Peabody Energy Corp (BTU) 2003 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. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to the Vice President of Public and Investor Relations, Mr. Vic Svec. Please go ahead, sir.

Thank you, John, and good morning everyone. Thanks for taking part in the conference call for BTU. Today we will be discussing both our strong performance, as well as our very good outlook. Executive VP and CFO Rick Navarre will be reviewing our results and outlook, and Chairman and CEO Irl Engelhardt will discuss the energy markets, as well as our pending acquisitions.

We will be making some forward-looking statements today, and they are consistent with our press release. We would encourage you to consider these, along with the risk factors that we note at the end of our earnings release, as well as those documents that we file with the SEC. For more detailed information, we also refer you to www.PeabodyEnergy.com. There you will also find a replay of our call. Rick?

Good morning everyone and welcome to our earnings review. 2003 has been a year of continued accomplishments. We posted very strong EBITDA for $410 million, up from the prior year. We turned in strong earnings per share of $1.73 at the high end of our targets. We also set a new industry sales record with 203 million tons. We continue to hold the line on costs, and we completed a very favorable refinancing during the year. The bottom line, this is our third year in a row of improving revenues, improving EBITDA, improving our volumes and improving our share price. These are accomplishments that no other company in the industry can match.

With that overview, let me take you through the 2003 results at a high-level. Our income statement on page six reflects a year in which the first half was marked by soft market conditions, customer outages and to the construction of several new Peabody mines. As expected, the second half benefited from stronger markets and higher volumes as we ramped up new operations and ran others at higher capacity levels. We are especially proud of our operators who maintain tight cost controls even as their minds were throttled back earlier in the year.

More importantly, the mines operated safely and earned top reclamation awards. Our income statement also reflects the excellent outcome of our $1.7 billion refinancing and several primary interest rate swaps. We were able to reduce our debt-related interest cost by almost 10 percent in 2003, and we expect more savings going forward. We again recorded a favorable tax benefit in 2003, and we begin 2004 with more than $700 million of NOLs to help us offset future income. Overall our actions have lead to higher EBITDA, $410 million, and our earnings per share of $1.73, which came in at the high end of our guidance.

The data on page seven illustrates the benefits of operating our mines at higher capacity levels in the second half of the year. You will note that Peabody employees tow the line on costs in the face of external pressures, such as higher fuel, explosives and healthcare costs. Our trading and brokerage and research management strategies continue to add value, contributing $45 million and $18 million of gross margins respectively. We also locked in some of the nearly 80 percent appreciation in our Penn-Virginia resource investment made in 2003 by selling a portion of our shares and recognizing the pretax gain of $7.6 million. Our relationship with Penn-Virginia continues to be very positive and a win-win relationship, and we still retain a 1.6 million share investment in that company. In 2003 we also purchased the remaining 18 percent interest in Black Beauty, the number one co-producer in the Illinois Basin.

Moving to our balance sheet on page eight, it remains very solid. Higher cash and receivables reflect increased sales during the second half of 2003 and a lower use of our receivable securitization program. Our bonds continue to be well-received, trading above par and are currently yielding 5.5 percent. In 2003 we also completed two secondary equity offerings, which greatly increased our stock's liquidity and float. We continue to be pleased with the growth of our share price, up 43 percent last year, since our IPO BTU has consistently outperformed the S&P mid-cap 400 and all other major industries.

Looking at 2004, we see some benefits of the favorable markets with more to come in 2005. As you would expect, we have committed in price more than 90 percent of 2004's planned production of 190 to 195 million tons, but this still leaves us with 13 million tons to be priced into very favorable market conditions. Most of the remaining unpriced tons are available in the favorable Appalachian coal markets.

Some of our customers have already entered the 2005 buying season, and Peabody is extremely well-positioned to capitalize on the improving market conditions with 70 to 80 million tons of unpriced 2005 production and more than 115 million tons available in 2006. As Irl will discuss in more detail in his remarks, we're quite optimistic about the global coal markets going forward.

