ESM, feds still in talks over unpaid leases

GILLETTE — Almost a year after buying and reopening the Eagle Butte and Belle Ayr coal mines in Campbell County, Eagle Specialty Materials hasn’t secured federal leases for the operations.

ESM and the U.S. Department of the Interior have been negotiating for months to resolve more than $50 million in unpaid federal royalties owed by bankrupt Blackjewel LLC.

Blackjewel and Contura Energy sold the Wyoming mines to ESM as part of a messy bankruptcy last year that involved shuttering the mines for more than three months.

Until there’s an agreement on satisfying the unpaid royalties, ESM will continue to operate the mines without owning the leases and at the discretion of the Interior Department, something outlined in a recent court order extending the negotiating deadline from the end of September through Dec. 31.

Although ESM is solely responsible for all federal royalty payments since taking over operations of the Powder River Basin mines Oct. 18, the fly in the ointment is how $50.1 million in royalties left unpaid by Blackjewel will be satisfied, said Rob Godby, director of the Center for Energy Economics and Public Policy at the University of Wyoming.

“The problem here isn’t that ESM is behind on its current payments,” he said. “What you’re looking at is a really tough political bargain.”

That’s because the Interior Department is charged with collecting any money owed and protecting public assets, in this case the value of the federal leases, Godby said. To that end, it can’t set a precedent of forgiving any or all of the unpaid royalties. The agency also doesn’t want to come down so hard on ESM that it shuts the mines down and stops all the current payments the company is making.

“It’s a balancing act with long-term and short-term trade-offs,” Godby said. “If they push too hard, they might push them out of business, because clearly, if ESM had the money they would’ve paid it by now.”

Eagle Specialty Materials is a privately held company based in Ohio owned by Michael Costello. Because it’s not a public company, there are no financial reports or filings to show just how solid or tenuous ESM’s finances are.

Because of that, Godby said analysts can only speculate about why an agreement hasn’t yet been reached.

“This is pure speculation, but what (ESM) is looking for is probably a payment plan,” he said. “We can’t know that for certain, because their finances are all private, but the fact that it’s not resolved yet probably means the government is expecting one thing and ESM wants another.

“If they can’t afford it, then the government’s in a really bad situation. If the government were a private creditor, they’d probably have to write it off as bad debt. That’s the problem — they’re not, and because of that they’re between a rock and a hard place.”

The negotiations over federal leases for Eagle Specialty Materials isn’t the only pressure facing ESM’s owner. Costello also owns Alabama-based FM Coal LLC, which filed for Chapter 11 bankruptcy reorganization Sept. 1.

FM Coal owns 21 mines in Alabama, of which five are active producing coking and thermal coal and employ 153 people. Another 12 mines are in reclamation with four more idle properties.

With $56 million in liabilities, dramatically falling production and mounting maintenance obligations, the company is upside down financially, according to its filing in the U.S. Bankruptcy Court for the Northern District of Alabama, Southern Division.

Costello owned 50% of the company until the separation of former chief operating officer Freddy Hunt, who owned the other 50% until his separation from FM Coal in July 2019, giving sole ownership to Costello, according to the bankruptcy filing. Less than three months later, Costello formed Eagle Specialty Materials to acquire the Eagle Butte and Belle Ayr mines.

Blackjewel got the mines from Contura Energy Inc. in December 2017 in a deal where no money changed hands, but Blackjewel assumed the debt associated with the mines from Contura. Less than two years later, Blackjewel filed for bankruptcy, which ultimately resulted in Contura, which was still on the hook for about $230 million in reclamation, buying the mines back.

Ultimately, instead of operating the PRB mines, Contura paid ESM $90 million to assume the reclamation obligations.

To secure ownership of the mines, ESM also agreed to pay Blackjewel $16.2 million in cash, pay $32 million to Blackjewel’s senior creditors, make good on any unpaid bills incurred during the bankruptcy up to $4.3 million and pay any unpaid wages and benefits owed to Blackjewel’s Wyoming employees.

Under the terms of the sale, ESM technically is mining as a contractor for Contura until it can secure transfers of state and federal permits and leases in its name.

A message to Costello regarding ESM’s negotiations for the federal leases wasn’t responded to by press time.

Complicating the situation is a continued downslide in production and the value of thermal coal from the Powder River Basin, Godby said.

“The fed is trying to make sure the public gets value out of this public resource, so to fulfill that obligation, they have to pursue unpaid royalties,” he said. “But in the long term, if they undermine the asset they could stop the ongoing payment of (current and future) royalties.”

Coming down hard on ESM to the point of putting it out of business “definitely undermines the value of this public asset. Once you do that, the potential for payment goes down, if not disappears.”

Also, the value of the leases is much less than when they were first issued, Godby said.

Overall, PRB coal production is down about 25% through the first half of 2020 compared to 2019. For the ESM mines, Eagle Butte was down about the same amount in the second quarter of this year and Belle Ayr about 39%.

Coal also has plummeted as a source for power generation in the United States, accounting for just 14% of domestic electricity in the second quarter, whereas a decade ago coal held 50% of the market.

Because of that, it’s likely ESM would need to pay off the $50 million over a period of time much longer than the federal government is willing to agree to, Godby said.

“The value of the public asset is much lower than it used to be,” he said. “But the liabilities have not been written down accordingly. If this was a private company and its creditors, a creditor would take a haircut because the value of the asset is not what it once was.”

A prime example is the recent decision by Peabody Energy Corp. to write down the value of the North Antelope Rochelle mine in southern Campbell County by more than $1.4 billion, Godby said. That’s an admission by the company that because of the weak market and pricing for PRB coal, and the unlikelihood of a turnaround, the asset simply isn’t worth what it once was.

“The problem here is the shareholders are the public” and not ESM or company investors, he said. “If (the government) gave them more time to pay this off, then they’ve written down the value of the asset.

“It’s like if you have a $100 debt. Repayment of that at $10 a year over 10 years is worth less than paying me $100 now. If the government works with ESM to create a payment plan, they run the risk of reducing the asset value that’s owed to the people of the United States.”

It also risks opening a floodgate for other coal companies to want to pay off their lease agreements over longer periods of time, he said.

The Interior Department’s willingness to continue negotiations with ESM can be interpreted a couple of ways, Godby said. One is that it’s a good sign there isn’t an impasse and both sides anticipate being able to eventually work something out.

Another is political.

“The last thing the Trump administration wants is to put a coal mine out of business a month and a half before the election,” Godby said.

In the end, the most likely explanation is the most simple: ESM would pay if it had the money, but it doesn’t.

“What this (continuing negotiation) tells us is that the same owner of FM, which is in bankruptcy, and ESM does not have deep enough pockets to pay this off,” Godby said.

In its Chapter 11 filing in Alabama, FM Coal cites “dramatic decreases in sales volume” from about 1.4 million tons in 2017 to 949,330 tons in 2019. So far in 2020, the company is on pace to produce about 622,000 tons.

Because of that reduced production and revenue, “the single greatest challenge faced by (the company) is the state of their equipment fleet,” the bankruptcy filing says.

While FM Coal and ESM are separate companies, the Alabama case is worth keeping an eye on, Godby said.

“FM went bankrupt (there) because it couldn’t keep up with required maintenance and reinvestment,” he said. “ESM may eventually find itself in the same situation. If it then files bankruptcy, what happens to that $50 million owed in the first place?”