Peabody Energy Corp (BTU) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Energy quarterly earnings conference call.

At this time, all participants are in a listen-only mode. Later, we will be conducting a question and answer session with the instructions being given at that time. If you should require assistance during the meeting, please press zero, followed by star and an operator will assist you off-line.

As a reminder, this conference is being recorded.

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

Well, thank you, . Good morning, and thanks for taking part in the yearend conference call for BTU.

Before taking questions today, our Executive Vice President and CFO, Rick Navarre, will review our results and outlook. Chairman and CEO, Irl Engelhardt, will then discuss our core strategies to create value.

We will be making some forward-looking statements today. They're consistent with our press release. We encourage you to consider these statements within the context of the risk factors that we note at the end of our earnings release, as well as those documents that we file with the SEC.

Replays of our call are available through a toll-free number, and through a web cast at peabodyenergy.com.

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

Good morning, and thanks for joining our review of Peabody.

Peabody posted strong across the board results for 2002. Our operating profit and net income both rose sharply, resulting in earnings per share of nearly two dollars. Net debt and interest coverage ratios were both improved, and cash flows from operations grew 34 percent.

Turning to our income statement on page six, we posted improvements in all key areas. 2002 revenues grew five percent for the year to $2.7 billion on a two percent increase in sales volume.

Peabody set an industry sales record with 198 million tons. Higher pricing translated into improved margins, resulting in a 17 percent increase in operating profit to $174 million.

At our last conference call, we mentioned that we expected to take a charge of $8 to $10 million in the fourth quarter to close higher cost operations and lower our cost structure. The final tally was approximately $13 million as we eliminated 400 positions, suspended two mines in West Virginia, and accelerated the closure of a mine in western Kentucky.

We also recorded a $17 million pretax charge concerning obligations for retiree healthcare premiums. This was a result of a January '03 U.S. Supreme Court ruling that reversed two lower court decisions, effectively reassigning an additional 300 retirees at Peabody.

Our interest expense improved for the third consecutive year, declining 23 percent. Income before extraordinary items rose $89 million for the year. The improvement included $40 million of tax benefits primarily from net operating loss carry-forwards used to offset taxable gains. Those of you - those of you who follow us regularly recall that Peabody had more than $500 million of NOLs available to shield future income. This is a good asset for the company.

Net income grew $127 million to 106 million in 2002, providing $1.96 in earnings per share. Excluding the positive effects of the tax benefits of about 74 cents a share and the adverse effects of the Supreme Court decision of about 19 cents a share, our EPS would have been $1.41 at the high end of our October 2002 guidance.

EBITDA also showed strong improvement for the year, increasing approximately $25 million to 406 million. Excluding the one-time charge related to the court decision, EBITDA would have been 423 million, up $42 million from the prior year, and also was in the range of our October guidance.

Moving on to the supplemental data on page seven, sales volumes slightly improved over 2002 as we matched our production to meet softer demand. Our revenues per ton increased 14 percent in the West and six percent in the East. The vast majority of our increase in average operating cost that you'll note in the schedule during the year was attributable to operating at less than optimal capacity levels to match lower than expected 2002 demand. Overall production was 177 million tons, compared with an original target of 199 million tons.

In addition, costs were impacted by revenue-based taxes and royalties. These accounted for 29 percent of 2002 cost increase in the East and 36 percent in the West. Overall, our gross margin improved and increased nearly 50 cents a ton. As previously mentioned, our operating cost and SG&A for the quarter were impacted by the charges related to the cost reduction efforts.

Turning to page eight, you'll see that we continued to strengthen our balance sheet for 2002. Our cash increased $33 million to close at the balance of 71 million. Our net debt balances decreased $35 million for the year. Our net debt to capitalization ratio continued to be below 50 percent, while our EBITDA coverage ratio increased from 2.9 times to four times cash interest expense.

As expected, we completed the year with just over $250 million in cap ex, and we're targeting $175 to $200 million in cap ex for 2003.

