Peabody Energy Corp (BTU) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Peabody Energy quarterly earnings call. For the conference, all the participant lines will be in a listen-only mode. However, there will be an opportunity for your questions, and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr. Vic Svec. Please go ahead, sir.

Good morning, everyone, and thanks for taking part in the conference call for BTU, following another very active and profitable quarter. Today, CFO and Executive Vice President of Corporate Development Rick Navarre will review our results and outlook. President and CEO Greg Boyce will discuss the markets and several major initiatives.

Forward-looking statements should be considered along with the risk factors that we noted at the end of our release and the MD&A section of our 10-K. We also refer you to Peabodyenergy.com for additional information.

And I will now turn the call over to Rick.

Good morning, everyone, and I would also like to thank you for joining Peabody's earnings review today. Peabody posted solid third-quarter results and we are well on our way to another record year. Among the highlights for the quarter, we earned $0.53 per share on EBITDA of $271 million. We managed through the start up of two new longwall systems that will strength our operating base and we completed the purchase of Excel Coal in Australia which Greg will discuss further.

Looking at the income statement, you will see higher production volumes and improved pricing for our increased revenues. EBITDA and operating profit both rose 15% for the quarter, driven by improved contributions from our Australian properties and the trading in brokerage segment. Earnings per share grew 26% to $0.53 on net income of $142 million for the quarter and $426 million net income through nine months.

Turning to the supplemental data, you will see our revenues per ton increase in all regions, given realized prices above 2005 levels. On the cost front, Eastern operating costs were affected by some of the same pressures that are impacting the rest of the industry. We are addressing these cost issues by tackling third-party supply challenges. We have recently completed the Black Stallion Mine, which will have an inherently lower cost structure and will replace a higher-cost contract operation.

On the other hand, we were very pleased with our Western operating costs per ton. Excluding sales-related taxes and the impact of fuel, we actually reduced costs in the West, despite the longwall issues at the -- Twentymile Mine. And as we predicted on the last call, we were also able to lower Australian costs per ton by 11% from the prior year and more than 20% from the second quarter. We recovered from the longwall startup issues, which elevated our margins to $32 per ton.

You can see what we are excited about adding the new high-margin Australia mines to the Peabody portfolio.

I can also report that the equipment issues at -- Twentymile in Colorado have improved. September was the mine's strongest month this year, running more than 50% higher per shift than the prior quarter. However, transportation continues to hamper our Western coal shipments. We lost about three million tons in the quarter, mostly in the Powder River Basin, as track repairs were completed on the joint line near our North Antelope Rochelle Mine.

On a positive note, we finalized an internal track upgrade at our Rawhide Mine during the quarter, which has increased the number of trains per day that can be handled at that site. The strength of the Peabody portfolio has driven steadily improving earnings in all market conditions this decade, and this year will be no exception. Our combined U.S. and Australian mining operations rose to higher levels, and continued strong performance from trading in brokerage and resource management has added $67 million in EBITDA this quarter.

We expect these activities to continue to grow, given our expanding asset base and global presence.

Our capital spending to date is $292 million, and we would expect to come in at the low end of our original CapEx targets of $450 to $525 million for the full year. You'll see in our balance sheet it reflects the addition of 20% ownership of in Excel, which we acquired during September, and the debt associated with that purchase. Our year end balance sheet will include the recent financing activities to complete the Excel transaction.

Our pro forma leverage ratio will now be above 50% and the Company has a new $2.75 billion credit facility providing significant financial flexibility; and we're targeting long-term leverage ratios closer to 40%, which will allow us to maintain optimum flexibility at a lower cost of capital. As a result, reducing debt will be a priority for Peabody moving forward.

Regarding our contracting activity, you will note in our release that we have priced much of our business for 2007, and in fact we had very little uncommitted volume left to sell. , Turning to our full year outlook, excluding Excel, we are continuing to target 2006 EBITDA of $1.05 billion to $1.15 billion. And earnings per share of $2, $2.43. Any fourth-quarter benefits from Excel are expected to be offset by acquisition and financing charges, and the acquisition will be accretive subsequent to that period.

In summary, the strength of Peabody's broad base of business has led to another solid quarter and strong nine-month performance. And we expect another record year.

At this time, I will turn the call over to our President and Chief Executive Officer, Greg Boyce. Greg?

Good morning everyone. Rick break has reviewed our solid results at record pace. I would like to discuss the market and outline our approach to two very different sets of conditions.

In the first category is the near-term U.S. supply/demand balance that reflects unusual factors. A very mild winter that suppressed coal use even as it allowed for higher coal production was followed by a short summer season. In addition, we have seen stronger than normal hydro conditions and a resumption of full nuclear generation.

All this has resulted in Central Appalachia coal prices that are below the cost of many of the mines in the region. Most believe that we are at peak coal in Central Appalachia, with operations that are chronically challenged by thinning seams.

Out West, in the Powder River Basin, markets have been held back by rail performance that still has only delivered half of the pent-up demand from customers. This has led to lower activity in the thinly traded Western coal markets.

Now, in all circumstances we believe it is important for our production to respond to market demands. And we have assessed these near-term market factors and rail capacity issues. And as a result, we are revising our mine plans for next year, particularly in the Powder River Basin. That is why our uncommitted volumes are lower than would normally be the case at this time of the year.

While our volumes will be higher in 2006, this will reduce the rate of our sales growth in 2007 to better match near-term conditions.

Also in the Powder River Basin, we are rescheduling the School Creek Mine plans for a 2009 or later start-up. This will enable the production from this new mine to more closely coincide with equipment lead times and necessary contract environment to ensure a successful long-term operation.

We believe these issues are very short term in nature. Already in the third quarter, coal shipments declined from both the prior year and the prior quarter. And coal use is expected to rebound to normal growth patterns with a return to normal weather patterns, leading to a tighter supply demand balance going forward.

