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[Episode #18] – The Collapse of Coal


The last of the big-time U.S. coal companies has gone bankrupt, and in the hills of Appalachia, they’re looking for their next move. How will the former coal miners find new careers and build new industries? How will the liabilities of coal companies ever get paid? And how did we get into this situation in the first place? We talk with one of the best coal reporters in the business (and a West Virginian native) to find out.

Guest: Taylor Kuykendall, coal reporter based in Charlottesville, Virginia for S&P Global Market Intelligence

On Twitter: @taykuy

On the Web: S&P Global Market Intelligence articles by Taylor Kuykendall

Recording date: April 17, 2016

Air date: June 1, 2016

Geek rating: 5

Chris Nelder: So let's bring Taylor into the conversation. Welcome Taylor, to the Energy Transition Show.

Taylor Kuykendall: Hi it's it's great to be here. Always happy talk about coal in the mountain state.

Chris Nelder: So let's start with some basics for those listeners who may not be intimately familiar with coal. First there are two main types of coal metallurgical coal usually referred to as "met coal," which is typically a hard black or brown coal used in smelting. And thermal coal which is usually a softer less energy dense type of coal that's used in power plants. So low sulfur coal became a preferred alternative for power plants several decades ago because it helps reduce the sulphuric acid emissions that cause acid rain. So now you've done a lot of reporting over the past several years on the wave of bankruptcies that's swept through the coal mining industry and kept a running total of those companies. Would you say those bankruptcies have most affected the miners of met coal or thermal coal? And why do you think it happened that way?

Taylor Kuykendall: Right. Among the top players in the industry what you really see is kind of a diverse mix of thermal and met coal in their portfolio. The idea there was to build diversity into the company and not put at all their eggs in one basket. The problem is the bottom fell out of both of these baskets in the United States. Coal markets have always been cyclical. Companies have adapted to that in the coal industry but in a way I think that they kind of anticipated some pressure on domestic coals and thermal coals but they really didn't anticipate what was going to happen in the met coal market. You know right now we have the benefit of looking back in hindsight, but you know if we pretend we're these coal executives are sitting in the boardrooms back in 2011 and we had a perfect example. I spoke recently with Patriot Coal's former CEO Ben Hatfield. He was there and kind of guided at the company through kind of being spun out of Peabody but also into their bankruptcy. And they were kind of a premier metallurgical producer before they ended up filing bankruptcy twice. But you know what he told me was like these weren't controversial moves. Nobody was saying when we were going to buy a bunch of met coal that was not that bad and in fact analysts were praising these companies for just putting a ton of money into met coal. I pulled up one of our old analyst reports from a groupnow known as Brean Capital. But these analysts said you know this is a transformational deal for Alpha back when it was buying, these huge coal properties from Massey Energy.

Chris Nelder: I remember that. Yeah.

Taylor Kuykendall: Yeah. They were saying a combined company of these two were a must own in the coal space. That's five years ago, 2011. And obviously Alpha is one of these companies that we saw go bust recently.

Chris Nelder: So we should probably talk for a minute about why that happened. I mean I should probably just let you talk and not speculate, but hey it's my show, I'll speculate. Some I'm going to say that the thermal coal market fell on hard times because electricity demand has gone flat or is actually falling and in a lot of places throughout the OECD and met coal went flat because basically China cooled off on its building boom.

Taylor Kuykendall: That was a major part of that. Everybody thought that China's growth was going to be endless back when they're making these bets. This is like around 2011 and these coal companies... I just don't think they could see the end in sight for Chinese growth and that's you know where met coal is going to be needed for steel for new buildings and such. And the met coal profit margin was way higher so these guys kind of got you know these kind of big eyes you start looking at all these properties. And that wouldn't have been such a big deal if they wouldn't have bought so much of this coal you know with debt. They went all in, bought billions of dollars just to go out and buy all these properties. And as I think a lot of listeners might know Chinese growth kind of came to a halt. And so now while thermal coal which they might have been about to prepare for because you know they've been dealing with like the cyclicality of that industry forever. I don't think they expected metallurgical coal to tank. And we saw that go from well over $300 a ton on the premium coal benchmark settlement. I mean that's right before all these companies bought these properties. And as soon as they bought them I mean it just tanked. We got down about $81 per ton in the last quarter settlement. But the most recent quarter settlement went up to $84 a tonne. That's the first time it's gone up in I think ten consecutive quarters. And again these these companies just were not expecting it. I mean they had analysts cheering them on when they were buying all these... You know making these huge bets. I'm not talking about these huge metallurgical coal bets. I'm mostly talking about Peabody Energy, Alpha Natural Resources, Walter Energy, Arch Coal. And really if you look at the order these guys bought these metallurgical coal properties then it's almost the same exact order that they went bankrupt. And we were kind of warning about this at S&P Global Market Intelligence back in early 2015 based on you know a lot of the work that was being done by BB&T Capital Markets analyst Mark Levin. He pointed out you know these companies in 2008... For example Walter Energy, one of the first companies to go bankrupt on this problem. They had a debt to EBITA ratio of about 3.4X. Within six years in 2014 that climbed up to 195X.

Chris Nelder: Woah!

Taylor Kuykendall: And That's the most extreme example of all of these companies. But I mean you had the same problem. Arch went from 1.6X to 14.9X. Alpha went from -0.3X to 11.2X. Peabody, 1.3X to 7X. I mean basically these people just way over levered and betting that net coal is just going to go through boom times forever and it just didn't work out.

Chris Nelder: So what was coal selling for back in 2005 when these deals were going down?

