Peabody Energy Corp (BTU) 2005 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS] As reminder, today's call is being recorded. I would now like to turn the conference over to the Vice President, Public and Investor Relations, Mr. Vic Svec. Please go ahead, sir.

Well, thanks, and good morning, everyone. Thanks for taking part in the conference call for BTU. Peabody is well on its way to another record year this year, and we look forward to discussing our progress this morning. Executive VP and CFO, Rick Navarre will review our results and our outlook. And President and CEO-elect Greg Boyce will discuss the markets and our growth initiatives. Forward-looking statements should be considered along with the risk factors that we note at the end of our release. And the MD&A section of our 10-K. We also refer to you PeabodyEnergy.com for additional information. I will now turn the call over to Rick.

Thanks, Vic. Good morning, to everyone and welcome to Peabody's earnings review. The industry's best portfolio of operations performed well in the second quarter. And the execution of our strategy has allowed us to deliver record results. I would like to review several of these highlights. Our operating profit earnings and operating cash flow all more than doubled over the prior year. Our EBITDA reached a new quarterly high. Sales volumes and pricing set new quarterly revenue records. And Peabody's financial outlook continues to improve as we sign profitable contracts.

I will now turn to the results beginning with a look at the income statement. Our quarterly revenues of $1.1 billion reflect higher pricing in volumes in all regions. This led to operating profit that was more than double last year and 60% higher than the first quarter. EBITDA was 62% greater than last year, and net income totaled $95 million, also more than doubling the same period a year ago. These results are a credit to the depth of the Peabody team, our diverse portfolio of assets, and our relentless focus on executing our core strategies.

I will move now to the supplemental data. You will note that we had growth in all regions. Eastern margins per ton improved 40% driven by unit revenue increases which reflect higher thermal and met coal pricing and increased volumes, which overcame the impact of a four-week water intrusion at our Harris mine which is now back to normal operations. Our western margins were level with the prior year. The western revenues benefited from improved pricing and shipments but were partly offset by a $13 million charge for disputed customer receivables. Excluding cost for higher sales prices and taxes related to those, our productivity actions have actually minimized the cost increases. For example, process improvement initiatives increased our North Antelope Rochelle dragline productivity more than 20% . This has freed up an entire truck shovel fleet that is being redeployed to other Powder River Basin operations. This in turn allows incremental production for no added capital which improves our overall returns. Had we been able to ship the 3.5 million tons in the PRB that were missed due to the transportation shortfall that we mentioned in our press release our western costs would have actually been flat to lower than prior year levels.

The reduced pattern for rail capacity is likely to carry through the second half, curbing 2005 deliveries by perhaps 20 to 25 million tons for the industry and 5 to 7 million tons for Peabody; however, we expect this will set up an even stronger 2006 season. Shipping to Australia, margins improved more than threefold compared with the prior year. Our revenues per ton are much greater due to the new higher priced met coal deliveries that began mid-quarter. The higher price business will continue in the second half. Our higher unit cost reflect equipment and geology difficulties at our underground operation and demerged charges related to ongoing port congestion. To address the port congestion during the quarter the Dowell Ripple Bay terminal imposed a scheduling system aimed at improving the vessel queue and reducing demerge. This lowered our overall sales volume in Q2 but should lead to better shipping and lower demerge cost in the future. Peabody earned $15 million from its trading and brokerage segment and we were also pleased to have earned $10 million from our resource management segment. With all of our segments increasing their contributions, Peabody's cash flow from operations more than doubled for the quarter and tripled for the first half of the year. Turning to our very strong balance sheet, you will see that our cash reached a new high of $459 million, and our net debt-to-net capital ratio is a very favorable 33%.

Before I turn to the Company's outlook, I would like to review our sales backlog and contract position. Peabody essentially sold out for 2005. We have 35 to 45 million tons available for pricing in 2006, and a significant 110 to 120 million tons available for repricing in 2007. Our largest unpriced sector as you would expect is for Powder River Basin coal where we are the largest producer. Here we are reaching agreements for prices up to 50% higher than expiring contracts. And the quoted prices imply that ultra low sulfur, 8800 PRB coal for 2006 delivery is between 12.50 and $13 per ton. The markets are just as strong in the Illinois Basin, where we are reaching agreements on new business up to 45% higher than roll-off contracts. And in Colorado, we are signing contracts up to 75% higher than rollover business. We've also locked in 2006 metallurgical coal sales at very favorable prices that are comparable with last year.

