Peabody Energy Corp (BTU) 2008 Q4 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. There will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) That being said, I'll turn the conference to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead, sir.

Good morning everyone and thank you for taking part in the conference call for BTU. Today Chairman and CEO Greg Boyce will provide an overview of Peabody strengths and our position as we begin the new year. Our Executive Vice President and Chief Financial Officer Mike Crews will review our record year. And President and Chief Commercial Officer, Rick Navarre will discuss the market fundamentals.

Our forward looking statement 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 our filed documents. We refer you to www.peabodyenergy.com, as always, for additional information. I'll now turn the call over to Greg.

Thanks, Vic and good morning, everyone. I'll review our outlook and priorities in a moment. First, however, I'd like to reflect on our record accomplishments in 2008. We followed up our three safest years in history with a 30% reduction in our global accident rate, Another new record.

We set new marks on all key measures, record sales volumes, revenues, EBITDA, operating profit and earnings and cashflows, and we received multiple honors, including Fortune's Most Admired Company in the mining sector as well as Platts Global Energy Award of Excellence and Strategy Energy Investment of the year awards. Mike will review our 2008 performance in more detail.

For now, allow me to thank Peabody's 7,000 employees who turned in a stellar performance during our 125th anniversary year. The breadth of these accomplishments are a direct result of our strategic actions in recent years. To highlight a few, we made the strategic decision to expand globally led by the Excel Coal Acquisition, Australian mine developments and the growth of our international trading operations. We attacked costs both through process improvement activities as well as structurally with new low cost mines such as Wilpinjong and El Segundo. We improve reliability and reduced operating risk in many ways, led by major capital projects in the Powder River Basin and the spin-off of Eastern US Coal assets.

And we began to develop the future of clean coal and BTU conversion through long term investments all over the world. Peabody is vastly different than five years ago. to cite just one example, 1% of our earnings at that time came from international operation, today that share is more than half. These actions have transformed Peabody into a world class energy company. They build upon the strength and continue to differentiate Peabody. Our leading production position, high business standards, excellent workforce and outstanding asset base. The value of these trends should be especially attractive to shareholders, during challenging economic times. For instance, our leading scale allows us to weather difficult storms. Our global diversity reduces exposure to any single market. Our reserve base offers a wealth of physical assets for Investors and our financial strength lets us capitalize on good buying opportunities as others may struggle with maintenance or working capital.

The global economic crisis has put everyone in uncharted waters, but as you know, we operate with a philosophy of succeeding in all market conditions and thriving during strong markets. As Rick will discuss the current economic conditions create market challenges that clearly could suppress demand throughout the year. While there is some lag effect, this is also resulting in an accelerating pull back in oil investment, natural gas drilling rigs and coal supplies. And that could set up a very sharp rebound when economic recovery takes hold.

As we work through the short term market issues in 2009, we should remember that because of our decision to lock in business at strong levels, Peabody will see higher realized prices in US markets. By historic standards, we expect strong international benchmark pricing, albeit clearly lower than 2008 levels. With softer economies however, we are pulling back production. 2008 output is targeted in the 195 to 200 million ton range in the US and 22 to 24 million tons in Australia. So when you count trading and brokerage transactions, total sales are targeted at 230 to 250 million tons. Because global pricing won't likely be settled for some time and given the uncertainty around eventual pricing and demand levels, we believe it is prudent to wait to release annual earnings targets.

So as we start the year, I would characterize Peabody's near term priorities in three areas. First, we will continue to target cost containment, capital discipline and increased contributions from higher margin mines. Second we'll continue to evaluate accretive acquisitions, pursue operating trading infrastructure and joint venture opportunities such as our investment in a Mongolian joint venture company which we announced this morning. And third we'll continue to advance our clean coal and BTU conversion activities, many of which occur with global partners. Now, for a detailed look at our 2008 results, I'll turn the call over to Mike Crews.

As Greg mentioned for 2008, we set new marks for every financial metric. In addition, we generated $1.4 billion in operating cashflows from continuing operations. This allowed us to fund CapEx, repay $130 million of debt. Repurchase $200 million of stock, and grow our cash balance. Let me first review 2008's results, beginning with the income statement highlights. Full year revenues grew 45% to $6.6 billion on a combination of higher volumes and increased prices across the global platform.

