U.S. Absorbs Clean Power Plan, Peabody Energy In Negative Campaign Mode

|
Includes: ARCH, BTU
by: Keith Williams

Summary

President Obama: "We're the first generation to feel the impact of climate change and the last generation that can do something about it".

As climate policies bite, Peabody Energy keeps campaigning against change.

Another coal company, Alpha Natural Resources enters Chapter 11 bankruptcy.

Market unimpressed as share price of Peabody Energy falls 9.17% to $1.09.

The Obama administration is determined to take action on CO2 emissions and so it isn't surprising that the next step, the Clean Power Plan is uncompromising. Some analysts have suggested that pricing carbon through a Federal cap and trade or carbon tax would have been more effective at reducing emissions, but this wasn't an option for political reasons. So instead the Clean Power Plan involves using regulation through the EPA to curb CO2 emissions.

Some analysts expected that the Obama administration would weaken its proposed actions in the face of a push-back from entrenched industry groups, coal states and political adversaries. Instead, there has been a small tightening of the plans to reduce CO2 emissions from power plants by 32% (instead of the earlier proposed 30%) from 2005 levels by 2030. Obama is relying on scientific advice that it is urgent to keep CO2 emissions out of the atmosphere. The inevitable result will be more coal power plants closing, which will put more downwards pressure on coal production.

What is surprising is the response from Peabody Energy (NYSE:BTU), the self-appointed spokesperson for push-back. Why would a company seek to hold back the tide, with arguments that have been widely criticized as lacking credibility? The press release from BTU is the kind of response the tobacco industry used to considerable effect when it delayed action on cigarette smoking for decades. What worked in the past isn't guaranteed to work in a more sophisticated world, where information is analyzed more critically.

Key points from the BTU press release

i) Action urged in the courts, in Congress, by the States, consumer groups and domestic and industrial electricity consumers to repeal the new EPA rules.

The press release argues that there is unprecedented early opposition to the new EPA rules, and that they fail on "legal, policy and practical grounds". These claims are at odds with evidence that there is strong support for climate action in the community, and that business is looking for leadership on decarbonisation.

ii) It is claimed "(unnamed) studies show" that American families and businesses will be punished by higher energy costs and less reliable power.

Precedents from around the world are claimed to demonstrate that soaring electricity prices result from emissions reduction targets. When the evidence for this claim is examined, it invariably leads to increased infrastructure costs (pole and wires) as being the main culprit for cost increases. Solar and wind power generation typically decrease cost spikes for electricity power, so there is contrary evidence that renewable power generation (both of which have effectively zero marginal cost i.e. no fuel input cost) actually depress prices.

iii) In a rare acknowledgement of climate change, the release argues that reducing CO2 emissions will have no notable benefit under "climate theory".

What Peabody means by this statement is obscure, as the consequences of CO2 emissions are well canvassed by expert science. Reducing emissions is clearly the key to mitigating climate change.

iv) The press release argues for a "technology path" rather than "artificial caps and taxes" to address carbon concerns.

This kind of argument is a delaying tactic (more research) at a time when President Obama makes clear that the experts say that there is an urgent need for immediate responses. The technology response highlighted by BTU, (CCS) (Carbon Capture and Storage) has lost initiative as a timely or cost-effective solution. It lacks credibility in today's technology debate.

Overall, the BTU response comes from a sense of entitlement about the status quo that isn't helpful.

Whether the management of BTU thinks it is fair or not, management has to manage within the context a company finds itself. Trying to get a contra groundswell of opinion against a major government initiative is an unusual tactic that hasn't produced constructive results to date. I am perplexed as to why the BTU management keeps up its campaign against scientific opinion and the investment community, which is switching its investment profile from fossil fuels to renewable energy. It is hard to see how this BTU management action is going to benefit shareholders.

A comment on the science

The latest results published in prestigious science journals Nature Communications and Nature Climate Change are sobering as even with 90% reduction in CO2 emissions, there will be a need to capture CO2 from the atmosphere to keep temperature rise to less than 2C. Currently, we are on a path to 4-8C temperature increase. This gives a perspective to BTU's claim that efficient "state of the art" coal plants reduce CO2 emissions by 25%. Simply put, this doesn't help with the task at hand.

So this is no joke and it deserves more consideration than handwaving by BTU that everything is basically OK. This is not a time for complacency and the Obama administration is showing that this is understood.

What should BTU management do?

I've argued for some time that the first step that needs to be taken to address an emergency is to acknowledge the reality of the situation. Today's press release from BTU shows that senior management and the board of BTU still don't understand (or if they, do they refuse to acknowledge it) the situation regarding CO2 emissions. Investors can't be happy with the captain of a ship resolutely steering the wrong way, ignoring the context for the business. It can only accelerate the problems ahead.

Consequences for investors in BTU in particular and coal in general

Another reason for the latest fall in the share price of BTU is the second chapter 11 bankruptcy (after Walter Energy) of a significant US coal company, Alpha Natural Resources. Arch Coal (NYSE:ACI), with a market capitalisation of just $38 million and debt of $5.1 billion, cannot be far behind.

Lest anyone be in doubt about what will happen should BTU end up choosing bankruptcy, the restructure of Walter Energy is instructive. Key Alabama and Virginia assets will be assumed by senior creditors, and junior creditors will get nothing. While the bankruptcy will reduce the company's debt substantially and it will be leaner due to mine closures and reduction in production, the prospects for small investors are poor at best.

Conclusion

The momentum for restructure of the US coal industry is building as both Walter Energy and Alpha Natural Resources have now sought Chapter 11 bankruptcy protection. BTU and ACI are both vulnerable to the same fate. It is probably too late for the US coal companies to take actions to broaden their businesses to accommodate the shift to a decarbonised economy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.