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Coal Suppliers' 2Q Results in the Black

Posted on: Wednesday, 21 September 2005, 03:01 CDT

Ask purchasers at utilities why their coal stockpiles are running low, and the response might be, "Because of the big engines that couldn't." In spite of significant problems with rail delivery of coal, coal suppliers reported enviable 2Q revenues and profits.

Peabody Energy's Gregory H. Boyce, president and CEO-elect, stated, "Coal markets are extremely strong, demand is running at record levels, customer inventories are at an all-time low, and our operations are in excellent position to meet growing customer demand." Through the first six months of 2005, net income rose 129% to $147 million, and earnings per share increased 112% to $1.10 per share.

Contributing to the coal boom are continued economic growth, decreased nuclear generation due to planned and unplanned plant outages, high costs of natural gas and oil, and favorable summer weather. At the same time, rail constraints for Powder River Basin (PPvB) coal and continuing declines in Central Appalachian production hinder supplies.

STAYING ON TRACK

BNSF and Union Pacific (UP) serve the coal mines in Wyoming's southern PPvB via a jointly owned line that is maintained and dispatched by BNSF. Two derailments in May, one for each of the companies, following heavy snow and rains demonstrated that the buildup of coal dust on the Joint Line crippled the railroad. Coal dust in the roadbed prevented water from draining out of the ballast (crushed stone that serves as a bed for railroad tracks) and destroyed the ballast's ability to support the track structure. Consequently, concrete ties fractured, rails spread apart, and switches were damaged.

In a letter to the Surface Transportation Board, dated July 15, UP Chairman and CEO Dick Davidson wrote that BNSF spent more than a month making emergency repairs to keep the railroad running. A long- term maintenance program to clean the ballast and rebuild the railroad has begun and will continue until cold weather halts it in November.

In June, UP warned utility customers that it would only be able to ship about 80 to 85% of the coal they need. It plans to allocate coal proportionately among its customers based upon planned and unplanned utility outages, day-today Joint Line, utility and railroad congestion, and rail carsets out of service.

Utilities are attempting to avoid paying high spot prices as stockpiles dwindle by conserving coal through adjusting power dispatch during ofF-peak periods, boosting use of gasfueled plants, and buying power from the wholesale market.

Wisconsin Power & Light Co. plans to ask permission to recoup an estimated $14 to $22 million from customers at a later date. This amount is the projection of how much more it will spend to buy power on the wholesale market compared with how much it would have cost to run its coal plant.

KING COAL RULES

The King's reign won't be ending any time soon, according to most projections.The commodity continues to fuel about 50% of U.S. total electricity output, and the Department of Energy expects domestic coal demand to climb by 413 million tons, or 38%, to 1.5 billion tons in 2025, from 1.1 billion in 2003.

Coal generation is finding favor again, albeit with environmental challenges, as natural gas prices remain high.

This translates into optimistic market oudooks for coal suppliers. Peabody has the largest position in the PRB. It is replacing expiring contracts with sales commitments at prices up to 50% higher in the PKB, 45% higher m the Illinois Basin, and 75% higher in Colorado. The company continues to target 2005 production of 210 to 220 million tons and total sales volume of 240 to 250 million tons. It is essentially sold out of its planned 2005 production. Its total un-priced volumes include about 35 to 45 million tons for 2006 and 110 to 120 million tons for 2007.

Arch Coal reported that 2Q sales rose 50% on demand for coal from the Western United States but added that rail disruptions slashed profits. Net income fell to $1.7 million compared with $9.3 million in 2Q 2004. Revenue increased to $634 from $423 during the same period last year. The company attributed a cut of 35 cents a share from earnings to rail problems.

Steven Leer, Arch Coal CEO, said in a prepared statement, "Power generators are likely to see stockpile levels erode still further in the coming weeks, with record lows likely by the end of summer. As a result, we expect unprecedented demand for coal as we enter 2006, with utilities competing aggressively for available tonnage."

Foundation Coal Holdings Inc. reported a 2Q revenue increase of nearly one-third, to $329.5 million. Net income for the quarter increased 162%) to $20 million compared with $7.7 million last year. The company has now committed and priced 90%, 73%, and 51% of its expected production in 2006, 2007, and 2008, respectively. The majority of uncommitted tonnage is primarily associated with higher value eastern coals. In the East, the company is 80%, 65%), and 32% committed, respectively, for the three years, while in the West, those percentages are 95, 76, and 58, respectively.

Copyright Hart Energy Publishing, LP Sep 2005

Source: Energy Markets

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