Peabody Energy Corp (BTU) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy quarterly earnings conference. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session for the financial community, and instructions will be given at that time.

If you should require assistance on today's call, please press the zero, then star.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Vic Svec. Please go ahead.

Well, thank you, Carol, and good morning, everyone. Thank you for taking part in the quarterly conference call for BTU.

Before taking questions today, our Executive Vice President and CFO, Rick Navarre, will review the results based on the earnings release that we distributed this morning.

Chairman and CEO, Irl Engelhardt, will then discuss our growth initiatives, the market conditions, and our financial outlook.

We'll be making some forward looking statements today, and they are consistent with our press release. We encourage you to consider these statements within the content of the risk factors that we note at the end of our earnings release.

As well as those documents that we filed with the SEC, replays of our call are available through a toll free number that the operator will announce later. They're also available through our web cast at peabodyenergy.com. You'll find investor relations information here, as well.

And with that, I'll turn the call over to Rick.

Good morning, and thank you for your interest in BTU.

Today I plan to review our financial performance for the most recent quarter, and nine months.

I view the results of the third quarter with mixed feelings. Our earnings were within the range of expectations; however, we experienced $39 million in operating issues during the quarter. Absent those issues, Peabody would have posted results that exceeded the high end of our expectations. Our activities that added value to our sales contract positions helped us offset our third quarter in operating issues.

Let's discuss our operating results in more detail. Turning to our income statement on page six of our earnings release, you'll see that we posted increases in a number of key areas. Revenues for the quarter increased nine percent to $715 million, driven by higher pricing, and the favorable impact of the contract resolutions.

Our revenues for the first nine months increased five percent to approximately $2 billion. Higher overall margins lead to an operating profit increase of $15 million for the quarter, and $42 million year-to-date, an increase of 42 percent and 36 percent respectively.

The third quarter benefited from the resolution of customer disputes involving two of our western contracts. As we announced in July, we received a favorable arbitration judgment related to our coal supply agreement for the Navajo generating station. We increased contract pricing retroactively on this contract, resulting immediately in a cash payment, and a $22 million increase in operating profit. And we improved pricing going forward on eight million tons of sales per year.

In addition, our customers that own the Mojave generating station approved a mediated settlement that resolved certain issues in the coal supply agreement. Those issues related to reimbursements of previously approved mining decommissioning, and other post-mining expenditures.

This settlement improves operating profit by $15 million, and results in cash payments that we will begin receiving in 2003 through 2005. Both resolutions were anticipated within the range of our earlier earnings targets.

Favorable sales prices and the contract resolutions were largely offset by a number of operating issues. The of the Big Mountain Mine, and lower production at two Powder River basin mines reduced EBITDA by approximately $16 million for the quarter.

Geological difficulties at two operations reduced EBITDA by approximately $17 million. And unplanned truck, shovel and dragline repairs in the southwest and in our Powder River basin region lowered EBITDA by $6 million.

Looking at the other key components of the income statement, you'll see that interest expense improved 10 percent. Income before extraordinary items increased $25 million for the quarter, and $65 million through nine months. And EBITDA rose 19 percent for the quarter, and 15 percent for the nine month period.

Turning to the supplemental data on page seven, you'll see that our U.S. mining for the quarter totaled $658 million, as mining revenues increased at 10 percent for the quarter, and seven percent for the nine months.

As discussed in our earnings release, trade revenues are being reported under new accounting guidelines for physically settled trades. The accounting change revises both revenues and costs at roughly five percent or less, and had no effect on operating profit, EBITDA, or net income.

Our sales volume was consistent with that of the prior year, as we continue to carefully match our production with demand. Our 2002 production is now expected to be 19 million tons lower than our original expectations.

Excluding the benefits of the dispute resolutions, our third quarter revenues per ton were up six percent and 10 percent in the east and the west, reflecting the favorable impact of our pricing on our sales contracts.

Our operating costs for the quarter increased six percent in the east, due to the previously mentioned operating problems, and lower production levels. In the west, you'll note that operating costs increased $1.08, with more than one third of that cost increase related to the additional taxes and royalties on higher sales prices, and on taxes and royalties related to the contract settlements.

In addition, we had 40 cents per ton of higher costs related to the higher repairs and maintenance issues that I discussed earlier, and I'll discuss some specific cost reduction measures that we'll be taking later in my remarks.

Our trading margins were down $5 million from the prior quarter, as we scaled back our activities. We will continue to utilize strong risk controls and a cautious approach to credit for our coal customers and our trading parties.

Other operating costs and revenues were unfavorable to the prior year quarter primarily due to a few of 2002 property transactions and almost $6 million of excise tax benefits that we recognized in the prior year.

Turning to page eight Peabodys strength in this balance sheet through improvements and working capital and debt repayments. Overall working capital improves $65 million since June as inventory levels decline, reflecting the impact of miner's vacations and strong shipments related to warm summer weather.

We also collected $26 million in outstanding tax refunds during the quarter. Over all our net debt balances improve $44 million cause we paid down $55 million and brought for borrowings during the quarter which was slightly off set by the consolidation of additional $13 million in debt.

Our net debt and net capitalization ratio remains below 50 percent while our interest cover ratio for the year has improved a 4.3 times interest coverage. Our CapX for the quarter was $56 million bringing a yearly total to $146 million excluding acquisitions of reserves and operations.

