Vectren’s coal operations lose money, run into market issues

Indiana-based Vectren Corp. (NYSE: VVC) reported May 2 that it has 2012 first quarter net income of $51.3m, compared to net income of $44.6m in the same quarter of 2011.

Utility earnings were $56m, compared to $48.6m in 2011. Non-utility results were a loss of $4.8m, compared to a loss of $10.5m, excluding the first quarter results from Vectren Source in 2011. Vectren Source was sold at the end of 2011.

“We are very pleased with our overall 2012 first quarter results and the improvement over the comparable results last year,” said Carl Chapman, Vectren’s chairman, president and CEO. “Our utility group again delivered solid earnings growth, as expected. Meanwhile, our Infrastructure Services segment continues to beat our expectations, offsetting some of the weakness we are experiencing in our coal mining operations. As a result, we are maintaining our overall 2012 earnings guidance at the same levels that we set in February.”

Vectren’s Coal Mining segment has two operating deep mines, and a third in development. It mines and sells coal to the company’s utility operations and to third parties through its wholly owned subsidiary Vectren Fuels Inc.

Coal Mining’s first quarter results were a loss of $0.3m, a decrease in earnings of $1.9m compared to 2011. Results have been impacted by reduced productivity at the Prosperity mine where a thin coal seam and other unfavorable mining conditions have negatively impacted costs. These increased costs offset very favorable cost per ton results at the new Oaktown mine during the period. Revenues decreased as expected due to reduced pricing to customers associated with contracts that had price reopener clauses effective for 2012. Also, sales in the first quarter were lower than expected due to the mild weather. Coal sold in the first quarter of 2012 was 1.1 million tons compared to 1.3 million tons in the first quarter of last year.

“Vectren Fuels continues negotiation with a number of customers regarding sales in 2012 and beyond,” said the Vectren earnings statement. “Coal sales in 2012 are now estimated at 5.6 million tons, with 70 percent sold. The impact of lower prices is expected to result in earnings from Coal Mining operations in 2012 substantially lower than the results in 2011. However, long term, reduced volumes from Central Appalachia and the large number of scrubbers to be installed should drive strong demand for Illinois Basin coal.”

Vectren said in its May 3 Form 10-Q filing that its Vectren South power generating unit issued a request for proposal in April 2011 regarding coal purchases for a four-year period beginning in 2012. After negotiations with bidders, Vectren South has reached an agreement in principle for multi-year purchases with two suppliers, one of which is Vectren Fuels. The other, unnamed party is coal operator Chris Cline’s Foresight Coal Sales.

Consistent with Indiana Utility Regulatory Commission (IURC) direction in an electric rate case, a sub-docket proceeding was established to review the company’s prospective coal procurement procedures, and the company submitted evidence related to the March 2011 RFP and those coal procurement procedures to the IURC in September 2011. In March, the IURC issued its order in the sub-docket, which concluded that Vectren South’s 2011 RFP process resulted in prices at the lowest fuel cost reasonably possible. The IURC will continue to monitor Vectren South’s coal procurement process in future fuel adjustment proceedings.

As of March 31, management estimates the company’s total Illinois Basin coal reserves to be approximately 131 million tons. Of this amount, about 39 million tons are attributable to a mine that is currently under construction located at the company’s Oaktown mining complex and is expected to open later in 2012. However, the Form 10-Q said Vectren Fuels may continue to adjust the timing for this second Oaktown mine as it evaluates the impacts of market conditions. Once this mine is in production, Vectren Fuels’ three underground mines are capable of producing a total of about 7.5 million tons of coal per year.

Five Star Mining LLC is the contract miner at the Prosperity underground mine and Black Panther Mining LLC is the contract operator at the Oaktown underground mines. Both contractors are controlled by the Blankenberger family.
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.