Largest coal supplier to Minnesota electric utilities files for bankruptcy protection

The supplier of half the coal burned in Minnesota power plants, Arch Coal Inc., filed for bankruptcy protection on Monday but pledged no interruption in mining and shipments to customers like Xcel Energy and Minnesota Power.

The nation's second-largest coal producer filed for Chapter 11 reorganization and said a majority of its primary lenders had agreed to cut $4.5 billion in debt that it couldn't repay because of the depressed coal market.

It is the latest sign of distress in the U.S. coal industry, whose main customers for thermal coal are electric utilities. Three other coal companies have sought bankruptcy protection in the past year, squeezed by weak demand and low prices as utilities turn to cheaper, cleaner natural gas power generation.

Arch Coal operates two mines in the Powder River Basin in Wyoming, including the largest, which shipped 48 percent of the coal purchased by Minnesota power plants in 2014, according to the U.S. Energy Information Administration. Minnesota power plants burned coal for 38 percent of the electricity generated in the state, according to September 2015 data, the most recent available.

Minnesota Commerce Commissioner Mike Rothman, whose agency tracks state energy supplies, said through a spokesman that officials are "closely monitoring the situation," but declined to comment in detail. Xcel and Minnesota Power also said they are watching developments and don't expect problems.

Coal power plants generally store several weeks of fuel, and use multiple suppliers, although Arch is the largest in Minnesota.

"We have been well aware of the potential filing by Arch," said Amy Rutledge, spokeswoman for Duluth-based Minnesota Power, which burns Arch coal at two plants. "To help offset any potential impact, we have grown our coal inventory levels to avoid any disruption."

Arch warned investors in November that it couldn't repay its more than $5 billion in debt. The stock has been trading at under $1, and dropped another 30 percent Monday to 57 cents. If the bankruptcy plan goes through, that stock would be worth nothing, with all equity going to senior debt holders.

"After carefully evaluating our options, we determined that implementing these agreements through a court-supervised process represents the best way to solidify our financial position and strengthen our balance sheet," John W. Eaves, Arch chief executive, said in a statement.

Minneapolis-based Xcel, the state's largest power company, relies partly on Arch to supply its largest coal burner, the Sherco power plant in Becker, as well as the Allen S. King plant in Bayport. Another regional customer is Dairyland Power Cooperative of La Crosse, Wis., a wholesale power supplier to municipal and cooperative utilities in four states, including Minnesota. A spokeswoman said the co-op has sufficient stockpiles at two Arch-supplied plants on the Mississippi River.

The coal market has been hammered by lower-cost natural gas — a product of the fracking boom in North Dakota and other states — and enforcement of environmental regulations, like the long-stalled mercury and toxic emissions rule that took effect last year. Even more coal power plants are expected to close under the federal Clean Power Plan to reduce greenhouse gas emissions.

"Basically, you have a coal industry that is designed for what coal demand looked like a few years ago before a substantial amount of low-cost natural gas was available and before a lot of environmental regulations," said Morningstar analyst Kristoffer Inton. "What the industry needs is for production to come down."

Inton said cutting output would push up prices, but companies like Arch that have high levels of debt have largely kept on producing to service their debt.

Leslie Glustrom, a Colorado-based clean energy advocate who has written two research reports on the future of Powder River Basin coal, said its mines increasingly will be forced to dig deeper to reach new reserves, adding to production costs at a time of price pressure.

"Minnesota and any state dependent on Powder River Basin coal should be taking a hard look at what is going on in the coal industry, and consider the unthinkable thought that we can't be assured of long-term coal supplies in this country," Glustrom said Monday. "That has massive implications for the U.S. electrical grid."

Minnesota got a hint of alarm two years ago, when the prolonged cold weather system called the Polar Vortex and other factors slowed down railroads that haul coal from Wyoming. Utilities grew alarmed as their coal piles dwindled, and some cut back coal-fired generation. Heading into this winter, Midwest power plants, on average, had 71 days of supplies of the Powder River type of coal, a 47 percent increase over a year ago, according to federal data.

David Shaffer • 612-673-7090 • @ShafferStrib