Late last year, Arch Coal (NYSE: ACI ) was warning of utility customers that were concerned about their ability to get coal. An AES (NYSE: AES ) utility subsidiary is the case that proves the point. That's going to be good news for some coal miners in the year ahead.
Burn, baby, burn
When natural gas prices were near historic lows in 2012, utilities burned as much gas as they could. That left coal piling up in store rooms around the utility industry. As natural gas prices started to come off their lows in 2013, however, utilities started to switch back to coal. Only they had plenty on hand, so they burned that.
That left coal demand weak despite increased coal use. It also set the stage for AES subsidiary Indianapolis Power & Light falling below "preferred levels going into the summer peak," as company spokesperson Brandi Davis-Handy told industry watcher Platts in an email.
This is something Arch Coal has been warning about since last year. During the miner's fourth-quarter conference call, Arch CEO John Eaves noted that, "Some of our customers have raised concerns about potential stockpile shortages if these trends continue." By "these trends," he meant cold weather and rail delivery problems.
That's exactly what the AES subsidiary ran into, according to Davis-Handy: "high burns and temporary transportation issues." Since those trends didn't end in the fourth quarter, lingering well into the new year, it's no surprise Indianapolis Power & Light is short on coal.
The upside of this situation
Arch Coal's first-quarter performance was pretty bad despite customers running low on coal. The company lost around $0.60 a share to start this year off, nearly double what it lost in the first quarter of 2013. That extends the red ink to six consecutive quarters. And weather-related rail delays were a part of the problem, since they led to weak Powder River Basin (PRB) coal shipments. The PRB accounts for about 45% of Arch Coal's business.
Since those volumes are likely to be made up as the year progresses, however, the revenue is largely delayed -- not gone. Moreover, there's only one way for AES to fix its coal inventory problem, and that's to buy more coal. So, it looks like demand trends for coal will be better this year than last, it just won't show up until the second or third quarter numbers.
For AES, Indianapolis Power & Light is just one small piece of an internationally diversified energy company. In fact, the company's entire U.S. operation only accounts for about 25% of its business. So this is more of a blip than a long-term concern. But its needs are telling for a company like PRB-focused Cloud Peak Energy (NYSE: CLD ) , where thermal coal is all that's mined.
Like Arch, Cloud Peak didn't put its best foot forward in the first quarter thanks to bad weather. It fell into the red. But as the year progresses, there should be steady improvement. That will likely come from both volume and price since PRB coal prices started to head higher late last year, a trend that's continued into this year.
The big difference between Cloud Peak and Arch Coal, however, is that the still-troubled metallurgical coal accounts for about 20% of Arch's operations. That means continued red ink, even if its PRB coal is doing well. For Cloud Peak, which only does PRB coal, there's nothing holding the top and bottom lines back -- except the weather, of course.
It's starting to look like a turn
It's worth noting that the first-quarter loss was Cloud Peak's first during the U.S. coal industry's deep downturn. That makes it a good choice for investors that see the U.S. coal malaise easing -- at least on the thermal side. Unfortunately, Arch, which will benefit from a thermal upturn, will continue to scrape bottom until met coal recovers, too.
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