UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q | ||
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013 |
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________ |
Commission File Number: 1-16463
____________________________________________
PEABODY ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 13-4004153 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
701 Market Street, St. Louis, Missouri | 63101-1826 | |
(Address of principal executive offices) | (Zip Code) | |
(314) 342-3400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | |||||||
Non-accelerated filer ¨ | Smaller reporting company ¨ | |||||||
(Do not check if a smaller reporting company) | ||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
There were 269,843,348 shares of the registrant's common stock (par value of $0.01 per share) outstanding at August 2, 2013.
TABLE OF CONTENTS
Page | |
Item 1. Financial Statements. | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Dollars in millions, except per share data) | ||||||||||||||||
Revenues | ||||||||||||||||
Sales | $ | 1,588.6 | $ | 1,699.7 | $ | 3,165.8 | $ | 3,484.8 | ||||||||
Other revenues | 136.7 | 281.4 | 307.5 | 517.0 | ||||||||||||
Total revenues | 1,725.3 | 1,981.1 | 3,473.3 | 4,001.8 | ||||||||||||
Costs and expenses | ||||||||||||||||
Operating costs and expenses | 1,437.2 | 1,466.0 | 2,826.6 | 2,887.8 | ||||||||||||
Depreciation, depletion and amortization | 185.7 | 155.3 | 356.4 | 298.2 | ||||||||||||
Asset retirement obligation expenses | 18.3 | 17.2 | 37.3 | 32.2 | ||||||||||||
Selling and administrative expenses | 64.0 | 62.7 | 129.1 | 133.7 | ||||||||||||
Other operating (income) loss: | ||||||||||||||||
Net gain on disposal or exchange of assets | (43.2 | ) | (3.4 | ) | (45.8 | ) | (7.4 | ) | ||||||||
Asset impairment | 21.5 | — | 21.5 | — | ||||||||||||
Loss from equity affiliates | 15.4 | 6.6 | 33.0 | 29.3 | ||||||||||||
Operating profit | 26.4 | 276.7 | 115.2 | 628.0 | ||||||||||||
Interest expense | 110.8 | 106.9 | 212.1 | 208.9 | ||||||||||||
Interest income | (1.1 | ) | (6.5 | ) | (7.0 | ) | (14.6 | ) | ||||||||
(Loss) income from continuing operations before income taxes | (83.3 | ) | 176.3 | (89.9 | ) | 433.7 | ||||||||||
Income tax (benefit) provision | (184.7 | ) | (38.2 | ) | (181.0 | ) | 36.2 | |||||||||
Income from continuing operations, net of income taxes | 101.4 | 214.5 | 91.1 | 397.5 | ||||||||||||
Loss from discontinued operations, net of income taxes | (14.3 | ) | (6.7 | ) | (23.4 | ) | (11.4 | ) | ||||||||
Net income | 87.1 | 207.8 | 67.7 | 386.1 | ||||||||||||
Less: Net (loss) income attributable to noncontrolling interests | (3.2 | ) | 3.1 | 0.8 | 8.7 | |||||||||||
Net income attributable to common stockholders | $ | 90.3 | $ | 204.7 | $ | 66.9 | $ | 377.4 | ||||||||
Income from continuing operations: | ||||||||||||||||
Basic earnings per share | $ | 0.39 | $ | 0.78 | $ | 0.34 | $ | 1.43 | ||||||||
Diluted earnings per share | $ | 0.39 | $ | 0.78 | $ | 0.33 | $ | 1.43 | ||||||||
Net income attributable to common stockholders: | ||||||||||||||||
Basic earnings per share | $ | 0.33 | $ | 0.75 | $ | 0.25 | $ | 1.39 | ||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.75 | $ | 0.25 | $ | 1.39 | ||||||||
Dividends declared per share | $ | 0.085 | $ | 0.085 | $ | 0.170 | $ | 0.170 | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, | Six months ended June 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||||
(Dollars in millions) | |||||||||||||||
Net income | $ | 87.1 | $ | 207.8 | $ | 67.7 | $ | 386.1 | |||||||
Other comprehensive (loss) income, net of income taxes: | |||||||||||||||
Net change in unrealized holding gains (losses) on available-for-sale securities (net of respective tax provision (benefits) of $3.7 ($1.5), ($0.1) and ($8.2)) | |||||||||||||||
Unrealized holding losses on available-for-sale securities | (7.6 | ) | (2.6 | ) | (13.8 | ) | (14.1 | ) | |||||||
Less: Reclassification for realized losses included in net income | 13.6 | — | 13.5 | — | |||||||||||
Net change in unrealized gains (losses) on available-for-sale securities | 6.0 | (2.6 | ) | (0.3 | ) | (14.1 | ) | ||||||||
Net unrealized (losses) gains on cash flow hedges (net of respective tax (benefits) provision of ($217.1), ($28.5), ($228.0) and $2.9) | |||||||||||||||
(Decrease) increase in fair value of cash flow hedges | (339.0 | ) | 42.7 | (270.3 | ) | 190.5 | |||||||||
Less: Reclassification for realized gains included in net income | (38.3 | ) | (37.3 | ) | (115.4 | ) | (121.5 | ) | |||||||
Net unrealized (losses) gains on cash flow hedges | (377.3 | ) | 5.4 | (385.7 | ) | 69.0 | |||||||||
Amortization of actuarial loss and prior service cost for postretirement plans and workers' compensation obligations (net of respective tax provisions of $8.4, $8.0, $16.7 and $16.1) | 14.2 | 13.8 | 28.4 | 27.7 | |||||||||||
Foreign currency translation adjustment | (74.5 | ) | (6.1 | ) | (73.4 | ) | 6.6 | ||||||||
Other comprehensive (loss) income, net of income taxes | (431.6 | ) | 10.5 | (431.0 | ) | 89.2 | |||||||||
Comprehensive (loss) income | (344.5 | ) | 218.3 | (363.3 | ) | 475.3 | |||||||||
Less: Comprehensive (loss) income attributable to noncontrolling interests | (3.2 | ) | 3.1 | 0.8 | 8.7 | ||||||||||
Comprehensive (loss) income attributable to common stockholders | $ | (341.3 | ) | $ | 215.2 | $ | (364.1 | ) | $ | 466.6 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) | ||||||||
June 30, 2013 | December 31, 2012 | |||||||
(In millions, except per share data) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 517.9 | $ | 558.8 | ||||
