Peabody Energy Corp (BTU) 2004 Q3 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 the participant lines are in a listen-only mode; however, there will be an opportunity for questions. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded. I would now like to turn the call over the Vice President, Public and Investor Relations, Mr. Vic Svec.

Thanks, John (ph), and good morning, everyone. Thanks for taking part in the conference call for BTU, following another very strong quarter. Today, Executive VP and CFO Rick Navarre will discuss our results and outlook. Chairman and CEO Irl Engelhardt will review the energy markets and several growth highlights.

We will be making some forward-looking statements today. We encourage you to consider these, along with the risk factors that we note at the end of our release and those documents that we file with the SEC. For a recap of financial information and a replay of our call, we also refer you to peabodyenergy.com. I will now turn the call over to Rick.

Thanks, Vic, and good morning everyone and welcome to Peabody's third-quarter earnings review. Peabody's solid results for the quarter continue a long record of meeting management's earnings targets, a commitment we take very seriously.

I will start with a review of the highlights for the quarter, which include a new industry sales volume record, new quarterly records for both revenues and EBITDA, operating profits that more than doubled, earnings per share of 66 cents for the quarter, and year-to-date net income of $107.5 million.

Let's discuss the results beginning with our income statement on page 6. Peabody's skilled employees continue to meet the robust demand from all coal markets. Our revenues increased 32 percent thanks to expanding volumes, higher prices, and contributions from newly-acquired assets. Our EBITDA grew 48 percent to $154 million, while operating profit jumped to 74 million. I will discuss the principal drivers of these issues in just a minute.

Given our higher pretax profitability this quarter, we had income tax expense that was $7 million higher than our previous estimate, and higher pretax earnings of $120 million year-to-date reduced the 2004 tax benefit by about $34 million, or 54 cents per share. Improving EBITDA and operating profit drove earnings per share of 66 cents for the quarter and $1.71 for the nine-month period.

Moving to the supplemental data on page 7, I will review some of the building blocks for the quarter. Our operations continue to run at higher capacity levels to satisfy strong coal demand. Revenues from U.S. mining, Australia, and trading and brokerage all showed significant increases based on higher pricing and expanded volumes. Peabody shipped nearly 59 million tons during the quarter, as every region again posted year-over-year increases.

Our eastern U.S. volumes were higher for both met and thermal coal products. Our western operations produced an extra 4 million tons this quarter, led by increased output, as well as the recently-acquired Twentymile mine. Australia's volumes also increased sharply due to the new met coal operations in Queensland.

Our record sales are notable considering global transportation issues incurred this quarter. Rail and seaborne export shipments were complicated by the hurricanes in the east. We estimate that the effect of the hurricanes cost us $6 million in earnings for this quarter. Shipping in Australia continues to be hampered by rail and port congestions, leading to significant demerge (ph) charges. All-told, transportation issues lowered our earnings by about $11 million this quarter.

Revenues per ton in the east were 9 percent higher than last year, with favorable pricing for both thermal and met coals. Our western revenues per ton also increased from high demand and increased Colorado sales. And Australian unit revenues more than doubled due to the met coals sales from the new operations.

Moving down page 7 to cost per ton, you'll see our western U.S. cost per ton continued to be stable with the prior year, after considering six hits (ph) per ton of higher steel, higher diesel and explosive expenses, and 15 cents per ton related to the mix effect of adding higher cost to Colorado production.

The increase in the eastern U.S. costs are primarily related to sharp inflation in raw materials, including fuel, explosives, and steel costs, which have more than doubled this year. Our higher expenses to upgrade coal to metallurgical quality specifications also had an impact, and higher sales-related costs associate with higher prices.

In addition, costs and volumes in an underground mine in Kentucky have been unfavorable this year due to geology and equipment issues. Fortunately, the year-to-date earnings impact has been largely offset by a $9.5 million insurance recovery related to these same issues.

Gross margins per ton for the quarter increased 18 percent in the eastern U.S. and 9 percent in the western U.S.. This is especially strong, given that most of our production was priced during the softer market conditions. And our Australian margins were $18 million higher than the prior year due to the contributions of the new met mines.

Like most industries, we are feeling the pressures of higher energy and steel charges. We are attacking these costs in a number of ways, including carefully controlling our consumption of key high-priced commodities, conducting a thorough supply chain management review, and locking in favorable pricing using hedging strategies. Fortunately, we made the decision earlier this year to hedge 100 percent of our 2004 fuel costs when the price per barrel was in the low 30s. And we locked in the natural gas component of our explosives cost at roughly $4.25 an MMBTU.

Even with these moves, our fuel explosives and fuel costs for the full year are expected to be 50 to $60 million higher than they were in the prior year. We will continue to look for opportunities to manage the volatility of these markets, but as important is making sure that we have full access to supplies and equipment to run our operations.

Our Australian revenues and cost per ton reflect the new higher margin met coals operations. During the quarter, we experienced some geology and equipment issues at our North Goonyella mine, which lowered our earnings by $5 million. We have installed new and a proven management team and we are accelerating the output at a new service operation that is adjacent to the underground mine. We believe these actions will increase the reliability and performance in Australia.

