Peabody Energy delays School Creek mine startup in PRB

Peabody Energy delays School Creek mine startup in PRB

Washington (Platts)--19Oct2006

Even as its third-quarter results showed increases, Peabody Energy is delaying
the startup of its 30 million to 40 million short ton/year School Creek mine
in Wyoming's Powder River Basin as part of a production scale-back prompted by
near-term softening markets,

The opening of School Creek will be delayed by several months to as much as a
year, Greg Boyce, the company's president and CEO, told analysts Thursday
morning following the company's release of its third-quarter earnings results.

Describing continued delays in rail service out of the PRB as well as
softening short-term markets, Boyce said the company decided it was best to
wait on the startup until the various conditions improved and to better match
with equipment lead times.

A Peabody Energy subsidiary, Western Roundup Resources, applied for a state
mining permit last summer to open the new operation (PCT 6/30). School Creek
is the first new coal mine proposed in the region in more than 15 years, and
is located between Peabody's North Antelope Rochelle mine and Arch Coal's
Black Thunder mine in Campbell County, Wyoming.

Peabody officials have said they plan to add 30 million to 40 million short
tons/year of coal from the PRB mine (PCT 10/26/05). Earlier this year, the
targeted online date was early in the last quarter of 2008 (PCT 1/6).

Delay due to 'unusual' market conditions
The School Creek delay is a consequence of Peabody's revised mining plans,
especially in the PRB, Boyce said. These revisions were prompted by softening
near-term market conditions coupled with continued rail service problems out
of the PRB.

"Two very different sets of conditions" exist in the current US coal market,
Boyce said. The near-term US supply-demand balance "reflects unusual factors":
a very mild winter that suppressed coal use even as it allowed higher coal
production, followed by a short summer season, with stronger-than-normal
hydroelectric-generating conditions and resumption of nuclear generation. In
Central Appalachia, this has resulted in prices below costs than at many of
the region's mines. "Most believe that we are at peak coal in Central App with
operations that are chronically challenged by thinning seams," Boyce said.

In the PRB, where mining costs actually declined in the third quarter,
"markets have been held back by rail performance that still has only delivered
half of the pent-up demand from customers," Boyce said. "This has led to lower
activity in the thinly traded western coal markets.

"We have assessed these near-term market factors and rail capacity issues and
as a result we are revising our mine plans for next year, particularly in the
Powder River Basin," Boyce said. "That is why our uncommitted volumes are
lower than would normally be the case at this time of year. While our volumes
will be higher in 2006, this will reduce the rate of our sales growth in 2007
to better match near-term conditions."

While Peabody still expects its PRB production and sales to exceed 2006
levels, the company will lower its previously planned 2007 PRB volume growth
by 7 million st.

In rescheduling the School Creek startup for 2009 or later, Boyce said, "This
will enable the production from this new mine to more closely coincide with
equipment lead times and the necessary contract environment to ensure a
successful long-term operation. Now, we believe these issues are very short
term in nature. Already in the third quarter, coal shipments declined from
both the prior year and the prior quarter, and coal use is expected to rebound
to normal growth patterns with a return to normal weather patterns, leading to
a tighter supply-demand balance going forward."

Peabody now has just 14 million st of planned US production uncommitted for
2007, with an additional 12 million st of coal to be repriced. The company has
60 million to 65 million st of planned US production uncommitted for 2008,
with an additional 37 million st to be repriced. Through nine months, the
company has priced more than 60 million st of its premium PRB coal "for
multiple years at levels more than double the average realized prices in
2005," the company said in its Thursday earnings statement.

Long term, Boyce referred to power plants outside of the US coming on line
between 2006 and 2010 that represent more than 500 million st/year of
increased coal use. World steel markets will continue to be strong and "it is
the perfect time to complete the Excel acquisition in Australia." Excel "will
be the only producer with access to five ports."

On the plus side for the deferred School Creek startup, Peabody can use the
deferred capital expenditures to reduce debt, Peabody CFO Rick Navarre told
the analysts.

Capital spending to date is $292 million, he said, and the company expects to
come in at the low end of original capex targets of $450 million to $525
million for the full year, including debt associated with the Excel purchase.
Reducing debt will be a Peabody priority, he noted.

US utility coal stockpiles declined by roughly 5 million to 10 million st in
the third quarter to an estimated 125 million tons, and this bodes well for
long-term demand, according to the Peabody executives.

Q3 income grows

Peabody reported third-quarter net income of 53?/share, or $142 million, up
from 42?/share, or $113.3 million, in the same period last year. Peabody
attributed the gain to increased production volumes, higher revenue/st in all
regions and lower operating costs in Australia. Total operating profits/st
increased 16% in the quarter to $2.85 from $2.45 a year ago.

Peabody sold 60.8 million st of coal in the third quarter, down from 61.6
million st a year ago. Sales for the first nine months of 2006, however,
totaled 182.9 million st, ahead of the 178.4 million st the company reported
selling through the first three quarters of 2005.

Q3 revenues increased 3% to $1.3 billion, and rose 14% to $3.9 billion through
nine months, on higher realized pricing and volumes in all regions. Average
revenues/st for the quarter improved 6% in the US and 7% in Australia.
Nine-month coal shipments totaled "an industry-leading" 182.9 million st,
Peabody said.

EBITDA totaled $270.7 million for the quarter and $809.0 million through nine
months, an increase of 15% and 31% over the respective prior-year periods, the
company said. "Quarterly EBITDA improvements were driven by increased volumes,
higher revenue per ton in all regions and lower operating costs in Australia,"
Peabody said. "Total operating profit per ton increased 16% to $2.85."

Analyst, market reaction

Peabody's Q3 earnings/share beat Merrill Lynch's estimate of 45?/share and an
industry consensus estimate of 43?/share. "We remain neutral on BTU [Peabody's
stock trading symbol]," ML coal industry analyst David Lipschitz said in a
Thursday advisory.

Though Q3 revenues increased, they were 8.6% below ML's estimate of $1.4
billion due to lower realizations in the East and Australia offset by higher
realizations in the West. EBITDA came in above ML estimates of $263.5 million.

In late Thursday afternoon trading, Peabody's share price checked in at
$43.53, up $2.58 from the previous day's close. The 52-week high was $76.29
and the low, $32.94.

-- Steve Hooks, steve_hooks@platts.com

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