Peabody Energy Corp (BTU) 2008 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Peabody Energy quarterly earnings conference call. For the conference, all the participant lines are in a listen-only mode, however, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded. With that being said, I will turn the conference now to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec.

Thank you John. Good morning everyone. Thanks for taking part in the conference call for BTU. Today our Chairman and CEO, Greg Boyce, will provide an overview of Peabody's position and our outlook.

Our Executive Vice President and Chief Financial Officer, Mike Crews, will review our record quarter. And President and Chief Commercial Officer, Rick Navarre, will discuss the market fundamentals.

Our forward-looking statements should be considered along with the risk factors that we note at the end of our release as well as the MDNA section of our filed documents. We also refer you to Peabodyenergy.com for additional information. And I will now turn the call over to Greg.

Thanks Vic and good morning everyone. During this time of unprecedented economic events, we are obviously pleased to be reporting the best quarter and forecasting the best year in Peabody's 125 year history. Mike will speak more to the quarter in a moment and discuss our record revenues, EBITDA, operating profit, earnings and cash flow.

Our approach is to be profitable in all market conditions with the intent to make superior profits in strong markets. It is the scope and breadth of Peabody's portfolio that differentiates us from others in the coal space and clearly this quarter highlights our earnings capacity.

In fact, there are two compelling themes around differentiation that give us strength during these troubled economic times. The first is how coal is different from other commodities and second how Peabody is unique among coal companies.

Let's first focus on coal as a commodity. I believe that coal is far better able to weather the economic downturns than most other commodities for several reasons. Coal is overwhelmingly an electricity fuel. Electricity is a basic staple and in developed nations is far less elastic to GDP and other commodities.

For instance, a 1% decline in GDP in the US would only translate into a 0.5% reduction in electricity. And coal fueled electricity is more protected given the around-the-clock baseload nature of the generation. Let's take a look at the effect in emerging economies.

I will tell you that Rick and I just returned from China last week and the signs we saw were not of downturns but instead an easing on the pace of economic growth. We still believe emerging economies will continue to grow, with China leading the pack with 8 to 10% growth. That translates into 11 to 14% electricity demand expansion in the world's largest electricity market.

On a global basis, we still see nearly 300 gigawatts of new coal fuel generation under construction today. These plans will begin operating over the next several years and will annually need some one billion tons of additional coal. This ensures positive global coal growth irrespective of the exact pace of global economies.

Thermal export coal supplies are also in tight supply. Consider that the go-to nations of China, Russia, Indonesia, South Africa and Columbia which account for more than two-thirds of thermal seaborne coal supplies have been unable to increase volumes in aggregate this year. Of course the new world of credit or lack thereof will only make these supplies tighter.

Let's turn to metallurgical coal, which of course is linked to steal demand. But 3% growth in global steal demand still translates to 25 million tons of additional coking coal needs. And global metallurgical coal remains in very short supply with more than 90% of global seaborne shipments coming from just four countries.

That's why pricing during the third quarter was still running ahead of the April benchmarks. It's for these reasons that we believe coal is far better positioned than other commodities for any global economic softness.

Now turning to the within coal story, Peabody continues to differentiate itself from the others. First and foremost, we made several major portfolio and capital investment decisions in recent years which have entirely reshaped our asset base and earnings profile to target the highest growth markets in the world and create the best cost profile.

With strong EBITDA and low sustaining capital requirements, Peabody has growing cash flows that we can reinvest in the business, use to enhance our balance sheet or return to shareholders. It is our performance and outlook that recently led S&P to raise our credit rating.

Our liquidity is further improved by a large line of untapped credit, giving us flexibility to potentially capitalize on undervalued assets including us in this environment. Our organic growth is also strong given our leading resource position.

We're largely contracted for 2009 and our unpriced volumes are in the regions experiencing the strongest demand. And finally, we've got a global trading arm that traditionally contributes some 5 to 10% of our overall EBITDA.

So simply put, Peabody is a distinctive Company in a distinctive industry that has been designed to navigate well through all economic waters. As Peabody plans ahead, we're paying close attention to capital expenditures, to the appropriate production levels for 2009 and to maximizing long-term shareholder value.

The markets will regain perspective and equities will recover from a gross overreaction to what is occurring in the markets. In the meantime, Peabody will continue to focus on performance.

We're pleased to raise our financial outlook and we're now targeting full-year earnings per share of $3.00 to $3.25 on raised EBITDA targets of 1.75 to $1.85 billion. Your Company has quality assets, strong free cash flows, access to credit, the ability to grow organically and a track record of performance. I would like to thank our 7000 employees around the world for the hard work that goes into another outstanding quarter.

So now for a more detailed look at our most recent results, I will turn call over to Mike Crews.

Thanks Greg and good morning everyone. I'm pleased to report a very strong third quarter that set records in every meaningful category and generated significant operating cash flow. Let me begin with the income statement highlights.

Third quarter revenues were $1.9 billion. That's a nearly 60% improvement over the prior period and reflects both higher volumes and increased prices across our global operations.

In Australia, revenues per ton more than doubled and volumes grew 21% from our expanded production base. In the US, revenues per ton improved 15% on slightly higher volumes.

EBITDA was a record $610 million with a 32% EBITDA margin. Mining operations nearly tripled prior year levels led by a $410 million increase in Australia. Trading and brokerage was again a strong contributor benefiting from opportunities in the US and international markets.

Third quarter operating profit of $490 million exceeded the second quarter record by 43% and last year by 324%. Pretax income grew to $440 million and our higher profitability led to income tax expense of $60 million.