Now let's turn to the mid to long-term markets, which have continued to strength in the past quarter. Global coal demand for electricity will continue to expand to meet existing plants running at higher utilization as well as new coal capacity demands. Outside of the U.S., more than 150,000 megawatts of new power plants are slated to come online between 2006 and 2010. These plans represent more than 500 million tons of increased coal use.

Specifically regarding the met coal markets, at a time when metallurgical coal contract discussions are just beginning, global steel uses up more than 10% through August. And met coal supplies from the U.S. and Canada are strained. And in the seaborne thermal coal markets, China continues to reduce its exports, and this trend is expected to continue. Russia continues to have supply issues and Europe has endorsed a plan to return to coal to meet its growing electricity needs.

In short, this is a perfect time to be completing the acquisition of Excel Coal in Australia. This acquisition is expected to triple Peabody's production by 2008 in the world's largest coal exporting nation. It offers solid product and geographic diversity and will have a growth platform of more than 500 million tons to serve these high-demand markets.

Excel also gives us three active mines, another three that are coming online, and will now be the only producer with access to five ports. This is a major addition to our global platform. It brings to 40 the number of Peabody operations around the world, and we are sharply focused on integrating Excel.

In the U.S., we are also seeing growth in new coal plants as those projects announced five years ago begin to come online. And with the industry's leading reserve base, Peabody is well-positioned to serve these long-term customers. We are also making significant progress on Prairie State. We recently received the U.S. environmental appeals board approval for the air permit. CMS has joined the project as an operating partner, and Bechtel has signed a letter of intent for the engineering and procurement of the power-related facilities.

Interest in coal-to-liquids plants is strong with dozens of plants being developed in China and growing bipartisan support in the United States. Recent bills introduced in Congress support incentives and long-term takeoff agreements. Just two weeks ago, the Air Force conducted a successful B-52 test flight using Fischer-Tropsch's fuels. And Air Force represents are now calling for coal-to-liquids to provide 50% of the Department of Defense needs by the end of the next decade.

During this quarter, we announced that we are evaluating two possible coal-to-liquids sites in partnership with Rentech. These sites in Montana and the Midwest could produce 10,000 and 30,000 barrels a day of coal-to-liquids using Peabody reserves.

In summary, we are taking positive steps to adjust our production base and meet near-term demand while positioning Peabody's operations to grow and meet the significant long-term demand increases in the U.S. and around the world. We are moving through our 2007 budgeting process and will update you on our financial targets in January.

At this time, we are confident that sales, EBITDA and earnings per share will all show sustained increases as we manage our cost structure, deliver on higher priced contracts, and benefit from our growing portfolio of assets.

I want to once again thank all of the Peabody employees for their great efforts and their continued focus on safety and improving our performance. We welcome all of Excel into the Peabody Group, and I thank all of you for your interest in BTU.

We will now be glad to into your questions at this time.

(Operator Instructions). Michael Dudas, Bear Stearns.

My first question regards -- we will go to Australia first. Could you maybe give us a little sense that you have Excel 100% ownership -- 100% ownership of the mix of what you anticipate from the mines, what the cost structure and similarities to the operations that you might see versus what we see in Appalachia? And again, from a contracting standpoint, what is available, what is not available and how that will roll through the P&L over the next 12, 18 months?

A lot of questions there, Mike.

Well, it is a big country.

Certainly we are going to give you more information as we get down and review the budgets in detail with the management team down there. But I guess at the highest level, let me try to give you a summary of what we have there. We're pretty excited about the operations. We expect them to be low-cost and in those cases we have some pretty low-cost. We have two large low-cost service operations in New South Wales and a coke and coal operation in Queensland. Which will also be a service operation.

So we are going to have a pretty good mix there, so we will probably have thermal coal, about 65%, and 35% met coal on the production base. Next year we would expect the production to ramp up to somewhere near 15 million tons and hitting 20 by 2008. So most of the coal is going to be exported, with the exception of about five million tons which will be on a long-term 19-year contract with Macquarie Generation, a large utility in New South Wales.

As we look at the Wambo open cut mine, for instance, it is the second most productive open cut property in Australia. We think the Wilpinjong mine, which is coming on board which is an open cut mine which has right now is in ratios of 1-to-1 or less; we will give it a run for its money to be probably maybe one of the most productive mines in Australia.

We're putting in a new longwall in our Wambo mine in addition to the open cut properties, and we expect that to be also a very low-cost operation. So we're looking forward to it. We think the margins are going to be fairly significant for the business for export thermal coal. The prices are at a good price, in the high $40s to $50 range. And cost structure should be pretty low. (multiple speakers) all your questions --

No, that's great, Rick. Thank you. And my follow-ups regarding our decision on the deferral of shipments and deferral of School Creek. How are you going to balance, again, the near-term over supply issues we witnessed because of the weather? And then looking at the long-term nature of what coal demand is going to be, given all the positive data points on new coal-fired plants and new investment, etc., not just out of the Powder River, maybe some of the other regions that you are very active in, will there -- is the fragility of the supply situation pretty stark that at these types of prices or of any type of delays you could see significant production issues in the U.S.?

Well, obviously, you make -- the question I think is, how do we look at balancing what we see as very temporary near-term demand factors with the longer-term as we plan our capital investments and our growth in our operations across the group, but particularly in the Powder River Basin. And I think as we have done and talked about this morning, we have looked at the very near-term issues of what has happened this year with weather-related demand, as well as rail performance.

And as we look at that carrying over to the first part of next year, we have adjusted our capital spend in our plans accordingly. As we look farther out in time, we are really trying to match the market demand and the pace of contracting to baseload these new operations in order to bring them in and time them when both the rail capacity and customer -- actual demand will be in place.

So that is, in a broad perspective, that is how we look at it. Obviously, it is something we are constantly monitoring, and it is something that we have the ability to adjust to meet the market factors.

But imply that the utility customers are not willing to commit longer-term and higher prices, given there is more uncertainty in the marketplace and they feel a little comfortable now?

