Clean Power Plan a ‘red flag’ tied to Peabody’s fate

By Saqib Rahim | 03/24/2016 07:03 AM EDT

As Peabody Energy Corp. tries to stave off bankruptcy, much of its fate is tied to an upstart Kentucky firm that’s betting on coal for the long term.

As Peabody Energy Corp. tries to stave off bankruptcy, much of its fate is tied to an upstart Kentucky firm that’s betting on coal for the long term.

Peabody, which has been scrambling to raise cash and pay its interest bills on time, struck a nearly $360 million deal last November. The buyer was Bowie Resource Partners LLC, a privately backed firm that wanted to buy three mines in New Mexico and Colorado.

But coal markets have worsened since then, and the deal is under threat.


"I think one of the biggest headwinds and risks right now is the Clean Power Plan. And I could imagine a lot of investors being hesitant to jump into the coal sector in any aspect right now, given the uncertainty," said Jack Chidester, an associate vice president at Doyle Trading Consultants. "It’s still unknown, which is a red flag for investors."

In a collapsing coal market, Bowie is one of the few buyers. The Louisville, Ky.-based company, which attempted to go public last June, claims to have a firmer business model than others: It markets low-sulfur coal, mainly to power companies in Utah, under long-term contracts, at a guaranteed price.

In its initial public offering documents, Bowie claims demand for its brand of coal is growing in Utah. It also said it can sell into global coal markets through export terminals in California.

"We believe that the Clean Air Act Amendments of 1990 will continue to drive demand for the low sulfur coal produced in regions such as Utah," the documents say. A spokesman for Bowie could not be reached for comment.

Long-term contracts, especially with reliable customers like utilities, historically have drawn plenty of support on Wall Street. But with more banks openly declaring that they’re reducing coal investments and stock values imploding in recent years, the coal industry faces more bearish sentiment than it’s accustomed to.

Regulations are a likely factor. Under the Clean Power Plan, for instance, Utah must cut its CO2 emissions rate by a third, according to E&E’s Power Plan Hub. Six of Utah’s coal plants would have to comply.

Utah has paused its compliance process since the Supreme Court stayed the plan in February.

Peabody, the world’s largest private-sector coal firm, said last week that bankruptcy is a possibility.

The firm is currently in a grace period on a $71 million interest bill, and it’s working with its top lenders to decide on a course of action.

If it can complete the deal with Bowie, that will take some of the pressure off. The Bowie deal would reduce its self-bonding needs by $300 million. Self-bonding, which lets companies promise to set aside money for cleaning up mines, is one of the major liabilities on Peabody’s balance sheet.

"Peabody stands ready to complete the sale of assets to Bowie consistent with our sales agreement," spokeswoman Beth Sutton said by email.

The firm has targeted closing the deal by the end of March.

Still, the deal wouldn’t necessarily exorcise the Chapter 11 demon.

The firm is burning through its $900 million of cash, so its lenders are still wondering if the company is sustainable in its current form, said Chiza Vitta, director of metals and mining at Standard & Poor’s.

"The overarching factor, though, is regardless of how much money these guys raise, if they can’t get the business back to a place where it’s break-even, you’re really just delaying a point in time where you have to file," he said. "Ultimately the most important thing here is to get the business healthy again."