The coal fleet of Public Service Enterprise Group (NYSE: PEG) was rarely called upon during the first quarter, and when the company’s New Jersey coal units at the Mercer and Hudson plants were dispatched, primarily at Hudson, they were operating part of that time on gas.
“Since our last update in February of 2012, the market price for gas has declined more sharply than the cost of coal,” PSEG Executive Vice President and CFO Carolina Dorsa added during a May 2 earnings call. “The discrepancy has further widened the cost of operating our coal units on coal versus our gas units. In fact, gas would need to increase in price by approximately $3 per mcf or coal decline by $2 per mmBTU. When demand is evident therefore, it has become more economic to run the coal units on gas.”
The coal/gas units at Mercer and Hudson in New Jersey, under PSEG Power, only had an average capacity factor of 2% in the first quarter, down from 29% in the year-ago quarter. The coal unit at the Bridgeport plant in Connecticut only had a capacity factor of 2% last quarter, down from 24% in the year-ago quarter. PSEG’s minority stakes in major baseload coal units in Pennsylvania at the Keystone and Conemaugh plants fared a bit better, with a capacity factor of 63% last quarter, down from 83% in the first quarter of 2011.
Ralph Izzo, PSEG Chairman, President and CEO, said the company’s results for the first quarter are strong in the face of a continued sharp decline in the price of natural gas and a very mild winter. Data indicates that the first quarter of 2012 was the warmest since 1970, and that March of 2012 tied March of 1945 in terms of average temperature as the mildest March since 1895.
“The energy markets are in the midst of a major transformation,” Izzo said. “Today’s low natural gas prices and the cost of meeting new environmental requirements will drive decision-making on the retirement of capacity. Capacity prices under PJM’s reliability pricing model, or RPM, as it’s most often referred to, reflect that markets have been well supplied. The upcoming PJM capacity auction should provide better insight into the future availability of supply.”
PSEG Power is adding 270 MW of new peaking capacity at its Kearny station in June, in place of older, less efficient capacity that it will retire, Izzo noted. It will also be adding 130 MW of new peaking capacity in Connecticut.
Nuclear units stay busy in the first quarter
Dorsa said that production from the nuclear fleet in the first quarter increased slightly from very strong levels in the year-ago quarter with the fleet operating at an average capacity factor of 98.2% during the quarter and output from Power’s combined cycle natural gas fleet increased 8.3% in the quarter. The combined cycle fleet operated at an average capacity factor of 56.6% versus 52.9% in the year-ago period. The coal fleet was rarely called upon during the quarter.
The collapse in coal generation last quarter means that the company has plenty of coal on site and in offsite storage, Dorsa said. “You may recall, we restructured the Adaro contract last year so that it no longer has a fixed commitment,” she added. “It is a calculated price, which will always be effectively a little bit below market that goes out through 2016, but we no longer have a penalty for canceling shipments so we no longer have to actually take coal. We do have some purchase commitments for coal and related transportation that go through 2013, and we’re in the process of trying to renegotiate some of those.”
She was referring to Adaro Energy out of Indonesia, which in recent years has been supplying an ultra-low-sulfur coal to PSEG to help it achieve environmental compliance while new emissions controls were added to coal units in New Jersey. The main consumer of this coal now is Bridgeport Unit 3 in Connecticut.
Izzo, asked whether the Mercer and Hudson coal units, which recently got back-end environmental retrofits, are shutdown candidates due to low recent usage, said: “I think that you never say never, right? Because there’s always some sort of business one can envision. However, we’ve always benefited from fuel diversity. The CapEx at those units is behind us. Still, we’re pretty confident that given a return of normal demand, which was anything but in the last six months, and some modest cooperation of prices, that those units will be quite ready, willing and available to meet the needs of the customers in this space.”
Dorsa added on that same point: “And as I said, in different periods of when they run, this quarter, although it hasn’t been very often, because they have the fuel flexibility, they can run on gas and gas is more economic to run on than coal, so that gives us even a little more than you would have with a normal coal unit.”
Minimal coal usage drags down fleet average
PSEG Power’s fleet declined 6.3% in the quarter as a result of a decline in production from the coal fleet, PSEG said in its May 2 earnings report. Production from the nuclear fleet increased 0.5% from very strong levels in the year ago quarter and output from PSEG Power’s combined cycle natural gas fleet increased 8.3% in the quarter. A decline in demand given warmer than normal weather conditions compared with more normal weather in the year-ago quarter, as well as a decline in wholesale energy prices, resulted in reduced dispatch of the coal fleet. A decline in average capacity prices to $110-MW/day from $174-MW/day reduced earnings in the quarter.
PSEG Power’s nuclear fleet operated at an average capacity factor of 98.2% during the quarter. The Hope Creek nuclear facility, 100%-owned by PSEG Power, entered a refueling outage in April. Salem 2, 57%-owned and operated by PSEG Power, is scheduled for refueling in the fall of 2012. The combined cycle fleet’s availability improved in the quarter, and the fleet operated at an average capacity factor of 56.6% versus 52.9% in the year-ago period.
PSEG Power continues to forecast output for 2012 of 53-54 TWh. Output for the remainder of the year is 70%-75% hedged at an average price of $59 per MWh. For 2013, forecast output of 52-54 TWh is approximately 55%-60% hedged at an average price of $53 per MWh. PSEG is forecasting output for 2014 of 53-55 TWh. Of this amount, 20%-25% is hedged at an average price of $55 per MWh.
PSEG noted in its May 2 Form 10-Q report that PSEG Power has approved the expenditure of approximately $192m for a steam path retrofit and related upgrades at its co-owned, nuclear Peach Bottom Units 2 and 3. Unit 3 upgrades were completed on schedule in October 2011. Unit 2 upgrades are expected to result in an increase of Power’s share of nominal capacity by about 14 MW in 2012. Total expenditures through March 31, 2012, were $118m and are expected to continue through 2014.
PSEG Power has begun expenditures in pursuit of additional output through an extended power uprate of the Peach Bottom nuclear units. The uprate is expected to be in service in 2015 for Unit 2 and 2016 for Unit 3. Power’s share of the increased capacity is expected to be about 137 MW with an anticipated cost of approximately $419m. Total expenditures through March 31, 2012, were $40m and are expected to continue through 2016.