May 9, 2016 - Coal producers, utilities and railroads agree that working together is the best path toward 2020 recovery, panelists at a major coal conference said last Thursday.

As the coal industry shifts to a smaller market share from its status as baseload fuel, its participants each will play a part in finance decisions, contracting and transportation, according to the panel discussion "2020 View" at the Eastern Fuel Buyers Conference in Orlando, Florida.

"We're good at predictability, but that's not the market reality," said David Lawson, vice president-coal at Norfolk, Virginia-based Norfolk Southern, one of four panelists. "How do we provide service when demand swings? How much on-demand service do we build into our network?"

One customer of the railroads, Tennessee Valley Authority, has seen its coal demand drop to the low 20 million st range from an average 45 million st in recent years, said David Owens, vice president-coal and gas services.

The utility sees coal accounting for 20% of its generation in 2020, down from 50%, Owens said. Gas also will account for 20%, nuclear 40%, and renewables accounting for the rest, he added.

The Nashville-based utility has had a coal-to-gas switching option, but needs a healthy coal industry to maintain flexibility when coal prices go back up.

"When the time comes will TVA be prepared to capture that option that will provide our customers the best economic result?" Owens asked. "We spend a lot of time looking at different coals and their quality. The number of different coals we can burn at our plants is significant."

Utilities are looking at different ways of structuring contracts, including adding more flexibility from both producers and surge capacity from railroads when demand increases.

Producers need both flexibility and optionality in contracting, said Tim Whelan, senior vice president of sales and marketing for Tulsa, Oklahoma-based Alliance Resource Partners, who echoed comments earlier in the day by Alliance CEO Joseph Craft.

"A single operation can't do that," Whelan said. "You really have to have a portfolio of assets to pull from and a range of quality coals. There needs to be a transparent model."

Producers also need more control over supply contracts, but access to capital is key, he said.

Coal's financial picture coal picture could improve as companies make their way through bankruptcy and production levels continue to rightsize with demand, said Jeremy Sussman, managing director of metals and mining for London-based Clarksons Platou Securities.

"I see a bit more light at the end of the tunnel for domestic side than international side," Sussman said. "Production in the US is down a third year to date, which is more than anyone expected."

The shift has been accelerated as more coal producers are owned by creditors and private equity funds, Sussman said.

"They will cut tons faster than publicly owned companies," he said.

The challenge remains for publicly-owned companies such as Peabody Energy, which is currently in Chapter 11 bankruptcy, working out agreements with creditors. The process could take years, but once the process takes place, the companies could emerge much less debt and profitable assets. 

"At the end of the day, you'll be down to a handful of large producers," Sussman said. "We'll get to a point where companies are a lot healthier, but it's going to take a long time to get there."