Taylor Kuykendall: The deals were being made closer to 2009 to 2011.

Chris Nelder: OK.

Taylor Kuykendall: And again that was about three hundred dollars per ton or...

Chris Nelder: So it fell from 300 bucks a ton-ish down to like 80-something a ton.

Taylor Kuykendall: Right it's in the 80s and it's been under 100 for the past couple of quarters. I don't think you could have talked to anybody at the beginning of the slide that would have predicted it would have gone that low. In fact I think one of the favorite games of coal companies at these conferences we go to was who was going to call where the bottom is at. I think everybody kind of jumped the gun every time and it got to the point where recently my analyst won't even call the bottom now. You know we finally saw an uptick this quarter. I don't think people are predicting it to go much higher though.

Chris Nelder: Wow. OK. So among the companies that have gone bankrupt now how many are on your running total and what kind of a dollar figure can we put on it? Right so we've got around 50 bankruptcies I believe is where we're at right now. It's kind of hard to put a dollar figure on it because it depends on where you where you value the companies. But there's a couple of different numbers that I think really jump out. And as far as trying to figure out you know how big these bankruptcies are for example as we published, you'll find these in the show notes. The 70 percent in the Powder River Basin is like in bankruptcy. That's more than two thirds. Even if you look into West Virginia that's 26 percent of the production that's coming out of there in the last fourth quarter has been coming from companies that are that are coming out of bankruptcy. So the combined market value of all the major publicly traded U.S. coal companies, it's currently at about $4.59 billion as of our last analysis which was done around March. That's about 4.7 percent less than November, but more than 92 percent of it's lost since April 2011.

Chris Nelder: Wow.

Taylor Kuykendall: At that time it was $62.5 billion.

Chris Nelder: Wow.

Taylor Kuykendall: Yeah. It's just an incredible loss.

Chris Nelder: So just off the top of my head. Quick math. That's what? $57 billion lost?

Taylor Kuykendall: Right. It's just incredible. I mean like you look at some of these companies and you know they kind of fell off the map. And if you really wanted to pull some more perspective into that we're down to $4.59 billion total. $2.7 billion of that's CONSOL Energy. So that's roughly half or more, a lot more than half actually. And that's mostly a natural gas company. So when you really look at just these coal assets, they're worth almost $2 billion off of $62.5 billion in 2011.

Chris Nelder: That's incredible. It's just incredible.

Taylor Kuykendall: And to come back a little bit to the thermal coal side of it I mean you know there's obviously, low natural gas prices as you know is one of the biggest problems that coal faces right now. I mean there also are problems, regulations are pushing this a little bit... Less so the Clean Power Plan which is kind of the you know the one that gets the spotlight all the time, but things like the mercury and air toxic standard that just really puts a cap on where you can build a coal plant. But then I mean also renewables are becoming cheap enough that they're actually creeping up in market share. So whereas like coal natural gas or competing back and forth every once in awhile and historically even more so recently natural gas is winning. Renewables are creeping in there not letting them have any of that ground back. These guys couldn't even catch a break with the weather. The past two winters have been so warm and a lot of people kind of forget this as well, like coal almost had a resurgence back towards the end of 2014 and it even gained some ground. And it was mostly because the polar vortex that created so much demand. And I think a lot of coal producers - and it's kind of sad to think about like I guess because you know they were really waiting around for another polar vortex basically. And I think they were kind of counting on that. It's kind of sad because you do see this kind of almost like hoping for something to happen. Because we have the same thing with met coal. One of the problems there is that the U.S. dollar is very strong right now and that that means that other companies that have coal mines in other countries are able to compete a little bit easier if they're using a weaker currency but also one of the reasons that coal prices went up so high, and this is where I think it's reasonable for people to say well you know these companies should have known what they were going. I know I said earlier a lot of analysts weren't predicting this to happen but where someone maybe should have noticed was that a lot of the reason the met coal price went up so high was because there was flooding in Australia. I mean kind of awkward but I remember being at a conference one time and a guy says you know every day I wake up for another market disruption to happen in Australia so that we can get back in there. I mean that market disruption was a fatal flood. I think that everybody's kind of waiting for something like that to happen and that's really short of. It's going to be hard to see a recovery in met coal and I just think that it's hard to imagine them getting back much market share in the thermal market either.

Chris Nelder: Well OK so I totally understand the points that you made here and that it is in fact sort of nuanced and there's a lot of different ways to look at it. But I've been just trying to get I don't know some kind of number in my mind of how much damage has been done financially. And we could look at it from the perspective of what was the market capitalization of these 50 some odd companies back in 2007 versus now? Or we could look at it in terms of what would be the valuation of the coal reserves that were held by those companies in 2007 versus now? Or we could look at it from the perspective of the number that you already gave us, what was the actual selling price of coal then versus now? So I mean amongst these 50 some odd companies that have gone bankrupt, are we talking billions tens of billions hundreds of billions of dollars? I mean what are the losses?

Taylor Kuykendall: Oh easily tens of billions if not hundreds of billions in market value, which Again this kind of tricky. One of the things that we're seeing a lot this year and one of the reasons it's hard to pin down a number like this... So when you talk about kind of book value of a coal company a lot of that's in reserves. A lot of the companies we saw this year, something we have seen in a while, they wrote down the value of those reserves, basically admitting to investors you know we're never going to get any value out of this. Now we do have numbers on market value as a side not here. We can get some of those market value numbers, and we do track that. It's kind of gotten just a little bit more difficult because basically the only company now left in the space that has kind of a multi-billion dollar market value is CONSOL Energy and they're mostly a gas company at this point. They're not really out there active in coal but we're talking about billions and billions. We've either cut the value in these companies to half if not three quarters by market value.

