Jonathan Brallier and Matthew Donahue

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Jonathan Brallierand Matthew Donahue
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Company Overview
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Company Overview

• Peabody Energy Corporation is the largest private
  sector coal company in the world
• Sold 248 million tons of coal in 2006 and
  generated 5.6 billion in revenues, accounting
  for approximately 10 of all United States
  electricity used in 2006
• Majority of revenues come from sales to U.S.
  electricity generators, which use coal for 50 of
  all production
• Held IPO in May 2001 and joined the SP 500 in
  November of 2006
• Has majority interests in 40 coal operations
  throughout the U.S. and Australia, and minority
  interest in a Venezualian mine

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Company Overview

• Operations also include marketing, brokering, and
  trading coal worldwide
• Traded almost 80 million tons of coal in 2006
• Created an international trading group in 2006
• Recently added operations offices in Europe and
  Beijing to further its global reach

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Company Overview
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Financial Ratio Analysis
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Financial Ratio Analysis
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Financial Ratio Analysis
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Risk Factors
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Risk Factors

• Unexpected termination of long term contracts
• Approximately 90 of revenue comes from long-term
  supply arrangements, the durations of which vary
  from one to 19 years
• Contracts often have detailed provisions that
  require Peabody to meet certain quality and
  service expectations
• Failure to meet these requirements can lead to
  severe economic consequences

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Risk Factors

• Soured relationships with major suppliers
• Over 20 of revenue comes from the companys five
  largest customers
• Leverage could lead to financial stress
• Peabody has approximately 1.4 billion in debt
  and about 500 million more in available credit
• Peabody hedges commodity price risk by using
  long-term contracts for coal sales

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Risk Factors

• The company also hedges commodities used in
  production through fixed price contracts and
  derivatives
• As the end of 2005, the company had fixed price
  contracts for 68.9 million gallons of diesel fuel
  
• The company uses forward contracts, swaps, and
  options to hedge currency and interest rate
  fluctuations

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Recent News
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Recent News

• Mild weather has led to decreased demand for
  coal
• Companies have been forced to decrease production
  this year due to high inventory levels and poor
  demand
• Recent steam coal prices have hovered around 40
  per ton, compared to last years price of 56
• Coal from the Powder River Basin is slightly over
  7 per ton, versus 21 from last year

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Recent News

• CEO Gregory Boyce recently told reporters that
  Peabody is managing its U.S. production and
  capital to match demand
• Reduced capacity will help reduce costs, thus
  strengthening sluggish revenues
• Merrill Lynch analyst David Lipschitz expects
  weak industry wide earnings for the first half of
  2007 until production cuts take effect

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SWOT Analysis
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SWOT Analysis
Strengths

• Non-union mines account for 86 of production
• About 90 of revenues come from long term
  contracts, thus mitigating price fluctuations
• Ability to grow organically as well as through
  strategic acquisition opportunities
• Development of integrated information system,
  expected to be fully operational by mid-2007,
  that will streamline international operations in
  finance, marketing, materials, human resources,
  sales, production, etc.
• Safetey record, measured by accident frequency
  rates, exceeded the industry average by 38

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SWOT Analysis
Weaknesses

• 1 market position in U.S. does not leave much
  room for growth domestically
• Central Appalachias coal reserve is of declining
  quality
• High sulfur levels in Illinois Basin coal and
  high mercury levels in Powder River Basin coal

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SWOT Analysis
Opportunities

• Recently established an office in Beijing to
  pursue new markets and growth opportunities
• Participation in emerging technologies such as
  Btu conversion, a process that turns coal into
  natural gas, liquid, or hydrogen

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SWOT Analysis
Threats

• Current litigation related to one of the
  companys largest supply agreements
• Current litigation could cost Peabody several
  billion dollars however, the company claims to
  have recorded adequate reserves for these
  liabilities and that there is no individual case
  pending that is likely to have a material adverse
  effect on our financial condition (2006 10-k)
• Continual reform of industry regulations and
  standards regarding safety and waste

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Industry Overview
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Industry Overview

• Coal generates over 50 of electric power and
  provides 85 of fossil fuel reserves in the
  United States
• Coal supply is reliable and relatively
  inexpensive compared to other energy sources
• Investments in the industry are an excellent
  hedge against inflation and downturns in the
  market
• Decreasing labor costs and low unionization will
  benefit shareholders
• Paul Forward, formerly of Legg Mason, projects
  demand growth at 3 per year, with prices
  increasing at 4.6 per year

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Industry Overview

• Coal is not as clean as other alternative
  energy sources, such as wind or solar power
• Democratic control could lead to restrictions on
  production
• History has shown that coal performs better under
  republican administrations, and vice versa
• Increasing surface mining restrictions
• Air pollution legislation often calls for
  increased capital requirements, thus draining
  operating profits

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Relevant Investor Information
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Relevant Investor Information
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Relevant Investor Information
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Relevant Investor Information
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Relevant Investor Information

• Quarterly dividend of 0.06 per share yields a
  weak 0.6

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Comparables Model
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Comparables Model
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eVal
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eVal
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eVal
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Recommendation
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Recommendation

• Moderate Buy
• Analyst Paul Forward recommends Buy
• Yahoo Finance - 7 Strong Buys, 9 Buys, 4 Holds
• MoneyCentral - 7 Strong Buys, 3 Moderate Buys, 3
  Holds, 1 Moderate Sell
• Reuters - 6 Buy, 9 Outperform, 5 Hold