Peabody Energy Corp (BTU) 2004 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Peabody Energy Quarterly Earnings Call. At this time all the participant lines are in a listen-only mode. However, there will be an opportunity for questions. [OPERATOR INSTRUCTIONS]. As a reminder today's call is being recorded. I would now like to turn the conference to Mr. Vic Svec, Vice President, Public and Investor Relations. Please go ahead, sir.

Good morning and thanks for taking part in the conference call for BTU. We had an outstanding 2004 and we are looking for even better results this year. Today Executive VP and CFO, Rich Navarre will review our results and Chairman and CEO, Irl Engelhardt will discuss the energy markets and the Company's outlook. We will make some forward-looking statements today. You should 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. Rich?

Welcome to Peabody's year-end earnings review. Our fourth-quarter results included a terrific year on a very high note. The Peabody team continued to deliver in 2004 and today we review our target in 2005 earnings per share growth of up to 100 percent. To recap a successful 2004, the Peabody team set yet another industry sales record and set new company marks for revenues, EBITDA, and earnings. Our operating profit increased 69 percent and net income grew $144 million. We also made successful acquisitions to grow the Company and our market capital is a 129 percent.

With those highlights, lets discuss the financial results in more detail beginning with our income statement on Page 7. You will see our revenues grew 29 percent to $3.6 billion for the year as Peabody's 7,900 employees met growing coal demand at all markets. Our mines rendered higher output levels and our team captured higher pricing and new operations made strong contributions. Our 2004 EBITDA increased 36 percent to $559 million. Our operating profit totaled $247 million for the year and earnings per share was $1.03 for the quarter and $2.75 cents for the year.

On Page 8, you will note that the 2005 revenues and volumes grew in every region. Higher met coal sales led to increased revenues per ton in East and in Australia. Western per ton revenues benefited from the addition of the Twentymile Mine in mid April.

Moving to operating costs per ton, increases in eastern costs reflected higher margin met coal production, increased cost for energy, explosives, and steel and higher royalty payments. In the West, the moderate increase in cost was largely related to higher energy charges and mix. Our productivity was excellent. Peabody operated 3 of the 4 most productive mines in America and our Rawhide Mine was the most productive according to the latest industry data. The reason I would like to call your attention to the productivity is because productivity is our best line of attack to control costs. We are dissecting each cost component and aggressively managing our cost structure to continuous improvement initiatives, purchasing, hedges, consumption controls, and the list goes on. Of course, some of the costs that we are experiencing are tied to strong prices in markets, which has more than offset cost inflation. Overall, our margin expansion boosted 2004 operating profit by 54 percent.

Moving down to capital expenditures, you will see, we invested $264 million in capital for the year including a $115 million for 2 new leases of Powder River Basin coal reserves. In 2005, our CapEx will include the next $115 million installment for the Powder River Basin reserves. New longwall equipment to improve productivity and capacity in Colorado and Australia and investments to extend the lives of our Burton and Harris met coal operations. This leads to higher-than-normal CapEx targets of 450 to $500 million for 2005.

For 2006, we are targeting lower levels around 300 to $350 million. Peabody's continued strong performance has led to a solid, flexible financial position with good liquidity. You will note on Page 9 that our cash balance stands at $390 million. We have a substantial amount of uncapped revolver capacity and we have a very favorable net debt-to-net capital ratio of 38 percent.

Now I would like to report on our sales contracting position. You will recall that Peabody's practices to layer in long-term contracts when markets are favorable to improve long-term growth and profitability. As a result, we have priced 95 percent of our planned 2005 production and 70 percent of our 2006 production. We continue to have 5 to 10 million tons of 2005 production available for sale and 70 to 80 million tons in 2006. The effects of a robust met coal market is just beginning to benefit Peabody's results and for 2006, we will have much more market leverage with 12 to 14 million tons of met coal either unpriced or recently priced in the strong markets. All of this leads to a very positive outlook. We are targeting 2005 earnings per share increases of up to 109 percent and EBITDA growth of as much as 52 percent continuing our trend of growing EBITDA year over year.

As we mentioned in the release, because our results are sensitive to high margin shipments and transportation availability, we are offering a broader range of guidance in 2005. As in the past though, we will tighten up this range as the year progresses.

Shipping to the first quarter outlook, we are targeting EBITDA of 140 million to $160 million and earnings per share of 45 cents to 70 cents. This often happens in the first quarter, our deliveries are affected by weather disruptions. For example, the transportation systems are being impacted by severe flooding on the Ohio River system, impacts of snow and rain that you've heard about in the West, and major storms that are holding up shipments and production out of our Queensland mines in Australia.

We expect later periods will benefit from higher pricing for agreements that began in the second quarter and an expected return to normal delivery pattern. In summer, we are looking for another rewarding year for Peabody and its shareholders. We are well positioned to capitalize on the market opportunities and we expect an excellent 2005, which will set up an even better 2006.

At this time, I will turn the call over to our Chairman and CEO, Irl Engelhardt.