Accounts receivable, net of allowance for doubtful accounts of $3.6 at June 30, 2013 and $13.7 at December 31, 2012 | 732.2 | 737.8 | ||||||
Inventories | 581.6 | 548.4 | ||||||
Assets from coal trading activities, net | 56.6 | 52.4 | ||||||
Deferred income taxes | 39.4 | 56.4 | ||||||
Other current assets | 321.5 | 621.7 | ||||||
Total current assets | 2,249.2 | 2,575.5 | ||||||
Property, plant, equipment and mine development | ||||||||
Land and coal interests | 10,957.5 | 10,947.7 | ||||||
Buildings and improvements | 1,412.4 | 1,321.3 | ||||||
Machinery and equipment | 3,075.8 | 3,162.2 | ||||||
Less: accumulated depreciation, depletion and amortization | (3,953.7 | ) | (3,629.5 | ) | ||||
Property, plant, equipment and mine development, net | 11,492.0 | 11,801.7 | ||||||
Investments and other assets | 1,186.7 | 1,431.8 | ||||||
Total assets | $ | 14,927.9 | $ | 15,809.0 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Current maturities of long-term debt | $ | 26.0 | $ | 47.8 | ||||
Deferred income taxes | 2.0 | — | ||||||
Liabilities from coal trading activities, net | 17.0 | 19.4 | ||||||
Accounts payable and accrued expenses | 1,625.8 | 1,606.9 | ||||||
Total current liabilities | 1,670.8 | 1,674.1 | ||||||
Long-term debt, less current maturities | 5,962.0 | 6,205.1 | ||||||
Deferred income taxes | 152.5 | 577.3 | ||||||
Asset retirement obligations | 713.9 | 687.5 | ||||||
Accrued postretirement benefit costs | 958.4 | 960.7 | ||||||
Other noncurrent liabilities | 919.2 | 765.5 | ||||||
Total liabilities | 10,376.8 | 10,870.2 | ||||||
Stockholders’ equity | ||||||||
Preferred Stock — $0.01 per share par value; 10.0 shares authorized; no shares issued or outstanding as of June 30, 2013 or December 31, 2012 | — | — | ||||||
Perpetual Preferred Stock — 0.8 shares authorized, no shares issued or outstanding as of June 30, 2013 or December 31, 2012 | — | — | ||||||
Series Common Stock — $0.01 per share par value; 40.0 shares authorized, no shares issued or outstanding as of June 30, 2013 or December 31, 2012 | — | — | ||||||
Common Stock — $0.01 per share par value; 800.0 shares authorized, 283.7 shares issued and 269.9 shares outstanding as of June 30, 2013 and 282.3 shares issued and 268.6 shares outstanding as of December 31, 2012 | 2.8 | 2.8 | ||||||
Additional paid-in capital | 2,314.2 | 2,286.3 | ||||||
Retained earnings | 3,087.4 | 3,066.4 | ||||||
Accumulated other comprehensive (loss) income | (420.0 | ) | 11.0 | |||||
Treasury stock, at cost: 13.8 shares as of June 30, 2013 and 13.7 shares as of December 31, 2012 | (464.4 | ) | (461.6 | ) | ||||
Peabody Energy Corporation’s stockholders’ equity | 4,520.0 | 4,904.9 | ||||||
Noncontrolling interests | 31.1 | 33.9 | ||||||
Total stockholders’ equity | 4,551.1 | 4,938.8 | ||||||
Total liabilities and stockholders’ equity | $ | 14,927.9 | $ | 15,809.0 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, | ||||||||
2013 | 2012 | |||||||
(Dollars in millions) | ||||||||
Cash Flows From Operating Activities | ||||||||
Net income | $ | 67.7 | $ | 386.1 | ||||
Loss from discontinued operations, net of income taxes | 23.4 | 11.4 | ||||||
Income from continuing operations, net of income taxes | 91.1 | 397.5 | ||||||
Adjustments to reconcile income from continuing operations, net of income taxes to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 356.4 | 298.2 | ||||||
Noncash interest expense | 11.1 | 11.5 | ||||||
Deferred income taxes | (205.3 | ) | (115.4 | ) | ||||
Share-based compensation | 28.6 | 24.2 | ||||||
Asset impairment | 21.5 | — | ||||||
Net gain on disposal or exchange of assets | (45.8 | ) | (7.4 | ) | ||||
Loss from equity affiliates | 33.0 | 29.3 | ||||||
Changes in current assets and liabilities: | ||||||||
Accounts receivable | (7.8 | ) | 93.5 | |||||
Change in receivable from accounts receivable securitization program | 50.0 | 32.0 | ||||||
Inventories | (33.4 | ) | (142.1 | ) | ||||
Net assets from coal trading activities | 6.0 | 161.4 | ||||||
Other current assets | 13.6 | 24.4 | ||||||
Accounts payable and accrued expenses | (0.7 | ) | (168.0 | ) | ||||
Asset retirement obligations | 26.3 | 25.7 | ||||||
Accrued postretirement benefit costs | 8.8 | 18.5 | ||||||
Pension costs | 25.8 | 24.8 | ||||||
Contributions to pension plans | (0.8 | ) | (0.9 | ) | ||||
Other, net | (12.5 | ) | 18.1 | |||||
Net cash provided by continuing operations | 365.9 | 725.3 | ||||||
Net cash used in discontinued operations | (34.5 | ) | (49.8 | ) | ||||
Net cash provided by operating activities | 331.4 | 675.5 | ||||||
Cash Flows From Investing Activities | ||||||||
Additions to property, plant, equipment and mine development | (166.5 | ) | (426.4 | ) | ||||
Changes in accrued expenses related to capital expenditures | (102.6 | ) | — | |||||
Federal coal lease expenditures | — | (89.2 | ) | |||||
Investment in Prairie State Energy Campus | — | (6.7 | ) | |||||
Proceeds from disposal of assets, net of notes receivable | 123.9 | 12.6 | ||||||
Purchases of debt securities | (9.7 | ) | (24.3 | ) | ||||
Proceeds from sales and maturities of debt securities | 17.0 | 27.6 | ||||||
Proceeds from the maturity of short-term investments | 4.8 | — | ||||||
Contributions to joint ventures | (323.8 | ) | (375.6 | ) | ||||
Distributions from joint ventures | 372.1 | 384.3 | ||||||
Advances to related parties | (35.7 | ) | (627.6 | ) | ||||
Repayment of loans from related parties | 18.2 | 618.7 | ||||||
Other, net | (3.6 | ) | (1.6 | ) | ||||
Net cash used in continuing operations | (105.9 | ) | (508.2 | ) | ||||
Net cash used in discontinued operations | (0.3 | ) | (7.7 | ) | ||||
