Seven months after it negotiated coal purchase contracts with four coal mining companies at relatively low prices, Owensboro Municipal Utilities has informed those companies that it will not be buying as much coal from them as anticipated.

OMU, which has elected to significantly lower the amount of electricity it produces at its Elmer Smith Station power plant in reaction to continued low prices it garners for that power on the open wholesale market, has informed its coal suppliers that the amount of coal it will take from them this year will not reach the minimum levels in the contracts.

OMU General Manager Terry Naulty informed the OMU board on June 22 of the move in his monthly general manager's report.

"(OMU) Issued "force majeure" letters to all four of OMU's coal suppliers indicating that due to poor market conditions, generation levels at Elmer Smith station are projected to be below the corresponding minimum quantities of fuel contracted for," Naulty wrote. "The force majeure clause allows OMU to purchase less than the annual minimum levels specified in the contracts without penalty."

Force majeure is a legal term for a clause in contracts that frees both parties from liability or obligation in the event something happens beyond the control of the parties.

"Our contracts have minimums and maximums in them," Naulty said. "With our generation levels and prices so low, we anticipate not needing enough coal for even the minimum amount. So far, none of the suppliers have provided negative feedback. They are experiencing the same with other companies. Our coal inventory is pretty high now. We physically have a limit on the amount of coal we can store safely. We feel like we're on very firm ground."

In recent months, OMU has adopted the unprecedented strategy of operating only one of the two generating units at the Smith plant.

OMU's reduced generation was significant during the 2015-16 fiscal year that ended on May 31. Naulty reported that Elmer Smith generation for the year was 1.1 million megawatt hours versus a budgeted amount of 1.74 million megawatt hours, a 36 percent variance, and the lowest output at the plant in 25 years.

Wholesale power sales for the year were also off by 36 percent, according to Naulty, with wholesale gross margin (sales revenue minus cost of production) coming in at $13.2 million when $21.4 million was budgeted.

In November, the OMU board approved coal purchase agreements for 2016 through 2018 with Western Kentucky Minerals/SunEnergy, Armstrong Coal, Peabody COALSALES and KenAmerican Resources for a total of between 1.18 million tons and 1.55 million tons of coal a year at prices (in the first year and second year) between $1.95 and $2.15 per million Btu.

All of the agreements were for prices lower than OMU's former contracts with its suppliers (WKM/Sun, Armstrong and Peabody). KenAmerican is a new supplier.

The prices OMU negotiated were lower than the national average, according to the U.S. Energy Information Agency. It said the annual coal price to the electric power sector averaged $2.36 per million Btu in 2014 and was averaging $2.25 in 2015.

Declining coal prices are blamed on declining demand, here and abroad, with some of the decline attributed to the availability of cheap natural gas for electric power production.

OMU spends more than $60 million a year on coal. The new contracts were expected to save OMU about $7 million over two years.

Steve Vied, 270-691-7297, svied@messenger-inquirer.com

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