How Texas Coal Plant Closure Affects Peabody Energy

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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.

24/7 Wall St. has received a request from Peabody’s communications team to clarify this article, and that clarification has been included at the end of this story.

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.

Here is the email we received from the Peabody communications team:

We work with Peabody Energy on their communications program. They have brought to our attention a few points in your October 13 piece “How Texas Coal Plant Closure Affects Peabody Energy,” that we would like the opportunity to connect with you on background to see if you agree they might merit a correction. In general, we note that the article was based on a report from IEEFA, an organization with a mission of “accelerating the transition to a diverse, sustainable and profitable energy economy.”  We make this point to highlight that there is a specific bias in the original IEEFA’s article, including conclusions drawn based on incomplete or imperfect information.

Specifically as it relates to your article:

  • It is not accurate to compare costs based on a spot price for 8,400 Btu coal with an average cost across the dozens of coal types Peabody mines in the PRB. Therefore, the statement that it “already costs Peabody more to mine the Rawhide coal than it earns by selling it” is false – based on an apples to oranges comparison.  As you can see in Peabody’s earnings release, the average cost per ton across Peabody’s entire PRB platform was $9.80 through June 30 and the average price per ton was $12.77.  It’s important for you to note that Mine costs may vary by as much as $6 per ton at Peabody’s PRB locations.
  • The quoted text from the IEEFA report is inaccurate, as it does the same thing as the prior point by comparing the spot price for a specific lower quality product with the costs Peabody incurs producing dozens of coal types across all the mines in its PRB complex.
  • The statement “Peabody knows the coal’s days are numbered” is an editorial assumption, not a statement that Peabody has made.
  • The Rawhide mine production information of 11.8M tons is incorrect – the company is not sure where the figure came from, but we can point you to the Mine Safety and Health Administration (MSHA), which is considered the best source of data for mining productivity (Rawhide mine is #4800993).  You can see there that the mine produced 5.3M tons through Q2, and 7.8 million tons through Q3.
  • Similar to the prior point, the statement about needing to mine 21M tons next year including 7M to make up for the Monticello loss is false, and we don’t think it is a fair portrayal of our business to draw conclusions about any Peabody PRB mine based on information about a single customer sourced from a third party.  Peabody has scores of customers from its three PRB mines, and operates those mines as a complex — moving people, equipment and contracts to where they are best served and most needed.
  • Similarly, the statement about needing to capture 84% of the growth is false because of the same issue.