With the bankruptcy of Peabody Energy Corp. yesterday, three of the nation’s five largest coal producers are now in court slogging through complex reorganizations.
Peabody’s Chapter 11 filing continues the brutal contraction of the U.S. coal sector, an unwinding of the growth it enjoyed in the last decade. St. Louis-based Peabody, which had been among the world’s largest private-sector coal companies, expanded into Australia and Asia in recent years with the hope of capturing markets in the developing world.
Peabody executives beat the drums about future coal exports to China. While operating massive mines in the American West, they relentlessly attacked and litigated President Obama’s policy to cut power plant carbon emissions.
Yet the world kept turning. Coal and electricity prices collapsed. U.S. power producers used less coal and burned more natural gas. Wind power took off in the Midwest. China’s economy slowed, and U.S. EPA regulated carbon.
Peabody’s boldest claims about growth were wrong, and its most strident rhetoric around climate change never shifted the direction of policy. Eventually Wall Street stopped listening. The company’s stock price sank as prices stayed low, plunging it deep into debt.
Now, its management and investors will spend months contemplating the financial realities of producing and selling coal in the 21st century — and how the company should retool for that.
Kristoffer Inton, an equity analyst at Morningstar Inc., put it plainly: When bankrupt coal companies emerge from Chapter 11 restructuring, which also includes the second-largest U.S. producer, Arch Coal Inc., they’ll be producing less coal. "Basically, future coal demand is going to be smaller than it’s been in the past, for a number of reasons," he said. "Because of that, the footprint of that demand isn’t going to be what it was, and the industry’s basically built for a world of higher demand."
Peabody, Arch Coal and Alpha Natural Resources Inc. accounted for about 40 percent of U.S. production in 2014, according to the U.S. Energy Information Administration.
Now all three are bankrupt. Environmentalists say that is evidence of coal’s structural decline — that it has permanently ceded ground to natural gas and renewable energy.
"A few years ago, Peabody Energy was telling investors demand for coal was going to rise," said Luke Sussams, a senior analyst with the Carbon Tracker Initiative. "This is a timely reminder that investors must not accept the demand expectations of fossil fuel companies on face value."
Coal is the source for about one-third of U.S. electric power; at the start of the decade, it provided half.
Still, some think the industry will consolidate and re-emerge as a more stable business.
"The market is right-sizing, essentially. And bankruptcy is obviously a way to help that process," said Andrew Moore, managing editor of Platts Coal Trader, an industry newsletter. "The cost-cutting that had to happen has happened, basically. So Peabody, Arch and Alpha are running as lean as possible by now. Once Peabody exits its reorganization, it’ll be even leaner and meaner."
The exact shape of that will have to be worked out in federal bankruptcy court. Peabody filed yesterday in the Eastern District of Missouri, declaring almost $9 billion in debt.
The next step is to figure out what the company is worth. Everyone who can lay a claim to Peabody’s assets — its lenders, stockholders, business partners and pensioners, and state environmental regulators, for example — will have a say.
"It’s all about the valuation of what they think the company is worth upon exit," Inton said.
After they settle on a figure, and the judge approves it, that value will be doled out in order of seniority — with senior debt holders first in line. In principle, that would allow a new company to emerge from bankruptcy nearly debt-free.
But there will be considerable debate about the value of Peabody, given how markets have shifted. Peabody has historically pointed to seaborne markets as an engine of growth. But coal growth in China may peak by 2030. India may succeed at supplying much of its coal domestically.
Meanwhile, in the United States, shale gas is cheap and abundant. Climate regulations, if upheld by the U.S. Supreme Court, will crimp the long-term prospects of coal.
"Still, multiple third-party estimates project that both the U.S. and global coal demand will stabilize," Peabody said in a press release yesterday.
"U.S. gas prices are projected to rebound from recent lows," Peabody said, despite years of low natural gas prices.
"Globally, thermal coal is expected to continue to fuel hundreds of existing coal generating plants as well as scores more that are under construction," Peabody said, underscoring its faith in demand growth outside the United States.
The company said all of its U.S. operations were cash-flow positive in 2015; that is, without the debt load, these businesses would be profitable.
Anthony Young, a senior analyst with Macquarie Research, said Peabody earns roughly $300 million a year before interest and other expenses — a considerable sum for any business.
"It’s not really the assets that are a problem; it’s more the balance sheet and the fact that they took on an extremely large amount of debt higher in the cycle," he said.
Now Peabody will look for ways to shed that debt. One way is to sell coal mines, as Alpha is trying to do in its bankruptcy proceeding.
Or it could hope for a savior: an investor who wants to buy up its debt and bet on a coal-market recovery.
But there aren’t as many buyers as there were a decade ago.
Last November, Peabody tried to sell $358 million of assets to Bowie Resource Partners LLC, which focuses on the Utah market and is trying to expand.
The deal fell through after Bowie couldn’t raise cash for it, Peabody said.
Even risk-taking investors are shying away from coal, Stephen Goldstein, senior managing director at Evercore Group LLC, told The Deal late last year.
"There’s not much willingness for new outside capital to come in and bid these assets at a low point in the cycle, as these distressed funds typically do," he said. "They have not been interested in coal. The new owners of these companies will be the debt holders."