Well, I think for the longer-term, it is really a number of major utilities looking at their long-term plans, trying to determine the exact timing of when those plants will be online, when they will need that coal, how early they want to enter into those contracts.

And quite frankly, they are focused on the permitting issues for some of these larger plants in that time frame and the construction issues. We have had a number of good discussions. We have already started building that base, but in light of where the markets are right now and where those discussions are, we have determined that we are going to differ School Creek at least until the 2009 time frame.

Jim Rollyson, Raymond James.

I realize you guys will probably give detailed guide on '07 when we get into -- you said January. Any thought just kind of where -- you are looking at 255 million tons shipped for this year for your guidance. Any thought to what that number ballpark looks like next year now with the adjustments?

Well, I think if you take out the [interim] brokerage, as we said earlier, our production should be about 230 million tons, and I think if you take it -- we have been growing about 15 million tons a year in the PRB for the last several years. And I think as I said in our remarks, probably cutting that down by seven. So if you had an additional seven to that and add on 15 million tons of Excel, that is probably about as much information as I would be prepared to give you today, which would be another 20 to 25 million tons to our actual number we expect to hit for '07, and that should get you fairly close.

Perfect. And then secondly, you have had a lot of recent positive progress on the Prairie State with permits and equity partners, etc. Can you kind of talk about maybe what the cost outlay might be going forward, or timing of that and kind of how you see that playing out?

We're still going through and finalizing that information. Obviously, that is the major task that Bechtel will now set their sights on with the LOI that we just signed with Bechtel. As you said, we have made great progress with CMS now on board as a codeveloper and eventually the operator. They are actively now in engaged in the process of working with Bechtel to review all of the numbers.

We have gone back to all of the manufacturers and see what the timing is for both contract and financial commitments to get deliveries for equipment. So it is a bit fluid right now. We see some increasing in expenditures during the course of right after the first of the year as we begin more construction on-site and begin to make additional holding commitments for equipment deliveries. Financial close in the second half of next year, wouldn't be till after that we would see major expenditures take place.

We have about 17% of the equity in the plant to place and sell and we are in advanced discussions with a number of parties for that. So it is still going to be a bit of an early -- part of the year busy season to complete all of the ownership structure; and then we'll know more once Bechtel and CMS and ourselves get through the LOI period for the cost structure on the plant.

And then I guess hopeful start-up closer to the end of the decade?

Yes, that would be right for the first unit.

Pearce Hammond, Simmons & Co.

Two questions. First on the California greenhouse gas initiative, how do you see that affecting Peabody and the coal industry as we move forward, and what is your response there? My follow up is just to Rick. Now that Excel has closed, what is the balance sheet going to look like debt-to-cap and long-term debt? You had $1.7 billion at the end of the last quarter. Thank you.

Okay, well, maybe I can talk about the California initiative first. As California designed that program, I would note to everybody that very interestingly, they put in a number of safety valves for the current and future governors to be able to use to slip all of that program based on the economics of the time. We are still trying to understand where California believes that they ultimately are going to get their power.

But having said all that, the real issue was their ability to take power from outside California based on their view of the environmental performance of coal plants. That only affects contracts over five years. So really, what it does is it probably limits the California utilities ability to invest in plants outside of California, but really does not limit their ability to purchase power - at least over that period of time.

And the California market is going to be very strong for power requirements, so I think what I am saying net, net at the end of the day from a coal-fired fuel electricity basis, we see the West continuing to be very strong.

And then on the balance sheet side, as we finish the transaction and get it completely financed this quarter, we will be sitting on roughly $3.2, $3.3 billion in debt from the $1.7 billion that you talked about. That will bring our leverage ratio, debt to total cap, up to about 57% in the near-term. As you've followed us, you know that we have been financing all of our capital needs with internally generated cash flows; and we expect to continue to do that going forward, and as we look forward at our opportunities, and our cash, we will bring that -- our goal will be to bring that down pretty rapidly to try to get back to a 40% debt-to-cap ratio.

Justine Fisher, Goldman Sachs.

The first question I have is regarding the cost in the East. I knew that you said that you would tackle them going forward, but could you tell less -- give us a better breakdown as to what accounted for the increase on a quarter-over-quarter basis? And how much was diesel fuel, etc., because I know that has gone down.

And also, what the cost per ton is at Black Stallion so that we can get an idea as to how much that may bring cost down going forward.

Justine, I'll answer that question. I think it would be tough for -- to blend in the Black Stallion and figure out because there are so many operations of out in the Eastern U.S., a number of Midwestern and Eastern numbers, and you really got a hodgepodge of numbers. So I probably would be reluctant to give you an exact number on Black Stallion other than to say that obviously it will be a profitable operation.

Let's talk about the specific details in the cost run-up in the East from where it was last quarter. Fuel, of course, had an impact, and I would say $0.75 to $0.80 was fuel costs, and a tiny bit of explosives. You probably had another $0.15, $0.20, at least for roof bolts costs.

Outside of that, the real drivers are the fact that we are using contract is that many of our operations, and as contractors, as we have mentioned in one of our recent calls and is that one of our contractors had left the site, and that is why -- that is where Black Stallion is going to replace men. That contract was a $60 plus cost structure; Black Stallion will be significantly less than that. So we are encountering this type of issues.

We have also taken on some properties that, while they are in the metallurgical coal market, we knew they were going to be higher cost structure. So a couple, $2, $3 of that were anticipated higher cost. So it's not necessarily things that we -- we planned on having higher cost because that is the geology that we have left to manage to be able to serve metallurgical coal contracts.

But the contracts we know are still selling in the $80 plus range. So it's still a profitable business.

So then just so I understand what happened with the contractors, that contract that was at a $60 a ton costs, they shut down, right?

A shutdown.

And so in these contracts, you guys have to pay a $60 ton cost -- basically they get to pass it all through to you, or how do those work?

We were paying them $60 ton a cost, and now if they do not produce the coal, I have to go buy that coal for someone else but still honor my contract.

