CURRENT ISSUE
| Cover Story |
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| Safety Still No. 1 |
| Cover Story | |
| By Brian Salgado | |
| Monday, 03 July 2006 | |
 As United Coal Co. returns to the mining industry after a seven-year absence, safety is still the top priority at its mines. “Those kinds of things are tough reminders of the dangers of the business,” Zervos adds. “We’re looking under every stone to find preventive measures and be proactive with the way we approach safety in our mines. These are reminders of how focused we need to be to work with our employees and to have continuous improvement in safety programs. We begin and end every meeting we have talking about safety. We celebrate and reward our successes, such as when one of our preparation plants goes two years without a single lost-time incident, and learn from the incidents that show us where our programs can and should be improved.” A focus on safety could be considered the one characteristic of United Coal that has not changed in its 36-year history. From an unorthodox start by an unexpected leader to a leap out of the coal industry altogether, United Coal has survived the ups and downs of coal mining through forward thinking and shrewd business tactics. A Unique Start Jim McGlothlin, then a young attorney based in Grundy, Va., started the company that became United Coal in February 1970 when he recognized a solid investment opportunity in coal mining in an odd place – on the courthouse steps. He happened upon an acquaintance who was trying to sell the assets of a small surface mining contractor in southern West Virginia. A quick look at the assets of the company being liquidated revealed to McGlothlin that the equipment value alone had to be worth his time in bidding something. As a lawyer, McGlothlin was aware that new federal mine safety legislation was slated to come into effect soon, and that an industry change could very well follow as smaller operators adjusted to the change and production decreased. Believing that higher coal prices would follow, McGlothlin had been looking for an entrée into the business, and the timing of his chance meeting seemed perfect. After reviewing the potential of this initial foray with Dennis Compton and Burton Fletcher, two coal operators he knew in Grundy, McGlothlin and his new partners took an option on the property. The trio immediately set out to find co-investors and looked close to home. Before long, McGlothlin’s father, Woodrow, and his first cousins, Nick and H.A. Street (also Jim’s law partners), had joined the initial three investors, as had Boyd Fowler, who was a McGlothlin relative with his own coal operations. For $100,000 (only $20,000 down), the company that later became United Coal got its start. The start of United Coal was inauspicious. The lawyer-turned-coal-operator got a glimpse of the labor unrest in West Virginia that was plaguing the industry. For four months, the new operators from Grundy couldn’t get anyone to show up for work. The group decided to close the operation and move the equipment closer to home in Buchanan County. Shortly thereafter, the new company acquired its first coal tipple and began to take off. A sales organization was formed in 1971 to market the company’s coal and that of other local operators, Virginia rail facilities were acquired and McGlothlin made a career change. The coal company that was now growing and changing rapidly needed full-time attention and McGlothlin traded his law practice to plunge headlong into an industry he has loved ever since. “The start was probably unorthodox by today’s standards,” says Brian Sullivan, senior vice president and general counsel of The United Co., the majority shareholder of United Coal. “At a time when the coal industry was not very robust, Jim and his partners took great financial risk in the belief that coal was poised to have a large part of the country’s growing energy needs.” From its early beginnings, the company reached the million-ton mark in 18 months, quite an achievement at a time when production efficiencies were no match for today’s standards. McGlothlin started quickly acquiring other coal companies and related businesses around southwest Virginia and eastern Kentucky while he saw the business changing. By late 1973, at the time of the country’s first energy crisis from the Arab oil embargo, the company had several operations in Buchanan County and was well positioned to take advantage of the 1970s coal boom. By early 1974, the company began to net more monthly profit than it had made in the entire previous year. Anticipating Change At an early stage of the company’s development, it showed the tendency to anticipate change needed to continue success. For instance, when United Coal struggled to get the supplies it needed, McGlothlin formed a supply