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Utilities tout move away from coal; several mines to close in coming months

In a dire sign for U.S. coal producers hoping to reverse the decline in domestic demand, some utilities began touting the cost savings of moving away from the fuel on their recent earnings calls.

Power companies noted that retiring coal units helped them meet their emissions reduction targets, reduced criticism about their effect on climate change and saved some money. About 9.7 GW of coal-fired generation is expected to retire this year.

"You know there was once a time when we had to make a sucker's choice between clean and expensive energy or the cheap and dirty stuff," said CMS Energy Corp. President and CEO Patricia Poppe on a July 25 call. "That just isn't true anymore."

And coal producers are feeling the effects, especially since the export market, which provided some thermal producers relief in 2018, has weakened significantly this year. At current export prices, many U.S. thermal producers will struggle to compete internationally, meaning more coal will likely be marketed domestically and increase competition on the home front.

Foresight Energy LP decreased its adjusted EBITDA and increased its capital expenditures guidance for the year due to low domestic utility demand coupled with high water challenges and low export pricing. President and CEO Robert Moore said on an earnings call this week that the company's low-cost assets will help it compete in other basins and is already seeing success in new territories.

"If these export markets aren't there, then we're poised to take domestic share, and that's what we're going to do," Moore said.

Two coal producers recently announced plans to shut down three coal mines as well. Peabody Energy Corp. will start staff reductions at the Kayenta mine in Arizona, since its sole customer is retiring, and will close the Somerville Central mine in Indiana in October. Alliance Resource Partners LP also announced that it will soon close its Dotiki mine in Kentucky to focus on its lower-cost Illinois Basin operations.

This week, Natural Resource Partners LP's president said the company was prepared for the market decline even as it copes with the bankruptcies of three of its leases, two of which are seeking to sell off most all of their assets. The company's leadership said that the lessor has not felt the impact of low international prices yet but noted that the market is hurting and likely will continue to impact its lessees.

Most of its lessees locked in their current contracts at higher prices in the fourth quarter of 2018, but Natural Resource expects those sales contracts to be renewed at lower levels.

Consol Energy Inc. executives said its long-term contracts with a diverse customer base minimized the impact of fluctuating commodity prices so far this year. The coal miner has 80% of its 2020 coal sales contracted and 34% of its 2021 volume.

"Our innovative contracting strategy allowed us to improve our revenue per ton compared to the year-ago period, even while spot commodity prices were materially lower," said President and CEO Jimmy Brock. "We believe our contracted position is among the best in the industry, and that significantly reduces the risk to the balance sheet."

Hallador Energy Co. CEO Brent Bilsland said he thinks the downturn in the export market is cyclical rather than structural and Illinois Basin producers will continue exporting a great deal of coal. Executives touted the stability of the company's customer base as well as its hedged tonnage over the next few years.

"To date, only 5% of our current customer demand has announced a retirement date within the next decade," Bilsland said. "Now we realize there is potential for more retirement announcements for customers, but we are also confident in our ability to continue to grow our customer base as we have most recently displayed."

Despite some of the challenges plaguing the sector, several coal companies that reorganized a few years ago have proven to score relatively well among their peers regarding their operational, solvency and liquidity credit metrics, having shed some debt and emerged with cleaner balance sheets.

But even the highest-rated producers are still subject to some risk.

"In a normal or growing industry, if your competitive position improves and your debt starts to go down, that can drive an upgrade pretty quickly," said Benjamin Nelson, a senior credit officer and lead coal analyst with Moody's Investors Service. "In an industry experiencing a secular decline, you need to do those things to maintain your rating."

Upcoming events

Coal Market Strategies Conference: The American Coal Council is putting on a conference Aug. 12-14 in Park City, Utah.

National Coal Council: The council will have its annual fall meeting Sept. 11-12 in Washington, D.C.