FTC moves to block Peabody-Arch venture

GILLETTE — The Federal Trade Commission is challenging a proposed joint venture between Peabody Energy Corp. and Arch Coal Inc. that would reorganize the companies’ Powder River Basin coal operations under a single umbrella.

The FTC announced Wednesday morning that it’s filed a complaint against the joint venture, claiming that “the transaction will eliminate competition between Peabody and Arch Coal,” according to a press release announcing the move.

In essence, the FTC says the joint venture would give the nation’s two largest coal producers an unfair competitive advantage.

Because Peabody and Arch together control more than 60 percent of the Powder River Basin coal production and reserves, they would have an unfair advantage in a joint venture with a potential to raise prices on their customers, the complaint says.

“The complaint alleges that owners of power generation units designed to burn Southern Powder River Basin coal have high fixed costs, and these units cannot readily replace SPRB coal with natural gas, wind, sun or nuclear fuels,” the FTC says in its press release.

The FTC’s concern for how the joint venture could potentially impact coal-fired power generators shows a possible outcome if the plan were approved, but it’s not that realistic, said Rob Godby, associate dean of the Haub School of Environment and Natural Resources and deputy director of the University of Wyoming Center of Energy Regulation and Policy.

“The FTC’s concern seems to be that (those power companies) are a captive customer to this type of coal,” he said. “That fear they’re going to raise the price on them, there’s just not much room to do that.

“Coal is struggling to stay in the market. We know that. While it would be possible for this combined company to (fix prices at a higher rate), I would argue that’s probably not in their best interest. If you put your customers out of business, is that really a smart move?

“Given the conditions of the market, I would be skeptical that this would raise prices for the consumers.”

Since filing its joint venture proposal with federal regulators in June 2019, Peabody and Arch have maintained the consolidation would create efficiencies and cost savings that couldn’t be realized operating individually.

Those synergies include unlocking about $820 million in savings for the companies in combining their largest assets, the North Antelope Rochelle and Black Thunder mines, into a single operation. They also expect annual savings of about $120 million a year for the first decade of the joint venture.

During the company’s 2019 year-end report earlier this month, Peabody President and CEO Glenn Kellow said Arch and Peabody have submitted about 3.1 million pages of documentation, six white papers and have made four presentations to the FTC.

Both companies can fight the FTC’s challenge at an administrative trial scheduled to begin Aug. 11.

For now, the news of the agency’s 4-1 vote against the joint venture will not go over well for their financial health, said Benjamin Nelson, lead coal analyst for Moody’s.

“The FTC’s rejection of the proposed joint venture between Peabody Energy and Arch Coal is a credit negative development for both companies,” Nelson said in a statement reacting to the FTC’s challenge. “While the companies plan to challenge today’s decision, Moody’s expects that business conditions for coal producers in the Powder River Basin will remain extremely challenging in light of ongoing secular decline in the demand for thermal coal, low natural gas prices encouraging switching in the near-to-medium term and far fewer opportunities to export coal compared to other coal basins in part due to social opposition in the Pacific Northwest.”

Since the companies went public with their joint venture plan, many coal industry analysts and watchdogs have said it could be the best hope for the Powder River Basin to survive longer in an increasingly challenging marketplace.

That the FTC is challenging the joint venture “is actually probably bad news for Wyoming, because if anything, this merger would’ve created a more profitable, more stable company,” Godby said.

“From Wyoming’s perspective, in the short run this is probably good for the other companies in the basin in that they won’t have the super-competitor who would control well over 60% of the Powder River Basin output,” he said.

“But in the long term, this could potentially hurt the Powder River Basin, because this was one avenue to extend the life of the basin,” Godby added. “I’m not sure (price-fixing) is actually a realistic threat, and you can make a case that the potential benefits of this merger could outweigh the negative consequences.”

In a statement reacting to the FTC, Wyoming Gov. Mark Gordon criticized the agency's challenge as "a wrongheaded attempt to drive a nail into an industry which is struggling to adapt to a rapidly changing marketplace."

He said the joint venture won't change the fact that the nation's energy portfolio has been moving away from coal and including a more broad palate of wind, solar, natural gas and other sources.

The state of Wyoming "will be watching this court case closely," Gordon said.

Arch and Peabody intend to move forward with the joint venture, according to an Arch Coal press release reacting to the FTC’s announcement.

The case for combining assets “has only grown stronger in recent months,” the statement says, adding the companies “intend to continue to pursue creation of a joint venture to strengthen coal’s competitiveness with other energy sources.”

Arch CEO John W. Eaves said the need for a joint venture now is “self-evident” and that it will “create a stable, durable supply platform for our thermal customers even as we continue our organizational pivot towards global metallurgical markets.”

Kellow said both companies have made a thorough case for the joint venture.

“We have provided tremendous amounts of evidence to the FTC during an extensive review, fully demonstrating that coal, including Southern Powder River Basin coal, faces intense competition from natural gas and other alternative fuels.”

Peabody and Arch will fight the FTC’s decision in the federal court system and maintain that the agency “fails to reflect the true competitive nature of the current U.S. energy landscape,” according to the companies’ statement.

Early Wednesday morning stock trading shows that the FTC’s rejection of the joint venture caught some by surprise, Godby said.

Peabody was down nearly 10% in early trading and Arch down more than 4%.

That suggests the market expected the FTC to not delay or contest the joint venture, Godby said. It also might be a surprise because of President Donald Trump and his administration’s vocal pro-coal stance.

“The administration has been, at least publicly, very pro-coal,” Godby said. “So, if there was any kind of administration influence over the agencies and the Executive Branch, this would kind of fly in the face of that.”