Chris Nelder: Wow. So the big news a few days before we recorded this interview was that Peabody Energy the world's largest coal company and the last of the standing coal companies, the big ones in the U.S., went bankrupt. So you reported that they slashed production by one third at their North Antelope Rochelle mine in Wyoming which is the largest coal mine in the United States just months before the company declared bankruptcy. Does that seem a little strange to you? I mean did they really not know just a few months earlier that they were actually headed into bankruptcy and so they really thought that it wasn't too late to take action and try to curb the oversupply that they were contributing to? Or do you think it was actually a last ditch cost cutting measure or what?

Taylor Kuykendall: Yeah so keep in mind that these are the sharpest cuts really came in kind of the very last months there. The production had already been decreasing a little bit there over the course of 2013. What a lot of people kind of leave out of this thing... So everybody's feeling this massive supply problem. They're kind of in that together right? But all of Peabody's coal mines were cash flow positive in 2015. So even though there was a supply glut out there Peabody was still able to make money off of it which is the problem that we have with a lot of these producers. Some of these guys here have no incentive to pull off production if they're still making money on coal. I think that's a fair question to ask someone like Alpha who is losing money on some of their coal. Why not shut it down? But again you got to keep in mind that you know a lot of these companies are not going to behave in an altruistic way that makes the market work. They're going to try to figure out what works for them. And at North Antelope that mine is so large and so productive that you really can outsell your competitor. So they were able to kind of keep this coal out there. I mean this is again... It doesn't get much cheaper than this mine. They've got a lot of mechanization. They're mostly using a lot of machines on a lot of coal miners. These coal seams are just huge and like I think they're basically out there with I think they have three drag lines and a couple like truck and shovels out there that are just basically pushing out coal all year round but then also remember that you know coal is really capital intensive. If you've got a mine open and you've put a lot of money into that mine already. You've probably borrowed some of that money to put that capital out there. And so sometimes even an oversupply particularly when you're accountable to shareholders over a quarter. But one of the easier ways to kind of continue to deliver value or to put off the costs of closing the mine is to sell your tons at a lower margin and hope that the competition goes away and maybe you can get something we mentioned before like a polar vortex or maybe natural gas spikes because of some supply problem. But I mean I don't think Peabody was really convinced at that point that they were going to be filing for bankruptcy. Keep in mind that the data that we talked about where they cut a third was first quarter. So that was about a month ago. The company still has a pretty decent amount of liquidity. I mean they think they have $636 million right now mostly in cash and liquidity. The problem there was that they had $2.1 billion December 31st 2014. Within a year they had $1.2 billion in liquidity by the end of 2015. So you know they've burned almost half of their liquidity off. But then like I said they went from $1.2 billion to $36 million just between the end of 2015 and now. And most of that is to service a lot of their debt that they had and also they kind of triggered some of the covenants in their borrowing process. Now another thing to keep in mind too is like the company didn't run out of money. That's not why they went into bankruptcy. What happened was they had a certain amount of liquidity, they had to have a certain amount of things met through the deals with their creditors and one of those things was a $358 million dollar sale of several of their assets to Bellway Resource Partners. What happened though they made the deal, they had it all agreed to. It was supposed to be wrapped up by the end of the first quarter and they were going to try to get near the liquidity from that. Then what happened is Bowie failed to be able to get there and secure the finance of the purchase. Nobody wanted to bank Bowie in this purchase. And so when that stalled and Peabody tried to buy them time, and then Peabody tried to talk to their creditors to try to get a little bit of a break and you know pause on when they meet these covenants and they just failed to do it. So they had to file. So keep in mind that the North property was still making money and it wouldn't make business sense for Peabody to directly you know shut down that production immediately. I think what you're seeing now is they probably kind of figured out within their customers that they're not going to be able to continue to make margins. If they could they would still be out there producing even if there wasn't oversupply.

Chris Nelder: Right. Sort of a case of an extended pretend meets the domino effect or something like that.

Taylor Kuykendall: Right. They get caught in this really weird circle and you know kind of adding onto that is it's just really expensive to close a coal mine.

Chris Nelder: How much does it cost to close a coal mine? I mean what's involved in that?

Taylor Kuykendall: Right. So a lot of it is you can't just... So we're talking about different situations... It's a surface mine but it's not like you can go over and close the door. If it's an underground mine you have to seal it up yet to ensure that you're not going have a lot of shifting around. You have a lot of reclamation obligations which gets talked about a lot in these bankruptcies. You know if you look at Peabody's North Antelope Rochlle mine I mean that is thousands of acres. Huge mine.

Chris Nelder: And that's a surface mine right?

Taylor Kuykendall: Correct. In West Virginia and Wyoming you go onto Google Earth and you don't have to zoom in past the state level before you can start seeing these mines from the sky. I mean they're huge. Try to imagine like you have to close it down and people don't understand sometimes too... You see the kind of nastiness of the surface mines. But legally those companies have to return those back to you know a reclaimed state and there's plenty of argument and debate about you know whether that's adequate or not. But I mean the fact is even if you don't think it's adequate it is expensive to reclaim any sort of state like it's a piece of property that large. And when you're doing that you're not making money. The way they kind of handle it right now in most cases, as you're mining and you finish mining an area you'll reclaim it at the same time so you're using some of your revenue to put back into reclamation. If all of a sudden you just stop and you have no reclamation anymore and you're just spending money on reclaiming mine you begin losing a lot more money than you were if you were just selling kind of cheap coal with a small margin. And that's why you see a lot of these companies really hesitant to shut any of the production.