Our outlook reflect a continuing trend of financial improvements in revenues, EBITDA and cash flows. Excluding the benefits of pending acquisitions, we are targeting 2004 EBITDA of $425 to $450 million as the favorable markets will allow us to increase both volume and prices. We are targeting 2004 earnings per share in the range of $1.60 to $2.00, reflecting higher EBITDA, slightly affected by reduced tax benefits, higher DD&A due to increased volume, and asset retirement costs that will impact our earnings per share by (inaudible) cents.

We expect the last three quarters of 2004 to be our strongest quarters. Our first quarter EBITDA is targeted in the range of $90 to $100 million, reflecting the timing of repairs and a cutback of production in our North Antelope Rochelle Mine to upgrade the coal handling systems to keep pace with the higher customer sales commitments we have made for 2004. Our earnings per share for the quarter is targeted in the 15 to 30 cents per share range. And our 2004 capital expenditures are estimated at $220 to $240 million. This spending is primarily aimed at equipment to improve productivity and reserve acquisitions.

So let me recap 2003. It was a year of many accomplishments, and we continue the trend of financial improvements. We have set new industry records, held the line on costs, met our quarterly and full-year targets, and maintained the confidence of the debt and equity markets, and we forward to a strong 2004 and beyond.

At this time, I will turn the call over to our Chairman and Chief Executive Officer Irl Engelhart for his remarks. Irl?

Thank you, Rick, and good morning everyone. I will begin today by thanking the Peabody employees for another good year. It is their performance that separates Peabody from its competitors, and they are laying the foundation for future growth and success.

Today I plan to review overall market conditions, briefly discuss our announced purchase of mines and provide a view of the future. Beginning with the markets, I am happy to report that the coal markets are very strong throughout the world. Simply put, the outlook for the coal markets is among the strongest the industry has seen in the past decade, and that strength exists both near-term and long-term. It is remarkable to see so many different coal markets shows strength at the same time.

In the United States, the markets are especially strong. You are aware of the U.S. market dynamics. We have competing fuels for electricity generation that are high cost or at practical supply limits, and at the very same time, we see the rising U.S. economy is stimulating more electricity generation. Some of the generators and industrial customers have allowed their coal inventories to reach low-level, and at the same time, we have exports that are starting to increase that add to already strong domestic demand. And we have supply problems that continue for some of the U.S. producers. All of those factors are positive for the U.S. coal markets and the U.S. coal prices.

I made a bold statement earlier -- the outlook for the coal industry is among the strongest the industry has seen in the past decade -- and the statement, of course, requires some elaboration. Coal demand is high in many markets. We have swirling issues to stimulate coal markets because of the interaction of the various global markets, and all of those stimuli are positive for the coal producers.

I would like to cover just a few of the issues that are affecting the markets. First, we have the enormous Chinese demand for all raw materials, and that is resulting in high ocean freight rates, as well as increased coal demand. The high ocean freight rates in turn stimulate European consumers to increase better take from the United States because it's one of the closest supply sources. And at the same time, they focus more on the South American supply sources.

Second, we have the Australian and U.S. production problems that are complicating Pacific Rim and European networks. We have steel producers that are scrambling to alter their blends because of the lowball coal shortages that exist, and this issue then increases the demand for PCI and lower quality net coals, which in turn reduces the supply in the thermal coal markets.

Third, we have the cutbacks in the Chinese exports that are tightening the supplies of the thermal coals for the Pacific Rim markets. In the last quarter 2003, the Australian prices rose as Pacific Rim generators, they returned to their traditional suppliers with very strong demand.

Fourth, we have U.S. exports at both net and thermal coals that are beginning to increase due to the attractive pricing in the seaboard market, and this new demand places additional strain on the limited Appalachian and Midwestern coal supplies. And due to the low coal inventories, the high prices for alternative fuels and the high electricity prices, U.S. generators have to focus on the reliability for coal supplies. The low cost coal plants must operate. And since the Appalachian coals are in short supply, alternative supply sources become much more attractive.

While there are just a few of examples, and I could go on for quite awhile, but they give you a glimpse of the swirling issues in the near-term coal markets. If one is a reliable producer, such as Peabody, the markets look very very good. I am also happy to report that the outlook for the coal industry is equally promising on the long-term basis. The high natural gas prices that exist currently in our forecast for the future, those high prices are providing generators with a very valuable economics lesson. Unfortunately American citizens are also learning through their home heating bills, and where the generators can pass through the cost of electricity from gas, the citizens are learning through expensive electricity bills.

