NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (PEC) and its consolidated subsidiaries and affiliates (along with PEC, the Company or Peabody). Interests in subsidiaries controlled by the Company are consolidated with any outside stockholder interests reflected as noncontrolling interests, except when the Company has an undivided interest in a joint venture. In those cases, the Company includes its proportionate share in the assets, liabilities, revenues and expenses of the jointly controlled entities within each applicable line item of the unaudited condensed consolidated financial statements. All intercompany transactions, profits and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, these financial statements reflect all normal, recurring adjustments necessary for a fair presentation. Balance sheet information presented herein as of December 31, 2019 has been derived from the Company’s audited consolidated balance sheet at that date. The Company’s results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2020.
Coronavirus Disease 2019 (COVID-19) Pandemic
On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. The global impact on economic activity has severely curtailed demand for numerous commodities. Within the global coal industry, supply and demand disruptions have been widespread as the COVID-19 pandemic has forced country-wide lockdowns and regional restrictions. In the seaborne markets, thermal demand from non-power sectors remains weak and steel production has been curtailed. Thermal coal demand in the U.S. has been pressured by low natural gas prices, subsidized renewable energy and weak electric power sector consumption due to reduced industrial activity. Supply risks have also emerged at a number of global and domestic producers.
While the ultimate impacts of the COVID-19 pandemic are unknown, the Company expects continued interference with general commercial activity, which may further negatively affect both demand and prices for the Company’s products. The Company also faces potential disruption to supply chain and distribution channels, potentially increasing its costs of production, storage and distribution, and potential adverse effects to the Company’s workforce, each of which could have a material adverse effect on the Company’s business, financial condition or results of operations. In addition, the COVID-19 pandemic could have an adverse impact on the timing of key events, including the timing of the Company’s litigation in the U.S. federal court system as it pursues the completion of the proposed joint venture with Arch Coal, Inc. (Arch), as further described in Note 15. “Other Events.”
In response to the COVID-19 pandemic, on March 27, 2020, the President of the United States signed and enacted into law the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). The Company has requested accelerated refunds of previously generated alternative minimum tax (AMT) credits from the Internal Revenue Service (IRS) as further described in Note 11. “Income Taxes” and expects to defer 2020 employer payroll taxes incurred after the date of enactment to future years. As further described in Note 12. “Long-term Debt,” subsequent to March 31, 2020, the Company borrowed funds under its revolving credit facility as part of its ongoing efforts to preserve financial flexibility in light of the current uncertainty in the global markets caused by the COVID-19 pandemic. Given the uncertainties with respect to future COVID-19 developments, including the duration, severity and scope, as well as the necessary government actions to limit the spread, the Company is unable to estimate the full impact of the pandemic on its business, financial condition or results of operations at this time.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
Newly Adopted Accounting Standards
Financial Instruments - Credit Losses. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13 (Topic 326) related to the measurement of credit losses on financial instruments. The new standard replaces the incurred loss methodology to record credit losses with a methodology that reflects the expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company adopted the standard on January 1, 2020 using the modified retrospective approach. The Company will be required to use a forward-looking expected loss model for accounts receivables, loans and other financial instruments to record an allowance for the estimated contractual cash flows not expected to be collected. The Company has not restated comparative information for 2019 and no adjustments to retained earnings were necessary as a result of adopting Topic 326.
Effective January 1, 2020, the Company recognizes an allowance for credit losses for financial assets carried at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term) which includes consideration of prepayments and is based on the Company’s expectations as of the balance sheet date.
Assets are written off when the Company determines that such financial assets are deemed uncollectible. Write-offs are recognized as deductions from the allowance for credit losses. Expected recoveries of amounts previously written off, not to exceed the aggregate of the amount previously written off, are included in determining the necessary reserve at the balance sheet date.
The Company pools its accounts receivable based on similar risk characteristics in estimating its expected credit losses. The Company also continuously evaluates such pooling decisions and adjusts as needed from period to period as risk characteristics change.
Fair Value Measurement. In August 2018, the FASB issued ASU 2018-13, which amended the fair value measurement guidance by removing and modifying certain disclosure requirements, while also adding new disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted the disclosure requirements effective January 1, 2020.
Compensation- Retirement Benefits. In August 2018, the FASB issued ASU 2018-14 to add, remove and clarify disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The Company adopted the disclosure requirements effective January 1, 2020.
Accounting Standards Not Yet Implemented
Income Taxes. In December 2019, the FASB issued ASU 2019-12 as part of its effort to reduce the complexity of accounting standards. The ASU enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification (ASC) 740, including requirements related to (1) hybrid tax regimes, (2) the tax basis step-up in goodwill obtained in a transaction that is not a business combination, (3) separate financial statements of entities not subject to tax, (4) the intraperiod tax allocation exception to the incremental approach, (5) recognition of a deferred tax liability after an investor in a foreign entity transitions to or from the equity method of accounting, (6) interim-period accounting for enacted changes in tax law and (7) the year-to-date loss limitation in interim-period tax accounting. ASU 2019-12 is effective on January 1, 2021 for calendar year-end public companies and early adoption is permitted. The Company plans to adopt the requirements effective January 1, 2021.
Equity Method Investments. In January 2020, the FASB issued ASU 2020-01, which clarifies the interactions between ASC 321, ASC 323 and ASC 815. The new guidance addresses accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective on January 1, 2021 for calendar year-end public companies and early adoption is permitted. The Company plans to adopt the requirements effective January 1, 2021.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, “Revenue from Contracts with Customers.” Refer to Note 1. “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for the Company’s policies regarding “Revenues” and “Accounts receivable, net.” On January 1, 2020, the Company adopted Topic 326 using the modified retrospective approach. See Note 2. “Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented” for further discussion of the adoption, including the impact on the Company’s opening balance sheet.
Disaggregation of Revenues
Revenue by product type and market is set forth in the following tables. With respect to its seaborne mining segments, the Company classifies as “Export” certain revenue from domestically-delivered coal under contracts in which the price is derived on a basis similar to export contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Seaborne Thermal Mining
|
|
Seaborne Metallurgical Mining
|
|
Powder River Basin Mining
|
|
Other U.S. Thermal Mining
|
|
Corporate and Other (1)
|
|
Consolidated
|
|
(Dollars in millions)
|
Thermal coal
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
36.5
|
|
|
$
|
—
|
|
|
$
|
266.6
|
|
|
$
|
184.6
|
|
|
$
|
—
|
|
|
$
|
487.7
|
|
Export
|
163.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
163.7
|
|
Total thermal
|
200.2
|
|
|
—
|
|
|
266.6
|
|
|
184.6
|
|
|
—
|
|
|
651.4
|
|
Metallurgical coal
|
|
|
|
|
|
|
|
|
|
|
|
Export
|
—
|
|
|
192.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
192.5
|
|
Total metallurgical
|
—
|
|
|
192.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
192.5
|
|
Other
|
0.9
|
|
|
0.7
|
|
|
—
|
|
|
7.7
|
|
|
(7.0
|
)
|
|
2.3
|
|
Revenues
|
$
|
201.1
|
|
|
$
|
193.2
|
|
|
$
|
266.6
|
|
|
$
|
192.3
|
|
|
$
|
(7.0
|
)
|
|
$
|
846.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Seaborne Thermal Mining
|
|
Seaborne Metallurgical Mining
|
|
Powder River Basin Mining
|
|
Other U.S. Thermal Mining
|
|
Corporate and Other (1)
|
|
Consolidated
|
|
(Dollars in millions)
|
Thermal coal
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
38.4
|
|
|
$
|
—
|
|
|
$
|
287.3
|
|
|
$
|
321.7
|
|
|
$
|
—
|
|
|
$
|
647.4
|
|
Export
|
211.9
|
|
|
—
|
|
|
—
|
|
|
7.0
|
|
|
—
|
|
|
218.9
|
|
Total thermal
|
250.3
|
|
|
—
|
|
|
287.3
|
|
|
328.7
|
|
|
—
|
|
|
866.3
|
|
Metallurgical coal
|
|
|
|
|
|
|
|
|
|
|
|
Export
|
—
|
|
|
323.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
323.7
|
|
Total metallurgical
|
—
|
|
|
323.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
323.7
|
|
Other
|
0.7
|
|
|
0.8
|
|
|
—
|
|
|
6.1
|
|
|
53.0
|
|
|
60.6
|
|
Revenues
|
$
|
251.0
|
|
|
$
|
324.5
|
|
|
$
|
287.3
|
|
|
$
|
334.8
|
|
|
$
|
53.0
|
|
|
$
|
1,250.6
|
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue by initial contract duration was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Seaborne Thermal Mining
|
|
Seaborne Metallurgical Mining
|
|
Powder River Basin Mining
|
|
Other U.S. Thermal Mining
|
|
Corporate and Other (1)
|
|
Consolidated
|
|
(Dollars in millions)
|
One year or longer
|
$
|
99.3
|
|
|
$
|
140.1
|
|
|
$
|
243.4
|
|
|
$
|
184.6
|
|
|
$
|
—
|
|
|
$
|
667.4
|
|
Less than one year
|
100.9
|
|
|
52.4
|
|
|
23.2
|
|
|
—
|
|
|
—
|
|
|
176.5
|
|
Other (2)
|
0.9
|
|
|
0.7
|
|
|
—
|
|
|
7.7
|
|
|
(7.0
|
)
|
|
2.3
|
|
Revenues
|
$
|
201.1
|
|
|
$
|
193.2
|
|
|
$
|
266.6
|
|
|
$
|
192.3
|
|
|
$
|
(7.0
|
)
|
|
$
|
846.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Seaborne Thermal Mining
|
|
Seaborne Metallurgical Mining
|
|
Powder River Basin Mining
|
|
Other U.S. Thermal Mining
|
|
Corporate and Other (1)
|
|
Consolidated
|
|
(Dollars in millions)
|
One year or longer
|
$
|
171.1
|
|
|
$
|
232.8
|
|
|
$
|
280.1
|
|
|
$
|
313.8
|
|
|
$
|
—
|
|
|
$
|
997.8
|
|
Less than one year
|
79.2
|
|
|
90.9
|
|
|
7.2
|
|
|
14.9
|
|
|
—
|
|
|
192.2
|
|
Other (2)
|
0.7
|
|
|
0.8
|
|
|
—
|
|
|
6.1
|
|
|
53.0
|
|
|
60.6
|
|
Revenues
|
$
|
251.0
|
|
|
$
|
324.5
|
|
|
$
|
287.3
|
|
|
$
|
334.8
|
|
|
$
|
53.0
|
|
|
$
|
1,250.6
|
|
|
|
(1)
|
Corporate and Other revenue includes gains and losses related to mark-to-market adjustments from economic hedge activities intended to hedge future coal sales. Refer to Note 7. “Derivatives and Fair Value Measurements” for additional information regarding the economic hedge activities.
|
|
|
(2)
|
Other includes revenues from arrangements such as customer contract-related payments, royalties related to coal lease agreements, sales agency commissions, farm income and property and facility rentals, for which contract duration is not meaningful.
|
Committed Revenue from Contracts with Customers
The Company expects to recognize revenue subsequent to March 31, 2020 of approximately $4.0 billion related to contracts with customers in which volumes and prices per ton were fixed or reasonably estimable at March 31, 2020. Approximately 46% of such amount is expected to be recognized over the next twelve months and the remainder thereafter. Actual revenue related to such contracts may differ materially for various reasons, including price adjustment features for coal quality and cost escalations, volume optionality provisions and potential force majeure events. This estimate of future revenue does not include any revenue related to contracts with variable prices per ton that cannot be reasonably estimated, such as the majority of seaborne metallurgical and seaborne thermal coal contracts where pricing is negotiated or settled quarterly or annually.
