BTU_2014.03.31.10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
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þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014 |
or
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¨ 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)
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| | |
Delaware | | 13-4004153 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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.
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| 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 271,319,439 shares of the registrant's common stock (par value of $0.01 per share) outstanding at May 2, 2014.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions, except per share data) |
Revenues | | | | |
Sales | | $ | 1,470.2 |
| | $ | 1,577.2 |
|
Other revenues | | 156.6 |
| | 170.8 |
|
Total revenues | | 1,626.8 |
| | 1,748.0 |
|
Costs and expenses | |
| | |
Operating costs and expenses (exclusive of items shown separately below) | | 1,394.8 |
| | 1,389.4 |
|
Depreciation, depletion and amortization | | 157.2 |
| | 170.7 |
|
Asset retirement obligation expenses | | 15.6 |
| | 19.0 |
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Selling and administrative expenses | | 59.5 |
| | 65.1 |
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Other operating (income) loss: | | | | |
Net gain on disposal or exchange of assets | | (9.8 | ) | | (2.6 | ) |
Loss from equity affiliates | | 6.6 |
| | 17.6 |
|
Operating profit |
| 2.9 |
| | 88.8 |
|
Interest expense | | 103.3 |
| | 101.3 |
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Interest income | | (3.6 | ) | | (5.9 | ) |
Loss from continuing operations before income taxes | | (96.8 | ) | | (6.6 | ) |
Income tax (benefit) provision | | (52.5 | ) | | 3.7 |
|
Loss from continuing operations, net of income taxes | | (44.3 | ) | | (10.3 | ) |
Income (loss) from discontinued operations, net of income taxes | | 0.2 |
| | (9.1 | ) |
Net loss | | (44.1 | ) | | (19.4 | ) |
Less: Net income attributable to noncontrolling interests | | 4.4 |
| | 4.0 |
|
Net loss attributable to common stockholders | | $ | (48.5 | ) | | $ | (23.4 | ) |
| | | | |
Loss from continuing operations: | | | | |
Basic loss per share | | $ | (0.18 | ) | | $ | (0.05 | ) |
Diluted loss per share | | $ | (0.18 | ) | | $ | (0.05 | ) |
| | | | |
Net loss attributable to common stockholders: | | | | |
Basic loss per share | | $ | (0.18 | ) | | $ | (0.09 | ) |
Diluted loss per share | | $ | (0.18 | ) | | $ | (0.09 | ) |
| | | | |
Dividends declared per share | | $ | 0.085 |
| | $ | 0.085 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2014 | | 2013 |
| (Dollars in millions) |
Net loss | | $ | (44.1 | ) | | $ | (19.4 | ) |
Other comprehensive income (loss), net of income taxes: | | | | |
Net change in unrealized holding losses on available-for-sale securities (net of respective tax benefits of $1.1 and $3.8) | | | | |
Unrealized holding losses on available-for-sale securities | | (1.8 | ) | | (6.2 | ) |
Less: Reclassification for realized gains included in net loss | | — |
| | (0.1 | ) |
Net change in unrealized losses on available-for-sale securities | | (1.8 | ) | | (6.3 | ) |
Net unrealized gains (losses) on cash flow hedges (net of respective tax provision (benefit) of $68.9 and ($10.9)) | | | | |
Increase in fair value of cash flow hedges | | 116.2 |
| | 68.7 |
|
Less: Reclassification for realized losses (gains) included in net loss | | 5.6 |
| | (77.1 | ) |
Net unrealized gains (losses) on cash flow hedges | | 121.8 |
| | (8.4 | ) |
Postretirement plans and workers' compensation obligations (net of respective tax (benefit) provision of ($6.2) and $8.3) | | | | |
Prior service cost for the period | | (17.4 | ) | | — |
|
Amortization of actuarial loss and prior service cost included in net loss | | 6.8 |
| | 14.2 |
|
Postretirement plans and workers' compensation obligations | | (10.6 | ) | | 14.2 |
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Foreign currency translation adjustment | | 16.5 |
| | 1.1 |
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Other comprehensive income, net of income taxes | | 125.9 |
| | 0.6 |
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Comprehensive income (loss) | | 81.8 |
| | (18.8 | ) |
Less: Comprehensive income attributable to noncontrolling interests | | 4.4 |
| | 4.0 |
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Comprehensive income (loss) attributable to common stockholders | | $ | 77.4 |
| | $ | (22.8 | ) |
See accompanying notes to unaudited condensed consolidated financial statements.