Those lessons all result in a flurry of activity that involve new coal generation. There are currently six new coal plants under construction, 13 additional units that are highly probable, and an expectation that 100 gigawatts of coal capacity will be constructed in the future. I would note that 100 gigawatts is approximately 300 to 350 million tons per annum of increased coal use.

So it is against that backdrop of improving markets that Peabody has locked in revenue improvements for 2004. We have gone through, sold through a combination of higher prices and higher volumes. Our sales position gives us very high revenue visibility and allows us to target another year of EBITDA improvements in 2004. And the outlook for 2005 is very strong also.

Regarding our announced acquisitions, you are aware that we signed several preliminary agreements late in 2003 to purchase mines from RAG Coal International. The parties are progressing the transactions through due diligence and are negotiating definitive agreements. Although one can never be certain with acquisitions, we are hopeful that we will close the transactions in the first half of 2004. If the transactions close, we expect the mines in Australia, Venezuela and Colorado to help Peabody participate in higher growth markets and to further diversify the markets we serve. The mines also give us more products to better serve our customers. The earnings from the new mines should further accelerate our earnings growth, and based upon the market conditions, we believe it is an excellent time to buy.

Turning to the future, I will start with the past. Peabody makes every effort to provide you with predictable results, and that is a difficult task. Yet the actual 2003 EBITDA is consistent with the guidance provided in last January's conference call, and our actual results fell within the range of EBITDA guidance during each quarter in 2003. Rick provided you with our targets for 2004. $425 to $450 million of EBITDA, and that is without considering the benefits of the RAG transactions. We also expect the last three quarters to be the strongest.

Our goal at Peabody is to make money in all market conditions. We focus on low-cost operations, adding value through world class sales and trading and aggressively managing a vast natural resource position. Those strategies allow us to target our improvements for a fourth year in a row, and as the markets continue to improve, we look forward to even better performance.

So on behalf of the full Peabody team, I thank you for your interest in our company, and at this time, we would be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Michael Deuce (ph), Bear Stearns.

Good morning. Irl, with regard to your foray internationally, could you remind us what Peabody looks that relative to allocating your capital towards acquisitions? You have made many of them in the past. Secondly, why these assets? Why these parts of the world? Is there anything significant relative to the strategy or the skillset that Peabody can translate internationally?

Well, Mike, you know we are both a buyer and a seller of assets. We do sell with our coal reserves, our surface properties, and we also do so with buying and selling mines, and we have got a long history of it.

What we are looking at with the assets that we have announced are participation in other markets that we don't currently serve, and it helps us diversify our production and our supply base, and it allows us to serve some markets that are much higher growth than we traditionally serve in the United States. So those are the primary things we are interested in. As you know, I am restricted from talking very much about a potential acquisition, so we will provide the additional information in due course.

A follow-up maybe for Rick, when you look at the mine plans out in the Powder River over the next few years, how do the ratios look? Are they getting a little bit heavier? Is that going to impact some of the potential cost opportunities which I assume will be made up by more than higher prices?

(multiple speakers). We are like everyone in the Powder River Basin really in mining anywhere in the world. When you mine the higher quality, the better assets are first and you work our way into the more difficult. We are about typical of the average at most of our mines for the Powder River Basin as a whole. I don't have any exceptional advantage other than perhaps at Rawhide with respect to ratio. It is a gradual increase in ratio. Largely we try to make up for it with higher productivity equipment and best practices that continue to make us more efficient.

Thanks for your time.

Van Braum(ph), Spears, Crasanthey, Braum (ph).

Good morning, gentlemen. Could you just review for us the open tonnage? What is coming off contract -- I think you priced probably most of '04 -- but '05, and what is uncommitted and what the prices were on those?

Let me start off by talking about '04 and I will focus on '05. The unpriced tonnage we have '04 is about 14 million tons at the end of the calendar year '03. Some of it is already sold, and we are simply going through market price reopeners, and that is several million tons. When we get to '05, the tonnage is in the range of 73 to 75 million tons, with about 31 million of it already sold but subject to repricing.

