A new contract with a unit of Rhino Resource Partners LP (NYSE:RNO) for coal out of the Castle Valley mine in Utah, plus problems with high-sulfur, high-ash coal being produced from its own Deer Creek mine in Utah, highlight some of the latest coal procurement actions of PacifiCorp.
PacifiCorp d/b/a Rocky Mountain Power filed a general rate case request in February with the Utah Public Service Commission. Parties are lining up to be in the case, with recent intervention requests filed by, for example, Western Resource Advocates and Utah Clean Energy.
The initial PacifiCorp rate case testimony dealing with coal supply issues came from Cindy Crane, Vice President, Interwest Mining and Fuel Resources for PacifiCorp Energy. PacifiCorp is somewhat unique in the utility industry in that it still operates some of its own coal mines for its power plants, including the Deer Creek longwall mine in Utah.
Several of the company’s very favorably priced long-term coal purchase agreements terminated in 2011 and have been replaced with new agreements at prevailing market prices or contain market reopener provisions that allow resetting of the contract price, Crane testified.
The company will supply about 65.5% of its coal requirements from third-party multi-year contracts and 34.5% with coal from affiliate mines. About 29.8% of the company’s total coal requirements are supplied under fixed-price contracts, 35.3% under contracts that escalate or de-escalate based on changes to producer and consumer price indices and 0.4% through spot coal purchases.
The Utah plants are sourced collectively through a diversified portfolio of coal supplies. While the Deer Creek mine supplies primarily the Huntington plant and a portion of the Hunter plant, the contract coal supplies are typically interchangeable between the plants.
Coal costs up due to higher prices
Test period coal costs have increased on a total company basis from $733.7m in the June 2012 ending test period, used in the 2011 rate case, to $767.4m in the May 2013 ending test period used in this case, an increase of $33.7m. The increase related to higher coal prices is about $47.6m, and the decrease related to reduced coal-fired generation is about $13.9m. Average coal costs have increased from $30.91/ton to $32.81, an increase of $1.90/ton.
Out of the $47.6m increase in coal prices, about $18m is associated with the affiliate mines; $0.3m is associated with increased operating costs at the Hunter prep plant; and the remainder of the increase, $29.3m, is associated with third party coal purchases and transportation costs. Information that Crane provided about cost increases at the affiliated Deer Creek, Bridger and Trapper mines is redacted from the public version of her testimony.
In the prior test period, the Carbon plant in Utah was supplied, in part, with 150,000 tons of coal from Arch Coal’s (NYSE:ACI) Skyline longwall mine that was deferred from 2009. In 2008, the company and Arch agreed to defer 300,000 tons of the company’s 2009 contract tonnage under the long-term Sufco coal supply agreement, which is a separate agreement, until 2011. Under the 2008 agreement, Arch also agreed to supply the coal from its Skyline mine, a substitute source for Sufco. In addition to obtaining the Skyline tonnage at the 2009 Sufco contract price the company required Arch to discount the Skyline coal price by a redacted among per ton in exchange for the company agreeing to the 2009 tonnage deferral.
With the expiration of this supply transaction in December 2011, the company entered into negotiations with Rhino Energy, the operator of the Castle Valley mine, for a new long-term coal supply agreement as well as increased volumes under the company’s long-term agreement with the West Ridge mine. Replacement of the Skyline coal supply will increase test period costs by a redacted amount.
The majority of the Hunter and a portion of the Huntington power plant requirements are supplied by Arch’s Sufco and Dugout Canyon longwall mines under the company’s long-term coal agreement with Arch Coal Sales. The delivered price of coal supplied by the Arch mines has increased from a redacted amount in the June 2012 ending test period to a redacted amount in the May 2013 ending test period, used in this case. The increase is due primarily to the annual price increase under the Sufco contract and the savings included in the prior test period with the inclusion of Sufco carryover tonnage from 2010 at the 2010 contract price.
As part of a 2011 price re-opener dispute settlement, Arch agreed to provide the company on a pro-rata basis in 2011 with 817,000 tons of Sufco contract shortfall associated with 2010 contract deliveries at the 2010 contract price.