Now I will turn to our outlook. We continue to provide a broad range of targets given the difficulty in predicting transportation performance. We are targeting third-quarter EBITDA of 210 to $240 million, up to a 60% improvement over the prior year, and we are also targeting third-quarter earnings per share more than double last year's level at $0.60 to $0.90 per share. Our full-year targets project up to 55% higher EBITDA and up to 125% increase in earnings per share year-over-year. In summary, we had a great quarter and a tremendous first half, and we are very optimistic about the future of the Company. With that as an introduction, I would like to now turn the call over to our President and next CEO, Greg Boyce. Greg?

Good morning, everyone. Rick has reviewed our very strong first-half results. I would like to discuss the continuing growth in all of our markets and Peabody's large pipeline of initiatives to meet this increasing demand. At the highest level, it is rewarding to see widespread recognition of coal's ability to provide secure, clean, low-cost energy. Members of both parties are supporting clean coal technologies as part of the U.S. Energy Bill that is now in conference and world leaders offered similar statements of support at the recent G8 summit. There is clear recognition that increasing the use of our most abundant fuel, coal, by advancing new technologies and generation, gasification and liquefaction is the only way to provide the energy needs of a rapidly expanding global economy.

Our world markets confirm that world nations are increasingly turning to coal. The supply/demand balance remains extremely tight particularly in the high growth markets of Asia and the United States. In 2004 for the third year in a row, coal was again the fastest growing energy source in the world. Since 2001, global coal demand has soared 25%, while oil, natural gas, and other fuels grew less than 10% over that same time period. Growth is being driven by the soaring Asia Pacific economies and consistent GDP growth of the world's largest economy here in the U.S. Some people still refer to China as a developing country, but I believe that two decades of 9% annual GDP growth which has elevated China to the sixth largest economy makes China a powerhouse, approaching super power status.

But even with coal production up nearly 10% in the first half of this year, China's coal imports continue to grow. This led Australia, the world's largest coal exporting nation, to increase shipments by more than 8% in an effort to keep up with the soaring Asian demand. Chinese steel production is up 28% over last year, and while some steel makers are rebalancing their inventory in a few product lines, global steel production continues to grow. Led by India, Brazil, and China. Met coal markets therefore remain very strong. Just this month we reached agreement on a two-year U.S. met coal deal at prices comparable with those of last fall.

In the United States, increased generation is driven by a growing economy, favorable weather, high gas prices, and weaker nuclear performance. Coal supplies are being constrained by depleting central Appalachia mines and very disappointing performance from the major U.S. railroads. Customer stockpiles are at record low levels and continue to deplete further. We expect inventories to reach an all-time low by the end of the summer and reach critically low levels in some areas. We know plants below 10 days of supply, units that are using gas to preserve coal. And customers that are trucking coal between plants to maintain operations.

Conditions are ripe for strong U.S. coal markets for some time to come. The growing economy favors greater coal use as does coals low relative cost. And at some point, generators will need to purchase 20 to 30 million tons more coal than they used to rebuild inventories back to safe levels. The bottom line, coal markets are very strong from all the major regions in which we operate, especially Colorado, the Illinois Basin, and the Powder River Basin. And as Rick noted, these improvements are flowing through our contract reopeners and new agreements.

It is rewarding to be shipping record volumes within rising markets, and Peabody is investing in a number of projects to meet growing demand. We are expanding Twentymile, America's largest western bituminous mine. Demand for this low-sulfur high Btu coal is unprecedented and recent rail upgrades allow Twentymile to expand by 40% to 12 million tons per year by 2008. The Gateway Mine near St. Louis will ship its first coal this quarter to serve a ten-year contract for an Indiana generating plant with scrubbing technologies. In West Virginia, we are expanding into the James Creek reserve area of the Harris Mine and are developing the 2 million ton per year Black Stallion Mine. We expect 2006 demand and rail service in the Powder River Basin to be very strong. Productivity initiatives at our PRB operations should allow 5 to 6 million tons of incremental shipments for essentially no additional capital, and we have started the permitting process for our new 30 to 40 million ton per year ultra low sulfur mine in the Powder River Basin to satisfy demand in America's fastly growing region.