Into the cost per ton he reported in the East includes buying coal from other high price contractors or actually buying coal sort of on spots?

We probably have almost a $0.75 a ton number just related to when you blend everything together that relates to buying coal at market/higher prices for us to recover coal on contracts where we did not get the coal from the contractor. So we have a contractor with the utility that is with Peabody, we have to go out and buy coal to make sure we honor our commitments. We have to do to the market and buy that if our contractors A., underproduce or B., just walk off the site.

And the other impact is, obviously, higher sales prices, we have another $0.75 related to that as well for taxes and royalties. They get baked into the cost. So that is a kind of a good cost, when you think about that way.

Have you guys disclosed what percentage of your Eastern coal you depend on third-party suppliers for just so we can get an idea of what may be at risk of these sort of third-party bankruptcies going forward?

Well, it was not a bankruptcy per se, but (multiple speakers) anyway, we have not disclosed that number, but I would say it is three to five million tons, maybe. Federal. But it is high margin business for us.

And then just regarding the international met coal prices, and I'll get back into queue, there was a recent sale of met coal that was reported I think it was at one of Rio Tinto's mines that took place at $83 a ton. I am wondering if you guys could comment on what that may mean for future met coal pricing in '07 for the contract levels, whether or not that A., whether you think that $83 will be indicative of selling prices, and then B., how that may affect the contract?

I will tell you that we normally do not comment on aberrations in the marketplace. But having said that, we view the steel demand is very strong, particularly in the Pacific Rim, and for the premium coking coals, that market remains very strong as well. So the end of the day answer is we do not see that as impacting what is going to take place over the next quarter as we go into the contracting season for met coal.

John Bridges, JPMorgan.

Congratulations on the discipline with PRB. I am looking at the Excel scheme of where that tonnage was going to come from. Very helpfully gave us tons per mine. Write through to 2010. I'm sure your production plans are a bit different, but could you give us a guide as to which ones perhaps are stronger than the original Excel plans, which one is weaker, any sort of guidance in that direction,

I think at this early stage the best thing to do is to take the numbers that they've put into the scheme of arrangement. Obviously we will have some minor adjustments to the output. Hopefully they will be stronger output as we get synergies from our properties and things. But I think it is a little bit premature for us to really start to change the output until it has had a fair chance to sit down with all of the managers and -- we just took the keys last week so -- to the property. So we've got to spend some time and see how the projects are going along.

But I think we feel very comfortable I think with what they have in there is achievable, for sure. So I think you should take the comfort that while we have three properties that are in late stage development, I can tell you I was there last week and I was at two of those late stage development properties. And they were in the process of getting -- shipping coal. They did not have all their facilities up yet, but I think they were ahead of schedule.

Ian Synnott, Natexis Bleichroeder.

First question, in terms of some of the CapEx that would be -- in the capital that would be getting deferred, there would you look to reallocate the capital you would have been spending on elsewhere, either towards dividend or maybe buy back or some sort of shareholder return, and kind of how much -- I do not know if you have specifically detailed it. But what ballpark should we be thinking about in terms of the amount of capital?

We haven't given that number out, and I guess we'll give that number out at a later point. It is really going to spread out over a longer term. Then just one year. So I (multiple speakers) give you the full details on the capital. But I would say at this stage of the game the capital would be deployed to honor the commitments that we made on the road to repay debt, and then maintain a balance between our stakeholders - both equity and debt holders. And we just recently repurchased some shares, which you saw in our release, so we have done that and I think that was a good acquisition for us, frankly, at the price that we acquired the shares at. So we'll continue to monitor that, but I think that right now we have got to honor our commitment to paying down debt.

And I guess also just thinking about it in terms of some of those capital deferrals, are you -- in terms of any of the existing equipment orders that you would have had a place with some of the equipment manufacturers, would you be delaying those orders? And then maybe pushing yourself off a bit in terms of the queue for whether it is trigons, or shovels or whatever?

We have not canceled or deferred any orders that we had in place. All we have really done -- there are long lead times. Before we made capital commitments that would have been under our original plans, we reassess and adjust. So we're not gone back and canceled at any commitments that we had.

If I could just ask one less question, could you give some great detail in terms of new contracts in the PRB, talk to the premium PRB products. But just in terms of how we should be thinking about the other commitments that you've made, some of the other mines further North of the PRB, the North Antelope. Is it sort of fair to think about the kind of pricing that we can back into the -- basically the levels double 2005 positions and then, making some adjustment for sulfur, is that kind of a fair way to think about where new contracts might have been signed?

Obviously we did not -- we do not want to go into that level of detail specifically for obvious reasons. Suffice it to say that you need to make the reasonable adjustments for the quality on a BTU basis and a sulfur basis.

David Gagliano, Credit Suisse.

Just to follow up on the last question on the pricing, it looks to me like you priced almost 30 to 40 million tons of '07 in '08 volumes in the quarter specifically. I know you are hesitant to talk specifics with regards to pricing, but can you give us some general indications with regard to levels of pricing? Perhaps you can frame it within the spot market, indications that we've seen or something to that end. That is my first question.

Again, I think all we can really do is to just fall back to our discussions about our contract pricing versus the spot pricing environment. We do not price off of the spot market. Obviously any contract business that we secure is at a premium because what we're doing is selling larger volume, longer term, multiyear, multi-loadout location contracts out of the Powder River Basin.

So without getting into any specifics, suffice it to say they would not be at these spot price numbers that you would see on those thinly traded markets.

Okay, and then was the majority of the volumes priced -- can we get a sense as to regional mix on the volumes that were priced and when they were priced during the quarter? Was it spread throughout the quarter? Was it early or late?

Well, I think it is probably obviously -- it would generally be spread during the quarter. I would say it was a mixture of Midwestern coal an some Eastern coal as well as Powder River Basin coal. I can tell you is from a competitor basis standpoint, what is left to sell we do not -- we are sold out in the Powder River Basin for next year. After taking reductions into consideration.

