Nation’s largest coal producer files for bankruptcy, says industry is in ‘unprecedented downturn’

Peabody Energy Corp., the nation’s largest privately-held coal company, voluntarily filed for bankruptcy today (April 13) in the latest sign that the entire coal industry is under duress as energy providers switch to cleaner natural gas stockpiles and other renewable energy sources.

In filing for Chapter 11 protection in the U.S. Bankruptcy Court for the Eastern District of Missouri in St. Louis, Peabody officials said the coal giant was taking a major step to strengthen liquidity and reduce debt amid an “unprecedented industry downturn.”

“This was a difficult decision, but it is the right path forward for Peabody. We begin today to build a highly successful global leader for tomorrow,” Peabody President and CEO Glenn Kellow said in a news release. “Through today’s action, we will seek an in-court solution to Peabody’s substantial debt burden amid a historically challenged industry backdrop. This process enables us to strengthen liquidity and reduce debt, build upon the significant operational achievements we’ve made in recent years and lay the foundation for long-term stability and success in the future.”

Under the bankruptcy petition, Peabody said it intends to reduce its overall debt level, lower fixed charges, improve operating cash flow and position the company for long-term success, while continuing to operate under the protection of the court process.

In addition, all of the company’s mines and offices will continue to operate in the ordinary course of business and are expected to continue doing so for the duration of the process. Peabody said none of its Australian coal subsidiaries were included in the filings, and those business units would continue normal operations.

In connection with bankruptcy filing, Peabody said it has obtained $800 million in debtor-in-possession financing facilities, which were arranged by Citigroup and include participation from some of the company’s secured lenders and unsecured noteholders. The credit arrangements include a $500 million term loan, a $200 million bonding accommodation facility and a cash collateralized $100 million letter of credit facility, and are subject to court approval as well as limitations as set out in the company’s filings.

Peabody said in addition to the company’s existing cash position, it believes it has sufficient liquidity to operate its business worldwide post-petition and to continue the flow of goods and services to its customers in the ordinary course. However, the company’s planned sale of the coal operations New Mexico and Colorado assets was terminated after the buyer was unable to complete the transaction, officials said.

Still, Peabody noted that “multiple third-party” industry forecasts project that the U.S. and global coal demand will stabilize as U.S. natural gas prices rebound from recent lows and the global thermal coal sector continues to fuel hundreds of non-U.S. existing coal generating plants as well as scores more that are under construction.

“A company like Peabody with safe, efficient operations will be well positioned to serve coal demand that will continue in the United States and around the world,” said Kellow. “We are a leading producer and reserve holder in our core regions of the Powder River Basin, Illinois Basin and Australia. Peabody has a new management team, outstanding workforce, unmatched asset base and strong underlying operational performance that represent a key driver in the company’s future success.”

Despite Peabody’s rosy forecast, energy analysts say the industry is clearly in trouble with the recent decline of coal as the U.S. main power source and the impact the Obama administration’s Clean Power Plan and other federal Environmental Protection Agency (EPA) rules have had on forcing power producers in Arkansas and others states to switch to other cleaner sources of energy.

In fact, outgoing Entergy Arkansas President and CEO Hugh McDonald recently told Talk Business & Politics that the state’s largest electricity provider has dramatically reduce its reliance on coal-fired power generation due to EPA rules and cheaper natural gas prices. In the Arkansas utility’s response to the EPA’s regional “haze” plan in August 2015, Entergy Arkansas proposed the eventual shutdown of its coal-fired operations at the White Bluff Electric Station in Jefferson County, instead of a costlier plan to install scrubbers atop the smokestacks of the sprawling power plant near Redfield by 2021.

COAL PRODUCTION AT LOWEST LEVEL SINCE 1986
Earlier this year, the U.S. Energy Information Administration (EIA) said that since reaching a high point in 2008, coal production in the U.S. has continued to decline. U.S. coal production in 2015 is expected to be about 900 million short tons (MMst), 10% lower than in 2014 and the lowest level since 1986.

Almost all coal from the nation’s five major coal basins or regions are used primarily for electric generation. The largest decline in coal production was in the Central Appalachian Basin, largely because of its difficult mining geology and high operating costs. Coal production in the Central Appalachian Basin in 2015 was 40% below its annual average level between 2010 and 2014, the EIA said.

In three other main areas, the Northern Appalachian Basin, Rocky Mountain region, and Powder River Basin, production in 2015 was 10% to 20% below their corresponding regional annual average levels between 2010 and 2014. By contrast, coal production from the Illinois Basin in 2015 was 8% higher than production levels over 2010-14.

In addition, coal’s share of electricity generation has fallen as its market share of natural gas and renewables increased. The average daily natural gas spot price at the Henry Hub, a key natural gas benchmark, fell from $4.38 per million British thermal units (MMBtu) in 2014 to $2.61 per MMBtu in 2015, resulting in greater natural gas-fired electricity generation.

In April 2015, natural gas-fired electricity generation surpassed that of coal-fired generation on a monthly basis for the first time in history, and it did so again in each of the months from July through at least October, the latest monthly data available. According to the most recent short-term energy outlook estimates, released on Monday (April 12), 2015 power sector coal consumption will be about 764 MMst, the lowest level since 1988.

Forecast coal production is expected to decrease by 143 MMst ( down 16%) in 2016, which would be the largest annual percentage decline since 1958. Still, coal-fired electric power plants in Arkansas supplied 54% of the state’s electricity in 2014. Mainly from coal deliveries via railcar from Wyoming.

CLEAN POWER PLAN MAY PUSH MORE COAL BANKRUPTCIES
Bankruptcies in the coal sector are also starting to pile up. Since mid-2015, top U.S. producers Alpha Natural Resources, Walter Energy, James River Coal, Patriot Coal and Arch Coal have all filed for bankruptcy protection. All these coal companies engaged in leveraging transactions near the height of the coal boom in 2011 that proved unsustainable when prices continued to fall, according to a recent Fitch Ratings’ report.

Arch Coal, the nation’s second largest coal producer, received approval to restructure its operations in January U.S. Bankruptcy court officials in St. Louis, the same court where Peabody filed its petition. Many coal trade groups and allies blame the Obama administration and the EPA’s Clean Power Plan for speeding up the industry’s recent decline.

“The Clean Power Plan would exponentially escalate their challenges. Limiting power generation choices and prematurely retiring coal plants will diminish fuel competition and strand assets. That will come with huge costs and risks which will impose enormous and unnecessary burdens on states, businesses, and families. It will destroy good jobs, raise electricity prices, disproportionately affect low-income households, and damage America’s ability to compete internationally,” the American Coal Council said recently.

A month ago, the state Department of Environmental Quality (ADEQ) and Arkansas Public Service Commission (PSC) halted stakeholder compliance meetings on the Clean Power Plan due to U.S. Supreme Court’s Feb. 9 stay blocking the EPA from implementing the far-reaching carbon emission rules. The U.S. Court of Appeals for the District of Columbia Circuit is expected to issue a decision on the Clean Power Plan this fall, which would put the rule in front of the Supreme Court in spring 2017.