Peabody Energy Corp. filed for Chapter 11 bankruptcy protection on Wednesday. The largest private-sector coal producer in the world submitted petitions listing $10.1 billion in debt for the most of its U.S. entities.
While Peabody intends to continue operations during the process, the filing is just another indication that the coal industry is struggling. With stricter environmental policies, low natural gas prices, and a global surplus of metallurgical coal, prices for the material have dropped significantly over the last decade.
"The outlook for coal players remains bleak," said Sandra Chow, a Singapore-based credit analyst at CreditSights Inc. "Any recovery remains a long way from here."
As reported by Bloomberg, the price of metallurgical coal has fallen roughly 75 percent over the five years and has hit the giant coal company hard. In 2011, Peabody expanded its steel-making division by purchasing Australia-based MacArthur Coal Ltd. for $4 billion. According to a company statement, MacArthur is not included in the bankruptcy petition and will continue to operate normally.
"It wasn't a question of whether Peabody was going to file, it was a question of when and would they include the Australian assets," explained Jeremy Sussman, a New York-based analyst for Clarksons Platou Securities Inc.
While the purchase of MacArthur may have been a mistake in the long term, the mines owned by Peabody do generate revenue, unlike other insolvent miners, like Walter Energy Inc. and Alpha Natural Resources Inc. Sussman says the filing is about the restructuring of assets that will help them stay in business and maintain production well into the future.
According to the Energy Information Administration (EIA), approximately 28 percent of America's electricity use is produced by coal. However, demand for coal by U.S. power plants and steel fabrication companies is dropping.
During 2008, coal production hit 1.17 billion tons, but has since dramatically fallen. The EIA projects only 752.5 million in 2016. Produced by a Peabody mine, Powder River Basin coal was trading at $9.05 a ton on Tuesday, 16 percent below the 5-year price average.
Peabody tried to sell some mines in New Mexico and Colorado, but the deal fell through after the buyer was unable to finish the agreement. Last year, the company began cutting jobs and just recently laid off 235 workers at its Wyoming coal mine.
Despite the statistics, Peabody remains positive about the future, especially in overseas markets.
"The factors affecting the global coal industry in recent years have been unprecedented," Peabody said in the statement. "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."
According to the bankruptcy petition, the company has $10.1 billion in debt and $11 billion in assets. Citigroup Inc. is lending the coal juggernaut $800 million to help fund operations during the process. The loan must still be approved by the court.
Unsecured creditors involve several groups of notes, including $1.56 billion in loans due by 2018. The St. Louis-based company also owes the Office of Natural Resources Revenue about $249.4 for mineral leases. Another $11.7 million is owed to retirees from a previous Peabody company, Patriot Coal Corp.
The Wall Street Journal reports that Peabody Energy Corp. was founded in 1883 by Francis S. Peabody with $100 and quickly grew into an international company with customers in 25 countries. The energy giant first became listed on the New York Stock Exchange in 1949 and is known for its sustainable mining practices.
"The company sees its land restoration as an essential part of the mining process," said the company statement. "Peabody intends to continue to work with the applicable state governments and federal agencies to meet its reclamation obligations."
Peabody Energy Corp.'s chapter 11 petition was filed in the bankruptcy court for the Eastern District of Missouri. While the filing will help keep the company sustainable, market indicators predict coal producers will continue to struggle for decades to come.
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