Peabody Energy Corp (BTU) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Peabody Energy quarterly earnings conference. For the conference all the participant lines will be in the 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 conference over to Mr. Vic Svec. Please go ahead, sir.

Good morning, and thanks for taking part in the conference call for BTU. Today CFO and Executive Vice President of corporate development, Rick Navarre, will review our results and our outlook. President and CEO, Greg Boyce, will discuss the markets and several key 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. And I will now turn the call over to Rick.

Thanks, Vic, and good morning, everyone. I would also like to thank you for joining Peabody's first quarter earnings call. I would like to begin with a few observations about the quarter. First, Peabody's performance continues to benefit from our diversity of operations and our portfolio management. Second, just as Peabody expanded our met coal presence in 2004 before major price movements, our recent Excel purchase has been followed by a very strong rise in seaborne thermal coal pricing. Third, you will see that our results were affected by a late winter blizzard in the Powder River Basin, along with a weaker U.S. dollar and international port and rail constraints.

We view the global port and rail issues as near-term growing pains related to a positive global coal growth that sets up major future benefits for Peabody. Bottom line, we experienced some short-term disruptions in the quarter. We are encouraged by the improvements we are seeing in the coal markets, and we are reaffirming our full-year EBITDA and EPS targets. In reviewing the quarter in detail, let's turn to the income statement. Our first quarter revenues were a record $1.37 billion. This was driven by improved U.S. coal pricing despite lower SO2 allowance pricing year-over-year, as well as lower volumes, particularly in the Powder River Basin.

Our EBITDA totaled $270 million as expected, we saw increased results from our Australian operations, trading and brokerage and our resource management activities. This more than offset $40 million related to the weather driven delays, the port and rail issues and the currency movements I discussed. In Australia the record high demand has created an extraordinary scene with some 160 ships off the East Coast of Australia. By some reports 10% of the world's Capesize vessels are waiting to load coal. Dalrymple Bay and Newcastle, the two main terminals that Peabody ships from each have waiting times of up to 30 days.

The port congestion reduced our first quarter volume by 350,000 tons and led to higher demurrage charges. These combined to lower our EBITDA in Australia by $10 million. The ports announced queue-management systems that will reduce all shippers throughput by 10% to 15% for the remainder of the year from these two key ports.

Regarding foreign exchange, the U.S. dollar weakened during the first quarter, and the strong commodity-based Australian economy allowed the Australian dollar to rise to its highest level in a decade. Currency movements impacted us by another $10 million in mostly non-cash expense. At current exchange rate levels the full-year results could be impacted by as much as $55 million. Our first quarter results were also impacted by $55 million in higher DD&A and interest charges related to the Excel purchase; this was as expected and will be offset later in the year and more fully in 2008 when the new Excel operations reach their plant production levels. On the cash side I am very pleased that our operating cash flow grew to $247 million and I also note that we reduced debt $100 million in the quarter after making a commitment to debt reduction following the Excel transaction.

Now I will drill down into the detail in the supplemental schedules. Our first quarter U.S. revenue grew 5.5%, led by a 28% price improvement for our premium PRB product. Looking to Australia, our revenues reflect higher volumes stemming from the addition of Excel. Our Australian revenue and cost per ton figures reflect the impact of mix between thermal and met products. In the eastern United States looking at the sequential quarter-over-quarter performance you will see that costs remain essentially flat. We had good results from our midwestern and northern Appalachia mines to some extent offset by geology and startup issues in central Appalachia.

Turning to the West, higher revenue related taxes accounted for nearly one-third of the cost increase. The remainder was largely driven by lower production volumes due to weather and some earlier than planned equipment repairs. As you can imagine, our business in the PRB is very volume sensitive. We expect next quarter's cost adjusted for higher sales related taxes to return and be more in line with our targets.

Turning now to our capital, we invested $135 million in the quarter and remain on track to spend $450 to $525 million in 2007. We continue to target our investments to deliver cost improvements in the United States, and expand our international platform including the planned completion of 3 new mines in Australia. For example, we are completing the upgrades in the Powder River Basin to improve productivity and lower our costs, and we've broken ground on the new El Segundo mine in New Mexico, which will add another world-class open cut coal mine to our portfolio, and it will serve a long-term 19-year contract. This mine will supplement neighboring Lee Ranch production and will have a 35% lower cost structure, largely due to its favorable overburden ratio.

Now let's turn to the markets. The forward coal markets are in significant contango. We've seen published eastern prices recently rise beyond $50 for 2008, and we have signed Powder River Basin contracts at forward prices of up to 50% above today's prompt levels. We've remained patient in committing to long-term contracts during the quarter. In fact, we secured less than 10% of the business that we bid on this quarter. However, the markets are shifting, and we believe our patience will lead to long-term improved value. We are essentially sold out of plant production for 2007 in the United States and we've stepped into the trade market to source some of our PRB contracts, leaving our valuable coal in the ground.

Now turning to our outlook, the full-year impact of lower U.S. production in the first quarter and the ongoing effects of transportation and currency may approach $135 million. Our targets continue to reflect this sensitivity on our high margin shipments, as well as the timing of the new mines and capital projects that we have ongoing. All in, we are reconfirming our original full-year financial targets, and we are now targeting second quarter earnings and EBITDA of $300 to $350 million and EPS of $0.35 to $0.55.

In summary, Peabody is well-positioned to realize benefits as the U.S. markets return to normal conditions, and we will further benefit from our expanded presence of the high-growth Asian markets. We will continue to manage our industry-leading portfolio of assets and trading skills to differentiate Peabody and create value in all market conditions.

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

Thanks, Rick, and good morning everyone. We have seen some exceptional events shape the coal markets in the first quarter led by China and the U.S. and we are very encouraged by the global coal markets. And we are continuing to move forward on a number of growth initiatives aimed at capitalizing on these events. Now I will start with the international markets, which underpin the fastest growing share of Peabody's earnings profile. You will recall our activities outside the U.S. represented a mere 1% of our EBITDA five years ago. This grew to 30% last year and will continue to increase as we move forward.

The global coal markets are showing significant strength. Let's take a look at a few of the major indicators. International thermal coal prices have increased in every major seaborne region over the past year. South Africa and South American coals, both up over 20%. China, up 38%, Russia up 61% and of importance to us in Australia where we have the largest and expanding production base it is up 31%.

