Entrepreneurial Dominion

       Michael Quillen

Survivor

Mike Quillen emerged from a battered coal industry to forge Alpha Natural Resources, almost overnight, into Virginia's largest coal producer -- and one of its largest, most profitable companies.

It’s been a long time since it’s been any fun to play in the coal business. But for Michael Quillen, president of Alpha Natural Resources, it’s been worth the wait. After gutting out decades of union conflicts, environmental crack-downs, cut-throat competition and a prolonged downturn in prices that would make a PC manufacturer blanch, Quillen today finds himself running one of only two billion-dollar companies based in Western Virginia.

Abingdon-based Alpha mines 22 million tons of central Appalachian coal, making it one of the top coal producers in the country. In the most recent quarter, the company generated $28 million in net income on $343 million in revenue, putting it on track to become the largest, most profitable company in Western Virginia -- surpassing even the K-Va-T Food Stores chain, which also happens to be located in Abingdon.

That's quite an accomplishment considering that only two years ago, Quillen was working with three or four other guys in an out-of-the-way office and negotiating the on-again, off-again deal with Pittston Corporation that would launch them on their way. "We did it all under the radar screen," he says. "We didn't create a lot of fanfare. We just slipped in here and created the company."

It pays to be smart, which Quillen definitely is: He’s one of the most tested, experienced coal mining executives in the United States today. But, as he readily acknowledges, it also pays to be lucky. When he was working on his transactions – acquiring a string of coal properties from Pittston, Coastal Coal, and American Metals and Coal in late 2002 and early 2003 – the coal industry hadn’t seen an “up” market since the early 1980s. Yet, shortly after Quillen took over properties containing some 600 million tons of coal leases and reserves, surging global demand and constricted supplies sent the price of the fuel soaring to levels not seen since the 1970s. Last quarter, Alpha’s year-to-year revenues leaped 40 percent – nine-tenths of which was due to price increases. “Luck and timing are much more rewarding than intelligence,” he quips.

Of course, as the truism goes, luck comes to those most prepared to take advantage of it. Quillen doesn’t claim that he forecast today’s price spike, but he was certain that the industry's fortunes had to change. The economic forces that had driven down the price of the fuel could not sustain themselves forever. The only question, he believed, was how long it would take for prices to rebound.

“The coal market has been seriously depressed since the early 1980s,” Quillen explains. “At no period over the last 15 to 20 years has anyone gotten a reasonable return on capital investment. People were surviving on cash flow.” Small companies couldn’t make it; the bigger companies were consolidating. Business had gotten so bad, he notes, that even banks and insurance companies were bailing out.

Several factors were working against Appalachian coal. Coal has been mined in Virginia for 120 years; all the thick, easily accessible seams have been worked out, leaving only hard-to-mine coal in thin seams or deep underground. The exploitation of western strip mines flooded the United States market with millions of tons of cheap tonnage. Natural gas, touted as the cleanest of all fuels, was inexpensive enough through the 1990s to grab major market share, while overseas, major customers deserted Central Appalachia in favor of aggressive competitors like Australia and China.

There’s no better time to buy, however, than when everyone else wants out. Quillen maintained faith that the market would turn. The mountains of Central Appalachia still hold some of the highest quality steam coal in the world -- high in BTUs, low in ash, low in sulfur – as well as the metallurgical coal best suited to make the coke used in steel. Moreover, demand for electricity was chugging relentlessly higher at the rate of two percent annually, year in, year out. No one is building more nuclear power plants to meet that demand, and severe constraints on North American natural gas production means gas prices will remain high. At some point, Quillen figured, power companies would have no choice but to burn more coal.

The catalyst came from China. The Chinese economy has been growing so rapidly that the government made a decision last fall to cancel all export permits for commodities such as coal. That left the Japanese, a major buyer, in a panic. The Australians, another major supplier, lacked the port capacity to ship any more, so the Japanese came shopping in the U.S. Soon, they were followed by the Koreans and Indians, who collectively took 10 million tons a year off the market. Then the U.S. utilities, who’d drawn down their stockpiles to record lows, felt compelled to jump in. “It’s kind of like the perfect storm,” Quillen says. “Everything’s lined up.”

