Peabody Energy, the largest U.S. coal producer, announced Dec. 22 that it has filed its plan of reorganization and accompanying disclosure statement with the U.S. Bankruptcy Court for the Eastern District of Missouri, representing another key milestone in the company’s Chapter 11 process.
“Today’s proposed plan is an important achievement in our path toward emergence,” said Peabody Energy President and Chief Executive Officer Glenn Kellow in a Dec. 22 statement. “The plan charts Peabody’s course forward and reflects an enormous amount of work by the company and multiple creditor groups to advance a proposal that has broad consensus, maximizes the value of the enterprise and paves the way for a sustainable future. We look forward to moving toward confirmation of the plan.”
The plan of reorganization and disclosure statement establish proposed recoveries for key stakeholders and outline other components of the company’s future governance and ownership. The proposed plan provides for a new, sustainable capital structure that significantly reduces the pre-filing debt levels by more than $5 billion, lowers fixed charges and recapitalizes the company through a backstopped rights offering of $750 million, a private placement of mandatorily convertible preferred stock of $750 million and the issuance of new common stock to satisfy certain creditor claims. The plan also anticipates that Peabody will emerge with substantial liquidity to satisfy near and long-term needs.
Following extensive negotiations, three key stakeholder groups – the First Lien Creditors, the Second Lien Group and the Unsecured Noteholder Group – reached agreement with the company on a framework that culminated in this plan of reorganization. Peabody currently expects to have a hearing on the disclosure statement on Jan. 26, 2017. Following court approval, Peabody intends to send the plan and disclosure statement to creditors for approval.
“Eight months ago, we set out on a path to strengthen the balance sheet and position the company for long-term success amid historically challenged coal industry fundamentals,” said Kellow. “While we still have outstanding issues to resolve prior to emergence, this plan demonstrates that Peabody retains an unmatched asset base, leading U.S. platform, substantial Australian thermal and metallurgical coal business, and a team of skilled employees with a fundamental commitment to lasting values. We’re pleased to reach this important step as we move to the next phase of Peabody’s Chapter 11 process. And we appreciate all of our employees’ actions in continuing to manage safe, low-cost operations and deliver the results that can best ensure our success.”
Given recent changes in the industry and company, Peabody also elected to provide updated projections for 2016 through 2021, incorporating changes to the company’s industry views and financial performance/outlook as of October 2016, and will make these projections public. Revisions to the August 2016 business plan mostly impact early years based on changes in near-term pricing and currency, along with the planned sale of the Metropolitan Mine in Australia targeted for the first quarter of 2017, subject to clearance by the Australian Competition and Consumer Commission.
In addition, Peabody is preparing updated financial statements to reflect the impact of actual performance, and these will be filed as a supplement ahead of the disclosure statement hearing. These filings follow the announcement recently that the company repaid its debtor-in-possession financing facility.
The company said it is possible that changes will continue to be made to the plan of reorganization and disclosure statement prior to final creditor and court approval. Peabody is targeting emergence around the beginning of the second quarter of 2017.
As part of the plan of reorganization, the company anticipates emerging as a public company. As frequently occurs in Chapter 11 processes, the plan provides that current Peabody Energy equity securities will be cancelled and extinguished upon the effective date of a confirmed plan of reorganization by the bankruptcy court, and holders would not receive any value for such equity interests.
Peabody Energy is the world’s largest private-sector coal company and a Fortune 500 company. The company serves metallurgical and thermal coal customers in 25 countries on six continents.
The core segments of the company’s business include Powder River Basin mining in Wyoming (mainly the massive North Antelope Rochelle mine), Illinois Basin mining and Australia metallurgical and thermal mining. Peabody owns interests in 26 active coal mining operations located in the United States and Australia. As of Dec. 31, 2015, the company’s property holdings included more than 6 billion tons of proven and probable coal reserves and approximately 500,000 acres of surface property. As of April 13, 2016, the bankruptcy petition date, the company employed nearly 7,100 skilled workers.
Peabody seems some coal price rebounds from recent lows
In the Dec. 22 disclosure statement, Peabody described how it invested heavily in its operations early this decade at a time of high coal prices. “After the investments of 2011 through 2012, coal prices began a downward cycle dropping to multi-year lows in early 2016,” the company added. “Seaborne coal prices have recently increased: metallurgical coal price was quoted at over $300 per tonne in the fourth quarter of 2016 (compared to a low of $73 per tonne in the fourth quarter of 2015), and Newcastle thermal coal price was quoted nearly $115 per tonne in November 2016 (compared to a low of $47 per tonne in the first quarter of 2016), demonstrating coal price volatility, particularly when viewed in the context of the historical pricing highs of 2011 and 2012 and current forecasts. Within the past month, a price for the benchmark quality hard coking coal from Australia has been established at $285 per tonne for the first quarter of 2017, a 43% increase over the fourth quarter 2016 settlement. A settlement for low-vol PCI has also been reached at $180 per tonne for the first quarter of 2017. Spot prices for the benchmark quality hard coking coal have retreated to approximately $260 per tonne as of December 15, 2016.
