History and Development of Business
Peabody Energy Corporation is the world’s largest private-sector coal company. We were incorporated in Delaware in 2001 and our history in the coal mining business dates back to 1883. We own majority interests in 28 coal mining operations located in the U.S. and Australia. In addition to our mining operations, we market, broker and trade coal through our Trading and Brokerage segment. In response to growing international markets, we have expanded our international trading group in the last few years, most recently with the addition of a trading office in Singapore and a business development office in Indonesia.
In the U.S., we have transformed in recent years from a high-sulfur, high-cost coal company to a predominately low-sulfur, low-cost coal producer, marketer/trader of coal and manager of vast natural resources through organic growth, divestitures and strategic operational restructuring. Internationally, we expanded our presence through the acquisition of Excel Coal Limited (Excel) in Australia. We have four core strategies to achieve growth:
1) Executing the basics of best-in-class safety, operations and marketing;
2) Capitalizing on organic growth opportunities;
3) Expanding in high-growth global markets; and
4) Participating in new generation and Btu Conversion technologies designed to expand the uses of coal through coal-to-liquids and coal gasification technologies, and the advancement of clean coal technologies, including carbon capture and storage.
In 2007, we spun off portions of our formerly Eastern U.S. Mining segment through a dividend of all outstanding shares of Patriot Coal Corporation (Patriot), which is now an independent public company traded on the New York Stock Exchange (symbol PCX). The spin-off included eight company-operated mines, two joint venture mines, and numerous contractor operated mines serviced by eight coal preparation facilities along with 1.2 billion tons of proven and probable coal reserves. Our results for all periods presented reflect Patriot as a discontinued operation.
Our operations consist of four principal segments: our three mining segments and our Trading and Brokerage segment. Our three mining segments are Western U.S. Mining, Midwestern U.S. Mining and Australian Mining. Our fifth segment, Corporate and Other, includes mining and export/transportation joint ventures, energy-related commercial activities as well as the management of our vast coal reserve and real estate holdings through initiatives such as 1) participation in developing mine-mouth coal-fueled generating plants; 2) developing Btu Conversion technologies, which are designed to convert coal to natural gas and transportation fuels; and 3) advancing carbon capture and storage initiatives. Our operating segments are discussed in more detail below with financial information contained in Note 22 to our consolidated financial statements.
U.S. and Australian Mining Operations
Mining Segments. Our Western U.S. Mining operations consist of our Powder River Basin, Southwest and Colorado operations, and our Midwestern U.S. Mining operations consist of our Illinois and Indiana operations. The principal business of our U.S. Mining segments is the mining, preparation and sale of thermal (steam) coal, sold primarily to electric utilities. Our Australian Mining operations consist of metallurgical and thermal coal mines in Queensland and New South Wales, Australia.
Trading and Brokerage Segment
Through our Trading and Brokerage segment, we broker coal sales of other coal producers both as principal and agent, and trade coal, freight and freight-related contracts. We also provide transportation-related services in support of our coal trading strategy, as well as hedging activities in support of our mining operations.
In response to growing international markets, we expanded our international trading group in 2006 and added trading operations offices in London, England in 2007 and in Singapore in 2009. Our trading and brokerage entities broker and trade coal in the Australia and Pacific Rim markets. We also have sales, marketing and business development offices in Beijing, China and Jakarta, Indonesia (opened in 2009) to pursue potential long-term growth opportunities in the Asian market.
Corporate and Other Segment
Resource Management. We hold approximately 9.0 billion tons of proven and probable coal reserves and more than 500,000 acres of surface property. Our resource development group regularly reviews these reserves for opportunities to generate earnings and cash flow through the sale of non-strategic coal reserves and surface land. In addition, we generate revenue through royalties from coal reserves and oil and gas rights leased to third parties, and farm income from surface land under third-party contracts.