Good morning everyone. As we move into the new year, I want to begin this conference by thanking the Peabody team for delivering on their financial commitments during 2004, and they also delivered on a number of other important commitments and a 11 percent improvement in safety, increased output to meet the customer needs, completion of successful acquisitions, and better productivity at most operations just to name a few examples.

Before we take your questions, I'd also often like to provide our view of the market conditions. Last year, at this time, we made a very bold statement. We said that the near and long-term market outlook was the strongest in the past decade. And as we enter 2005, we are more bullish than ever for Peabody and for the industry. We believe that strong market conditions are being driven very powerful forces. And the most important force driving coal's success is the need for a strong economy. China, India, and America are expected to post the largest economic gains moving forward and they will also post the largest increases in coal use. Each of those countries is using a diversified mix of energy sources to fuel its economy. And China, India, and America are all using the domestic coal resources for increased electricity generation. The standard of living of their citizens and the competitiveness of their industries both benefit from those policies. The second driver of coal's bright future is the cost of reliability problems of competing fuels. The International Energy Agency forecasts growing oil and natural gas usage of more than 60 percent over the next 25 years and yet the future supplies of oil and natural gas require huge investments. Investments to expand supplies with sources with political, security, infrastructure or environmental issues.

And most energy consumers are confident that coal can meet their needs and global coal use is expected to grow by over 50 percent over that same 25-year period. Based upon their actions to diversify their energy supplies, however, we believe energy users appear much less confident that oil and gas output will be either reliable or economical. So the problems with the competing fuels are creating a wave of coal-generating projects. Globally, 900 coal-generating units are under development with more than 100 expected to come online over the next 2 year in China alone. In the US, 6 units are under construction and another 100 plants are being developed. And as we look further into the future, we are seeing a very promising change as coal use expands using new combustion and conversion technologies. Increasing research is being applied to convert the energy stored in coal.

Technological advances may allow coal to be converted into synthetic gas, diesel fuels, or other energy forms in a commercially economically run manner. And while the conversion of coals, BTUs is in its infancy. We believe coal conversion or BTU conversion offers an important alternative, an alternative should oil or natural gas supplies fail to match the world's energy needs.

Peabody will grow and prosper as it satisfies the expansion of coal demand that will result from those powerful forces. Our unmatched sales and trading activities provides a window despite changing energy trends. Peabody's globally diverse operations give us the flexibility to satisfy evolving customer needs and our 9 billion ton reserve base will increase in value as new generation is constructed and coal's BTU conversion advances.

I believe you have seen that Peabody is targeting significant increases in EBITDA and net income for 2005. We expect to have a very good year and believe that future will be even better. The broad range of our guidance reflects a high-class problem for Peabody. High margins make it more difficult to predict near-term results especially when weather or other unpredictable events affect our volumes. We are very excited though about the prospects for Peabody. We expect 2005 to be an excellent year, and 2006 and beyond to continue the trend of improvements. On behalf of the Peabody team, I want to thank you for your interest in our Company. We'll take your questions at this time.

[OPERATOR INSTRUCTIONS] Michael Dudas, Bear Stearns.

I got 3 questions. First, on the CapEx budget, you talk about Colorado and Australia. Give a little bit more color of what you're actually going to be doing there in the next couple of years. Part of the increase is the fact that equipment cost and times are up so much, such as improvements in mix or costs, will those capital investments have brought?

Mike, this is Irl Engelhardt, what we're doing at both of the mines is putting in new state-of-the-art longwall systems and you recall that those are very thick seam mines -- 12 plus feet of thickness in the coal seams and so the equipment is quite large. And what we're doing is putting an equipment that allows us to increase the capacity should the market conditions make that desirable. I believe you've seen that in Australia, we produce metallurgical coal from the mine where the longwall is being installed. So, certainly the conditions are good and in Colorado, that coal has received very favorable market acceptance. So, we're optimistic, we can keep growing there also.

Is there going to be -- in Colorado, is there going to be transportation constrained a bit?

Well, we believe that we will have the transportation capacity in place to continue to grow. And part of the growth will be to serve a nearby plant that we either truck or rail the coal to -- that doesn't have to cross the mountain range.

Now my second question is, Irl or Rich, can you give a sense of historically what typically locked in for their future business beginning of a calendar year and so where do you stand relative to that? And is that more of a function now because the utilities are still not quite sure how to go about things, or your upbeat nature of the marketplace. Could you just give a little bit of color, give a better perspective?

Sure. I believe we have consistently explained to everyone that we don't have a set rule. What we do is, we look at each of the markets and take a forward view of the markets, and have our price to unpriced position based upon our view. For instance, we entered 2004 with strong exposure to the pricing of metallurgical coals and that proved to be a good step. We also had most of our Powder River Basin coals already under contract and that proved to be a good step. So, as we enter this year, we went for the -- sticked to the and we also locked in some market improvement for 2006 already, again, allowing for upside. We have time to expand our production if the market conditions continue to grow. However, in the guidance that we have given for 2006 about the committed/uncommitted volumes, we have assumed a flat versus 2005 volume related to that. So, we take a view of the market and our goal is to lock in a priced position and a contracted position that improves our earnings.