During a year when many energy companies faced a difficult credit rating environment, we were able to move in a positive direction. Recently, S&P rated Peabody's senior secured bank loan BB+ and Moody's provided us with a favorable liquidity rating. This comes on the heels of Fitch raising its long-term ratings outlook for Peabody to positive and reaffirming its investment grade rating of our Black Beauty affiliate.

Looking forward to 2003, BTU is targeting EBITDA in the range of 2002's $406 million in EBITDA.

We expect better market conditions in the latter half of 2003. We also expect higher contributions from our new mines and our mining cost initiative to benefit earnings from our core business.

Offsetting the improvements, our impacts of higher, mostly non-cash charges, which I'll discuss. There are three main areas affected and I'll lead you through these by looking at the table on page four of the press release.

Within the retiring health care column, Peabody expects to incur $30 million in additional non-cash expenses. Nearly two-thirds of this increase stems from historically low interest rates. This low is the discount rate that we use to estimate the present values of our future long-term liabilities. The other third of the increase involves higher, long-term medical inflation assumptions, primarily related to prescription drugs. We believe this is more of a near-term inflation trend and not necessarily indicative of long-term health care trends. Once again, these are non-cash charges and we actually expect our cash spending in this area to remain fairly stable in 2003.

Our pitching expense also increased approximately $10 million given the lower discount rates, combined with the lowered equity market returns in the past several years.

The final item relates to a new accounting standard, statement of financial accounting standards 143 for recording asset retirement obligations. This primarily impacts mining and other asset intensive industries. We had previously accrued for post-mining reclamation liabilities over the life of the mine, consistent with prevalent industry practice. To do that that's expected to result in a one-time, pre-tax gain in 2003 of nearly $75 million, which reduces the portion of the previously recorded liability.

This will be offset by higher operating charges going forward of about $24 million. Changes to this required standard has absolutely no effect on our expected cash spending for reclamation.

We continue to evaluate the overall tax impact of these items and therefore will provide total EPS guidance at a later date.

Again, the required items have very little impact on cash. In fact we are targeting another year of very strong cash operating, operating cash flow. With 10 to 20 percent growth, we expect our operating cash flow to end up at 255 to $280 million for 2003.

In summary our results for 2002 showed solid improvements as we turned in another record year. We increased profitability, grew our cash flows, strengthened our balance sheet, and invested for the future. We also took major steps to improve our operating costs and expand our margins. And as Irl will discuss in more detail, we have positioned Peabody very well to benefit from the improved market conditions for the second half of 2003.

With that, I'll now turn the call over to our Chairman and Chief Executive Officer, Irl Engelhardt. Irl?

Thank you, Rick. Good morning, everyone.

I plan to discuss BTU's progress within the context of our three core strategies. For those that have followed Peabody, the strategies should be familiar. For new participants, the strategies are what set us apart from the others in our industry.

Our first strategy is to maintain safe, low cost operations. In 2002, our safety rate again placed us a leader in the industry and ahead of most other U.S. industries. However, we are never satisfied with our safety performance; it receives our constant attention.

In 2002 we invested nearly a quarter of a billion dollars in new, low cost mines, improvements to our cost structure and in acquisitions, through Willow Lake mine in Southern Illinois is nearing its first full year of operation. The Vermillion Grove Mine in Illinois and Rivers Edge Mine in West Virginia are moving to full capacity and the Highland Mine in Western Kentucky will begin shipping next month and should ramp up its production throughout the year. The newly acquired Wilkie Creek Mine in Queensland is performing very well. We're currently evaluating the Asia-Pacific coal markets and our goal is to determine the proper output level for the new mine.

Our management team made major improvements to the cost structure in the fourth quarter. We shrunk our employee base by seven percent, we closed three higher cost operations, and we reengineered a number of other operations. The reason is we believe safe low cost mining operations are the foundation of a good mining company and maintaining that status is our priority because we are structuring Peabody to be profitable in all market conditions.

Our second strategy is to apply world-class sales and trading skills to Peabody's operations and through our business base. I'm pleased to report we weathered last year's turbulent markets and credit issues related to our customers. Our credit and risk controls worked very well, we had no uncollectible receivables. We also adjusted our production to match the soft demand and revenues, and margins improved for our Eastern and Western U.S. mines as we made the adjustments. The margin gains were difficult since the shipments were 18 million tons lower than we expected when we entered 2002.

