Peabody Energy Corp (BTU) 2007 Q4 法說會逐字稿

Welcome to the Peabody Energy quarterly earnings conference call. For the conference today, all the participants lines will be in listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS) And as a reminder, today's call is being recorded. With that being said, I would like to turn the conference now to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec.

Thanks John and good morning everyone. Thanks for taking part in the conference call for BTU. Today our new President and Chief Commercial Officer, Rick Navarre will review our results and our outlook. Chairman and CEO Greg Boyce will discuss the markets as well as Peabody's key focus areas for 2008. Forward-looking statements should be considered along with the risk factors that we note at the end of our release as well as the MD&A section of the 10-K. We also refer you to peabodyenergy.com for additional information. With that, I'll turn the call over to Rick.

Thanks, Vic. Good morning everyone and thank you for joining our 2007 earnings review and our outlook for 2008.

As we reflect on 2007, you will recall we had a number of significant accomplishments. And to name just a few, we completed three new mines in Australia which greatly enhances our position in the international coal markets. We executed the spin-off of Patriot Coal. We completed major capital upgrades in the Powder River Basin. Expanded our global trading operations and we began construction of the Prairie State Energy Campus.

We also had a few challenges. You'll recall that we've voluntarily cut 17 million tons of production from our plan in response to U.S. markets in early 2007. And we involuntarily reduced our volumes in Australia, incurring lost sales and higher costs due to coal chain congestion. Yet through all of this we completed the transformation of our earnings platform and set new records for tons sold, revenues and EBITDA. The end result is a company that is in the best position to benefit from some very strong global coal markets.

Let me remind everyone that the results we discussed today are from continuing operations excluding Patriot Coal. As to the Patriot spin-off, we do believe that it was a success for our shareholders as both Peabody and Patriot shares appreciated meaningfully after the spin. Furthermore, Peabody has improved its operating portfolio. It is now 90% service mines and 95% union free operations. We have also reduced our liabilities by a billion dollars, lowered our exposure to permanent issues, production volatility and compliance challenges that largely affect the Eastern Mines. And while we spun off these assets, we continue to participate in the Appalachia market through our trading and brokerage activities. In fact, we have sold 4 million tons of export coal in the past several months, most of that coal coming from the eastern United States.

Now, let me begin with the high level review of 2007 results starting with our income statement. Our continuing operations achieved record revenues of $4.6 billion, an 11% increase over last year on increased prices per ton in all U.S. regions and higher Australian volumes. Our full year EBITDA was $956 million or 6% above last year. Our earnings per share $1.56 was well within our guidance and our earnings per share would have exceeded the high end of our guidance but for $0.21 reduction in our expected tax benefit. The change in taxes was due to a noncash true up of the Excel purchase accounting related to the impact at foreign exchange rate on deferred tax balances. In addition, we reported $157 million of after tax charges for discontinued operations. This includes 10 months of Patriot results along with transaction costs, which are well aligned with the estimates that we shared with you last quarter.

Now, let me take you through the supplemental data. For the year, our U.S. operations achieved higher prices in all regions, led by a 29% improvement in our premium PRB price realizations. Overall, our U.S. revenues grew 17% which led to a 20% expansion of our U.S. per ton margins over last year. In the eastern U.S., our operations delivered improved per ton margins over last year and nearly 80% of our mines turned in higher revenues per ton offsetting increased materials and commodity basin increases. In the western U.S., our cost trended down the last quarter due to improved productivity and lower cost following the installation of our new dragline and conveyor systems earlier in the year. With the completion of these significant projects North Antelope Rochelle is again the world's largest coal mine.

Now shifting to Australia, Peabody doubled its volumes and revenues were up nearly 40% in this region. Australia's average realized price per ton was lower than the prior year due to a change in mix to add thermal coal to our previously, predominantly met-based position and we also had a $120 million lower in met pricing settlements in 2007 compared to 2006. However, as we look forward to the settlements that are just around the corner for the new year, we expect that we will significantly exceed 2007's met pricing levels which had greatly improved our revenue profile going forward.

Our Australian costs were about $5 per ton lower than last year. This is also related to the change in mix toward a more balanced portfolio toward a more balanced portfolio of metallurgical and thermal operations. I would like to also update you on the Australian coal chain and I say in the fourth quarter, we did see some improvement, but we think it also has a long way to go. We have been very proactive this year in addressing the long-term Australian transportation challenges with several initiatives aimed at securing export capacity. First we were successful in retaining the existing throughput allocation system at the Port of New Castle. And second, just last week we joined with a handful of other producers to approve construction of the new NCIG terminal at the New Castle Port. Peabody is the second largest shareholder of this 30 million ton terminal and we will gain 5 million metric tons of dedicated throughput when it's completed in 2010. We also expect to participate in the Goonyella-Abbott Point rail and port expansion project which will increase our capabilities out of Queensland.

Now let me summarize our expectations for 2008. Earlier I touched on an a number of major capital projects at our operations which required significant investments over the past few years. These projects are largely complete and we are now targeting lower 2008 capital in the range of $350 to $400 million. As to our sales position in the United States, our 2008 production is largely committed and priced. At the same time we have 220 to 240 million tons to price over the next two years. Representing significant leverage to quickly improving U.S. market conditions. We are very pleased with our U.S. sales position. In Australia, we have 9 to 10 million tons of planned 2008 production available for pricing. And our Australian unpriced volumes should grow significantly in '09 and '10 as legacy contracts roll off. Many of these contracts were inherited from Excel and in fact, if our legacy volumes were available to be priced today, they would contribute well more than $200 million of additional revenues.

Now turning to our financial outlook for 2008. We're targeting EBITDA of $1 billion to $1.3 billion which at the high end, of course, would be as much as 35% above last year. This reflects the benefits of higher pricing and volumes in both the U.S. and Australia which as just mentioned as being in part held back by the inability to reprice Legacy contracts out of Australia at current market rates as well as higher fuel, explosives and currency costs in 2008 that will add $150 million to our costs. Our year-over-year earnings per share targets are being affected by higher noncash tax and DD&A expense of up to $0.85 per share. The majority of this difference is tax related and is purely an accounting issue as we recognize tax benefits in 2007 due to our positive earnings outlook. I'll also remind you that we still maintain $1.8 billion of gross net operating loss tax assets that will allow us to offset a significant amount of future cash tax payments.

So in summary, Peabody has expanded operating and trading platform is extremely well positioned in an international market that is experiencing strong demand and shortages of supply. We are uniquely positioned among U.S.-based coal companies with geographic and product diversification that gives us the scale and reach to succeed in these interconnected global markets. To discuss the markets and Peabody's 2008 focus areas, I'll now turn the call over to our Chairman and CEO, Greg Boyce. Greg.

Thank you, Rick. And I know everyone on the call joins me in congratulating you on your well-deserved promotion to President and Chief Commercial Officer. Those familiar with the company know that Peabody has long benefited from Rick's financial acumen, strategic sense, transaction skills and ability to drive results.

