Coal, New Projects

Peabody, Arch form joint venture bent on improving coal competitiveness

Peabody Energy and Arch Coal are combining their Powder River Basin and Colorado assets into a joint venture, the companies detailed in a statement.

The partners into the new combination believe it will strengthen the competitiveness of coal against natural gas and renewables in the power generation market. The joint venture was announced on the same day that President Trump’s Environmental Protection Agency finalized its new coal-friendly program to replace the stricter Clean Power Plan carbon emissions goals.

The Peabody and Arch venture is expected to have a pre-tax net present value of about $820 million.

“The Peabody/Arch joint venture is an extraordinary example of industrial logic targeted to strengthen the competitive position of our products and create significant value for multiple stakeholders in a low-cost combination with exceptional physical synergies,” said Peabody President and CEO Glenn Kellow. “The transaction unites two strong, culturally aligned workforces with a commitment to core values such as safety and sustainability.  We believe this joint venture allows us to offer enhanced products and security of supply for customers, increased value for shareholders, greater efficiencies for railroads, long-term opportunities for employees and strength for the communities in which we operate.”

Arch Coal CEO John W. Eaves also expressed his company’s excitement about the deal’s potential.

“This new joint venture should allow us to realize the full potential of our valuable assets in the Powder River Basin and Colorado and benefit our customers in the process,” Eaves said. “The significant operating synergies will enhance the competitiveness of these assets and also enable us to continue to generate long-term, sustainable returns for our shareholders. We look forward to completing this transaction in a timely manner.”

Among other assets, the joint venture will combine two productive and adjacent U.S. coal mines–Peabody’s North Antelope Rochelle Mine (NARM) and Arch’s Black Thunder Mine, which share a property line of more than seven miles–into a single, lower-cost complex.

The announcement also noted that the joint venture should help reduce costs significantly beyond what each company could achieve alone. This should help coal gain cost competitiveness vs. the rising gas-fired and renewables markets.

Arch is contributing its low-cost, higher-margin West Elk Mine that enhances Peabody’s Twentymile Mine in Colorado.  Further synergies are expected from the integration of the Caballo, Rawhide and Coal Creek mines, which have some of the best overburden-to-coal ratios in the world, according to the companies. 

Together with NARM and Black Thunder, these Powder River Basin assets are touted as highly productive as any in the U.S. 

“For Peabody, the creation of the joint venture is a clear demonstration of the company’s U.S. thermal strategy to optimize our lowest-cost, highest-margin operations in a low-capital fashion to maximize cash generation,” said Kellow. “The transaction fully aligns with our stated investment filters, further enhances our financial strength and enables continued commitment to our shareholder return program, in which we are committed to returning an amount greater than our free cash flows to shareholders in 2019.”  

Peabody and Arch will continue to operate the assets independently until closing of the transaction.  Closing is subject to regulatory approval and satisfaction of usual closing conditions. 

Upon closing, Peabody and Arch will each contribute its active Powder River Basin and Colorado mines, as well as related assets and liabilities, into the joint venture.  Each company expects to proportionally consolidate the joint venture within their respective financial statements.

In 2018, on a combined basis, the assets shipped 206.0 million tons of coal. The assets are operated by a workforce of approximately 3,300, with combined proven and probable reserves totaling 3.4 billion as of Dec. 31, 2018.

Coal fuels close to 30 percent of the U.S. electricity mix. Trading for shares of Peabody closed up nearly 1 percent Thursday to $23.51 on the New York Stock Exchange.

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The Future of Coal-Fired Generation will be one of the content tracks offered in the upstairs summit at POWERGEN International.