In late August, I presented an evaluation of the effects of new EPA regulations on coal power plant retirements. Since then, other Seeking Alpha contributors have published noteworthy articles on natural gas prices, coal supply curves by region, and one determination that I am playing for Team Zombie.
The Patriot (OTCQB:PCXCQ) bankruptcy this year continually raises the fear that with domestic thermal coal companies in such a weak state, default of a single power plant operator could be devastating (as was the case for Patriot). In this article, I use EIA-923 2011 early release coal transaction data in order to assess customer diversification by revenue in the U.S. domestic thermal coal market. Patriot, James River Coal (JRCC), Consol Energy (NYSE:CNX), Alliance Resource Partners (NASDAQ:ARLP), Alpha Natural Resources (NYSE:ANR), Arch Coal (NYSE:ACI), Cloud Peak Energy (NYSE:CLD), and Peabody Energy (NYSE:BTU) are included in the analysis.
The bituminous and sub-bituminous transactions in the EIA-923 2011ER data were categorized into the parent mining companies based on known subsidiaries, as well as acquisitions and mine purchases since 2011, to the extent this information is readily available. Certain transactions made by intermediaries were re-categorized to the originating mining company based on coal mine ownership or operating rights. Revenue for each transaction was calculated from the physical quantity, heat content, and price for the transaction.
The early release data is incomplete pending validation by the EIA. No adjustment could be made for mine closures in the interim (such as by Alpha and Arch). Revenue was summed by power plant operator for each parent mining company to produce the charts below; however, operator subsidiaries were not grouped into parent companies in this process. This gives us an imperfect but useful estimation of the degree of customer diversification for these coal companies.
Pie charts showing the fraction of company revenue attributable to each plant operator are shown below, where operators are displayed in counterclockwise descending order by total reported revenue. Between charts, the same color does not indicate the same plant operator.
Click to enlarge images.
The results show a considerable concentration of revenue from a select few operators for several of the mining companies. This is especially notable for James River, but also for Patriot, Alliance, and Consol. Peabody, Arch, and Cloud Peak are the winners in this analysis with clear customer diversification. Additionally, the largest major customer for Arch and Peabody in this analysis is the Tennessee Valley Authority, a federally owned corporation with (presumably) minimal default risk. While Arch and Peabody are surely subject to broad trends in power generation, they are not susceptible to the sudden shock of default by a major customer that Patriot experienced.
It should be noted that many of these companies have other operations than just domestic thermal coal mining, so context is important. Many also mine metallurgical coal, Consol is into natural gas, and Peabody is a global producer. Analysis of these companies must account for the steel outlook internationally and, of course, current valuations.
Arch has limited international exposure and minimal risk of a serious blow in the short term due to the default of any one customer as indicated in its pie chart above. Also, the recent Fed stimulus will accelerate the business cycle (all else being equal) and will boost the housing market -- and with it electricity demand -- over the coming years.
Finally, with its debts termed out and indications of tolerance for higher inflation by the fed, high debt at Arch becomes less of an issue. For these reasons, I am now somewhat more optimistic on the performance of my Arch position over the next several years. The valuation to book is attractive and I will be looking to add to my position if the price drops into the $6.00-$6.50 range.