4. Coal and Alternative Energy Coal Despite the lengthy coal strike (see the box entitled 104 Reduced exports also damaged the financial performance of U.S. coal operations. During 1993, U.S. coal exports fell 27 percent, to 74.5 million tons, largely due to reduced exports to Canada, France, Denmark, and the Netherlands. 105 Steam coal exports to Canada were reduced and less steam and metallurgical coal was exported to the European countries. Sluggish European economies and competition with Australia, South Africa, and Poland (the other major coal exporting countries), and competition with subsidized European coal producers, all contributed to the reduction in U.S. coal exports to Europe during 1993.106 Lower U.S. exports were also related to the settlement of the British coal strike of 1992. Continued pressure on coal producers from falling coal prices led to further consolidation of U.S. coal operations through mergers, exit, and diminished activity. For example, Cyprus Minerals and Amax Coal In 1993, the FRS reporting group reduced its presence in U.S. coal production for the fifth consecutive year. In 1989, before the exit of FRS companies began, the largest FRS coal producers were DuPont's Consolidation Coal, ARCO, Exxon, Shell Oil, and Sun; at that time, the FRS companies accounted for 29 percent of U.S. coal production. By 1993 the leading FRS coal companies were ARCO, Exxon, Kerr-McGee, RTZ Kennecott Corporation's Nerco,110 and Chevron. The FRS share of U.S. coal production had fallen to 21 percent. Over this period, six FRS companies exited U.S. coal production-BP America, Burlington Resources, Mobil, Occidental Petroleum, Shell Oil, and Sun-and DuPont transferred its Consolidation Coal unit to Consol Energy, a 50-50 joint venture between DuPont and RWE AG of Germany, reducing the number of FRS coal producers to 11. The exit of the former FRS coal producers largely accounted for the 22-percent decline in the FRS companies' U.S. coal production in 1993 (Table 23). 101 Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), p. 225. 102 Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), p. 211. 103 Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), pp. 211, 219. 104 Energy Information Administration, Quarterly Coal Report October-December 1993, (Washington, DC, May 1994), P. 2. 105 Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), p. 217. 106 Energy Information Administration, Annual Energy Review 1993, DOE/EIA-0384(93) (Washington, DC, July 1994), p. 208. 107 Cyprus Amax Minerals Company, 1993 Annual Report, p. 9. 108 Occidental Petroleum Company, Annual Report 1993, p. 2; Sun Company, Annual Report 1993, p. 26; and USX, The 1993 U.S. Steel Group Annual Report, pp. 58, 64, and 67. 109 Energy Information Administration, Performance Profiles of Major Energy Producers 1992, DOE/EIA-0206(92) (Washington, DC, January 1994), p. 55. 110Nerco became an FRS company during the 1992 reporting year and was acquired by RTZ in 1993 (RTZ Corporation, 1993 Annual Report, p. 16). Major Work Stoppage During 1993 The most salient feature of the U.S. coal industry during 1993 was the prolonged United Mine Workers of America (UMWA) strike against the Bituminous Coal Operators Association (BCOA). The contract between the UMWA and the BCOA expired on February 2, 1993. Negotiations, which had begun prior to the expiration of the contract, were then temporarily ended and the UMWA selectively struck Peabody Coal operations. Within 30 days of the expiration of the contract, the strike was extended to include Consol, Zeigler Coal Holding Company, Arch Mineral, R&P, and Freeman Energy, which are other Eastern coal producers and BCOA members. Approximately 1 month into the strike, the two sides agreed to a 60-day extension (until May 3, 1993) of the expired contract. However, the extension of the contract also expired without a settlement being reached. Before the strike was finally settled on December 14, 1993, it had affected coal producers in seven states and approximately 17,500 miners and their families.b,c,d The principal union concerns were job security for its members and "double breasting" by the BCOA members. "Double breasting" is the term given to the creation of non-union affiliate companies by unionized companies. The union demanded that its members who had been laid off by the unionized companies be hired by the non-union affiliate companies when openings occurred. The agreement reached by the two sides requires the BCOA companies to hire three union miners for every five new employees hired at their non-union operations. Additionally, miners would receive a pay increase of $1.30 per hour and the companies would be allowed more flexibility in determining work schedules. aThe Coal Journal, April 1993, p. 28. "Energy Information Administration, U.S. Energy Industry Financial Developments 1993 Fourth Quarter, DOE/EIA0543(93/4Q) (Washington, DC, April 1994), p. 11. "The