TECO Coal cuts back 2012 production to meet soft market

TECO Energy expects TECO Coal’s net income to increase in 2012 over 2011 due to higher contract selling prices, even though coal sales volumes are expected to fall, said TECO Energy (NYSE:TE) in its Feb. 24 Form 10-K annual report about a subsidiary that operates mines mostly in eastern Kentucky.

TECO Coal has more than 90% of its expected 2012 sales of between 7 and 7.3 million tons contracted, TECO Energy added. The average expected selling price across all products is expected to be $96/ton in 2012, which reflects substantially all of the planned 2012 metallurgical coal sales committed and priced. In 2011, TECO Coal subsidiaries sold 8.1 million tons of coal.

In 2012, met coal sales volumes are expected to be at, or slightly above, 2011 levels. The higher average selling price also reflects the expiration at the end of 2011 of a 600,000-ton, below-market steam coal contract, and the repricing of those tons for 2012 at attractive market prices in the second quarter of 2011. The product mix in 2012 is expected to be almost 50% specialty coal, which includes stoker, metallurgical and pulverized coal injection (PCI) coals, with the remainder being utility steam coal.

The all-in total per-ton cost of production at TECO Coal in 2012 is expected to increase to a range between $83 and $87/ton. This cost range includes higher royalty payments and severance taxes, which are a function of selling price, and the impact of spreading fixed costs over fewer tons.

The lower volume projected for 2012 reflects TECO Coal’s response to market conditions by exercising production discipline and eliminating unsold tons from its 2012 sales projections. Mild winter weather, low natural gas prices and tough world-wide economic conditions caused the selling price for certain types of coal to decline in late 2011 and early 2012.

In November 2011, TECO Coal announced that it had made a new discovery of an additional 65 million tons of proven and probable met coal reserves on properties it controls, and an additional estimated 9 million tons of met coal classified as resource (non-reserve coal deposits) due to seam thickness. There is an additional 14 million tons of met coal classified as resource pending further geologic studies. These met coal reserves are located below existing reserves and substantially all of these reserves are owned by TECO Coal, which eliminates royalty payments. The coal from these reserves can be transported by conveyor belt to an existing prep plant, which has adequate capacity. The use of conveyor belts eliminates the trucking costs.

In 2012, TECO Coal will evaluate detailed mining plans and potential markets for this high-vol met coal. TECO Coal has received one permit amendment from the state of Kentucky related to surface development activities to access a portion of these reserves, and expects to file a second permit amendment in 2012 to access the remainder of these reserves. When these permits are received, TECO Coal will begin the surface preparation and infrastructure development work to bring these reserves into production.

In 2011, TECO Coal allocated its reserves by market category. As a result of this allocation, 34.9% of the reserves are classified as met coal, 48.8% as PCI coal and 16.3% as steam coal.

TECO extricates one mine from stalled Corps permit process

Since 2008, the issuance of permits by the U.S. Army Corp of Engineers under Section 404 of the Clean Water Act required for surface mining activities in Central and Northern Appalachia has been challenged in the courts by various entities. These challenges have been appealed by various mining companies affected on a number of occasions, but very few permits have been issued over the past several years. TECO Coal had six permits on the list of permits subject to enhanced review by the U.S. Environmental Protection Agency (EPA) under its memorandum of understanding with the Corps, which was issued in September 2009. However, three have subsequently been withdrawn. At this time, TECO Coal has all of the permits required to meet its 2012 sales projections, the Form 10-K said.

In 2011, TECO Coal modified the mine plan for a mine that was in the queue for the Corps to act upon. The modification eliminated the requirement for a Section 404 permit and a permit was subsequently issued by the state of Kentucky. Under the revised mine plan, TECO Coal will be able to mine these reserves but at a higher cost due to moving rock and dirt longer distances to already permitted storage areas.

In April 2010, the EPA issued new guidance on environmental permitting requirements for Appalachian mountaintop removal and other surface-mining projects. The guidance limits measure conductivity (the level of mineral salts) in water discharges into streams from permitted areas, and was effective immediately on an interim basis. At that time, the EPA stated that it would decide whether to modify the guidance after consideration of public comments and the results of the Science Advisory Board (SAB) technical review of the EPA scientific reports. In July 2011, the EPA made this guidance final without modification. “Because the EPA’s standards appear to be unachievable under most circumstances, surface-mining activity could be substantially curtailed since most new and pending permits would likely be rejected,” the Form 10-K said. “This guidance also could be extended to discharges from deep mines and preparation plants, which could result in a substantial curtailing of those activities as well.”

