Gloomy Christmas 2009 for Peabody Energy Stockholders? (BTU)

From 10Q Detective:

Peabody Energy Corp. (BTU-$28.92), the world's largest private-sector coal company, appears reasonably positioned to ride out the economic downturn, having locked in thermal coal contracts last year for 2009 delivery and beyond at close to 50 –to- 60 percent premiums to current Powder River Basin (PRB) spot prices of $9.00 per short ton. Reduced electric demand and rising inventory stockpiles, however, have utilities clamoring for deferral and relief from their coal-supply off-take agreements—shipments integral to this coal miner’s financial results.

Year to date, coal-based electricity generation demand has declined nearly six percent from the prior year, or 15 million tons, according to the Energy Information Administration (EIA)—and could fall an aggregate 60 million to 70 million tons compared to 2008. Reduced steam generation combined with cheaper costs of competing power sources, such as natural gas, have contributed to an increase in utility inventory levels of coal, too. At March 31, current stockpiles represented a 21.5 million short ton oversupply, or approximately two-percent on annual consumption of 1.12 billion tons, according to the EIA.

During 2008, more than 80 percent of Peabody’s total sales (by volume), or almost 210 million tons of coal, went to U.S. electric utilities. Looking to address the current oversupply situation, chief executive officer Greg Boyce told analysts on the first-quarter 2009 earnings call to expect total production cuts of about 15 million tons this year, with most of the announced production cuts anticipated to come from its biggest mining operation in the U.S., the low-sulfur producing PRB coal region in Wyoming. Boyce guided listeners on the call to expect full-year 2009 U.S. production of 185 million and 190 million tons.

Entering the second quarter, Peabody was fully contracted for 2009 shipments and roughly 90 percent committed for 2010. Should generation burn continue to fall through the second-half of the year, there is a growing concern that that more customers would pressure the coal miner to renegotiate volume and price breakpoints or defer shipment schedules. Peabody president Rick Navarre stressed on the quarterly conference call, however, that the company was “not in active renegotiations of contracts,” although he admitted the company would welcome talks to customers having “issues”—depressed end-user demand accompanied by growing coal stockpiles....MORE

HT: Pension Pulse