Coal Journal, December 1993, p. 2. dThe Coal Journal, January 1994, p. 1. *The Coal Journal, January 1994, p. 1, and Energy Information Administration, Quarterly Coal Report October-December 1993, DOE/EIA-0121(93/4Q) (Washington, DC, May 1994), p. 9. The Coal Journal, January 1994, p. 2. Remaining FRS coal operators continue to actively seek and implement cost-reducing measures and technology.111 For example, Coastal Corporation's coal segment had its tenth consecutive year of operating profit in 1993, indicating success in reducing its costs in the face of years of declining coal prices.112 Exxon took steps during the year to further streamline its U.S. coal operations, realizing significant cost reductions through" ... new and ongoing programs in the highly competitive [coal industry] environment."113 However, Exxon found that its lower operating expenses were more than offset by lower coal prices, resulting in lower earnings in 1993 than in 1992.114 Despite the exit by some FRS companies, other FRS 111Kerr-McGee notes that its productivity was at an all-time high during 1993, contributing to its 5-percent increase in operating profit (Kerr-McGee, 1993 Annual Report, p. 3). 112Coastal Corporation, 1993 Annual Report, p. 23. 113 Exxon Corporation, 1993 Annual Report, p. 20. 114Exxon Corporation, 1993 Annual Report, p. F4. 115Kerr-McGee Corporation, 1993 Annual Report, pp. 3, 18. Table 23. Coal Financial and Operating Indicators for the FRS Companies, 1992-1993 aUnusual items totaled $91 million (pretax) in charges and $927 million (after tax) in charges in 1992, and $65 million (pretax) in charges and $176 million (after tax) in gains in 1993. Sources: Energy Information Administration, Form EIA-28, and company annual reports for unusual items. and announced its intention to expand its low-sulfur coal production.116 Coal market developments appeared to have an adverse effect on the FRS companies' financial results. Coal revenues fell by more than $700 million dollars and operating income (excluding unusual items) was down 44 percent from the levels of 1992 (Table 23). However, more than 80 percent of the reduction in revenues and 45 percent of the decline in income were due to the exit of former FRS coal producers. The recent retrenchments complicate the interpretation of aggregate FRS coal data for 1992 and 1993. Table 24 presents financial and operating information for a consistent group of domestically-oriented FRS coal producers. Average coal prices received by this group fell 93 cents per ton, slightly more than the 77-cent decline in the national average price of coal. Operating costs of the group fell slightly more than did prices, reflecting the emphasis on cost cutting and better utilization of production capacity, which rose from 81 percent to 84 percent. Examples of operating cost reduction measures and technology recently implemented include: conveyor construction and upgrading, 116Coastal Corporation, 1993 Annual Report, pp. 23-24. Despite their modest financial improvement, the FRS companies with ongoing coal operations made sizable reductions in their capital expenditures for U.S. coal, down 34 percent. Most of the reduction in capital expenditures was made by Chevron and Kerr-McGee. Chevron's reduction followed the placement of a longwall mining system at its York Canyon, New Mexico mine and the development of the Sebree, Kentucky underground mine, both completed during 1992.118 Kerr-McGee completed the installation of a second longwall mining system in the Galatia, Illinois mine, No. 5 unit, during 1992 and planned a temporary shutdown, beginning in 1994, of its higher sulfur Galatia No. 6 unit.119,120 117 Chevron, Supplement to the Chevron Corporation 1992 Annual Report, p. 49; Coastal Corporation, Annual Report 1993, pp. 23-24; Exxon, 1993 Annual Report, p. 20; Kerr-McGee, Annual Report 1992, p. 16; Kerr-McGee, Annual Report 1993, pp. 3 and 17; and RTZ Corporation, 1993 Annual Report, p. 16. 118 Chevron Corporation, Supplement to the 1991 Annual Report, p. 49. 119Higher sulfur coal can be burned only with emission allowances or after blending with low-sulfur coal. 120Kerr-McGee Corporation, Annual Report 1992, p. 18, and Kerr-McGee Corporation, Annual Report 1993, pp. 17-18. Table 24. Financial and Operating Items in Coal for a Consistent Group of FRS Companies, 1992-1993 aData are for FRS coal producers reporting production and revenues in both 1991 and 1992. Alternative Energy In 1993, the FRS companies' alternative energy investments were largely in tar sands operations, cogeneration, and geothermal steam production. These lines of activity accounted for 84 percent of alternative energy revenues in 1993. Solar power manufacturing was of lesser importance. Sun and Exxon are largely responsible for FRS investment in oil production from Canadian tar sands. Three companies (Coastal, Texaco, and Enron) accounted for a large share of FRS company investment