Accounts Receivable
“Accounts receivable, net” at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
Trade receivables, net
|
$
|
230.0
|
|
|
$
|
283.1
|
|
Miscellaneous receivables, net
|
35.2
|
|
|
46.4
|
|
Accounts receivable, net
|
$
|
265.2
|
|
|
$
|
329.5
|
|
Trade receivables, net included no allowance for credit losses as of both March 31, 2020 and December 31, 2019. Miscellaneous receivables, net included no allowance for credit losses as of both March 31, 2020 and December 31, 2019. No charges for credit losses were recognized during the three months ended March 31, 2020 or 2019.
(4) Discontinued Operations
Discontinued operations include certain former Seaborne Thermal Mining and Other U.S. Thermal Mining segment assets that have ceased production and other previously divested legacy operations, including Patriot Coal Corporation and certain of its wholly-owned subsidiaries (Patriot).
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized Results of Discontinued Operations
Results from discontinued operations were as follows during the periods presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Loss from discontinued operations, net of income taxes
|
$
|
(2.2
|
)
|
|
$
|
(3.4
|
)
|
Liabilities of Discontinued Operations
Liabilities classified as discontinued operations included in the Company’s condensed consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
Liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
58.4
|
|
|
$
|
58.8
|
|
Other noncurrent liabilities
|
105.1
|
|
|
105.5
|
|
Total liabilities classified as discontinued operations
|
$
|
163.5
|
|
|
$
|
164.3
|
|
Patriot-Related Matters
A significant portion of the liabilities in the table above relate to Patriot. In 2012, Patriot filed voluntary petitions for relief under Chapter 11 of Title 11 of the U.S. Code (the Bankruptcy Code). In 2013, the Company entered into a definitive settlement agreement (2013 Agreement) with Patriot and the United Mine Workers of America (UMWA), on behalf of itself, its represented Patriot employees and its represented Patriot retirees, to resolve all then-disputed issues related to Patriot’s bankruptcy. In May 2015, Patriot again filed voluntary petitions for relief under the Bankruptcy Code in the U.S. District Court for the Eastern District of Virginia and subsequently initiated a process to sell some or all of its assets to qualified bidders. On October 9, 2015, Patriot’s bankruptcy court entered an order confirming Patriot’s plan of reorganization, which provided, among other things, for the sale of substantially all of Patriot’s assets to two different buyers.
Black Lung Occupational Disease Liabilities. Patriot had federal and state black lung occupational disease liabilities related to workers employed in periods prior to Patriot’s spin-off from the Company in 2007. Upon spin-off, Patriot indemnified the Company against any claim relating to these liabilities, which amounted to approximately $150 million at that time. The indemnification included any claim made by the U.S. Department of Labor (DOL) against the Company with respect to these obligations as a potentially liable operator under the Federal Coal Mine Health and Safety Act of 1969. The 2013 Agreement included Patriot’s affirmance of indemnities provided in the spin-off agreements, including the indemnity relating to such black lung liabilities; however, Patriot rejected this indemnity in its May 2015 bankruptcy.
By statute, the Company had secondary liability for the black lung liabilities related to Patriot’s workers employed by former subsidiaries of the Company. The Company’s accounting for the black lung liabilities related to Patriot is based on an interpretation of applicable statutes. Management believes that inconsistencies exist among the applicable statutes, regulations promulgated under those statutes and the DOL’s interpretative guidance. The Company has sought clarification from the DOL regarding these inconsistencies. The amount of these liabilities could be reduced in the future. Whether the Company will ultimately be required to fund certain of those obligations in the future as a result of Patriot’s May 2015 bankruptcy remains uncertain. The amount of the liability, which was determined on an actuarial basis based on the best information available to the Company, was $85.7 million at both March 31, 2020 and December 31, 2019. While the Company has recorded a liability, it intends to review each claim on a case-by-case basis and contest liability estimates as appropriate. The amount of the Company’s recorded liability reflects only Patriot workers employed by former subsidiaries of the Company that are presently retired, disabled or otherwise not actively employed. The Company cannot reliably estimate the potential liabilities for Patriot’s workers employed by former subsidiaries of the Company that are presently active in the workforce because of the potential for such workers to continue to work for another coal operator that is a going concern.
Combined Benefit Fund (Combined Fund). The Combined Fund was created by the Coal Act in 1992 as a multi-employer plan to provide health care benefits to a closed group of retirees who last worked prior to 1976, as well as orphaned beneficiaries of bankrupt companies who were receiving benefits as orphans prior to the passage of the Coal Act. No new retirees will be added to this group, which includes retirees formerly employed by certain Patriot subsidiaries and their predecessors. Former employers are required to contribute to the Combined Fund according to a formula.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the terms of the Patriot spin-off, Patriot was primarily liable to the Combined Fund for the approximately $40 million of its subsidiaries’ obligations at that time. Once Patriot ceased meeting its obligations, the Company was held responsible for these costs and, as a result, recorded “Loss from discontinued operations, net of income taxes” charges of $0.1 million and $0.2 million during the three months ended March 31, 2020 and 2019, respectively. The Company made payments into the fund of $0.4 million and $0.5 million during the three months ended March 31, 2020 and 2019, respectively, and estimates that the annual cash cost to fund these potential Combined Fund liabilities will range between $1 million and $2 million in the near-term, with those premiums expected to decline over time because the fund is closed to new participants. The liability related to the fund was $14.9 million and $15.2 million at March 31, 2020 and December 31, 2019, respectively.
UMWA 1974 Pension Plan (UMWA Plan) Litigation. On July 16, 2015, a lawsuit was filed by the UMWA Plan, the UMWA 1974 Pension Trust (Trust) and the Trustees of the UMWA Plan and Trust (Trustees) in the United States District Court for the District of Columbia, against the Company, Peabody Holding Company, LLC, a subsidiary of the Company, and Arch. The plaintiffs sought, pursuant to the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the Multiemployer Pension Plan Amendments Act of 1980, a declaratory judgment that the defendants were obligated to arbitrate any opposition to the Trustees’ determination that the defendants had statutory withdrawal liability as a result of the 2015 Patriot bankruptcy. After a legal and arbitration process and with the approval of the U.S. Bankruptcy Court for the Eastern District of Missouri (Bankruptcy Court), on January 25, 2017, the UMWA Plan and the Company agreed to a settlement of the claim which entitled the UMWA Plan to $75 million to be paid by the Company in increments through 2021. The balance of the liability, on a discounted basis, was $26.7 million and $26.0 million at March 31, 2020 and December 31, 2019, respectively.
(5) Inventories
Inventories as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
Materials and supplies
|
$
|
113.7
|
|
|
$
|
116.3
|
|
Raw coal
|
59.1
|
|
|
85.1
|
|
Saleable coal
|
96.4
|
|
|
130.1
|
|
Total
|
$
|
269.2
|
|
|
$
|
331.5
|
|
Materials and supplies inventories presented above have been shown net of reserves of $8.2 million and $7.9 million as of March 31, 2020 and December 31, 2019, respectively.
(6) Equity Method Investments
The Company had total equity method investments of $47.1 million and $56.9 million reflected in “Investments and other assets” in the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively, related to Middlemount Coal Pty Ltd (Middlemount). Included in “Loss (income) from equity affiliates” in the unaudited condensed consolidated statements of operations was a loss of $9.1 million related to Middlemount during the three months ended March 31, 2020 and income of $3.8 million during the three months ended March 31, 2019.
The Company received cash payments from Middlemount of $1.1 million during the three months ended March 31, 2019, related to financing receivables accounted for as in-substance common stock due to the limited fair value attributed to Middlemount’s equity. No payments were received from Middlemount during the three months ended March 31, 2020.
One of the Company’s Australian subsidiaries and the other shareholder of Middlemount are parties to an agreement, as amended from time to time, to provide a revolving loan (Revolving Loans) to Middlemount. The Company’s participation in the Revolving Loans will not, at any time, exceed its 50% equity interest of the revolving loan limit. At March 31, 2020, the revolving loan limit was $70 million Australian dollars and the Revolving Loans were fully drawn upon by Middlemount. Per the terms of the current agreement, the revolving loan limit will be reduced to $50 million Australian dollars in August 2020. The Revolving Loans bear interest at 15% per annum and expire on December 31, 2020. The carrying value of the portion of the Revolving Loans due to the Company’s Australian subsidiary was $23.6 million and $17.1 million as of March 31, 2020 and December 31, 2019, respectively.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) Derivatives and Fair Value Measurements
Derivatives
Corporate Risk Management Activities
From time to time, the Company may utilize various types of derivative instruments to manage its exposure to risks in the normal course of business, including (1) foreign currency exchange rate risk and the variability of cash flows associated with forecasted Australian dollar expenditures made in its Australian mining platform, (2) price risk of fluctuating coal prices related to forecasted sales or purchases of coal, or changes in the fair value of a fixed price physical sales contract, (3) price risk and the variability of cash flows related to forecasted diesel fuel purchased for use in its operations, and (4) interest rate risk on long-term debt. These risk management activities are actively monitored for compliance with the Company’s risk management policies.
As of March 31, 2020, the Company had currency options outstanding with an aggregate notional amount of $550.0 million Australian dollars to hedge currency risk associated with anticipated Australian dollar expenditures over the six-month period ending September 30, 2020. The instruments are quarterly average rate options which entitle the Company to receive payment on the notional amount should the quarterly average Australian dollar-to-U.S. dollar exchange rate exceed amounts ranging from $0.73 to $0.75 over the six-month period ending September 30, 2020.
As of March 31, 2020, the Company held coal-related financial contracts related to a portion of its forecasted sales for an aggregate notional volume of 1.6 million tonnes. Such financial contracts include futures, forwards and options. Of the aggregate notional volume, 1.3 million tonnes will settle in 2020 and the remainder will settle in 2021.
