Arch Coal and its subsidiaries expect to restructure in bankruptcy court their debt obligations and capital structure, return to viability and obtain the highest recovery possible for creditor constituencies through a chapter 11 plan of reorganization, said the company, one of the nation’s top coal producers, in a Jan. 11 filing at the U.S. Bankruptcy Court for the Eastern District of Missouri.
Among a series of first-day motions for approval of various housekeeping matters, including permission to keep signing coal supply contracts, the company on Jan. 11 provided overview testimony from John T. Drexler, a Senior Vice President and the Chief Financial Officer of Arch Coal.
Drexler told the court: “Unlike almost all other coal producers that have sought bankruptcy protection, Arch has no labor-related issues that need to be resolved in chapter 11. … . Arch’s single-employer pension plan, which is frozen, is well-funded, and is not expected to be affected in any way by or during these cases. Nor does Arch anticipate any significant layoffs as a result of the restructuring. Thus, the Debtors can focus their attention on marshaling their resources to continue to operate their businesses in the ordinary course, honor their strong customer and vendor relationships and maintain their award-winning safety and environmental practices. Upon emergence, the Debtors are confident that they will leverage their superior low-cost thermal and metallurgical coal asset base and their highly-skilled management team and workforce to create substantial value for their stakeholders and continue their prominence as a leader in the coal industry.”
The company has worked out a deal already with major lenders to restructure its debt, with certain court approvals needed to get that deal into place.
Arch is a leading producer and marketer of coal in the United States, with operations and coal reserves in each of the major coal-producing regions of the country. As of January 2016, it was the second-largest holder of coal reserves in the United States, owning or controlling over 5 billion tons of proven and probable reserves.
Arch supplies different qualities of coal to a variety of domestic and international customers located in 36 U.S. states and 20 countries throughout North America, Europe, Asia and South America. The Company’s principal customers are domestic and foreign utilities (including 159 power plants in the United States), steel producers and other industrial facilities. Arch sold approximately 134 million tons of coal in 2014, much of that out of the giant Black Thunder mine in the Powder River Basin of Wyoming.
Currnetly, Arch conducts mining operations at ten active mine complexes. For reporting purposes, the company organizes its production units into three segments: the Powder River Basin segment, with operations in Wyoming; the Appalachia segment, with operations in West Virginia, Kentucky, Maryland and Virginia; and the Bituminous Thermal segment, with operations in Colorado and Illinois. In 2014, 84% of the coal Arch produced and sold based on volume was from the Powder River Basin. The Appalachia segment accounted for approximately 10% of Arch’s sales in 2014, and operations in Colorado and Illinois comprised the remaining 6% of sales.
For the 12 months ended Dec. 31, 2014, Arch reported revenues of $2.94 billion, adjusted EBITDA from continuing operations of $280 million, and a net loss of $558 million. These figures represent a 2.5% decrease in revenue and a 10% increase in adjusted EBITDA from the previous fiscal year.
Various factors have hammered U.S. coal producers lately
The U.S. coal industry is intensely competitive, Drexler noted. Arch’s principal domestic competitors include Alpha Natural Resources (currently also in Chapter 11 bankruptcy protection), Cloud Peak Energy, CONSOL Energy, Peabody Energy, Walter Energy (currently being dismembered in bankuptcy) and Alliance Resource Partners LP. This competitive operating environment has been compounded by decreased coal consumption by the electricity and steel industries in the United States and around the world, due, in part, to weakened international and domestic economies, the availability and lower price of competing fuels for electricity generation—particularly natural gas—and the impact of increasingly stringent environmental and other government regulations.
As of Jan. 11, Arch employed approximately 4,600 full- and part-time employees. These employees include miners, engineers, truck drivers, mechanics, administrative staff, managers, directors and executives. None of Arch’s employees is represented by a union. As of the end of 2014, Arch estimated that its pension benefit obligations totaled $353 million, with funded assets of $337 million and post-retirement benefit obligations of $36 million.
“Despite the many proactive steps the Debtors have taken over the last several years to enhance the efficiency of their operations and to focus on high-return opportunities, the Debtors’ highly leveraged capital structure, consisting of more than $5 billion in outstanding indebtedness and approximately $360 million in annual debt service, cannot be sustained in the current depressed coal market,” Drexler reported. “The Debtors’ operational success is closely linked to global demand for coal-fueled electricity and steel. Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry. In domestic thermal markets, the industry has experienced falling coal demand and an associated decline in coal prices, precipitated by flat U.S. power demand, a surge in low-cost natural gas availability and increasingly burdensome environmental regulations. As a result, generators are expected to retire nearly 13 gigawatts of coal-based capacity in 2015. In metallurgical markets, the industry has suffered from slowing global economic growth, a related decline in global steel production, the start-up of significant new coal mine capacity in Australia and a strong U.S. dollar that has undermined the competitiveness of U.S. producers. As a result of these challenges, several major U.S. coal companies have filed for chapter 11 protection in the last several years, and virtually all are in distress.