Net cash used in investing activities | (106.2 | ) | (515.9 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Repayments of long-term debt | (215.6 | ) | (280.0 | ) | ||||
Common stock repurchase | — | (99.9 | ) | |||||
Acquisition of MCG Coal Holdings Pty Ltd noncontrolling interests | — | (49.8 | ) | |||||
Dividends paid | (45.9 | ) | (46.3 | ) | ||||
Repurchase of employee common stock relinquished for tax withholding | (2.8 | ) | (8.0 | ) | ||||
Excess tax benefits related to share-based compensation | — | 3.7 | ||||||
Other, net | (1.8 | ) | 10.8 | |||||
Net cash used in financing activities | (266.1 | ) | (469.5 | ) | ||||
Net change in cash and cash equivalents | (40.9 | ) | (309.9 | ) | ||||
Cash and cash equivalents at beginning of period | 558.8 | 799.1 | ||||||
Cash and cash equivalents at end of period | $ | 517.9 | $ | 489.2 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Peabody Energy Corporation’s Stockholders’ Equity | |||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Stockholders’ Equity | |||||||||||||||||||||
(Dollars in millions) | |||||||||||||||||||||||||||
December 31, 2012 | $ | 2.8 | $ | 2,286.3 | $ | (461.6 | ) | $ | 3,066.4 | $ | 11.0 | $ | 33.9 | $ | 4,938.8 | ||||||||||||
Net income | — | — | — | 66.9 | — | 0.8 | 67.7 | ||||||||||||||||||||
Net change in unrealized holding losses on available-for-sale securities (net of $0.1 tax benefit) | — | — | — | — | (0.3 | ) | — | (0.3 | ) | ||||||||||||||||||
Net unrealized losses on cash flow hedges (net of $228.0 tax benefit) | — | — | — | — | (385.7 | ) | — | (385.7 | ) | ||||||||||||||||||
Postretirement plans and workers’ compensation obligations (net of $16.7 tax provision) | — | — | — | — | 28.4 | — | 28.4 | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (73.4 | ) | — | (73.4 | ) | ||||||||||||||||||
Dividends paid | — | — | — | (45.9 | ) | — | — | (45.9 | ) | ||||||||||||||||||
Share-based compensation | — | 28.6 | — | — | — | 28.6 | |||||||||||||||||||||
Write off of excess tax benefits related to share-based compensation | — | (4.1 | ) | — | — | — | — | (4.1 | ) | ||||||||||||||||||
Employee stock purchases | — | 3.4 | — | — | — | — | 3.4 | ||||||||||||||||||||
Repurchase of employee common stock relinquished for tax withholding | — | — | (2.8 | ) | — | — | — | (2.8 | ) | ||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (3.6 | ) | (3.6 | ) | ||||||||||||||||||
June 30, 2013 | $ | 2.8 | $ | 2,314.2 | $ | (464.4 | ) | $ | 3,087.4 | $ | (420.0 | ) | $ | 31.1 | $ | 4,551.1 | |||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated financial statements include the accounts of Peabody Energy Corporation (the Company) and its affiliates. Interests in subsidiaries controlled by the Company are consolidated with any outside shareholder interests reflected as noncontrolling interests, except when the Company has an undivided interest in an unincorporated 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 2012 Annual Report on Form 10-K. 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, 2012 has been derived from the Company’s audited consolidated balance sheet at that date. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2013.
The Company classifies items within discontinued operations in the unaudited condensed consolidated financial statements when the operations and cash flows of a particular component of the Company have been (or will be) eliminated from the ongoing operations of the Company as a result of a disposal (by sale or otherwise) and the Company will no longer have any significant continuing involvement in the operation of that component.
(2) Newly Adopted Accounting Standards and Accounting Standards Not Yet Implemented
Presentation of Unrecognized Tax Benefits
In July 2013, the FASB issued accounting guidance requiring entities to present unrecognized tax benefits as a reduction to any related deferred tax assets for net operating losses, similar tax losses or tax credit carryforwards if such settlement is required or expected in the event an uncertain tax position is disallowed. Currently effective U.S. GAAP does not provide explicit guidance on the topic. The new presentation guidance will become effective for interim and annual periods beginning after December 15, 2013 (January 1, 2014 for the Company). While the adoption of this guidance may impact the presentation of unrecognized tax benefits in the Company's consolidated balance sheet, it will not affect the Company's results of operations, financial condition or cash flows.
Balance Sheet Offsetting
In December 2011, the Financial Accounting Standards Board (FASB) issued accounting guidance, which was further clarified in January 2013, requiring additional information intended to help reconcile existing differences in balance sheet offsetting requirements under U.S. GAAP and International Financial Reporting Standards. While this standard leaves existing guidance surrounding the offsetting of financial assets and liabilities unchanged, it requires several additional disclosures, including gross and net information about instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to a master netting arrangement or a similar agreement. The guidance applies to the Company's derivatives, which include both non-coal trading derivative financial instruments held for risk management purposes and derivative contracts associated with the Company's trading and brokerage activities. The guidance became effective for the Company for interim and annual reporting periods beginning on or after January 1, 2013. While the adoption of this guidance impacted the Company's disclosures, it did not affect the Company's results of operations, financial condition or cash flows.
