Kansas City Southern (NYSE: KSU) sustained a big drop in utility coal moves in the first quarter, but big summer heat and an unnamed customer that’s building a huge coal stockpile ahead of the end-of-year expiration of a rail contract are helping to boost coal moves lately.
Patrick Ottensmeyer, Executive Vice President, Sales and Marketing for KCS, said during a July 17 earnings call: “As was the case in the first quarter, our coal volumes dropped primarily due to the warm spring weather across our region, extremely low natural gas prices. In fact, our utility coal volumes are up further from the first quarter levels. [W]e are seeing improvements in utility coal volumes from the low point in March.”
Utility coal volumes hit bottom in the spring and the railroad has seen steady improvement every month since March. “While the extreme heat we are experiencing across most of the country and most of our service regions should drive some increase in demand, the continued low price of natural gas and relatively high coal stockpiles will likely keep volumes from growing further from these levels,” Ottensmeyer added. “As much as I should avoid making predictions about the future of the coal business, especially after being pretty far off last quarter, it feels like the worst is behind us and volumes should continue at or near June and July levels going forward through the rest of the year.”
David Starling, KCS President and CEO, said: “It certainly appears that the worst may be over this year as Pat spoke about coal. Of course, right now with the blistering heat in our region, the coal burns are quite good. We’re going to have to wait to see where natural gas prices are later in the year when temperatures moderate. Currently, natural gas pricing is moving toward a level which would make PRB coal price competitive, but we’ll have to see how that market develops over the next few months.”
Ottensmeyer said every utility KCS serves is now taking coal. “Some of them still have very high stockpiles in spite of the fact that the heat is really causing the plants to all run at pretty high levels,” he added. “But every one of our plants is now taking coal; and again, at the risk of being wrong twice, I’m just telling you exactly what we’re hearing from our customers, and what we’re hearing is that they expect—probably the best chart in the deck, in my opinion, is the one that shows the average daily carloading for the coal business. You can see how far that fell off in March, April and May, and where it’s come back to. And what we are hearing is that the expectation is that we will be in that sort of high 600, low 700, the range that you see in June and July for the rest of the year.”
One customer building a coal stockpile “to the sky”
Starling pointed out: “I might add, too, that we have one coal customer that their contract will be up for renewal at the first of the year, so they’re expecting a rate increase and we expect them to have as much coal delivered as they can possibly stand between now and the end of the year.”
Ottensmeyer later added on that point: “Dave mentioned the fact that one of the coal moves that we’re in is… a joint line move with another western carrier. [A]nd to provide a little bit more clarification to the point Dave made, our rates are set for this move going forward but the originating carrier bringing the coal to Kansas City, that contract is up for a renewal at the end of this year, and they are expecting the rates will increase and they are building a stockpile to the sky in anticipation of those rates increasing. So we’re seeing some unusually heavy movement for the rest of the year as they build their stockpile in anticipation of a rate increase. We won’t see that rate increase because this is what’s called a Rule 11 rate, where the rates for the two railroads are set separately directly to the customer. Our contract is not going to be affected, but the overall cost to the utility will be.”
Ottensmeyer said the company is hearing that at natural gas prices of around $3.50/mmBtu and higher, the coal plants and the coal business will do pretty well. “We’re below that now,” he added. “Right now, everything is firing because of the intense heat, and everyone is taking coal; so when the temperatures moderate, if gas prices are where they are, we might see some drop-off at a couple of plants.”
KCS serves eight coal-fired utilities in the U.S. and receives more than 30 million tons of coal annually through the Kansas City, Mo., interchange, the company website said. These unit trains of 125 cars originate on the BNSF Railway and Union Pacific railroads. The majority of coal originates in the Powder River Basin region of Wyoming; however, KCS also hauls coal from Illinois, Utah and Colorado mines. Its served power plants include the Flint Creek and Welsh plants of American Electric Power (NYSE: AEP), the Shady Point plant of AES (NYSE: AES) and the Monticello and Martin Lake plants of Luminant Energy.
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 The Kansas City Southern Railway Co., serving the central and south central U.S.