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Production, earnings continue to slide as industry preps for new coal landscape

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

Rate case activity slips, COVID-19 proceedings remain at the forefront in August


Production, earnings continue to slide as industry preps for new coal landscape

Asearnings season continued this week and production for the first quarter of theyear became clear, U.S. coal producers looked ahead at a leaner future and a "permanentlychanged" market landscape.

Thisweek, S&P Global Market Intelligence compiled production data from thecountry's major producing basins, showing lower overall output at most mines asdomestic producers continue to try to cope with oversupply and waning demand athome and abroad.

Withproduction sliding in the Uinta,Powder River Basin,Illinois Basin,Northern and CentralAppalachian Basins, the industry struggledto find some positive signs for the months ahead as they continue to pursuehistorically low levels of production to identify sustainable demand levelsduring the first half of 2016.

Expectedly,this decline in demand and production has weighed on the bottomline of thoseproducers that have not already sought bankruptcy protection. Those fewreporting gains this year are usually due to their exposure to non-coaloperations.

Thoseremaining are also expectedto face continued challenges and the prospect of rivals emerging relieved ofdebt burdens and operating at lower costs. However, while that will toughencompetition, analysts say most firms that avoided bankruptcy court so far arelikely to continue to avert it at least in the short term.

Moody'ssenior credit analyst Anna Zubets-Anderson told S&P Global MarketIntelligence this week that remaining publicly traded coal producers are ratedby Moody's as "at risk," but that because their debt loads are lessthan the major producers in bankruptcy, most of them are unlikely to filebankruptcy this year.

Theindustry's wealth of challenges are all combining to create a landscape that has been "permanentlychanged," according to CloudPeak Energy Inc.'s President and CEO Colin Marshall. After postinga first-quarter net loss of $36.4 million on April 28, Marshall described a newfuture for the industry on an earnings call.

"Aswe look forward, it is clear that the dynamics of the coal industry havepermanently changed," Marshall said. "Where coal used to provide baseload generation, it is now much more variable depending on power demand,renewable output and the price of natural gas. We are currently adapting tooperating in an environment where shipments vary significantly from quarter toquarter."

Forsome, that new landscape looks a lot like the past, including lower productionand, in the case of Kentucky, the lowest industry the commonwealth has seensince 1898.

Facingsuch an evident industry crisis, Kentucky's political focus has shifted to coalin the run up to this November's election, which will see presidential andsenatorial contests on the ballot.

Facingre-election this year, junior Sen. Rand Paul, R-Ky., took aim at the Obamaadministration and Democratic frontrunner Hillary Clinton, the blame for Kentucky's coalcollapse at their feet.

"InKentucky we've lost over 10,000 coal jobs since 2008," Paul said. "Thedecline grows every single year. What people often forget is that when thepresident decides to unilaterally implement anti-coal regulations, he's notonly putting coal companies and coal miners out of work. The [U.S. EPA]'s warisn't just on coal, it's on all Kentucky jobs."

Inan attempt to address concerns about comments she made regarding the future ofthe coal industry, Clinton traveledto Kentucky as well, following a visit to West Virginia, where she called on a "MarshallPlan" for the region. PresumptiveRepublican nominee for president, Donald Trump, soon followed Clinton to WestVirginia where he received a decidedly warmer welcome from the local coalindustry.

Hailedby the industry as a vital component of a coal recovery and means of reachingthe global market, the country's varied export projects saw mixed results thisweek, including a decision by the Louisiana Department of Natural Resources todelay a needed state permit for a controversialterminal in the Plaquemines Parish.

Outwest, the Washington state Department of Ecology and Cowlitz County, Wash.,released a draft environmental impact statement for the proposed project, while aCanadian federal court judge this week dismissed a motion to strike a courtchallenge against the construction of a new coal export terminal in theVancouver area.

Facinglegal action of its own, MurrayEnergy Corp. was finedby a judge of the Federal Mine Safety and Health Review Commission and orderedto withdraw controversial bonus plans. Hoping to limit further legalinteractions with Murray, the EPA askeda federal judge to either rule it has fulfilled its mission to assess the jobsimpact of Clean Air Act regulations or order it to do so in a case brought byMurray, a leading coal producer.

Inother court news, the ArizonaPublic Service Co. and PacifiCorpasked the U.S. Bankruptcy Court for the Eastern District of Missouri toenter an orderterminating a coal supply agreement with Peabody Energy Corp. for its Cholla power plant inArizona.