Westmoreland Coal (NASDAQ: WLB) will lose business to North American Coal to supply lignite out of its Beulah strip mine to the adjacent Coyote power plant once a contract expires in May 2016.
Based on the uncertainty of securing a new contract with Coyote, in the fourth quarter of 2011, Westmoreland revised various accounting estimates to reflect the impact on mining operations of the current contract’s expiration in 2016. These changes resulted in revised depreciable asset and coal reserve lives and asset retirement obligations, said the company in its Aug. 9 Form 10-Q filing.
On May 3, the Coyote station customer informed Westmoreland that it is entering into a mine development agreement with another provider that will likely result in a coal supply agreement with that provider. “As a result, Coyote Station will likely not purchase coal from the Beulah Mine after the expiration of its current contract,” said the Form 10-Q. “For the past several years, the Beulah Mine has averaged 2.4 million tons of coal sold per year to Coyote Station. The Company is currently considering strategic alternatives for its Beulah Mine, which also provides approximately 0.5 million tons of coal to the Heskett Station power plant on an annual basis.”
Said the Westmoreland website about Beulah: “Coal from this operation supplies the fuel requirements for the adjacent 427 megawatt Coyote Generating Station. Coyote is a low-cost, base-load generation facility that utilizes emission control technologies and purchases all of its lignite from the Beulah Mine. Dakota Westmoreland also owns and controls a four-mile rail spur that connects the mine and plant to the Burlington Northern Santa Fe Railroad’s Stanton line, which it uses to supply the two-unit 75 megawatt Heskett Station, located 74 miles away.”
Virtually all of the fuel requirements of the Coyote, Heskett and Lewis & Clark stations are met with coal supplied by units of Westmoreland under contracts that expire in May 2016, April 2016 and December 2012, respectively, said MDU Resources (NYSE: MDU) in its Feb. 24 annual Form 10-K report.
MDU Resources is the parent of Montana-Dakota Utilities. Montana-Dakota estimates the Heskett and Lewis & Clark coal requirement to be in the range of 450,000 to 550,000 tons and 250,000 to 350,000 tons per contract year, respectively.
Coyote owners opted for North American Coal after RFP
The Coyote plant owners—Otter Tail Power, Montana-Dakota Utilities, NorthWestern Energy and Northern Municipal Power Agency— announced in May that they have entered into an agreement with North American Coal to begin developing the Coyote Creek mine near the Coyote power plant. According to station manager Jan Rudolf, newly appointed as Otter Tail Power’s vice president of energy supply, the new mine should be ready to deliver lignite coal in May 2016 when the station’s contract with the existing supplier ends.
Rudolf said the company issued a request for proposals for coal supply to lignite providers in North Dakota almost two years ago and after nearly year-long discussions with potential providers, including the existing provider, chose North American Coal, which operates several lignite mines in the U.S. The Coyote owners also considered western subbituminous coal before opting to continue with lignite.
As for Lewis & Clark and Heskett coal supply, MDU Resources spokesman Mark Hanson said in an Aug. 15 email that both plants are under contract with a coal supplier and the plant operators continue to work with those suppliers. “We are actively working on future coal supply for Lewis & Clark,” he added.
North American Coal is a unit of NACCO Industries (NYSE: NC).
Looks like Sherco Unit 3 out of operation until early 2013
Also, Westmoreland reported in the Form 10-Q that in November 2011, an explosion and subsequent fire occurred at Unit 3 of Xcel Energy’s (NYSE: XEL) Sherburne County (also known as Sherco) plant, which is the largest customer of the company’s Absaloka strip mine in Montana. Xcel indicated that Unit 3 will be offline for an extended period while it investigates the source of the explosion and the extent of the damage. The current estimate is that Unit 3 will be back online by the end of the first quarter of 2013, Westmoreland said.
“Westmoreland Resources, Inc., or WRI, our wholly owned subsidiary that operates the Absaloka Mine, maintains business interruption insurance coverage and submitted a notice of loss to its insurance carriers,” the Form 10-Q said. “Our insurance carriers have accepted liability under the policy for the business interruption claim and we have started to receive cash proceeds.”
Sherburne County is a three-unit, 2,400-MW plant, with Unit 3 rated at 900 MW. It burns low-sulfur Western coal from mines in Montana and Wyoming. The plant normally burns 30,000 tons of coal every day (three trainloads) and more than 9 million tons a year.