Peabody Energy Corporation

views updated

Peabody Energy Corporation

701 Market Street
St. Louis, Missouri 63101
U.S.A.
Telephone: (314) 342-3400
Fax: (314) 342-7799
Web site: http://www.peabodyenergy.com

Public Company
Incorporated: 1890 as Peabody Coal Company
Employees: 6,400
Sales: $2.67 billion (2001)
Stock Exchanges: New York
Ticker Symbol: BTU
NAIC: 212111 Bituminous Coal and Lignite Surface Mining; 212112 Bituminous Coal Underground Mining

Peabody Energy Corporation is the largest private-sector coal company in the world. It accounts for more than 16 percent of all U.S. coal sales—more than 180 tons a year. The Clean Air Act has prompted the company to shut down many mines producing lower grades of coal. After a number of changes of corporate ownership in the 1990s, the company launched a successful public offering in May 2001.

Origins

Peabody Coal was founded in the 1880s by Francis S. Peabody. The son of a prominent Chicago attorney, Peabody graduated from Yale University with the intention of studying law in Chicago. Displaying little aptitude for the profession, however, he opted for a career in business, working at a bank for a brief period before embarking on a private retail venture in 1883. With a partner, $100 in start-up capital, a wagon, and two mules, the 24-year-old Peabody established Peabody, Daniels & Company, which sold and delivered coal purchased from established mines to homes and small businesses in the Chicago area. Capitalizing on the social and business relations cultivated by Peabody’s father, the company attracted a large customer base and experienced success from the onset. As sales continued to increase, the company rose to prominence among the major coal retailers in Chicago.

In the late 1880s, Peabody bought out his partner’s share of the business, and in 1890 the company was incorporated in the state of Illinois under the name Peabody Coal Company. Five years later, in order to meet increasing customer demand, Peabody began its own mining operation, opening Mine No. 1 in the southern Illinois county of Williamson. This venture represented the first step in Peabody’s transition from coal retailer to mining company.

At the turn of the century, coal-burning fireplaces and furnaces composed the chief source of heat for both private residences and public buildings. Moreover, the railroad and shipping industries relied heavily on coal to power their steam engines. Over the next ten years, however, the increasing popularity of alternative fuels—including natural gas, which had applications in home heating, and diesel fuel, which could be used to power locomotives—led to a greatly reduced demand for coal in what had been its primary markets. Nonetheless, coal became an important commodity for another developing industry during this time; as electricity was brought to homes and businesses in urban and eventually rural parts of the country, the operation of electrical utility plants demanded large amounts of coal. In 1913, Peabody Coal won a long-term contract to supply coal to a major electric utility, and, realizing the growing importance of this market, the company began focusing on obtaining similar high-volume, long-term supply contracts, while acquiring more mining and reserve property to meet expected demand.

Having anticipated and adapted to changes in the marketplace, Peabody Coal thrived, gaining a listing on the Midwest Stock Exchange in 1929 and becoming known as a coal producer rather than retailer. Despite adverse economic conditions during the Great Depression and disputes and strikes involving the unionization of mine workers, the company continued to realize profits and growth. In 1949, Peabody Coal was listed on the New York Stock Exchange. During this time, Francis S. Peabody retired and was succeeded as company president by his son, Stuyvesant (Jack) Peabody, who later ceded control to his own son, Stuyvesant Peabody, Jr.

Merger with Sinclair in 1955

By the mid-1950s, Peabody was ranked eighth among the country’s top coal producers. Long dependent on its underground mines, however, the company began losing market share to competitors engaged in surface mining, a less expensive process that yielded a higher volume of coal. Heavy losses at Peabody ensued in the early 1950s, and the company engaged in merger talks with Sinclair Coal Company, the country’s third largest coal mining operation. Peabody management believed that Sinclair could offer the company access to greater financial resources and surface mining operations that would help it to remain competitive.