company (now known as United Central Industrial Supply LLC, and no longer owned by McGlothlin and his partners) in 1974, a time when parts for mining equipment and general mine supplies were suddenly extremely scarce, and turned it into the largest mine supply wholesaler in the industry. “By becoming a distributor of supplies, United Coal could always warehouse enough supplies to meet the demand of its own company,” added Darrell Cole, current president of United Central. When the company experienced difficulty in hiring and training in a tightening labor market, it started its own company safety and training center in Grundy. It also opened its own laboratories at processing facilities before other companies followed suit, in order to cut down on analysis time. A research and development center was constructed so that the company could stay on the cutting edge of developments in coal-related technology, an issue that is today in the forefront of the nation’s energy policy. The early success begot more success, and McGlothin and his partners began an acquisition spree that saw the company grow to a powerhouse in central Appalachia. By 1976, the name United Coal Co. had been adopted to merge the interests that the original seven partners had in various coal-related businesses, and a coal brand was born. By May 1981, United Coal led coal exports at Hampton Roads – quite a first decade from its beginnings on the courthouse steps. The trend of diversification continued for United Coal as it moved into its second and third decades. When it became difficult to obtain roof control products, United Coal bought Birmingham Bolt Co., a steel company, by moving quickly to close the deal in fewer than 30 days. The acquisition was a step into the manufacturing sector for United Coal, and into a new business with operations in eight states. “One of Jim McGlothlin’s trademarks in the early days of his career was being able to move quickly,” Sullivan says. “Because he has a keen business mind and is very sharp-witted from a business perspective, his training allowed him to look at things quickly as a businessperson and the legal pitfalls. An ordinary businessperson turns the deal over to a lawyer to make it happen. But, if you have a businessperson as a lawyer, then it skips a step.” Nothing demonstrates this acumen more than United Coal’s acquisition of the Dal Tex property in Sharples, W.Va. in February 1978. On a hurried visit to Zapata Oil Co. in Houston, McGlothlin struck a deal in an afternoon to acquire coal property measuring more than 20,000 acres from the oil company that was losing money in the project. Confident that the property had untapped potential, McGlothlin and Street camped out in Zapata’s offices. The contract for the purchase of the property was drafted and signed that day, and the two waited for board approval and the money to be wired before they traveled home as the owners of the property. The Dal Tex property became a centerpiece for United Coal as the company eclipsed the production mark of 15 million tons in the 1980s. In the 1980s, when the coal industry began a decline, United Coal continued its diversification strategy. Recognizing that the name United Coal no longer fit a company whose holdings eventually included real estate, charter aircraft operations, electric co-generation facilities, manufacturing and financial services, the owners of United Coal formed The United Co. as the umbrella under which the diverse businesses would be housed. Into Oil and Gas The United Co., newly minted, set about entering the oil and gas business that was rising as coal prices began to sag. The acquisition of Star Oil and Gas Ltd., headquartered in Calgary, was an expansion into the Canadian oil patch in the late 1980s. In the United States, The United Co. formed a company that became known as United Resources, which is headquartered in Austin, Texas, and has oil and gas production in several of the state’s basins. The United Co. formed Scratch Golf Co., a golf course development and operating company that built and operated many well-known resort golf courses, such as the courses at The World Golf Village in St. Augustine, Fla. By 1992, McGlothlin had come to the realization that the coal industry in which he had grown in had changed fundamentally. Prices that had skyrocketed in the 1970s had rationalized. Larger producers were beginning to dominate the market and were taking advantage of changes in technology to add production, which put further price pressure on a fuel source that was competing with the seemingly abundant availability of oil and natural gas. In April 1992, United Coal sold the Dal Tex property to Ashland Coal (now known as Arch Coal Co.). That sale was followed several years later by United Coal’s departure from the operating side of the coal business. In