One of nation’s top coal producers, Alpha Natural Resources, seeks Chapter 11 protection

The list of U.S. coal companies in bankruptcy, which includes recent entries Walter Energy and Patriot Coal, has gotten longer with the Aug. 3 petition for Chapter 11 filed by Alpha Natural Resources (OTC PINK: ANRZ).

Alpha and certain of its wholly-owned subsidiaries filed voluntary petitions on Aug. 3 with the U.S. Bankruptcy Court for the Eastern District of Virginia in Richmond to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The Board of Directors of Alpha authorized the filing of the Chapter 11 cases to enhance the company’s future as it weathers what the company called “a historically challenged coal market.” The relief provided by Chapter 11 will allow the company to reorganize and emerge as a financially viable business that is better positioned to compete in dynamic energy markets.

Alpha’s stock price had fallen so low that it recently had to leave the New York Stock Exchange and switch its listing to the over-the-counter markets.

The company said it will promptly seek the necessary immediate relief from the court that will allow normal business operations to continue uninterrupted while in Chapter 11, with coal being mined, customer commitments honored, and wages and benefits for Alpha’s affiliated employees paid. Alpha affiliates operate more than 50 underground and surface mines and more than 20 coal preparation facilities in Virginia, Kentucky, West Virginia, Pennsylvania and Wyoming. Among its assets are two Powder River Basin mines in Wyoming (Belle Ayr and Eagle Butte), two longwall mines in southwest Pennsylvania (Cumberland and Emerald), and a number of mines in Central Appalachia, including ones bought in a 2011 acquisition of Massey Energy

Alpha Chairman and CEO Kevin Crutchfield said: “While a difficult decision, this voluntary Chapter 11 filing is the right strategy at the right time for the future of our business. It will enable us to build on the significant steps we have taken over the past several years to restructure our debt and protect our operations. I am confident Alpha will emerge from this process as a stronger company, with a diversified resource base and better positioned for the future.”

Crutchfield said the U.S. coal industry is in an unprecedented period of distress with increased competition from natural gas, an oversupply in the global coal market, historically low prices due to weaker international and domestic economies, and increasing government regulation that has pushed electric utilities to transition away from coal-fired power plants. But he also emphasized that neither Alpha nor the U.S. coal industry should be thought of in the past tense – while the sector will likely get smaller, coal will continue to play a critical role in providing affordable and reliable electricity and in the production of steel for infrastructure.

“The change and challenges the U.S. coal industry has experienced over the last several years are greater than any in the past three decades,” Crutchfield said. “There is no doubt more uncertainty ahead, but also transformational opportunity in the coal sector for those who make proactive, strategic decisions.” 

Alpha said it has secured an 18-month Debtor-in-Possession (DIP) financing package totaling up to approximately $692 million, arranged by Citigroup, and led by a group of both its first and second lien lenders. The DIP financing package provides the company with significant operational flexibility to successfully reorganize. Accordingly, Alpha said it enters this process with the necessary liquidity to support its ongoing operations (which will continue to generate additional cash).

Alpha expects to work with all key constituencies to reorganize and exit Chapter 11 in the most efficient manner possible. The current management team is expected to remain in place to lead the company through the bankruptcy process.

Alpha on Aug. 3 launched to provide stakeholders with information about the bankruptcy process and legal filings made with the court. With the Aug. 3 filing, the previously announced conference call and webcast scheduled for Aug. 5 to report the company’s second quarter 2015 results will no longer take place.

Alpha’s coal production has dropped lately, with financial losses posted

During 2014, Alpha’s coal shipments totaled 84.5 million tons, compared with 86.9 million tons in 2013. Met coal shipments were 18.6 million tons for 2014, compared with 20.1 million tons shipped during the same period a year ago. Shipments of PRB and Eastern steam coal were 36.5 million tons and 29.5 million tons, respectively, during 2014, compared with 38.2 million tons and 28.6 million tons, respectively, in 2013. The year-over-year decrease in shipments of PRB coal principally reflects poor rail performance, while the year-over year decrease in metallurgical coal shipments is primarily driven by weak market conditions and production curtailments, Alpha said in a Feb. 12 earnings statement.

