A black outlook
Illinois coal in slump
A decade ago, Chris Cline was sitting at the top of the proverbial coal heap.
Cline, who made his fortune mining coal in Appalachia, bet big on Illinois coal at the dawn of the 21st century, quietly securing sufficient reserves in the Land of Lincoln to make his company, Foresight Energy, founded in 2006, one of the nation’s biggest mining companies. He sold all of his mines in West Virginia and became an Illinois-only coal magnate, betting that the federal government would require power plants to install scrubbing technology that would allow high-sulfur Illinois coal to be burned to generate electricity.
He seemed to win that bet as the U.S. Environmental Protection required power plants to install scrubbers that promised to help buoy the resurgence of the Illinois coal industry, which had collapsed in the wake of federal clean-air standards approved in 1990. Cline was a visionary, admirers said, a man who saw first what would ultimately become obvious.
“Today…the Cline Group’s aptly named Foresight Energy is nearing the end of the initial phase of a plan that might upend the entire coal market,” Coal Age magazine gushed back in 2011. “Combined with a hand-picked core of can-do coal miners recruited from throughout Central Appalachia and Illinois, and led by an experienced, innovative and nimble mine management team, Foresight is creating a revolutionary new culture of production. The company’s build-out is nothing short of transformative for the citizens of Illinois and for the Illinois coal industry.”
But profits have plummeted along with the price of coal. Foresight, which went public in June of last year, has seen its stock price drop from the very beginning, when it opened at $20 a share and headed south to close at $19 on the first day of trading. At the end of last week, the stock traded at $14.41. Foresight isn’t alone. Stocks of other coal companies with Illinois mines have also taken a beating.
Arch Coal, the nation’s second-largest producer that has operations in Appalachia and Wyoming as well as a Williamsville mine that supplies City Water, Light and Power, has seen its stock drop from $4.37 to below $1 in a year’s time. Peabody Energy, the world’s largest coal company that operates three mines in Illinois as well as mines in Wyoming, Arizona, New Mexico, Colorado and Australia, has gone from more than $19 to less than $5. Alliance Resource Partners, which has two Illinois mines as well as mines in Kentucky, Indiana, West Virginia and Maryland, has dipped from nearly $46 to less than $32.
In the case of Foresight, Riverstone Holdings, a New York-based investment firm that specialized in the energy sector, ended its partnership with Cline in February by cashing out a stake of undisclosed size that was large enough to put one of the firm’s partners on Foresight’s board of directors. Riverstone had thrown in with Foresight eight years ago, when the Illinois coal boom was just getting started, and Cline acknowledged the firm’s importance earlier this year when announcing that one of his company’s biggest investors was getting out.
“Riverstone’s gutsy investment back in 2007 helped us to grow right through the global financial crisis in 2008 and 2009 and really demonstrated to me the practical advantages of partnering with experienced, knowledgeable energy investors,” Cline said in a written statement.
Through a spokesman, E. Bartow Jones, a Riverstone partner who had sat on Foresight’s board of directors, declined an interview request.
A blockbuster deal
Riverstone’s withdrawal in February left Foresight in the control of Cline-owned companies and Cline family trusts. But it didn’t stay that way for long. In April, Murray Energy Corp., a privately held company, bought a stake in Foresight in a monster $1.37 billion deal that brought together two rivals that would be the nation’s third largest coal mining concern if the companies formally merged.
Just last year, Murray had sued Foresight, claiming that the company had used confidential information to steer the purchase of land and mineral rights directly in the planned path of Murray’s longwall mining operations in southern Illinois. The Foresight purchases, Murray alleged, were made solely to frustrate Murray’s mining plans rather than to allow Foresight to expand its mining operations.
The lawsuit was settled as the two companies forged a deal to create one of the nation’s largest coal concerns, with 9 billion tons of reserves between the two entities and a projected 88 million tons of production each year. But the deal first announced in March changed dramatically before it was closed in April, signaling a weakened coal market that has financiers nervous.
