Swimming against the tide of many other U.S. electric utilities that saw less coal burn than they had anticipated in 2011, Appalachian Power actually burned 10 million tons last year, against a projected level of only 7.9 million tons.
On the more negative side for this American Electric Power (NYSE:AEP) subsidiary is that its actual coal costs in 2011 averaged $63.78 per ton (264 cents/MMBtu), up from a projection of $57.24 per ton (232.86 cents/MMBtu).
Testimony from Jason Rusk, employed by American Electric Power Service Corp. in the Fuel, Emissions & Logistics Group as Director, Coal Procurement, was filed March 30 by APCo at the West Virginia Public Service Commission. This is part of an annual Expanded Net Energy Cost (ENEC) review case.
“The trend from recent years of steadily rising coal prices matched with lower coal market volatility continued through the first half of 2011,” Rusk testified. “In spite of the recent economic downturn, the market did not experience significantly lower coal prices for the majority of 2011 because demand for coal in other countries continued to support the price of coal from the Central Appalachian Basin, the main type of coal consumed by APCo. However, starting in the fourth quarter of 2011, Central Appalachian coal prices have dropped significantly in response to weak domestic demand.”
In 2011, APCo saw a slight increase in generation need over 2010, which resulted in APCo consuming more coal in 2011 than in 2010. But continued low power demand as a result of the economic downturn still prevented coal prices from rising significantly, Rusk noted.
“Coal prices are believed to be continuing on a general upward trend as easily-mineable eastern bituminous coal sources are becoming rarer, but there is also some uncertainty regarding future EPA rules and how the implementation of those rules may affect future coal consumption,” Rusk wrote. “This uncertainty is reflected in the District of Columbia’s Circuit Court of Appeals decision to stay implementation of the EPA’s Cross-State Air Pollution Rule (‘CSAPR’) on December 30, 2011, less than two days before the rule was to take effect. The stay of the CSAPR has not yet had a significant impact on the market price for coal, but future developments regarding CSAPR and the recently-finalized Mercury and Air Toxics Standards (‘MATS’) do have the potential to cause a downward effect on prices due to lack of demand if utilities have to shutter non-compliant coal-fired power plants. These rules could also lead to increases in price for lower sulfur coals, as utilities look to contract for cleaner coals. It is uncertain what the overall impact of these influences may be on the coal market as a whole.”
16 coal contracts in place, with six to expire by mid 2013
APCo currently has 16 long-term coal contracts with 13 vendors that will be in effect as of July 1, 2012, or are forecast to begin delivering coal within the forecast period. Of these 16 agreements, six are scheduled to expire by the end of the twelve-month forecast period ending June 30, 2013.
In 2011, APCo executed three new long-term coal supply agreements and 11 short-term agreements. APCo also executed a long-term supply agreement in January 2012 that will deliver coal during the forecast period. The three new long-term agreements that APCo entered in 2011 were all for the supply of low-sulfur fuel to the partially-scrubbed Amos plant, and each supplied coal to the plant starting in mid-2011. These contracts were necessary to meet an immediate need for that particular coal at Amos.
The 11 short-term contracts that were executed in 2011 all supplied coal between mid-2011 and the end of 2011, with none of these agreements planned to continue into 2012. These short-term agreements were executed in order to meet the immediate need for low-sulfur coal at Amos, and also to purchase coal for the Clinch River and Glen Lyn plants, which exceeded their forecasted fuel consumption in 2011.
“Low sulfur coal was in great demand during the summer of 2011 as plants without nitrogen oxide and sulfur dioxide controls exceeded their anticipated coal consumption,” Rusk testified. “Also the Amos plant, which consumes a blend of high and low sulfur coals, began to run below its target inventory of low sulfur coal. This need for low sulfur coal was driven by the depletion of high inventories of coal that existed over the past few years, and resulted in the need for APCo to increase purchases to attempt to maintain near target inventories. The long-term agreement that APCo entered into in January 2012 was established to deliver high sulfur coal to the Amos and Mountaineer plants over the next ten years to fill a need for that quality coal.”
APCo is planning to procure more coal during the forecast period, but it is not yet clear what effect that procurement will have on overall coal prices during the forecast period, Rusk said. APCo did not participate in any fuel hedge transactions in 2011, as favorable conditions for hedging opportunities did not arise during that time.