Now last quarter I forecast that China could be a net importer by the end of 2007. In fact, the growth in China's coal demand has again surprised the world and as a result we believe China has been a net importer during the first quarter. A few key numbers here to look at. China's exports are on track to be 19 million tons below 2006 levels, nearly all of which is thermal coal. Their imports have increased during the same time as it appears that China prefers to import coal into their southern region. The bottom line here is that a nation that four years ago exported 80 plus million tons more than it imported has now taken all that coal off the seaborne market and is looking for more imports.

This is made even more acute by neighboring Vietnam which last year accounted for nearly 55% of China's imports, but now plans to reduce its coal exports to retain energy for its own internal growth. This has significant long-term implications for Peabody's fast-growing Australian portfolio, as well as our activities in China directly. We continue to build our engineering business development and coal trading capabilities in China.

Turning to India, we see that demand also continues to rise. India's coal minister said recently that coal demand could quadruple over the next 25 years, to allow India to continue its 9% per year GDP increases. India today is buying large quantities of coal from South Africa and starting to buy coal resources in Asia. Peabody is also increasing its coal sales to India, again through its growing Australian production base and trading operations.

Now with the significant tightening in the Pacific Rim markets we have seen a strong impact on the Atlantic markets. The benchmark delivered price into Europe, for instance, has approached record highs in the past few weeks. Peabody is just relocated its European coal trading office to London to expand its sales trading and brokerage activities in what is the largest and most liquid trading market in the world. Rising seaborne markets have historically created a pull in the U.S., and rising global coal demand is one of a number of events that could further tighten the U.S. supply demand balance. As we assess current stockpiles, we look at both day's burn and total tons. Overall electricity demand is up nearly 5%, while coal production is now down nearly 2% for the year. This suggests that stockpiles are on a path to return to more normalized levels.

A number of shutdowns continue to take hold in the eastern U.S. coal fields as high-cost mines are being edged off the cost curve and some surface mining capacity will be impacted by the recent valley fill permit decision. While Peabody primarily operates underground mines in Appalachia, more than 10% of U.S. production still comes from surface mines in Central App. In addition, the late March blizzard in Wyoming further reduced U.S. production some 5 million tons.

Regarding longer-term growth, we are pleased to see more than 10,000 megawatts of new coal units under construction today. This represents more than 35 million tons of new annual demand. And as we analyze these plants, 70% of the coal supplies would come from the Powder River Basin and Illinois Basin, regions where Peabody is number one in both production and reserves. We also see another 11,000 megawatts that are highly probable in the near-term.

Before we open up the call for questions I would also like to discuss our other announcement today. As you know, Peabody reviews its portfolio with an eye to creating the best opportunities to achieve long-term shareholder value. We are engaged in a strategic review of operations in West Virginia and Kentucky. We expect that this may result in a spinoff or other transaction. In the case of a spinoff this would create a leading eastern U.S. coal supplier that would build on a proven track record and a significant asset base with a leading metallurgical coal position.

As you know, Peabody's strategy is to remain the leader in the Powder River, Southwest Colorado and Illinois Basins, to continue to grow rapidly in Australia and to expand into the fastest growing global markets for coal, led by China and India. This transaction would allow Peabody to continue to deliver on these strategies. At the same time we recognize that there are specialized growth opportunities in West Virginia and Kentucky. We understand that you may have a number of questions at this time, but our answer to most of these will be, pleased stay tuned. We look forward to communicating with you more as the final form becomes clear over the next month or so.

So in summary, (inaudible) Peabody remains our leading asset base in people, our international scope and our ability to position our global portfolio to meet the strongest growth markets to create shareholder value. As always, I want to thank all of our employees for their focus on safety and great efforts. We appreciate your interest in BTU and Rick and I would be happy to take your questions at this time.

(OPERATOR INSTRUCTIONS) John Hill, Citigroup.

Thank you, and good morning everyone, and congratulations on clearly explaining the plan and sticking with it. Just a quick question, if we could on the PRB and some of the new contracting sounds promising anyway. Can you give us a little more detail? Is that '08 tonnage, is it over a period of time, and what is the sulfur in there?

John, on that particular contract those are over a period of time, and it would be for our standard products out of the Powder River Basin in terms of the quality parameters.

Okay, great. And then just a quick follow-up. What happened in trading and brokerage or whatever it was, it was obviously good in terms of the per ton margins coming up to $8 a ton, what happened, and how should look at this as we go ahead?

There are a couple things happening there, John, that I think are very positive. I think as we continue to expand our trade operations beyond just the U.S. and we opened the office in London as we talked, you may have heard us talk about that. And we are beginning to trade as well in China in the near, shortly our Australian trading desk is also contributing. So we are getting international revenues from the trading platform, which is very good for us.

Secondly, what you're seeing is a little bit of a decline when you get to a margin per ton. You are getting a little bit of decline in the traditional brokerage business and back to the -- and we are getting into the more trading business. So when you do that you don't really have necessarily the full revenue impact as you would on a physical sale. Or the tonnage impact that you may have just a financial settlement. So while it is strong, it is profitable, the business continues to grow, that is the right message to take away from this. And as usual there is always a structured transaction or two that we are able to do in the quarter related to positions that we may have that we may monetize with the options and things like that. But it was a good, strong quarter for us. We hope to repeat it as we move forward but still looking for good business profitability out of that segment.

Very good. Thank you.

Michael Dudas, Bear Stearns.

Greg or Rick could you touch a little bit on dynamics going on in the Illinois Basin right now? You did [not] highlight in your press release about exporting some tonnage out of that region. It seems to be some news of some overinvestment in that region, based on the scrubber build opportunities over the next couple of years. And that combined with lower leased prompt PRB pricing may be putting some pressure in that market. Could you characterize a little bit about where we are there and prospects for growth in pricing recovery in that region?

Well, Michael, I think when you look at the Illinois Basin there is no question there are a number of new operations that are being discussed and some that are under construction in the Illinois Basin. We have been very careful as we have developed our new operations there with our gateway mine and our two-unit mine at Wildcat Hill being the most recent. But it really relates to the timing and the build out of the scrubber units for that market, and I think as we have all seen there is some of that scrubber buildout that is being delayed just due to the nature and the general delay in capital facility constructions in this country. But as we bring on new production in the Illinois Basin or new mines we baseload those with new contracts. We think that overall the market will develop in a regular measured process as we go forward.

My follow-up question is what is Peabody's view, or is it going to translate with the National Mining Association or other major initiatives relative to carbon, are we going to see something out of Peabody on a more defined basis? Is this going to be part of maybe the coal user based group or EEI that will go out and at least lobby or at least take in account some of the political ramifications that seem to be going on in the carbon market?