Favorable exchange rate movements reduced income tax expense by $63 million in the quarter, lowering the effective tax rate to 14%. We're now targeting a tax rate in the 20 to 25% range for 2008. Finally, income from continuing operations and earnings per share were both records, totaling $377 million and $1.38 per share.

Now let me take you through the supplemental schedule. Beginning with the US, our tons sold were nearly 51 million which was higher than last year and the second quarter largely due to our western operations. This was the first full quarter that the new, low-cost El Segundo Mine was in-service and the North Antelope Rochelle Mine rebounded well from last quarter's downtime to complete installation of the new loadout facility, the last of three major projects.

With the completion of these multiyear investments, we're beginning to see the benefits in both volume and cost. Overall unit costs were 5% better than the second quarter.

Moving on to Australia, the power of our operating platform built from recent year investments is delivering very good results. Third quarter volumes grew 1.2 million tons above last year, reflecting the expanded production base completed in late 2007 and year-to-date we've continued to gain market share as our production has increased 15% versus only a 3% reported increase for the entire Australian industry. In addition to improved volumes, our revenues per ton more than doubled last year's levels, reflecting the higher (inaudible) and thermal prices for annual contracts that began in the second quarter.

Australia costs were comparable with last quarter and last year despite the effects of higher commodity prices, royalties and adverse currency movements. Our hedging programs have been effective at minimizing volatility associated with rapidly changing exchange rates. With a stable cost structure and strong pricing, Australian margins totaled $61 per ton, a significant increase over both second quarter and last year.

Now I would like to take a moment to review our financial position which has been the focus of so many companies in these uncertain times. With our improving profitability, operating cash flow for the quarter reached $462 million.

As a result, Peabody's cash balance grew to $104 million even as we repurchased BTU stock and reduced our borrowings by about $100 million. From a leverage standpoint, we have no significant near-term maturities in our debt portfolio. We also continue to have ample liquidity with approximately $1.5 billion available under our long-term revolving credit facility.

To summarize, we've turned in another quarter of record results, added strength to our already solid balance sheet and extended our track record of performance. I will now turn the call over to our President and Chief Commercial Officer, Rick Navarre.

Thank you Mike and good morning everyone. What I would like to do today is walk you through our view of the global and domestic coal markets during this extraordinary time.

Generally you would expect that physical coal markets, the financial coal markets and of course the equities to be closely aligned. However in recent months, this relationship has become extremely disconnected.

The easing of the physical markets has been magnified in the paper coal markets as banks and hedge funds have unwound their positions to preserve cash and to fund redemptions, creating a large selling overhang unrelated to the coal fundamentals. The supply-demand balance has also been complicated by very mild, late summer weather across the Northern Hemisphere along with concerns of an economic downturn.

These are a lot of pressures for the market to digest at once. Yet looking at the fiscal fiscal coal market indicators, you still see a world using a growing amount of coal and facing very tight and increasingly uncertain supplies.

On the global front, we've seen pullbacks in steel demand and economic concerns that could slow the growth in electricity generation in the near-term. Worries about the demand side though appear to be currently outpacing their reality.

In China for instance, past expectations of 9 to 10% controlled economic growth have generally led to much higher actual performance. The Chinese government and many companies tell us they expect an 8 to 10% growth rate in the next year. This while it may be an easing, it's hardly the dramatic drop-off voiced by those expressing an extreme bearish macro sentiment.

More importantly, coal transactions for physical delivery in recent months have been at very strong levels for both thermal and met coal. Recent activity in Australia has been above the April benchmark levels and we have signed premium PRB and Illinois basin contracts averaging nearly 50% and more than 70% respectively above 2007 realizations.

While we have seen a decline in the spot prices in the last two to three weeks, it's too early to predict where these prices will ultimately settle. We're still one to two quarters away from finalizing next fiscal year's international export contracts, however, we expect the markets will time to recalibrate based upon the real supply and demand fundamentals rather than the financial volatility that exists today.

Tight supply will be further compounded by the global credit freeze. A significant amount of plant production expansions and new mines will be at risk around the world. It will also have an impact on existing production capacity at high cost mines and distressed operations.

Let me now shift focus to our overall sales position, one of our key strengths. We have nearly one billion tons of contract backlog and our approach to contracting by layering in long-term, high price contracts continues to create steady and improving results.

We are substantially committed in the United States for 2009 at higher realized prices than 2008 and we will be contracting our international export business early next year as I mentioned. We will price some 6 to 7 million tons of Australian thermal export coal in 2009 versus just 2.5 million tons this year. This will include the repricing of legacy contracts that have historically been priced at 35 to $55 range. So we don't expect to see a decline in realizations in 2009.

In summary, we believe the financial markets are being artificially suppressed by the need for some players for liquidity. And while the credit crisis has created valid demand worries, it's also created supply challenges that are less visible but just as real.

So we look forward to continuing to deliver improving results and capitalizing on our financial position amid these markets and creating a platform that will deliver shareholder value both in the near-term and in the long-term. Thank you for your participation this morning and we would be happy to take questions at this time.

(Operator Instructions) Jim Rollyson, Raymond James.

Greg, you look at obviously some of the things you have said and kind of we have all been focusing on how the physical market has been acting relative to the financial markets and obviously there's quite a disconnect that you guys have laid out. Can you maybe spend a minute and talk about -- as you go forward into '09 and '10, you've obviously spent a great deal of time and effort locking up coal at these higher prices and establishing a pretty strong cash flow build as you go through the next couple of years.

Has your outlook on how you spend that cash flow changed in the last three months in terms of -- obviously you've got a real situation in the financial markets. Has that changed your thought process of where you might spend that cash versus what you might have thought five or six months ago?