Australia revenues doubled prior year levels and volumes rose 14%. The US operations also turned in solid results with a 21% revenue increase. EBITDA was at the top end of our expectations reaching a record $1.85 billion . Performance was led by our Australian operations which featured more than half of the total EBITDA along with strong results from our US operations. You may recall last quarter, we discussed the potential of delayed shipments, fourth quarter customer deferrals were approximately one million tons representing $150 million of EBITDA.

Trading and brokerage also turned in outstanding results, contributing $219 million of EBITDA for the year. With a footprint in all the key coal markets we successfully seized opportunities in both the strong markets in the first half of the year, as well as the softer fundamentals toward year end. Operating profit of $1.4 billion more than doubled 2007's levels and led to a significant improvement in pretax income. Our effective tax rate was 16%, lower than our expected 20% to 25% range largely due to the effect of favorable exchange rate movements in the fourth quarter. This improvement in taxes was more than offset by shipment deferrals. You'll also recall the currency cut against us in the first half with respect to income taxes. Finally, income from continuing operations increased more than a $0.5 billion to a record $985 million with earnings per share of $3.63.

Now let me take you through the supplemental schedule beginning with the US , where we sold a record 200 million tons. Please note we now refer to our operations in the Illinois Basin as our Midwestern US Operations. US revenues per ton improved 15% as new contract prices layered in over the year exceeded roll-off levels in all operating regions. This was our third consecutive quarter of declining costs in the West and stable costs in the Midwestern US. On a full-year basis, over half of the US cost increase was due to a combination of higher sales related taxes and the inflationary impact of commodity prices in fuel, explosives and maintenance supplies. Our overall US margin per ton improvement was led by our higher revenues and shift toward lower cost operations, such as the new El Segundo mine in the Southwest and North Antelope Rochelle in the Powder River Basin.

Turning to Australia, we clearly realized some of the earnings potential from out recent years of investment. Volumes increased 14% to nearly 24 million tons where as the overall industry exports from Australia grew only 4%. Peabody's Australian revenues per ton increased over both last quarter and last year due to the higher met and thermal prices per annual contract that began in the second quarter of 2008. On the cost side, we achieved the low $50 per ton level we targeted even with the dramatic fluctuations in commodities prices and increasing royalties. Of the $6 per ton rise in 2008 costs versus last year, $4 relates to increased royalties and more than $1 was due to higher than average fuel prices. All told our Australian margins reached $42 per ton which was more than five times higher than 2007's margins.

Now I'd like to take a moment to review our financial position. Our record results generated operating cashflows totaling $1.4 billion, including more than $1 billion generated in the second half of the year. On the investment side, we exercise tight capital discipline during 2008, as reflected in the full year capital expenditures well below targeted levels. Looking forward, the sustaining capital portion of our total CapEx is expected to remain in the $1 to $1.50 per produced ton range. Debt repayments totaled $130 million improving our leverage to 52% to 57% a year ago Finally, we repurchased $200 million of stock during 2008. Recognizing the long term value our stock represents. Cash on hand reached $450 million at year end. The combination of the strong cash position and available credit increased our liquidity to nearly $2 billion. And we have no significant debt maturities until 2011, which provides us with additional flexibility. In closing we are pleased with 2008's record performance. We look forward to updating you throughout the year on our 2009 progress. Now I'll turn the call over

Thanks, Mike, and good morning, everyone. This morning I'd like to discuss three topics in the market. First I want to walk you through the choppy markets we experienced in 2008. Then I'll discuss Peabody's view of how the near and long term markets may set up. And finally, I'll review why current market trends will benefit Peabody and play to our strengths as they recover. To put an extremely turbulent 2008 in perspective. In the first half we saw strong coal demand growth around the world. Including higher US exports.

Yet by year end demand had slumped from mild summer weather across the Northern Hemisphere and a drop in the global economies. Even the growing Asian economies experienced rare declines in generation and shipments slowed considerably as steel demand dropped and credit markets collapsed. So where are we today? We expect the soft coal markets to be with us throughout much of the year until industrial activity bounces back and the economic stimulus plans take root. We have higher customer stockpiles and much cheaper oil and natural gas to contend with. Having said that, we are seeing some positive indicators beginning to emerge.