When I joined Peabody almost five years ago, we established an action plan to create the new BTU. We were looking for a stronger platform for sustained growth. We identified several key areas. We wanted a new safety focus in culture, and we have just completed our three safest years in our 125-year history. We wanted to restructure the portfolio to target the very best growth markets. And we have since made acquisitions in Australia, Colorado and the PRB, while spinning off Patriot Coal. We're also very well positioned to participate in new developments in the best emerging coal producing regions of the world: China, Mongolia and Mozambique. We wanted an international operating and trading platform emphasizing the fast growth Pacific rim markets and we now have one of the largest global coal trading platforms with offices on four continents. We wanted a business base that could capitalize on growing demand while managing costs and we're expanding our Australian capacity to more than 30 million tons while completing projects in the PRB and New Mexico. We wanted to serve an energy-short world with new products and clean-coal technologies and we're participating in projects that cleanly turn coal into gas, transportation fuel and electricity leading to a carbon-reduced future. So following tremendous hard work by the Peabody team and significant well-placed investments, we are positioned to benefit from these initiatives beginning in 2008 and we now have greater leverage to price, volume and growth improvements over the long term.

I'd now like to discuss the global coal markets and Peabody strategic priorities. As I review the extraordinary events and global dynamics that are shaping the current energy markets, it's clear that we now have a new coal market paradigm. It's what I would call coal convergence. For years, many accepted the links between oil and natural gas markets but viewed coal as a localized product. The facts are however that coal has become more multi-regional. In fact, now more global. Demands in China or rims in Australia immediately impact the global markets. With that impact being felt all the way to the coal fields of Wyoming.

Let me just give you a few examples. Coal has been the fastest growing fuel in the world for each of the past five years. The strain [these grades] is showing through. Most visible are the rail and port limitations. And while coal chain expansions are underway, rising demand continues to render these additions insufficient. Global benchmark coal pricing is rising from already high marks, stock piles are very low and generators are increasingly concerned about supply. India utilities with plants with critically low inventories having instructed to increase their imports by two-thirds this year. China with demand outstripping supply and critically low stock piles in many provinces is encountering brownouts and directing all coal to go to electricity generation. Just last week, coal exports were halted at least through the end of February. Now, this is stunning for a nation that has been the world's third largest coal exporter much of this decade.

More nations are keeping their coal at home to serve growing generation. Strong electricity demand growth in South Africa for instance, [straight] generation resulting in curtailment in export coal mining itself. The international coal demand impact on the U.S. has been strong and rapid. We believe that most U.S. generators still have not realized they now compete with their European and Asian counterparts for the same coal. Conservatively, net exports from the U.S. should more than triple just between 2006 and 2008. And as ports fill up in the East Coast, we're seeing significant demand out of the Gulf for Illinois basin, Colorado and even PRB coals, all regions in which Peabody is number one. We're starting to see the benefits of this global convergence with published PRB prices up more than 75% on the forward year product in just over in the past year. Global metallurgical coal demand and pricing is equally strong. Ahead of settlements, spot coal is scarce, [forts] are constrained and the world's largest met coal producing region is recovering from the recent typhoon. All of these leaves the world short of metallurgical coal. Longer term coal demand trends are equally bright. EIA notes that coal will increase its global market share in the coming decades while EIA states that coal will account for most U.S. generation capacity during that time.

New coal plants are being rapidly developed around the world. China alone added the equivalent of the entire United Kingdom grid just in coal field generation last year. Some 96,000 megawatts. India has greatly increased its plant buildup and targets now more than 75,000 megawatts of new capacity by 2012. Much of it coal fueled. Even some Mid East nations are talking about building coal plants because of long-term concerns about gas supply. And the U.S. which has become famous for loud opposition to major new energy projects of any kind were seeing the largest new power plant buildout in more than a quarter century. So against this backdrop, our global sales and trading team has been very active. Since the first of the year, we have sold Colorado and Midwest coal to European customers, we have sold Western bituminous coal to Japan and even Powder River Basin coal through the gulf to Europe. And we continue to see strong interest from Europe. We have placed Indonesian coal into Korea and new business is just beginning to be booked for 2008 and 2009 at a time when the markets are routinely setting new highs.

This global activity increases opportunities in the U.S. as PRB coal is also being moved into additional markets along the East Coast for test burns. Illinois Basin Coal is finding its way up the Ohio River to compete in traditional northern Appalachia markets. Clearly global demand is still outrunning supply. So we believe that these recent headlines represent not some temporary perfect storm, but a systemic, long line demand greater than supply market that is likely to continue for many years to come. High energy demand, lack of competing fuels, cost pressures in key markets, all support this new reality. And the decisions we made in recent years to ramp up our global production and trading business will serve us very well over the next several years.

So our focus in 2008 is in the area of execution to insure we're getting as much coal into these tight markets as possible. We plan to improve productivity and cost, we're increasing our focus on efficiency improvement and debottlenecking at all of our operations while aggressively managing commodity cost pressures. We will expand our access to high growth, high margin markets. We have the most global exports of any U.S. based company and that position will grow further in 2008 from our Australian, U.S. and trading platforms. And Rick has discussed our two long-term projects in Australia to improve our dedicated throughput there. We plan to increase our capital efficiency as we benefit from our strong investment program of recent years and we're pursuing international development opportunities with projects that we're evaluating in several countries to feed our growth pipeline. We will continue to advance our clean coal projects, ranging from coal to gas plants with [Conical Philips] in Great Point Energy to near zero emissions projects such as GreenGen and Coal21.

So in closing I would like to thank Peabody's team of employees around the world for a safe and successful 2007. And we look forward to benefiting from the strong nexus of our expanded production platform and increased pricing in 2008 and intend to build from that larger base, as we move forward. So, thank you for your time and John, I think we can now open up the line to questions.

Certainly. (OPERATOR INSTRUCTIONS) And ladies and gentlemen to give everyone an opportunity to ask a question, please limit yourself to one question and one follow up. First from the line of John Hill with City, please go ahead.

Thanks and good morning everyone. Just a question on the 2008 EBITDA guidance, if we could get a breakout between Australia and then an idea of what kind of assumptions are in there both for trading and resource management. That would be great.

Yes, John, this is Rick. Let me start with the trading and resource management and then just kind of give you where we are on those particular numbers. As you know, on trading and resource management, we typically told folks at the beginning of the year from a standpoint of estimating and modeling what might be the total contributions of those lines of business. They are a bit lumpy, so we generally would say probably from a trading standpoint that you should think about a 75 to 80 million number and it probably won't be pro rata by quarter, but that's essentially the number I would shoot for at this point in time. With respect to trading or I mean, sorry, resource management, you saw that we in '06, we were about $46 million on a continuing OP basis in '07 we're at 86, which included [CNS] gain of about 50. I would be in the $40 to $50 million range for that number at this point in time in the year. As it relates to the Australian breakout of EBITDA, I don't think we're prepared to give that number at this point in time until we've finished and get completely resolved with all the price elements which as you know, are still ongoing and obviously moving very, very favorably, but it's too much information for us to put out right now with the settlements and discussions going on.

