by Sandy Robson
News that Peabody Energy, the world’s largest publicly owned coal producer, had filed for bankruptcy protection, broke nationwide on April 13, 2016.
That news was of particular interest in Bellingham, Washington, because the Gateway Pacific Terminal (GPT), a 48 million metric ton per year coal export facility, is proposed for Cherry Point, in Whatcom County, and Peabody, in 2011, had reportedly agreed to be the first customer, looking to ship its Powder River Basin coal to Asia through the terminal. The GPT applicant, Pacific International Terminals (PIT), is a subsidiary created for the GPT project by SSA Marine, the world’s largest independent, privately-held marine terminal operator.
Five years ago, on February 28, 2011, a Peabody Energy press release had announced “a long-term agreement” with SSA Marine in which the coal producer would initially export up to 24 million metric tons of coal annually through the planned GPT.
The question that came to many Whatcom County residents’ minds after learning of Peabody Energy’s bankruptcy filing, was how that news might impact SSA Marine’s plans for the GPT project in light of the fact that the coal company was slated for the lion’s share of the terminal’s throughput capacity.
The Bellingham Herald ran an April 13, 2016 article about Peabody’s bankruptcy news with the headline, “Potential Cherry Point coal terminal customer files for bankruptcy.” This was big news, but what caught some people’s attention was the word “potential,’ which could imply a more distant relationship than has been put forth by both Peabody and SSA Marine.
Indeed, the April 13, 2016 headline seemed contrary to the information originally disseminated to the public by Peabody Energy in its February 28, 2011 press release, announcing its company’s agreement with SSA Marine to ship Peabody coal through GPT, which according to the release, included rights to throughput over the life of the terminal’s operation. And, the headline seemed to contradict the information in the news media subsequent to that 2011 press release.
A lack of commitment and understanding
Adding to the confusion about the information the public had been given since the February 28, 2011 press release by Peabody Energy; the news media; and SSA Marine, was what Bob Watters, senior vice president for SSA Marine, was reported to have said about the agreement between Peabody Energy and SSA Marine. The Bellingham Herald April 13, 2016 article referenced above, reported:
“Bob Watters, senior vice president for SSA Marine, said that Peabody never actually committed to shipping the 24 million metric tons per year.
“‘That was being negotiated over time and was not consummated,’ Watters said in an email Wednesday. ‘They still have interest as a customer. When permitting is closer to a reality is the best time to gauge greater project interest.’
“Peabody and SSA Marine had a memorandum of understanding anticipating that a definitive agreement would be developed later, Watters said.”
Investopedia.com describes a memorandum of understanding (MOU) as “a nonbinding agreement between two or more parties outlining the terms and details of an understanding, including each parties’ [sic] requirements and responsibilities.” The website pointed out that “an MOU is often the first stage in the formation of a formal contract.”
The story evolves: a ‘long-term agreement’ becomes a short-term option
After having already confused some readers with his comments about the agreement Peabody has/had with his employer, SSA Marine, in the April 13, 2016, Bellingham Herald story, Bob Watters seemed to confuse matters even more, in comments he provided to the Seattle Times, in an April 13, 2016, article titled, “Coal giant Peabody, ex-backer of NW export terminal, in bankruptcy.” In this article, Watters used the word “option” when he referenced the agreement. The Seattle Times article reported:
“Peabody once planned to export up to 24 million metric tons of coal per year through the proposed Gateway Pacific Terminal in Whatcom County. It announced the export agreement in 2011, a time when coal markets were strong and prospects looked bullish for shipping western coal to Asia.
“But Bob Watters, a spokesman for terminal developer SSA Marine, said Peabody’s option had expired and it no longer has any agreement to use the terminal. Watters said the Chapter 11 filing ‘will have no impact on the project.'”
In the Seattle Times and The Bellingham Herald articles referenced above, Watters had characterized SSA Marine’s agreement with Peabody Energy to ship its Powder River Basin coal through the Gateway Pacific Terminal, differently in each article. The public is then left wondering; (1) what really was/is the agreement between the two companies, and (2), why did Watters refer to the agreement differently in each of those articles?
In Peabody Energy’s February 28, 2011 press release, the agreement was not described as an “option” agreement, or a “memorandum of understanding,” as SSA Marine Senior Vice President Watters had stated in comments he provided to the Seattle Times and The Bellingham Herald. Peabody had described it as “a long-term agreement” in its 2011 press release.
Shortly after Peabody’s February 28, 2011 announcement of its agreement with SSA Marine for the miner to ship 24 million metric tons of coal annually through GPT, a March 3, 2011 Casper Star Tribune article reported that Bob Watters had stated:
“Peabody is the first customer, but the company [SSA Marine] is also targeting other customers to export grain, potash, calcined petroleum coke and other products.”
Poof! An agreement disappears
An email sent on May 2, 2016, seeking clarification on the 2011-announced agreement between SSA Marine and Peabody received the following response from Peabody Energy Spokesperson Beth Sutton:
“We remain supportive of activities to increase Powder River Basin exports from the West Coast over time and see no impact on our activities resulting from the filing.