This may sound like a long list of improvement initiatives, but we have found that the key to continuing our record of performance is to address our challenges early and aggressively.

Moving to the sales, trading, and brokerage areas, you'll see that these activities contributed $16 million in gross margins. Our sales and trading group works to optimize our contract positions and profit from the record pricing and volatility occurring in most coal markets that we deal in.

Looking at our capital expenditures for the first nine months, you'll see that we spent $148 million, reflecting both the needs of the newly-acquired operations and the first installment on our acquired Powder River Basin reserves. Our 2004 CapEx target remains at 280 to $300 million.

I will now turn to the balance sheet on page 8. You'll see our cash balance of $402 million remains very solid. And our net debt-to-capital ratio of 33 percent remains at its lowest levels in recent years.

In summary, we have posted excellent results during the first nine months and we are well poised to continue responding to the higher global demand. Our expanded product line allows us to benefit from the market improvements, while avoiding large exposure to some of the risky mining regions. Peabody has strong upside in these excellent markets, as you'll note from our unpriced tons mentioned in the release. We expect robust demand in pricing and contributions from new mines to overcome external cost pressures and transportation issues. We are again raising our full-year earnings per share targets to $2.55 to $2.85, and are targeting EBITDA of 545 to $565 million.

Simply put, the Peabody team is seizing opportunities created by the outstanding market fundamentals. We are working through the inevitable challenges and we are turning in solid results. We fully expect to continue this record of improvement as we look ahead. With that, I will now turn the call over to our Chairman and Chief Executive Officer, Irl Engelhardt.

Thank you, Rick, and good morning, everyone. Our earnings release describes the coal markets and the reasons those strong markets should continue, so I plan to spend a few minutes discussing where the markets are taking us.

In 2003, the large economies in China and the U.S. began to strengthen, and they spread the economic recovery to the Pacific Rim and other countries around the world. Coal demand has become very strong in most markets as a result, and many supply regions are having difficulty satisfying that demand. You are aware of the reasons -- overloaded rail and port systems, uncertain environmental rules, court decisions restricting Appalachian production, very low customer stockpiles, high cost of competing fuels, and producer bankruptcies. That long list of issues creates some very tight market conditions, and we believe those conditions will exist for a number of years.

In answer to the question where are the markets taking us, we believe the markets provide a bright future, both near- and long-term, for all of the members of the coal industry. First, customers are relearning the value of reliable producers and they are willing to pay and make commitments to obtain reliability. Second, we see customers that are switching to different coals for a number of their generating units, and this activity may open new markets for certain products. Third, large investments are being made to improve the emissions from existing coal plants and to build new coal plants, and those investments ensure that America will benefit from clean, low-cost electricity for many decades. Fourth, coal gasification is receiving renewed attention, creating yet another market for America's most abundant energy resource.

We see an increasing recognition that coal is the key to solving America's energy supply problems. Generators are investing billions of dollars in emission controls and new coal plants. Both President Bush and Senator Kerry have expressed strong support for funding of additional clean coal technology, and those technologies offer the promise to be even more efficient and cleaner coal plants for the future.

Significant investments in coal gasification technology are also taking place. GE's purchase of Chevron-Texaco's coal gasification technology and their recently announced alliance with Bechtel demonstrate the confidence of those two very large and very sophisticated companies in the future of coal. We are hopeful that they will install a large commercial-scale IGCC plant that will become reliable and economical to operate after an adequate period of working out the inevitable operating issues.

The new technologies create a very bright future for Peabody and the industry. Rick mentioned the accomplishments of Peabody during the first nine months of the year. They arise from the implementation of our three key strategies. Two of those strategies -- running safe, low-cost operations and adding value through world-class sales and trading skills -- those two strategies helped us post earnings improvements for the past four years. They also helped us perform very well last quarter.

The third strategy, managing our 9 billion ton resource position, is helping us to implement our growth plans. During the year we expanded that resource position by completing the accretive purchases in Australia and Colorado, and the new mines are performing at or above our initial expectations. We are also making progress on agreements to purchase a 25.5 percent interest in the number one mine in Venezuela. We look forward to a full year's results from the three new operations during 2005.

We are also using that vast resource position to continue to develop clean coal fuel generating plants. The activity is expected to provide longer-term earnings growth for Peabody. We are making significant progress and committing significant resources as we continue toward the permitting, biodesign and partnering activities for the plants.

In summary, the good work of our employees and the successful implementation of Peabody's strategies allowed management to again increased BTU's earnings per share targets for 2004. It is quite satisfying to see Peabody's employees and the operations perform well, when our customers need them, and to see Peabody maintenance reputation as a profitable and reliable supplier. And the prospect of using our 9 billion ton reserve base to supplement America's natural gas supplies is very exciting indeed. We appreciate your interest in Peabody, and at this time we would be pleased to answer your questions.

