USA: Arch Coal files for bankruptcy

Published by MAC on 2016-01-12
Source: Reuters, Forbes, Mining.com

... amid concerns over clean-up costs

Arch Coal files for bankruptcy, hit by mining downturn

By Tracy Rucinski

Reuters

11 January 2016
 
Chicago - Arch Coal, the second-largest U.S. coal miner, filed for Chapter 11 bankruptcy protection on Monday with a plan to cut $4.5 billion in debt from its balance sheet in the midst of a prolonged downturn in the coal industry.

Arch Coal, saddled with debt since its 2011 acquisition of International Coal Group, has been suffering from a sharp drop in coal prices, stricter pollution controls, falling demand from China and increasing competition from natural gas.

"Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry," Chief Financial Officer John Drexler said in a filing with the U.S. Bankruptcy Court in St. Louis on Monday.

Shares of leading U.S. coal producer Peabody Energy Corp hit a record low on Monday and were still down 18.7 percent in afternoon, after Arch warned that 2016 pricing is expected to be weaker than initially feared.

"Initially, Peabody is in a better position to weather the storm, but we don't know how bad it's going to get," said Steve Piper, associate director of energy fundamentals at SNL Energy.

To restore its balance sheet, Missouri-based Arch said it has a debt-for-equity agreement that will give control of most of the company to senior lenders, which as of September included Eaton Vance Management Inc, Tennenbaum Capital Partners and Highland Capital Management.

It will also receive $275 million in debtor-in-possession financing and has more than $600 million in cash and short-term investments, enough to run its operations smoothly throughout the restructuring process, it said.

Arch Coal, with about 4,600 employees, expects mining operations and customer shipments to continue uninterrupted. Unlike other bankrupt miners including Walter Energy and Patriot Coal, the union-free miner said it has no labor issues that need resolving in Chapter 11.

Producers accounting for more than 25 percent of U.S. coal are currently in bankruptcy, based on 2013 government figures of major U.S. coal companies' production.

Loss-making Arch, which supplies both domestic and international clients, derives 84 percent of its coal from the high-performing Powder River Basin in Wyoming, but overall business has been hit by weakness in Central Appalachia.

"The Central Appalachia mines may require a fairly drastic spin-off in the bankruptcy process, and the Illinois Basin will also be closely watched," Piper said.

The company may still need to broaden the support among its creditors before seeking court approval for its bankruptcy plan.

Before filing for bankruptcy, Arch cut production, wages and prices and its dividend to fight falling demand for coal, which was surpassed by natural gas as the largest source of electricity in the United States for the first time last year.

Arch Coal was widely expected to go bankrupt after ending a previously proposed debt swap with lenders in October and delaying a $90 million interest payment due in December.

Arch Coal's notes have been trading at a deep discount, with unsecured notes trading in the secondary market at less than 1 cent on the dollar on Friday, court papers showed. Normally a company's shares are canceled after a bankruptcy filing.

(Additional reporting by Ankush Sharma in Bangalore; Editing by Paul Simao and Matthew Lewis)

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Will Taxpayers Get Stuck With The Bill To Clean Up Strip Mining Coal Sites?

Ken Silverstein

Forbes

10 January 2016

The issue of how to pay for mine reclamation is flying below the surface of the general public even though the matter is, literally, above ground and right before the eyes of the major coal-producing regions. At issue is “self bonding” that ensures that their surface mines are “reclaimed.”

Many smaller coal companies must post a “surety bond” that they purchase from an insurance company, which would provide the funds to restore strip mines so that the sites can be used again if the producer is unable to meet that responsibility. But the larger developers have been allowed to use their own balances sheets to back up those promises — a right that has presented no problem, until recently. That’s because the financial health of the nation’s coal companies is failing, which potentially puts taxpayers at risk of paying the reclamation costs.

And it’s no small sum: almost $2.7 billion in self-bonds are outstanding from Alpha Natural Resources ANR +%, Arch Coal, Cloud Peak Energy and Peabody Energy BTU +0.00%, says the Taxpayers for Common Sense. Altogether, the United States has been working to clean up more than 500,000 acres that were abandoned before the bonding law took effect in 1977 at a cumulative cost of potentially $12 billion.

“In short, if the coal company goes bankrupt, the state or federal governments—that is, we, the people—might have to pay to clean up the company’s messes,” writes Clark Williams-Derry of sightline.org.

It wasn’t until 1977 that the U.S. Congress passed laws that were signed by the president to restore mine sites and to post a bond. The purpose of the so-called Surface Mining Control and Reclamation Act is to not just ensure that mine sites are cleaned up but to also make sure that taxpayers don’t get stuck with the bill. Already, $8 billion has been spent to reclaim abandoned mine sites and another $4 billion is necessary for pre-1977 sites, says the taxpayer group.

It is thus up to the Office of Surface Mining Reclamation and Enforcement to oversee the process. As such, the agency is now reviewing its policy of allowing major conglomerates to self-bond in light of their financial woes. In other words, the original value of their assets is far more than what they would fetch in today’s markets — one that is enduring historically low prices for coal used to make electricity and for coal used to make steel. That’s on top of the fact that natural gas is taking market share from coal in electric generation markets.

To continue this practice of self bonding, the struggling parent companies are using the balance sheets of their healthier subsidiaries. News reports from Reuters have specifically cited Arch Coal and Peabody Energy, especially their strip mining sites in Wyoming and Montana that are part of the Powder River Basin and that supply 40 percent the nation’s coal.

The problem, of course, is that Arch has said it could file for bankruptcy to give it time to reorganize while Peabody might not be far behind it. A judge would then prioritize each claim. In a phone call with Peabody, it says that it is in the process of writing a detailed analysis of this situation but that allowing it to use the assets of both the parent and its subsidiaries is perfectly legal.

