Interview with Michael J. Quillen of Alpha Natural Resources
- October 28, 2010
VB: Tell us a little about yourself. How did you get in the coal business?
Quillen: It’s kind of an interesting story. I’ve got a bachelor’s and master’s out of Virginia Tech, and the masters was in engineering but with a concentration in transportation. And I had worked for Southern Railway at the time, which of course now is Norfolk Southern. But when I got out, I went to Richmond with the highway department. … And my dad, who was an insurance agent, and another gentleman who was a high school principal, and another gentleman who was an electrical contractor, decided they were going to get in the coal business and formed a little company.
At that time, they needed somebody to be the foreman and someone to do the engineering. So they called me up in Richmond and offered me $1,000 a month. This was like in 1973 or ’74, and I said, “I can live forever in Gate City for $1,000 a month.’”
So I left the highway department and came down and bossed the surface mine during the daytime, did the engineering work at night. Dad sold out in nine months; I’ve been in it 37, 38 years.
VB: And you’re originally from Gate City?
Quillen: Gate City.
VB: Alpha Natural Resources has grown primarily through acquisitions. Is the company still interested in acquiring a stake in Whitehaven Coal? If so, why would this be a strategic buy for Alpha? If you can’t comment on that, could just talk with us about any other expansions or why you feel like this is the way to go in the future?
Quillen: Well obviously I can’t talk about any particular opportunity that we might be looking at and, in particular, that one, because I’m also a shareholder in Whitehaven … I started that company in Australia back in I guess the early 2000’s when I was running Australia operations. But I think it’s a well-known fact that Alpha continues to look at expansion opportunities either through internal growth or through acquisitions. And obviously they’ve got dual interests not only within the United States but also outside the United States.
I think they’re going to be more interested in countries that are stable, not areas that are volatile or don’t have stable governments. So I think particularly Australia, Canada, parts of South America are going to be more attractive when they look off shore … Alpha is certainly the size right now that there’s no push or rush to continued growth. I think it’s something they would look at primarily from “Is that the right thing for shareholders?’
VB: How is the merger with Foundation Coal working out for the company?
Quillen: Very well. When you put two companies together, ones that are that large individually, and they’re both approximately the same size, you’ve got integration issues. It has gone better, I think, than anyone anticipated … I think there’s obviously some nervousness maybe on Foundation’s side because a majority of the work was moving down here to Abington. The mines went together very quickly and very easily. I guess if you ask the accounting and computer departments, they would probably still be feeling some stress because that’s one of the more difficult things to do for companies this size. But it has gone very well. I think actually the company publicly reported that the synergies [$60.1 million annually] exceeded what was originally forecast [$45 million].
VB: Did the company have to let anyone go? Did the merger result in any loss of jobs?
Quillen: Well, obviously, me. I moved up to chairman. And the CEO of Foundation is on our board. But very few. There were a few at the top. Most of them changed that could have changed jobs. Not many left. … I guess there were about 200 people in the Baltimore office, and I think there were 75 or 80 of those who were offered positions down here. And most of them accepted that. There still is an office in Baltimore, and that will be reduced again at the end of this year. I think they’re going to retain a smaller office up there. And then some people chose not to relocate because of spousal situations or whatever.
VB: Was it a difficult transition for you to move from CEO to chairman?
Quillen: Not really … I didn’t step aside immediately. That transaction closed on June 30th of last year, and I stayed on as executive chair for six months and worked with Kevin and Kurt and the other executives on a daily basis up until the end of the year.
I’m not at all bored. I’m still in here two or three days a week. A lot of what I do now has more to do with the regulatory/political arena … So I’m certainly not bored at all.
VB: Mine safety has been a big issue following the fatal explosion this year at a Massey mine. What impact is this having on the industry?
Quillen: Well certainly it’s impacting the whole industry. It was a tragic event, and I guess we’re still looking to see what the final result of the analysis is — if they can determine what happened. But obviously it has brought a spotlight on the industry. It has gotten the politicians more involved who want to solve the problem so that it never happens again, which is certainly the industry’s desire. We’re having more inspections. We were already having a lot more inspections after Sago and Darby and Aracoma [mining disasters that occurred in 2006] and the other accidents we had two years ago. That has been enhanced now. A lot more violations are being written that before you probably would have worked out. In other words, if an inspector was there and he pointed something out, and you corrected it before he left, he might not write that. Today, they’re under so much pressure that they’re writing just about everything, so you’re seeing a lot more numbers come out in terms of violations being written.
… Additional legislation is being considered, most of which we’re somewhat concerned about. We really don’t oppose legislation that we think is going to enhance safety, but some of these things we really are not seeing where the safety side is going to come out of that.
An example would be … actually this came out of the Financial Review Act, that public companies now are required to report either in their proxy or their 8K or 10K filings any violations that they get of a certain degree. That’s already available for all coal companies under the MSHA (Mine Safety and Health Administration) reporting system. So it’s double reporting. It’s going to require a lot more work that doesn’t change anything at all.
VB: That was already in the works, you said, with the Financial Review Act. It was not a result of the Massey accident?
Quillen: Well no. It came in after Massey, but it got put in at like 3 a.m. We didn’t even know it was in there. In fact, we asked our senator if he knew it was in there when he voted for it, and he didn’t know it was in there.
