By Taylor Kuykendall

Following months of speculation that it would happen, Arch Coal Inc. added its name to a list of nearly 50 coal companies that have sought bankruptcy court protection since 2012.

An SNL Energy count of coal company bankruptcy filings shows at least 49 petitions for bankruptcies have been filed by coal companies since 2012. Patriot Coal Corp. filed for bankruptcy twice before it was liquidated and sold off to other coal companies.

The market slump has created a sort of buying frenzy among better-leveraged producers looking to expand their footprint and take advantage of low coal prices. That strategy did not play out well for Fortress Resources LLC, the company that bought some of James River Coal Co. assets after that company went bankrupt, only to take those assets back to bankruptcy court about a year later.

With a nasty 2015 behind the industry, many are fearing a 2016 that does not look much better. Early in the year, Arch appears to be the first coal company to fall into bankruptcy court in 2016.

The industry's woes can be traced back to a mélange of factors. Government regulations have made it increasingly costly to both mine and burn coal while natural gas prices have remained so persistently low, coal is often not competitive in U.S. power markets it once dominated. Meanwhile, global markets for both thermal and steel-making coal from the U.S. have remained persistently weak. Compounding the issue is that coal companies, even in bankruptcy, have been slow to rationalize supply to the reduced demand, keeping a lid on prices that generate little or no profit at some of the nation's mines.

On top of all the negative market factors, the largest of the companies facing bankruptcy all took on huge debt loads to buy up metallurgical coal at what would end up being a near-term height of that market. When demand for metallurgical coal softened and other global producers kept plenty of met coal on the market, prices tanked and continued to drift lower.

While Arch held out longer than some had expected, the nation's second-largest coal company finally succumbed to the fate of other major U.S. producers such as Alpha Natural Resources Inc. and Walter Energy Inc.

"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," Arch Chairman and CEO John Eaves said in a Jan. 11 news release. "We are confident that this comprehensive financial restructuring will further enhance Arch's position as a large-scale, low-cost operator. Since the market downturn, we have taken many steps to enhance the efficiency of our operations and to strengthen our asset base."

In a letter to employees, Arch's management said the announcement would not have an impact on pay or health and welfare benefits.

"During the first nine months of 2015, we generated strong cash margins in all of our operating segments — a claim few competitors can make," Eaves explained in the letter. "This is a financial restructuring and we will continue to operate our mines today and tomorrow as we did yesterday — safely, responsibly and efficiently."

In that letter, Arch acknowledges that industry-wide challenges persist, but also insists that it is "confident coal will play a critical role in supplying the world with energy and steel for decades to come.

"The industry is undergoing great change, but our strong operations, exceptional workforce, and agreement with our lenders will further equip Arch to navigate through current challenges," Eaves said. "We are confident in Arch's future outlook, and believe that we are uniquely positioned to emerge a stronger and more competitive company."

In a court document filed in the U.S. Bankruptcy Court for the Eastern District of Missouri, Arch's Senior Vice President and CFO John Drexler explained the industry's challenges in the "intensively competitive" coal market, particularly as demand has waned. In one section, he notes that the company's notes have traded at a deep discount — as of Jan. 8 they were trading in secondary markets at less than one-cent on the dollar. Second lien notes traded at less than five cents on the dollar and obligations under the term loan traded at 43.5 cents on the dollar.

"Over the past several years, a confluence of economic challenges and regulatory hurdles has hobbled the coal industry. In domestic thermal markets, the industry has experienced falling coal demand and an associated decline in coal prices, precipitated by flat U.S. power demand, a surge in low-cost natural gas availability and increasingly burdensome environmental regulations," Drexler wrote. "As a result, generators are expected to retire nearly 13 GW of coal-based capacity in 2015. In metallurgical markets, the industry has suffered from slowing global economic growth, a related decline in global steel production, the start-up of significant new coal mine capacity in Australia and a strong U.S. dollar that has undermined the competitiveness of U.S. producers."

