US Coal Sector Faces Tougher 2015

One of the nation’s top coal producers Thursday unveiled its strategy for surviving another tumultuous year in the industry: Scale back. Alpha Natural Resources Inc. says it will slash costs and reduce operations as demand for U.S. coal continues to shrivel due to lower gas prices and tougher power plant rules.

“We have dealt with reality as it is, as opposed to the way we wish it were,” Kevin Crutchfield, Alpha’s chairman and CEO, said on an investor conference call. “We may still have a little bit more work to do.”

The Bristol, Virginia-based coal giant said it would cut costs by up to $75 million in 2015 by adjusting its operational footprint and curbing overhead spending. Alpha currently owns 75 mines in the Appalachian region and Wyoming. Last fall, it was forced to halt operations at 11 mines in West Virginia, jeopardizing 1,100 jobs, though most of those mines are running again.

Crutchfield signaled more miners could lose their jobs this year as the company curbs its production volumes. “The cuts we’ve announced this morning are quite significant. Unfortunately there’s people associated with that,” he said on the fourth-quarter earnings call.

The cuts bring Alpha’s 2015 capital expenditures budget to $275 million, compared to $350 million last year.

Alpha reported a net loss of $122 million in the last quarter of 2014, an improvement over the company’s $359 million loss in the same period of 2013. Crutchfield attributed the diminished loss to improving rail service, which has suffered backlogs due to increase shipments of crude oil. For all of 2014, the company’s net loss was $875 million, compared with a net loss of $1.1 billion in 2013.

Total revenues in 2014 reached $4.3 billion, including $3.7 billion in coal revenues, according to Alpha executives. That’s down from total 2013 revenues of $5 billion, with $4.3 billion in coal revenues. Alpha said the year-over-year decreases are largely due depressed prices, weaker domestic demand, and decreased shipments of metallurgical coal, which is used in steelmaking, particularly in China.

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Alpha and its competitors, such as Arch Coal Inc. and Peabody Energy Corp., have struggled in recent years from competition with cheaper natural gas. Utilities are increasingly switching to lower-carbon gas to both reduce costs and address stronger federal regulations on greenhouse gas emissions and air pollution from coal-fired power plants.

Coal plants accounted for about 39 percent of total U.S. electricity generation last year, down from about 52 percent in 2000, according to federal energy data. Natural gas, meanwhile, is now about 27 percent of all U.S. electricity supplies, up from just 16 percent at the turn of the century. Cleaner gas is expected to supplant coal as the top U.S. power source in the coming decades as states seek to comply with the Obama administration's proposed power plant rules.

In recent decades, U.S. coal mining jobs have fallen by about half, from around 112,000 positions in 1985 to around 58,000 in 2012.

Faced with tougher market conditions, Alpha has curbed costs by $350 million since 2012 and regularly idles mines. “We’re building a smaller but more sustainable portfolio of assets,” Crutchfield told investors Thursday. “We’ll continue to focus on those things we can control.”