So we are in relatively good position right now and excellent position for next year. I cannot tell you the prices, but I will generally give you the idea of where the tonnage is located and that is subject to repricing for '04. It is roughly one-third, one-third, one-third in Appalachia, Midwest and Powder River Basin.

Is that the same for '05 of the 73 million?

No. In '05 there is a much higher percentage of it that is in the Powder River Basin with about -- it is roughly about 50 percent of it is in the Powder River Basin. The rest of it is split between the Midwest and Appalachia.

Thank you.

Bill Burns, Johnson Wright.

Maybe for Rick, just looking at depreciation and amortization, it came in at 57.6 million, which is down sequentially from I think it was 61. It changed last quarter. Then I was reading in '04, you expect higher depreciation. So I am looking for a handle or a range, what do you think '04 is going to come in at around 250 million?

Exactly. I think '04 for depreciation will be right at 245 to 250 million, so it will be about $62 million a quarter or something along those lines would be a good estimate for the number. That is driven by higher volume for the most part is what is driving it to DD&A. And you will see the asset retirement obligation expense that came in this year at 31 million probably coming in at $34 to $35 million next year just as we work off some indifferent projects this year early in the year that will bring that number up a little bit. We will have that information in our reconciliation on the Webside or the details, but so we are comfortable giving you those numbers.

I will pick it up. Then, a follow-up. Maybe the same thing on selling and administration. It looked like it popped up in the fourth quarter 32 million. It was running for the first three quarters at around the 25 to 26 million a quarter. Anything special there?

Some of the timing related to last year's fourth quarter was a little higher as well, but some of the issues on that line essentially are related to higher pension costs in 2003. Our stock price is higher, which lead to the long-term incentive plan and having a few million dollars of additional accrual, so those are the primary issues that drove the number up. I would look at that number to be flat for next year.

Ross Payne, Wachovia Securities.

Last year at this time, you guys were looking for I think about $177 million worth of 177 million tons of production, and obviously you guys far exceeded that. What are the possibilities for upside in terms of production relative to the guidance you are showing here if the economy continues to improve and the environment is somewhat like we have been seeing here in the fourth quarter?

First, we are scrambling to find what we did provide as the guidance for the number last year.

We said 177, and we came in at about right at 177 this year as well. What you are looking at is the total sales volume, which improves includes trading and brokerage, so that is where the 203.2 came from.

We have to distinguish production from the total sales volume.

Very good. So basically you are probably also saying that you expect to be on top of the guidance you're giving here?

But what we are saying I think is in the outlook section on page four of our release (multiple speakers). We said 190 to 195 for production and 210 to 220 for the total sales volume.

Okay. That is very helpful. One other follow-up, if you guys can just elaborate a little bit on the CapEx budget that is increasing year-over-year and the type equipment, where it is going and that kind of thing?

I will cover it. A couple of things that we are doing. First, last year we did not have a payment for federal leases in the Powder River Basin. This year we will have a new lease or two that we have to go through the bonus bidding process and that increases it.

Also, we cut back on our CapEx last year due to extremely soft market conditions at the beginning of the year and also because we completed a number of new mines that we were constructing. So this year we only have one new mine that is under construction at the current time, and we have a number of pieces of new equipment that we are buying. A lot of it for the Powder River Basin, some for the Midwest on some of the Black Beauty mines, and it is really scattered through most of the company through replacements and productivity enhancement.

Thanks a lot guys.

Dave Gagliano, Credit Suisse First Boston.

I just have a couple of quick questions. First on the Thoroughbred (inaudible), I am just wondering if there is any update there?

Sure. As you know, we have a draft there permit for Thoroughbred, and as expected, the Sierra Club and others have decided to appeal the issuance of the permit by the state of Commonwealth of Kentucky. So we are in about week 10 or 11 of the appeal process. It is not anything that we did not expect and ultimately expect to be successful in that.

We have received the citing permit, which is a big step, and we have a lot of interest from customers on the power purchase agreements and also interest from joint venture partners. So Thoroughbred is alive and kicking, so to speak, and moving down around the racetrack.