Murray was originally supposed to get an 80-percent stake of Foresight. Instead, it settled for a 34-percent share. According to a story published by Reuters, the deal was restructured to avoid triggering a refinancing of Foresight debt that would have been required had Murray acquired a larger share of Cline’s company. Refinancing in today’s climate of depressed coal prices could have proven expensive as lenders pondered coal’s future – Moody’s has projected that coal company profits will decline by as much as 8 percent this year. Terms of the Murray-Foresight deal include an option, however, that would allow Murray to get the full 80 percent controlling stake for just $25 million, the newspaper reported.
“The whole coal space is a difficult sell for debt investors because there are no visible near-term catalysts for a rebound in the industry,” CreditSights analyst Charles Johnston told Reuters. “If you look at the largest domestic coal producers, they are all distressed names.”
Depressed prices, lower production
The deal between Ohio-based Murray and St. Louis-based Foresight made two proverbial 800-pound gorillas into even more powerful ones, according to some observers.
Murray, which boasts that it is the largest underground coal mining company in America, operates three mines in Saline and Franklin counties in Illinois and a dozen, mostly in Ohio and Appalachia, outside the Land of Lincoln. With three billion tons of reserves, Foresight has four Illinois mines – in Franklin, Macoupin, Williamson and Montgomery counties – and the company boasts that its mines are the most productive in the nation on a tons-produced-per-man-hour-worked basis.
“They’re (Foresight is) very well positioned,” says Wilfredo Ortiz, an analyst with Deutsche Bank, which has set a target price of $23 for Foresight stock, more than $8 above its current price. “They have vast (coal) reserves they can tap into and increase production organically. You add the component of the Murray deal and you’re adding the possibility of engineering growth.”
Both companies specialize in high production at rock-bottom cost, and Illinois is perfect for that. The state boasts an estimated 200 billion recoverable tons of coal, more than any other state aside from Wyoming and Montana. Seams can be as much as 10 feet thick, with topography that lends itself to the use of subterranean longwall mining equipment, which scoops out entire seams with minimal manpower, leaving the ground above to collapse once the coal is mined.
Philip Gonet, president of the Illinois Coal Association, sees the deal between Murray and Foresight as strengthening both companies. For example, he said, Murray owns a longwall refurbishing and fabrication shop in Centralia where Foresight equipment could be repaired and maintained.
“If you’re the low-cost producer, you’re going to be able to survive,” Gonet says.
Illinois is home to at least 11 coal companies, and a battle of attrition could be in the offing, judging by remarks Bob Murray, chief executive officer of Murray, made last year at the American Coal Council Spring Forum in Florida. Murray said that there are too many mines in the Illinois Basin to allow more growth, but he intends to be “the last man standing,” according to a report in Platts, an energy industry publication.
“Until some players in the basin are financially eliminated, I don’t see good prospects,” Murray told Platts.
The average price of Illinois Basin coal has dropped from $46.02 per ton a year ago to $39.30 today, according to the U.S. Energy Information Administration, a division of the U.S. Department of Energy. Foresight officials say they’re optimistic in the long term, but the short-term picture isn’t pretty.
“We don’t believe that the industry can sustain in this level of pricing,” Foresight chief executive officer Michael Beyer said in a conference call with analysts last week to discuss first-quarter results. “I mean, obviously, with our low-cost structure we are able to participate, but we don’t think that the prices, at where they are for the Illinois Basin or the national level, are sustainable, and so we are optimistic that we’re going to see an improvement over time as the inventories are worked off.”
During last week’s conference call with analysts to discuss first-quarter results, Robert Moore, chief financial officer for Murray who is slated to become Foresight’s chief executive officer under the deal between the two companies, said that he expects production to remain flat into 2016, with Murray shifting some production to Foresight mines to achieve the lowest possible production costs as the companies work together instead of battling each other.
Ortiz predicts that Foresight and other Illinois coal companies will produce just enough coal to satisfy contracts and avoid stockpiling coal.
“I think they’re all cognizant of the fact that the market is oversupplied, the more they produce, the more they impact their own markets,” Ortiz says. “They don’t want to capture more market share at the expense of their own profitability.”
Still, production in the Illinois Basin has been on the rise, thanks largely to Foresight, which produced 6.6 million tons of coal during the first quarter of this year, an increase of nearly 31 percent over the first quarter of last year. All told, mines in Illinois last year produced 58 million tons of coal, Gonet says, more than half of the 105 million tons mined in 2014 in the entire Illinois Basin, which extends into Indiana, Kentucky and Tennessee.