We remain on track for the year for capital spending of about $180 to $200 million. At a time when many energy companies are facing difficult ratings outlooks we were very pleased that rated the outlook on Peabody to positive most recently.

They also reinforced the investment rate rated in our black unit and also during the quarter assigned Peabody as SJL1 equity rate. Another key milestone was reached during the quarter and on September 30th when BTU was added to the SNP Madcap and 400 index.

In summary while our results improved for the quarter, we were not satisfied with our performance. We expected better results and we're taking actions to improve our operations.

We planned organics to spend our higher cost big operation. We also suspended our colony base service operation and our high wall operation. We also plan to close our camp 11 mine in Western Kentucky earlier then originally planned and we're going to dissect our cost structure and cost drivers company Y to improve our performance and our productivity.

So in summary we continue to navigate to very turbulent economic and industry conditions although our - but our still improved 15 percent for the first nine months of this year which matches the strong 15 percent improvement we had in EBITDA in 2001.

We expect to finish to 2002 with EBITDA growth of approximately 10 to 15 percent and we will aggressively manage our cost to achieve continued positive results for the company. I will now turn the call over to our Chairman and Chief Executive Officer, Irl Engelhardt.

Thank you Rick and good morning everyone.

Rick covered the third quarter results management actions in the current business environment. What I plan to do is cover the growth initiatives our prospectives on the markets and discuss the outlook for the fourth quarter.

Starting with our growth initiatives we're taking the very conservative approach in the current business environment. Our development spending has been reduced and any acquisitions that we complete must be through bargains.

And I'm happy to report that we did complete two acquisitions as quarter and they fit that true bargain criteria. We acquired a very large reserve position in Queensland the acquisition gives us a tow hold in Australia and we can use that hold to explore other opportunities or pursue organic growth.

We also purchased the remaining stake in our that we did not own. Our owns a new service mine a new underground mine and a new five million tone per annum cleaning plant.

The operations serves electricity customers on the Ohio and Mississippi rivers and they serve those customers under long term sales contracts.

We are very proud of the fact that our generating project took a major step forward. The state the common wealth of Kentucky issued it's air permit and that's an air permit for one of the largest generate co fired generating plants to have been permitted in recent times.

We continue to seek partners for in the sister plant state and I am also happy to report that state made good progress in its development efforts.

Turning to the markets we know the last quarter that the coal markets were showing signs of a rebound and the rebound continued over the past three months but the economy slowed the rate of improvement. A cooling degree-days ran about 16 percent above normal from June through September that stimulated strong retail consumption of electricity and that in turn was good for coal.

However the soft economy dampened the industrial demand for electricity. We think it was down some six to seven percent through September and that lost industrial demand slowed the coal market improvement versus our earlier expectations.

Natural gas generations increased this year due to circumstances that over ride usual economy rules. More than 55 a watts of new gas generating capacity has come on line or is coming on line this year and despite some very high gas prices that create dispatch costs in many regions. Many of the new plants have to operate for several months to obtain manufacturer warrantees.

Although the natural gas reduced coal demand in the first three quarters as we look at the high forward gas prices we that they both very well for electricity generation that uses coal.

So I believe in summary coal demand is recovering from a very slow start earlier in the year. We see production cut backs in the east that are facilitating customers stock file reductions and assuming normal weather patterns we expect the stock pile reduction process to be complete late in the fourth quarter or very early in the first quarter of 2003.

We expect 2003 coal demand to grow at a rate of about one and half to two percent and that is a more conservative view than the past due to the soft economy. However higher natural gas prices or a electricity demand due to industrial growth both could increase that growth rate for coal.

If we have additional production cut backs in for permitting bonding trucking for financial reasons the other coal producing regions could receive a .

Looking to the future our long-term sales contract based provided Peabody with a very solid foundation. Were sold out for 2002 at current plan production levels at 180 million tones.

For 2003 we have 157 million tones or 85 percent of planned out put committed and priced. We have added just 25 million tones to our sales contract backlog for 2003 and we have only added eight billion tones for 2004.

We believe that our patient approach to the markets will result in the best long-term results during a period of improving market conditions. Rick reported on the steps that are being taken to improve our cost structure for 2003 and beyond.

We'll take a one-time charge of eight to $10 million dollars in the fourth quarter and that will be painful. The charge is related to early mine closing and certain other cost cutting measures.

We believe those aggressive steps will serve Peabody very well if the conservative view of the market is correct and the same cost cutting steps will allow us to make even more money when the markets improve.

For the full year management is targeting EBITDA in the 420 - $435 million range and that's up 10 - 15 percent. We are also targeting our earnings per share the dollar 20 to a dollar 45 for this year.

I want to thank you for your continued interest in Peabody and at this time we would be happy to entertain your questions.

At this time members of the financial community are welcome to ask questions. To do so please press one on your touch tone phone. We ask that participants limit your time to one question and one follow up question. Should you have additional questions you are welcome to rejoin the queue and we have a question from the line of please go ahead.

Good morning.

Morning .

: Can you explain the amount of contracts you've signed in the third quarter and what the pricing was like relative to what you've already booked and my second question is can you give us some feel for how much you've been able to cut costs. You've taken a charge in the early closing of the mine. I presume that you've reduced some head count. Could you tell us what impact that would have on your costs.

Well let me start off with the contracts we've signed. I think you realize that the markets have been extremely soft this year and the pricing that was out on the market place was not what we discern.