Thank you and my third question is regarding Prairie State, it seems that it is a very active and productive year for the process there. Could you just remind us a little bit where you are relative to schedule. Do you feel like you are headed behind and we give a good chance of getting some contracted business of that output in 2005, so we can have a construction decision to be made?

Sure. Well, we are moving ahead very rapidly with Prairie State, a lot of activity right now. Strong support from the local communities to state and we've passed the major milestone this past few weeks, when we received our air permit. That's a major event and one that is important for any project to move ahead. We have done a great deal of work involving our engineering and we're actively working with our contractor to take bids for the final details of the engineering and the actual equipment. There is tax of contracts around here, where we are negotiating with various potential partners and hope to have an announcement sometime soon to hear in more detail. But, it's quite active and moving along at a good pace.

Daniel Roling, Merrill Lynch.

Could you update us on the Powder River Basin transportation situation? Are you seeing the trains showing up and are they succeeding at reducing some of the bottleneck we saw last year?

Well, what we see right now, Dan, is that the weather problems that exist throughout the United States are causing a great deal of difficulty for the rail roads. Some of the rail roads are being impacted in the far West by the huge amount of rainfall that occurred in California and moved on into the mountain ranges especially in Utah and Colorado and tremendous amount of damaging work that they have to do to have that occur -- the weather involving wide fluctuations of temperature down to minus 10 up to 60 degrees in short periods of time has impacted the railroads. So, we are being affected negatively in that part of the world by their reliability. On the positive side, they have invested heavily in their rolling stock and their equipment and put a great deal of investment into -- to improve the service. They hired a large number of people and that offset some of the retirements that they are experiencing. And I believe, we expect that sometime in the second half of the year that we'll see some improvement in the service there. Nevertheless, some of the breadth of our guidance in this first quarter is a function of that -- of the rail service that we are receiving in that part of the world.

And then, switching to international market, given the tremendous growth in steel production worldwide and our estimate of significant additional steel capacity -- the integrated type coming on line, I would like your views, if you don't mind, on the supply and demand for metallurgical coal over the next 3 to 5 years and our view is that it's going to remain extremely tight. Do you see incremental supply conquering that or -- just your views?

I think our view is that especially over that 3 to 5-year period that your spot on, that it will be very, very tight. And there will be several factors -- the demand of course number one, how long the economies around the world remain strong; and two, how long it takes for China to build it's own steel-making capacity and whether it has got it's own coal production for metallurgical purposes. So those are sort of the big drivers of it. We think that any expansion in supply -- right now, it appears that the largest will come out of Australia. It appears that there are multiple years of development for those large projects to come on board. Of course, they are coming on in the part of the world where the largest demand exists. So, it's probably prudent for that to occur.

Wayne Atwell, Morgan Stanley.

Just a couple of quick short questions, can you talk to us about customer inventory levels in the East. You've had a pretty mild winter -- uninterrupted recently -- last couple of weeks by some pretty cold weather. Is there any paranoia about inventory levels of your customers in East Coast?

The inventories continue to be the lowest on the East Coast of the United States. That's been the situation for roughly the last 15 to 18 months. It didn't really improve too much this past year. The primary problem that the customers and we are having at the moment is getting the coal from the mines to the customer locations. Some of the customers are extremely low at their stockpiles and again the mines -- their railroads seem to be allocating the capacity to avoid any stock out at the customer's sites. The other complication right now is flooding. The Ohio River system is very high. You saw that there was a significant blockage of one of the locks due to some sinking of some barges that are blocking the gates and so those customers along the Ohio are having their supplies disrupted in some cases by that flooding situation. We've experienced it about 2 weeks now and have at least another week to go before we hope to get back to normal production. So -- for normal shipments. So, that's complicating the issues also.

It maybe -- it's hard to give us a good feel for this, but it seems like there is a number of extraordinary factors in the first quarter; shipping delays in the Australian area, weather conditions here, that as you point out the flooding, rails continue to be somewhat unpredictable. Can you give us any kind of feel in general for first-quarter disruptions and extraordinary factors?

Well the primary problems are weather, weather, and weather and how it impacts transportation. Our operations are running very, very well, which is a very good thing. The only ones that are being impacted are those that are affected surface mines whether it's large amounts of snowfall or large amounts of rainfall; that's primarily in the Midwest for the surface mines was the rainfall and the snowfall. Down in Australia, we have several surface mines that are being affected by monsoons right now. But that's a temporary thing, it will be fixed quickly. The impact of the weather on shipping is our biggest problem. For instance, there are major storms in the South Pacific right now and that's increasing the number of vessels that are in the queue off of Dalrymple Bay were up to 40 plus vessels right now. And that's affecting the shipment of high margin metallurgical coals from that port. And we incur demurrage when those kinds of problems occur. Here in the United States, I talked about the Ohio River flooding impacting us 3 months and I talked about earlier the rail delivery and service problems in the West. So, it's primarily weather and transportation unfortunately affecting us when our operations are running very well.