Peabody has been very active in the national discussions around carbon management. We have been very proactive in indicating that our view is that carbon is an issue that everyone expects to be managed. We believe technology is the path for that. As you know, we are a founding member of FutureGen and have been a strong advocate for additional clean coal and carbon captured sequestration development funding out of the government. And very active in terms of on an international platform what is happening in Australia. Our operations, our participants in the COAL21 fund in Australia which is a voluntary fund that we all pay per ton to fund carbon captured storage research in Australia.

The issue that always comes down to is a discussion about a hard carbon cap or a cap and trade program. We continue to advocate we need the technology deployed first, and then we can discuss what a rational regulatory program might be in the future later. So I think we have been very active and consistent in terms of the message we've tried to bring to the discussions around carbon management.

Do you expect any action by Congress in this administration?

I think Congress is finding that this is going to be a very deliberate process and where originally there was views that we would see something mid this year; everything we see now is the discussion is going to take a lot longer. And quite frankly, all of that is predicated on now the information that Congress is receiving is that the technology is the key, and the focus needs to shift from when are we going to have hard numbers on carbon to how quickly can we incentivize and deploy the commercial technologies to capture carbon and sequester it. So I think it's going to be slower than we would have seen or people would have thought earlier.

Thanks, Greg.

David Gagliano, Credit Suisse.

I was wondering if I could just focus in on the Central Appalachia decision. I was wondering considering you've had these assets for a long time and obviously you have clearly signaled that in your view is not the area of growth from a Peabody perspective. I am just wondering if you could comment with regards to the timing of this announcement, especially considering what we are hearing is that things are expected to improve, i.e., why do it now as opposed to waiting a year?

As we look at the portfolio the issue is we want to be able to enable both parts of the business to focus on their core strategies and grow. As we've talked earlier for Peabody that is growing in the Midwest and the West, Internationally and in Australia. But there is a great opportunity to begin to look at growing a business in the eastern part of the U.S. And so we think actually the time now is probably better than others because that will enable that entity to the extent that it is a spend to succeed with that business plan focused on the eastern part of the U.S.

Just as a somewhat related follow-up, to the extent that you could comment on, obviously you are going to get some proceeds from this transaction, I am just wondering if you could comment on prioritizing what you plan to do with the proceeds. Would it be debt reduction, would it be growth, or reinvesting in the business, special dividend, what would you say would be your priorities? And if it is growth, if you could just comment with regards to your preference either U.S. or international. Thank you.

Let me tackle that. I guess there is no guarantee that this time what the final structure of the transaction will look like as to whether there will be cash proceeds; it will be a pure 100% tax free spend. But in the event there are some proceeds as it relates to either a sale or a spend, certainly we will look at the alternatives that we have in front of us. And clearly we are trying to grow the business and we are looking at international opportunities and we think that has some of the best prospects for return to our investors. At the same time if there is nothing available at the time the transaction comes forward we'd certainly do what we said we would do with respect to paying down some debt and getting that a little bit more rightsized to allow us in the future more flexibility toward our growth strategy in our other platforms.

Fair enough. Thanks.

Mark Liinamaa, Morgan Stanley.

With 43 million to 90 million tons of potential new demand coming from new generating capacity can you comment on how prepared the existing PRB mine and rail infrastructure is to deal with that? And as a follow on to that, would 50% above the current price for PRB be enough to induce new mine development? Thanks.

A couple of things, starting with the rail infrastructure first, we have always said that we believe that the rail infrastructure would continue to be developed. And in fact the railroads continue to put capital into expanding the rail infrastructure out of the West in order to be able to manage the long-term growth out of the Powder River Basin. Nothing has changed our mind. In fact, the railroads continue to have a view of growth there that is equal to or in fact ahead of where we see things going, and continue to invest extensively in the Western system.

In terms of the mine response, as you recall with our School Creek opportunity we have the largest opportunity to provide additional volumes going forward. We continue to do engineering and environmental permitting School Creek; while we have not made a firm decision yet as to the exact timing of that, it will depend on how quickly the market develops over the next couple of years. But again, we are in the best position to meet that new market demand as it fully develops. Your last question about what the returns would need to be, obviously we wouldn't make that decision until we had sufficient view that over the long-term, including some baseload contracts, that we had adequate margins and a capital return on that project.

Okay. Thank you.

James Rollyson, Raymond James.

Could you talk on the outlook for the Australian market? Obviously you got some added production coming in through the rest of the year. And in the context of when those mines start up, can you kind of talk and given the transportation constraints, can you talk about how volumes look to go throughout the year and maybe the mix between thermal and met?

In total we are looking at this year probably about 24 to 25 million tons of production out of Australia with core constraints probably costing us 2 to 3 million tons of capacity this year. That is probably -- and it is roughly about 60% thermal, 40% met on the breakdown of the tons.

Just as a follow-up on the same lines, you had mentioned, the prices have moved up roughly 31% on the thermal side so far since you bought Excel. Have you been able to capture much of that to impact '07, or is that more kind of going forward in '08 and beyond?

If you will recall, the contracting season for thermal coal in Australia starts, the new pricing would start April 1 and go through the last three quarters of this year and incorporate the first quarter of 2008. So to the extent that those price increases have occurred, we will see the benefit of those price increases through the back three quarters of this year and into early next year.

Fantastic. Thank you.

Brian Gamble, Simmons.

Good morning, guys. My first question is just wanted follow-up on Dave's question earlier about Central Approximately. I know you guys don't want to tip your hand at all to what exactly you are going to do, but in light of the fact that we have been hearing consolidation rumbles for the last 18 months or so, what is your view on why that has not occurred, and why you are having to go into review with a possible spinoff as opposed to just selling those assets to a willing buyer in the region?

Well, as we look at it I think it is clear I still would tell you I think there are significant opportunities for consolidation in the Central Appalachian region with the producers in that part of the world. And I think this particular entity being 100% spinoff or whatever form it takes we will be in a strong position because of its contiguous nature of its reserves with other properties. So we have had many opportunities as Peabody to be that consolidator. And as we've said on a number of occasions, we are focusing our efforts on Australia, the Powder River Basin and some of these other growth markets. That is why we think it was time to let this company flourish under a management that is more focused on those types of opportunities and be able to do that.

