US coal crisis deepens as gas prices fall

Ed Crooks, 1st February 2015, Financial Times

The latest sign of the deepening crisis hitting the US coal industry came on Friday, when Alpha Natural Resources announced that it planned to idle production at three mines in West Virginia and cut jobs at two more, affecting about 91 workers in total.
Kevin Crutchfield, Alpha’s chief executive, described the conditions facing the US coal industry as “unprecedented”. “Despite the hard work of these operations to reduce costs,” he said, “prices remain depressed and current coal supply simply exceeds demand.”
Already battered by competition from cheap natural gas and increasingly onerous regulations on pollution from power generation, the industry has in the past six months suffered a fresh onslaught.
Alpha will give more details of the impact when it reports its 2014 earnings on February 12.
Peabody Energy, the largest coal producer in the US, last week reported an after-tax loss, excluding writedowns, of $597m, and cut its dividend from 8.5 cents per quarter to just 0.25 cents. Operating cash flows of $337m were smaller than its interest payments of $414m.
Greg Boyce, chief executive, described conditions as “challenging”, and said that he expected US coal demand to shrink by 50m-60m tons — about 5-6 per cent — this year.
In the past six months, Peabody’s shares have dropped 59 per cent and Alpha’s by 69 per cent. The two other largest US coal companies have suffered similar falls: Cloud Peak Energy is down 56 per cent and Arch Coal down 69 per cent.
Coal companies’ bonds have also been falling. Peabody’s 2021 bonds were yielding almost 11.5 per cent on Friday, while Alpha’s 2019 bonds had a yield of almost 47 per cent. Peabody’s five-year credit default swaps — the cost of insuring the company’s debt against default — have risen to 948 basis points, up from 707bp at the end of 2014.
Two significant coal companies have sought Chapter 11 bankruptcy protection in recent years, Patriot Coal in 2012 and James River Coal last year, and others are expected to follow.
“I think you’re going to see multiple bankruptcies in US coal over the next 12-18 months,” says Curt Woodworth, an analyst at Nomura.
“The outlook isn’t good: the outlook is getting worse.”