For Peabody and SunEdison, requiem and rebirth
For Peabody and SunEdison, requiem and rebirth
It is an extraordinary spectacle.
Peabody Coal — the bluest of blue-chip coal companies, the prince regent of King Coal — and SunEdison — lauded just a few months ago as the emerging colossus of the solar industry, the recipient of big investments by some of the smartest money managers on Wall Street — teetering on the very edge of bankruptcy at the very same time.
Every industry has winners and losers but rarely does one industry have two industry leaders, at polar opposites of the industry, losing (and losing big) simultaneously .
What madness is this?
An extraordinary coincidence, to be sure, but this is a tale of one company that got the long-term strategy right but its implementation horribly wrong, versus another company that, to this day, has executed at the very top of its peer group but pursued a long-term strategy that has been consistently misguided, with disastrous consequences.
Let's start with the latter.
I was at Lehman Brothers 15 years ago when the bank bought Peabody Coal, which had fallen on hard times. Management was changed. Transactions were completed and, after a few years, Peabody was reintroduced to the public markets with the NYSE ticker symbol BTU.
Everyone who worked on the deal thought the ticker was so clever (being a departure from the initials norm that most companies use for their ticker) and so symbolic because Peabody intended to be the very symbol of the fossil-fuel industry in the United States.
The timing was good. In the high natural gas price environment that existed at the time, the stock took off and Peabody, indeed, reclaimed its place as the leading company in the American coal industry. It had a market cap measured in the tens of billions of dollars and demonstrated consistently outstanding mining operations operated in accordance with the highest safety standards. (I was honored to tour a Peabody deep shaft mine in Illinois back in 2006 and was very impressed.)
But even back then, the "carbon question" was beginning to fester and the long-term prospects for the American coal industry began to look a little cloudy.
Peabody and its coal brethren did take some action in response, but in retrospect they did way too little. They wasted a few years and a few million dollars on the George W. Bush administration's "FutureGen" project, a project that was so ill-conceived in so many ways that it ultimately was killed by President Bush's last secretary of energy, Sam Bodman.
Most tragically, rather than spread their resources around other carbon-capture projects, they poured many more millions of dollars (it is said) into an industry P.R. campaign aimed at persuading the American public that there was such a thing called "clean coal" that, in reality, did nothing about coal's greenhouse gas emissions.
Precious money was wasted and, even more critically, time was lost. And, of course, the only people their nonsensical P.R. campaign convinced was — themselves.
When the price of natural gas began its long and inexorable decline in 2009, the bottom fell out on coal. There was massive coal-to-gas switching in terms of the dispatch of the existing power generation fleet. Even more devastatingly, the American power industry over a very few years went from trying to permit 110 new coal plants around the country to trying to build none at all.
Devastating data point
Even Peabody and other titans of the coal industry could not ignore this devastating data point — the evisceration over time of their customer base — so they conjured up alternative strategies. First, they tried to build their own coal plants to stimulate demand for their product. When that failed, they turned their covetous gaze to the East.
They decided they were going to not only survive but thrive by exporting massive amounts of Wyoming coal to feed the insatiable coal demand of China — no matter that the coal would have to travel through the inhospitable terrain of climate warrior Gov. Jay Inslie's Washington state, and no matter that China's coal demand has proven to be anything but insatiable.
Finally, and most recently, the American coal industry has declared itself the champion of poor people in developing countries. Coal will be the salvation of the developing world's energy needs, the American coal industry proclaims. It is a claim that is so preposterous on its face, and so unsubstantiated by any back-up effort to actually do coal-based rural electrification around the world, that I have never bothered to figure out whether it was just a P.R. "son-of-clean-coal" effort or an actual business strategy.
All the while, Peabody and the rest of the industry put too little effort into the one thing that might have saved them: learning how to combust coal economically and at scale without emitting CO2 into the atmosphere.
For management of traditional energy companies, the imminent fall of Peabody offers an important lesson. Wall Street and your own board of directors may push you and reward you for managing your business for short- to medium-term profit, giving nothing but lip service to the existential risk that threatens the viability of your business long term. But beware, the long-term will creep up on you faster than you think. Ask Peabody.
Notwithstanding Chapter 11, life will go on at Peabody as it does in the bankruptcy-prone airline industry. Coal will continue to flow out of Peabody's massive North Antelope mine, albeit in seriously diminished amounts.
The lesson here is strategic, not operational. The natural gas industry needs to launch its own Apollo program to figure out how to combust natural gas without the carbon emissions. The power companies that rely heavily on coal-fired generation — well, they need to figure out something else to do with their soon-to-be-stranded coal assets.
Sun Edison's problems are the opposite. They set out to be the solar industry’s first and only supermajor solar company, a strategic goal that was, in my opinion, well worth pursuing. It is not an illusory pot of gold at the end of the rainbow.
It is the future, not the past. The world of multinational corporations needs such a company as a worthy counterparty capable of fulfilling their burgeoning global solar needs. With SolarCity and its kind focused more or less exclusively on the residential solar market, Sun Edison (SUNE in stock-ticker lingo) had every right to think it might become that solar supermajor.
But hey, you SUNE dudes, you may be in the sexiest end of the energy business but certain immutable laws of energy infrastructure apply to you as well as to the rest of us: you can't consistently overpay (or underbid) by two or three times for assets that offer a fixed revenue stream; you can't layer project leverage on top of mezzanine leverage on top of structurally subordinated leverage on top of corporate leverage; and you have to slow down your growth aspirations on occasion to consolidate your management systems, to put responsible people in charge around your far-flung empire.
Let's face it, those of us in the conventional power industry don't have the deep international talent bench of a Coca-Cola or McDonald's — which they developed over multiple decades — and neither did you.
Fortunately, SUNE, the tides of history are in your favor. Solar is here to stay and there continues to be a competitive void in the strategic space you were seeking to fill. You still have a chance to succeed if you do a big lift on your execution to match your strategy.
For you, maybe unlike Peabody, the availability of Chapter 11 is a godsend (as it was for NRG, which was in Chapter 11 when I became CEO there, and the other independent power producers a decade ago). Many, if not all, of your past mistakes and current problems can be addressed and you can go on to better — and some day, bigger — things.