Quillen got his start in the coal industry working for Humphreys Coal Co., in Wise County, a midsized company still in operation today. He then joined the Paramont Coal Co. as one of its early employees, and helped build it into the largest non-union coal operation in Virginia. During a series of bitter strikes by the United Mine Workers Association in the late 1970s and early 1980s, Paramont was on the receiving end of considerable threats and violence. Quillen roamed the mountains and hollows of Wise County with a semi-automatic rifle, for self defense, in the back of his four-wheel drive.

Eventually, Paramont was purchased by Pittston, at one time the dominant coal producer in Virginia, as its non-union operating arm. Quillen rose steadily to positions of increasing responsibility in the industry – serving most recently as COO of American Metals and Coal – but he always wanted to run a company according to his own vision of an employee-oriented enterprise.

A few years ago, Richmond-based Pittston (now Brink’s) made a strategic decision to exit the coal industry to focus on its security and air freight businesses. With the backing of a private equity firm that chipped in $75 million, Quillen purchased several Pittston properties, including its Virginia operations. He was exploring the potential to partner with Coastal Coal, which owned properties adjacent to Pittston when, as luck would have it, its parent company abruptly decided to unload its coal properties as well. After two rounds of bidding, Quillen snapped up those, too.

In the third of his whirl-wind deals, Quillen merged Alpha Natural Resources with the North American coal properties of his old employer, American Metal & Coal, in exchange for equity. Last November he capped off his acquisition binge with the purchase of Mears Energy in Pennsylvania. As prices climbed higher and profits started gushing in, Quillen sold $110 million in bonds, using the proceeds to pay off his short-term debt. “We have a very strong balance sheet right now,” he says.

Quillen’s priority now is to digest his rapid-fire acquisitions and build a strong enterprise. He’s still looking at potential acquisitions, but he has no desire to grow bigger for the sake of growing bigger. “Our desire is just to be profitable and safe,” he says. “We’re not going to go out and do stupid things just for growth. You don’t want to get enamored with yourself, or you’ll get a real education. The coal industry will eat your lunch quick.”

After years of disinvesting – Appalachian coal production actually declined from 280 million tons per year at one time to 220 million tons – economic conditions warrant an increase in investment for the first time in more than two decades. Quillen expects Alpha Natural Resources to commit $60 million to capital spending this year. Instead of leasing equipment, the company is confident enough to buy it outright.

Meanwhile, Alpha finds itself in the unusual position of actually hiring coal miners for a change. Thanks to phenomenal increases in productivity – the semiconductor industry has nothing over coal mining – the coal industry has been able to maintain production without hiring new miners for literally 20 years. In Virginia, while mine output has fallen by about one third since the peak, mining employment has plummeted from roughly 20,000 to only 5,000 today.

The labor supply is the main restriction on expansion right now. No one has been training new miners for years; the workforce averages 50 years old. “You can’t find a 35-year-old miner,” Quillen says. Alpha’s greatest challenge is hiring and training workers to accommodate higher production levels. The success of the company, he insists, rides on the backs of the miners. "The coal miners deserve all the credit. The rest of us are just here to support them and stay out of their way. They do the heavy lifting every day in tough conditions."

Fortunately, it shouldn’t be a problem finding good people. Mining jobs start at $50,000 a year – double the typical wages in most coalfield communities. The company put on a job fair in Castlewood not long ago and got 800 applicants. Even then, it takes two years to train a miner to work safely on his own, so Alpha won't be able to ramp up production very quickly.

Quillen, a native son who has long taken an interest in Southwest Virginia ’s economic development, is delighted to contribute to the region’s prosperity. Besides hiring miners, Alpha supports an administrative staff of 50 people in Abingdon, a small but historic town on the edges of Virginia’s coalfields.

Although Alpha has operations in five different states, he says, he was never in doubt where to locate the headquarters. “We love being in Virginia … Southwest Virginia is a great place to be.”

-- September 22, 2004

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