Oil Check Washington

Peabody, next Northwest coal exporter to go bankrupt

Photo credit: ZHart, used under creative commons

Feb 25th - Peabody Energy, the world’s largest private coal company, has had plans to ship coal through the Northwest for years. Their Gateway Pacific terminal just north of Bellingham, WA, has been in a holding pattern as local communities weigh whether a project like this is in the collective interest. After contentious debates, massive public hearings and countless news stories, the permitting process understandably has been delayed.

While this process has been playing out locally, coal has been undergoing a well-reported transformation nationally. Once the standard bearer of our power grid, coal has dropped from providing a substantial 50% of the nation’s electricity to 29%. As we write, the Oregon legislature is heading to a final vote on a proposal to completely transition off coal. The result of this downturn is that many domestic coal companies were becoming heavily dependent on exported coal (and exports have been falling since 2012)—carried by train through American cities and towns—to make up the difference. While the United States continues its transition to a clean energy economy, companies like Arch Coal, Cloud Peak and Peabody made huge financial bets on foreign coal markets. Two major factors have put a tremendous dent in the coal industry’s dream.

First, despite industry claims of "insatiable demand" from "power hungry” Asian nations, countries like China and South Korea don’t want to be anchored to coal any more than the U.S. does, an issue Oil Check has previously discussed. When questioned about China’s domestic energy policy, Chinese Premier Li Keqiang said: “Environmental pollution is a blight on people's quality of life and trouble that weighs on their hearts, we must fight it with all our might." The largest protests in modern Chinese history have been over pollution and the ruling party knows that clean energy is their next path to an even stronger, modern economy. By many measures China has been transitioning even faster than the U.S. – the country is set to shut down 1,000 coal-mines this year. Second, Northwest residents have fought coal coming through their neighborhoods on massive scale and have mounted a coordinated campaign to fight these proposals. The process for the projects has taken years longer than the companies had envisioned and permits continue to be delayed with concerns as wide ranging as local health, traffic delays, and indigenous fishing rights.

The coal industry did not see these shifts coming and after incurring huge debts buying assets during coals early 2000s boom, there has been an unprecedented string of coal company bankruptcies. Over the last 4 years twenty-six companies have gone bankrupt and over 260 mines have shuttered their doors. Arch Coal’s January 2016 chapter 11 filing was the latest and largest company to fall. Arch is the second largest coal company in the U.S. and is one of the major backers of an enormous potential coal export facility in Longview, WA.

Why Peabody is Likely Next

Peabody has fallen prey to many of the same industry issues as its competitors. A massive company with assetsacross the US and Australia many thought Peabody would be much better insulated from the financial disasters that have sunk so many industry peers. But the current energy reality is shifting so quickly it looks likely to swallow up even this industry behemoth. To pay back many of its creditors, Peabody already has begun selling off a large chunk of its assets. Some believe this will help the company stabilize but others like David Desjardins of the well regarded investment site Seeking Alpha doesn’t think this is nearly enough:

“The problem is its over leveraged balance sheet. The decent operating margin is dilapidated by the expenses associated with the debt load. In my opinion, the bankruptcy seems extremely probable.

This affirmation is corroborated by the credit analyst. As of January 14, the unsecured bonds are trading at 8.6 cents on the dollar for an impressive yield of 99%. The bankruptcy looks already priced-in.

This means that creditors buying Peabody’s bonds have set a price that gives funds back in an incredibly short time span because they are already expecting the company to go bankrupt.

Desjardins continues:

The second scenario is to continue to sell a meaningful amount of assets at a distressed price. Based on the atmosphere in the coal industry, the totality of its assets is probably not worth the principal of $6.3 billion in my opinion.

In conclusion, the bankruptcy looks inevitable in my opinion. I believe the asset sales are only buying time and not solving the real problem. I would not touch the stock with a ten-feet pole.”

Energy industry data analysis firm Wood Mackenzie corroborates the plight of Northwest coal exporters and their rapid decline highlighted in this graphic showing American Powder River Basin coal being uncompetitive with international markets for nearly the next decade:


Fiddling while Wyoming and Appalachia burn

What’s most troubling is how the coal industry has responded to this seismic shift. Rather than make essential market adjustments or executive pay cuts, the industry has poured money into front groups, opposition and bonuses.

As bankruptcies continue, more information about coal companies’ inner workings comes to light. Through chapter 11 creditor reports, researcher Lee Fang of the Intercept uncovered direct links between Alpha Natural Resources and organizations that actively promoted climate denial and harassed scientists. Arch Coal just this week was found to have similar ties, likely giving significant funds to these organizations.

As Oil Check has reported, over the last three election cycles coal companies and their local backers have poured hundreds of thousands into local politics and lobbying to try and shift the political balance to their favor.

Even after companies have gone bankrupt, many still show a shocking level of indifference. In exchange for staying on board with the company through its bankruptcy, Alpha Natural Resources has negotiated to pay executives millions in bonuses. This comes while Alpha has seen fit to cut employee pensions, health insurance and disability payments in order to pay back creditors.

Locally, the coal industry front-group the Alliance for Jobs and Exports responded to news of Arch’s bankruptcy by repeating tired rhetoric and a lack of understanding for what’s happening to the industry.

“Despite the lengthy delay in reviewing their applications, and the disconcerting signal it sends to other outside investors looking at Washington as a place to do business, there’s plenty of interest as well as a high-level of confidence in the need for these projects; whether it be markets overseas or here at home.”

As its bankruptcy looms, here’s hoping Peabody takes a sober look at what a just transition away from their products will look like and learns from the industry's recent tragic mistakes.

- Nick Abraham Editor Oil Check Northwest

[email protected] @oilchecknw


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