This year, the U.S. Energy Information Administration forecasts total U.S. production of 926 million tons. That would be the lowest total since 1987, continuing a trend of declining production that saw tonnage dip below 1 billion tons in 2013, the first time since 1993 that domestic mines produced less than a billion tons of coal in a year. That same year, Illinois mines bucked the trend and surpassed 50 million tons, a benchmark that hadn’t been realized in more than 20 years.
“Studying the dynamics has been interesting,” Ortiz observes. “There are many moving parts. When you talk about the U.S. as a whole, coal production and demand haven’t moved in sync. Right now, we’re kind of at this state where certain basins are increasing production, Illinois being one of them.”
The depressed market coupled with surging production in Illinois might be good news for CWLP, which is now negotiating prices with Arch. Nearly half of the coal mined at the company’s Viper mine in Williamsville is burned in Springfield. Eric Hobbie, CWLP chief utility engineer, says that competing coal companies have made pitches when windows open for negotiating prices, and the same might happen now.
“We always negotiate in the best interests of our consumer,” Hobbie says. “The market’s changed. Anytime there’s competition, the buyer side wins.”
While the current market is depressed, Hobbie is optimistic about the long-term future of coal.
“The short term, it’s going to be a tough few years,” Hobbie predicts. “There’s a lot of people who are, maybe, declaring it to be over. … But I don’t see how we eliminate coal.”
“There’s a lot of people who are declaring it to be over. But I don’t see how we eliminate coal.”
Bottom line, Hobbie says, the United States needs a reliable source of electricity at a reasonable price, and so coal has a lot going for it, not the least of which is the ability to stockpile the commodity to use as needed. By contrast, he says, it’s tough to fill the need for electricity with wind turbines when the air is still and the temperature is near 100 degrees with 90-percent humidity.
“Because of its nature, coal has things that are appealing,” Hobbie says. “That’s why the industry got to where it is.”
Still, the industry in Illinois faces sufficient challenges that mining companies have looked to the government for help, and have gotten it. Since 2013, Murray has received $2.36 million in state grants to pay for equipment at its mine near Harrisburg in southern Illinois. Since 2014, Foresight has landed nearly $1 million in state grants to pay for equipment at its mine near Carlinville. And the industry wants more.
A bipartisan group of 10 downstate lawmakers has announced that they will push legislation that would provide financial incentives for Illinois power plants to install scrubbing technology that would allow generating facilities in the Land of Lincoln to burn Illinois coal. Scrubbers on most Illinois power plants are engineered for Wyoming coal. Appearing alongside lawmakers at the press conference last month was Roger Dennison, lobbyist for Foresight, which has made nearly $200,000 in campaign contributions to Illinois politicians this year. All told, Foresight has made more than $2.2 million in campaign contributions to Illinois politicians since 2009.
Legislation aimed at outfitting Illinois power plants to burn Illinois coal instead of coal from Wyoming is key to Foresight’s hopes for the future, Beyer, the company’s CEO, told analysts in last week’s conference call.
“This represents a tremendous market opportunity for Foresight due to the close proximity of our mine(s) to the coal-fired plants in the state,” said Beyer, who noted that less than 9 million tons of the 53 million tons of coal burned in Illinois last year came from within the state’s borders.
Foresight, which was a top contributor to Gov. Bruce Rauner’s inauguration earlier this year, is also hoping for help from regulators. The company is now fighting the state attorney general’s office over water pollution issues at its Carlinville mine. And Foresight last year in Securities and Exchange Commission filings informed investors that it faces significant fines for drilling an injection well at its Sugar Camp mine at Akin, in Franklin County, without a required permit from the Illinois Environmental Protection Agency. The company drilled the well to dispose of mine waste while a permit application was pending but not yet approved.
During last week’s conference call, Beyer said that Foresight expects the permitting process to speed up in at least one state agency.
“We are encouraged that this new administration has come in and we have been working with the existing legislators in the new administration and we feel like we are getting two new permitting teams approved within the Illinois Department of Natural Resources, and so we expect the pace of permitting to pick up significantly here over the next couple of months,” Beyer said.
Contact Bruce Rushton at email@example.com.