Looking at the 2003 coal markets, we expect steady growth in demand. Beginning customer inventories are near normal levels. We see available coal plants running flat-out in most regions and part of the reason is we see our competition, natural gas-fired generation, being curtailed due to high prices. We also see increases in customer activity and we see stronger Appalachian pricing. We believe a combination of factors should make coal markets very positive during 2003, yet we are taking a very conservative view in our sales targets for the year. Upside exists in 2003 because Peabody has production of approximately four to five million tons available each quarter should the markets improve. Our forward price sensitivity is also very strong. We have about eight million tons of 2003 production to be priced. We also have about 75 million tons to be priced for 2004 and a $1 increase on unpriced 2004 production could result in nearly $60 million of higher EBITDA.

Our third strategy is to aggressively manage our large resource base to grow our business. In December we entered into an alliance with Penn Virginia Resource Partners. The alliance brings geographic diversity and improves the risk profile of Penn Virginia and it allows Peabody to monetize reserves at favorable market multiples. We also completed a novel transaction with Los Angeles Sanitation District during the year. Our team converted a four thousand acre former gold mine in California into a landfill. The profits from the transaction totaled 10.1 million and it provides a very good example of value creation for assets. On the generation development front we received a number of key permits for the Thoroughbred and Prairie State projects and that includes the air permit for Thoroughbred. In 2003 we will continue the permitting process for the plants, we will seek partners, and we will sell the output of the plants.

Those are just a few examples of how our 300 thousand acres of surface lands and our nine billion tons of coal reserves are managed to create value. Peabody's natural resource position creates unique opportunities to capture synergies, in both the acquisitions and divestitures.

I would like to offer a few brief views on the outlook before we take your questions. EBITDA for Peabody's operations, from our sales, from our trading, and our business development functions are all expected to improve in 2003. Our level of guidance is limited by a conservative view of the market and the non-cash charges that Rick discussed. As noted, we have upside should the markets improve.

Free cash flow for 2003 is expected to show significant improvements over 2002, and I assure you we plan to deploy that cash flow very wisely.

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

Ladies and gentlemen, at this time members of the financial community are welcome to ask questions. To do so, please press one on your touchtone phone. We ask the participants to limit your time to one question and one follow-up. Should you have additional questions, you are welcome to rejoin the queue.

And our first question comes from Dave Gagliano with CSFB. Please go ahead.

Hi, guys.

Just two questions, here, and I'll try and hold off on the follow-up. First of all, just in terms of timing, when do you expect to record the, you know, the one-time post mining reclamation gain?

Dave, this is Rick. We'll do that in the first quarter.

OK.

The standard is effective for 2003, so we'll go ahead and book that at the end of the first quarter of 2003.

OK. And then, given the nuances with the changes in terms of the tax assumptions, can you give us a little sense as to what's a fair effective tax rate to assume for '03?

As you know, Dave, we've had the benefit over the years of having the net operating loss carry forwards to help us out, and we've got about $500 million of those still with us. So, as we look forward, right now, based upon our current projections, we'd probably look at a tax rate that's near zero to a slight benefit, because we're gonna be able to utilize those carry forwards to offset any tax expense or tax charges.

OK. Great. I'll hop off now and come back later.

Thank you, David.

And next we have with Wachovia Securities. Please go ahead.

How are you doing, guys?

A couple of quick questions. Can you just comment in general about what the acquisition market looks like and any thoughts on further developments with Penn Virginia?

Well, I think, Ross, we expect a great deal of consolidation to occur during the year. We've come through some tough times in the industry, and there are a number of players that have some financial requirements to be overcome. And, as you can tell, this is an industry that needs some additional consolidation, so we expect it to be quite active.

Related to the Penn Virginia activity, we do not have an exclusive with Penn Virginia, but we do have a good affiliation that would allow us to look at our asset base and determine if we have others that would be a good fit with them and us. And we'll continue to pursue that during the year.

