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Coal deliveries from proposed Arch-Peabody JV more than 25% of US production

A proposed joint venture between two U.S. coal heavyweights in the western U.S. will bring together a set of coal mines accounting for more than a quarter of the total coal deliveries to U.S. power plants in 2018.

In June, Peabody Energy Corp. and Arch Coal Inc. announced plans to consolidate mining assets that delivered coal to at least 124 different power plants across the country in 2018, an S&P Global Market Intelligence analysis shows. The two companies are working through the regulatory process in which the Federal Trade Commission will analyze the potential anti-competitive effects of the deal that aims to combine their Powder River Basin and Colorado assets.

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As part of the review, customers of the mines are likely to be contacted about concerns of such a consolidation, but Peabody President and CEO Glenn Kellow noted on the company's July 31 earnings call that there had been early support from multiple stakeholders so far. S&P Global Market Intelligence reached out to the owners of the top 15 power plants, in terms of coal received from the mines, about any potential concerns about the deal. Roughly half responded, but those who did mostly said the information was proprietary or declined to comment.

"We continue to monitor coal market conditions, including the proposed joint venture," said Amy Jahns, a spokeswoman for WEC Energy Group Inc. "At this time, we don't expect any significant impacts to our costs or operations."

Neither Arch nor Peabody responded to a request for comment seeking updates on the progress of the joint venture.

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The Arch and Peabody mines that are part of the joint venture proposal delivered 195.1 million tons of coal in 2018, more than a quarter of total U.S. coal production of 755.6 million tons. The bulk of that production came from Peabody's North Antelope Rochelle and Arch's Black Thunder mines, which produced 98.3 million tons and 71.1 million tons of coal in 2018, respectively.

Black Thunder and North Antelope Rochelle sit adjacent to one another and would operate as a single complex under the joint venture. Arch Coal's Black Thunder delivered coal to 79 power plants and Peabody's North Antelope supplied fuel to 82 coal plants across the U.S.

"This combination is aimed at unlocking extraordinary synergies and creating exceptional value for customers and shareholders by strengthening the competitiveness of coal against natural gas and renewables," Kellow told investors on a second-quarter earnings call.

Some of the power plants taking coal from Arch and Peabody's western U.S. operations are already highly dependent on one or more mines that will become part of the joint venture. For example, the largest power plant customer of mines in the joint venture is Ameren Corp.'s Labadie power plant. The plant bought 8.8 million tons of coal in 2018, 6.6 million tons of which came Peabody's North Antelope Rochelle mine alone. Another 1.8 million tons came from Black Thunder, while the plant purchased just over 400,000 tons from Cloud Peak Energy Inc.'s Antelope mine.

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Peabody issued a Sept. 20 statement affirming its commitment to the joint venture after it terminated previously announced tender offers to purchase $1 billion in outstanding notes and concluded refinancing activities. Peabody previously said its refinancing initiative was, in part, to accommodate its pending joint venture with Arch.

"The company looks forward to continuing to take the steps needed to advance the highly accretive transaction in a timely and effective manner to add value to the enterprise," the statement said.

Seaport Global Securities analyst Mark Levin noted that Peabody's financing stumble, in which it tabled its primary loan deal and pushed through an amendment to its credit facility by upsizing its revolver by $215 million and later scrapped its bond deal and associated tender offers, could complicate completion of the joint venture. Covenants in Peabody's existing bonds need to be dealt with before the company could execute an agreement, Levin noted. That might mean paying consent fees to 2022 and 2025 bondholders and Arch may need to take similar action with its term loan.

"As such, the future of the joint venture isn't in jeopardy," Levin wrote in a Sept. 24 note. "It's just more steps — including ones that require cutting checks — may be required."

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To see all 124 power plants that these mines delivered coal to during 2018, click here.