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CSX sees higher coal volumes in Q2 14, performance levels strained

Washington (Platts)--16 Jul 2014 558 pm EDT/2158 GMT


CSX on Wednesday reported a 6% increase in coal volumes in the second quarter of 2014, driven by an unexpected jump in activity in the North, weighing on network performance and average train speed in the period.

Coal volumes rose to 330,000 units in Q2 2014 from 310,000 units in Q2 2013, a year-on-year increase of 6% due to higher shipments of domestic coal and utilities replenishing stockpiles, partially offset by a decrease in a softening export market, the company's Q2 2014 results showed Wednesday.

Despite higher coal volumes, coal revenues fell 3% to $744 million in the quarter, as revenues per unit fell 9% to $2,255. Revenues were negatively impacted by lower export pricing and an unfavorable domestic revenue mix.

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Domestic coal volumes rose 15%, with growth in both Northern and Southern utility shipments reflecting higher natural gas prices, building of utility stockpiles for the summer cooling season and competitive gains, CSX Chief Sales and Marketing Officer Clarence Gooden said during Wednesday's earnings conference call.

Export coal tonnage declined 12%, as global market conditions for both thermal and metallurgical coal remain soft, with the API2 benchmark for thermal coal below $75/mt, a level at which US coal remains challenged to compete, and the Queensland metallurgical coal benchmark remained at low levels at $120/mt, Gooden added.

Looking to the third quarter, CSX expects domestic coal volumes will grow by double-digit rates as utilities continue to rebuild inventories.

Export coal volumes are expected to be "significantly" lower in third quarter, Gooden said. CSX is estimating full-year export volumes in the mid-30 million st range, reflecting soft global market conditions, especially in thermal coal.

NETWORK PERFORMANCE FALLS BELOW EXPECTATIONS

"System-wide operating performance is still below the level customers have come to expect from CSX, especially across our Northern tier," CSX Chief Operating Officer Oscar Munoz said during the earnings call.

"The biggest part of our surge in the North was driven by crude by rail and by our coal business," Gooden said. "Our coal business particularly was much higher than what we expected it to be, primarily as a result of [natural] gas prices, as a result of a colder winter, and as a result of the Great Lakes themselves, the utility lake coal closing much earlier due to the weather and opening much later due to the weather."

"In the second quarter, the robust demand we experienced has led to a decline in on-time originations and arrivals, as well as resource constraints in some areas of the network," Munoz said.

Service levels -- which began to decline at the beginning of the year due to adverse weather conditions, and despite a rapid surge in volume toward the end of the first quarter -- have stabilized, albeit at lower levels, he added.

Train velocity -- the average train speed between terminals in miles per hour -- was estimated at 19.3 in Q2 2014, down from 23 in Q2 2013.

On-time originations for Q2 2014 were down to 56% from 91% in Q2 2013, and on-time arrivals were 42% compared with 82% over the same period last year.

With respect to notable strategic capacity additions, CSX is adding investments in the Southeast corridor, including a new coal unit train processing facility, in an effort to support increasing demand for Illinois basin coal.

As for the outlook for the coal volumes in 2015, "I think 2015 for domestic utility coal is still going to be a robust year for multiple reasons," Gooden said. "One, the stockpiles now are way down. Two, as long as [natural] gas stays, particularly for Illinois Basin, above $3.50 [MMBtu] for the Southeast, it makes coal competitive in the mix. ... I think the utilities are tending to lean more now to sufficient stockpiles rather than having insufficient stockpiles to meet their customers' demand."

Overall, CSX posted earnings of $529 million on revenues of $3.2 billion, compared with Q2 2013 earnings and sales of $521 million and $3 billion, respectively.

--Charlie Noh, chang.noh@platts.com
--Edited by Annie Siebert, ann.siebert@platts.com




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