Priced -- meaning you're sold out -- I mean, you have priced and committed your line volumes?

The volume that we will produce next year has been committed.

And priced?

And largely priced. The only thing that's left to price are contracts that were left under reopen or provisions where there is some formulaic way to come up with the price.

David Lipschitz, Merrill Lynch.

On the rail issues, you say you lost three million tons of the quarter. How are you looking for the rails in 2007, considering you're still having problems? Are they going to be corrected by then? What are the status of the real issues?

Well, obviously, that was one of the facts that we looked at when we reassessed our 2007 growth plans in the Powder River Basin. No, we have never anticipated that '07 would be back to normalized operations. I think we have said previously we thought it was going to take until 2008 for full fluidity in all of the pent-up demand, including test burns and the like, to return to the Powder River Basin. I would remind everyone that the UP is still embargoed for business in the Powder River Basin. That has not changed.

And with the maintenance programs that took place, particularly our North Antelope Rochelle Mine operation, fell (indiscernible) debt in the third-quarter. There is no question that there are additional volumes being moved out of the Powder River Basin. More coal being moved out of the Powder River Basin than any time in history. But it is still not meeting both the sales commitments for this year as well as the pent-up demand. We see that continuing through next year, and that is why we adjusted our production profile for next year.

And just a different topic -- you talked about getting back to normal weather and demand and things like that. If we were to have a warmer than normal winter, do you think we will see a lot more production cuts going forward?

I do not want to speculate on what other people do; but obviously if we have that situation, then the stockpile issues will remain and the market dynamics will be unchanged. I think all of the projections are for a return to a closer to normal weather winter than we had last year, which obviously is very positive.

Let me ask you this -- would you cut production?

I think we have given you our view of our production plans as far as we want to discuss them on an open basis. But basically, for next year, we have got commitments. So we have got to meet all of our sales commitments across all of the regions. So there is little room at this point in terms of changing any of our deliveries under our existing sales commitments.

Matthew Lemmie. UBS Securities.

I have two sort of housekeeping questions. First one is on your 2006 guidance, does that include the net gain on disposal or exchange of assets? And if it does, is the numbers we've seen so far this year in line with or above, below your expectations?

This guidance of course includes all of our business lines, and of which resource management is one of those lines with the 10 billion ton reserve base. So it does include games on asset sales. We are buying and selling reserves on a continuing basis. So it does include that.

And are the results for the first nine months in line with what you expected or are they above or below?

There is always a little bit of variability, but I think if you look quarter-over-quarter and nine months to nine months, we are pretty comfortable with last year's numbers.

My second question was on selling and administrative expenses for the quarter. They look a lot lower than last year's quarter. And also a little bit lower sequentially. I was wondering if you could talk about that in a little more detail.

The issue there was in last year's quarter, we had pretty strong stock price performance, and as part of our long-term incentive-based plan, equity based compensation plan, we had some large accruals related to this equity-based plans because of this strong stock price performance. As you recall, our stock was up 100% last year. So that was the major issue into SG&A last year. This year the price performance is not quite as robust.

Sequentially, if I am looking at the June quarter, I am looking at about a $41 million expense, and so we're down about $10 million sequentially. Any particular reason for that, or just seasonality?

(multiple speakers) the same issue, because the stock price, as you follow the stock price, in the third-quarter, the stock price dropped, so that we also had to adjust the number for equity-based plans. So it was accrued up to what the stock price was at the end of the second quarter and with the performance early on in the third-quarter that allowed us -- required to adjust that down.

Justin Bergner, Gabelli & Co.

First of all, a quick follow-up question in regards to cost in (indiscernible). Kagan is an indication of whether you're seeing cost inflation as more severe in Appalachia or in the Midwest? And then perhaps any comments whether any labor issues in the Midwestern region are contributing to cost inflation?

Clearly it's -- as Greg said in his remarks, we pay the Appalachian region is experiencing what Greg has termed peak coal, and I think if you look at us producing in Appalachia, it's clearly more heavily weighted into Appalachia then the Midwest. And we're not really seeing any major labor issues or cost runups in the Midwest because of labor. So it is isolated primarily to what is happening in the Central Appalachia and Southern Appalachian regions. (multiple speakers) in the Midwest is fuel charges because we have a bit more service operations there.

With regards to your trading business, could you provide a bit more color on the contribution to EBITDA that that business is making quarter and year-to-date? In particular comment on what is driving EBITDA even as volumes reported are lower?

This year we've got very strong margins on a brokerage contract that we entered into several years ago. The profitability is high. The customers delivering the product. So that is one issue. And part of it is just managing that book tightly. We've also added international trading to our portfolio this year, which really did not get kicked off until third quarter. So that has added some additional small volume, but good strong margins for us. And we think we will see that continue.

So in terms of looking forward in the trading business, would you expect increased volumes or kind of similar volumes, but continued margins to what you were able to produce this year?

I think it is going to vary a bit in each region, but I think in total, we would probably just be looking at a total -- it is always a little bit lumpy, so I guess the best number I could probably tell you as we would expect profitability on an annual basis to run $60 to $80 million.

Bruno Yang. Citadel Investment Group.

Just wanted to get -- you commented that the met coal market is strong, but just wondering if you could get any additional color and how you are feeling going into the contract pricing season? Thanks.

Well, again, I would come back to underlying the met coal market is what is happening in the global steel business. China continues to drive significant growth in. India is also growing very strong in steel production. Through August, steel production globally is up 10%, which continues to show the strength of that sector. And so as we look at met coal going forward, we think it follows very closely what is happening with steel, particularly for the better quality met coals, which we have a higher percentage in our portfolio.

So we remain very optimistic about where those met coal markets will go, going forward.

David Silverstein. Merrill Lynch.

