March 24, 2019 - Major U.S. coal producers that bit the bullet early and filed for bankruptcy a few years ago are now enjoying the benefits of improved coal markets and clean balance sheets, but the companies that avoided that first wave of reorganizations now find themselves particularly stressed by declining domestic demand.

Two companies that illustrate some of the problems faced by the sector today are Westmoreland Coal Co., which just wrapped up a bankruptcy reorganization, and Cloud Peak Energy Inc., which skipped an interest payment on its debt due March 15 while it considers a bankruptcy reorganization. Both companies avoided major acquisitions of metallurgical coal assets, but they also avoided the diversification that is allowing other U.S. coal companies to reap the benefits of improved demand for seaborne metallurgical coal.

Westmoreland’s minemouth model — building coal mines near the power plants that need them and securing long-term contracts — proved a detriment when pressure from cheap natural gas and environmental legislation pushed those customers out of the market. Cloud Peak bet big on the Powder River Basin and its potential as an exporter, which never quite materialized, and a shrinking market for Powder River Basin coal is challenging Cloud Peak’s higher-cost operations. Meanwhile, natural gas and renewable energy are cutting into coal’s overall share of electricity generation.

Competing with companies that restructured debt and reduced costs through bankruptcy reorganization can slow the balancing of supply against reduced demand, a process Murray Energy Corp. CEO Robert Murray described in 2016 as being dragged “down the bankruptcy sewer.” Murray Energy, another thermal coal-focused entity that has avoided bankruptcy, produces coal in the less stressed Northern Appalachia and Illinois basins but was recently downgraded by S&P Global Ratings based on its “unsustainable capital structure.”

Increased exports have helped disguise a secular decline in domestic demand for coal that has continued despite President Donald Trump’s attempts to boost the coal sector’s prospects.

“Utility companies … are dealing from a newly powerful position in which they operate with less dependence on coal — and from a position that regards coal-fired power as increasingly untenable,” said a March 18 report from the Institute for Energy Economics and Financial Analysis. “Without the robust customer base it had for generations, the U.S. coal industry — the [Powder River Basin] segment of that industry included — cannot continue along a business-as-usual path.”