Peabody Energy Corporation — Q2 2011 Form 10-Q
Business context and period. The filing reports unaudited results for the three and six months ended June 30, 2011, compared with the same periods in 2010. Peabody operates coal mines and trading businesses in the U.S. and Australia. Its reportable segments are Western U.S. Mining, Midwestern U.S. Mining, Australian Mining, and Trading and Brokerage.
Key financial metrics
Dollars in millions, except per-share data. Percentages are calculated from reported figures.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $2,008.0 | $1,661.4 | $3,752.9 | $3,177.0 |
| Operating profit | $458.4 | $324.4 | $752.7 | $566.6 |
| Income from continuing operations, net of tax | $293.0 | $214.7 | $472.6 | $351.8 |
| Net income attributable to common stockholders | $284.8 | $206.2 | $461.3 | $339.9 |
| Diluted EPS attributable to common stockholders | $1.05 | $0.76 | $1.69 | $1.26 |
| Operating margin | 22.8% | 19.5% | 20.1% | 17.8% |
| Adjusted EBITDA, consolidated | $579.5 | $440.4 | $995.7 | $797.6 |
- Q2 revenue rose 20.9% and common-stockholder net income rose 38.1% year over year. For the first half, revenue increased 18.1% and common-stockholder net income increased 35.7%.
- Management attributed the improvement principally to stronger Australian seaborne coal pricing and higher Australian volumes in Q2, along with lower interest expense. The Q2 income tax provision increased to $119.8 from $53.4.
- Six-month operating cash flow was $615.6, versus $464.4 in 2010. Investing used $439.8, including $354.8 of capital additions; financing used $294.1. Cash and cash equivalents ended June at $1,176.9, down from $1,295.2 at year-end 2010.
- At June 30, total debt was $2,512.0, down from $2,750.0 at year-end, primarily reflecting redemption of $218.1 of 5.875% Senior Notes in April. The company reported covenant compliance. Cash plus short-term investments totaled $1,251.9; reported available liquidity was $2.7 billion, including $1.5 billion available on the revolver.
- Current assets were $3,110.4 and current liabilities $1,485.5. The filing reported $965.5 of accrued postretirement benefit costs and $520.4 of asset retirement obligations.
- Quarterly dividends declared were $0.085 per share, versus $0.070 in Q2 2010.
Material changes and operating drivers
- Australian Mining revenue increased 48.2% in Q2 and 40.4% for the first half. Q2 realized prices for seaborne metallurgical and thermal coal rose 50% and 16%, respectively, year over year. Australian segment Adjusted EBITDA rose to $376.9 in Q2 from $223.6.
- Western U.S. Mining segment Adjusted EBITDA fell to $134.1 from $207.3 in Q2. Management cited Twentymile geologic issues, higher operating and maintenance costs, commodity cost inflation, and a $24.5 litigation provision.
- Midwestern U.S. Mining segment Adjusted EBITDA increased to $82.0 from $71.4 in Q2, although Midwest flooding disrupted production and coal transportation. Trading and Brokerage Adjusted EBITDA increased to $50.4 from $14.3 for the quarter; first-half trading revenue was affected by unfavorable market movements, including volatility after the Japan earthquake.
- Q2 results included a $23.5 non-cash gain on an exchange of coal reserves and a $14.6 Prairie State project development fee. These items contributed to lower Corporate and Other losses. A $1.7 cost was recorded for the senior-note redemption.
Outlook, risks, and contingencies
- Management described global coal supply-demand fundamentals as solid near term, led by Pacific markets, while U.S. demand remained weak. It expected Q3 to benefit from Australian prices and volumes, with weather, rail, co-shipper, and longwall-move constraints; it expected U.S. and Australian volumes to improve in Q4, subject to operating conditions.
- 2011 capital expenditure guidance was $900–$950 million, with about 70% of growth and expansion capital targeted at Australian projects. Management expected available liquidity and operating cash flow to cover anticipated requirements for existing operations over the next 12 months and foreseeable future.
- After quarter-end, Peabody and ArcelorMittal launched an offer for Macarthur Coal valuing its equity at approximately A$4.7 billion (about US$5.2 billion). The offer was conditional, and proposed financing included cash, revolver borrowings, debt and/or equity issuance, and potentially a $2 billion bridge facility. The acquisition was not completed as of the filing.
- After quarter-end, Peabody was named winning bidder for approximately 220 million tons of Powder River Basin reserves, with a first payment of $42.1 million in July and four further annual payments of the same amount.
- Risks highlighted include coal demand and price volatility, weather and flooding, mining/geologic and transport disruptions, rising labor and input costs, foreign exchange, counterparty credit, access to capital, and changes in environmental and financial regulation. Australian MRRT and proposed carbon pricing, U.S. air-pollution rules, and derivatives regulation could affect future costs; impacts were not yet determined.
- The Navajo claims were settled in August 2011, after the reporting date; a $24.5 million provision had been recorded in Q2. Other disclosed matters include Gulf Power litigation, Oklahoma lead-related claims and environmental cleanup liabilities of $51.6 million, and the Kivalina climate litigation. Management stated it believed the matters were not likely to have a material adverse effect, while acknowledging uncertainties in certain cases.
- Coal trading counterparties included 46% non-investment-grade and 11% unrated exposure. A material adverse event could trigger approximately $102 million of collateral postings on specified net-liability positions; exchange variation margin posted was $149.2 million at June 30.
Important facts for investors to verify
- Whether Australian coal pricing, production, and currency effects sustain segment earnings, and whether U.S. flooding and Twentymile operating issues normalize as forecast.
- The cash, debt, and dilution implications of the conditional Macarthur offer, including the proposed bridge financing and final transaction terms.
- Execution and funding of the $900–$950 million capital program, Prairie State commitments, and the new federal coal lease payments.
- Subsequent developments in the Navajo settlement, Gulf Power matter, environmental claims, and regulatory proposals, including any resulting cash costs or changes to reserves.
- Liquidity sensitivity to trading collateral requirements, receivables securitization availability and renewal, and the continued availability and cost of credit markets.