Nuclear Plant Closures Will Boost Coal's Prospects

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The owners of aging nuclear power plants have been opting to close them instead of paying for updates to keep them going. With new environmental laws regarding power plant emissions at least five years away, more nuclear plant closures could be on the way. That should help coal maintain or even grow its share of the electric generation market.

Cheap natural gas prices led electric utilities to cut back on coal use. As natural gas prices have increased this year, however, electric utilities have switched back to coal. According to the U.S. Energy Information Administration, coal use increased 13%, year over year, in the first four months of 2013.

Clearly price has a lot to do with what fuel electric companies choose. Through the first four months of the year, coal's share of the market increased from about 35% to 40%. Natural gas fell from 35% to around 25%. Nuclear advanced from the high teens to about 20%. Renewable sources saw small increases. The big loser was natural gas. Coal equities, however remain in the doldrums. 

New laws are likely to favor renewable power sources, so their trend toward higher share of the power market should remain in tact. Rules that make building new coal plants prohibitively expensive are likely to result in increased natural gas plants. However, aging nuclear power plants and the general lack of new nuclear construction could result in less nuclear power being available.

That would allow market share increases for natural gas and renewables to come at least partially from nuclear's share and not from coal's. 

Doing Well Despite the Problems

The clear leader in coal is Alliance Resource Partners (NASDAQ: ARLP). The partnership has been posting record top and bottom line results right through coal's problems. Revenues, for example, have grown about 14% on average over the past decade and 18% over the last three years.

This is largely because of increasing production and low coal mining costs at its Northern Appalachia and Illinois Basin mines. The company sold about 30 million tonnes of coal in 2010, 32 million tonnes in 2011, and 35 million tonnes in 2012. Weaker coal companies have been closing mines.

Alliance continues to invest in new production, so it's planning on selling around 4 million tonnes more coal this year than last. That should drive another record year in 2013 and additional dividend increases. Meanwhile, the company believes its coal is competitive with natural gas priced as low as $3.

Alliance is perhaps the single best coal operator today. Its shares yield around 6.2% and the partnership has increased its distribution at least annually for a decade. 

Another Cheap Operator

Cloud Peak Energy (NYSE: CLD) is another coal miner with low costs. It operates almost exclusively out of the Powder River Basin region. The company was spun off from international mining giant Rio Tinto in 2009. Like Alliance, Cloud Peak has remained profitable through the coal industry's darkest days.

The company's relatively cheap coal is a big part of that. But so is its growing export business. The company has gone from exporting virtually no coal in 2007 to exporting 4.4 million tons of coal last year. Coal exports are a key strategic focus for the future. That's powered by the fact that demand in India and China is expected to drive overall coal demand for years to come

Sales and earnings have been lower year over year in each of the last two quarters, with earnings dropping over 40% in the first quarter compared to last year. The second quarter was even worse, falling from about $0.55 a share to eight cents. However, Cloud Peak is well positioned.

It already has committed sales of 92.5 million tonnes, compares to 90.6 million tonnes last year. Although the vast majority is under contract for prices below 2012 levels, stock piles at U.S. utilities are declining. That should set the company up for better pricing next year as demand picks up on top of its already higher volumes. 

Big Here and Big There

Peabody Energy (NYSE: BTU) is a large U.S. coal producer and already has a large position in Asia. It serves the growing coal markets of India and China from its coal mines in Australia. Those assets provide an important level of diversification.

The company's bottom line was soundly in the black until a non-cash asset impairment charge dragged 2012's earnings deeply into the red. The vast majority of that charge relates to the company's over $800 million write down of the value of its Australian mines largely because of low met coal prices. That said, the write down only represents about 10% of the total investment the company has made in the region over the past decade despite an about 50% drop in the pricing of met coal.

Taking out that charge left the bottom line at over $2.60 a share. This is why the company hasn't had to cut its dividend. Peabody lost about a dime a share in the first quarter, but second quarter earnings came in at over $0.30 a share. The bottom line is likely to dip in the third quarter, with management's expectation of anywhere from a loss of $0.16 a share to a profit of $0.09 a share.    

That said, China and India continue to increase imports. As supply and demand come back into balance and coal prices rise, Peabody's proximity will quickly turn into a competitive advantage compared to domestic miners, like Cloud Peak, looking to ship their coal to these regions. The company's 2.1% dividend yield isn't impressive, but is relatively high for the company. And the shares are trading a little below book value.

Will Coal Come Back?

The dynamics in the coal industry are improving, but pricing is still soft. That should change and nuclear plant closures will help over the long-term. Alliance is outperforming the industry and should be a top consideration for investors. Cloud Peak has low cost coal and an increasing focus on exports, which should position it well for a rebound. And Peabody has global exposure that would be hard to duplicate. Watch the industry and specifically this trio for a rebound.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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