Peabody Exploring Asset Sales to Shore Up Balance Sheet

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Peabody Energy Corp., the largest U.S. coal producer, is exploring asset sales on two continents to help strengthen its balance sheet in a deeply depressed market for the commodity.

The company is considering sales of “non-core” reserves, land holdings and stakes in active operations in Australia and the U.S., St. Louis-based Peabody said Thursday in a statement. It also posted a sixth straight quarterly loss and cut its sales-volume forecast. The shares fell to a 12-year low.

Peabody is looking for new ways to weather the industry’s worst downturn in decades. Thermal coal, used by power plants, is facing pressure from low-cost natural gas and tougher emissions standards, while metallurgical coal, which is used in steelmaking, is at a seven-year low amid slowing Chinese demand.

Under review for possible sale are 3 billion tons of coal reserves not assigned to active mining, and 500,000 acres (202,000 hectares) of land. The assets include the Burton Mine in Australia, Peabody’s highest-cost operation, where the current contract-miner agreement will expire in mid-2016.

Peabody also said it has studied the prospect of placing some U.S. coal operations in a master-limited partnership. The move is an “interesting option,” Chief Financial Officer Michael Crews said on a conference call.

Crews declined to say which assets might go into an MLP, a structure that’s proven popular with investors in recent years since it typically pays no corporate income tax and returns more cash to shareholders via dividends. Any decision to proceed would probably first require coal-market sentiment to improve, he said.

Gas Switch

The company reduced its forecast for U.S. thermal coal output this year to 180 million to 190 million tons. Its January projection was for 190 million to 200 million tons. U.S. coal demand will decline by as much as 100 million tons, primarily due to power plants switching to gas, Chief Executive Officer-elect Glenn Kellow said on the call.

The first-quarter net loss widened to 65 cents a share from 18 cents a year earlier. Stripping one-time items -- including a 23-cent expense related to the refinancing last month of Peabody’s 2016 senior notes -- the loss was 39 cents, wider than the 32-cent average of 20 analysts’ estimates compiled by Bloomberg.

Revenue fell to $1.54 billion for the quarter from $1.63 billion, missing the $1.6 billion average estimate.

Peabody is the most indebted U.S. coal producer. It issued $1 billion of second-lien debt last month and had its credit rating cut by Moody’s Investors Service to five levels below investment grade.

Shrinking Glut

The company’s 10 percent second-lien notes rose 1.7 cents to 87.75 cents on the dollar yielding 12.7 percent at 4:09 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The shares fell 7.6 percent to $4.50 in New York, the lowest price since July 2002.

Despite the gloom, Peabody projects demand for coal in the Illinois basin and southern Powder River Basin -- two of its biggest production areas -- to increase by 50 million to 70 million tons by 2017.

It also sees some improvement in the metallurgical coal market, with seaborne supply expected to decline for the first time in three years. That will eat into a global glut of the steelmaking ingredient as 20 million metric tons of announced production cutbacks take effect, Peabody said.

(Earlier versions of this story were corrected to show Peabody may sell partial interests in active operations, not reserves, and that sales missed analysts’ estimates, instead of beating them.)

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