Executive builds a global coal leader based on a culture of safety
- November 30, 2011
The call to Mike Quillen’s home came late in the afternoon on April 5, 2010. He had just pulled in the driveway from work when his wife called him to the phone. “It’s Don Blankenship,” she said. Quillen, chairman of Alpha Natural Resources Inc. in Abingdon, had known Blankenship, then CEO and chairman of Richmond-based Massey Energy Co., for years.
“Have you heard what happened?” Blankenship asked.
“We had an explosion at Upper Big Branch, and we need your rescue teams.”
“When you get that call, “ Quillen says in recalling the conversation, “you don’t ask a lot of questions. You just say, ‘Where’s the location?’”
Within the hour, five of Alpha’s rescue teams were headed to the Upper Big Branch mine in Montcoal, W.Va. Sadly, the search for survivors proved fruitless. Twenty-nine coal miners died, and two suffered injuries in the catastrophic blast — the worst U.S. mining disaster in 40 years. Quillen and Alpha CEO Kevin Crutchfield visited their rescue teams at the mine. “We were there when they brought the last of the bodies out,” says Quillen. “It’s not something you easily forget.”
Typically, the image associated with Appalachian coal mining has been of a dirty, dangerous business. Upper Big Branch is a stark reminder of what can go wrong. The mine remains closed as federal regulators continue to investigate ventilation systems and other factors that may have contributed to the lethal blast. A final report, from the U.S. Mine Safety and Health Administration (MSHA), is expected by the end of the year.
Quillen says coal mining doesn’t have to be a dangerous occupation. The executive, who started at the bottom working coal, has created a business model that gives coal miners a voice in reporting unsafe conditions. Alpha’s approach? Safety translates into strong employee morale, low turnover and profits. “They don’t work for us; we work for them,” Quillen likes to say of miners.
The lack of an “us vs. them” mentality between operator and coal miner is the culture Alpha is incubating at Massey’s former mines, which it absorbed in a $7.1 billion takeover on June 1.
Safety is so important, says Quillen, that he keeps a reminder close by. After nearly four decades in the business, “There have been seven fatalities at companies where I was in charge as the operating officer,” he confides. “I get frustrated because some of them are so senseless … I keep a list in my wallet of the date, name and incident as a reminder of how important safety is.”
Quillen, the Virginia Business 2011 Business Person of the Year, champions the coal mining industry and its significance to Southwest Virginia as an economic lifeline. In 2002 the Gate City native started a company with seven people. Through acquisitions it has grown into a global industry leader. After the Massey deal, Alpha more than doubled its work force to 14,000, 2,150 of whom work in Virginia. It operates 34 mines and five coal preparation plants in the state.
The Massey deal transformed Alpha — already America’s third largest coal producer — into the world’s fifth-largest supplier. The combination also made Alpha a global player in high-demand metallurgical coal, a key ingredient used in making steel. Still, taking over Massey was viewed as a bold and risky move. While St. Louis-based Arch Coal also made a bid, other coal operators shied away from taking on Massey’s dismal safety record.
In a preliminary report on the Upper Big Branch accident, the MSHA noted that in 2009 it issued 515 citations and orders at the mine and another 124 in 2010.
An independent investigation, done at the request of Joe Manchin, then governor of West Virginia, found 64 safety violations at Upper Big Branch for ventilation problems alone in 2009. In that report issued in May, safety expert J. Davitt McAteer — a former top federal mine safety regulator — said that the explosion “could have been prevented” and termed it the result of “failures of basic safety systems.” He also faulted federal mine safety officials for not using their enforcement authority to rein in the mine’s safety problems. Massey contends that the explosion was caused by an unpreventable surge of natural gas and not a buildup of coal dust, a theory that contradicts the findings of federal regulators and the independent investigation.
McAteer also cited an American University study that showed Massey had one of the worst safety records in the industry, with a higher rate of fatalities than other coal operators. From 2000 to 2010, Massey piled up 62,923 violations, including 25,612 serious ones. During that time, MSHA proposed $49.9 million in fines — $15 million more than any other company — with many of them contested by Massey.