Obviously, buying an insurance policy to cover the cost of reclamation in the event of bankruptcy is money that would otherwise go toward production and paying worker salaries. However, the inability to pay such restoration costs could fall on everyone else if the companies are unable to do so. Otherwise, there would be a big, ugly blight upon the land.

How real? “We cannot predict our ability to obtain these bonds or their cost in the future,” says Alpha Natural Resources, in a filing with the U.S. Securities and Exchange Commission. Wyoming, for example, has said that Alpha does not qualify any longer to self-bond.

Moreover, the wave of bankruptcies that has hit the coal sector has already caused some major producers to default on their obligations to pay bondholders: Alpha Natural Resources, Patriot Coal and Walter Energy. Both Arch Coal and Peabody Energy have a “reasonable likelihood of default,” says Fitch Ratings, with Arch being the more probable of the two.

It’s the job of state regulators to review companies’ financials to determine if they qualify for self-bonding, although they are bound by what federal law says. And until federal regulators — or the courts — rule any differently, parents are using the financials from their healthier subsidiaries to back up their promises. The value of the assets is worth more than the cost of reclamation, they say.

For decades, coal’s financial clout was not in question. Now that the fuel has fallen out of both market and regulatory favor, however, much of the industry is being forced to restructure, prompting regulators to re-evaluate just what businesses can self-insure.While the coal-producing states want the economic development, they do not want any taxpayer rescues.

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Arch Coal’s bankruptcy suggests a questionable strategy

Tom Sanzillo

Mining.com

14 January 2016

Arch Coal’s bankruptcy filing acknowledges a financial fact, that the company is overleveraged. It continues, however, to ignore market reality.

The filing identifies $5.1 billion in long-term debt. It places enterprise-wide annual debt service payments at $360 million. The filing details the company’s failed attempt to reorganize these debt levels at $4.2 billion with annual debt service of $291 million. And Arch has concluded that at the current price of coal operations it cannot sustain even this level of reduced debt.

We do not know what the outcome of the bankruptcy proceeding will be with regard to debt load, but the plea from Arch is that if it can just get rid of this debt load it can become profitable.

Arch’s third-quarter 2015 numbers dressed up the company well for the bankruptcy filing. If you net out their impairment ($2 billion in lost value) and costs of the Patriot Coal bankruptcy the company is much closer to breaking even than last year’s $558 million loss. To its credit, Arch points to cost control in both Central Appalachia and the Powder River Basin. So, Arch argues that taking away some or all of the $360 million debt service obligation redeems the company as a going concern.

Does it?

Let’s take a look at operations for Arch in the Powder River Basin, where it generates more than half of its annual income. In its 2014 10K issued in February 2015 the company projected 2016 Powder River Basin prices for the company hitting $14.58 per ton. Nine months later, at the end of September, 2015 Arch lowered it 2016 Powder River Basin estimate to $13.39 per ton. The company discloses that 66 million tons is under contract for 2016 at these prices. In September 2015—when Arch was making its 2016 forward-looking projection—Platts was looking at spot prices of $11.20 through 2016. Today Platts see Powder River Basin spot prices at sub-$10 per ton through 2017. The Energy Information Administration’s recent short-term outlook also shows weak 2016 pricing.

The company has already reduced costs in the Powder River Basin. Going forward, the risk of erosion on both the price side and the company’s ability to continue to reduce costs is high. The workhorse mine for Arch, Black Thunder is maturing. In coal mining, geology drives costs over time, and a debt discussion is a discussion of the company over time.

It is understandable that Arch would have a hard time grasping just how far coal prices will fall—most companies in the industry are getting it wrong too.

Paradoxically, the continued downward price slide is driven in no small measure by an unwillingness by the companies to discipline production.

The way Arch is able to keep its contract prices almost 40 percent above spot prices is because regulated utilities are able to bring their overall costs low enough to keep some coal in their portfolio mix. How long are utilities going to keep this up and how long are public service commission’s going to grant higher prices for coal-fired plants when cheaper alternatives continue to be available quarter after quarter?

Arch says it plans to close no mines. It says it plans to continue business as usual during the bankruptcy and to emerge with less debt. It assumes the market going forward will support its current production levels. Its filing it notes that its divest, close and idle strategy is more divest and idle then close. The company is simply planning to add the same amount of coal from Arch operations to the currently oversupplied market.

This, of course, is the plan at most other coal companies and it is a recipe for unsustainable prices. The question of mine closings is important, the corollary question of which companies should close its doors is a close second.

Arch executives seem oblivious to this trend in the coal markets. The company also mentions that natural gas prices are low and this has cut into its markets, yet no outlook is offered for those prices. The EIA’s recent shor-term outlook shows some uptick in natural gas prices and coal prices in 2017. This uptick will not create price increases high enough or sustained for a period long enough to send new prices signals to incentivize new investment in mining, however.

The Arch filing does not mention the role of renewables as competition for the company. In Texas, the state with the fastest-growing wind power capacity buildout in the country, Arch has lost almost five million tons in coal sales from the Black Thunder mine since 2012. Power plants at Coleto Creek, Fayette, Spruce, Deely, Sandy Creek and Tolk have all decreased their purchases. Only coal sales to the Harrington plant have remained flat.

The Powder River Basin is Arch’s strongest region and is likely to grow as the go-to region for the remaining coal demand in the country going forward. Arch’s cost of production even with the reductions remains around $10 per ton, higher than its competition at Cloud Peak and Peabody.

Central Appalachian thermal and metallurgical markets look considerably worse.

A wise man once said: “A speculator is someone who yesterday did not have a penny and today is millions in debt.”

At the end of the day, without the debt the speculator still did not have a penny.

Tom Sanzillo is IEEFA’s director of finance.