VB: Somebody slipped it in?
Quillen: Yes, we think we know… I think the pattern of violations is another area they’re trying to look at… Companies could end up being closed down for things that really aren’t that … you don’t want to say any violation is not significant, but some of them are certainly … like paperwork violations, those types of things are not dangerous in terms of harming employees.
… So many are being written now, there’s a lot tied up in administrative court or in the court system. And you hear these politicians complaining a lot about that. But the fact is our statistics — we’re winning 60 percent of those. So they’re writing violations that once we get into the administrative process are being revoked. You don’t put out a report and say they were turned over again. So it’s really consuming a lot of time. And the small operators are struggling with this environment. Obviously, we’re fortunate enough to have a lot of professional safety people and people that can handle these types of things. But a small operator, his safety guy may be his HR guy, may be his purchasing agent. They are really struggling in this environment.
VB: What is Alpha doing to make mines safer?
Quillen: …The advantage of Alpha in a lot of things is when we formed the company, we had decades of experience in the industry, so we wanted to put together a company that that learned from the things we had seen positive in our prior history. So we came out with a very strong safety culture when the company was first formed. And we said from day one we would not start any meeting … without talking about safety, whether it’s the board of directors, whether it’s an earnings call, whether it was a mine site visit or whatever.
So we feel strongly and we study — we have statistics breaking down every accident, the time of the day, shift, whether the guy worked the day before, parts of the body, all of these things. But it’s really behavior based. This industry has a long history of regulation and safety analysis. … I see all the accident reports, and I require them to notify me if there’s a serious accident. When you look at these, it’s pretty frustrating when almost all of them are somebody doing something that they knew not to do, they’d been trained not to do, they had the equipment to do it in the proper way, and they still do it. And that’s the thing.
We’re seeing significant change. When I first got in the industry in the ‘70s, it was more of a macho type industry, where there were a lot of things done that certainly weren’t right, but you didn’t think much about it. I think today coalminers, even the coalminers that have a lot of experience, their attitude has changed as well. We shouldn’t get in a hurry. We shouldn’t take the shortcut. We shouldn’t do that.
So what we’ve implemented, it’s a card check thing where we require every mine to turn in on a monthly basis where miners have reviewed other miners, positive or negative. Now it’s obviously anonymous, but if they see somebody doing something that they shouldn’t do, they’ll write it up. Then they’ll have a safety break and talk about what they could do. Or somebody is doing positive, they’ll write it up. And we have proven now — I guess we’re in our eighth year — that there’s a direct correlation between those observations, which is what we call them, between those safety observations and that particular mine’s safety performance, there are direct correlations. The more observations, and the more they’re thinking about that every day, the better the safety statistics for that particular mine.
So we’re a firm believer that it’s not fines … I have never been influenced, don’t even know … how much we pay in fines. That’s not what motivates me for safety. You’ve just got to do the right thing. When we have a major accident, my motivation, I always go to the hospital and meet with the family and the individual. Certainly, in the case of a fatality, you have to meet with the family. Those people’s lives are changed forever … A week later, you’re back doing your regular job but you understand that accident changed that individual’s life and his family’s life maybe forever — that’s a heck of a responsibility. So it’s not hard to motivate people.
It was interesting, when we first went public and started doing our investor calls on a quarterly basis, we always started every call with discussion of safety. And there really wasn’t a lot of interest from the financial people and the analysts on that topic until those accidents three years ago. And when that happened, then they began to realize that is a topic that maybe investors should be somewhat conscious of … The first couple of years that we did those, you could really sense that the people that were on that call were just saying, “Okay, hurry up and get through this.” But we never varied from that and of course we still do it today.
VB: If we could go back to the card check. That’s an innovative idea.
Quillen: Card check is probably not the right word we want to use. It’s observation cards.
VB: So you’ve implemented this in all of your mines? How frequently do they [the miners] do the observation checks?
Quillen: They do it daily.
VB: Are they anonymous?
Quillen: They are anonymous. Yes. In other words, you don’t want to finger point at somebody. What we’ve found out, as we’ve made acquisitions, is there’s certainly a learning curve, even with Foundation I think there was, a learning curve to get people to have confidence that it wasn’t some way to get somebody in trouble, or build a record to fire someone, or take disciplinary action. So you’ve got to walk the walk. You can’t just put that out there. And our safety group has done an excellent job of follow up. And people have seen that there’s positive reaction to these types of things.
… I saw one Friday, where if we have a near miss at any operation, then that safety professional will write up that near miss and say, “This is what could have happened.” Or even if we have an accident, he’ll write up what happened and send that throughout the company for everyone. So it’s like any other thing. Communication is such a key. Let’s openly talk about it.
The observation card, like the first companies we bought, they’re so used to it, it’s just routine. The newer companies, it takes them a little bit longer to have confidence that you’re not doing something that is in some way a detriment to them.
VB: Can you give us an example? Did anything ever surface as sort of an early warning as a result of the observation card where you implemented a change?
Quillen: Oh, well, again it’s people doing things they know not to do … like somebody getting in a hurry and not putting support under something that may end up falling on them. My pet peeve … somebody cuts themselves with a knife. Of course, in the mines, you’ve got cables you’ve got to do. And it’s very simple — cut away from yourself. But it’s so frustrating, after we’ve known this for decades. In fact they’ve got a poster out there, “We’re going to have to tell Mike if you cut yourself with a knife.” But they get in a hurry, and they cut, and next thing you know they’ve cut themselves.
