Gregory H. Boyce has No Doubts About Coal

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An interview with the president and chief executive officer of the world’s largest private-sector coal company, Peabody Energy.

by John M. Powers, associate editor

Greg Boyce wants to give you a lump of coal… but don’t worry, that’s a good thing.

Your parents told you if you were naughty you would get a lump of coal in your stocking on Christmas. That was supposed to be a bad thing. But after reading what Gregory Boyce, president and CEO of Peabody Energy (NYSE: BTU), has to say about coal, you can imagine him being quite delighted with a good lump in his stocking. In fact, a lot of you reading this sentence have probably received more than a few lumps of coal from Boyce. OK, let’s clarify that. As the world’s largest private-sector coal company, Peabody fuels 10 percent of the nation’s electricity generation and more than 2 percent of the world’s electricity.

So why does Boyce think coal is such a good thing? For starters, it makes for good business. In 2006 Peabody racked up sales of 248 million tons for $5.3 billion in revenues and Boyce expects a record year in 2007. And why not? Peabody has not only made money lately, they’ve also garnered some awards. The company made the 2006 Fortune 500 listing, and earned a spot on Fortune’s 2007 list of America’s most admired companies, just to name two.

Still, with the hysteria of late over climate change, can coal continue to be a good thing? Boyce thinks so, and what’s more, he thinks it’s the key to America’s energy future. There is no fossil fuel that is so plentiful as coal and as Boyce pointed out, the U.S. has three times the energy equivalent of Saudi Arabia’s oil in coal. As far as the pesky problem of coal emissions, the one-time CEO for energy at the international mining and exploration company Rio Tinto plc has Peabody chasing a near-zero emissions goal for coal by promoting the development and use of carbon capture and sequestration technology.

And there’s more, but we’ll let Boyce tell you in his own words. (This interview was conducted by e-mail.)

In the U.S., record coal production is forecast for 2007. What plans is Peabody Energy making to match demand?

Energy demand is steadily increasing in the U.S. We’re a nation on the go, and we use an array of electric technologies that make our economy grow and our lives more productive. There have been more than 150 electric generating plants announced in 38 states around the country that would be fueled by about 300 million tons of coal annually. Most are using advanced combustion technologies to improve the environment and are being developed to address shrinking reserve margins for baseload electricity.

As the world’s largest coal company, Peabody is uniquely positioned to capitalize on these growth opportunities, and this is also true on the international front. Consider that the energy value in our 10 billion tons of reserves is more than 205 quadrillion Btus, exceeding the oil or gas reserves in the continental United States and the proven coal reserves of more than 150 different nations.

The National Coal Council’s 2006 study called for improvements to the existing transportation infra-structure to accommodate growth in coal production. Is progress being made?

The National Coal Council study calls for annually doubling coal use to produce clean electricity, transportation fuels, synthetic natural gas, hydrogen and ethanol. It also calls for investing $515 billion to create a new energy infrastructure that would drive down energy costs 33 percent, create 1.4 million jobs and $3 trillion in net-present-value economic benefits by 2025. This will require large scale movement of coal by railroads to serve the existing base and a significant investment to grow the infrastructure for these new applications.

History has shown that the railroads are willing to make the investment to attract new business, and we believe that they will. For instance, in the Powder River Basin, 200 million tons of coal were produced and shipped in 1990. In 2006, more than 400 million tons were moved. We continue working with Congress and others to implement recommendations in the plan to improve energy security, drive down energy costs and build the economy, and we believe this plan has broad bipartisan support.

Are coal-fueled power plants Peabody’s largest customer segment?

Yes, they are. We fuel approximately 10 percent of U.S. electricity and more than 2 percent of the world’s power. Our customer base includes more than 400 electric utilities, steel makers and industrial users in 20 countries. Peabody is also one of the world’s leading suppliers of metallurgical coal for steel production, and we have a growing international presence to serve these needs. In 2001, less than 1 percent of our EBITDA came from our international activities and in 2006, 30 percent of our EBITDA came from our global activities. [EBITDA: earnings before interest, taxes, depreciation and amortization.]

Beyond our core business of fueling electricity, we are participating in the trend toward new generation and Btu conversion, using technology to transform coal’s energy to create liquid transportation fuels, synthetic natural gas and hydrogen. We are evaluating projects in the Midwest and West that would transform coal into diesel or jet fuel using the Fischer-Tropsch coal-to-liquids process and coal-to-natural gas using ConocoPhillips technology.

Do U.S. coal-fired generators generally enter into long-term contracts?

A number of our customers prefer the advantages of long-term coal supply contracts because they offer security of supply and predictable costs. We have a diverse portfolio of products and great sourcing flexibility, which benefits Peabody by creating strong forward revenue visibility. For instance, two contracts we executed last year representing 125 million tons of coal are expected to provide more than $2 billion in revenue.

Aging work force issues have U.S. electric companies worried. What work force issues does Peabody face?

Developing our future workforce is crucial to our long-term success, especially as we consider our plans for growth. We want to recruit the best and brightest in an increasingly competitive market for skilled technicians and managers. We have a robust “Workforce of the Future” program that includes recruiting, training and school partnerships. Core to this is a premier training regime offered through high-tech centers in Appalachia, the Midwest and West. These training centers offer best practices, virtual technology, advanced curriculum and hands-on skills applications for key career tracks.