Peabody has also been very active in our other major growth initiatives. We received the permit for Prairie Stage mine and Prairie State is increasingly valuable given the rising cost of electricity in the Midwest. We have hired our first Director for our China activities and will officially open our Beijing office this quarter. We continue to evaluate other Btu conversion opportunities and are pleased at the growing focus from private industry and governments to turn coal into natural gas and liquid fuels. These initiatives combined with execution of our base strategies suggest both volume and margin expansion for 2005, next year, and beyond.

In summary, I want to thank the entire Peabody team which continues to make progress on the key priorities I discussed earlier this year, executing the basics by managing safe, productive, low-cost operations, expanding our global reach to serve growth markets, growing organically using our unmatched resource base, and participating in the industry growth from Btu conversion technologies. These focus areas represent powerful engines to create long-term value using Peabody's strong balance sheet and outstanding team. We look forward to continuing to report on our progress, and we'd be happy to take your questions at this time.

[OPERATOR INSTRUCTIONS] First we go to line of Daniel Roling with Merrill Lynch. Please go ahead.

Hey, it's Dave Lipschitz. How are you doing guys?

Good, Dave, how are you doing?

Good. In the PRB. If and when the rail maintenance is done by the end of this year, what kind of production do you think the whole region can get out next year on the rail? What type of maximum type of capacity do you think the rail has right now when everything is up and running?

Well, I think it is our view that the rail capacity will easily exceed 400 million tons. The issue with the rail performance right now is an issue of getting the tracks up to their standard level of maintenance. Once that is behind them the railroads were on track for a record year earlier this year, and we would expect that next year they will easily be able to manage the -- not only the normal increase in coal demand, but also this pent-up demand of 30 plus million tons to rebuild inventories.

So you're looking at 430 to 440 million tons you think next year?

We think that's achievable.

Okay. Thank you.

Our next question is from Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen.

Good morning, Mike, how are you doing.

First question is, Greg, when you highlight in your growth initiatives the Gateway mine and the ten-year coal supply agreement and the Twentymile Mine, could you talk a little bit about that expansion at Twentymile, how much coal have you locked under agreements yet, how much is required for you to go ahead or do you even need those types of commitments to go ahead with that expansion and could you maybe tie that into how you thought about with regard to Gateway how long those negotiations were and what kind of returns you're looking at on that investment relative to the negotiations you had with the customers?

Okay. Well, I appreciate the question. The -- in the case of Twentymile, that expansion comes about for two reasons. One, the railroads made some significant improvements in the Denver Gateway area which allows additional coal to come out of that northwest Colorado region. In addition, we had planned, and we're in the process of replacing the long wall at Twentymile, a project that we've talked about previously. That equipment that we are replacing is larger and allows us to increase the capacity at Twentymile by operating additional shifts.

In addition, Twentymile will be also taking up and replacing the Seneca tonnage from our Seneca mine which will be closing at the end of this year. That's another about 1.7 million tons. When you combine the transportation efficiencies, the long wall replacement which we had already planned for, in the case of Twentymile, we have secured some additional volumes but part of it was to replace the Seneca tonnage and to anticipate that market growth. Now when you look at Gateway, that's a different story. Obviously that's Illinois Basin coal, higher sulfur, met coal is targeted to go as I indicated to an Indiana power plant where there's scrubbing technologies. We looked for a 10-year supply agreement to underpin the restart of operations at the Gateway mine.

Are those price reopening sensitive 10-year contracts?

Those contracts have price mechanisms in them and we are comfortable obviously that they will provide the returns that we needed to resume operations at Gateway.

Terrific. My second and my follow-up is, regarding Australia, you mentioned in your prepared remarks -- I guess it was Rick, you'll see lower demerged, better shipment opportunities in the second half, but when do you see that whole port congestion, infrastructure situation alleviating itself so you can achieve target levels and actually serve -- you and of course all the other producers conserve some of the growth that's expected in that region?

