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All of the Coal Plants Aren't Being Closed

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Alpha Natural Resources is expecting over 200 coal plants to be shuttered because of increasingly stringent environmental regulations. However, the Illinois Pollution Control Board just gave Dynegy five more years to clean up plants it wants to buy so they wouldn't be shut down. That doesn't mark a trend reversal, but it shows that coal isn't dead yet.

More time
About a year ago, Ameren asked the Illinois Pollution Control Board to loosen environmental mandates at a handful of its coal plants. It warned that the cost of upgrades would lead it to shutter over 4,000 megawatts of power. That's a lot of power to replace, so the board agreed to delay the implementation of new rules by five years. Dynegy, which subsequently agreed to buy the power plants, won a similar hardship plea, threatening to call off its purchase if it didn't get the same deal.

That's good news for Ameren and Dynegy, which are swapping the assets. Ameren is looking to get out of the merchant power business so it can focus on its regulated assets. Although there's less upside on the regulated side of the utility business, it offers far more consistent returns. Moreover, the company will be able to refocus on regulatory relationships and improving its operations. In fact, the sale will make Ameren look a lot more like its regulated peers, which should please more conservative investors.


Dynegy, meanwhile, is increasing its already large position in coal. It will go from owning a little under 3,000 megawatts of coal power in the state to over 7,000. And the company, which only emerged from bankruptcy in late 2012, will continue to be a big customer for Powder River Basin (PRB) coal—which all of its units, current and those to be acquired, use.

The PRB players
That's great news for Cloud Peak Energy , which operates exclusively in the PRB region. It also helps explain why the company hasn't lost a dime despite the coal industry's difficulties. That's been helped along by its astute basin focus and its avoidance of metallurgical coal. That latter market has seen a severe price correction despite still solid demand because of oversupply.

That's been a thorn in the side of Arch Coal . Arch which is another of the big PRB players, paid $3.5 billion to acquire met coal assets at what, in hindsight, was the top of the market. So while weak thermal coal markets have been an issue, the company's notable position in the PRB has actually been an island of strength compared to its steel coal business. And the debt it took on for the deal remains another big overhang.

That said, Arch shares have been hard hit and should provide the most upside of the big PRB players for more aggressive investors. Indeed, while Cloud Peak is likely to get through the downturn without too much pain, you are essentially betting that Arch manages to muddle through when you buy its shares. Assuming it does, however, the shares should rebound nicely.

ACI Chart

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That said, if you want more diversification than Cloud Peak offers and less risk than Arch, Peabody Energy is a better option. The company is big in the PRB, but also has notable operations in the similarly cheap Illinois Basin and in Australia, which has easy access to still growing Asia. Besides being more diversified than Arch, Peabody is also less levered.

This is not the end of coal
The big takeaway from the concessions granted to Ameren and Dynegy is that coal is far from dead. And, looking at the coal industry, Cloud Peak, Peabody, and Arch will benefit from Illinois' decision because it means continued demand for their PRB coal. Of the trio, Cloud Peak, which is focused on the region, is the most direct beneficiary.

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The article All of the Coal Plants Aren't Being Closed originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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