(OPERATOR INSTRUCTIONS) Michael Dudas with Bear Stearns.

My first question, Rick, could you expound a little about the hedging aspect to your cost this year? I think you mentioned in your prepared remarks that overall costs are up 50 to $60 million more than you would have thought at the beginning of the year in the budgeting process. Is that correct?

No, it's actually over and above prior-year costs. In our budgeting process, we in fact (indiscernible) higher fuel costs -- obviously not at the 53 to $54 a barrel range, of course. But the benefit that we had is back about April, we decided to lock in our fuel costs and locked in at about $31 a barrel for the rest of '04.

How does, as you are going through the process this year on the budgeting side, look relative to the increase in costs? Are you anticipating a moderation next year in steel or roof bolt type costs, labor, and how much of the hedge roll-of will impact next year? I'm trying to get some sort of delta on the operating side.

It's a good question, Mike. We are not finished looking at it right now, and obviously, the costs are continuing to move in those markets. But as I said earlier, steel costs -- and it is a pretty substantial component of our underground mines with the roof support cost being primarily steel-related, and those are up twofold. But we think -- from where we are at today, we would hope it would moderate a bit. And while we do have hedges in place that go into 2005, as well, that are in the $30 range as well. So we do have part of '05 hedged. We don't have the whole year hedged.

So we'll expect some level of increase in 2005 on all those components as we don't have the benefit of the full hedge, as well as the fact that costs have risen a bit. I can't give you a precise number today. Clearly, when we put together our budget and give our forecast for '05, we will give you a sense for it. It won't be 50 to $60 million, though. We have kind of hit -- the big chunk of that has happened in this year.

Thank you. My follow-up for Irl. Irl, what is the tone of the customers in your negotiations relative to contracts with thermal and the metallurgical coal? I noticed in the release about multi-year contracts on the met side. Do you anticipate in the next couple years that the contract lengths are going to get longer-term, and are the utilities starting to understand that the market is not going to get back down to where it was in the recent past?

I believe they are recognizing that fact, Mike. What we see differs by market, of course, but for the majority of the markets we see the customers focused on reliability of supply, and they are focused on ensuring that they have a supplier locked in under multi-year agreements that provides the base to keep their generating plant or their steel mill operating.

Most were caught by surprise with the shortage of coals that have existed in many markets this year and by the quick rebound in the economy. So, reliability and locking down under multi-year agreements is very important to them. Also, those that are building new plants, new generating plants, tend to go after multi-year agreements because it helps them ensure that they have the lowest rate for their financing.

Thanks for your time.

Paul Forward with Legg Mason.

Good morning. I was wondering if you could provide a little more detail on the boost in sales and trading profits for the third quarter. And I was wondering how much you have baked into your fourth-quarter forecast for that line item.

Paul, traditionally what we try to give you on guidance -- as you know, the sales and trading can be a bit lumpy for us, but for the most part, we are usually expecting that number to come in in the $40 million range on average as a contributor for the whole business. So we had a pretty good quarter in the third quarter. Probably not expecting to have the same level of improvement in this upcoming quarter. We had a couple nice contracts that we were able to restructure and get some values for in the third quarter. So I think if you're looking at a $40 million number, I would still stay in that range overall for the year.

Okay. And just another question on -- is there any change to the outlook for the Harris or Black Mesa mines, and is there any guidance you might able to give us if both do shut down by the end of 2005, what the annual EBITDA impact of that might be?

In the case of the Harris mine, we are working to extend the life of the mine. We have not completed our final plans, but it appears that there could be a several year extension of Harris. It produces an extremely high-quality metallurgical coal, one of the best high-vol metallurgical coals in the United States. And with the improved market conditions, there are adjacent reserves that we are looking to develop and extend this way.

In the case of Mojave, there is some favorable development in that the parties have agreed to a mediation process to address the issues. It is something that we proposed several years ago. And to show you how slowly things move, after several years we are finally migrating to it. We hope that the mediation process is successful, but we continue to have in our forecast the mine closing in the year 2005.

So we are looking at it conservatively and we forecast that it goes down. We hope it does not fall. If it would, I think our guidance that we had last given you was that at the six-month mark for the year it had $11 million of EBITDA. So it has to use the same guess here in the 20 to $25 million range for EBITDA on an annual basis -- less than 5 percent of our total.

And very good news for Harris. And you know it supplies that high-quality metallurgical coal too, so you can imagine that that is good news for our earnings too.

Excellent, thank you.

Dave Gagliano with CSFB.

I just wanted to ask a couple quick questions on the met coal side. Just in terms of a breakdown between obviously the U.S. operations and the Australian operations, I am assuming for 2005 that the Australian operations, the tonnage there is all open for repricing in the upcoming coal year. Is that right?

Most of it is, Dave, for sure, over 90 percent of it.

And that is -- is that 7 million tons?

7 to 8 million tons.

And given, obviously, we're in that season now -- and obviously Mike had mentioned this a minute ago -- I was wondering if you could give us a little more color on the tenor of the negotiations up until this point with the international steel mills.