Unlike other major producers that have gone into bankruptcy, Drexler said Arch has no anticipation of a dispute with labor during its reorganization. None of Arch's employees are represented by a union.

"Arch's single-employer pension plan, which is frozen, is well-funded, and is not expected to be affected in any way by or during these cases," Drexler wrote. "Nor does Arch anticipate any significant layoffs as a result of the restructuring. Thus, the debtors can focus their attention on marshaling their resources to continue to operate their businesses in the ordinary course, honor their strong customer and vendor relationships and maintain their award-winning safety and environmental practices. Upon emergence, the debtors are confident that they will leverage their superior low-cost thermal and metallurgical coal asset base and their highly-skilled management team and workforce to create substantial value for their stakeholders and continue their prominence as a leader in the coal industry."

Critics of the coal industry quickly admonished the company for continuing to crank out coal in such a low-price environment. Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis, said the biggest problem for the industry is that coal companies are mining too much coal and any bankruptcy plan should address a plan to close mines, particularly in Central Appalachia.

"Like most of the coal industry, Arch's outlook continues to be unrealistic, avoiding hard questions," Sanzillo said. "Arch cannot continue to operate zombie mines and chase the ghosts of past markets."

The notion that part of the industry's woes is tied, at least in part, to a lack of supply discipline amid a coal glut has resulted in increased popularity of the term " zombie mines." A recent McKinsey report called the industry a "slow-motion train wreck" and suggested a big part of the industry's problem is that it has simply become too expensive to shut the mines down.

"The coal industry faces some hard choices, whether or not players collectively realize it," the report states. "While harsh capacity cuts are normally viewed as the tough but surefire way that an industry can turn its situation around, that is not the case for the U.S. coal industry."

In one recent speech, Murray Energy Corp. CEO Robert Murray said that the industry, "as a whole, taking all producers together, is now bankrupt."

"Indeed, all coal companies together currently lack $45 billion to fund their debts and employee and reclamation liabilities," Murray said. "Only three of America's leading coal companies are currently demonstrating positive cash flows, and they have large debt levels. Our coal markets, both domestically and internationally, are declining daily."

At a recent coal trading conference, Energy Venture Analysis President Seth Schwartz also lamented the industry's somewhat self-inflicted supply problem.

"The problem with this industry is nobody will close a goddamn coal mine," Schwartz said. "Patriot has gone through two bankruptcies, but we've got another owner that wants to run more coal out of Patriot than Patriot did last year. How's met coal going to recover if [Blackhawk Mining LLC] increases met coal production from Patriot? We're all sitting here crossing our fingers hoping 'Gee, maybe Walter will close their coal mines.'"

Arch's bankruptcy prompted a news release from one of its most vocal opponents, environmental group WildEarth Guardians, calling for steps such as withdrawing applications for new federal coal leases and new mining operations, relinquishing federal coal leases where the company is no longer producing coal, and committing to expeditious deadlines to shut down and reclaim its three existing mines.

"By shedding liabilities appropriately, Arch can ensure that workers and retirees are taken care of, the American public is protected, the climate is safeguarded, and shareholders get some return, even as the long-term prospects for the company are bleak," said Jeremy Nichols, WildEarth Guardians' climate and energy program director. "There is no future for coal, but that doesn't give Arch Coal license to screw everyone over as they decline."

Others are seeing the bankruptcy as a turning point in major battles between Arch and environmentalists. In one joint statement of several groups headlined "Arch Coal Bankruptcy: The End of an Era," Ross Macfarlane, a senior adviser with Climate Solutions in Seattle, suggested this could kill off Arch's efforts to expand its export abilities off the West Coast.

"Arch's bankruptcy is the final nail in the coffin for the Millennium coal terminal in Longview, Washington, as well as the company's fading dreams to make itself into a major player exporting Montana coal to Asian markets," Macfarlane said. "Today's announcement leaves that project without any solvent backers and reflects the fact that financial markets have decisively rejected the idea of pouring hundreds of millions of dollars into risky export schemes. We need to close the book on this effort to revive a dying industry and help Longview build a viable economy for the 21st century."