What do you see in pricing out there in the market in terms of acquisition?

Well, I really can't comment too much on it other than there are some reasonable good prices. The market hasn't been tested much in the last two years. So, it's difficult to determine exactly what it is. In our case, the asset has to be synergistic, it has to be accretive within a one-to-two-year period, and it has to truly fit our goals of being a world-class company.

Thank you.

Next we have Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen.

Good morning, Mike.

Irl, could you comment on some of the behavior of your major customers? The industry and the market's still trying to figure out when the utilities are going to start getting back into the game. What's their sentiment do you get the sense right now, given the difficulties the industry had in 2002, and how that may play out for overall trends in pricing going forward?

Well, we expect the coal demand to grow about two percent in 2003. The markets are really inconsistent throughout the country. Those customers that are involved in the Eastern United States where we have a very heavy industrial base in the U.S., they are having a tough time because much of their industrial load is off. Most of their growth is based upon residential or the service sector growth. We believe that they are taking their stockpiles down to lower levels than has been traditional. And they may - some may go as low as 25 days or even 20 days.

That is a dangerous game to play because it creates volatility in prices. It also creates some reliability problems, should we have such simple things as problems with the transportation system, a lock might freeze up or something like that on the river system. So, it's a dangerous thing for them to do, and it's difficult to generalize as to what is going on because it is inconsistent throughout the country.

Thank you. And just to follow up, Irl, over the next 24 - 36 months, when you look at your uncommitted tonnage, would we anticipate maybe the tenor of the contracts lengthening? Will we anticipate maybe the Company being a little bit more optimistic in holding tonnage back? How do the - how have you talked to the sales guys on how to position Peabody and how they allocate the resources going forward?

Well, I can't tell you the pricing, of course.

Of course not .

But, generally - ...

we hope.

Yes, generally the strategy we follow is in low-growth markets, we tend to backup our investment in a new mine with a long-term contract.

Sure.

And that's in a low-growth or in a market where we don't expect the price to change materially. It gives us predictability in our revenue base, and our - and allows our operations to be optimized because they have a secure outlet for their product.

We are willing to take some market risk in those markets where we have a forward price view that there will be improvement or that there will be some volatility that we can capitalize on. So, we are optimistic for especially the Appalachian and Powder River Basin markets looking forward, and I think you can look at some of the trade publications and you'll see the forward strips for some of them that show some pretty good improvement.

And Mike, I'll just add that, you know, looking at our position for 2004, we have in the sales strategy, not locked up a lot of 2004 business. We actually have 75 million tons to still be priced in 2004 so if that tells you what our view is around 2004.

Right.

Do we know - thank you for your thoughts gentlemen.

Thank you.

And next we have . He's with . Please go ahead.

Good morning, gentlemen.

Morning, .

First, let me say I - congratulations on the first quarter and a great year and it appears you guys are really pulling away from the other producers in your ability to deliver in a very difficult environment.

I just want to ask you about the progress in the share repurchase. You mentioned earlier that you're - it's a consolidating industry. But when I look at the numbers for PDR, for example, where you were able to sell tonnage for, you know, roughly a dollar a ton or, you know, close to nine times EBITDA. Wouldn't some type of share repurchase look, you know, attractive given that you're currently trading at 27 cents per ton in the ground and, you know, less than five, six times EBITDA? Wouldn't you think that the assets that you know best are perhaps the most valuable?

Well, we certainly have a lot of opportunity. Our strong cash flows as we look at 2003, are being evaluated. We're looking at all of our opportunities. Share buy-backs are one, refinancing the entire company, we don't have to, but there are beautiful interest rates out there right now and great opportunities considering our improving credit outlook.

There are some acquisitions out there. There are capital investment opportunities. We will just go through all of those opportunities, including dividend increases and determine what the most appropriate way to create value is. So, I think you should see something during the year that is indicative of the course that we'll take.

And , to your point, that we're trading into five times EBITDA, you note the, you know, one of the acquisitions we made during the year was in Australia. We made that at two times EBITDA. So that was, you know, we had a choice. You know, you buy back stock at five times X or you buy something at two X that you can improve and build upon. And it was a great acquisition for us and we bought it at two X and turned around and sold assets as you said, at nine X on the PBR transaction. So we're trying to manage the portfolio and we're going to create value for you.