Let me use one piece of clarification first. Remember that when the prices are renegotiated, it is effective as of April 1. So just wanted to make sure --.

Right.

I will give you that. You can read regarding -- read in the trade publications about the tenor of the negotiations in the Pacific rim. Those tend to be very important because they establish benchmarks that are compared to around the world. The tenor is very favorable for continued very strong pricing in those marketplaces, and again, reliability of supply will be a big issue.

The same exists in the United States marketplace. Actually the negotiations are underway already, multiple-year coal supply agreements with the reliable suppliers are available. And we are hopeful that we will be successful in locking those down.

Just as a follow-on, roughly how much of your U.S.-based met coal production is open for repricing for 2005?

Be roughly 4 million tons.

Great, thanks.

Daniel Roling with Merrill Lynch.

Thank you. A follow-up on that -- and just correct me if I'm wrong, but I thought in the press release it said 6 to 8 million tons of met coal available for repricing. And Rick, didn't you just say 7 to 8 in Australia and 4 in the U.S.?

I did. I think some of that is related to -- some of the tons are committed but maybe not priced. And maybe that's where we're having the (multiple speakers).

Okay. So these are open for pricing of 11 to 12 to 12 then?

Yes.

Okay, good. Irl, you said the tenor was very positive.

We will double check that number. We want to make sure we get it right.

Okay, thank you. And then the other question on tons and open, the steam coal that is still open for pricing, around 18 million tons, could you give us a breakdown on that -- if it is U.S. and is it PRB or non-PRB?

Of the total, less than half of the tonnage is PRB coal. And the rest of it is in those much higher-value metallurgical or steam coal markets that are doing very well.

Let me clarify. In the press release, we did have 6 to 8 million tons. I guess I was thinking about -- my number is the total amount of metallurgical coal that has been available to be repriced in this market. So we have already locked down some of that because the U.S. negotiations have already begun. So (indiscernible) we have already locked a little bit of that down. So in total, when we began the year, we had 10 to 12 in disfavorable (ph) conditions. Six to 8 remain.

Six to 8 (ph) of the met is remaining, and would it be a safe assumption to say that's all in Australia then?

It is not all Australia, but it is predominantly in Australia. There still some contracts to be put together in the U.S. as well.

So that would leave on the steam side effectively 16 to 18 million tons, and less than half of that is in the PRB?

For 2005, less than half of the total 25 million tons available is in the PRB. It's 10 or 11 million tons in the PRB.

Okay. All rights. And then Irl, on the tone, the tenor, it is very upbeat; you are very positive. But what we're reading and hearing are numbers that we have not seen since the early '70s, approaching $100 a ton. I know you won't comment on price, but maybe you can give me some guidance if what we are hearing (technical difficulty). The offer prices is about 130 a ton and the Japanese steel mills have come back and said 105. And you're negotiating between those -- not you specifically. But are we talking triple digit prices for met coal?

First of all, I can't answer your question about pricing, and you know the reasons why. But the trade publications, you always take them with a grain of salt, but you cross check by reading multiple publications and checking your sources. And you'll get in the general ball park by doing that.

Okay, thank you.

John Bridges with JP Morgan.

Looking at your tonnage growth figures, we would think there's a big supply reaction going on in the U.S. with these higher prices, but a lot of that, I suspect, is coming from new acquisitions. Could you tell us how much of the growth that you are reporting is from those acquisitions?

In '05?

No -- well -- (multiple speakers).

In '04, there would be roughly -- let me get the exact numbers, I have them, for you.

As you recall, we made the acquisitions on (technical difficulty), so we don't have (ph) a full year's results in there.

For the year, we expect 7 to 8 million tons for the year to be related to acquisitions. And obviously next year will be a bigger number because we will add another full quarter of operations. So next year we would probably be looking at a number that's probably closer to 16 million tons.

How much organic growth do you expect to see from the operations themselves versus acquisitions?

As you know, we have not provided the guidance for 2005 yet, but there is organic growth opportunity in our operations. Simply looking at Australia, just improving the operation of North Goonyella and being able to market the output from the announced small surface mine that we put in adjacent to North Goonyella is one of the sources. And here in the United States, as we improve our productivity and we continue to improve the capacity utilization of our mines, also we ramp up some of the newer mines that were built in the last two or three years, you will see organic growth.

I was just trying to get a sense as to what extent organic growth could counter the cost rises. With Kyoto back in people's faces again, any quick thoughts on the impact to cost sector?

I believe that both candidates have indicated that they will not support a Kyoto protocol. Certainly Senator Kerry has said that it would need to be fixed before he would be willing to sign it. The real issue and the most fundamental issue that they face is we don't have good alternatives in this country regarding our energy supply other than coal. So that is why both candidates have been strong supporters of clean coal technology and improving our emissions via the use of technology. So we expect that in the either event that there will be a significant amount of focus on the clean coal technology front and trying to reduce the emissions in that manner.

Any progress on gasification technology?