“Before and immediately following the Petition Date, the U.S. coal industry saw unprecedented industry-wide coal production declines largely due to the impact of increased electricity generation from low-cost natural gas and renewable fuels, decreased capacity utilization of coal fired power units, plant retirements, flat electricity demand, and reduced heating degree days. Natural gas prices rebounded in mid-2016, driving increased coal demand in the second half of 2016 though 2016 U.S. coal demand and production is still on a pace to be the lowest since the late 1970s. Metallurgical and thermal coal pricing for Australia seaborne benchmark products also reached multi-year lows in late 2015 and early 2016 largely driven by excess supply and an easing of Chinese coal imports. However, seaborne prices improved sharply in the latter half of 2016 largely due to policy restrictions in China that limited domestic coal production and encouraged higher coal imports.
“[C]oal is expected to remain an essential source of global electricity generation and steelmaking for many decades to come. The Company projects U.S. coal demand for electricity generation will decrease 15 to 25 million tons between 2016 and 2021 as impacts from plant retirements more than offset higher capacity utilization. In 2021, coal is estimated to supply approximately 29% of U.S. electricity generation with the PRB and Illinois Basin expected to supply nearly 55% of U.S. coal production.
“Seaborne metallurgical coal demand is expected to increase by 10% to 15% by 2021 largely due to demand growth in Asia, with India becoming the largest importer of seaborne metallurgical coal. Seaborne thermal demand is projected to increase by 25 to 35 million tonnes from 2016 through 2021 driven by Asia-Pacific growth as power and coal demand are expected to increase with new coal capacity. Approximately 375 gigawatts of new coal-fueled generating capacity is expected to be added worldwide by 2021. The majority of new capacity is expected to be ultrasupercritical or supercritical generation as the global coal-fueled generating fleet transitions to lower carbon dioxide and other emissions.
“In the U.S., the Debtors hold a portfolio of assets in the PRB and Illinois Basin that continues to generate profits despite lower coal demand and pricing. The Company intends to continue to lower unit costs to generate greater value and better compete with alternative fuels such as natural gas and renewable fuels for electricity generation. In Australia, the Company has targeted a smaller, more profitable platform focused on (i) premium thermal and metallurgical coal products and (ii) highly productive, lower cost mining assets, in order to serve higher growth markets in Asia. The Company will look to improve or optimize strategic assets, divest, sell or suspend nonstrategic assets, and restructure or mitigate take-or-pay agreements to improve cash flows and continue to drive enhancements to the platform.
“Within the United States, demand from electric utilities declined approximately 110 million tons to approximately 740 million tons in 2015 based, in large part, on flat overall generation demand, decreased capacity utilization of coal generation, increase in electricity generation from low-cost natural gas and renewable fuel sources, plant retirements and reduced heating degree days in the United States. Natural gas prices fell nearly 40% in 2015 to an average of $2.63 per mm/Btu from $4.26 per mm/Btu in 2014, which drove coal’s share of electricity generation in the power sector down to approximately 33% compared with approximately 40% in the prior year. U.S. coal production declined by approximately 105 million tons in 2015 to approximately 900 million tons as production cutbacks accelerated during the year. Despite supply reductions, reduced coal demand led to utility inventories rising nearly 30% above prior year levels. For the Debtors specifically, U.S. coal shipments declined 7% in 2015. The Debtors’ U.S. coal shipments during the first quarter of 2016 were down another 33% compared to the first quarter of 2015.
“Unprecedented industry conditions continued into the first quarter of 2016. In the U.S., industry-wide production declined nearly 30% to approximately 173 million tons driven by approximately 15-year low natural gas prices due to overproduction and mild weather. During this same time, U.S. coal demand declined approximately 20% to approximately 152 million tons. Internationally, thermal coal prices for the April 2 Japanese fiscal year benchmark product settled at $61.60 per tonne, 9% below prior-year marks of $67.80 per tonne. Metallurgical coal benchmark for the first quarter of 2016 settled at $81 per tonne, which was a multi-year low.”
Peabody noted how it cut costs at its operations prior to seeking bankruptcy. “In addition to such operational measures, beginning in 2015, the Company moved to shed non-core assets,” it reported. “In 2015, the Company realized cash proceeds of $70 million related to their ongoing resource management activities through the sale of surplus land and coal reserves. In addition, on November 20, 2015, the Company entered into a purchase and sale agreement with a subsidiary of Bowie 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 Mine in Colorado 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 transaction in addition to its own debt restructuring or refinancing. The transaction was terminated shortly before the Petition Date.
“Debtor Four Star filed an adversary proceeding against Bowie Resource Partners, LLC (Adv. Case No. 16- 04073) on June 1, 2016, to recover the termination fee owed by Western Megawatt Resources, LLC (“Megawatt”) and guaranteed by Bowie, under that certain Purchase and Sale Agreement, dated November 20, 2015, by and between Four Star and Megawatt (the “Four Star Sale Agreement”) whereby Megawatt agreed to pay Four Star $20 million should Megawatt fail to obtain the necessary financing to close the Four Star Transaction under the Four Star Sale Agreement. Bowie filed an answer and asserted its counterclaims on August 17, 2016. The parties completed discovery on December 16, 2016. Four Star and Bowie each filed a motion for summary judgment on December 20, 2016. A trial in the consolidated proceedings is scheduled for January 24, 2017.”