Yes, I think the answer to that question is yes. If you asked us as has been asked in our previous conference calls, we probably would've rated organic growth opportunities highest on our list given the very high prices for acquiring assets, that's number one.

Number two, where our own equity value was so as we look at the opportunities for cash today, clearly we want to make sure that we are -- any opportunistic acquisitions might come about given the current valuations. We want to be prepared to participate in those and we also want to make sure that in terms of where the market unfolds over the next couple of years that our growth profile from organic development matches that market demand, which based on everything we see around the globe, we are still going to see growth but we believe it's going to be slower than we might have anticipated six months ago.

And then ultimately, we've got to continue to look at the valuations of our own internal valuations as we indicated. We were in the market in the third quarter on share repurchases. So I would say that previously organic growth was the top of the list. That deck is shuffling in terms of the use of cash.

Very good. As a follow-up, I guess if you look at your updated guidance for the year and factoring in the third quarter, it obviously implies that fourth quarter is quite a bit lower than kind of what you have been plugging in or certainly what the street has and what you did for the third quarter. Can you maybe just step us through the sequential decline and kind of where that stems from?

Well I think what you have to focus on is the year. And you have to focus on the fact that the third quarter was a great quarter for us. We have always said that timing of vessels in Australia, these are very high-value vessels. And the timing of how our production comes out particularly out of Australia is going to impact quarter to quarter.

You know, the fact that we are raising our annual guide indicates that we expect the end of the year to continue to be very strong. How that flowed between the third quarter and the fourth quarter, maybe that has changed slightly. But overall, our back half of the year is stronger than we had originally anticipated.

Now if we continue vessel movements and our cost -- and our volumes continually strong, because of the performance of the ports, we will have another very good quarter in the fourth quarter. The other aspect is we had a strong trading quarter in the third quarter.

We wish we had a great crystal ball to tell us exactly how many counterparties will still be in the trading arena, what the volatility will be and what the liquidity will be. But we don't have it right now. So we have tried to the factor the vessels, we have tried to factor the trading and the other aspects into our forecast for the rest of the year.

Excellent, thank you. Good quarter.

Paul Forward, Stifel Nicolaus.

We had a, you mentioned in your remarks, very mild summer domestically for weather and power demand especially the second half of the summer. Gas may cutting into coal demand in some areas. At what point do you look at this and look at the strong utility coal stockpiles in the states that are using PRB coal and decide to idle some production in the PRB or elsewhere?

I think -- Paul, good question. Obviously we would ascribe it to the global cooling which took place through this year. When you look at whether the entire Northern Hemisphere, whether it was China, whether it was North America, whether it was Europe, coal demand because of weather related factors this summer were down and that is part of what we're seeing in the marketplace.

So that clearly has an impact. I will tell you and everyone as we now are planning for our production next year in 2009, we have already trimmed the volumes that we expect to come out of the Powder River Basin.

So that is trimming some of the growth but as far as idling any existing capacity, is that something that you would expect possibly competitors due to maybe weaker margins that it will be kind of their job to do it first rather than yourselves?

Well I think first of all we have to look at right now the way we see 2009, we still see growth in the coal market. You know the exports for this year, we expect will come in around that 85 million ton range.

We have tempered our view as to the extent of exports for next year. But we still expect them to at least be at the levels that we're seeing this year perhaps, slightly up which -- and with the production volume issue that we've seen in the east particularly this quarter which we expect to continue, PRB volumes are going to need to grow just to satisfy existing demands.

And the question is, how much do they grow by? And as I indicated, we have already taken the position that we are going to reduce our volumes that we had planned for next year. What others decide to do remains to be seen.

I would also remind you that we are essentially fully contracted for the most part for the PRB. So we would have to be cutting back and taking backorders. What we have in our total portfolio to be repriced, a lot of that is reopener business that just gets repriced but it has already been sold.

Michael Dudas, Jeffries.

Maybe somebody can address the issue about the low credit accessibility that we're witnessing in the marketplace, maybe from a producer perspective, primarily I guess on the east coast but also internationally and maybe Indonesia, Vietnam, some of the burgeoning markets for maybe new virgin capacity, Mozambique or Mongolia, how that might impact that supply increase?

And also from the trading market, given that you've had a very, very good year of trading business on the coal side, how do see that? Is that going to further cause volatility in the financial market and maybe (inaudible) some of the issues in the fiscal market because there will be a lot less liquidity in the financial side?

Mike, let me take that. I think when you look at it clearly, there's obviously a lot less liquidity in the global market as it relates to cash as well as favorable credit lines. And so when you look at projects, new projects and look at where new coal mines were planned to be built to respond to the growing demand, we see that backing off quite a bit because we don't see the availability of capital except for those with very strong balance sheets.

So there's a lot of projects we've put on hold and are those projects in Indonesia, Mozambique and other places? I think those are all going to be tougher places to do business in the future because of not only the financial risk, but they're going to have country risk as well. So I think those are going to be -- those projects will be further down the line when it comes to projects that might get financed.

But as we look at where Peabody sits, I think we have adequate capital to execute our strategies. I think when you talk about the eastern part of the United States, we all know that there are smaller players there that will be strapped for capital. We also know that there has been at least and these are just public announcements, ten forced (inaudible) in the last two weeks out of these. And with that type of activity and those continuing, you're going to see -- if you see more of that, it's going to be tough for those -- for the financial markets to respond to that.