The new bond deal that you guys did had what we would call an investment-grade covenant package, much looser covenants. And I was just wondering that move to start to alleviate the covenants, and any implications for your other Peabody debt? And also with respect to your Excel Coal -- the Excel you are inheriting, I noticed -- I know that there is a change in control, but if no one is tendering, are you just going to pay a met coal on those bonds and take this bond out?

Good questions. Obviously, if you look at the package, we were pleased to get an investment-grade package across the line with both our credit facility as well as the bonds; and I think you will see a movement more toward that. We basically have an entirely unsecured facility both on the bonds and the term debt, which allows us to hopefully move up the grading chain down the line. So that was intentional. And we are also happy to tap into the 20-year market as well, with some good strong rates with investment-grade bonds-type covenant.

As you look at the Excel bonds, they do have change of control provisions in the bonds; and we will have to take those out if they are put to us under change of control provisions. And there will be a make-whole amount. That is what I talked about earlier when I said part of our fourth-quarter benefits from Excel will be offset because it will have these make-whole requirements to go to earnings. That could be as high as $12 to $15 million.

Okay, so you do anticipate doing the make-whole on those?

For the most part, right.

I do not know whether you are required to do so. (Multiple speakers)

If put to us, we're required to do so.

You're required to only -- yes, if they're put to you. Yes.

Yes, you're right. I mean, if people choose not to put those to us and there are favorable rates, but there are some covenants that we may not be as familiar with.

Very fair.

So we would like to try and keep our covenants as flexible as possible and not get have a small amount of debt driving the Company.

And that would be during the fourth-quarter?

Yes, that'll happen in the fourth quarter.

(indiscernible). UBS Securities.

Most of my questions have actually been answered. I just had one housekeeping type question. You had noted in the press release today and in your comments that Twentymile Mine is now running above preinstallation levels and that you plan to ramp up production and so forth. Have all of the technology issues been resolved and so forth? Is it something where we can see a significant increase in production going forward?

Well, we had a very, very strong September, as we talked about. I would say that the issues around the longwall, the engineering redesigns have all been complete. The vast majority of those changes on the systems have been made. There are a few remaining things to be complete, but the level of volume and the reliability is much improved from where it was.

David Khani. FBR.

My questions are more on the power plants. How long do you think it will take Bechtel to come up with a final figure of costs so that you can put that out for us?

I think we're looking at that taking place during the first quarter of next year. It is usually by the time they go through and do the engineering, rebidding, those types of things, finalization and negotiations with suppliers. It is a minimum of a three-month, more likely little over a three-month type of a time frame.

And are you going to try to seek out a fixed sort of turnkey price so that you will not be at risk if there is some overcosts runs?

I don't want to specifically say how we are going to manage that at this point in time. Suffice it to say that managing the risk is a key component of any final agreement we enter into.

And I am sorry, one last one. It looks like you probably took a little bit lower equity interest in this project, but I think you probably went through a big learning curve, given it's your first one and you have another one coming down the pike. Can you just walk through a little bit of the process you think you learned and how it's going to maybe help you for the second one?

Well, I think at the end of the day, if you step back -- all the way back to when we started these projects, we had a couple of objectives. We wanted to reinforce and show that there really was a path to permit and build state-of-the-art, very environmentally driven coalfield generation facilities in this country. Clearly, we have done that with both Prairie State.

And second of all, we wanted to take and do that in an area where we had the reserves that, for a period of time, were viewed as not going to be coming to the marketplace. Both of these plants have now been permitted in the Illinois Basin with advanced technologies. I would say that we would like to believe that going down this path helped facilitate the process as has now driven the list of plants under design and consideration in this Company -- country all the way up to 154 plants.

So both of those things were critical upfront. We have accomplished both of those as we move to financial close next year on Prairie State. I think the issue of what level of equity that we ultimately wanted to have in those plants, obviously we wanted -- always wanted to be a participant. Never said that we had to have a major equity piece, targeted a minority piece early on, wanted to make sure we got a strong operating partner; and we couldn't be more pleased to have CMS involved in this project.

They have a long and extensive history of operating coalfield stations and a high level of performance operating capabilities. And we have got a great diversity of partners for the load coming out of Prairie State. So we are comfortable with the equity levels that we're at now and look to conclude the structuring of that plant.

For the second plant, would you like a higher equity stake, do you think, to have more skin in the game?

We will look at that when we get down to getting closer on that plant. A lot of it depends on where we think the load is coming from, depends on the interest that we have from other equity participants. And there is a value in monetizing the reserves that these plants are built on, as well as what we think longer-term values are for the equity. And of course we have to balance it, given where we are at with our growth plans, both on an international basis with BTU conversion facilities and with our existing coal operations.

Paul Forward. Stifel Nicolaus.

On the PRB volume that you're going to be producing next year that has already been committed, as you said earlier, how quickly can you bring back the seven million tons that you decided not to produce for next year?

I would say that if we saw the need and the demand in the railroad turnaround, we would have the ability to adapt and move fairly quickly. Obviously, it is dependent on what point in the year that that occurs. If things turned quickly and rail was fluid earlier in the year, then we have a better chance of making some of that.

If we are talking about midsummer, then volumes lost are very difficult to gain in a short period of time during the course of the year.

And with the Twentymile volumes coming back pretty strong now, and the drop in Central Appalachia, the drop in sulfur credit pricing, what is the risk that all that translates into a depressed market for Colorado coal? And how committed are you for '07 when you look out on your plant volumes for '07, if you can give that kind of detail?

Well, I do not think we would want to give the detail for a specific mine, given that our Colorado region is predominantly one mine in the portfolio. But I would say that we have seen very little impact to what has happened both in Central Appalachia and in Powder River Basin to the Colorado market and at this point, would not anticipate that we would see significant changes in the dynamics there.

Obviously, our focus right now is to ship the volumes under the commitments that we had this year, and then finalize getting Twentymile up to its full capacity for next year.

Mark Liinamaa, Morgan Stanley.