Well, you know, Mike, this is Rick, it's going to take a number of years for them to expand it -- the capacity at that port, and they're obviously in the study phase right now. So it will be several years before they put that capacity in, and they are anticipating doing that. The Q management system that they did put into effect in this last quarter has reduced the Q from some 50-plus vessels down to less than 20 vessels. There has been an improvement although at the cost of some shipments in this quarter. We think that this is a step in the right direction over time with the expanded capacity when they put the capital in, we will get this fixed in the next three to four years.

But in the next -- are you saying in the second half of the year you will start to see -- or when we look out to 2006 expectations that it will are more normalized or we still got a little catch-up to do.

We think there will be a little bit of catch-up because we're still going to be probably be running at less than full entitlements which are at 95%. We'll probably run it as an 80 to 85% entitlements for rest of year hoping to get back up to 95% of our entitlements, but that only covers the demand that is available right now. That port is running at full capacity right now. So as demand increases, we need to have some infrastructure changes as well.

Thank you, gentlemen

Our next question is from Paul Forward with Legg Mason. Please go ahead.

Hi, good morning. Just looking a little further out on the scrubber installations going on in the Eastern U.S. right now. We presume there is going to be quite a bit new demand for high sulfur coal. Just wondering what your view is on -- on Illinois Basin versus northern Ap, and which region is likely to capture the lion's share of the incremental tonnage?

Well, good question. Our response really is that both markets are going to capture that growth. We are seeing record coal demand as these additional scrubbers get built and as new generating facilities get built, we are going to see both regions continue to strive to keep up with that demand. Obviously in the Illinois Basin, we see significant growth as evidenced by the investments we have made in the Illinois Basin, but whether you look at the Powder River Basin, Illinois Basin, Colorado, northern Ap, we see growth in all of those regions as you look at the additional coal-fire generation capacity that is going to be built. And with the additional scrubbing capacity, the coal fire generation that will be maintained going forward.

And just switching gears on China. Is that -- is your role there going to be just marketing of imported coal or do you eventually want to get into production with maybe a joint venture with the Chinese company, that sort of thing?

Our initial efforts will be in the importing and marketing of coal. We will be looking at all opportunities potentially partnering with Chinese companies for production and distribution internally. See that farther down the road as we learn more about that marketplace and the framework gets put in place for those types of investments to be made. But our initial efforts will be in the marketing of coal into China.

Thanks.

Next we will go to Dave Gagliano with CFSB. Please go ahead.

Hi, just quickly switching over to the -- just the EBITDA impact during the quarter. The 40 to $50 million hit that you took from the Eastern the Western and the Australian operations. Can you give us a breakout between Eastern, Western, and Australian operations?

I can try to do that, Dave. Essentially -- probably easier to break it down between Western -- between the transportation side of it. Let me break it into a couple of components. From a transportation side I would say it's about 25 million of the $50 million related to transportation difficulties. And I can characterize those as in part in Australia due to the cutback in the entitlements, as well as the merge, and the ability not to get some of the vessels out of the higher margin. Same thing in Appalachia, we've missed some vessels at the end of the quarter that's high margin business and then PRB, of course, the impact of not shipping those incremental tons of 3.5 million tons.

I'm trying to -- and I've really got it broken down more by transportation, as well -- and operations as opposed to broken down by region. But I can try to think -- let me look at the region -- I will tell you Australia is probably -- of the 25 million, Australia is going to be 10, Appalachia is going to be another 5 to 6, and PRB is going to be 5 to 10, somewhere in that neighborhood. And the tough one on the PRB to get your arms around, Dave, is the fact that that's just the incremental cost component -- or profit component of those tons doesn't take into consideration the fixed cost nature of some of those that we absorbed during the quarter that we would have been able to spread across more tons. But hopefully that answers your question.

It does. In terms of the 25 million. And the other 15 to 25 million is -- what is it mining related?

It's related to operating issues in Australia and in Appalachia.

Okay. Are those issues largely resolved at this point?

