Former IEEFA Transition Policy Analyst Karl Cates has been an editor for Bloomberg LP, an editor for the New York Times, and a consultant to the Treasury Department-sanctioned community development financial institution (CDFI) industry.
Navajo Transitional Energy Company (NTEC) appeared to have bought into a house of cards last year when it acquired three struggling coal mines in the Powder River Basin (PRB) of Montana and Wyoming.
Now comes word that the very foundation upon which the company was created seven years ago, and which was used as a springboard to purchase the PRB mines, will be gone in less than 10 years.
Rather than diversifying, NTEC has doubled down on coal
NTEC, as the company is known, was founded in 2013 for the sole purpose of acquiring Navajo Mine, formerly owned by BHP Billiton, which sold it to the Navajo-owned company just as U.S. coal markets began to go south. But rather than diversifying, NTEC doubled down, buying a 7 percent stake in the Four Corners power plant outside Farmington, N.M., which gets its coal from the nearby NTEC-owned Navajo Mine.
Last week, utility Arizona Public Service (APS), the main owner of Four Corners, announced that it will end all coal-fired generation by 2031 and that it will shut down Four Corners. Navajo Mine—whose sole customer is Four Corners—will no longer be needed, either, leaving NTEC bereft of its core business. It is entirely possible, too, that Four Corners will fade away even sooner than planned, as APS builds new sources of generation.
THE APS SHIFT TOWARD CLEANER GENERATION RESOURCES IS PART OF A NATIONAL TREND away from coal-fired electricity and one that is being acutely felt in the Western U.S.—nowhere more painfully than in the Southwest, where four other plants either will close soon or have closed recently:
Unresolved issues include cleanup bonding, payment of taxes and royalties and obtaining leases and mining permits
When NTEC executives moved to buy the Montana-Wyoming Powder River Basin coal mines out of bankruptcy this past August, they argued vaguely that the acquisition would bring in revenue and provide long-term stability. Instead, many months later, the deal appears as tenuous as ever, mired in uncertainty over unresolved issues that include cleanup bonding, payment for taxes and royalties owed local and state governments, and obtaining leases and mining permits.
This uncertainty has taken a toll, no doubt, on any good will for NTEC in Montana and Wyoming, where both the state and local communities are highly dependent on coal royalties and taxes for their budgets, not to mention the hundreds of jobs at stake. Concern has been growing over the company’s commitment to following through on its financial promises, leading to prominent negative headlines and discussions about tightening state policies for coal companies.
BACK IN NAVAJO NATION, SENTIMENT IS GROWING AGAINST NTEC over the company’s lack of consultation with tribal leaders and the potential size of the financial risk to the Nation, so much so that tribal leaders have formally distanced themselves from NTEC.
NTEC executives continue to keep company operations and decision-making shrouded from Navajo Nation scrutiny, including details surrounding the business case for taking over the PRB mines, company financial performance, and what—if any—contingencies are in place should the PRB mines fail.
All of this is happening against a backdrop of fast declining demand for coal.
Competitors have yet to report on fourth-quarter earnings and activity, but expectations are that Peabody Energy and Arch Coal—two of the biggest producers—will report losses, and Moody’s Investors Service reports that fourth-quarter coalfield rail activity, a leading indicator, was down. CSX, notably, saw a 14 percent drop in fourth-quarter coal activity and expects coal shipments to be down by 20 percent in 2020. In addition, Moody’s, which in December reiterated its negative outlook for thermal coal producers, says that it expects EBITDA (earnings before interest taxes, depreciation and amortization) to fall by one-third this year.
Coal’s share of U.S. power generation could go as low 8% by 2030 compared to over 40% ten years ago
Further, analysts at Moody’s and Morgan Stanley recently projected that coal’s share of U.S. power generation could go as low as 11 percent or 8 percent, respectively, by 2030. A generation ago, coal accounted for more than 60 percent of U.S. electricity generation, and as recently as 2010 topped 40 percent. And the news gets worse, as prices for gas—driven lower by the fracking boom—crossed through a milestone recently, dropping to less than $2/MMBtu, adding “another nail in the coffin going forward because very few coal plants are going to be directly competitive at $2 [per MMBtu] natural gas,” a Wood Mackenzie energy analyst said this week.
This year promises consolidations across the industry and oversupply corrections that will prove to be “an inflection point for domestic thermal coal producers,” the CEO of Alliance Resource Partners, among the better-run coal companies in the U.S., said during an earnings call just this week.
None of these circumstances favor NTEC.
MEANTIME, THE PRICE OF RENEWABLE ENERGY IS DROPPING, TOO, AND THAT SECTOR IS GAINING MARKET SHARE along a second front that, alongside gas, is systematically destroying the U.S. coal industry. Renewables have another advantage going for them: They will outlast gas-fired generation, which has been on the upswing for a generation but that is now showing weakness of its own.
Aside from its missteps on coal, NTEC has fundamentally failed to live up to its name. Were it being run as a truly “transitional” company, it would be investing in the future rather than the past. Arizona Public Service, Salt River Project, and Tri-State Generation and Transmission Association, to cite three prominent regional companies, have very recently made transformational decisions to embrace renewables and to abandon coal. By contrast, executives at NTEC ignore the world around them with an all-or-nothing bet on coal that could very well leave it without any money to invest in modernization and might just sink the company completely.
Karl Cates ([email protected]) is an IEEFA energy transition policy analyst.
Seth Feaster ([email protected]) is an IEEFA data analyst.