Generally the pricing that we have achieved on the tonnage that we've sold was above the roll over or the roll off price for the same quantity as business. Our is not at the levels that we were signing in early 2001 so it is some improvement in price but not where we would desire.

Regarding the cost cutting measures we are simply taking them to improve our cost structure. We're doing it across the board in every major operation that we have and we're simply going in and re-engineering everything we do related to the operations and the way we run the company.

The exact impact we're not able to provide at this time. We're right in the middle of the budgeting process and so there when you're in the middle of a budgeting process there are many swirling issues that are too numerous to mention.

But we're doing it to improve our earnings for the long haul.

And part of the issue is we're not running the mines at their optimum capacity right now so as you're cutting costs you'd be maybe back in line where you wanted them to be and you won't see the true benefit of cost cutting until you get the mines back up the right passage.

: Right.

And maybe another way of answering it too is we're really preparing two scenarios. One is a conservative scenario for next year and another is a market inclement scenario.

: Right.

And one we intend to operate against and the other one we hope to operate against so.

: In terms of the contracts could you you may not want to give us exact numbers but can you give us some sort of a feel you're able to sign contracts. Maybe three percent, five percent, 10 percent, 20 percent above the roll off levels. Did you sign any in the third quarter?

We did not sign anything significant in the third quarter to my knowledge. Maybe a few million tons but, but that's not big in our terminology. In the market was fairly soft in that period. Related to the exact percentage we have such a mix of products that, that really isn't a useful number. It would be misleading if I quoted a generalization like that.

OK thank you.

And our next question comes from the line of David with Credit First Boston. Please go ahead.

Hi I'm going to ask perhaps a similar question to a couple of questions that Wayne just asked but try to maybe a different angle here.

Given that 85 percent of your '03 production is committed and priced. Can you just give us a cent as to what you expect your realize prices to be? In both the East and the West in 2003.

Again we're putting the final book of business together and it would really be premature for us to give the information so I really can't do that at this time.

It still puts a big impact Dave on your remaining tons to be booked. I mean it certainly I wouldn't think overall I think it would be at least flat or slightly up from what we expect to have for the full year this year.

I believe you know Dave that we are such a mix of have such a mix of business with small amount in large amount in the Mid West a large in the West and that for us to give a generalization is really not a meaningful number.

I would point out that prices are softer at the moment than they were when our business was signed however there's very little business being done in at the current time so that market really has yet to re-price itself and the exact level that it prices itself at is yet to be determined.

In the that is a region where our remaining coal has yet to be sold and since I have so many competitors that listen to this I really am hesitant to, to mention anything about the price there.

: OK.

Sorry, sorry I can't fill out your model.

: It's fair enough. Let me, let me try a, try another question here though. On the costs side yeah obviously you've got a few cost reduction initiatives you've put in place.

The numbers I show have you know your cost per ton both in the East and the West have increased fairly substantially since the end of the calendar year 2001 and in terms of the at least directionally in terms of the trend what are your thoughts for 2003 in terms of your unit costs expectations for both Eastern and Western operations.

Well I think the first thing you have to do when you look at our cost trend for this year is that you have to pull out the impact of the settlements that Rick mentioned earlier and I think he broke out the amount in the third quarter.

38 cents a ton.

Was 38 cents a ton related to those settlements. He had to pull that out. And the second thing you had to do is that you have to look at the impact of, of royalties and taxes that are revenue based on the cost structure and they will flow up and down with the cost structure and so in the for instance those are 33 percent so one has to do adjust for that.

So when you get past that our cost structure has increased during the year in the and much of it is related to operating at lower than optimal levels. In it has increased somewhat, but it's largely due to operating with the idled and a few costs that we can't control on a day to day basis. But over the long term we can having risen.

So generally there are many pressures per business in general on prices. Everything from healthcare costs, to pensions, to workers comp and other things, insurance. So every major company in the United States will deal with those. But then going in the other direction companies like ours who are trying to get ahead of the cost curve, are improving productivity to offset those upward pressures.

My goal is to have a very respectable cost structure for next year.

I think just to add to that, I think as Irl said if you strip out, we can get down to the clean costs by taking away the impacts of favorable pricing it has on the cost structure by the higher taxes and royalties. And then just that if we were operating at the optimum level that we anticipated I think you'd find that in the east and the west our costs would have been basically flat to slightly down over the prior year in that case. It's a lot of just volume oriented.

But there are some other one off issues related to insurance and things of that nature that are going up as a result of the credit markets and the insurance markets.

OK.

And so presumably given that your volumes are expected to be basically flat next year versus this year, it doesn't sound to me like your cost structure is expected to change significantly next year versus this year, excluding obviously the impact of you know, the fee based royalty taxes and excluding the you know, the other one time items. But from an operating perspective, is that a fair assumption?

I don't - I mean I don't think that's exactly correct . We had some substantial issues in the east with respect to some of the geology with . We won't have the mid-western next year which has been a big source of issues in the mid-west and in our eastern cost structure because we're shutting down the and we're replacing that with the where we use continuous miners. I think that'll help that issue.

We will also either have the operation shut down completely, and it won't impact our cost structure as negatively. And we had some pretty substantial one off repairs. We had a dragline - substantial dragline repair in the west this year that cost us $5 to $6 million. That was a big number.

