The nation’s largest coal producer, Peabody Energy (NYSE: BTU), succumbing to the same forces that recently forced other industry giants like Arch Coal and Alpha Natural Resources into bankruptcy, on April 13 voluntarily filed petitions under Chapter 11 for the majority of its U.S. entities in the U.S Bankruptcy Court for the Eastern District of Missouri.
Through this process, the St. Louis-based company said it intends to reduce its overall debt level, lower fixed charges, improve operating cash flow and position the company for long-term success, while continuing to operate under the protection of the court process.
All of the company’s mines and offices are continuing to operate in the ordinary course of business and are expected to continue doing so for the duration of the process. No Australian entities are included in the filings, and Australian coal mining operations are continuing as usual. Peabody is the biggest U.S. coal producer, largely on the back of its giant North Antelope Rochelle mine in the Powder River Basin of Wyoming, while it is a major producer of coal in Australia.
“This was a difficult decision, but it is the right path forward for Peabody. We begin today to build a highly successful global leader for tomorrow,” said Peabody President and Chief Executive Officer Glenn Kellow in an April 13 statement. “Through today’s action, we will seek an in-court solution to Peabody’s substantial debt burden amid a historically challenged industry backdrop. This process enables us to strengthen liquidity and reduce debt, build upon the significant operational achievements we’ve made in recent years and lay the foundation for long-term stability and success in the future.”
In connection with the process, Peabody has obtained $800 million in debtor-in-possession financing facilities, which were arranged by Citigroup and include participation of a number of the company’s secured lenders and unsecured noteholders. The facilities include a $500 million term loan, a $200 million bonding accommodation facility and a cash collateralized $100 million letter of credit facility, and are subject to court approval as well as limitations as set out in the company’s filings. In addition to the company’s existing cash position, Peabody believes that it has sufficient liquidity to operate its business worldwide post-petition and to continue the flow of goods and services to its customers in the ordinary course.
Peabody also announced April 13 that the planned sale of the company’s New Mexico and Colorado assets was terminated after the buyer was unable to complete the transaction. That leaves it without extra cash to bolster its finances.
Peabody says there is an upside for the coal industry
The factors affecting the global coal industry in recent years have been unprecedented, Peabody noted. Industry pressures in recent years include a dramatic drop in the price of metallurgical coal (a point of emphasis for the Australian operations), weakness in the Chinese economy, overproduction of domestic shale gas and ongoing regulatory challenges.
Still, multiple third-party estimates project that both the U.S. and global coal demand will stabilize, said Peabody. U.S. natural gas prices are projected to rebound from recent lows. Globally, thermal coal is expected to continue to fuel hundreds of existing coal generating plants as well as scores more that are under construction. Coal currently fuels approximately 40% of global electricity and is expected to be an essential source of global electricity generation and steel making for many decades to come.
“A company like Peabody with safe, efficient operations will be well positioned to serve coal demand that will continue in the United States and around the world,” said Kellow. “We are a leading producer and reserve holder in our core regions of the Powder River Basin, Illinois Basin and Australia. Peabody has a new management team, outstanding workforce, unmatched asset base and strong underlying operational performance that represent a key driver in the company’s future success.”
In 2015, all of Peabody’s U.S. operations were cash-flow positive, the Australian platform earned more than the prior year despite lower prices for coal and the company’s administrative expenses and capital investments were at the lowest levels in nearly a decade.
Peabody has filed pleadings, referred to as “first day” motions, with the U.S. Bankruptcy Court. These motions are expected to enable the company to continue, among other things, paying employee wages and providing healthcare and other benefits without interruption.
Also, as required under New York Stock Exchange regulations, trading in shares of the company stock on the NYSE is expected to be suspended immediately.
Related to these activities, Peabody has retained Jones Day as its legal advisor, Lazard Fréres & Co. LLC as its investment banker and financial advisor and FTI Consulting Inc. as its restructuring advisor.
In a fact sheet for stakeholders, Peabody asked itself whether it will be looking to sell assets through this Chapter 11 process? It answered: “The company will continue to evaluate opportunities to reshape its platform to best compete in key regions by targeting the sale of non-core assets.” It added: “Our filter for evaluating divestitures includes factors such as strategic fit, value consideration, growth potential and cash flow requirements.”
The company also asked itself whether it expects its self-bonding status for reclamation liabilities will be affected? That issue has been controversial related to other bankrupt coal companies. Reclamation bonds, a form of insurance, are required by states so there is a third party that can pay for post-mining site reclamation if the mine operator can’t. Some states allow self-bonding if the coal company can put up enough cash collateral.
Wrote Peabody on the self-bonding issue: “We have informed the states in which we self bond of our Chapter 11 filing. This does not change our commitment to our reclamation obligations. We expect to continue discussions with both the Office of Surface Mining Reclamation and Enforcement (OSM) and the states in which we self bond regarding our go-forward bonding requirements.”