in cogeneration facilities while Unocal primarily accounted for the FRS companies' investment in geothermal production. Lower prices for oil derived from tar sands reduced Sun's revenue and income in 1993.121 Overall, total revenue for tar sands declined 12 percent compared to 1992. Exxon reported tar sands production of 44,000 barrels per day in 1993, while Sun reported production of 61,000 barrels per day in 1993. In 1992, Sun's tar sands operations were impaired by a fire.122 Enron, a new FRS respondent in 1992, added significantly to the FRS companies' involvement in 121 Sun Company, 1993 Annual Report, p. 33. cogeneration facilities, making cogeneration the second largest FRS investment in alternative energy in 1993. Cogeneration, which is the simultaneous production of steam and electricity from a single fuel source, is one of the largest growth markets for natural gas. In 1993, a combined cycle power plant, in which Enron holds a 50-percent ownership interest, became operational in Milford, Massachusetts. In addition to Enron's cogeneration investments in the United States, Enron has three cogeneration plants in various stages of construction in Guatemala and the Philippines. 123 In 1993, Enron's 50-percent owned combined cycle facility in Teesside, England became operational. Coastal, another major cogeneration investor, has ownership interests in four cogeneration operations in the United States and is in the early stages of developing a gasfired cogeneration plant in Gorzow, Poland, which will have a capacity of 48 megawatts. 124 Additionally, Texaco has ownership interest in nine cogeneration facilities in the United States with a combined capacity of 1,057 megawatts. 125 Unocal, the world's largest producer of geothermal power, has U.S. operations concentrated in California, foreign operations in the Philippines, and a development project in Indonesia. In 1993, Unocal's earnings 122 Exxon Corporation, 1993 Annual Report, p. F27, and Sun Company, 1993 Annual Report, p. 33. 123 Enron Corporation, 1993 Securities and Exchange Commission Form 10-K, P. 6. 124The Coastal Corporation, 1992 Securities and Exchange Commission Form 10-K, p. 22. 125 Texaco, Inc., 1993 Financial and Operational Supplement, p. 36. included a $19-million gain from the sale of geothermal Commitments to solar energy by the FRS companies have been reduced in recent years. In 1990, ARCO sold off its solar power subsidiary to Siemens AG of Germany leaving only Amoco and Mobil as the remaining two FRS companies with solar power manufacturing facilities. 127 However, in November 1993, Mobil shut down its 19-year old solar energy program partly due to the expectations of poor prospects for growth in utilities' demand for solar energy facilities.128 In August 1994, Mobil sold its solar operation to ASE Americas,129 another German-based company, leaving Amoco, the only U.S.-based oil company invested in solar energy. Some FRS companies have investment interests in reformulated fuels market and continued investments in coal gasification projects. For example, Kerr-McGee has operations in renewable fuels, such as ethanol, at its plant in Corpus Christi, Texas.130 Texaco has The combination of lower oil prices and the retrenchments in alternative energy in 1993 led to 11-percent declines in both revenues and operating expenses from 1992. The net effect was a slight decline in operating income (Table 25). However, led by Enron's $151million investment in its Teesside facility, the FRS companies' 1993 capital expenditures were up 67 percent from the prior year. Also, Unocal reported that its capital expenditures for geothermal operations rose to $53 million in 1993 from $37 million in 1992, due in part to its geothermal developments in Indonesia, which are expected to be in operation in 1994.1 Table 25. Revenues, Income, and Investment in Other Energy for FRS Companies, 1992-1993 (Million Dollars) 134 "Additions to net property, plant, and equipment and advances to unconsolidated subsidiaries. Source: Energy Information Administration, Form EIA-28. 126Unocal Corporation, 1993 Annual Report, p. 23. 127 The Wall Street Journal, March 27, 1991, p. A5. 128 Mobil, News Release, November 4, 1993, p. 1, and Oil and Gas Journal, November 15, 1993, P. 31. 129 "ASE, a solar energy company newly formed from a merger of two former solar energy companies, RWE, a subsidiary of Nukem, and Deutsch, a subsidiary of Daimler Benz, intends to expand solar activities considerably over the next decade. Sources: The Washington Post, August 3, 1994, p. F2., and Power Europe, August 12, 1994, Energy Section. 130Kerr-McGee Corporation, 1991 Annual Report, p. 25, and 1993 Securities and Exchange Commission Form 10-K, p. 21. 131Texaco, Inc., 1993 Financial and Operational Supplement, p. 36. 132Sun Company, 1993 Annual Report, p. 20. 133 Mobil, News Release, March 3, 1994, p. 1. 134Unocal Corporation, 1993 Annual Report, p. 24. |