Arch Coal, the second largest coal company in America and the operator of the Black Thunder mine near Wright, filed for bankruptcy Monday.
Arch executives characterized the move as necessary to restructure the company’s more than $5 billion debt. Mining operations will continue as the company navigates Chapter 11 proceedings, the St. Louis-based firm said.
“After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet,” said John W. Eaves, Arch’s chairman and CEO, in a statement. “We are confident that this comprehensive financial restructuring will further enhance Arch’s position as a large-scale, low-cost operator.”
Wyoming, the country’s top coal-producing state, has much at stake in Arch’s bankruptcy filing.
The Black Thunder coal mine, the second-largest in the country, employs 1,600 people. The Coal Creek mine between Gillette and Wright employs roughly 157 people. The company said Monday it would continue to pay salaries and benefits in full.
Arch's assessed tax valuation in 2014 was $1.1 billion, third most in the state.
And it has $458 million in unsecured reclamation liabilities in the state.
Gov. Matt Mead, in a statement, assailed federal environmental regulations, saying they were responsible for the company’s financial position.
“Today’s news further shows how the administration’s efforts to move the country away from a reliable, abundant and affordable energy source are harming the economy,” Mead said.
The development underscored the depths of the downturn now enveloping the coal industry. On Friday, the U.S. Energy Information Administration reported American coal production had slumped to its lowest level since 1986. U.S. coal consumption, meanwhile, fell to levels not recorded since 1988.
Arch executives noted the deteriorating market conditions in their court filings. Coal fell from 48 percent of U.S. power generation in 2008 to 38 percent in 2014, as cheap natural gas became increasingly attractive to utilities, they said.
Power companies retired 13 gigawatts of coal-fired power in 2015. An additional 23 percent of existing coal capacity is anticipated to be retired or converted to natural gas in the next decade as utilities move to meet new environmental regulations, the company said.
Arch staked a large bet on metallurgical coal used in steel production in 2011 when it paid $3.4 billion for the International Coal Group. But a supply glut and waning demand from China combined to drive down prices. Metallurgical coal prices are now at their lowest levels since 2004, Arch said.
Producers have struggled to pay their debts against that backdrop. Arch had more than $5 billion of debt at the end of the third quarter, when it reported a $2 billion loss.
Arch Chief Financial Officer John Drexler, in court filings submitted to the U.S. Bankruptcy Court for the Eastern District of Missouri, said the company’s $360 million annual debt service could not be sustained in the current market.
“They have assets that should remain in operation,” said Kristoffer Inton, an analyst who tracks the company at Morningstar. “It is really a question of making sure balance sheet and debt load they carry matches a company of that size. When you look at that debt load, it made sense looking backwards at 2011 when they were making a lot of money. The problem is they were looking at a peak and thinking it was a new normal.”
Arch’s Powder River Basin mines are among the most attractive in the company’s portfolio, said Robert Godby, a professor who studies the energy industry at the University of Wyoming. The mines will likely serve as a source of revenue to the company or as a valuable asset in a sale, he said.
“Either way, employees in the PRB are among the few assets right now creating cash and revenues for Arch and therefore they are likely to be quite safe,” Godby said. “Front office and executive staff in the company may not be so lucky.”
Arch had sought to negotiate a deal with senior creditors to reduce its debt by $990 million. But lenders opposed the deal, fearing it would compromise their investment in the company.
The failure to reach an agreement prompted company executives to warn of a bankruptcy filing in November. Last month, the mining firm invoked a 30-day grace period on a $90 million interest payment. The grace period was set to expire on Jan. 15.
On Monday, Arch said it had come to an agreement with creditors holding more than 50 percent of a $1.9 billion loan. The deal will help the company wind down $4.5 billion in debt, Arch said.
Under the terms of the agreement, lenders would effectively swap debt for ownership in the company. Senior creditors would receive $145 million in cash, the $90 million interest payment due in December, $325 million in new debt and most stock issued by a reorganized company.
Junior creditors were presented with two options. They could assume a minority stake in the company of up to 4 percent or collect assets leftover after payments to senior creditors.
Senior lenders receiving equity in the company indicates there was not enough money to make creditors whole, Inton said.
“It shows you how much smaller the company is going to be in terms of price value,” he said. “Usually you only get equity if you don’t get made whole.”
Inton called bankruptcy a painful, but necessary step in matching a coal company’s size to reduced market demand.
“It helps them become smaller in terms of their debt load and what they need to produce,” he said.
The filing is likely to intensify debate over coal companies’ reclamation obligations. The issue rose to the fore last year after Alpha Natural Resources filed for bankruptcy with $411 million in unsecured reclamation obligations in Wyoming alone.
Arch has roughly $457 million in unsecured reclamation liabilities in the state.
Environmental groups issued a series of statements following news of Arch’s filing, calling on regulators to ensure financing is guaranteed for mine cleanup.
“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, a landowner group based in Sheridan. “With over 90 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.”
Jeremy Nichols, climate and energy program director at WildEarth Guardians, said it was time for Arch to bring its operations to an end, saying it would help stem the global rise in temperatures.
“There is no future for coal, and it’s time for Arch Coal to be honest about this with its shareholders, its employees and the American public who sustain so much of the company’s operations,” he said.
Federal regulations allow coal companies to secure future reclamation obligations with their finances, provided they can demonstrate financial health.
Alpha failed a financial test prior to filing for bankruptcy. But Wyoming regulators have said Arch was still eligible to use unsecured reclamation bonds because its obligations were guaranteed by a financially healthy subsidiary. That subsidiary, Arch Western Resources LLC, also filed for bankruptcy Monday.
In court filings, the company requested $75 million of its debtor-in-possession loan be set aside to meet reclamation obligations.
The state Department of Environmental Quality said in a statement released shortly after the filing that it would review Arch’s reclamation status and not comment further.
“The company clearly is in no position to honor its reclamation responsibilities should it have to,” said Godby, the University of Wyoming professor.
He noted the situation is more dire in Appalachia where the likelihood of mine closures is higher. Arch’s Powder River Basin mines will likely remain in operation, he noted.
Nevertheless Arch’s bankruptcy may force Wyoming to reevaluate the practice of allowing companies to employ unsecured reclamation bonds, “potentially raising such financing costs for any future operators,” he said. “This could also undermine the general competitiveness of coal mining in the longer term.”
This story has been updated. An earlier version incorrectly reported Arch's annual tax payments. The company has an assessed valuation of $1.1 billion. It also misidentified an Arch subsidiary, Arch Western Resources LLC.