The Company had no diesel fuel or interest rate derivatives in place as of March 31, 2020.
Coal Trading Activities
On a limited basis, the Company engages in the direct and brokered trading of coal and freight-related contracts (coal trading). Except those contracts for which the Company has elected to apply a normal purchases and normal sales exception, all derivative coal trading contracts are accounted for at fair value. Coal brokering is conducted both as principal and agent in support of various coal production-related activities that may involve coal produced from the Company’s mines, coal sourcing arrangements with third-party mining companies or offtake agreements with other coal producers. The Company also provides transportation-related services, which involve both financial derivative contracts and physical contracts. Collectively, coal and freight-related hedging activities include both economic hedging and, from time to time, cash flow hedging in support of the Company’s coal trading strategy. Revenues from such transactions include realized and unrealized gains and losses on derivative instruments, including those that arise from coal deliveries related to contracts accounted for on an accrual basis under the normal purchases and normal sales exception.
Offsetting and Balance Sheet Presentation
The Company has master netting agreements with certain of its counterparties which allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default or termination. Such netting arrangements reduce the Company’s credit exposure related to these counterparties. For classification purposes, the Company records the net fair value of all the positions with a given counterparty as a net asset or liability in the condensed consolidated balance sheets.
The Company’s coal trading assets and liabilities include financial instruments cleared through various exchanges, which involve the daily net settlement of open positions. The Company must post cash collateral in the form of initial margin, in addition to variation margin, on exchange-cleared positions that are in a net liability position and receives variation margin when in a net asset position. The Company also transacts in coal trading financial swaps and options through over-the-counter (OTC) markets with financial institutions and other non-financial trading entities under International Swaps and Derivatives Association (ISDA) Master Agreements, which contain symmetrical default provisions. Certain of the Company’s coal trading agreements with OTC counterparties also contain credit support provisions that may periodically require the Company to post, or entitle the Company to receive, variation margin. Physical coal and freight-related purchase and sale contracts included in the Company’s coal trading assets and liabilities are executed pursuant to master purchase and sale agreements that also contain symmetrical default provisions and allow for the netting and setoff of receivables and payables that arise during the same time period. The Company offsets its coal trading asset and liability derivative positions, and variation margin related to those positions, on a counterparty-by-counterparty basis in the condensed consolidated balance sheets.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of derivatives reflected in the accompanying condensed consolidated balance sheets are set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Asset Derivative
|
|
Liability Derivative
|
|
Asset Derivative
|
|
Liability Derivative
|
|
(Dollars in millions)
|
Foreign currency option contracts
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
Coal contracts related to forecasted sales
|
18.9
|
|
|
(0.8
|
)
|
|
20.1
|
|
|
(0.1
|
)
|
Coal trading contracts
|
71.8
|
|
|
(69.6
|
)
|
|
81.1
|
|
|
(74.2
|
)
|
Total derivatives
|
90.9
|
|
|
(70.4
|
)
|
|
102.3
|
|
|
(74.3
|
)
|
Effect of counterparty netting
|
(69.6
|
)
|
|
69.6
|
|
|
(74.3
|
)
|
|
74.3
|
|
Variation margin (held) posted
|
(16.8
|
)
|
|
—
|
|
|
(22.1
|
)
|
|
—
|
|
Net derivatives and margin as classified in the balance sheets
|
$
|
4.5
|
|
|
$
|
(0.8
|
)
|
|
$
|
5.9
|
|
|
$
|
—
|
|
The net amount of asset derivatives, net of margin, are included in “Other current assets” and the net amount of liability derivatives, net of margin, are included in “Accounts payable and accrued expenses” in the accompanying condensed consolidated balance sheets.
Effects of Derivatives on Measures of Financial Performance
Currently, the Company does not seek cash flow hedge accounting treatment for its currency- or coal-related derivative financial instruments and thus changes in fair value are reflected in current earnings.
The tables below show the amounts of pre-tax gains and losses related to the Company’s derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Total loss recognized in income
|
|
(Loss) gain realized in income on derivatives
|
|
Unrealized gain (loss) recognized in income on derivatives
|
Financial Instrument
|
|
|
|
(Dollars in millions)
|
Foreign currency option contracts
|
$
|
(0.9
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
0.1
|
|
Coal contracts related to forecasted sales
|
(8.6
|
)
|
|
(6.4
|
)
|
|
(2.2
|
)
|
Coal trading contracts
|
(0.1
|
)
|
|
4.1
|
|
|
(4.2
|
)
|
Total
|
$
|
(9.6
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(6.3
|
)
|
|
|
Three Months Ended March 31, 2019
|
|
Total (loss) gain recognized in income
|
|
(Loss) gain realized in income on derivatives
|
|
Unrealized gain recognized in income on derivatives
|
Financial Instrument
|
|
|
|
(Dollars in millions)
|
Foreign currency option contracts
|
$
|
(1.1
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
0.2
|
|
Coal contracts related to forecasted sales
|
50.7
|
|
|
10.9
|
|
|
39.8
|
|
Coal trading contracts
|
(1.1
|
)
|
|
(4.8
|
)
|
|
3.7
|
|
Total
|
$
|
48.5
|
|
|
$
|
4.8
|
|
|
$
|
43.7
|
|
During the three months ended March 31, 2020 and 2019, gains and losses on foreign currency option contracts were included in “Operating costs and expenses,” and gains and losses on coal contracts related to forecasted sales and those related to coal trading contracts were included in “Revenues” in the accompanying unaudited condensed consolidated statements of operations.
The Company classifies the cash effects of its derivatives within the “Cash Flows From Operating Activities” section of the unaudited condensed consolidated statements of cash flows.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
The Company uses a three-level fair value hierarchy that categorizes assets and liabilities measured at fair value based on the observability of the inputs utilized in the valuation. These levels include: Level 1 - inputs are quoted prices in active markets for the identical assets or liabilities; Level 2 - inputs are other than quoted prices included in Level 1 that are directly or indirectly observable through market-corroborated inputs; and Level 3 - inputs are unobservable, or observable but cannot be market-corroborated, requiring the Company to make assumptions about pricing by market participants.
The following tables set forth the hierarchy of the Company’s net financial asset positions for which fair value is measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Foreign currency option contracts
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Coal contracts related to forecasted sales
|
—
|
|
|
20.0
|
|
|
—
|
|
|
20.0
|
|
Coal trading contracts
|
—
|
|
|
(16.5
|
)
|
|
—
|
|
|
(16.5
|
)
|
Equity securities
|
—
|
|
|
—
|
|
|
4.0
|
|
|
4.0
|
|
Total net financial assets
|
$
|
—
|
|
|
$
|
3.7
|
|
|
$
|
4.0
|
|
|
$
|
7.7
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(Dollars in millions)
|
Foreign currency option contracts
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Coal contracts related to forecasted sales
|
—
|
|
|
21.2
|
|
|
—
|
|
|
21.2
|
|
Coal trading contracts
|
—
|
|
|
(16.4
|
)
|
|
—
|
|
|
(16.4
|
)
|
Equity securities
|
—
|
|
|
—
|
|
|
4.0
|
|
|
4.0
|
|
Total net financial assets
|
$
|
—
|
|
|
$
|
5.9
|
|
|
$
|
4.0
|
|
|
$
|
9.9
|
|
For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including interest rate yield curves, exchange indices, broker/dealer quotes, published indices, issuer spreads, benchmark securities and other market quotes. In the case of certain debt securities, fair value is provided by a third-party pricing service. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:
|
|
•
|
Foreign currency option contracts are valued utilizing inputs obtained in quoted public markets (Level 2) except when credit and non-performance risk is considered to be a significant input, then the Company classifies such contracts as Level 3.
|
|
|
•
|
Coal contracts related to forecasted sales and coal trading contracts are generally valued based on unadjusted quoted prices in active markets (Level 1) or a valuation that is corroborated by the use of market-based pricing (Level 2) except when credit and non-performance risk is considered to be a significant input (greater than 10% of fair value), then the Company classifies as Level 3.
|
|
|
•
|
Investments in equity securities are based on observed prices in an inactive market (Level 3).
|
Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of March 31, 2020 and December 31, 2019:
|
|
•
|
Cash and cash equivalents, restricted cash, accounts receivable, including those within the Company’s accounts receivable securitization program, notes receivable and accounts payable have carrying values which approximate fair value due to the short maturity or the liquid nature of these instruments.
|
|
|
•
|
Long-term debt fair value estimates are based on observed prices for securities with an active trading market when available (Level 2), and otherwise on estimated borrowing rates to discount the cash flows to their present value (Level 3).
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Market risk associated with the Company’s fixed- and variable-rate long-term debt relates to the potential reduction in the fair value and negative impact to future earnings, respectively, from an increase in interest rates. The fair value of debt, shown below, is principally based on reported market values and estimates based on interest rates, maturities, credit risk, underlying collateral, and completed market transactions, which have been limited in recent history.
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
December 31, 2019
|
|
(Dollars in millions)
|
Total debt at par value
|
$
|
1,360.1
|
|
|
$
|
1,367.2
|
|
Less: Unamortized debt issuance costs and original issue discount
|
(53.2
|
)
|
|
(56.4
|
)
|
Net carrying amount
|
$
|
1,306.9
|
|
|
$
|
1,310.8
|
|
|
|
|
|
Estimated fair value
|
$
|
793.5
|
|
|
$
|
1,271.1
|
|
The Company’s risk management function, which is independent of the Company’s coal trading function, is responsible for valuation policies and procedures, with oversight from executive management. Generally, the Company’s Level 3 instruments or contracts are valued using bid/ask price quotations and other market assessments obtained from multiple, independent third-party brokers or other transactional data incorporated into internally-generated discounted cash flow models. Decreases in the number of third-party brokers or market liquidity could erode the quality of market information and therefore the valuation of the Company’s market positions. The Company’s valuation techniques include basis adjustments to the foregoing price inputs for quality, such as sulfur and ash content, location differentials, expressed as port and freight costs, and credit risk. The Company’s risk management function independently validates the Company’s valuation inputs, including unobservable inputs, with third-party information and settlement prices from other sources where available. A daily process is performed to analyze market price changes and changes to the portfolio. Further periodic validation occurs at the time contracts are settled with the counterparty. These valuation techniques have been consistently applied in all periods presented, and the Company believes it has obtained the most accurate information available for the types of derivative contracts held.
Significant increases or decreases in the inputs in isolation could result in a significantly higher or lower fair value measurement. The unobservable inputs do not have a direct interrelationship; therefore, a change in one unobservable input would not necessarily correspond with a change in another unobservable input.
The Company had no transfers between Levels 1, 2 and 3 during the three months ended March 31, 2020 and 2019. The Company’s policy is to value all transfers between levels using the beginning of period valuation.
