Due to factors like extensive coal-to-gas switching by power generators, Patriot Coal Corp. (NYSE: PCX) said April 20 that it plans to idle the Freedom underground mine and, pursuant to the federal WARN Act, gave a 60-day layoff notice to affected employees at that operation.
The Freedom mine is located in the Bluegrass complex near Henderson, Ky., and produced 1.2 million tons of thermal coal in 2011. Following this shutdown, Patriot will have no remaining uncommitted Illinois Basin thermal coal for 2012 delivery.
“Thermal coal markets remain weak as a result of the mild winter, coupled with low natural gas prices and reduced demand for electricity related to the economic downturn. We are taking this step to align production with committed sales,” said Patriot Executive Vice President and COO Bennett Hatfield. “Additionally, during the first quarter, we idled three smaller Central Appalachian thermal coal mines that together produced about 1.2 million tons in 2011. In total, including today’s announcement and the previously announced closure of the Big Mountain complex [in southern West Virginia], we have reduced Patriot’s annual thermal production by more than 4 million tons compared with 2011.”
The company plans to provide updated guidance for 2012, including anticipated thermal coal volume, in conjunction with its first quarter earnings announcement.
Said Patriot’s Feb. 23 annual Form 10-K report about the impacted operation: “The Bluegrass mining complex is located in western Kentucky and is sourced by two company-operated mines, Freedom, an underground mine, and Patriot, a surface mine. Coal at Freedom is produced utilizing continuous mining methods, while coal at Patriot is produced utilizing the truck-and-shovel/loader mining method. All coal is sold on the thermal market and is transported via truck or via barge loaded on the Green River. Coal is produced from the Kentucky No. 9 seam. The employees at the Bluegrass mining complex are not represented by a union.”
Patriot isn’t the only one feeling the coal market blues. Peabody Energy (NYSE: BTU), the nation’s largest coal producer, said April 19 that it has trimmed its forecast for its own U.S. coal production for 2012 by about 10 million tons per year. Coincidentally, Peabody spun off Patriot in an IPO several years ago.
Peabody Chairman and CEO Greg Boyce said that U.S. coal markets faced a weak first quarter with coal generation off sharply due to low natural gas prices, mild weather and a continued sluggish economy. “We believe that U.S. coal consumption could decline in excess of 100 million tons in 2012,” Boyce added during an April 19 earnings call. “A portion of the lower coal use stems from lower U.S. electricity demand due to the mild winter, while most relates to coal-to-gas switching. You’ll recall we said in January that the coal-to-gas switching could be as high as 85 million tons should gas prices remain low.”
Boyce noted that overall U.S. coal production curtailments accelerated through the first quarter and reached an estimated 12 million tons in March, which annualizes out to more than 140 million tons of lower shipments.
Peabody was first out of the box as far as U.S. coal producers in releasing first quarter earnings, so comments similar to those of Boyce will probably be voiced by executives at other public coal companies as other first-quarter earnings are rolled out over the next few weeks.