6
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Non-Coal Trading Derivatives. The Company's non-coal trading derivative financial instruments are transacted in over-the-counter (OTC) markets with financial institutions under International Swaps and Derivatives Association (ISDA) Master Agreements. Those agreements contain symmetrical default provisions which allow for the net settlement of amounts owed by either counterparty in the event of default or contract termination. The Company offsets its non-coal trading asset and liability derivative positions on a counterparty-by-counterparty basis in the condensed consolidated balance sheets, with the fair values of those respective derivatives reflected in “Other current assets,” “Investments and other assets,” “Accounts payable and accrued expenses” and “Other noncurrent liabilities." Though the symmetrical default provisions associated with the Company's non-coal trading derivatives exist at the overall counterparty level across its foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios, it is the Company's accounting policy to apply counterparty offsetting separately within those derivative contract portfolios for presentation in the condensed consolidated balance sheets because that application is more consistent with the fact that the Company generally net settles its non-coal trading derivatives with each counterparty by derivative contract portfolio on a routine basis.
Coal Trading Derivatives. The Company's coal trading assets and liabilities include financial instruments, such as swaps, futures and options, cleared through various commodities exchanges, which involve the daily net settlement of closed positions. The Company is required to post cash collateral, known as variation margin, on exchange-cleared positions that are in a net liability position and entitled to receive variation margin when in a net asset position. The Company also transacts in coal trading financial swaps and options through OTC markets with financial institutions and other non-financial trading entities under 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, with the fair values of those respective derivatives reflected in “Assets from coal trading activities, net” and “Liabilities from coal trading activities, net."
Refer to Note 6. "Derivatives and Fair Value Measurements" and Note 7. "Coal Trading" herein for the additional quantitative disclosures related to this guidance.
Accumulated Other Comprehensive Income
In June 2011, the FASB issued accounting guidance, which was finalized in February 2013, that introduced new disclosure requirements requesting that entities provide additional information about reclassification adjustments out of accumulated other comprehensive income, including changes in accumulated other comprehensive income balances by component and significant reclassification items. The new disclosure requirements became effective for interim and annual reporting periods beginning after December 15, 2012 (January 1, 2013 for the Company). While the adoption of this guidance impacted the Company's disclosures, it did not affect the Company's results of operations, financial condition or cash flows. Refer to Note 12. "Accumulated Other Comprehensive Income" herein for the additional disclosures related to this guidance.
(3) Discontinued Operations
Discontinued operations include certain non-strategic former Midwestern U.S. and Australian Mining segment assets held for sale which the Company has committed to divest, former Midwestern U.S. Mining segment assets that have ceased production and other previously divested operations.
Results from discontinued operations were as follows during the three and six months ended June 30, 2013 and 2012:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Total revenues | $ | 35.6 | $ | 63.2 | $ | 67.7 | $ | 129.7 | ||||||||
Loss from discontinued operations before income taxes | $ | (16.1 | ) | $ | (9.9 | ) | $ | (32.7 | ) | $ | (19.0 | ) | ||||
Income tax benefit | 1.8 | 3.2 | 9.3 | 7.6 | ||||||||||||
Loss from discontinued operations, net of income taxes | $ | (14.3 | ) | $ | (6.7 | ) | $ | (23.4 | ) | $ | (11.4 | ) | ||||
7
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assets and liabilities classified as discontinued operations included in the Company's condensed consolidated balance sheets were as follows:
June 30, 2013 | December 31, 2012 | |||||||
(Dollars in millions) | ||||||||
Assets: | ||||||||
Other current assets | $ | 39.4 | $ | 37.5 | ||||
Investments and other assets | 142.6 | 140.8 | ||||||
Total assets classified as discontinued operations | $ | 182.0 | $ | 178.3 | ||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 31.8 | $ | 33.3 | ||||
Other noncurrent liabilities | 42.9 | 27.1 | ||||||
Total liabilities classified as discontinued operations | $ | 74.7 | $ | 60.4 | ||||
(4) Investments
Investments in available-for-sale securities at June 30, 2013 were as follows:
Available-for-sale securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Current: | ||||||||||||||||
Federal government securities | $ | 2.9 | $ | — | $ | — | $ | 2.9 | ||||||||
U.S. corporate bonds | 2.0 | — | — | 2.0 | ||||||||||||
Noncurrent: | ||||||||||||||||
Marketable equity securities | 10.9 | — | — | 10.9 | ||||||||||||
Federal government securities | 25.4 | 0.1 | (0.2 | ) | 25.3 | |||||||||||
U.S. corporate bonds | 17.7 | 0.1 | (0.1 | ) | 17.7 | |||||||||||
Total | $ | 58.9 | $ | 0.2 | $ | (0.3 | ) | $ | 58.8 | |||||||
Investments in available-for-sale securities at December 31, 2012 were as follows:
Available-for-sale securities | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Current: | ||||||||||||||||
U.S. corporate bonds | $ | 4.1 | $ | — | $ | — | $ | 4.1 | ||||||||
Noncurrent: | ||||||||||||||||
Marketable equity securities | 32.4 | — | — | 32.4 | ||||||||||||
Federal government securities | 32.0 | 0.2 | — | 32.2 | ||||||||||||
U.S. corporate bonds | 19.5 | 0.2 | — | 19.7 | ||||||||||||
Total | $ | 88.0 | $ | 0.4 | $ | — | $ | 88.4 | ||||||||
8
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's short-term investments are defined as those investments with original maturities, at the time of purchase, of greater than three months and up to one year and are included in "Other current assets" in the condensed consolidated balance sheets. Long-term investments are defined as those investments with original maturities, at the time of purchase, greater than one year and are included in "Investments and other assets" in the condensed consolidated balance sheets. The Company’s investments in marketable equity securities consist of an investment in Winsway Coking Coal Holdings Limited (Winsway). Those equity securities are included in "Investments and other assets" in the condensed consolidated balance sheets.
Contractual maturities for available-for-sale investments in debt securities at June 30, 2013 were as shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractual maturities for available-for-sale securities | Cost | Fair Value | ||||||
(Dollars in millions) | ||||||||
Due in one year or less | $ | 4.9 | $ | 4.9 | ||||
Due in one to five years | 43.1 | 43.0 | ||||||
Total | $ | 48.0 | $ | 47.9 | ||||
Proceeds from sales and maturities of debt securities shown in the tables above amounted to $4.1 million and $8.1 million for the three months ended June 30, 2013 and 2012, respectively, and $17.0 million and $9.8 million for the six months ended June 30, 2013 and 2012, respectively. The Company realized net gains of less than $0.1 million during the three and six months ended June 30, 2013 and 2012 associated with those sales and maturities. Purchases of debt securities shown in the tables above amounted to $5.2 million and $24.3 million for the three months ended June 30, 2013, and 2012, respectively, and $9.7 million and $24.3 million for the six months ended June 30, 2013 and 2012, respectively.
