Tri-State secures Craig future, while Hayden gets new coal supply

Tri-State Generation and Transmission Association and other co-owners of the 1,304-MW Craig power plant have secured at least some of the future coal supply for that plant with the purchase of the Colowyo strip mine in Colorado from Rio Tinto.

International miner Rio Tinto announced Dec. 1 that it has completed the divestment of the Colowyo mine to Western Fuels-Colorado LLC. The parties had originally agreed to the sale in September and its terms are confidential. This is the last Rio Tinto coal mine in the U.S., following the 2009 spin off of Cloud Peak Energy (NYSE:CLD) in an IPO.

Western Fuels-Colorado is an affiliate of the Western Fuels Association, a coal producing and buying cooperative that has Tri-State as a member. Colowyo is a major supplier to the Craig power plant, which is about 30 miles from the mine. The other major supplier to the plant is the adjacent Trapper strip mine, which is owned by the plant co-owners.

A couple of years ago, faced with dwindling coal reserves in the current mine area and the prohibitive expense of developing new coal reserves nearby, Rio Tinto cut Colowyo’s production back to the level needed to just fulfill two long-term contracts with Craig that expire around 2017. That took this coal off the open market. U.S. Mine Safety and Health Administration data shows that Colowyo produced 1.9 million tons in the first three quarters of this year, 2.6 million tons in all of 2010 and 3.6 million tons in 2009.

Western Fuels-Colorado delivers coal under contract to the Craig and Nucla power plants in western Colorado and had been handling coal purchases, at the rate in 2010 of about 1.5 million tons, from Colowyo. “The purchase of Colowyo mine secures a clean-burning fuel supply,” said Duane Richards, CEO of the Western Fuels Association, in the Sept. 16 original announcement about this deal. “This transaction provides certainty in the long-term supply and cost of fuel.”

“Western Fuels-Colorado’s purchase of Colowyo will ensure a reliable and affordable supply of coal to Craig Station for the expected life of the power plant,” said Mike McInnes, senior vice president of production at Tri-State, in the Sept. 16 announcement. Craig, which has undergone a series of major efficiency improvements in recent years, is expected to operate in its current state for the next 30-40 years. Western Fuels Association noted that theTrapper mine will continue to deliver coal to Craig.

With Colowyo a ? mark, PSCo signs with Peabody

The up-to-now uncertain future of Colowyo played a key role in a recent effort by Public Service Co. of Colorado, a unit of Xcel Energy (NYSE:XEL), to secure new coal supply for the 446-MW Hayden power plant. An old contract for Peabody Energy (NYSE:BTU) to supply coal out of the Twentymile longwall mine was due to expire at the end of 2011 and PSCo was looking to replace it.

Susan Arigoni, who is employed by Xcel Energy Services Inc. as Vice President, Fuels, testified about the hunt for new Hayden coal supply in a Nov. 14 filing at the Colorado Public Utilities Commission in a proceeding related to new emissions controls to be installed at Hayden. Twentymile is 27 miles by rail from Hayden and Colowyo is 40 miles by rail from the plant, making those mines the most economic options for coal supply to the plant, Arigoni noted. Three other longwall coal mines in Colorado that could supply Hayden are located in the North Fork Valley, which is more than 326 miles by rail to Hayden.

“With limited supply options for Hayden, a primary focus early on was to exhaust all possible supply options besides Peabody,” Arigoni said. “Colowyo, owned by Rio Tinto, is the best alternative because it is the only alternative with proximity to Hayden nearly equivalent to Peabody’s. Colowyo production is sold out through 2017, and production beyond that time will require development of additional reserves. Rio Tinto was contacted with the idea of discussing a coal purchase post 2017. However, Rio Tinto was not interested in operating the mine after 2017 and investing the capital required to develop additional reserves. Even if Rio Tinto had been interested, Hayden would still have a gap in supply of three or four years from 2012 until 2015 or 2016.”

A few months ago, with no immediate prospects for Colowyo assets being sold to an entity willing to invest the capital necessary to develop additional reserves, it was clear Colowyo could not be considered a long-term prospect, Arigoni said. Even if Colowyo were to be sold, it will take at least two years from the closing of that transaction for Colowyo to ramp up production from 2.3 million tons per year. Despite the inherent economic advantage the short transportation distance creates for Twentymile, PSCo solicited proposals for coal supply in the market in January 2011. The combination of responses from coal suppliers and the rail pricing indicated Peabody was the lowest priced option, but negotiations over the ensuing months brought the coal pricing down even lower, said Arigoni.

One issue was that coal reserves at Twentymile will be exhausted around the end of 2014, Arigoni said. However, Peabody has adjacent reserves, called Sage Creek, it is willing to develop into a new longwall mine but only if it got a long-term coal sales contract that underpins the investment it would take to open those new reserves. “Public Service was able to balance its lack of competitive options with Peabody’s interests to achieve a transaction that provides a long-term supply for Hayden,” said Arigoni.

Arigoni revealed some details of pricing in the new contract with Peabody when comparing those prices against an early-2010 price forecast that had been provided by consulting firm Wood Mackenzie. For example, Wood Mackenzie had predicted a price of $1.92/MMBtu in 2012, with the negotiated price with Peabody coming to a higher $2.19. In 2013, the forecast was $1.96 while the negotiated price was $2.23. The Wood Mackenzie forecast had only gone out to 2018, but a table of prices in the Arigoni testimony shows the Peabody contract extending out to 2027. In 2018, the forecast was for $1.50, while the actual price was $2.53. In the final year of the Peabody deal, 2027, the price is $3.01/MMBtu.

The negotiated delivered cost, which is FOB mine plus rail transportation, is higher than the Wood Mackenzie forecast due primarily to assumptions relating to reduced Colorado coal demand and an attendant drop in coal prices not proving to be the case. In fact, global demand for Colorado coal has created a new export market for Colorado coal that was not anticipated by Wood Mackenzie. None of the events causing a reduction in demand in Wood Mackenzie’s model, including the elimination of demand from PSCo shutting the Cherokee and Valmont coal plants by the end of 2017, has occurred yet, so market prices have not adjusted to those events, Arigoni pointed out.

“The contract provides Public Service with a supply of coal to Hayden at least though 2019,” Arigoni said. “The prices for the coal result in a reasonable cost of coal supply for Hayden.” That mention of “at least through 2019” indicates that the contract probably has a reopener in it for 2019 that allows PSCo to opt out of the contract if it can’t get market prices at that point from Peabody.

MSHA data shows that Twentymile produced 5 million tons in the first three quarters of this year and 7.7 million tons in all of 2010. The U.S. Bureau of Land Management said in coal reserve leasing documents related to the replacement Sage Creek mine that its production would be up to 12 million tons per year out of the Wadge seam, which is the seam currently being worked by Twentymile. 

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.