Consultant paints grim picture for Utah coal, unionized coal liabilities

A consultant hired by PacifiCorpSeth Schwartz of Energy Ventures Analysis, told the Idaho Public Utilities Commission that the Utah coal industry faces a number of issues and likely a continued shrinkage of production, making PacifiCorp’s new deal to buy coal from Bowie Resource Partners LLC a good one.

PacifiCorp on Dec. 15 filed for approval from the Idaho commission of several things, including the shutdown of its Deer Creek longwall mine in Utah in 2015, a coal supply deal with Bowie to replace that coal out of Bowie’s Utah mines, and the sale of the shut Trail Mountain deep mine in Utah to Bowie. PacifiCorp cited deteriorating coal quality at Deer Creek and ever-higher United Mine Workers of America-related costs for the workforce at Deer Creek as primary reasons to shut the mine and seek replacement coal.

In supplemental testimony filed with the Idaho commission on Dec. 15, Schwartz described the recent erosion of the Utah coal market. “Historically, the Utah coal market has had limited supply relative to the potential demand. There was a small number of economic coal mines and a large potential market, including local power plants as well as shipments to power plants in the Eastern U.S. and exports to overseas markets. The major change in recent years has been the decline in demand for Utah coal. Utah coal is no longer demanded in Eastern markets and several local power plants have announced plans to close in the near future. As a result, there is now excess supply of coal on the Utah market, and the concern of potential shortages and price spikes in the commercial market is much less than in the past.”

The fall in demand for Utah coal is due to lower demand for coal in the Eastern U.S. and the fact that Utah coal has become less competitive over time with other sources of similar quality coal (bituminous, low-sulfur) delivered to Eastern customers, such as Rockies coal from the states of Colorado and Montana as well as coal from Appalachia, he added. Sales of Utah coal to Eastern power plants have fallen from 3.8 million tons in 2008 to near zero (5,152 tons) in 2013, Schwartz noted.

“The major market for Utah coal is at local power plants and industrial customers,” he wrote. “In 2013, sales of Utah coal to power plants in Utah, Nevada and California were 13.2 million tons, down from 18.2 million tons in 2008. PacifiCorp purchased 7.3 million tons for its Utah plants in 2013. The other major markets are the large Intermountain Power Project (‘IPP’) power plant in Utah, the North Valmy and Reid Gardner power plants in Nevada, several cogeneration plants in California, and a number of industrial customers in Utah, Nevada, California, and Idaho. In 2013, Utah coal sales to these other power plants were about 5.9 million tons (including 5.2 million to IPA) and sales to industrial consumers were 2.6 million tons. In addition, some Utah coal (about 0.7 million tons in 2013) is exported to overseas markets through ports in California.

“The demand for Utah coal will decline at other local power plants because most of these plants have announced dates when they will close. The Reid Gardner power plant will close units 1-3 at the end of 2014 and the remaining unit at the end of 2017. PacifiCorp will close the Carbon power plant in 2015. NV Energy‘s most recent Integrated Resource Plan, filed in 2013, reflects retirement dates for the North Valmy units in 2021 and 2025. All of the plants in California have announced they will stop burning coal by the end of 2015. Finally, IPP has announced it will stop burning coal after its contracts with the California participants expire in 2027. At that point PacifiCorp is likely to be the only consumer of Utah coal in power plants, along with the industrial customers and the export market.”

Wrote Schwartz about current Utah coal mines: “The Emery and Horizon mines have been closed for economic reasons. Production has declined at the large Sufco, Dugout Canyon, West Ridge and Deer Creek mines due to depletion of reserves and more difficult mining conditions. Two new mines have been developed to partially replace the decline from existing mines: the Lila Canyon mine and the Coal Hollow mine in southern Utah (which is the only surface mine in Utah).

“The supply of Utah coal will continue to decline. Two of the large remaining coal mines, West Ridge and Deer Creek, are facing depletion and closure in the near future. West Ridge is expected to close in 2016. Deer Creek would deplete all of its remaining reserves in 2019, but is being closed earlier. Arch Coal, the former owner of Canyon Fuels (which was sold to Bowie Resources in 2013), reported limited reserve life at both the Dugout Canyon and Skyline mines, although these lives could be extended with new coal leases. While Murray Energy is planning to replace the depleting West Ridge mine with the Lila Canyon mine, the closure of the Deer Creek mine will significantly reduce the supply of Utah coal.”

Schwartz said about PacifiiCorp’s two main coal plants in Utah: “The Hunter and Huntington plants can only deliver coal by truck and are not located near a railroad. The economics of coal transportation make truck delivery over long distances expensive, and the economic sources of coal for these plants will likely be limited to the five nearby coal mines which can deliver coal by truck within a radius of less than 70 miles. These mines are the Sufco, Skyline and Dugout Canyon mines owned by Bowie Resources, the Castle Valley mine owned by Rhino Energy, and the Lila Canyon mine owned by Murray Energy (which is replacing the depleting West Ridge mine). These mines are likely to produce 13-15 million tons per year through 2018, with about half of the coal supplying the PacifiCorp power plants.