The gasification technology made a big step forward when General Electric put its vote of confidence in it, and then it entered into the alliance with Bechtel. Those are both big, sophisticated companies, and they don't make bets like that without having a thorough analysis and feeling that they will be successful.

What we really need with the gasification technology is to build a large, commercial-scale plant and work out the bugs in the technology. We only have two plants that are being used for the generation of electricity in this country, and one is the Tempa (ph) Electric and the other is Wabash River in Indiana. Both have received large government subsidies. Both have operated at somewhat of a successful level, but not at a very commercially viable level.

And also, when one looks at the emissions from the plants, you'll find that the large, advanced coal plants, PC-based coal plants like our Prairie State plant actually are better from a sulfur dioxide-nitrous oxide emissions standpoint and approach those plants in terms of efficiency, or in the same ball park. So what I see happening with IGCC is we are very supportive. We want it to work. We want it to be proven, and we think it provides another way for the electricity sector to generate electricity. We think there will be ongoing improvements in the pulverized coal type plants, like Prairie State and Thoroughbred.

Okay, great. Thanks a lot. Congratulations.

Vladimir Jelisavcic with Longacre.

Good morning. I just wanted to ask you -- it appears as though during the third quarter there were additional '05 tons that you committed. My question is just what is the quantity and price that you locked in for '05 during the third quarter?

As you know, we are not allowed to disclose the price information. And what we encourage people to do is to simply monitor our targeting and our guidance that we provide and recognize there has been a long history of meeting those targets. Rick, what was the quantity --?

Locked in for '05 -- for '05 delivery, we sold 20 million tons during the quarter.

And that is a simple mathematical calculation from what we said the last quarter.

Right, exactly.

Thank you for that, Irl. Also a follow-up question. Could you just elaborate on the difficulties that you had in Kentucky?

Sure, we had an issue with one of our mines which has really been an ongoing issue since we constructed the mine. And simply stated, we had equipment that was supposedly state-of-the-art that did not work. And we are debugging that equipment and are just about to the end of the debugging process. The other problem we had was we had some geologic issues that affected the length of time to develop it and the operating cost after it was put in place.

And then we also had a customer issue where a customer had an unexpected failure right at the beginning of the mine's operation, and essentially took down the sales outlet for the plant for about 6 to 9 months, so that was somewhat difficult too. But that all is behind us. That occurred several years ago. So a whole series of events have occurred there, but the mine is producing much better and most of the equipment problems and geologic problems are behind us now.

When you say equipment, Irl, you mean problems with the long wall?

It did not have a long wall. It had a state-of-the-art set of continuous miners and continuous haulage systems that were attached to it. So effectively, you would load from the continuous miner onto a belt and it would be conveyed directly to the top. There were significant problems with all of the equipment, including the continuous miner and the haulage system. So it was not a long wall.

I appreciate that. Thank you.

David Khani with Friedman Billings Ramsey.

Rick, a quick question on the EBITDA contribution from the acquisitions. It looks like your EBITDA increased about 100 million roughly year-over-year for the first nine months. How much of that came from the acquisitions?

About $57 million for the year and a little over 30 for the quarter. I think we told you at the beginning of the year that we had estimated it would be about $75 million for the full year, so we are on track for that.

Great. And second, really, Rick or Irl, you are going to be in a nice position for some free cash flow looking out the next couple years. Maybe strategically, what do you think you're going to use it for?

As Irl said earlier, we have with our reserve base a number of organic growth opportunities that we continue to look at that --looking at very good quality reserves that are generally going to be lower cost than some of the mines that we could potentially acquire. At the same time, there are a number of opportunities out there that we're looking at that we are being approached with and we are evaluating. So we will try to look for the best opportunity to create value and see where we go from there. Hopefully, we'll find some good opportunities, and if not, we will do the alternatives that are available to us. (multiple speakers) pay down debt or whatever else makes sense.

If you look at our track record, we have a record of organic growth simply developing new mines on the reserves that we own or being selective and making good strategic buys at the right time. And so we will probably pursue both of those opportunities as we go along.

Great, okay. Thank you very much. Good quarter.

Dick Price with Westminster Securities.

Good quarter. Wanted to ask just a question looking to the future. The impact of the BLM issue or BLM termination not to let the (indiscernible) North lease.

And your question?

Do you have any outlook, any comment on the impact of that? What is the impact the North Antelope Rochelle complex?

As you know, we had two different bidding situations. The first, we were successful for approximately 300 million tons of coal. The second, the Bureau of Land Management rejected the bid as not competitive, and now our solution is to rebid. We will either rebid before the end of the year or early next year, depending upon their schedule.

The situation is simply that when we rebid, we adjusted the price for ratio and quality and they did not deem it appropriate, so we have to do it again. And we expect to be successful.

But you do expect there will be an opportunity to go back in?

There is an opportunity some time before the end of the year or early next year.

Great. Thanks again. Congratulations. It was a good quarter.

John (indiscernible) with Apollo.

Can you give us any guidance in terms of a tax rate for next year and what should we expect in terms of normalized tax rate by '06, '07?