Our new miner training course uses virtual technology that simulates haul trucks, shovels and other mining equipment to hone safety and operations skills before training on real equipment. Word of mouth on this program has spread like wildfire. We can’t offer enough classes to satisfy demand.

Peabody’s active on six continents. What markets look the most promising?

Let me answer this in two parts. First, let me put into perspective our broad view of global markets, and then I’ll address our focus.

The world’s population will grow 25 percent to 8 billion-plus people in the next 25 years, and world energy demand will increases 71 percent. To meet this increase, we’ll need 15 trillion kilowatt hours of electricity per year, more than the world used in 2000. We’ll need 34 million barrels of liquid fuel per day, more than three times the current production of Saudi Arabia, and we’ll need 82 TCF in natural gas per year, more than the world consumed in 1995. How do we serve these markets? Through more clean coal, which is increasingly crucial for our energy security.

Turning to our long-term outlook, global markets are outstanding. Steam coal prices increased in every major seaborne region this past year: South Africa, South America, China, Russia and Australia. China has now become a net importer of coal, and India coal demand continues to rise. All of this has significant long-term implications for Peabody’s fast-growing Australia portfolio, as well as our growing activities in China.

Peabody is moving swiftly to capitalize on growth opportunities in the world’s strongest economies. We are growing our presence in Australia through our acquisition of Excel Coal, and we are expanding trading activities there. We opened an office in Beijing last year, and recently opened a representative office in neighboring Mongolia, which I believe may represent the world’s next Powder River Basin. We also recently opened a European trading office in London to serve our customers in the most liquid and mature of global trading markets. Our trading activities are expanding in Australia, China and South America.

How does the acquisition of the Australian company, Excel Coal, fit into your strategic plans?

How does the acquisition of the Australian company, Excel Coal, fit into your strategic plans?

Our $1.5 billion acquisition of Excel Coal marks an important step in our strategy to expand in high-growth global markets. We are tripling our presence in Australia-the world’s largest exporter of coal-with the accretive acquisition that was completed in the third quarter last year.

Peabody is the fastest growing coal company in Australia and one of its largest producers, with 10 surface and underground mines in Queensland and new South Wales and an additional underground mine in the final stages of development. We have substantial market diversity, a broad portfolio of metallurgical and steam coal products, both domestic and seaborne customers, and access to five coal ports.

Increasingly, natural gas (and oil) are coming from unstable regions of the world, which causes price and production fluctuation. How is the coal industry impacted?

Let me share a couple of astonishing facts: Higher natural gas prices have cost nearly $500 billion more than expected since 2000. We’ve lost more than 3 million manufacturing jobs since 2000, blamed on the high price of natural gas, and we’ve failed to close the gap even during strong economic growth. At the same time, oil prices have increased more than 70 percent in the past five years.

Now let’s look at the enviable position of the United States. Our nation’s coal supply is equal to some 800 billion barrels of oil, more than three times the energy equivalent of Saudi Arabia’s oil. We believe that coal is vital to creating synthetic natural gas and transportation fuels and that using coal to create diesel could be one of our most important new markets. Coal-to-liquids has strong bipartisan support and a growing chorus of support from governors across the nation.

The Southern States Energy Board, in its American Energy Security Study, is calling for creating 5.6 million barrels of diesel per day, which would require about 1 billion tons of coal annually. Separately, the National Coal Council study calls for transforming coal into pipeline-quality synthetic natural gas to relieve at least 15 percent of residential, commercial and industrial consumption and eliminate the need to spend $300 billion per decade on imported liquefied natural gas.

Climate change regulation is on the horizon. Do emerging technologies hold the key to coal, and Peabody’s future?

Technology provides the path for environmental improvement, control of carbon and energy security. It is crucial for the United States to accelerate commercial deployment of technologies that will capture and sequester carbon. Through a number of voluntary and industry-based initiatives, Peabody is pursuing the goal of near-zero emissions and carbon management for coal-based energy.

I advocate a practical three-pronged approach that includes building out the next generation of state-of-the-art coal-fueled plants to ensure electric reliability; fully funding and building FutureGen, which seeks to commercialize IGCC technology with carbon capture and sequestration; and aggressively proving carbon sequestration on a broad scale, beyond enhanced oil recovery.

Each time we have regulated emissions in this country, we have had commercial technologies to enable the reductions at known costs. That doesn’t exist today for carbon dioxide and it must before carbon dioxide is capped. Technology first, controls later, to protect our energy security, keep jobs in the United States and fuel our growing economy as the environment continues to improve. Let’s also recognize that we have a good track record that is getting better, when you consider that coal used for electricity generation has tripled since 1970 as key criteria emissions have been reduced by about one-third. As our GDP increases, our population grows and our electricity use increases, but emissions continue to decline.

Peabody posted its fifth consecutive year of record earnings in 2006. Will 2007 hold any surprises?

Worldwide energy events continue to validate the investment thesis in Peabody as the world’s only global pure-play coal investment. I believe that we have entered a long period of sustained growth and that our outlook is bright. We’ve posted record financial results for the past five consecutive years, and I expect 2007 to be another record year as we continue to focus on our core strategies for growth: executing the basics, capitalizing on organic growth, expanding in high-growth markets and participating in new generation and Btu conversion markets.

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