Yes, that's like actually a very good point. I mean just as long as it's a credit and synergistic is I guess the point I would stress and as a shareholder that's what I want to see. Let me just ask you, do you in fact have the flexibility to do a share repurchase? I know we've talked about that before. And I think one of our covenants actually prohibits right now. Do you have the ability to authorize a share repurchase?

We don't at this time, . We will once we're in the process, as Irl said, the interest rates are at historic lows right now, so we're really going - we're looking at a comprehensive refinancing and the MPV's of that are very attractive. And when we finish that we'll have that ability. We'd expect to finish that. We'll be working very hard in the first quarter. So we will have that ability pretty soon.

Great. We'll look forward to it and again, congratulation from distinguishing yourselves in a difficult industry.

Thank you for the kind words.

Next we have . He's with JP Morgan. Please go ahead.

Good morning, Irl, everybody.

Good morning.

Rumor has it that Hayden was overturned yesterday. I just wondered it - what your sense was and what you thought the implications were. And then I wondered if you could sort of elaborate a little bit on your two percent forecast, growth forecast in this year given the way stock piles were run down last year and presumably they're going to be sort of held, there should be some catch up this year, than two percent sounds a bit conservative.

Well, let me start with Hayden. It indeed was overturned this past year. It was remanded back to him for reconsideration. We're pleased with that; it shows that the court system does work when a judge exceeds his authority and goes beyond the review that he's supposed to conduct. So it is good for the industry. The exact outcome is yet to be determined because we would expect that additional decisions have to be made. But it was a good ruling and we're pleased with it.

Would you repeat your question on the two percent growth?

Given that the stockpiles were run down, putting a lot of downward pressure on sales last year, your two percent growth forecast for this year on last year sounds very conservative.

Well, we believe it is, but this is a difficult year to predict. We have a country that may be going to war, we have all of the ramifications of that, we are still in an economic recession, and it is just a difficult situation. We have utilities that are taking their stockpiles down below normal levels. It could be a very good year for the coal industry. On the other hand, we can't count on that; we can't count on good weather--or cold weather to bail us out of our problems. We have to plan and manage the Company in a way that will create profits in any circumstance. So we have the flexibility to grow and perform reasonably well with a conservative forecast, and yet the flexibility to ramp up production should the market improve. And we think that's the best of both worlds.

And, John, I guess I'd add that there is a gap between coal usage and coal production, particularly because what it--right to your point, last year, while people reduced their stockpiles, coal usage actually went up in the country, but production went down 40 to 50 million tons.

So the reverse is going to happen this year. While Irl's talking about two percent growth in usage, coal production may have to go up to catch up on the stockpiles.

Right.

Thanks a lot and good luck.

OK.

Our next question comes from with . Please go ahead.

Hi, guys.

Morning, John.

Wow, looks like a lot of my questions have been covered. Maybe we can just get to a little more specifics about what you kind of--to look for in terms of free cash. And I guess that's a function of, clearly, I think these--the guidance is conservative, but sort of what are you modeling for cap ex for '03 and '04? And we can kind of use our own expectations for what the numbers are going to be to get to a free cash .

Sure, John. We're looking at about 175 to 200 on cap ex for '03. Right now best projection. We haven't given any guidance on '04, but I would say that, you know, that's typically in the range of where we'll be in '04. And so, out of that 175 to 200, about $80 to $90 million of that cap ex is related to the completion or building of new mining capacity, , completion of Highland 11 and the likes of it. There's probably 100 to 110 of that that's maintenance capital.

And based on where interest rates are, is there--can you just walk me through what you think you can do in terms of maybe terming out some of your--some of your debt or clearly . I mean, if your--you know, sort of 400, 450 of EBITDA seems like the debts--you know, seems like you could be doing some stuff on the debt.

We absolutely can, John. I guess I'm reluctant to go into the specifics at this early stage until...

Sure.

