A November 2011 explosion and subsequent fire at Unit 3 of Xcel Energy’s (NYSE:XEL) Sherburne County plant may cost as much as 3.1 million tons in 2012 sales of the Absaloka mine in Montana, said mine owner Westmoreland Coal (NasdaqGM:WLB) in its March 13 annual Form 10-K report.
Xcel indicated that Unit 3 will be offline for an extended period while the company investigates the source of the explosion and the extent of the damage, the Form 10-K added. The Westmoreland subsidiary that runs the Absaloka mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers. “While our insurance carriers have accepted liability under the policy for the business interruption claim, we are currently unable to determine the financial impact of this fire on us due to the uncertainty of when Unit 3 will resume operation,” Westmoreland said.
Another major development for Westmoreland is that on Jan. 31, it closed a deal with Chevron Mining to acquire the Kemmerer surface mine in Kemmerer, Wyo. This deal included about 107 million tons of total proven or probable coal reserves as of the end of 2011, and has an estimated life at current production levels of about 22 years.
Kemmerer supplies about 2.7 million tons per year to the adjacent Naughton power plant via conveyor belt under an agreement that expires in December 2021. Kemmerer also supplies about 2.1 million tons a year to various industrial customers, with the vast majority being shipped via short-haul rail or train to Trona plants in Green River, Wyo.
Westmoreland also pointed out in the Form 10-K that contract to supply lignite to the Coyote power plant, located adjacent to the Beulah mine in North Dakota, expires in May 2016. “We have been negotiating with the Coyote Station owners in a competitive bid process for another long-term supply contract,” the company said. “Based on the direction of those negotiations, we have changed various accounting estimates due to the uncertainty of entering into a new agreement upon the conclusion of the current contract in 2016.”
The Beulah mine supplies about 2.5 million tons per year to the adjacent Coyote plant via conveyor belt. It also supplies around 0.5 million tons per year via rail to the Heskett plant under an agreement that expires in 2016. Prices under these agreements are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
In 2011, Westmoreland derived about 78% of its total revenues from coal sales to four power plants: Colstrip Units 3-4 (29% of 2011 revenues), Limestone (20%), Colstrip Units 1-2 (16%) and Sherburne County (13%). The company pointed out that new environmental regulations could compel Limestone, the customer at the Jewett mine, to purchase more compliance coal, reducing or eliminating Westmoreland’s sales to that plant.
The Jewett mine has an agreement with NRG Texas Power’s adjacent Limestone plant, which commenced Jan. 1, 2008, and replaced various prior agreements. NRG Texas Power is obligated to pay all mine costs of production plus a margin and the mine’s capital and reclamation expenditures. The agreement runs through 2018, and may be extended by NRG Texas Power for up to an additional 10 years or until the mine’s reserves are exhausted. NRG has the option to determine volumes to be delivered, which average about 4.2 million tons per year, and to terminate the agreement at its discretion.
Basically all Westmoreland mines rely on limited customers
Four of Westmoreland’s five mines are dedicated to supplying customers located adjacent to or near the mines, leaving those mines very dependent on those customers. Similarly, the Kemmerer mine derived about 60% of its 2010 revenue from sales to the nearby Naughton power plant of PacifiCorp.
Absaloka is Westmoreland’s only mine that isn’t near a customer power plant and works the open market. But, about 85% of all tons sold in 2011 from this mine were to the rail-served Sherburne County plant in Minnesota under multiple contracts. The mine has several three- to five-year contracts with various parties that totaled roughly 5.5 million tons in 2011. The contracts with the Sherburne County plant are three-year rolling contracts, with one-third of the tonnage expiring on an annual basis.
Westmoreland said that its contract with Colstrip Units 3-4, for coal out of its adjacent Rosebud strip mine, expires in December 2019. “We have already begun discussions with the 3&4 buyers on the 2019 renewal,” the Form 10-K said.