Export Facilities. We own a 37.5% interest in Dominion Terminal Associates, a partnership that operates a coal export terminal in Newport News, Virginia. The facility has a rated throughput capacity of approximately 20 million tons of coal per year and had 11.0 million tons of throughput in 2009. The facility also has ground storage capacity of approximately 1.7 million tons. The facility exports both metallurgical and thermal coal primarily to European and Brazilian markets.
We control a 17.7% interest in the Newcastle Coal Infrastructure Group, which is currently constructing a coal transloading facility in Newcastle, Australia. The facility, which is expected to be completed in 2010, is backed by take or pay agreements and will have an initial capacity of 33 million tons per year of which our share is 5.8 million tons, with expansion capacity of up to 66 million tons per year.
Generation Development, Btu Conversion and Clean Coal Technology. To maximize our coal assets and land holdings for long-term growth, we are contributing to the development of coal-fueled generation, pursuing Btu Conversion projects that would convert coal to natural gas or transportation fuels and advancing clean coal technologies.
Generation development projects involve using our surface lands and coal reserves as the basis for mine-mouth plants. Our ultimate role in these projects could take numerous forms, including, but not limited to, equity partner, contract miner or coal lessor. We are currently a 5.06% owner in the Prairie State Energy Campus (Prairie State), a 1,600 megawatt coal-fueled electricity generation project under construction in Washington County, Illinois. Prairie State will be fueled by over six million tons of coal each year produced from its adjacent underground mining operations. We sold 94.94% of the land and coal reserves to our partners in Prairie State and we are responsible for our 5.06% share of costs to construct the facility. The plant is scheduled to begin generating electricity in 2011.
We are exploring Btu Conversion projects designed to expand the uses of coal through coal-to-liquids (CTL) and coal gasification technologies. Currently, we are pursuing development of a coal-to-gas (CTG) facility known as Kentucky NewGas, a planned “mine-mouth” gasification project using ConocoPhillips proprietary E-Gastm technology to produce clean synthesis gas with carbon storage potential. We also own an equity interest in GreatPoint Energy, Inc., which is commercializing its coal-to-pipeline quality natural gas technology. We are also pursuing a project with the government of Inner Mongolia and other Chinese partners to explore development opportunities for a large surface mine and downstream coal gasification facility that would produce methanol, chemicals or fuel products.
We are participating in the advancement of clean coal technologies, including carbon capture and storage, in the U.S., China and Australia. We are a founding member of the FutureGen Alliance, a non-profit company working in partnership with the U.S. Department of Energy (DOE), which under its new configuration, would develop multiple carbon capture and storage sites. We are the only non-Chinese equity partner in GreenGen, a near-zero emissions coal-fueled power plant with carbon capture and storage. In Australia, we made a 10-year commitment to fund the Australian COAL21 Fund designed to support clean coal technology demonstration projects and research in Australia. We are also a founding member or member of a number of related partnerships including the Global Carbon Capture and Storage Institute (Australia), the U.S.-China Energy Cooperation Program, the Asia-Pacific Partnership for Clean Development and Climate, the Consoritium for Clean Coal Utilization, the National Carbon Capture Center, and the Western Kentucky Carbon Storage Foundation.
Mongolia Joint Venture. In 2009, we acquired a 50% interest in a joint venture holding with Polo Resources Limited (AIM: PRL), which holds coal and mineral interests in Mongolia. In connection with this acquisition, we obtained warrants to enable us to acquire an approximate 15% equity interest in Polo Resources Limited. The joint venture is in the development stage and plans to ship metallurgical and thermal coal to Asian markets once developed.
Paso Diablo Mine. We own a 25.5% equity interest in Carbones del Guasare, S.A., a joint venture that includes Anglo American plc and a Venezuelan governmental partner. Carbones del Guasare operates the Paso Diablo Mine, which is a surface operation in northwestern Venezuela that produces thermal coal for export primarily to the U.S. and Europe. We are responsible for marketing our pro-rata share of sales from Paso Diablo; the joint venture is responsible for production, processing and transportation of coal to ocean-going vessels for delivery to customers. In December 2009, we entered into an arrangement to assume Anglo American’s interest, which is conditional on the approval of various parties (including the Venezuelan governmental partner) and regulatory approvals.