The answer is yes. It's going to be tight, it is going to impact not only expansion projects. I think it's going to impact sustaining CapEx for folks who are not going to be able to do get the capital to even buy that new equipment that they need at their property.

As it relates to trading, clearly with the exit of some of the banks from the trading market, it will reduce liquidity and we have been in this business for ten years when there was very little liquidity from the very beginning and that made money every year doing that. You know, so we're -- still think it's a good business to be in and we will continue in it. The intelligence alone is worth a lot more than we probably gained just the financial segment that we have.

But there will be less players. They will come back eventually because the market has volatility to it and that is a good place to trade. But as (inaudible) as we see it, are we going to do the able to replicate the trading earnings next year? We will come out and talk about that I guess in our '09 guidance. But it would probably be difficult at this point in time with the players that are -- without this many players in the market.

Thank you, my follow-up is regarding that you mentioned at third quarter you retired $100 million. Is that debt and equity combined?

No, that was just repayments on our revolver. We had a zero balance on our revolver at the end of the quarter.

What was the approximate amount of shares done in the third quarter and can you remind us what the Board has authorized for Peabody to allocate and how comfortable relative to covenants or so that you can ramp up such a purchase?

The Board authorized us to repurchase 5% of our outstanding shares. Previously we have repurchase 2.2 million. During the third quarter of this year we started buying and we ultimately averaged out at about the high 40s and we were repurchasing shares until we were blacked out for the quarter. So overall what we have left on that program is approximately 10 million shares, well within our existing available liquidity on our revolving credit facility.

Jeremy Sussman, Natixis.

I guess my first question is with sort of weakening -- you touched upon this a bit. But with some of the weakened valuations out there, are there any particular areas that you're seeing some reserves that might be attainable that previously were too expensive?

I would just tell you it's pretty much across the board right now. Obviously there are reserves that are still owned by major mining houses and they're in good shape. But whether it's Australia, whether it's Indonesia, whether it's here in the US, there are reserves that for some of the junior players are becoming potentially available at very attractive valuations. Whether ultimately anything could get concluded remains to be seen. But we are starting to see more availability in that marketplace than we would have seen three months ago.

That's helpful. And then you mentioned that the 35 -- in Australia your $35 legacy contracts are up for repricing. I assume you're talking about the Wilpinjong Mine there. How much of that actually -- if that is not right, let us know. But how much of that comes off the book for repricing?

It's not the Wilpinjong Mine. The Wilpinjong actually that's the domestic contract that isn't open for repricing. These are export tons primarily out of Wambo -- out of the Wambo location and it's about 3 million tons in total, not all of the 35. It's between 35 and 55 but to give you a sense, that 3 million is probably at about 45 on average.

Jeremy, these were contracts that we inherited with the Excel acquisition. When Excel was looking to finance those expansion, they sold these tons forward at pricing that would've been in existence in 2005 and 2006. And as Rick said, they are now coming off -- coming to their end.

That's helpful. Lastly, in terms of foreign exchange, you mentioned that there was -- that hurt a little bit this quarter. But obviously we have seen a shift with the Aussie dollar. So when do you think we could start to maybe see that actually helping going forward?

With our hedge position, for the rest of the year we are 85% hedged at an average rate of about 80. For 2009, we're also 85% hedged at an average rate in the low 80s.

So even if you take today's rates which have collapsed only recently and if you assume that you had that for the rest of 2009, an all-in effective rate for 2009 is going to look very similar to the all-in effective rate for 2008.

Gotcha. Thank you very much, that's helpful.

Mark Liinamaa, Morgan Stanley & Co. Inc.

I would be interested, guys, if you could to try and frame the absolute downside. Clearly the market is very worried about the supply-demand balance for US coal next year and into 2010 and when you look at the combination of economic weakness, lighter industrial load, steel, exports; in your [serial] planning, how long could it go?

Well, I think that's a $1 million question for a whole lot of sectors including the market. (multiple speakers) as we look at where global economies -- all you can do is just take different scenarios for the global economy and what that would result in terms of demand for our products.

Quite frankly, we in terms of downside on thermal coal, international thermal coal and US thermal coal, you know flat is about as low as you think you possibly could go because of the amount of new capacity that is being built whether it is here in the US or more importantly, internationally. And China effectively -- a downside case in China is 8% growth which still has 10% plus electricity growth rate in the world's largest market which is going to require significant volumes of thermal coal. So the thermal market we think is going to be -- is going to continue to have growth through this time period and it's just -- pick him -- whether it's good growth or whether it is a medium growth.

(inaudible) 2009 flat is a worst case type thing? I know it is a difficult question to answer, but clearly that is something that investors are concerned about.

I mean from our perspective, that's kind of the planning scenario that we are using. That's all I can tell you.

Any thoughts on China and plans to limit exports on coke or anything like that next year? Are you hearing anything about that? And that will be it for me, thanks.

Well the fact is China has continued to limit exports and they have just imposed a fairly significant export tax on coke. In terms of even thermal coal, they have yet to release any additional export licenses for this year.

So we anticipate that China -- their energy short. We were just over there last week as we said. They are still -- with all of their growth, they were having power brownouts because of their inability to ultimately meet their existing demand and they are still anticipating 8 to 10% growth in their economy and and much more of it redirected to infrastructure development and internal growth rather than the export growth that they would have had in the past. But it still remains strong.

Thanks very much, good luck guys.

David Gagliano, Credit Suisse.

I was wondering if I could just ask Mark's question in a bit of a different way. Based on your market intelligence, what do you think is the marginal cost of producing thermal coal in Central Appalachia and in the Powder River basin? And also if you could frame it in terms of the global hard coking coal market as well, that would be great. Thanks.

