Americas: Energy - Environmental Rules for US Coal Plants to Impact Multiple Sectors

New environmental regulations on coal plants will impact multiple sectors

Over the next 5-8 years, new environmental regulations will drive retrofits and retirements for much of the US coal generation fleet.

We expect the EPA – under federal court mandates – to draft and enforcenew regulations for emissions reductions from existing coal-fired powerplants. New draft rules for mercury/acid gases are expected to emerge inthe next few weeks and be finalized by early 2012 – with implementation inthe 2015 timeframe. We estimate roughly 47% of the coal fleet, 14% of the total US capacity, will need to install new pollution controls or be retired.

We see these regulations impacting several sectors with E&C firms emerging as initial beneficiaries …

We see the E&C companies, technology providers (BWC) and installers (SHAW, URS, FLR), benefiting from new orders for pollution control equipment as well as for a potential new generation to replace retiring coal units. We estimate the market for pollution control equipment and installation for E&C companies as $30 bn to $40 bn – a significant uptick in spending by the utilities sector on the existing coal fleet. Among the E&Cs, we see BWC as the key beneficiary given its leverage, as both a technology provider and installer, to this long-term cycle.

... while Utilities and IPPs, as well as gas E&Ps, should eventually benefit, although this remains a longer-term theme…

When implemented, pending any legal challenges, we believe the new rules will (1) raise demand for natural gas generation and likely reduce demand for coal and (2) force retirements of older, smaller and less efficient coal plants – a positive for the power sector, as it should somewhat reduce the significant surplus in generation supply. CPN (Buy), PPL (Buy), FE (Not covered) and EXC (Sell) should emerge as the largest multi-year beneficiaries within utilities, while – due to increasing reliance on natural gas generation after 2013-2014, lower-cost gas E&Ps such as COG (Neutral) could structurally benefit as well.

…and the impact on coal and rail, over time is, modestly negative

The retirements of smaller, older and inefficient coal plants will drive a multiyear decline in domestic thermal coal demand – hurting CAPP coal the most. We believe PCX (Neutral) will be negatively impacted given its high exposure to high cost CAPP coal, while the railroads CSX (Neutral) and NSC (Sell) will see loss of business from the CAPP and NAPP coal burning plants.

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