And should we assume that this is temporary that you won't be forced to cut back any production because of inability to inventory?

We'll make some of it up. We will continue to ramp up our inventories and then we expect to meter it out over the last 9 months of the year.

Right, but you won't have to cut back any production because of lack of ability to store coal anywhere?

No, no we don't expect that to be a problem.

Paul Forward, Legg Mason.

I was just wondering will the delays in Queensland push some of the lower priced coal around $57 a ton set a year ago. Will that be pushed into the second quarter and so you will have less in the way of repriced coal coming out from the second through fourth quarters this year?

We don't think so. We think that -- that is a temporary thing that will last about a week or 2 and that will largely ship most of the lower price business in the first quarter.

And what is the mix that you get out of Australia, hard versus semi-soft, versus thermal coal?

Well, it is just potentially hard coking coal -- Paul, this is Rich Navarre -- very, very little thermal coal, that's used in the blending at all, but -- so it's probably 99 percent in hard met coal.

And so we wouldn't expect much in the way of a discount from the sort of $120 plus numbers we have seen for the fiscal year beginning in April '05 based on product quality or anything.

We have a couple of different products down there and then our premium product to go. And as we said in our press release, we sold for roughly $125 a ton and our lower version of that product is about $110 a ton. So, pretty close to the same numbers you are talking about overall, so not much of a discount.

Dave Gagliano, CSFB.

Just a quick one on the longwall installations that you mentioned for 2005. Just 2 questions there. One, timing on the installations both in Colorado and in Australia; and then two, as it relates to the Australian operations, is there any incremental or expected incremental production increase associated with the installation of longwall?

And I'll start with Australia. Well, the Australians just really is replacing an existing longwall equipment -- we are not looking at increased output right now in Australia, it will be the same level of production that we had -- expect to have in '05. The installation of lot of equipment will occur in the second half of the year. And we don't expect any major delays as a result of that. We've got a big indoor schedule. As it relates to Twentymile, we expect to have the equipment in place in -- we are buying at this year, getting it in place but won't install the equipment until the first quarter of '06.

And is that in -- just to follow on Twentymiles -- is that replacement as well? Is that--

That is replacement.

And we are going to do in different district of the mine and the equipment has gone through a number of cycles, so it's pretty much end of it's life. So, as we replace that equipment because of its age, we're also getting a more robust system that has more capacity to hold the top that we need. So that's -- add a little bit to the cost. In addition, these are very, very long panels. So we're replacing significant number of shields over the longwall as well. So, it is a big project and that is moving pretty smoothly right now.

John Bridges, J.P. Morgan.

The Australian longwall -- is that going to better able to handle the sort of the tough geological conditions in Goonyella?

Well, we hope so. It certainly is in state-of-the-art equipment and has some features to it that overcome the unconsolidated material in the roof there and you know that North Goonyella is a geologically difficult mine. Our first priority was to make it safer than it was and we are doing well there and next is to make it more productive and we are doing better.

How is Eagle Field working? What sort of tonnage is coming out of that this year?

Eagle Field, did you say?

Yes, we are expecting to get about 800,000 tons out that new surface mine this year. Obviously, we are having a little bit of slow down right now because of the weather issues but that'll be just a temporary -- as Irl said that's temporary for a couple of weeks and get 800,000 to 1 million tons out of that property.

And then out of a big picture question with respect to marketing, Rich. And when I talked to our utility people they seem to have confidence that the LNG, LPG facilities that are being put in place, will take the pressure of the utilities and sort of from 2007 to 2008 onwards? Is that coming back at you from the utilities whey they talk contracts, are they are showing confidence of that or are they beginning to worry?

They are beginning to worry. I talked to a number of the CEOs in utility industry and of course, they all are trying to follow a pattern and diversifying their energy supplies and yet they are prudent about the reality of what is likely to occur because LNG is one of those products that if they get it wrong, it will add to having in many cases, been wrong about their investments in natural gas power generating plants. And so they doubled up their bet and have the serious problems. So, I am not hearing anyone that's betting big dollars on the LNG. They still watch the difficulty of obtaining the permits for these facilities, and they support them, but they are not betting big dollars on them. Almost every utility is, where it's prudent to do so, is looking very hard at new coal power generating plants.

David Khani from Friedman, Billings, Ramsey.

Hi guys! good quarter. Quick question on, I guess, costs. How much of your main sort of bearable cost such as fuel and steel have you had locked up now into '05? You had a good position in '04. Give us a sense of where you stand in '05.

Sure David. On the steel, we really haven't had a mechanism to really hedge our steel cost. So, we are fluctuating with the price of steel and the surcharges that are still out there, so that we're experiencing. As it relates to fuel, just recently we took advantage of the dip in the market about a month and a half ago and locked up additional component of our fuel. We're approximately about 90 percent hedged right now at an average cost of $35 a barrel. So, we didn't get the pretty favorable number for 2005. We had a big chunk locked in the low 30's, and then we locked in this last piece about $40 and average of about $35 a barrel. So, we feel pretty good about where we're headed so far.