Let me start in Appalachia and I can take it from public data and from also personal information from looking at financials of smaller coal companies that get presented to us to look at from acquisition standpoints. You can see that you're talking about an $80 to $90 cost for thermal coal, at the marginal level, the highest cost producer, the tail end of the cost curve.

So you are going to need $90 to $100 to clear that market for Appalachia. We've seen thermal and we've seen metallurgical coal from some of the met producers out of Appalachia in the $120 plus range. And I would say that is a marginal number. For the kind of -- for the marginal metallurgical, it's in excess of $100. So that's probably a realistic number to think about from that standpoint.

PRB, it's more of a flat cost curve, difficult one for me give you any direct view on that one. It's pretty flat at the end of the day. What I can tell you in the PRB is that obviously costs have gone up because of commodity costs. Even though they have dropped a bit, they are still higher than where they have been with respect to diesel fuels and explosives.

And having said that, the cost of reserves in PRB has gone up fivefold in the last five years. That's certainly a big number. The ratios have increased significantly. So you're seeing that the marginal cost has gone up quite a bit in the PRB.

Shneur Gershuni, UBS.

I guess my first question is kind of on the supply side. You did talk about 25 million tons of incremental demand for metallurgical quality coal or (inaudible) coking coal. You also talked about a demand expansion with respect to electricity use in China and so forth.

I was wondering if you could I guess first address where you think Chinese coal production can grow to next year? Will there still be a deficit relative to their demands and so forth? And then secondly, if you could also talk just about the supply with respect to where you see supply coming online with respect to the met coal market as well too.

Okay well maybe just starting in China, clearly China has been growing a couple of hundred million tons a year in terms of their productive capacity and that has struggled to keep up with -- in fact has not kept up with their internal demand. You know, at a slightly slower growth, we think that China perhaps has the ability to meet their demands, their stockpiles. They run stockpiles that are about 14 days rather than what we run in this country.

So they together stockpiles healthy. But net net, they're still very tenuous in terms of being able to satisfy their demand internally and number -- 2.7 range billion tons of supply, demand and supply, that is a number that we can use at this point in time.

I think for the rest of the globe, as Rick indicated, we think supply is continuing -- is going -- the growth of supply is going to be very, very tight. We have just come off up until recently -- the first half of this year was the strongest thermal markets we have ever seen and when you add up all the major exporting nations, they couldn't even increase a ton of output based on that.

It just shows you the nature of the supply side of this business. So we think that is not going to change and in fact, based on current status of the availability of liquidity and credit, probably get even tighter.

Just to clarify one point there, so effectively with respect to China, just focusing on that for a minute, you're basically saying you do expect it to still be effectively in deficit or precariously close to at the very least?

That is correct.

I was wondering if you could talk about costs as well too. Have we potentially seen the peak on input costs? Is this quarter potentially one of the worst quarters outside of except for labor per se? But are you expecting that potentially that we could see some margin expansion next year just due to some of the input costs coming in relative to where they have been in the last four to six months?

Clearly if you run oil out at $70 a barrel through all of next year, you're going to see a significant easing of at least that cost pressure. We have yet to see significant reductions in either our evanesce materials or the equipment costs or steel costs although we expect that that ought to start easing based on what's happening in the steel market. So, net net, yes; unless things change rapidly here, we would expect an easing of the cost pressures from what we had over the last two years.

Is there a temptation to take advantage of oil where it is right now and hedge in some of the costs or do you kind of want to watch and wait a little bit?

On the crude oil side for next year we are 63% hedged already. And that is at a price around $100 a barrel.

Right, I'm saying looking out where you see it right now, do you sit there and say maybe we should take that up to 85% or 90%? Is there an opportunity to layer in some hedges at this level?

You're right. There is and that is the position that we've taken in the past and we will continue to take where we like to -- we layer it in. We have target percentages to make sure that we manage the volatility but clearly as it comes down, we've been in the markets trying to average down our position.

Alright, perfect. I think I used up my two questions. Thank you.

Brian Gamble, Simmons.

I just wanted to touch on the Australian market first if I could. You mentioned export growth of 3% this year but you guys seem to be performing quite well. Could you go over two things? One, has the new market on the global basis supply-demand balance in general slowed down some of the expansion plans in the region? Or is it steady as she goes? And two, what has enabled you to benefit versus some of the other guys that might be under some pressure and maybe some current levels of (inaudible) at some of the ports?

You have multiple questions there. I guess in terms of where we see the development of new projects, particularly out of Australia, we see it affected by the availability of cash to develop those projects, not really affected by whether the market is going to be strong enough to absorb that product. As we said earlier, we still see positive seaborne thermal coal demand growth going forward. So we are still going to need additional coal.

So it's more affected by the liquidity. We have been successful increasing market share because of the platform buildup we had an Australia as a result of the Excel acquisition. We had the new mine at Wilpinjong. We had expansions at Wambo and we had the new Millennium Mine come on in the met coal region up in Queensland.

SO that was built into our program. We are able to purchase that portfolio which was developing new projects early in the stage and got into the market early. So I think that was really the reason why we were successful.

Lastly, I think your question on ports, as you know we are a developer of NCIG port. That is still under construction with an anticipated startup and begin shipping in 2010 and we have committed for volumes out of the new [avid point] expansion process in the [northern link] out of Queensland. So both of those over time significantly increase our availability of port capacity particularly beyond 2010.

Just a second quick follow-up. Inventory stockpiles in the US, east versus west, do you have (inaudible) demand cover?