And Prairie State is also making good progress. Its permit application for the air permit, which is most difficult and significant state of Illinois and has been for some time, and many of the other permits are already in hand. So we think both are moving along a good pace. It likewise has very strong interest from competitors, from customers and from partners. So we are optimistic about both. We will keep you posted as they develop.

Is there any change in terms of the recently anything new coming from the joint venture side? If not, what are your thoughts in terms of going forward with this project on your own?

As we have said all along, we will not go forward on our own. The reason being simply that one has to recognize what they can do and what they are good at and what they are not good at. We are looking for a partner that is experienced in the construction and the operation of large-scale generating plants, and these will be big. And we are very good at building and operating mines. So we are looking for roughly a 50-50 relationship, and I cannot name the names of the companies, but they are very interested parties at this time.

Great. And just the last one just quickly. I have not tried to back into it yet, but if you can, give me the income tax rate assumption that you're using to get the estimate for full year 2004, the earnings estimate?

On the taxes, we are looking at a tax benefit next year of roughly about $31 to $32 million. You really can't in a NOL position, the tax rate (inaudible) applicable number because it is really an allocation methodology based on your earnings per quarter at the end of the day. So based upon what we expect each quarter, we will allocate at $32 million across the years. It is just down finally from last year because we don't have the large $53 million onetime charge we had associated with the debt extinguishment, and that is why the benefit is a little bit less than last year.

Dan Rolling, Merrill Lynch. (technical difficulty) -- Paul Forward, Legg Mason.

Could you maybe quantify the impact of what you would consider to be onetime items such as the upgrades you are doing out at North Antelope Rochelle in the first quarter? I know your guidance is 15 to 30 cents of EPS, but if you took out what you consider to be onetime items, what would your guidance look like?

We really have not tried to do that. I can tell you there are a couple of things obviously in the first quarter -- obviously the North Antelope Rochelle issue will reduce the earnings out of that operation and position us to perform better than the back half of the year. Also, we are doing some market at of our closed suspended mines, which you will say a larger charge on our asset retirement obligation expense in the first quarter proportionally than you will for the rest of the year. That is probably going to be up $4 to $5 million so you can tack what the EPS impact of that. So small items like that, but when you put them together, it is probably going to put us back, if we were able to put those back together and did not have issues, it would be 55 cents, 50 cents, but that is just an estimate.

Maybe it would be good for me to explain what we're doing at Rochelle North Antelope. It is a very large-scale operation. It was operated at 80 million tons this past year. It, like most of the Powder River Basin mines, is largely constrained by a rail loading and coal handling capability.

What we have done is fine-tuned that capability over the years, and we think we have another fine-tuning that will allow it to move on up from 80 to maybe 85 million tons in the future. So it is a high-quality coal that it is very low sulphuring, in very strong demand, so that would be a good project for us to complete.

Well, how much of that high-quality coal is going to not be there for the market in the first quarter? Is it going to be enough do you think to create a little bit of a tightening of spot markets out of the PRB?

You are asking a number of questions, but we think that the market has largely rolled it in already to its perception. So that is our view of that.

As far as the impact, it is somewhere in the 1 million to 2 million ton range, and it is very temporary and then it will operate at a higher capacity going forward. So we should make it up and continue to improve this year there.

Dan Rolling, Merrill Lynch.

This time I hit the mute button instead of the speaker, so I am still here. Basically could you give us an update on permanent status for undeveloped mines that you could start construction on in the next year or two?

Permit status for new mines that we could start construction on in the next year or two.

To rephrase it, do you have any permits in place that you have just been sitting on that you could now start construction of?

We do. However, we have no major construction projects that are planned for the rest of this year. Meaning no major new mines other than the one that we have got underway.

What would the total tons be of what you have got permitted but you have not started on?

We don't total it up that way. There is a backlog of those permits in some markets we simply wait until we have a long-term contract, say, a high sulphur market or a Southwestern market. In Appalachia, we have numerous permits in hand that we can put in place if we want to. Indeed, our Appalachian tonnage will climb from roughly 14 million tons of production to 17 this year. So that will be good, but all of that is factored into the guidance we have provided so far.

