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IEEFA Update: Navajo Generating Station in Arizona, Next Big Hit to Peabody’s Portfolio

April 27, 2018
Tom Sanzillo

To its credit, Peabody Energy produced more coal in the first quarter of 2018 than it did in 2017, at a time when production for the rest of the United States coal industry was down 6%.  However, despite the production increase, Peabody’s profits from U.S. production were 28% less in the first quarter of 2018 than in the first quarter of 2017. The company’s Australian operations carried the positive news for the quarter, accounting for 5% of worldwide production but 63% of profit.

During the company’s first quarter review earnings call this week, not a word was spoken by the company or stock analysts about the controversy over its Kayenta mine property in Arizona. The mine is the workhorse for Peabody’s western operation, which produced the highest margins in its U.S. portfolio. The region produced 9% of Peabody’s U.S. production and 23% of its profit.

But Kayenta serves only one power plant – the Navajo Generating Station — and last year the owners of the plant announced it was no longer financially viable and will close. Peabody Energy commenced a campaign to keep the plant open, hiring an investment banker, Lazard, to find a new owner. A reinvigorated plant would allow Peabody’s Kayenta mine to continue supplying 6 to 7 million tons of pricey and high profit coal to the power plant.

IEEFA’s analysis shows that the Navajo Generating Station, like many others across the country, cannot compete in the power markets absent significant public subsidies. Even Peabody’s own investor presentations make clear that continuing coal-fired power plant closings will result in a shrinking coal market. In order for the Navajo Generating Station to become financially viable, the impossible must happen – new owners would have to find consumers willing to buy electricity at above market price; the Arizona Public Service Commission would need to support a high cost option, even as it looks to solar energy to decrease electricity prices; the EPA would need to waive pollution controls; the Navajo nation would need to accept lower royalty payments; the price of natural gas would have to rise prodigiously and quickly and with an upward outlook (a factor that no responsible party is predicting); an unfair water agreement between the Navajo and the plant owner would need to be continued; and the plant proponents would have to overcome the growing skepticism of tribal leaders and the opposition of grass roots organizations looking for real economic opportunities that are consistent with Navajo culture.

Peabody’s reputation for selling a bad power plant deal to communities is well established. In the 2000s, Peabody conceived of a plan to build the Prairie State coal plant in Southern Illinois to burn the coal from its Lively Grove mine.  Peabody put up only $250 million for what became a $5 billion project, with the majority of the investment coming from more than 200 communities with municipal power systems.  As part of the deal, Peabody also sold the communities the Lively Grove mine, netting a nice profit on low quality coal. Then Peabody bailed out of its investment in the plant, leaving the communities saddled with high electricity prices for the next four decades.

If the Navajo/Kayenta deal were actually a good investment, one would expect Peabody, which is loudly advocating for the deal, would put up some of its own cash. Since emerging from bankruptcy last year, Peabody is flush with cash, having built up $1.4 billion in cash and cash equivalents. If the company were to enter into a co-venture with other potential owners it might be easier to sell a deal for the Navajo Generating Station. But don’t hold your breath for that possibility.

Peabody’s shareholders have had enough of the speculative gambles that brought the company to bankruptcy. The company is using its profits to pay dividends, and just recently increased its program of stock buybacks from $500 million to $1 billion. The company will not even contemplate investing in its core business with new mining initiatives, much less in a high-risk power plant with no customer base. Peabody wants investment in the Navajo plant, but that investment needs to come from someone else’s money and at the expense of the tribal residents and ratepayers.

There are real life consequences to Peabody and Lazard’s financial folly. Everyone else involved in the Navajo Generating Station is planning to move on. The current power plant owner — a consortium of local utilities and federal agencies — has committed to hiring all of the workers currently employed at the power plant. Peabody, however, has not made the same commitment to its own employees at Kayenta. Meanwhile, many in the Navajo and Hopi communities are moving forward with development of new economic opportunities and Arizona utilities are moving forward with more solar investments.

Peabody and Lazard’s insistence on the viability of this ill-conceived venture undermines these efforts at economic transition. Peabody and Lazard want to turn this bad deal into a good deal for them by giving the public a raw deal. But only the dumb money is on coal.

Tom Sanzillo is IEEFA’s director of finance.


IEEFA Update: 2 Out-of-State Potential Navajo Generating Station Buyers Face Long Odds

IEEFA Update: Push to Keep Navajo Generating Station Alive in Deal With Arizona Water Distributor Is Fraught With Risk

IEEFA Update: In Campaign to Prop Up Navajo Generating Station, Peabody Energy Seeks a Victory Again at Somebody Else’s Expense

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures.

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