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Upper Midwest Coal Deliveries Up; Rail Issues Hit PRB Especially Hard


By Charlotte Cox and Darren Epps, SNL Energy 

Powder River Basin (PRB) coal deliveries in the upper Midwest declined during the first three months of the year compared to the previous two years despite frigid temperatures, illustrating railroad transportation difficulties and prompting questions about the impact on future coal pricing. SNL Energy analyzed coal deliveries to Iowa, Michigan, Minnesota, North Dakota, South Dakota, and Wisconsin, six states impacted by rail issues stemming from a harsh winter and a boom in other businesses, including crude shipments.

coal deliveriesCoal delivery issues, particularly on BNSF Railway Co., weighed on the bottom line of PRB coal producers, including Cloud Peak Energy and Arch Coal in the first quarter, and limited spot coal purchases by utilities still waiting on their contracted shipments.

The issue is not completely resolved. Dairyland Power Cooperative, forced to truck coal during the winter from a Minnesota utility to its John P. Madgett coal-fired plant in Alma, Wisconsin, due to slowness on BNSF's rail network, is still experiencing some difficulties. "We are finding that rail delivery is still unpredictable," Dairyland spokeswoman Katie Thomson said June 12, noting that the utility is no longer hauling coal by truck.

Rail issues in the upper Midwest during the periods of high demand, driven by the cold winter, forced some generators to eat up their coal stockpiles, spend more to truck in coal, and even curtail coal usage. In the first quarter of 2014, net generation by coal-fired units in the upper Midwest was up almost 7%, or 3,267 GWh, over the year-ago quarter, and up almost 15%, or 6,679 GWh, compared to the first quarter of 2012.

Meanwhile, deliveries to coal plants in the upper Midwest from all coal regions were up more than 2%, or 606,963 tons, compared to the year-ago quarter, and down roughly 7%, or more than 2.1 million tons, from the 2012 first quarter. PRB coal was hit particularly hard, with a decline of more than 1%, or 302,192 tons, compared to the year-ago quarter and a drop of almost 12%, or 2.7 million tons, compared to the 2012 first quarter.

The impact on pricing is unclear. For the week ended June 5, the 8,800 Btu/lb PRB product edged 0.2% higher on the week to $13.03/ton, continuing a slow but steady climb. Some analysts have speculated that pricing is not moving substantially higher due to rail issues and ample supply.

BNSF has worked to improve service ahead of summer, as evidenced by increases in the railroad's weekly coal carloads. In a June 11 note following a meeting with Peabody management, Sterne Agee & Leach Inc. analyst Michael Dudas said "railroad confidence has improved somewhat" and added that he expected utilities to become more active buyers when they became more confident in rail service.

Michigan had the largest percentage decrease in coal deliveries from all regions year-over-year in the first quarter of 2014, with a decline of more than 4%, or 203,052 tons, while PRB coal deliveries to generators within the state declined more than 6%, or 249,977 tons. Compared to the first quarter of 2012, coal deliveries from all regions were down nearly 18%, or 972,381 tons, and PRB coal deliveries were correspondingly down almost 18%, or 828,854 tons. Meanwhile, net generation by coal-fired units in the state was up almost 4%, or 421 GWh, compared to the year-ago quarter, and increased more than 18%, or 1,888 GWh, compared to the first quarter of 2012.

With a decline of roughly 4%, or 194,630 tons, Iowa had the second-largest percentage drop in coal deliveries from all regions year-over-year in the first quarter of 2014. PRB took that hit especially hard, with deliveries to the state declining almost 5%, or 213,742 tons, during that same period.

Coal deliveries from all regions were down almost 28%, or 1.75 million tons, compared to the first quarter of 2012, while PRB saw a decline of more than 28%, or 1.78 million tons. However, net generation in the state by coal units increased almost 9%, or 678 GWh, compared to the first quarter of 2013, and increased just under 1%, or 52 GWh, compared to the first quarter of 2012.

According to Iowa-based electric utility MidAmerican Energy's Form 10-K filed March 3, BNSF delivers coal directly to MidAmerican's Walter Scott plant and to an interchange point with Canadian Pacific Railway Co. for short-haul delivery to the Louisa and Riverside plants. Both BNSF and MidAmerican are subsidiaries of Warren Buffett's Berkshire Hathaway.

According to Iowa-based electric utility MidAmerican Energy's Form 10-K filed March 3, BNSF delivers coal directly to MidAmerican's Walter Scott plant and to an interchange point with Canadian Pacific Railway Co. for short-haul delivery to the Louisa and Riverside plants. Both BNSF and MidAmerican are subsidiaries of Warren Buffett's Berkshire Hathaway.

On the other hand, Minnesota had the largest year-over-year percentage increase in coal deliveries from all regions in the first quarter of 2014, with 10.8%, or 351,812 tons, which were made up entirely of PRB-sourced coal. Compared to the first quarter of 2012, coal deliveries from all regions increased 12%, or 387,668 tons, and deliveries from PRB increased more than 12%, or 392,888 tons. However, coal generation in the state outstripped that growth, with a gain of more than 24%, or 1,356 GWh, compared to the year-ago quarter and an increase of 26%, or 1,435 GWh, compared to the first quarter of 2012.

David McMillan, senior vice president of external affairs at Allete, said June 9 that the coal stockpile at Allete's Minnesota Power's Clay Boswell plant is back to a more stable level after falling to just four days of burn earlier this year due to railroad transportation issues.

Minnesota Power's Taconite Harbor plant, however, dealt with a different weather-related transportation issue - a largely frozen Lake Superior. Coal moves by rail to the Midwest Energy Resources Co. terminal in Superior, Wisconsin, and then is shipped by water to Taconite. According to the Lake Carriers' Association, ice formation not seen since 1994 caused a 55% decline in Great Lakes coal shipments in April compared to a year ago. The only way vessels could safely cross Lake Superior in April was to be convoyed by U.S. and Canadian Coast Guard icebreakers.

According to SNL Energy data, Taconite took coal from Black Thunder and Cloud Peak's Spring Creek mine in the first quarter. "I know the steel mills have been having trouble getting shipments as well," McMillan said. "There is no downtime for the ships."

Basin Electric Power Cooperative's (BEPC) Leland Olds plant in North Dakota, which burns in-state lignite coal, took coal by truck for about a month due to slowness on BNSF's line. BEPC spokesman Curt Pearson said major maintenance work on the track west of Leland Olds continued to impact deliveries, but work has been completed.

"We have been meeting with BNSF every couple of months to discuss cycle time and stockpile inventory with the goal of avoiding trucking lignite to [Leland Olds] next winter," Pearson said June 16.

BNSF also serves the Laramie River Station in Wyoming, operated by Basin Electric. Pearson said Basin Electric has concerns over the smaller train sets and reduced velocity at Laramie River and hopes to see relief this summer or early fall. Laramie River takes coal from Black Thunder and Cloud Peak's Cordero Rojo mine, according to SNL Energy data.

Of the states reporting coal stockpiles, Wisconsin reported the largest pvariable frequency driveercentage decline year-over-year for March 2014, with a drop of more than 48%, or almost 1.8 million tons. Compared to March 2012, coal stocks in the state were down almost 74%, or roughly 5.4 million tons. Michigan had the second-largest percentage decline year-over-year in March 2014, with a decrease of more than 42%, or almost 2.1 million tons. Coal stocks in the state were down almost 53%, or nearly 3.2 million tons, compared to March 2012.

coal stocks by state