Obviously, publicity wise, the major accidents get it. But when you look at statistics, it’s the smaller, repetitive stuff, where someone got in a hurry and didn’t use a safety situation. Electrical people have really learned that. Used to, I’m thinking back decades ago, people would try to take a short cut and not lock out something. Those they don’t do anymore. But it’s trips and falls, standing up on a bucket instead of going to get something more stable. Same things you do around your house a lot of times.
And the other thing, the workforce is older. They’ve got to realize, which I certainly do, you’re not as limber as you were when you were in your 20s. So we have some sprains, back injuries, things people have to watch, and get somebody to help them lift it rather than trying to lift something.
VB: Before we leave safety, there is one other thing we wanted to ask about. Right after the Massey mine disaster, the government had a blitz of inspections. And they did check some of your mines. There were two Alpha mines on a list of 57, and there were some citations. Was that all taken care of? I kind of get the sense that what you’re saying, the nature of the beast, is people are going underground every day, and there’s a lot of room for things to happen. It’s a dangerous profession.
Quillen: Let me answer the second part first. What a lot of people don’t understand … is, if you don’t fix it, you don’t go back to work. It’s not like they write something, and you just decide not to fix it and get fined. You have to fix it. It’s not an option of whether you fix it. And they give you a time period depending on what the violation is. They say it has to be closed by business today or the start of business tomorrow, or if it’s something else, it may be three days. But you have to fix it. And if you don’t fix it, then it becomes a real issue where you can get shut down.
VB: The mines we’re referring to are Cumberland and Emerald Mines.
Quillen: That’s our two longwall mines. UBB [Upper Big Branch, the Massey mine in West Virginia where 29 miners died last April] was a longwall mine … I don’t know whether they went to all the longwall mines, because there are not that many of them left, really, but those two were different than our other mines.
VB: I don’t know what a longwall mine is.
Quillen: It’s an underground mine. Underground you have two types of mines. A continuous mine, where you basically go in 20 feet, then you pull back out and go in and roof and bolt that. A longwall mine has these large structural things … and you’re under them all the time mining. You take the coal out and just let the roof fall behind you and you keep moving forward. That was what Upper Big Branch … the accident was on the long wall. So we presume that the reason those two mines were there is because they were large, longwall mines like Upper Big Branch. There was nothing statistically that would have said those mines would have been selected.
VB: So you didn’t have to go in and make fixes as a result of the investigation?
VB: You’re building a new headquarters in Bristol. And this is going to be a green headquarters. Why did you decide to move from Abington to Bristol?
Quillen: When we built this building back four years ago, we thought we had 30 percent extra capacity. But we’ve continued to grow. Now, including this office, we have four other offices rented in Abington today. And we’ve still got people to move down from Baltimore. So we need more space … We looked at this space, to add on to this building, but there is a rock quarry directly across the interstate. We’re sitting on some of the hardest rock … We did the cost — actually we did geothermal drilling here — and looked at some things, but it wasn’t practical to expand on this side. We looked at possibly trying to buy the site across the street from us and have a campus type thing, but that lot wasn’t available. So we had to start looking outside.
The other thing that a lot of people don’t understand was half of our board of directors are from Foundation, not half, but I guess four out of ten are from the Foundation side. We had to look at where it was the most economical for our shareholders to put the corporate headquarters and where it was the most efficient. There was certainly interest out of Maryland to come there, and they looked at incentives. Tennessee was very aggressive … If you did a survey in this building, probably 30 to 35 percent would have voted for Tennessee, because Tennessee doesn’t have income tax. So even though they live in Tennessee, when they work here, they have to pay Virginia income tax. So there was certainly some motivation to look at Tennessee. And it basically came down to where it made sense from an operational standpoint. There is a lot of coal talent administratively around here because this has basically been a coal area for 60, 70 years.
Then the State of Virginia did put a package forward that made the business decision that from our shareholders’ point of view, this was the right place to be. And that it was home … certainly wasn’t a negative.
When we first formed Alpha [in 2002], there was tremendous pressure on us by our original investment group to not put the corporate headquarters of a public company in Southwest Virginia. New York, Pittsburg, even Richmond. They thought this was not the right place to be. We won that debate primarily because we wanted to be close to the operations. … We knew there was a lot of talent around here. And the cost of living is great. We don’t have any trouble recruiting here. Actually, when we get somebody to move from an urban area here with a family, they love it. So we weren’t at all concerned about that … There are only two publicly-listed companies in Southwest Virginia. It’s us and Advance Auto in Roanoke … The cost of living is so economical for the quality of life down here. I’ve been here all my life, in and out, and I’ve always come back, so I’m prejudiced. It’s a great area.
VB: Let’s go back to the aging of the workforce … Can you tell us, what Alpha is doing with its worker retention program? A couple of years ago, you offered workers stock, and there were other incentives to keep people on.