The change from Massey to Alpha has been embraced in West Virginia, a state known for its storied coal miners, and Blankenship’s home for many years. “Alpha is on the leading edge of the industry,” says Bill Raney, president of the West Virginia Coal Association. “Mike Quillen is a major part of that, having established the theme and the basis for how it’s going forward, and Kevin Crutchfield is clearly following that lead.” Raney adds that Alpha has “a credible and full of integrity approach to the way they mine and the treatment of people. It’s gotten a positive response here all around.”
The Massey deal
Besides Massey’s notorious safety record, there also was the liability of legal exposure, with ongoing criminal and civil investigations surrounding the mine accident. On the plus side of the ledger were Massey’s rich assets in metallurgical coal. “Met” coal fetches top dollar on the market — as much as $255 a ton recently — because of its demand in developing countries such as China and India. That price compares with $10 to $12 per ton for thermal coal used in the production of electricity.
Massey and Alpha had explored some form of alliance in 2006 and 2007. After Upper Big Branch, a serious bid for a buyout began when Quillen called on Blankenship at his Kentucky office about three weeks after the explosion. According to Securities and Exchange Commission filings, Quillen began by expressing Alpha’s sympathies about the mine accident. After discussing some coal industry issues, Quillen came to the point: A merger would be best for everyone involved. Blankenship balked, saying a deal wouldn’t be good for his shareholders because of the depressed price of Massey shares since the accident.
The deal didn’t begin to take final shape until after Blankenship retired, under pressure, as CEO in December 2010. By then, increased regulatory enforcement in Massey mines had reduced productivity, and the company was looking at a net loss of $166.6 million for the year.
“It’s something Mike and I talked about for a long time, along with our board. Can we handle this?” recalls Crutchfield. “But at the end of the day — and this cuts to Mike’s strength — we think it’s going to be a story about people, and our ability to cause people to see things our way.”
Crutchfield is referring to Alpha’s “Running Right” program. Started in 2004, the program was designed to improve Alpha’s record on mine fatalities, which at that time was about average for the industry. The program allows miners to have a say on safety by submitting anonymous observation cards to point out unsafe conditions or practices. Cards are picked up daily in the mines. About 15,000 cards are turned in each month for review by the company’s safety staff, and potential safety problems are discussed during meetings at the mine. “Most accidents are behavior based,” says Quillen. “What we teach is ‘Look out for one another. Think before you act.’”
During a recent conference call with analysts Crutchfield began the discussion the way Alpha always does, with an update on safety performance, which, he said, “has never been more important as we integrate with Massey.” Alpha has invested 55,000 hours training Massey’s hourly employees in the nuances of Running Right. “Probably the most rewarding thing we have seen so far is how receptive 7,300 people have been to this Running Right system,” he told analysts.
In 2009, Alpha achieved one of its best safety records. Its operations received more than 40 state and federal safety awards. In addition, many affiliates completed the year without a lost-time accident. For 2010, the company’s total reportable incident rate was below the industry average as well. However, one affiliate, Kingston Mining Inc., had a fatality on Oct. 11, 2010, when a 56-year-old roof-bolting machine operator sustained fatal injuries from a roof fall in an underground mine in West Virginia. The accident provoked two citations from the MSHA for failure to follow an approved roof plan. Alpha also reported a fatality this year when a 26-year-old sustained fatal head injuries in July at a former Massey mine in Kentucky while hauling supplies. In that case, no citations were issued.
Alpha’s goal — of reducing injuries to zero — seems ambitious considering that coal miners work with and around heavy, dangerous machinery in a dark environment, hundreds of feet below the earth. So far this year, 18 miners have died in fatal accidents in the U.S., down from 48 in 2010, which included the 29 deaths at Upper Big Branch.