Next year, it would be very difficult to give you a solid tax rate. As we have said before on our calls, because of the fact that we have the benefit of over $700 million of net operating losses in our portfolio from the years when we were a leveraged company, we get a lot of tax benefits versus tax expense, which tends to make the rate a very meaningless. So what we are expecting is probably this year we expect to have a benefit of 28 to $29 million. Next year will be roughly the same -- this is my very early estimates; we haven't done the budget yet, of course.

As we get into '06, '07, we will become more of a normal taxpayer. And normal in our situation, since we are a mining company, will be an AMT taxpayer, which will be closer to 20 percent tax rate. And that will be reduced a bit by the new tax law that just went into effect with the manufacturing credits. We will get a 9 percent tax deduction as a result of the manufacturing credits that are in the new tax bill once we exhaust our NOLs. So we will kind of transitions from the benefit of the NOLs into that tax credit.

But you're sort of expecting to be what -- an 18 percent kind of taxpayer?

That's roughly out the '06/'07 time frame, right.

Again, we would encourage you to listen carefully during our January conference call. There are a lot of moving pieces with this and every other company in our industry in general. But when you look at some of those moving pieces, the wonderful market conditions and improved pricing, having a full-year benefit of the new acquisitions, the possibility of the acquisition in Venezuela, which should add to us. But going the other direction, those cost pressures that we referred to. All of those moving parts, we would encourage you to let us get our budgeting process completed and we will provide the guidance for next year, probably in January.

And when we do our Reg G disclosure schedules, we provide the tax number. And we will give that information on a quarterly basis as well as an annual basis, so you can continue to follow that number.

Thank you.

Michael Lucas (ph) with Appaloosa Management.

I really wanted to clarify again the pricing situation and the unpriced and priced tonnage. Could we just start with met coals? The press release says 6 to 8, then I heard an 11 number. Can you just give me exactly where we stand on that coal for '05/'06?

Yet to be sold as of today would be roughly 6 to 8 million tons on a per calendar year basis. And from a full fiscal year basis, there's 10 to 11 million tons, because part of that gets sold out of Australia. We were only counting the fractional number for Australia, meaning that we booked the business in April. So we took out that first full quarter as being business that would be rebooked. So that's -- a little bit confusing on the fractional (multiple speakers).

What was unpriced in April?

When we reprice metallurgical coal on the export market, it gets repriced as of April 1. That is just traditional in the market. So when we put the 6 to 8 number together, we took essentially 75 percent if you will of the total annual volume to get to that number. And I was giving a total number. When I gave it to Dan Roling, I was giving him an annual number.

So the April-to-April number would be 11? Is that how I would look at this?

April to April would be 11.

Okay. But you priced three of that basically already prior to this?

Right.

And that is in the (indiscernible) prices?

Prices that are roughly -- yes, what we are experiencing today.

Okay. And then for '06, I guess, probably not much hedged at all on that 14 to 16 total met (multiple speakers)?

Very little, if any, would be sold in '06.

And then could you just help me walk through again -- I remember the last -- you had like 60 million unpriced tons as for the last conference call and you kind of gave a good breakout then. I'm trying to understand what's PRB priced, unpriced, (indiscernible) priced, unpriced, and maybe (multiple speakers)?

You're looking at '06 now?

No. '05 -- I'm sorry. And '06 if you are willing to give that.

We have given the '06 numbers, that we have 85 to 95 million tons yet to be priced into the market. Roughly half of that will be in the Powder River Basin. And then you break it down into the met business. And if you looked at Appalachia and Australia together, you would be looking at almost 20 million tons out of that 85 to 95.

Which year are you --?

'06. I'm talking about 2006.

So it's basically like 4 million tons from (indiscernible), like 14 to 16 for met coal and 45 for PRB?

Roughly, yes. And then you have Colorado, which would about half of their production would come up for sale, at about 4 million tons, which is also a very robust market.

Okay, that is '06. Can you just help me walk through '05 too, please?

'05, we said 25 to 30 million tons as of today. We said 6 --

To 8 for mets?

Yes, it's looking like 8 million for the net number. Between Appalachia and Australia we're talking about a 10-plus-million-dollar number and $11 million for PRB -- 11 million tons, rather, I'm sorry.

11 million for PRB?

So less than half in the PRB and the other major component in the East and in Australia.

I'm sorry, so it is 10 in the App. PRB would be 11 and 8 in the coal?

Met coal and Appalachia are the same, to some extent. Not the same number, but part of the Appalachian coal is metallurgical coal.

So all that is U.S., all that 6 to 8 million tons unpriced is U.S. stuff?

No, it is not. It is Australia and part of Appalachia.

I got it, you bundled the number into 10 and it is inclusive of the 8 million tons of coal and 11 for PRB.

Okay.

I just wanted one more thing. I'm still trying to understand the pricing discrepancy between PRB now that this (indiscernible) has come down. When you enter into new contracts with the utilities or whatever, do you try to reference that price to what it would on a BTU basis with transportation etc. in the East? In other words, whatever that would be times the 8800 -- multiply it out, you'll probably come to a -- if you get to a $50 number, you would think you would need $10 to $11 PRB coal.

