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FTC moves to block joint venture of Peabody, Arch coal mines in western US

Peabody Energy Corp. and Arch Coal Inc. will take on the Federal Trade Commission in court following a decision from the regulator to block the companies' attempts to create a joint venture of coal mining assets in the southern Powder River Basin and Colorado.

The FTC filed an administrative complaint challenging the transaction, it said in a Feb. 26 news release. The complaint alleges that the joint venture would eliminate competition between the two largest coal companies in the U.S., which are also the two primary competitors in the market for thermal coal from the southern Powder River Basin.

The FTC also authorized staff to file a complaint seeking a temporary restraining order and preliminary injunction in the U.S. District Court for the Eastern District of Missouri that would maintain the status quo pending an administrative trial on the merits of the FTC decision to block the joint venture.

"This joint venture would eliminate the substantial head-to-head competition between the two largest coal miners in the United States, and that loss of competition would likely raise coal prices to power-generating utilities that provide electricity to millions of Americans," Ian Conner, director of the FTC's Bureau of Competition, said in the release.

The two companies announced the joint venture in June 2019, with Peabody to own 66.5% of the operation and Arch to own the remaining 33.5%. Peabody and Arch estimated the joint venture would lead to annual synergies of $120 million in its 10 years.

Peabody and Arch responded by saying they intend to continue to pursue the creation of the joint venture.

"The proposed joint venture offers a clear and compelling path to strengthen both our and our customers' ability to compete in today's marketplace with electricity produced from coal," Peabody President and CEO Glenn Kellow said in a Feb. 26 statement. "We believe that the commission has reached an incorrect decision that should be rapidly remedied within the court system to allow customers and others to benefit from the combination."

The companies believe that the FTC incorrectly defined the market in a way that does not capture the "true competitive nature of the current U.S. energy landscape," according to the release.

The proposed transaction covers seven of the companies' mines, including Peabody's North Antelope Rochelle mine and Arch's Black Thunder mine, which share a property line of more than 7 miles. The two operations are the largest coal mines in the country by production.

The other assets in the transaction are the Caballo, Rawhide and Coal Creek mines in Wyoming and the West Elk and Twentymile mines in Colorado.

In 2018, the two companies mined more than 60% of all the coal produced in the southern Powder River Basin. Power generators designed to burn coal from the region have high fixed costs and cannot readily replace the fuel with natural gas, wind, sun or nuclear fuels, the FTC wrote.

The votes to file the administrative complaint and to authorize staff to seek a temporary restraining order and preliminary injunction were both 4-1. FTC Commissioner Christine Wilson voted no. The FTC scheduled an administrative trial to begin Aug. 11.

Arch's recent pivot to a focus on coking coal makes the risk to the joint venture a greater negative for the company, Clarksons Platou Securities analyst Daniel Scott said in a note following the deal. However, as the operator under the proposed deal, Peabody was in line to get more synergistic benefits from the transaction, Scott said.

Rejection of the proposed joint venture is a credit negative development for both companies, Benjamin Nelson, a lead coal analyst with Moody's Investors Service, said in a statement. The rating agency recently downgraded Peabody's outlook to negative.

"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," Nelson wrote.