The Kansas City Southern (NYSE: KSU) railway is expecting a major rebound later this year in its domestic thermal coal movements and is working on some opportunities to rail U.S. coal into Mexico for export out of a new facility on Mexico’s Pacific Coast.
Speaking on an April 24 earnings call for first-quarter results were: KCS President and CEO David Starling; Dave Ebbrecht, the Executive Vice President of Operations; Pat Ottensmeyer, EVP of Sales and Marketing; and Mike Upchurch, EVP and CFO.
Ottensmeyer noted that beginning in the first quarter, KCS has reconfigured and expanded its coal business unit to better reflect the company’s diversified opportunities in the broader energy sector. The coal business unit has been renamed Energy and now contains movements of crude oil, frac sand needed for shale gas and oil production, export coal and other alternative sources in addition to the unit coal and petroleum coke that has been included in the past.
“As is the case with all the other railroads, our coal volumes and revenue dropped fairly sharply in the first quarter due to factors that are well-known, such as unusually warm winter weather and low natural gas prices,” Ottensmeyer added. “However… we experienced significant growth in the other commodity groups, primarily frac sand, which substantially offset the decline in utility coal. Longer term, we believe that low natural gas prices driven by the new oil and gas discoveries in North America will be positive for KCS, even though this will be a negative factor for our utility coal business. In other words, the potential negative impact to coal will be more than offset by strength and growth in frac sand…and crude oil shipments.”
The outlook for the Energy segment may surprise some people, Ottensmeyer said. “We’re showing double-digit revenue increase for the second quarter and single digit for the full year. Clearly, some of this is a function of the new configuration of the business unit, the addition of frac sand and crude oil, but most of this improvement in the second quarter is a function of increasing shipments by some of our utility customers who were particularly slow during the first quarter. We feel that the demand is there and that we can handle sizable volumes, either directly to refineries or at existing KCS facilities. In addition, we are still working with potential shippers interested in exporting U.S. coal through Mexico to Asia and I still believe that this market makes sense if the global demand for coal reaches anywhere near the level most experts are forecasting.”
The new import-export facility that would handle coal exports is at the Mexican port of Lázaro Cárdenas. Ebbrecht said that the terminal was opened in the first quarter. “[W]e’re not shipping any coal there,” he added. “I think we will, but we’re still talking to people about using Lázaro as a port to serve Asia. Right now, the pricing is still a way off of the benchmark price, but it’s close, and if the forecast that we’re seeing for demand for coal in Asia, particularly India and China, are anywhere near close, I would expect that gap is going to narrow and we will be able to move coal out of Lázaro Cárdenas.” Asked a follow-up question, Ebbrecht said the dollar differential is within 10%. “It’s about 7% or 8% off in terms of the total delivered cost,” he noted. “That includes the price of the coal.”
Ottensmeyer said about exports through Mexico, that for a coal producer, its growth opportunity is outside of this country and one of the big challenges is how to get it on the water. “So there’s a lot of interest in Lázaro, but it’s not included in the guidance that we’re giving at this point,” he noted. “It’s still a little too uncertain.”
Asked about second quarter utility coal movements, Ottensmeyer said his crystal ball is not a good one. “Keep in mind, as Dave mentioned, our coal business isn’t as complicated, I’ll say, as some of the other carriers. We have [nine] plants. We probably have better visibility than some of the other carriers because we only have a handful of customers that we need to talk to, but even with that, the visibility is poor because one of our major customers, one of our top two coal customers, has now given us five forecasts for 2012.”
Upchurch said that generally, the U.S. power plants that KCS serves have operated at baseload, which generally makes them steady power producers. “They have been considered baseload plants, but obviously, when you combine a very warm winter, and in particular in Texas where you have a deregulated environment and natural gas, competition from natural gas fired plants with demand being down because of the weather, even baseload plants are going to be affected.”
Headquartered in Kansas City, Mo., Kansas City Southern is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding is Kansas City Southern Railway, serving the central and south central U.S. Its international holdings include Kansas City Southern de Mexico, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lázaro Cárdenas, Tampico and Veracruz.
KCS receives more than 30 million tons of coal annually through the Kansas City, Mo., interchange. These unit trains of 125 cars originate on the BNSF and Union Pacific railroads. The majority of coal originates in the Powder River Basin of Wyoming; however, KCS also hauls coal from Illinois, Utah and Colorado mines. Among the power plants it serves are AES Corp.‘s (NYSE: AES) Shady Point plant in Oklahoma, American Electric Power‘s (NYSE: AEP) Flint Creek plant in Arkansas, the Hugo plant in Oklahoma of Western Farmers Electric Cooperative and the Asbury plant in Missouri of Empire District Electric.