Witnesses for the United Mine Workers of America union are wrong in claiming that Patriot Coal can emerge from Chapter 11 bankruptcy protection without slashing UMWA benefits like it wants to, said consultant Seth Schwartz.
Rebuttal testimony from Schwartz, president of consulting firm Energy Ventures Analysis, was filed by Patriot Coal on April 23 at the U.S. Bankruptcy Court for the Eastern District of Missouri. Patriot, a major coal producer that has been in Chapter 11 protection since last July, is trying to convince the court to let it cut UMWA benefits as part of a yet-to-be-unveiled reorganization plan. The benefit cuts issue is due for an April 29 hearing.
The following is a summary of Schwartz’s response to UMWA witnesses who say this drastic benefit cutting isn’t needed:
- The coal market price forecasts used by Patriot in its Business Plan are reasonable and, if anything, are more optimistic than current futures market prices and recent coal market price forecasts, Schwartz said. The UMWA’s conclusion that Patriot’s revenues would be significantly higher if it had used other third-party price forecasts is flawed due to a major mistake in excluding production taxes from Patriot’s sales revenues in its Business Plan, he added.
- A UMWA witness claims that the recent recovery of natural gas futures prices supports a more positive outlook for thermal coal market prices. “However, the recent recovery has been for short-term natural gas prices, due to cold weather, while long-term prices for natural gas have not increased,” Schwartz wrote. “A more relevant measure of the outlook for future coal prices comes from the coal futures market itself and coal company stock prices, both of which have fallen since the beginning of 2013 while short-term gas prices have increased.”
- The union asserts that Patriot’s UMWA-represented mines have labor productivity better than average in their coal regions and have labor costs lower than Patriot’s non-union mines. The UMWA witness made numerous errors in his analysis and is wrong on both counts, Schwartz said. “Despite the fact that Patriot has far superior mining conditions at its UMWA-represented mines (thicker coal seams for deep mines and lower strip ratios for surface mines), Patriot’s UMWA-represented mines have lower productivity than its competitors in the region and higher labor costs than at Patriot’s non-union mines. These problems can only be explained by the high hourly wage and benefit costs and the restrictive work rules in the UMWA labor contracts, which Patriot is trying to modify in this proceeding.”
Schwartz: Various tax bites need to be figured into sales prices
On the sale price issue, there is a major error in the UMWA calculations because the sales price for Patriot’s coal includes taxes, as explicitly shown in the Business Plan, Schwartz wrote. The taxes which were excluded from the UMWA calculation of Patriot’s sales price are:
- the Federal Black Lung Tax, which is equal to $1.10 per ton for deep mines and $0.55 per ton for surface mines;
- the Federal Reclamation Fee, which is equal to $0.12 per ton for deep mines and $0.28 per ton for surface mines;
- the State of West Virginia workers compensation tax, which is equal to $0.56 per ton;
- the State of West Virginia special reclamation tax, which is equal to $0.299 per ton;
- the State of West Virginia severance tax, which is equal to 5.0% of the gross sales price; and
- the Commonwealth of Kentucky severance tax, which is equal to 4.5% of the gross sales price.
“These taxes are paid by Patriot and included in the coal sales price,” Schwartz explained. “The coal market prices quoted on the NYMEX futures exchange and the coal market price forecasts of my company and other forecasters—including SNL Energy and Wood Mackenzie, the services relied on by Mr. [Srinivas] Akunuri—all include these taxes levied on coal production in the market price of coal. Thus, the most elementary reason that Mr. Akunuri finds Patriot’s coal prices used in the business plan to be ‘understated’ is that he has made a mistake in calculating these prices, rather than use the prices provided by Patriot.”
Schwartz: Gas prices aren’t showing much in the way of good news
The increase in natural gas prices cited by Akunuri and UMWA witness Michael Buckner is only an increase in the spot price for natural gas, which was unusually depressed during 2012 because of the extremely mild winter weather, Schwartz wrote. The indicator of the long-term future market for thermal coal is the long-term futures price for natural gas, not the spot price.
While the spot price has increased from its extreme lows of early 2012, the long-term futures price has declined. For example, when spot gas prices were at their low point at the beginning of April 2012, the long-term price average for calendar year 2017 was $4.77/mmBtu, the most recent futures price (April 17, 2013) for the same year has fallen to $4.55/mmBtu. Thus, the long-term fundamentals for coal competing with gas have not improved; if anything they have gotten worse, he added. While the power market will continue to use lower-cost thermal coals, such as high-sulfur coals from Northern Appalachia and the Illinois Basin, the high-cost Central Appalachia mines will continue to be uneconomic compared to generation from natural gas, he said.
“While Mr. Buckner cites statements by executives of other metallurgical coal producers (Alpha Natural Resources, Arch Coal, James River Coal and Walter Energy) in February and March 2013 that the world coal market shows signs of improvement, public investors obviously do not agree that their companies’ future prospects have improved,” Schwartz said. “From February 1, 2013 through April 19, 2013, the common stock prices of these four companies have declined by 19%, 32%, 44% and 53%, respectively.”
Notable is that those four coal companies, plus other publicly-traded coal producers, are not going to be real happy with Schwartz’s statement and might be looking to make their own rebuttals. They have cited, as the UMWA indicated, stronger met coal and natural gas prices as positive signs in the early stages of 2013.