Yes -- well, let me break it in two parts. In the Harris mine, we had a lot of water in the long wall panel. We have moved long wall panels since that point in time. We are now into our last panel there before we transition that mine into James Creek. Essentially we will be able to make this up it just really pushes out the shipments and the production of that coal into later in '05. And that was a pretty substantial impact. And then in North Goonyella, the underground mine there, it is an ongoing challenge and we have talked about it through a number of conference calls. Are the problems fixed and resolved? They are getting better, but it will be -- continue to be a challenge. But we are getting new long wall equipment that will go into effect next year which we think will better manage the root conditions and the problems that we see down there in geology.

Okay. Great. Thanks very much.

Our next if he from Pierce Hammond from Simmons International.

Just a quick question on the coal to liquids and coal gasification and so forth. Have you been approached and how soon do you see these sorts of things coming about and sort of a follow-on to that is would you see it more playing out in the PRB with the sub bituminous coals or is there going to be sort of advantage with the bituminous coals in the Illinois Basin?

We have had a number of discussions in both the coal-to-liquids and the coal gasification. As you know there is a significant amount of both of those taking place in China and overseas, places like South Africa. The issue on which region -- it can be a Powder River Basin, it can be an Illinois Basin. These technologies work on both bituminous and sub bituminous so it really will become an issue of the transportation infrastructure and the product delivery infrastructure, and then the large reserve blocks. And as I say, we have had a number of discussions. We have got large reserve blocks in both the Illinois Basin and the Powder River Basin, where these facilities could be built.

From an economic standpoint, do you have any specific numbers that 35 to $40 a barrel or, on the oil?

Yes, on the oil side, the Chinese plants, their view is 35 to $40 a barrel to produce oil. Talking with the technology suppliers, they would agree with that price range or cost range. On the gasification side to produce pipeline quality gas, the numbers I have seen are in the range of 6 to $7 to a million to produce pipeline quality gas, to produce gas for industrial use, which is not the same quality would be at a lower cost.

Thank you.

Our next question is from Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys. Just, actually two quick things. One, you are kind of optimistic, I guess, or excited still about the outlook for met coal in your commentary and obviously bringing up Black Stallion. There has been a lot of talk with recent events there and what the spot market has done. What are you guys seeing lately in that market?

Well, as we have mentioned in our remarks, we've recently signed a contract in the U.S. for a two-year term, and it's at prices that are very similar to last year. So we haven't seen a real decline in the demand for the met coal at all. We expect in -- the demand in Asia is extremely strong, and while we haven't been pricing any coal out of Asia out of our Australian operations because we are not in the season for that yet, we don't see any significant weakness there that gives us any concern at all. We think it's going to be very strong.

And then just kind of switching gears on the railroad performance. Obviously the PRB situations have grabbed all the headlines. What have you experienced, I guess, on the Eastern side? I think expectations before were generally that things get better as we go through the second half of this year. Is that still the expectation?

Yes, we can -- well, we are not where we need to be in the East. I would say that we are seeing incremental improvements on a regular basis in the East, and look for those to continue. In the West, everyone is well aware of the significant maintenance program that has now been put in place, particularly in the Powder River Basin on the joint line, which will impact through November of this year, but as I said earlier, our expectations will be that the railroads will complete that, and next year we will be able to ship record volumes.

Great, thank you.

Next we'll go to John Bridges with JP Morgan. Please go ahead.

Hi, good morning, Greg, Rick. Congratulations on the progress at North Antelope. I was just wondering following-on on the rail capacity thing in PRB. You are moving up to the plus 400 million ton level, but at what stage does -- do the small incremental improvements, better maintenance, that sort of thing run out of steam and you have to put another line in? When does that happen?

Well, the -- the railroads have long-term capital investment plans for all of the rail system out of the Powder River Basin. They are in the process even this year of adding additional double track, and their long-term programs just extend that to continue to add length of double tracking and ultimately triple tracking out of the Powder River Basin. So it is a combination of additional track capacity, and then locomotive and car capacity, all of which they have a program and are spending money currently and will continue in '06 and beyond to meet the demand.

One of things I want to add, John. Is that looking at their forecast for the demand growth out of the Powder River Basin, they share the same numbers that we do, and that's roughly 200 million tons over the -- between the next 15 to 20 years.

