Two Regional Coal Companies to Merge in $2 Billion All-Stock Deal

Alpha Natural Resources will have access to Wyoming's Powder River Basin, a source of low-cost coal.
Alpha Natural Resources will have access to Wyoming's Powder River Basin, a source of low-cost coal. (By Nati Harnik -- Associated Press)
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By Steven Mufson
Washington Post Staff Writer
Wednesday, May 13, 2009

Alpha Natural Resources will buy Foundation Coal Holdings in an all-stock transaction valued at $2 billion, a deal that will create the country's third-biggest coal company.

The combined company will operate 59 coal mines and have reserves of 2.9 billion tons of coal.

Abingdon, Va.-based Alpha is the nation's largest supplier of coal used for steelmaking. It mines coal in four Eastern states -- Virginia, West Virginia, Kentucky and Pennsylvania. Foundation, based outside Baltimore in Linthicum Heights, produces mostly coal that is burned to produce electricity. Most importantly, it gives Alpha access to Wyoming's Powder River Basin, a source of low-cost coal.

Alpha agreed to pay for Foundation with about $1.4 billion worth of stock and will assume $530 million of Foundation's outstanding debt. Foundation shareholders will receive an estimated 37 percent premium over Monday's share price and will end up owning 41 percent of the combined company.

Foundation shares soared in trading yesterday, up nearly 21 percent to $28.06 a share.

Only Peabody Energy and Arch Coal would be larger than the new firm, which will keep the name Alpha Natural Resources.

The merger comes at a critical time for the nation's coal industry. The Obama administration is pressing for a cap-and-trade system to limit greenhouse gases, which could inhibit the expansion of coal-fired power plants and place new carbon dioxide emissions requirements on plants.

"As we transition away from coal over the next two decades, coal demand will continue to decline and this should drive more mergers," said Bruce Nilles, a lawyer with the Sierra Club.

Coal still fuels half of the nation's electricity generation plants. "We can't generate the energy we need without coal," Foundation chief executive James F. Roberts said during a conference call with analysts. "By everybody's estimates, that amount is going to increase over the next 20 years."

For now, much of the industry is reeling from the economic downturn. Foundation recently reported a loss for the first quarter of 2009, as a result of weak demand for electricity and mounting inventories at utilities. The steel industry ran at less than 45 percent of capacity in the first quarter, and utility coal stockpiles climbed to 66 days worth of supplies, Foundation said.

But Alpha Resources reported a 61 percent increase in profits, to $41.0 million, in the first quarter compared with a year earlier. It said that it had a 20 percent drop in shipments but that profit margins rose as it focused on its most efficient mines.

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