So from our standpoint we think there are opportunities, and that is how we would approach that. And we think to put together a management team that clearly will be strong and have the Peabody pedigree and commitment to deliver on those types of results. As to why some of the other folks haven't done it, I think that is a difficult question for us to probably -- we could speculate, of course and spend a lot of time going through that, but that is probably not best for us to guess why they haven't done that.

That's fair. With your recent announcement about making strategic investment in China and the ramp in Australia, trying to take advantage of the Chinese market, do you feel going forward that capital would be better spent in China directly to take advantage of that market? Or would more indirect route in taking advantage of reserves and opportunities in Australia that indirectly benefited by China? How do you see that capital being allocated?

I would tell you that our first order of preference would be to continue to look for accretive opportunities in Australia. The investment dynamics within China are still evolving. We are spending a significant amount of time understanding the resources, building a trading and sales platform in China. But for the near-term we would continue to look for opportunities in Australia as a way to supply that Chinese marketplace and all of the Pacific Rim, which has been fundamentally impacted by the consumption of energy in China.

Thank you very much.

David Khani, FBR.

Is all the legacy liability going to be assigned to the assets that are going to be spun out?

That is something obviously we are still continuing to structure, which more news to come in the next 30 to 45 days as we get ready, if we have to file a form 10 in association with the spinoff, but it will be a balance that make both companies where the eastern company will have the ability to manage those liabilities. So obviously we will put the right balance of liabilities there. It will have some associated with the active operations, of course, but it won't be all of our liabilities.

And just a follow-up question from some questioner before. On the PRB contracts, could you give us roughly the weighted average life of those contracts that you signed in the first quarter? Is it three years, two years, four years, ballpark?

On a weighted average basis it is probably 3, but they probably range from 2 to 5 in that ballpark if you are looking at breaking them out individually.

Great. Okay, thank you.

Paul Forward, Stifel Nicolaus.

Good morning. In Australia I think in the last quarter you had been talking about maybe $40 a ton cost. With currency having done what it has done and the port constraints is this $45 we saw in the first quarter is that something that's going to hold or something in that ballpark?

Certainly your question with the currency movement from where we first started it would probably cost us $3 or $4 a ton in overall cost structure, but I think we're still shooting for a $40 number. I think we still think we can get to the $40 by the end of the year as we ramp up some of these lower costing sell operations. So I am still sticking with the $40.

Okay, and then going to the Appalachian idea, I think in your K you talked about maybe 550 million tons of reserves, and this morning you talked about 1.5 billion tons. This 550 in the Appalachian alone, and this morning you talked about 1.5 billion tons of reserves; is that pulling from Western Kentucky?

It is in part. There is obviously as we look at the Kentucky operations that we would consider putting in there we would include the reserves that go with Western Kentucky, as well. And then there are some other additional reserves that might be included in the entire package, as well. It is a meaningful amount of coal reserves. So 1.5 billion is a number that we are looking at right now.

Are there, I guess lastly, are there any mines that you can see in the Appalachians where reserves are a concern over the next say five years?

Not really, no.

Okay, thanks.

Shneur Gershuni, UBS.

Most of my questions have been answered, but I do have a couple of quick follow-ups to some of the earlier ones. With respect to the 19 plants that are highly probable and so forth, can you define the criteria that you use to define them as highly probable? Is it halfway through the permitting process or somewhere between announcement and actually moving dirt?

There are two groups that we talked about. The first group was the plants that are actually under construction about 10,000 megawatts. The other ones that we said were highly probable, about 11,000 megawatts. That would be the items that you mentioned, the ones that are in permitting, the ones that are actively in engineering design, those are the types of criteria that we would look at in order to assess the probability of all of those that have been talked about out there in the -- particularly the [nettle] database, which is the database that we use.

Okay, and just one other follow-up, and I don't want to beat the spin-out of the eastern coal transaction to death here. Just you'd sort of listed some priorities before of how you would like to use the capital; would share buybacks be on the list, as well too?

Well it always is, it is always in our list of things that we look at and we just evaluate where the best opportunity is at the time and based upon our cash flows and our future prospects. So certainly is something that we always evaluate. As you know and last year we bought back $100 million worth and we still have an open share buyback program.

Great. Thank you for taking my question.

Ian Synnott, Natexis Bleichroeder.

Thanks, good morning. A lot of my questions have been hit, but just one follow-up on the PRB, just more on the cost side. If we did see the volume start to pick up again in the West, how much of kind of the cost increase you think would be reversed, and you think we would move back more towards last quarter's levels, the December '06 quarter?

I think you will move a little closer to the December '06 level. You might be up about 4, 5% because of what we've projected at the beginning of the year was related to cost escalations related to the fact that we don't have our fuel hedges in place as favorable as we had last year. Some of the increases in commodity costs and tires and things of that nature. We would get back to last year plus 3 to 5% adjusted for sales taxes, of course.

That is helpful. Just one more and a follow-up and I'll show you if I could. In terms of you had mentioned going through the contracting season but if we are looking out towards 2008, at this point how much can we assume is kind of open on the thermal side and would it still be about that 60% 40% thermal met mix?

When you look at the entire Australian platform majority of it reprices every year for both the met coal and the thermal coal side. For 2007 once we get past this contracting season from April 1 through the end of the year, that will all be contracted and priced as will for the first quarter of '08. Then everything will then reprice -- essentially everything will reprice from the beginning of the second quarter of '08 going forward for the rest of '08.

So then you would be in a good position to benefit from some of these higher prices or we should see something there? And what about on the coke and coal side? I heard some positive comments from one of the other big producers in Australia, Rio, this morning. They are seeing some improvements in the coke and coal market. You guys feel pretty -- how do you feel on the coke and coal side?

Again, we see the coke and coal market globally very strong, as well. That business has now been priced through the first quarter of '08 for all of the base tonnage and would then reprice beginning April 1 of 2008 based on negotiations that would take place at the end of this year or the first part of next year. So again it is the bulk of the volumes repriced on an annual basis beginning April 1.

Right. Okay, great. Thanks very much.

Bill Burns, Johnson Rice.

I wonder if you can give me an update or us an update on your coal to liquids. I know you had looking in the Powder River Basin and Illinois Basin about some projects like that. And the more of a macro sense of coal to liquids, do you think the timing of that has changed any, maybe pushed further in the future or just what your thoughts may be on that.

