By David Nicklaus

November 13, 2020 - Baseball fans may remember when Busch Stadium’s video board used to go dark for a few seconds, then return with a reminder that coal “keeps the lights on.”

The old slogan is becoming less true every year. Coal plants produce just 19% of U.S. electricity, down from 45% a decade ago, and Peabody, which paid for those stadium ads, is having trouble keeping its own lights on.

Wright, Wyoming Coal is loaded into a train at Peabody's North Antelope mine Thursday near Wright, Wyoming.

Photo: J.B. Forbes, St. Louis-Dispatch
 

The world’s largest private-sector coal miner disclosed this week that it might face a return trip to bankruptcy court if it can’t renegotiate its debt.

Peabody finished the first trip less than four years ago, in April 2017, having eliminated $5 billion in debt and forged a balance sheet that executives thought was solid enough to thrive in a declining industry.

What they didn’t count on was the decline accelerating. Cheap natural gas and renewable energy caused utility after utility to turn its back on their longtime favorite fuel.

“I don’t think anyone anticipated that the cost of renewable energy would fall so fast, or that natural gas would get as cheap as it did,” said William O’Grady, chief market strategist at Confluence Investment Management.

Peabody took a $1.4 billion write-down in August on the value of its North Antelope Rochelle complex in Wyoming, the biggest U.S. coal mine. That, along with Peabody’s deteriorating finances, triggered a series of consequences.

Surety companies, which guarantee the cleanup of mines, began demanding more collateral. Peabody also says it expects to be in violation of certain loan covenants by year’s end, which means lenders could demand immediate repayment.

Peabody said Monday that 99% of the surety companies have agreed to a deal in which it will put up $75 million in new collateral, plus an additional $25 million each year until 2025, and give the companies a lien on $200 million worth of equipment.

Meanwhile, it’s still negotiating with lenders. Documents filed this week show a back-and-forth in which bondholders want to increase Peabody’s interest rate from 6% to 12% in exchange for stretching the debt out by one year, to 2023. Peabody is offering to pay 7.125% and wants a three-year extension to 2025.

If it can’t reach an agreement with the lenders, Peabody says it may wind up back in bankruptcy.

Rob Godby, associate professor of economics at the University of Wyoming, expects the mining giant to avoid that outcome. “It’s certainly a riskier company than it was, but I don’t think they’re quite at death’s door yet,” he said. “There are still ways out for Peabody.”

A rise in natural gas prices would help, as would a rebound in electricity demand. Both those things might happen as the nation recovers from a pandemic-caused recession. “The coal market might get a little bit better in the next year,” Godby said. “There’s a little bit of breathing room.”

Still, the long-term outlook is bleak. “The problem is that higher natural gas prices will also feed demand for renewables,” said Clark Williams-Derry, an analyst at the Institute for Energy Economics and Financial Analysis. “Coal is a typewriter in the computer age, and the electricity markets are going to be moving on.”

It seems foolhardy in hindsight, but investors were optimistic about coal as recently as mid-2018. Peabody’s shares rose from $25 to $45 in the company’s first 15 months out of bankruptcy.

Now, they’re worth just 90 cents, meaning Peabody’s market value has fallen from $4 billion to a mere $88 million. After that kind of value destruction, optimists are hard to find.