In addition to the securities described above, the Company held an investment in debt securities in 2012 related to the Company's pro-rata share of funding in the Newcastle Coal Infrastructure Group (NCIG). These debt securities are recorded at cost, which approximates fair value, and are denominated in U.S. dollars. The Company sold $16.4 million and $17.8 million of debt securities related to NCIG during the three and six months ended June 30, 2012, respectively. The Company recognized a loss of $0.2 million realized on the sale for the three and six months ended June 30, 2012. The Company did not have any investments in NCIG securities during the three and six months ended June 30, 2013.
At each reporting date, the Company performs separate evaluations of debt and equity securities to determine if any unrealized losses are other-than-temporary. After evaluating Winsway's credit downgrades, another of which occurred during the second quarter of 2013, and due to the duration and severity of the market losses incurred, the Company concluded that its investment in Winsway equity securities was other-than-temporarily impaired and, as such, recognized an impairment loss totaling $21.5 million on the investment during the three and six months ended June 30, 2013, resetting the Company's cost basis in that investment to $10.9 million. The Company will continue to evaluate its investments in debt and equity securities for impairment that is other than temporary at each reporting date.
In November 2012, the Company purchased $4.8 million of time deposits denominated in Chinese Renminbi with six month maturities. These investments were classified as held-to-maturity investments which were recorded at amortized cost, which approximates fair value, and were included in "Other current assets" in the condensed consolidated balance sheet at December 31, 2012. Proceeds from the maturity of these investments amounted to $4.8 million for the three and six months ended June 30, 2013. The Company did not have any held-to-maturity investments at June 30, 2013.
(5) Inventories
Inventories consisted of the following:
June 30, 2013 | December 31, 2012 | ||||||
(Dollars in millions) | |||||||
Materials and supplies | $ | 168.9 | $ | 157.6 | |||
Raw coal | 114.2 | 164.3 | |||||
Saleable coal | 298.5 | 226.5 | |||||
Total | $ | 581.6 | $ | 548.4 | |||
9
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Derivatives and Fair Value Measurements
Risk Management — Non-Coal Trading Activities
The Company is exposed to various types of risk in the normal course of business, including foreign currency exchange rate risk for non-U.S. dollar expenditures and balances, price risk on commodities utilized in the Company's mining operations and interest rate risk on long-term debt. The Company manages commodity price risk (excluding coal trading activities) related to the sale of coal, in part, through the use of long-term, fixed-price contracts, rather than through the use of derivative instruments. In order to manage its exposure related to price risk on certain commodities used in production, as well as for foreign currency exchange rate and interest rate risk, the Company utilizes derivative financial instruments. These risks are actively monitored in an effort to ensure compliance with the risk management policies of the Company.
Foreign Currency Hedges. The Company is exposed to foreign currency exchange rate risk, primarily on Australian dollar expenditures made in its Australian Mining segment. This risk is managed through the use of forward contracts and options that the Company designates as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted foreign currency expenditures.
Diesel Fuel and Explosives Hedges. The Company is exposed to commodity price risk associated with diesel fuel and explosives utilized in production in the U.S. and Australia. This risk is managed through the use of derivatives, primarily swaps, and to a lesser extent through the use of cost pass-through contracts. The Company generally designates the swap contracts as cash flow hedges, with the objective of reducing the variability of cash flows associated with forecasted diesel fuel and explosives purchases.
Interest Rate Swaps. The Company is exposed to interest rate risk on its fixed rate and variable rate long-term debt. From time to time, the Company manages the interest rate risk associated with the fair value of its fixed rate borrowings using fixed-to-floating interest rate swaps to effectively convert a portion of the underlying cash flows on the debt into variable rate cash flows. The Company designates these swaps as fair value hedges, with the objective of hedging against adverse changes in the fair value of the fixed rate debt that result from market interest rate changes. In addition, from time to time, interest rate risk associated with the Company’s variable rate borrowings is managed using floating-to-fixed interest rate swaps. The Company designates these swaps as cash flow hedges, with the objective of reducing the variability of cash flows associated with market interest rate changes. As of June 30, 2013, the Company had no interest rate swaps in place.
Notional Amounts and Fair Value. The following summarizes the Company’s foreign currency and commodity positions at June 30, 2013:
Notional Amount by Year of Maturity | |||||||||||||||||||||||
Total | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||
Foreign Currency | |||||||||||||||||||||||
A$:US$ hedge contracts (A$ millions) | $ | 5,608.4 | $ | 992.3 | $ | 1,888.5 | $ | 1,469.1 | $ | 856.5 | $ | 402.0 | |||||||||||
Commodity Contracts | |||||||||||||||||||||||
Diesel fuel hedge contracts (million gallons) | 198.3 | 52.9 | 83.8 | 50.6 | 11.0 | — | |||||||||||||||||
U.S. explosives hedge contracts (million MMBtu) | 2.3 | 1.1 | 1.2 | — | — | — | |||||||||||||||||
Account Classification by | ||||||||||||||||
Cash Flow Hedge | Fair Value Hedge | Economic Hedge | Fair Value of Net Liability | |||||||||||||
(Dollars in millions) | ||||||||||||||||
Foreign Currency | ||||||||||||||||
A$:US$ hedge contracts (A$ millions) | $ | 5,608.4 | $ | — | $ | — | $ | (314.2 | ) | |||||||
Commodity Contracts | ||||||||||||||||
Diesel fuel hedge contracts (million gallons) | 198.3 | — | — | (19.2 | ) | |||||||||||
U.S. explosives hedge contracts (million MMBtu) | 2.3 | — | — | (3.4 | ) | |||||||||||
10
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the net fair value of the Company’s non-coal trading commodity contract hedge positions held in “Accumulated other comprehensive (loss) income” at June 30, 2013, unrealized net losses expected to be reclassified from comprehensive income to earnings over the next 12 months associated with the Company’s diesel fuel and explosives hedge programs are approximately $10 million and $3 million, respectively. Based on net unrealized losses associated with the Company's foreign currency hedge contract portfolio and realized gains related to foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012 held in "Accumulated other comprehensive (loss) income" at June 30, 2013, the net loss expected to be reclassified from comprehensive income to earnings over the next twelve months associated with that hedge program is approximately $10 million. As these realized and unrealized gains and losses are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings will partially offset the effect of the realized underlying transactions.