And another step we have taken is to put in place consumption teams that work throughout the Company to, when you have a high-priced commodity, to try to reduce your consumption of it to the extent that's prudent to do so. So, that's another major step for us.

And then last, how about on the explosive side, can you hedge that?

Yes, we've hedged that through natural gas hedges, it is somewhat of a derivative of natural gas and we have a fair amount of that locked up for the first 6 months of this year, still locked up at a natural gas price roughly 4.25, which is we locked up, that was a 24-month hedge we put in place. The back half of the year is a little bit more closer to the market today, but it is probably locked in the high 5's, so we do have the rest of this year locked up as well. So, explosive shouldn't be as big a variation year over year as it was last year.

That's great, that's great. And then last, on legacy cost, what sort of a directional change year-over-year, or if you can give a sort of a sense of maybe dollars?

Yes. Total cost or legacy costs are going up about roughly $40 million to $50 million and it really -- and some are still on non-cash basis. It's really -- continued pressure on long-term interest rates has driven down this coverage once again with respect to retiree healthcare, pension costs, everything else, so it's also -- it's a non-cash external charge and then your turn rates in your healthcare side, although we experienced healthcare inflation in the 4 to 5 percent range, we are still required for accounting reasons, another reason that we use a roughly 8 percent inflation turn rate, is an assumption, long-term assumption. So, as we continue to beat that over time, hopefully that will bring our cost down, but it is pushing up our book cost by $40 to $50 million.

I guess you bought out a joint venture in Central , is there more opportunity to do that? Do you think there is some, I know it's not really easy, it's not where you want to be more so, but is there opportunities where you guys can scoop up some assets?

Well, we actually bought out a joint venture in Western Kentucky and it produces very high BTU, mid-to-high sulfur coal and what we believe is that that type of coal will be in very high demand as customers install a large number of scrubbers over the next 3 to 5 years. So, that's why we did that. We have a number of these joint ventures where we've taken our assets and then helped parties team up with us to expand an operation. We have the ability then to evaluate whether the performance is good and whether we want to invest in it further and in that particular case we did and in some we don't and we sell them and move on. So, it's just a little pipeline of growth opportunities that we have out there that we're constantly nurturing.

I guess last question on the Prairie State. What's -- where do you stand on sort of your ownership issue right now because I think it says in your last press release that you made some progress on your partnership ranges?

We did. Since it's not public information as to what percentage that we have contracted or getting ready to contract, I can't give you the exact number. All I can say is the interest is extremely high, it's sometimes surprising when we pick up our clippings to find that parties will announce that they are going to team up with us or invest in the Prairie State, of course Thoroughbred, the other one in Kentucky. We don't have an agreement yet with them to do so. So, that's fascinating to watch happen. So, that's part of what you get when you deal with some public entities that are municipalities or other bodies. Quite strong interest as to key point.

Is your goal maybe not to sell down more than 50 percent? Is that a fair assumption then?

No. Our goal is to number one, lock up a group of partners who will have a power uptake, lock up of partner that will help us with the operation of the venture and by the way we have keen interest there and number of conversations going. And, then we will stay in for a percentage. The exact percentage that we stay in for is actually a function of what our partners want and the demand is very high, so we can almost take any percentage that we want.

Great. Congratulation guys.

Jay Turner, BMO Nesbitt Burns.

Just had a quick question on your Australian mining operations, the costs, it has gone from $34.42 a ton up to $38.79. Is that all the merge or is there some other issue there?

Well, the merger certainly a component. You know that September quarter?

Yes. Well, you've reported 3 quarters. That means April -- Q2 was $34.42, Q3 was $36 .

And there is a little bit of blend in there with our lower cost Wilkie Creek operations, the thermal coal operation. But for the most part what you are seeing in the fourth quarter is higher demurrage charges and little bit of downtime at the North Goonyella operations. We didn't get as much productivity in the fourth quarter out of the North Goonyella operations of the underground. Longwall operations, you get a lot of fixed costs associated with that. But hoping to turn that around for sure in the '05 period.

And the 7 million tons for the next year looks pretty good production target for the hard coking coal?

Yes, that is incorrect, 7.5 million tons.

And Wilkie Creek would be what about, a million and a half, 1.2?

Yes.

Fritz von Carp, Sage Asset Management.

Good morning. I had a question on followup to Dan's question on the met coal market. Help me understand what do you think is the worldwide met coal production in '04, and what do you think that could rise to in '05? And I don't know if you could give me numbers on global or just the seaborne site. We are trying to get a feel for in metric tons what met coal production can grow in '05 over '04?

Just give us one second. We are hoping to give you the right numbers, just hang on, one second. And we are seeing this met coal demand growth of course primarily to feed the steel makers in Asia, as well as the US. Good strong areas of growth that are improving in line with these economies, that are in the upper single digits when you get to some of the strong Asian countries, of course driven by China.