Chris Nelder: So in the wake of the Peabody bankruptcy you and a colleague calculated that about 44 percent of the coal produced in the U.S. came from a company that had filed for bankruptcy since 2012 and that about two thirds of the coal produced in the Powder River Basin in Wyoming which is the nation's premier thermal coal region came from coal companies who recently filed for bankruptcy. Should we be at all concerned about the future of coal supply or will existing stockpiles and bankruptcy court workouts ensure that we continue to produce enough coal for our power plants?

Taylor Kuykendall: I don't think you have to worry about there not being enough coal supply out as you point out there. There's a lot of stockpiles built up out there. That Would last a few months and we couldn't shut down all the mines and live off the stockpiles for any lengthy period of time. But the problem is like what we mentioned before when you go into bankruptcy these coal mines aren't being shut down. A lot them are continuing to operate while the company tries to reorganize and come out on the other side. And Peabody's Trying to do that right now. Peabody's idea is not to you know necessarily have a fire sale to get rid of all these coal mines or to dump them and then just disappear. I mean they're really anticipating that there are going to be able to use Chapter 11 bankruptcy to restructure debt operations and as they put it while riding out the storm that beset the coal industry. They are convinced that after some of this production cuts off they continue to mine. And there's a lot of mines out there that aren't mining at the full capacity that they can mine at. If we were talking about coal generators going bankrupt I think that would be reason to be worried about what would happen with electricity. Are we going to have enough you know to keep the grid stable? But I think as long as we're talking about coal bankruptcies that's not really a challenge. If all of a sudden we started running out of coal or we have some sort of coal shortage. Well a lot of these coal companies' problems disappear right? Because all of a sudden coal prices go back up. People start paying enough for coal and these coal companies can mine and make money. So I don't think we're going to have any sort of supply issues. Maybe long term you might see a little more volatility if there's fewer companies competing. But the thing is right now one of the things that the coal industry touts is that it's you know cheap energy but really kind of being cheap energy is really what's sort of killing the industry right now.

Chris Nelder: Right exactly. So I mean one of the things that just constantly niggles at me is why these coal companies waited so long to take action and prevent this massive damage to their balance sheets and their employees and in fact the regions were they operate, I mean state revenues, all of that stuff. Why didn't they shut down the zombie mines that were operating at a loss? And why didn't they attempt some sort of a job retraining or a business strategy pivot when was clear for literally decades that this business was in contraction?

Taylor Kuykendall: Right. And I think I mean kind of the short answer is it's really hard to do a whole lot of those things. To look a little bit closer, so as far as pivoting to another industry, CONSOL Energy did it. I think it's kind of yet to be seen but I think a lot of people would say that it looks like they might have done that successfully in the pivot to natural gas. But then you also had Alpha to try to do the same thing. They had a joint venture with Rice Energy where they were trying to get to the natural gas as well. Problem was it a little bit too late. They got into so much debt with their their met coal buy that they crashed before they were able to actually use that a lot. And I believe they ended up selling a lot of liquidity and they're still trying to figure out what to do with some of their other natural gas properties in bankruptcy. But I mean I think a lot of these companies thought they were doing that. For example I mean I think all these metallurgical coal buys we were talking about earlier I think that was really their honest attempt at diversifying. They thought that here's an industry that we're good at. It's what we know and it's pretty much kind of the same kind of business model and business structures that we use for thermal coal. Maybe we can just pivot to metallurgical coal and I think they didn't really maybe see that that wasn't so diverse as maybe they thought it was. I mean if you look back at it, you know they thought this is a safe bet again... It's kind of hard... You know we've been declining for decades. And that's true of thermal coal. We saw that the coal sector was shrinking but there were plenty of people six seven years ago, smart people that were you know looking at this and writing down even if they disagreed with the use of coal I mean I think most people saw profits in the future or at least you know trying to sell overseas and especially in the metallurgical coal markets. But obviously that didn't work out. And I think another thing that they really couldn't have anticipated was kind of the success that the environmental movement was able to have not just in like shutting down or sort of getting regulations done but also going to the state city level and getting just you know plants actually just shut down. And then also one of the major problems now is going to be the environmentalists are having a lot of success shutting down port capacity, or at least delaying port capacity. And they're doing in a way that like not necessarily is immediately affecting the global demand but in a way that a lot of people are looking at that and not wanting to bet on coal again because they're seeing that there is a movement against it and they're seeing that they were successful before. But I mean I think that these companies really thought what was going to happen is they were picking the assets... In some cases it was Peabody got rid of Patron. So that got them out of Appalachia. We had a four site energy start in Illinois. Illinois coal basins got you know better coal seams. Longwall coal seams. Longwall mineable coal seams. Peabody was betting on the large surface mines out west. Everybody thought that they'd found a model that was going to make them the coal company to invest in. Alpha was buying at Massey because they thought they were going to be the premier steel making coal provider. It just turns out that somehow none of those...

Chris Nelder: So in their minds the writing was not on the wall about coal.