Hedge Ineffectiveness. The Company assesses, both at inception and at least quarterly thereafter, whether the derivatives used in hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded in “Accumulated other comprehensive income” until the hedged transaction impacts reported earnings, at which time any gain or loss is reclassified to earnings. To the extent that periodic changes in the fair value of derivatives deemed highly effective exceeds such changes in the hedged item, the ineffective portion of the periodic non-cash changes are recorded in earnings in the period of the change. If the hedge ceases to qualify for hedge accounting, the Company prospectively recognizes changes in the fair value of the instrument in earnings in the period of the change.
A measure of ineffectiveness is inherent in hedging future diesel fuel purchases with derivative positions based on refined petroleum products as a result of location and/or product differences. Transportation surcharges, which may vary over time, for purchased diesel fuel in certain regions can also result in ineffectiveness, though such surcharges have historically changed infrequently and comprise a small portion of the total cost of delivered diesel.
The Company’s derivative positions for the hedging of future explosives purchases are based on natural gas, which is the primary price component of explosives. However, a small measure of ineffectiveness exists as the contractual purchase price includes manufacturing fees that are subject to periodic adjustments. In addition, other fees, such as storage and transportation surcharges, can result in ineffectiveness, but have historically changed infrequently and comprise a small portion of the total explosives cost.
The Company’s derivative positions for the hedging of forecasted foreign currency expenditures contain a small measure of ineffectiveness due to timing differences between the hedge settlement and the purchase transaction, which could differ by less than a day and up to a maximum of 30 days.
11
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below show the classification and amounts of pre-tax gains and losses related to the Company’s non-coal trading hedges during the three and six months ended June 30, 2013 and 2012:
Three Months Ended June 30, 2013 | ||||||||||||||||||
Financial Instrument | Income Statement Classification Gains (Losses) - Realized | Gain recognized in income on non-designated derivatives | Loss recognized in other comprehensive income on derivatives (effective portion) | Gain reclassified from other comprehensive income into income (effective portion) | Gain reclassified from other comprehensive income into income (ineffective portion) | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
Commodity swap contracts | Operating costs and expenses | $ | — | $ | (25.0 | ) | $ | 0.5 | $ | 0.1 | ||||||||
Foreign currency forward contracts | Operating costs and expenses | — | (492.6 | ) | 62.1 | — | ||||||||||||
Total | $ | — | $ | (517.6 | ) | $ | 62.6 | $ | 0.1 | |||||||||
Three Months Ended June 30, 2012 | ||||||||||||||||||
Financial Instrument | Income Statement Classification Gains (Losses) - Realized | Gain recognized in income on non-designated derivatives | Loss recognized in other comprehensive income on derivatives (effective portion) | Gain reclassified from other comprehensive income into income (effective portion) | Gain reclassified from other comprehensive income into income (ineffective portion) | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
Commodity swap contracts | Operating costs and expenses | $ | — | $ | (79.0 | ) | $ | 10.5 | $ | 0.1 | ||||||||
Foreign currency forward contracts | Operating costs and expenses | — | (12.0 | ) | 81.6 | — | ||||||||||||
Total | $ | — | $ | (91.0 | ) | $ | 92.1 | $ | 0.1 | |||||||||
Six Months Ended June 30, 2013 | ||||||||||||||||||
Financial Instrument | Income Statement Classification Gains (Losses) - Realized | Gain recognized in income on non-designated derivatives | Loss recognized in other comprehensive income on derivatives (effective portion) | Gain reclassified from other comprehensive income into income (effective portion) | Gain reclassified from other comprehensive income into income (ineffective portion) | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
Commodity swap contracts | Operating costs and expenses | $ | — | $ | (19.1 | ) | $ | 7.2 | $ | 0.3 | ||||||||
Foreign currency forward contracts | Operating costs and expenses | — | (453.9 | ) | 147.2 | — | ||||||||||||
Total | $ | — | $ | (473.0 | ) | $ | 154.4 | $ | 0.3 | |||||||||
Six Months Ended June 30, 2012 | ||||||||||||||||||
Financial Instrument | Income Statement Classification Gains (Losses) - Realized | Gain recognized in income on non-designated derivatives | Gain (loss) recognized in other comprehensive income on derivatives (effective portion) | Gain reclassified from other comprehensive income into income (effective portion) | Loss reclassified from other comprehensive income into income (ineffective portion) | |||||||||||||
(Dollars in millions) | ||||||||||||||||||
Commodity swap contracts | Operating costs and expenses | $ | — | $ | (20.9 | ) | $ | 27.8 | $ | (4.5 | ) | |||||||
Foreign currency forward contracts | Operating costs and expenses | — | 128.3 | 194.6 | — | |||||||||||||
Total | $ | — | $ | 107.4 | $ | 222.4 | $ | (4.5 | ) | |||||||||
12
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company classifies the cash effects of its non-coal trading derivatives within the "Cash Flows From Operating Activities" section of the unaudited condensed consolidated statements of cash flows during the period of settlement for those instruments.
Offsetting and Balance Sheet Presentation
The classification and amount of non-coal trading derivative financial instruments presented on a gross and net basis as of June 30, 2013 and December 31, 2012 are presented in the tables that follow.