Okay. And then perhaps one for you, Rick. The asset sale you mentioned and the accounts. What was that?

Well, there were a couple of property sales, John. As you know we typically in our Resource Management business will sell properties that are nonstrategic to the Company, roughly 25 to $30 million a year in property sales. This past quarter, we sold really three properties, similar mines that were closed that we were able to dispose of and dispose of the reclamation liability along with those properties. So it was a good deal for us and a good property sale for us. So they were nothing strategic to the Company.

Okay. Thank you much.

Our next question is from Gill Alexander with Darfill Associates. Please go ahead.

Good morning. As you look at the U.S. utility industry, how much more coal tonnage do you think the industry will need in the '05-'08 period or if you want to do the '06-'08 period.

Well, I think the--.

Well, I mean, we see -- we see goal grow, which tracks the electricity demand growth over time. Numbers that would say that total coal growth would be right around 1% a year across the country. Now that's going to vary by region, with stronger growth coming out of the Powder River Basin and the Illinois Basin and the Colorado regions. But that would translate into--..

15 to 20 million tons a year probably is what would our best projections would be.

Thank you very much.

Our next question is from Jay McCandless with Avondale Partners. Please go ahead.

Good morning. A couple of quick questions for you. First one on the U.S. met coal contract you discussed. Can you all get specific on the price for this year versus last year?

No, as you can appreciate specific pricing, it is confidential information, and we wouldn't be prepared to discuss the specifics.

Okay. My other follow-up is, I know you all already discussed the spot market for met coal being fairly strong right now. What kind of prices have you all seen out there?

I guess what we said, we are frankly -- there really isn't much of a spot market for met coal at this point in time because typically met coal is negotiated and purchased in a concerted buying and selling initiative that goes -- takes place in usually January -- December/January time frame so there's very few -- very little activity in the met market right now.

Okay. All right, thank you.

[OPERATOR INSTRUCTIONS] And we'll go to the line of Eric Fell with 3D Hill (ph). Please go ahead.

Yes. I just wanted to follow up on the question someone asked about liquefication and gasification and you quoted prices of 35 to 40 a barrel for oil, for instance. Does that include, I'm assuming, some current spot prices for coal?

Yes.

Is there a significant difference on the region with that cost less than the PRB, say, than if you used coal in the Illinois Basin?

Well, there really -- it really depends. Obviously there is a transportation component over the coal as well. So it depends on where you locate these facilities. But essentially, the differential in the price is then also offset by the different Btu contents of Illinois Basin versus Powder River Basin. So for these types of numbers they would be essentially the same.

Fair enough, thank you.

We'll next go to David Thickens with Deephaven Capital. Please go ahead.

Good morning. I realized that obviously most of your call is western coal transported by rail but can you comment at all on what you think will come of the announcement this morning that the Coast Guard has closed the Mississippi river to barge traffic above St. Louis. Do you see any impact on the coal markets from that?

We don't -- we don't see any immediate impact from that. There's a significant amount of barge traffic will be down the Ohio.

Right, that's still open.

Yes, and then lower -- come in lower than St. Louis.

Okay. Have you heard of any other disruptions from low water levels farther down on the river?

Not--.

That you have hear of?

No.

Okay. Thank you.

There has been significant rain fall along the Ohio River Valley so that's obviously sustaining the water levels down through the system.

All right, thank you.

We have a follow-up from Michael Dudas. Please go ahead. Michael Dudas, your line is open.

Oh, thank you very much. Sorry about that. Rick, I want to follow up on capital expenditures, expected range maybe for this year and what can we read in -- I know your budgets aren't there, but what we can read in for '06 given the laundry list of opportunities, and to follow up on that, when do you think you will have a go-ahead or contract signed to start construction of Prairie State.

Okay. A lot of questions. Let me see if I can take it in order. We are still forecasting for the year about 450 million to $500 million in CapEx for 2005, Mike. And obviously there is reserve acquisitions embedded in that related to the PRB. Reserves that we bought last year and then there's the long wall equipment at Twentymile and in Australia that Greg talked about. Some of the bigger ticket items if you will then the expansion moving Harris into the James Creek extension area for the metallurgical coal mine. So those are the big issues in this year and we're kind of sticking with those numbers for right now. There could be some variability in that if we see some lead time issues where we might have to react a little quicker and buy capital early just to make sure we get the equipment in--.

