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Stuart Hampton

US Coal Company Bankruptcies: What Is Killing King Coal?

by Stuart Hampton | Dun & Bradstreet Editor

August 31, 2015 | No Comments »

coal power plant smokestack emissionsIn August 2015 one of America’s coal mining giants, Alpha Natural Resources, filed for Chapter 11 bankruptcy protection. A major employer in areas like southwestern Pennsylvania, West Virginia, eastern Kentucky, and Wyoming, Alpha has been hit by a perfect storm of stricter carbon emission regulations, slumping coal prices, weakening demand, and a backlog of heavy debts it had accumulated to finance the purchase of coal mining assets.

In part, Alpha is a victim of the success of other players in the US energy sector. Exploration and production companies have used new technologies and drilling techniques like hydraulic fracturing to flood the power plant fuel market with cheaper natural gas (from the Eagle Ford, Marcellus, and other onshore basins) as part of the shale revolution of the past decade.

The company has been forced to idle or close more than 80 mines since mid-2011, has fired 6,500 workers, and cut capital expenditures by 55%, but none of these measures was sufficient to prevent it from moving into bankruptcy in 2015.

And Alpha is not alone. Over the past few years, almost 270 coal companies large and small have gone bankrupt and about 300 mines have closed. Between 2009 and 2014, while the Dow Jones Industrial Average rose 69%, the Coal Sector Index lost 76% of its value. The two largest US coal producers, Peabody Energy and Arch Coal, lost a combined $1.2 billion in 2014. Unless out-of-court restructurings for Arch and Peabody succeed, they could be the next two coal producers to file for bankruptcy protection.

The Obama administration’s newly announced regulatory rules requiring the reduction of carbon gas emissions from existing power plants by 32% from 2005 levels applies even more pressure to an industry already buffeted by depressed prices.

For several years US power-generating companies have been phasing out older coal-fired plants in favor of cleaner and more efficient natural gas cogeneration plants in order to both comply with state and federal government carbon emission reduction targets and to avoid the high cost of retrofitting ancient coal-fired plants.

Like many of its peers, Alpha is also struggling with a large debt load. A lot of coal producers borrowed money to fuel growth on the expectation that demand would rapidly grow around the world, especially in China, as hundreds of millions of people gained access to electricity as a result of that country’s burgeoning economy.

But with Chinese and Indian cities increasingly smogbound, these markets are also pushing for greener power solutions. In addition, the slowdown of the Chinese economy in 2014 and 2015 has contributed to lower coal prices and coal demand. China, once a source of seemingly unending growth for US coal exports, actually burned 2.9% less coal in 2014 than it did in 2013.

King Coal is not dying a death of a thousand cuts but of a few major blows: falling US consumption, shrinking exports, tightening environmental regulations, the growth of a low-cost power plant alternative fuel, and crippling debt.

As hurting US coal companies can attest, Old King Coal is not a merry old soul.

British editorial veteran Stuart Hampton has been covering oil and gas companies for Hoover’s since the Neogene-Quaternary period. Well, actually, since the early 1990s. For the best overview of the oil industry and its history he recommends Daniel Yergin’s “The Prize.” You can also follow Stuart on Twitter.

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