“I’d refer you to Bob Watters for detail on the terminal’s throughput partners and for any clarification on his comments. You’ll recall Cloud Peak has an agreement for throughput; Peabody does not have an agreement.”
People following the GPT project, and Peabody investors, might find it disturbing that the spokesperson for one of the parties to the throughput agreement, Peabody Energy, a public company, would not offer a straightforward response to the questions posed, and instead chose give a cryptic answer, which obfuscates the actual nature of the agreement its CEO once touted to the public in 2011.
Because Peabody Energy is a public company, it must be transparent and continue to keep its shareholders informed on a regular basis by filing periodic reports with the SEC. It would follow then that Peabody would need to be clear to investors about its agreement with SSA Marine, announced in its February 28, 2011 press release.
The first paragraph of Peabody Energy’s February 28, 2011 press release reads:
“Peabody Energy (NYSE: BTU) today announced an agreement with SSA Marine to initially export up to 24 million metric tons of coal per year through the planned Gateway Pacific Terminal in Whatcom County in northwest Washington. Coal export volumes would be dependent upon global market demand, terminal capacity and other factors.”
The press release went on to say:
“Extensive engineering and permitting work is under way to develop the facility, and port operations could begin within several years based on achievement of key project development milestones. Peabody has rights to throughput over the life of the operation and could expand its capacity in future years. The company already exports Powder River Basin coal from Western Canada to Asia and South America.
“‘We’re opening the door to a new era of U.S. exports from the nation’s largest and most productive coal region to the world’s best market for coal,’ said Peabody Energy Chairman and Chief Executive Officer Gregory H. Boyce. ‘Asian nations are leading the world in economic growth and industrial production. Exporting Powder River Basin coal delivers sustainable clean coal, creates U.S. jobs and offers a unique way for America to benefit from major Asian economic growth.'”
Prudent and truthful disclosure required
It is reasonable to conclude that the news about the agreement between Peabody Energy and SSA Marine, announced in Peabody’s February 2011 press release would be considered a material event since an agreement to export 24 million metric tons of coal per year to Asia is not likely considered to be something made in the ordinary course of business—and because the coal producer was a publicly traded company, it would likely then have had to file a Form 8-K with the Securities and Exchange Commission (SEC), about that material event.
One of the four main divisions of the SEC is the Corporate Finance division, which is responsible for overseeing the disclosure documents which are required to be filed with the SEC by U.S. public companies. This transparency enables investors to make informed decisions as the filings require companies to provide prudent and honest disclosure of financial and material information. The definition of “material information,” according to the SEC, is any information pertaining to a particular business that could be relevant to an investor’s decision to buy, sell or hold the security.
“Form 8–K provides investors with current information to enable them to make informed decisions. The types of information required to be disclosed on form 8–K are generally considered to be ‘material.’ That means that, in general, there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision.”
In looking on the SEC website’s EDGAR (Electronic Data Gathering, Analysis and Retrieval) database section for February 2011 through March 2011, there does not appear to be a Form 8-K filed by Peabody Energy regarding its February 28, 2011 press release the company issued about its throughput agreement with SSA Marine.
However, on April 19, 2011, Peabody Energy did file a Form 8-K with the SEC regarding a press release issued setting forth its company’s first quarter 2011 financial results. In the report, it stated: “The announced a major throughput and development agreement for up to 24 million tonnes per year of Powder River Basin coal through a large planned West Coast export facility. Permitting is underway and has received broad-based political labor and business support.”
Peabody Energy also filed a Form 8-K on July 19, 2011, regarding a press release issued setting forth Peabody’s second quarter 2011 financial results which stated this on page 5, under the “Project Update” section:
“Permitting activities continued for the Gateway Pacific Terminal, a planned major deepwater dry-bulk export facility in Washington state. Peabody has a throughput agreement for up to 24 million tonnes per year of Powder River Basin coal through the facility.”
It’s all about presentation
On March 28, 2011, Peabody Energy presented at the Howard Weil Energy Conference in New Orleans, Louisiana; and on May 11 and 12, 2011, Peabody Energy presented at the Bank of America–Merrill Lynch Global Metals and Mining Conference in Barcelona, Spain.
Both presentations included a presentation slide entitled, “Peabody Secures Major Long Term Agreement for PRB Exports to Asia,” which highlighted the 24 million ton per year throughput at GPT, and stated that permitting “was underway,” by SSA Marine.
Peabody Energy also filed a Form 8-K with the SEC on November 30, 2011, regarding its 2011 November “Investor Presentation,” held in Boston, Massachusetts. In the Investor Presentation, on page 27, there is a photo displayed of the rendering of the proposed GPT at Cherry Point and under the photo it states: “Peabody has a 24 million tonne per year throughput agreement for a deep-draft export facility being permitted in Cherry Point, Wash.”
Peabody’s Form 8-K filings referenced above, did not refer to its company’s February 2011 throughput agreement with SSA Marine as an “option,” or a “memorandum of understanding,” as SSA Marine’s Bob Watters had referred to it to media on April 13, 2016, the day Peabody Energy filed for bankruptcy.
