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The 'New BTU': Largest US coal producer springs out of bankruptcy

Peabody Energy Corp. returned to the NYSE on April 4 fresh out of bankruptcy and riding a wave of optimism in the U.S. coal sector.

The world's largest private-sector coal producer is the last of the giant coal miners in the U.S. to emerge from bankruptcy, joining old peers such as Arch Coal Inc.. and surviving less fortunate companies such as Peabody spinoff Patriot Coal Corp. and sold-off metallurgical coal producer Walter Energy Inc. Riding the tailwinds of a friendly presidential administration and boosted market fundamentals, the company will face competition from somewhat familiar faces such as Contura Energy Inc., formed from top assets in the bankruptcy of Alpha Natural Resources Inc., and new players like the recently public Ramaco Resources Inc.

The company emerges, more than $5 billion lighter in debt, into a market that, after a multiyear decline, is finally starting to see some stabilization in the domestic thermal markets. Meanwhile, international metallurgical coal prices are soaring due to weather disruptions and longer-term factors.

Peabody's bankruptcy, like many in the sector, resulted from a "perfect storm" of factors.

Just as cheap natural gas was set to flood the U.S. power sector and metallurgical coal prices were about hit a peak in late 2010 through 2011, coal companies were buying up metallurgical coal properties to participate in what many were viewing as a nearly boundless opportunity. Among those in the buying frenzy was Peabody, which scooped up Macarthur Coal Ltd. (Peabody Energy) for about $5 billion. The debt-fueled purchases would weigh heavily on the balance sheets of U.S. coal producers when metallurgical coal prices tanked shortly after.

"They weren't controversial moves," Patriot Coal CEO Bennett Hatfield told S&P Global Market Intelligence in 2015. "If you look back at the press coverage in 2011, Alpha was generally heralded for their growth by adding on [Massey Energy] and similarly, Arch and [International Coal Group] was a combination that was widely complimented in terms of investor reaction and analyst reaction. None of us saw the changes coming in the market that have befallen the industry since then."

The metallurgical coal market only declined further, compounding the troubles faced with declining domestic demand. Peabody was able to hold on longer than many of its peers, but market forces against the industry were unyielding for months as waves of bankruptcies swept over the sector, taking down at least 50 small and large coal mining companies.

Peabody tried to sell properties including its El Segundo and Lee Ranch mines in New Mexico and the Twentymile mine in Colorado to Bowie Resources LLC, but the deal fell through due to struggles to secure financing. The company had warned that without the $358 million deal, it could likely join the then-growing roster of bankrupt coal companies.

Data from the U.S. Mine Safety and Health Administration showed Peabody was drastically rapidly cutting production in the weeks ahead of its announced bankruptcy filing as the entire sector tried to rebalance production to match rapidly diminished demand from U.S. utilities. On April 13, 2016, however, the company announced it was forced to seek the protection of the U.S. Bankruptcy Code to reorganize its balance sheet.

"This was a difficult decision, but it is the right path forward for Peabody. We begin today to build a highly successful global leader for tomorrow," Peabody President and CEO Glenn Kellow said at the time.

Early on, the coal company faced opposition in its bankruptcy reorganization process as some creditors felt they were getting far less value from the reorganization than they deserved. Opponents to Peabody's plans fought the company on bonuses for employees, plans to handle current and future reclamation obligations and more.

At the onset of Peabody's bankruptcy, the outlook for coal remained somewhat bleak, and the company continued to post losses and declining sales. Near the end of the reorganization, however, optimism swept the industry as markets began to show signs of demand flattening or increasing and coal share prices jumped on news of the election of President Donald Trump.

Those improvements to the U.S. coal market prompted some investors to buy into Peabody on the over-the-counter market, despite warnings that its stock would likely be made worthless upon emergence. Mangrove Partners made a $7.1 million bet on Peabody and Discovery Capital Management LLC, the hedge fund of billionaire Robert Citrone, took on an 8.6% stake in Peabody's equity ahead of the reorganization.

A group of investors, including a former top Peabody executive, would later argue that the improving coal market entitled shareholders to a piece of Peabody's success in reorganization. They argued the company no longer faced the difficulty it cited in its widely-supported original bankruptcy plan. The bankruptcy judge blocked opposing creditors' efforts to force Peabody to reorganize under a plan more favorable to a committee of nonconsenting creditors. That decision was appealed by the creditors.

Peabody ultimately shook off its large debt load with a reorganization plan that included a $1.5 billion stock sale comprising a $750 million rights offering for bondholders and a $750 million private placement of preferred equity offered to institutional investors.

"We believe that 'the New BTU' is well positioned to create substantial value for shareholders and other stakeholders over time," Kellow said in a recent statement. "Peabody is the only global pure-play coal investment, and we have the scale, quality of assets and people, and diversity of geography and products to be highly competitive."

FBR & Co. analyst Lucas Pipes initiated Peabody with an "outperform" rating and assigned the company a 12-month target share price of $33. Peabody extinguished the value of its common stock trading under the ticker symbol BTUUQ effective at 4 p.m. on April 3 and is now trading as BTU.