Peabody Energy Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This annual filing also reports fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
Peabody is a coal producer with mining operations in the United States and Australia, plus coal trading and brokerage activities. It reported four principal operating segments: Western U.S. Mining, Midwestern U.S. Mining, Australian Mining, and Trading and Brokerage. In 2013, it produced 218.4 million tons from continuing operations and sold 251.7 million tons, including trading volumes. Approximately 80% of worldwide mining sales by volume were under long-term contracts.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $7.014 billion | $8.078 billion |
| Operating profit (loss) | $(324.8) million | $172.5 million |
| Loss from continuing operations, net of tax | $(286.0) million | $(470.9) million |
| Net loss attributable to common stockholders | $(524.9) million | $(585.7) million |
| Diluted EPS | $(1.97) | $(2.19) |
| Adjusted EBITDA (non-GAAP) | $1.047 billion | $1.837 billion |
| Adjusted income from continuing operations (non-GAAP) | $104.5 million | $238.7 million |
| Adjusted diluted EPS (non-GAAP) | $0.34 | $0.84 |
| Cash from operating activities | $722.4 million | $1.515 billion |
| Cash and cash equivalents at year-end | $444.0 million | $558.8 million |
| Total debt, including capital leases | $6.002 billion | $6.253 billion |
| Total assets | $14.133 billion | $15.809 billion |
| Total stockholders’ equity | $3.948 billion | $4.939 billion |
Year-end current assets were $1.993 billion and current liabilities were $1.776 billion. Available liquidity was approximately $2.1 billion, comprising $444 million of cash, $1.5 billion available under the revolving credit facility (net of letters of credit), and $117.2 million of available securitization capacity. The filing states it was in compliance with its debt covenants at year-end.
Material changes versus 2012
- Revenue declined 13.2%, primarily due to lower realized coal prices, lower U.S. mining volumes, and reduced Trading and Brokerage contributions. Total tons sold rose 1.3%, as higher Australian sales and trading volumes more than offset U.S. declines.
- Segment Adjusted EBITDA fell 38.9% to $1.416 billion. Australian Mining Adjusted EBITDA decreased 66.3% to $316.6 million; Trading and Brokerage moved from $119.7 million of Adjusted EBITDA to a $19.9 million loss. Western U.S. results also declined; Midwestern U.S. results were nearly flat.
- Coal prices remained pressured by seaborne supply exceeding demand. Australian quarterly benchmarks for high-quality hard coking coal and Newcastle thermal coal were lower than in 2012. U.S. sales volumes fell as utility customers drew down inventories.
- Cash from operating activities fell by $792.7 million, reflecting lower Adjusted EBITDA, unfavorable changes in trading-counterparty margin cash flows, and the absence of 2012 foreign-currency hedge monetization proceeds. Lower capital spending helped reduce investing cash outflows.
- Reported continuing-operations loss improved year over year, largely because 2013 included a $448.3 million income tax benefit. Adjusted income and Adjusted EBITDA both fell, so the improvement in reported loss did not indicate stronger underlying adjusted earnings.
Outlook, risks, contingencies, and unusual items
- 2014 targets: U.S. sales volumes of 185–195 million tons, with 10%–15% of projected sales unpriced; Australian sales of 35–37 million tons, including 16–17 million tons of metallurgical coal and 11–12 million tons of thermal exports. Management expected U.S. realized pricing per ton to decline 5%–8% year over year, U.S. unit operating costs to fall 1%–3%, and Australian costs to be in the low-to-mid $70-per-ton range.
- Capital and cash: Targeted 2014 capital spending was $275–$325 million, below 2013 levels. Management said expected liquidity and operating cash flows should cover anticipated capital requirements, while noting that weaker markets or credit conditions could constrain discretionary spending.
- Impairments and closures: Continuing-operations asset impairment and mine-closure costs were $528.3 million in 2013, versus $929.0 million in 2012. Fourth-quarter 2013 included $506.8 million of impairment and mine-closure costs. Peabody approved closure of the Wilkie Creek mine in Australia, recording $167.4 million of pretax discontinued-operations charges. It also recorded $43.2 million of impairment on its Middlemount equity investment.
- Patriot settlement: Peabody agreed to pay $310 million over four years through 2017 and provided $141.5 million of credit support in connection with Patriot Coal’s emergence from bankruptcy. The 2013 results included $30.6 million of continuing-operations settlement charges and $98.0 million of charges in discontinued operations. Peabody may still face exposure to certain pre-spin-off black-lung liabilities if Patriot cannot meet its obligations.
- Debt and fixed commitments: Peabody refinanced its credit facilities in September 2013 with a $1.65 billion revolver and a $1.20 billion term loan. Reported total contractual cash obligations were $18.022 billion, including $3.725 billion of take-or-pay commitments, mainly for Australian rail and port capacity. These obligations may remain costly if volumes are insufficient.
- Other exposures: Major risks include coal-price and demand volatility, competition from natural gas and other energy sources, environmental and mine-safety regulation, transportation constraints, labor and operating disruptions, Australian-dollar movements, counterparty risk, and further impairment charges. Queensland’s higher coal royalty rates and Australia’s carbon-pricing framework affected costs; repeal of the latter was pending legislative action as of the filing. The filing also describes significant environmental claims and litigation, including a Queensland joint-venture claim seeking at least A$1.193 billion, which Peabody disputed and said could not be reasonably estimated.
- Safety and audit: A fatal haulage incident occurred at Wildcat Hills in July 2013; the mine was temporarily idled and later resumed operations. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether coal prices, segment margins, and the 2014 volume and cost targets developed as management expected, particularly in Australian metallurgical coal and U.S. thermal coal.
- Whether operating cash flow and available liquidity can support debt service, capital needs, dividends, and the Patriot settlement amid weaker earnings.
- How sensitive further impairment charges are to coal-price, production-cost, transportation, and foreign-exchange assumptions, given the large 2013 impairment charges.
- Whether take-or-pay commitments, mine closures, reclamation security, and retiree-benefit obligations create cash demands above management’s expectations.
- Whether tax benefits and deferred tax assets are realizable; the filing reports substantial valuation allowances and a large 2013 tax benefit.
- How litigation, regulatory changes, and the potential remaining Patriot-related liabilities may affect future results and liquidity.