Consol reports stagnant coal sales

US MINING company Consol Energy lists lower coal sales, higher unit costs and higher idle mine costs as the main reasons for a big drop in earnings.

Staff Reporter

For its second quarter, ended June 2002, Consol reported net income of $US9 million, compared with $US49.3 million for the same period a year ago.

"Coal sales in our core market area were stagnant during the period," said J. Brett Harvey, president and chief executive officer. Harvey said lower coal sales volumes, higher unit mining costs and higher idle mine costs more than offset higher prices received for a ton of coal in the period-to-period comparison.

"We have taken aggressive steps to reduce coal production in order to keep pace with market demand," said Harvey. "As a result, we expect our inventories to drop by 2.8 million tons in the third quarter, and by 4.2 million tons by the end of the year."

Inventories at June 30, 2002, were 5.8 million tons, including equity affiliates, compared with 1.5 million tons, including equity affiliates, at the same time a year ago.

Harvey said hot weather in most of the United States during June and July has benefited coal consumption, but the high level of coal inventories at power plants going into the summer cooling season have not yet been drawn down sufficiently to attract buyers back to the market. At the end of March coal stockpiles at power plants were 35% higher than at the same time a year earlier.

"Despite the hot weather and an overall increase of 1.6% in electricity production in the first six months of this year, inventories at many of the plants we serve remain high," he said. "Operating problems at a number of customer power plants have limited what might have been robust coal consumption in the early part of the summer. The end result is that many coal buyers remain on the sidelines."

Harvey said the company expects power plant inventories to return to normal levels by year-end.

"We expect weak performance in the third quarter, but a rebound in the fourth quarter as coal buyers return to the market," he said.

CONSOL Energy idled a number of mines to reduce production during the quarter, resulting in a 14% decline in production compared with the same period a year earlier. McElroy Mine was idled for the last two months of the quarter, and Blacksville #2, Robinson Run, Mine 84, Mahoning Valley, Humphrey and VP#8 mines were idled in mid-June.

Average realized prices for coal improved nearly 8% in the period- to-period comparison. However, actions taken to reduce production increased idle mine costs and unit costs per ton of coal produced, resulting in a decline in margins per ton of coal produced of $1.68, or 44%, in the period-to-period comparison.

"Despite the disappointing year we will have," said Harvey, "there are signs that things may improve in the fourth quarter. Barring unforeseen events, this could create momentum that will carry into 2003."

Harvey said the summer cooling season has been 16% warmer than normal thus far, and the forecast is for warmer-than-normal temperatures to continue. As a result, coal burn at coal-fired power plants should increase. Coupled with cutbacks in coal production and other coal supply constraints, inventories at power plants and at coal mines should decline significantly by mid-fourth quarter.

Harvey said spot prices for coal appear to be improving, although purchasing overall is still at low levels. The pricing environment for coal sold under contract for shipment in 2003 remains positive. "Although we haven't written many contracts," he noted, "thus far, prices have improved compared with the past several years, although they don't match the very high prices we saw in the early part of 2001." Harvey said he expects the company's average realized price per ton of company-produced coal sold to continue to improve over the next four quarters.

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