Pavan Sukhdev

"We still have a lot to learn about the nature of value and the value of nature"

Evolve or Perish: Lessons from Peabody Energy

Peabody Energy, the world’s largest private-sector coal producer, applied for “reorganisation” under Chapter 11 of the Bankruptcy Code on April 13, 2016. This means it will retain control of its operations, but under judicial oversight, and present to the court a reorganization plan within 120 days, and persuade its creditors to accept the plan within 180 days. The company had been struggling to stay afloat due to a drop in coal prices, competitive natural gas prices, the Chinese economic slowdown and increasing environmental regulation.

In late-2015, Peabody settled an investigation launched in 2007 by the New York State Attorney General, recognising the need for and agreeing to make full disclosures around the business risks posed by climate change to its investors. The AG’s office accused Peabody of “providing incomplete and one-sided discussions” of the International Energy Agency’s findings by only reporting the highest future coal use projections in an attempt to mislead investors2. Further, a consulting firm hired by Peabody projected in March 2014, that a $20/tonne carbon tax would reduce coal demand for power generation in 2020 by 38% – 58%; it did not disclose this either to its investors.

urban-res-powerplant-coal-s

Photo Credit: Shutterstock

Investors ought to have been sceptical of a carbon intensive company claiming inflated future profit projections, as Peabody’s bankruptcy was by no means an outlier. Since 2012, around 50 coal companies in the U.S. have declared bankruptcy, including three of the four largest coal producers in the U.S. – Peabody, Arch Coal and Alpha Natural Resources – accounting for 41% of total output. Given such adverse conditions, investors now find themselves in a risky environment where, on a conservative scenario analysis, global assets worth $2 trillion risk becoming stranded assets. Over 500 institutions valued at $3.4 trillion have already divested from the fossil fuel industry.

Peabody’s stock price has fallen from a high of $72.71 in April 2011 to $1.37 in June 2016. This is not the first time we have come across such a story. Years ago, Enron also pursued risky investments under highly leveraged structures to the point that they declared bankruptcy. Their stock also tumbled from $90 in 2000 to less than $1 in 2001. Much of Peabody’s downfall can be ascribed to its poorly timed $5.2 billion purchase of Macarthur Coal in 2011, for which it borrowed $4.1 billion, even as industry experts projected a grim outlook. Peabody’s pursuit of size and overleveraging, much akin to Enron’s, placed in danger the futures of its 7,000 employees, its creditors, and its investors.

On its way to bankruptcy, Peabody, along with four other major U.S. coal producers spent nearly $100 million over the last ten years on political lobbying to help protect federal tax-funded fossil fuel subsidies. As part of its aggressive and unethical lobbying, Peabody made generous Political Action Committee (PAC) donations to federal candidates—an alarming majority of which went to Republican candidates over each of the last nine election cycles (Table 1).

Capture

Table 1: Peabody PAC Donations to Federal Candidates,  2000 – 2016

Peabody’s bankruptcy filing inadvertently exposed its funding of the “climate denial” movement by means of donations to think tanks, climate sceptic scientists and lobby groups. In 2014-15, the company donated $332,000 in “charitable gifts and donations” through the Peabody Investment Corporation to organisations involved in attacks on climate science. Donations were also made to several climate deniers, most notably Richard Berman, who had once compared the U.S. EPA to terrorists. Peabody is also a vocal opponent of President Obama’s Clean Power Plan, which is widely hailed as the most  ambitious step taken against climate change and supported by major corporations such as Unilever, Nestle, eBay and L’Oréal.

By funding the climate denial lobby, Peabody acted in a self-serving manner in a failed attempt to maintain its position in the market. It was evidently trying everything it could to survive in a changing economic landscape where the vast majority of consumers have chosen to no longer ignore anthropogenic global warming.

Sukdhev-Logo-Blog

We have been here before—with the tales of Enron, Volkswagen, ExxonMobil, BP and others

In my book Corporation 2020 I identify some key characteristics of today’s dominant yet defunct corporate model, which I call “Corporation 1920:” the pursuit of size, aggressive and unethical lobbying, unethical advertising, leverage without limits, all leading to huge negative externalities: the public costs of private profits. Peabody ticks every box of “Corporation 1920.”

In an evolving landscape of consumer interests and citizen demands, Peabody’s “Corporation 1920” model and ethics are outdated. Peabody undermined its own future and survival by acting against the public interest. Worldwide, capital misallocation to earth-system-threatening fossil fuel fuels over the last decade has been huge, averaging an estimated USD950 billion a year. Markets are meant to punish the misallocation of capital, and the message from investors is clear: they recognize that fossil fuel investments are stranded assets, and will gradually re-allocate capital away from them. The lesson for the fossil fuel industry as well as those that produce fossil-fuel-intensive goods and services is clear: evolve or perish.

We have been here before—with the tales of Enron, VolkswagenExxonMobil, BP and several other such corporations that made considered choices to pursue private profits at the expense of public risks and losses. They all have recurring themes that revolved around the DNA of “Corporation 1920.” We must address these recurring corporate traits through appropriate legislation while improving citizen education in order to tackle the demand and supply sides of our Corporation 1920challenge. To build an inclusive green economy of permanence, one that works for everyone, we need Corporation 2020. Its time is now.

———————-

References
Peabody Bankruptcy Papers

———————-

Originally published in Island Press on 20th July, 2016

July 26th, 2016 Posted by | no comments