Two questions, one the coal-to-liquids and then looking at coal to gas maybe taken separately. Coal-to-liquids we are still seeing interest both in the Illinois Basin and the Powder River Basin, and those two regions primarily because of the size of the reserve base that would be required to baseload one of these coal-to-liquids facilities? I think what we are in right now is a period of time where we are waiting to see what happens with both the U.S. military's ability to provide some baseload contracts over a longer period of time beyond just a five to seven years that they are limited today. As well as some of the new legislation, for instance the Senator Obama, Bunning bills that are moving through Congress and then lastly, even Congressmen Boucher has said as part of the House's energy independence bill midsummer this year they would be including coal-to-liquids in that bill.

When you move to coal to gas I think that one is actually moving along without many impediments. We've got a number of projects we are looking at and doing some engineering work on. And of course things like unexpected drawdowns like we had this morning and the gas markets where they are at, is providing more impetus for coal to gas, those plants have a lower capital entry point and can be brought on in a quicker timeframe than a major coal-to-liquids facility.

Thanks.

John Bridges, JPMorgan.

Congratulations on getting into the Pacific Rim ahead of the market. The mix of thermal and met coal, the 60/40, was that in place this quarter, and could you give us a bit of a detail on the ramp up that you expect during this year?

The 60/40 is more of a going forward number. Would have been much heavier on the met side for this first quarter, John. This is Rick. And as we go forward, but by the time we get to the end of the year we should be at about a 60/40 mix and about 25 million tons. So you can kind of do the math on that, and I think we will be in about 30 million tons, 20 to 30 million tons for sure in 2008 is the expectation with about the same balance.

Okay, so what were you sort of 50/50 in the first quarter?

I'm trying to -- I'll have to look it up but I think it is probably the opposite. It is probably more like 60% met and 40% thermal. Because a lot of the stuff we are bringing online are higher volume thermal properties like the Wilpinjong mine, which will ramp up to a 7 million ton operation, which is all thermal. And the Wambo underground, which doesn't come online until probably August, which is all underground. So it is going to be -- but we do have Millennium starting up which is a surface mine. We already had Metropolitan in existence, which is a New South Wales based metallurgical coal mine, which is already at its full production. So it is more met side.

On that basis the price that you reported looks a little bit light. Was there anything affecting that?

There is also -- you have to understand as part of the thermal business out of Wilpinjong is a baseload contract with a large utility that is essentially no less equivalent to then what we would look at a federal lease payment, essentially, to get access to the reserves. And it is a low price. It is much lower than thermal export markets. The domestic contract which brings down the overall average revenues and gives us the access to that 160 million ton coalfield to then allow us to export.

Okay. How much was Wilpinjong in the first quarter then?

It was a total of probably one million tons.

Okay.

But it would've been supplying mostly for -- it would not have been to the export market. It would have all been under the contract to the domestic market, which is significantly less than the export market.

On the demurrage side in Australia, how long do you think the situation is going to carry on?

It is always a good -- tough to pull out the crystal ball -- last year they did put in a system like this. They called the capacity balancing system. And it straightened things up at Newcastle in about four to six months and we hope for the same, of course, and Dalrymple Bay has had the same issues and they have straightened things out. And obviously they are investing the capital, which is the good news, but they haven't got it online yet. This management system will hopefully get things straightened out by the end of the summer, but there are a lot of vessels out there right now. This is a record for them.

So you are looking for the second half?

Yes, we are probably looking at late second half is how we size it up, to be honest with you. Just to be conservative about it.

I think you have to look at it in two respects. There is the vessel queue that drives the demurrage charges and that probably will begin to sort itself out sooner rather than later once they implement the management system. But then you also have the overall throughput issues out of the ports at Dalrymple Bay really being affected by the timing of the completion of their port capacity expansion, which will be laid to the second half of this year. And then at Newcastle additional capacity tied to rail improvements, which they will be doing throughout the balance of this year. So we will see, I think we will see the vessel queue come down because of the management system. But ultimately getting through to where we get full and open volumes through both of those ports will probably take a bit longer period of time.

Would you remind us which mines go where?

Yes, if you start at the North our Burton and North Goonyella and Eaglefield and Millennium mines all go through Dalrymple Bay. Our Wilkie Creek mine goes through the Port of Brisbane. Our Baralaba mine goes through Gladston, then you move to the south. Wilpinjong, Wambo and the Wambo underground and a bit of blending out of Chain Valley go through Port of Newcastle and then our metropolitan mine goes through Port Kembla.

Excellent. I really appreciate that. Thank you.

Justine Fischer, Goldman Sachs.

The first question I had is just a clarification on the Western pricing. I am assuming that the average price there was $12.70 because there was a higher mix of Southwest coal. And I was wondering if you could give us an indication of what the percentage mix was maybe so we can kind of model going forward an increased amount of PRB tonnage.

It will be hard to do with that, but it certainly as far as the amount of -- are you looking, Justine, for the amount of tonnage that is involved in that --

Just on a percentage basis or even if that is actually the reason why it was $12.70. I am assuming it was a higher (multiple speakers)

No question there is some Southwestern coal and that comes out of Colorado coal, and there is coal from the [Kanta] mine, there is coal from the Lee Ranch mine in New Mexico, and then there is obviously of course the three Powder River Basin mines that go into that blend to get the $12.70. What I can tell you is that overall the numbers up 20% roughly but the 17 to 20%, but you're up to -- the premium PRB product is 28% of that increase. So on an individual basis.

So the PRB at 28% of the increase from December's quarter 10 70 to this quarter (multiple speakers).

PRB prices were up 28%, slightly pulled down in total because the blending of the other Southwestern operations into your $12.70. But the balances are pretty close to what historical levels have been.

The next question I had is regarding some of the comments that you made in the beginning remarks. And you said that you guys were buying PRB coal to fulfill some of your contracts. Was that because of higher costs coming out of the PRB? Because I think we always look at Central App and maybe with the high-cost Central App mines you can understand why companies would purchase coal to meet some contracts that they are running a high-cost mine. But in the PRB it seems like margins have always been positive, and mining is relatively low-cost. I am wondering why you guys decided to purchase some PRB coal to fulfill some contracts.

I think we just used it as an opportunity. There is no question that we can produce the coal and generate margin. But when you look at the opportunity what we are paying for the reserves, we think that we can use those reserves and resell those that are lower sulfur 0.5 pound coal, let's sell those in the right market at the right time. And when we can purchase coal, people are selling what is on -- see if you can buy some (inaudible) coal at these low prices -- we will use that on some of the flexibility we have in some of our contracts.

Is there a price at which you would stop buying purchase coal and instead kind of focus more on mining Peabody's coal?