Just wondered if you would comment quickly on the scrubber situation. You made comment in the release that scrubbers are being delayed, should benefit PRB. And with the developments as you see them in the Illinois basin?

Mark, this is Rick. We talked about it with you a couple of times, and obviously I think the general consensus, I think, was with the [care] rules going into effect by 2010 and everybody would have their scrubbers installed by 2010.

What we have been seeing announcements from a number of large utilities that because of delays in being able to get equipment, because of the high price of equipment, in some cases 40% higher than their earlier estimates, that they are delaying the installation of scrubbers potentially beyond 2010. So we think that, in both cases, PRB is going to be very competitive and continue to grow in the scrubber world as well. But we think obviously if they delay them, it will obviously favor PRB coal near-term for sure.

You can see, you can go back and look at some of the major announcements by some of the large utilities that have recently made those announcements.

And I just wanted to congratulate you on making, I think, a great decision to match production under the PRB with rail capacity. Entirely the right move. So great.

Wayne Cooperman, Cobalt Capital.

Just a quick question on the East. You had a contract -- you had to go buy coal on the spot market. But I thought the prices came down. So would you not have benefited from that, or did you have a very favorable contract that you got out of?

Wayne, the particular case we're talking about is metallurgical coal. And the metallurgical coal prices have not come down. Even though we had a producer that at $60 could not produce the coal, we're still having to replace that coal in the $80 plus range.

Right, and you do not have your own capacity to increase that?

That's exactly what the Black Stallion Mine -- we accelerated that mine so we should be bring that online here pretty quickly. And that will help us mitigate some of that impact because -- through the next year.

You think you have more situations like that? Because given what's going on in the costs, I imagine there's a lot of marginal guys that might just stay home and besides on going to work.

There is no question as you look at what is going on Appalachia, you're going to have some marginal producers in the contract level that are not as well capitalized and cannot handle the -- what's happened short-term in the marketplace. Will it impact us significantly with our portfolio of 250 million tons of production? We are pretty diverse. Yes, we may get some impact, but it will not be significant.

How much of your tons are you actually buying from other guys under contracts like that?

It is probably three to five million tons. I do not have the exact number (multiple speakers) .

It is not pretty significant.

It is meaningful dollars when you lose one, but (multiple speakers).

Every dollar is meaningful when you lose it.

The total package for BTU, it is not going to change things.

Ashish Gupta. [Ennon] Capital.

Just a couple of questions. One macro and one more housekeeping. On the housekeeping, a follow-up to the question on the asset disposal game. How should we think about modeling asset disposal gains going forward along with your tax rate? And just was wondering if that asset disposal gain, was that included in your previous guidance on earnings?

The asset disposal gain has been a segment of business, obviously, if you followed us since we have been a public company. And it is obviously quarter to quarter, it may be a bit difficult. I think you have to look at it on an annual basis and try to estimate what that number is on an annual basis. Typically, I would say that number should run $60 to $75 million. But year-over-year, you can see through September we ran about $80 million, so we had a pretty solid year thus far.

And that is all driven in part because the reserve values are higher. When you got 10 billion tons of reserves, it allows you to grow that portfolio. So we'll give you better guidance next year as to how we think that is going to shake out for '07.

But then I will switch to the tax rate question. As we have said many times on the tax rate, because we have $1.8 billion in well tax assets utilized, we've got a little bit of lumpiness in our tax position, but the great news is that we're not going to pay in cash taxes to the great extent in the United States as we are in Australia. What we expect, as we move forward, is the tax rate will start to increase as we shoo into those benefits. You'll see that rate probably increase into the 10 to 15% next year, working its way up to the A&P rate of about 25% over two to three years.

For this fourth quarter, as par with last fourth-quarter, we would expect the large benefit as we finish our budgeting process and are able to recognize that the benefit of some of these tax assets, because we have visibility into future profitability in cash flow.

Fair enough. And then on more of the macro question, I just wanted to better understand your decision to lower your uncommitted exposure for '07 and '08. And as you commented more than you would normally do, just in general if you believe coal fundamentals are improving and have troughed or are improving from current levels and prices should increase going forward, why not leave more of your tonnage for '07 in [OE] unhedged?

We still have hedged '08 tonnage unhedged, of course. In '07 basically we are managing to what we think we can deliver. There are still some logistical constraints into moving the coal. So it does not make a lot of sense for us to produce coal that we're not confident can be delivered at this point in time. We think it is a short-term issue. We think the rails are on top of what they need to do to correct the situation.

And they have made significant progress this year, and we think they will hopefully get to full solidity by sometime next year.

Mark Reichman, A.G. Edwards.

Just real quickly, on the debt, I was just looking into how quickly you would be looking to get to, like, a 40% debt ratio. I mean, are there assets that are available for sale that you might be able to pay down debt with?

I mean, I guess one question to me is -- are the interest in the Venezuelan operations still strategic? So what kind of mix should we look at in terms of asset sales, equity issuances and free cash flow to be applied to the reduction of debt over what timeframe?

I think that is a bit of a strategic question that I am not prepared to probably give you too much detail on at this point in time, obviously. We will look at all of the above and decide when the markets are right and make sense. And there's no urgency.

Obviously, we are putting our priority on paying down debt. It is very manageable for us because the visibility that we have to our cash flows and the billion tons of backlog on long-term contracts that we have. So there is no pressure for us to pay down the debt. We just think that is a much more manageable level and it provides kind of the right cost to capital and the right management flexibility.

So we will obviously keep you posted as we make any decisions to accelerate that payment, other than through ongoing free cash flow.

Leslie Rich, Columbia Management.

I wondered if you could talk a bit more about your outlook for Illinois in general, aside from Prairie State, and in terms of how quickly you see production ramping up there? And sort of what your expectations are, particularly in a post-scrub environment?

