Commodities & Metals

Is Bankruptcy the Only Way Out for Arch Coal?

It is no secret that being in the coal business is now about as bad as would have been to be a coal miner in years past. The coal mining stocks also seem to have caught the black lung under regulations and energy guidelines from the current administration and the EPA. After years of sliding, the case for a bankruptcy at Arch Coal Inc. (NYSE: ACI) looms ever larger. Before just assuming this is an industry or company-specific slam, it is not. Those bankruptcy risks are taken directly from Arch Coal’s SEC filing after the coal giant reported its quarterly financials.

On Monday, Arch Coal posted a loss of $1.999 billion for the third quarter of 2015, but it actually showed a bit narrower of a loss than what analysts had built in. Still, the net loss compares with a loss of $97 million a year earlier. That is a net loss of almost $94.00 per share. Arch Coal’s adjusted loss was -$3.38 per share, and revenue was down 7% at $688.5 million.

Does an adjusted EBITDA of $134.8 million, up from $71.9 million a year ago, matter to anyone? Arch’s earnings report showed that the company elected to terminate its $250 million revolving credit line, which will become effective on November 11, 2015. The company said that it had no borrowings under the revolver and that it has no intention to borrow under it. On a pro-forma basis, Arch has liquidity of $704.4 million, with $694.5 million of that in cash and liquid securities.

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Arch Coal shares gyrated between positive and negative on Monday after the report. Its stock was last seen down more than 5% at $1.57, with a daily range of $1.54 to $1.93, and a miserable 52-week range of $1.00 to $29.10.

Arch Coal’s losses from disposed operations resulting from Patriot Coal bankruptcy were put at $149.3 million for the third quarter alone. The quarterly filing said:

On December 31, 2005, Arch entered into a purchase and sale agreement with Magnum to sell certain operations. On July 23, 2008, Patriot acquired Magnum. On May 12, 2015, Patriot and certain of its wholly owned subsidiaries (“Debtors”), including Magnum, filed voluntary petitions for reorganization under Chapter 11 of the U.S. Code in the U.S. Bankruptcy Court for the Eastern District of Virginia. Subsequently, on October 28, 2015, Patriot’s Plan of Reorganization was approved, including an authorization to reject their collective bargaining agreements and modify certain union-related retiree benefits. As a result of the Plan of Reorganization, the Company became statutorily responsible for retiree medical benefits pursuant to Section 9711 of the Coal Industry Retiree Health Benefit Act of 1992 for certain retirees of Magnum who retired prior to October 1, 1994.

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There is a big discussion around the self-bonding issues in the 10-Q filing. Arch Coal warned in its “Risk Factors” that a loss or reduction in its ability to self-bond could have a material adverse effect on its business and results of operations. The company said:

Federal and state laws require us to obtain surety bonds or post letters of credit to secure performance or payment of certain long-term obligations, such as mine closure or reclamation costs, federal and state workers’ compensation costs, coal leases and other obligations. The costs of surety bonds have fluctuated in recent years while the market terms of such bonds have generally become more unfavorable to mine operators. These changes in the terms of the bonds have been accompanied at times by a decrease in the number of companies willing to issue surety bonds. We use self-bonding to secure performance of certain obligations in Wyoming. Self-bonding commits us to pay directly for reclamation costs rather than obtaining a traditional surety bond. As of December 31, 2014, we have self-bonded an aggregate of approximately $458.5 million. The Land Quality Division of the Wyoming Department of Environmental Quality periodically re-evaluates the amount of the bond, so the current amount is subject to increase.

There can be no assurance that the amount of our self-bonding obligations will not be increased or that we will continue to qualify to self-bond. To the extent we are unable to maintain our current level of self-bonding, due to legislative or regulatory changes or changes in our financial condition, our costs would increase and it could have a material adverse effect on our financial condition and results of operations, as well as cast substantial doubt on our ability to continue as a going concern.

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As far as a bankruptcy possibility, Arch Coal further said that it must restructure its balance sheet and noted a going concern in its “Risk Factors.” Arch Coal even warned that investors should anticipate being completely wiped out. The filing said:

As a result of extremely challenging current market conditions, Arch believes it will require a significant restructuring of its balance sheet in order to continue as a going concern in the long term. We are currently in active dialogue with various creditors with respect to a restructuring of our balance sheet. There can be no assurance that these efforts will result in any such agreement. If an agreement is reached and we pursue a restructuring, it may be necessary for us to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement this agreement through the confirmation and consummation of a plan of reorganization approved by the bankruptcy court in the bankruptcy proceedings. We may also conclude that it is necessary to initiate Chapter 11 proceedings to implement a restructuring of our obligations even if we are unable to reach an agreement with our creditors and other relevant parties regarding the terms of such a restructuring. In either case, such a proceeding could be commenced in the near term. If a plan of reorganization is implemented in a bankruptcy proceeding, it is likely that holders of claims and interests with respect to, or rights to acquire our equity securities, would likely be entitled to little or no recovery, and those claims and interests would likely be canceled for little or no consideration. If that were to occur, we anticipate that all, or substantially all, of the value of all investments in our common stock will be lost and that our equity holders would lose all or substantially all of their investment. It is also likely that our other stakeholders, including our secured and unsecured creditors, will receive substantially less than the amount of their claims.

Additional risks noted that Arch Coal could lose some or a significant portion of its liquidity. This would be either due to stricter credit terms from suppliers or the following:

In the event we undertake a Chapter 11 proceeding and conclude that we need to procure but we cannot obtain any needed debtor-in-possession financing or provide adequate protection to certain secured lenders to permit us to access some or all of our cash.

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The company’s earnings release commentary from management almost sounds optimistic if you consider just how bad the filing “Risk Factors” are for Arch Coal shareholders. Two quotes were as follows:

John W. Eaves, Arch Coal’s chairman and chief executive officer:

From an operational perspective, Arch delivered an exceptionally strong performance during the quarter. Our results reflect the actions we have taken to respond to the challenging market environment, including reducing costs and enhancing efficiency across the company. Thanks to the efforts of our skilled employees, we increased cash margins in each of our three operating regions and continued to build on our industry-leading safety and environmental stewardship records. Despite these efforts, however, the difficult conditions impacting the coal industry persist, and we expect they will continue throughout 2016.

John T. Drexler, Arch Coal’s senior vice president and chief financial officer:

As demonstrated by our third quarter results, our operations continue to generate a significant amount of cash; and we are maintaining sufficient liquidity to continue operating as normal. Our cash flow, however, is not sufficient to service our debt sustainably in this operating environment. As a result, Arch will require a significant restructuring of its balance sheet to continue to operate as a going concern over the long term. We are currently in active dialogue with various creditors with respect to a restructuring of our balance sheet. Our mining operations and customer shipments are continuing as normal and we continue to have sufficient liquidity and no near-term maturities. Regardless of what path we ultimately choose, we expect to continue providing our customers the same high quality services they have come to expect from Arch.

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