Credit and Nonperformance Risk. The fair value of the Company’s coal derivative assets and liabilities reflects adjustments for credit risk. The Company’s exposure is substantially with electric utilities, energy marketers, steel producers and nonfinancial trading houses. The Company’s policy is to independently evaluate each customer’s creditworthiness prior to entering into transactions and to regularly monitor the credit extended. If the Company engages in a transaction with a counterparty that does not meet its credit standards, the Company seeks to protect its position by requiring the counterparty to provide an appropriate credit enhancement. Also, when appropriate (as determined by its credit management function), the Company has taken steps to reduce its exposure to customers or counterparties whose credit has deteriorated and who may pose a higher risk of failure to perform under their contractual obligations. These steps include obtaining letters of credit or cash collateral (margin), requiring prepayments for shipments or the creation of customer trust accounts held for the Company’s benefit to serve as collateral in the event of a failure to pay or perform. To reduce its credit exposure related to trading and brokerage activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset asset and liability positions with such counterparties and, to the extent required, the Company will post or receive margin amounts associated with exchange-cleared and certain OTC positions. The Company also continually monitors counterparty and contract non-performance risk, if present, on a case-by-case basis.
Performance Assurances and Collateral
The Company is required by the exchanges upon which it transacts to post certain additional collateral, known as initial margin, which represents an estimate of potential future adverse price movements across the Company’s portfolio under normal market conditions. The Company posted initial margin of $5.6 million and $7.9 million as of March 31, 2020 and December 31, 2019, respectively, which is reflected in “Other current assets” in the condensed consolidated balance sheets. As of March 31, 2020 and December 31, 2019, respectively, the Company had posted $2.8 million and $1.3 million in excess of margin requirements.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is required to post variation margin on positions that are in a net liability position and is entitled to receive and hold variation margin on positions that are in a net asset position with an exchange and certain of its OTC derivative contract counterparties. As of March 31, 2020 and December 31, 2019, respectively, the Company was in receipt of $16.8 million and $22.1 million in variation margin.
Certain of the Company’s derivative trading instruments require the parties to provide additional performance assurances whenever a material adverse event jeopardizes one party’s ability to perform under the instrument. If the Company was to sustain a material adverse event (using commercially reasonable standards), its counterparties could request collateralization on derivative trading instruments in which the Company holds a net liability position. Based on the aggregate fair values of such net liability positions at March 31, 2020 and December 31, 2019, the Company would have been required to post additional collateral of $0.8 million and approximately $0.0 million, respectively. As of March 31, 2020 and December 31, 2019, the Company was not required to post collateral to counterparties for such positions.
(8) Intangible Contract Assets and Liabilities
The Company has recorded intangible assets and liabilities to reflect the fair value of certain U.S. coal supply agreements as a result of differences between contract terms and estimated market terms for the same coal products and also recorded intangible liabilities related to unutilized capacity under its port and rail take-or-pay contracts. The balances, net of accumulated amortization, and respective balance sheet classifications at March 31, 2020 and December 31, 2019, are set forth in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Assets
|
|
Liabilities
|
|
Net Total
|
|
(Dollars in millions)
|
Coal supply agreements
|
$
|
16.8
|
|
|
$
|
(19.9
|
)
|
|
$
|
(3.1
|
)
|
Take-or-pay contracts
|
—
|
|
|
(32.9
|
)
|
|
(32.9
|
)
|
Total
|
$
|
16.8
|
|
|
$
|
(52.8
|
)
|
|
$
|
(36.0
|
)
|
|
|
|
|
|
|
Balance sheet classification:
|
|
|
|
|
|
Investments and other assets
|
$
|
16.8
|
|
|
$
|
—
|
|
|
$
|
16.8
|
|
Accounts payable and accrued expenses
|
—
|
|
|
(5.9
|
)
|
|
(5.9
|
)
|
Other noncurrent liabilities
|
—
|
|
|
(46.9
|
)
|
|
(46.9
|
)
|
Total
|
$
|
16.8
|
|
|
$
|
(52.8
|
)
|
|
$
|
(36.0
|
)
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Assets
|
|
Liabilities
|
|
Net Total
|
|
(Dollars in millions)
|
Coal supply agreements
|
$
|
20.7
|
|
|
$
|
(21.4
|
)
|
|
$
|
(0.7
|
)
|
Take-or-pay contracts
|
—
|
|
|
(40.0
|
)
|
|
(40.0
|
)
|
Total
|
$
|
20.7
|
|
|
$
|
(61.4
|
)
|
|
$
|
(40.7
|
)
|
|
|
|
|
|
|
Balance sheet classification:
|
|
|
|
|
|
Investments and other assets
|
$
|
20.7
|
|
|
$
|
—
|
|
|
$
|
20.7
|
|
Accounts payable and accrued expenses
|
—
|
|
|
(8.4
|
)
|
|
(8.4
|
)
|
Other noncurrent liabilities
|
—
|
|
|
(53.0
|
)
|
|
(53.0
|
)
|
Total
|
$
|
20.7
|
|
|
$
|
(61.4
|
)
|
|
$
|
(40.7
|
)
|
Amortization of the intangible assets and liabilities related to coal supply agreements occurs ratably based upon coal volumes shipped per contract and is recorded as a component of “Depreciation, depletion and amortization” in the accompanying unaudited condensed consolidated statements of operations. Such amortization amounted to $2.4 million and $4.8 million during the three months ended March 31, 2020 and 2019, respectively. The Company anticipates net amortization of sales contracts, based upon expected shipments, to be an expense of approximately $5 million during the remaining nine months of 2020, expense of approximately $1 million for the year 2021 and credits of approximately $2 million per year for the years 2022 through 2024, and $3 million in total thereafter.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future unutilized capacity and the amortization periods related to the take-or-pay contract intangible liabilities are based upon estimates of forecasted usage. Such amortization, which is classified as a reduction to “Operating costs and expenses” in the accompanying unaudited condensed consolidated statements of operations, amounted to $2.6 million and $5.6 million during the three months ended March 31, 2020 and 2019, respectively. The Company anticipates net amortization of take-or-pay contract intangible liabilities to be approximately $5 million during the remaining nine months of 2020, and for the years 2021 through 2024 to be approximately $4 million, $3 million, $2 million and $3 million, respectively, and $16 million thereafter.
(9) Property, Plant, Equipment and Mine Development
The composition of property, plant, equipment and mine development, net, as of March 31, 2020 and December 31, 2019 is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
Land and coal interests
|
$
|
4,025.4
|
|
|
$
|
4,022.4
|
|
Buildings and improvements
|
557.6
|
|
|
547.9
|
|
Machinery and equipment
|
1,534.4
|
|
|
1,518.6
|
|
Less: Accumulated depreciation, depletion and amortization
|
(1,509.6
|
)
|
|
(1,409.8
|
)
|
Property, plant, equipment and mine development, net
|
$
|
4,607.8
|
|
|
$
|
4,679.1
|
|
(10) Leases
The Company has operating and finance leases for mining and non-mining equipment, office space and certain other facilities under various non-cancellable agreements. Historically, the majority of the Company’s leases have been accounted for as operating leases. Refer to Note 1. “Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, for the Company’s policies regarding “Leases.”
The Company and certain of its subsidiaries have guaranteed other subsidiaries’ performance under various lease obligations. Certain lease agreements are subject to the restrictive covenants of the Company’s credit facilities and include cross-acceleration provisions, under which the lessor could require remedies including, but not limited to, immediate recovery of the present value of any remaining lease payments. The Company typically agrees to indemnify lessors for the value of the property or equipment leased, should the property be damaged or lost during the course of the Company’s operations. The Company expects that losses with respect to leased property, if any, may be covered by insurance (subject to deductibles). Aside from indemnification of the lessor for the value of the property leased, the Company’s maximum potential obligations under its leases are equal to the respective future minimum lease payments, and the Company assumes that no amounts could be recovered from third parties.
One of the Company’s operating lease agreements for underground mining equipment in Australia entered into in 2013 requires contingent rent to be paid only if and when certain coal is mined at a specified margin as defined in the agreements. There was no contingent expense related to that arrangement for the periods listed below.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of lease expense during the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Operating lease cost:
|
|
|
|
Operating lease cost
|
$
|
8.6
|
|
|
$
|
15.5
|
|
Short-term lease cost
|
9.9
|
|
|
8.3
|
|
Variable lease cost
|
1.0
|
|
|
6.0
|
|
Sublease income
|
—
|
|
|
(1.4
|
)
|
Total operating lease cost
|
$
|
19.5
|
|
|
$
|
28.4
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
$
|
3.4
|
|
|
$
|
4.1
|
|
Interest on lease liabilities
|
0.2
|
|
|
0.5
|
|
Total finance lease cost
|
$
|
3.6
|
|
|
$
|
4.6
|
|
Supplemental balance sheet information related to leases at March 31, 2020 and December 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
Operating leases:
|
|
|
|
Operating lease right-of-use assets
|
$
|
78.0
|
|
|
$
|
82.4
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
25.2
|
|
|
$
|
29.6
|
|
Operating lease liabilities, less current portion
|
44.5
|
|
|
52.8
|
|
Total operating lease liabilities
|
$
|
69.7
|
|
|
$
|
82.4
|
|
|
|
|
|
Finance leases:
|
|
|
|
Property, plant, equipment and mine development
|
$
|
88.0
|
|
|
$
|
89.6
|
|
Accumulated depreciation
|
(47.6
|
)
|
|
(45.9
|
)
|
Property, plant, equipment and mine development, net
|
$
|
40.4
|
|
|
$
|
43.7
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
8.6
|
|
|
$
|
14.3
|
|
Long-term debt, less current portion
|
0.5
|
|
|
0.9
|
|
Total finance lease liabilities
|
$
|
9.1
|
|
|
$
|
15.2
|
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
Operating leases
|
3.7
|
|
|
|
Finance leases
|
14.8
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
7.3
|
%
|
|
|
Finance leases
|
6.0
|
%
|
|
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental cash flow information related to leases during the three months ended March 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for operating leases
|
$
|
12.8
|
|
|
$
|
24.1
|
|
Operating cash flows for finance leases
|
0.2
|
|
|
0.7
|
|
Financing cash flows for finance leases
|
5.8
|
|
|
7.3
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
Operating leases
|
1.3
|
|
|
0.5
|
|
Finance leases
|
0.1
|
|
|
—
|
|
The Company's leases have remaining lease terms of 1 year to 21.8 years, some of which include options to extend the terms deemed reasonably certain of exercise. Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
Period Ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
|
|
(Dollars in millions)
|
2020
|
|
$
|
21.8
|
|
|
$
|
0.7
|
|
2021
|
|
22.6
|
|
|
1.0
|
|
2022
|
|
13.5
|
|
|
0.7
|
|
2023
|
|
11.6
|
|
|
0.5
|
|
2024
|
|
4.7
|
|
|
0.5
|
|
2025 and thereafter
|
|
7.3
|
|
|
8.2
|
|
Total lease payments
|
|
81.5
|
|
|
11.6
|
|
Less imputed interest
|
|
(11.8
|
)
|
|
(2.5
|
)
|
Total lease liabilities
|
|
$
|
69.7
|
|
|
$
|
9.1
|
|
(11) Income Taxes
The Company's effective tax rate before remeasurement for the three months ended March 31, 2020 is based on the Company’s estimated full year effective tax rate, comprised of expected statutory tax provision, offset by foreign rate differential and changes in valuation allowance. The Company’s income tax provision of $3.0 million and $18.8 million for the three months ended March 31, 2020 and 2019, respectively, included a tax benefit of $3.3 million and less than $0.1 million, respectively, related to the remeasurement of foreign income tax accounts.
