Westmoreland Coal (NasdaqGM: WLB) announced Dec. 23 that it has entered into an agreement with Dominion Virginia Power, a subsidiary of Dominion (NYSE: D), to restructure the remaining five years of the ROVA I and ROVA II contract to allow the energy component of the contract to be supplied from outside sources.
The restructured contract provides long-term benefit to ROVA, Dominion and its customers, Westmoreland added in the brief statement.
ROVA (also called Roanoke Valley) has two units, called Roanoke Valley I and II, with a total capacity of approximately 230 MW. ROVA commenced operations in 1994 as a Public Utility Regulatory Policies Act co-generation facility with long-term power purchase agreements with Dominion. In 2012, ROVA experienced significant unplanned maintenance outages, resulting in reduced megawatt hours and capacity factor.
“We can extend, by mutual consent, the contracts with Dominion Virginia Power for five-year terms at mutually agreeable pricing,” Westmoreland noted in its March 12 annual Form 10-K report. “In 2012, the sale of power to Dominion Virginia Power accounted for approximately 13% of our consolidated revenues. We are impacted by seasonality as due to the impact of weather on customer demand and scheduled maintenance outages typically performed in the spring and fall.”
Westmoreland entered into a coal supply agreement for the larger ROVA coal unit in June 1993, and a coal supply agreement for the smaller unit in December 1993, which provide for ROVA’s coal needs for a twenty-year period, terminating on May 29, 2014, and June 1, 2015, respectively. Westmoreland also entered into power sales agreements with Dominion that provide for the sale of power for a twenty-five year term through May 29, 2019, for the larger ROVA unit and June 1, 2020, for the smaller ROVA unit. The coal supply agreements provide for coal at a price per ton that is significantly less than today’s open market price for Central Appalachia coal. Upon the termination of the coal supply agreements beginning in 2014, Westmoreland will be required to renegotiate the current contract or find a substitute supply of coal at a projected cost per ton far greater than the price it is paying today.
“However, the power sales agreements do not provide for a price increase related to an increase in the cost per ton of delivered coal and Dominion Virginia Power’s payment for power after 2014 will not escalate with our increased coal costs,” the Form 10-K said. “Due to the change in the economics of ROVA at such time, it is projected that ROVA will begin incurring losses in 2014 and may be unable to pay its obligations as they become due. While we are actively pursuing various possibilities for the future of the operation, there is no guarantee that we will be able to execute an alternative before our margins related to ROVA are negatively affected.”
Colorado-based Westmoreland Coal is the oldest independent coal company in the United States. Its coal operations include sub-bituminous coal mining in the Powder River Basin in Montana and Wyoming, and lignite mining operations in Montana, North Dakota and Texas.