Sure.

So that may move a bit, but that is our best guess today. As we look into '06, it becomes a little bit -- right now without having done a full budget and looking at all the projects. We'd say if you kind of back down some of the special projects like the Harris extension and other things, I think we have kind of communicated a number between 350 to $400 million with the level of operations that we have right now for an '06 number but really haven't firmed that number up much more than that. Prairie State on the other hand, is your third question, operating partner discussions are ongoing. We are trying to get the finalization of the permit. Probably looking to start spending capital -- real capital in mid to late '06.

Is that part of that 350 to 450 number in your mind?

A small part of it. It is not part of the 350 to 400 we've been spending -- the capital we have been spending ongoing has been roughly 15 to $20 million a year for these projects and that has been in the 350 to 400 and in the 500. The actual -- once we start the plant, that will be a totally separate partnership and will not include that capital. That will be a different number.

And do you have a broad park of how much investment Peabody will have to contribute relative to Prairie State?

We are looking right now at a number that's probably in the 20 to 25% ownership range on that plant. So we will have -- we have already sold 47% to partners that will -- that will take back power because they are small munis and co-ops that need the power for their native base low growth that they expect. That 47% has been sold, the operating partner will of course own a share, and then we will own 20 to 25%.

One final follow-up regarding your activities at Prairie State. How does it bode well -- how does the process at Prairie State maybe even over the last 12 months bode for the very aggressive plans that appear, the electric utilities the United States have for actually permitting constructing and getting these coal-fired power plants on line when the industry needs it?

Well, in our view, it bodes extremely well, because we have now gone through the very extensive engineering review and permitting review process for Prairie State and have shown that these very large advanced technology plants can be permitted once we clear the way through this last appeal process and begin construction. It is our view that it will facilitate the permitting and construction of additional capacity by all of the utilities .

Terrific, thank you, gentlemen

We do have a follow-up from John Bridges. Please go ahead.

Following on from one of those questions. The -- that query about converting Prairie State to an IGCC plant. Where is that? Where is that situation?

We have no plans to convert Prairie State to an IGCC. Prairie State has been permitted as an advanced technology coal plant, but, when the IGCC was looked at all during the permitting process, it was very clear that for a plant the size of Prairie State that is not yet a commercial technology. So there's no further discussions in that light.

So what hoops do you still have to jump through on that?

For Prairie State?

Yes.

Prairie State, right now, all of the permits have been -- major permits have been issued including the mine permit which we just received this quarter. There has been an appeal filed on the air permit for Prairie State. That is currently before the Environmental Appeals Board. We are awaiting their decision which we would expect some time around the end of the year. Once we receive that favorable decision, we would proceed to begin construction in 2006.

Okay. Great. There was a comment earlier from Rick about the -- coke and coal prices kicking in mid quarter. When did they kick in. Any particular date?

Well, in Australia, John, they typically would kick in on the beginning of what we call Japanese fiscal year, of course, which would be April 1, but because of carry-over commitments, when we acquired the operations in Australia last year, they had -- they were short some production to certain customers that we had to make up. So they weren't able to capture the higher prices until really mid quarter. And then we still have just a couple of vessels left that we have to still honor at the old 40 to $50 met coal prices.

Okay.

That is essentially what the reference was, why we didn't start on April 1, with the new pricing.

That's helpful. Thank you.

We have a question with Jay Turner with BMO Nesbitt Burns. Please go ahead.

Good morning, gentlemen. I just wanted to talk a little bit about your guidance for rest of the year and on the back of your press release. On the interest expense line, if you go to the high -- the high result, you have guidance of 25 million in Q3 and 104 for the year. You have booked 22 -- essentially 44 million -- 40 to 45 million so far and if you do the math that implies almost $35 million in Q4. That was one thing. Then the same thing on the income tax expense line. You've got -- so far you have booked taxes of 14.5 million. You have got guidance for the third quarter at the upper end of 6, and having it flat on the high end of the year at 6 which implies a $15 million benefit in the fourth quarter. Am I understanding that correctly?