Looking at the Eastern US, you've got for the eastern producers, you've got a lot less inventory on hand. You are actually probably below target by seven or eight days in total. So you've got a pretty thin inventory situation in that part of the world.

As far as the Powder River Basin, of course we got almost to target at the end of last quarter but because of the weather in this quarter, we've gone above that and we're probably about four or five days above target right now. So a little bit heavy on inventory at the power plants for PRB (inaudible)

And you are referring to target as a five-year average? Is that right?

We are referring to targeted days on the ground. We expect -- we don't look at it as a five-year average. We look at the targeted days of burn that they want to have.

David Lipschitz, Merrill Lynch.

In terms of your dealings with your utility customers, as the physical market has fallen off some, where are length of term and all that type of stuff going right now? Are people looking for longer, shorter, just give me the shortest deal possible?

I think right now we haven't seen a significant change in any of the buying behavior at this point in time. But you also got to understand there really hasn't been much buying or selling going on in the last month. I think everybody is you know -- in the market side is kind of waiting to see how this thing settles out.

And we are perfectly fine to wait as well because in our view, the markets have submarined well below the bottom. And when the customers and everybody has time to come up for air and look around, they're going to see that the coal supply and demand fundamentals are exactly the same as they were for the most part and we'll be back to talking more about term business. So we haven't seen much change like I said, but there's hasn't been a lot going in the last month either.

Other questions, in terms of South America, what's your outlook for Columbia, Venezuela and that market in terms of what you believe that market looks like, in terms of getting more involved with it and things like that?

Well Venezuela is clearly a market that we are already involved in with the ownership of the largest mine in Venezuela but that mine is about 7 million tons a year but it's not producing up to its capacity this year. It's probably a little bit lower than that this year. Don't see much expansion going on in Venezuela. Tough market so you won't see any more coming out of Venezuela.

Columbia, that is a market that we'll probably grow at four, five to 10 million tons a year of capacity. We're not in that market right now. There's only really three major coal mines in that market but it's a good market for export coal into Europe and some into the US.

Is that a market you would like to be in?

At the right time for the right price and the right set of assets, absolutely. It fits our profile from a trading standpoint.

Luther Lu, FBR Capital Markets.

Rick, I want to follow-up on the marginal cost question. You mentioned that the (inaudible) marginal cost is 80 to $90 per ton. Then how many tons is produced at that price?

Luther, you've got about 200 million tons being produced in Appalachia and at the end of the day, we're just looking at the tail end of the cost curve and I couldn't tell you exactly how many tons. But it's enough to make it -- to set a price because if you don't have a price that's above 80 or $90, you're going to lose a lot of tons out of that market, which is already a fragile market. So is it 10 million tons or is it 20 million tons? I think the point is not really that -- it's big enough to make a difference.

Okay, big enough to make a difference. That's good to know. And then on the -- this question is for Greg. Recently you mentioned in an interview that you had planned to open up a (inaudible) mine in the Powder River Basin in 2009 so that you can take down the production at Rawhide and Caballo to increase the margins. Is that plan still in place?

Yes, we are still finalizing those plans. We anticipate getting the final permits sometime in the first half of 2009. As we have always done with our portfolio, we're going to look at ways to maximize our margin.

The School Creek operation is going to be producing at 8800 BTU quality product. The margin on that product is higher than we have at other operations. So we will begin to migrate volumes from those other operations down to School Creek as we bring it up so that we can maximize the overall margin that we get out of our total Powder River Basin production.

So would the increase in the capacity in Power River Basin somehow keep a lid on the Powder River Basin price?

We're going after margin expansion with bringing on School Creek at this point in time. We're not looking at volume expansion. You know, obviously what the market needs is what will get produced.

John Bridges, JPMorgan.

Congratulations guys, great results. I wondered -- the Australian stuff took a while to get going. What actually fell into place in this quarter to give you the big boost?

Well it's a couple of factors. Obviously the Australian platform, the volumes performed well. You know, incrementally we did get better performance in terms of our ability to ship the product to market. That was number one.

Number two, we got the full benefit of the revenue stream based on the repricing of the Australian platform as of April 1. Remember, we had a bit of carryover in the second quarter. We didn't have any in the third quarter. Plus the team in Australia did a good job maximizing the higher value product shipments in terms of the ability to move material out through those ports. So you add all of those things up, (inaudible) it was very good quarter out of Australia.

So you got the trifecta.

Yes.

Congratulations on that policy. With respect to the global industry, one of the things we saw recently was the big growth in planned Indian thermal coal demand although there's some hopes there that they're going to be able to satisfy that domestically. Any comments on that?

Well we still see strong demand growth out of India. Whatever that level is, it will still be higher than we will see in other locations. We still anticipate that their input -- or their import growth will be one of the highest growth rates in the world. They're trying to develop additional coal resources. But in our view, they're going to become a significant importer of both thermal and additionally met coal going forward.

(multiple speakers) The view of the government as well as Coal India, which is the big producer there, is expecting to import coal as well. So they definitely are looking at the same way.

Okay, great. That should help over the next couple of years. Thanks a lot guys. Good luck.

Justine Fisher, Goldman Sachs.

So my first question is regarding capital investment in this environment. And I agree with you that the credit crunch is making this commodity down cycle interesting in that it should limit the capital availability to invest in commodity supply. But I think the two other interesting things going on is that first of all, a long string of strong use for commodity companies has made companies like yourselves quite well capitalized to still take advantage of investment opportunities despite the credit crunch that may affect smaller players and you know even though prices are down from that in thermal coal, the margins are still pretty strong and a lot of investments may still be profitable even though prices have declined.