“The supply of Utah coal is uncertain after 2019. Based upon the current assigned reserves, the Skyline and Dugout Canyon mines would likely be closed in this time period. While Bowie has announced plans to lease additional coal reserves and maintain production, these plans could change based upon market conditions and the ability to obtain these coal leases. It is possible that Utah coal supply could be significantly smaller in this time period.

“Our forecast of Utah coal prices is for coal with a heat content of 11,800 Btu per pound loaded FOB rail in the area of Price, Utah. … We estimate current market prices to be $37-$38 per ton. We project that these prices will increase to over $42 per ton by 2016 due to closures of Utah coal mines (Deer Creek and West Ridge). We project that Utah coal prices will continue to rise over time, reaching $46 per ton by 2020 and reaching $50 per ton by 2024.

“After the closure of the Deer Creek mine, there will be only three producers of Utah coal: Bowie Resources, Murray Energy and Rhino Energy. Without the Deer Creek mine, PacifiCorp would not be able to supply its coal demand without purchasing large volumes from Bowie. This would give Bowie the ability to price discriminate and charge PacifiCorp a higher price than the prevailing market price for Utah coal to other customers. By committing all of its coal requirements at the Huntington plant under a new long-term contract with Bowie at fixed prices PacifiCorp will continue to have competition among the remaining Utah coal producers to supply the Hunter plant, preventing Bowie from being able to exercise market power and charge higher prices.”

Schwartz says the UMWA retiree system under severe financial strain

Schwartz said about new strains on the UMWA worker system, which offer a good reason for PacifiCorp to reduce its exposure now: “Several large UMWA mines have already closed in 2014 in Alabama, Virginia and West Virginia. Producers have provided WARN Acts notices at a number of other mines and these are likely to close in the near future. Weak prices for metallurgical coal have jeopardized the viability of several other large mines which have disproportionately more employees, due to difficult mining conditions. Further, the remaining mines will become much less economic when the large increase in contributions to the 1974 Pension Trust starts in 2017.

“I have calculated the signatory coal production by parent company in 2013, which is presented in Exhibit No. 14. The largest coal producer was Consol Energy (its subsidiaries Consolidation Coal and McElroy Coal). Consol sold these mines in late 2013 to Murray Energy, the parent company of Ohio Valley Resources, another signatory producer. The combination makes Murray Energy the largest signatory producer, with over 45 percent of all of the 2013 production, all from six highly-productive mines. Excluding Energy West, there were only six other signatory coal producers in 2013.

“The second-largest signatory producer was Patriot Coal (including its subsidiaries Eastern Associated Coal, Highland Mining and others). Patriot filed for Chapter 11 bankruptcy in 2012, citing high operating costs and long-term liabilities, especially associated with the [National Bituminous Coal Wage Agreement]. Patriot emerged from Chapter 11 in late 2013, but has continued to lose money. In 2014, Patriot has closed or idled two of its remaining UMWA mines and given WARN notice at another mine. In its bankruptcy, Patriot announced that it had reached an agreement with the UMWA to limit its future contributions, although the terms were not made public.

“The next-largest signatory coal producers were subsidiaries of Walter Energy and Alpha Natural Resources. ln 2014, Walter closed the large North River UMWA mine [in Alabama]. Walter is highly-leveraged due to a large acquisition of Western Coal in 2011 at the peak of the metallurgical coal market and is now in precarious financial condition. Walter’s debt has been trading at about 50 percent of its face value and its common stock has fallen to only five percent of its peak value in 2011. Alpha also incurred a large debt in a 2011 acquisition of Massey Energy and its common stock is also just five percent of its peak value in 2011. Alpha has announced the closure of its remaining signatory Virginia mines at Dickenson Russell Coal Company and has stopped development at its large Emerald mine [in Pennsylvania].

“The next-largest producer, Cliffs Natural Resources, has two UMWA mines, both producing metallurgical coal, and has reported losses at these mines since they were purchased in 2007. Cliffs has recently announced its intention to sell these mines and exit the coal business. Finally, Mechel idled all of the UMWA mines at its Bluestone Coal subsidiary this year. Mechel has also announced its intention to sell its coal mines and its credit rating has fallen to a point where bankruptcy is likely.

“The UMWA is actively lobbying Congress to provide federal funding for the 1974 Pension Trust. This does not appear likely given the budget deficit and is not an event the Company can count on. The value of the Trust’s investment assets could increase faster than projected by the actuaries, however, this is unlikely given the current deficit which is depleting the assets.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.