Like Peabody, Sinclair was founded in the late 19th century as a retail operation, providing customers in the vicinity of Aurora, Missouri, with coal for heating their homes and businesses. During the 1920s, Sinclair President Grant Stauffer was approached by Russell Kelce, an ambitious coal miner who sought to put his years of practical experience to use in an executive capacity. Born into a long line of coal miners, Kelce had begun working in the mines of Pennsylvania while in his teens. He later moved to the Midwest, where his father had established a mining operation. Stauffer and Kelce reached an agreement in which Stauffer would be responsible for cultivating a large customer base and long-term contracts and Kelce would oversee mining operations. By 1926, Kelce had purchased a significant share of the Sinclair Coal Co., and he became president when Stauffer died in 1949.

Kelce was also named president of the new company that resulted when Sinclair and Peabody merged in 1955. That year, Sinclair acquired 95 percent of Peabody’s stock and moved Peabody’s headquarters to St. Louis. However, the Peabody name, familiar to investors due to its listing on the New York Stock Exchange, was retained. Under the leadership of Russell Kelce, and, later, his brothers Merl and Ted, Peabody doubled its production and sales by opening new mines and acquiring established mines in the western states, including Arizona, Colorado, and Montana. By the mid-1960s, the company had opened a mine in Queensland, Australia, its first venture outside North America.

The Litigious 1970s and 1980s

In 1968, Peabody’s assets were acquired by Kennecott Copper Corporation. Although Peabody became the largest coal producer in the United States during this time, its position under Kennecott was made tenuous by an antitrust suit. The Federal Trade Commission (FTC) ruled that Kennecott’s purchase of Peabody was in violation of The Clayton Act, a decision that Kennecott challenged. In 1976, after eight years of litigation, the FTC ordered Kennecott to divest itself of Peabody Coal Company. That year, a holding company, Peabody Holding Company, Inc., was developed, and the following year it bought Peabody Coal for $1.1 billion.

Edwin R. Phelps presided over Peabody during these years of litigation, and in 1978 he was named the company’s chairperson. The presidency was then transferred to Robert H. Quenon, a former executive in the coal division of Exxon. Quenon met with several challenges at Peabody, including poor labor relationships, low employee morale, financial losses, and outdated plants and equipment. However, he later recalled in an interview for Peabody’s Pulse magazine that he was encouraged by the fact that the company “had a very good management team. They understood coal, and made things happen.”

Quenon oversaw a reorganization of Peabody that resulted in separate divisions for sales, marketing, mine operations, resource management, and customer service. By selling off several of its properties, the company was able to finance more modern facilities and equipment. Moreover, Quenon was able to capitalize on the OPEC oil crisis by renegotiating longer term contracts with customers who feared that coal prices, like oil prices, would soon increase dramatically.

Although Peabody became more financially stable, it also faced union strikes and litigation over safety issues during the 1970s and 1980s. The longest strike took place from December 1977 through March 1978, ending when mine workers throughout the country accepted a new three-year contract. The 110-day strike could have led to power shortages and industrial layoffs; however, this threat to the nation’s economy was avoided largely due to the stockpiling of coal that occurred before the strike commenced. Nevertheless, this strike and another in 1981 that lasted for 75 days proved costly to Peabody, and the company strove to improve its relations with its employees.

The safety of Peabody mines was called into question beginning in 1982, when the company was charged with tampering with the results of safety tests at its mine in Morganfield, Kentucky. The tests, made mandatory for all coal mines by the Mine Safety and Health Administration (MSHA), measured the amount of coal dust to which miners were exposed, since excessive amounts of the dust were linked to pneumoconiosis, commonly known as black lung disease. Peabody pled guilty to 13 charges of tampering with the test results in December 1982 and paid fines totaling $130,000. Also during this time, MSHA found the company’s Eagle No. 2 mine in Illinois in violation of safety standards, having failed to provide adequate roof support beams, which resulted in the accidental death of a foreman. Reacting to these and other similar disasters, Peabody focused its attention on safety, designating teams of engineers to design stronger roofs and better ventilation systems at its underground mines. In addition, the company patented its invention of a “flooded bed scrubber,” which operated in conjunction with mining machinery to reduce the amount of coal dust in the mines.