PEABODY ENERGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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| | | | | | | | |
| | (Unaudited) | | |
| | March 31, 2014 | | December 31, 2013 |
| | (In millions, except per share data) |
ASSETS | | | | |
Current assets | | | | |
Cash and cash equivalents | | $ | 508.1 |
| | $ | 444.0 |
|
Accounts receivable, net of allowance for doubtful accounts of $7.5 at March 31, 2014 and $7.4 at December 31, 2013 | | 454.4 |
| | 557.9 |
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Inventories | | 549.4 |
| | 506.7 |
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Assets from coal trading activities, net | | 50.2 |
| | 36.1 |
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Deferred income taxes | | 64.2 |
| | 66.4 |
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Other current assets | | 283.9 |
| | 381.6 |
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Total current assets | | 1,910.2 |
| | 1,992.7 |
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Property, plant, equipment and mine development, net | | 10,855.4 |
| | 11,082.5 |
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Deferred income taxes | | 62.3 |
| | 7.8 |
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Investments and other assets | | 1,017.2 |
| | 1,050.4 |
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Total assets | | $ | 13,845.1 |
| | $ | 14,133.4 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Current liabilities | | | | |
Current maturities of long-term debt | | $ | 20.8 |
| | $ | 31.7 |
|
Deferred income taxes | | 7.3 |
| | — |
|
Liabilities from coal trading activities, net | | 11.6 |
| | 6.1 |
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Accounts payable and accrued expenses | | 1,559.9 |
| | 1,737.7 |
|
Total current liabilities | | 1,599.6 |
| | 1,775.5 |
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Long-term debt, less current maturities | | 5,977.4 |
| | 5,970.7 |
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Deferred income taxes | | 31.1 |
| | 40.9 |
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Asset retirement obligations | | 715.2 |
| | 712.8 |
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Accrued postretirement benefit costs | | 711.3 |
| | 684.0 |
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Other noncurrent liabilities | | 794.8 |
| | 1,001.6 |
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Total liabilities | | 9,829.4 |
| | 10,185.5 |
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Stockholders’ equity | | | | |
Preferred Stock — $0.01 per share par value; 10.0 shares authorized; no shares issued or outstanding as of March 31, 2014 or December 31, 2013 | | — |
| | — |
|
Perpetual Preferred Stock — 0.8 shares authorized, no shares issued or outstanding as of March 31, 2014 or December 31, 2013 | | — |
| | — |
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Series Common Stock — $0.01 per share par value; 40.0 shares authorized, no shares issued or outstanding as of March 31, 2014 or December 31, 2013 | | — |
| | — |
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Common Stock — $0.01 per share par value; 800.0 shares authorized, 285.2 shares issued and 271.3 shares outstanding as of March 31, 2014 and 283.9 shares issued and 270.1 shares outstanding as of December 31, 2013 | | 2.9 |
| | 2.8 |
|
Additional paid-in capital | | 2,351.8 |
| | 2,340.0 |
|
Treasury stock, at cost — 13.9 shares as of March 31, 2014 and 13.8 shares as of December 31, 2013 | | (466.7 | ) | | (464.7 | ) |
Retained earnings | | 2,378.2 |
| | 2,449.8 |
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Accumulated other comprehensive loss | | (293.3 | ) | | (419.2 | ) |
Peabody Energy Corporation stockholders’ equity | | 3,972.9 |
| | 3,908.7 |
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Noncontrolling interests | | 42.8 |
| | 39.2 |
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Total stockholders’ equity | | 4,015.7 |
| | 3,947.9 |
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Total liabilities and stockholders’ equity | | $ | 13,845.1 |
| | $ | 14,133.4 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions) |
Cash Flows From Operating Activities | | | | |
Net loss | | $ | (44.1 | ) | | $ | (19.4 | ) |
(Income) loss from discontinued operations, net of income taxes | | (0.2 | ) | | 9.1 |
|
Loss from continuing operations, net of income taxes | | (44.3 | ) | | (10.3 | ) |
Adjustments to reconcile loss from continuing operations, net of income taxes to net cash provided by operating activities: | | | | |
Depreciation, depletion and amortization | | 157.2 |
| | 170.7 |
|
Noncash interest expense | | 5.9 |
| | 5.6 |
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Deferred income taxes | | (69.9 | ) | | (47.8 | ) |
Share-based compensation | | 13.5 |
| | 11.8 |
|
Net gain on disposal or exchange of assets | | (9.8 | ) | | (2.6 | ) |
Loss from equity affiliates | | 6.6 |
| | 17.6 |
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Gains on previously monetized foreign currency hedge positions | | (40.9 | ) | | — |
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Changes in current assets and liabilities: | | | | |
Accounts receivable | | 47.5 |
| | 77.5 |
|
Change in receivable from accounts receivable securitization program | | 55.0 |
| | — |
|
Inventories | | (42.7 | ) | | (23.3 | ) |
Net assets from coal trading activities | | (5.7 | ) | | 25.3 |
|
Other current assets | | (5.5 | ) | | 7.1 |
|
Accounts payable and accrued expenses | | 47.1 |
| | 43.5 |
|
Asset retirement obligations | | 9.5 |
| | 12.7 |
|
Accrued postretirement benefit costs | | 3.6 |
| | 3.8 |
|
Accrued pension costs | | 5.4 |
| | 12.5 |
|
Other, net | | (5.6 | ) | | (16.6 | ) |
Net cash provided by continuing operations | | 126.9 |
| | 287.5 |
|
Net cash used in discontinued operations | | (72.8 | ) | | (15.8 | ) |
Net cash provided by operating activities | | 54.1 |
| | 271.7 |
|
Cash Flows From Investing Activities | | | | |
Additions to property, plant, equipment and mine development | | (24.4 | ) | | (74.0 | ) |
Changes in accrued expenses related to capital expenditures | | (18.3 | ) | | (66.4 | ) |
Proceeds from disposal of assets, net of notes receivable | | 99.8 |
| | 53.0 |
|
Purchases of debt securities | | (2.0 | ) | | (4.6 | ) |
Proceeds from sales and maturities of debt securities | | 0.4 |
| | 12.9 |
|
Contributions to joint ventures | | (151.8 | ) | | (154.1 | ) |
Distributions from joint ventures | | 138.2 |
| | 174.3 |
|
Advances to related parties | | (3.1 | ) | | (23.1 | ) |
Repayments of loans from related parties | | 1.5 |
| | 14.8 |
|
Other, net | | (0.6 | ) | | (1.0 | ) |
Net cash provided by (used in) continuing operations | | 39.7 |
| | (68.2 | ) |
Net cash used in discontinued operations | | — |
| | (0.1 | ) |
Net cash provided by (used in) investing activities | | 39.7 |
| | (68.3 | ) |
Cash Flows From Financing Activities | | | | |
Repayments of long-term debt | | (5.2 | ) | | (108.5 | ) |
Dividends paid | | (23.1 | ) | | (22.9 | ) |
Repurchase of employee common stock relinquished for tax withholding | | (2.0 | ) | | (2.6 | ) |
Other, net | | 0.6 |
| | 1.3 |
|
Net cash used in financing activities | | (29.7 | ) | | (132.7 | ) |
Net change in cash and cash equivalents | | 64.1 |
| | 70.7 |
|
Cash and cash equivalents at beginning of period | | 444.0 |
| | 558.8 |
|
Cash and cash equivalents at end of period | | $ | 508.1 |
| | $ | 629.5 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
PEABODY ENERGY CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Peabody Energy Corporation Stockholders’ Equity | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interests | | Total Stockholders’ Equity |
| (Dollars in millions) |
December 31, 2013 | $ | 2.8 |
| | $ | 2,340.0 |
| | $ | (464.7 | ) | | $ | 2,449.8 |
| | $ | (419.2 | ) | | $ | 39.2 |
| | $ | 3,947.9 |
|
Net (loss) income | — |
| | — |
| | — |
| | (48.5 | ) | | — |
| | 4.4 |
| | (44.1 | ) |
Net change in unrealized holding losses on available-for-sale securities (net of $1.1 tax benefit) | — |
| | — |
| | — |
| | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
Net unrealized gains on cash flow hedges (net of $68.9 tax provision) | — |
| | — |
| | — |
| | — |
| | 121.8 |
| | — |
| | 121.8 |
|
Postretirement plans and workers’ compensation obligations (net of $6.2 tax benefit) | — |
| | — |
| | — |
| | — |
| | (10.6 | ) | | — |
| | (10.6 | ) |
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 16.5 |
| | — |
| | 16.5 |
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Dividends paid | — |
| | — |
| | — |
| | (23.1 | ) | | — |
| | — |
| | (23.1 | ) |
Share-based compensation | — |
| | 13.5 |
| | — |
| | — |
| | — |
| | — |
| | 13.5 |
|
Write-off of excess tax benefits related to share-based compensation | — |
| | (4.8 | ) | | — |
| | — |
| | — |
| | — |
| | (4.8 | ) |
Stock options exercised | 0.1 |
| | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | 0.6 |
|
Employee stock purchases | — |
| | 2.6 |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
|
Repurchase of employee common stock relinquished for tax withholding | — |
| | — |
| | (2.0 | ) | | — |
| | — |
| | — |
| | (2.0 | ) |
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (0.8 | ) | | (0.8 | ) |
March 31, 2014 | $ | 2.9 |
| | $ | 2,351.8 |
| | $ | (466.7 | ) | | $ | 2,378.2 |
| | $ | (293.3 | ) | | $ | 42.8 |
| | $ | 4,015.7 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
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. Certain prior year amounts have been reclassified to conform with 2014 presentation.