Quillen: The thing that I think — particularly the national media misses — I compliment our local media because I think they certainly understand. But it’s irritating to me when I see, particularly when we have an accident, the media portraying that coalminers only do this because they have to. If they could get out of it, they would, or they can’t do anything else. That’s totally erroneous because this industry is very much like being in the military or being on a sports team. There is so much camaraderie, depending on each other, you just, if you’re in it a year, you’re probably in it 30. Very few people leave this industry … Obviously, it’s not for everybody, particularly if you’re claustrophobic. … It’s something that not everybody is going to do, so there’s a little bit of machoism in it maybe, that you recognize you’re doing something that everybody is not going to do.
It’s not a physical labor job anymore. Everything is mechanized. We tell the prospective candidates that we’re recruiting now, if you don’t have a high school education, you’re not going to make it as a coalminer today because it’s so technical with ventilation, and electrical, and all the things they have to have knowledge in — it’s not just a strong back like it would have been back in the ‘50s and ‘60s.
With that being said, the industry is struggling right now with getting young people … Most of our hires are legacy. In other words, their family was somehow involved in coal mining, whether their father or their grandfather, their uncle, or they were a contractor, or somebody was selling services, most of them are that. We have not been able to yet really have a strong acceptance of just a young person — and we’re obviously not going to be discriminatory — but from a new hire that has no affiliation with this, coming into this industry because almost all of the publicity we get is either something negative environmentally or something negative about safety.
We were making progress as an industry talking about the benefits of being in the industry. And then Upper Big Branch happened, so that’s a set back … We had just gotten through I guess a couple of years of trying to get past Sago and Aracoma. And we were having the best recruiting that we’ve had … We’ve had a lot of success with military people because, one, a 23-year-old out of the military is more mature than a 23-year-old from anywhere else … And they understand safety. They understand teamwork. They don’t mind getting dirty.
Actually we’ve got a program. It’s kind of a funny story … We’ve got a lot of young people working in our recruiting and they said, “We need you to come and talk to a group of Millennials.” And I said, “Well that’s great, but you’re going to have to tell me what one is, because I didn’t know what it was.” They said, “Oh, that’s the new generation coming on.”
So certainly not my age group, but we’ve got Facebook and Twitter accounts and blogs and all these new communications tools that the current generation is more understanding of. But when we look at, I mean our interns … how many interns did we have this year? Close to 40 wasn’t it?
Particularly the engineering side, it’s like recruiting an athlete right now. We work hard to try to get a new hire. It doesn’t necessarily have to be a mining engineer. It could be an electrical engineer, mechanical engineer. That’s a very competitive environment right now. We work them sometimes two and three summers before we actually offer them a job when they graduate. And you’re down here taking them to dinner and doing a lot of things that you just didn’t used to do.
What happened in the industry — because this industry kind of was stagnant from the early ‘80s until about 2001— this industry really didn’t grow in terms of people. Productivity picked up. A lot of mines, smaller mines, consolidated into bigger mines. So there was a lot of opportunity. We probably lost a generation of coalminers. So now we’ve got a lot of people who are in their 50s and 60s that are going to be moving out of the industry …
There is going to be a real opportunity … to move into upper management if they’ve got the skill set because the openings are going to be there in the next 10 years. There is going to be a huge turnover in this industry in the next 10 years.
I think when we first did the consolidation of the three companies with Alpha, we were running close to a 50-year-old average workforce. It’s lower than that now, but when we made the acquisitions with the first three companies, I think it was 48 or 49, which is pretty old for this industry as you start trying to work in, particularly, underground conditions.
VB: What is the average or a typical salary for a coalminer with Alpha?
Quillen: It varies a little bit between states and type of mining — whether it’s surface mining or underground. The number we use is around $60,000 to $65,000 [the figure is $67,547 in the Virginia counties of Buchanan, Dickenson, Russell and Wise]. Now that includes a little bit of benefits, but after about a year, most of them are making in that range. We have a lot of people who are hourly that make $80,000 to $90,000 that work overtime. The industry, right now, we are down a little bit on overtime. Normally, you would work five days a week and every other Saturday. If times are good, you work that other Saturday; if it wasn’t, you backed off some. But in this economy, rather than have layoffs, we’ve cut back working hours a little bit … In some states, we’re up as much as three times the average salary, the mining industry is. That’s obviously, in these areas, very good income.
… I don’t want to get on the stump about this, but I do get irritated to have coalminers portrayed … These people are your Sunday school teachers, your Little League coaches. They’re living in nice, brick homes. Their kids are going to college. They’re up there with any type of occupation out there.
… I can remember when Wal-Mart first came down here. This was years ago. I was working in economic development on a committee. And it said, “Why do you want to come here?” They [Wal-Mart] said, “You guys have more disposable income than most urban areas.”
VB: We talked about your new, green, corporate headquarters. Can you tell us about some of Alpha’s other major environmental initiatives? How is your Department of Sustainability going?
Quillen: On the building, we learned a lot. It was interesting, and we do a lot of those things Whether it’s wind or solar or biomass, we try to get involved in those because not only are we interested in diversifying if it’s right for the shareholders, but it’s also educational. When we got into these green buildings, we learned the different categories of green building. We also learned we are never going to get platinum because we don’t have mass transit here …
We also did a lot of work with the architect about the different costs. You hear a lot of numbers, but we know particularly in this building what it costs to move from each level, so we learned a lot.