And we had a boom fall and collapse in this past quarter that we had to - it cost us production, and it cost us a lot of money to fix it. So we're not expecting those types of things to recur.

OK. Thank you.

And our next question comes from the line of with Friedman, Billings. Please go ahead.

Hi guys.

A quick question on, you know, if you're running at the 100 million - 180 million-ton rate next year, historically what have you done as far as sold in the market traditionally?

And where to you see yourself - how much coal do you see yourself selling in the market in '03? You know, what's sort of the change in strategy here?

Traditionally we would go into the year, depending upon our view of the market David, with you know, five to 10 million tons still to be sold. And into the market essentially with, you know, additional capacity ramp ups so that, you know, we can run the mines a little harder, get a little bit more tons out. And we usually keep a few tons available to sell. I think last year we went into six or seven million tons to sell. This year is probably not going to be much different. We'll go in to it somewhere in that neighborhood depending on how we feel about the next couple of months.

It's really a function of our view the market last year we anticipated with the highest stock pile so some softness in the market. So we went in with relatively few tons. And you have more tons this year.

And do you think with supply dropping here especially in the higher that maybe you're thinking about potentially some point next year you would ramp up production to meet the needs and therefore maybe sell a little bit higher spot coal if the demand is there? Is that kind of what you're thinking?

Well we're preparing two scenarios for next year. One is a conservative scenario and the other is a market improvement scenario. We do have more capacity but we will be very careful on bringing that ion and making sure it's truly profitable for us to do so.

And by shutting down the big mountain you know suspending the big mountain operation. It's a two million ton a year operation. If marketing improves substantially we'll bring the operation back on that's a nice profit for us.

And just a quick follow up on the other questions that the other guys have asked. The coal that you have locked up in the contract this year is it been more shorter term in nature or have you partly - some of that into ?

The coal that we locked up this year and again there were limited amounts of it only 25 million for 2003 and only eight million for 2004.

That was it.

That was it OK.

And compared to previous years we locked up as much as 200 million tons when we had a different view of the market place and felt it was advantageous to do so so we move in and out of the markets depending upon our view of what is going to happen.

this year resembles a lot what we did in 2000 when the markets were soft because of high stock files in 2000. We were not engaging in long term . We basically sold what we needed to sell to keep our operations running at a reasonable level and then we are kept as much available for up side leverages as we possibly could in the future.

And for good out of that 25 million tons a good 10 of that is reopened business which we knew we would lock in at this point.

OK. Great. OK thank you.

Thank you.

And our next question comes from the line of with Strong Capital. Please go ahead.

Good morning Irl, Rick and Dick.

Good morning.

o'connor: You've noted that some new gas generating plants displays lower costs cold generation as they operated for purposes during the quarter. I wanted to know did you have any evidence or can you suggest any evidence of some of these new plants being shuttered sometime soon perhaps in the fourth quarter and switching back fuel switching back to coal.

Based upon the frowns that are on the faces of some of our customers that own these plants we know that they will only run 'em when it's economic to do so and they simply have been forced when you first build a plant you have to run it and demonstrate whether it works or not to obtain warranty. And unlike the previous generation of plants that were simple combustion turbans. The new combined cycle plants require running them for a longer period of time.

OK.

If you have a big concentration of the plants in a given area you can impact a lower cost coal demand and we saw that happening especially in parts of the south west along the gulf coast boarder and a little bit in the North Eastern part of the United States.

So can you suggest a time at which your customers might switch back to coal.

Well I think they are switching back as quickly as they possibly can. Our view is that we will see them marginally switching back this quarter and in the first quarter of next year.

And then lastly what kind of an overall impact on the coal market do you think that would have.

Well it is overall impact on the coal market is somewhere in the seven to 12 million tons a year. It's a very difficult number to get your arms around because this information is not readily reported. We're putting it together from simply information we obtained when we deal with our customers so we believe its seven to 12 million tons impact for this year.

Thank you.

And our next question is from with please go ahead.

How're you doing guys.

Hi Ross.

Couple of questions. I assume that a lot of the other coal producers are backing off on their production. When do you see supplies getting back to more historical levels. I notice in the press release it was still a little bit above the normal from the sequential quarter, and you know once that does occur you think that pricing will start to move up in the first quarter is that what I was hearing.

Well what has happened from a supply standpoint is the Powder River Basin through the first nine months has increased it's supply by about one percent. In the Appalachian region it is down about six percent.

We don't know exactly what our competitors are going to do but what we think is really driving the market is more of the stockpile reductions than it is the competitor supply situation and its a simple function of many of our customers just running those stockpiles down to low levels.

And frankly the definition of a normal level has changed from what it was in prior years with some of the credit problems which exist in the market place right now we see some of the cash management activities of those customers driving those stockpiles down to a little lower level than had been traditional so it varies really from region to region and customer to customer as to what's going on.

We think when we get to a simple return to normal stockpile levels that we will have a fairly strong surge in perceived demand by the supply base and we think the ... improve somewhat.

OK great also Rick for my benefit here I'm trying to normalize the EBITDA numbers as best I can and I do assume that the settlements of 22 and 15 are reflected in the EBITDA number. I was wondering if maybe you could comment on what cost that did occur during the quarter might have been somewhat one time if you will I know that typically you do have outages and equipment problems periodically but if I wanted to just kind of strip out some what you would consider one time ... what that level might be.

