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Hurt By Dwindling Demand, Arch Coal Files For Bankruptcy – Is Shift To Natural Gas Is Killing American Mining Companies?

By Alap Naik Desai
Published on: 08:09 PST, Jan 11, 2016

Arch Coal, America’s second-largest coal mining company, filed for bankruptcy protection. The company intends to restructure and minimize its $6.5 billion debt

Driven by the steadily dwindling demand of coal, Arch Coal filed for Chapter 11 bankruptcy protection on Monday. The company is trying to cut $4.5 billion from its financial liability of $6.5 billion. The prolonged downturn in the demand for coal has had a deep impact on multiple coal producers in the United States, forcing many to seek protection through bankruptcy, while they attempt to restructure their finances in the hopes of survival.

Filing for Chapter 11 bankruptcy protection allows companies to reorganize their debt while they keep their business operating, reports U.S. News. Despite the financial struggles, Arch Coal has confirmed that all of its mines will continue to stay open and functioning. It has ensured that none of its 4,600 employees would be affected by the bankruptcy process, and all of them would be paid their dues. Even the benefits, including health care and retirement plans, will stay intact and won’t be affected by the bankruptcy process.

Arch Coal has active mines in Colorado, Illinois, Kentucky, Maryland, Virginia, West Virginia, and Wyoming. Primary customers of the company are steel manufacturers and power generating companies. However, as they have been switching to cheaper fuels, the company hasn’t been able to easily offload what it produces, indicated Chief Financial Officer John Drexler in the filing with the U.S. Bankruptcy Court in St. Louis.

“Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry.”

Ever since its acquisition of International Coal Group in 2011, Arch Coal has been saddled with mounting debt. However, it is not the acquisition but the unfortunate timing that has hit the company hard. Since the beginning of this decade, there has been a sharp and consistent drop in coal prices. Stricter pollution controls have forced companies to reevaluate their choice of fuel.

One of the most popular and easily available fuels is natural gas. Compressed Natural Gas, or CNG, is being opted by many industries who wish to switch to a cleaner as well as relatively cheaper fuel. Being in a gas form, CNG burns a lot better, producing a much larger amount of energy as compared to coal. Its transportation is a little trickier, but with proper precautions, the fuel offers much better energy than coal while emitting lot less greenhouse gases.

While China’s decline in its manufacturing sector has impacted the energy sector significantly, none of them have been as badly hit as coal. Moreover, power companies, which have traditionally been the biggest consumers of coal, have steadily switched to natural gas. Coupled with the consistently strong dollar, the situation has hurt American coal producers a lot more than foreign miners with costs in weaker currencies, reported the Wall Street Journal.

Essentially, Arch Coal will continue to function and won’t shut down. In order to survive, the company claims to have made a deal with its lenders to bring down its debt by more than $4.5 billion. According to the filing, the company has $6.5 billion in debt and $5.8 billion in assets. According to Reuters, Arch Coal signed 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 is interesting to note that Arch Coal doesn’t have any labor issues that need resolving. However, before filing for bankruptcy, the company did cut production, wages, prices, and its dividend in order to counter the falling demand for coal, forcing producers, which account for 25 percent of U.S. coal, into bankruptcy.

[Photo by Sean Gallup/Getty Images]

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