NIPSCO adding PRB coal supply to contract position

Northern Indiana Public Service Co. (NIPSCO) has lately been adjusting its coal supply by adding some Powder River Basin contract business, said Kevin Strnatka, Director, Fuel Supply, for NIPSCO.

NIPSCO on Feb. 2 filed testimony with the Indiana Utility Regulatory Commission to open its latest fuel adjustment clause (FAC) case. In a Feb. 28 filing, the utility revised some of the figures for the FAC case but made no change in the Strnatka testimony of Feb. 2. In March 8 testimony, the Indiana Office of Utility Consumer Counselor offered no major comments on the Strnatka part of the testimony.

In the third quarter of 2011, NIPSCO’s fuel requirements for its generating units were supplied by coal (83.36%) and by natural gas (16.64%). NIPSCO uses: a blend of Powder River Basin coal and Pittsburgh #8 seam coal out of Northern Appalachia in Unit 12 at its Michigan City plant; Illinois Basin high-sulfur (ILB) coal in Units 7 and 8 at its Bailly plant; and a blend of PRB coal and Pittsburgh #8 coal in Unit 14, and straight PRB coal in Unit 15 and ILB coal in Units 17 and 18 at its R. M. Schahfer plant.

Effective Jan. 1, NIPSCO had four long-term contracts with three coal producers. These coal producers are: Arch Coal Sales for PRB coal, with Arch Coal Sales a unit of Arch Coal (NYSE(ACI); the Consol Pennsylvania Coal unit of CONSOL Energy (NYSE:CNX) for Pittsburgh #8 coal; and two ILB coal contracts with the Peabody COALSALES LLC unit of Peabody Energy (NYSE:BTU). “NIPSCO is currently negotiating term contracts with two (2) additional PRB coal suppliers that would be effective around April 1, 2012,” Strnatka added in the Feb. 2 testimony. ”If needed, the remainder of NIPSCO’s coal requirements would be met through spot purchases.”

The delivered cost of coal in all of 2011 was $51.43/ton or $2.570/MMBtu. The delivered cost of coal for the fourth quarter, the “reconciliation” period in the FAC case, of 2011 was $49.74/ton or $2.522/MMBtu. The average spot market price of coal during the fourth quarter 2011 reconciliation period was $13.75 per ton for PRB coal, $50.51 per ton for ILB coal and $75.90 per ton for Pittsburgh #8 coal.

“Coal supply during the reconciliation period was impacted largely by the weather, the continuing decrease in the price of natural gas and the softening of the export markets,” Strnatka testified. “The mild weather has decreased electricity demand and placed coal units in economic reserve, causing inventories to move higher. The continuing fall of natural gas prices is causing additional coal to gas switching, thereby creating more coa; supply availability on the market. Finally, due to the European debt crisis and the slowing down of the Asian coal markets, it appears less domestic coal is being exported overseas. Consequently, due to the oversupply of coal on the markets, NIPSCO’s coal costs during the reconciliation period reflected a slight decrease in price.”

NIPSCO’s delivered cost of coal during the reconciliation period decreased compared to the third quarter of 2011 from $51.76/ton or $2.581/MMBtu to $49.74/ton or $2.522/MMBtu. This reduction can be attributed to a decrease in price in an ILB coal contract, taking less high-cost Pittsburgh #8 coal and slightly lower fuel surcharges.

NIPSCO’s estimated delivered cost of coal during the forecast period of April 2012 through June 2012 is about $51.43/ton or $2.58/MMBtu.

CSAPR court stay impacts coal situation

A PRB coal solicitation was issued on Oct. 11, 2011, to replace contract coal commencing around April 1, 2012. Currently, NIPSCO is negotiating with suppliers for a multi‐year term for high demand, ultra‐low‐sulfur PRB coal, Strnatka said. “Potential increases in price for this type of coal were anticipated due to the implementation of the Cross‐State Air Pollution Rule (‘CSAPR’) which was scheduled to become effective on January 1, 2012,” he added. “However, on December 30, 2011 the United States Court of Appeals for the District of Columbia issued an order staying this rule. As a result, CSAPR did not go into effect on January 1, 2012 and there is some uncertainty regarding the rule.”

NIPSCO has negotiated with one producer a substantial price cut for ILB contract coal for 2012. NIPSCO has also negotiated a new multi‐year transportation deal for deliveries of both PRB and high‐sulfur coal. Transportation rates for PRB coal and part of NIPSCO’s high‐sulfur coal needs will be slightly less than current rates in 2011. Overall, NIPSCO is currently projecting a delivered coal cost of $2.58 per million Btu for the forecast period. It is important to note that the projected delivered cost of $2.58 per million Btu in the forecast period could be influenced by the economic dispatch of our coal units and the volatility in the diesel fuel market.”

Diesel fuel is a key component in the costs of rail transportation of coal. In a prior FAC case, an industrial electricity use group recommended that NIPSCO should develop and implement a hedging policy as soon as possible and plan for the portion of its coal transportation costs that are subject to automatic adjustment based on on‐highway diesel fuel price indices or other petroleum price indices.

NIPSCO indicated that it would review the group’s recommendation regarding coal transportation hedging to analyze, among other things, the possible benefits and costs of such a hedging policy, the various tools available to accomplish a hedging program, and the reduction in transportation price volatility that could be achieved through a hedging policy. Strnatka said NIPSCO has been working to determine the amount of transportation cost that is exposed to risk of automatic adjustment and against what commodities the risk is exposed. This is complicated by the fact that the transportation contracts include fuel surcharge triggers against two different commodities. One contract uses West Texas Intermediate crude prices as its trigger while another uses highway diesel fuel. In addition, different contracts have separate fuel surcharge escalators once a trigger price is reached.

“Notwithstanding the above challenges, two of the three contracts that create fuel surcharge exposure will expire at the end of 2012,” Strnatka added. “This may provide an opportunity to mitigate one of the most onerous fuel surcharge mechanisms associated with a railroad that delivers all coal to NIPSCO’s R.M. Schahfer Generating Station. These contract negotiations will commence later this year. NIPSCO’s recommendation would be to defer a decision regarding a coal transportation hedging program until both new transportation agreements have been negotiated, particularly the fuel surcharge mechanism associated with coal delivered to the R.M. Schahfer Generating Station. NIPSCO will continue to reach out and be available to work informally with stakeholders to review further analysis after new agreements take effect. If warranted, the next step would then be to review different options for implementing a hedging program.”

Michael Eckert, an analyst at the OUCC, said in March 8 testimony that due to the mild weather and the low cost of natural gas, NIPSCO’s coal-fired units are not being dispatched as much. Therefore, its coal inventory is beginning to grow. The OUCC will continue to monitor and inform the commission about NIPSCO’s coal inventory in future FACs, Eckert wrote.

A table in Eckert’s testimony indicates that the CONSOL Energy contract expires at the end of 2012, the Arch contract expires at the end of 2013, one Peabody COALSALES contract expires at the end of 2015 and another Peabody COALSALES contract expires at the end of 2012. “Cloud Peak” is also mentioned in the table, with no contract timeline shown. This is a reference to PRB coal producer Cloud Peak Energy (NYSE:CLD).

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.