... we actually have--until we have more worked out on that, but when we get it worked out, and we will, soon -- we will share the details with you.

And, what's the timeline for when you think the bank covenants, agreements, what have you, get sort of revised so that you're in a position to take in some shares?

We'll be by the first half of the year.

Terrific. Well, great quarter, and a happy to be a shareholder.

Thank you for your support.

The next question comes from David Tameron with Stifel, Nicolaus. Please go ahead.

Good morning, everyone.

A quick question for you. As we to natural gas and fuel switching, what help, if any, would you guys expect from that? I assume it's all gonna be in the Northeast and kind of the Gulf Coast where some of these plants are concentrated, but, could you give us a little more color on that?

Well, the natural gas plants that have been constructed and that are under construction are primarily concentrated along the Gulf Coast and in the Northeast, as you've said. However, there's a smattering of plants throughout the country.

With the high gas prices that exist at the current time, where the utilities have the option, they have turned those gas plants off and they're running their coal plants flat out at the current time. Some had take-or-pay gas contracts that expired at the end of '02, and we believe that, also, freed up -- or increased the coal demand -- coal, part, electricity demand, some.

So, you've picked the right locations. Right now, coal is extremely competitive, vis-à-vis natural gas, and we expect it to be that way for the long-term.

Are you hearing anything more from, you know, people wanting to enter into longer-term contracts because they see the natural gas, you know, situation as prices remain high? Have you seen any of that from your customers?

Well, each customer seems to have a different strategy, but those that are building new coal fire plants need long-term contracts to back up their financing, and we're having opportunities in that area. And then we have a few that are simply taking a portfolio approach to their fuel supply and want a good base-load contract to anchor the fuel supply for a big plant, an important plant to them. And then, some are looking at major investments they have to make in the plants to put in selected catalytic reduction or to put in scrubbers ...

Um-hmm.

... or, whatever. And they want some long-term coal supplies, at least for a significant part of their buys to be present so that they have a good basis for their economics going forward.

So, yes, we see renewed interest in longer-term agreements. It varies from customer to customer depending upon their financial situation, however.

OK. Thank you very much.

Thank you.

And now, we have Dick Price with Wunderlich. Please go ahead, sir.

Good morning, gentlemen.

Good morning, Dick.

Hey, Dick.

Could you shed a little color on the region by region sales or production volumes, including Australia, and also your outlook, particularly for the first quarter in those regions, and then for the year?

Traditionally, Dick, as you know, we don't provide information with respect to regional forecasts of sales and production, so we're not gonna be able to give you that type of detailed information. But, as we look forward into the first quarter, we've got a couple -- as we said in our outlook, we'll have a couple of customer outages, both in the Midwest and in the west that will have an impact to dampen what we would have had last year's first quarter with respect to volume. That's probably as much detail as I can give you of region by region.

OK. Thanks, gentlemen.

OK, thank you, Dick.

And now, we have Dan Roling with Merrill Lynch. Please go ahead.

Thank you. A couple questions, Irl, on the - or Rick, on the 406 million guidance for EBITDA, can you tell us if that includes any of - or how much spot tonnage that you still have available is not included in that number?

we have - in the number is eight million tons to be sold and priced that we have imbedded in that number - that we haven't sold out of 177 just - 180 million tons of production that we expect. And Irl can comment on the - some additional capacity that we have.

We have approximately four to five million tons per quarter that is not in the number. And it is simply some of our higher-cost output or it's tonnage that we don't feel that the pricing is appropriate to put into the marketplace right now.

And in the progress on Thoroughbred, I was pleased to see you got the permit. What is the timeframe over the next couple years as far as the next milestones before you get to the point of breaking ground? And any estimate on when you would break ground? Thanks.

Well, on Thoroughbred, we did receive the permit, and then, as I think all of you on the call would expect, the environmental community immediately filed their appeals of the permit. We were very careful in all of our modeling and all of the ways we conducted ourselves, so we expect no problem working our way through the appeals. But it does take time, and it will be in the summer - late summer before that hearing will be heard.

