GILLETTE — Already trying to bail out a ship taking on water, Powder River Basin coal producers are now trying to keep that up during a torrential downpour.
An already-battered coal industry will struggle to make it through the rest of 2020 as much of the United States is reeling socially and financially in a coronavirus-fueled recession, said Rob Godby, a University of Wyoming economist and associate dean of the Haug School of Environment and Natural Resources.
COVID-19 shelter-in-place orders and the virtual shutdown of many businesses and industries could be too much for some cash-strapped companies, especially since it comes on the heels of a mild winter that saw less demand for coal-fired power generation, he said.
“We’re already seeing that impact,” Godby said of a noticeable drop in electricity consumption. “You have less commercial and retail use of electricity and the pattern of usage has changed because of so many people not working or working for home.
“Weekdays are looking more like weekends with fewer peaks, and the peaks there are are lower, along with the overall demand for electricity.”
While more people are likely using more power at their homes while spending more time there, 100 people doing that still doesn’t compare to those same people sitting in an air-conditioned movie theater, then having a quick bite out and then doing some shopping.
It adds up to another blow for an already battered thermal coal industry, Godby said.
“The bottom line is when the ship sinks, the ones in the greatest danger are the weakest swimmers or the most vulnerable, and those are the coal companies,” he said. “If you’re in a leaky boat, you’re bailing on the sunniest of days. But then if a storm comes, you’re in trouble, because you’re in a leaky boat to begin with.”
Despite some intense lobbying from U.S. coal producers, the $2.2 trillion coronavirus relief package does’t include anything for coal. But even if it did, it wouldn’t change a more fundamental problem the industry now has, according to a new report from Moody’s Investors Service that shows many companies don’t have enough cash on hand to weather the storm.
“While the coal industry generated significant free cash flow in 2017 and 2018, credit quality did not improve meaningfully because producers returned much of that cash to shareholders through dividends, special dividends and share repurchases,” the report says.
What being cash-poor does for the coal companies is make it much more difficult to get favorable lines of credit, Godby said. That will be especially true now for companies like Eagle Specialty Materials and Navajo Transitional Energy Co., new mine owners in the PRB looking to secure financing to assume hundreds of millions of dollars in reclamation guarantees.
Now with a coronavirus slump, “it makes that really hard,” Godby said. “What it means is the costs are probably going to go up, not down, for any kind of investment like that when you’re looking at the willingness to bond or insure (coal producers) because the probabilities have gone up that they’re going to fail.”
He said it’s not impossible to find credit, but coal companies weren’t considered good risks before the COVID-19 pandemic.
“If there’s a fire in your neighborhood and it’s threatening your house, it’s going to be a lot harder to find fire insurance,” he said. “Somebody will offer it to you, but it’s going to cost a whole lot more.”
It’s more important now than ever for companies to have cash reserves, Godby said. But since many of the nation’s largest coal producers emerged from Chapter 11 bankruptcy reorganization in the past few years, they’ve been hyper-focused on buying back outstanding shares of stock and paying out dividends and executive bonuses. In fact, a Peabody Energy Corp. SEC filing this week shows an overall compensation package for CEO Glenn Kellow of more than $7 million in 2019.
Production has been on the decline for a decade, the Moody’s report points out, meaning the coronavirus itself isn’t the cause of any new challenges for the industry.
As the demand for coal wanes and it continues to be less expensive to produce through natural gas or alternative sources, coal is fast becoming the last resort commodity, Godby said.
“If you’re in the thermal coal market, there are now technologies that are both cleaner and cheaper, with the fundamental thing being cheaper,” he said.
Added to that is a political climate that has seen more coal-fired generation be curbed or retired ahead of schedule and that many of the world’s large financial institutions are adopting policies of not investing or lending money to fossil fuel producers.
“Many of these companies will need creditors to extend them credit at reasonable rates right now,” Godby said. “But the lack of credit is being caused by these companies already being vulnerable and weak, so now they’re an even greater risk.”
The pandemic also has been enough for Moody’s to adjust its forecast for U.S. coal production for the rest of the year.
Already expecting production this year to be 15% to 20% less than 2019, because of the pandemic “we now expect that industry conditions will worsen beyond this forecast.”