In response to the COVID-19 pandemic, the United States enacted the CARES Act. The CARES Act contains numerous tax provisions including a provision that provides for the acceleration of refunds of previously generated AMT credits. The Company has requested accelerated refunds of approximately $24 million from the IRS and has adjusted its current and deferred tax asset balances accordingly. The Company continues to evaluate the implications of the remaining provisions of the CARES Act.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) Long-term Debt
The Company’s total indebtedness as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
(Dollars in millions)
|
6.000% Senior Secured Notes due March 2022
|
$
|
459.0
|
|
|
$
|
459.0
|
|
6.375% Senior Secured Notes due March 2025
|
500.0
|
|
|
500.0
|
|
Senior Secured Term Loan due 2025, net of original issue discount
|
391.1
|
|
|
392.1
|
|
Finance lease obligations
|
9.1
|
|
|
15.2
|
|
Less: Debt issuance costs
|
(52.3
|
)
|
|
(55.5
|
)
|
|
1,306.9
|
|
|
1,310.8
|
|
Less: Current portion of long-term debt
|
12.6
|
|
|
18.3
|
|
Long-term debt
|
$
|
1,294.3
|
|
|
$
|
1,292.5
|
|
6.000% and 6.375% Senior Secured Notes
On February 15, 2017, the Company entered into an indenture (the Indenture) with Wilmington Trust, National Association, as trustee, relating to its issuance of $500.0 million aggregate principal amount of 6.000% senior secured notes due 2022 (the 2022 Notes) and $500.0 million aggregate principal amount of 6.375% senior secured notes due 2025 (the 2025 Notes and, together with the 2022 Notes, the Senior Notes). The Senior Notes were sold on February 15, 2017 in a private transaction exempt from the registration requirements of the Securities Act of 1933.
The Senior Notes were issued at par value. The Company paid aggregate debt issuance costs of $49.5 million related to the offering, which are being amortized over the respective terms of the Senior Notes. Interest payments on the Senior Notes are scheduled to occur each year on March 31 and September 30 until maturity. During the three months ended March 31, 2020 and 2019, the Company recorded interest expense of $17.5 million and $18.0 million, respectively, related to the Senior Notes.
The 2022 Notes were redeemable beginning March 31, 2019, in whole or in part, at 103.0% of par, beginning March 31, 2020 at 101.5% of par and beginning March 31, 2021 and thereafter at par. The 2025 Notes may be redeemed, in whole or in part, beginning March 31, 2020 at 104.8% of par, beginning March 31, 2021 at 103.2% of par, beginning March 31, 2022 at 101.6% of par and beginning March 31, 2023 and thereafter at par. In addition, prior to the first date on which the Senior Notes are redeemable at the redemption prices noted above, the Company may also redeem some or all of the Senior Notes at a calculated make-whole premium, plus accrued and unpaid interest.
On August 9, 2018, the Company executed an amendment to the Indenture following the solicitation of consents from the requisite majorities of holders of each series of Senior Notes. The amendment permits a category of restricted payments at any time not to exceed the sum of $650.0 million, plus an additional $150.0 million per calendar year, commencing with calendar year 2019, with unused amounts in any calendar year carrying forward to and available for restricted payments in any subsequent calendar year. The Company paid consenting Senior Note holders $10.00 in cash per $1,000 principal amount of 2022 Notes and $30.00 in cash per $1,000 principal amount of 2025 Notes, which amounted to $19.8 million. Such consent payments were capitalized as additional debt issuance costs to be amortized over the respective terms of the Senior Notes. The Company also expensed $1.5 million of other payments associated with the amendment to “Interest expense” in the accompanying unaudited condensed consolidated statements of operations during 2018.
During the fourth quarter of 2019, the Company made open-market purchases of $41.0 million of the 2022 Notes for $39.9 million, plus accrued interest. In connection with the purchases, the Company wrote off $1.3 million of debt issuance costs and charged $0.2 million to “Loss on early debt extinguishment.” The notes were subsequently canceled.
The Indenture contains customary conditions of default and imposes certain restrictions on the Company’s activities, including its ability to incur debt, incur liens, make investments, engage in fundamental changes such as mergers and dissolutions, dispose of assets, enter into transactions with affiliates and make certain restricted payments, such as cash dividends and share repurchases.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Senior Notes rank senior in right of payment to any subordinated indebtedness and equally in right of payment with any senior indebtedness to the extent of the collateral securing that indebtedness. The Senior Notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by substantially all of the Company’s material domestic subsidiaries and secured by first priority liens over (1) substantially all of the assets of the Company and the guarantors, except for certain excluded assets, (2) 100% of the capital stock of each domestic restricted subsidiary of the Company, (3) 100% of the non-voting capital stock of each first tier foreign subsidiary of the Company or a foreign subsidiary holding company and no more than 65% of the voting capital stock of each first tier foreign subsidiary of the Company or a foreign subsidiary holding company, (4) a legal charge of 65% of the voting capital stock and 100% of the non-voting capital stock of Peabody Investments (Gibraltar) Limited and (5) all intercompany debt owed to the Company or any guarantor, in each case, subject to certain exceptions. The obligations under the Senior Notes are secured on a pari passu basis by the same collateral securing the Credit Agreement (as defined below), subject to certain exceptions.
Credit Agreement
The Company entered into a credit agreement on April 3, 2017 among the Company, as borrower, Goldman Sachs Bank USA, as administrative agent, and other lenders party thereto (the Credit Agreement). The Credit Agreement originally provided for a $950.0 million senior secured term loan (the Senior Secured Term Loan), which was to mature in 2022 prior to the amendments described below.
Following the voluntary prepayments and amendments described below, the Credit Agreement provided for a $400.0 million first lien senior secured term loan, which bore interest at LIBOR plus 2.75% per annum as of March 31, 2020. During the three months ended March 31, 2020 and 2019, the Company recorded interest expense of $4.9 million and $5.7 million, respectively, related to the Senior Secured Term Loan.
Proceeds from the Senior Secured Term Loan were received net of an original issue discount and deferred financing costs of $37.3 million that are being amortized over its term. The loan principal is payable in quarterly installments plus accrued interest through December 2024 with the remaining balance due in March 2025. The loan principal was voluntarily prepayable at 101% of the principal amount repaid if prepayment occurred prior to October 2018 (subject to certain exceptions, including prepayments made with internally generated cash) and is voluntarily prepayable at any time thereafter without premium or penalty. The Senior Secured Term Loan may require mandatory principal prepayments of up to 75% of Excess Cash Flow (as defined in the Credit Agreement) for any fiscal year if the Company’s Total Leverage Ratio (as defined in the Credit Agreement and calculated at December 31, net of any unrestricted cash) is greater than 2.00:1.00. The mandatory principal prepayment requirement changes to (i) 50% of Excess Cash Flow if the Company’s Total Leverage Ratio is less than or equal to 2.00:1.00 and greater than 1.50:1.00, (ii) 25% of Excess Cash Flow if the Company’s Total Leverage Ratio is less than or equal to 1.50:1.00 and greater than 1.00:1.00, or (iii) zero if the Company’s Total Leverage Ratio is less than or equal to 1.00:1.00. If required, mandatory prepayments resulting from Excess Cash Flows are payable within 100 days after the end of each fiscal year. The calculation of mandatory prepayments would be reduced commensurately by the amount of previous voluntary prepayments. In certain circumstances, the Senior Secured Term Loan requires that Excess Proceeds (as defined in the Credit Agreement) of $10.0 million or greater received from sales of Company assets be applied against the loan principal, unless such proceeds are reinvested within one year. The Senior Secured Term Loan also requires that any net insurance proceeds be applied against the loan principal, unless such proceeds are reinvested within one year.
The Credit Agreement contains customary conditions of default and imposes certain restrictions on the Company’s activities, including its ability to incur liens, incur debt, make investments, engage in fundamental changes such as mergers and dissolutions, dispose of assets, enter into transactions with affiliates, and make certain restricted payments, such as cash dividends and share repurchases. Obligations under the Credit Agreement are secured on a pari passu basis by the same collateral securing the Senior Notes.
Since entering into the Credit Agreement, the Company has repaid $558.0 million of the original $950.0 million loan principal amount on the Senior Secured Term Loan in various installments, including $546.0 million which was voluntarily prepaid. In September 2017, the Company entered into an amendment to the Credit Agreement which permitted the Company to add an incremental revolving credit facility in addition to the Company’s ability to add one or more incremental term loan facilities under the Credit Agreement. The incremental revolving credit facility and/or incremental term loan facilities can be in an aggregate principal amount of up to $350.0 million plus additional amounts so long as the Company remains in compliance with Total Leverage Ratio requirements as set forth in the Credit Agreement. The amendment also made available an additional restricted payment basket that permits additional repurchases, dividends or other distributions with respect to the Company’s common and preferred stock in an aggregate amount up to $450.0 million so long as the Company’s Fixed Charge Coverage Ratio (as defined in the Credit Agreement) is at least 2.00:1.00 on a pro forma basis.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In April 2018, the Company entered into another amendment to the Credit Agreement which lowered the interest rate on the Senior Secured Term Loan to its current level of LIBOR plus 2.75% and eliminated an existing 1.0% LIBOR floor. The amendment also extended the maturity of the Senior Secured Term Loan by three years to 2025 and eliminated previous capital expenditure restriction covenants on both the Senior Secured Term Loan and the incremental revolving credit facility described below. In connection with this amendment, the Company voluntarily repaid $46.0 million of principal on the Senior Secured Term Loan.