The EPA guidance was challenged in the courts by a number of coal mining industry-related organizations, states and municipalities relating to the stringency of the standards as well as the focus on the coal industry and the Appalachian region. In October 2011, the U.S. District Court for the District of Columbia ruled that the EPA had exceeded the statutory authority conferred upon it by the Clean Water Act in implementing the coordinated review process with the Corps. There is a second portion of the lawsuits related to the actual water quality guidance that is not scheduled for hearings until the second quarter of 2012. Pending the outcome of the second portion of the case, few, if any, new permits are expected to be issued by Corps.

TECO Coal makes 2011 changes

TECO Coal, with offices located in Corbin, Ky., is a wholly-owned subsidiary of TECO Energy, and through its subsidiaries operates surface and underground mines as well as coal processing facilities in eastern Kentucky, Tennessee and southwestern Virginia. TECO Coal owns no operating assets but holds all of the common stock of Gatliff Coal, Rich Mountain Coal, Clintwood Elkhorn Mining, Pike-Letcher Land, Premier Elkhorn Coal, Perry County Coal and Bear Branch Coal.

Met, PCI and industrial stoker coals, with sales of 3.7 million tons in 2011, accounted for about 46% of 2011 coal sales volume. Steam coal sales, at 4.4 million tons, accounted for approximately 54% of 2011 coal sales volume. In 2011, TECO Coal subsidiaries sold 8.1 million tons of coal. All of this coal was sold to customers other than TECO Coal affiliate Tampa Electric.

In 2011, TECO Coal sold the idled Millard Facilities and properties located in Pike County, Ky. TECO Coal currently has four mining complexes, mostly operating in Kentucky with a portion of Clintwood Elkhorn Mining operating in Virginia. A mining complex is defined as all mines that supply a single wash plant, except in the case of Clintwood Elkhorn, which provides production for two active wash plants. These complexes blend, process and ship coal that is produced from one or more mines, with a single complex handling the coal production of as many as 11 individual underground or surface mines.

Significant projects for 2011 included the following:

Premier Elkhorn Coal

  • Exploration activities identified 65 million tons of newly-discovered met coal in two below drainage seams underlying its current Burke Branch facilities and adjacent properties. Much of the identified reserves are owned by TECO Coal.

Clintwood Elkhorn Mining

  • The Persimmon Branch surface mine, in Woodman, Ky., began operations in the spring of 2011. The mine produces met and steam coal.
  • Construction of the Lick Creek slope mine was completed in the fourth quarter of 2011. This slope will access several million tons of high-vol A met coal from the Hagy seam and began full production in January 2012.
  • The Persimmon Branch deep mine construction was completed in the third quarter of 2011 and this operation is in production. This mine produces high-vol A met coal from the Blair seam.
  • In Virginia, construction of the Abners Fork deep mine was completed in the third quarter of 2011 and it is in full production. This mine produces high-vol A met coal from the Splashdam seam and provides access to substantial reserves near the Clintwood No. 3 preparation facility.
  • At the Clintwood No. 3 prep plant, a clean coal reclaim belt was installed to facilitate the more efficient loading of trains.

Gatliff Coal discontinued surface mine operations in Bell County, Ky., in late autumn 2009. Poor market conditions and a depletion of the low-sulfur coal that was previously required on its sales contract led to this cessation. Gatliff Coal had no production in 2011 or 2010, leaving a reserve base of 3.4 million recoverable tons of predominantly low-sulfur underground mineable coal, which may eventually be recovered by Gatliff Coal or by neighboring competing coal companies for coal royalty considerations. Rich Mountain Coal formerly operated as a contractor for Gatliff Coal’s Tennessee production but is currently in reclamation status.

In 2009, Perry County Coal completed a comparable trade of underground reserves of 16 million tons with another mining company. During 2010, the boundary of reserves for the E4-2 mine area was core drilled to confirm final reserve quantities and qualities and to finalize a comprehensive mining plan. A review of reserves for the E4-2 mine area for Perry County Coal proved an additional 6.9 million tons of reserves, which were previously reported as resource coal. In 2010, Perry County Coal leased the First Creek reserve which is contiguous to its existing E4-1 underground mine. This lease will facilitate the mining of about 10 million tons of additional reserves. Perry County Coal produced 3.1 million tons of coal in 2011, leaving a total reserve base of 141.2 million recoverable tons.

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.