Coal Supply Agreements
As of January 31, 2010 we had a sales backlog of over one billion tons of coal, including backlog subject to price reopener and/or extension provisions, representing nearly five years of current production. Agreements in backlog have remaining terms ranging from one to 17 years. For 2009, approximately 93% of our worldwide sales (by volume) were under long-term coal supply agreements. In 2009, we sold coal to 345 electricity generating and industrial plants in 23 countries. For the year ended December 31, 2009, we derived 28% of our total coal sales revenues from our five largest customers (excluding trading transactions). At December 31, 2009, we had 79 coal supply agreements with these customers expiring at various times from 2010 to 2016.
U.S. We expect to continue selling a significant portion of our coal under long-term supply agreements. Customers continue to pursue long-term sales agreements as the importance of reliability, service and predictable prices are recognized. The terms of coal supply agreements result from competitive bidding and extensive negotiations with customers. Consequently, the terms of these agreements vary significantly in many respects, including price adjustment features, price reopener terms, coal quality requirements, quantity parameters, permitted sources of supply, treatment of environmental constraints, extension options, force majeure, and termination and assignment provisions. Our strategy is to selectively renew, or enter into new, long-term supply agreements when we can do so at prices we believe are favorable.
Australia. Our international coal mining activities accounted for 10% of our mining operations sales volume in 2009. Our production is sold primarily into the export metallurgical and thermal markets. Price reopener provisions are present in the majority of our multi-year international coal agreements. Historically, these provisions allow either party to commence a renegotiation of the agreement price annually. A majority of the reopener provisions relate to metallurgical coal repriced annually in the second quarter of each year. We also have a long-term coal supply agreement with a customer in Australia, which runs through 2025 and is expected to supply approximately 130 million tons from our Wilpinjong Mine.
Coal consumed in the U.S. is usually sold at the mine with transportation costs borne by the purchaser. Australian and U.S. export coal is usually sold at the loading port, with purchasers paying ocean freight. Producers usually pay shipping costs from the mine to the port, including any demurrage costs (fees paid to third-party shipping companies for loading time that exceeded the stipulated time). We believe we have good relationships with rail carriers and barge companies due, in part, to our modern coal-loading facilities and the experience of our transportation coordinators. See the table on page 4 for transportation methods by mine.
The main types of goods we purchase are mining equipment and replacement parts, ammonium-nitrate and emulsion based explosives, diesel fuel, off-the-road (OTR) tires, steel-related (including roof control materials) products and lubricants. We also purchase services at our mine sites that include maintenance services for mining equipment, temporary labor and other various contracted services, including contract miners. Although we have many well-established, strategic relationships with our key suppliers, we do not believe that we are dependent on any of our individual suppliers, except as noted below. The supplier base providing mining materials to the coal industry has been relatively consistent in recent years, although there continues to be some consolidation. Supplier consolidation in explosives and underground equipment has limited the number of sources for these materials, resulting in our purchases of these items being concentrated with one principal supplier; however, some supplier competition continues to be present. In recent years, demand and lead times for certain surface and underground mining equipment and OTR tires has increased. However, we do not expect lead times to have a near-term material impact on our financial condition, results of operations or cash flows.
We continue to place great emphasis on the application of technical innovation to improve new and existing equipment performance. This research and development effort is typically undertaken and funded by equipment manufacturers using our input and expertise. Our engineering, maintenance and purchasing personnel work together with manufacturers to design and produce equipment that we believe will add value to the business. In 2009, we began a program to upgrade the mining equipment at our North Antelope Rochelle Mine, both to increase overburden removal capacity and improve mining cost with larger more efficient trucks and shovels. Our engineers have also been working with several major equipment vendors to develop conceptual designs of in-pit crushing and conveying systems in place of trucks in an effort to move large quantities of overburden resulting in cost savings and a more environmentally friendly operation. We are currently working with a vendor to implement the “Landmark” longwall shearer navigation system at our North Wambo Underground Mine. This system includes hardware and software that monitors and controls the pitch, roll and depth of cut of the shearer to maintain the face alignment, allowing the shearer to mine more efficiently. We have also begun pilot testing of a paste slurry pumping system that, if successful, will allow coal refuse from the Metropolitan Mine to be disposed of in abandoned areas of the underground workings rather than transported to the surface.