“The Debtors’ revenue is largely dependent on coal prices, which have plummeted in the face of a significant decrease in U.S. thermal coal consumption and a global decline in metallurgical coal demand. In June 2015, the price of metallurgical coal fell to its lowest point since 2004, down more than 70% from its previous high in 2011. The price of steam coal has followed a similar trajectory.
“Domestically, coal consumption in the United States fell by nearly 200 million tons between 2008 and 2014. The available data for 2015 suggest another significant decline in 2015, and preliminary discussions with domestic customers indicate that 2016 pricing will remain weaker than previously anticipated. Arch’s sales commitments remain well behind the pace of prior years.
“A key factor in the declining demand for coal is the availability of inexpensive natural gas. Vast quantities of natural gas have become available at economically competitive prices due to discoveries of large shale deposits in the United States and advances in extraction technology. As a result, prices for natural gas have recently reached near-record lows, spurred by a glut of production from shale fields in Pennsylvania, West Virginia and Ohio. Earlier this year, and for the first time ever, natural gas surpassed coal as the largest source of electricity in the United States in certain months. In 2014, coal accounted for 38.7% of U.S. energy generation by megawatt hour; this figure is down from 42.2% in 2011 and 48.2% in 2008. Based on government forecasts, coal is expected to account for approximately 34% of U.S. energy generation in 2016.
“Demand for metallurgical coal depends on the strength of the global economy, and in particular, the demand for steel. Weak economic growth, particularly in Europe and in China, has lowered demand for construction materials and other steel products, which has reduced demand for metallurgical coal. Increased steel imports and reduced steel demand by oil and gas producers have also eroded metallurgical coal demand in the United States.
“In the face of these competitive pressures, U.S. coal producers are especially disadvantaged. The strength of the U.S. dollar reached an 11-year high in March 2015. A strong dollar benefits foreign producers, whose input costs are generally denominated in local currencies. Australia, whose currency has been particularly weak, is especially benefiting from the strong U.S. dollar, given its significant coal reserves and established infrastructure. Consequently, supply rationalization—the reduction in production as a result of lowered prices— has thus far been largely confined to U.S. coal producers.”
Company has been cutting both costs and production
“From an operational perspective, in light of the decreased demand for thermal and metallurgical coal, the Company has taken steps to reduce coal production to match market expectations and to reduce operating costs (including through salary and wage reductions) and capital expenditures per ton,” Drexler wrote. “In particular, the Company has reduced the cash cost of coal from the Powder River Basin by $0.47/ton in the first nine months of 2015 from 2014, and has reduced the cost of coal from its Appalachia segment by $10.00/ton over the same period. This significant reduction in the Appalachia segment was generated, in part, by the idling of the Cumberland River Coal Company complex, a metallurgical coal mining complex in Appalachia, in the third quarter of 2014, as well as improving productivity at the Company’s Leer operating complex.
“In recent years, the Company has taken numerous steps to streamline its mining portfolio and monetize assets that are not essential to future growth plans. Since the beginning of 2012, the Company has divested, closed or idled eight mining complexes, which included the sale of the Canyon Fuels operations [in Utah] in 2013 for approximately $435 million. During that same period, the Company has reduced its workforce by nearly 3,000 employees. On December 31, 2014 the Company’s single-employer pension plan was frozen to future benefit accruals.
“In addition, the Company has continued to demonstrate its commitment to long-term success by streamlining operations and increasing efficiencies. Over the past year, the Company has adjusted operating schedules and reduced shift work and contract labor throughout its operations to better align with sales volume. The Company has also taken aggressive measures to cut costs across the organization, including through improvements to process, material optimization, implementation of predictive maintenance and decreasing parts and supplies expense through renegotiated supplier terms.
“The Company has also divested certain non-core assets and explored the divestiture of others, and, in the first quarter of 2014, sold a highwall miner thermal mining manufacturing unit, ADDCAR Systems, LLC, for $21 million, and its Hazard, Kentucky subsidiary for $26 million.
“The Company also made efforts to preserve liquidity by decreasing capital expenditures in 2014 to $147 million—down $250 million from 2012 levels. Arch has further reduced expected capital spending levels in 2015 to less than $140 million, a level that it feels is sustainable. The Company also reduced the annual cash dividend rate to $0.01 per year in the first quarter of 2014 (as compared to $0.11 per quarter at the beginning of 2012), before eliminating the dividend entirely in the first quarter of 2015.”