For 2014, the company-wide average realization was $44.05 per ton and the adjusted average cost of coal sales was $39.88 per ton, resulting in a $4.17 per ton, or 9.5%, adjusted coal margin. By comparison, company-wide average realization in 2013 was $48.99 per ton and the adjusted average cost of coal sales was $44.40 per ton, resulting in a $4.59 per ton, or 9.4 percent, adjusted coal margin. The decrease in adjusted coal margin per ton was primarily attributable to lower per ton realizations for metallurgical coal, Eastern steam coal and PRB coal, largely offset by lower Eastern adjusted costs of coal sales per ton.

For full year 2014, Alpha recorded a net loss of $875 million, compared with a net loss of $1.1 billion during the same period a year ago. Excluding various items, Alpha’s adjusted net loss was $334 million for 2014, compared with an adjusted net loss of $475 million for 2013.

In a first-day filing with the bankruptcy court, Philip J. Cavatoni, the Executive Vice President & Chief Financial and Strategy Officer of Alpha, wrote: [O]ver the past several years, American coal producers have encountered a variety of macroeconomic headwinds and regulatory obstacles that collectively have distressed most of the domestic coal industry. These negative trends have included: (a) rapidly falling coal prices due to, among other things, the substantially expanded ability of North American energy companies to produce vast quantities of natural gas; (b) weak demand and significant oversupply for both thermal and metallurgical coal due to slower than expected economic growth in the United States and overseas markets (such as China, where coal remains the primary source of energy); (c) the increasing use and government subsidization of renewable energy technologies, both in the United States and abroad; and (d) the continual tightening of federal and state regulation of coal producers and operators of coal-fired power plants, which has further reduced domestic demand for thermal coal and increased the costs of maintaining regulatory compliance. The coal industry historically has been subject to cyclical trends, and the Debtors anticipate that coal prices and global demand for coal will eventually recover.”

Crutchfield wrote in a separate first-day filing: “Global coal prices generally correlate to the overall economic condition of the world’s leading industrial and developing economies. As the United States has struggled to recover from the Great Recession and many other leading coal-consuming countries have suffered economic downturns or constrained growth in recent years, coal prices have not come close to reaching pre-recession levels. After briefly spiking in 2011 (immediately after the Japanese Fukushima nuclear disaster and multiple typhoons striking Australia), global coal prices have been mired in a trend of steady decline. Even as the United States has enjoyed modest annual gross domestic product growth during the past five years, demand for coal along with coal prices have fallen sharply over the past four years, reaching a 10-year low during the summer of 2015. As set forth on the following charts, (a) prices for met coal and thermal coal have respectively fallen by approximately 72% and 44% since 2011 and (b) central appalachian coal production has declined by approximately 50% since 2008 and by approximately 37% since 2011.”

Crutchfield pointed out various EPA initiatives, including the Mercury and Air Toxics Standards (MATS), as contributing factors in Alpha’s problems: “These new regulations (MATS, in particular) have already contributed to the retirement of approximately 400 coal-fired electricity generating units and the loss of over 62,000 megawatts (or approximately 20%) of electric generating capacity. Moreover, it is expected that these new rules and regulations will (a) force the closure of approximately 468 additional existing coal-fired units with approximately 73,000 megawatts of electric generating capacity, (b) disincentivize utilities from constructing new coal-fired plants and (c) further reduce domestic demand for thermal coal, thereby putting increasing economic pressure on coal producers such as the Debtors.”

Crutchfield said changes have been made at Alpha to adjust to the new realities. The big Emerald longwall mine in the Pittsburgh seam in Pennsylvania has reached the end of its life-of-mine reserves and is due to shut this year. Since July 2011, which is right after the Massey Energy buy, the Alpha companies have idled or closed more than 80 mines, impacting the livelihood of approximately 7,000 employees and their families, primarily in Central Appalachia. These idled mines impose substantial annual costs upon the debtors of approximately $175 million, including costs related to reclamation obligations, employee-related legacy obligations and maintenance and legal costs.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.