What the Cold Winter Is Telling You About Coal's Future

After a couple of relatively warm winters, we finally had a bad one—and it speaks volumes about our electricity future.

Apr 30, 2014 at 3:41PM

The U.S. thermal coal market is starting to improve. A big part of that was the cold winter, which, according to the U.S. Energy Information Administration (EIA), led to a year-over-over increase in electricity demand of over 5%. Nearly 60% of that increase was sated with coal power.

After a couple of relatively warm winters, the amount of coal sitting unused at power plants was at historically high levels. That came about because of a combination of weather and historically low natural gas prices. So there was less need for power and a cheaper alternative to coal.

Natural gas prices have since risen and the cold winter led to a massive 24% drop in coal stockpiles between November 2013 and February 2014. According to the EIA, stockpiles are at "the lowest level since March 2006." And this is where it gets interesting.


Source: EIA

The cold weather also drew down natural gas inventories, which are sitting at 11-year lows. That, in turn, is expected to keep gas prices "in the low $4 per million British thermal unit (MMBtu) range over the summer, a level high enough to limit the growth of natural gas use in the electric power sector."

In fact, the cold winter led to record prices for natural gas in some regions. For example in early February, natural gas cost 50% more year over year in New England. Imagine what that does to a customer's electric bill!


Source: EIA

More coal demand
The tough winter is starting to make investments like Southern Company's (NYSE:SO) Kemper coal plant look a little more enticing. This plant will use the latest clean coal technology and makes use of carbon capture. It will be among the cleanest coal plants once it's built.

Southern has caught a lot of heat over the plant, the first of its kind, because of delays and cost overruns. In fact, according to Southern, "full year 2013 [results] include after-tax charges totaling $729 million, or 83 cents per share-related to increased cost estimates for construction of the Kemper project." It's understandable that investors would be upset by anything that led to a 30% year-over-year drop in earnings.

However, Southern has been increasing its exposure to natural gas for years and that fuel now accounts for over 40% of its generating capacity. Imagine if gas prices jumped 50% where Southern operates; Kemper will give it the flexibility to choose the cheapest fuel.

Cheap coal...
All coal isn't created equal, however, which begs the question of what coal is best. One region that's seen notable increased demand in recent years is the Illinois Basin (ILB). There are a number of large miners in the region, but the purest play in the ILB is Alliance Resource Partners (NASDAQ:ARLP). Ten of the company's 14 mines are in the ILB.

And, according to Alliance, ILB coal is price competitive with natural gas in the $3 to $3.50 per thousand BTU price range. The EIA expects prices above $4 -- advantage coal. In fact, while coal miners throughout the industry have been suffering, Alliance has been putting up year after year of record results. Last year was number 13. And if the first quarter is any indication, this year will be number 14.

That's because of another industry trend. Not only is ILB coal price competitive with gas right now, but ILB coal is also relatively cheap compared to Central Appalachian (CAPP) coal. So Alliance has been gaining market share from competitors in the CAPP region as utilities switch from CAPP coal to ILB coal.

Don't count coal out
Although Alliance projects growth to slow from last year's levels, it's still one of the best positioned coal miners in the industry. And this past winter shows that coal is far from dead. In fact, if gas prices increase too much, look for more utilities to follow Southern's lead by sticking with coal.

Not a believer in coal? Invest in America's new energy boom
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P. and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers