'Dirty' Profits at Peabody Energy -- Windfall Profit Taxes Coming?

(MoneyWatch) 

• The Company: Peabody Energy, the world's largest private sector coal company.
• The Filing: Form 8-K filing with the SEC on July 23, 2008.
• The Finding: Like most of its coal-mining peers, Peabody benefited from favorable supply and demand fundamentals in the second quarter. Continued higher-than-expected prices, combined with significant open-ended supply agreements (unlocked pricing) on future tonnage, positions the company to record fiscal 2009 and 2010 earnings, too.

The Upshot: Torrid demand for steam coal is expected to continue with the build-out of new coal-fueled plants in every region of the world; supply is constrained, with traditional coal exporting nations, such as China, Russia, and South Africa restricting exports because of inventory and production declines.

(For a more-detailed discussion on pricing and demand/supply imbalance issues, please refer to my column on Arch Coal, posted on July 29.)

Peabody has capacity and ample reserves to handle increasing domestic and global thermal coal demands. The company owns approximately 3.3 billion tons of proven and probable coal reserves in the Southern Powder River Basin, the largest and fastest growing major U.S. coal-producing region, and controls more than 3.7 billion tons of proven and probable coal reserves in the Illinois Basin (the largest reserve base of any of its competitors in both mining regions).

The company should profit handsomely in the next two years, for it controls the largest portfolio of non-fixed price production in the thermal coal space. For example, more than 35 million tons of U.S. coal is not priced for 2009, and 90 to 100 million tons remains unlocked for 2010 delivery.

Industry analysts believe Peabody could generate more than $800 million in free cash flow in 2010.

To date, politicians in the U.S. have made little headway in efforts to tax "dirty energy" like coal or in reaching consensus on including coal (a major contributor of carbon dioxide emissions) in any comprehensive cap-and-trade system for global warming.

Continued outsized industry coal profits could lead to comparison with those "greedy" oil companies, too.

The Question: How long before the discussion on windfall profit taxes shifts from oil to coal on Capitol Hill?