Peabody Energy (NYSE:BTU), the world’s largest private sector coal company by volume, noted in its latest financial filing that debt and liquidity worries pose some risk to its future as “a going concern.”
Peabody acknowledged that if out-of-court debt restructuring doesn’t work, it might be need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code.
A key paragraph in the 10K report filed March 16 with the Securities and Exchange Commission (SEC) summarizes risk associated with Peabody’s commercial operations.
“As a result of operating losses and negative cash flows from operations and our election to exercise a 30-day grace period with respect to certain interest payments, together with other factors, including the possibility that a covenant default or other event of default could cause certain of our indebtedness to become immediately due and payable (after the expiration of any applicable grace period), we may not have sufficient liquidity to sustain operations and to continue as a going concern,” Peabody said.
“Our current operating plan indicates that we will continue to incur losses from operations and generate negative cash flows from operating activities,” Peabody said. “These projections and certain liquidity risks raise substantial doubt about whether we will meet our obligations as they become due within one year after the date of issuance of this report. We have also elected to exercise the 30-day grace period with respect to a $21.1 million semi-annual interest payment due March 15, 2016 on the 6.50% Senior Notes due September 2020 and a $50.0 million semi-annual interest payment due March 15, 2016 on the 10.00% Senior Secured Second Lien Notes due March 2022, as provided for in the indentures governing these notes.”
Failure to pay these interest amounts on March 15, 2016 is not immediately an event of default under the indentures governing these notes, but would become an event of default if the payment is not made within 30 days of such date.
As a result of this situation combined with other uncertainties facing domestic and global coal markets, “there exists substantial doubt whether we will be able to continue as a going concern. In addition, in February 2016, we borrowed approximately $945 million under the 2013 Revolver, the maximum amount available, for general corporate purposes.”
Peabody could divest certain coal mines, other assets
“We are currently exploring alternatives for other sources of capital for ongoing liquidity needs and transactions to enhance our ability to comply with the financial covenants under our 2013 Credit Facility,” Peabody said.
“We are working to improve our operating performance and our cash, liquidity and financial position,” Peabody said.
“This includes: pursuing the sale of non-strategic surplus land and coal reserves as well as existing mines, particularly the sale of our El Segundo and Lee Ranch coal mines and related assets located in New Mexico and our Twentymile- Mine in Colorado; continuing to drive cost improvements across the company, attempting to negotiate alternative payment terms with creditors; maintaining our current level of self bonding and/or replacing self-bonding with other financial instruments on reasonable terms; evaluating potential debt buybacks, debt exchanges and new financing to improve our liquidity and reduce our financial obligations; and obtaining waivers of going concern and financial covenant violations under the 2013 Credit Facility,” Peabody said.
The company has brought in financial and other advisors to help seek solutions.
“However, there can be no assurance that our plan to improve our operating performance and financial position will be successful or that we will be able to obtain additional financing on commercially reasonable terms or at all,” Peabody said.
“As a result, our liquidity and ability to timely pay our obligations when due could be adversely affected. Furthermore, our creditors may resist renegotiation or lengthening of payment and other terms through legal action or otherwise. If we are not able to timely, successfully or efficiently implement the strategies that we are pursuing to improve our operating performance and financial position, obtain alternative sources of capital or otherwise meet our liquidity needs, we may need to voluntarily seek protection under Chapter 11 of the U.S. Bankruptcy Code,” Peabody said.