For the twelve-month period ending Feb. 28, Duke Energy Indiana purchased approximately 13.3 million tons of coal (under both long- and short-term contract commitments) at an approximate average cost of $2.77/MMBtu.
The delivered cost of coal purchased under long-term commitments averaged $2.77/MMBtu and made up 95.9% of total coal receipts. The delivered cost of coal purchased under short-term commitments averaged $2.84/MMBtu.
Brett Phipps, employed as Managing Director of Fuel Procurement for Duke Energy Progress, a utility affiliate of Duke Energy Indiana, noted those facts in April 30 testimony to the Indiana Utility Regulatory as part of Duke Energy Indiana’s twice-yearly fuel cost review case. Both of these utilities are subsidiaries of Duke Energy (NYSE: DUK).
Wrote Phipps about coal prices in general: “Although published prices for U.S. coal markets have not changed significantly since the last fuel proceeding they have softened across the regions. The following are 2015 price indications for the different coal producing regions: High-sulfur Illinois basin coal prices are in the low to mid $30s per ton; Central Appalachia coal prices are in the mid $40s; Northern Appalachia coal prices are in the mid to high $40s; and Powder River Basin coal prices are approximately $10-11 per ton.
“Coal demand has lessened slightly since the last [fuel case] mainly due to cheaper natural gas pricing and lower purchase power cost. As such, utility stockpiles have seen some growth since the last [fuel case]. Coal markets are likely to be relatively stable in the near term; however, looking forward, we see potential for market volatility, due to a number of factors, including: (a) recent U.S. Environmental Protection Agency (‘EPA’) regulations for power plants that result in utilities retiring or modifying plants, which lower total domestic steam coal demand, and can result in some plants shifting coal sources to different basins; (b) softening demand in global markets for both steam and metallurgical coal, causing export opportunities to decline for U.S. coal producers; (c) increased production in the Illinois Basin and Northern Appalachian regions; (d) increased volatility in gas prices, and continued increase in gas supply combined with installation of new combine cycle (‘CC’) generation by utilities, especially in the South, which may also lower overall coal demand; (e) increasingly stringent safety regulations for mining operations, which result in higher costs and lower productivity and (fj volatile power prices.”
Phipps said that Duke Energy Indiana’s coal inventories as of Nov. 30, 2014, were approximately 3,980,000 tons (or 65 days of coal supply at a full load burn rate per day) across the system. As of Feb. 28, coal inventories increased to approximately 4,196,000 tons (or 68 days of coal supply) due to lower power prices and low natural gas prices this past winter. Duke Energy Indiana expects coal inventories to increase over the next quarter because of existing contractual commitments, plant outages, and lower burns due to seasonal weather.
Duke Energy Indiana continues to evaluate the need for a coal decrement, Phipps noted. That is where the utility factors in its coal inventory costs to the market power bids out of its coal plants, boosting their power sales. Additionally, the company continues to evaluate a host of options in order to effectively manage the growing inventories. As inventory levels dictate, the company explores options to store or defer contract coal or resell surplus coal into the market. However, due to continued weak coal market conditions, resell opportunities will continue to be extremely difficult in the near term, Phipps noted.
Duke Energy Indiana has exercised its right to reopen the contract price of an existing long-term agreement in accordance with the terms of the contract by giving notice in March, Phipps said, without providing details.
As for natural gas pricing, Phipps wrote: “Spot natural gas prices are dynamic, volatile and can change significantly day to day based on market fundamental drivers. The current spot price for natural gas is in the range of approximately $2.75 to $3.05 per MMBtu. For the period December 2014 through February 2015 the price the Company paid for delivered natural gas at its gas burning stations was between a low of $2.66 per MMBtu on February 9, 2015 to a high of $11.50 on February 19, 2015. In comparison, during the previous period of September 2014 to November 2014, the price the Company paid for delivered natural gas at its gas burning generation stations during this period was in a range of delivered daily gas prices between a low of $3.52 per MMBtu on October 28, 2014 to a high of $5.10 per MMBtu on November 18 and 19, 2014.
“During December 2014 through February 2015, natural gas prices increased in the winter period due to higher demand for natural gas. The Company’s new firm transportation agreement with Panhandle Eastern for firm pipeline capacity to support the Noblesville and Cayuga CT operations began service in June 2014. This firm transportation enhanced the supply reliability by reducing the risk of gas pipeline capacity curtailments to interruptible transportation during periods of tighter supply and demand conditions due to extreme weather.”