Southern Indiana Gas and Electric is working with coal supplier Foresight Coal Sales to resolve some issues with the ash content of its coal that turned up during test burns of this lllinois product.
Wayne Games, Vice President-Power Supply at Southern Indiana Gas and Electric d/b/a Vectren Energy Delivery of Indiana Inc. (also known as Vectren South), made that point in a Nov. 21 fuel adjustment clause (FAC) filing at the Indiana Utility Regulatory Commission. Vectren South is a unit of Vectren Corp. (NYSE: VVC).
The Foresight contract became effective in October 2011. Foresight Coal Sales is a unit of coal operator Chris Cline’s Foresight Energy, which is developing new longwall deep mines in Illinois that produce high-sulfur coal aimed primarily at scrubber-equipped power plants like those of Vectren South.
“Because Vectren South had not previously burned coal from Foresight’s mines, the contract with Foresight provided for a test burn period in which Vectren South could burn the coal to ensure that the resulting ash could continue to be sold for beneficial reuse,” Games wrote. “Vectren South sells its ash for beneficial reuse to a cement manufacturer in order to avoid the costs of developing a landfill. In order for the ash to be used for beneficial reuse it must meet certain specifications. Foresight and Vectren South have completed the test burn. Based on an analysis of the ash produced during the burn, and discussions with the ash customer, Vectren South has determined that the ash produced from burning Foresight coal does not meet its specifications due to the levels of certain constituents. Therefore, Vectren South provided notice to Foresight on October 23, 2012 that it is suspending the Agreement pursuant to the terms of the contract’s test burn provisions while the parties enter into good faith negotiations to attempt to resolve the issues related to ash quality. Those negotiations have commenced.”
Games provided no further information on the Foresight contract in the Nov. 21 filing. In prior FAC testimony, Games identified the ash customer as Holcim, the concrete manufacturer. The Foresight contract volume increases from 250,000 tons this year to 500,000 tons in 2013, with the contract to end in 2017. This coal is aimed at the A.B. Brown power plant.
As of August 31, 2012, coal inventory at Vectren South’s coal-fired plants stood at approximately 623,000 tons, with additional off-site storage of 222,000 tons, Games noted in the Nov. 21 filing.
Light coal burn, higher coal costs become an accounting issue
J. Cas Swiz, Director, Regulatory Implementation and Analysis at Vectren Utility Holdings Inc., the immediate parent company of Vectren South, discussed a coal inventory reduction approved by the commission in a prior FAC case. The commission approved a settlement agreement that provides for creation of a regulatory asset in the amount of $42.4m designed to provide agreed upon reductions in the value of the coal inventory on Vectren South’s books, as well as a reduction to 2012 contract purchases, to a price per ton that equals projected 2013 contract prices. This deferred amount will be recovered over a six-year period starting in January 2014.
Effective Dec. 31, 2011, Vectren South’s book value of its coal inventory was reduced to $53.81 per ton, the projected contract price for coal in 2013. This resulted in a $17.8m decrease in the value of the coal inventory, with a corresponding regulatory asset created. Effective Jan. 1, 2012, all coal purchases under existing contracts were also reduced to the same $53.81 per ton via a monthly journal entry to the same regulatory asset. Starting in January 2012, coal consumption was recorded at the lower inventory price per ton as a result of both entries, Swiz noted.
As of Oct. 31, 2012, the deferred coal costs within the regulatory asset account totaled $42.4m. In August 2012, Vectren South reached the maximum deferred amount defined in the commission approval order. Effective September 2012, the process to reduce the price of purchases ceased, and the actual delivered cost per ton is now impacting the weighted average cost of inventory.
Vectren South reached the maximum deferred amount sooner than originally anticipated because the mild winter of 2011-2012 resulted in a larger coal inventory balance at the end of the year than originally anticipated. This created approximately $0.8m of additional deferrals related to the reduction of the inventory value at year end. In addition, high diesel fuel prices have caused the delivered cost per ton of coal to be higher than anticipated, forcing increased deferrals in 2012. Because reductions to the delivered cost of coal ceased once the maximum deferred amount was reached, the weighted average cost of coal inventory increased, which will create increased coal consumption expense in future periods.
“The deferral of $42.4 million has resulted in reduced fuel costs, as expected,” Swiz noted. “The accelerated period in which the cap was reached did not impact the overall benefit received by customers.”