Wednesday 29 July 2015: Peabody Energy reported a net loss of US$1.05bn for its June quarter overnight. For the first half of 2015, total coal volumes were down 8.5% and revenues down 15% year-on-year.

Peabody wrote down its coal portfolio by US$901m, delivering a net loss for the half of US$1.22bn. Net debt rose by US$129m over the last six months despite a massive cost out focus, with another 300 Australian job cuts announced, following on the removal of 250 American corporate office cuts.

With pricing continuing to fall and Peabody’s balance sheet still deteriorating, the result leaves little positive for coal investors, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

For the first six months of 2015, Peabody reported total coal volumes down 8.5% and revenues down 15% year-on-year to US$2.9bn. Peabody’s Australian operations reporting a 18% year-on-year price decline to US$60.58/t, while the US domestic operations saw prices down 5% yoy. Peabody’s Australian coal division reported revenues down 20% year-on-year on a 2.8% decline in volumes.

“Top-of-the-cycle, multibillion dollar debt-funded acquisitions and a continued failure to manage over-supply in a seaborne coal market in structural decline, mean that the American coal sector is in financial distress,” said Tim Buckley, Director of Energy Finance Studies at IEEFA. “The consequences in terms of shareholder wealth-destruction has been significant.”

“The company shuffled the accounting definition of gross profit to deliver a US$7/t ‘positive margin’, but given this is now defined as gross profit before deducting losses on currency hedging, selling and administration, restructuring costs, plus the exclusion of loss-making associates and is calculated to be before rehabilitation provisions, the red ink remains clear throughout the result.”

Peabody Energy’s net interest expense ballooned 44% year on year to US$288m for the six months. Given a loss before interest and tax was US$974m, even removing asset write-downs of US$901m, the company was again unable to cover its interest bill from operating earnings.

Net debt rose by US$129m over the last six months to US$5,818m. The sharemarket is currently valuing the equity of Peabody Energy at US$344m, a shadow of the US$18bn of five years ago. Peabody Energy shares are down 84% just to-date in 2015.

“Financial distress in the US coal industry is clear,” said Buckley. “Alpha Natural Resources Inc. has been delisted from the New York Stock Exchange and Walter Energy filed for bankruptcy this month. With no light on the horizon for seaborne thermal coal in particular, the rapid decline for Peabody is telling.”

The last decade has witnessed a litany of poor decisions by the company. In 2006, Peabody acquired Excel Coal Ltd (in Australia) for A$1.34 billion. Patriot Coal Corporation was spun off in 2007 – only to have it enter Chapter 11 in 2012.

Patriot Coal filed again for Chapter 11 a second time in 2015.

Peabody acquired Macarthur Coal Ltd (Australia) for a record A$4.9 billion in 2011, again, the peak of the coal boom.

Peabody has subsequently reported asset impairments of US$929m in 2012, US$528m in 2013 and again US$154m in 2014. Despite these multi-billion dollar losses, Peabody’s 2015 proxy statement reports that the Board paid its Chief Executive an average US$10.4 million annually over 2012-2014, before promoting him to be Chairman.

In contrast, in the last five years, shareholders have lost US$17bn or 97% of their equity value, as Peabody struggles under a US$5.8bn debt burden and multi-billions of dollars of underfunded rehabilitation and unfunded retired worker pension liabilities.

Given the US regulatory moves to rescind ‘self-bonding’ guarantees over recent months, US coal companies are increasingly being required to provide external funding for their multi-billion dollar rehabilitation liabilities.

This should be ringing alarm bells in the New South Wales and Queensland state government offices as to the potential under-funded state of rehabilitation liabilities with respect to Peabody’s Australian business.

“Australian regulators remain asleep at the wheel in terms of rehabilitation liabilities,” said Buckley.

“The reality is that if Peabody is unable to cover the cost of its mine rehabilitation, that burden will be shifted to taxpayers. While this seems an extreme scenario, Australia has 52,000 historical examples that show this has been a tried and tested outcome of mining in this country.”

About IEEFA

The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce dependence on coal and other non-renewable energy resources.

More here on IEEFA research: http://ieefa.org/category/subject/reports/