New Peabody plant will convert coal into natural gas

~ The nation's largest coal company plans to build a facility in Illinois.

ST. LOUIS -- Peabody Energy Corp., the nation's biggest coal company, announced Wednesday plans to build a facility in Illinois that transforms coal into natural gas.

Peabody formed a partnership with ArcLight Capital Partners LLC, a Boston-based investment company that finances a broad array of projects in the energy industry. ArcLight would not comment on how much it is investing in the project.

The plant is in the early stages of development, Peabody said in a news release. The company declined to offer additional comment.

The 'future' of the industry

Turning coal into natural gas represents the "future" of the coal industry, said Michael Dudas, an analyst with Bear, Sterns & Co. in New York. Coal is increasingly attractive as an alternative to oil or natural gas because it is relatively cheap and can be produced domestically, Dudas said.

The technology to gasify coal has been proven for at least 10 years, but the price of natural gas has to be high to make the process economically profitable, said Rich Bonskowski, a geologist with the U.S. Energy Information Administration. While that is the case now, the price of natural gas is highly volatile and could undercut the profitability of coal gasification if it drops again, he said.

In a good position

Dudas said Peabody is in a good position to compete in the new market for coal gasification projects because the company owns the largest coal reserves in the United States. The firm says it owns 9 billion tons of coal and the new plant in Illinois would consume about 3 million tons of coal annually.

About 90 percent of all coal in the United States is currently sold to utility companies that burn it to generate electricity, Bonskowski said.

Illinois is ripe territory for a coal gasification plant. In June, Gov. Rod Blagojevich signed legislation that removes some regulatory obstacles to build such plants. Illinois also produces high-sulfur coal that can be processes at the plants.

Facing the competition

Peabody could face some competition in the state. Power Holdings of Illinois LLC, is planning to begin construction in 2007 on a $1 billion, privately financed gasification site southwest of Mount Vernon, Ill. The plant would have about 150 workers and could use 3.5 million tons of Illinois coal a year, company president Robert Gilpin said Tuesday during the bill-signing ceremony.

Peabody's stock closed at $81.42 Wednesday on the New York Stock Exchange, up $2.60 from its closing price the day before.