Fair Value of Assets as of June 30, 2013 | ||||||||||||||||||||
Financial Instrument | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1) | Net Amount | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Current Assets: | ||||||||||||||||||||
Commodity swap contracts | $ | 3.0 | $ | (2.7 | ) | $ | 0.3 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 43.6 | (43.6 | ) | — | n.a. | n.a. | ||||||||||||||
Total | $ | 46.6 | $ | (46.3 | ) | $ | 0.3 | $ | (0.3 | ) | $ | — | ||||||||
Noncurrent Assets: | ||||||||||||||||||||
Commodity swap contracts | $ | 0.6 | $ | (0.5 | ) | $ | 0.1 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | — | — | — | n.a. | n.a. | |||||||||||||||
Total | $ | 0.6 | $ | (0.5 | ) | $ | 0.1 | $ | (0.1 | ) | $ | — | ||||||||
(1) | Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default. |
Fair Value of Liabilities as of June 30, 2013 | ||||||||||||||||||||
Financial Instrument | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet | Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1) | Net Amount | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||
Commodity swap contracts | $ | 16.1 | $ | (2.7 | ) | $ | 13.4 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 119.6 | (34.6 | ) | 85.0 | n.a. | n.a. | ||||||||||||||
Total | $ | 135.7 | $ | (37.3 | ) | $ | 98.4 | $ | (2.3 | ) | $ | 96.1 | ||||||||
Noncurrent Liabilities: | ||||||||||||||||||||
Commodity swap contracts | $ | 10.1 | $ | (0.5 | ) | $ | 9.6 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 238.2 | (9.0 | ) | 229.2 | n.a. | n.a. | ||||||||||||||
Total | $ | 248.3 | $ | (9.5 | ) | $ | 238.8 | $ | 1.9 | $ | 240.7 | |||||||||
(1) | Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default. |
13
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value of Assets as of December 31, 2012 | ||||||||||||||||||||
Financial Instrument | Gross Amounts of Recognized Assets | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1) | Net Amount | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Current Assets: | ||||||||||||||||||||
Commodity swap contracts | $ | 18.3 | $ | (3.8 | ) | $ | 14.5 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 260.1 | — | 260.1 | n.a. | n.a. | |||||||||||||||
Total | $ | 278.4 | $ | (3.8 | ) | $ | 274.6 | $ | (8.0 | ) | $ | 266.6 | ||||||||
Noncurrent Assets: | ||||||||||||||||||||
Commodity swap contracts | $ | 2.5 | $ | (1.4 | ) | $ | 1.1 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 27.6 | (0.8 | ) | 26.8 | n.a. | n.a. | ||||||||||||||
Total | $ | 30.1 | $ | (2.2 | ) | $ | 27.9 | $ | (3.4 | ) | $ | 24.5 | ||||||||
(1) | Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default. |
Fair Value of Liabilities as of December 31, 2012 | ||||||||||||||||||||
Financial Instrument | Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet | Derivatives Not Offset in the Condensed Consolidated Balance Sheet(1) | Net Amount | |||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Current Liabilities: | ||||||||||||||||||||
Commodity swap contracts | $ | 8.5 | $ | (2.8 | ) | $ | 5.7 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | — | — | — | n.a. | n.a. | |||||||||||||||
Total | $ | 8.5 | $ | (2.8 | ) | $ | 5.7 | $ | (5.7 | ) | $ | — | ||||||||
Noncurrent Liabilities: | ||||||||||||||||||||
Commodity swap contracts | $ | 8.3 | $ | (2.4 | ) | $ | 5.9 | n.a. | n.a. | |||||||||||
Foreign currency forward contracts | 0.8 | (0.8 | ) | — | n.a. | n.a. | ||||||||||||||
Total | $ | 9.1 | $ | (3.2 | ) | $ | 5.9 | $ | (5.7 | ) | $ | 0.2 | ||||||||
(1) | Adjustments relate to the further netting of derivative contracts with a common counterparty across the Company's foreign currency, diesel fuel and explosives hedging strategy derivative contract portfolios that would be contractually enforceable in the event of default. |
See Note 7. "Coal Trading" for information on balance sheet offsetting related to the Company’s coal trading activities.
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.
14
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Instruments Measured on a Recurring Basis. The following tables set forth the hierarchy of the Company’s net financial asset (liability) positions for which fair value is measured on a recurring basis:
June 30, 2013 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Dollars in millions) | |||||||||||||||
Investments in debt and equity securities | $ | 47.3 | $ | 11.5 | $ | — | $ | 58.8 | |||||||
Commodity swap contracts | — | (22.6 | ) | — | (22.6 | ) | |||||||||
Foreign currency forward contracts | — | (314.2 | ) | — | (314.2 | ) | |||||||||
Total net financial assets (liabilities) | $ | 47.3 | $ | (325.3 | ) | $ | — | $ | (278.0 | ) | |||||
December 31, 2012 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Dollars in millions) | |||||||||||||||
Investments in debt and equity securities | $ | 75.4 | $ | 13.0 | $ | — | $ | 88.4 | |||||||
Commodity swap contracts | — | 4.0 | — | 4.0 | |||||||||||
Foreign currency forward contracts | — | 286.9 | — | 286.9 | |||||||||||
Total net financial assets | $ | 75.4 | $ | 303.9 | $ | — | $ | 379.3 | |||||||
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 quotes, published indices and other market quotes. Below is a summary of the Company’s valuation techniques for Level 1 and 2 financial assets and liabilities:
• | Investments in debt and equity securities: corporate bonds and U.S. government treasury instruments and marketable equity securities are valued based on quoted prices in active markets (Level 1) and U.S. government agency securities are valued based on derived prices in active markets (Level 2). |
• | Commodity swap contracts — diesel fuel and explosives: valued based on a valuation that is corroborated by the use of market-based pricing (Level 2). |
• | Foreign currency forward and option contracts: valued utilizing inputs obtained in quoted public markets (Level 2). |
The Company did not have any transfers between levels during the three and six months ended June 30, 2013 or 2012 for its non-coal trading positions. The Company’s policy is to value transfers between levels using the beginning of period valuation.
