301 North Memorial Drive
Peabody Holding Company is the largest producer and marketer of coal in the United States. The company's 40 subsidiaries and affiliates mine, process, transport, and market bituminous, or soft, coal. Peabody's main customers are power companies and industrial plants that burn coal to produce steam that generates electricity. Steel manufacturers also buy coal from Peabody for use as a raw material in coke production. To secure loans to buy mines, mining equipment, and coal reserves, Peabody pioneered the use of long-term sales contracts with its customers. The company sells nearly three-fourths of its coal using long-term agreements. Peabody's owner is Hanson PLC, a British industrial management firm that acquired the coal company in 1990.
Peabody's business has always been coal. In 1883 Francis Stuyvesant Peabody and Edwin F. Daniels opened a retail coal yard in Chicago with $100 in start-up funds. Peabody, Daniels & Co. soon prospered. In 1885 26-year-old Francis Peabody purchased Daniels's interest in the business, renaming it Peabody & Co. A savvy businessman, Peabody established good political connections with Chicago's powerful Democratic Party. This enabled his company to become the party's official coal supplier. Customers throughout Chicago looked forward to the arrival of Peabody's two-mule cart purveying only the best quality coal. In 1890 Peabody incorporated his business as the Peabody Coal Company, and expanded into wholesaling. That same year, the company obtained its first major supply contract, to provide coal to a steamer, the Dahlia.
Peabody Coal soon had sufficient sales to justify owning its own mines. The company began operating a mine near Snider, Illinois, in 1895, and acquired three more mines in Williamson County, Illinois, in 1897, 1898, and 1901. At this point, Peabody learned one of the important lessons of the coal industry: while mines are a valuable asset, buying and opening them for operation is extremely expensive. Peabody's mine acquisitions near the turn of the century left the company coal-rich but cash-poor.
To obtain financial backing for further expansion, Peabody needed a steady stream of income. This problem was neatly solved in 1903, when Peabody obtained its first coal supply contract with a large power company. Chicago Edison, now Commonwealth Edison, required huge quantities of coal to generate electricity for the city's homes and businesses. Peabody agreed to supply the power company with all the coal it needed on a cost-plus-profit basis. The contract with Chicago Edison enabled Peabody to continue expanding its mining operations. The company opened two more mines in 1911 and signed its first long-term sales contract in 1913.
The advent of World War I brought a huge increase in demand for coal. Between 1913 and 1917, U.S. coal production increased 30% in an effort to meet the energy and raw materials requirements of munitions and steel manufacturers. By 1917 Peabody was producing 12 million tons of coal per year from mines in Ohio, Indiana, Illinois, Kentucky, Virginia, and Wyoming. This made Peabody one of the larger mine operators in the United States. No single coal company controlled more than 3% of the market.
Stuyvesant (Jack) Peabody succeeded his father as company president in 1919. By 1924 Peabody Coal had one billion tons of coal reserves and was the largest coal producer in Illinois. It reported net sales of $29.2 million and net income of $1.6 million in 1925, when the company sold 11.9 million tons of coal.
Peabody weathered the stock market crash of 1929 and the early years of the Great Depression under the wings of several of its largest customers. Commmonwealth Edison (Edison), Peoples Gas Light & Coke Company (Peoples Gas), and several other Illinois utilities bought a controlling share of Peabody's stock in 1928. At that time, Peabody Coal was re-incorporated under the same name and merged with several of its subsidiaries, and with coal producers previously controlled by the utilities.
Peabody signed long-term contracts to supply 90% of the coal required by Edison and several affiliated companies, and to provide nearly seven million tons of coal annually to Peoples Gas. The contracts were for 30 years, set to expire in 1958. To ensure that it could supply the large volumes of coal promised in the agreements, Peabody purchased six large mines in Saline County, Illinois.
By 1929 Peabody had 9,600 employees and operated 25 mines in Illinois, 2 in West Virginia, and 1 each in Indiana, Kentucky, and Oklahoma. Peabody's stock was first listed on the Chicago Stock Exchange on May 15, 1929.
The Great Depression put a temporary damper on Peabody's growth. The company did not open any new mines from 1933 through 1935, and reported net losses in the same years. Edison's shareholders demanded renegotiation of the company's contracts with Peabody, and Edison divested itself of Peabody's stock in August 1935.