The Rosebud mine has two contracts at Colstrip. Effective Jan. 1, 2010, a new cost-plus agreement commenced with Colstrip Units 1-2 with a projected term through at least 2019 and expected tons of 3 million per year. A second agreement at Units 3-4 covers about 7 million tons per year and is the one set to expire at the end of 2019. This contract is also cost-plus, but has provisions for specific returns on capital investment.
The Savage lignite mine, located along the Montana-North Dakota line, supplies about 0.3 million tons per year to the local Lewis & Clark plant under an agreement that expires at the end of 2012. Prices under this agreement are based upon certain actual mine costs and certain inflation indices for such items as diesel fuel.
Cost of ROVA coal supply becoming a big issue
Westmoreland also pointed out in the Form 10-K a looming coal supply issue for its two-unit ROVA (also known as Roanoke Valley I and II) power plant in Weldon, N.C., which has a total capacity of about 230 MW. The company built ROVA, which commenced operations in 1994, as a Public Utility Regulatory Policies Act co-generation facility with long-term power sales deals with Dominion Virginia Power.
Westmoreland entered into a coal supply agreement for the larger unit at the ROVA plant in June 1993, and a coal supply agreement for the smaller unit in December 1993, which provide for ROVA’s coal needs for a 20-year period, terminating in May 2014 and June 2015, respectively. It also entered into power sales deals with Dominion Virginia Power for a 25-year term until May 2019 for the larger ROVA unit, and June 2020 for the smaller ROVA unit.
The coal supply agreements provide for coal at a price per ton that is much less than today’s open market price for Central Appalachia coal, the Form 10-K said. Upon the termination of the coal supply agreements beginning in 2014, the company will be required to renegotiate current contracts or find substitute coal at a projected cost per ton far greater than the price it is paying today.
“However, the power sales agreements do not provide for a price increase related to an increase in the cost per ton of delivered coal and Dominion Virginia Power’s payment for power after 2014 will not escalate with our increased coal costs,” Westmoreland warned. “Due to the change in the economics of ROVA at such time, it is projected that ROVA will begin incurring losses in 2014 and may be unable to pay its obligations as they become due.”
Westmoreland didn’t name the ROVA coal suppliers. Westmoreland’s 2004 annual report identified them as CONSOL Energy (NYSE:CNX) and TECO Coal. Also, an attachment to a Form 8-K/A filing by Westmoreland in November 2006, related to Westmoreland’s buy of part of ROVA from a joint venture partner, described the coal contracts.
The venture entered into two agreements with TECO Coal, said the attachment. TECO then entered into a subcontract with Kentucky Criterion Coal, an affiliate of Westmoreland, to provide 79.5% of the coal requirements under the agreements. In December 1994, Westmoreland sold the assets of Kentucky Criterion to CONSOL Energy’s Consol of Kentucky unit.
Each coal contract is for an initial term of 20 years from the respective commercial operations date with two five-year renewal options, the attachment said. Under the agreements, ROVA must purchase a combined minimum of 512,500 tons of coal each contract year. In the event ROVA fails to purchase the minimum quantity in any contract year, it may be liable for actual and direct damages incurred by TECO, up to a maximum of $5/ton for each ton short for ROVA I or 20% of the current base price for each ton short for ROVA II. The base price, covering coal and related transportation, is adjusted annually on July 1 of each contract year based upon the GNPIPD. The average coal cost per ton, including transportation, for the six months ended June 30, 2006, and 2005, was $49.62 and $47.29, respectively.
Westmoreland is an energy company whose operations include six surface coal mines in Montana, Wyoming, North Dakota and Texas. It sold 21.8 million tons of coal in 2011, with that amount to grow sharply this year with the acquisition of Kemmerer. The sale of Kentucky Criterion was part of an effort by Westmoreland in the 1990s to extricate itself from heavily-unionized, largely underground coal production in the eastern U.S. so it could transition into surface mining in the western U.S.