We got every number in front of us from crude steel production to -- but the exact tonnage we don't have. So, basically what we expect is the growth within the output to be less than 2 or 3 percent and there is a supply-demand imbalance, with demand exceeding supply right now. So, we don't see that 2 or 3 percent growth over the next few years catching up with the demand in balance.

Tell me if this number sounds right to you, I understand that you don't have quite the exact in front of you. But I am looking at somebody else's forecast that total global coking coal market in '04 was about 600, I guess this is million metric tons. That's down roughly, right?

That's correct. And that kind of including non-seaborne -- (Multiple Speakers) the seaborne number is more like 500 million tons and there is the other number which is -- then you got some domestic met production.

Yes, so this model has got 600 as being total global and then the total sea borne being about like 215 or so. So about a third of the total global, does that sound right?

It's 205 to 215 is the demand right now. We think -- that's the sea borne and we think the supply into the sea borne somewhere in the range of 190 million metric tons.

Okay. And so 5 -- so you said something like 2 to 3 percent growth at the most, was what you said?

Yes.

And on its own, it is 600, so if I just take a midpoint --

You are being more precise than we are on (multiple speakers)

I am talking about -- globally about 10 or 15 million tons growth. Does that sound about right?

That's about right. It's -- the supply is growing at a rate of about -- or about 2.6 percent over the last few years. So that's still in that same range. It's not until we get 3 to 5 years out that we expect a significant increase in the supply and that will be due to a number of new mining projects that are coming on stream down in Australia and for them to come on stream that's mean the port capacity and the rail system have to be upgraded also. So those are -- there are some big ifs right there.

Messa , Zimmer Lucas Partners

I have just a couple of questions. One, you talk about in the press release of steel and the cost and in the healthcare expenses; overall what kind of percentage increase do you see in your costs in '05 versus '04?

We think its probably going to be somewhere in the -- it will be under 5 percent overall and we do -- what's really going to some of the inflation impacts will roll through. We will offset some of that with continued improvement in productivity. So if you look at an overall cost basis, you are probably talking about -- only 5 percent increase in cost. It will still flow through and that's offsetting doubling of our steel cost, which is a pretty substantial number and obviously a very high increase in our cost of fuel for the most part. And the reason, we are still experiencing higher fuel costs when you look at last year's cost being high as well is that we got an active hedging program and in 2004, our average steel cost because of our activities in hedging, we are in the low $30 and that we are still experiencing $35 of payroll rather than that versus a ton in '05 because we still have hedges going forward.

Okay. And I am not sure but could you shed some light on, you talk about in the press release of the 3 million tons, Australian, 110 to 125. How is that relative to the 5 million of US met coal that you have been -- you settled along pricing recently -- I don't know if it's recently actually, but --

Well, you are getting into too many specifics on the US side of the metallurgical settlements, but to tell you that roughly they should on a net back basis -- they should be fairly equivalent pricing -- because that's the benchmark pricing usually drives the pricing around the oil.

And the 110 to 125 is FOB at the mine and it's per ton and not ton, correct?

It's per ton, it is a metric ton. So it's large ton versus short ton. In US, you get the net back that number and it isn't that at the mine, its actually at the port.

At the port, right. And also I am not sure, could you -- may be shed some light on your 65 to 75 of unpriced in '06 and then the 130 to 140 in '07 as far as break down between different regions?

No, we cannot because we would largely be defining for our competitors what our view of the market place is so we just can't share that, but we are just really very comfortable with our position.

Okay. I was just referring to the number of tons that make up the 65 to 70. Not the pricing of course.

For the most part of the number that we can probably -- that we can share with you is out of metallurgical side. There will be 12 to 14 million tons of those numbers in each year and will be repriced but since we you do repriced that on an annual basis that's a fairly easy number to give you. The rest of it is balance between our views in that particular markets. All of which have gone up for the most part and so we are pretty happy with the position, but I am not going to get into much more detail than that by region in the US.

Dick Price, Westminster Securities

Good quarter. Could you give us an update on the Black Mesa-Mohave discussions and then after that on the two other power plant developments, Kentucky and New Mexico?

Sure, the Black Mesa project is in a very long and sophisticated mediation process right now and generally the two tribes and the customers and Peabody are meeting frequently to attempt to reach a resolution of all of the complex issues to allow Mohave to go forward. I can't handicap the outcome at this time, it's best to just to let the process run its course for the sake of our employees and for the sake of the tribal members who rely a great deal on the royalties for the support of schools and other infrastructure. I hope the matter is resolved successfully and quickly.

How much of that fee is dependent on the California regulatory situation relative to Mohave?

Well, the California regulatory -- the public utility commission has issued encouraging statements to the California based owner of Mohave. And there were other participants in Mohave also you should know, but they have encouraged a resolution of the matter, but of course there has to be a resolution that is in the best interest of the rate payers of California. So, they seem to be very supportive of diversified energy mix, if these matters can be resolved.

Little update on Kentucky power plant New Mexico?