Still, Crutchfield asserts that “It’s not an unreasonable expectation for a man to come to work in a safe environment, make a living and return home safely to his family.” Alpha’s No. 1 goal, he adds, is “to do our level best to understand what happened [at Upper Big Branch] so we can ensure it doesn’t happen again.” Alpha has hired its own experts and is doing its own analysis of what caused the explosion. “Nor,” he says, “will we ever produce another pound from that portal sight. We just don’t think it would be appropriate for the obvious reasons.”
Aside from the massive undertaking of safety training, Crutchfield says the overall merger is going “reasonably well. … I know this will sound a little hokey,” he continues, “but a part of the thinking in acquiring Massey is that the industry needed Alpha to do this. There’s the whole shareholder strategic piece, but there’s also the human side, the need for hope and redemption. What we have found is that there are a great number of high-quality people [at Massey] who want to do the right thing and just needed the leadership to reinforce them that the right thing is expected …”
The merger turned Alpha into the country’s largest producer of met coal. On the world stage, it now ranks as the third-largest producer of met. With 150 mines, it has the second largest coal reserve in the U.S. (5 billion tons), behind Peabody Energy. “The Massey deal puts them in rarified air in the U.S.,” notes Brian Gamble, an analyst who covers the coal industry for Simmons & Co. International in Houston. Yet how the merger plays out, he adds, will depend on demand in the global met market and how Alpha manages its lower-price, thermal coal assets in a climate of increased federal regulation at home.
After suffering a deflating second-quarter loss of $56.4 million, Alpha was in much better shape by the third quarter. The first full quarter of results from the former Massey mines and higher prices for met coal more than doubled its profit to $66 million. Revenue also more than doubled to $2.3 billion. The company said it spent more than $1 billion in the quarter on merger-related costs, including $10.6 million on charges related to the Upper Big Branch explosion.
World rankings must be heady stuff for a company started with a handful of people who brought lawn chairs and card tables to work. Quillen says that in the beginning money was so tight that Alpha once tacked a bed sheet on the wall to serve as a projection screen while pitching a local bank for a loan.
Last month, Alpha moved into a new “green” corporate headquarters. The $20 million, 130,000-square-foot building has a green rooftop and a light-harvesting system that automatically decreases artificial lighting on sunny days. How far Alpha has come in nine years surprises even Quillen. “It’s been a team effort since day one,” he says, and “a lot of luck and timing.” But even he admits, “I never would have dreamed that Massey, a company that had been around for nearly 100 years, would no longer exist and that Alpha would still be here.”
Quillen, 62, didn’t start out in coal mining. After graduating from Virginia Tech in 1970 with a degree in civil engineering, he worked a short time for Southern Railway before returning to Tech for a master’s degree. Then he went to work for the Virginia Department of Transportation.
He got his start in the coal industry in 1974 when his father, H.B. “Jack” Quillen, and a couple of business partners hired him as the foreman/engineer at a small surface mine in Gate City. After nine months, his father — who had worked previously in insurance — sold his interest. But Quillen stayed in the business, rising to leadership positions at several coal companies, including Pittston Coal Co. and Amvest Corp.
By 2002, Quillen saw an opportunity to buy the coal operations of some mines owned by Pittston (now The Brink’s Co.), but needed investment money. A private-equity company, First Reserve Corp. in Greenwich, Conn., agreed to put up $85 million. That backing also helped pay for other acquisitions, including the mining operations of American Metals and Coal International and El Paso Corp. As these core assets were being put in place, Quillen formed a team of executives, and ANR was born.
Alpha went public in 2005 and four years later merged with Baltimore-based Foundation Coal, another First Reserve-financed company. That deal put Alpha on the map as a major U.S. producer, with nearly 6,000 workers and annual revenues of more than $2 billion. When the Foundation acquisition closed on July 31, 2009, Quillen moved up to chairman, and Crutchfield, who had been president, became CEO.