So I am wondering how you would think those other two factors of this cycle might affect the credit crunch that could limit supply. And I guess maybe another way to more specifically to ask the question is what percentage of the new projects that have been announced let's say over the last year would you guys say if you could were financed by projects -- were based on project financed or trying to be financed by new credit facilities as opposed to financed by large mining companies that may still have the wherewithal to pursue them?

Well obviously, there is a lot that you have asked there (multiple speakers)

Sorry, that was a novella of a question.

That's okay. I mean let's just take a look for instance in a location like Australia where we were seeing a lot of projects on the board, the projects that were designed by the large mining companies. Obviously they will look at their own investment decision-making process and determine whether they want to move forward with those.

But there was a substantial amount of new projects that were being developed by the smaller equity players and the thinly capitalized players. And where they were using the ability to issue equity to raise the capital to expand operations, that door is completely closed. And then where they were using the ability and then co-funding that with debt, they just don't have access to those marketplaces given their capital structures.

You can use that same example in places like Indonesia, in places like the eastern part of the US. So there's no question that the current state of the capital markets and access to liquidity is going to impact those participants in the marketplace.

What percentage of that in the past has been debt versus equity financed, I'm not sure we have a real good number in terms of a global basis. Suffice it to say there was a significant number of the smaller players that that was their finance model, no different than it would be in the gas market here in the US. So there's clearly going to be an impact on future volume growth.

Same thing when you look at the US and you look at Central Appalachia. We all know there are hundreds of producers in Central Appalachia and many small producers that are living on a shoestring even with these margins. And at the end of the day, they're not going to be able to get access to capital. Regardless of what the margins are, the banks are not going to lend money to those types of companies.

Along those lines, I know we were talking when you had your analysts day in New York about steel players trying to get into the coal markets and I was wondering if your steel -- mills have been cutting their production estimates but it seems that they're also still quite well capitalized. Are you still seeing the interest in met coal? I guess this applies to both Australia and Central Appalachia given the acquisitions we have seen over the last couple of months. Are you guys still seeing steel players interested in taking advantage of reserve opportunities as you are or do you think that it's going to sway back to the coal companies being the coal acquirers as opposed to steel companies.

We are still seeing interest by the coal companies, by the international coal companies and that gives us confidence in our own projections which you know we do a lot of work on. Steel companies rather -- that continue to look at these metallurgical coal assets because scarcity of supply and they're buying these assets and the prices that they're paying for these assets would indicate that their view of a very tight supply situation going forward. So it confirms our view.

Okay and then on the PRB, when you guys reported your second quarter results, you had about 35 to 40 million tons of US coal unpriced. And I am assuming a decent chunk of that was from the PRB just given your breakdown in the US and then now you're mostly committed. So I know that you guys are pretty bullish on the trajectory that PRB prices might take in June and now all that's coal is committed.

So I'm wondering first of all, did you commit -- why did you commit all that coal over the quarter given that there's still the fourth quarter left? And then second of all, you had mentioned that there were new demand opportunities for PRB like coal by wire and backfilling in the east. I'm wondering if any of the tons you did commit during the third quarter were to those new pockets of demand like coal by wire or backfilling in the east?

The answer is yes. We did commit coal, about 20 million tons during the quarter to PRB, most of it in the upper teens to give kind of a sense for where it was, where the market was at the time which is much higher than what you saw in the traded market if you will or the OTC market. And a lot of those opportunities were to buyers that were buying more PRB coal than they traditionally bought which they were using to transmit by wire or because of backfill opportunities or test burns.

But at the same time, I would say that when you go back to the 35 million tons in the previous quarter, we didn't commit all of that coal. What we did is we committed as I said, approximately 20 million tons. The rest relates to what Greg mentioned earlier is we trimmed our production forecasts for 2009 by 5 to 10 million tons in the PRB to match demand.

Mark Caruso, Millennium Partners.

Just on the performance trading and marketing is very good. The way you account for that, that's all cash in the quarter?

No, we account for it on a marked to market basis of course as we are required to for trading. The cash aspect is going to vary but typically when we look at the cash element of our trading portfolio, it is a pretty short dated book. So it's going to -- 80% of it is going to come to cash in probably a 24 month period. And so if you look at it for that quarter, maybe one-third of that 52 maybe is cash because some of these positions are put on and they're '09 positions, delivery -- and '10 delivery. But in total that's how you have to look at the entirety of the (multiple speakers)

Do you have the exact marked to market in the quarter, how much it was?

(multiple speakers) market that we were able to record was $52 million. That is the marked to market position (multiple speakers)

Okay, so that's non-cash (multiple speakers)

Well it's not non-cash. Some of it -- we marked $52 million but we had positions that were previously marked in earlier quarters that turned into cash (multiple speakers)

That you realized in the quarter (multiple speakers)

That we realized (multiple speakers) so our total marked position is probably that we have to still collect is closer to a $300 million number in total. (multiple speakers) you can see that when you look at the balance sheet.

And also just as far as you mentioned capital constraints in the market. On the trading side, have you found more opportunities or less opportunities given that other players that are less capitalized probably can't participate?

Well from a trading standpoint, it's always better to have more participants in a market because it creates liquidity. As I said earlier, we've been in this business for 10 years from trading coal and players come in and players leave and we are are the one constant that stays obviously because it helps us around our production profile. It also helps us optimize our contract backlog as well as gain market intelligence.

We have seen a few players obviously exit which as they've exited, they have been heavy selling positions which is what's caused the significant volatility and the dip in the traded markets which is not reflective of the physical markets. But that will turn and over time and most of the positions that we're and we do a lot of brokerage business, it's back-to-back. So we will still be trading in this market.