Peabody's coal output increased gradually during the ensuing decade and World War II, reaching more than 17 million tons in 1944 and 1945. In 1944 the company reported net sales of $43 million and net income of $2 million. The U.S. government took control of the nation's coal mines three times in the war years, between 1943 and 1947, to prevent work stoppages threatened by labor unions.
When Jack Peabody died in 1946, his son Stuyvesant Peabody Jr. was elected the company's new president. The following year, the company recapitalized to fund new mine development. Construction work on two new mines began in 1948.
Peabody's stock was listed on the New York Stock Exchange in 1949, a year when the company reported net income of $1.7 million from the sale of 15.5 million tons of coal. The company had scaled down its mine holdings to nine in Illinois, two in Kentucky, and one in West Virginia.
The early 1950s were a difficult time for Peabody. The decade opened with a lengthy mine workers' strike, which significantly decreased production. Coal prices remained unprofitably low, and demand declined in the Chicago area as competition arose from natural gas. Following several years of declining sales and expensive mine development efforts, Peabody sustained a net loss of $640,000 in 1954 on the sale of nearly ten million tons of coal.
Otto Gressens succeeded Stuyvesant Peabody Jr. as company president in 1954. Peabody stayed on briefly as chairman of the board, retiring in February 1955.
The company's fortunes took a turn for the better in July 1955, when the Sinclair Coal Company and its affiliates merged with Peabody. Sinclair owned and operated profitable strip mines in Kansas, Missouri, and Oklahoma. While the entire industry had to cope with the low price of coal, stripminers were still able to make a profit because their mining costs were relatively low in comparison to those of underground mining operations.
Prior to the merger, Sinclair was the nation's third-largest coal producer, and Peabody ranked eighth. The Peabody name was retained after the merger because of its listing on the New York Stock Exchange. Sinclair's former owners, however, held 95% of the consolidated company's stock.
Following the merger, Russell Kelce, the former president of Sinclair Coal, became president of Peabody. Russell and his younger brothers, Merl Kelce and Ted Kelce, had operated the Sinclair group of coal companies for many years and were no strangers to the coal business. Russell Kelce began working in the mines at the age of 15, to provide for his family after their father was injured in a mine explosions. Russell joined Sinclair in 1926 as vice president and became president in 1949.
Russell Kelce died two years after the Peabody-Sinclair merger, in 1957. During his brief tenure as Peabody's president, however, the company invested $41 million in extensive mine improvements. Peabody developed new, lower-cost mines and prepared to take full advantage of inexpensive water transportation by building docks and loading facilities on inland waterways near its coal reserves.
Russell Kelce's youngest brother, Merl Kelce, was the next president of Peabody. He sought more long-term contracts with power companies, and used the future income promised by these agreements to secure financing for additional mines and automated mining equipment. These investments enabled Peabody to expand its profitable strip-mining operations, nearly double its reserves, and increase productivity.
Peabody expanded its holdings to the other side of the globe in 1962, by participating in a joint venture to open the first major strip mine in Australia. In 1965 the joint venture began fulfilling a 13-year contract to deliver a total of 30 million tons of coal to Japanese steel mills.
During the decade following the Sinclair merger, the Kelces more than doubled Peabody's coal reserves, from 1.84 billion tons in 1955 to 4 billion tons in 1965. Coal output increased dramatically, from 26 million tons in 1956 to 56 million tons in 1965. In 1961 Peabody became the largest coal producer in the United States, surpassing its rival, Consolidated Coal Company, for the first time. The decade following the merger also saw net sales more than double, from $97.5 million in 1956 to $208.3 million in 1965. Net income rose from $7.2 to $22.5 million for the same period.
Ted Kelce succeeded Merl Kelce as Peabody's president in 1963, and Tom Mullins succeeded Ted Kelce in 1965. Like the Kelces, Mullins came from a coal-mining family; his father operated mines in Indiana. Prior to joining Peabody in 1963, Mullins was president of Midland Electric Coal Company. Although Merl Kelce had resigned as company president, he kept his hand in the business, assuming the role of chairman and CEO in 1965. As Kelce neared retirement age, however, he began looking for a new owner for Peabody.
Meanwhile, Frank Milliken of Kennecott Copper was looking for a well-run coal company. As president of the United States's largest copper producer, Milliken believed his company needed to diversify into a business with more stable cash flows. In contrast to the soft-coal market, copper demand and prices vary widely from year to year, and new copper veins are nearly impossible to find as old ones become depleted. Peabody, with its steadily increasing revenue and dependable long-term sales contracts, seemed like an ideal acquisition for the copper company.