Understood, understood. Just one quick follow up, if we were to commit PRB tonnage for 2009 for Peabody's product mix, what type of pricing range do you think you could realize given where the market is today?

Well, I mean, the only thing we really commented is on where the OTC market is today and it's continued to improve significantly over the last several weeks. I'd say right now, you're talking -- the PR premium, the PRB product is about $16. Right now, we think that's going to get better from our standpoint because of what's happening in the global markets. It's beginning to feel the effects of what's happening and what we're seeing across the entire globe as it relates to coal supplies and demand.

Very good, thank you.

Thanks John.

Our next question is from the line Paul Forward with Stifel and Nicolaus, please go ahead.

Yes, thanks. Looking at this first quarter guidance of EBITDA, $175 to $250 million. Just considering the low end of that range, you haven't had a quarter under 200 since the first quarter of 2005. It's a different company now, to larger -- you've made a lot of upgrades, various mines, we have had a few months of awfully strong pricing. How can we reconcile that with a quarterly rate under 200 at the low end of that guidance?

Well, I think Paul, first of all, good morning. You know, what we're trying to do is establish a guidance range there that makes sense for what we see going forward. A couple of things. Obviously with the Australian platform now, there's a high variability from the first quarter of any year to the back three quarters, because of pricing changes that take place in the marketplace don't go into effect until the beginning of the second quarter. But more importantly, we're still working our way through variability relative to the port situation in Australia. And as I mentioned in my remarks, the Queensland area has and is trying to recover from the typhoon that, for some of the producers was a devastating effect, fortunately for us we didn't have near those effects. But having said that, our guidance range is really designed to take into account the fact that there's a lot of moving parts yet that we're facing going forward in this quarter. And we felt that that range was appropriate.

And I'd also add, Paul, there's a couple of long [low] moves in the first quarter as well, so it's just we feel much more comfortable with the out quarters run rate and we have got price settlements that will improve once we get into the Japanese fiscal year. There really is going to be a change in what you see between Q1 and Q2, 3, 4.

Okay. And on the -- I know you don't want to talk about pricing, but thinking about this full year '08 guidance, you got a much better handle on costs because there -- if you were to go by region on a cost per ton basis, production cost, would you be able to give us some kind of broad sense of escalation in operating cost Australia, eastern U.S., western U.S., in your guidance. Thanks.

Yes, Paul, it's Rick again. I'll give you some directional information as it relates to cost and I think we feel pretty good about cost going into the year with some of the capital investments that we made last year, let me preface it by that, plus the new mines we have in Australia and we're also bringing on some lower cost production later in the year with the El Segundo Mine to replace [lot of] Lee Production. So let's kind of look at it by region, I think starting with PRB where we have got the most tons, we feel pretty good about PR B, we will have a little bit higher sales related tax, which we really shouldn't care about that because that's obviously a good thing. Obviously, diesel fuel is having an impact across our platform, but I think even with diesel fuel cost being up and explosives cost being up substantially because of higher natural gas and PRB ,I think we will have costs with a couple percent, we could be given a couple percent of where they were last year, sales related cost. That will be the best inflation hold that we have had in the last couple years, I'm sure. As it relates to Australia, we should see, we would hope that costs would come down a bit. Even though costs are being impacted once again by higher diesel fuel costs and we would think that there's probably going to be another $2 to $3 in currency in costs in 2008 because obviously the rates ramped up pretty rapidly last year, we didn't have a full impact of near 90 plus currency rate in the number, but nevertheless it's probably $2, but nevertheless we still should come down a couple bucks because we have more efficient and lower cost operations going forward. As we look to the east, pretty flat on the cost structure except for commodity cost, M&S cost and fuel cost, which could cost us a couple of bucks in that particular region.

Okay, thanks for that Rick.

The only, Paul, it's Greg, the only thing just a quarter by quarter basis, Australian costs, we won't see the full impact probably until the later quarters given that the merge is likely to be high again in the first quarter of this year. And, you know, costs are sensitive to the volumes that we can ship.

It's very fair, we had some merge we thought we were going to incur in Q4, it kind of pushed into Q1 because of that, we didn't move out.

All right, thank you.

Next question from the line of David Gagliano with Credit Suisse. Please go ahead.

Hi. Just a couple quick questions. First of all on the volume targets for '08, I'm just wondering if you could give us a little more visibility in terms of the U.S., regional break down in 08. I know we have Australia, 23 to 25 million. [Excellent number]. Can you give us a split between the east and the west.

I think, give me a second here. I think that -- give me one second Dave. Just to give you a little more color on Australia, we anticipated several million ton increase overall on Australia volumes. A couple of million of that will stay at home in the country. So on a net basis we will have a small increase, maybe a million tons or so that we anticipate into the export market. We're looking at probably 7% up in the west on total tonnage year over year. So we will do a little bit better in Colorado than we had done last year. We've got the prep plan up and running. It will allow us to move out higher quality coal both in the export market as well as into this natural market. And then the PR B will be up with some of the upgrades that we have done out there as well. Probably about 7% improvement in the West off of what was last year 161 million tons.

Plus we'll be adding the El Segundo operation in New Mexico in the back half of the year.

Okay.

That will be a slight increase as well in the southwest. On the east side, you'll probably see -- it's pretty flat for the most part.

Okay.

Maybe, up a million tons.

Okay. Just as a follow up, obviously it looks like you didn't commit much or anything actually for 2009 in the fourth quarter. But Greg, in your prepared marks it sounds like to me, you have clearly become more aggressive since the beginning of this year on pricing some of those open positions. I wonder if you could wrap numbers around those comments. How much have you committed since the beginning of this year and what kind of pricing should we be thinking about in terms of those commitments since the beginning of this year.

I said that we probably haven't committed -- we've committed very little since we began the year.

Since the beginning of this year, I mean, I think step back and say that obviously you heard the comments very well when our expectations are that these markets are going to be continuing to improve and so we are being very, very careful in terms of any contracting for nine and ten that we're doing certainly out of the U.S. platform. What we have been, what we have been selling in the first part of this year has almost predominantly been in the export markets which all of the traded indices give you an idea of the direction of all of that pricing. So, all of this bodes very well for the annual mating season, if you will as I would call it, coming out of the PRB which typically doesn't start for another month or two. It will be interesting to see if that gets accelerated some when people recognize that this is a global marketplace and I would say that there is a significant number of PRB consumers right now that are just starting to realize what's happening with the global marketplace.

Okay. I obviously must have misunderstood the prepared remarks. The commentary was more directed towards during the course of the year in 2007. You had become more aggressive and presumably, that was the misunderstanding on my side. But the question then is six months from now, if you had a crystal ball, what would you like your 2009 open position to be in the perfect world in terms of how much you want committed and priced.

