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Peabody Energy

Coal giant Peabody Energy files for Chapter 11 bankruptcy

Nathan Bomey
USA TODAY

The nation's largest coal company, Peabody Energy (BTU), filed for Chapter 11 bankruptcy protection Wednesday as the coal industry grapples with the fallout of low natural gas prices, costly regulations and China's economic slowdown.

St. Louis-based Peabody, which traces its corporate roots to 1883, had warned in March that "sustained depressed" coal prices had placed it on the edge of insolvency.

Low natural gas prices, the sluggish Chinese economy and U.S. environmental regulatory pressure have compounded the financial pressures facing coal companies, which include costs such as pensions and retiree health care obligations, analysts say.

Peabody's market capitalization peaked at about $20 billion in 2011. Wednesday, it was $34 million, illustrating the swift contraction in the coal market over the last half decade. The company has about 7,100 employees globally, including 5,400 hourly workers.

"The announcement shouldn’t come as a surprise to anyone," Rapid Ratings International CEO James Gellert, whose firm has been tracking Peabody, says. "Peabody has been on a downward trajectory for the last few years, and between low commodity prices, increased regulation and a crippling debt weight, it was only a matter of time before they filed for bankruptcy."

The U.S. Energy Information Administration projected that 2016 U.S. coal production will equal about 752.5 million tons, representing a 25% decline from 2014.

Peabody notes in its filing that its competitors have suffered as well. Some 50 coal companies have filed for bankruptcy, according to Peabody's estimate. Those include most of the top producers, such as Arch Coal, Patriot, Alpha Natural Resources and Walter Energy.

Peabody has posted four consecutive yearly losses, including a $2 billion loss in 2015 as revenue fell 17% to $5.6 billion.

"Coal companies have been under intense pressure for the past few years, mirroring what the energy sector in general has been going through," Gellert said.

Peabody is expected to use the bankruptcy process to shed debt and restructure its operations instead of pursuing a sale of assets, Reorg Research analysts said.

The company listed $10.1 billion in debts and $11 billion in assets, including ownership interest in 26 active mines in the U.S. and Australia. Shareholders with at least 5% of the company are Blackrock, Kopernik Global Investors, Vanguard Group and Susquehanna Securities, according to a court filing.

"Through this process, the company intends to reduce its overall debt level, lower fixed charges, improve operating cash flow and position the company for long-term success, while continuing to operate under the protection of the court process," Peabody said Wednesday in a statement.

Trading of the company's shares (BTU), which closed at $2.07 on Tuesday, will be suspended. The stock hit a high of $299.10 in the first quarter of 2014.

"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," CEO Glenn Kellow said. "This process enables us to strengthen liquidity and reduce debt, build upon the significant operational achievements we've made in recent years and lay the foundation for long-term stability and success in the future."

Peabody said it had secured $800 million in bankruptcy financing from a group that includes secured and unsecured creditors to maintain operations.

Peabody noted that the sale of assets in New Mexico and Colorado had collapsed after a prospective buyer could not complete the deal. The company hired law firm Jones Day to provide bankruptcy counsel, investment bank Lazard for financial advice and FTI Consulting for restructuring guidance.

The company owned 6.3 billion tons of "proven and probable" coal reserves and about 500,000 acres of land as of Dec. 31, according to a court filing.

Over the last decade, the U.S. shale oil and gas boom has flooded the market with cost-competitive natural gas, swiping market share away from coal and giving utilities alternatives.

In 2015, utilities burned almost exactly the same amount of coal as natural gas, with each commodity representing 33% of U.S. electricity generation, according to the EIA. The EIA projects that coal will still deliver 20% of U.S. electricity by 2040.

But as recently as 2008, the U.S. burned more than double as much coal as it did natural gas, illustrating coal's swift decline.

The commodity is facing intense pressure from regulators and the Obama administration, which has erected regulatory obstacles blocking coal-fired power plants because they contribute to climate change.

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.

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