Kansas City Southern executives said Friday that the short-term outlook for the utility coal business lacks visibility, as ongoing congestion over the rail network poses yet another hurdle for the domestic coal industry, already diminished by low and less volatile natural gas prices and related coal plant retirements.
KCS shared its short term view of the utility coal business during a Friday conference call following the release of its second-quarter earnings results.
"We just don't have clear enough visibility in the coal business in the months ahead ... you'll remember that one of our utility customers closed down a number of generating units after September last year," KCS President and CEO Dave Starling said during the call. "We don't know if that will happen again and we don't know if some of our utility customers will seek to expand their coal stockpiles as a hedge against rail service issues with originating carriers that have impacted cycle times in 2014."
A congested rail network is the latest hurdle in a recovery in US coal prices, as deliveries are stalled and out of the control of KCS.
"We know the demand for coal is right now is high at the plants we have because some of their stockpiles are low," Starling said. "So, if more coal can come through the pipeline, we could move it. So, we don't control that and that is why we have to give you the message the way we are. If we control all the way through the origins, we would probably be changing the guidance, but we don't, so until we have a more clear picture of how that coal and grain are going to move, we think we are being very honest with you."
ENERGY BUSINESS LAGS OTHER COMMODITIES
KCS' energy business was the only commodity group to post a year-on-year decline in revenues in Q2 2014, including a 7% decrease in utility coal sales.
Utility coal revenues fell 7% to $48.8 million year on year in Q2 2014, weighing down the broader energy segment, which fell 5% to $81.4 million from $85.3 million in Q2 2013.
Utility coal carloads fell 4% to 46,100, while revenue per carload fell 3% to $1,059 from $1,096.
Across all commodity groups, revenues totaled $625.9 million, up 12% from $557.2 million, and aggregate carloads and units rose 7% to 573,600 from 534,900.
Earnings per share jumped to $1.18/diluted share from 14 cents/diluted share in Q2 2013.
"No doubt that our utility coal business could have performed better this quarter were it not for congestion and service problems experienced throughout the North American rail network," KCS Executive Vice President of Sales & Marketing Pat Ottensmeyer said.
As for earnings guidance for the back half of 2014, KCS did not raise its outlook, despite the better-than-expected earnings growth in the first six months of the year.
"While we are pleased with our first half [earnings per share] performance, we are not prepared to change our guidance for the full year," Starling said. "There are a few reasons for this. I already discussed the grain comparables get harder in the second half."
Uncertainty in the coal business also led management to hold conservative expectations for the second half of the year.
"We are not going to attempt to quantify the [rail congestion] impact here, but the good news is this: We believe there could be some additional volume and revenue coming in the months ahead above normal seasonal trends, as utilities build stockpiles from their current low levels. Service improvements will be the key to realizing that opportunity," Ottensmeyer said.