Coal prices appear to have stabilized this past month. Stockpiles at China's largest port have declined and prices have increased consistent with recent hikes in Chinese steel output and steel prices. India continues to have very low stockpiles and the government has called for additional increases in 2009 coal imports. In the US , generation is on the rise and stockpiles are coming down, giving heating degree days running at currently 11% higher in the coal burning regions than last winter. In US steel production numbers have stabilized in the US with capacity, utilization now in the 40% to 50% range up from the 30s in December.

Peabody reacted very quickly to the downturn, as Mike mentioned, we trimmed our capital costs and cut PRB in Australian production targets. Furthermore we are seeing a significant industry response to the soft economy. Globally we have tracked more than 70 million tons of production cuts for 2009 which have been announced or implied along with major reductions in capital spending. These reductions may be be deeper than many realized, and let me explain that a bit further. First we expect that global steel production on an annualized basis will decline up to 20%. So based on seaborne metallurgical demand of about 200 million metric tons. this would imply that a 40 million tons of reduced metallurgical is required-- what have we seen so far? We've seen about 30 million tons of cuts to date announced among roughly 75% of the world's met coal supply base, excluding private companies that may never announce their reduction plans.

Moving to seaborne thermal demand, it is expected to be largely stable for the year, as high growth economies move to lower growth in the Pacific, yet they're still positive. And the Atlantic market will experience slight declines.

Focusing specifically on the US domestic market, we would expect lower demand from a combination of factors. Reduced generation, some instances of natural gas displacing coal largely in the eastern markets, reduced exports, and reductions to bring customer stockpiles back in line with targeted levels. We expect these factors could reduce US demand by 60 to 70 million tons in 2009. In the United States we've already seen some 40 million tons of announced production cuts from about half of the US supply base. We would once again expect there are unannounced cuts from private and public producers. But with high cost coal and exports becoming increasingly under pressure. For instance, year to date we've already seen southern West Virginia production, in January, down 5%, while east Kentucky is down 12%. Moving beyond 2009 and to our longer term view. For Peabody it really hasn't changed. We remain optimistic for a number of reasons, first, overall electricity demand will return to growth patterns, led by the emerging economies. And second, geology permitting and regulatory hurdles will continue to challenge coal production, especially in the eastern US coal fields.

Significant investment deferrals are taking place across the entire energy space. And finally, many producers both now and in the future, will be be challenged to access new capital or even refinance existing debt. So it's our view that supply and demand will rebalance, coal demand will resume its growth, and steel mills will finish de-stocking and run at higher levels The ultimate recovery could drive a strong rebound due to the possible tight supply situation and driven by a higher capacity utilization and investment gridlock.

I've discussed the major industry drivers and within each of these drivers and trends, Peabody stands out among its US based coal peers. We're the only company with the global reach to benefit from the higher growth Pacific markets. We have greater operating reliabilities as a result of not being subject to major permitting, geologic and compliance issues in the east, and our results in 2008 reflected that. We have cash and liquidity to seize investment opportunities. We have a strongly contracted position for 2009 and 2010, and we have the potential to act quickly when the market rebounds. That's the summary of our view of the market conditions both near term and longer term. We thank you for your participation this morning, and would be happy now to take

(Operator Instructions) First we go to the line of Michael Dudas with Jeffries & Company.

Good morning, gentlemen. My first question is related to your expectations in the Illinois Basin -- remind us where you stand on new investment in the region and how much of an ability you have to take advantage of a relatively strong Illinois Basin market Versus som of the other regions in the US

Sure, Michael. As we've said before, we have a number of advanced projects in the Illinois Basin going through the permitting stage as well as several more behind that that are in the final engineering stages. As we've always said we plan on taking advantage of the Illinois Basin at that point in time and bring on new properties that we secure base load contracts for those operations which we are in the process of discussing several groups. So at the end of the day, you know, given our large reserve basin in the Illinois Basin, I think we would expect to see additional volume coming from the Illinois Basin over the course of the next several years.

My second question for follow up is relative to your coal trading and sales business. Can you explain how that has been helpful and relative to navigating the markets and can we see a similar level of contribution given that you've expanded the platform around the world? And are you going to plan to move a little more into the electricity trading or other areas around what you do in coal?

This is Rick, Mike. Let me start at the beginning and say, the trading business has been a strong asset for the company, and as we've discussed a number of times, it provides us the insight and visibility into the markets that helps us make decisions from a capital investment perspective, from an M&A perspective and overall market perspective in general. I think as I look forward, we would see that continuing to expand. So I don't see anything lessening in that regard as we continue to expand our international platform, it's been a great asset.