In the meantime, we're going forward with the marketing of the power and working to line up a new - partners to join us in the plants. With the high natural gas prices, many of our potential partners are reevaluating the strategies that they might have had when they were investing in gas plants. And our coal plants, with their extremely low cost, is - are becoming all the more attractive.

Once we have the partner, once we have the power supply agreements locked up, it will take us about two to two-and-a-half years once we pull the trigger to go forward to put it into operation.

So, from groundbreaking to electricity, two - two-and-a-half years?

That's about right.

And would one be off much if he speculated it'd be another year to year-and-a-half before you broke ground?

I think that would be a reasonable estimate at this time.

Thank you.

Thank you.

Next, we have Wayne Atwell with Morgan Stanley. Please go ahead.

Thank you. Good morning.

Good morning, Wayne.

To my under - to understand, you only have eight million of unpriced coal for this year and I realize you have the four to five million per quarter, so you - everything is priced expect that eight million?

That's correct.

That's correct.

And how much might that have changed during the fourth quarter?

Not very much, Wayne. I think we had probably going into the fourth quarter maybe it was to 15 million tons possibly.

Oh, OK.

I don't know the exact - there wasn't - there wasn't a lot left in the fourth quarter. But we've been - frankly, been very conservative on our sales with respect to 2004 and really haven't been committing anything beyond the '03 timeframe. So, we've left a lot on the table to be re-priced in '04, giving us leverage to the market.

OK, and if I could just think out loud with you a little bit about your comments on consolidation, if one were to look at this coal industry and the public companies over the last three or four years, most of them haven't really made much money if at all - any. They have fairly high debt levels because of past consolidation.

Cash flow has been slightly positive and capital's been built up through market activity i.e. equity offerings and such. So the cash flow generation of the industry hasn't really always been that good over the last few years. Does consolidation make sense for an industry that's not generating much in the way of earnings and not much in the way of positive cash flow? Tell me if I'm being overly critical.

No. I think you are being right on. We hope that you exclude us from that list of wrongs, as you go - as you're categorization.

We give - we give you very high marks ...

Thank you.

... for the way you run your business.

I just believe that it's an industry that is the classic for needing some additional consolidation to occur. It is not making much money. And the better mines need to be running and those that are less cost effective need to be shut in and the proper price paid for the product.

I guess - I guess maybe my question is the ability of the players to finance that. I agree with you 100 percent. It makes sense. The business model should have that development, there should be consolidation. But it doesn't look like most of the players really can afford it.

A number of them can't.

Our point is that they may not be able to afford it because we're talking really from our standpoint. That we think that there are opportunities with, you know, we've got synergistic reserves and contracts and there are opportunities for us to manage some of those assets and make more money than the industry's traditionally made.

And perhaps I could use the word contraction also in the same breath as consolidation. Some contraction will occur in the industry due to bankruptcies and lack of profitability over a long period of time.

It's already going on, actually.

Right. And one last question, with the gas price as high as it is and coal as relatively low as it is, I'm surprised that there hasn't been more fuel switching away from gas and toward coal. I realize there's some friction that would prevent, you know, as much as one might guess, but there hasn't been as much as I would have anticipated.

Well what we believe is happening is a lot of the - of the switching has occurred, especially in the month of January. And many of the coal plants - I mean many of the gas plants where the generator has the opportunity or simply running at very low levels or turned off because they can't be making any money on most of those gas plants at some of the power prices that exist right now.

OK. So with statistical lag this is something that's happening that we can't identify yet because it hasn't been reported in the numbers we all monitor.

I believe that's correct.

Great. Thank you very much.

Now we have with Energy Equities. Please go ahead.

Yes, I wanted to ask a follow-up on that. Would you hazard a guess as to quantifying what the amount of fuel switching might be in additional tonnage that you would from - just anecdotal evidence - guess you might be able to put your finger in the first quarter?

Are you talking for the industry as a whole?

Yes. No, for the industry as a whole.

It and it's pure guess, I'll qualify it with that, but it's somewhere in the 10 to 20 million ton range I suspect for the quarter.

OK.

And it's a function of what happens with the weather and gas prices in the next few months.

