Huge U.S. coal company declares bankruptcy

Bad investments, cheap natural gas and air pollution regulations led to Arch's decline.

 

One of the nation’s largest coal companies, Arch Coal, filed for bankruptcy Monday, making it the second company with large Western mines to seek Chapter 11 restructuring in recent months. 

The St. Louis-based company announced that it expects to continue to operate its mines and pay its 4,600 employees while it seeks a bankruptcy court’s approval for its debt restructuring.  Arch said its lenders had agreed to reduce its debt by more than $4.5 billion, but that deal would have to be approved by the court.

Responding to its employees’ and retirees’ fears, Arch said it does not anticipate major layoffs or disruptions to its pensions due to the bankruptcy. But it conceded that market conditions may impact staffing. The company operates two surface mines in Wyoming’s Powder River Basin as well as the underground West Elk mine in Somerset, Colorado. It has proposed opening a surface mine in southeastern Montana, the Otter Creek project. It also has mines in Appalachia and Illinois.

Black Thunder, Arch's largest mine, helps Wyoming lead the nation in coal production.
EcoFlight

“Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry,” John Drexler, Arch’s chief financial officer, said in a filing with a U.S. bankruptcy court in Missouri.  The company could no longer pay annual fees of $360 million on its $5 billion debt, given the “current depressed coal market.”

The company’s financial troubles stem from its purchase of the International Coal Group for $3.4 billion in 2011, which made it the second largest producer of metallurgical coal, used to make steel. Following that deal, world prices for metallurgical coal tanked, leaving Arch swamped in debt. As HCN has reported, Virginia-based Alpha and Peabody, the world’s largest private-sector coal company, made similar bad investments in metallurgical coal mines when prices were near peak. Peabody’s stock, already a fraction of what it was just a few months ago, dropped 20 percent on Monday following Arch’s news.

Adding to the coal giants’ troubles, electric companies have been switching to natural gas, both because of its low price and because of state and federal air pollution regulations. Coal is the dirtiest source of electricity both in terms of conventional air pollution and the carbon emissions that contribute to climate change. By requiring states to reduce greenhouse gas emissions from their electricity sectors, President Obama’s Clean Power Plan is expected to further reduce the use of coal in coming years unless the plan is stopped by pending legal challenges from states and utilities.  

Arch anticipates that by the time those cases make it through the courts, coal’s fate may already be sealed. “By the time legal challenges have been resolved, it is possible that many of the required investments may have already been made, resulting in further coal plant retirements, which would have severe consequences for Arch’s business,” Drexler writes in his declaration.

U.S. coal companies’ hopes that a growing export market would offset domestic declines have not materialized. The international climate change agreement reached in Paris in December puts pressure on countries around the globe to reduce their coal use.

Although it’s too early to know what impact the bankruptcy will have on Arch’s various operations, the company’s Powder River Basin mines are among its most profitable and likely will keep operating, even after the company makes it through bankruptcy either by Arch or new owners, according to experts.  They “are among the few assets right now creating cash and revenues for Arch and therefore they are likely to be quite safe,” says University of Wyoming economic professor Robert Godby. West Elk’s prospects are less clear. The mine already struggles with profitability, so much so that Arch negotiated a lower royalty rate with the federal government because of the relative high cost of mining the coal.

Environmental groups hoped that the federal government would not continue to reduce Arch’s royalty rates and otherwise prop up the company, given the outsized role greenhouse gas emissions from coal play in climate change.  Environmental groups also worried about the implications of Arch’s bankruptcy for the reclamation of its massive surface mines in  Wyoming.

WildEarth Guardians wrote to Arch beseeching the company to use the bankruptcy to plan an orderly exit strategy. “This needs to be about emerging from bankruptcy with a plan for going out of business,” says Jeremy Nichols, who directs the group’s climate and energy programs. “The reality is that’s where the world is going.”

Elizabeth Shogren is HCN's DC correspondent. 

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