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Peabody Energy’s Pathway Out Of Bankruptcy Leads … Backs To Bankruptcy, Says IEEFA

After filing for bankruptcy in April of this year, the world’s biggest coal miner, Peabody Energy, has plans to emerge from bankruptcy that, according to experts, will only lead it straight back into bankruptcy.

Peabody Energy is the world’s largest private sector coal miner, but in April of this year it filed for Chapter 11 bankruptcy protection following months of rumors and speculation. Peabody’s bankruptcy followed hot on the heels of a number of other coal production companies similarly announcing bankruptcy, including Arch Coal Inc., Alpha Natural Resources, Patriot Coal Corp., and Walter Energy Inc. The US coal industry has been particularly hard hit of late, with a massive decline in production and demand — a trend seen elsewhere, such as in India and China, but not to the same degree and dramatic business consequences.

Recently, Peabody Energy published its 2017-2021 Business Plan, which entailed its efforts to emerge from bankruptcy. However, according to the Institute for Energy Economics and Financial Analysis (IEEFA), a research and analysis firm focused on the financial and economic issues pertaining to energy and the environment, “Peabody Energy’s plan to emerge from bankruptcy will most likely end ironically. In another bankruptcy, that is.”

IEEFA published a research memo (PDF) in late August investigating Peabody Energy’s Business Plan, and found it significantly lacking.

“It is overly optimistic on financial projections in key areas, in its coal-production outlook and in its expectations for cost-control results,” wrote Tom Sanzillo, IEEFA Director of Finance. “It fails to acknowledge that a post-bankruptcy Peabody may not be able to meet its self-bonding solvency requirements. The plan also misrepresents the true size of company assets and suggests wrongly that Peabody will be a larger enterprise than is likely.”

The memo analyzes the general aspects of Peabody’s Business Plan, as well as the company’s Financial Focus on the Powder River Basin, and reaches a stark conclusion:

“Peabody’s presentation of its financial condition is misleading and is reminiscent of the company’s 2007 spinoff of Patriot Coal, which filed for bankruptcy in 2012 — and again in 2015.”

IEEFA notes that “Industry consensus” on the bankruptcy of Patriot Coal “was that Patriot failed because it did not adequately align the company’s expenses and liabilities, particularly existing pension and environmental challenges with weak revenue potential in a declining coal region (Appalachia).” This led to the company emerging from bankruptcy in December 2013, only to file again in May of 2015. “While Peabody’s financial condition is different in many respects from Patriot’s,” Sanzillo concludes, “the similarities are striking, especially in terms of stated coal reserves, overly optimistic cost-management strategies and declining revenue potential in a weak market.”

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