You think that'll switch back immediately or do you think they'll get it hooked?

Well they - it's a function of gas prices and it's a function of the way the coal plants are operating. One of the constraints on the coal plants this year is the installation of selective catalytic reduction units on a number of plants throughout the country and that will cut back coal demand somewhere in the range of five to twelve million tons, we believe, this year. So, in some cases, the coal plants may not be available because investments are being made for their long-term operation.

And that might contribute to your bullish outlook for '04?

Yes, for the first quarter. I mean, one of our customers that is--that we mentioned in the first two quarters being down is actually down for repair in January, but they're down for two months later in the first half of the year because they're installing selective catalytic reduction units and that's a good thing. Another of the customers has installed scrubbers approximately two to three years ago and this is the first time they take them down to overhaul them and fine-tune them. So that's a good thing, too. So, it's a temporary issue with us.

Is there any--do you detect any impact yet from the Bush administration's desire not to retrofit in their new legislation?

Well, the utility industry--or the electricity generators around the country I think are embracing the concept that--of endorsement of the Clear Skies proposal, but they also want some relief form the New Source review, change and interpretation that occurred under the , Al Gore and Clinton administration. And they are working with Congress to develop the exact parameters that they're willing to live with and that are practical to live with. So I think there's general acceptance of the concept and now we're into the detail and the ugly part where the legislation is made and that's difficult, as you know.

I thought that was an administrative decision.

The New Source review is an administrative decision, but the Clear Skied proposal will require legislation, so that's the other side of it.

That--the administrative part, have you seen any impact of that or do you expect that this year?

I believe the administrative part will result in some additional repairs to generating plants and could have a slight negative effect on coal, but over the long term, it's the right thing. So we appreciate your questions there.

Thank you.

Thank you.

Next we have with Goldman Sachs. Please go ahead.

Good morning. Two quick questions. Were both charters that you took in the fourth quarter non-cash and do you mind giving us what was drawn and what was available under your credit facilities?

OK, the $17.2 million charge related to the retirees is non-cash for this year. We expect it'll probably result in about a $10 million cash funding next year.

When you say this year and next, which are...

2002 it was non-cash and 2003 it will have a cash impact. We haven't been--now that we have the new benefit, those retirees will be reassigned to us by the Social Security Administration and they will send us an assessment of the liability and then we'll have to fund that. And we expect to fund it next year.

And your second question was what?

Could you just give us what was drawn and what was available under your revolving credit facilities?

We have about $300 million available in the facilities and we have zero drawn. So we were not into our revolver during--at the end of the year.

OK. And what about the $13 million charge? Was that non-cash also?

That was mostly cash. I'd say 99 percent of that charge was cash. So, that was our workforce reduction, shutting down some operations, so all of that was the cash -- it our cash side.

Great. Thank you.

Thank you.

You have a follow-up question from Ross Payne of Wachovia Securities. Please go ahead.

Yeah. I just want to follow up and see if you could comment on the overall capacity utilization of coal plants right now. And obviously, they have some catalytic equipment that's being put on them, but, in general, where is the industry right now? Do you see any general increases for '03 or '04?

Well, for the year as a whole, the industry ran at about 70 percent capacity. The winter in some parts of the country is a peak period, and frankly, the plants are running all out at the current time. Usually, they go down in the spring and the fall for repairs if they're going to, and they run flat out in the summertime, again. So, right now, we're in the period where they're running very hard, and that's good for our industry.

Is that 70 percent -- is that up a little bit, or down from ...

Well, last year it was probably down about one percent from some previous years. The reason was all of the repairs and then, again, the increased gas utilization in some parts of the United States. And also, there was increased hydro production this last year.

Would it be fair to say that expectations should be up a percentage or two for this year?

We're expecting it to be up -- if we're talking capacity factor -- up about a percent or two. And when we're talking coal demand, we're talking up a couple of percent.

OK. Great.

Thank you.

Thank you.

And we have no further questions at this time. Please continue.

OK. Well, we want to thank everyone for your support of Peabody and your interest, and we will do our best to meet and exceed your expectations. Thank you.

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