Here is an outline of the 16 term contracts that APCo had in place:
- Consolidation Coal – expires 12/2021, 1.25 million tons in 2012 and then 2.1 million tons in every contract year thereafter, to be used at Amos and Mountaineer, range of 5.96 to 6.68 lbs/MMBtu of SO2 content. This is a major new contract that only began on Jan. 1 of this year and was made possible by relatively new scrubbers on each of the customer power plants. Consolidation Coal is a unit of CONSOL Energy (NYSE:CNX) that has several large Pittsburgh-seam longwall mines in northern West Virginia that produce this kind of high-sulfur coal. No origin mines are given for any of the contracts, including this one. This coal would be delivered by barge. Notable is that this contract is for a much longer term than the usual APCo coal contract.
- American Energy – expires 12/2017, 3 million per year except 3.8 million in 2011, for Mountaineer and Amos, max of 7.4 lbs/MMBtu of SO2. American Energy is a Robert Murray company that operates the Century longwall mine in Ohio.
- Appalachia Coal Sales – expires 12/2012, 720,000 tons in 2012, Amos plant, max of 1.85 lbs/MMBtu of SO2 for 2012 coal. Appalachia Coal Sales is controlled by Alpha Natural Resources (NYSE:ANR) through a June 2011 takeover of Massey Energy.
- Appalachia Coal Sales – expires 12/2012, 125,848 tons per year in 2011 and 2012, Clinch River plant, max of 1.05 lbs/MMBtu of SO2.
- Appalachia Coal Sales – expires 12/2014, 750,000 tons per year for three-year term, Clinch River, no specs given.
- Arch Coal Sales – expires 12/2014, calls for 480,000 tons in 2012 and then 360,000 tons per year in 2013 and 2014, Amos plant, max of 2 lbs/MMBtu of SO2. Arch Coal Sales is part of Arch Coal (NYSE:ACI).
- Bowie Resources LLC – expires 12/2014, calls for 620,400 tons in 2012 with no tons shown for 2013 or 2014, Clinch River, max of 0.87 lbs/MMBtu. Bowie Resources, an independent operator, controls the Bowie No. 2 longwall mine in Colorado.
- Central Coal – expires 12/2013, calls for 378,000 tons in 2012 and 504,000 tons in 2013, Amos plant, max of 1.6 lbs/MMBtu of SO2. Central Coal is a sales arm of Central Appalachia coal operator Jim Bunn Sr.
- Central West Virginia Energy – expires 12/2012, 660,000 tons in 2012, Mountaineer and Amos, max of 1.6 lbs/MMBtu of SO2. Central West Virginia Energy is also one of the Massey Energy operations that Alpha Natural Resources acquired last year.
- Logan & Kanawha Coal – expires 12/2013, 20,000 tons per month, Amos plant, max of 1.77 lbs/MMBtu of SO2. Logan & Kanawha is a unit of James River Coal (NASDAQ:JRCC).
- Maple Coal – expires 12/2013, 360,000 tons in 2011 dropping to 300,000 tons per year in each of 2012 and 2013, Kanawha River plant, max of 1.6 lbs/MMBtu of SO2. Maple Coal is a unit of Walter Energy (NYSE:WLT).
- Mercuria Energy Trading – expires 6/2013, 125,000 tons in 2011, falling to 50,000 tons per year in each of 2012 and 2013, Sporn plant, max of 1.6 lbs/MMBtu of SO2, with option to move that up to 2 lbs/MMBtu in 2012 and 2013.
- Patriot Coal Sales LLC – expires 12/2014, 500,000 tons in 2011, rising to 555,000 tons per year in the 2012-2014 period, Amos, max of 1.6 lbs/MMBtu of SO2. Patriot Coal Sales is a unit of Patriot Coal (NYSE:PCX).
- Patriot Coal Sales LLC – expires 12/2014, 400,000 tons in 2011, 500,000 tons in 2012 and then 180,000 tons per year for 2013 and 2014, Amos, max of 1.35 lbs/MMBtu of SO2.
- Peabody COALTRADE LLC – expires 12/2012, 180,000 tons in 2011 and 500,000 tons in 2012, Amos, max of 1.6 lbs/MMBtu of SO2. COALTRADE is a unit of Peabody Energy (NYSE:BTU).
- Southern Coal – expires 12/2012, 30,000 tons per month for a total of 720,000 tons over the two-year contract term, Amos, max of 3.33 lbs/MMBtu of SO2. Southern Coal is controlled by independent coal operator Jim Justice.