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Company Business Summary(Standard&Poor's)
This energy company supplies low enriched uranium, a critical component in the production of nuclear fuel for reactors to produce electricity, to commercial nuclear power plants. Our fundamental outlook for the coal and consumable fuels sub-industry for the next 12 months is positive. We believe coal inventories, which were almost 20% above normal levels at the end of March, will decline by the end of the year after production cutbacks and increased demand begin to reduce utility stockpiles. The Energy Information Administration (EIA) forecasts a nearly 15 million ton decline by the end of 2007, although we believe the reduction could reach twice that amount based on lower production and strong global demand levels. We think this should support steady increases in coal prices, and therefore coal producers' revenues, as supply and demand likely begin to approach more normalized levels later in 2007. We expect strengthening domestic demand from electric utilities to help reduce stockpiles. Electricity generation is up strongly since last year, with heating degree days ahead 13.8% year to date vs. last year, driven in part by the blast of cold air at the end of the winter season. Secondly, we believe that as we enter the summer driving season, which has historically elevated oil and gas prices, coal prices will also rise as coal is a cheaper alternative fuel for electric utilities, which consume almost 90% of coal production. Thirdly, global dynamics should also increase demand and prices. China has become a net importer of coal, driving other Asian countries to search for new coal suppliers and to look to the U.S. for a greater portion of their coal imports. India is also expanding its coal imports as its energy consumption grows. On the supply side, we believe production cutbacks should remove 30 million to 40 million tons of production through 2007. The late blast of cold at the end of the winter season reduced stockpiles, and the late snowstorms in the Midwest and Powder River Basin delayed rail shipments. Furthermore, certain producers shut down or idled production at unprofitable mines. As a sign of declining stockpiles and higher demand, many coal producers are reporting that they are receiving calls from utility customers to ship more coal than previously scheduled. We believe we are already seeing the effects of these events on supply. According to the EIA, U.S. coal production declined 2.3% and railroad cars loaded declined 1.4% year to date through June 30. An Appalachian production decline (down 4.8%) helped Central Appalachian spot prices increase almost 9% in the second quarter, according to the EIA. Year to date to July 6, the S&P Coal & Consumable Fuels Index rose 20.5%, compared to an 8.5% increase in the S&P 1500 Composite Index.