Item 1A. Risk Factors
Item 1A. Risk Factors.
We operate in a rapidly changing environment that involves a number of risks. In addition to the risks discussed below, for information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors disclosed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020. In addition to the other information set forth in this Quarterly Report, including the information presented in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” you should carefully consider those risk factors disclosed in the aforementioned filing, which could materially affect the Company’s results of operations, financial condition and liquidity.
Our business, results of operations, financial condition and prospects could be materially and adversely affected by the recent COVID-19 pandemic and the related effects on public health.
Our operations are susceptible to widespread outbreaks of illness or other public health issues, such as the continuing global COVID-19 pandemic. The COVID-19 pandemic could have a material adverse effect on our business, results of operations, financial condition and prospects, including our ability to comply with covenants under our debt agreements.
The COVID-19 pandemic has caused governments around the world, including in the United States and Australia, to implement quarantines, travel bans, shutdowns and “shelter in place” or “stay-at-home” orders, which have significantly restricted the movement of people and goods and have periodically necessitated teleworking by a portion of our workforce. These restrictions and measures, and our efforts to act in the best interests of our employees, customers, suppliers, vendors and joint venture and other business partners, have affected and are continuing to affect our business and operations, causing us to modify a number of our normal business practices and may adversely affect our business, financial condition and results of operations in ways that may be material.
Governmental mandates also may require forced shutdowns of our mines and other facilities for extended or indefinite periods. In addition, the COVID-19 pandemic may cause supply chains to be interrupted, slowed or rendered inoperable, and widespread outbreaks in locations significant to our operations could adversely affect our workforce, resulting in serious health issues and absenteeism. If our operations are curtailed, we may need to seek alternate sources of supply for commodities, services and labor, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected, they might delay, reduce or cancel purchases from us.
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In addition, the COVID-19 pandemic has substantially interfered with general commercial activity related to the transportation of coal and our customer base, which could materially and adversely affect our business, financial condition, results of operations, business and prospects. The continuing spread of COVID-19 has contributed to adverse changes in general domestic and global economic conditions and disrupted domestic and international credit markets, which could negatively affect our customers’ ability to pay us as well as our ability to access capital that could in the future negatively affect our liquidity.
Within the global coal industry, supply and demand disruptions resulting from the COVID-19 pandemic have been widespread and have adversely impacted us and our customers. With respect to seaborne metallurgical coal, global steel production decreased approximately 6% through the six months ended June 30, 2020 compared to the prior year period, as the COVID-19 pandemic continued to have significant impacts on steel demand. Steel demand deterioration has caused producers, including Peabody customers, to idle capacity and restrict output, which has pressured seaborne metallurgical coal demand. This deterioration could continue given ongoing effects from the COVID-19 pandemic on economic conditions in key demand centers. Seaborne thermal coal demand continues to be impacted by the COVID-19 induced reduction in overall electricity generation, along with competition from alternative fuel sources and low gas prices. In the United States, overall electricity demand has been negatively impacted year-over-year due to the COVID-19 induced economic shutdowns through the six months ended June 30, 2020.
Despite our efforts to manage these realized and potential impacts, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of the COVID-19 pandemic as well as third-party actions taken to contain its spread and mitigate its public health effects. While the ultimate impacts of the COVID-19 pandemic on our business are unknown, we expect continued interference with general commercial activity, which may further negatively affect both demand and prices for our products. We also face disruption to supply chain and distribution channels, potentially increasing costs of production, storage and distribution, and potential adverse effects to our workforce, each of which could have a material adverse effect on our business, financial condition or results of operations.
Since there are no comparable recent events that provide guidance regarding the effect the COVID-19 pandemic may have, the ultimate impact of the pandemic is highly uncertain and subject to change. As a result, we do not yet know the full extent of the impacts on our business, financial condition, results of operations and prospects, or the global economy as a whole. However, in addition to potentially having a material adverse effect on our business, results of operations, financial condition and prospects, the effects could heighten many of our known risks described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 21, 2020.
The terms of our indenture governing our senior secured notes and the agreements and instruments governing our other indebtedness impose restrictions that may limit our operating and financial flexibility.
The indenture governing our senior secured notes and the agreements governing our other indebtedness contain certain restrictions and covenants which restrict our ability to incur liens and/or debt or provide guarantees in respect of obligations of any other person and other restrictions, all of which could adversely affect our ability to operate our business, as well as significantly affect our liquidity, and therefore could adversely affect our results of operations. Our credit facility also contains a mandatory prepayment provision providing that certain amounts of excess cash flow (as defined in the agreements governing the facility) must be utilized to make payments on the outstanding balance under that facility.
These covenants limit, among other things, our ability to:
◦ incur additional indebtedness;
◦ pay dividends on or make distributions in respect of stock or make certain other restricted payments or investments;
◦ enter into agreements that restrict distributions from certain subsidiaries;
◦ sell or otherwise dispose of assets;
◦ enter into transactions with affiliates;
◦ create or incur liens;
◦ merge, consolidate or sell all or substantially all of our assets; and
◦ place restrictions on the ability of subsidiaries to pay dividends or make other payments to us.
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Our ability to comply with these covenants may be affected by events beyond our control and we may need to refinance existing debt in the future. A breach of any of these covenants together with the expiration of any cure period, if applicable, could result in a default under our senior secured notes. If any such default occurs, subject to applicable grace periods, the holder of our senior secured notes may elect to declare all outstanding senior secured notes, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. If the obligations under our senior secured notes were to be accelerated, our financial resources may be insufficient to repay the notes and any other indebtedness becoming due in full.
In addition, if we breach the covenants in the indentures governing the senior secured notes and do not cure such breach within the applicable time periods specified therein, we would cause an event of default under the indenture governing the senior secured notes and a cross-default to certain of our other indebtedness and the lenders or holders thereunder could accelerate their obligations. If our indebtedness is accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If our indebtedness is in default for any reason, our business, financial condition and results of operations could be materially and adversely affected. In addition, complying with these covenants may make it more difficult for us to successfully execute our business strategy and compete against companies who are not subject to such restrictions.
We have experienced negative cash flows from operations during the first half of 2020. Results from continuing operations, net of income taxes and Adjusted EBITDA for the six months ended June 30, 2020 declined by $1,850.8 million and $423.9 million, respectively, compared to the corresponding prior year period. The Company’s available liquidity declined from $1,275.8 million as of December 31, 2019 to $926.1 million as of June 30, 2020. Available liquidity was comprised of cash and cash equivalents of $732.2 million and $848.5 million as of December 31, 2019 and June 30, 2020, respectively, and combined availability under the Company’s revolving credit facility and accounts receivable securitization program of $543.6 million and $77.6 million as of December 31, 2019 and June 30, 2020, respectively. During the six months ended June 30, 2020, the combined availability under the Company’s revolving credit facility and accounts receivable securitization program decreased as a result of a $300.0 million borrowing under our revolving credit facility, an additional $83.0 million of letters of credit issuances, and a $83.0 million decrease in available receivables under the accounts receivable securitization program.
There is significant risk that we will not be in compliance with the first lien leverage ratio requirement under our credit agreement in the second half of 2020 without successfully taking mitigating action. Noncompliance with the ratio covenant would constitute a default under the credit agreement, and the revolving lenders could elect to accelerate the maturity of the related indebtedness, and could potentially choose to exercise other rights and remedies under the agreement. Further, our senior secured notes and certain lease agreements contain cross-default provisions which would be activated by a default under the credit agreement, which could result in a similar acceleration of maturity under those obligations.
We believe we could seek to avoid noncompliance by taking certain mitigating actions, such as obtaining a waiver of the default condition, executing an amendment to the credit agreement, or completing asset sales to generate additional liquidity, but can offer no assurance as to the likelihood of success of such actions. If such actions were not successful, we could avoid noncompliance while maintaining operating liquidity beyond twelve months by repaying the amount currently outstanding under our revolving credit facility and replacing outstanding letters of credit with cash collateral. Such actions would avoid default on the remaining indebtedness under the credit agreement and cross-default on the senior secured notes and lease agreements as described above, but would have negative impacts to our liquidity. Any of these actions could have an adverse effect on our financial condition, results of operations or cash flows.
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