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Industry split on new coal plants as US tax reform may rush retirements

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Industry split on new coal plants as US tax reform may rush retirements

U.S. coal is split on the feasibility of new coal plants, as U.S. tax reform could give some utilities a path for closing coal-fired power plants in a way that softens the impact on ratepayers.

With a pro-coal White House now backing the idea of bringing back coal but market headwinds against coal persisting, the sector is divided over whether the solution is pushing new coal plants, preserving the current fleet or both.

Joseph Craft, president and CEO of U.S. thermal coal producer Alliance Resource Partners LP, encouraged the industry to "protect the fleet" on a recent earnings call, while the world's largest private coal miner Peabody Energy Corp. said it had no new plans for greenfield development in the U.S.

Avoiding coal plant retirements was also at the top of a list of principles the American Coalition for Clean Coal Electricity submitted to the U.S. Environmental Protection Agency on Feb. 26 hoping to guide regulators in replacing the Obama administration's Clean Power Plan.

However, replacing the Clean Power Plan with a policy emphasizing efficiency improvements to lower carbon dioxide emissions could still trouble some U.S. coal plants, industry supporters warned.

In early comments from coal supporters, several expressed concerns that efficiency standards may not be a workable solution. The variability of coal plants and their respective ability to achieve higher heat rates, one measure of plant efficiency, complicates other hurdles to using efficiency standards to consistently reduce emissions, such as the tendency for heat rate improvements to degrade over the life of a plant.

Another challenge facing coal-fired power generators is U.S. tax reform, which some have suggested could speed the closure of coal plants.

On a Feb. 27 earnings call, PNM Resources Inc. President and CEO Patricia Vincent-Collawn said the utility, which serves New Mexico and Texas, is passing the benefits of tax reform to customers with new rates. The move, she said, also allowed the company to begin a transition away from coal while holding the impact on customers' bills to just over 1%.

In a Jan. 30 report, The Brattle Group suggested utilities could find "creative ways" to return tax savings to customers other than a simple rate reduction, including accelerating book depreciation for early retirement of power plants or other at-risk assets.

The week also saw a coal industry executive recommending that the federal government provide more "clarity and certainty" in its rules for the payment of federal royalties.

"The best way to provide clarity and certainty, to avoid further appeals and costly litigation, is to request formal rulemaking around the coal valuation benchmarks," Matthew Adams, vice president of taxation at Cloud Peak Energy Inc. and a member of the U.S. Department of the Interior's Royalty Policy Committee, said at the committee's Feb. 28 meeting in Houston.

The DOI's Office of Surface Mining Reclamation and Enforcement this week announced $300.7 million in funding for 28 coal-producing states and tribes to reclaim abandoned coal mines in 2018.

Among the industry's rail partners, a strong export market and tax reform helped boost the fourth-quarter 2017 coal business of major U.S. railways, even as low natural gas prices and a mild early winter put a damper on revenues.

Nearly all major railways reported positive effects from the tax reform bill. "Coal, you could debate whether it's going to be around five, six years or not. But it's good business for us," Canadian National Railway Co. CFO and Executive Vice President Ghislain Houle said Feb. 21 at the Barclays Industrials Select Conference.

However, for BNSF Railway Co., the railroad's coal revenue dropped 3% in the fourth quarter to $965 million, from the $996 million reported in the last quarter of 2016, which it attributed to low natural gas prices and mild weather.

The railroad recently joined a lawsuit filed by Lighthouse Resources Inc. against Washington officials over the proposed Millennium Bulk Terminals-Longview.

Natural Resource Partners LP also reported its fourth quarter earnings this week and attributed its gains to declining utility stockpiles and strong export demand.

It posted net income of $30.7 million, or $1.26 per unit, in the fourth quarter, compared with $3.5 million, or 28 cents per unit, a year earlier.

Upcoming events:

American Coal Council: The council will hold its 2018 Spring Coal Forum March 6-8 at Sandpearl Resort & Spa, Clearwater Beach, Fla.

Coal Prep Society of America: The society will host its CoalProTec2018 on April 23-25 at the Lexington Convention Center in Lexington, Ky.