Southern Indiana Gas and Electric (also known as Vectren South) has worked out terms of two contract re-openers and is lining up spot deals for new coals that it wants to test, said Wayne Games, the company’s Vice President-Power Supply.
Games, in Aug. 22 fuel adjustment testimony filed at the Indiana Utility Regulatory Commission, noted that as of May 31, coal inventory at Vectren South’s coal-fired plants stood at approximately 455,000 tons, with additional off-site storage of 212,000 tons.
As explained in prior fuel proceedings, Vectren South is continuing its efforts to expand the number of potential suppliers, Games said. Vectren South has signed a spot purchase agreement with Indiana producer Sunrise Coal to buy 50,000 tons of coal in 2013. Vectren South also continues to negotiate with another non-affiliate Indiana producer for a potential spot purchase in 2013 of 30,000 tons of coal, with an option to increase the quantity by an additional 20,000 tons. That producer wasn’t named.
“These spot purchases do not create a term commitment and are based on near term prices,” Games wrote. “These spot purchases should allow Vectren South to assess the coal quality of these suppliers and make future procurements less contingent upon test burns. Vectren South has not previously bought coal from either of these suppliers. If the burns are successful, Vectren South will be able to evaluate future bids from the supplier with the knowledge that their coal is compatible with Vectren South’s boilers.”
With the assistance of its coal consultant, Emily Medine of consulting firm Energy Ventures Analysis, Vectren South solicited four area suppliers for offers for spot coal for the purpose of conducting test burns. The four were selected due to location and the fact that the utility had not used their coal. Each supplier was asked to respond with price, volume and specifications.
“We ultimately worked with two suppliers – one to ship to Brown and one to ship to Culley,” Games said. “Each supplier offered prices which we compared to current market; given the volumes involved and the desire to test the coal, price was a consideration among a number of factors.”
Re-opener terms worked out with Alliance Coal, Vectren Fuels
In 2013, Vectren South has negotiated with Alliance Coal and affiliate coal producer Vectren Fuels under contractual price re-opener provisions for coal delivered in 2014 and 2015. Both contracts state “that the parties agree to negotiate in good faith,… a new price and specifications for coal quality for the supply of coal in years five (5) and six (6).” The prices for year five and six were not established in the base contracts.
The Alliance re-opener concerns a contract for 250,000 tons of coal per year for the A.B. Brown power plant. Vectren South has agreed in principle to re-opener terms with Alliance for deliveries in 2014 and 2015, Games said. If Alliance’s Pattiki mine in Illinois cannot provide an adequate supply of coal, Alliance has the right to offer comparable coal from its other mines for consideration and evaluation, with Vectren South reserving the right to conduct a test burn.
The Vectren Fuels re-opener is under a contract for 410,000 tons of coal per year for the A.B. Brown plant. The contract provides Vectren South with the option to reduce or increase the contract volume by 15%. Vectren South has agreed in principle to re-opener terms with Vectren Fuels for deliveries in 2014 and 2015.
“Vectren South solicited offers from both suppliers,” Games added. “Given each contract represented an independent obligation to negotiate, Vectren South kept the negotiations separate and evaluated each offer. Moreover, the coal provided by each supplier has different quality characteristics that impact Vectren South’s generation, including its ability to provide fly ash for beneficial reuse. Vectren South, with the assistance of its coal consultant, Emily Medine, analyzed the offers based on available market data. Ms. Medine also solicited a competitive quote from an area mine with what Vectren South believes to be acceptable coal quality. Using the market data, and this competitive offer, Vectren South negotiated the re-opener pricing. The suppliers agreed to prices that are reasonable and consistent with prevailing market prices.”
Ash content is a key issued. After failing to work out various issues, including those related to the quality of the ash left after the burning of Illinois coal, Vectren South last year terminated a contract with coal operator Chris Cline’s Foresight Coal Sales.
“In 2011, when Vectren South entered into a contract with Foresight, very specific provisions were included providing for a test burn opportunity due to Vectren South’s lack of familiarity with this Illinois coal,” Games said in Feb. 22 fuel testimony filed at the Indiana commission. “Following a test burn period, it became apparent that Foresight’s coal contained too many constituents and could not be burned by Vectren South without compromising the contract established with a large cement manufacturer for beneficial reuse of the ash from Vectren South’s power plant thereby avoiding more expensive landfill development. Other issues were identified related to quality and delivery logistics, but the ash issue was the most significant concern.”