I don't think we ever stop buying purchase coal if it is at the right -- in our trading group -- because we can always make a margin because if the price is moving up we will sell -- we will use the purchase coal on our contract and then we will resell the coal that we produce out of our coal mines and then the market moves up.

And the second question was on the comment that you exported to Illinois Basin coal; it seems as though Illinois Basin, you can obviously get it from mine to port but it seems relatively farther away from port than other regions. I was wondering what motivated the decision to export? Was it lower prices in the U.S., or was it significantly higher prices because I think you guys have to pay the export costs, right?

We pay to get to the port, so essentially it is a strong, global coal market. Essentially. When you look at the global coal market and look at the pricing for AP12, which is the European benchmark pricing, if you will, it was in the $70 plus deliver basis, which is probably the highest level it has been in three or four years and approaching its record level. So you could move an Illinois Basin product down the Mississippi River and out into Europe and still have a very nice profit.

You guys plan to export, to increase the amount that you export? I guess it obviously depends on where international prices.

Obviously (inaudible) international coal markets and where they stand and where the supply and demand balance is.

And then a third comment that you made about how Peabody dealt with the first quarter market was you said that the company didn't win most of the bids, or most of the coal bids that you were bidding on. I think that you said that, and I was wondering just because -- so it seems as though there were a lot of other coal producers who are kind of underbidding in order to get the coal out the door.

You could use whatever you would like to say it, how we can get the business but just to say it was at pricing that we didn't like. So obviously we could have come in second, third or fourth it really didn't matter; at the end of the day we were comfortable -- we are comfortable with where we are, and this is obviously on a position of being committed, we are less committed than we normally are at this time of year but we see the market shifting. We were counting on that and hopefully we called that right.

And were those PRB bids or Eastern bids or what region were most of the bids?

Mostly in the West.

Okay, and then the last question I have is just about the motivation of the spinoff. I know that you can't comment on exactly what form it would take but I wanted to clarify whether or not you guys are trying to spinoff Central App because you don't want to be the majority ownership in an entity in Central Appalachia? Or whether or not you think there would be more value and more focus in a separate entity? Just trying to figure out whether the priority would be to continue for Peabody to continue to have a significant ownership stake or whether the idea is to get someone else to (inaudible) that stuff.

I think your second description is the one we want to go with because there is going to be more value and more focus to have a separate entity. There is a great business model that can be created in the Eastern properties. And what we want to do is to make sure going forward with the spin that we got a management team and a set of assets that is focused within that region. They are off creating a significant amount of value within the context of their business. Meanwhile Peabody and BTU, we are able to focus all of our activities on what are the main strategies that we have articulated in the past and continue to move forward with, in Australia, international and in the western regions.

So it is not necessarily that Peabody wants out of Central App. It is just that you think the entity is better off by itself?

Absolutely.

One more question if I can and then I promise that is the last one. I have a question about the supply cuts that you guys mentioned in the press release. I think that there has been a lot of talk about the shutdown of the Wabash mine and the strike at a couple of foundations mines for a little bit in the PRB. I think those were factors that a lot of people were talking to taking out supply, but I guess Wabash is 1 to 2 million tons a year and maybe there is 5 million tons cut out of the PRB, but it seems to me that when you look at these numbers they are not that large a percentage of the U.S. coal supply. So I am wondering how we can equate those smaller numbers with that significant a decrease in supply that people have been talking to.

When you are this closely balanced within the context of the U.S. market and you look at the significant pressure coming in from outside from the global markets, it only takes a small amount of production changes to have an impact and/or demand changes. And when you have now both the demand side with electricity generation increasing and the reductions in the supply side that are continuing, it will not take very long for them to have continued impact on the marketplace.

Those were cuts that were happening after the data had come out suggesting the overall market was already down several percent because of Appalachia cutbacks and other things. So this is really more additive to what was already a number of tons coming out of the market.

[Mike Lonar], Goldman Sachs.

It's Chris Hussey with Goldman; I apologize because it sounds like Goldman is ganging up on you guys. In the equity side. When you look at the whole call you guys have had here, it sounds a little bit like your strategy is to lighten up in the U.S., and that the Central App you have a choice, you could keep Central App and consolidate or you could let somebody else consolidate it. But when you look broadly at what you guys are doing recently, you bought Australia, the call -- really the high tone of the call has all been about the international markets. The U.S. markets may or may not be turning but coal prices on the spot at least are pretty awful. When we look out five years from now do you guys have sort of a strategy for what percentage of your business will be U.S. versus international?

I guess just starting with the last question first, we don't put out specific targets as to where we want to be relative to whether it is international, whether it is U.S., whether it is PRB, Colorado, Illinois Basin. But we continue to look at growing in what we believe are the high-growth markets. I think going back to an earlier comment that you made in terms of a strategy of deemphasizing the U.S. if you go back three years ago within the context of Peabody, we made major acquisition in Colorado. We made the largest acquisitions of reserves in the Powder River Basin. We made acquisitions in the Illinois Basin that resulted in the start up of Gateway. So sure we've also made acquisitions in Australia, but we continue to focus all of our activities in our key strategy areas. That is not to short the U.S. versus international. When it comes to the Central App region in the East it is just a fundamental belief that a management team that is focused on the business model and the business opportunities that are unique to the Eastern part of the U.S. that that management team will be able to unlock significant value that we, as we focus on delivering on our core strategies are not as focused upon. And that is really the basis for the decision that we made.

Great. Thank you and the last question on that is then there has been some discussion on this call about proceeds from the Central Appalachia spinoff. I just want to make sure I understand the language; spinoffs as I understand do not typically result in proceeds. Are you expecting to do a transaction that would result in cash proceeds to the remaining Peabody?

The way I answered that question earlier was in fact it is what we are talking about now is a 100% spinoff as one alternative; which is a tax-free spinoff which does not present in proceeds exactly. What we are saying there are other strategic alternatives of course that we will evaluate to make sure what we do is in the best interest of the shareholders. Is that a sale, is that a partial sale, those things are fully looked at and a question to me was if there were proceeds, because of any of these other alternatives what would you do with them.

Got it. I just wanted to know, thanks very much, guys.

(inaudible) Alliance Capital.

Good morning. Good question. Do you think you can handle a higher debt load after you dispose of or offload your Appalachia mines? You would have a superior mine portfolio with you then.

Obviously we could handle a higher debt load today if we chose to do so, but that hasn't been our stated strategy. Our stated strategy has been to bring back our debt into a more manageable I guess I would say optimal cost to capital into the 40 to 45% range. And right now that is where we feel we'd like to get to. Clearly as we unload some of the and move around the capital structure we will reevaluate that where we need to be on the debt balance going forward.

