Effective April 1, Northern Indiana Public Service Co. (NIPSCO) had five long-term contracts with four coal producers: Arch Coal Sales (for Powder River Basin coal); Enserco Energy LLC (PRB coal); Consol Pennsylvania Coal (Pittsburgh 8 coal); and two contracts with Peabody COALSALES LLC (Illinois Basin coal).
NIPSCO is currently negotiating a possible term contract with another, unnamed coal supplier for future requirements of PRB coal, said NIPSCO’s Director of Fuel Supply, Kevin Strnatka, in May 4 fuel adjustment clause testimony at the Indiana Utility Regulatory Commission. If needed, the remainder of NIPSCO’s coal requirements would be met through spot purchases, he added.
In the first quarter of this year, NIPSCO’s fuel requirements for its generating units were supplied by coal (68.22%) and the remainder by natural gas (31.78%), including the gas-fired Sugar Creek Generating Station. NIPSCO uses: a blend of PRB and Pittsburgh #8 coal in Unit 12 at its Michigan City plant; Illinois Basin high-sulfur coal in Units 7 and 8 at Bailly; and a blend of PRB coal and Pittsburgh #8 coal in Unit 14, just PRB coal in Unit 15, and just Illinois Basin coal in Units 17 and 18 at its R. M. Schahfer plant.
NIPSCO made no spot purchases in the first quarter of this year. NIPSCO does not anticipate any issues in securing coal or transportation this summer, Strnatka wrote. “The challenge this summer will be to manage the excess coal inventory incurred due to the mild winter and the low natural gas pricing, effectively displacing coal fired generation,” he added. “Consumption could further decline based on continuing mild weather and persistent low natural gas pricing. NIPSCO will attempt to manage through any excess inventory by working with suppliers to defer tons as allowed in the coal supply agreements, and to redirect coal for consumption from one station to another if necessary, but at the same time attempting to meet the minimum volume commitments in our transportation agreements to forego paying liquidated damage penalties to the railroads.”
The delivered cost of coal for the twelve months ending March 31, 2012, was $51.08 per ton or $2.565/mmBtu. The delivered cost of coal for the first quarter of this year was $50.62 per ton or $2.554/mmBtu.
The average spot market price of coal during the first quarter was $10.51 per ton for PRB coal, $47.08 per ton for Illinois Basin coal and $65.34 per ton for Pittsburgh #8 coal. NIPSCO tracks spot market pricing by reviewing various daily and weekly coal publications. These average spot market prices do not include transportation charges.
Mild weather, cheap gas take a bite out of coal in Q1
Coal supply during the first quarter continued to be impacted by the mild weather, the decrease in the price of natural gas and “lackluster” coal demand in both the domestic and international markets, Strnatka said. Inventories continue to grow and spot market pricing is sliding due to the overabundance of coal on the market. However, since electrical demand has decreased, requiring less coal to be burned, NIPSCO was not afforded any opportunities to buy cheap coal in the spot market. Therefore, reduced coal requirements were fulfilled with strictly contract coal.
NIPSCO’s delivered cost of coal during the first quarter increased compared to the fourth quarter of 2011 from $49.74 per ton or $2.522/mmBtu to $50.62 per ton or $2.554/mmBtu. This increase can be attributed to an increase effective Jan. 1, 2012, in the contractual price of PRB and Pittsburgh #8 coal that will be in effect for 2012. Transportation costs, including fuel surcharges were relatively flat during the first quarter.
In the third quarter of this year, NIPSCO anticipates that its delivered cost of coal will be approximately $50.56 per ton or $2.553/mmBtu. Since NIPSCO will likely be reducing any excess coal inventory, and not have a need to purchase spot coal, the delivered coal cost will be reflective of the existing coal and transportation agreements. The projected delivered cost of $2.553/mmBtu could be influenced by the volatility in the diesel fuel market, since rail transport costs are in part tied to the price of diesel fuel to run locomotives.
The average spot market prices for calendar year 2013 are currently projected by NIPSCO at $13.18 per ton for PRB coal, $50.77 per ton for Illinois Basin coal and $68.84 per ton for Pittsburgh #8 coal. These average spot market prices do not include the cost of transportation.
NIPSCO wrestles with fuel surcharge issues
In a prior fuel case, a group of NIPSCO industrial power customers 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 Industrial Group’s recommendation regarding coal transportation hedging to analyze, among other things, the possible benefits and costs of such a 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.
Figuring this out is complicated by the fact that the transportation contracts include fuel surcharge triggers against two different commodities, Strnatka noted. One contract uses West Texas Intermediate (WTI) 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.”