Coal costs could impact the credit ratings of some utilities, analyst warns
Pittsburgh Post-Gazette --Aug. 13
Aug. 13--Standard & Poor's warned yesterday that the credit ratings of some U.S. utilities could be jeopardized over the long term if surging coal prices remain near current levels.
Higher oil and natural gas prices, low inventories at power plants and
railroad bottlenecks also have contributed to the run-up in coal prices, as has
the lower U.S. dollar, which encourages U.S. coal exports.
"The effect of sustained higher coal prices will be staggered and will
not be fully felt before 2006," S&P analyst Aneesh Prabhu wrote in a
report published yesterday.
Prabhu said utilities with fixed or capped prices for generation, whose
supply contracts are expiring or those that can't recover rising fuel costs
because of regulations will be affected the most. Some utilities are entering
into longer-term contracts to lock in prices over the near term while others are
sitting it out, hoping to negotiate after prices fall, he said.
The S&P analyst cited a contract announced this month between Upper St.
Clair coal producer Consol Energy and Allegheny Energy, a Greensburg-based
utility. The multiyear deal will increase Allegheny's coal costs to $34 a ton
this year, up from $30 per ton last year, Prabhu said. The contract will give
Allegheny 90 percent of its 2005 coal requirement and half of what it needs the
following year, he said.
Coal prices haven't been this high since oil prices spiked in the early
1980s, said Friedman Billings Ramsey analyst David Khani. He said the long-term
nature of coal supply contracts means it will take several quarters for the
higher prices to filter down to coal producers. The lag, as well as other
factors, make it unlikely that coal production will increase dramatically any
time soon, Khani said.
Coal production has risen less than 1 percent over the last year, following
production declines in 2002 and 2003. Production in the Appalachian region has
declined in five of the last six years and has fallen 1.3 percent so far this
year, Prabhu said.
The quality of Eastern U.S. coal and regulatory issues also make production
increases unlikely, Khani said. "The good stuff has been mined, and they're
mining thinner and thinner seams," he said.
Consol produced 16.5 million tons of coal in the second quarter, up 6 percent
from year-ago levels. It expects production will increase to 16.6 million to
17.2 million tons in the current quarter, but is forecasting slightly lower
prices.
Consol's outlook calls for average prices in the range of $29.20 to $29.50
per ton. That's lower than the $29.77 per ton average customers paid in the
second quarter, but about $2 above second quarter 2003 prices, Consol said.
Improvements at Consol's Bailey Mine in Greene County and the McElroy Mine
near Moundsville, W.Va., will add about 7 million tons of annual capacity next
year, Consol said.
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