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Coal will have role to play in nation's energy future

The Baltimore Sun

We seem to be at a turning point in the future of energy and the response to global warming.

The United Nations report on climate change has given momentum to critics of the status quo. Even conservatives (economists Greg Mankiw and Gary Becker, former Fed Chairman Alan Greenspan) suggest taxing traditional energy to discourage fuels that contribute to warming.

The huge buyout offer for Texas energy giant TXU includes a promise to scrap eight planned electricity plants powered by coal, one of the worst sources of greenhouse gas. Minnesota Gov. Tim Pawlenty just signed a bill requiring state utilities to produce a fourth of their electricity from wind and other renewable energy by 2025.

How will it all turn out? If we had a time machine, we could travel to 2025 to see. Or - almost as good - we can stay here and now and analyze the stock price of Baltimore-based Foundation Coal.

Everything about Foundation says "old energy."

The company, which went public in 2004, is descended from oil giant Amoco Corp. Its product was advanced technology when Thomas Jefferson was president.

Its assets are 14 coal mines from West Virginia to Wyoming. Its customers are about 100 coal-burning electricity plants - the kind of facilities that excel in producing mercury, nitrogen dioxide and other pollution in addition to carbon compounds. And Foundation's market is under siege.

"No New Coal Plants," said the protesters' T-shirts at the Texas Capitol last month, according to the Austin American-Statesman. "One of the dirtiest sources of energy," says Al Gore on ABC News.

Coal's share of U.S. electricity generation fell from 52 percent in the early 1990s to 49 percent last year, yielding space to cleaner nuclear and natural-gas plants, according to the Energy Department. National coal consumption fell last year for the first time since the recession year of 2001 - even though the economy grew 3.3 percent.

Coal prices have fallen as much as 50 percent in the past year - much more than prices for oil and natural gas. At the end of 2006 Foundation booked a quarterly loss for the first time since right after it went public in 2004.

Foundation Coal's stock, however, hasn't heard the bad news.

Although at $32 the stock has retreated from its $55 neighborhood of last year, it's still up by half from its initial offering price.

Six Wall Street analysts have "buy" ratings on Foundation. David Khani of Friedman, Billings, Ramsey predicts the stock will hit $65.

He may or may not be right, but it doesn't matter. What's important isn't whether Foundation sells for $30 or $60. What's important is that Foundation isn't selling for $6.

By pricing Foundation at a multiple of earnings higher than that of Intel or Microsoft, investors are saying very loudly that dinosaur energy will be an important part of the economy for decades.

As other energy sources grow scarce, the United States sits on enough coal to last centuries. More than 50 coal-fired electricity generators are on the drawing board for the next five years, says the Energy Department.

And even with a stiff carbon tax and the expensive scrubbers that generators badly need, coal-fired electricity looks like it will be affordable for a long time. It cost only $22 last year to produce a megawatt-hour of juice with coal, according to Global Energy Advisors, compared with $80 for natural gas and petroleum and $60 for solar, wind and other alternative technologies.

At Foundation, buyers for its product are lined up around the block. The company has sold all its anticipated production for this year, most for 2008, half for 2009 and a fifth for 2010.

Maybe the best indicator of all showed up in Minnesota recently. Government boondoggles have prompted people there to build numerous ethanol plants. But the facilities burn lots of energy to distill the fuel, and the natural gas they've been using has gotten very expensive, reports the St. Paul Pioneer Press .

So they're switching to coal.

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