Taylor Kuykendall: I think they believe that there was probably some writing on the wall and I think that they all thought that they could find their niche and that they would survive in that niche. And it turns out that the market just was not good to any of them. Just about everything kind of went bust. And the job retraining for workers I mean I don't know... You look at though like maybe Alpha again trying to buy up natural gas and they wanted to go to natural gas. That might have worked. The problem was is that by the time they realized that this was super necessary to survive they already had this huge kind of unserviceable debt load. So like nobody wanted to loan them money to go out and get into natural gas you know. And they didn't have the liquidity they needed to go out like say buy into natural gas or get into some other industry. And so as far as like the retraining of the workers then it kind of becomes you know I think that's more of something that community leaders probably wish they would have thought more ahead of time. But I think by the time these companies realized how bad it really was going to be for them specifically. And I say them specifically because a lot of these companies even up until like two three years ago were saying you know we just need these other guys to go into bankruptcy and then we're going to be fine. And it turns out they're going into bankruptcy too. But yeah and one of the challenges here is that there's just so much liability out there that I just don't... I don't know that they can recover at this point to diversify and I don't know if they could have done it even three or four years ago.

Chris Nelder: So you don't think like even the local politicians saw this situation coming and wanted to do something about it before it became a crisis.

Taylor Kuykendall: Right and it depends on where you're talking about too. So I can't speak much to Wyoming but say in West Virginia there's a real challenge there and one, it's has a long history of the coal industry. It's a very influential political power in West Virginia. And I think again because they weren't convinced that this was kind of a secular decline it was more of a cyclical decline. I think that they had a lot of people convinced that coal was maybe going to come back and that you could kind of in their phrasing if you just get the Obama administration off their backs that everything was going to be fine. And I think a lot of politicians would believe that because you know as they grew up they saw the mining industry go down and come back. But even then I think there are some people that want to see that economic diversification in West Virginia. I mean one of the things that kind of jumped out at me was that was one of the longtime economic officials there in the region said you know we don't recruit extractive industry. They want other industry. They want other companies other businesses to compete there, but without visiting West Virginia it's kind of hard to explain but the geography is basically like if someone took a piece of paper crumpled it up and try to lay it back out flat. You'd either have to build on top of the mountain meaning you have to flatten it out. You have to build on the side of a mountain which is impractical. Or you have to build down in the valley in the flood plain there's just not a whole lot of places for different businesses to go. And even if there is a kind of a flat place it might be you know two or three hours from an interstate. It's a real challenging place to try to do economic development. And the problem is that whenever I think the coal mines always offer kind of a quick easy solution, one of the kind of unsavory questions that as a West Virginian I hate to even really throw out there is that maybe there's there's populations too big in some of these areas. A lot of the towns exist because a coal mine was put there and there really wasn't anything else built and you know historically when those coal companies left a lot of the town did too. It just seems like recently we have a lot of people kind of sitting around waiting for something else and they're not getting it and I think that while you can put a little bit on West Virginia politicians maybe a couple of years ago should have been either squirreling away tax money or at least coming up with new programs, I think it's a really challenging... It's challenge stretch to be like they should have come up with this because I don't know the answer for what to put in some of those communities is maybe is as easy as some people would like it to be. And I think that what we're seeing now is that people that are trying to get on the ground and do this are working really hard and they're making some inroads and definitely having some success. But I think it's a really slow process and it's going to be several generations before we really see any kind of deep diversification in the state.

Chris Nelder: Yeah. I mean this is one of the questions that I that I really struggle with in fact I raised it in the very first episode of this podcast in the interview with Mike Grunwald talking about the so-called war on coal. I mean people can blame the Obama administration but I mean again this is an industry that had been in contraction for decades. And I wondered how the people in coal country feel about the coal company executives and the elected officials who failed to take action in this long decline and just wound up leaving them high and dry. I mean there are people there in West Virginia and elsewhere in Appalachia who are fourth and fifth generation coal miners. And I wonder if the politicians failed to take action because they thought that those people their constituents didn't want to hear anything except that they would fight for coal or if people actually wanted to transition away from being dependent on coal mining but their leaders let them down. Obviously there's a lot of pain there. There's a lot of folks who are really struggling financially now and seeing their long held expectations their hopes and their dreams crumble. You know I wonder as a West Virginia native I mean I assume you know or know of some of these multigenerational coal miners. I mean how do they feel?

Taylor Kuykendall: Right. So that's a really complex question that I think a lot people don't understand one of the problems is even there's some resistance to some diversification of the economy. I don't mean that when you talk about I'm going to diversifying the economy people raise pitchforks, it's just that they're not necessarily as interested maybe because they've seen some of that happen. The problem like for example like if you shut down a mine in Logan County it's not just that you're getting rid of a job and they need to find another job. A coal miner is someone that's graduated usually from high school and gone straight to a couple of weeks of training and now is capable of making you know $80,000 plus right at a high school and you're telling them to go find another job in another part of the economy, and like for example one of the big solutions is tourism service industry. You're not going to find a lot of jobs in the tourism service industry that are averaging $80,000 a year. These people are able to support their families. One of the stories I did when I used to work for the State Journal in Charleston West Virginia, central Appalachia is really one of the last places where there's a pocket of culture where it's still really common highly common for it to be a single income household. I mean that's the majority of houses in Central Appalachia because they can do that. These coal miners can go and make between you know an $80,000, is a number I'm just going to toss out that, but some of them are higher, some a little bit lower. They can afford to to have this kind of traditional lifestyle they're used to and it's difficult to try to tell them you can replace that with something else. I've even gone down and spoke to some of these guys. I remember one, I asked him... You know at that time the Marcellus Shale gas field was just booming. I said, you know why don't you drive up there? He was talking about moving to Canada to go mine coal there. And I said why don't you just look to the northern part of the state and learn how to work natural gas rigs? And not to simplify how easy it is to work on natural gas rigs. I think there's a whole set of training there as well. But you know I asked him and he said I can't make as much money in the natural gas field as I do in the coal mines. I don't know how true that is, but there's at least a perception that these are the only jobs they can do and make this much money. And so you do see a ton of people moving. I know in Kentucky a lot of people that live in eastern coalfields, they're mining in Central Appalachia. But when their mine shut down you get a ton of people coming out of Western Kentucky which is in the Illinois basin where things are going a lot better and they were recruiting these guys back over. And as you know as much they want to stay home and we all kind of like tend to love where we grow up, they were ready to move not because they wanted to be exactly where they live but they had become accustomed to this coal mining job. And it's something that pays very well and so I think that because of that you kind of have a loyal voting base like if someone in the coal company tells these guys you know this is what's hurting our industry we need to save it. I mean I think they're a very active political base. And I think it would be hard to blame them. They grew up accustomed to like you know a really well-paying job they could do in their community not far from from where they grew up but also like basically kind of the skill set that their father did. It's a whole culture that I think is going to be really hard to change you know politically. It's going to take as I said before, generations before this sinks in.

