Peabody Energy repays $300 million of debt in Q3, targets $1.2-to-$1.4 billion debt level, eyes cash-flow revolver

By Paul Deckelman

New York, Oct. 25 – Peabody Energy Corp. – which emerged from Chapter 11 earlier this year after having shed more than $5 billion of debt – continued to pare down its debt load during the recently ended 2017 third quarter, company executives said Wednesday.

They said that the St. Louis-based coal producer had completed $300 million of voluntary debt repayments during the quarter ended Sept. 30.

“We remain committed to quickly executing on our capital allocation initiatives,” the company’s president and chief executive officer, Glenn L. Kellow, told analysts on a conference call following the release of the quarterly results.

“You may recall that last quarter, we targeted a total of $300 million of debt repayments by year-end, and we are pleased to have accelerated those repayments in the third quarter.”

Kellow also noted that Peabody had amended the credit agreement put in place prior to the company’s having come out of bankruptcy on April 3, “reducing the interest rate by 100 basis points and allowing greater flexibility for shareholder returns.”

More debt reduction on tap

And he said that Peabody “continue[s] to target an additional $200 million of debt repayments by year-end 2018 and aim[s] to have gross debt of $1.2 to $1.4 billion over time.”

As of the third quarter’s end, Peabody’s balance sheet showed some $1.66 billion of total debt, consisting of $1.61 billion of long-term debt less current portion and $47.1 million of current portion debt coming due within the next 12 months.

That was down sequentially from the roughly $1.96 billion of balance sheet debt at the end of the 2017 second quarter on June 30 – about $1.77 billion of long-term debt less current portion and $189 million of current portion debt.

In contrast, the balance sheet shows that Peabody’s “predecessor” company – i.e., Peabody before its emergence from bankruptcy – had some $8.44 billion of pre-petition “liabilities subject to compromise” on the books at the end of fiscal 2016 on Dec. 31. Peabody had sought protection from its bondholders and other creditors via a Chapter 11 filing with the United States Bankruptcy Court for the Eastern District of Missouri in St. Louis on April 13, 2016.

Company eyes restricted cash cuts

Peabody’s executive vice president and chief financial officer, Amy Schwetz, told the analysts on the call that Peabody ended the ended the third quarter with $925 million of available cash and total liquidity of $943 million.

“Robust adjusted EBITDA contributions paved the way for the company to generate $240 million of operating cash flow this quarter, while paying approximately $135 million in Chapter 11 exit and settlement costs,” Schwetz declared.

She added that fourth-quarter cash flows “are expected to benefit nearly $120 million from reduction in Chapter 11 payments.”

Schwetz said that Peabody also freed up about $25 million of its restricted cash balance during the quarter, bringing the total balance figure as of Sept. 30 down to $538 million.

“While we continue to chip away at the balance, we are focused on the longer-term, more impactful lower-cost options of our multi-pronged approach. We are engaged with surety providers to expand coverage to Australia. We continue to explore the potential for a cash revolver over time, an Australian bank guaranty facility, and we are managing our liabilities the old-fashioned way – by reclaiming land and reducing obligations.”

Schwetz said that Peabody is working to get at least $200 million and possibly as much as $400 million of its restricted cash balance released between now and the end of 2018.

During the question-and answer portion of the conference call that followed her formal presentation and Kellow’s the CFO said that what she really wanted to do was “free up all the [restricted] cash,” but acknowledged that the company’s $200 million-to-$400 million target through 2018 was a more realistic figure.

She said that Peabody would seek to bring down the restricted cash balance through “the traditional methods” of unloading certain non-core assets, “that will yield some cash back to Peabody, but then working with the financial community as well, in really three ways, the first being what we’ve discussed of returning to a normal cash-flow revolver that we can utilize for [letters of credit].

Peabody’s exit financing put in place before its emergence included no revolving credit component – just $950 million of covenant-light five-year first-lien senior secured term loan debt and $1 billion of new first-lien senior secured junk bond financing, split into $500 million tranches of five- and eight-year notes.

Schwetz also said that the company would seek to extend the surety program that it currently uses for its U.S. obligations into Australia, where the company also has extensive mining operations, “and then finally, one that we haven’t talked about in the past, which is looking to develop an Australian bank guaranty facility that we might be able to use in a way to provide guarantees to the government and other parties that we provide assurance to, as a way to release that cash.”

Share repurchases continue

Kellow said that the company is targeting a liquidity level of around $800 million, although “[we] recognize there will be times, such as this quarter, where we are a bit above our targeted levels.”

Schwetz said that Peabody is “agnostic whether that [$800 million] comes in the form of cash, or other forms of liquidity, i.e., a revolving credit facility over time, or A/R securitization, to the extent that there’s capacity in excess of our letters of credit. What I would say is the A/R securitization today and probably a revolving credit facility in the future will initially be earmarked as ways to free up that trapped cash, as mechanisms to provide financial assurances going forward.”

Kellow said that the company’s financial approach was four-pronged – generate cash, reduce debt, “invest wisely,” in terms of pursuing organic growth or merger and acquisition opportunities, and return cash to the shareholders.

“I’m pleased to note that we have made progress across the board,” he proclaimed, including having executed $100 million of share repurchases during the quarter, or 20% of the $500 million of such buybacks authorized by the company’s board of directors.

In September, the company amended its post-bankruptcy credit agreement, repaying $150 million of the outstanding five-year term loan B debt, bringing the total pro forma size of that obligation down to $647.6 million, and pricing it at Libor plus 300 basis points, a pickup of 100 bps over the Libor plus 450 bps loan which had priced in February.

Kellow said that “we also amended our credit agreement to free up capacity to execute the size of share repurchases the board authorized. Our debt agreements contain some ongoing regulators to capital returns – but we believe we have ample capacity to continue with repurchases.”

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