Company Perspectives:

Our actions are guided by a singular mission: to be a worldwide supplier of low-cost energy, which contributes to economic prosperity and a better quality of life.

In 1983, Quenon was made president and CEO of Peabody’s parent company, Peabody Holding Co., and Wayne T. Ewing was named president of Peabody Coal. Two years later, when Ewing moved to the Peabody Development Company, another subsidiary of Peabody Holding, he was replaced at Peabody Coal by Howard W. Williams. Improved labor relations at Peabody were reflected in the successful negotiations of contracts with the United Mine Workers, allowing the company and its miners to avoid strikes in 1984 and 1988. Growth in Pea-body’s operations continued and, in 1984, the company acquired the West Virginia coal mines of Armco Inc. for $257 million, resulting in new contracts with northeastern utility companies. During this time, Peabody’s headquarters were relocated in Henderson, Kentucky, which offered closer proximity to its central mines.

Clearing the Air in the 1990s

The passage of The Clean Air Act by Congress in the early 1990s forced many coal producers, including Peabody, to reassess their operations. Phase I of the Act mandated that American industries work to reduce the amount of sulfur dioxide emissions produced by their plants. Although the installation of scrubbers at coal-burning power plants would enable such companies to modify the effects of high-sulfur coal themselves, most customers preferred to switch to a low-sulfur coal product. As a result, Peabody’s competitive status hinged on its ability to renegotiate customer contracts and provide a product lower in sulfur content. Some Peabody mines, including Eagle No. 2, lost major contracts and were forced to close, whereas others were able to implement new equipment and procedures that produced low-sulfur coal. The prospect of the stricter clean air requirements outlined in Phase II of the Act, scheduled to go into effect by the year 2000, prompted Peabody to invest heavily in technology, hoping to be better prepared for eventual shifts in demand.

Hanson PLC acquired Peabody Holding Company, Inc. in 1990, a year after the bidding process had been set in motion by Newmont Mining Corporation, a company in which Hanson had a 49 percent shareholding. Irl F. Engelhardt was named president of the Peabody Group, while G.S. (Sam) Shiflett became Peabody Coal’s 13th president.

In addition to the responsibilities of containing costs and implementing substantial changes in the company’s Illinois Basin mines, Shiflett faced the threat of a strike by United Mine Workers during the first year of his presidency. Several developments in the coal industry contributed to dissatisfaction among mine workers. Technological advancements, including the computerization of some mining operations, led to reductions in the workforce. Moreover, new nonunion mining operations emerged, offering stiff competition through lower coal prices, which unionized miners feared would lead to wage cuts. Finally, as coal companies were increasingly acquired by large, international conglomerates, the lines of communication between labor and management became convoluted, and the potential for rifts increased.

The costly, extended strike and over a year of negotiations ended in December 1993, when the union agreed to a new four-year contract. The contract included provisions for an improved healthcare plan as well as the establishment of the Labor Management Positive Change Process (LMPCP). LMPCP, an effort to resolve future problems through cooperation rather than confrontation, invited employees to voice concerns regarding mine conditions and job security and suggest solutions. As chairperson of the Bituminous Coal Operators’ Association (BOCA), Peabody President Shiflett was instrumental in designing and negotiating the contract to resolve the strike.

In the mid-1990s, Peabody continued to rely on the utility industry as its primary customer base. With analysts predicting steady increases in the country’s demand for coal in the 1990s, bolstered by rising demand at electric generation plants, Peabody Group looked forward to renewed profits and expansion throughout the 1990s.

Changing Hands in the Late 1990s

Peabody and Eastern Group, a U.K. electricity distribution and generating company, were spun off by Hanson in March 1997 to create The Energy Group PLC. The new company planned to become an integrated electric company and immediately began buying U.S. power marketing companies such as Boston-based Citizens Lehman Power LLC. Renamed Citizens Power, this was eventually sold to Edison Mission Energy for about $110 million.

