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Lower expectations drive Peabody's $1.42B impairment of largest US coal mine

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Lower expectations drive Peabody's $1.42B impairment of largest US coal mine

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With its large coal seams in the Powder River Basin, the North Antelope Rochelle mine has long been the largest coal mine by production volume in the United States. Peabody Energy Corp. announced in its second-quarter earnings release that it was drastically decreasing the estimated value of the mine.
Source: Peabody Energy

The largest coal mining company in the United States substantially lowered the value of one of its top-producing thermal coal assets based on low expectations for future coal demand.

Peabody Energy Corp. impaired the value of its North Antelope Rochelle coal mine in Wyoming by $1.42 billion in the second quarter. Peabody said it was lowering the expected value of the coal mine, the largest in the United States, because of assumptions regarding lower long-term natural gas prices, the timing of coal plant retirements, and continued growth from renewable generation.

"While we still believe coal is essential to a reliable energy grid and that our [Powder River Basin] assets are best positioned to serve that demand ... we do expect coal's long-term share of the U.S. generation mix to remain below prior-year levels," Peabody CFO Mark Spurbeck said on the company's Aug. 5 earnings call.

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Production from the North Antelope mine has dropped drastically in recent years. U.S. Mine Safety and Health Administration data shows the company produced about 30.7 million tons of coal in the fourth quarter of 2014, a near-term high for the mine. Quarterly production from North Antelope dropped below 20 million tons for the first time in recent history in the first quarter of 2020, and second-quarter production totaled just 14.0 million tons. Peabody delivered coal from North Antelope to 84 power plants across the U.S. in 2019, according to S&P Global Market Intelligence data.

"This is a clear signal that Powder River Basin coal production isn't coming back and the multi-year decline that was prevalent before the pandemic will continue long after the virus is gone," Shannon Anderson, the staff attorney for the Powder River Basin Resource Council, said in an emailed statement about the impairment. "It's time for Wyoming leaders to think about what comes next for our communities, coal miners, and our revenue streams."

Peabody reported that its total shipments out of the Powder River Basin declined 28.4% in the quarter compared to the prior-year period, although costs in the segment improved 4.7%. The company has been adjusting to lower demand and pricing with multiple initiatives, including temporarily idling production at mines, adjusting shift schedules and reducing units in operation.

"U.S. thermal coal conditions remain especially challenging given weak overall electricity demand, high customer inventory levels and continued low natural gas prices," Peabody wrote in its earnings release. "These factors have accelerated the secular decline already underway in the industry."

The company also announced it was evaluating "strategic financing alternatives" to enhance financial flexibility. The company ended the quarter with $848.5 million of cash and cash equivalents on hand and $926.1 million of available liquidity. That is a decrease of $261.6 million since the end of the first quarter.

Peabody Energy had $6.54 billion in total assets as of the end of 2019 but reported $4.95 billion in total assets on its balance sheet as of the end of June. Including the impairment, the company booked a $1.54 billion net loss, or $15.78 per share, in the quarter.

The company has been hit hard by the COVID-19 pandemic. Revenues from Peabody's seaborne segments declined $257.5 million on 48% lower metallurgical volumes and depressed metallurgical and thermal coal prices. The company's U.S. thermal revenues in the quarter declined $234.4 million due to the closure of its Kayenta mine in Arizona during the third quarter of 2019 and the effect of lower natural gas prices on coal demand.

"The overall weak demand, coupled with depressed pricing, has required us to continue to aggressively pursue our cost repositioning program," Peabody President and CEO Glenn Kellow said on the earnings call. "To date, we've made significant progress, and we have needed to, yet still more needs to be done."

The company has touted a proposed joint venture with competitor Arch Resources Inc. that would combine both companies' western U.S. coal assets as a possible solution to persistent challenges faced in the Powder River Basin. However, the company has encountered opposition from the Federal Trade Commission based on anti-competitive concerns around the deal. Peabody said it expects a decision on the joint venture by the end of the third quarter.

"While we've always believed in the benefits the joint venture brings to multiple stakeholders, the case has only grown stronger in 2020," Kellow said. "Challenging demand conditions have underscored the need for this transaction to remain competitive with other fuel sources."