Last Friday, Vistra Energy Corp. (NYSE: VST) subsidiary Luminant announced that it will close its 1,800-megawatt (MW) coal-fired Monticello power plant located in the northeast corner of Texas. For Vistra stockholders this is a good thing — the plant is money-loser and closing it takes it off the company’s books as a liability. For Peabody Energy Corp. (NYSE: BTU) stockholders, the closure is not such good news.
Peabody’s Rawhide mine in the Powder River Basin of northeastern Wyoming sends about 30% of all its production to Monticello, and now the coal miner needs to find another place to send all that coal.
In the first six months of this year, Rawhide produced about 11 million tons of coal, 3.6 million of which were sent to Monticello. Peabody also sold another 33% of its mined coal to five other plants in Texas. None of the five plants has revealed closure plans.
Still, Peabody knows that coal’s days are numbered. While 2017 has been a relatively good year for coal miners, demand is expected to begin tapering off next year and continue for years to come.
It already costs Peabody more to mine the Rawhide coal than it earns by selling it. According to the Institute for Energy Economics and Financial Analysis (IEEFA):
With an average cost of production in the Powder River Basin of $9.80 per ton and spot markets in the middle $8-per-ton range, the company [is] having to absorb prices-per-ton declines as older, higher-priced contracts roll off.
When Peabody emerged from Chapter 11 earlier this year, the company projected an increase in Powder River Basin production of 14 million tons in 2018. To reach that projection with the loss of about 7 million tons from Monticello means that the mining company will have to dig out 21 million tons next year. It could do that, but the question is whether Peabody can sell that much coal.
The U.S. Energy Information Agency (EIA) recently forecast that demand for western U.S. coal would add 25 million tons to next year’s production. If Peabody expects to make up for the loss of coal sales to Monticello, the company needs to capture 84% of that growth. That’s not going to happen.
Rolling back environmental regulations that demand cleaner fuels will not change the math: natural gas is already cheaper than coal, and solar and wind are getting there. The only way to save the industry is for the federal government to put its thumb on the scale, as Energy Secretary Rick Perry has done with his proposal to attach a value to the reliability and resilience coal-fired power plants and to pay the power producers a subsidy equal to that value.
Peabody stock posted a recent high of $29.79 last Friday. The stock closed at $28.63 on Thursday, down about 1.7% on the day for a drop of nearly 4% in the past week. The stock’s 52-week range is $22.58 to $32.50, and the consensus price target is $35.83.