Peabody’s Boyce offers limited comment on exposure to Patriot bankruptcy

Surprisingly, Peabody Energy (NYSE: BTU) officials were only asked once during a July 24 earnings call about Patriot Coal, a spin-off from Peabody that still has some financial connections to Peabody that sought bankruptcy protection on July 9.

Peabody Chairman and CEO Gregory Boyce responded: “I’ll make a few points, I guess, regarding Patriot’s reorganization since you’ve raised the issue. Understandably I need to limit my remarks due to the bankruptcy proceedings. But first of all, since we spun off Patriot in October of 2007, the world of Patriot has changed significantly. If you’ve read the Patriot filings, they say in their own filings with the bankruptcy court, these changes included Patriot’s acquisition of Magnum Coal, which had its own substantial assets and liabilities and made significant changes in their capital structure. [There has been] decreased demand for coal due to sharp declines in natural gas prices and the softening of global steel markets and more burdensome environmental and other government regulations. We have consistently stated in our SEC filings that at the time of the spinoff, we believe that our only exposure, materially, was about $150 million of possible black lung liabilities for which Patriot has primary liability. Patriot indicated in their filings that they obtained the right to self-insure those liabilities with the Department of Labor and they posted $15 million in collateral to secure those obligations. We’ve got a small number of commercial agreements with Patriot. We believe the exposure under those agreements is immaterial. We’ll continue to watch the bankruptcy proceedings, but that’s where it stands today.”

As for its own coal operations, Boyce said that in the United States, it continues to expect overall domestic coal use to decline 100 million to 120 million tons in 2012 due primarily to coal-to-gas switching. With natural gas prices up more than 50% off recent lows, Powder River Basin coal-fueled power plants are “back in the money,” he added. And the strong summer burn combined with improved supply demand fundamentals are starting to bring down coal stockpiles. June stockpile draws were nearly double the 10-year average. And second quarter cooling degree days ran 28% above the norm. “We’re also beginning to see customers reentering the market for 2013,” Boyce added.

“U.S. industry conditions remain difficult as we continue to see mine closures in response to lower demand,” said Boyce. “But at the same time, strong companies, at the low end of the cost curve, are likely to come out the other side in good shape. We believe that domestic coal use will rebound in 2013 due to higher gas prices and we look for particularly strong gains in coming years from the PRB and Illinois Basin.” Peabody is the leading coal producer in both the Illinois Basin and the PRB.

In the U.S., Peabody’s 2012 production is fully priced. The 2013 volume is 70%-75% priced, assuming current year production levels, Boyce noted.

“We’re just now starting to see customers come back into the marketplace,” Boyce said. “Some for this year and a few for the out years. We had already adjusted our expectations and our sales position for 2013, 70% to 75% sold at current production rates. We’ll have to see how the next two to three months play out, in terms of inventories and demand, to really be able to have a sense for 2013 volumes. But suffice it to say, we’ll look at all of the things relative to adjusting volume based on what the market needs for 2013.”

Boyce said most of the change in the 2013 contracted volumes was the establishment of this year’s production as the base production for 2013. “If you look at what we’re saying is base, if we use of this year’s production as the surrogate for 2013, we are 70% to 75% sold out,” he added. “We’ve had our normal price reopeners that we’ve negotiated during the course of the quarter, those have a number of different mechanisms. Their baskets, their indices, there are all types of things that relate to those reopeners in terms of setting price.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.