Arch Coal Files for Bankruptcy

Company seeks to cut $4.5 billion in debt

Wall Street Journal
12 January 2016
John W. Miller and Peg Brickley

Arch Coal Inc.’s bankruptcy filing Monday signals that the coal industry’s shakeout is entering a crucial phase, which will result in more small, unlisted mining companies, record numbers of mines for sale and lower wages for workers.

Over a quarter of U.S. coal production is now in bankruptcy, trying to reorganize to cope with prices that have fallen 50% since 2011, battered by competition from natural gas and new environmental rules. Arch, the biggest domino to fall so far, is trying to trim $4.5 billion in debt from its balance sheet.

Competitors Walter Energy Inc., Alpha Natural Resources Inc., and Patriot Coal Corp. all filed for court protection last year.

But bankruptcies only spell death for current corporate structures, not necessarily the mines they operate. And the U.S. still gets 34% of its electricity from coal, according to the Energy Information Administration, and that number is still expected to be around 30% by 2030. “The question is, what is that 30% going to look like?” says Steve Nelson, chief operating officer at Longview Power LLC, a 700-megawatt coal-fired plant in northern West Virginia.

The massive coal mines of northeast Wyoming aren’t going out of business. Nor are the small, efficient producers in Illinois that are mining rich seams. Although coal production in Central Appalachia fell 40% in 2015 relative to 2010-2014, it dropped 10%-20% in Wyoming, and increased 8% in the Illinois basin, according to the EIA.

The survivors will be low-cost producers across the country, including most of the 11 mines in Arch’s portfolio. Major U.S. mining firms have many profitable mines, but have racked up too much debt and liabilities. Their mines are now expected to fall into the hands to a new roster of owners and operators dominated by creditors and private-equity firms. “Historically, chapter 11 filings don’t always equate with production cuts,” says Jim Thompson, an analyst with IHS Global Energy. “It’s about the individual mines, and whether they can control costs.”

With $600 million in cash on hand, and a $275 million bankruptcy loan on the way, Arch said it would be able to continue normal mining operations during chapter 11 proceedings. It also said it had already scaled back operations and didn’t expect any layoffs to result from the bankruptcy.

Arch’s senior lenders are slated to get a combination of cash, new senior debt and most of the reorganized company’s stock, according to a term sheet outlining the proposed bankruptcy workout plan. Junior creditors can choose between a minority slice of equity, or the value of Arch’s assets that aren’t pledged as collateral for senior loans, court papers said.

A good example of the post-shakeout coal industry is a Mepco Holdings LLC-owned mine in West Virginia, nestled among verdant and luscious hills and hovels that includes over dozen coal mines in a 50-mile radius. Many mines in the region have closed, throwing thousands of miners out of work, and many others are now emerging from or filing for bankruptcy.

“There are a lot of good mines left,” said Mepco and Longview Chief Executive Jeff Keffer. “They just have to go through the bankruptcy process, and reduce their debt burden.”

The companies filed for court protection in 2013, and their secured debt was converted into equity held by private-equity firms KKR & Co., Centerbridge Partners LP, American Securities LLC, and Third Avenue Management LLC. The group wrapped it into one operation — run by Mr. Keffer — that also includes Longview, the power plant it supplies. The plant and mine provide power to 500,000 homes, Mr. Keffer said on a recent tour of the complex.

“There’s too much coal out there, so companies like Arch need to focus on the mines that continue to be profitable,” he said.

During the visit, Messrs. Keffer and Nelson showed off the four-mile conveyor belt linking up mine and plant, part of their solution. At a time of low prices, “the huge handicap in Appalachia is transportation,” said Mr. Nelson. “We save a lot of money this way.”

Mr. Keffer said the operation is profitable. “And this is 600 workers; 500 at the mine, and 100 at the plant,” he says. “A solar plant producing the same amount of power would employ only two or three people.”

Another advantage for mining companies that are restructuring: With thousands of coal miners out of work, starting wages in West Virginia have fallen to around $20 an hour, half of that what they were at the start of the decade, according to local mine operators.

Harlan Cherniak, a senior executive at KKR — Mepco-Longview’s biggest investor — said coal mines are a sector that “distressed credit investors are looking at for 2016.”

The Longview power plant was completed in late 2011 and, despite technical glitches during its first years of operation, is one of the most modern and fuel-efficient in the country, Mepco-Longview managers said. They have implemented as many filters as possible to reduce their carbon emissions, but they still fear they won’t be compliant with new rules that go online in the next decade. “We’re doing the best we can,” said Mr. Keffer.

Environmentalists are concerned that coal companies might not fulfill their obligation to repair the land they have mined on. “Bankruptcy should not be used as a haven for the company to escape its obligations,” said Bob LeResche, chairman of the Powder River Basin Resource Council, which promotes responsible development of Wyoming’s mineral resources. “With over ninety square miles of coal mines in Wyoming’s Powder River Basin, Arch has a $458 million reclamation liability. State and federal taxpayers must not be left with the bill.”

Arch has said it is committed to meeting its environmental obligations. “You can’t cut costs by reducing safety or your concern for the environment,” said Mr. Keffer. “That will hurt you in the end.”

Write to John W. Miller at and Peg Brickley at