On sustainability, we’ve been working on that … We were doing this before sustainability became a catch word. For the last five or six years, we’ve had a group of individuals, very intelligent individuals that basically are not coal background type of people – MBAs and that type people – that we have looking at alternative investments for the company, looking particularly at energy-related alternative investments. And again, they’ve worked on about everything you can think of … I don’t know how many projects come through here a week, but it’s several a week … Most don’t make the check list criteria on something we’re going to spend a lot of time investigating. Right now, I think we’ve got about a dozen projects, half of which are potentially favorable; half are questionably favorable, that they’re continuing to look at …
… We’re not naïve as to how carbon-based fuels are being looked at by certain segments of society, and where are we going to be in 20 or 30 years. We obviously want to have an Alpha down the road, and how that Alpha looks, we’ve got to be intelligent of what the future holds for us. Coal research is something we’re very interested in, whether it’s carbon capturing, storage or whether it’s coal to liquids or coal to gasification because that’s our primary business. But we’re involved in a lot of other things, too …
We have an R&D group. We invest with Virginia Tech and other universities on research, which is maybe more speculative than what this group is looking at from a purely business standpoint. What we find is it’s very difficult to find a renewable energy project that’s going to pay back your costs to capital … There are very few projects today that we’ve seen that really can meet the criteria that we could take to shareholders and say, “This is a good investment opportunity.”
We’ve learned a tremendous amount. The sustainability group, they’re looking at a lot of things. They certainly are involved in the regulatory side. But we certainly haven’t found any homerun yet in terms of what else to do …
VB: Coal ash has become a hot-button environmental issue with the EPA is considering tougher regulations. How does Alpha dispose of ash? Do you favor state versus federal regulation?
Quillen: Coal ash is a utilities issue. We have refuse we deal with, but it’s not the same thing. Coal ash is a result of burning. If you’ve ever burnt coal, you’ve got ash.
The thing that gets everyone’s attention — whether it’s the dirt right out here in the front yard or whatever — it’s going to have heavy metals in it. That’s a fact of life that you’ve got arsenic and heavy metals … When you’re talking to the public, and you mention arsenic, they don’t want any of it.
The issue that brought this to the forefront, of course, was the dam collapse down at TVA (Tennessee Valley Authority.) The standards on the dams that we have around our mine sites are significantly more stringent than what the utility is required to do. Under the mining law, our dams have to be inspected on a monthly basis, have to be certified by a professional engineer on a quarterly basis, have to have a safety factor 2 ½ times. So if that dam had been to our standards, that dam would not have failed. So people get confused a little bit over that. That wasn’t a coal industry issue. If you ask the average citizen, they didn’t really see it that way because of the way it was written, but those dams were a separate issue. And it’s going to have an impact.
A lot of that fly ash goes into … wallboard … And there’s not enough wallboard demand to use all of it, so it gets deposited. And it’s kind of interesting that EPA has decided that if it’s used for productive use, it’s not environmentally a problem, but if it’s not, it is. Well, you’re going to tell a mother that if you’re going to put that on a wall in her nursery it’s OK, but you can’t put it in a landfill and dispose of it properly. So there are a lot of semantics in that.
But it’s a major issue to the utilities. I think the end result … it comes down to the proper analysis and look at the numbers. Now I think the standards on how they dispose of it have got to be brought up some. And there will be an increased cost to do that. But our industry adopted that when the Federal Surface Mining Law came in ’77, ’79. We went under new standards, and we know how to do it now. So it’s not new technology that’s going to solve this problem. That should not be a problem.
VB: Getting back to what you were saying about coal capture and clean coal technology, do you see that as the future of coal? Or is it just too much pie in the sky?
Quillen: No, I don’t think it’s pie in the sky at all … Technologically, capturing it, there’s an economic issue, and I think it can be commercialized very easily.
Transportation is not going to be an issue in terms of technology because you put it in a pipeline just like you would natural gas. There’s obviously a cost issue there.
Storage, the issue is going to be, again, not the technology of it … There are certain geological formations that absorb CO2 like a sponge. Now it’s hard for the average person to recognize how you are going to put this gas down in a rock, and it’s going to absorb it. But we know geologic formations actually attract it and will release other gases to hold that. So saline aquifers and some of these other coal seams will do it. So technically we know what will do it, and we know it will hold it.
The thing our industry has to do is we have to prove … that it’s not escaping. Because when you hear people that complain about this, say, “Well, we understand it will hold. But what if there was an earthquake that released all this CO2 at the same time?” Well, that wouldn’t be good. But if you have an earthquake, that’s probably not going to be a good event, either.
Technologically, that’s not, I think the issue. The issue is certainly economics versus what other alternatives are available, whether that be nuclear renewables ….
But the real issue I think is political. The real issue is … and we as an industry push this on the state level and on the national level — that there needs to be legislation. If you have a sequestration site, you do it and document that you’ve done it by the engineering standards. You’ve met whatever standards or you exceeded whatever standards are set there so that after a certain period of time, you are somewhat related to that liability, because it’s very difficult on any company to have liability for infinity for something they don’t know what’s going to happen.