It seems that if the agreement between Peabody Energy and SSA Marine, allowing Peabody to ship 24 million metric tons of coal through GPT was an “option” agreement, as Watters told the Seattle Times, then that detail would be specified as such in any Form 8-K filed with the SEC that referenced that agreement—after all, Peabody Energy is a publicly traded company, which necessitates that it be transparent and precise with potential and current investors.
Cloud Peak’s option is clear
For instance, Cloud Peak Energy Inc., a U.S. coal producer with mines in Wyoming and Montana, was very clear in its February 13, 2013 press release, when it announced a throughput option agreement with SSA Marine that provides Cloud Peak Energy with an option to ship up to 16 million metric tons of capacity per year through the proposed GPT at Cherry Point. The press release pointed out that Cloud Peak Energy’s option is exercisable following future permit completion for the terminal. It should be noted that in August 2015, Cloud Peak Energy invested for a 49% stake in Pacific International Terminals, the subsidiary SSA Marine created to house the GPT project.
Cloud Peak Energy filed a Form 8-K with the SEC on February 13, 2013, reporting it had issued the press release with the information about its agreement with SSA Marine, and included a copy of that February 13, 2013 press release.
On February 14, 2014, Cloud Peak Energy filed a Form 10-K Annual Report with the SEC for fiscal year ending on December 31, 2013.
Page 1 of Cloud Peak’s 2013 Annual Report, reads:
“We continue to seek ways to increase our future export capacity through existing and proposed Pacific Northwest export terminals, including our option agreement with SSA Marine. This throughput option agreement with SSA Marine provides us with an option for up to 16 million tonnes of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal at Cherry Point in the State of Washington. Our potential share of capacity will depend upon the ultimate capacity of the terminal and is subject to the terms of the option agreement. The terminal will accommodate cape size vessels. Our option is exercisable following the successful completion of the ongoing permit process for the terminal, which is uncertain.”
Page 10 of Cloud Peak’s 2013 Annual Report reads:
“Also, in February 2013, we announced a throughput option agreement with SSA Marine that provides us with an option for up to 16 million tonnes of capacity per year through the planned dry bulk cargo Gateway Pacific Terminal at Cherry Point in the State of Washington. This agreement requires us to make annual option payments, aggregating up to a maximum of $16 million over a five-year period. The initial shipping term is 10 years with an option to enter into two five-year extension terms. Our potential share of capacity will depend upon the ultimate capacity of the terminal and is subject to the terms of the option agreement. The terminal would accommodate cape size vessels. Our option is exercisable following the successful completion of the ongoing permit process for the terminal, which is uncertain.”
It would seem likely that if Peabody Energy’s agreement with SSA Marine to ship 24 million metric tons of coal via GPT was a throughput option agreement as SSA Marine executive Bob Watters referred to it in the Seattle Times, that the specifics of that deal would be similar to Cloud Peak’s 2013 throughput option agreement, and would then need to be detailed in a Form 8-K, or Form 10-K, filed with the SEC, as Cloud Peak had done. However, in reviewing the SEC’s 2011 EDGAR filings for Peabody Energy, Peabody’s agreement with SSA Marine is not described as an option agreement, and is simply referred to as a “throughput agreement” in the 8-K filings in which it is mentioned.
Peabody’s stock price fortified by its throughput agreement announcement
Surprisingly, in Peabody Energy’s 10-K Annual Report for fiscal year ending December 31, 2011, filed with the SEC on February 27, 2012, there does not appear to be any reference to the company’s agreement with SSA Marine announced on February 28, 2011. The only information found in the annual report that seems relevant to that subject is this sentence found on Page 8 which reads: “We are also currently pursuing a U.S. west coast port facility that will allow us to export Powder River Basin coal to Asian markets.”
Back in 2011, Peabody Energy’s February 28 press release quoted its then-Chairman and CEO Gregory H. Boyce, lauding the company’s throughput agreement with SSA Marine to ship coal via GPT to Asia, when he said, “We’re opening the door to a new era of U.S. exports from the nation’s largest and most productive coal region to the world’s best market for coal.” Peabody’s announcement of the news of that agreement surely attracted investor attention to Peabody Energy, and SSA Marine certainly advertised the agreement news to its advantage, as it announced, and began promoting, its GPT project that same month.
As a matter of fact, according Yahoo Finance, the thirty-day period immediately following the February 28, 2011 news of the agreement, saw a significant rise in Peabody Energy’s stock price. On March 25, 2011, Peabody’s stock closed at 72.63, which was the highest price at which the stock had closed since June 30, 2008, when it had closed at 88.05. The stock price had risen over 7 points by March 25, 2011, since the February 28, 2011 closing price of 65.49 on the day of Peabody’s announcement about its agreement to export coal through the proposed coal terminal at Cherry Point.
With Bob Watters having given the media two different descriptions of SSA Marine’s throughput agreement with Peabody Energy, the public is left with little real understanding of just exactly what the agreement was that had been promoted to the public and investors by both companies since 2011.
Whatcom County residents who would bear the many significant, adverse impacts from a 48 million ton per year coal export terminal, if it were built and operating, may want to apply renewed scrutiny to other information advertised about the project by SSA Marine, its various GPT advocacy groups, and companies involved with the project.