Yes the way I look at it Ross it's almost a push to something stem because basically as I've said in my remarks if you add the items that we've had in respect to the big mountains shut down in the camp. 11 shut down it's properly about $39 million and our settlements were about $37 million.

So you get to a pretty close you know year over year we don't anticipate those same level equipment repairs that we had. We don't expect to have the drag line to collapse on us and so if those things don't happen again then you know that takes every pursue cost structure by the same amount as the approximate way to settlements.

OK. That's very helpful. Thank you.

Thank you.

Our next question is from John with JP Morgan, please go ahead.

Good morning Irl, everybody. I wonder if you could just dig a bit deeper into the sort of dynamics of the contracting situation. I think you sort of touched on it with respect to the the run down and the stock pile so that the utilities are seemed to be engaged in. Given the price that was now I would have thought that would be banging your door down to sign contracts.

But just I get the sensed that you don't have the credit to sign contracts or maybe they are trying to save an awful lot of money with their stockpiles?

It is a fascinating market place right now. The market place is the dynamics there are swirling I think is the way I'd describe it from a supplied base we have the permitting issues and the question mark of how much they supplied bases is gonna be eroded from Judge Hayden's second ruling and in turn the impact that, that has on, on issues links of permits for construction by the Court of Engineers.

You have credit problems in that part of the world that ultimately are going to cause some economic mines to close. We have the trucking issue and so we've got all of that going on. And then we have customers who are managing their stock piles to lower levels then usual, as especially in the East that we see that occurring.

And the other problem is that much of the industrial problem that we mentioned on the industrial electricity demand shrinkage has occurred East of the Mississippi river and so that's happening also. So a lot of swirling dynamics they're the pricing for '03 in that market place as largely to be determined.

Having to finally and erecting John I mean we don't comment on the forward pricing but I'll point you to the third party sources there's a lot of the trade, trade publications that are out there that post forward curves in respect of PR beyond eastern calls and if you look at those numbers that are out there while we don't necessarily describe the total trade in market theory what the prices are but least directionally they are on the right area.

If you look at prop delivery '03 pricing compare to '04 pricing there's about a twenty to thirty percent difference in the pricing. So if you were trying to buy a coal for '04 over this over the counter market that's been quoted in east trade prices. You're going to pay 30 percent higher then what you're going to pay for prop delivery today.

: All right so basically your two inches are going out on a limb and hoping that when they do need to call then the rails will be able to deliver?

We'll let you choose those words. We don't talk about our customers like that.

: OK. Thank you.

Thank you.

Next question is from Stuart with Avenue Capitals please go ahead.

Hi Stuart.

Thank you could you just elaborate on the geological problems that you referred to first of all were they confined to central Amb and could you just give us more out of the nature of them and the volume in fact?

Yeah. The impact wasn't primarily two big locations, one is our Camp 11 mine in Western Kentucky. We have moved to a new area in mind with the long wall. All of our inside and outside experts have said that the geology was solid and everything would be great.

And frankly it wasn't. And so that's partially contributing to the early closure of camp 11. We simply found that we could replace the call in the market place at a lower cost and mining it ourselves so we did so.

The other was a very temporary thing. We believe that our mine in West Virginia and right in the middle of a long wall panel they hit a geologic abnormalities involved in a pension of coal and unfortunately long walls don't navigate those problems very well.

We couldn't detect it on either side of the long wall panel it just happened to be right there. And so we worked our way through so don't expect it again but that's part that's why we always have ranges of guidance that we provide everybody.

And what was the volume impact of the West Virginia.

I think that one was probably two or 300,000 tons somewhere in that range.

I think roughly together they combine two operations for about a million tons down in total. I think what complicated it even further I think Irls point for the camp mine is the camp mine was already nearing the end of its life. It's expected to end up in 2003 and then those last panels are very very profitable panels because you don't have to do any development work.

So it's unfortunate that we had to close it early but that's why it's a little bit more costly then it would otherwise have been.

But just to be clear you had said that during the quarter you thought the impact of these two was did I hear you right $16 million of EBITDA.

17.

Ok and ...

Cause you knew you're just talking about some profitable contracts we couldn't satisfy.

And how much of that would you expect to to continue going forward.

The problem is finished. The guidance for the fourth quarter is suing us to shut down of the camp 11 mine which had experienced the other difficulty and the right off of any undepreciated assets at that location as well.

We've embedded that into our guidance for Q4 going forward on annual basis. Camp 11 will be replaced by a new mine that opens up at the very beginning of next year late this year the Highland mine.

Yes it's a brand new mine that has been under development for most of this year and it will come on to replace camp 11.

Thank you.

Thank you.

Next question is from with Merrill Lynch. Please go ahead.

Good morning gentlemen.

Good morning .

: Just one question to on the come back to the cost structure. Any chance you can maybe indicate to us what your fixed, variable cost would be in both your Eastern and Western operations as a sort of general number.

it is due to the adversity of our operations and ensures a number of them and it really is not a meaningful number to generalize on. The Powder River is so much different than New Mexico than the two mines in the black mason Arizona versus Colorado versus Illinois versus all these locations we offer again and we can't give in generalization.

: I suppose it would go and get a break down by region. You have just mentioned ...

We do not publish that in production.

For competitive reasons we don't do that cause if you know the powder river based can consist the stuff you play that we've been very cautious in our to keep that information..

I understand that.

Generalized as to the West.