We have, I believe, provided calculations in some of our meetings with investors in the past, the large meetings, that simply showed the calculation that you've gone through. And yes, there theoretically is a high price for Powder River Basin coal, much higher than it is right now. However, of course, market forces are brought to bear and the issues of transportation are brought to bear, meaning can the transportation service providers really get the coal to the market? So those are some of the reasons that that theoretical calculation really doesn't work. But yes, there is a significantly higher theoretical price in the Powder River Basin, if you ignore the market forces.

Ian Bittner (ph) with Bear Stearns Asset Management.

I just wanted to ask -- I'm new to the industry, so I wanted to ask a naive question if I could. We all know about the price increases, etc., and you said on the conference call you can't tell us what the increases were. But are you satisfied with the pricing that you have gotten with the contracts and have you seen the people that are buying the coal, the utilities, etc., the steel companies, do you see them willing to -- when I say willing, I guess it is the wrong word, but for lack of a better word, do you see them willing or meeting the prices that you have expected?

I'm trying to figure out how to answer it. We really don't discuss much about pricing at all. There are just very complex market forces at work right now. And generally, if you are new to the industry, some of the analysts that were on asking questions earlier in the call write very good reports that analyze those market forces, and I would encourage you to go there, and that is the best way to handle that. On contracting and pricing, it is very simple. If we are not satisfied that it is going to earn a good return for us, we don't enter into the business.

Let me just rephrase the question then. Being new, I don't even know how to ask the right question, but let me try again. Given your expectations going in, have your expectations -- again, you're not telling me there's a lot of complexity -- are you satisfied, therefore have they met your expectation regarding the pricing, whatever that may be?

If you are referring to our budget at the beginning of the year, some of the pricing has been amazing in some markets and others has been disappointing. But overall, the results speak for themselves. Our company is doing much better than it did in the past, a lot of it due to pricing and volume, offsetting the inevitable cost pressures that a company like ours has.

I think that is a good answer. Thank you.

David Seconds (ph) with Deephaven Capital Management.

Could you talk -- two pieces are related -- talk a little bit more about the trends you're seeing? Are we seeing any kind of meaningful increase in selling western coal into eastern markets? And related to that, can you talk about the news we've heard recently about new tactics or a new tack taken by the railroads in terms of contracting activities with the utilities? We're hearing of much, much higher prices, and an unwillingness on the part of the railroads to sign longer-term contracts, the way they have in the past.

I would start out -- one of the market factors that is affecting the Powder River Basin is that thus far this year, the railroads did not have the capacity, the western railroads, to satisfy demand from customers, first-time customers, in the East to use Powder River Basin coal. And there is a pent-up demand for Powder River Basin coal from a number of first-time users in the East. When that gets resolved, I am not sure.

Second, it is true that it appears that the railroads are in general taking a tack, an approach, to raise their rates and they are doing so on the basis with the argument that they are not earning their cost of capital. Everybody wants them to be reliable, well-capitalized, and to be profitable. That is what business is all about. However, I think a lot of parties, and we are one of them, are watching closely that they don't put rates in effect that are to the detriment of coal and such that coal subsidizes some of their other movements that are unprofitable.

Okay, thank you much.

Fritz von Carp with Sage Asset Management.

My question has been answered, thank you.

Jay Turner with BMO Nesbitt Burns.

Good morning. I just had a quick -- let's go back to what Rick had said a little earlier about '06 unpriced volumes. If I heard correctly, you said the total met coal was 20 million tons?

No, I did not say that.

Sorry. I misheard (multiple speakers).

Our capacity for met coal on an annual basis is, as I said in my remarks, around 12 to 14 million tons on an annual basis, so that is split between Australia and Appalachia.

Jay, when he provides these numbers, he's assuming a status quo. This is assuming no (multiple speakers).

That's what I was trying to get at, is what you see your growth profile in met over the next couple (multiple speakers).

And we simply haven't put those numbers together and won't have them available until January when we have our conference call there.

Just secondly, again something Rick said. You mentioned the cost associated with hurricanes were approximately $6 million, I think, Rick, you said earnings. Is that 6 million an after-tax or a pretax number?

It would be EBITDA. In most cases, that usually flows down to the bottom line, but in this quarter it did not. It would be EBITDA.

Okay, great. Thank you very much.

John Hudson with Bricoleur Capital.

Rick, real quick, just on this insurance recovery, was that pretax as well?

Yes, that was a pretax number.

Was that all related to issues or costs that were incurred in the third quarter?

No, it was related to issues and costs related to that particular operation that we had the problems with during the year, but most of the cost occurred in the previous year related to that operation.

And is this like liquidated damages from the equipment supplier or is this business interruption?

No, these are just losses that we incurred when we were opening the mine that reduced our earnings in the previous years and now we're just getting a recovery. It is just a business interruption type claim.

Some this year, too.

