(Reuters circulated the following article by Steve James on July 15.)
NEW YORK — Two major U.S. coal producers warned on Friday that full-year profits would be hurt as a result of rail delivery disruptions that could further increase the danger of shortages at U.S. power stations.
Arch Coal Inc. (ACI.N: Quote, Profile, Research) said it expects earnings for the year to fall as much as 60 percent below Wall Street estimates, while rival Massey Energy Co. (MEE.N: Quote, Profile, Research) told Reuters the effects of domestic rail woes would have an impact on its profits.
Arch stock slumped more than 4 percent after the announcement but rallied later and was down just 15 cents, or 0.28 percent, at $53.37 in afternoon trading on the New York Stock Exchange. Shares of Massey were down 0.52 percent but Consol Energy (CNX.N: Quote, Profile, Research) and Peabody Energy (BTU.N: Quote, Profile, Research), the other major U.S. coal producers, were both up.
“This should be just a near-term glitch,” said analyst Mark Reichman of A.G. Edwards & Sons, who lowered Arch’s investment rating from ‘buy’ to ‘hold.’ “The rail situation could drag on till November, but on the other hand, it should support stronger coal prices (next year).”
“We believe the impact will prove much greater than anticipated,” Morgan Stanley analyst Wayne Atwell wrote in a note released after Arch’s warning. “We expect Arch shares to trade down short-term. In addition, the shares of other coal producers, particularly those with PRB (Powder River Basin) exposure, are likely to be affected as well.”
There was no immediate comment from railroads CSX (CSX.N: Quote, Profile, Research), Union Pacific (UNP.N: Quote, Profile, Research) or Burlington Northern (BNI.N: Quote, Profile, Research), but Bob Fort, a spokesman for the Norfolk Southern Corp. (NSC.N: Quote, Profile, Research) said: “We know demand for capacity remains high and where specific capacity issues are raised we’re doing everything we can.”
Arch said it expects second-quarter earnings of 5 cents per share and full-year earnings of 75 cents to $1.25 a share. Analysts’ average estimates are 43 cents for the quarter and $1.83 for the year, according to Reuters Estimates.
St. Louis-based Arch, which mines two-thirds of its coal in the Powder River Basin of Wyoming and Montana, said track work following derailments had already curtailed shipments. “Coupled with continuing poor performance by the eastern railroads, these disruptions could lead to significant challenges for U.S. power plants,” Chief Executive Officer Steven Leer said.
“We are likely to see a rapid draw-down of power plant stockpiles, particularly if current above-average temperatures persist.” Utility stockpiles at the end of June were 15 percent below the five-year average, according to Arch estimates.
SHIPMENTS FALL
The company said rail problems reduced shipments by 4 million tons during the second quarter, and net income by 35 cents a share.
Spokesman Deck Slone told Reuters that 2 million tons of the shortfall in shipments was left in the ground as pit inventories had grown while coal piled up awaiting shipment.
But the company had not laid off miners, he said. They were still working regular shifts, producing less coal and working on other activities, like land reclamation and maintenance.
Richmond, Virginia-based Massey said the difficulties with railroads looked certain to hurt its bottom line in the long term. “I don’t think the quarter is so much the issue so much as the full year,” said spokeswoman Katharine Kenny. “It affected us last year and it seems likely that there certainly will be some impact this year.”
She said Massey has no operations in the West, and mines coal in the central Appalachian area, mostly in West Virginia and eastern Kentucky. But she said rail delays in the West could potentially benefit Massey, since more utilities in the East that primarily use PRB coal are experimenting with blending Appalachian coal with the western supplies.
Heavy rains buckled tracks in the Powder River Basin area in northeast Wyoming and southern Montana earlier this year, and repairs are expected to take the rest of 2005.
As a result of coal shortages and expected high usage rates due to the summer heat, Arch expects unprecedented coal demand in 2006 as utilities rebuild stockpiles.
Two utilities owned by Xcel Energy Inc. (XEL.N: Quote, Profile, Research) said they have already been forced to buy more electricity from third parties and fire more generating facilities with natural gas because of coal shortages. They warned of higher customer prices as a result.
Coal fires about half the electricity generated in the United States, according to the Edison Electric Institute. Arch fuels about 7 percent of electricity generated in the country. (Additional reporting by Ben Berkowitz and Michael Erman)