Arch Coal, one of the United States’ largest coal companies, filed for bankruptcy on Monday in the hopes of eliminating more than $4.5 billion in long-term debt, according to a press release issued by the company.
The news comes as several of Arch’s competitors — Patriot Coal, Walter Energy, and Alpha Natural Resources — have also filed for bankruptcy. Arch Coal is the second largest supplier of coal in the United States behind Peabody Energy, and its mines represent 13 percent of America’s coal supply.
…it shows that the second-largest coal company in the United States is unable to pay its debts and provide any return at all to its shareholders
Low natural gas prices and environmental regulations made 2015 a tough year for the U.S. coal industry, with domestic production levels slumping to a 30-year low. Coal production has been on the decline for years, since peaking in 2008, and 2015’s production numbers represent a 10 percent decline from 2014. Recent climate policies have also hampered coal use, which is more expensive and polluting for utilities than natural gas. In April, natural gas surpassed coal, for the first time ever, as the primary source of electricity generation in the country (though it remained in the top spot for only a month before being overtaken by coal).
“U.S. coal consumption is declining dramatically as coal-fired power plants are shutting down. Coal is being displaced by renewables and natural gas, and the Asian markets that all coal companies were looking to as their saviors are moving in the opposite direction,” Ross Macfarlane, senior advisor with Climate Solutions, told ThinkProgress. “[Arch’s bankruptcy filing] wasn’t unexpected, but it’s still very significant in that it shows that the second-largest coal company in the United States is unable to pay its debts and provide any return at all to its shareholders.”
As a company, Arch has seen a fairly rapid decline in the value of its shares following a flurry of domestic acquisitions in 2011. Those acquisitions, which totaled in the millions, were based on the presumption that the coal industry would see rapid overseas growth in the coming years. That overseas growth never materialized, with coal consumption several key nations like China peaking, or appearing to peak, in the past few years. In early 2011, stock in Arch Coal peaked at $260 a share — on Monday, shares in Arch Coal were worth less than a dollar. During that time, Arch Coal executives doubled their pay, despite falling share prices.
Under Chapter 11 bankruptcy protection, Arch Coal will exchange much its debt to lenders for equity in the company, known as a debt-for-equity swap. According to the Wall Street Journal, Monday’s filing comes after months of unsuccessful attempts to stave off bankruptcy, including out-of-court negotiations with creditors to financially restructure the company. In November of 2015, however, it appeared as though those attempts were falling apart, and Arch Coal announced in its quarterly earnings report that it could file for bankruptcy in a matter of months.
In a company-issued press release, Arch framed the bankruptcy in a positive light, arguing that financial restructuring would better position the company for long-term success.
“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,” Arch’s chairman and CEO John W. Eaves said in the press statement announcing the Chapter 11 filing. “We are confident that this comprehensive financial restructuring will further enhance Arch’s position as a large-scale, low-cost operator.”
Arch Coal currently has some $600 million in cash and short term investments, and expects to receive another $275 from lenders. That amount, the company says, will be enough to sustain operations through bankruptcy, and the company expects to maintain its mining operations throughout the proceedings.
It’s a clear confirmation that the markets are not seeing any significant upside potential in coal and that the company is fighting for its financial life
The bankruptcy filing, however, could impact Arch Coal’s operations both at the mines and along the West Coast, which has seen an uptick in proposals for fossil fuel export terminals in recent years. Arch Coal is co-owner of the proposed coal export terminal at the Millennium Bulk Terminals site in Longview, Washington — if completed, the coal export terminal would be the largest in the country. Currently, it’s one of just two coal export terminals still under consideration by the Washington Department of Ecology. If built, proponents argue that the export terminal would represent a $680 million investment that could spur infrastructure and employment in a critically underemployed area of Washington.
But the bankruptcy filing — which follows financial troubles suffered by another investor in the project, Ambre Energy — threatens the financial feasibility of the project, Macfarlane argues.
“It’s a clear confirmation that the markets are not seeing any significant upside potential in coal and that the company is fighting for its financial life,” Macfarlane said. “The prospect that it is going to raise the $650 million to $1 billion that is estimated is needed to do this project is effectively zero.”
Macfarlane also worries about what will happen to the land that Arch is currently mining. Federal law requires coal companies to guarantee that, in the event that the company goes under, mines will be cleaned up — these are known as “reclamation bonds” and are required by federal law for any mining permit. But instead of setting setting aside money or purchasing what are akin to insurance policies, Congress has allowed coal companies to back up those assurances with “self-bonds” — promises that rely on the financial health and reputation of the coal company. As recently as September, Wyoming has allowed Arch Coal to self-bond to cover its reclamation requirements, meaning that if the company is not financially healthy enough to cover those self-bonds, the government and taxpayers could be left shouldering the burden.
“There’s a danger that the state and the public may be left with pennies on the dollar compared to the costs of actually reclaiming and restoring this public land that has been devastated by the coal company itself,” Macfarlane said.