Coal shortage forces power plants to look elsewhere for fuel

London (Platts)--3Jan2006

Shrinking coal inventories at the nation's power plants are holding back
growth of coal as a fuel, according to some analysts, although the Energy
Information Admin., in its most recent quarterly report, noted that U.S. coal
consumption in the electric power sector is up about 20 million tons over the
same period in 2004. 

For January-September 2005, power plants burned 781.1 million tons, EIA said,
compared to 761.5 million tons for the same period in 2004. In 2003, for the
nine months, power plants burned 753.3 million tons. 

Nevertheless, electric power sector stocks are at the lowest they've been
since 1999, according to the EIA. For the quarter ending Sept. 30, electric
power sector stocks were down to almost 90 million tons. For the quarter
ending in June 30, stocks were 115.8 million tons, and for the first quarter,
105.5 million tons. The next smallest stockpile was 102.3 million tons in the
fourth quarter 2000. 

For comparison purposes, in 2004, stocks in 4Q were 106.7 million tons; 3Q,
106.2 million tons; 2Q, 120.3 million tons; and 1Q, 113.1 million tons. 

As a result, some analysts say that the tighter coal market and dwindling
nuclear and petroleum derived power are driving power producers to more
expensive natural gas as an alternative. 

"Even with the significant increase in natural gas prices, generation of
electricity from natural gas has increased 8.0% year-to-date, while coal has
only increased 1.9%," said analysts Daniel Roling and David Lipschitz in a
Dec. 20 report. We believe this is a result of extremely low coal inventory
levels at utilities, which has caused them to burn natural gas rather than
coal in order to meet their generation needs."

Utilities' coal inventories remain tight going into 2006 as rail maintenance
and high demand has kept inventories at record low levels, Merrill Lynch's
analysts wrote. The latest EIA inventory totals indicate nationwide coal
stockpiles are at a 33-day supply. "This is 8.3% lower than last year and the
lowest September in our database," the analysts wrote. 

"Based on our model, November's days of supply are well below the new industry
'norm' of 40 days. Our estimate for November is for the lowest inventory
levels we have seen during the last 10 years for November. We estimate utility
inventories at the end of November were only 37 days of supply, or 103 million
short tons, 9.0% and 10.4% lower, respectively, than the November 2004
levels."

These lower-than-ever inventories come at a time of overall coal price
increases, they said. For instance, as of mid-December, Powder River Basin
coal was trading on the spot market at $18.25/ton, up 220.2% from last year.
This price is similar to Platts Coal Outlook's OTC Hedge Price Monitor
reported for 8,800-Btu PRB coal as of Dec. 19 (see related story, page 3).

Imported coal may also be gaining from the current coal situation. Since 1999,
EIA said that imported coal has been climbing each year, and 2005 is on track
to be significantly larger for imported stock. As of Sept. 30, EIA said the
United States has imported 22.7 million tons, compared to 27.3 million tons
for all of 2004 and 25.0 million tons for 2003. For January-September 2004,
the United States imported almost 20 million tons, and for the same period in
2003, 18.4 million tons. 

Bullish on coal despite debt structures 
The Merrill analysts reiterated "Buy" recommendations on shares of Arch Coal
and CONSOL Energy, and remained "Neutral" on shares of Foundation Coal, Massey
Energy and Peabody Energy.

Meanwhile, in a Dec. 15 report, Standard & Poor's coal analysts Dominick
D'Ascoli and Thomas Watters commented that Peabody "has the best overall
ranking" in terms of credit quality at BB/Stable/?. This is "attributable to
its satisfactory business risk profile that clearly stands above its peers.
Peabody has good mine and geographic diversity, significantly more coal
reserves, and, despite increasing costs experienced by many of its peers, has
for the most part been able to contain its costs. However, its financial risk
profile, driven by an aggressive capital structure that includes significant
debt-like liabilities, constrains the rating."

The S&P analysts painted a similar picture for Arch (BB/Stable/?), saying that
it "ranks third in the overall ranking [of relative credit quality of selected
U.S. coal companies] with good operating diversity in three coal basins and a
large surface mine in the Powder River Basin that is less prone to operating
disruptions than underground mines. Nevertheless, despite its relatively good
business profile, credit quality is limited because of its aggressive
financial leverage. Arch's financial risk profile is the weakest among the
four other coal companies [Peabody, CONSOL, Foundation and Massey]."

At BB-/Positive/?, CONSOL "has the second-best overall ranking, because of its
coal and gas diversity play while boasting the second-largest coal reserve
position. However, while CONSOL has a relatively low level of book debt, it
has the largest absolute amount of debt-like liabilities."

Foundation (BB-/Stable/?) ranks fourth, followed by Massey (BB-/Stable/?),
which S&P downgraded on Nov. 23 "because of a more aggressive financial policy
in light of an announced $500 million share-repurchase program and roughly
$200 million increase to debt levels."

As for Foundation, "despite operations in four coal basins [S&P views its]
operating diversity as weaker than the top three because most of its EBIDTA is
concentrated at four mines, two in the Powder River Basin and two in Northern
Appalachia.

"Massey, with significant production exposure to the mature, declining and
difficult operating environment of Central Appalachia, ranks last," S&P said.

This story was originally published in Platts Coal Outlook. Request a free
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