Kennecott acquired Peabody on March 19, 1968. In August of the same year, the Federal Trade Commission (FTC) issued a formal complaint charging that the combination of the nation's largest copper and coal producers violated the Clayton Antitrust Act. An FTC examiner dismissed the complaint in March 1970, but the full commission overturned his ruling in 1971 and ordered Kennecott to divest Peabody. By acquiring the nation's largest coal company, the FTC commissioners said, Kennecott had removed itself as a potential competitor in the coal business, making the industry less competitive than if Kennecott had acquired smaller mining companies on a piece-meal basis.
At the time of the FTC's decision against Kennecott, mergers were deemed anticompetitive if at least 50% of the market was already controlled by eight or fewer companies, with one company controlling at least 20% of the market. Although this was not the case in the coal industry, the commissioners said that a trend toward concentration was developing. In reality, during the five years following the ruling, the industry became less concentrated. Frank Milliken refused to accept the FTC's divestiture order. While Kennecott tried unsuccessfully to appeal its case, Peabody faced other serious challenges.
Part of Peabody's appeal for Milliken had been its respected management. At the time of the merger, Merl Kelce was enthusiastic about continuing to participate in running the business, even though he no longer owned it. Less than a year later, however, Kelce called Milliken to tender his resignation, explaining that he had lost interest in the company. Tom Mullins, who had been Peabody's president since 1965 and was 48 years old, unexpectedly died of a heart attack in 1971. Ed Phelps, formerly senior vice president for operations, succeeded Mullins as president.
Management changes were not Peabody's only worry. Compliance with the Mine Health and Safety Act of 1969, labor unrest, and the beginnings of 1970s-style double-digit inflation decreased productivity and pushed up coal production costs.
The price of coal skyrocketed from $10 to $50 per ton because of the Arab oil embargo in 1973. Peabody's long-term contracts, however, prevented it from raising its prices, even enough to cover its costs. In 1973 contract purchases accounted for nearly 90% of Peabody's sales, at prices that averaged less than $6 per ton. Peabody reported operating losses in 1973 and 1974.
Despite the coal company's profitability problems, Kennecott still was determined to hold onto Peabody. For five years after the FTC's divestiture order in 1971, Kennecott unsuccessfully tried to appeal its case. In 1976 Kennecott and its directors were declared in contempt of court for failure to comply with the divestiture order. The time to sell Peabody had come.
Many potential buyers called; six were chosen. Newmont Mining, then tne nation's fourth-largest copper producer, was the leader of the investor group. The FTC approved the transaction and the newly formed Peabody Holding Company acquired Peabody Coal's stock in June 1977 for $1.1 billion. Newmont Mining acquired a 27.5% interest in Peabody Holding. The other investors were The Williams Companies, with 27.5%; Bechtel Group, witn 15%; Boeing Company, with 15%; Fluor Corporation, with 10%; and The Equitable Life Assurance Society of the United States, with 5%. At the same time, Kennecott sold Peabody's interest in the Australian strip-mining venture to Broken Hill Proprietary Company of Australia.
In January 1978 Robert Quenon became president of Peabody Coal. Ed Phelps, who was nearing retirement, was made vice chairman. Quenon came to Peabody from Exxon, where he had been senior vice president of Carter Oil, an Exxon subsidiary. Quenon had been a mining superintendent for Consolidated Coal early in his career. He joined Exxon in 1967 as operations manager of the company's coal and shale oil department.
Peabody needed all of Quenon's skills and experience to overcome the profitability problems it had faced throughout the 1970s. The company was losing money on about half of its 60 long-term contracts: $42.7 million in 1978, and $28 million in 1979. By the end of 1980, most of the money-losers had been renegotiated.
Peabody further improved its financial picture by closing unprofitable and marginally profitable mines. Closing mines and streamlining operations enabled the company to reduce its work force from 16,000 to 11,100 between 1979 and 1989.
Until 1984 two-thirds of Peabody's coal output was from high-sulfur coal fields in the Midwest. By the mid-1980s, passage of acid-rain legislation that could decrease demand for Peabody's high-sulfur coal appeared imminent. Because emissions from power plants that burn this coal contribute to acid rain, Peabody began to reposition itself as a provider of low-sulfur coal, expanding its reserves and mining operations in West Virginia and the western United States. By 1989 more than half of Peabody's output was low-sulfur coal, and Peabody was the largest U.S. producer of this product.
