Some see the filing for Chapter 11 bankruptcy protection on Monday by Patriot Coal as the proverbial canary in a coal mine for the reign of King Coal. Coal has historically served as the primary source for electricity generation in the US, but the practice of fracking has made natural gas a cheap source of fuel that threatens to replace coal.
Earlier this year, the Energy Information Administration published statistics showing that electricity generation from natural gas-fired plants is nearly equal to that from coal-fired plants. The trend toward the use of natural gas seems to be overtaking the use of coal in the long term: coal’s share for electricity generation dropped from 45% in the first quarter of 2011 to 36% in the first quarter of 2012.
Although coal companies continue to struggle because of low coal prices and falling demand, they also blame environmental rules for contributing to their troubles. For some, new rules proposed by the US Environmental Protection Agency make construction of new coal-fired power plants almost impossible. Although a decline in carbon dioxide emissions may subsequently follow a fall in the use of coal generation, the transition to natural gas may also bring its own problems. Along with concerns about natural gas fracking, environmental regulators now worry about lifecycle methane emissions from gas that potentially could be more harmful than carbon dioxide.
But for Patriot Coal, the near-term problems are its main concern, as it makes adjustments to its existing capital structure to “achieve long-term success.” It has secured $802 million in financing from a group led by Citigroup, Barclays, and Bank of America Merrill Lynch. It has hired the Blackstone Group and the law firm Davis Polk & Wardwell for advice on its credit facilities. It has also turned to turnaround consulting firm Alix Partners for advice and appointed Ted Stenger, an AlixPartners executive, as its chief restructuring officer.
Also affected by the filing for bankruptcy protection are the company’s rivals. Shortly after Patriot Coal filed, its shares plummeted 72%, closing at 61 cents. The slide also affected competitors Alpha Natural Resources, Arch Coal, and Peabody Energy, whose stock also slipped from 6% to 7% on Monday.
Although Patriot Coal believes in the long-term health of coal in the US, for now the company may depend on exports of its metallurgical (met) coal, which is used in steelmaking, to China or Europe. Its thermal coal, used in power generation, contributed about 76% of its revenues in 2011, while thermal coal accounted for 24%.
Whether natural gas will topple coal as the main source of electricity generation remains a question for now. Coal will not likely abdicate willingly, as coal companies try to maneuver their product mix with more met coal while waiting for a rebound in the global economy.