July 1997, the stock of United Coal Company was sold to A.T. Massey Coal Co. (now known as Massey Energy). In the late 1990s, The United Co. redeployed the capital from the sale of the coal business primarily into its growing oil and gas businesses. At that time, McGlothlin saw some of the fundamentals that led him into the coal business in the first place. By 2000, the operations of Star Oil and Gas and United Resources had grown such that United Energy (the parent of both oil and gas producers), was one of the more recognized independent producers in North America. In 2002, at a time when natural gas prices were at historic lows and following the spectacular collapse of Enron, United Resources purchased more than $100 million of natural gas properties in south Texas. Eighteen months later, when those assets were in turn sold, United Resources more than doubled its money. The year 2004 saw yet another turn in the road for The United Co. After selling most of its domestic and foreign oil and gas assets, McGlothlin and Nick Street (the only other remaining partner of the original seven), were presented with an opportunity they never thought would come again – to get back into the coal business. By 2004, the same indicators that had led to the 1970s coal boom seemed to be lining up again. Domestic dependence on foreign oil was leading to rising gas prices. McGlothlin began to receive communications almost daily from old friends with ties to the industry. A Return to Coal In April 2004, The United Co. formally returned to the coal industry, this time as an investor in a turnaround of a coal company in Chapter 11 bankruptcy in eastern Kentucky. McGlothlin did not stand on the sidelines as a mere investor for long. By the end of 2004, United Coal Co. had been reformed, and two subsidiaries were in the beginning stages of operation – Sapphire Coal Co. in Letcher County, Ky., and Carter Roag Coal Co. in Randolph County, W.Va. There was only one problem. In 2004, having been out of the coal business for seven years, United Coal Co. was a brand name in search of the same sort of top-flight management team it had before. The company attracted several of its former key people to return, such as Dave Fortner, who had a key part in building the company’s operations in Virginia in the 1970s. Even so, United Coal had needs at many key positions. As it had many times before, fortune smiled upon United Coal. In early 2005, Zervos, who had formed Global Energy Management LLC to pursue coal mining acquisition opportunities in the Central Appalachian basin, and his team began to encounter United Coal repeatedly looking at the same acquisition opportunities. United Coal had the projects, capital and Zervos’ management team, including Ken McCoy (operations), Bill Wells (engineering and strategic planning), Bob McAtee (safety and human resources) and Ed Toppings (maintenance), giving the company all of the major management disciplines in one package. After looking at two projects together, in April 2005 Zervos and Global Energy Management came on board as the new management team of the reformed United Coal Co. The focus of the “new” United Coal is to identify high-quality, predominantly metallurgical coal reserves in the Central Appalachian basin. To that end, United Coal, with Zervos at the helm as president and CEO, is fast replicating its early success and employing many of the same ideals upon which the company was founded. Opportunism has been the watchword. Since Zervos, who has a 25-year track record in the industry, and his team have been on board, production has grown exponentially with the same focus on safety, hiring and training the best personnel in the industry. United Coal has had success in recruiting the best-in-class operators as subsidiary presidents and front-line supervisors. This is reflected in the company’s production growth and safety results. In 2006, United Coal expects production of 6.5 million clean tons, and will become a supplier of choice to consumers of metallurgical quality coal. The company also mines high-Btu steam coal that offers utilities an economical steam-generation fuel. “Our experience as a major U.S. exporter of metallurgical coal gives us a solid base with metallurgical coal consumers both domestically and worldwide,” sales Gary Chilcot, the company’s vice president of sales. “We understand their technical requirements and know the decision-makers who purchase our products.” It is its high-grade products that will separate United Coal from the competition in the long run, Zervos said. “Our biggest distinguishing factor is our market niche,” he says. “We have a portfolio made up of high-grade metallurgical coal. Our focus in the future will continue in this direction as well as on the higher-quality steam reserves. We focus heavily on our