Time for Coal to Retire?

In its 2014 Annual Energy Outlook (AEO2014) the EIA increased the number of expected coal-fired electricity plant retirements significantly. Approximately 60,000 megawatts (MW) are expected to go offline by 2020, which is up 50% from 2013 numbers of 40,000 MW. With approximately 300,000 MW generated from coal in the U.S., these retirements represent approximately 20% of total capacity.

Courtesy of EIA

The reason for the rapid rise in retirements is two-fold. First, low natural gas prices and increasing accessibility to the fuel are providing a cheaper and cleaner alternative to coal for electricity generation. Second, the Mercury and Air Toxics Standards (MATS) is set to go into effect in April of 2015 and will require power plants to limit their emissions of toxic air pollutants like mercury, arsenic, and metals. Emissions that were previously unregulated. As a result, costly scrubbers and other emission reduction technologies must be employed to meet the new standards. Simple cost/benefit analysis has led to the decision to close many coal-fired plants, usually those of smaller scale.

Full-year statistics for 2012 show that 37% of all electricity in the U.S. was produced from coal-fired plants. The magnitude of this retirement will therefore impact everyone. Consumers will potentially pay more for electricity, alternatives to coal-fired production will see more demand, and coal producers will be be hurt.

Major coal producers, represented as a whole through the Market Vectors-Coal ETF (NYSEMKT: KOL  ) , will suffer demand declines as a result of these retirements. These demand declines will in turn increase the available supply of coal, thus reducing overall price. This is bad news to coal producers like Peabody Energy  (NYSE: BTU  ) , Arch Coal (NYSE: ACI  ) , and Alpha Natural Resources (NASDAQOTH: ANRZQ  ) , who are already struggling with profit margins.

Fiscal year 2014 estimates for those companies forecast a very dismal year ahead. Peabody Energy is projected to see its profit of $0.34 per share in 2013 fall to just $0.05 in 2014.

Arch Coal's estimates for 2014 are even worse. Analysts are looking for a loss of $1.43 per share vs a loss of $1.08 in 2013 -- a 32% decline in growth for an already struggling company.

Finally, Alpha Natural Resources, which over the last three years has lost over 90% of its market cap, seems to be in the worst shape. It is projected to maintain significant losses for 2014 with a loss of $2.10 per share for vs. a loss of $2.15 for 2013.

The extent of these declines will become more clear as regional reports are released by the IEA this spring, showing projected closings. This information should be coupled with the access to Montana and Wyoming's sub-bituminous coal fields. While producing less Btu's per pound than Eastern bituminous coal, the much cleaner coal will produce less pollution per Btu generated making this the preferred coal for the future.

While many investors may be looking at coal stocks, believing they present a potential value investment, it is still too soon to get a firm grasp on just how badly these positions will be hit. Therefore, it would be prudent to wait for 2016 to pass given that extensions issued by states could delay the implementation of MATS for up to one year. At that point real future demand can be more accurately predicted.

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  • Report this Comment On March 04, 2014, at 1:57 PM, Peter405 wrote:

    EIA is committing the error of " extrapolation"; what if the composition of Congress changes at the mid-term elections in Nov and OB is followed by a Republican president. The EPA may find its wings clipped.

    I am buying coal and coal stocks as a contrary play

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James Catlin

James Catlin has degrees in both Political Science and Economics. He is the owner of a small orchid nursery and manager of a private portfolio that includes stocks and investment real estate.

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