Yes, the Kentucky power plant continues to proceed though the appeals process. As you recall, some of the environmental community challenged the permit that was issued for Thoroughbred. The hearings are complete, it's in the hands of the administrative law judge. And we are hopeful that sometime in the first half of this year that we will get a ruling, and we can proceed with it. Again there is good support for Thoroughbred to be built from the local communities and from the potential customers and partners, but we have to get through the appeals process. In the case of Mustang, out in New Mexico, we had recently received a grant from the department of energy for clean coal technology funding, and if it goes forward, we would hope to install that technology with the support of the department of energy and demonstrate an ultra-clean plan. At this moment, it's a distant third behind Thoroughbred and Prairie State.

By saying distant, are you talking about four to five years out at this point in time?

I am talking -- it's probably at least a year-and-a-half behind Thoroughbred in the permitting process which is behind Prairie State in the permitting process.

Congratulations on the quarter.

, Loomis Sayles

Congratulations on a great quarter. I was just wondering what your priority uses of free cash flow are?

Yes, I think we have explained to you that the -- we have a good capital program that's primarily focused on number one completing the purchase of those leases in Wyoming and also related to the longwall equipment in just modernizing and refreshing our operations. We have an ability to grow organically, and we have a number of different projects where we would develop new mines on our coal reserves. We have a 9 billion ton plus base of coal reserves, and we are working our way through those projects and picking those that have the right combination of a long-term coal supply agreement at a good price and probability of earning a higher return. And that allows us to grow and we will do very well. We also continue to look at every possible acquisition out there because we can grow organically. We have the ability to be very disciplined. I think you noticed that the RAG transaction was very successful and very accretive and those are the types of acquisitions we try to make. So we'll use the cash flow most likely for organic growth and occasionally in opportunistic acquisition. And if we don't do that, we pay down debtor or do something else that will create shareholder value.

The question was coming from -- I was wondering if you were planning on delevelling and then relevelling to fund the Prairie State project.

I don't think we have a clear plan to do something like that though the -- I think you noticed that we refinanced twice in 2004 to improve our borrowing cost. So, we will pick the right technique at the time that Prairie State moves forward and announce it at that time.

And one of the things on the Prairie State project is that we -- the amount of equity capital that will be required by Peabody is not very material. So, we wouldn't have to actually delever the Company to be able to fund it. We will have some equity contribution carries that will get credit for in the contribution of our reserves and then we'll -- it will be project financed and we will have a -- the project will be leveraged, so our equity contribution can be funded from our cash flow.

David Tepper, Appaloosa Management.

In light of the Northern Appalachia and 2 Putnam scrubbers down in Southeast, how do you think that will fetch you guys on a long-term basis more PRB coal, you know, in light of the contract to be signed as well?

We think on -- overall, we are going to do very well moving forward both in the Powder River Basin in the Midwest and for Northern Appalachian Pittsburgh 8 type coals. In the case of Powder River, there are number of new plants that are being built or on the drawing board and those plants will increase the demand for our Powder River Basin coal. There are logical users of Powder River Basin coal. With respect to the construction of scrubbers in the Midwest and elsewhere around in the Southeast and Northern central part of the country, it will help our coal reserves that are located in those sites. So, part of the reason we brought that joint venture out in Western Kentucky was because of the future use of going back to the Midwestern coals.

Yes, I'm sorry but what I meant is, how does that affect Northern Appalachia, how does it affect your PRB position, if people want to use less PRB coal and opt for scrubbers or they offset and debase their facilities and go for PRB Coal, actually that's my question.

All of our focus says that Powder River Basin coal will continue its same growth rate that it has enjoyed the last few years. Even though scrubbers are installed and some of the customers back in the east no longer require it, it's because of the construction of a number of new clients that will offset that loss of demand.

And a number of those plants that will be installing scrubbers are already taking Central Appalachian product as it is today and providing allowances and allowance prices are getting so high up into the $700 per tone range. So, they're having to choose between scrubbing or PRB coal, must have been making these choices. So, you will still see PRB obtaining additional market share, what we will see is the continued shrinkage out of Central Appalachia and that hole will be filled by other coals that can go into scrub plants or by the PRB coals.

I am just curious as to where goes to, in the SPG like 200 million per 1000 megawatts or not. And the other choice PRB coal and derate their facilities, I am trying to understand that whole process and want you guys to think about that. Now they have to go to SPG as opposed to just derating their facilities if the CapEx is so small to do so?

Okay. Well first, most of the utilities have not have detected derate to use Powder River Basin coal. They simply have made a minor modification to their coal handling equipment and have been quite successful in running the plants flat out, and so that myth doesn't really exist. Second, the decision to put in a scrubber, if you are located in the Southeastern part of the United States where the rail road, transportation cost is very, very high, it becomes much easier than if you are sitting closer to Powder River Basin fields where the transportation cost is not. So, generally the utilities go through an economic analysis and a combination of factors causes them to make the decision, but we see a large number of scrubbers to be installed in the Southeast and the Central part of the country, and the real winners in coal fields in the US will continue to be Powder River Basin, the Midwestern High Sulfur Reserves and Northern Appalachia. The part of the country that will have the most difficulty will be Central Appalachia because of its costs structure.

