Arch Coal (NYSE: ACI), in its Nov. 9 quarterly Form 10-Q filing with the SEC, raised a “going concern” warning as this major U.S. coal producer tries to re-work its finances in a historically tough coal market.
“The Company incurred a net loss for the years ended 2014, 2013 and 2012 and will report a net loss in the current year as well,” Arch Coal said. “Additionally, in 2014 and 2015, the Company has been unable to generate sufficient cash to cover interest expense and capital expenditures. The Company launched subordinated debt exchange offers in July 2015 that, if successful, would have substantially improved the Company’s leverage profile. The exchange offers were terminated on October 27, 2015 as a result of various factors, including the actions of the Company’s term lenders in directing the term loan agent not to execute the required documents as well as highly challenging market conditions.
“With the extremely challenging market conditions currently facing the industry, the Company will require a significant restructuring of its balance sheet to continue to operate as a going concern over the long term. The Company is currently in active dialogue with various creditors with respect to restructuring of the Company’s balance sheet. The Company’s mining operations and customer shipments are continuing as normal and the Company has no near-term maturities.
“The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s ability to continue as a going concern is contingent upon the Company’s ability to restructure its balance sheet with the various creditor parties; there can be no assurance that these efforts will results in any such agreement. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.”
The Foirm 10-Q added about underlying market reasons for these financial problems: “Pricing and volume for our metallurgical products continues to be pressured by ongoing global oversupply and the relative strength of the U.S. dollar. Slowing economic growth in China and globally has slowed demand growth, and supply rationalization has been slow to take effect. The relative strength of the U.S. dollar benefits our foreign competitors in the global metallurgical and thermal markets as much of their input costs are in their local currencies. We sold 1.6 million tons of metallurgical coal during the third quarter of 2015 compared to 1.7 million tons during the third quarter of 2014, and 4.7 million tons of metallurgical coal during the first three quarters of 2015 compared to 5.0 million tons during the first three quarters of 2014. Overseas thermal markets are uneconomic for substantially all U.S. production at current pricing levels.
“Domestic thermal coal volumes increased slightly in the [Powder River Basin] and Other segments while continuing to decrease in Appalachia. Low natural gas pricing and implementation of the [Mercury and Air Toxics Standards] continue to be the major drivers of weakness in the domestic thermal markets. Natural gas pricing during the third quarter of 2015 remained low enough for it to compete economically with coal as an electric generation fuel more widely than in the third quarter of 2014. Appalachian thermal coal, with its higher cost structure, is particularly vulnerable to competition from low natural gas prices. Additionally, regional natural gas prices have been lower than the national average in some traditional Appalachian thermal coal markets, particularly the Mid-Atlantic. Closure of some coal fueled facilities to comply with the MATS regulation further reduces demand compared to the prior year quarter. Although the closed coal-fueled plants were generally older, smaller, and less utilized than the remaining fleet, the closures do have a negative impact on demand.”
Two other major U.S. coal producers, Alpha Natural Resources and Walter Energy, have sought bankruptcy protection this year. Another major producer, Patriot Coal, which was made up in part of operations Arch Coal sold off several years ago, recently had its primary assets sold in bankruptcy. Arch cited some lingering involvement it had in Patriot’s finances as one of the reasons for its current financial distress.