Sector Watch: Clean Coal
A recent U.S. Supreme Court ruling giving the Environmental Protection Agency authority to regulate green house gases will likely spur further advances in so-called “clean coal” technologies – that is, technologies that remove harmful greenhouse gases created during coal combustion. Two of the most popular clean coal technologies are 1) coal gasification, which involves converting coal to gas using a combination of heat, steam and pressure and stripping carbon from the gas before it is burned, and 2) supercritical technology, which uses extremely high temperatures to burn coal more efficiently and create more power using less coal.
The U.S. Department of Energy hopes to spur large-scale implementation of clean coal technologies by offering companies tax credits to help drive down development and implementation costs. The Bush Administration has authorized more than $1.65 billion in tax credits to support clean coal projects.
Despite the fact that coal-fired power plants are a major source of air pollution in the United States, coal would be a difficult energy source to replace. About 50% of this nation’s electricity is generated by burning coal. Electricity demand, according to the U.S. Department of Energy, is forecast to rise 39% by 2030; coal expected to provide 57% of this electricity.
Coal is a favored energy source because it is both cheap and plentiful. The United States has more than 267 billion tons of coal reserves, about 27% of the world’s total reserves, and produces approximately 1.0 billion tons of coal each year which is used to generate electricity. Without coal to meet its energy needs, the United States would be required to import the equivalent of an additional ten million barrels of oil per day.
Most of the companies working on clean coal technologies are large utilities and integrated energy producers. These include Duke Energy (NYSE: DUK), ConocoPhillips (NYSE: COP) and Royal Dutch Shell. However, there are a handful of smaller energy companies developing clean coal technologies that are poised to reap the benefits of growing demand.
Evergreen Energy (NYSE: EEE) has developed a patented technology for cleaner-burning coal. The company’s proprietary K-Fuel® process combines heat with pressure to physically and chemically transform high moisture, low BTU coal into a more energy efficient, lower emission fuel. A side-benefit of the K-Fuel® process is the removal of significant amounts of mercury from the coal and reductions in carbon dioxide, sulfur dioxide and nitrogen oxide emissions.
Evergreen Energy has completed the initial construction and start-up of its first plant using the K-Fuel® process and is working with Bechtel Power Corp. to standardize its plant equipment and future plant designs. Its first K-Fuel® processing plant is located in Fort Union, Wyo., adjacent to the Powder River Basin, an area known to contain significant coal and energy reserves. During last year’s fourth quarter, Evergreen Energy signed letters of agreement with two utilities to construct K-Direct facilities (i.e. K-Fuel® processing plants located on-site with coal-fired power plants) and completed successful test burns of K-Fuel® processed coal with two large industrial customers.
Evergreen Energy generated 2006 revenues of $36.7 million, compared with $984,000 in 2005, but recorded operating and net losses of $51.5 million, compared with 23.3 million a year earlier, due to $26.3 million in plant start-up costs. Consensus estimates for Evergreen look for 15% growth this year and longer-term growth averaging 25% annually. The company had cash, restricted cash and marketable securities totaling $88 million at year-end 2006, and plans to spend $25 million in 2007 to start up its Fort Union processing plant and develop its Buckeye coal mine and K-Direct facilities. These shares currently trade close to the low end of their 52-week price range Of $5.45 to $18.70.
Syntroleum Corporation (Nasdaq: SYNM) owns a proprietary gas-to-liquids and coal-to-liquids process for converting natural gas and coal into synthetic liquid hydrocarbons. The company has 160 patents issued and pending on this technology. Syntroleum’s process allows coal reserves, which are difficult and expensive to extract due to environmental concerns and long distances from power plants, to be converted into ultra-clean fuels for easy transportation.
In February 2007, Syntroleum signed an agreement with China Petroleum & Chemical Corp. (NYSE: SNP) to jointly develop natural gas-to-liquids and coal-to-liquids technologies in China. The joint development partners will construct a 17,000 barrel per day natural gas-to-liquids plant and a 100 barrel per day coal-to-liquids plant in China using Syntroleum’s technology. Under the terms of the agreement, Sinopec will pay Syntroleum $20 million annually over the next five years to support development of the technology.
Syntroleum produced revenues of $3.8 million in 2006, compared with $7.9 in 2005, mainly from joint development agreements with the U.S. Department of Defense and fuel sales to the Department of Transportation and Department of Defense. Revenues in 2005 included $5.8 million of previously deferred revenues relating to Department of Energy fuel deliveries.
The consensus estimates look for growth of 53% in 2007. The company’s 2006 expenses totaled $21.1 million and consisted of research, development and engineering program spending. At year-end 2006, Syntroleum had cash totaling $33.5 million to fund its future growth initiatives. These shares are also currently trading at the low end of their 52-week range, which is $2.45 to $8.30.
