U.S. coal giant Peabody Energy Corp. (NYSE: BTU) filed for bankruptcy on April 13, the most powerful convulsion yet in an industry that’s enduring the worst slump in decades.
The company voluntarily filed petitions under Chapter 11 for the majority of its U.S. entities in the United States Bankruptcy Court for the Eastern District of Missouri, according to a statement dated April 13. All of Peabody’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, it said.
As previously reported by Mergers & Acquisitions, Peabody had indicated in a March 16 filing with the U.S. Securities and Exchange Commission that it might seek Chapter 11 protection. Many energy companies have indicated concerns regarding their ability to continue operations, including Energy XXI Ltd. (NASDAQ: EXXI) SandRidge Energy Inc. and Vaalco Energy (NYSE: EGY). Others have provided updates to investors on loans and negotiations with lenders, including Foresight Energy (NYSE: FELP) and Linn Energy (Nasdaq: LINE).
Founded in 1883 by 24-year-old Francis S. Peabody with $100, a wagon and two mules, the miner is now the largest private-sector coal company in the world, with customers in 25 countries and about 8,000 employees, according to its website. It joins at least four other coal companies that have sought bankruptcy as the industry endures its worst downturn in decades -- a result of tougher environmental policies, a flood of cheap natural gas and a global glut of metallurgical coal that’s dragged prices for steelmaking component to the lowest in more than 10 years.
“The outlook for coal players remains bleak,” said Sandra Chow, a Singapore-based credit analyst who tracks coal producers at CreditSights Inc. “Any recovery remains a long way from here.”
The price of metallurgical coal has tumbled about 75 percent since its 2011 peak. That’s been particularly painful for Peabody, which spent $4 billion in 2011 to acquire Australia’s MacArthur Coal Ltd. in an effort to expand its sales of the steelmaking component. No Australian entities are included in the filings, and Australian operations are continuing as usual, according to the statement.
“The factors affecting the global coal industry in recent years have been unprecedented,” Peabody said in the statement. “Still, multiple third-party estimates project that both the U.S. and global coal demand will stabilize. Coal currently fuels approximately 40 percent of global electricity and is expected to be an essential source of global electricity generation and steel making for many decades to come.”
The U.S. will continue to use coal, which generated about 28 percent of the country’s electricity in December, according to the Energy Information Administration. Demand for coal used in power plants and for making steel should remain weak through 2016, but India and Southeast Asia will be bright spots, said Bloomberg Intelligence analyst Andrew Cosgrove.
“This isn’t a death knell for coal. It’s the pains of a shrinking industry,” Cosgrove said.
U.S. coal production peaked in 2008, at 1.17 billion metric tons. In recent years, it’s plunged and may fall to 752.5 million in 2016, the Energy Information Administration projected in its monthly Short-Term Energy Outlook released Tuesday.
As recently as October 2014, Peabody executives were optimistic, saying the worst might be over and investors were encouraged that coal pricing may have hit a bottom. The uptick never came, and last year, Peabody began cutting jobs and looking to sell assets. The planned sale of its New Mexico and Colorado assets was terminated after the buyer was unable to complete the transaction, according to Wednesday’s statement.
As part of the bankruptcy process, Peabody has obtained $800 million in debtor-in-possession financing facilities, which were arranged by Citigroup Inc. and include participation of a number of the company’s secured lenders and unsecured noteholders, it said in the statement.
The filing leaves uncertainty around Peabody’s $1.47 billion in environmental liabilities. Under a federal law enacted in 1977, mining companies must post surety bonds or other collateral that cover future mine cleanup costs unless their balance sheets are strong enough to qualify for an exemption known as "self-bonding."
Before the bankruptcy filing, WildEarth Guardians and the Environmental Law & Policy Center sought to get Peabody’s self-bonding revoked in states including Wyoming, New Mexico and Illinois, saying that its finances were too poor to justify the privilege.
Peabody, which boasts sustainable mining practices and “clean coal,” says it has restored thousands of acres of mined lands over its long history. But in November it agreed with New York Attorney General Eric Schneiderman to make more specific disclosures about the financial risk it faces from future climate-change policies after his office claimed Peabody hadn’t disclosed concerns to investors and regulators that it had discussed in private. Peabody neither admitted nor denied those findings.
“The company sees its land restoration as an essential part of the mining process,” it said in the April 13 statement. “Peabody intends to continue to work with the applicable state governments and federal agencies to meet its reclamation obligations.”
Peabody grew quickly after its humble beginnings. The 133-year-old company listed on the New York Stock Exchange in 1949 and went through many corporate incarnations. It spun off operations in Appalachia and the Illinois Basin as Patriot Coal Corp. in 2007. Patriot filed for bankruptcy in 2012 and again in 2015, joining rivals Arch Coal Inc., Alpha Natural Resources Inc. and James River Coal Co.
Fitch Ratings Ltd., in a February note, said Peabody faced “continued competition in domestic markets from cheap natural gas and bankrupt coal producers, expectation of a delayed recovery in the seaborne metallurgical coal market from very low levels, and prospects for further weakness in the Asia Pacific steam coal markets.”
Trading of Peabody’s shares are expected to be suspended immediately, it said in the statement.
-- Additional Reporting by Jakema Lewis