Chris Nelder: So it doesn't sound like they're really... The rank and file coal worker isn't particularly blaming coal companies or their elected officials for not anticipating this change and trying to do something about it. I mean everybody just kind of wanted to hold on to what they had.

Taylor Kuykendall: Well and I would say that like... Obviously speaking in generalities these people kind of difficult.

Chris Nelder: Well sure.

Taylor Kuykendall: A great example is a former coal miner named Gary Bentley. I spoke with him recently. He's from Kentucky but he now works with the Georgia-Pacific Corps. So he started coal mining right after he graduated high school. He's actually writing a lot of stories about it. Some are pretty funny about some of the kind of big burly guys as he describe them kind of like teaching him how to mine. But I mean he said that you know he had a daughter and he realized that money wasn't the most important thing anymore and that he wanted a job that he knew he could come home from. He told me that he's kind of frustrated with these politicians. I mean one of the things he told I think was you know politicians are screaming we're bringing coal jobs back. And he told me that he thinks it's a false hope that they're feeding people but that these people believe it when they say it so they fight hard for it because they want those jobs. You know they need them in that area. And the way he said it and he said that people are afraid to look at the truth that things are going to change. They're not going to have these jobs. But I mean one of the things that he points out that is just an excellent point that I can't get over enough especially kind of like backing my West Virginia people here for a minute but he says he feels like coal miners could do anything. They are really smart people I mean they're not in there with pick axes digging for the coal I mean you've got people that are electricians. They might have like lots of experience working machinery. They're really talented workers and they're usually hard workers you know that are going in there to put in really long shifts. And I've been in a coal mine. It's not a comfortable place to stand. And they're doing it for hours on end a day. I can't even imagine. It's like he said I think that it is just kind of a fear of change in those areas and it's even I think if they want to believe that it's that things are changing it's kind of hard to accept.

Chris Nelder: Well I think that's actually a sort of a truism across the entire spectrum of energy transition isn't it?

Taylor Kuykendall: Oh it really is. I mean I think you're always going to see that like in any kind of any kind of community where these people are used to these things and I think that's the situation. If you're talking about coal plant workers or natural gas workers oil workers. It's all kinda the same.

Chris Nelder: Sure. On a slightly different subject, Robert Murray, CEO of Murray Energy is arguably the most politically outspoken and probably the most reviled coal company executive in America. Murray Energy is the largest privately owned coal mining company in the country. It's been under fire for years for safety violations and various political activities. And Mr. Murray recently made news by saying that the companies that have recently gone bankrupt should just go away and not be allowed to come out of bankruptcy relieved of their debts and get back to work because there's just too much supply and the industry needs to cut supply in order to get back into balance of supply and demand and get prices back up and be able to operate profitably. And he actually said these zombie mines are chasing the ghosts of past coal markets. That's a nice line you had in one of your pieces there. I guess that makes sense but I wonder if he would be saying that if it were his company that were going through a bankruptcy proceeding right now?

Taylor Kuykendall: Fair question. And yeah he's always one of our more colorful speakers. I like to go listen to him talk. And he definitely has critics and detractors across the industry and I won't debate the individual points of some of those. But I mean I would also point out that on the other hand in his defense that he is well respected in business circles in the coal world because he has made a couple different decisions. And one of the things he told me in a recent interview that I did with him personally is that while he wanted those mines to go away, he doesn't think it's going happen. I mean he told me I was like, I said OK so what's it going to take these mines to close down? ... And what he told me is it's a myth. It costs too much to close it down. These companies have to deal with the surety performance balance and there's reclamation liabilities. And he said that it's too expensive to really scale... And then another wonderful quote from him is that all the bankruptcies that are happening and he's out here trying to get lenders to back him and to help him kind of back his liabilities and he said that everybody else is dragging him into this bankruptcy sewer. And I think that what you have to understand about Murray's business model is that it should have worked really well in this market. If you didn't have all these companies... Because it's hard to actually tell how Murray Energy is performing as a company. It's private. We have no public financial details of how they're doing. Based on some recent acquisition activity from I think two years back kind of suggests that maybe that at least they were doing well then. But they're not going terribly bad now although they are starting to cut production. I think the thing to keep in mind is he had a completely different model when he said he set up his coal companies. He built an empire of mines that were centered in northern Appalachia, one more productive regions going right now. And one of the other advantages that it has is so it's got the proximity advantage of Central Appalachia to the big markets like you know the northeast. But also he only bought highly productive longwall coal mines. He has something called the concentric ellipse or concentric circles strategy that he uses where like he makes sure that all his mines are located near power plants that have transportation system. And then also he didn't jump into this frenzy this kind of killing all the other coal companies. So I mean I think part of the reason is he's maybe a little bit bitter towards some of these companies that are still open. Is that you know he was cautious. He was selective about what he was doing. He didn't necessarily get greedy and go out and buy a bunch of met coal mines they did but CONSOL Energy's longwall mines but those are all similarly doing pretty well. And one of the things he told me though is that the crisis isn't even here yet because like he's actually in West Virginia and he's telling now people in West Virginia that they need to fight back against these people that are that are filing for bankruptcy and not claiming all their liabilities with it. He said that you know he should charge them more. He told me the judges weren't forcing them to pay enough of their liabilities and that's because basically the way he sees it is like these guys went out make big bets and now big federal government's going to cover it and he didn't make the bet. And now you know he's kind of suffering from a kind of really collective market sentiment against coal.