Yeah no problems at all. Maybe to switch a bit you're Australian acquisition.

Yes.

unid; I'm just wondering in some sort of your sort of prudent approach to marketing in U.S. whether that's going to have any impact on your plans you might have had previously for what you were going to do with and maybe potential expansion and also if you just can update us on what you see happening in sort of export thermal coals markets in Asia right now.

Well the thermo - start with the second part first. The thermal coal markets as you know have declined quiet a bit this past year to year and a half and the outlook is unclear for this next year.

The nice thing about is it does have a low cost structure and we can be profitable even at these low prices that out there. We did not pay a great deal for the operation and we view it as a toll hold which we can either expand due to the large reserve base that it has or we can use our management that are there to go elsewhere.

We are using prudent management these are people that worked for us prior to our sale of our for Australian assets back in January of 2001. So we know them well and they're good.

OK thanks a lot.

Thank you.

Next question is from with please go ahead.

Thank you a lot of my questions have been already answered - I asked and answered. But could you give a comment on the recent trading activity you now within your operations and maybe some insight on how the pre-approval on - in 21 permits can - might effect you now ?

OK first of all our trading operations as you know you've been to our office that they operate under very strict credit to the risk management controls and those controls are very useful especially right now with the turbulent markets.

We have scaled back the amount of the trading that we are doing simply because the number of credit worthy counter parties as reduced and so we are being very cautious in that regard our form trading as we've explained is not a financial toy of trading it's more of a physical form of trading where we're trading around our contract position and around our asset base and so generally we deliver the product in some way and we're really optimizing our long term contracts and our short term contracts.

Little bit like we described with the situation where it was more profitable for us to source the call for the third party rather than produce it ourselves. Regarding the N21 issue as I understand it there will be a decision made some time in February by a combination of courts and the government agencies with the idea begin what is the impact of ruling on all of the permits that exist right now.

We've reviewed the our situation we think that we are untouched regarding that decision making process because it largely revolves around the issue in succession which are for underground mines like we operate primarily used in the initial construction. For surface mines you need to have a permit in place going forward. So we feel that for certainly the next four or five years we don't have an issue with that problem. Now the rest of the industry I think each one will have to answer to that question under - it's certainly a wild card supply base.

Thank you.

The next question is from with Wanderlust Research. Please go ahead.

My question has been asked and answered. Thank you gentlemen.

Thank you.

And we'll move on to with UBS Warburg.

Rick I think you mentioned that you couldn't fulfill someone of your contracts because of production problems. Is there any reason why you couldn't I guess buy some coal in the market and fulfill those contracts.

We do that in some cases but generally being able to that is not - it depends on the situation of course but it's not as mining the coal unless the markets trends are out there are favorable to you. mines when we had to close that down. We could produce that coal cheaper or earlier on and we're going to have to buy that coal to replace it so that's why we're taking charge in the first quarter.

: Right but not as profitable - is different than not being fulfilling the higher place contract. Were you fulfilling with purchase coal or were you not fulfilling it?

Well in certain cases when you're talking about a higher grade of coal that we produce out of our that you can't even buy the right quality of coal and substitution rights for that because it's such a fine product.

: OK.

In that situation all that happened was the delivery was delayed ... we'll just have to move it into a different quarter.

: OK. OK.

In the case of camp 11 we've explained the solution there which is to but coal from third parties and we had to work with the customer to be able to do that. To make sure that there large generating plant was comfortable with the coal that we would source to supply.

: Can you just give the production figures for into the first three-quarters rather than sales figures?

OK. We'll have somebody look into that and we'll announce ...

We'll look it up and rattle it off a little later in the call. OK?

: OK. Sure on the suit with Indiana Michigan how - are those volumes included or excluded from your hedged - your sold production for '03 .

They are well we're not delivering under that contract at present and it appears that it will take a ruling of the court to allow us to deliver in the future which we expect to obtain. So they're not in in numbers that we've discussed at run rates for example on '03 there not in that number.

: OK. And then just one last question. You've answered this a thousand different ways but just let me sort of make sure that I'm thinking about it the correct way. Your looking for sort of flat to slightly up on the production side flat pricing. And if I exclude the sort of the 37 million it looks like your earnings are below a dollar and that will be made up if I look at '02 but '03 by some of these particular issues that have occurred in '02 on the cost side, because royalty and tax I would think would be pretty similar as the run rate in '02, given that pricing would be the same.

Can you - and you've outlined them a bit, but just to get us to and '03 number that - a range there, could you sort of walk through the particular changes that you see in the cost structure?

Well I think I heard you rattling off many of the assumptions that one would want to put in an '03 model. And all I can say is we're not providing the '03 guidance at this time. We are continue - this is October, we are continuing to work on our budgets and deal with all the swirling issues that those that deal with budgets are faced with.

And we're working on two scenarios. One is what I call a conservative scenario that assumes the market growth and roughly the level that we mentioned earlier. And the other one assumes a stronger economy and output level in pricing. The first we will be prepared to operate against and make good money. And the second we hope to achieve and do very well on.

So we will - we just can't give any more guidance than that though at this time. Sorry.

That's . Thanks.

Bob?

Yes?

The productions levels, I think, are about 45 million for Q1, 43 for Q2, 43 for Q3.

OK. So the - OK so second quarter and third quarter were?

The same.

The same. Yes.

OK. The ...

It's a mix issue of course. But yes.

