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US coal miners' options fading fast as planned retirements narrow customer base

Adding to domestic sector stress, recent weakness in export markets has further exacerbated coal producers' problems as tons that were going abroad try to wedge back into the U.S. market.

Despite drastic cuts in production, U.S. domestic thermal coal markets could continue to face oversupply for the foreseeable future as about a quarter of U.S. coal production is bound for power plants where customers have already set a future retirement date.

An S&P Global Market Intelligence analysis showed that nine coal basins across the U.S. produced about 683.5 million tons of coal in 2019. Of that, producers delivered 174.3 million tons to power plants that have already set retirement dates.

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Asked about the future of the railroad company's coal business, Kenny Rocker, Union Pacific Corp.'s executive vice president of marketing and sales, said on a July 29 earnings call that the company's coal business is likely to "continue to leak" over time.

"We're going to have challenges here in the near term and long term," Rocker said. "It's in structural decline."

Without new coal-fired power plants, the steady march of retirements continues to shut out producers' increasingly scant options to sell their coal.

The announced retirements will occur over the next 22 years. However, just under half of the total coal delivered to plants with retirement plans went to facilities retiring by the end of 2025. More than 75% of those deliveries went to plants retiring by the end of 2030. The tonnage figures are likely to increase as more generators set retirement dates for their aging coal fleets.

Utilities, increasingly under pressure to act on climate change goals and other environmental, social and governance investing principles, often only discuss their coal plants during calls with investors in terms of retiring their existing fleets. NextEra Energy Partners CFO Rebecca Kujawa said on a recent earnings call that retiring unit 4 of the Scherer coal-fired power plant by January 2022 would generate hundreds of millions of dollars in savings for its Florida Power & Light Co. customers. At the same time, the retirement will prevent four million tons of carbon dioxide emissions, Kujawa added.

Scherer, which NextEra owns a portion of, is the largest operating coal-fired power plant in the U.S.

"These transactions, which will make FPL one of the first utilities to eliminate all of the coal from its generation portfolio, demonstrate FPL's continued commitment and position [the company] as a clean energy leader," Kujawa said. "We remain proud of our environmental track record, particularly the CO2 emissions reductions that we have delivered throughout Florida and across the country."

Southern Co. noted on its second-quarter earnings call that coal had fallen to just 13% of its energy mix in June. The company could see coal fall below 20% of its generation mix for the first time in modern history for the full year.

"We acknowledge that this near-term outcome is partially driven by extremely low natural gas prices and electricity demand reductions from both the pandemic as well as mild weather," Southern Executive Vice President and CFO Andrew Evans said on the July 30 call. "But the long-term trend is also driven by less temporal factors, including a combination of coal plant retirements and a concerted effort to increase our renewables portfolio."

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Some coal-producing regions are more likely to struggle than others with the shrinking domestic customer base. Southern Wyoming delivered about 84.9% of the coal produced in 2019 to plants that have set retirement dates. The nearby Powder River Basin provided about 30.8% of the coal produced in the period to plants that will retire before the end of 2042.

More than one in five tons delivered to U.S. power plants from the Illinois Basin went to plants with plans to retire. The Uinta Basin delivered about 48.9% of its coal to plants that are set to close. On the other hand, Central Appalachia, which has pivoted mainly to a focus on metallurgical coal after substantial downsizing in the last several years, delivered only about 1.8% of its coal to plants with plans to retire.

Several mines delivered the equivalent of all, nearly all, or even more coal than they produced in 2019 to plants with plans to retire.

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Alliance Resource Partners LP, one of the few large U.S. coal companies to avoid filing for bankruptcy in the last few years, noted that domestic demand is being pinched not only by the long-term declines in demand but also by the global COVID-19 pandemic. Still, Alliance President and CEO Joe Craft said the company was optimistic about its prospects.

"[Alliance's] low-cost, strategically located, well-capitalized, long-lived coal operations will allow us to service the needs of our domestic customers as well as expand our market share as weaker competitors exit the market and allow us to participate in export opportunities when international market conditions improve, hopefully, in the near future," Craft said.

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