A follow-up to that. What sort of constraints do you think you're existing debt imposes on what you can do with the Appalachia assets, or does it not impose any constraints?

We have no constraints.

Okay thank you.

Brett Levy, Jefferies & Co.

I just have a couple refinements on previous questions. First off, what do you see as the total amount of capacity that has come out sort of since March of last year? Is it obviously there's a lot of guys that has stated an intention that imposes a certain amount of discipline particularly in Appalachia. What do you guys see as the total amount of capacity that has come out since peak levels?

I guess our estimate would be just consistent with what we've seen with respect to some of the reduction in production statistics that have come off the public data, which would suggest the market is probably going to be down on an annual basis between 20 and 30 million tons, the production out of Appalachia.

And when do you think that happens.

It is already happening, I guess because in the first quarter I think the overall percentage was down 7%, and the production was down 7% out of Appalachia for the first quarter so it is already beginning to happen and if you annualize that you get to the kind of numbers I am talking about.

Do you think it continues throughout the year and you get to that sort of final --

It would be a surprise to me to see we start to ramp back up necessarily.

You've heard no word of anyone sort of cheating as the prices are sort of starting to drift up a little bit?

Haven't heard it but I am sure people may speculate that, but we haven't seen that yet. It is tough. It is not as easy as people believe to just shut down, particularly on an underground operation. If you close that underground operation you can't -- you can't just turn it back on right away because it is not really a peaker.

And the second one, and this is more of a bond guy question but 40 to 45% of total cap probably isn't quite investment-grade. Is it a priority for you guys to have investment-grade bonds or that is just kind of its down there on the priorities behind some of the other more share related stuff?

I think it is obviously something that we don't make it our top priority, because we think that our cost of capital where we are at today reflects near investment-grade ratings anyway. But we think that frankly with what we see going forward with our projections and we think we can get to investment-grade with a 40% ratio. We've had those discussions with the rating agencies and clearly that is probably the high end of what they would be comfortable with, but that is something that we will continue to look at and we don't make it to our number one goal, because it is something that is a bit out of our control.

Appreciate it. Thanks, guys.

[Wayne Atwell], [North Street Capital].

Thank you, and congratulations on your restructuring the Company over the years to put yourself in a strong position. We've touched on this a little bit -- could you discuss your thoughts on China, buy versus build, surface versus underground -- how fast you might be in China and safety issues that's in an area where there is a lot of safety concern. Do you think you can solve those issues?

A lot of questions wrapped up there, and I will try and put them all into the context of our China strategy. Our China strategy is to focus on surface operation opportunities versus underground. Clearly it is what we believe is the premier surface, coal surface mining company in the world. That is the skillset and the advantage that we bring into the Chinese market. The discussions that we've had with all of the potential partners over there, they clearly recognize our surface mining skills. The other aspect about surface mining is obviously we can bring in all of our safety programs and safety practices and management practices associated with surface mining that would allow large volumes in China to be mined at a much safer level than they have in the past.

They had a question about buy versus build. It is our view that we will be looking at some type of joint venture builds versus buy, although there might be an opportunity to look at one or two existing operations. But predominately because they are so heavy in underground operations in China our focus would be on a joint venture type opportunity to build.

Any kind of timing, and how much capital would you feel comfortable committing?

It is early days for those kinds of projections at this point in time. As I said earlier, the investment climate is still evolving for the coal sector in China. Suffice it to say we are focusing on our trading and brokerage and selling opportunities initially and continue to build our engineering business staff in Beijing to look at opportunities for investment.

One last question. Would that be a domestic sales or do you think export?

It would be domestic sales into China.

Thank you.

Sean O'Malley, Morgan Stanley.

Good morning. Just a quick questions regarding a comment in the release this morning. You referred to the valley fill permit decision as potentially threatening 100 million tons of coal production at surface mines in Appalachia. Is your view that existing permitted operations could or would be impacted by the decision, or are you more referring to operations that are either awaiting permitting or some point in the future may require permitting?

I think based on the nature of that decision and the uncertainty it provides it raises a lot of questions for both going forward and existing surface operations. Each operation will have to look at its own unique circumstances and look at how its ability to permit and continue to permit are affected going forward. But it drills a level of uncertainty across a major portion of the production out of Central App.

Just a quick follow-up on that so were the regulatory implications of the decision a factor in your decision regarding your position in Central App?

No, they were not as I said earlier, we have virtually no surface production in Central App. Ours is essentially all underground. Our decisions related to the potential spin were related to the business model and the ability of that entity to increase value on its own was unrelated to mountaintop removal issues.

Thank you very much.

David Silverstein, Merrill Lynch.

In the event that you do a spinoff, I just want to confirm with you guys where you calculate your restrictive payment basket under your bonds these days? If you were going to generate, call it 800 to $900 million or so of proceeds from Central App properties or not just proceeds if you were to spinoff that value.

Can you please repeat the very first part of the question? I'm sorry I didn't catch that.

Can you give me an accounting of where you believe your restricted payments basket is today?

It is $1.2 billion.

So you would probably exhaust -- you would still have room to do the spinoff? You would just exhaust a large part of it?

That is why I said earlier that I think there was no restrictions because we feel like we've carved out what we needed in our last credit arrangement to be able to do this transaction. As you can imagine, this transaction (technical difficulty) working on for a while to structure and make sure that the timing was right. Of course to make sure we put forth the right capital market structure for both BTU and the new company. So we are in good shape.

And just to confirm volumes we are looking at 23 million tons?

Last year, the historical 2006 West Virginia and Kentucky numbers were 23 million tons, exactly.

Zach Schreiber, Duquesne Capital.

It is Zach Schreiber from Duquesne. Thanks for your time; just a question on the markets and the does the contango or the carry in the markets make major difference between the front of the curve and the back where you guys are signing contracts?

What are you ascribe that major difference to sort of implied tightness in the back or implied really kind of like in the back relative to what is going on in the front?

What are you seeing on the rail front? PRB has been extremely volatile for the last couple of years. Could we ever get back to the prices we saw before, or were those really just partly a function of abnormally high SO2 prices at $1600 a ton?

And since we are now at 475 or wherever we are a ton, are we ever going to go back to where we were?

Is the right price more in sort of the 12 to $15 per ton range?