You are on the taxes, Jay. As you might recall in previous calls we've discussed, that the way our taxes work -- essentially we are obviously a higher taxpayer this year on an accounting basis because of the high profitability that we have right -- currently. What we typically do, though, is we've set up significant valuation allowances against our NOLs. We generate these net operating loss carry-forwards that we have back in the late '90s and the collectability or realization of those particular NOLs wasn't certain at that particular time so we had valuation allowances that were set up for the realization of those particular NOL assets. Each year in the fourth quarter when we are doing our budget, we are in a position then to project profitability forward with more certainly because we've locked in more contracts. When we do that, we expect to have a release of the valuation allowance against those tax assets, because we will have a view to the future that will be able to realize those tax assets. We are anticipating a $20 million plus benefit in the fourth quarter.

Okay. How about the interest expense line?

Well, on the interest expense, the component that is missing I think is the surety bonds and what is the credit fees. When you get that you'll get the -- I think that's -- interest expense actually is pretty level for most of the year.

Yes, it's just a flat line in the guidance. You have got sort of 27 million at the low end for the Q3 and 25 million at the high end for Q3 and then 106 million and 104. And I am just -- like I say there is a big jump there.

I guess I don't see it.

Okay. It is on -- well, we can do this off line, but it's on page 10. And it's -- just under the interest income.

For 25 to $27 million for the quarter and between 106 to 104 million for the year.

Right. And you've booked 44.4 so far so it implies -- that's about 70 million.

We have actually booked 50.8.

So that's supposed to include the surety bond? The interest expense guidance.

Yes, it does.

Okay, all right. That's the difference then.

That is the difference. I am sorry. A little bit of confusion. We've already booked 50.8. So really 50.8 for the six months and our estimate for the full year is 104 to 105, 106.

That's fine. That is the missing piece. Thanks a lot

We have a follow-up from Jay McCandless. Please go ahead.

Hey, gentlemen. I wanted to ask you a couple more questions on the U.S. contract. Can you tell me what tonnage level that was for?

No, Jay. I think that falls in line with commercial issues that we prefer not to discuss.

Sure. And also I was going to ask you, do you think that the rail situation is going to improve well enough in the coming months to where you all can deliver on that contract with no problem?

Yes, we're not -- we don't -- we have no concerns in the East in terms of being able to deliver under those contracts.

Okay. Thank you.

We'll next go to Justin Bergner with Cabelli. Please go ahead.

Good morning.

Good morning.

Can you tell me at a company-wide level, what percent of coal volumes are you looking to price one year ahead, two years ahead and beyond, and how might that be different now than in the current pricing environment versus what you have done historically?

Well, obviously, the whole strategy that we use as to how much coal we sell in price for the forward years is part of our marketing strategies and marketing programs and wouldn't want to get into the specifics of that. But suffice it to say that we expect to have high levels of our coal contracted for the immediate forward year at a much lower level as you go farther out in time.

And is that--.

We have provided and given the information on our uncommitted position for '06 and '07.

And what I would add to that is that last year at this time, when we were making decisions to secure commitments out of the Powder River Basin, we were firmly -- believed that the price was undervalued and hadn't moved up yet and it needed to move so we didn't lock in long-term business we sold out just one year forward and now -- fortunately that has proven correct for us as the market has moved up quite nicely since then.

Okay. Thank you.

We have a follow-up question from Eric Fell. Please go ahead.

Yes, I just wanted to get my -- go try and see if I can you guys to see if I can get information on the met coal pricing contract in the U.S. You said it was obviously similar to last year. Is there any -- can you give any indication if that was at the margin up or down price-wise?

It was basically about the same value -- almost exactly the same price.

Okay.

That we did last year for the same quality of met coal. So there is obviously different qualities out there for both U.S. and Australian coals, as well as transportation differentials, but roughly within a couple of dollars of what we sold it for last year.

Okay, thank you.

To the presenters on the call, there are no further questions in queue.

Okay. Well I want to thank everybody for your interest in BTU. We felt a very good quarter for us, and we look forward to continuing to have strong growth going forward, and keeping you updated in our further quarterly conference calls. Thank you very much.

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