Peabody Energy (NYSE:BTU) is the world’s largest private sector coal company by volume but the company’s bottom line is being hurt by the rise of cheap natural gas for power generation in the United States.
That’s one of the many things to take away from the Peabody March 16 10K filing with the Securities and Exchange Commission (SEC). In the filing, Peabody talks about its debt situation and working with creditors to avoid a potential bankruptcy court restructuring.
As of Dec. 31, 2015, Peabody owned interests in 26 active coal mining operations located in the United States and Australia.
Peabody became a public company in 2001, but its history in the coal business dates back to 1883. In 2007 Peabody spun off Patriot Coal. Peabody had approximately 7,600 employees at the end of 2015
At the end of 2015, “we held approximately 6.3 billion tons of proven and probable coal reserves and approximately 500 thousand acres of surface property through ownership and lease agreements,” Peabody said.
In 2015 Peabody advanced the development of the Gateway North Mine in the U.S. to replace production from the existing Gateway Mine as its reserves were exhausted in the second half of 2015.
During 2015, Peabody derived 26% of its total revenue from its five largest customers, which tend to have contracts that expire at various times between 2016 and 2026.
The contract contributing the greatest amount of annual revenue in 2015 was approximately $285m, or about 5% of the company’s 2015 total revenues, and is due to expire in 2026, Peabody said.
Hydraulic fracturing, carbon policy pose increasing concern
Hydraulic fracturing for natural gas has hurt coal’s position as a major fuel supplier for the U.S. electric sector in recent times, Peabody noted.
“We believe the economics of gas-to-coal switching enable demand for thermal coals produced in the U.S. Powder River and Illinois basins in which we produce to benefit when natural gas prices rise above a range of $2.50 to $2.75 per mmBtu and $3.50 to $3.75 per mmBtu, respectively, and to decline when natural gas prices fall below those levels,” Peabody said.
For a point of reference the spot prices being reported by Energy Information Administration (EIA) in the same week of the Peabody SEC filing have typically been running at less than $2/mmBtu.
The EIA reported in its February 2016 “Short Term Energy Outlook” that coal’s share of U.S. electricity generation for all sectors was 33% in 2015, down from 39% in 2014. Electricity generation from coal was negatively impacted by a 40% decline in average U.S. natural gas prices, which fell to an average price of $2.63 per mmBtu in 2015. The EIA expects full year average U.S. natural gas prices to remain in line with 2015 prices at an average of $2.64 per mmBTU.
Peabody owns a 37.5% interest in Dominion Terminal Associates, a partnership that operates a coal export terminal in Newport News, Virginia that exports both metallurgical and thermal coal primarily to European and Brazilian markets.
Peabody owns slightly more than a 5% interest in the Prairie State Energy Campus (Prairie State), a 1,600-MW coal-fueled power plant and adjacent coal mine in Washington, St. Clair and Randolph counties in Illinois, which commenced commercial operations during 2012.
“We are responsible for our pro rata portion of Prairie State’s production costs and marketing and selling our share of electricity generated by the facility,” Peabody said.
“In January 2016, we entered into a definitive agreement to sell our subsidiary holding this participating interest in the Prairie State Energy Campus to the Wabash Valley Power Association for approximately $57 million, subject to certain customary closing adjustments and satisfaction of closing conditions,” Peabody noted.
Peabody supports clean coal technology. “In China, we are the only non-Chinese equity partner in GreenGen, an integrated gasification combined cycle coal-fueled power plant near Tianjin, China that began electric generation for commercial consumption in 2012 and plans to utilize carbon capture and storage (CCS) in its next stage of development.”
In the United States, Peabody was a founding member of the FuterGen Alliance and continued to support the development of the FutureGen 2.0 project until the Department of Energy (DOE) funding was terminated in 2015, Peabody said. The company continues to support other coal research and development efforts.