Anticipating continued low natural gas prices and demand for Powder River Basin coal, Peabody Energy Corp. is writing down the value of Wyoming’s North Antelope Rochelle mine by $1.42 billion.
The announcement was made Wednesday morning, hours before the company was scheduled to have its earnings call to report its 2020 second quarter financials. Including the write-down of NARM’s value, the company is reporting a net income loss of $1.55 billion for the quarter.
In the quarterly report, Peabody President and CEO Glenn Kellow called the write-down an example of the company “taking further action to improve our cost structure.”
The COVID-19 pandemic also is pressuring the company’s U.S. and seaborne sectors, he said.
“Continued uncertainty in global markets requires us to further improve our operating performance and ensure we have a scalable structure that can respond to market conditions in the months ahead,” Kellow said.
Devaluing NARM, located near Wright, is an admission that the low natural gas prices that have weighed on the thermal coal market for several years will continue. The timing of coal plant retirements, which many companies have moved up years ahead of their original schedules, and continued growth in renewable generation also are pressuring PRB coal, the report says.
During Wednesday morning's earnings call, Peabody Chief Financial Officer Mark Spurbeck said that the devaluation was a necessary move “despite it being a fabulous asset.”
The move also means that going forward, Peabody doesn’t believe NARM is likely to produce again at the levels that has historically made it the most productive coal mine in the United States, said Rob Godby, a University of Wyoming energy economist.
“What they’re probably saying is production is going to be much lower than what the current value is at,” he said. "It's just not going to generate as much revenue.”
While some could speculate resetting the value of an asset is a prelude to selling it, Godby said that’s unlikely in this case.
“What they're doing is stating the asset was probably over-valued because it was based on the production it used to have," he said.
By the numbers
That reduced coal production is stark.
In 2014, NARM produced 118 million tons of coal, and as late as 2017 was still more than 100 million tons. Last year, that fell to 85.3 million tons. Through the first six months of 2020, the mine is producing at level of 63 million tons. If that holds, 2020 would mark a nearly 47% reduction in seven years.
Shipments of Powder River Basin coal were down 28% in the second quarter this year compared to 2019.
For the three months, Peabody's three PRB mines sold 17.9 million tons of coal compared to 25 million tons for the same period last year. For the first half of the year, Peabody’s local mines have sold 41.4 million tons of coal, down from the 50.3 million in the first half of 2019.
A decade ago, PRB coal accounted for about 50% of the electricity generation in the United States. Now, coal overall made up less than 20% of the generation in the second quarter of this year.
“U.S. thermal coal conditions remain especially challenging given weak overall electricity demand, high customer inventory levels and continued low natural gas prices,” the quarterly report says. “These factors have accelerated the secular decline already underway in the industry.
“Total U.S. electricity generation year-to-date through June was down approximately 4%, with coal generation falling 31% to 17% of the generation mix as natural gas and wind took market share, rising to 39% and 9%, respectively, of the generation mix.”
The reduced coal-fired generation, coupled with the impacts of COVID-19, has Peabody suspending its projections for the second half of the year. While 87 million tons of PRB coal, priced at an average of $11.36 per ton, are committed for the year, it’s unclear whether power plants will accept delivery of more coal when their stockpiles are already high.
“Ultimately, deliveries will be dependent on general economic conditions, weather, natural gas prices and other factors,” according to the second quarter report. "Peabody continues to closely monitor volumes and is aggressively protecting its contractual rights."
Workforce; joint venture
Part of the company’s response has been an overall workforce reduction of about 24% over the last 18 months. That includes 450 positions across several mines, 170 of which were from NARM in a round of April layoffs.
Overall, NARM reports 985 workers in the second quarter, down about 20% from the 1,228 at the end of the first quarter.
That coal’s slice of the power generation pie has dropped to 17% is a compelling reason for a proposed joint venture between Peabody and Arch Resources Inc., Kellow said.
The Federal Trade Commission has rejected the plan, which would merge the companies’ Wyoming and Colorado mines into a single, larger operation.
The FTC argues the joint venture would provide an unfair competitive advantage over other coal producers, while Peabody and Arch have sued to allow the merger. Closing arguments in that case are expected next week.
“Challenging demand conditions have underscored the need for this (joint venture),” Kellow said.
In the end, Peabody’s move to devalue NARM sends a strong message that reinforces the need for Wyoming to quickly wean itself from its financial dependence on coal and energy, said Shannon Anderson, a spokeswoman for the Sheridan-based Powder River Basin Resource Council.
“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,” she said. “It's time for Wyoming leaders to think about what comes next for our communities, coal miners and our revenue streams.”