Owners of Coal Gasification Plant Default
Owners of the Great Plains coal gasification plant--the nation’s first commercial synthetic fuels plant--defaulted on a $1.5-billion U.S.-guaranteed loan Thursday, saying they could not keep the plant open without more government help.
The U.S. Department of Energy, which rejected the owners’ request for $720 million in price supports and $673 million in deferred payments, said it will continue to operate the Beulah, N.D., plant until it decides what to do with it.
A department spokesman said the plant has a week’s supply of coal on hand and another week’s supply on order. The plant employs 973 in the North Dakota hamlet of 5,600. If the plant closes, “it would hurt like hell,” said Darold Benz, Beulah’s mayor.
Planned 12 Years Ago
As a result of the default, the owners, which include Los Angeles-based Pacific Lighting, said they will take major write-offs to cover the losses. Pacific Lighting said it will take a third-quarter write-off of $60 million, or $1.52 a share. Pacific Lighting, which had a 10% share in the project, earned $278.3 million, or $3.56 a share, in all of 1984.
The plant, which produces synthetic gas from coal, was planned 12 years ago, when the price of oil was expected to soar to as high as $60 a barrel, compared to today’s price of about $27 a barrel.
By the time the Great Plains plant opened last summer, it was too expensive to run profitably. The owners asked for price supports equivalent to $10.50 for every 1,000 cubic feet of gas for three years, more than four times the current spot price of natural gas.
The supports would drop to $6.60 for every 1,000 cubic feet for the next seven years.
Without government support, the owners would have lost more than $1 billion in the first 10 years of operation, said Keith McKinney, president of Pacific Lighting Synthetic Fuel Co., the subsidiary that participated in the Great Plains project. With the supports, the owners would have lost $100 million in the first five years, which they would have earned back in the second five years, said McKinney.
The plant has been producing about 125,000 cubic feet of gas a day, which the owners have been selling for $5.50 per 1,000 cubic feet under a formula that pegs the price of gas to the price of No. 2 fuel oil, a substitute for natural gas. The current spot price for natural gas ranges between $2.50 and $2.80 per 1,000 cubic feet.
The other partners are Lombard, Ill.-based Midcon and Transco Energy, Tenneco and Coastal Corp., all based in Houston.
Midcon said it would write off between $85 million and $90 million, reducing net income between $2.80 to $2.95 a share. For the year ended last Sept. 30, Midcon reported net income of $146 million, or $4.86 a share.
Transco Energy said it would write off $91 million, or $3.69 a share. In 1984, Transco earned $138 million, or $5.27 a share.
Tenneco didn’t have figures available. Coastal said it had already written off the investment.