Illinois … they actually passed legislation, and Texas I think has some now, where after a certain period of time, the state assumes that liability. We all know human nature. If you put something down in the ground that somebody is breathing every day — we’re putting it out in this room right now — but in a litigious society, you’re going to have headaches. You’re going to have a potential increase of cancer allegations. You’re going to have lawsuits. That’s just the nature of about anything today.
So I think that part of it is going to be the most difficult to get resolved … Because if you’re going to borrow a billion dollars to put a facility in like this, and you’re financing that, the banks or the finance institutions want to know something about where that liability is going to go.
There is some well-drafted legislation in some states now. It certainly was proposed in some of the federal legislation that was looked at. But I think that has got to be resolved to really make this practical down the road … I’m not sure how we’re going to solve climate change, but it will be through technology. It won’t be through politics.
VB: But you think it’s doable? It’s just a matter of time of how far out, maybe 10 years, before it will be commercially viable?
Quillen: Yes. We even participate in a well just over here in Tazewell County, and actually the absorption rate was better than what we anticipated. Virginia Tech did the study. Technologically, I think the other issue is that where the current coal-fired power plants are today, a lot of them are in regions that don’t have the geology conducive to sequestration. Again, you have to have specific geology to absorb it. Long pipelines to geologic areas are probably not that practical … I think most new coal-fired plants are going to be built in areas where sequestration is a logical approach within a reasonable vicinity.
VB: Would that be applicable to the new Wise County plant?
Quillen: Yes. The work has been done. Actually, we know the route for a pipeline to go to actually sequester it … The test well that’s down today has proven out very well that it will absorb. Now again, what you need to make a specific case … is to make sure that the CO2 is going to stay in the formation. And of course it’s put down very deep.
VB: That leads us to the next question. With growing pressure to cut greenhouse gases and legislation being considered that would require the U.S. to get 15 percent of its energy from renewable sources, what sort of effect would that have on the coal industry?
Quillen: I served on the Governor’s Climate Change Commission and was on the Governor’s Energy Policy Commission before that. People can take statistics and massage them to a degree that can prove any story. So the issue that makes this very confusing is certain people make an assumption of much our electricity consumption or generation is going to grow annually. And it has been running at about 2 percent, a little less than 2 percent. The current projections are that’s going to run — depending on whose study you’re looking at — half a percent to maybe 1 percent. But assuming that energy consumption still grows, then you’ll hear people say, “Well coal is not going to be harmed.”
But if you take a flat case, which is what we’ve had the last two years where we haven’t had additional energy generation, then if you put a 15 percent renewable standard out there, then that’s probably going to come from coal, which would be very detrimental. If you looked at it today, the only other place it would probably come would be out of natural gas. With the new discoveries in natural gas, the current price of natural gas, I would think the logical business decision the utility would make is they’re going to take it away from the coal fire.
…When we looked at it in the governor’s commission, it became very apparent that even though several states around the country have standards, none of them are really making it per se. The math gets really funny. Nobody is really, in my mind, making 15 percent. We looked at in Virginia. Because of our geography we don’t have the wind or the solar seasons to make that a viable opportunity. Particularly if you exclude offshore wind, how we’re going to make 15 percent in Virginia? We really weren’t sure how we were going to do that.
And of course I think nuclear needs to be a big part of this country’s energy future. Nuclear, which doesn’t generate any CO2, doesn’t count [towards the 15 percent]. There are probably not going to be any more hydro dams built. So we’re limited in where we’re going to get that 15 percent. Now there’s some math in there that thinks conservation may get half of that. But it’s not going to be as easy as people think … I think everybody’s power bill is going up regardless of what we do … I just don’t see any other way. We know all the numbers between cost of solar — even with subsidies — cost of solar, cost of biomass, cost of wind. They’re certainly not competitive with coal and natural gas today.
VB: It seems that has always been the ace in the hole for coal — that it is plentiful in America, and affordable. Business people say that to recruit business you have to have affordable electricity. Going forward — and I know Alpha is a major supplier to the country’s utilities — do you feel that’s going to help coal stay in the game?
Quillen: Oh yes. It’s not going to go. I think it’s a magnitude issue … We’ve done a significant number of studies and analyses of the different scenarios, even the different legislative acts that have been proposed of what that would do. In none of them does coal go away. That’s just not going to happen in our lifetime.
In our Rotary Club speech, we have a very telling chart of every state in the country — of their percentage of electricity generated by coal and their cost per kilowatt. There’s obviously a direct correlation to that. And then we also relate that to economic activity in the last 10 years. When you look at the states that have done well, it’s because of low energy. You get an argument sometimes about a right-to work-state. But when you really break it down, it’s cost. Tennessee and Kentucky both have done extremely well because their cost of electricity is half of some of the Northeast states and California, for example.
So certainly a direct correlation to economic activity and coal fire generation. Really, I don’t think anybody can argue that; the statistics are just too clear. Kentucky has got, what, 95 percent of the aluminum production in the country now. They’re about 6 cents a kilowatt. They got the last two major automobile manufacturing plants because of cost.
If you want to talk about the impact, and I served on the committee with Northrop Grumman, you go down and talk to the shipyard in Newport News and ask them what 1 cent a kilowatt would do to them. It was staggering to me how big an impact that had on them in dollars and cents. It’s a huge factor.