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, 2013. 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, 2013 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, 2014 are not necessarily indicative of the results that may be expected for future quarters or for the year ending December 31, 2014.
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. Previously effective U.S. GAAP did not provide explicit guidance on the topic. The new presentation guidance became effective for interim and annual periods beginning after December 15, 2013 (January 1, 2014 for the Company). The adoption of the guidance, which the Company applied prospectively beginning in the first quarter of 2014, had no material effect on the Company's results of operations, financial condition, cash flows or financial statement presentation.
Discontinued Operations
In April 2014, the Financial Accounting Standards Board (FASB) issued accounting guidance that raised the threshold for disposals to qualify as discontinued operations to a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. Such a strategic shift may include the disposal of (1) a major geographical area of operations, (2) a major line of business, (3) a major equity method investment or (4) other major parts of an entity. Provided that the major strategic shift criterion is met, the new guidance does allow entities to have significant continuing involvement and continuing cash flows with the discontinued operation, unlike current U.S. GAAP. The new standard also requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The new guidance will apply prospectively to disposals that occur in interim and annual periods beginning on or after December 31, 2014 (January 1, 2015 for the Company), with early adoption permitted for disposals or new classifications of assets as held for sale that have not been reported in previously issued financial statements. The impact to the Company will be dependent on disposal activity that occurs during and subsequent to the period of adoption.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) Asset Realization
The Company's mining and exploration assets and mining-related investments may be adversely affected by numerous uncertain factors that may cause the Company to be unable to recover all or a portion of the carrying value of those assets. As a result of various unfavorable conditions, including but not limited to sustained trends of weakness in U.S. and international seaborne coal market pricing and certain asset-specific factors, the Company recognized aggregate impairment charges of $528.3 million and $910.9 million during the years ended December 31, 2013 and 2012, respectively. For additional information surrounding those charges, refer to Note 2. "Asset Impairment and Mine Closures Costs" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
The Company generally does not view short-term declines subsequent to previous impairment assessments in thermal and metallurgical coal prices in the markets in which it sells its products, such as the decline in benchmark pricing for seaborne metallurgical and thermal coal that occurred during the three months ended March 31, 2014, as an indicator of impairment. However, the Company generally does view a sustained trend of adverse changes in coal market pricing (for example, over periods exceeding one year) as an indicator of potential impairment and, because of the volatile and cyclical nature of U.S. and international seaborne coal markets, it is reasonably possible that such prices may not improve or decrease further in the near term, which may result in the need for future adjustments to the carrying value of the Company's long-lived mining assets and mining-related investments. The Company's assets with values most sensitive to near-term pricing include mines in Australia with comparatively shorter remaining lives and mining-related investments, which assets had an aggregate carrying value of $249.4 million as of March 31, 2014.
(4) Discontinued Operations
Discontinued operations include former Australian Mining and Midwestern U.S. Mining segment assets that have ceased production and other previously divested operations.
Summarized Results of Discontinued Operations
Results from discontinued operations were as follows during the three months ended March 31, 2014 and 2013:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions) |
Loss from discontinued operations before income taxes | | $ | (0.1 | ) | | $ | (16.6 | ) |
Income tax benefit | | 0.3 |
| | 7.5 |
|
Income (loss) from discontinued operations, net of income taxes | | $ | 0.2 |
| | $ | (9.1 | ) |
There were no significant revenues from discontinued operations during the three months ended March 31, 2014. Total revenues associated with discontinued operations amounted to $32.1 million during the three months ended March 31, 2013.
Assets and Liabilities of Discontinued Operations
The carrying amounts of assets and liabilities classified as discontinued operations included in the Company's condensed consolidated balance sheets were as follows:
|
| | | | | | | | |
| | March 31, 2014 | | December 31, 2013 |
| | (Dollars in millions) |
Assets: | | | | |
Other current assets | | $ | 3.1 |
| | $ | 38.6 |
|
Investments and other assets | | 21.9 |
| | 47.4 |
|
Total assets classified as discontinued operations | | $ | 25.0 |
| | $ | 86.0 |
|
| | | | |
Liabilities: | | | | |
Accounts payable and accrued expenses | | $ | 47.2 |
| | $ | 127.8 |
|
Other noncurrent liabilities | | 87.9 |
| | 90.2 |
|
Total liabilities classified as discontinued operations | | $ | 135.1 |
| | $ | 218.0 |
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Settlement Agreement with Patriot and the UMWA. Pursuant to the definitive settlement agreement reached in 2013 with Patriot Coal Corporation and certain of its wholly owned subsidiaries (Patriot) and the United Mine Workers of America (UMWA) on behalf of itself, its represented Patriot employees and its represented Patriot retirees, the Company remitted a payment of $70 million to Patriot in January 2014. Refer to Note 18. "Commitments and Contingencies" for additional details surrounding that settlement agreement.