Okay, I think I understand both parts of the question better. You are correct, in the back half, particularly in the fourth quarter of 2007, we were not rushing out to sell coal into the then market for say PR B or Colorado or even Illinois basin coal, because we did have a few in terms of what was happening in these global market places that eventually there would be a pull back to the U.S.. So, we have not placed as much coal as we normally would have for '09 and '10 and the last quarter of 2007. Going forward, I mean, it really depends on how quickly we see the market convergence into the PRB from what's happening on a global basis. Obviously, the global marketplace is extremely strong. We're still waiting to see what the thermal coal settlements are out of Australia into the Pacific rim. We're still waiting to see what the metallurgical coal shipment settlements will be out of Australia into the Pacific rim. They will set the tone for every single market in my view spilling all the way back to the Powder River Basin once those settlements are complete.

Perfect, thanks. Very last question, what is the assumed price within your 2008 guidance. I'm just wondering what you're assumed price is for the 6 million tons roughly of unpriced met coal in Australia.

I would love to give you that number, but I'm sure there's a few customers on the call that would love to hear it as well, so I'll pass on that one.

All right. Thanks very much.

And next from the line of Shneur Gershuni with UBS. Please go ahead.

A couple quick questions I guess. First and foremost, just with respect to your guidance, the tax numbers I guess kind of surprising to where it's been for the past couple years and so forth. I was wondering if you can give us some color on what has changed and also if you can comment on the depreciation numbers as well too, because that seems to be quite high as well.

From a tax standpoint, if you followed us over the last couple years, what you will see and what happened in 2007 is that we have deferred tax assets that are net operating loss carried forwards that we had reserved because at the time we incurred those or received those benefits, we were coming out of an LDO, without a lot of visibility into the future with respect to taxable income. As we updated our plan in the fourth quarter of this year and looked at our numbers and saw with visibility, saw our tax position going forward, that we would be a taxpayer and be able to utilize those benefits to offset cash payments, we were able to fully recognize those essentially releasing evaluation allowances. It's a bit technical, but that's essentially what we did and it was a hundred plus, $190 million credit to our tax line in 2007. Somewhat offset by some of the other issues we talked about as related to purchase accounting around the Excel transaction. So with those evaluation allowances that are essentially gone now, so basically what we have left are the deferred tax assets which will offset cash payments, but they won't have any impact on our book accounting going forward. So we will be from book standpoint, closer to 15, 20% tax expense number going forward. That's the major shift and that's a pretty big number when you think about it from an EPS standpoint. It has no impact on our cash. It has no impact on our EBITDA. DD&A is purely a function of pushing back the purchase price for Excel and some of the capital investments that we made in the past several years. Also noncash as it relates to ongoing future earnings.

I might just add something to this, I think there's a little bit of message in the capital costs and DD&A impact that we're seeing. And that is the capital barriers to entry in this business have gotten significant. For anybody wanting to either build new capacity or bring on expanded capacity, the cost of steel, the cost of equipment, the cost of labor to build things is significantly higher than it was. You know, I feel really good about what we have completed in Australia and in the Powder River Basin in Colorado, because we've got that behind us. But I think there's a message as I said in the DD&A charges and the capital charges. We spent more than we thought we were going to spend for those facilities, but anybody thinking about them today is going to have to incur higher costs going forward.

Okay. If I can just follow up with just two more questions here. Just with respect to Australia, have you declared any force majeure at all given the situation that's going on or do you feel that your operationally sound at this point?

No, there was a couple of levels of force majeures that were declared over the last couple of weeks. Part of the force majeures were on the transportation network by the railroads, those were lifted fairly quickly once the system opened up. We had a period of time at North Goonyella where we had a force majeure claimed but even that now has been lifted. So we have seen an impact on a certain amount of our tonnage, but we are now have lifted those force majeures.

And finally if I can just turn to your comments about sending coal to Japan and so forth, I was just wondering if you can sort of walk us through the mechanics. Are you actually shipping coal out the West or is there some sort of swap going on of some sort, and also if you can talk about increasing test burns into the eastern market given the fact that northern AP and central AP appears to be very tight right now and there may be a BTU gap for the utilities on a go forward basis.

Okay. Starting with the exports first, that was Western Bituminous Coal that was railed to the West Coast and shipped out of the West Coast into the Japanese market, so it wasn't a traded process, it was an actual delivered through the West Coast process. You're absolutely right in terms of the Powder River Basin and the pull into the East Coast. As these very significant amounts of East Coast coal is being sold into the international market, the request for Powder River Basin coal to fill behind both Illinois Basin and Powder River Basin coal to fill behind that Eastern coal as well as now the utilities that are wanting to increase their mix of PRB coal in their burn to make sure that they have got sufficient supplies. There's been one instance where even to replace imported coal that was not available for the East Coast utilities, PRB coal is being burned in place.

Going to the exports again just to kind of add to what Greg said, we have sold as much export coal in January as we did in all of 2007. Very strong market.

I mean, one of the numbers we haven't talked about is I think that the inventory levels in this country are coming down to the tune of 2 million tons a week so far this year. And that's as compared to only a million ton reduction in all of January of last year to just give a sense as to how much of this volume is now starting to move into the export marketplace.

Great, thank you very much.

Our next question from the line of Jim Rollyson with Raymond James, please go ahead.

Good morning, everyone.

Good morning, Jim.

Greg, could you maybe talk about the moving PRB prices we have seen at least the [Nymex] stuff and you guys always talk about the contract market and kind of how that sometimes differs from the spot price market. It seems like the inventory situation in the U.S. right now and granted that's changing, is a little bit higher on the PRB coal side than it's been on the Eastern Coal side. Do you think this kind of pop we have had just in the past week or two with some of these events, is that a sustainable move or is it just you kind of gradually moving higher within the context of this tightening global market to where we need to see inventories maybe coming down before this move up to the mid-teens is more sustainable. Just kind of give your thoughts on that.

Yes, I think if you go back and look over the last three or four years, you look at what has happened when the cap and the Eastern prices have gone up to the levels they're at now, in fact even slightly lower, you look at that gap then between the Western coal and the Eastern coals, there was always an [lag] effect before that pricing in the West caught up. I think our view is we're in that catch-up zone and the question is whether it's sustainable or not is less related to the size of the PRB inventory in might view and more related to views on how strong and how long the export markets will be there. And of course, as our comment said our view is given global demand and the struggles of the supply chain to keep up, we think the export markets are going to be strong and pulled back to the PRB for a long period of time.

Thanks for that. And just as a follow up, you talked about briefly the concept of exporting some PRB coal, which is probably the last type of coal in the U.S. that would go for export. Can you talk about what you're seeing there from how that might develop on a longer term basis.

Well, on a longer term basis, we're discussing more PRB coal to move through the Gulf and into the Atlantic Basin as an initial endeavor and series of sales. You know, the question becomes at what point, some people ask well, when does it start moving directly into the Pacific market. Based on our view of the global convergence of these markets it really is, because the biggest demand for coal right now is the Pacific rim and it's keeping so much of that coal at home and/or diverting so much of what's available out of South Africa into the India Pacific Rim market that in effect, the PRB is displacing coals because of Pacific Rim demand. So it doesn't really physically need to go to the West Coast and move into Japan, it just needs to displace coal that are coming from elsewhere going there. So we are already seeing that in our view.