…We certainly talk to our employees about this. The industry is not going to go away. Now you can debate whether there is going to be 50 percent generation 30 years from now … I guess the engineer in me is thinking, “I don’t know whether it’s going to be carbon capturing sequestration. It could very well be algae.” There are so many things that could change the game in this. We just don’t know. But we do know we have abundant resources of coal in this country, and smart minds will figure out how we continue to use it if we’re ever going to have any energy security. So I have some faith in where this is going to go.
VB: Where are your biggest growth markets right now?
Quillen: China and India. The math is just staggering. We’ve got 330 million people in America, and you’ve got 1.3 billion in China, 1.1 billion in India. India is going to eventually pass China because of the one-baby rule. But we look at energy consumption per capita … You might not totally agree with it, but when we look at industrial revolutions around the last 200 years, we certainly saw it in Europe: coal fired. We saw it in the United States: coal fired. We saw it in Japan and Korea: coal fired. We’re now seeing it in the growth areas of China and India. It’s coal fired because it’s available and it’s economic. And those guys are not going to cut back to make us happy. I don’t think that’s going to happen.
The quality of life — when you look at the things they have — whether it’s automobiles per capita, electricity per capita, washing machines per capita, they want their standard of living to go up. When you look at them doing that times their numbers, you can make a case, which we’ve done that … that there’s not enough natural resources on the globe to handle that. They’re not going to get anywhere near where the United States is any time soon, but they’re going to continue to improve their standard of living, and rightfully so.
It’s kind of interesting to me … I can get a lot of attention in a Rotary Club or any kind of audience speech when I say, “Look, we don’t have a global warming problem; we’ve got a people problem.” And people say, “What’s that?” Well, we’ve got 6 to 7 billion people on this earth. If we continue to grow, we’re putting more and more demands on this place from a human side … It’s going to be hard. I know we looked at some of the numbers, and I guess we’ve got to go back to the energy consumption and CO2 production when William Taft was president to get down to the level that was in the Kerry/Lieberman deal [an energy bill they co-sponsored]. Americans aren’t very good at that. We’re not very conservative … Economics will force it …
VB: What portion of your sales is going to China and India now?
Quillen: Not a significant amount. We’re the largest exporter out of the United States in coal, the largest producer of metallurgical. All of the export we’re doing right now is metallurgical coal, which goes to the production of steel. Our traditional customers, primarily because of logistics, are Europe and South America; however, we have seen a significant increase in activity going … to Korea and Japan, depending on what Australia is doing.
Today, because of demands in the Pacific Basin, you’re seeing U.S. coal going in increasing numbers to particularly China, and it’s coming up in India. But percentage wise that’s not big versus our current markets. But growth wise, it’s almost all the growth. When you look at the statistics, we basically look at the U.S. and Europe being flat to marginally increasing in terms of steel production for the next few years but significant growth, particularly in China.
VB: what is the biggest challenge in terms of being the chairman of one of America’s largest coal companies today?
Quillen: There’s so much pressure and attention on anybody in the top four or five executive positions in a public company today. What I’ve found, certainly when I was the CEO, was that I was spending up to half of my time doing things that certainly weren’t bottom line dollar exercises … I’ll use Sarbanes Oxley as an example. We’re Sarbanes Oxley compliant. I think we spent the first year we had to achieve that. We spent over $5 million external to the company.
Sarbanes Oxley did a couple of things. It brought all of our different operations into the same standards. It made you go through and look at the process, but I don’t feel like Sarbanes Oxley is going to make somebody more honest or less honest. I think people are basically, intrinsically, they’re honest or they’re not honest.
We spend a lot of time from the legislative/regulatory arena doing things that somebody else caused, whether it was Enron or whether it was a coal accident … And now I think the thing — not only as chairman but also on anybody that’s on the board of a public company — it’s just not a good–old-boy network anymore. You have significant, serious fiduciary responsibility, whether it’s risk management, whether it’s sustainability, whether it’s compensation.
I’m also on the board of Martin Marietta … and I was on that even when I was CEO. And the interesting thing, from being a CEO and a chairman, is to sit on another public board as just a board member and see it from that perspective. It took some time, but it also was a learning experience …
But my role, and I take it seriously, it is different. Kevin is the CEO, and it’s his job to run the daily operations. Mine is to be involved on the strategic side, have the oversight role and to do those types of things, whether it’s the audit function or the compensation function. We were one of the first companies to have a safety and health and environment committee of the board. And to challenge management on anything that comes up to our level has to be looked at seriously.
… When we formed this board, what we did, we went out and attracted people that were high-level people in the industries we dealt with. One of our first board members was Lynn Draper, who is the ex-CEO of AEP. We went out and got an individual from the railroad. We went out and got a manufacturing person, CFO from a manufacturing company and steel … We wanted people that actually had experience in our constituents. We’re got a good board. . … You’ve got to keep everyone engaged. They have some strong personalities.
VB: What do you do when you’re not working here?
Quillen: I’m very active in a lot of things. I’m on the Board of Visitors at Virginia Tech. I’m on the Virginia Port Authority, which again is a learning process. I’m on the Virginia Coal Economic Development Authority, which I’ve been on for 20-some years … I’m on the Virginia Coal and Energy Commission and the Governor’s Job Commission. So I do a lot of different things that are somewhat related.
