Peabody’s New CEO Can’t Fix Old Problems
by Diana Best
May 5, 2015
Yesterday, at their annual shareholder meeting in St.Louis, Glenn Kellow stepped in as Peabodys newest CEO. After reporting larger than expected losses in the first quarter and facing a slew of red flags from regulators and analysts alike, Kellow had more problems on his plate than most on his first day on the job.
In front of a room of shareholders, analysts, and employees, Kellow admitted that times have been anything but easy for US coal companies, but that he is optimistic about the long-term future of the company and viability of the coal industry at large.
The truth is, Peabodys problems arent going anywhere.
Peabodys finances are in a dismal state:
Peabodys finances have gone from bad to worse. In the past year, Goldman Sachs , Bank of America, Standard & Poor, and many others have downgraded Peabody to sell, underperform, and negative respectively as its stock price hit record lows. In September 2014, Peabody was removed from the S&P 500 altogether. The company reported a total loss of more than $780 million by the end of 2014. At the close of business yesterday, the company was trading at a measly $4.68, down from the high of $72 in 2011.
Since its peak in April 2011, Peabodys share price has declined approximately 93% in value and continues to drop. Despite Peabodys confidence that better times are in sight, many prominent analysts believe that coal markets will never bounce back. As Goldman Sachs so gently put it, Just as a worker celebrating their 65th birthday can settle into a more sedate lifestyle while they look back on past achievements, we argue that thermal coal has reached its retirement age.
Not just analysts are skeptical. Major institutional investors, like the biggest sovereign wealth fund in the world, the Norwegian government pension fund, have already divested from Peabody.
In the first quarter of this year, Peabodys unsecured bonds were among the worst performers in the coal industry. According to Bloomberg, in March, after the issue of $1 billion in second-lien bonds, Peabodys bond price dropped 25 cents on the dollar. Following the bond deal, lenders limited Peabodys ability to borrow money in the future.
Meanwhile, Peabody is lining the pockets of its own executives:
Last month, proxy advisory firm Glass Lewis & Co gave Peabody an F grade for their pay-for-performance compensation program. Even though the company continues to hemorrhage money and has lost up to 93% of its value, Peabodys executives received above-average compensation over the last few years, even getting raises, despite their poor performance. In 2014, Greg Boyce, former CEO, reportedly received $10.9 million in compensation.
Peabody responded by announcing a temporary 10% cut in compensation for their chief executives, but, according to a recent report from the Institute for Energy Economics and Financial Analysis (IEEFA), the cuts only total $218,000 and affect only a portion of executives compensation.
Where does this leave shareholders and others invested in Peabody? While Peabody executives take home millions, Peabody has cut dividends to shareholders. Furthermore, pensions and benefit programs for workers remain largely unfunded and are increasingly vulnerable.
Subsidies and shortcuts previously exploited by the company are coming under new scrutiny
According to an exclusive from Reuters, the federal government is looking closely into the issue of reclamation of strip mined land, and whether or not struggling US coal companies, like Peabody, should still qualify to self-bond.
Currently, states oversee mine reclamation and some allow mining companies to leave part of their expected clean-up costs uninsured or self-bonded if they meet certain financial qualifications. As coal companies like Peabody lose massive amounts of money, there are doubts as to whether these coal companies will actually be able to pay for the billion-dollar costs needed to fully reclaim these mines.
The result of losing the ability to self-bond could be disastrous for the already cash-strapped company. According to Peabody, To the extent we are unable to maintain our current level of self-bonding due to legislative or regulatory changes or changes in our financial condition our costs would increase and our liquidity available for other uses would be reduced.
Furthermore, the Office of Natural Resource Revenue (ONRR) proposed a new rule that seeks to close a loophole long-exploited by coal companies like Peabody. Currently, coal producers can avoid paying higher royalties for coal bound for export by first selling the coal to affiliated brokers before the coal is shipped overseas. The loophole cheats taxpayers out of hundreds of millions of dollars. For coal companies like Peabody hoping to ramp up coal exports in the near future, this rule could have serious impacts to the cost of doing business.
Despite being crippled with debt, faced with contradictory evidence from prominent finance institutions, and preparing for tighter regulations from lawmakers, Peabody executives nevertheless continue to claim that coal will somehow rise to the top again. Either blindly optimistic or convincingly naive, Peabodys vision of the future seems out of touch, out of date, and in-denial.