A portion of both the Carbon and Hunter coal needs are supplied by the West Ridge longwall mine in Utah under a long-term fixed price coal supply agreement that expires in December 2014. A redacted increase in coal costs under that deal reflects both an increase in delivered costs and an increase in contract tonnage from about 700,000 tons in the prior test period to about 870,000 tons in this test period.
Changes seen in Wyoming coal supply picture
Turning to Wyoming, the Naughton power plant is supplied under a long-term agreement with Westmoreland Coal’s newly-acquired Kemmerer mine next door. Test period costs will increase due to changes in contract specific producer and consumer price indices as well as production taxes and royalties. As part of a September 2010 contract renegotiation, the parties agreed to several price resets over the term of the agreement with the first price reset occurring January 2013.
Almost 30% of the Jim Bridger plant coal requirements in Wyoming are supplied by the nearby Black Butte mine. The delivered cost of Black Butte coal to the Jim Bridger power plant has increased due to higher rail and FOB mine costs. Coal costs adjust monthly based on changes to contract specific producer and consumer price increases as well as Wyoming production taxes and royalties; Union Pacific rail rates are adjusted quarterly based on the changes to the All-Inclusive Index less Fuel published by the Association of American Railroads. PacifiCorp co-owns the Jim Bridger plant and the adjacent Bridger Coal mining operations with Idaho Power.
In October 2007, PacifiCorp entered into a long-term coal supply agreement with Wyodak Resources for up to 1.8 million tons of coal annually for the Dave Johnston plant from the Wyodak mine that extended through December 2011. During the spring of 2011, the company issued a solicitation for Powder River Basin coal supplies for Dave Johnston. Based on the results, the company entered into new deals with Arch, Peabody Energy (NYSE:BTU) and the Western Fuels Association for coal supplies from the Coal Creek, Rawhide and Dry Fork mines.
The Wyodak plant is entirely supplied by the Wyodak mine under a long-term coal supply agreement through 2022 via an overland conveyor. The average mine price of Wyodak coal has increased since the coal costs adjust monthly based on changes to contract specific producer and consumer price increases as well as Wyoming production taxes and royalties.
Peabody wins new deal for Hayden plant
Since its inception, the co-owned Hayden plant in Colorado has been supplied by Peabody under several long-term coal supply agreements. The previous coal supply agreement was negotiated in December 2005 and extended through December 2011. The Hayden plant owners made numerous attempts to negotiate a contract extension prior to the expiration of the agreement; however, Peabody was unwilling to extend the Twentymile agreement under similar terms and conditions.
Consequently, Xcel Energy (NYSE:XEL), on behalf of the other Hayden plant participants, issued a request for proposal for new coal supplies for the 2012-2014 timeframe. Xcel received multi-year proposals from PRB coal suppliers as well as suppliers in the Green River and Uinta Basin in Colorado. Based on the results of the solicitation, the Hayden plant owners negotiated a new coal supply agreement with Peabody for coal that will for most of the contract term be out of the new Sage Creek mine, which will eventually replace Peabody’s adjacent Twentymile mine. The test period reflects the recently negotiated coal price with Peabody as well as the Union Pacific’s cost to transport the Twentymile coal by rail.
The co-owned Cholla plant in Arizona is supplied under a long-term coal supply agreement with Peabody’s Lee Ranch/El Segundo mine complex and transported by the BNSF Railway. Contract prices under both agreements adjust quarterly; the coal contract adjusts to changes in contract specific producer and consumer price indices while the rail agreement adjusts based on changes to the Railroad Cost Recovery Factor published by the Association of American Railroads and diesel fuel prices. Test period costs have increased due to higher rail and mine costs.
Lower heat content in the Bridger coal becomes an issue
Total Bridger Coal deliveries to the Jim Bridger plant from the surface mine at the site decreased from 1,609,150 tons in the prior case to 1,214,785 tons, a reduction of 394,365 tons; however, deliveries out of the adjacent longwall deep mine have increased from 4,396,850 to 4,697,215, an increase of 300,365 tons.