Yes, one of our moves is we've got PRB into the East Coast to a coastal plant, replaced Indonesian coal that needed to stay behind. It's a huge pull, I mean, the impact of China shutting down exports, there's a lot of things going on that are really -- this market is real very strong.

Great, thank you.

Our next question is from the line of John Bridges with J.P. Morgan, please go ahead.

Morning, everybody, Greg and Rick. Congratulations, Rick.

Thank you John.

The exports, the Western [bed] exports to the West Coast, where do they go out of, was that Vancouver?

Actually those -- that exports went out through California.

Oh, I thought the Los Angeles port was closed.

Coal has been shipped out of the West Coast.

Oh, okay. Because the terminal is gone, so what sort of capacity is there out of California?

You know, it would not be significant capacity, John. I mean, if exports were to significantly ramp up directly out of the West Coast, then the port of Vancouver would have to come into play.

Right, right. And the comment on exporting PRB. You pulled back on capacity last year, what sort of capacity have you got there in the PRB that could be put into that export market?

Well, that's a good question John. I mean, our Powder River Basin team has just done a stupendous job in terms of delivering the capital projects for the productivity and the cost reductions that we were looking for, particularly at our North Antelope Rochelle Mine. And so, we have actually been able to continue to grow our volumes there without having to bring on green field capacity. That's one of the reasons why School Creek continues to get pushed out a bit. But at the end of the day, depending on where these markets go, I'd remind everybody we do have the School Creek facilities and the School Creek reserves to be fully developed if the market were to warrant that kind of development in the near term. But during the course of this year, we have some continued efficiency and productivity projects that we have got in place. So there's a potential for a bit if warranted.

Okay. You didn't mention tire problems, so have you got that under control?

Again, our team throughout the West and the Midwest has done a great job in terms of extending our tire life. We grew our volumes last year with essentially a flat deliveries of tires from our suppliers. So what we have -- clearly it's a risk everybody has, but we feel good about what our team is doing, the tire life that we're getting and the ratable deliveries that we're getting from our suppliers. So at this point in time it's not a major limiting factor for us. Part of that is you remember John, that with our (inaudible) and conveying system in North Antelope Rochelle and our new dragline that we started up mid-year last year, that freed up a lot of trucks that we had two choices, we could have stood down or deployed them into producing, more coal for the market.

Okay. Just a bookkeeping question, you're giving us the comparable quarters based upon your numbers ex-Patriot, could you give us all of those for 2007 or will we get them with each quarter as they come through, we would just like to get our numbers straight.

We do them certainly as we do each quarter. If we have them before that, certainly we will put them on our web site, put that information will be probably included in our 10-K anyway.

Okay. We'll look for it.

One thing on that point John, you also note that the balance sheets, the comparable balance sheets will also strip Patriot out and condense them down into one line item so they're much more comparable going forward.

Okay, excellent. Thanks a lot. Good luck guys.

Thank you.

Our next question is from the line is from Jeremy Sussman with Natexis Bleichroeder. Please go ahead.

Hi, good morning.

Good morning, Jeremy.

Good morning, Greg. In terms of the PRB exports to Europe, can you talk a little bit about maybe pricing and quality compared to what you would be getting in the U.S.?

Well, we wouldn't be exporting at lower than mine back prices than we would be getting in the U.S. marketplace. And in fact, it's been certainly at a premium to what the OTC markets would as we would with any contracted business out of the Powder River Basin, so it's a complicated movement. You've got rail, you've got barge, you've got ocean vessel. When you've got the kind of trading platform that we have where we're involved in particularly the ocean freight markets, at a 24/7, we have the ability to put these packages together and move quickly to convert them into sales back at the mine.

I think that's fantastic. And I guess just in terms of acquisitions, is your focus still global or, I guess what are the thoughts these days?

We continue to focus on any accretive acquisitions we can find.

Clearly, we have been very successful at building this global platform. We still are very active in terms of our international development, whether it's additional acquisitions, in the Australasian region or whether it's new developments in Mongolia and China, but we continue to look at all opportunities that make sense.

Sure. I guess this last question. You touched upon it a little bit earlier, but maybe you can go into a little more detail, just as we see some more exports out of the East Coast. What is the real opportunity for the PRB to come to the Southeast in terms of how much more it can even get blended in with the current burn out there?

Well, it's a tough number to put your arms around. I guess it all's going to go with how much gets exported and what that demand increase is going to be because it is going to have to be replaced by some product, it's either going to have to come from the Illinois Basin or it's going to have to come from the Powder River Basin essentially. To give you a sense what the railroads are thinking, which they're a key part of that move, in their earnings call just recently, I know that BN talked a lot about this particular topic and indicated that they expect a lot of moves out of the PRB to go to the East to replace export coal and to be used in their blend stock and they were talking about their shipments for their share of the joint line being up as much as 5% next year. That's their forecast.

Okay, great. Thank you very much.

And next with the line of Mark Liinamaa with Morgan Stanley, please go ahead.

Good morning.

Good morning, Mark.

As you think about price convergence, and of course, that sounds tremendous when you look at the prices that are in the international markets today. Is that something that's going to be a guiding principle as you look to price contracts for 2009 and beyond or is it going to be a margin expectation given the cost structure in the various regions?

Mark, it's Rick, I mean certainly it's -- margins are important in any business, but it doesn't drive our pricing at the end of the day. I mean, we are in the market to get the right price and we want to be low cost producer on that cost curve and just because we're the low cost producer doesn't mean we stick to a lower price than what the market should bear. So we're looking at convergence and what's the net back and what are the alternatives to the customer and that's the way we should look at the markets.

And are the customers beginning more and more to recognize that kind of pricing dynamic over time?

I think most -- a lot of the customers are. You're getting into a market with the lowest delivery cost per million BTU, and people look at that obviously and you look at that coupled with some of the other handling charges and things. There's always going to be some basis differential of course, between the products due -- the transportation and other issues. But I think as you look at all the movements that are going on around the world and look at the net backs, I mean, the smart folks are taking advantage of the arbitrage opportunities and the traders are doing it, the good utilities that have the sophisticated staffs are also looking at that.

That's great. You may have already given this number and I may have missed it, but within your planned production, did you put an absolute number on what is earmarked for exports in your current book?

As much as they will take.

Within the say, 200 million or so that you have planned, is there a rough number that will be targeted domestically for export?

I don't think we have a target in there per se. I think the market is continuing to surprise us probably daily how strong it is, so I wouldn't put a particular number. As far as the overall U.S., we're probably targeting a growth of up to 30 million tons in exports.

How much of that we will get, we're not going to lay that number out. But I think, we're estimating a 30 ton growth in the export market on the U.S.

Okay. Thanks very much, guys.

Our next question is from the line of Michael Molnar with Goldman Sachs, please go ahead.

Good morning, everyone.

Good morning, Michael.

