Arco Agrees to Sell Domestic Coal Unit to Arch

Atlantic Richfield Co. on Monday agreed to sell its domestic coal operations to Arch Coal Inc. for $1.14 billion, making the St. Louis-based company the nation’s second-biggest coal producer.

The deal comes just nine months after Arch Coal completed a merger with Ashland Coal Inc., and gives it operations in the Western United States to complement its activities in the East.

Los Angeles-based Arco said last month that it was near a final agreement to sell its Arco Coal unit’s U.S. operations to Beacon Group, a New York investment firm. Those talks fell apart last week, Arco said.

The agreement would make Arch the dominant U.S. producer of low-sulfur coal, the most desirable type for electricity generation because it more easily meets environmental standards. Most U.S. electricity is generated with coal, and as power sales to U.S. consumers are opened to competition over the next few years, Arch is counting on coal sales rising.

With the latest acquisition, Arch Coal would have annual coal sales of close to 110 million tons, or roughly 10% of the nation’s coal supply, and annual revenue of nearly $2 billion, Arch Coal officials said.

It would be the second-biggest U.S. coal producer after Peabody Coal, which is owned by Britain’s Energy Group.

Investors responded positively to the deal, sending Arco shares up $1.50 to close at $81.88, and Arch shares up 50 cents to $26.94. Both trade on the New York Stock Exchange.

Arco would sell its coal operations in Colorado and Utah to Arch, and merge its coal operations in Wyoming with Arch’s operations there under the banner Arch Western Resources.

Arch Western would be 99% owned by Arch Coal and 1% owned by Atlantic Richfield.

Jobs at the coal mines are not expected to be affected, but there would probably be some layoffs at the management level, said Steven F. Leer, Arch Coal’s president and chief executive.

Leer said the deal would make Arch better able to meet growing demand from electric utilities to compete in a deregulated marketplace.

“A combination of the two makes for a wonderful coal company that is producing environmentally friendly low-sulfur coal. And we will be able to service virtually every coal-fired power plant in the U.S. on a competitive basis,” Leer said.

The deal must still be approved by federal regulators and shareholders. The transaction is expected to close before July.

Leer also noted that all of Arco’s coal operations and most of Arch Coal’s operations already meet federal Clean Air Act regulations.

The deal with Arch Coal is not expected to have a significant impact on Arco’s earnings for the year, the company said in a statement.