During the June 2012 ending test period, the heat content of the Bridger coal deliveries from the underground mine was projected to average 9,492 Btu/lb. The heat content in the May 2013 ending test period is forecast at 9,262 Btu/lb. The approximately 230 Btu/lb decrease in heat content is the result of increased ash content in the coal. Increased out-of-seam dilution associated with the current sandstone roof has caused the ash content of the underground mine to increase from 11.79% in the prior period to 13.67% in the May 2013 ending test period.
Bridger is a captive mining operation controlled by the Jim Bridger power plant owners, while Black Butte is an independent operator. Though test period delivered costs of Bridger Coal and Black Butte are similar, the Black Butte mine has no additional production capacity, Crane noted. The company was even forced to purchase about 130,000 tons of Black Butte coal from the Valmy power plant owners during the last half of 2011 to supplement the current year coal supply.
Deer Creek costs, plus its sulfur and ash contents, going up
There are three primary drivers for a projected Deer Creek cost increase: reduced production; increased material and supply costs; and increased longwall set-up costs. Deer Creek’s production is projected to be about 265,000 tons less in the May 2013 ending test period. Materials and supply costs have increased primarily due to increased unit costs and higher usage of operating supplies for roof support and adverse geological conditions associated with elevated levels of ash and sulfur. Due to two additional longwall moves in the May 2013 ending test period and lower coal recovery from the longwall panels, the longwall set-up cost per ton will increase by a redacted amount.
The Deer Creek mine represents the lowest cost company coal supply in Utah. Deer Creek costs are more less than the delivered cost of Castle Valley and Sufco coals into the Huntington power plant, Crane noted.
Deer Creek’s sulfur content has increased with the movement of longwall operations in December 2010 from the upper Blind Canyon seam to the lower quality Hiawatha seam. Also, during the first quarter of 2011, Deer Creek encountered areas of high ash and high sulfur with the sulfur content at times exceeding 1%. The company did not previously encounter pockets of high sulfur coal in the Blind Canyon seam. The Deer Creek mine will again encounter elevated levels of ash and sulfur coal with sulfur reaching as high as 1.4% in 2012.
To ensure emissions compliance related to the Deer Creek sulfur levels, the company segregates the coal at the Huntington plant and then, depending upon quality, the coal will be shipped to the Hunter and/or Cottonwood Prep plant. This coal is then reclaimed and comingled with other coals to ensure the blended product does not cause a sulfur exceedance or violates minimum heat content requirements. The Hunter plant is forecasted to consume at least 300,000 tons of Deer Creek mine’s high ash, high sulfur coal during the May 2013 ending test period. Deer Creek could avoid this problem coal, but not without significantly increasing its production costs.
Ash-fusion temperature an issue at Hunter
In December 2010, the company executed a coal supply agreement with UtahAmerican Energy for coal from the West Ridge mine for 2011 through 2014. The West Ridge mine’s high ash fusion temperature mitigates the low ash fusion characteristics of Arch’s Sufco coal that causes boiler slagging at Hunter and its high sulfur content improves precipitator performance at the Carbon plant. The contract established 500,000 tons as the annual contract minimum in 2011 and 1 million tons as the contract minimum for 2012 through 2014.
Arch Coal’s Dugout Canyon mine is the only other active longwall operation in Utah that produces high ash fusion temperature coal. Arch previously supplied the company with over 1 million tons of Dugout Canyon coal annually under the Electric Lake settlement and as substitute coal under the company’s long term agreement with Sufco. Arch’s contractual requirement to supply Dugout Canyon coal as a substitute for Sufco coal expired in December 2010.
Something not mentioned by Crane is that in November 2011, the Canyon Fuel subsidiary of Arch announced that it would be scaling back production at Dugout Canyon in response to continuing weakness in coal demand. In keeping with this market-driven decision, Canyon Fuel eliminated a total of 114 jobs at the mine, and said it plans to suspend longwall operations at the end of the current panel, currently planned for the first half of 2012.