A $1.2 billion “ship or pay” agreement with Newcastle Coal Terminal appears to be behind Peabody Energy expansion plans at Wambo and Wilpinjong coal mines despite US bankruptcy proceedings and serious questions about the future of Peabody’s Australian operations.
The release this week of financial statements for Peabody holding company Holdco, which controls all Australian subsidiaries, shows a $2.7 billion loss in 2015 – up from a $1.2 billion loss in 2014 – and a $250 million inter-company loan in April to support Peabody’s Australian operations during the US bankruptcy process.
The $250 million loan is necessary because the US bankruptcy proceedings prevents Australian subsidiaries from drawing on Peabody borrowing facilities, a situation that “significantly impacts the liquidity of the group”, the Holdco documents said.
Holdco, Wilpinjong and Wambo financial statements released in the past few weeks also reveal how the Hunter mines are tied to the US bankruptcy process, which analysts are increasingly pessimistic Peabody will be able to work through.
While Wilpinjong is not listed in the bankruptcy proceedings its assets, held by Holdco, secure debt which is the subject of the bankruptcy proceedings.
Peabody conceded the US proceedings mean “additional liquidity risks” for Australian operations if financiers and suppliers call-in bank guarantees and securities or require the repayment of future lease commitments. The risk includes $123 million in lease commitments at Wilpinjong, between Denman and Mudgee.
Wilpinjong mine’s profit in 2015 was $78 million, down from $125 million in 2014, and it had $176 million in current net liabilities by December, with $59 million in contingent liabilities for rehabilitation. Wilpinjong supplies coal to Bayswater and Liddell power stations and has a contract to sell coal to Bayswater owner AGL until 2026.
Financial statements lodged with the Australian Securities and Investments Commission show the $250 million internal loan facility cannot be used to fund capital expenditure, raising serious doubt about expansion proposals at both Wambo and Wilpinjong.
The NSW Department of Planning is assessing plans for underground and open cut expansion at Wambo, with the open cut proposed for 21 years. Peabody has proposed an eighth open cut pit at Wilpinjong, extending the proposed life of the mine until 2033.
In a submission to the Department, Environmental Justice Australia (EJA) – a non-profit public interest legal practice – said Wambo’s financial statements showed it did not have the financial capacity to undertake the expansion, estimated to cost $500 million.
“As at December 2015 Wambo had only $4.6 million in cash and its traditional line of credit has expired,” the EJA submission said.
It noted Wambo Coal’s auditor concluded in April that “there is significant uncertainty whether the company and/or the consolidated entity will continue as a going concern”.
The EJA said a $1.2 billion “ship or pay” contract with Newcastle Coal Terminal of more than 10 years appeared to be the “real and understated reason” behind Peabody’s continued push for expansion plan approvals.
”The ‘ship or pay’ contract at issue is ‘joint and severable’,” the EJA.submission said.
“If either Wambo or Wilpinjong do not fulfil minimum volume requirements, the other must make up the shortfall or pay penalties. In 2015 Wambo sold over $70 million in coal to Wilpinjong.”
The EJA argued that expansion allows coal companies to avoid closing and rehabilitation costs “crystalising on balance sheets”.
“It buys companies time to sell assets to inexperienced and potentially more financially constrained operators.”
A Peabody spokesperson said Peabody Australia was not part of the Chapter 11 bankruptcy protection process and planned to operate as usual.
“The financial report states that the directors of the company are satisfied that reasonable grounds exist to believe the company and consolidated entity will be able to pay their debts as and when they become due and payable,” the spokesperson said.
“The Peabody team in Australia is working hard continuing efforts to improve costs and generate positive cash flows.”
In the first quarter of 2016 Peabody Australia delivered positive before tax results of $US5.6 million despite export price reductions of up to 31 per cent.