlement payments, federal coal lease expenditures, capital spending and other obligations; also confirm continued revolver access and covenant compliance.
- Potential additional Australian deferred-tax-asset valuation allowances and the resulting effect on reported earnings and cash taxes.
- Developments, reserves and outcomes in the Monto, Queensland Bulk Handling, Eagle Mining and other legal matters, as well as Patriot-related indemnity exposure.
- Closing and net proceeds from the Wilkie Creek sale, and whether coal-market conditions require impairment of long-lived assets or mining-related investments.
- Implementation and consequences of U.S. emissions rules, Australian carbon-pricing repeal, and further credit-rating changes.