During the fourth quarter of 2017, the Company entered into the incremental revolving credit facility (the Revolver) for an aggregate commitment of $350.0 million for general corporate purposes and paid debt issuance costs of $4.7 million. In September 2019, the Company entered into an amendment to the Credit Agreement which increased the aggregate commitment amount under the Revolver to $565.0 million and extended the maturity date on $540.0 million of the commitments from November 2020 to September 2023. The maturity date for the remaining $25.0 million commitment is November 2020. The Company incurred $5.7 million of additional debt issuance costs in connection with the amendment. As a result of the amendment, such loans, letters of credit and unused capacity related to the $540.0 million of extended commitments bear interest and incur fees at rates dependent upon the Company’s First Lien Leverage Ratio (as defined in the Credit Agreement) beginning in 2020. At March 31, 2020, such rates were LIBOR plus 3.00% for revolving loans, 0.4% per annum for the unused portion of Revolver capacity, and 3.125% per annum for letters of credit fees. The Revolver is also subject to a 2.00:1.00 Total Leverage Ratio requirement (as defined in the Credit Agreement), modified to limit unrestricted cash netting to $800.0 million.
At March 31, 2020, the Revolver was utilized solely for letters of credit of $72.6 million, primarily in support of the Company’s reclamation obligations, as further described in Note 17. “Financial Instruments and Other Guarantees.” During the three months ended March 31, 2020 and 2019, the Company recorded interest expense and fees of $1.7 million and $1.6 million, respectively, related to the Revolver.
In early April 2020, the Company borrowed $300.0 million under the Revolver, reducing its remaining availability to $192.4 million. The borrowing was made as part of the Company’s ongoing efforts to preserve financial flexibility in light of the current uncertainty in the global markets and related effects on the Company resulting from the COVID-19 pandemic. While the Company does not currently expect to use the proceeds from these borrowings for any near-term liquidity needs, it may use the proceeds for working capital and other general corporate purposes.
Restricted Payments Under the Senior Notes and Credit Agreement
In addition to the $450.0 million restricted payment basket provided for under the September 2017 amendment, the Credit Agreement provides a builder basket for additional restricted payments subject to a maximum Total Leverage Ratio of 2.00:1.00 (as defined in the Credit Agreement).
In addition to the $650.0 million restricted payment basket, plus an additional $150.0 million per calendar year, provided under the August 2018 amendment, the Indenture provides a builder basket for restricted payments that is calculated based upon the Company’s Consolidated Net Income, and is subject to a Fixed Charge Coverage Ratio of at least 2.25:1.00 (as defined in the Indenture).
Further, under both the Indenture and Credit Agreement, additional restricted payments are permitted through a $50.0 million general basket and an annual aggregate $25.0 million basket which allows dividends and common stock repurchases. The payment of dividends and purchases of common stock under this annual aggregate $25.0 million basket are permitted so long as the Company’s Total Leverage Ratio would not exceed 1.25:1.00 on a pro forma basis (as defined in the Credit Agreement and Indenture).
Finance Lease Obligations
Refer to Note 10. “Leases” for additional information associated with the Company’s finance leases, which pertain to the financing of mining equipment used in operations.
(13) Pension and Postretirement Benefit Costs
The components of net periodic pension and postretirement benefit costs, excluding the service cost for benefits earned, are included in “Net periodic benefit costs, excluding service cost” in the unaudited condensed consolidated statements of operations.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net periodic pension (benefit) cost included the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Service cost for benefits earned
|
$
|
—
|
|
|
$
|
0.5
|
|
Interest cost on projected benefit obligation
|
7.0
|
|
|
8.3
|
|
Expected return on plan assets
|
(7.4
|
)
|
|
(7.8
|
)
|
Net periodic pension (benefit) cost
|
$
|
(0.4
|
)
|
|
$
|
1.0
|
|
Annual contributions to the qualified plans are made in accordance with minimum funding standards and the Company’s agreement with the Pension Benefit Guaranty Corporation. Funding decisions also consider certain funded status thresholds defined by the Pension Protection Act of 2006 (generally 80%). As of March 31, 2020, the Company’s qualified plans were expected to be at or above the Pension Protection Act thresholds. Minimum funding standards are legislated by ERISA and are modified by pension funding stabilization provisions included in the Moving Ahead for Progress in the 21st Century Act of 2012, the Highway and Transportation Funding Act of 2014 and the Bipartisan Budget Act of 2015. The Company is not required to make any contributions to its qualified pension plans in 2020 based on minimum funding requirements and does not expect to make any discretionary contributions in 2020.
Net periodic postretirement benefit cost included the following components:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Service cost for benefits earned
|
$
|
1.1
|
|
|
$
|
1.2
|
|
Interest cost on accumulated postretirement benefit obligation
|
5.5
|
|
|
6.3
|
|
Expected return on plan assets
|
(0.4
|
)
|
|
(0.1
|
)
|
Amortization of prior service credit
|
(2.2
|
)
|
|
(2.2
|
)
|
Net periodic postretirement benefit cost
|
$
|
4.0
|
|
|
$
|
5.2
|
|
In October 2018, the Company amended its postretirement health care benefit plan which reduced its accumulated postretirement benefit obligation, as further described in Note 17. “Postretirement Health Care and Life Insurance Benefits” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The reduction in liability has been recorded with an offsetting balance in “Accumulated other comprehensive income,” net of a deferred tax provision, and is being amortized to earnings over an average remaining service period to full eligibility for participating employees.
In 2018, the Company established a Voluntary Employees Beneficiary Association (VEBA) trust to pre-fund a portion of benefits for non-represented retirees. The Company does not expect to make any discretionary contributions to the VEBA in 2020.
(14) Accumulated Other Comprehensive Income
The following table sets forth the after-tax components of accumulated other comprehensive income and changes thereto recorded during the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
Adjustment
|
|
Prior Service
Credit (Cost) Associated
with
Postretirement
Plans
|
|
Total Accumulated Other Comprehensive Income
|
|
(Dollars in millions)
|
December 31, 2019
|
$
|
(4.3
|
)
|
|
$
|
35.9
|
|
|
$
|
31.6
|
|
Reclassification from other comprehensive income to earnings
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
Current period change
|
(6.8
|
)
|
|
—
|
|
|
(6.8
|
)
|
March 31, 2020
|
$
|
(11.1
|
)
|
|
$
|
33.7
|
|
|
$
|
22.6
|
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Postretirement health care and life insurance benefits reclassified from other comprehensive income to earnings of $2.2 million during both the three months ended March 31, 2020 and 2019 are included in “Net periodic benefit costs, excluding service cost” in the unaudited condensed consolidated statements of operations.
(15) Other Events
Organizational Realignment
From time to time, the Company initiates restructuring activities in connection with its repositioning efforts to appropriately align its cost structure or optimize its coal production relative to prevailing market conditions. Costs associated with restructuring actions can include early mine closures, voluntary and involuntary workforce reductions, office closures and other related activities. Costs associated with restructuring activities are recognized in the period incurred. Such charges included as “Restructuring charges” in the Company's unaudited condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 amounted to $6.5 million and $0.2 million, respectively, primarily associated with involuntary workforce reductions.
During April 2020, the Company further reduced its workforce by approximately 250 positions, primarily within the Powder River Basin Mining and Other U.S. Thermal Mining operating segments, through the use of involuntary reductions and voluntary programs. The Company will incur additional restructuring charges during the second quarter of 2020, the amount of which will be dependent upon the ultimate participation in ongoing voluntary programs.
United Wambo Joint Venture with Glencore
In December 2019, after receiving the requisite regulatory and permitting approvals, the Company formed an unincorporated joint venture with Glencore plc (Glencore), in which the Company holds a 50% interest, to combine the existing operations of the Company’s Wambo Open-Cut Mine in Australia with the adjacent coal reserves of Glencore’s United Mine. The Company proportionally consolidates the entity based upon its economic interest.
Both parties contributed mining tenements upon formation of the joint venture. Construction and development efforts are currently underway to combine operations. The joint venture agreement specifies that the Company will continue to fully own and operate the existing Wambo Open-Cut Mine through December 1, 2020, at which point the development of the combined operations is expected to be completed, the parties will contribute mining equipment and other assets, and joint operations will commence. Glencore is responsible for construction and development activities and will manage the mining operations of the joint venture.
PRB Colorado Joint Venture with Arch
On June 18, 2019, the Company entered into a definitive implementation agreement (the Implementation Agreement) with Arch, to establish a joint venture that will combine the respective Powder River Basin (PRB) and Colorado operations of Peabody and Arch. Pursuant to the terms of the Implementation Agreement, Peabody will hold a 66.5% economic interest in the joint venture and Arch will hold a 33.5% economic interest. The Company expects to proportionally consolidate the entity based upon its economic interest. Governance of the joint venture will be overseen by the joint venture’s board of managers, which will be comprised of Peabody and Arch representatives with voting powers proportionate with the companies’ economic interests, with the exception of certain specified matters which will require supermajority approval. Peabody will manage the operations of the joint venture, subject to the supervision of the joint venture’s board of managers.
On February 26, 2020, the U.S. Federal Trade Commission (FTC) sought a preliminary injunction to challenge the Company’s proposed joint venture. Peabody and Arch intend to continue to pursue creation of the joint venture and will litigate the FTC’s decision within the U.S. federal court system. Court proceedings are currently scheduled to begin on July 13, 2020, with a ruling expected shortly thereafter, subject to any potential changes to the court’s schedule as a result of the COVID-19 pandemic or other exigent circumstances. The FTC has also initiated an administrative proceeding on the merits, which is currently scheduled for hearing on October 27, 2020.
Formation of the joint venture is subject to favorable resolution of the FTC’s challenge noted above and customary closing conditions, including the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, the receipt of certain other required regulatory approvals and the absence of injunctions or other legal restraints preventing the formation of the joint venture. In September 2019, the Company amended its Credit Agreement to expressly permit formation of the joint venture and is currently addressing such formation under the Indenture governing the Senior Notes. At such time as control over the existing operations is exchanged, the Company will account for its interest in the combined operations at fair value, which could result in a significant loss.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
North Goonyella
The Company’s North Goonyella Mine in Queensland, Australia experienced a fire in a portion of the mine during September 2018 and mining operations have been suspended since then. During 2019, the Company completed segmenting of the mine into multiple zones to facilitate a phased re-ventilation and re-entry of the mine, re-ventilation of the first zone of the mine and subsequently re-entered the area. Following these activities and a detailed review and assessment, the Company determined that due to the time, cost and required regulatory approach to ventilate and re-enter the rest of the mine, the Company will not pursue attempts to access certain portions of the mine through existing mine workings, but instead will move to the southern panels. The Company is in ongoing discussions with the Queensland Mines Inspectorate regarding ventilation and re-entry of the second zone of the current mine configuration. Based on the planned approach, the Company expects no meaningful production from North Goonyella for three or more years. In 2020, the Company commenced a commercial process for North Goonyella in conjunction with the existing mine development. The process comes in response to expressions of interest from potential strategic partners and other producers. Commercial outcomes could include a strategic financial partner, a joint venture structure or complete sale of North Goonyella. Subsequent to the first quarter of 2020, the Company entered into commercial agreements to reduce the rail and port commitments related to North Goonyella for the second half of 2020 through the first half of 2023, while maintaining sufficient capacity for future production.