Mine Closure Costs. In December 2013, the Company ceased production and commenced the final reclamation of the Wilkie Creek Mine in Queensland, Australia and correspondingly accrued for potential port and rail take-or-pay contractual liabilities and certain other exit costs at that time. The following table summarizes the changes in those liabilities for the three months ended March 31, 2014:
|
| | | | | | | | | | | | |
| | Accrued Take-or-Pay Liabilities | | Other Exit Costs | | Total |
| | (Dollars in millions) |
Liability balance at December 31, 2013 | | $ | 33.9 |
| | $ | 2.7 |
| | $ | 36.6 |
|
Cash payments | | (3.5 | ) | | (2.4 | ) | | (5.9 | ) |
Foreign currency remeasurement expense | | 0.9 |
| | — |
| | 0.9 |
|
Liability balance at March 31, 2014 | | $ | 31.3 |
| | $ | 0.3 |
| | $ | 31.6 |
|
The Company expects the majority of the remaining cash expenditures associated with the liabilities presented above to occur within the next twelve months. In addition to those closure-related liabilities, the Company's unaudited condensed consolidated balance sheet at March 31, 2014 included $48.2 million of asset retirement obligations related to Wilkie Creek.
(5) Investments
Investments in available-for-sale securities at March 31, 2014 were as follows:
|
| | | | | | | | | | | | | | | | |
Available-for-sale securities | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (Dollars in millions) |
Current: | | | | | | | | |
Federal government securities | | $ | 2.8 |
| | $ | — |
| | $ | — |
| | $ | 2.8 |
|
U.S. corporate bonds | | 10.6 |
| | 0.1 |
| | — |
| | 10.7 |
|
Noncurrent: | | | | | | | | |
Marketable equity securities | | 10.9 |
| | — |
| | (1.7 | ) | | 9.2 |
|
Federal government securities | | 28.8 |
| | — |
| | (0.1 | ) | | 28.7 |
|
U.S. corporate bonds | | 14.1 |
| | — |
| | — |
| | 14.1 |
|
Total | | $ | 67.2 |
| | $ | 0.1 |
| | $ | (1.8 | ) | | $ | 65.5 |
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments in available-for-sale securities at December 31, 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 | | $ | 2.8 |
| | $ | — |
| | $ | — |
| | $ | 2.8 |
|
U.S. corporate bonds | | 2.4 |
| | — |
| | — |
| | 2.4 |
|
Noncurrent: | | | | | | | | |
Marketable equity securities | | 10.9 |
| | 1.3 |
| | — |
| | 12.2 |
|
Federal government securities | | 28.8 |
| | — |
| | (0.1 | ) | | 28.7 |
|
U.S. corporate bonds | | 20.8 |
| | 0.1 |
| | — |
| | 20.9 |
|
Total | | $ | 65.7 |
| | $ | 1.4 |
| | $ | (0.1 | ) | | $ | 67.0 |
|
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 March 31, 2014 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 | | $ | 13.4 |
| | $ | 13.5 |
|
Due in one to five years | | 42.9 |
| | 42.8 |
|
Total | | $ | 56.3 |
| | $ | 56.3 |
|
Proceeds from sales and maturities of debt securities shown in the tables above amounted to $0.4 million and $12.9 million for the three months ended March 31, 2014 and 2013, respectively. The Company realized net gains of $0.1 million or less during each of the three months ended March 31, 2014 and 2013 associated with those sales and maturities using the specific identification method. Purchases of debt securities shown in the tables above amounted to $2.0 million and $4.6 million for the three months ended March 31, 2014 and 2013, respectively.
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 the length of time market value has been less than cost and the financial conditions and near-term prospects of Winsway, the Company deemed the unrealized loss incurred during the three months ended March 31, 2014 associated with its investment in Winsway equity securities to be temporary and the change during the period to be generally consistent with the trend of equity securities across the coal mining industry. The Company has the ability to hold the securities until recovery and has no current intention to divest the securities. Accordingly, the Company did not recognize other-than-temporary losses on its investments during the three months ended March 31, 2014.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) Inventories
Inventories as of March 31, 2014 and December 31, 2013 consisted of the following:
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| (Dollars in millions) |
Materials and supplies | $ | 168.2 |
| | $ | 166.8 |
|
Raw coal | 134.2 |
| | 122.6 |
|
Saleable coal | 247.0 |
| | 217.3 |
|
Total | $ | 549.4 |
| | $ | 506.7 |
|
Materials and supplies inventories presented above have been shown net of reserves of $7.1 million and $7.4 million as of March 31, 2014 and December 31, 2013, respectively.
