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Posted on May. 5, 2007
By Jeffrey Tomich
ST. LOUIS POST-DISPATCH

Peabody's Partner in $2.5 Billion Prairie State Project Backs Out

A key partner in Peabody Energy Corp.'s Prairie State Energy Campus, a $2.5 billion coal-fired power plant planned for Southern Illinois, has backed out because it couldn't find customers to buy the power.

Michigan-based CMS Energy Corp. signed an agreement in October to take a 15 percent stake in the project as well as operate the 1,600-megawatt plant and oversee its development.

But CMS on Thursday disclosed in a Securities and Exchange Commission filing that it pulled out of the project because it "does not meet our investment criteria, including the level of power purchase agreements for our share of output."

The withdrawal presents questions about the future of Prairie State, including whether the plant will be built.

St. Louis-based Peabody, the nation's biggest coal producer, has insisted for years that Prairie State was necessary to help meet growing demand for electricity in the Midwest. But CMS was unable to find customers for long-term power agreements.

"We're being very disciplined in our new investments, and we couldn't be sure that our projected return expectations could be met," said Jeff Holyfield, a CMS spokesman. He didn't disclose what terms the company was seeking from potential customers, or whether the company was required to pay Peabody for terminating the relationship.

Peabody highlighted the Prairie State project in a video for shareholders at the company's annual meeting last week in Clayton. Chief Executive Gregory Boyce didn't mention that its co-developer had pulled out.

Spokesman Vic Svec said Friday that the loss of CMS puts Peabody back in the market for a partner to operate the plant, about half an hour southeast of St. Louis. But he said it shouldn't slow down the development of Prairie State, which Peabody expects to be in operation by 2011.

"Other parties have expressed strong interest," Svec said in an interview Friday. "We would not expect it to have a serious effect on the project. We will continue to move forward on a number of fronts."

The withdrawal of CMS isn't Peabody's first setback at Prairie State. The plant is years behind schedule because of trouble obtaining the necessary environmental permits and appeals from environmental groups. And those delays have led to hundreds of millions of dollars in cost increases to cover rising prices for steel, concrete and other construction materials.

The Sierra Club and other groups opposing Prairie State's development see the withdrawal of CMS as more than an isolated business decision. They view it as part of a broader trend away from coal and fossil fuels in light of growing concern about climate change.

"That's a huge signal and a huge blow," said Bruce Nilles, director of the Midwest Clean Energy Campaign for the

Sierra Club. "We're seeing major cracks in the coal rush, and Peabody may, ironically, be the latest victim."

In the six months since Peabody signed the agreement with CMS, Democrats have gained control of both houses of Congress and a number of different proposals are being discussed to limit emissions of carbon dioxide, a heat-trapping gas emitted by coal-fired power plants.

While there are at least 10,000 megawatts of new coal-fired generating capacity under construction in the United States, according to Peabody and other coal producers, several high-profile coal projects have been canceled.

Dallas-based TXU Corp., for one, scuttled plans for most of the dozen coal-burning plants the company was going to build in Texas to get regulatory approval for a buyout by private investors.

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