During the three months ended March 31, 2020 and 2019, the Company recorded $10.1 million and $36.9 million in containment and idling costs. An additional provision of $24.7 million related to equipment losses was recorded during the three months ended March 31, 2019, which was incremental to amounts recorded in prior periods and represented the best estimate of loss based on the assessments made as of that date. No provision for equipment losses was recorded during the three months ended March 31, 2020.
In March 2019, the Company entered into an insurance claim settlement agreement with its insurers and various re-insurers under a combined property damage and business interruption policy and recorded a $125 million insurance recovery, the maximum amount available under the policy above a $50 million deductible. The Company has collected the full amount of the recovery.
In the event that no future mining occurs at the North Goonyella Mine or the Company is unable to find a commercial alternative, the Company may record additional charges for the remaining carrying value of the North Goonyella Mine of up to approximately $300 million. Incremental exposures above the aforementioned include take-or-pay obligations and other costs associated with idling or closing the mine.
Asset Impairment and Other At-Risk Assets
Other than the provision for North Goonyella equipment losses described above, the Company recorded no asset impairment charges during the three months ended March 31, 2020 or 2019. However, the Company has identified certain assets with an aggregate carrying value of approximately $2.1 billion at March 31, 2020 in its Seaborne Metallurgical Mining, Powder River Basin Mining, Other U.S. Thermal Mining and Corporate and Other segments whose recoverability is most sensitive to coal pricing, cost pressures, customer demand and customer concentration risk. The Company conducted a review of those assets for recoverability as of March 31, 2020 and determined that no further impairment charges were necessary as of that date.
(16) Earnings per Share (EPS)
Basic EPS is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding. As such, the Company includes the share-based compensation awards in its potentially dilutive securities. Dilutive securities are not included in the computation of loss per share when a company reports a net loss from continuing operations as the impact would be anti-dilutive.
For all but the performance units, the potentially dilutive impact of the Company’s share-based compensation awards is determined using the treasury stock method. Under the treasury stock method, awards are treated as if they had been exercised with any proceeds used to repurchase common stock at the average market price during the period. Any incremental difference between the assumed number of shares issued and purchased is included in the diluted share computation. For the performance units, their contingent features result in an assessment for any potentially dilutive common stock by using the end of the reporting period as if it were the end of the contingency period for all units granted.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The computation of diluted EPS excluded aggregate share-based compensation awards of approximately 3.0 million and 0.3 million for the three months ended March 31, 2020 and 2019, respectively, because to do so would have been anti-dilutive for those periods. Because the potential dilutive impact of such share-based compensation awards is calculated under the treasury stock method, anti-dilution generally occurs when the exercise prices or unrecognized compensation cost per share of such awards are higher than the Company’s average stock price during the applicable period. Anti-dilution also occurs when a company reports a net loss from continuing operations, and the dilutive impact of all share-based compensation awards are excluded accordingly.
The following illustrates the earnings allocation method utilized in the calculation of basic and diluted EPS.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(In millions, except per share data)
|
EPS numerator:
|
|
|
|
(Loss) income from continuing operations, net of income taxes
|
$
|
(129.3
|
)
|
|
$
|
133.3
|
|
Less: Net (loss) income attributable to noncontrolling interests
|
(1.8
|
)
|
|
5.7
|
|
(Loss) income from continuing operations attributable to common stockholders
|
(127.5
|
)
|
|
127.6
|
|
Loss from discontinued operations, net of income taxes
|
(2.2
|
)
|
|
(3.4
|
)
|
Net (loss) income attributable to common stockholders
|
$
|
(129.7
|
)
|
|
$
|
124.2
|
|
|
|
|
|
EPS denominator:
|
|
|
|
Weighted average shares outstanding — basic
|
97.2
|
|
|
108.5
|
|
Impact of dilutive securities
|
—
|
|
|
2.0
|
|
Weighted average shares outstanding — diluted
|
97.2
|
|
|
110.5
|
|
|
|
|
|
Basic EPS attributable to common stockholders:
|
|
|
|
(Loss) income from continuing operations
|
$
|
(1.31
|
)
|
|
$
|
1.18
|
|
Loss from discontinued operations
|
(0.02
|
)
|
|
(0.04
|
)
|
Net (loss) income attributable to common stockholders
|
$
|
(1.33
|
)
|
|
$
|
1.14
|
|
|
|
|
|
Diluted EPS attributable to common stockholders:
|
|
|
|
(Loss) income from continuing operations
|
$
|
(1.31
|
)
|
|
$
|
1.15
|
|
Loss from discontinued operations
|
(0.02
|
)
|
|
(0.03
|
)
|
Net (loss) income attributable to common stockholders
|
$
|
(1.33
|
)
|
|
$
|
1.12
|
|
(17) Financial Instruments and Other Guarantees
In the normal course of business, the Company is a party to various guarantees and financial instruments that carry off-balance-sheet risk and are not reflected in the accompanying condensed consolidated balance sheets. At March 31, 2020, such instruments included $1,557.4 million of surety bonds and $206.8 million of letters of credit. These financial instruments provide support for the Company’s reclamation bonding requirements, lease obligations, insurance policies and various other performance guarantees. The Company periodically evaluates the instruments for on-balance-sheet treatment based on the amount of exposure under the instrument and the likelihood of required performance. The Company does not expect any material losses to result from these guarantees or off-balance-sheet instruments in excess of liabilities provided for in the accompanying condensed consolidated balance sheets.
The Company is required to provide various forms of financial assurance in support of its mining reclamation obligations in the jurisdictions in which it operates. Such requirements are typically established by statute or under mining permits. At March 31, 2020, the Company’s asset retirement obligations of $758.7 million were supported by surety bonds of $1,365.0 million, as well as letters of credit issued under the Company’s receivables securitization program and Revolver amounting to $111.1 million.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable Securitization
The Company entered into the Sixth Amended and Restated Receivables Purchase Agreement, as amended, dated as of April 3, 2017 (the Receivables Purchase Agreement) to extend the Company’s receivables securitization facility previously in place and expand that facility to include certain receivables from the Company’s Australian operations. The receivables securitization program (Securitization Program) is subject to customary events of default set forth in the Receivables Purchase Agreement. The Securitization Program provides for up to $250.0 million in funding accounted for as a secured borrowing, limited to the availability of eligible receivables, and may be secured by a combination of collateral and the trade receivables underlying the program, from time to time. Funding capacity under the Securitization Program may also be utilized for letters of credit in support of other obligations. During 2019, the Company entered into an amendment to the Securitization Program to extend its term through April 1, 2022 and reduce program fees.
Under the terms of the Securitization Program, the Company contributes the trade receivables of its participating subsidiaries on a revolving basis to P&L Receivables, its wholly-owned, bankruptcy-remote subsidiary, which then sells the receivables to unaffiliated banks. P&L Receivables retains the ability to repurchase the receivables in certain circumstances. The assets and liabilities of P&L Receivables are consolidated with Peabody, and the Securitization Program is treated as a secured borrowing for accounting purposes, but the assets of P&L Receivables will be used first to satisfy the creditors of P&L Receivables, not Peabody’s creditors. The borrowings under the Securitization Program remain outstanding throughout the term of the agreement, subject to the Company maintaining sufficient eligible receivables, by continuing to contribute trade receivables to P&L Receivables, unless an event of default occurs.
At March 31, 2020, the Company had no outstanding borrowings and $132.7 million of letters of credit issued under the Securitization Program. The letters of credit were primarily in support of portions of the Company’s obligations for reclamation, workers’ compensation and postretirement benefits. Availability under the Securitization Program, which is adjusted for certain ineligible receivables, was $12.8 million at March 31, 2020. The Company had no collateral requirement under the Securitization Program at either March 31, 2020 or December 31, 2019. The Company incurred fees associated with the Securitization Program of $0.7 million and $1.1 million during the three months ended March 31, 2020 and 2019, respectively, which have been recorded as interest expense in the accompanying unaudited condensed consolidated statements of operations.
Collateral Arrangements and Restricted Cash
From time to time, the Company is required to remit cash to certain regulatory authorities and other third parties as collateral for financial assurances associated with a variety of long-term obligations and commitments surrounding the mining, reclamation and shipping of its production.
Other
The Company has provided financial guarantees under certain long-term debt agreements entered into by its subsidiaries and substantially all of the Company’s U.S. subsidiaries provide financial guarantees under long-term debt agreements entered into by the Company. The maximum amounts payable under the Company’s debt agreements are equal to the respective principal and interest payments.
(18) Commitments and Contingencies
Commitments
Unconditional Purchase Obligations
As of March 31, 2020, purchase commitments for capital expenditures were $42.7 million, all of which is obligated within the next five years, with $35.6 million obligated within the next 12 months.
As of March 31, 2020, Australian and U.S. commitments under take-or-pay arrangements totaled $945.0 million, of which approximately $105 million is obligated within the next year. The change in commitments under take-or-pay arrangements since the year ended December 31, 2019 was largely driven by changes in the foreign currency exchange rates. For additional information regarding the Company’s commitments under take-or-pay arrangements, refer to Note 26. “Commitments and Contingencies” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingencies
From time to time, the Company or its subsidiaries are involved in legal proceedings arising in the ordinary course of business or related to indemnities or historical operations. The Company believes it has recorded adequate reserves for these liabilities. The Company discusses its significant legal proceedings below, including ongoing proceedings and those that impacted the Company’s results of operations for the periods presented.
Litigation Relating to Continuing Operations
Peabody Monto Coal Pty Ltd, Monto Coal 2 Pty Ltd and Peabody Energy Australia PCI Pty Ltd (PEA-PCI). On October 1, 2007, a claim was made against Peabody Monto Coal Pty Ltd, a wholly-owned subsidiary of Macarthur Coal Limited (Macarthur) that is now a wholly-owned subsidiary of the Company, and Monto Coal 2 Pty Ltd, an equity accounted investee of Macarthur, now known as PEA-PCI. The claim, made by the minority interest holders in the joint venture, alleged that the Macarthur companies breached certain agreements by failing to develop a mine project. The claim was amended to assert that Macarthur also induced the alleged breach of the Monto Coal Joint Venture Agreement. The Company acquired Macarthur and its subsidiaries in 2011. The claim originally sought damages of up to $1.1 billion Australian dollars, plus interest and costs, but was amended in November 2019 to seek $18 million Australian dollars, plus interest and costs.
The Company asserted that the Macarthur companies were never under an obligation to develop the mine project because the project was not economically viable. A trial commenced in the Supreme Court of Queensland, Australia on April 8, 2019 and concluded on December 12, 2019. Before a decision was handed down, the parties reached a settlement to end the multi-year dispute, the terms of which included the Company (a) transferring its interests in Monto Coal 2 Pty Ltd, and therefore the Monto Coal Joint Venture, to the claimant; and (b) agreeing to use commercially reasonable efforts to transfer certain other assets to the claimant. These settlement terms are not expected to result in a material impact to the Company’s financial accounts. As a result of the settlement, the parties filed a dismissal of the litigation on January 24, 2020.
