Strong customer base
Another positive of Westmoreland Coal Company (WLB) is its customer base. The company supplies coal to utilities with strong balance sheets. A lot of its customers on long-term contracts are highly rated, such as PPL Corp. (PPL) at BBB, MDU Resources Group (MDU) at BBB+, and PacifiCorp at A-.
The company’s revenues focus on a few key customers. However, the customers’ strong profile offsets the customer concentration risk to some extent. Moreover, WLB’s acquisition of Canadian mines has resulted in greater diversity in its customer base.
Base load plants
Base load plants are plants that run throughout the year to meet base electricity demand. As a result, the demand for coal from these plants is predictable and relatively stable. On the contrary, the “peaker” power plants run primarily to meet seasonal peak energy requirements. So base load power plants show higher utilization levels, while “peaker” plants run on lower utilization.
The company’s U.S. operations supply coal primarily to base load power plants with an average utilization of over 75% in the past nine years. While coal will eventually lose out to natural gas, according to the U.S. Energy Information Administration’s (or EIA’s) estimates, Westmoreland Coal Company is unlikely to see a steep decline in demand. It serves base load power plants, which are in a better position to comply with the U.S. Environmental Protection Agency’s (or EPA’s) new regulations.
Just as WLB is cost-competitive in coal production, its customers are cost-competitive when it comes to power generation. Most of WLB’s customers are located in the Northern Midwest and West Coast regions. Here, coal is much more competitive than natural gas as a fuel for power generation—even if natural gas prices fall to $3 per MMbtu. As a result, (WLB) faces less of a threat from natural gas compared to eastern coal producers (KOL) like Alpha Natural Resources (ANR) and Arch Coal, since natural gas is more competitive in the east.
We’ve looked at Westmoreland’s domestic customers. But what about the company’s presence in the seaborne coal market? Read on to the next part to find out.