OK.

same tons but ...

Right, right. OK. Great, thanks.

OK. Thank you.

Our next question is from with . Please go ahead.

All right. Good morning gentlemen.

Good morning.

: Just a couple of clarifications on some numbers.

The 80 to 95 million in EBITDA for the fourth quarter, is that net of the eight to 10 million of mine closures?

It is net, yes.

: OK. That was one.

And then the second one is on the revenue increase under the settlements of $1.30 a ton and margin of $1.13, does that include the full 37 million? In other words the 20 million in cash that you got?

The full $37 million is included in revenues.

: So that's in $1.30?

That's right. It's .

: And on top of that - sorry.

margin $37 million.

: Right. And then on top of that there's the better pricing for the current quarter under the contract?

No that - those are included.

: OK. Great.

Yes. Those are together. The $22 million - the better price for the contract will be 2003 - going forward in 2003, the settlement amount for $22 million was a from previous years.

: So the 22 include something for the current quarter as well?

That's right.

: I see. OK. That's it, thanks.

Thank you.

Next question is from the line of with Morgan Stanley. Please go ahead.

Thank you.

We've all been reading a lot in the press about the challenging environment - financial environment for utilities. Do you have any receivables that you think are at risk? And what's the outlook going forward? Are you with the stronger or weaker utilities, or what - how are you dealing with the diminished financial strength of the utility industry?

Well Wayne what we've done is to use our credit controls and really just be on top of both our trading and our normal sales activities. And thus far we have not had an issue with credit and collection on our receivables. Now we have a number of accounts that a year ago were considered investment grade that are on, that are on COD right now frankly.

And we have other security in place that wasn't in place a year ago. If we look at September 30 about 73 to 75 percent of our receivables at September 30 were investment grade accounts.

Now that's down from a year ago. But for us to be able to just rattle it off that we know shows you that we're watching it pretty carefully.

So at this point you don't have any receivables that your worried about that are in place now and going forward your weaker customers your on pay as you go or .

That's correct or we have some other form of security in place.

We and accounts, pay as you go things of that nature to try and strengthen the credit position so.

So we're so far we're very comfortable but it's a very volatile market as you know and we're watching it each and every hour.

And if we look at the maybe the implications for this going forward obviously you'd like to have a stronger customer base as possible and it sounds like you've been very and your really spot on dealing with this.

Those this have any long term implications I guess the country obviously needs power and even if these utilities are in desperate financial shape they have be they have to buy coal and they have to burn it to create power for the market place so I guess if your thoughtful about how you deal this you should be able to come out of it OK and even if some of these companies go into bankruptcy there're going to have to buy coal so you should be OK.

That's correct. We have gone through bankruptcies years ago that and we did not lose our receivable and we were able to continue to call supply agreement very profitably on an on going basis.

The ramifications for the country are enormous I mean our country has to spend a great deal of money on it's energy infrastructure over the next five years and the poor credit rating of many companies plus the environment in raising capital. Those are both going to be major impediments to some of the investment that has to occur.

So we'll all watch and deal with it. Every American citizen will deal with it.

One last question. If your in one hand negotiating with utility to extend the contract and get a good price and on the other hand your playing hard ball in terms of there coal availability does that diminish your capability of signing a contract or will your competition be as thoughtful and careful as you?

I can't speak for the competition. Certainly we are being very careful on the payment terms of any agreement that we enter into and any customer that is an investment grade we look at more there are more desirable than some others.

Hopefully they are looking at us the same way especially in locations like . Our balance sheet should be very attractive to them cause they know that we can deliver on the product especially when the time gets tough for them and the markets turn and the power prices are very high and there exposure is very high if they fail to generate with the coal that is required.

I can give you one example of that in we have seen bids by other suppliers who will not go beyond a year or so with out having a provision with in there bids and clearly that's not something we need offers so reliability continues the count and increasingly counts in our business.

That idea part one was one more point is that we had actually had business that we had turned down at prices that we felt didn't warrant the risk related to the credit associated with particular customers that some of our kind of our competitors are taken the business and we decided to decline to do that because there wasn't enough price to justify the risk.

Right I guess more specifically what I am saying is when your very stripped of your credit do you pay a price on the sales side with maybe some of your competition be willing to a little more free with there credit and is that going to hurt you.

There is a risk of that of course but at the end of the day we think our approach will pay off because we won't have right offs.

Right bottom line is that happening in the market or is this just the theory I'm.

I think it is a little early yet but were seeing a little bit of that.

Thank you.

And we have a question from the line of J P Morgan please go ahead.

Hi guys how are you doing.

Fine.

Can you just give more specifics on the mines in the that are currently operating low capacity as well as I guess other than big mining in what other mines have been idle during the year or slowed down.

In the county in our world hide mine is running at a rate of about three and a half billion tones a year versus a more desirable rate for us roughly eight and half and our mine is trotted back some also. Our market is operation generally run reasonably close to capacity.

And I guess other than big mining in are the idle mines.

Those are the primary back that we have done.

We still have the capacity to run additional shifts at some of our other mines that we would have done had the market been there so that there not extended there is additional capacity that we could have ran that was expected in our original projections of 199 million tones late last year.

So we are operating at about 19 million tones lower than what we had planned to produce so the same.

Basically the mines.

OK so other than those like and and are there any other ones where there is.