Throughout Alpha’s rapid growth, Quillen fought investors to keep the company in Southwest Virginia. In fact, Alpha is the only Fortune 500 company in Virginia west of Roanoke. Originally based in Abingdon, Alpha moved a few miles away last month to the Sugar Hollow Business Complex in Bristol, Va.
Locals revere Quillen’s dedication to Southwest Virginia. “For years, the Appalachian model was people who made their money here typically went elsewhere. Michael has made a point of keeping the business in the region, keeping the money in the region and improving the community. It has really inspired other businesses,” says Richard Rose, artistic director for the Barter Theatre in Abingdon, where Quillen chairs an $8 million capital campaign.
Quillen isn’t one to play the role of wealthy coal baron. Crutchfield has known Quillen since 1986 and has worked under him at three companies. In all that time, “Mike never forgot his roots, never forgot who signs his paycheck — the coal miner. It didn’t matter if we were standing in a room in New York with hedge-fund billionaires. Mike never played to that. He never tried to be anything but himself.”
According to Crutchfield, success also hasn’t changed Quillen’s frugality. “One night — and this was in the early days — we were going to Connecticut for a board meeting. We pull up to the hotel and it was raining cats and dogs. A sign out front said they would valet park for $5. Mike said, ‘$5 is ridiculous. We won’t get that wet.’ So we parked in the rain and walked.”
Quillen’s greatest strength, Crutchfield says, is his people skills. “He has the innate ability to pull out the best in people under any set of circumstances. What he does well is manage to people’s strengths. Mike doesn’t focus on weaknesses.”
Political leaders are tapping his executive skills. Virginia Gov. Bob McDonnell recently appointed Quillen chairman of the Virginia Port Authority after replacing every member except him on the 11-person board. The governor also named Quillen to the board of visitors at Virginia Tech where earlier this year Quillen and his family pledged $3 million for a new engineering building.
“Mike gets people to work,” says McDonnell. “He has a great sense of humor, but when it comes to making decisions, he’s no nonsense and all business. He knows how to get things done.”
Jerry Kilgore, a former Virginia attorney general now with Richmond-based McGuireWoods Consulting, grew up in Gate City. His family and the Quillens have known each other for years, and attended the same Gate City United Methodist Church. “He’s known in Southwest Virginia as the great turnaround expert,” Kilgore says. “He knows who to hire, who to trust and, more importantly, how to make a deal. There is that hard-nose business side, but he’s such a nice guy that a lot of people underestimate him, and that works to his advantage in a lot of ways.”
Recently remarried, Quillen and his wife, Debbie, have 12 grandchildren between them. Besides the time he spends on boards, including the board of directors of Martin Marietta Materials, the big family keeps him busy. “There’s a ball game, a dance recital, something nearly every night,” he says.
His oldest son, Chris, works for Alpha, purchasing coal produced by others for blending. With a second generation of his family involved in coal, Quillen considers the future and recognizes challenges ahead. “There’s the issue with coal being a fossil fuel and the reality of where the environment is heading,” he says, namely toward more renewable forms of energy.
Coal is increasingly under attack because of carbon emissions that many scientists claim contribute to global warming. Nonetheless, it continues to fuel about 45 percent of this country’s and 41 percent of the world’s electricity. “My philosophy is that technology will take care of a lot of things going forward,” says Quillen. He’s referring to clean-coal technologies, which are making progress, though slowly, in terms of commercialization.
Alpha and other coal companies also face growing criticism and, in some cases, lawsuits from environmental groups for surface mining that destroys mountaintops. Quillen says Alpha restores the land, and that the new, flat terrain frequently leads to economic development that would not occur if the land remained hilly.
As for a legacy, Quillen says he wants nothing more than the respect of the coal miners. “My real reward is having some small part in these guys having a good-paying job for 35 years and providing opportunities for their kids.”
About Alpha Natural Resources:
Location: Bristol, Va.
Market cap: $6.4 billion
Mines: 150 in Virginia, West Virginia, Kentucky, Pennsylvania and Wyoming
Annual coal production capacity: More than 120 million tons