And last but not least on the cap and the nap in the Illinois Basin are you seeing delays on the scrubbers relative to what you expected, or are you just seeing the normal kind of delays that you and yourselves and other market participants expected?

And if you think that we have reached a tipping point where people are going to become sulfur agnostic and buyers are going to just buy BTUs or is that still some ways out?

Let me try to start with the last and then try to work our way back up through those questions. I guess on the scrubbers I think from our standpoint we have continued from Peabody's perspective to say that we had expected delays. We just didn't think the construction capacity was there and everybody was getting in the queue at the same time. They were waiting for more affirmative decisions around environmental issues. So from our standpoint we had projected that we are probably where we are today is where we would end up. I think the market on the other hand was projecting that this would happen much faster, that everybody would be essentially fully scrubbed by 2010. That is not realistic, of course.

As it relates to the overall will of the market become sulfur agnostic in the future capacity 2011, 2012 at some point in time, I think there will be some less concern about sulfur. There will always be an issue because it has an impact on what the cost is to scrub. It also has an impact on the type of capital that you install, whether it be the wet scrubbers which can scrub anything, of course, versus dry scrubbers which would be more appropriate for low sulfur products. We are already shipping low sulfur products, our PRB coal already goes into a significant number of scrubbed units. I think to that goes back to some of your earlier questions will PRB prices go back to the levels of where they were before? And I think the answer is clearly the PRB is undervalued when you look at an arbitrage to Central Appalachian product pricing in the $50 plus range. And ultimately it is going to be about delivered price per MMBtu and the cost to scrub and that is where the sulfur content or value changes. So when you look at that a $50 cap market at current rail rates you're talking about a $15 PRB product.

So that puts you in the midteens. Anything north of $50 obviously improves that and it's all going to be about delivered price per MMBtu. So that is how we analyze it. So the extra PRB is undervalued when you look at the market as a whole considered a national market. So over time customers will put in the equipment that allows them to have choices, and we can do that.

And you are talking $50 per ton for eastern coal. Is it $35 per ton to move the PRB --

Well, depends on how far you're moving it but yes, those numbers if you are taking it very far to the East its going to be $35. Obviously in the Midwest -- the Midwest is going to compete with cap coal, northern cap as well as Illinois Basin coal and that costs may be $20 a ton to move it to somewhere near St. Louis, Illinois type -- so the movement is going to be different.

But this $35 per ton is on a PRB ton equivalent, not an eastern ton. So it is the lower BTUs. The 8800, 8500 versus 12,000, right?

You adjust for the heat content.

So the $35 per ton is on a heat content equivalent basis to a --

That is just the transportation cost, not the fuel cost. That does include the transportation cost plus the fuel cost -- let me say it differently. Parity of a $50 delivered cap product into the southeastern United States would be roughly $15 delivered Powder River Basin products, in today's market, approximately assuming a $30 rail rate.

[Dhaval Patel], [Columbus Hill]

Just following up with the last question; just wanted to know if you are realizing that the PRB is being undervalued, then are you staying out of the market until you can capture that full value, or are you still willing to sign contracts? As we get closer to 2008 you still have to start locking in some contracts.

I think it is -- it's Greg -- we obviously are not going to talk about our specific marketing and sales strategy. Suffice it to say, as Rick said earlier, we did not secure much business in the first quarter and probably not surprising. We will continue to evaluate both the forward markets and our operating platform as we go through the rest of the year. Now the other thing I would add a little bit about the discussion was the issue about SO2 pricing. The last time we saw SO2 pricing move significantly higher was during a period of time when gas prices got very high. We are entering into a season right now where that dynamic is beginning to set itself up again. We talk about what are the catalysts for particularly PRB pricing. It is both the energy content as well as that low sulfur content, as well.

Just a follow-up, I think you talked about buying some tons on open market as opposed to pulling out your own tonnage out of the ground. Can you give us some kind of a number out of how much from the PRB that would be, how many tons?

I think you can understand for a lot of reasons related to not only our sales portfolio, but also our trading and brokerage business we would not want to go into specific details on numbers at all either in terms of volumes and/or pricing.

Actually just as a last question -- when you do do that does that actually help tighten up the market and impact the spot or it is actually done on a different negotiated contract basis?

It is just a trading decision that the trading department makes in terms of a normal trade desk process. So I guess I would just leave it at that.

Okay. Thank you.

Yuri Maslov, Nevsky Capital.

Just to get clarification in a fairly out of those 24, 25 million tons of production which you are planning for '07 how much of that are you going to export as opposed to sell domestically?

Probably about 17 million tons that will be exported.

So despite the bottlenecks at the Newcastle port you think that you would be able to ship some incremental volume coming out of those new mines?

Sure. We've had to cut down on our expectations by 2 to 3 million tons, of course. So that is our current expectations, so 16 to 17 million tons right now.

And those new mines had freight and port contracts and allocations. So they will be reduced on a pro rata basis along with all of the other producers. So yes we did have allocations for volumes out of those new operations.

Okay. Thank you very much.

Sean O'Malley, Morgan Stanley.

Just a follow-up question regarding the value of PRB on a delivered BTU basis relative to Central App. It seems that the difference in terms of measured value has been persisted for quite a while between PRB and Central App. Is it your view that the undervaluing of the PRB product will start to close over time, and what do you think will be the cause of that given that it has remained this way for quite some time?

When you look back to 12 months ago it was more in balance with parity. Obviously there was a little bit of inefficiencies in the market. So you're right, it has been there in the last 12 months, but it hasn't been there. So we think it is, has the opportunity to return itself once the markets tighten back up and the rail situation is becoming more fluid and we will just have to see how it all plays out at the end of the day. But it is certainly our belief that ultimately as everybody has predicted the prices of all these products will be looked at on a delivered price per million BTU. And when that happens and your utility -- and you are looking at your fuel costs and there is too big of an arbitrage opportunity to ignore.

The other arbitrage opportunity that we really haven't talked about is the difference between coal pricing from all regions and natural gas. And when we are talking about natural gas in the $7.50 or $8.00 range and coal on a delivered basis today only being on average around $2.50, there is significant headroom, as well, for coal across the platform to continue to move.

Okay. Thank you.

And with no further questions in queue I will turn it over to Mr. Boyce for any closing comments.

Thank you all very much for your continued interest in BTU. As you've heard this morning, we have made significant progress in terms of our international and Australian strategy, growth opportunities. And we will expect that that will continue very well going forward as well as we see the fundamentals here in the U.S. markets continuing to improve. So we look forward to updating you next quarter. Thank you.

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