(7) 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 coal supply agreements (those with terms longer than one year), 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 March 31, 2014, the Company had no interest rate swaps in place.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Notional Amounts and Fair Value. The following summarizes the Company’s foreign currency and commodity positions at March 31, 2014:
|
| | | | | | | | | | | | | | | | | | | |
| Notional Amount by Year of Maturity |
| Total | | 2014 | | 2015 | | 2016 | | 2017 |
Foreign Currency | | | |
| | |
| | |
| | |
|
A$:US$ hedge contracts (A$ millions) | $ | 4,630.4 |
| | $ | 1,501.3 |
| | $ | 1,645.1 |
| | $ | 997.0 |
| | $ | 487.0 |
|
Commodity Contracts | | | | | | | | | |
Diesel fuel hedge contracts (million gallons) | 200.5 |
| | 79.0 |
| | 74.2 |
| | 42.0 |
| | 5.3 |
|
U.S. explosives hedge contracts (million MMBtu) | 0.8 |
| | 0.8 |
| | — |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | |
| Instrument Classification by | | | |
| Cash Flow Hedge | | Fair Value Hedge | | Economic Hedge | | | Fair Value Liability |
| | | | | | | | (Dollars in millions) |
Foreign Currency | | | | | | | | |
A$:US$ hedge contracts (A$ millions) | $ | 4,630.4 |
| | $ | — |
| | $ | — |
| | | $ | (238.0 | ) |
Commodity Contracts | | | | | | | | |
Diesel fuel hedge contracts (million gallons) | 200.5 |
| | — |
| | — |
| | | (0.5 | ) |
U.S. explosives hedge contracts (million MMBtu) | 0.8 |
| | — |
| | — |
| | | (0.5 | ) |
Based on the net fair value of the Company’s non-coal trading commodity contract hedge positions held in “Accumulated other comprehensive loss” at March 31, 2014, the Company expects to reclassify an unrealized net gain associated with the Company's diesel fuel hedge programs of approximately $0.1 million and an unrealized net loss associated with the Company's explosives hedge programs of approximately $0.5 million from comprehensive income into earnings over the next 12 months. 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" at March 31, 2014, the net loss expected to be reclassified from comprehensive income to earnings over the next twelve months associated with that hedge program is approximately $13 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 are expected to 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 loss” 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.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 months ended March 31, 2014 and 2013:
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, 2014 |
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) (1) | | Loss reclassified from other comprehensive income into income (effective portion) (1) | | Loss reclassified from other comprehensive income into income (ineffective portion) |
| | | | (Dollars in millions) |
Commodity swaps and options | | Operating costs and expenses | | $ | — |
| | $ | (8.5 | ) | | $ | (2.2 | ) | | $ | (0.2 | ) |
Foreign currency forward contracts | | Operating costs and expenses | | — |
| | 216.5 |
| | (18.8 | ) | | — |
|
Total | | | | $ | — |
| | $ | 208.0 |
| | $ | (21.0 | ) | | $ | (0.2 | ) |
| | | | | | | | | | |
| | | | Three Months Ended March 31, 2013 |
Financial Instrument | | Income Statement Classification Gains (Losses) - Realized | | Gain recognized in income on non-designated derivatives | | Gain 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 swaps and options | | Operating costs and expenses | | $ | — |
| | $ | 5.9 |
| | $ | 6.7 |
| | $ | 0.2 |
|
Foreign currency forward contracts | | Operating costs and expenses | | — |
| | 38.7 |
| | 85.1 |
| | — |
|
Total | | | | $ | — |
| | $ | 44.6 |
| | $ | 91.8 |
| | $ | 0.2 |
|
| |
(1) | Includes the reclassification from "Accumulated other comprehensive loss" into earnings of $40.9 million of previously unrecognized gains on foreign currency cash flow hedge contracts monetized in the fourth quarter of 2012. |
Cash Flow Presentation. 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.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Offsetting and Balance Sheet Presentation
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.
The classification and amount of non-coal trading derivative financial instruments presented on a gross and net basis as of March 31, 2014 and December 31, 2013 are presented in the tables that follow.
|
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Assets as of March 31, 2014 |
Financial Instrument | | Gross Amounts Recognized | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts 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 | | $ | 4.3 |
| | $ | (1.5 | ) | | $ | 2.8 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 4.6 |
| | (4.6 | ) | | — |
| | n.a. |
| | n.a. |
|
Total | | $ | 8.9 |
| | $ | (6.1 | ) | | $ | 2.8 |
| | $ | (1.3 | ) | | $ | 1.5 |
|
| | | | | | | | | | |
Noncurrent Assets: | | | | | | | | | | |
Commodity swap contracts | | $ | 1.8 |
| | $ | (1.2 | ) | | $ | 0.6 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 8.8 |
| | (8.8 | ) | | — |
| | n.a. |
| | n.a. |
|
Total | | $ | 10.6 |
| | $ | (10.0 | ) | | $ | 0.6 |
| | $ | (0.1 | ) | | $ | 0.5 |
|
| |
(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 March 31, 2014 |
Financial Instrument | | Gross Amounts Recognized | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts 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 | | $ | 4.6 |
| | $ | (1.4 | ) | | $ | 3.2 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 124.8 |
| | (4.6 | ) | | 120.2 |
| | n.a. |
| | n.a. |
|
Total | | $ | 129.4 |
| | $ | (6.0 | ) | | $ | 123.4 |
| | $ | (1.5 | ) | | $ | 121.9 |
|
| | | | | | | | | | |
Noncurrent Liabilities: | | | | | | | | | | |
Commodity swap contracts | | $ | 2.5 |
| | $ | (1.3 | ) | | $ | 1.2 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 126.6 |
| | (8.8 | ) | | 117.8 |
| | n.a. |
| | n.a. |
|
Total | | $ | 129.1 |
| | $ | (10.1 | ) | | $ | 119.0 |
| | $ | 0.1 |
| | $ | 119.1 |
|
| |
(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. |
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value of Assets as of December 31, 2013 |
Financial Instrument | | Gross Amounts Recognized | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts 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 | | $ | 8.7 |
| | $ | (2.3 | ) | | $ | 6.4 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | — |
| | — |
| | — |
| | n.a. |
| | n.a. |
|
Total | | $ | 8.7 |
| | $ | (2.3 | ) | | $ | 6.4 |
| | $ | (5.0 | ) | | $ | 1.4 |
|
| | | | | | | | | | |
Noncurrent Assets: | | | | | | | | | | |
Commodity swap contracts | | $ | 2.8 |
| | $ | (0.9 | ) | | $ | 1.9 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 0.2 |
| | (0.2 | ) | | — |
| | n.a. |
| | n.a. |
|
Total | | $ | 3.0 |
| | $ | (1.1 | ) | | $ | 1.9 |
| | $ | (1.3 | ) | | $ | 0.6 |
|
| |
(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, 2013 |
Financial Instrument | | Gross Amounts Recognized | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts 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 | | $ | 3.9 |
| | $ | (1.9 | ) | | $ | 2.0 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 211.9 |
| | — |
| | 211.9 |
| | n.a. |
| | n.a. |
|
Total | | $ | 215.8 |
| | $ | (1.9 | ) | | $ | 213.9 |
| | $ | (5.4 | ) | | $ | 208.5 |
|
| | | | | | | | | | |
Noncurrent Liabilities: | | | | | | | | | | |
Commodity swap contracts | | $ | 2.5 |
| | $ | (1.3 | ) | | $ | 1.2 |
| | n.a. |
| | n.a. |
|
Foreign currency forward contracts | | 261.6 |
| | (0.2 | ) | | 261.4 |
| | n.a. |
| | n.a. |
|
Total | | $ | 264.1 |
| | $ | (1.5 | ) | | $ | 262.6 |
| | $ | (0.9 | ) | | $ | 261.7 |
|
| |
(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. |
See Note 8. "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.