portfolio of low-volatile, mid-volatile and high-volatile metallurgical coal in the steel-making business. We’ve got a high-end product that fulfills our customers’ wishes.” After Zervos’ arrival at United Coal, the company again began on an acquisition trail. The last quarter of 2005 saw the closing of two major acquisitions: Pocahontas Coal Co. in Beckley, W.Va., and Wellmore Coal Co. in Bristol, Va. Between its four subsidiaries, Zervos says, United Coal now has 1,000 employees and a proven reserve base of approximately 200 million tons of coal. The four subsidiaries own and operate 27 mines and seven preparation plants. “We can be best categorized as a startup company because we’re really just over a year old,” Zervos says. “But we’re growing fast. Our production level is already at 6.5 million tons of coal, and we’ll be growing to 7.5 million tons by year-end at full capacity. We’re not in the top 20, but we’re just getting back into the business and aggressively looking for growth.” The Four Operations The purchase of the assets now known as Carter Roag Coal Co. closed in October 2004. After acquiring the company, which had several idled operations in Randolph County, W.Va., United Coal rehabilitated the Pleasant Hill Mine, improved the coal preparation plant at Star Bridge and reconstructed the short-line railroad on the property. Pleasant Hill had its first production in January 2005, and in December 2005, the company’s 1-A mine was opened and began production. Operating primarily in western Randolph County and eastern Upshur County, Carter Roag controls more than 50 million recoverable tons of high-volatile metallurgical coal reserves in the Sewell seam, according to United Coal. The Morgan Camp mine, located close to the rehabilitated Star Bridge preparation plant, is expected to begin production in the third quarter of this year. The annual production at Carter Roag from the Pleasant Hill, 1-A and Morgan Camp mines is expected to be approximately 1.5 million tons by 2007, United Coal says. A new, 500-ton-per-hour preparation plant is being constructed next to the existing Star Bridge preparation plant to increase throughput capacity. Carter Roag’s plans include the development of what is believed to be the largest, contiguous block of Sewell coal remaining in West Virginia in the next several years. Known as “Area F,” the project adjoins Sewell reserves currently mined from the Pleasant Hill Mine. The Area F expansion will include the development of a large shaft/slope underground mine complex using a combination of seven super-section and single continuous miner production units. A new preparation plant will be constructed, and the railroad facilities will receive a significant upgrade. “When completed, the Area F project will add more than 3 million annual clean tons of production at Carter Roag,” United Coal says. United Coal acquired the former assets of Golden Oak Mining and Cook & Sons Mining and renamed the operation Sapphire Coal Co. in December 2004. United Coal says Sapphire’s primary focus is the production of high-Btu coal from the eastern Kentucky strata, including the Hazard, Amburgy, Elkhorn and Whitesburg seams. Since United Coal bought Sapphire, the company says it has improved rapidly. “We have made major capital investments to improve its 1,100 tph preparation plant, including adding a fine coal circuit that has significantly increased productivity and recovery,” the company says. “The preparation plant is one of the largest and most efficient in eastern Kentucky.” Sapphire currently operates three underground mines, UZ, Sandlick II and Advantage, according to United Coal. Advantage is less than one mile from the prep plant and will ultimately have an overland belt from the mine to the prep plant to eliminate truck hauling from the mine. Sapphire’s Buck Creek surface mine yields a lower-sulfur product used to optimize Sapphire’s coal blend for traditional utility customers. “By standardizing mine suppliers, parts and inventories and focusing on cost containment, United Coal has reduced its per-ton costs and gained a new competitive advantage,” the company says. Sapphire is on track to produce more than 2 million clean tons annually in 2006 and at a rate exceeding 2.3 million tons in 2007, the company adds. United Coal added Pocahontas Coal Co. in November 2005 as its third operating subsidiary, which brought with it more than 60 million tons of premium low-volatile Pocahontas seam metallurgical reserves in Raleigh, W.Va. Pocahontas’ operations are located in southern Raleigh County in the communities of Killarney, Josephine, Lillybrook and Affinity. According to United Coal, Pocahontas has two active deep mines – Josephine Nos. 2 and 3 in the Pocahontas Nos. 2 and 3 seams – an active surface and highwall miner operation, a coal preparation plant