Great. One last thing, it seems your mine-mouth facilities -- You know what to do -- transmission system opening up from ComEd, it will be powering that PJM market. You guys deal with a real power, it's their market, it's the PJM -- is that the (power , you get a regional transmission system across the United States so you can build a flash power across from those mine-mouth facilities?

Well, Prairie State will have the ability to tie to 2 different power poles and one of the interconnects will get into PJM. But on the other hand most of its logical customers for its product are not in PJM. They are customers that are in the central part of the United States and they will be either investing in the plant or signing up long-term power purchase agreements. They are generally, either directly tied into the MISO system or there are from it in the whole system. So, that's what we are seeing right now.

That's for Prairie what about the other one?

Yes for Thoroughbred it will tie to SERC and ECAR, and it will involve installation of a large transmission line to the South and to the North and actually serve 2 different power poles too. It will not go into PJM though unless it's another away. Again, it will have long-term power purchase agreements generally with customers that are nearby. These are not planned in the merchant sense pre year -- an electricity trader that's trading around these plants. These are plants that are build, locked in under long-term power purchase and power sales agreement and they are very secure investment grade customers for the power on a long-term basis. PJM is where you want to go if you are a power trader that's the high price market.

Arjun Krishnan, Morgan Stanley.

Thank you, my questions has been answered. Thank you.

And we have a follow up from Daniel Roling, please go ahead.

Thank you. Just a couple of points of clarification. On the legacy cost issue Rick, was the 40 to 50 million due to lower interest rate inclusive of healthcare and pension or is it 40 or 50 on each one?

No. It includes both. The combined number for healthcare and pension costs. And it is related to the lower discount rate and their higher healthcare inflation trend rates we will require to use in our assumptions.

Okay. And then the other point of clarification deals with the new longwalls, I understand, that you said that we should not look for increased production this year or next year from the new longwalls, but the question I have or what I may have misunderstood is will these new longwalls have the capability if the demand is there in '07 -- may be to increase the production from where we are seeing those mines today?

Yes.

Do you know how much?

We can. We are not at the liberty to say at the point, but they will have the capacity.

And we have a follow up from Paul Forward, please go ahead.

Irl, you had mentioned coal conversion technology -- I was just wondering what is Peabody doing right now on that and other ways that the company can be more actively in the area through the technology or project development?

Well, first of all there are a number of companies that are investing heavily in it right now. I think you see Sasol, you see General Electric, you see Shell and others that are out working on the gasification or liquefaction technology. What Peabody has done over the years, is we've worked with Southern companies in the Department of Energy on gasification technologies especially the cleanup of the gas streams so let it be environmentally friendly at a facility a demonstration plant down in Alabama. You will see a picture of it in our annual report from last year. That plant to that technology Southern will take it on to a contract that they have in Orlando, Florida where they will receive department of energy funding to put again on a commercial scale and that is very encouraging to see it move forward. So, gasification is moving on a research basis and people are trying to commercialize it. It is not proven technology but large companies, large investments are being made in it. On the liquefaction basis, Sasol and the Chinese Government are both active in liquefaction around the world, I think you may have read about the large coal to oil products plant that is in China, Shenhua is involved in that one, and I think Shell may be involved in that one also. So that is a very promising technology. If oil and natural gas remain in short supply, if they are not able to reach the 60 percent growth that is being projected by the International Energy Agency, due to terrorism, lack of infrastructure, political problems, whatever it might be, then it is nice to know that this coal conversion technology is there as an important insurance policy.

Okay, thanks and I guess just quickly on the -- do you have any views you can express on region wide PRB output in 2005, do you have a percentage growth rate you might be working with right now?

It just will continue with a fall of the same general rate that has existed in the past. The trend continues.

When we saw it last year, it went up roughly 20 million tons last year. We could probably expect a similar number this year.

Michael Dudas, Bear Stearns.

Yes, I just wanted to ask one thing about --- the question was, would you be ending the long-term fixed price contracts for the megawatts?

Excuse me, can you repeat that again?

Would the thought be to enter the long-term fixed prices on those contracts for the megawatts?

Not on fixed prices, they will be the appropriate price adjustment mechanisms. In some cases the industrialists themselves in the plant will have the power of take rights in others, we will take our percentage share of the operating of the plant. So, under long-term power sales agreements, the power sales agreements will have the appropriate protection for inflation or margin maintenance, I think is the key term.

Okay, since there will be a mechanism, we will fix this to something.

There will be a mechanism to protect our margins moving forward.

Okay. Great, thank you.

I will now turn it back over to the presenters for any closing comments.

Well, thank you very much everyone for your interest in Peabody. I think you have seen a good year in 2004. The guidance for 2005 is very robust and we expect even better things in the future. Again, thank you for your support in Peabody.

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