Given the tough markets conditions prevalent in the coal industry, debt refinancing, closing of high cost mines and non-core asset sales have remained popular options for coal companies to improve upon their financial flexibility in order to survive the ongoing downturn.
Peabody Energy (BTU), the largest coal producer in the U.S., has recently been in the news, as the company is planning to acquire $2.7 billion in loans to refinance its debt. The $2.7 billion debt refinancing plan consists of a $1.2 billion term loan and a $1.5 billion of revolving credit line. BTU currently has total debt of almost $6 billion, debt-to-equity of 132% and an interest coverage ratio of 4.20x. The company is scheduled to face a debt maturity of almost $302 million in 2015, and another $863 million of debt maturity in 2016.
As part of the debt refinancing, the company is seeking a $1.2 billion (term loan B) seven-year term loan at an interest cost of 2.75%, and a credit revolving facility of $1.5 billion. BTU plans to use the proceeds of Term Loan B to repay the full outstanding debt scheduled to mature in 2015 and 2016. The credit revolving facility of $1.5 billion will expire in 2018 (tenor of 5 years), and it is anticipated that it will be undrawn at the time of the closing.
Last week, Moody's assigned a Ba1 rating to BTU's new debt refinancing plan. Also, Fitch Ratings plans to assign a BB+ rating to the proposed plan. Last month, in August, Moody's further downgraded BTU's credit rating into junk territory, as coal market conditions remained soft. Currently, the company is assigned 'Ba2' and 'BB' credit ratings by Moody's and Fitch, respectively.
In spite of the soft coal market conditions, BTU reiterated its sales guidance for 2013. Last week, the company reaffirmed its coal sales target of 230 million tons-250 million tons for the full year 2013. However, the coal sales guidance midpoint of 240 million tons remains below the previous two years' sales. The company was able to sell 249.4 million tons and 248.5 million tons in 2011 and 2012, respectively. The company is expecting that its U.S. operations coal sales will total 180 million-to-190 million, while the Australian sales volume will remain in a range of 33 million-to-36 million in 2013. The company is targeting adjusted earnings per share to remain in a range of $(0.16)-to-$0.09, whereas adjusted EBITDA is expected to be in a range of $210 million-to-$270 million.
Moreover, to support its bottom line results in the tough market conditions, the company has been working to improve upon its cost structure. Its ongoing cost control efforts are expected to result in a 2%-3% decrease in its U.S. operation costs.
I reaffirm my bullish stance on the company. I believe that coal stocks have bottomed and coal markets are set to rebound in the upcoming quarters as coal producers are cutting their production to address the problem of excess coal supply in the market. Also, coal-fired electricity generation has been on the rise in recent quarters, and the Energy Information Administration [EIA] expects coal-fired electricity generation to rise to 40.5% in 2013, as compared to 37% in 2012, which will bode well for coal companies. Moreover, BTU is trading at depressed valuations, at a P/S of 0.65x and a P/B of 1.10x, which makes it a good investment option. Due to the aforementioned factors, I remain bullish on the stock.