If we can just talk a little bit about that estimate that we have been talking about with exports on I think, you said 75 million, can you just walk us through some of your logic or analysis on how you come to thinking it might be about 75 million in exported tons?

That number is a combination of both the thermal coal and the met coal as we go forward, so as we analyze what's happening, we started looking at the international basins, we look at the Pacific Rim, what its needs are, we look at the Atlantic basin, what it's needs are. We calculate what we think the volumes are required to fill the demand gap, then we eventually bring that all the way back to the port capacities and the volumes out of the East Coast and the Gulf Coast of the U.S. for exports, which is where we see the vast majority of almost virtually all of that export coming from. A specific break down, a little less met, maybe that 36 to 38 range for tonnage, a million tons on met coal and the remainder being thermal coal. And as long as these markets continue to stay strong, I think we will start to see some of the ports that because of lack of use have -- shall we say become less efficient over the last couple of years, claw back some of their productivities and actually increase their capacity over the next couple years. And I remind you, we're actively involved in the port structure, because we are still a third owner in DTA.

Got it. And if you had to think about the key infrastructure limitation, whether it be the rail or the terminals themselves, what do you see as the first thing as more and more exports happen that would be the bottleneck in the system, is it more just the terminals or do you see rails, some of the rail lines being -- the bottleneck as well?

I think our sense right now would be, it would be some of the terminals themselves would be bottle necks, but as they begin to become more efficient then, we will have to look at the rail network as well.

Okay, great. And just one last question, on the Great Point Energy investment, can you give us some color on what did you see here that you found exciting?

Clearly, what's exciting about the Great Point Energy investment is the development of that technology which would gasify the coal and produce a thin gas at a significant -- significantly competitive price to the cost of natural gas and at a lower cost point than some of the traditional gasification processes. That was really the interest that we had there at number one. And number two, it would appear that it favors, the western subbituminous type coals, which obviously was our holdings out West is also of interest to us.

Okay, Greg. Thanks guys.

And next from the line of Pearce Hamond with Simmons and Company, please go ahead.

Hey, good morning.

Good morning, Pearce.

Good morning, Pearce.

Greg, I would like to get your perspective on Queensland, both of your mines and the overall industry and when will things get back to normal following the recent flooding?

Well, I think the question about normal is probably going to be mine-by-mine and company-by-company specific. I can give you my general assessment. There was a section of Queensland that was hit unbelievably hard with flooding. I think the Internet is awashed with photographs of drag lines that are covered all the way up above the house. So you're talking about pit flooding of 50, 60 feet deep. Not everybody was hit to that extent. In our locations, we had some localized water in our pits and the roads were cut off -- a lot of the roads in Queensland cross through these river drainages and so you lose road access for a number of days. That was probably the biggest impact to us. All of that's been re-established. We think within the context of the guidance that we have given for both the quarter and the year we have incorporated any of the impacts and we now are back up and running at our operations. But clearly, when you look at for instance operations that have been flooded to the extent that some of them have -- folks are talking about anywhere from three to six months or longer to where they get back to what they would call normalized operations. So it's going to be a slow buildup. You've got the likes of a number of major producers there that have declared force majeure because of -- they were disproportionately hit with the rains and the flooding.

Great. And on the contracts that Excel had committed internally in Australia before you all had purchased them, if you were to mark those to marketing and I think that Rick had mentioned a figure earlier, I think it was a top line figure, but how much more EBITDA could you be receiving if those were to get essentially a pricing that's in the marketplace today on those 5 million tons?

Well, Pearce, I think that number is about $200 to 250 million roughly.

On the revenue side?

It's revenue. It's EBITDA as well. It all falls to the bottom line.

Okay. Yes. That's right, sorry.

Minor taxes and we're all going to [thin]. Taxes and royalties are just a small component of that. Most of it is going to fall to the bottom line or the EBITDA.

Then the Australian -- those prices for those generators in Australia. I know they are obviously lower than spot, can you give us an indication to where those are, those Legacy contracts and the roll off schedule. Another roll off over the course of the next two years but --

Not counting for the export contracts and then there's the domestic contract as you know that goes on for quite sometime. So that one will continue in the portfolio. But the export contracts, the majority of those will roll off in the next 18 to 24 months and they were -- most of those are at market prices at the time we acquired the company and were determined business deals that were agreed to with the exception of maybe one contract that was a little bit lower than market because it had a prepaid component to it that Excel agreed to. So, that's all the detail I can really provide on it.

Pearce, when you look at our numbers that we provided, we have got 9 to 10 million tons of our Australian production available for pricing for this next fiscal year starting April 1. And we say about two-thirds of that is the metallurgical coal. If you then, jump just one year to 2009, we have got 17 to 20 million tons of Australian coal unpriced, about half of that's met coal. And that just, that differential is not coming with significant production capacity, but a big jump in that is the roll off of some of these Legacy contracts.

Great and one final question. Rick, on the '08 guidance, how much [the merge] is baked into that?

Well, it's certainly not, it's still a bigger number than we would like to put in there, Pearce, but it's roughly about $4 a ton on average and that's coming down about a couple of bucks from last year's number. So if we can beat that, that would be great. We would be very happy about that. If we beat the [demerge] number, we will probably move more coal as well. We need to be cautious in the numbers at this stage of the game until the queues are running fluently.

Sure. Well, thank you very much.

Thanks, Pearce.

And next from the line of Luther Lu with Friedman, Billings, Ramsey. Please go ahead.

Yes, good morning. I just have a few clarifying questions. Hello?

Yes. How are you doing?

Okay. First question is the 9 to 10 million tons for this remainder of the calendar year or for the fiscal year?

It's for the Japanese fiscal year, which starts April 1 and then would run through then the first quarter of next year.

Okay. So for the remainder of 2008, you have three-quarter of that.

Yes.

Okay. And for the met coal, are they mostly still high quality met coal? Low [vol] type?

We have a mix of metallurgical grade coals. We have -- the highest quality, the Goonyella brand is obviously the highest quality coking coal. We have got some semi-soft and a variety of different brands there. We can you give you that information that breaks it down, but I don't have that off the top of my head.

Okay. All right. And Rick, did you mention that premium PRB right now is at $16?

That's approximately where the OTC is with the sulfur premium would put you up into the high $15, $16 range.

Can you contract at that level right now or contract prices still a little bit higher?

Like I said, we haven't been doing a lot of contracting because at this point in time we're looking at the markets and the overall impact of the rest of the markets before we decide to secure any measurable business out of the PRB or any of those other basins at this point.

Okay. And in terms of your 2008 currency hedge, what level are you at?

We're in pretty good shape for 2008. We're about 80% hedged in '08 and a number that's probably about $0.80, $0.81 on Australian dollars compared to the rate that's about $0.90 today, it's about $0.89 or $0.90 right now, so, feel pretty good about that. If we weren't hedged, then every penny would be about $13 million impact.

Every penny is about 13 million?

On unhedged basis.

Unhedged. Okay.

But as we are -- since we are hedged, we shouldn't have that currency volatility as much as we had last year.

Okay.

