Arch Coal Files for Bankruptcy
Company seeks to cut $4.5 billion in debt
Wall Street Journal
12 January 2016
John W. Miller and Peg Brickley
Arch Coal Inc.’s bankruptcy filing Monday signals that the coal
industry’s shakeout is entering a crucial phase, which will result
in more small, unlisted mining companies, record numbers of mines
for sale and lower wages for workers.
Over a quarter of U.S. coal production is now in bankruptcy,
trying to reorganize to cope with prices that have fallen 50%
since 2011, battered by competition from natural gas and new
environmental rules. Arch, the biggest domino to fall so far, is
trying to trim $4.5 billion in debt from its balance sheet.
Competitors Walter Energy Inc., Alpha Natural Resources Inc., and
Patriot Coal Corp. all filed for court protection last year.
But bankruptcies only spell death for current corporate
structures, not necessarily the mines they operate. And the U.S.
still gets 34% of its electricity from coal, according to the
Energy Information Administration, and that number is still
expected to be around 30% by 2030. “The question is, what is that
30% going to look like?” says Steve Nelson, chief operating
officer at Longview Power LLC, a 700-megawatt coal-fired plant in
northern West Virginia.
The massive coal mines of northeast Wyoming aren’t going out of
business. Nor are the small, efficient producers in Illinois that
are mining rich seams. Although coal production in Central
Appalachia fell 40% in 2015 relative to 2010-2014, it dropped
10%-20% in Wyoming, and increased 8% in the Illinois basin,
according to the EIA.
The survivors will be low-cost producers across the country,
including most of the 11 mines in Arch’s portfolio. Major U.S.
mining firms have many profitable mines, but have racked up too
much debt and liabilities. Their mines are now expected to fall
into the hands to a new roster of owners and operators dominated
by creditors and private-equity firms. “Historically, chapter 11
filings don’t always equate with production cuts,” says Jim
Thompson, an analyst with IHS Global Energy. “It’s about the
individual mines, and whether they can control costs.”
With $600 million in cash on hand, and a $275 million bankruptcy
loan on the way, Arch said it would be able to continue normal
mining operations during chapter 11 proceedings. It also said it
had already scaled back operations and didn’t expect any layoffs
to result from the bankruptcy.
Arch’s senior lenders are slated to get a combination of cash, new
senior debt and most of the reorganized company’s stock, according
to a term sheet outlining the proposed bankruptcy workout plan.
Junior creditors can choose between a minority slice of equity, or
the value of Arch’s assets that aren’t pledged as collateral for
senior loans, court papers said.
A good example of the post-shakeout coal industry is a Mepco
Holdings LLC-owned mine in West Virginia, nestled among verdant
and luscious hills and hovels that includes over dozen coal mines
in a 50-mile radius. Many mines in the region have closed,
throwing thousands of miners out of work, and many others are now
emerging from or filing for bankruptcy.
“There are a lot of good mines left,” said Mepco and Longview
Chief Executive Jeff Keffer. “They just have to go through the
bankruptcy process, and reduce their debt burden.”
The companies filed for court protection in 2013, and their
secured debt was converted into equity held by private-equity
firms KKR & Co., Centerbridge Partners LP, American Securities
LLC, and Third Avenue Management LLC. The group wrapped it into
one operation — run by Mr. Keffer — that also includes Longview,
the power plant it supplies. The plant and mine provide power to
500,000 homes, Mr. Keffer said on a recent tour of the complex.
“There’s too much coal out there, so companies like Arch need to
focus on the mines that continue to be profitable,” he said.
During the visit, Messrs. Keffer and Nelson showed off the
four-mile conveyor belt linking up mine and plant, part of their
solution. At a time of low prices, “the huge handicap in
Appalachia is transportation,” said Mr. Nelson. “We save a lot of
money this way.”
Mr. Keffer said the operation is profitable. “And this is 600
workers; 500 at the mine, and 100 at the plant,” he says. “A solar
plant producing the same amount of power would employ only two or
three people.”
Another advantage for mining companies that are restructuring:
With thousands of coal miners out of work, starting wages in West
Virginia have fallen to around $20 an hour, half of that what they
were at the start of the decade, according to local mine
operators.
Harlan Cherniak, a senior executive at KKR — Mepco-Longview’s
biggest investor — said coal mines are a sector that “distressed
credit investors are looking at for 2016.”
The Longview power plant was completed in late 2011 and, despite
technical glitches during its first years of operation, is one of
the most modern and fuel-efficient in the country, Mepco-Longview
managers said. They have implemented as many filters as possible
to reduce their carbon emissions, but they still fear they won’t
be compliant with new rules that go online in the next decade.
“We’re doing the best we can,” said Mr. Keffer.
Environmentalists are concerned that coal companies might not
fulfill their obligation to repair the land they have mined on.
“Bankruptcy should not be used as a haven for the company to
escape its obligations,” said Bob LeResche, chairman of the Powder
River Basin Resource Council, which promotes responsible
development of Wyoming’s mineral resources. “With over ninety
square miles of coal mines in Wyoming’s Powder River Basin, Arch
has a $458 million reclamation liability. State and federal
taxpayers must not be left with the bill.”
Arch has said it is committed to meeting its environmental
obligations. “You can’t cut costs by reducing safety or your
concern for the environment,” said Mr. Keffer. “That will hurt you
in the end.”
Write to John W. Miller at john.miller@wsj.com and Peg Brickley at
peg.brickley@wsj.com