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Black Hills, NRG Differ on Impact of Coal-to-Gas Switch

Black Hills Corp. and NRG Energy Inc. officials last week offered decidedly different views on coal-to-natural gas switching during separate conference calls to discuss 2Q2012 earnings performance.

Black Hills management team said last Monday it was suspending prior to retirement several old coal and natural gas-fired power plants in Colorado and South Dakota as part of its utility operations in those two states. Two days later NRG senior executives speculated that there may be the beginning of a reversal of the ongoing coal-to-gas switch for power generation, particularly in the Texas market where NRG is the second biggest generator.

Seeing a rally in natural gas prices that could push them up to the $3.50 to the low $4 area in the next two to three years, NRG COO Mauricio Gutierrez said gas prices in some areas are beginning to approach the same level as Eastern coal prices.

Black Hills CEO David Emery said the 55% increase in year/year profits came mostly from the utility sector, where a record heat wave in June pushed power operations to maximum output, but that was partially offset by poor results on the natural gas side, both for utility and exploration and production (E&P) operations. There was a 32% drop in gas utility sales and a 27% decrease in the average price Black Hills received for gas supplies from its E&P operations, Emery said.

Meanwhile, Black Hills Energy's Colorado utility and Black Hills Power announced suspension of operations at the W.N. Clark coal-fired generation plant in Canon City, CO, and natural gas-fired steam units Nos. 5 and 6 in its Pueblo, CO, generation complex. In addition, Black Hills said it will suspend operations Aug. 31 at its Ben French coal-fired plant in Rapid City, SD. "Suspension of operations requires the units to still be available to generate electricity when necessary, especially during hot summer months when customers are using the most energy," a spokesperson said.

Emery said the company did a detailed analysis of new environmental regulations, along with changing market and operating conditions before "identifying an opportunity to make changes to our resource portfolio by suspending operations at some of our older generating facilities in advance of permanently retiring those plants." The company expects the 42 MW Clark plant to close by the end of 2013, while the 25 MW French, 34.5 MW Osage and 22 MW Neil Simpson are all scheduled to be retired on March 21, 2014.

NRG's Gutierrez said with the recent gas price rise combined with a rise in heat rates (the fuel quantity needed to produce a fixed amount of power) in Texas "we have seen the reversal of the switching that we experienced in January." That's why NRG sees the prospects for such a reversal more broadly, keeping in mind that natural gas is "just one component," he said.

"From our perspective there is a small relationship between heat rates and natural gas, and heat rates are a function of fuel markets in which gas has a lot of drivers," Gutierrez said. "In the forward markets, when you get into 2013 or '14 or '15, with gas prices in the high $3 range and low $4 territory, you are significantly out of the [coal-to-gas] switching area."

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