In 1984 Peabody paid $257 million for Armco's low-sulfur coal mines and reserves in West Virginia and a share in Dominion Terminal Associates, owner of the second-largest coalloading pier in the United States. Ownership in the coal pier enabled Peabody to expand significantly its participation in the coal export market. Peabody used the pier, located in Newport News, Virginia, to load coal shipments bound for customers overseas. Between 1985 and 1989 Peabody increased its coal exports from 2.3 million tons to 6.4 million tons, accounting for approximately 6% of the export coal market.
Peabody acquired more mines in West Virginia in 1987, when Eastern Enterprises, then called Eastern Gas and Fuel Associates, exchanged its coal properties for part of Newmont's interest in Peabody. The properties, valued at $152 million, included 7 mines and 800 million tons of low-sulfur coal reserves.
Ownership of Peabody Holding's stock changed hands periodically throughout the 1980s. In 1983, Fluor Corporation sold its stake in Peabody to Newmont, The Williams Companies, Boeing, and Bechtel. In 1987 Newmont Mining doubled its share in Peabody by purchasing The Williams Companies's interest. Newmont reduced its share in Peabody later that year with the Eastern Enterprises exchange. In 1989 Equitable Life Assurance sold its share in Peabody to Newmont.
Newmont's parent company, Consolidated Gold Fields PLC, was acquired in 1989 by Hanson PLC. Newmont had increased its debt level in 1987 to fend off a takeover attempt by corporate raider T. Boone Pickens. To reduce the company's debt to a more acceptable level, Hanson decided to give Newmont a cash infusion by purchasing Newmont's share of Peabody Holding. To gain 100% ownership of Peabody, however, Hanson also made offers to Peabody's other investors. Boeing, Bechtel, and Eastern Enterprises sold their combined 45% interest to Hanson in February 1990 for $504 billion. At the same time, Hanson bid $715 million for Newmont's 55% share, but was topped by AMAX, the nation's third-largest coal company. Hanson raised its bid to $725.6 million and acquired Newmont's share of Peabody in July 1990. Peabody Holding was in 1991 100% owned by Hanson Industries, Inc., Hanson PLC's U.S. subsidiary.
In 1989 Peabody Holding's subsidiaries operated 43 mines: 15 in West Virginia; 8 in Kentucky; 5 each in Illinois and Indiana; 2 each in Arizona, Colorado, Ohio, and Wyoming; and 1 each in Montana and Oklahoma. At the same time Peabody had 49 long-term contracts to provide more than one billion tons of coal to electric utilities and industrial customers. The company sold approximately 75% of its output to contract customers and received an average price of $20 per ton.
During its history, Peabody's ability to meet the enormous coal requirements of the nation's largest power companies enabled it to obtain valuable long-term contracts and the financing necessary to expand and grow. In the early 1990s more than half of the electricity used in the United States was generated by burning coal, and 10% of that coal was supplied by Peabody. In the 1990s, coal may become an even more important source of energy as an alternative to high-priced oil and unpopular nuclear power. The electric companies were counting on Peabody; as the nation's largest coal producer, it seemed likely to be able to deliver.
Principal Subsidiaries: Affinity Mining Company; Blackrock First Capital Corporation; Bluegrass Coal Company; Cameo Minerals Inc.; Canyon Coal Corp.; Castner, Curran & Bullitt, Incorporated; Charles Coal Company; Coal Properties Corp.; Colony Bay Coal Company; EACC Camps, Inc.; Eastern Associated Coal Corp.; Eastern Royalty Corp.' Gateway Terminals, Inc.; James River Coal Terminal Company; Midco Supply and Equipment Corporation; New Superior Coal Company; North Antelope Coal Company; North Page Coal Corporation; NuEast Mining Corp.; Peabody Australia Pty. Ltd.; Peabody Coal (U.K.); Peabody Coal Company; Peabody Development Company; Peabody Insurance Limited; Peabody Terminals, Inc.; Powder River Coal Company; Powderhorn Coal Company; Powderhorn Properties Company; Raven Mining Inc.; River Properties Corp.; Rochelle Coal Company; Sentry Mining Company; Sterling Smokeless Coal Company; Sterling Smokeless Fuel Corp.; Sycamore Coal Company; Tecumseh Coal Corporation; Trinity Mining Company; Western Associated Coal Corp..