Northern Indiana Public Service turns in depressed coal burn in Q1 2015

For the three months ended March 31, Northern Indiana Public Service Co.‘s (NIPSCO) fuel requirements for its generating units were supplied by coal (69.84%) and the remainder by natural gas (30.16%), including the Sugar Creek Generating Station.

NIPSCO uses: a blend of Powder River Basin (PRB) coal and Pittsburgh #8 (Pitt8) coal in Unit 12 at its Michigan City Generating Station; Illinois Basin (ILB) coal in Units 7 and 8 at its Bailly Generating Station; and a blend of PRB coal and Pitt8 coal in Unit 14, PRB coal in Unit 15, and ILB coal in Units 17 and 18 at its R. M. Schahfer Generating Station.

Shirley Schultz, Manager of Fuel Supply for (NIPSCO), wrote in April 30 fuel cost testimony filed at the Indiana Utility Regulatory Commission: “NIPSCO had six (6) long term supply contracts in the first quarter of 2015 with Arch Coal Sales Company (PRB coal), Peabody COALSALES, LLC (PRB coal), Consol Pennsylvania Coal Company (Pitt8 coal), Peabody COALSALES, LLC (ILB coal), Oaktown Fuels Mine No. 1 LLC (ILB coal) and Sunrise Coal, LLC (ILB coal). The remainder of NIPSCO’s coal requirements was met through spot purchases.

“The delivered cost of coal for the twelve months ending March 31, 2015 was $50.02 per ton or $2.467 per million Btu. The delivered cost of coal for all coal shipments during the reconciliation period of January, February and March 2015 was $50.70 per ton or $2.466 per million Btu. The delivered cost of coal for contract coal shipments during the reconciliation period was $50.83 per ton or $2.490 per million Btu. The delivered cost of coal for spot coal shipments during the reconciliation period was $49.39 per ton or $2.224 per million Btu.

“NIPSCO agreed to purchase approximately 208,000 tons of spot coal from one supplier during the reconciliation period. These tons will be shipped during the period of May 1, 2015 through December 31, 2015.

“The average spot market price of coal during the reconciliation period was $11.18 per ton for PRB coal, $33.78 per ton for ILB coal and $51.71 per ton for Pitt8 coal. NIPSCO tracks spot market pricing by reviewing various daily and weekly coal publications. These average spot market prices do not include transportation charges.

“Coal supply during the reconciliation period was impacted by natural gas pricing and weak coal demand. Consequently, spot market pricing across all coal regions remained relatively soft. Railroad fluidity and velocity during the reconciliation period continued to be improved as compared to railroad performance during 2014. Inventory stockpiles also improved at NIPSCO’s generating stations, and NIPSCO’s total coal inventory was twelve percent (12%) above its system target level at the end of the reconciliation period. This was primarily due to low natural gas prices leading to the displacement of coal fired generation by natural gas fired generation.

“NIPSCO’s delivered cost of coal during the reconciliation period was $50.70 per ton or $2.466 per million Btu, which was an increase compared to the fourth quarter of 2014 at $50.07 per ton or $2.454 per million Btu. Increased costs during this reconciliation period were due to coal and transportation contract annual price increases and increased freeze treatment costs. Also, in the first quarter of 2015, there was a smaller percentage of spot coal shipments, which were at a lower price per ton than the price per ton for contract coal shipments, than there was in the fourth quarter of 2014.

“NIPSCO anticipates that its delivered cost of coal for the forecast period of July, August and September 2015 will be approximately $51.17 per ton or an estimated $2.543 per million Btu.

“The average spot market prices for calendar year 2016 are currently $12.22 per ton for PRB coal, $34.92 per ton for ILB coal and $54.24 per ton for Pitt8 coal. These average spot market prices do not include the cost of transportation. 

“NIPSCO has coal supply agreements in effect for 2015 with firm pricing. NIPSCO also purchased additional ILB spot coal to supplement the term coal purchases in 2015. At this time, NIPSCO does not antidpate needing additional spot coal during the forecast period. However, if actual coal consumption is greater than forecasted consumption, additional spot coal purchases may be required. NIPSCO believes the greatest impact on the supply, demand, and cost of coal during the forecast period will be the price of natural gas. If natural gas fired generation remains competitively priced, and effectively displaces coal fired generation, coal markets will be oversupplied and coal pricing will remain soft.

“NIPSCO has transportation agreements in effect for 2015 with firm pricing (exclusive of fuel surcharges), so there will be no additional transportation price increases in the forecast period related to these existing transportation agreements. The prices of West Texas Intermediate crude decreased during the reconciliation period. If this trend continues, NIPSCO’s delivered coal cost will be impacted as a result of paying lower fuel surcharges to the railroads. However, due to the displacement of coal fired generation by natural gas during the reconciliation period and NIPSCO’s total coal inventory above target level, NIPSCO placed three (3) of its coal unit train sets in short-term storage to reduce coal shipments and avoid further increases in coal inventories above target. Additional costs will be incurred for the storage of these railcars, thereby impacting the delivered cost of coal.

“NIPSCO does not anticipate any issues in securing coal or transportation during the forecast period. The challenge will be to manage the growth in NIPSCO’s coal inventory. NIPSCO’s coal burn was down twenty-one percent (21%) during the first quarter of 2015 from what was projected. Low natural gas prices and generating unit outages could continue to impact NIPSCO’s inventory through the forecast period. However, as mentioned in Answer 25, the short-term storage of three (3) of NIPSCO’s coal unit train sets will mitigate further increases in coal inventory levels. NIPSCO is currently projecting to maintain target inventory levels throughout the forecast period.”

NiSource Inc. (NYSE: NI) said in its April 30 first-quarter earnings report that its NIPSCO subsidiary remains on schedule and on budget with a flue gas desulfurization (FGD) unit at its coal-fired Michigan City Generating Station. The approximately $265 million project at Michigan City Unit 12 is expected to be placed in service by the end of this year. Another $80 million in environmental investments also will be completed at NIPSCO’s coal-fired facilities this year. These investments, supported with cost recovery, help improve air quality and ensure NIPSCO’s generation fleet remains in compliance with current environmental regulations, NiSource said. In the 2013-2014 period, NIPSCO also completed FGD installations on the coal-fired Schahfer Units 14 and 15.

Notably, the Michigan City Unit 12 scrubber may allow NIPSCO leeway to procure more higher-sulfur coal for that unit.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.