The follow-up question. Could you give us an update on what you are seeing in the metallurgical market, and we are hearing numbers close to $66 at the port for met coal. Are those numbers things that we should take as reasonable?

Certainly we have seen those kind of numbers, and it depends upon what duration you are talking about. But that kind of price is certain out there in the marketplace.

Obviously at the mine, we are seeing over $50 for metallurgical coal right now. And obviously to get it to the port, it is another $15, $16. So your numbers are well within the range of what is out there in the current market for metallurgical coal.

What do you look for your met coal to be up year on year? Thank you.

Your question is, what do we expect our volume to be up year on year?

Yes. Please.

It will be a couple of million tons.

Thank you.

John Bridges, J.P. Morgan.

Looking at your industry outlook, it is glowing. Looking at your expectation for earnings, it is a bit below consensus at the moment. Now maybe the analysts have got it wrong, but I wondered if you could tell us if there is any caution or anything you do see that could derail the positive outlook for the coal sector?

And then perhaps, there is obviously a need for use of more coal to balance this high-cost gas, but then the courts are doing their best to prevent that happening through blocking new source review and all that sort of thing. I wonder if you could comment on that as well?

Well, you certainly like most others, have not complied with the one question rule, but I will try to answer them all if I can remember. Starting off with the one that is closest, my near-term memory is best. New source review -- we thought that EPA had developed a great solution for the coal tons left on new source review by doing two things. Number one, promulgating a clear understanding of the new source review regulations, which by the way was fairly consistent with what the panel came up with way back in 1996 in a previous administration, but ignored by the previous EPA. However, that was challenged in the court.

Now simultaneously they promulgated regulations to put in place more stringent standards for sulphur dioxide, nitrous oxide, and mercury. The net effect of both what have been to improve the efficiency of the coal plants and to result in lower emissions from the coal plants. It is illogical as to why the environmental community would challenge, would block more stringent regulations, but they did through their quarter action.

Nevertheless, what we see is just a continued use of these plants at higher and higher capacity factors. They are running very hard right now, and we expect the plants run hard all year. We see also investments in the existing plants to put in better emission control equipment. Also, we see the six new plants under construction, so the coal plants are both near and long-term are having the investments made. There really is not much of a choice for the United States. We have to provide the electricity, and we have to do so at a low cost, so the coal is the only real answer.

I will violate the one question rule, and ask you to repeat the first part of the question if you will?

I was just wondering whether there are any sort of worries that you still had, lingering worries, with respect to the coal market this year?

With respect to the coal markets, there are not many lingering worries both this year and next year. We have a rising economy, we had normal weather, the markets are strong all over the world. Largely we have a global supply imbalance with demand exceeding supply. There is a logical question -- how long will that last? But due to the sheer number of markets that are strong at the same time, it will probably last a very longtime. So that is all great.

Now what else impacts the industry? The same thing that impacts all industry in America -- rising pension costs, higher energy costs that affect explosives and diesel fuel usage, things of that sort. We factor all of that into our guidance and try to be conservative as we do so.

Thanks. Well done.

Wayne Atwell, Morgan Stanley.

Good quarter. Maybe you could explain why the Powder River Basin pricing is a little bit stronger. I certainly agree with all your comments about the markets, and it is amazing to see what is happening to the coal market globally. But normally the Eastern coal takes off and that is followed by strength in the Powder River Basin. We haven't really seen that as much as we would have expected.

Well, there is never any perfect model for anything I believe, especially the inner relationship in the coal markets. They are different every time. The last time we had a bull market in Appalachia, it took about a six-month lag for the Powder River Basin to be affected.

Why hasn't the pricing taken off as much? Well, I would say that it is improved based upon if you simply use the indicators in the OTC markets, the prices in the OTC markets as an indicator, it is higher. There are many factors that are affecting it from some milder weather in some of the traditional regions that use Powder River Basin coal to takeovers that are going on and things of that sort. Very complex. Beyond that, I really cannot comment very much about why -- much about pricing. You are aware of many of the reasons why.

If I can just ask one more follow-up question. Could we hear about the price environment for discussions with utilities? I know you cannot be very specific, but if we are looking at Eastern coal, my understanding is contract discussions might be in the neighborhood of up to $4 to $8 versus where they might have been a year ago in terms of what you might lock in for three to five years.