Luther this is Vic. Were you asking about the Legacy tons or unpriced tons for 2008 out of Australia?

I'm talking about unpriced tons for Australia.

Okay. The Legacy tons are on a fiscal year basis. The unpriced tons are calendar year, but of course, that benefits us post the first quarter once we get the Japanese fiscal year for most of those contracts.

Okay. So for the -- from 2-Q to 4-Q, you have 9 to 10 million tons unpriced coal?

Exactly.

Okay, got it. Thank you guys, very much.

Thank you.

The next question is from the line of Gordon Howald with Calyon, please go ahead.

Hey, guys. Could I just go back to that PRB pricing question for a sec. Can you really justify $16 PRB coal in contract, not that they were (inaudible) in the market is I'm saying right now. The last time PRB spiked, it was accompanied by rail problems, why wouldn't volumes just increase pretty dramatically to bring that price down, I'm just trying to get a sense of contracting at these levels.

Yes, maybe this is a little bit of clarification. The last time actually the PRB pricing spiked is actually when we weren't having rail problems. It was actually the opposite. Because we had rail problems which held PRB pricing back, which made that lag that Greg referred to earlier take longer to go into effect because people weren't bidding on PRB coal because it wasn't available because of rail issues. When the rail became more fluid and they standard taking test burns and started participating in moving more coal to the East, the pricing moved. So and, I mean discuss the question how do we justify $16 pricing. I mean it's -- I don't know how you justify anything less than that when you look at the rest of the markets.

Do you think there's a lot of similarities then between what's happening now and what happened the last time, two years ago when the big spike happened there?

Well, there certainly are. I think, it's magnified when you see what's happening because the numbers are even larger, it's happened across a broader scale on a global platform. It's really hitting every country outside the U.S.. You're seeing central Appalachian coal has moved to $70. It wasn't $70 last time we had this discussion two years ago. That's pulling on Illinois Basin, that's beginning to pull on the Colorado coals and this is the same thing that happened in the past. You're seeing PRB, if you get CAP coal and you can't get NAP coal because it's going out in the export market, you're going to have to burn something and so, the customers are beginning to realize they need to have reliable supply and they need to start securing some of that. So I think the situations are very similar if not amplified a bit.

I appreciate the color. Thanks, guys.

Next question is from the line of Lawrence Jollon with Lehman brothers, please go ahead.

Good morning. Just wanted to touch on free cash flow in the quarter. I questions typically you offer up an operating cash flow number, I didn't see it in this press release. So I guess first question is, what was your operating cash flow and then, what was your revolver balance at year-end?

The reason you don't have a cash flow number this time in the release and it's purely just because of the fact that with the Patriot spin off, we have two different systems and we're still tackling the differences between Peabody and Patriot to get you the right number. Obviously, we will be filing our 10-K in the next couple of weeks here and we will get you the details on that. I give you a guess of number for the overall free cash flow, for the operating cash flow but I'm not going to do that because if I felt more comfortable on it, I would have put it in the press release. We know the total we need to break it out between the retiree health care payments and such between Peabody and Patriot. The revolver borrowing was about in the 90s at the end of the year.

Back to cash flow if you don't mind, could I ask it a different way? Were there any material investing or financing activities in the quarter absent common stock dividends and obviously, the revolver borrowings, was there anything else unusual?

No, not at all.

Okay. Then lastly on exports and I'm hopping in between another call so I apologize if you have already gone through this. But I believe earlier in the call, you referenced that you're the largest exporter of coal in the U.S? I guess, one I want to confirm that statement and two, just to want to follow up on that because that will confuse the other competitors who got larger --

Yes and what we said was we are the largest exporter of coal of any of the U.S. coal companies supplying coal into the export markets. Because you have to understand it's not only what we export out of the U.S. but it's our entire Australian platform.

Okay. That's makes sense. I'm sorry, I just misheard it then. Thank you very much.

Thank you.

Your next question from the line of Justine Fisher with Goldman Sachs, please go ahead.

Good morning.

Good morning.

So, you guys said you're pretty much committed in price for domestic tonnage for 2008, right?

Pretty much, but there's still a little bit that we have available.

The one thing that I'm grappling with and it's not just with you guys, it's with most of the U.S. coal companies that if most of the companies are pretty much committed and priced for their '08 steam coal tonnage, how can particular companies export that much more coal if you've already got it committed to people in the U.S. and then how can total U.S. exports increase by 30 million tons when there's a finite amount of new projects coming on line for steam coal?

From our standpoint, I mean a lot of it -- our export product is coming from a couple different places. It's coming from Colorado where we have the capability to run the long wall a little harder and then produce a little bit more coal than we have in the past and we can move that coal on the rail system. We have -- we can move some PRB coal and we have access to the trading and brokerage market. From our standpoint, we have significant commitments on our brokerage side that will allow us to move that coal into the export market and take advantage of that so we don't actually have to have -- we can use other people's capacity I guess is the best way to say it from the trading side.

I mean I guess if I just go over the larger coal companies, I mean, pretty much Consol said last week, they're committed. Massey's pretty much committed. Arch with the exception of [Man] Laurel is largely, I guess maybe they're the only ones that aren't, but which companies do you think will be bringing on most of this additional 30 million tons?

Well, a lot of what has already been committed is particularly in the fourth quarter of last year was for the export marketplace. The other thing that you have to recognize is it's one of the reasons why stock piles are coming down as rapidly as they are because there's a lot of movement. Coal that is able to come out of those stock piles either through deferred shipments and/or just trading out of those utility stock piles and shipping coal directly to the export markets. So, it's a combination of the two, as I said when you see the stock piles coming down 2 million tons a week, that's a huge signal as to what's happening on the export basis.

And Justine, I think I would add that I think where the disconnect is we don't expect to see Central Appalachian production go up because of exports. As a matter of fact, we think it's going to continue its slide and decline. Frankly, what's happening is that this coal is being sold into the export market. What hasn't been realized yet is that when the customers in the U.S. come out to buy coal it may not be there, because it's already been sold in the export market. It doesn't necessarily mean that there's going to be higher production, it means it's already been sold so those customers are going to have to look elsewhere for their products.

And you guys said the utilities are yet knocking on your door to sign '09 coal?

Well, typically, most utilities wait until after the winter to decide what they're looking for for the future so utilities [even] that burn's going to be. So, that's been the traditional pattern.

Given the last spike we saw in PRB coal regardless of what the cause of it was, was close to that $16 level. I mean you guys must be assuming that PRB will to go to the 20s, if you're not signing at that peak level.

Once again, I'm saying that there's not a lot of contracting activity at this point in time. And there's certainly no reason to believe on a net back basis that you can get some pretty strong prices out of the PRB over time.

Yes and if you look at the fourth quarter of last year's PRB average, it wouldn't have been at those levels.

This is more recently, the market has begun to move in the PRB in the last, this first quarter really of this year, a little bit in December.

And I would remind everyone, our sales strategy has always been to layer in good high margin profitable business in all market conditions. So, as we see going forwards in the PRB, we talked about our unsold position over the next couple of years totals anywhere from 220 plus million tons, we will be layering in business going forward.

