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Blackjewel Bankruptcy Could Set Off Ripple Effects For Freight Rail

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Blackjewel Bankruptcy Could Set Off Ripple Effects For Freight Rail

Going on 16 hours here in Cumberland. Overnight these guys got a megaphone, about 10 pizzas, and some "big boy juice". The #blackjewel coal train still hasn't left. pic.twitter.com/cZ9hsV1RDH

— Sydney Boles (@sydneyboles) July 30, 2019

The bankruptcy of private coal company Blackjewel could result in ripple effects across the freight rail industry. 

There was an immediate impact. On July 29, frustrated coal miners began blocking a CSX (NYSE: CSX) train in response to Blackjewel's stalled mine operations and weeks without pay. 

However, Blackjewel's bankruptcy also reminded the broader industrial sector of the vulnerability of U.S. coal production overall, particularly so for western U.S. coal production. That's because Blackjewel not only owns Central Appalachian mines but two of the biggest mines in the Powder River Basin (PRB). As a result, one lingering question will be how and if western rail movements will be affected by a possible slow decline in western coal production, just as CSX and Norfolk Southern (NYSE: NSC) were affected by declines in Appalachian coal production. 

Blackjewel, which has assets in Wyoming and the Central Appalachian coal-producing states of Kentucky and West Virginia, declared Chapter 11 bankruptcy on July 1, according to filings submitted to the U.S. Bankruptcy Court for the Southern District of West Virginia. 

As a result of the bankruptcy, Blackjewel's mines abruptly closed, and there are reports that some workers have gone without pay for weeks. In response, on July 29, a number of miners in Harlan County, Kentucky, where some of Blackjewel's mines are located, began blocking a CSX train carrying coal from continuing on its route. The miners said they were not moving until they got paid by Blackjewel.

Late on July 31, the miners agreed to allow CSX retrieve its locomotives while leaving the coal cars on the tracks. But the miners' protest is still ongoing.

CSX said, "Following productive discussions with local stakeholders, the demonstrators agreed to briefly withdraw, allowing a CSX crew to safely retrieve two locomotives from the blocked coal train so that we could continue serving other customers. We continue to monitor the situation and are hopeful that a quick resolution can be reached."

Blackjewel's parent company, West Virginia-based Revelation Energy, did not respond to a request for comment. But state and local leaders have been voicing their support of the miners.

"I fully support the miners. Blackjewel failed to pay them for weeks of hard work and the way they filed for bankruptcy prevents miners from accessing their 401Ks, making it even harder for them to feed their families during this trying time," said Kentucky Attorney General Andy Beshear. 

While the miners' plight in Kentucky has garnered national media attention in recent days, other miners in other states who were also employed by Blackjewel are facing similar questions about their job prospects. In addition to Blackjewel's bankruptcy, parent Revelation Energy also declared bankruptcy on July 1. Revelation Energy was the sixth-largest U.S. coal producer in 2017, with output of 37.8 million short tons, according to the U.S. Energy Information Administration.

Blackjewel and the Powder River Basin

Blackjewel's bankruptcy also resulted in the closure of two of its mines in Wyoming, the Belle Ayr mine and the Eagle Butte mine. These two mines, located in the PRB, are among the largest coal-producing mines nationally. The Eagle Butte mine ranked fourth among the top producing U.S. coal mines in 2017, with output at nearly 17.3 million short tons, according to the EIA. The Belle Ayr mine ranked sixth in 2017 and produced 15.8 million short tons. 

"Diana and I were devastated to learn about the Eagle Butte and Belle Ayr mines' layoffs. We send our heartfelt sympathies to everyone impacted by this horrible news. This kind of unexpected, mass layoff does not benefit anyone. It immediately affects our families, friends and neighbors in very real ways. It ripples through our communities, our state and our economy," said U.S. Senator Mike Enzi (R-Wyoming) on July 2. 

Although the Wyoming mines remain closed, they could potentially reopen because the bankruptcy court has agreed to allow the mines to be sold. Tennessee-based Contura Energy is a potential buyer for the Eagle Butte and Belle Ayr mines, as well as a metallurgical coal mine in Fayette County, West Virginia, Contura said on July 25.

"Contura's divestment of these PRB assets over a year and a half ago was a strategic decision to focus on our met[allurgical]-heavy eastern asset base, and while that remains our strategic focus, our considerations changed when Blackjewel declared bankruptcy," said Andy Eidson, interim co-chief executive officer of Contura Energy. "Absent another qualified purchaser for the assets, we have determined that the most prudent path forward is to reacquire these mines to reestablish operations, resume safe and responsible coal production, and bring hundreds of miners back to work."

The Eagle Butte and Belle Ayr mines served the domestic and international coal markets, according to Javelin Global Commodities, a company that had formed a sales and marketing joint venture with Blackjewel. The joint venture exported PRB coal out of the Gulf Coast, according to Javelin's website. Javelin was unavailable for comment about the bankruptcy.

Union Pacific (NYSE: UNP) and BNSF (NYSE: BRK) handle coal from the Eagle Butte and Belle Ayr mines. Union Pacific was unavailable for comment by press time on Blackjewel's bankruptcy, while BNSF declined to comment.

As U.S. coal production dwindles, what does that mean for freight rail?

Although the Eagle Butte and Belle Ayr mines could potentially reopen in the coming weeks, the bankruptcy of Blackjewel and the May 2019 Chapter 11 bankruptcy of western coal producer Cloud Peak Energy are reminders that coal production in the western U.S. is not immune to the overall systemic decline in U.S. coal production and consumption.

