The increased output did not enable Vectren’s coal mining division to post a profit in the April-June period, however. Coal mining operations swung to a $3.7 million loss after posting a profit of $2.5 million a year earlier.
Vectren blamed the earnings reversal on continued higher production costs associated with a thin high-sulfur coal seam and other unfavorable mining conditions at Prosperity. Quarterly results also reflected reduced pricing for customers related to contracts that had price reopener clauses during 2012 as well as the overall softness in the coal market.
In an early August phone conference with analysts to discuss quarterly earnings, Vectren officials voiced optimism that the company was turning the corner on mine production costs.
“We should see improvement through the remainder of 2013 as our low-cost Oaktown mines ramp up production and with continued improvements at Prosperity,” said Carl Chapman, Vectren chairman, president and CEO.
Both of Oaktown 2’s continuous miner units are “super sections and are prepared for full production,” he said. “We clearly have some ramp-up that is continuing. We believe our cost structure will continue to improve throughout the year.”
Jerry Benkert, Vectren executive vice president and chief financial officer, said Oaktown 2’s costs “should be similar to Oaktown 1 as it reaches full production later this year.” Once that happens, and with smoother sailing at Prosperity, the coal mining division is expected to return to profitability. Oaktown 1 went into production nearly three years ago.
At Prosperity, whose unfavorable geology has caused the company headaches for the past couple of years, seams were “somewhat thicker” in the second quarter. “Cost issues have been going on for a while” at the mine, Chapman conceded. “We are disappointed. The mine has a thin seam.”
Vectren is attempting to improve the situation by adding low-profile mining equipment at Prosperity. “The first round arrived earlier this year,” Chapman said, and the second round of equipment was scheduled to be installed before the end of August. “We’re hopeful changes we made will improve the costs.”
Before the end of this year, Vectren hopes to secure sales contracts for an additional 1.2 million to 1.6 million tons for 2014. That would increase the company’s sales commitments for next year to 80-85% of anticipated production.
Coal stockpiles at U.S. electric utilities are slowing decreasing, Benkert said, although some utilities still are hesitant to book new coal sales.
Nevertheless, he said Vectren “sees opportunities for volumes that would easily exceed projected sales for 2014. We expect a higher percentage of sales from Oaktown next year, which should reduce total average costs per ton.” And that “will lead to significantly improved coal mining results in 2014 and beyond.”