- Company says it has deal in place to cut $4.5 billion in debt
- Mining firm plans to continue operating during reorganization
Arch Coal Inc. joined the ranks of bankrupt coal miners as the U.S. continues to shift toward cheaper, cleaner-burning natural gas, threatening the dominance of one of the world’s dirtiest sources of energy.
The holder of the second-largest reserve of coal in the U.S. filed for creditor protection Monday. The company said it has an agreement with a majority of its senior lenders to erase $4.5 billion in debt from its balance sheet and allow it to keep operating without interruption. Arch has been losing money since 2012.
“Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry,” Arch Chief Financial Officer John T. Drexler said in a filing accompanying the Chapter 11 petition in St. Louis.
Industrywide troubles including slower demand from China, competition from Australian exports and cheap gas pushed competitors Patriot Coal Corp., Walter Energy Inc. and Alpha Natural Resources Inc. into bankruptcy last year. High pension costs and the threat of stricter environmental regulation have compounded the coal miners’ woes.
Arch said in the filing that environmental regulations have made it more expensive for companies to use coal. It blamed Environmental Protection Agency rules for causing more than 400 coal-fired generators to close. Overall, 23 percent of the generating units are expected to retire or convert by 2025, Arch said.
The Sierra Club called the filing “the end of an era,” but another environmentalist group cautioned that the bankruptcy could affect reclamation -- the restoration of land after coal is extracted.
“The announcement significantly reduces the likelihood that several Arch Coal projects across Montana and Washington State will move forward,” the Sierra Club said in a statement. Arch dramatically increased pay for its executives while failing to adapt to public health concerns about coal pollution and the increasing demand for clean energy, the San Francisco-based group said.
Arch owns the country’s second-largest coal mine, Black Thunder in Wyoming’s Powder River Basin. Powder River Basin Resource Council, a preservation group, said the company’s more than 90 square miles of coal mines in the area have a $458 million reclamation liability.
“State and federal taxpayers must not be left with the bill,” the group said in a statement.
The court filing listed $5.8 billion in assets and $6.5 billion in debt. The company has agreed to the terms of a $275 million loan to keep it operating during bankruptcy. The loan includes a $75 million carve-out for environmental reclamation obligations, according to court papers.
“This is the end of a period where coal producers can expect to lever up and be able to service outsize debt profiles,” Ted O’Brien, chief executive officer of Doyle Trading Consultants LLC, said in an interview before the filing.
Still, O’Brien said, Arch is different from its competitors in that it has several good mines that can make money even with low prices for its main product.
“Arch is very clearly a capital-structure issue as opposed to a company that’s been running uneconomic mines because they can’t afford to close them,” he said.
Coal’s share of electricity generation in the U.S. fell to 30 percent in April, as the historically popular fuel was overtaken by gas for the first time. Coal still generated more than 40 percent of electricity globally and is used in the production of 70 percent of the world’s steel, according to the World Coal Association.
St. Louis-based Arch’s output has put it among the top five U.S. metallurgical coal producers and made it the second-biggest thermal coal miner, behind Peabody Energy Corp.
As of the end of 2014, Arch estimated that its pension benefit obligations were $353 million, according to court filings. The company said it doesn’t expect its pension plan, which is well-funded, to be affected during the bankruptcy.
President Barack Obama’s Clean Power Plan, which takes effect in 2022, requires states to cut carbon emissions by using less coal and more solar, wind and gas power. The plan could reduce coal demand by 20 percent, according to New York-based Doyle Trading. A so-called Stream Protection Rule from the U.S. Interior Department would also change industry practices.
The bankruptcy filing followed in-fighting among hedge funds holding different layers of Arch debt. GSO Special Situations Master Fund LP, a Blackstone Group LP affiliate, even filed a lawsuit seeking to clear the way for a debt exchange.
Arch has also had to cope with the effects of its 2011 purchase of International Coal Group Inc. The $3.4 billion acquisition, made when metallurgical coal was selling for $330 a metric ton, increased its exposure to a thermal coal from Appalachia, which has been particularly hard hit as cheaper thermal coal is mined in the Midwest.
Central Appalachian coal fell 13 percent in 2015, capping a fifth annual decline on the New York Mercantile Exchange. Prices closed at $44.33 a metric ton on Friday.
The case is In re Arch Coal Inc., 16-40120, U.S. Bankruptcy Court, Eastern District of Missouri (St. Louis).