Well, obviously we think very positively about the Illinois Basin. Being one of the largest reserveholder in that area and the largest producer, we have a number of operations which we are adding production to. We brought the Gateway Mine on last year and started our Wildcat Hills Underground, and we are looking at a number of other opportunities in the Illinois Basin. Both to meet current growing demand as well as in a post-scrub world, we see the Illinois Basin being a strong growth region. While the fuel prices affected some of the cost structures on the surface operations, it is a stable operating environment and one that we know very well historically. So our plans are to continue to grow the Illinois basin to meet that market demand, which we see as being very strong.

What is your annual production out of Illinois right now?

Well, out of the Illinois basin, it is about 38, 40 million tons right now.

And you can see that ramping up over the next three years?

Yes.

David Gagliano, Credit Suisse.

First of all, the Eastern costs, obviously a lot of moving parts. I do not want to keep coming back to it, but with all the moving parts, the purchases and the spot market etc., what do you think is a reasonable forecast moving forward over the next six quarters for Eastern? What's your target for the Eastern cost per ton?

Well, I think it is certainly going to be flattening out with the number that we have now. I think, you know, part of as I said was a shift in mix as we got the James Creek Mine coming onboard, which was a higher cost metallurgical coal mine. And that is a bit permanent in that cost structure, which we anticipated and did that willingly and knowingly to be able to participate in the met market.

So I do not see it getting any higher. Hopefully we will be able to know $2 or $3 out over time to be able to get it back down and knock out some of those contractor costs. But it is a bit of mix issues as well, so I will probably have to give you more information on that as we give you the guidance for '07.

I would just remind you that we do subscribe to the theory that Central Appalachia is a challenged operating environment that does get the brunt of the cost pressures in the sector.

On Excel Coal, can you just remind me again, the 15 million tons potentially in '07, and 20 million in '08. What is the split between met and thermal?

About 65% thermal (multiple speakers) as part export thermal and then some domestic thermal, and then 35% metallurgical coal. Once it gets to full production capacity. So we will not get to that full capacity until sometime mid '07, because one of the mines does not come online until late '07, one of the thermal mines will not come on until then.

Pearce Hammond, Simmons & Co.

Just a follow up on the synfuelers reopening their synfuel lines in Central Appalachia -- is that a positive or a negative? On the positive side, does it gives you a little bump on EBITDA you thought may been gone? On the negative side, does that bring some tons to the market that probably normally would not be there, but are essentially subsidized tons?

The answer is both. It obviously gives you a little bit of bump back into the -- because we were a synfuel producer, of course. We did not have any host sites. But we shipped coal through the facilities, supplied the facilities. We hit a small bump on that in that regard. But I think overall, these credits expire in 2007. As we see it in terms of the overall market, you're going to probably pull off 100 million tons plus of subsidized coal at the and of 2007 or when oil prices ramp back up. And that'll be good for the market overall.

So 100 million tons overall?

Of total synfuel's throughout that's being subsidized.

You said the full 100 million would come off, or --?

Well, the tonnage will still get shipped. I do not want to misinterpret. The tonnage will get shipped. It is not like 100 million tons is not going to go into the market. It is not going to have a subsidy that it has now so it's at that low end of the curve.

What percentage of that 100 million, though, do you think would never get shipped, just would fall off?

That is a tough one. I do not know the answer to that. It is going to be site by site, and mine by mine.

Justine Fisher, Goldman Sachs.

I just have a couple of last questions. First of all, how many longwall -- in light of the longwall problems that you had this year, both in Australia and the U.S., could you just tell us first of all how many longwall moves you may have next year, if you know? Then, second of all, what you have done to make sure that the equipment maybe will not have as many snafus as it did this year?

I do not think we have the full number of longwall -- .

We are going to have -- for most mines, you have one or two longwall moves per year. So that is kind of a given there.

And then next year we will have six longwalls running in the Company.

And then for Central Appalachia, can you just go over the gross projects that you have? There is Black Stallion, but just so that we can get a better -- we can get a better idea of the tonnage growth there in '07 and '08, just given that you have given us a little bit more color on what is going to go on this year?

Most of the Appalachian projects, Justine, are replacement. The Black Stallion is replacing a contract miner as we said before that has basically had too high a cost structure to continue to provide coal. So that is -- Black Stallion is a little more of a replacement. And James Creek is a replacement for our Harris metallurgical coal mine. So really in Appalachia, you're seeing probably flat production year over year.

And sorry, last question, because I know it is a long call -- there were 60 or 70 million of coal unpriced at the end of the second quarter, and now there is only about 12. Is there any reason you decided to price the remaining '07 tonnage now rather than wait, say, until the fourth or the first quarter to potentially squeeze a bit more of the market, depending on where natural gas goes?

I think there is more than 12. I think what we said is that there's 12 million tons that are uncommitted, meaning they have not been sold to a customer. There is still an additional 14 million tons that are subject to pricing. So now you are going from 60 to 26.

Just to get the numbers straight for you. The difference between what we have not sold and what we have not priced.

And so then, any reason why you decided to price the remainder of that rather than waiting until maybe the four or the first quarter, when if you look at it at least where elongated natural gas is, it's higher?

A lot of that -- the curve that we're looking at for coal is also in contango just like elongated natural gas curve. That is how we're selling coal going forward. We're not selling coal based upon what you see in the thinly traded spot market. So we're looking at '07 numbers and we are selling contracts that have -- that are in contango and not the depressed spot prices.

So think about 60 going down to really only -- and then you got to take out the seven million tons of production that we took out, so you've really got to be talking about 53 million tons down to 26 million tons, so slightly less than 30 got priced.

Not all of that was in the Powder River Basin. Some of that -- probably over half of that was related to price reopeners. We did not really sell the coal. It was subject to a reopener provision in the contract that was set by a formula or some other mechanism. So we really didn't actually go out and solicit the market for that many tons.

There are no further questions. I will turn it back to you, Mr. Boyce, for any closing comments.

Thank everyone for their interest in BTU. It was a strong quarter for us, looking at the full portfolio of Peabody activities. We look forward to updating you in January on our forecast for 2007. Thank you.

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