Our enterprise resource planning system provides detailed equipment and mining performance data for all our U.S. operations. Proprietary software for hand-held Personal Digital Assistant devices was developed in-house, and has been deployed at all U.S. underground mines to record safety observations, safety audits, underground front-line supervisor reports and delay information. Wireless data acquisition systems are installed at our two largest mines, North Antelope Rochelle and Caballo, to dispatch mobile equipment more efficiently and monitor performance and condition of all major mining equipment on a real-time basis.
We use maintenance standards based on reliability-centered maintenance practices at all operations to increase equipment utilization and reduce maintenance and capital spending by extending the equipment life, while minimizing the risk of premature failures. Specialized maintenance reliability software is used at many operations to better support improved equipment strategies, predict equipment condition and aid analysis necessary for better decision-making for such issues as component replacement timing.
We also use in-house developed software to schedule and monitor trains, mine and pit blending, quality and customer shipments to enhance our reliability and product consistency.
The markets in which we sell our coal are highly competitive. According to the National Mining Association’s “2008 Coal Producer Survey,” the top 10 coal companies in the U.S. produced approximately 70% of total U.S. coal in 2008. Our principal U.S. competitors (listed alphabetically) are other large coal producers, including Alpha Natural Resources, Inc., Arch Coal, Inc., Cloud Peak Energy Inc., CONSOL Energy Inc. and Massey Energy Company, which collectively accounted for approximately 41% of total U.S. coal production in 2008 (most recent publicly available data). Major international competitors (listed alphabetically) include Anglo-American PLC, BHP Billiton, China Coal, Rio Tinto, Shenhua Group, and Xstrata PLC. In Australia, the top 10 coal companies produced approximately 84% of the country’s coal in 2009. We compete on the basis of coal quality, delivered price, customer service and support and reliability.
As of December 31, 2009, we had approximately 7,300 employees, which included approximately 5,400 hourly employees. As of such date, approximately 29% of our hourly employees were represented by organized labor unions and generated 10% of 2009 coal production. Relations with our employees and, where applicable, organized labor are important to our success.
U.S. Labor Relations. Hourly workers at our Kayenta Mine in Arizona are represented by the United Mine Workers of America, under the Western Surface Agreement, which is effective through September 2, 2013. This agreement covers approximately 7% of our U.S. subsidiaries’ hourly employees, who generated approximately 4% of our U.S. production during the year ended December 31, 2009. Hourly workers at our Willow Lake Mine in Illinois are represented by the International Brotherhood of Boilermakers, under a labor agreement that expires April 15, 2011. This agreement covers approximately 9% of our U.S. subsidiaries’ hourly employees, who generated approximately 2% of our U.S. production during the year ended December 31, 2009.
Australian Labor Relations. The Australian coal mining industry is unionized and the majority of workers employed at our Australian Mining operations are members of trade unions. The Construction Forestry Mining and Energy Union represents our Australian subsidiary’s hourly production and engineering employees, including those employed through contract mining relationships. All the Australian subsidiary’s mine sites have enterprise bargaining agreements. The current labor agreement at our Metropolitan Mine expires in June 2010; renegotiations for a new agreement will commence in the first quarter of 2010. The labor agreement for the Wambo Mine coal handling plant was renewed in 2008 and expires in 2011. The labor agreement for the Wambo Underground Mine was renewed in early 2009 and will expire in 2012. For the Wilkie Creek Mine (expired October 2009) and the North Goonyella Mine (expired May 2009), we have reached agreements in principle, with the vote of the unions and employees expected to take place in late February 2010.