and a rail loading facility in East Gulf, W.Va. Pocahontas increased production from the Josephine Nos. 2 and 3 mines and expanded both the existing highwall mining and contour surface operations in the upper Pocahontas and Beckley seams. The Affinity complex consists of an existing slope mine in the Pocahontas No. 3 mine, a coal preparation plant and a rail loading facility. “Although the Affinity complex is idle, Pocahontas has plans to reopen the complex, which has some of the best remaining Pocahontas No. 3 coal in southern West Virginia,” Zervos says. Also included in the Pocahontas Coal Co. project is a lease on a large virgin block of Sewell coal known as the Weirwood reserve, which the company says presents future development possibilities. “United Coal has favorable long-term price indications from domestic and foreign consumers for the low-volatile coal produced by Pocahontas and plans to capitalize on the opportunity to execute long-term commitments for a base load of this high-quality product,” notes sales head Gary Chilcot. Pocahontas Coal Co. expects to produce approximately 1.4 million clean tons in 2006 and between 1.75 million and 2 million clean tons in 2007 from existing operations. Additional capacity increases will be achieved via start-up of the Affinity complex. United Coal’s final acquisition came in January when it purchased The Rapoca Group and renamed it Wellmore Coal Co., a well-known name from United Coal’s past. Wellmore’s preparation plant and loadout facilities in Big Rock, Va., known as Wellmore Nos. 7 and 8, were originally built by United Coal. Wellmore No. 7 was, in fact, the first preparation plant United Coal built from the ground up in the mid-1970s. “Many of the Rapoca employees hired by Wellmore Coal after the acquisition of Rapoca are former United Coal employees who were welcomed back to the United Coal family,” notes McGlothlin. Wellmore’s reserves, which total more than 30 million recoverable tons, are primarily mid- to high-volatile and low-sulfur steam reserves in the Splashdam, Banner, Glamorgan, Jawbone and Hagy seams. Its deep and surface mining operations are located throughout Buchanan, Tazewell and Dickenson counties in Virginia, with additional reserves located in Pike County, Ky., and McDowell County, W.Va. Through company owned and contract operations, Wellmore operates 12 underground mines, four surface mines and three preparation plants and rail loading facilities. Zervos explains the reason for United Coal going home again to Buchanan County: “Wellmore’s Splashdam reserves are some of the most sought-after mid/high-volatile coal in the central Appalachian basin. Our sales team has a long and successful history of selling this coal to domestic and international customers.” United Coal sees great opportunity at Wellmore Coal Co. “We believe our familiarity in operating the original United Coal, combined with the discipline and expertise of the ‘new’ United Coal will lead to Wellmore re-emerging as a dominant supplier of mid/high-volatile metallurgical coal,” Zervos says. Wellmore Coal plans to produce more than 2 million clean tons in 2006 and is pursuing development of additional reserves and production capacity. Growing Pains Zervos says the toughest part of re-entering the coal market has been hiring qualified management and experienced coal miners. With energy sources in such high demand, including coal, recruiting employees has been extremely difficult because of lingering effects of the '80s and '90s. “The '80s and '90s were tough in the coal business,” Zervos says. “With all the mining schools slowing down and only a few grads coming out of engineering schools, a few schools dropped their programs completely. We lost a generation of miners with the depressed business. When it rebounded, the industry wasn’t prepared. So we’re having to train all over and trying to attract students into college mining programs again.” Even with labor shortages, this is a good time to be in the energy market, according to Zervos, pointing to the fact that coal is the No. 1 player in the U.S. utility sector, representing 51 percent of electricity-generating fuels. Zervos also says coal has been helped by worldwide economic growth and the demand for steel, the manufacture of which employs coking coals. “The growth in the economy and inflation has benefited coal tremendously,” Zervos says. “There is excitement with coal in general. We are very proud of the top-shelf team we’ve been able to put together in the past year. “At all levels, we have leaders with 20-plus-year histories in the business as safe and efficient operations people. Putting that team together in a short period has been one of our greatest accomplishments. Our team is poised to and capable of doing more.” |
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