County of San Mateo, County of Marin, City of Imperial Beach. The Company was named as a defendant, along with numerous other companies, in three nearly identical lawsuits brought by municipalities in California on July 17, 2017. The lawsuits seek to hold a wide variety of companies that produce fossil fuels liable for the alleged impacts of the greenhouse gas emissions attributable to those fuels and seek compensatory and punitive damages in an amount to be proven at trial, attorneys’ fees and costs, disgorgement of profits and equitable relief of abatement. The lawsuits primarily assert that the companies’ products have caused a sea level rise that is damaging the plaintiffs. The complaints specifically alleged that the defendants’ activities from 1965 to 2015 caused such damage. The Company filed a motion to enforce the Company’s Second Amended Joint Plan of Reorganization of Debtors and Debtors in Possession as revised March 15, 2017 (the Plan) because it enjoins claims that arose before the effective date of the Plan. The motion to enforce was granted on October 24, 2017, and the Bankruptcy Court ordered the plaintiffs to dismiss their lawsuits against the Company. On November 26, 2017, the plaintiffs appealed the Bankruptcy Court’s October 24, 2017 order to the United States District Court for the Eastern District of Missouri (the District Court). On November 28, 2017, the plaintiffs sought a stay pending appeal from the Bankruptcy Court, which was denied on December 8, 2017. On December 19, 2017, the plaintiffs moved the District Court for a stay pending appeal. The District Court denied the stay request on September 20, 2018, and the plaintiffs have appealed that decision to the United States Court of Appeals for the Eighth Circuit. On March 29, 2019, the District Court affirmed the Bankruptcy Court ruling enjoining the plaintiffs from proceeding with their lawsuits against the Company. That ruling likewise was appealed. On May 6, 2020, the Eighth Circuit Court of Appeals denied the plaintiffs’ request for stay and affirmed the order compelling the plaintiffs to dismiss the Company. The plaintiffs may ask the Eight Circuit Court of Appeals to reconsider or may appeal to the United States Supreme Court. In the underlying cases pending in California, the U.S. District Court for the Northern District of California granted plaintiffs’ motion for remand and decided the cases should be heard in state court. The defendants appealed the order granting remand to the United States Court of Appeals for the Ninth Circuit (Ninth Circuit) and sought a stay of the U.S. District Court for the Northern District of California decision pending completion of the Ninth Circuit appeal. The U.S. District Court for the Northern District of California granted defendants’ request for a stay pending completion of the Ninth Circuit appeal. The plaintiffs filed a motion to dismiss part of the appeal. The parties are now litigating at the Ninth Circuit whether a state or federal court should hear these lawsuits. Regardless of whether state court or federal court is the venue, the Company believes the lawsuits against it should be dismissed under enforcement of the Plan. The Company does not believe the lawsuits are meritorious and, if the lawsuits are not dismissed, the Company intends to vigorously defend them.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
At times the Company becomes a party to other disputes, including those related to contract miner performance, claims, lawsuits, arbitration proceedings, regulatory investigations and administrative procedures in the ordinary course of business in the U.S., Australia and other countries where the Company does business. Based on current information, the Company believes that such other pending or threatened proceedings are likely to be resolved without a material adverse effect on its financial condition, results of operations or cash flows.
(19) Segment Information
During the year ended December 31, 2019, the Cottage Grove and Kayenta Mines shipped their final tons, and the Company announced the closures of the Wildcat HiIls Underground and Somerville Central Mines, with both of those operations expecting to ship their final tons in 2020. Due to these changes, the Company has revised its reportable segments beginning in the first quarter of 2020 to reflect the manner in which the chief operating decision maker (CODM) views the Company’s businesses going forward for purposes of reviewing performance, allocating resources and assessing future prospects and strategic execution. The Company now reports its results of operations primarily through the following reportable segments: Seaborne Thermal Mining, Seaborne Metallurgical Mining, Powder River Basin Mining, Other U.S. Thermal Mining and Corporate and Other. Prior period results have been recast for comparability.
The business of the Company’s seaborne operating platform is primarily export focused with customers spread across several countries, with a portion of its thermal and metallurgical coal sold within Australia. Generally, revenues from individual countries vary year by year based on electricity and steel demand, the strength of the global economy, governmental policies and several other factors, including those specific to each country. The Company classifies its seaborne mines within the Seaborne Thermal Mining or Seaborne Metallurgical Mining segments based on the primary customer base and coal reserve type of each mining operation. A small portion of the coal mined by the Seaborne Thermal Mining segment is of a metallurgical grade. Similarly, a small portion of the coal mined by the Seaborne Metallurgical Mining segment is of a thermal grade. Additionally, the Company may market some of its metallurgical coal products as a thermal coal product from time to time depending on market conditions.
The Company’s Seaborne Thermal Mining operations consist of mines in New South Wales, Australia. The mines in that segment utilize both surface and underground extraction processes to mine low-sulfur, high Btu thermal coal.
The Company’s Seaborne Metallurgical Mining operations consist of mines in Queensland, Australia, one in New South Wales, Australia and one in Alabama. The mines in that segment utilize both surface and underground extraction processes to mine various qualities of metallurgical coal (low-sulfur, high Btu coal). The metallurgical coal qualities include hard coking coal, semi-hard coking coal, semi-soft coking coal and pulverized coal injection coal.
The principal business of the Company’s thermal mining segments in the U.S. is the mining, preparation and sale of thermal coal, sold primarily to electric utilities in the U.S. under long-term contracts, with a relatively small portion sold as international exports as conditions warrant. The Company’s Powder River Basin Mining operations consist of its mines in Wyoming. The mines in that segment are characterized by surface mining extraction processes, coal with a lower sulfur content and Btu and higher customer transportation costs (due to longer shipping distances). The Company’s Other U.S. Thermal Mining operations historically reflect the aggregation of its Illinois, Indiana, New Mexico, Colorado and Arizona mining operations. The mines in that segment are characterized by a mix of surface and underground mining extraction processes, coal with a higher sulfur content and Btu and lower customer transportation costs (due to shorter shipping distances). Geologically, the Company’s Powder River Basin Mining operations mine sub-bituminous coal deposits and its Other U.S. Thermal Mining operations mine both bituminous and sub-bituminous coal deposits.
The Company’s Corporate and Other segment includes selling and administrative expenses, including its technical and shared services functions; results from equity affiliates; corporate hedging activities; trading and brokerage activities; results from certain mining and export/transportation joint ventures; minimum charges on certain transportation-related contracts; the closure of inactive mining sites; and certain commercial matters.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s CODM uses Adjusted EBITDA as the primary metric to measure the segments’ operating performance. Adjusted EBITDA is a non-GAAP financial measure defined as (loss) income from continuing operations before deducting net interest expense, income taxes, asset retirement obligation expenses and depreciation, depletion and amortization. Adjusted EBITDA is also adjusted for the discrete items that management excluded in analyzing the segments’ operating performance, as displayed in the reconciliation below. The Company has retrospectively modified its calculation of Adjusted EBITDA to exclude restructuring charges and transaction costs related to joint ventures as management does not view these items as part of its normal operations. Management believes non-GAAP performance measures are used by investors to measure the Company’s operating performance and lenders to measure the Company’s ability to incur and service debt. Adjusted EBITDA is not intended to serve as an alternative to U.S. GAAP measures of performance and may not be comparable to similarly-titled measures presented by other companies.
Reportable segment results were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
Revenues:
|
|
|
|
Seaborne Thermal Mining
|
$
|
201.1
|
|
|
$
|
251.0
|
|
Seaborne Metallurgical Mining
|
193.2
|
|
|
324.5
|
|
Powder River Basin Mining
|
266.6
|
|
|
287.3
|
|
Other U.S. Thermal Mining
|
192.3
|
|
|
334.8
|
|
Corporate and Other
|
(7.0
|
)
|
|
53.0
|
|
Total
|
$
|
846.2
|
|
|
$
|
1,250.6
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
Seaborne Thermal Mining
|
$
|
55.1
|
|
|
$
|
94.7
|
|
Seaborne Metallurgical Mining
|
(32.7
|
)
|
|
85.8
|
|
Powder River Basin Mining
|
25.4
|
|
|
36.4
|
|
Other U.S. Thermal Mining
|
38.5
|
|
|
75.9
|
|
Corporate and Other
|
(49.5
|
)
|
|
(38.7
|
)
|
Total
|
$
|
36.8
|
|
|
$
|
254.1
|
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of consolidated (loss) income from continuing operations, net of income taxes to Adjusted EBITDA follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
(Dollars in millions)
|
(Loss) income from continuing operations, net of income taxes
|
$
|
(129.3
|
)
|
|
$
|
133.3
|
|
Depreciation, depletion and amortization
|
106.0
|
|
|
172.5
|
|
Asset retirement obligation expenses
|
17.6
|
|
|
13.8
|
|
Restructuring charges
|
6.5
|
|
|
0.2
|
|
Transaction costs related to joint ventures
|
4.2
|
|
|
—
|
|
Provision for North Goonyella equipment loss
|
—
|
|
|
24.7
|
|
North Goonyella insurance recovery - equipment (1)
|
—
|
|
|
(91.1
|
)
|
Changes in deferred tax asset valuation allowance and reserves and amortization of basis difference related to equity affiliates
|
(0.7
|
)
|
|
—
|
|
Interest expense
|
33.1
|
|
|
35.8
|
|
Interest income
|
(3.1
|
)
|
|
(8.3
|
)
|
Unrealized losses (gains) on economic hedges
|
2.2
|
|
|
(39.8
|
)
|
Unrealized gains on non-coal trading derivative contracts
|
(0.1
|
)
|
|
(0.2
|
)
|
Take-or-pay contract-based intangible recognition
|
(2.6
|
)
|
|
(5.6
|
)
|
Income tax provision
|
3.0
|
|
|
18.8
|
|
Total Adjusted EBITDA
|
$
|
36.8
|
|
|
$
|
254.1
|
|
|
|
(1)
|
As described in Note 15. “Other Events,” the Company recorded a $125.0 million insurance recovery during the three months ended March 31, 2019 related to losses incurred at its North Goonyella Mine. Of this amount, Adjusted EBITDA excludes an allocated amount applicable to total equipment losses recognized at the time of the insurance recovery settlement, which consisted of $24.7 million and $66.4 million recognized during the three months ended March 31, 2019 and the year ended December 31, 2018, respectively. The remaining $33.9 million, applicable to incremental costs and business interruption losses, is included in Adjusted EBITDA for the three months ended March 31, 2019.
|