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:
|
| | | | | | | | | | | | | | | |
| March 31, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in millions) |
Investments in debt and equity securities | $ | 25.7 |
| | $ | 39.8 |
| | $ | — |
| | $ | 65.5 |
|
Commodity swaps and options | — |
| | (1.0 | ) | | — |
| | (1.0 | ) |
Foreign currency cash flow hedge contracts | — |
| | (238.0 | ) | | — |
| | (238.0 | ) |
Total net financial assets (liabilities) | $ | 25.7 |
| | $ | (199.2 | ) | | $ | — |
| | $ | (173.5 | ) |
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in millions) |
Investments in debt and equity securities | $ | 28.8 |
| | $ | 38.2 |
| | $ | — |
| | $ | 67.0 |
|
Commodity swaps and options | — |
| | 5.1 |
| | — |
| | 5.1 |
|
Foreign currency cash flow hedge contracts | — |
| | (473.3 | ) | | — |
| | (473.3 | ) |
Total net financial assets (liabilities) | $ | 28.8 |
| | $ | (430.0 | ) | | $ | — |
| | $ | (401.2 | ) |
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:
| |
• | Investments in debt and equity securities: U.S. government securities and marketable equity securities are valued based on quoted prices in active markets (Level 1) and investment-grade corporate bonds and U.S. government agency securities are valued based on the various inputs listed above that may preclude the security from being measured using an identical asset in an active market (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 months ended March 31, 2014 or 2013 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 March 31, 2014 and December 31, 2013:
| |
• | 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. |
| |
• | 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 and estimated fair values of the Company’s long-term debt are summarized as follows:
|
| | | | | | | | | | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| (Dollars in millions) |
Long-term debt | $ | 5,998.2 |
| | $ | 6,134.3 |
| | $ | 6,002.4 |
| | $ | 6,167.5 |
|
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit and Nonperformance Risk
The fair value of the Company’s non-coal trading derivative assets and liabilities reflects adjustments for 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. The Company also continually monitors counterparties for nonperformance risk, if present, on a case-by-case basis.
(8) 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 months ended March 31, 2014 and 2013 were as follows:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
Trading Revenues by Type of Instrument | | 2014 | | 2013 |
| | (Dollars in millions) |
Commodity futures, swaps and options | | $ | 35.6 |
| | $ | 51.0 |
|
Physical commodity purchase/sale contracts | | (14.6 | ) | | (25.1 | ) |
Total trading revenues | | $ | 21.0 |
| | $ | 25.9 |
|
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” 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.
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 $64.3 million and $62.9 million as of March 31, 2014 and December 31, 2013, respectively. Based on the net fair value of the Company’s coal trading positions held in “Accumulated other comprehensive loss” at March 31, 2014, unrealized gains to be reclassified from comprehensive income to earnings over the next 12 months are expected to be approximately $45 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.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Forecasted Transactions No Longer Probable. During the three months ended March 31, 2014, the Company reclassified gains of $0.1 million out of “Accumulated other comprehensive loss” to earnings as the underlying forecasted transactions were deemed no longer probable of occurring within an acceptable proximity to the timing contemplated at hedge designation.
Offsetting and Balance Sheet Presentation
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 over-the-counter (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."
The fair value of assets and liabilities from coal trading activities presented on a gross and net basis as of March 31, 2014 and December 31, 2013 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 March 31, 2014 |
Assets from coal trading activities, net | | $ | 529.6 |
| | $ | (427.7 | ) | | $ | (51.7 | ) | | $ | 50.2 |
|
Liabilities from coal trading activities, net | | (439.3 | ) | | 427.7 |
| | — |
| | (11.6 | ) |
Total, Net | | $ | 90.3 |
| | $ | — |
| | $ | (51.7 | ) | | $ | 38.6 |
|
| | | | | | | | |
| | Fair Value as of December 31, 2013 |
Assets from coal trading activities, net | | $ | 418.8 |
| | $ | (324.7 | ) | | $ | (58.0 | ) | | $ | 36.1 |
|
Liabilities from coal trading activities, net | | (332.7 | ) | | 324.7 |
| | 1.9 |
| | (6.1 | ) |
Total, Net | | $ | 86.1 |
| | $ | — |
| | $ | (56.1 | ) | | $ | 30.0 |
|
| |
(1) | Approximately $29 million and $42 million of the net variation margin held at March 31, 2014 and December 31, 2013, respectively, related to cash flow hedges. |
See Note 7. "Derivatives and Fair Value Measurements" for information on balance sheet offsetting related to the Company’s non-coal trading activities.
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 (liability) coal trading positions for which fair value is measured on a recurring basis as of March 31, 2014 and December 31, 2013: |
| | | | | | | | | | | | | | | |
| March 31, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in millions) |
Commodity futures, swaps and options | $ | — |
| | $ | 38.3 |
| | $ | — |
| | $ | 38.3 |
|
Physical commodity purchase/sale contracts | — |
| | (1.9 | ) | | 2.2 |
| | 0.3 |
|
Total net financial assets | $ | — |
| | $ | 36.4 |
| | $ | 2.2 |
| | $ | 38.6 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in millions) |
Commodity futures, swaps and options | $ | — |
| | $ | 26.4 |
| | $ | — |
| | $ | 26.4 |
|
Physical commodity purchase/sale contracts | — |
| | 1.5 |
| | 2.1 |
| | 3.6 |
|
Total net financial assets | $ | — |
| | $ | 27.9 |
| | $ | 2.1 |
| | $ | 30.0 |
|
For Level 1 and 2 financial assets and liabilities, the Company utilizes both direct and indirect observable price quotes, including U.S. interest rate curves; LIBOR yield curves; Chicago Mercantile Exchange (CME) Group, Intercontinental Exchange (ICE), LCH.Clearnet (formerly known as the London Clearing House), NOS Clearing ASA and Singapore Exchange (SGX) contract prices; 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:
| |
• | Commodity futures, swaps and options: 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). |
| |
• | Physical commodity purchase/sale contracts: purchases and sales at locations with significant market activity corroborated by market-based information (Level 2). |
Physical commodity purchase/sale contracts transacted in less liquid markets or contracts, such as long-term arrangements with limited price availability, are classified in Level 3. Indicators of less liquid markets are those with periods of low trade activity or wide pricing spreads between broker quotes.