The way I look at it, any of those things I do … that may have some input into bringing prosperity back here, and particularly to coal miners, is what I spend my spare time doing. I’ve got 12 grandchildren, so I’ve got a football game to go to tonight, a football game to go to tomorrow night. I don’t lack for anything to do. I don’t have a whole lot of hobbies. I play golf occasionally and certainly like college football. But most of it, I’m either doing something with the family or some more appointments … I think all those things are important to bringing something back to Southwest Virginia because everything I have and a lot of what my kids have came from these guys right here.
VB: Thank you. We appreciate you taking the time to talk with us.
Quillen: I appreciate your interest. Our industry has to do more … to get our message out. We have a problem. I know there are too many engineers in this industry, but when we have an issue, we’ve got to give like a 30-minute, technical explanation. Where somebody says you’re destroying the environment or you’re polluting the stream, those are pretty dramatic words. We don’t have elevator speeches, but we’ve got to do better about getting out and explaining non-emotionally all of these things that we deal with.
Our safety record in the industry is a perfect example. We’re producing more coal than we’ve ever produced. The safety record statistically continues to improve almost every year. Obviously we had a blip this year in terms of fatalities, but last year we had the lowest number of fatalities ever. It was 16-19 depending on whose numbers you want to count. If you ask the average person out here on the street, how many fatalities you thought the coal mining industry had in America in 2009, I guarantee you they wouldn’t say 16.
Rick Nida: manager, external communication corporate, Alpha Natural Resources
Last year, if you look at incident rates, which are the way you look across industries, coal mining fell between being a bank teller and being a retail clerk.
Quillen: … Take the Gulf situation. When we have a mining accident … it’s just on and on and on. … But the fatalities they had on that platform haven’t gotten nearly the exposure. In fact, the day that Upper Big Branch happened, I think a skating rink fell over in Europe with like 300 people killed. That was in the news one day.
We’ve asked professionals what is it about our industry that we stay in the news on this negative end? They say it’s the shark theory. And we say help me out here, “What’s the shark theory?” Basically if there’s a shark attack anywhere in the world, you read about it because people are fascinated with it. And their explanation is our industry has that fascination to people who don’t know anything about it — that they continue to ask why you actually would go under a mountain and start taking something out over the top of your head, and why would you work in that environment?
So it’s just something we have to accept. But if it’s going to be that way, then we’ve got to be communicative. We have issues. We have to deal with them, whether it’s environmental or safety. But we also have a lot of positives, and the biggest positive we’ve got is our people.
VB: One question about surface mining. Would the chances of major fatalities in that be much lower than underground mining?
Quillen: Well, if you go back over some period of time, they were [lower] because underground was more dangerous. But I think because of the improvement in underground, they’re not that far apart right now. This year the biggest problem we’ve had on surface mining is big machines running over little machines. Again, something that’s in a pickup truck doesn’t need to get close to a 250-ton hauler. But they continue to do it. So obviously it is safer, no question.
It used to be much bigger than it is now, but I think it’s because underground has improved significantly … Of course, the interesting thing, we’re finally getting people to say surface mining instead of strip mining. We did learn that probably wasn’t the right connotation.
VB: Do you think all the publicity about strip mining and blowing off the tops of mountains and the visuals that puts in peoples’ minds has something to do with the way people respond?
Quillen: It does. We see actors and singers getting involved in this mountain top mining issue. And really I don’t mind at all and certainly appreciate somebody that has a viewpoint that they just don’t want to see a mountain — trees knocked down and explosives go off and take something out. We firmly believe and have a lot of physical evidence that we can show people that we can put these mountains back. We’re doing it every day. In fact, we have a helicopter tour that we take politicians and nature conservancy, a lot of people on, and we show them about six mountains out here, three of which have been mined and three haven’t, and they cannot tell the difference.
… To say that we’re destroying communities and destroying streams, that’s really not what’s happening. We’ve won a national award for building a manmade stream … And we’ve won the National Reclamation Award. We can do these things. It’s not going to be overnight. But my theory is we can keep the economic activity going in a region, can provide a lot of very high-paying jobs, and we can do it environmentally right, and we’re not destroying anybody. Mountain top mining — the thing that people don’t understand is — mountain top mining, if it’s a true mountain top mining site, where we put it back, for example, level, we have to have a permit that says we’re putting it back to a higher and better standard …
Their definition, to people who oppose it, is mountain top mining is anything that has excess spoil that goes in what we call a hollow. And their definition of a stream is anything that feeds a stream. There’s actually an ad out there that shows a mine somewhere dumping into a trout stream. I guarantee you that never happens. You go to jail if that happens. And if you do it, you can’t ever mine again in America. If you forfeit a bond, you lose that right to ever mine it again, so those things are not going on. But that’s the perception when people hear that we’re burying streams … That’s not what’s going on. But they have better sound bytes than we do …
Technically, things have gotten much better than they’ve ever been. What you never hear in the mountain top mining argument is basically the guy that owns that land complaining. that’s missed by all the media … If this is so bad, why is the guy letting them do it? They want us to leave it more level than it is, because even as we’re putting it back into timber, they can harvest it and get so much more productivity off of it. You’re not going to hear somebody that’s letting you mine it say, “Oh, they’re just destroying it,” because it goes back more productive. But we don’t win the PR battle.