Other Financial Instruments. The following methods and assumptions were used by the Company in estimating fair values for other financial instruments as of June 30, 2013 and December 31, 2012:
• | Cash and cash equivalents, 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. |
• | Held-to-maturity investments in time deposits denominated in Chinese Renminbi of $4.8 million held as of December 31, 2012 had carrying values based on amortized cost which approximated fair value due to the short maturity of the investments. Those time deposits matured during the six months ended June 30, 2013. |
• | 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). The carrying amounts of the 7.875% Senior Notes due December 2026 and the Convertible Junior Subordinated Debentures due 2066 (the Debentures) are net of the respective unamortized note discounts. |
15
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts and estimated fair values of the Company’s long-term debt are summarized as follows:
June 30, 2013 | December 31, 2012 | ||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
(Dollars in millions) | |||||||||||||||
Long-term debt | $ | 5,988.0 | $ | 5,903.4 | $ | 6,252.9 | $ | 6,583.9 | |||||||
Nonperformance and Credit Risk
The fair value of the Company’s non-coal trading derivative assets and liabilities reflects adjustments for nonperformance and credit risk. The Company manages its counterparty risk through established credit standards, diversification of counterparties, utilization of investment grade commercial banks, adherence to established tenor limits based on counterparty creditworthiness and continuous monitoring of that creditworthiness. To reduce its credit exposure for these hedging activities, the Company seeks to enter into netting agreements with counterparties that permit the Company to offset asset and liability positions with such counterparties in the event of default.
(7) Coal Trading
The Company engages in the direct and brokered trading of coal and freight-related contracts (coal trading). Except those 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.
The Company's policy is to include instruments associated with coal trading transactions as a part of its trading book. Trading revenues from such transactions are recorded in “Other revenues” in the unaudited condensed consolidated statements of operations and 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. Therefore, the Company has elected the trading exemption surrounding disclosures related to its coal trading activities.
Trading revenues recognized during the three and six months ended June 30, 2013 and 2012 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
Trading Revenues by Type of Instrument | 2013 | 2012 | 2013 | 2012 | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Commodity futures, swaps and options | $ | 34.9 | $ | 39.8 | $ | 85.9 | $ | 50.6 | ||||||||
Physical commodity purchase/sale contracts | (38.3 | ) | 32.8 | (63.4 | ) | 41.9 | ||||||||||
Total trading revenues | $ | (3.4 | ) | $ | 72.6 | $ | 22.5 | $ | 92.5 | |||||||
Risk Management
Hedge Ineffectiveness. The Company assesses, both at inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging activities are highly effective at offsetting the changes in the anticipated cash flows of the hedged item. The effective portion of the change in the fair value is recorded in “Accumulated other comprehensive (loss) income” until the hedged transaction impacts reported earnings, at which time gains and losses are also reclassified to earnings. To the extent that periodic changes in the fair value of a derivative exceeds the changes in the hedged item to which it has been designated, the ineffective portion is recorded in earnings in the period of the change. If the hedge ceases to qualify for hedge accounting, the Company prospectively recognizes the changes in fair value of the instrument in earnings in the period of the change.
16
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In some instances, the Company has designated an existing coal trading derivative as a hedge and, thus, the derivative has a non-zero fair value at hedge inception. The “off-market” nature of these derivatives, which is best described as an embedded financing element within the derivative, is a source of ineffectiveness. In other instances, the Company uses a coal trading derivative that settles at a different time, has different quality specifications or has a different location basis than the occurrence of the cash flow being hedged. These collectively yield ineffectiveness to the extent that the derivative hedge contract does not exactly offset changes in the fair value or expected cash flows of the hedged item.
The gross fair value of coal trading positions designated as cash flow hedges of forecasted sales was an asset of $164.8 million and $153.1 million as of June 30, 2013 and December 31, 2012, respectively. Based on the net fair value of the Company’s coal trading positions held in “Accumulated other comprehensive (loss) income” at June 30, 2013, unrealized gains to be reclassified from comprehensive income to earnings over the next 12 months are expected to be approximately $140 million. As these unrealized gains are associated with derivative instruments that represent hedges of forecasted transactions, the amounts reclassified to earnings may partially offset the effect of the realized underlying transactions in the unaudited condensed consolidated statements of operations.
Offsetting and Balance Sheet Presentation
The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of June 30, 2013 and December 31, 2012 is set forth below:
Affected line item in the condensed consolidated balance sheets | Gross Amounts of Recognized Assets (Liabilities) | Gross Amounts Offset in the Condensed Consolidated Balance Sheets | Variation margin (held) posted (1) | Net Amounts of Assets (Liabilities) Presented in the Condensed Consolidated Balance Sheets | ||||||||||||
(Dollars in millions) | ||||||||||||||||
Fair Value as of June 30, 2013 | ||||||||||||||||
Assets from coal trading activities, net | $ | 693.8 | $ | (507.8 | ) | $ | (129.4 | ) | $ | 56.6 | ||||||
Liabilities from coal trading activities, net | (528.0 | ) | 507.8 | 3.2 | (17.0 | ) | ||||||||||
Total, Net | $ | 165.8 | $ | — | $ | (126.2 | ) | $ | 39.6 | |||||||
Fair Value as of December 31, 2012 | ||||||||||||||||
Assets from coal trading activities, net | $ | 380.4 | $ | (170.8 | ) | $ | (157.2 | ) | $ | 52.4 | ||||||
Liabilities from coal trading activities, net | (190.5 | ) | 170.8 | 0.3 | (19.4 | ) | ||||||||||
Total, Net | $ | 189.9 | $ | — | $ | (156.9 | ) | $ | 33.0 | |||||||
(1) | Approximately $88 million and $76 million of the net variation margin held at June 30, 2013 and December 31, 2012, respectively, related to cash flow hedges. |
See Note 6. "Derivatives and Fair Value Measurements" for information on balance sheet offsetting related to the Company’s non-coal trading activities.
17
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurements
The following tables set forth the hierarchy of the Company’s net financial asset coal trading positions for which fair value is measured on a recurring basis as of June 30, 2013 and December 31, 2012:
June 30, 2013 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Dollars in millions) | |||||||||||||||
Commodity futures, swaps and options | $ | — | $ | 40.3 | $ | — | $ | 40.3 | |||||||
Physical commodity purchase/sale contracts | — | (2.0 | ) | 1.3 | (0.7 | ) | |||||||||
Total net financial assets | $ | — | $ | 38.3 | $ | 1.3 | $ | 39.6 | |||||||
December 31, 2012 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
(Dollars in millions) | |||||||||||||||
Commodity futures, swaps and options | $ | 1.2 | $ | 24.4 | $ | — | $ | 25.6 | |||||||
Physical commodity purchase/sale contracts | — | 2.2 | 5.2 | 7.4 | |||||||||||
Total net financial assets | $ | 1.2 | $ | 26.6 | $ | 5.2 | $ | 33.0 | |||||||