Within four months of listing on the London and New York stock exchanges, Energy Group attracted a takeover bid by Portland-based PacifiCorp. In May 1998, Lehman Merchant Banking Partners emerged as Peabody Group’s new owner, paying Texas Utilities $2.3 billion. Texas Utilities had acquired Energy Group PLC for $7.4 billion and retained ownership of Eastern Group.

Peabody Coal raised its stake in Evansville, Indiana-based Black Beauty Coal Co. to 81.7 percent in February 1999. Peabody had owned 43.4 percent of Black Beauty and paid $150 million to buy 33.3 percent more from P&M Coal Mining Co. and 5 percent from a management group. Just before the purchase, Peabody had paid $1.3 million to settle a United Mine Workers claim related to the 1994 transfer of coal reserves to Black Beauty, a nonunion company.

Key Dates:

1883:: Francis Peabody starts a retail coal venture.
1913:: Peabody Coal wins long-term contract with a major utility.
1929:: Peabody lists on Midwest Stock Exchange, establishes reputation as coal producer.
1955:: Peabody merges with Sinclair Coal.
1968:: Kennecott Copper Corporation acquires Peabody.
1976:: Federal Trade Commission (FTC) orders Kennecott to sell Peabody; holding company is formed.
1990:: Hanson PLC acquires Peabody.
1997:: Hanson spins off Peabody into The Energy Group.
1998:: Lehman Merchant buys Peabody.
2001:: Peabody goes public again.

Peabody announced a $1 billion, six-year contract to supply the Tennessee Valley Authority’s Cumberland Generating Station in August 1999. The contract stipulated that two-thirds of the coal come from mines in Kentucky. The union and government officials were negotiating to keep those mines open beyond 2002, offering millions in incentives and concessions. Within a few months, Illinois Power would stop buying coal from Peabody’s last Illinois mine, choosing lower-polluting Wyoming coal instead.

In late 2000, Peabody Coal’s Black Mesa Mine in Arizona drew protests from members of the Hopi and Navajo tribes, which had leased Peabody the lands since the mid-1960s. The protestors took issue with the pumping of billions of gallons of water from the “N” aquifer to move pulverized coal along a 273-mile pipeline to the Mojave Generating Station in Laughlin, Nevada. A Peabody representative cited studies that the operations consumed less than I percent of the aquifer’s water. (Members of the Hopi tribe would later sue Peabody for discrimination on the basis of national origin, alleging that the company hired only Navajos at its Kayenta and Black Mesa mines.)

P&L Coal Holdings Corporation, known commonly as Peabody Group, changed its name to Peabody Energy Corporation in April 2001. Peabody Energy netted $456 million in an initial public offering held on May 22, 2001. The energy sector, stoked by California’s recent power crisis, was hot again. The emphasis placed on coal by President George W. Bush and the Department of Energy made Peabody’s pure play even more appealing.

Lehman Merchant Banking Partners, a unit of Lehman Bros., retained a 59 percent stake in the company. Peabody was still left with $1 billion in debt after the IPO. Lehman had long placed a priority on reducing Peabody’s debt. In January 2001, Peabody had sold an Australian coal business to London’s Rio Tinto pie for about $450 million plus the assumption of $119 million in debt.

Principal Subsidiaries

Black Beauty Coal Company (81.7%); Peabody Coal Company.

Principal Divisions

Powder River Basin; Southwest; Appalachia; Midwest.

Principal Operating Units

Arizona Operating Unit; Seneca Coal Company; Camp Operating Unit; Midwest Operating Unit; Bluegrass Coal Company; Big Sky Coal Company; Lee Ranch Coal Company; Big Mountain Operating Unit; Federal Operating Unit; Harris Operating Unit; Wells Operating Unit; Rocklick Operating Unit.