Yes, and some this year. But it's a business interruption type claim. So when we had the charges from before, we didn't make a big deal out of it because we just blended it in with the rest of our operations. And so it was nice to finally get a recovery of some of the cost that we had already lost out of that.

All right, great. Thanks.

A follow-up from David Khani.

Rick, have you quantified the potential impact for the industry for Horizon and also on yourself as well?

First, I'll say it is very complicated, Dave. There's a lot of challenges still going on with this issue. I know that the UMWA and the funds are all still appealing the ruling on the Horizon bankruptcy case. In total, I probably couldn't give you an exact number from a total standpoint. As we look at Peabody -- because we know that number -- if all those beneficiaries would flow into the orphan pool and Peabody had responsibility for our share, it is a pretty immaterial number for us going forward. It is probably going to range next year in the 3 to $4 million range, so it is not a real big number.

Is there anybody else out there that we should be leery of that's could (multiple speakers) in this situation?

Yes, and I will stop there.

Ask the question in other conference calls and (indiscernible).

Thanks.

A follow-up John Bridges.

Just a bit of housekeeping. You have about 10 cents of next year's sales still to price, but are you going to price it or you just going to be comfortable running into next year with 10 percent going into the spot market?

And also on the software adjustment to PRB prices, you were saying that it's a nice concept, but it doesn't work too much in practice. Could you give us an indication as to what sort of sense your PRB sales are affected by that sulfur adjustment?

On the sulfur adjustment, that one does work. I was answering a much broader question that involved long movements into the East, I believe. But on the sulfur adjustment, we do receive a significant premium for our Powder River Basin coals that have lower sulfur content. And our Rochelle North Antelope complex has one of the lowest sulfur contents in the United States, and the sulfur premium is in the neighborhood of -- what, Rick?

Today, and you have to look at it -- we're just getting the prices where they are at, but prices today for sulfur allowances or credits are $575. So if you translate that into our product, it's between $1.50 and $2 premium. And are we getting all of that on every single contract? No, but we have a lot of contracts that are indexed to that particular sulfur credit market.

Would you say it's half of your contracts or a quarter of your contracts?

It varies, John. Sometimes we have an index that's purely based upon the markets on a traded basis. Sometimes it is just based upon a point -- we sell them a 0.8 pound product versus selling them a 0.4 or 0.5, which we deliver, and then we get that adjustment in the contract. I couldn't tell you exactly how many of them have that in there, but it is increasingly becoming more of an issue for us as we negotiate our contracts. And we are getting that value.

Okay. Thanks a lot.

Because the customers get the value.

Andrew Shirley (ph) with Ivory Capital.

I apologize. I missed the beginning of the call, but it sounds like you made some comments regarding cost pressures and I was wondering if you could just reiterate those comments.

Sure. Many of the costs are the same costs you would expect an industry like ours to be dealing with, and that's higher fuel costs, of course, diesel fuel. We use 95 million gallons of diesel fuel year and obviously you know what is going on with the price of oil.

We are also experiencing -- we use a lot of explosives. Those cost are highly tied to natural gas, so that is tied in there. And then you look at our steel costs, and that's probably the largest component that we're seeing the inflation. Steel costs in fact have doubled. We use a lot of steel in roof support in our underground mines and then our capital cost obviously has a lot of steel to it.

We have some active programs to manage consumption. We are also active in the markets to use hedging techniques to try to reduce the volatility in the cost and we have been fairly successful. But it has added cost pressures year-over-year of about 50 to $60 million.

I think the significance for an investor is first of all you have a company that is very forthright and will talk about cost pressures on its industry. And then above all, we are focused on them and we have numerous plans to mitigate those costs. And that is very important as you consider who you invest in, that they do have those steps in place. So while there are cost pressures, we have an action plan to deal with them and overcome them.

The 50 to 60 million is your expectation for 2004?

2004 over prior year 2003. So a little bit of that is going to be related to volume, but most of it -- I would say 80 percent of it is price. Obviously, volume impact because we are producing at a higher clip and production run rate than we were last year.

In aggregate, if you look at 2004, is there a fair amount of protection from prior hedging strategies and contracts?

Yes, there is. As I said earlier in the call, consider it lucky or whatever you want to consider it, or having a good crystal ball, in April 2004 we had locked up all of our fuel costs at low 30s per barrel, as the costs continued to rise. So we're benefiting from that in 2004. Obviously I won't be able to replicate that in 2005, but we do have some of those hedges that we took out beyond '04 that will help us in '05. So incrementally, we're not expecting a 50 to $60 million swing in '05. We will see an uptick and pressure on the cost, but it won't be as significant as it was this year.

Okay, great. Thanks.

Ladies and gentlemen, we thank you for your questions. We are approaching the one-hour mark. I will now turn the call back over to management for any closing comments.

This is Irl Engelhardt and I just once again want to thank you for your interest in our company and your support of our company. We provided earnings guidance for this quarter and we will endeavor once again to make that commitment. We take it very, very seriously. Again, thank you for your support.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and you may now disconnect.