Chris Nelder: Right. And so that's I think really maybe one of the biggest important questions that we have here. I mean what will happen to all these liabilities that these companies are leaving behind that are that are going bankrupt? I mean as as Mr. Murray pointed out bankruptcy courts typically relieve the petitioner of its obligations to employees, lenders, shareholders, and the environment, I mean everybody. So while those of us who are advocating transition away from coal have something to celebrate with the industry being in decline shouldn't we also be concerned about the pension and health care obligations of the present and past employees of these companies? And what about all the ruined landscapes that it's their responsibility to restore after the mines close? The waste products they're leaving behind and so on? I mean it seems to me that all of that is just likely to get shoved onto taxpayers like it always does. Following the old saw, privatize the profits and socialize the losses.

Taylor Kuykendall: So I think that that's kind of the great mystery everyone's trying to answer that's covering the coal space right now. There's been a couple of different proposals, let's kind of put it in perspective one of the source of this phrase zombie minds or at least kind of how it's been properly used within the industry in the past couple months and where Murray kind of got to start from was this report by a McKinsey & Company and what they were looking at there was in 2020 that even if they were able to do a round of capacity curtailments and reducee production 225 million tons the industry that survive will carry liabilities of about 70 billion. But only be able to service about 25 billion dollars worth of those liabilities. And there's about forty five billion dollars that they just cannot financially cover and that's an optimistic scenario. And so we don't know what that means yet. A couple of different things. One is sometimes a liability a billion dollar liability for example let's just take a chunk and say it's a billion dollar liability. That might not actually cost a billion dollars. When people make these these assumptions these calculations it's always kind of like if Peabody shut down north ... mine Right now what would it cost for the state to bring in somebody to clean it up? That liability is not quite what they actually pay when the coal company itself is doing it with their own machinery around workers. So it's probably a little bit smaller than maybe those numbers and that might be a little bigger. I think there's a lot of really interesting kind of things are being looked at on how to handle this right so like Alpha right now they're they're creating two entities out of bankruptcy one. It's kind of their awesome lines, the ones that they probably should have focussed on and they're going to make a company that is just like a company like Alpha but like much much smaller. The other entity that they're trying to, and they've been in bankruptcy for quite a while is a group that's a mine that is basically just going to be focusing on mining only at the rate kind of like as the market allows them to use that revenue just to reclaim that mine. This company's second entity not going to be dedicated to profiting. They're mostly dedicated to shutting down these mines and getting reclaimed without leaving any liability behind. You have another kind of concept with the Virginia conservation legacy fund. Basically they've gone out and bought a lot of coal properties that have been bankruptcy. It's a guy out of Virginia who was an environmentalist that actually kind of butted heads with coal magnate Jim Justice there for a little bit that his idea was to buy this coal plant trees or do any kind of other kind of environmental project to do so you can pay our carbon credits with this holdings. The idea that being that you can mitigate climate change while still selling coal by finding other ways to offset the carbon. That's a really interesting thing that we're still figure out exactly that works because there is no market for them trade that CO2 credits right now. And maybe depending on how the clean power plant works that market will open up. And then also interestingly enough that legacy fund got involved with metallurgical coal and how that actually works with carbon credits is something they haven't explained fully yet either. But the idea there though is like they're planning on figuring out some those liabilities. One of the kind of interesting ideas and to go back to economic participation a little bit, well this touches on that is looking at the Hobet mine site right outside Charleston, North Virgina it's not far at all. It's a huge mine site and Virginia conservation Legacy Fund wants to pair with the state of West Virginia and Governor Earl Ray Tomblin mentioned in his state address. The idea is to reclaim that mine property but then also to set up a business park on it. And the idea is like anything from one acre to several hundred or thousands acres of property depending on you know what you're trying to put up there. You can build either your you know industrial manufacturing site or you can build a warehouse or whatever you think is appropriate so they're going to try to redo some of that which would mean that like maybe some state funds end up going into that through economic development credits that might get you somewhere else or BCOA might take some interest in that again it's good see how that works. But I think you're somewhat correct in that we're probably going to see at least some of the liabilities fall to state and federal entities and then eventually the tax payer. I mean unfortunately there's the legal system doesn't allow a lot of options here. Particularly the bankruptcy course. There they kind of favor the company that comes in the bankruptcy coming out on the other side or being sold like in a way that the shareholders and stakeholders get value out of it. So I think at this point a lot of the part of the biggest part of the conversation is that state and federal officials are looking at how not to let this happened again and how to maybe maximize what they get out of it and unfortunately and kind of sadly I think that might be some of the probably the best that we might be able to get out of this in places like West Virginia and Kentucky. But I think a lot of that's kind of going to be ending on what kind of creative solutions we see both out of state federal officials and maybe even the coal companies themselves.