Are you talking about utilities?

Correct.

Certainly that is a low end of the range I believe. The numbers are quite strong, but I cannot really talk much more than that. There are numerous things that are impacting the demand for coal going into the generation and the industrial plants, and I went through a number of them awhile ago. We have just got a convergence of pressures on that Appalachian market. Well, really most markets.

Fadi Shadid (ph), Friedman Billings Ramsey.

Congratulations on a solid '03. I wanted to learn more about sales and trading outlook. How do you see '04 playing out versus '03, and what it could mean to gross margins? Also, what do you mean -- the 1 billion tons in backlog, why is that important going forward?

For our company, we follow a strategy of signing long-term contracts for most of our output in the Midwest and in the Southwest where the markets are less volatile and where they are really much smaller and the opportunities don't come along very often. And that gives a good view of the future revenue stream, allows us to optimize our cost at our mines, and allows us to optimize our cash flow.

In the Powder River Basin in Appalachia, what we do is we take more market exposure, and we will enter into agreements based upon our view of the market going forward. So that is why we go about that.

Now in total we have a backlog of approximately 1 billion tons plus, and that includes some business that has market price reopeners, but it is still a firm commitment for us to deliver going forward. So it is a good view of the stability of the Company, and at the moment, it may not seem as important as it will someday when the markets are softer. Having been around long enough to go through the soft parts of it, I understand that. So it is really important in that period especially.

How about sales and trading in '04 versus '03?

I think we are always very conservative about sales and trading. Your firm probably has a trading desk of its own, and you know it is difficult to predict the earnings from that kind of an activity, so we tend to be conservative. We experienced in 2003 and really late through most of 2002, a decline in the number of creditworthy counterparties. So we have taken a more conservative view of our outlook for sales and trading. Rick, do you want to -- can you relate what it will be?

I will touch on that. This year, as you saw in our release, we turned in about $45 million in gross margin from that line of our business, and we look at it next year, and we just assume that the continued softness in the number of counterparties continues throughout 2004 that was in 2003, and we are not sure that is going to happen. We are seeing a few more players come back into the market actually. We will probably estimate that that number would be somewhere between $30 and $40 million, and that is what we have used in our guidance for next year is about $30 to $40 million target for that line of business.

Very well. Thank you.

David Tameron, Stifel Nicolaus.

Congratulations on a good quarter. Most of my questions have been answered, but one quick question. Do you have any excess capacity available in 04? If coal prices stay strong, how much capacity do you have idled or sitting on the sidelines that could ramp up to take advantage of that?

We have some capacity that is available primarily in the Powder River Basin, perhaps in the Midwest, very limited in Appalachia. It is in the range of 2 to 5 million times. It would be some of our higher cost capacity, just like every other producer in the industry. So it would not necessarily be our most profitable. We are always careful on how we allocate that particular level of capacity.

Okay. So -- my one follow-up question -- so barring -- the production number you gave, there could be a little upside to that but not significant outside barring any future acquisitions?

There could be upside to it, but again it would be the higher cost production. So the margins would perhaps deteriorate on a pure cost basis. Perhaps the pricing would be attractive enough to tempt us to do it.

Fritz von Karp, Sage Asset Management.

My question has been answered. Thanks.

David Snow, Energy Equities.

Could you just synapse the price trend for the markets to the extent you are able to do so?

I really cannot do it on the line here. I think the best way to see it is in some of our presentations that we make at various conferences. We have an exhibit there that shows the movement to Powder River Basin pricing and Appalachian steam coal pricing in the OTC market. Now while it is not exactly what the prices are, it gives you the general trend. So I think we are out at a number of conferences over the next couple of weeks, and if you want to catch us there, we will drop through that with you.

We also have a presentation available on our Website that has that same information. I would encourage you to look at some other publications that would also show you what is happening in the import markets and what is happening with respect to coal in Australia, as well to get a global sense of the total price, and you will see those markets are all moving very nicely.

They are European indicator prices and Colombian prices and Venezuelan prices --

I believe the export prices in the international market are up about 20 percent. Is that a good proxy for what is happening overall in the U.S.?

