Due to problems selling coal in a tough market, Vectren Corp. (NYSE: VVC) said in its Aug. 1 earnings report that it is lowering the guidance on its Coal Mining division, which operates two underground mines in Indiana serving the power plants of Vectren and outside parties.
“Our results for the first half of 2012 significantly exceeded the prior year results and our internal expectations,” said Carl Chapman, Vectren’s chairman, president and CEO. “Our utility group continues to deliver based on the solid regulatory frameworks in place and the nonutility Infrastructure Services segment continues to beat our expectations given increasing demand and favorable construction conditions. While our consolidated results for the first half of the year were excellent, we do anticipate strong headwinds during the second half of the year, particularly in Coal Mining. As a result of the continued weakness in demand for coal, we are lowering our guidance for the 2012 year.”
Because of the expected continued weakness in demand for coal, the company is decreasing guidance related to the Nonutility Group, excluding ProLiance, to be in a range of $0.18 to $0.28 per share. This compares to previous guidance of $0.30 to $0.40 per share. Coal Mining mines and sells coal to the company’s utility operations and to third parties through Vectren Fuels Inc.
During the second quarter of 2012, Coal Mining earned $2.5m, compared to earnings of $8.5m in the prior year’s second quarter. Coal Mining earned $2.2m year to date in 2012, compared to earnings of $10.1m year to date in 2011. Results were anticipated to be lower in 2012 due to reduced pricing for customers associated with contracts that had price reopener clauses effective for 2012. However, results in 2012 have also been impacted by lower than expected sales due to a mild winter and low electric load demand.
In addition, results were negatively impacted by lower productivity at the Prosperity mine and higher mining costs resulting from a thin coal seam and other unfavorable mining conditions. These increased costs offset very favorable cost per ton results at the relatively new Oaktown mine during the periods. The cost environment is very favorable at Oaktown but has been impacted by the demand-driven reduction in production.
Coal sales year to date in 2012 were 2.1 million tons compared to 2.5 million tons last year. Through the six months ended June 30, Coal Mining segment revenues were $118m, a $22m decrease compared to 2011. The revenue decrease in the second quarter was $11m.
“Vectren Fuels continues negotiations with a number of customers regarding sales in 2012 and beyond,” said the company. “Coal sales in 2012 are now estimated at 4.2 million tons, inclusive of expected spot sales of approximately 0.3 million tons. The impact of reduced demand for coal may result in a loss from Coal Mining operations for the year ended December 31, 2012. The company is continuing steps to lower production to match the current demand. However, long term, reduced volumes from Central Appalachia due to increased regulation and the large number of scrubbers to be installed throughout the United Sates, including the Midwest, should drive strong demand for Illinois Basin coal.”
The Prosperity deep mine, located in Pike County, is listed with the U.S. Mine Safety and Health Administration under contractor Five Star Mining, which is run by members of the Blankenberger family. The mine produced 1.1 million tons in the first half of this year and nearly 2.5 million tons in all of 2011.
The Oaktown No. 1 deep mine, located in Knox County, is listed with MSHA under Black Panther Mining LLC, another Blankenberger company. This mine, which went into first production in the fourth quarter of 2009, produced 1.5 million tons in the first half of this year and 2.7 million tons in all of 2011. Black Panther Mining is also due to operate the nearby Oaktown No. 2 deep mine, which Vectren has said is in the works but is awaiting market developments.
Vectren is an energy holding company headquartered in Evansville, Ind. Its energy delivery subsidiaries provide gas and/or electricity to more than 1 million customers in adjoining service territories that cover nearly two-thirds of Indiana and west central Ohio. Vectren’s nonutility subsidiaries and affiliates currently offer energy-related products and services to customers throughout the U.S.