The Company's risk management function, which is independent of the Company's commercial 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. While the Company does not anticipate any decrease in the number of third-party brokers or market liquidity, the occurrence of such events could erode the quality of market information and therefore the valuation of its market positions. The Company's valuation techniques include basis adjustments to the foregoing price inputs for quality, such as heat rate and 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.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the quantitative unobservable inputs utilized in the Company's internally-developed valuation models for physical commodity purchase/sale contracts classified as Level 3 as of March 31, 2014:
|
| | | | | | | | | |
| | Range | | Weighted |
Input | | Low | | High | | Average |
Quality adjustments | | 1 | % | | 8 | % | | 8 | % |
Location differentials | | 1 | % | | 27 | % | | 25 | % |
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 following table summarizes the changes in the Company’s recurring Level 3 net financial assets:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions) |
Beginning of period | | $ | 2.1 |
| | $ | 5.2 |
|
Total net gains (losses) realized/unrealized: | | | | |
Included in earnings | | 1.8 |
| | (4.1 | ) |
Settlements | | (1.7 | ) | | 0.3 |
|
End of period | | $ | 2.2 |
| | $ | 1.4 |
|
The following table summarizes the changes in net unrealized gains (losses) relating to Level 3 net financial assets held both as of the beginning and the end of the period:
|
| | | | | | | | |
| | Three Months Ended |
| | March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions) |
Changes in net unrealized gains (losses) (1) | | $ | 0.2 |
| | $ | (3.2 | ) |
| |
(1) | Within the unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of comprehensive income for the periods presented, unrealized gains and losses from Level 3 items are combined with unrealized gains and losses on positions classified in Level 1 or 2, as well as other positions that have been realized during the applicable periods. |
The Company did not have any significant transfers in its coal trading positions between Level 1 and Level 2 during the three months ended March 31, 2014 or 2013. There were no transfers in or out of Level 3 during the three months ended March 31, 2014 or 2013. The Company’s policy is to value transfers between levels using the beginning of period valuation.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of March 31, 2014, the timing of the estimated future realization of the value of the Company’s trading portfolio was as follows:
|
| | | |
| | Percentage of |
Year of Expiration | | Portfolio Total |
2014 | | 64 | % |
2015 | | 19 | % |
2016 | | 14 | % |
2017 | | 2 | % |
2018 | | 1 | % |
| | 100 | % |
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 and steel producers. 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, will post or receive margin amounts associated with exchange-cleared and certain OTC positions. The Company also continually monitors counterparty and contract nonperformance risk, if present, on a case-by-case basis.
At March 31, 2014, 83% of the Company’s credit exposure related to coal trading activities was with investment grade counterparties, while 13% was with non-investment grade counterparties and 4% was with counterparties that are not rated.
Performance Assurances and Collateral
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 net liability positions which, based on an aggregate fair value at March 31, 2014 and December 31, 2013, would have amounted to collateral postings to counterparties of approximately $13 million and $7 million, respectively. As of March 31, 2014 and December 31, 2013, no collateral was posted to counterparties for such positions.
Certain of the Company’s other derivative trading instruments require the parties to provide additional performance assurances whenever a credit downgrade occurs below a certain level as specified in each underlying contract. The terms of such derivative trading instruments typically require additional collateralization, which is commensurate with the severity of the credit downgrade. If a credit downgrade were to have occurred below contractually specified levels, the Company’s additional collateral requirement owed to its counterparties would have been zero at March 31, 2014 and December 31, 2013 based on the aggregate fair value of all derivative trading instruments with such features. Accordingly, the Company had posted no margin related to such features as of March 31, 2014 or December 31, 2013.
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. At March 31, 2014 and December 31, 2013, the Company held net variation margin of $51.7 million and $56.1 million, respectively.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the requirements surrounding variation margin, 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. As of March 31, 2014 and December 31, 2013, the Company had posted initial margin of $16.1 million and $19.6 million, respectively, which is reflected in “Other current assets” in the condensed consolidated balance sheets. The Company also had posted $0.4 million and $1.0 million of margin in excess of the exchange-required variation and initial margin discussed above as of March 31, 2014 and December 31, 2013, respectively.
(9) Financing Receivables
The Company's total financing receivables as of March 31, 2014 and December 31, 2013 consisted of the following:
|
| | | | | | | | |
Balance Sheet Classification | | March 31, 2014 | | December 31, 2013 |
| (Dollars in millions) |
Accounts receivable, net | $ | 0.1 |
| | $ | 0.1 |
|
Investments and other assets | 362.8 |
| | 351.7 |
|
Total financing receivables | $ | 362.9 |
| | $ | 351.8 |
|
The Company periodically assesses the collectability of accounts and loans receivable by considering factors such as specific evaluation of collectability, historical collection experience, the age of the receivable and other available evidence. Below is a description of the Company's financing receivables at March 31, 2014.
Codrilla Mine Project. In 2011, a wholly owned subsidiary of PEA-PCI, then Macarthur Coal Limited, completed the sale of its 85% interest in the Codrilla Mine Project to participants of the Coppabella Moorvale Joint Venture (CMJV) where PEA-PCI sold down its interest in the Codrilla project to the CMJV (Codrilla sell down) so that, following the completion of the sale, ownership of the Codrilla Mine Project reflected the existing ownership of the Coppabella and Moorvale mines with PEA-PCI retaining a 73.3% ownership. Prior to the acquisition of PEA-PCI by the Company, consideration of $15.0 million Australian dollars was received by PEA-PCI upon completion of the Codrilla sell down, representing 20% of the agreed price. Two installments, for which the Company held non-interest-bearing receivables, are due upon the completion of certain milestones. The first installment, with 40% due on the granting of the related mining lease, was received during the three months ended September 30, 2012. The final 40% is due upon the earlier of the mine's first coal shipment or a specified date. The sales agreement was amended in the second quarter of 2013 to delay the specified date from March 31, 2015 to June 30, 2016, resulting in an adjustment to the discounted value of the note receivable in the amount of $1.6 million. This adjustment was recorded as a reduction to "Interest income" in the unaudited condensed consolidated statements of operations for the year ended December 31, 2013. There are currently no indications of impairment on the remaining installment and the Company expects to receive full payment upon the earlier of the mine's first shipment or June 30, 2016. The remaining balance associated with these receivables is recorded in "Investments and other assets," which was $29.8 million and $28.5 million at March 31, 2014 and December 31, 2013, respectively, in the condensed consolidated balance sheets.