(multiple speakers). Again I have to be very cautious about talking about pricing. But the sources that Rick talked about will give you a good feel for that. You can calculate it readily, and you'll see it's different in almost every market that is here in the United States.

Stuart Glickman, Standard & Poor's.

My questions have been answered. Thanks, gentlemen.

Trey Carpenter, Citigroup Asset Management.

Thanks for taking some time here with us this morning. I wanted to ask you about -- to see if you have any concern about developing supply constraints in rail transportation from the PRB region to the Eastern markets?

We don't have a major concern right now related to supply constraints. But what we are concerned about is the customers using the system better than they did in 2003, as they tended to back-end load their deliveries on many of their contracts, and the system just does not have that flexibility. It needs to have more ratable deliveries for their contracts, and that is what the contracts generally call for, but they did not really do it that way. So the whole system would work better if it were more ratable deliveries.

What kind of average rail rates are you guys looking at from the PRB region to the Eastern markets?

Again we are not the one that does the contracting. It is done primarily by the utilities. So it is like a lot of things -- it fluctuates. There are contracts that are rolling off where there is competition, there is intense competition for between the railroads for the business. Where there is not, it is much more difficult.

Mark Reichman, A.G. Edwards.

My question has been answered. Thank you.

Dick Price, Westminster Securities.

Good quarter, gentlemen. Good morning. You're unpriced tons for '03 seem to be skewed on a tons versus tons produced basis heavily towards the East. I am wondering if, particularly since the East seems to have the sharpest price rise, you can provide some clarity as to why that balance?

What we try to do is take a forward view of the market and what is going to happen, and our view was to leave as much coal as is practical available for '04 in Appalachia for some reasons that are pretty obvious. So that is what we did. You'll see us take a different view year by year based upon what we believe will work.

As you know, the OTC prices year-over-year are up substantially for that product and even the metallurgical product as well. So I think we have left the right coal unsold at this point.

In the context of that, without giving away the store, could you suggest where that split is -- Northern Appalachia, Central Appalachia or is it just East?

It is primarily -- I think I mentioned for '04 the 14 million tons is (multiple speakers) 1/3 Appalachia, 1/3 Midwest, and 1/3 Powder River Basin. Generally the 1/3 Appalachia is all in the metallurgical or high-quality low sulfur steam coal.

Bill Burns.

To the extent you could, I have some questions about Australia. In terms of what would be like average cost down in Australia given a run-rate of 7 or 8 billion tons?

It depends upon the type of mines, surface mines, underground mine, whether it's metallurgical coal, thermal coal. There are just so many variables, I just cannot provide it in that way.

Given what is on your plate down in Australia --?

We really don't disclose the individual mine's cost. That is the something we don't do for competitive reasons obviously.

Thanks, Irl.

Van Braum.

I was just wondering if you could refresh my memory as to what the earnings leverage is per dollar a ton increase in the West and in the East? I think we had done it at one point. I cannot recall what it is. I know there is some moving parts here, but just a hypothetical leverage?

Well, I have heard Rick answer that question many times, so I will hand off to him.

Really as you look in '05, it would be the year you want to look at the most. In '05, if you look at $1.00 per ton price improvement and you factor all the taxes and all that, you are probably looking at upside leverage of about $60 million of improvement in '05 per dollar a ton.

Per dollar a ton. Okay. Does it matter West versus East?

It does matter West/East. I am giving you the blended number. Obviously you have a substantially different tax structure as you know in the East than the West where you have to pay the royalties and severance taxes. You only gets 67 cents on the dollar in the East, and you get about 90 cents on the dollar (inaudible) 67 cents in the West and 90 cents in the East on the dollar based upon taxes and royalties. So you have got to factor those issues in. But on a blended basis, it is roughly $60 million.

We have no further questions in queue. I will turn it back to presenters for any closing comments.

Well, just once again, thanks to everyone for your continued interest and your support of BTU. We worked our way through a difficult market condition here in 2003 and continue to post improvements in EBITDA and many other key metrics. We are looking forward to better results in '04 and again in '05.

Thank you for your interest in our company.

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