Peabody Energy has cut costs, but a torrent of negative factors, including a prolonged coal market slump and high debt, led it to file for Chapter 11 protection on April 13 at the U.S. Bankruptcy Court for the Eastern District of Missouri.
Filed with the court that day was testimony from Amy B. Schwetz, an Executive Vice President and the Chief Financial Officer of Peabody Energy.
Schwetz noted that Peabody is the world’s largest private sector coal company by volume. Its history in the coal business dates back to 1883. The Peabody debtors consist of 154 entities, all of which are wholly owned direct or indirect subsidiaries of Peabody.
The venerable ompany has also secured a new leadership team in recent years. In mid-2015, in addition to Schwetz’s promotion to the CFO position, the debtors appointed a new Chief Executive Officer, who has been with the company since September 2013, and recruited a new Chief Legal Officer, who started in August 2015. Further, the Board of Directors also elected a new, non-executive Chairman, effective Jan. 1, 2016. “Accordingly, the Company is moving forward with a fresh perspective as it evaluates its strategic options in what continues to be a volatile coal market both domestically and internationally,” wrote Schwetz.
The current depressed market is a marked departure from relatively recent market highs, said Peabody. Reflecting those highs, in 2011, the company had a peak market capitalization of approximately $20 billion and a market capitalization to debt ratio of 8.0 to one. The company’s Adjusted EBITDA was over $2 billion. Because of its market and operational strength during the high period of 2011, the company decided to strategically expand its presence in the Australian coal market by investing in a significant platform there to further diversify the company’s customer base and access higher growth global markets. That debt-fueled buying spree included the 2011 acquisition of PEA-PCI (formerly Macarthur Coal Limited), an independent coal company in Australia, which included two operating mines, a 50% equity-affiliate joint venture arrangement, several development projects and thermal and metallurgical coal reserves and resources.
In 2012, Peabody secured significant coal reserves to augment its production capability in the United States’ Powder River Basin by submitting bids for control of the North and South Porcupine reserve area to the U.S. Bureau of Land Management (BLM) which awarded the leases following sealed bid auctions. Specifically, in two bids won in May and June 2012, the company leased more than approximately 1.1 billion tons of reserves. The reserves are adjacent to the company’s North Antelope Rochelle Mine and were leased for a weighted average price of $1.10 per mineable ton, or a total of $1.2 billion over a five year period ending in December 2016.
After the acquisitions of 2011 through 2012, international coal prices began a downward cycle dropping to their lowest levels in 2016. This, coupled with lower volumes, resulted in the company’s debt burden becoming unsustainable.
Peabody located in western U.S. and Illinois Basin
The debtors’ target operating model is structured around the U.S. business unit, the Australian business unit and a corporate unit that is responsible for corporate functions and shared services. Today, the Company conducts business through seven segments: (a) Powder River Basin Mining; (b) Midwestern U.S. Mining; (c) Western U.S. Mining; (d) Australian Metallurgical Mining; (e) Australian Thermal Mining; (f) Trading and Brokerage; and (g) Corporate and Other, which includes, among other things, selling and administrative expenses, corporate hedging activities, mining and export/transportation joint ventures.
As of Dec. 31, 2015, the company owned interests in 26 active coal mining operations located in the United States and Australia. The domestic mines produce and sell thermal coal, which is primarily purchased by electricity generators. The company’s Australian operations mine both thermal and metallurgical coal, a majority of which is exported.
In the United States alone, as of Dec. 31, 2015, Peabody holds an estimated 5.5 billion tons of proven and probable coal reserves, and the company had U.S. coal sales of approximately 180 million tons.
In addition to its mining operations, the company markets and brokers coal from itself and other coal producers primarily across the United States, Australia, Europe and Asia. In total, the company’s 2015 mining segment’s coal sale volumes were approximately 214 million tons, a decline of 7% from 2014, while its 2015 trading and brokerage volumes were approximately 15 million tons.
The company’s North Antelope Rochelle mine in the PRB is the world’s largest and most productive coal mine and has been recognized by the Wyoming Department of Environmental Quality and the United States Department of Interior as an industry leader in reclamation practices. This mine operates with two 12-hour shifts per day, 365 days per year and employs approximately 1,150 workers. In 2015, the debtors shipped nearly 140 million tons of coal from their PRB operations to approximately 100 separate facilities in 24 states.
The debtors’ Western U.S. Mining operations are comprised of mines located in New Mexico, Arizona and Colorado. These mining operations are characterized by a mix of surface and underground operations and of coal with mid-range sulfur and Btu content. While the debtors view this region as non-core to their portfolio, these mining operations have provided strong and stable cash flows. Coal sales from these operations primarily serve the local markets in which they operate, with sales totaling approximately 18 million tons in 2015.
The debtors’ Midwestern U.S. Mining operations include, among other things, active mines in Illinois and Indiana. These mining operations are characterized by a mix of surface and underground operations and coal with a higher sulfur and high Btu content. Collectively, the debtors sold approximately 21 million tons from their Midwestern U.S. Mining operations in 2015.
Schwetz wrote about the lousy coal markets of recent years: “Among other factors, demand from electric utilities declined approximately 110 million tons in 2015 based, in large part, on reduced degree heating days in the United States, the El Nino effect, flat generation demand and an abundance of extremely low priced natural gas. Natural gas prices fell nearly 40% in 2015 to an average of $2.63 per mm/Btu, which drove coal’s share of electricity generation in the power sector down to 33% compared with approximately 40% in the prior year. U.S. coal production declined by approximately 105 million tons in 2015 as production cutbacks accelerated during the year. As a result, fourth quarter 2015 production was down approximately 50 million tons compared to the same period in 2014. Despite supply rationalizations, reduced coal demand led to utility inventories rising nearly 30% above prior year levels.
“For the Debtors specifically, overall U.S. coal shipments were down 7% in 2015 (down 3% in the PRB and down 20% outside of the PRB). Year-to-date U.S. coal production shipments in 2016 through March are down another 31%, and average natural gas prices have declined 30%, suggesting that these trends are continuing.”
Sale of western coal mines to Bowie falls through
The company has moved aggressively to shed non-core businesses and properties to raise money. In 2015 alone, the company realized cash proceeds of $70 million related to ongoing resource management activities through the sale of surplus land and coal reserves.
In November 2015, the company entered into a purchase and sale agreement with a subsidiary of Bowie Resource Partners LLC pursuant to which the company agreed to sell its El Segundo and Lee Ranch coal mines and related assets located in New Mexico and the Twentymile deep mine in Colorado (called the “Four Star Transaction”) for $358 million. The closing of the Four Star Transaction was scheduled to occur during the first fiscal quarter of 2016 but was delayed due to the buyer’s inability to secure financing for this purchase and its own restructuring. The transaction has been terminated, Schwetz wrote.
In January of this year, Peabody agreed to sell its small remaining stake in the coal-fired Prairie State power plant in Illinois to the Wabash Valley Power Association for $57 million in cash. The Federal Energy Regulatory Commission approved the sale on April 6. Before the Prairie State Sale can close, Wabash must obtain approval from the Indiana Utility Regulatory Commission (IURC). Peabody iscurrently working with Wabash to obtain IURC approval in order that they may bring this proposed sale before the bankruptcy court for Peabody.