Middlemount Mine. The Company periodically makes loans to the Middlemount Mine joint venture (Middlemount), in which the Company owns a 50% equity interest, pursuant to the related shareholders’ agreement for purposes of funding capital expenditures and working capital requirements. Middlemount intends to pay down the loans as excess cash is generated as required by the shareholders’ agreement. The loans bear interest at a rate equal to the monthly average 30-day Australian Bank Bill Swap Reference Rate plus 3.5% and expire December 24, 2015. Based on the expected timing of repayment on these loans, which is projected to extend beyond the stated expiration date, the Company considers these loans to be of a long-term nature. As a result, the foreign currency impact related to the shareholder loans is included in foreign currency translation adjustment in the unaudited condensed consolidated balance sheet and the unaudited condensed consolidated statements of comprehensive income. As a result of the expected timing of interest repayments, interest income on these loans was recognized when cash was received. Interest income of $1.4 million was recognized on these loans in each of the three months ended March 31, 2014 and 2013. Interest income under a full accrual basis would have resulted in an additional $1.7 million and $1.6 million of interest income during the three months ended March 31, 2014 and 2013, respectively. "Investments and other assets" included $333.0 million and $323.2 million at March 31, 2014 and December 31, 2013, respectively, related to these loans in the condensed consolidated balance sheets.
Other Financing Receivables. From time to time, the Company may enter into transactions resulting in accounts or notes receivable held by the Company, which have been reflected in "Accounts receivable, net." These notes are generally short term in nature with positive historical collection experience and do not represent a material credit risk to the Company.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| |
(10) | Property, Plant, Equipment and Mine Development |
Property, plant, equipment and mine development, net, as of March 31, 2014 and December 31, 2013 consisted of the following:
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| (Dollars in millions) |
Land and coal interests | $ | 10,957.7 |
| | $ | 11,024.1 |
|
Buildings and improvements | 1,549.6 |
| | 1,525.4 |
|
Machinery and equipment | 2,679.6 |
| | 2,777.5 |
|
Less: Accumulated depreciation, depletion and amortization | (4,331.5 | ) | | (4,244.5 | ) |
Total, net | $ | 10,855.4 |
| | $ | 11,082.5 |
|
(11) Income Taxes
The Company's tax benefit of $52.5 million and tax expense of $3.7 million for the three months ended March 31, 2014 and 2013, respectively, includes remeasurement benefit of $1.4 million and remeasurement expense of $1.6 million related to foreign tax accounts, respectively. The 2014 effective tax rate before remeasurement is based on the Company's estimated full year effective tax rate, which is comprised of the expected statutory tax expense that is more than offset by reductions from percentage depletion, foreign rate differential and Australian minerals resource rent tax. During the three months ended March 31, 2014, the Company recorded a valuation allowance on certain Australian deferred tax assets amounting to $42.6 million that, in the judgment of management, are not considered more likely than not to be realized.
During the three months ended March 31, 2014, the Company decreased its unrecognized tax benefits, interest and penalties by $28.9 million due to a settlement on the 2004 through 2010 Australian Taxation Office (ATO) audit relating to certain financing transactions. The Company previously made a $34.9 million advance deposit to the ATO and received a refund of $6.0 million in April 2014. During the three months ended March 31, 2014, the U.S. Internal Revenue Service (IRS) added the 2011 through 2013 tax years to the 2009 through 2010 audit due to amended returns filed for capital and net operating loss carrybacks.
The Company believes during the next twelve months it is reasonably possible for a $25.0 million decrease in its net unrecognized tax benefits due to potential audit settlements.
(12) Long-term Debt
The Company’s total indebtedness as of March 31, 2014 and December 31, 2013 consisted of the following:
|
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
| (Dollars in millions) |
2013 Term Loan Facility due September 2020 (1) | $ | 1,182.9 |
| | $ | 1,185.4 |
|
7.375% Senior Notes due November 2016 (1) | 650.0 |
| | 650.0 |
|
6.00% Senior Notes due November 2018 (1) | 1,518.8 |
| | 1,518.8 |
|
6.50% Senior Notes due September 2020 (1) | 650.0 |
| | 650.0 |
|
6.25% Senior Notes due November 2021 (1) | 1,339.6 |
| | 1,339.6 |
|
7.875% Senior Notes due November 2026 (1) | 247.5 |
| | 247.5 |
|
Convertible Junior Subordinated Debentures due December 2066 (1) | 380.4 |
| | 379.7 |
|
Capital lease obligations | 28.5 |
| | 30.5 |
|
Other | 0.5 |
| | 0.9 |
|
Total long-term debt | $ | 5,998.2 |
| | $ | 6,002.4 |
|
(1) Denotes indebtedness issued by Peabody Energy Corporation
The carrying amounts of the 2013 Term Loan Facility due September 2020, the 7.875% Senior Notes due December 2026 and the Convertible Junior Subordinated Debentures due December 2066 (the Debentures) have been presented above net of the respective unamortized original issue discounts.
PEABODY ENERGY CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Voluntary Debt Prepayments
During the three months ended March 31, 2013, the Company voluntarily prepaid $100.0 million in aggregate principal of its previous term loan facility with existing cash on hand. The Company recognized a loss on debt extinguishment of $0.9 million associated with the prepayments, which was classified in "Interest expense" in the unaudited condensed consolidated statements of operations for the three months ended March 31, 2013. During the three months ended March 31, 2014, the Company made no debt payments beyond its scheduled maturities.
(13) Pension and Postretirement Benefit Costs
Net periodic pension cost included the following components:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2014 | | 2013 |
| | (Dollars in millions) |
Service cost for benefits earned | | $ | 0.5 |
| | |