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High Energy
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Peabody
the world’s largest private-sector coal company, faces future with
confidence.
By Kevin Kipp
How many Btu are there in 9,300,000,000 tons of coal? For Peabody
Energy—NYSE symbol: BTU—that’s all of them.
Irl Engelhardt is chairman and CEO of St. Louis-based Peabody, the
world’s largest coal company. He says the company’s reserves—all
those tons—are equivalent to America’s coal needs for nine years.
Peabody’s actual mine production, closing in on 200 million tons
a year, fuels more than 9 percent of the nation’s electricity and
more than 2 percent of the world’s, he notes.
According to background information provided by Vic Svec, Peabody’s
vice president - external affairs, 90 percent of the country’s one
billion tons of annual coal production is used by electric utilities,
and about 52 percent of all electricity is fueled by coal. Nuclear
accounts for 20 percent, natural gas for 16 percent, hydro and everything
else for 12 percent.
These are gravy days in the coal industry, thanks in part to growing
demand for electricity and also the spike in natural gas prices
that exacerbated all the hysterics in California last year. Many
coal customers secured supplies by signing long-term contracts,
Engelhardt says, usually at higher prices.
“Ninety-two percent of Peabody’s business in 2002 is already under
contract with customers,” he says.
Even with higher prices for coal and a plunge in natural gas prices,
electricity is considerably less expensive with coal.
But Engelhardt is far from sanguine about his market advantage:
“The combination of recession and mild weather have masked the energy
problems the United States faces. For America to show sustained
economic growth, we must address many of the energy-related problems
that showed up in 2000 and 2001.
“Baseload generating capacity needs to be increased,” he continues,
“and we need to do it with coal because it’s inexpensive, even with
the latest environmental equipment.”
Engelhardt says natural gas prices are artificially low, due to
reduced demand from the chemical industry and other business sectors.
“They could double in two years, and triple in five.”
Welcome though that may be to coal mining outfits, Engelhardt sees
virtues in his competition. “I support diverse fuel supplies for
America’s energy needs: nuclear, natural gas, coal, and renewables,”
he says. “Price shocks occurred in the past when we relied too heavily
on one energy source. It damaged the U.S. economy. For instance,
natural gas price increases destroyed the chemical industry, and
the loss of disposable income [as families’ heating bills tripled]
was a factor in the economic downturn we face now.”
Peabody is coming off the bench to develop some of its own generating
capacity by undertaking two mine-mouth projects. Each will produce
1500 megawatts, Engelhardt says. The Thoroughbred Energy campus
in western Kentucky should be on line in 2005 or 2006. Prairie State
Energy campus in Washington County, Ill., should begin operating
a year or so later.
The new plants will provide enough electricity for 3 million homes.
“Peabody is moving aggressively to supply some of America’s need
for new baseload generation,” Engelhardt says. “We are also demonstrating
that fueled generation can be clean and inexpensive. The cost of
electricity at these plants is projected to be in the lowest 15
percent in the Midwest.”
Peabody doesn’t want to keep it all to themselves. “We envision
a 50-50 partnership with an unregulated producer who has skills
in power plant construction, operation and marketing,” Svec says.
Siting the plants adjacent to mines eliminates the cost of transporting
the five or six million tons of coal each one will burn annually.
Engelhardt says, “They will establish new emissions standards, using
the latest technology to reduce sulfur dioxide, nitrous oxide, particulates
and mercury emissions.”
Engelhardt has moved Peabody into trading coal and emission allowances
as well. Merrill Lynch analysts expect these operations to generate
$20 million to $30 million annually as well.
Peabody is also exploring the commercial potential for coalbed methane.
The economics and outlook change considerably if a thousand cubic
feet of gas cost $2, compared to last year’s well-head highs of
$10.
Peabody’s coal reserves are located in 14 states, which it breaks
down into four markets: Appalachia, including West Virginia; Midwest,
including Illinois; Powder River Basin, up Montana and Wyoming way;
and Southwest, right near Four Corners.
Engelhardt’s first job with Peabody, back in 1977 when the company
was owned by Newmont Mining, was “to decentralize the management
of the company. Everything was headquartered in St. Louis, but Peabody
was large and the distances made it difficult to manage the company.
My job was to help establish smaller management units around the
country.”
Eleven years later, a span during which ownership changed almost
as many times, Engelhardt was putting the HQ back together again
in St. Louis. “Modern communications, technology and transportation
improved management’s capabilities,” he says. “We made individual
mines more autonomous.”
The real sign of his executive skill may have been surviving so
many different owners. Besides Newmont: Boeing, Bechtel, Equitable
Life Assurance, Eastern Gas and Fuel Associates and, finally in
1990, Brit conglom Hanson PLC.
“He knows how to create value,” Svec says, “and he shows both consistency
and the ability to be nimble and adapt to changes in owners, capital
structure and the market place.”
The details show it wasn’t just surviving.
Engelhardt explains that in 1996 Hanson decided to “spin off five
different companies to its shareholders.” He became co-CEO of The
Energy Group: Peabody Group in the United States and Australia,
and Eastern Electricity in the United Kingdom.
