The United States’ second-largest coal producer, Arch Coal, Inc. filed chapter 11 bankruptcy on Monday, January 11, 2016, just months after the company gave up efforts to avoid bankruptcy court through renegotiating maturation dates on its bonds.
Arch Coal executives suggested demand for coal was gradually slowing as alternatives such as natural gas were rising in popularity, and dropping in cost. It also cited the strong U.S. dollar, economic slow downs in Europe and China, and more stringent regulatory requirements globally as conditions that have squeezed profitability from the U.S. coal sector.
But, the company’s balance sheet woes are also related to a stream of large takeovers of competitors’ coal assets, which the St. Louis-based company leveraged with debt.
“The Debtor’s 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,” company’s Chief Financial Officer John Drexler wrote in a declaration, submitted at the Bankruptcy Court for the Eastern District of Missouri on Monday.
The U.S. coal industry is facing tough times. Three of Arch Coal’s closest competitors filed for chapter 11 bankruptcy protection last year; Alpha Natural Resources Inc. filed in August, Patriot Coal Corp. in October, and Walter Energy, Inc. in December.
Chapter 11 bankruptcy allows companies to continue operations while attempting to rework their debt.
Alpha Natural Resources, which is a fairly new enterprise and established in 2002, faced similar issues after it orchestrated a series of billion-dollar debt-leveraged deals. At the time of its bankruptcy filing last August, Alpha Natural Resources, then the nation’s fourth largest coal producer, had $10.1 billion in assets, and owed liabilities of $7.1 billion.
Arch Coal has said that no significant layoffs or delays to delivery of its product are expected in connection with its bankruptcy filing. Its 4,600 full and part-time employees should continue to receive benefits, including health care and retirement plans.
Company history and competitor purchases
Arch Coal was born in Delaware in 1969 as Arch Mineral Corporation. The company entered a merger with Ashland Coal Inc. in 1997 to become the nation’s fifth largest coal producer.
In June 1998, the company bought the assets of Atlantic Richfield Company for $1.14 billion. This purchase included the Black Thunder and Coal Creek mines in Wyoming, the West Elk mine in Colorado, and a 65 percent interest in Canyon Fuel Company in Utah. In October 1998, Arch Coal acquired a leasehold interest in a 412-million-ton Federal Reserve tract for $158 million.
In July 2004, Arch Coal bought the remaining 35 percent interest in Canyon Fuel Company for $112 million. In August the same year, it bought Triton Coal Company’s North Rochelle mine for $364 million. Arch Coal financed the purchase of the North Rochelle mine with $242 million in cash, which included proceeds from the sale of two smaller mines on the property.
It also borrowed $22 million from its existing revolving credit facility, and borrowed another $100 million in the form of a term loan.
In September 2004, Arch Coal bought a leasehold interest in the Little Thunder reserve, a 719-million-ton Federal Reserve tract adjacent to the Black Thunder mine, for $611 million.
The company agreed to make five equal annual payments of $122.2 million. The first payment was financed using its existing revolving credit facility.
In December 2005, Arch Coal sold off its stock in Hobet Mining Inc., Apogee Coal Company, LLC, and Catenary Coal Company, LLC. The sale helped the company write-off an estimated $50 million to $60 million of below-market legacy sales contracts, and charges of $70 million to $80 million in post-retiree healthcare liabilities.
“Had the transaction occurred at September 30, 2005, the book liabilities associated with these operations would have included approximately $450 million of post-retiree healthcare, workers’ compensation and reclamation obligations, or $520 million to $530 million including the $70 million to $80 million charge discussed above,” the company said in a statement.
Arch Coal bought Rio Tinto’s Jacobs Ranch mine complex in Wyoming for $761 million in October 2009.
In June 2011, the company bought International Coal Group, Inc.. The aggregate value of the transaction totaled $3.4 billion “excluding costs associated with the redemption of ICG’s outstanding debt and fees related to the transaction,” the company wrote in a statement.
“Arch currently anticipates financing this transaction with a combination of internally generated cash flow from operations, borrowings under the company’s $800 million revolving credit facility, and possibly other debt instruments,” the company said in a statement at the time of the purchase.
In August 2013, Arch Coal sold its equity interests of Canyon Fuel Company, LLC, for $423 million in cash.
Arch Coal’s current and long term liabilities
According to filings submitted in bankruptcy court on Monday, Arch Coal’s pension benefit obligations totaled an estimated $353 million at the end of 2014, with funded assets of $337 million and post-retirement benefit obligations of $36 million. Arch Coal also has a $1.9 billion secured term loan due in 2018.
“Obligations arising under the Term Loan are guaranteed by substantially all of the Debtor subsidiaries of Arch Coal, and are secured by first-priority liens on substantially all of the Debtors’ assets,” court documents submitted by the company’s CFO state. “The Credit Agreement also provided for up to $250 million in revolving loans. The Company had no borrowings under its revolver and, on November 11, 2015, terminated all revolving credit commitments,” the document states.
Arch Coal has a series of unsecured notes that will reach maturity in 2019 and 2020. Of these, $1 billion worth of 7.000 percent senior unsecured notes will be due in 2019, and $375 million in 9.875 percent senior unsecured notes will mature in 2019.
An additional $500 million in 7.25 percent senior unsecured notes are due in 2020, and $1 billion in 7.25 percent senior unsecured notes are due 2021. Arch Coal had also issued $350 million in 8 percent senior secured second lien notes that will mature in 2019. These second lien notes are secured against the same assets of the term loan, but on a second-priority basis.
In his declaration to the bankruptcy court, Dexler wrote that the company’s bonds have traded at a sharp discount in recent months. Unsecured notes were trading in the secondary market on January 8 at less than 1 cent on the dollar. The company’s second lien notes also traded at a deep discount compared to their value, at less than 5 cents on the dollar. Obligations under the term loan were trading at 43.5 cents on the dollar.
Executive salaries and bonuses
The company, which is headquartered in St. Louis, has several highly paid members on its leadership team.
The most highly paid is the President and Chief Executive Officer, John Eaves, who in 2014 made a total of $6,946,235, according to Salary.com. Of this $975,000 was received as a salary, $3,151,533 is bonuses, $2,744,517 as stock, and $75,185 came through other types of compensation. Salary.com drew the income information from proxy statements filed for the 2014 fiscal year.
Arch Coal’s Senior Vice President and Chief Financial Officer, John Drexler, was paid $3,121,919 in total in 2014, according to the website. Of this, $525,000 was received as a salary, $1,390,239 as bonuses, $1,161,015 as stock, and $45,665 through other types of compensation.
About Arch Coal
Arch Coal’s principal customers are domestic and foreign utility companies, including 159 power plants in the United States, steel producers, and other industrial facilities.
Arch Coal is now carrying out mining operations at only 10 active mine complexes in the United States, down from 16 in 2014. Arch Coal employs approximately 4,600 full and part-time employees, none of which are represented by a union. Six employees were members of a union in 2014.
Coal accounted for about 39 percent of U.S. electricity generation from January through November 2014, according to the Energy Information Administration. Coal is used by power plants to generate electricity, and also common in the manufacturing sector.