Why coal stocks didn’t get much help from the Supreme Court’s mercury ruling

By Emily Holden, Benjamin Hulac | 07/02/2015 08:10 AM EDT

Coal stocks surged this week after the Supreme Court found problems with U.S. EPA’s regulations to curb coal plant mercury emissions, but investment experts say most coal plants and electric utilities will see no major benefit from the ruling.

Coal stocks surged this week after the Supreme Court found problems with U.S. EPA’s regulations to curb coal plant mercury emissions.

Peabody Energy Corp. shares finished 9.9 percent higher, Alpha Natural Resources Inc. spiked midday and ended up 2.6 percent, and Arch Coal Inc. holdings rose 4.8 percent by the closing bell Monday.

But investment experts say most coal plants and electric utilities will see no major benefit from the ruling.


"Utilities have already largely implemented the EPA rule, installing scrubbers on surviving plants and shutting down other plants where economics made implementation cost prohibitive," MorningStar equity analyst Travis Miller said in a note after the ruling. "In addition, with low-cost natural gas continuing to drive the construction of new natural gas generation, we think the ruling is too far past to necessarily undo the impact of MATS."

Indeed, coal stocks had already dipped back down Tuesday and yesterday, another sign that the industry is in structural decline, rather than in a cyclical slowdown or blip that can rebound based on court action on climate regulations.

About half the country’s coal capacity had complied with the Mercury and Air Toxics Standards by an April 2015 deadline, while the other half requested yearlong extensions, according to MJ Bradley & Associates.

The Supreme Court’s decision doesn’t let those coal-burning units with extensions off the hook, though. The justices ruled that EPA unlawfully failed to consider how much the regulations would cost to implement in deciding to limit mercury emissions, but it remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit for further consideration.

It’s impossible to know how the D.C. Circuit will respond, but judges could vacate the rule while EPA reconsiders the cost issue (Greenwire, June 30). Environmental advocates have said they will fight to keep that from happening. If the rule is waylaid, some coal plants that have not yet made changes could run longer without emissions controls, said Dennis Pidherny, a public power analyst for Fitch Ratings.

"For a number of the issuers that we rate, they’ve been agonizing over whether or not to spend the money putting on additional pollution controls," Pidherny said. "The uncertainty may allow them to continue to operate without those scrubbers for a longer period of time."

Investors might have been banking on that uncertainty when they poured money into coal producer stocks Monday.

Or it might have been that coal stocks were "horribly discounted and they were looking for any good news to snap some up," said Fitch coal analyst Monica Bonar.

Philip Smyth, an investor-owned utilities analyst for Fitch, said the ruling’s impact won’t be "meaningful from a big picture point of view" and natural gas prices have a much bigger influence on coal’s competitiveness.

‘Regulatory risk still remains’

Any delay in implementing the rest of the changes under the mercury rule could give companies time to consider how to react to a host of climate regulations. They could have a better idea of how EPA’s finalized Clean Power Plan will play out in their states, for example, Pidherny said.

On the other hand, if the court’s response undercuts MATS requirements, the industry could have a harder time complying with those upcoming carbon emissions requirements, he said.

EPA air chief Janet McCabe said in a blog post Tuesday that the ruling would have no bearing on the Clean Power Plan (ClimateWire, July 1).

But analysts at Fitch and MorningStar think the precedent will force EPA to more cautiously weigh costs.

"At the end of the day, EPA did the analysis — it just looks like going forward they’ll have to slow down and do a more thorough analysis before the rule," said Monica Bonar, a Fitch coal analyst.

Miller warned that this won’t make coal any safer an investment, though.

"Although we think the Supreme Court ruling will force the EPA to more carefully push future regulation and will make the industry more fervent in its claims of EPA overreach, we caution investors that regulatory risk still remains a key risk to coal stocks," he said.

The coal sector has lost roughly 63 percent of its value during the past year, and during yesterday’s trading it was the worst performer of all Dow Jones sectors, sliding nearly 6 percent. Since 2012, more than 30 coal mining companies have filed for bankruptcy protection.

Shares of companies that climbed Monday saw their gains wiped out yesterday.

Peabody started the nosedive yesterday after lowering shareholder expectations for its second-quarter performance with new information. In response, shares plummeted 18.31 percent, and Peabody finished as the fourth worst-performing stock.

The St. Louis-headquartered firm said Tuesday that harsh rain and flooding had cut production by 5 million to 5.5 million tons at its facilities in the West, triggering a $40 million loss. The company also warned of a $20 million loss due to lower Australian coal prices.

In early June, Peabody, the largest private-sector coal operator, announced it would cut 250 jobs in Indiana and Wyoming, and in a filing posted Tuesday, the firm said it is eliminating 250 other positions in Australia.

By the end of yesterday, Alpha had dipped 7.7 percent, Arch dropped 4.8 percent, and Walter Energy Inc. and Cloud Peak Energy Inc. gave back 3.7 and 9.4 percent of their gains.

Alpha may soon be undergoing a debt restructuring, and Wyoming’s environment department has informed the company that it no longer qualifies for "self-bonding" and will have to have insurance or cash on hand to clean up abandoned mining facilities. Peabody and Arch, which also have facilities in the state, are "getting tarred with that brush, as well," Bonar said.

"It’s just a tough market," she said, adding that a cooler-than-usual summer has done nothing to spur electricity and coal demand.

"You’ve had, more recently, [metallurgical] coal find a new bottom," Bonar said.