Rick's point is that there are Saturdays that we don't work over time and that we would normally would have run the Saturday you know work so those are round at a number of our other operations.

And when we did it keeps your cost structure down so obviously you can absorb those fixed calls over a lot more tones so that is one of the reasons you see that the costs for it to increase up when you are not running at the capacity levels that you had anticipated when the capacity together.

OK great thanks John.

comes down other fleet that we have right now.

OK thanks.

OK thank you.

And our next question comes from the line of with please go ahead.

Yes hi guys a quick question looking at the your customer base in general and the number you through out the 73 to 75 percent investment grade, could you give me a sense of the non investment grade is much of that the IPPs world out there or unregulated segment, is that a good majority of the roughly 25 percent.

It would primarily be steel companies, some oversees accounts where we have special credit and collection agreements signed or some of the IPPs that have purchased and need to we have on a COD basis.

OK that's all I was looking for thank you.

Thanks.

And the next question comes from the line of please go ahead.

I just have one quick follow up question for you guys. Can you give us an idea of what numbers we can expect for 2003 I know you're in the budgeting process but just kind of a broad range and secondarily the maintenance capital expenditure number that your company typically has.

OK Ross I probably - we haven't finished our forecast for next year but I'd give you a guidelines of somewhere in the 150 to 175 range for 2003 for and you know maintenance capital is a tough term to define but in some cases I'd say that number is in the neighborhood of about $100 million to $110 million for that number.

: OK great thanks a lot.

And we do have a question from the line of with Bear Stearns. Please go ahead.

Yeah Hi you guys.

Hi Stephen.

Oh good thanks. Just presumably we won't hear from you guys again until I guess January and just trying to get an upbeat, I mean are you going to give us some kind of guidance for '03 before that time on a press release or ... just a question I guess.

That's a good question we haven't finalized our budget yet so we haven't really come to the answer on that we plan to review our budget with our board in December and so I think that question is yet to be answered I think is the way we'll say it.

OK great and more a ... basis trying to figure out how many new customers have you guys signed on over the last year maybe that have switched from primarily to - is there some sort of number or tonnage so I can sort of just look at the growth possibilities.

Well I think the way to describe it is the switch from to is just a continuos process and part of the six percent decline in production in the East is to offset stockpile reductions but part of it is ... is still up about one percent this year despite the soft markets. It just continually moves to the East and I would estimate that somewhere in the range of 10 to 20 generating units have either switched or begun to use coal on a much more significant basis than they did last year.

Part of the reason they do it is with low burners and out of river basin coal in a number of generating units there are some very low emissions that can be achieved, plus the sulfur content of the coal is very low and so the customers find it very attractive.

: Right OK and presumably to get through your eastern customers you guys would ship from your mines to a prep plant where you would then mix with your Eastern coast to serve your higher BTU content is that ...

Generally what is occurred is the customers buy it. The two coals for themselves and they find it more cost effective to blend it themselves at their facility.

I see ok. Thank you.

Thank you.

And we have we'll take one final question from the line of with JP Morgan. Please go ahead.

Hi this is a great follow up. We've been talking a lot about creditors the now and in your notes you say you're still looking for partners for your joint ventures. Does the credit issue limit you in finding those partners.

It really does yes. One of our biggest constraints right now. We actually had a partner and they spent some millions of dollars with us working on the thorough bred project but they experienced credit issues and could not complete it.

Just when we think that we know who the long term partner could or should be then we see a new round of credit issues and I think we have a period of time that we have to all go through in this country where we just watch all of the issues shake themselves out.

And then the logical partner will be appearing. But we could log in with some net three months ago were considered extremely strong and you could pick them out yourself and would have made a mistake so that is why I mentioned earlier on that we were reducing our spend rate on some of the development project.

So they're still very viable projects but to continue to do is throw large amounts of engineering and so on until we truly have a partner that would have a good imput into some of that engineering decision. That isn't a wise thing to do.

So we'll continue to make good progress on our and doing all of the development work around the projects but we do have to have a good partner to go forward with.

Ok thanks great answer and congratulations on getting the A quality permit.

Well it was a big event. I mean it was under strong opposition by some of the members of the environmental community and it's one of the largest plants to be permitted. Coal fire plants to be permitted in quite some time so.

Any other major permit that still has to come.

The primary other permits are water withdrawal from the adjacent river. There's a sighting permit that has to occur in Kentucky but the big one and the most difficult is the Air permit and so the others will come in due time.

Thank you.

Thank you.

And gentlemen please continue.

Ok well thanks to everyone who's still on the call for your continued interest in Peabody. I think you can see we're taking the steps to be profitable should the current market conditions continue while we're taking the steps that'll allow us to make even more money should the markets improve.

And we appreciate your constant attention and support as we go along. Thank you.

Ladies and gentlemen this conference will be available for replay after 1.30 today and run through Saturday November 16th at 11.59pm. You may access the AT&T teleconference replay system at any time by dialing 1800 475 6701 and entering the access code of 652 851. International participants dial 320 365 3844. Those numbers again are 1800 475 6701 and 320 365 3844. Access code 652 851. That does conclude our conference for today.

Thank you for you're participation and for using At & T Executive Tele-conference.

You may now disconnect.

If you would like to make a call, please hang up and try again. If you need help hang up and then dial you're operator.

Thank you.

If you would like to make a call, please hang up and try again. If you need help hang up and then dial you're operator.

Thank you.