Michael Goldenberg, Luminous Capital Management (Operator Instructions)

Brian Finkelstein, Catapult Capital Management LLC.

Good quarter. I just had a question. Australia performed exceptionally well this quarter compared to Q2 and is $7 million, is that a more reasonable runrate if you guys have all vessels lined up or would it be in between the 5.5 and $7 million going forward?

Yes, our forecast for volumes for the year was that 22 to $24 million for the year. That would be kind of our normal quarterly runrate.

Closer to a 6 (multiple speakers) what we thought for this year is probably about a 6 million ton average to get to the top end of the guidance that we'd given for the year around (multiple speakers) a quarter. But as we go into next year, we will be looking at a number that is -- but that is an average as you understand because some of these mines are being brought up to fuller capacity in the back half of the year.

Got it. And then just one follow-up. I know on some of the -- I guess you guys have talked recently about a possible Illinois expansion. If you could just comment if you have gotten I guess any further on that project?

I think what we've said all along is new developments in the Illinois basin would be predicated on entering into long-term sales contracts to baseload those operations. We continue to do permitting and engineering on new operations in the Illinois basin. When we're at a point to actually make any kind of a formalized announcement, we will do that. But suffice it to say for right now we're in the engineering and the permitting phase.

I know in other regions it takes -- or some people have talked about five to seven years for Northern (inaudible). Can you bring up mines in Illinois in a couple year timeframe or is it still a longer timeframe?

No, it's a couple of year timeframe. It's not the length of time that it would take for those deep mines in Appalachia.

Sanil Daptardar, Sentinel Asset Management.

I think you talked about trimming some production in the western region in 2009. Did I hear it correctly? Is there any reasons for that or is it because of the market demand?

What we talked about was reducing our growth expectations in the western region for 2009 and that is just basically a reflection of certainly where our stockpiles are today, where we see where demand is and we had an unsold position because of where the market was. So we've trimmed that unsold position and our growth expectations for 2009.

As we look at the (inaudible) pricing right now that's available, we're not going to produce coal for those prices.

And in the case of Australia, you're still (inaudible) on the position that you have basically of growing the production there in 2009 to 24, 25 million tons?

That's correct.

A question on the cost side. I just wanted to know how much is oil in terms of your cost in percentage of your cost?

We use 130 million gallons across the platform. So whatever price forecast you're going to use for oil, just apply it against that. Right now because of our hedging position at $10 change in the oil price --

About $3.5 million on an unhedged basis, so and then two-thirds of that number -- a little less than two-thirds of that number is hedged.

In this is all reflected in cost of goods sold, right?

(multiple speakers) correct so in excess of $400 million across -- on an annual basis would be spent probably this year or roughly that number $400 million would be spent on fuel when you look at the total cost of sales.

Okay, thanks. You had mentioned earlier on the call and the presentation, you painted a quite bullish picture about 300 gigawatts of coal-fired plants coming under construction and so forth and that could add about 1 billion tons of coal. What is the timeframe that you're looking at? It's about five years down the road or just going to give (multiple speakers)

That's three to four years view of demand.

In terms of the metallurgical coal, that 25 million additional tons?

Well that just represented a 3% growth rate off of today's steel production levels would be. We didn't really reflect in there, steel had been growing obviously quite rapidly and much higher than a 3% rate. But if you were to just look at numbers in terms of 3% growth rates, that's about 25 million tons. But we did not put a forecast in terms of that growth out at this point.

China would be the most consuming nature of the metallurgical coal that is on the seaborne market?

It would be China, it would be India, still parts of Europe still have metallurgical coal growth and a number of other countries. But it would be India and China would be the -- and Brazil would be the top countries.

Primarily China produces its own metallurgical coal. So any cutback in steel production in China generally doesn't have a direct -- necessarily a direct impact to the metallurgical seaborne market as much as you would think because you've still got the other countries that are producing the coal -- India, Brazil, and others.

Adam Comora, EnTrust Capital Inc.

I just wanted to follow up on the metallurgical coal market. Everybody had been talking about good pricing being realized earlier in the third quarter. I'm just curious what is the current state of negotiations? When do you think you guys will start contracting out the rest of your production? And any thoughts or any kind of color you could give us on where you think contracts may settle out for next year's coal year on the high-quality benchmark metallurgical coal?

Well I think all we can really say at this point in time is it would be normal for those negotiations in earnest to be right after the first of the year, in the first quarter of next year remembering that the target date is April 1 to conclude those negotiations. All I can say at this point is our view is the higher quality metallurgical coals are still in short supply around the globe, irrespective of where ultimately steel demand for next year comes out to be.

Remember that even with an easing of steel prices, the steel manufacturers still have substantial margins in steel. And so we will just have to watch it closely over the course of the next couple of months leading up to the negotiations in the first quarter. But certainly for the higher quality metallurgical coal products, they are still in very tight supply on a global basis.

Mr. Boyce, I'll turn it back to you for any closing comments.

Thank you all very much for participating this morning. As you now see, it was an extraordinary quarter for the Company in what are extraordinary times. Our forward view in terms of where these markets are going is not one that is walking off the cliff. It's one of easing growth rates but of positive movement going forward.

So we look forward to reporting back on our final year in January and updating everyone in terms of our '09 forecast at that point in time. Thank you very much.

Ladies and gentlemen, this conference is available for replay. It starts today at 12:30 PM Central time and it will go for one month until November 16 at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 960398. (Operator Instructions) That does conclude your conference for today. Thank you for your participation. You may now disconnect.