He helped lead a $6.5 billion IPO of TEG in February 1997. Fifteen
months later, shareholder value improved by $1.8 billion when the
old Texas Utilities (Now TXU) bought TEG. They sold Peabody to Lehman
Brothers, and kept Eastern Electricity.
He managed the IPO of Peabody that put the company back on the market
as an independent company in May 2001. “The offering was heavily
oversubscribed,” he says. “It was fantastic: 33 percent of the float
generated $450 million.”
Ron Londe, research analyst at A.G. Edwards, says, “The stock offering
reduced debt significantly. It bodes well for their long-term viability
as an industry leader and growth in the coming years.
“They’re the largest coal company in world,” he says, “with the
most experience. They’re in every market and have every type of
customer and are getting into all kinds of contract structuring
and coal trading...very innovative.”
“Like all coal companies, they have environmental liabilities,”
he continues, “which are expensed at about 6 percent of sales, which
is not that significant financially. Within the industry they have
a good record for reclamation, and have won awards for it in different
states.”
Peabody’s latest annual report also lists half a dozen “Excellence
in Mining” awards from the U.S. Department of Interior in 2000.
Management and Lehman Brothers own two-thirds of Peabody’s stock
traded, Engelhardt says. The Australian holdings and Citizen Power
were also sold as part of a debt reduction campaign that seems to
be working. In March 1999, the company’s $2.5 billion in debt represented
82 percent of capital. Three years later, debt stood at $1 billion
and the ratio fell to 48 percent.
Pretty good wheeling n’ dealing for a farm boy who grew up in Pinckneyville,
Ill., population...a very few thousand. Engelhardt says he “was
raised without much livelihood.”
His rise from the little town in little Egypt makes him appreciate
Horatio Alger. “It’s the all-American story. I grew up without much,
but the opportunities this country gives you...where else can you
escape such humble beginnings to run a major company?”
Engelhardt attended the University of Illinois in Champaign, after
graduating in 1964 from high school. He went to work for a small
CPA firm as an undergraduate in 1967, learning about audit and tax
issues in a variety of industries “as training in basics of business.”
In 1971, he earned his MBA at SIU-Carbondale and went to work for
Arthur Andersen in the consulting division, “focusing on electric
utilities and construction.”
He has been CEO at Peabody since 1990, and likes St. Louis. “There
are strong arguments for Peabody to locate in a place like Denver,”
Engelhardt says. “It’s close to a lot of our western operations,
but we remain in St. Louis because of the central location. Technology
helps us manage a large corporation from here, and a major selling
point is how readily we can get to our customers in other cities
and back, and to our operations.”
Engelhardt also applauded the area’s “large base of employees reflecting
the can-do attitude of St. Louis. These are sophisticated, high-performance
employees.” Nearly 400 of Peabody’s 6,400 employees work in the
area.
Robert Archibald, president of the Missouri Historical Society,
is inclined to believe that if the decision is Engelhardt’s, it
is likely sound. “Irl is a quiet guy,” Archibald says, “but he has
carefully thought through whatever he’s saying. He’s sensitive and
a good listener. He has a facile ability to sort through information
and come to legitimate decisions.”
More Archibald: “He uses information carefully and comprehensively
to identify courses of action, next steps, what’s important.”
Archibald is delighted that Engelhardt has been on his board for
two years. “It’s my personal view that he chooses the boards he
serves carefully. I think he really cares about the organization
and wanted to serve, instead of feeling like he ought to. That makes
a stellar board member.”
Archibald also offers the observation that Engelhardt “provides
a new paradigm for leadership. The world is more complicated than
it once was. Irl doesn’t have a ‘damn the torpedoes’ attitude. He’s
thoughtful about other people, thoughtful about the impact of what
he does on his employees and those near his mining operations. He’s
sensitive to the ambiguities and complexity of the work he does.
For a coal mining company, that’s a tough job.”
Engelhardt is also an avid hunter and fisherman. “You remember when
you’re outdoors that nature is beautiful, powerful and immense.
It’s humbling to realize how insignificant you are.”
He also engages in self-discovery as a regular participant in pick-up
basketball games at the Missouri Athletic Club. At 6 feet and age
55, he observes, “The older you are, the better you used to be.”
Terry Egger, publisher of the St. Louis Post-Dispatch, is
one of his regular playmates at the MAC. Egger says Engelhardt is
“very good, although you can tell that he’s like the rest of us...the
body doesn’t do all the things the mind remembers it can.”
More specifically, Engelhardt has a good shot and is “an unselfish
player; he’s a great teammate.”
Asked what he could glean about Engelhardt’s executive capabilities
from his court performance, Egger says, “When guys are running around
in shorts and a tee-shirt, it’s difficult to envision them running
a multi-billion dollar company. But you can tell by their characteristics
on and off the court what they’re made of. Irl seems bright and
balanced and a real straight shooter.”
Kevin Kipp runs Bubble Communications, a creative services and
community relations firm in St. Charles.
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