Okay. Then the last quick question is the export contracts that you guys were talking about out of the Western Bituminous Region et cetera. Are those spy contracts or are people approaching you to sign longer term contracts because I guess, Consol had said previously that they're being approached for two to five year contracts. Are your guys are looking at PRB, Illinois Basin, et cetera, are they looking for long term or is that more short term?

Well, most of what we have been done recently has been shorter term. But we are -- people are starting to inquire about longer term business.

We have locked up some deals all the way into '08, '09, and continuing to look for opportunities, potentially extend that out.

Our next question from the line of Sanil Daptardar with Sentinel Asset Management, please go ahead.

Thanks. Given the presentation that you mentioned, the demand that's outstripping supply, do you plan to reverse the production cutbacks of 2007?

Well, we have essentially built those back in. I mean, if you remember the biggest part of our production cutbacks back in 2007 for the near term was volumes growth and the Powder River Basin. Incrementally, when you look at what we're adding in '08 and '09, we're bringing some of that back. The biggest difference is the timing of School Creek. We have not changed that in terms of -- have not brought it into any 2008 production. But we will just have to see how the market materializes over the course of the next six to nine months.

Okay. The 4 million ton and export you talked about mostly from western U.S. was for 2007, right? The entire 2007, you only exported 4 million tons from the U.S.

That was business that we solved, that we booked for '08 and '09.

I see. So what was the export for 2007 from the U.S.?

Total U.S. exports?

Yes.

4, 5. Yes, from us, 4, 5 million tons.

4, 5 million tons. So if the business book for '08, '09 are 4 million tons in export is the same volume that you had in 2007, if the export demand was so strong, is there a possibility that this export number may go higher during the course of 2008?

I think your question is, is there the possibility that the exports will be even stronger than we think they will be, I think the answer to that is yes.

Okay. Primarily, it would be to the European markets or would it be exporting to the Asian markets from here?

Well, it would be direct primarily to Europe. But that's us that's saying indirectly, it's going to be in the Asian markets because that's why there's a shortfall into Europe.

Okay, to the previous question, you mentioned about to the earlier questions that the more demand in the U.S., the utilities are mainly signing the short-term contracts. Now, if one [extra] voluntary, they're looking at short-term contracts, there is sufficient stock piles that they have and there might be an implied message that they think the coal prices may come down. But according to you, it doesn't seem so that the coal prices are going to come down. But if they're not worried about the prices going -- if they're worried about prices going higher they would have gone for longer term contracts currently, but they're not doing so. Where are things basically on you one here? What are the things that are being missed here?

I think the disconnect is I don't think, maybe you misunderstood. We didn't say the utilities were signing short-term contracts. I think what we said is this is typically a lull in the buying period in January where customers are typically waiting for the winter to be over before they decide how much they're going to buy. But I think we haven't seen a change in buying patterns that would suggest that they're going to shorter term contracts at all.

I see. Okay, well, thanks.

Thank you.

Our next question is from the line of Gilbert Alexander with Darphil Associates, please go ahead.

Good morning. Could you go me an idea of where coal inventories are now as far as base supply and where they could be at the end of the first quarter?

Well, I think if you look around the different coal producing regions in the East, the inventories are coming down very rapidly. Probably short in northern AP, with the recent draw downs getting close to being below average, Central AP, Illinois Basin is tight, the Western inventories, the Powder River Basin inventories are probably still slightly above average and those are the ones that I think will start to come down very rapidly now that the others have come into a lower than normal average.

And on Green Point, can can you give us any color as to what technical problems still have to be overcome?

I think it's, I think it's early days for that. And we will just leave it at that. It's obviously an emerging technology, but it's one that ourselves as well as a number of other major companies have looked at and are looking to support the next stage development and potential commercialization.

Our final question today will be from the line of Mike Tian with Morningstar, please go ahead.

Good morning, guys.

Good morning.

My question is about coal inventories as well. I'm just looking at the latest EIA numbers and I see the Bituminous stocks are pretty stable, however subbituminous stocks have risen like 20% year over year and of course, this is the continuation of a three year trend now. My question is, how long do you think this can continue which -- stocks are going to continue to rise before the contract prices and what-not gets damaged before this starts to impact prices and demand.

Yes. Well, I'm not sure whether you're referencing volume of inventory or days burn of inventory.

Volume. I see the subbituminous is up to about 81 million tons.

I understand, but we only look at days burned because the market and the generating capacity in the country is growing as well. So the only real relevant data is the days burned which we don't see as quite out of line as the volume would show number one. Number two, I think as we have talked about the PRB pricing has been increasing even given the inventory situation and that's a pretty clear signal as I think is where people think these things are going to sort out over the course of the next two to three months or first half of the year.

Right. But the prices have been increasing on [regular] volume, that's what you said right because right now you said it was a lull. So we're really basing these prices on very few transactions.

Well again as we said earlier, when you look at how rapidly the -- if you scale things back, if you go back a year ago and we talked about the inventory situation in the country, everybody was talking about cutting back production because there was this very large buildup of inventories. And now we sit here today and we have not only eradicated the eastern overhang, we have got significant increased volumes in exports and now in addition, we have got Illinois Basin and Western Bituminous and Western Subbituminous coals starting to move into the export market. So it's very rapidly going to change the inventory situation here in the U.S., particularly country for the Western Subbituminous coals. You look at all those dynamics they're much more of an impact on what the pricing environment's going to be than exactly what today's inventory is in the stock piles. As I said if you look at it in terms of days burned, which is really ultimately the utilities need to look at, the numbers are not as high as they would look if you're looking at pure tons.

Right okay. Just on a broader sort of view question, you said that the demand is increasing about 2% a year, if I remember correctly and according to the EIA, we cut supply or cut production by a little bit less than a percent. In that light, why is stock piles still going up?

Well, on a country basis stock piles, I don't believe on a day's burned basis are going up. So I'm not -- maybe we can follow up our conversation, but our view is stock piles are are coming down, number one. Number two, the first thing that had to be reduced was the over, if you will the overcapacity, that's all come out of the market. Now, what we're seeing is significant draw down on a rapid base in inventories and we think that trend will continue.

And that will conclude the question and answer session. I'll turn it back to the presenters for any closing comments.

Well, thank you all very much. As you can tell when you look at and we look at what's happening in the global energy markets, particularly what's happening in every coal market across the globe, it is a very dynamic time in the business. When you look at what we have accomplished with our platform and where we're positioned in all of these market places, we look for a very good 2008. So I thank you for your interest.

Ladies and gentlemen, that does conclude your conference for today. This conference is available for replay. It starts today January 31st at 3:15 p.m., central time. It will last until March 1st, 2008 at midnight. You may access the replay at any time by dialing 1-800-475-6701. International parties please dial 320-365-3844. The access code for the conference is 900053. Those numbers again 1-800-475-6701 or 320-365-3844 and the access code 900053. That does conclude your conference. Thank you for your participation. You may now disconnect.