"Over the past several months, Cloud Peak Energy has thoroughly evaluated strategic alternatives to address the challenging market conditions in our industry. We believe, at this time, that a sale process in Chapter 11 will provide the best opportunity to maximize value for Cloud Peak Energy," Colin Marshall, the company's chief executive officer, said in May. 

Indeed, U.S. coal production has fallen from 1.15 billion short tons in 2007 to 774.6 million short tons in 2017, according to the EIA. U.S. coal production peaked at 1.17 billion short tons in 2008, but it has been declining since then despite an uptick in 2014.

In the EIA's latest Short-Term Energy Outlook released on July 9, it forecasted U.S. coal production to fall by 72 million short tons, or 9 percent, in 2019 to 684 million short tons, which would be the first time U.S. production would be less than 700 million short tons in more than 40 years.

Near-term signals also affirm coal's systemic decline. U.S. coal exports have been falling as Europe switches to natural gas. Meanwhile, U.S. carloads of coal are down 6 percent year-to-date compared to the period in 2018, according to the Association of American Railroads. U.S. coal carloads totaled 2.3 million carloads for the week ending July 27.

U.S. coal production has been declining over the last several years, in large part because power companies have been opting to use more natural gas and less coal to help produce electricity. 

Appalachian coal could not compete with cheap natural gas prices, and as a result, coal production has fallen in states such as Kentucky, Virginia and West Virginia, while the freight railroads serving those companies, CSX and NSC have been evaluating shedding portions of their network that had run mostly coal trains. 

Coal produced in the Illinois Basin and the Powder River Basin hasn't been as affected, in part because the coal coming from those mines in the western U.S. generally costs less. Coal produced in the western states also has a lower heating value.

But that dynamic could be changing. Cheap natural gas from Texas and the push to use more renewable energy sources are starting to displace coal at more utilities in the Midwest and in western states. 

While Appalachian coal production is expected to fall by 7 percent this year on lower export demand, coal production in the interior U.S. is projected to fall 6 percent and western coal production is anticipated to fall 12 percent because of lower domestic consumption, according to the EIA's Short-Term Energy Outlook. 

Source: Energy Information Administration

The EIA also reported in a July 1 quarterly coal outlook that western coal production fell 8.8 percent, to 94.5 million short tons in the first quarter of 2019 compared with 103.7 million short tons in the same period in 2018. Of that, PRB production fell 12.9 percent to 70.4 million short tons from 80.8 million short tons. 

Source: Energy Information Administration

FreightWaves Market Voices expert Jim Blaze talked about a projected decline in PRB production in June.

"Here is a closer look at the PRB coal market. Approximately 130 power stations in the U.S. bought PRB coal in 2018 – from just 16 PRB mines. A decade earlier that customer base was about 200 users, spread over 23 states. That's a significant decline of about 35 percent," Blaze said in June. "Failure to find new markets will likely result in  a slow reduction towards 300 million or fewer tons mined annually in the coming five years."

Coal companies are responding to coal's decline by consolidating operations. In June, major U.S. coal producers Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) said they were combining their PRB and Colorado assets as a means to shore up their operations amidst challenging headwinds.

"This combination is aimed at unlocking extraordinary synergies and creating exceptional value for customers and shareholders, by strengthening the competitiveness of coal against natural gas and renewables," BTU chief executive officer Glenn Kellow said during his company's second quarter earnings call on July 31.

If mines close and operations consolidate in the western U.S. as a result, one ongoing question is whether the freight trains serving the western coal mines will find themselves facing the same situation CSX and NSC faced when mines in central Appalachia shut down. In recent years, CSX and NSC have divested or continue to evaluate some of the track and rail assets that served primarily coal mines and coal preparation plants.

Some eastern lines are now possible "stranded assets" because tonnage on coal-served lines fell with the drop of coal, making those lines less valuable on a revenue per ton mile basis, Blaze told FreightWaves. 

"I'd expect a future sell-off of some of these Class I rail company lines to short line railroads," he said.

The eastern railroads also have been monitoring Appalachian coal production for two decades, and they have been seeking alternatives to compensate for the impending lost revenue from coal, Blaze said. 

Meanwhile, the stranded assets in the western U.S. could be the lines running east and west, Blaze said. Potential coal exports are facing local opposition in the Pacific Northwest, while the decline in U.S. coal-fired generation could soften western coal volumes heading eastward via Chicago, he said.  

"There are really some really interesting things that are occurring, but it's going to be different by geography. Stranded assets could occur in some lanes but not in all of them," Blaze said.

The other kind of stranded assets, according to Blaze, are locomotives and coal gondolas and coal open top hoppers.

How the decline in coal production in the western U.S. will play out for freight rail movements in the western U.S. could take years to discern. 

But in the near-term, UNP said earlier this year that it expects coal to see the same challenges in 2019 as it has seen in previous years. 

"We expect coal to experience continued headwinds throughout 2019," Kenny Rocker, UNP's senior vice president for sales and marketing, said during UNP's first quarter earnings call in January 2019.

A quarter later, the company reported that its coal and coke volume was down by 7 percent in the second quarter of 2019, driven by the ongoing headwinds of contract changes and the retirement of coal-fired units at power plants. Coal exports were also lower because of softer market conditions.

Image sourced from Pixabay

Posted-In: bankruptcy Freight Freightwaves Logistics Railroads Industry Supply ChainNews General

 

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