Chris Nelder: So a lot of short term reclamation jobs and that kind of thing maybe?

Taylor Kuykendall: Yeah and that's something that as long as they have the cash to do it the coal companies can do some of that. But yeah there is there should be plenty of reclamation work out there to do. And it's just a matter of who's going to pay for that but I mean I think arguably the way things are going now especially the way kind of federal policy is treating coal. That's another thing to keep in mind I should have mentioned before too is that there are federal programs that people are trying to get out there to help these people others. Obama's Power Plus plan the other Reclaim Act that a bipartisan group lawmakers are looking at. And the Reclaim Act essentially just pumps several million dollars a year from the abandoned mine reclamation fund to get that in there really quickly to help reclaim some of these sites with a priority of putting something that's economically viable in its place.

Chris Nelder: Right. And so yeah ultimately you need new industries you need more longer term jobs and that was something I wanted to talk about next because you'd written recently a very interesting three part series titled "replacing coal" which stemmed from a conference on building a resilient West Virginia. And you talked to a number of people who are trying to figure out how to create new jobs outside the coal industry and attract new industries. Do you think those people are getting actual traction amongst rank and file former workers in the coal industry and amongst the industries that they're trying to bring into West Virginia? What's the mood like in coal country are people finding things to be optimistic about or are they just brooding over their losses or leaving?

Taylor Kuykendall: Yeah you have some people leaving. If you look in at I believe the Associated Press or a local outlet recently reported there's a ton of people leaving these coal filled counties. But I think you've also got like a kind of a mixed bag of how people are responding to this. I mean there's those young people that are leaving you know they're going off to college they're finding other jobs. And you've got young people that are staying there, they're trying to create something, there were two young people there that were with an economic development group and they were out working with them on that with the fresh Appalachian and also the coal field development corps they see really excited though about what they're doing, you know they're out there building houses or reclaiming furniture and then you know the refresh Appalachia movement is something that you know putting their farms in and kind of building an agriculture community in the state. There's all kinds of things out there that I think are really creative and interesting one that surprised me is there's a reclaimed mine site in Kentucky I visited about a year or two years ago and they basically had this really large cattle farm out there in this large flat area and it looked a lot like Texas really where they're at. And that's basically what the idea was that people were sending cattle from Texas to come back here on this farm and to be grazed and all that. And you could see the coal mine off in the distance while they're still working on it because they were kind of doing it in pieces. But there's lots of really interesting products like that. You've got golf courses being put on coal mines and obviously a golf course doesn't make a whole lot of jobs but there's a lot of different things out there. And I think that there are a lot of who are excited about it. One of the things that I have not seen as much in other states is that a lot of people that live in West Virginia really really love living in West Virgina. They want to stay there they want to be there if they can. But you do have a lot of people too where they say I want to do X job I have to leave, and one of the things that I think that a lot of people are trying to push out especially the older people that are already kind of established themselves in the community and don't want to see the younger people leave. You know what they're saying is like we can't let people believe you're your option is coal miner or teacher or nurse. You know? Like you have you can go out there and do a whole lot of things in the community and what we're started seeing now too is that you might have heard of this interesting kind of concept as there's a project where they're teaching coal miners how to code. There's a lot of jobs like that where you don't have to be necessarily in the area where business is based, you can work remotely. And this is kind of a new concept I think probably got ignored and it's too bad it wasn't looked at earlier. This notion that instead of trying to educate the workforce what you do is you educate the workforce to to be computer programmers and there's no... West Virgina is not Silicon Valley at the moment. They move or like you trained do like electrical work, well if the mines are shut down and there's no equipment to run they go and they do the electrical work somewhere else. I think the idea that the goal here now though which is really interesting is teaching them to do things where they can do that work from home. And so you're basically taking all these people and giving them skills and building a workforce first. And now once you have an educated workforce that has these sorts of skills now it's a little bit more easy to bring in alternative industries. It's really hard to go to a tech company and say hey why don't you come work in Charleston West Virginia or come to Beckley West Virginia and we'll go out there and do a program where we train a workforce for you. No company wants to do that and risk that. West Virginia unfortunately this is one of the things that was said at the conference. It doesn't look good on paper. Statistically the test scores aren't always great. Like you have a lot of the people that do end up with higher education and then leaving the state, but they are hard workers. And I think that that's something that's kind of difficult to quantify. So I believe we are taking a really important step in the state. They're starting to look at having a workforce and then bringing that to them and this you know the Internet age is making it a lot easier. But I think overall there is a kind of genuine hope for the state even if it is maybe going a little bit slower than a lot of people would like to see economic diversification happen. I mean I really think they'll figure it out. One of the challenges here is, I don't think at least I can't maybe you can, I can't think of a great example of when this has happened before when sure industries have disappeared, but I don't know how many of them have been this geographically concentrated and in areas where there's nothing else. You know like when we saw you know when we saw steel decline those were in like huge cities like or at least cities kind of on the river. There were other kind of industires around it and maybe that city emptied out and spread out but it's kind of hard to I think imagine seeing something like what we're seeing in West Virginia or Kentucky right now where you I mean whole swaths if you if you're looking at basically everything the whole southern part of West Virginia that almost had nothing but coal and coal related industry. And now they're trying to figure out what they can put there instead. And that's a real challenge. But again I would I would reiterate I think a lot of people are somewhat optimistic about what can be done.

Chris Nelder: Interesting. I try to think about where this is all going. You know what's what's the outlook and you and your colleagues at S&P Global Market Intelligence published a huge 14 part series on the future of coal last December and we'll link