As we look at the year that we had this year, it was a record year in excess of $200 million earned, and not counting how much improvement it adds to our overall backlog of cantractural. It will be a tougher year next year to replicate those absolute earnings. With the liquidity in the marketplace, that we've seen a decline in liquidity, post economic crisis, but at the same time, you know, we're still making money in this market as you notice in the fourth quarter, we were able to still post $30 plus million , I was to throw a number out there for now, I'd have to say it's -- the only visibility we have, is what we just saw in the last quarter, can we earn $15 to $20 to $30 million a quarter? Yes, but it will be lumpy at times, depending upon the volatility in the markets. But it certainly is something that we continue a strong asset of the business. And we traded as much as 165 million tons of coal this year. Our business has expanded quite a bit. And we're trading on four Continents now. As it relates to the trading to expanded products such as electricity, Mike, I think right now we've stuck to our knitting and we stay pretty tight with what we know best. And that's coal and transportation, so we can move

Terrific. My final question is, Mike, could you remind us of what the share repurchase authorization is today, and given what looks like some relatively tight capital expenditure outlooks in 2009, even given your overall view of the market, With current prices, are share repurchases continuing to be on the board and maybe if be moved up a little bit, relative to some of the other things in the market?

Sure, the program started originally, we had 5% of our outstanding shares authorized, this past year we've doubled the size of the program availability to $1 billion. We repurchased $200 million worth of shares this year, and, you know, what we said in the past is -- in terms of the cashflows that we have, we look at organic growth, we look at potential M&A activity, the reinvestment in the business, repayment of debt, and repurchase of shares, and given the current economic climate, we've also been very focused on generating cash and holding on to some of that cash. What I can tell you, we were in the market actively in the 3rd and fourth quarter, we believe there's a value there, it will continue to evaluate as we go through 2009 and see what our cashflow outlook looks like.

I guess I would just add, we had the program in place, particularly in a time when opportunities for growth of the enterprise were limited due to asset valuations. Clearly we're in a time frame now where opportunistic acquisitions, joint ventures, adding to the platform are becoming extremely attractive, based on areas and issues that other folks have gotten themselves into. So I think you can expect that we will continue to walk a bit slowly in that arena, until we can finalize and look at all of the other opportunities that are out in the marketplace.

I understand. Well said, thank you, Greg, Mike.

We'll go to Paul Forward with Stifel Nicolaus, please go ahead.

Yes, thanks. You haven't given guidance, I can understand no guidance for the 2009 full year just on the uncertainty in the markets, but first quarter '09. I just wanted to get a sense of when we look sequentially on your operating, on your coal operations by region in the fourth quarter of '08, what sort of sequential changes would you anticipate for the first quarter numbers in '09? Can we assume a reasonably comparable quarter, when you look at each region's operations in terms of volumes and margins? Or if there are any significant changes, could you alert us to those?

Well, Paul, this is Greg, let me do the best I can with that. Given the uncertainties that we're facing, tell what you we know today. And particularly focus on some of the issues that we're facing in these regions, if you look at the Midwest. I think at this point our view is, we don't see significant changes from the 3rd and fourth quarter of last year, to the 1st quarter of this year. If you look at the West, we announced that we were going to have lower production in the Powder River Basin this year versus last year. I would say that more of that will be weighted to the second, third, fourth quarter. What we're seeing right now in the PRB given the severe cold weather across the country is the utilities are still taking reasonable amounts of coal, you know, I think we're going to have to wait and see how the shoulder period in the spring affects the demand before we see the full impact of those cuts begin to kick in. And the last thing I would say is, in Australia, we happen to have one of those triple witching hours in the first quarter of this year where we're moving the long walls of North Goonyella, Wambo underground and Metropolitan, so that needs to be factored into the first quarter volumes.

All right. And also another question on the trading business. Looking at the sequential changes from the 3rd to the 4th quarters and assets and liabilities, you had assets down $48 million I believe, liabilities were down $245 million sequentially. Could you give us a little sense of what happened there?

That's just business that was realized and the positions rolled over.

Okay, and I guess maybe --

So essentially if you had an outstanding position, it was an asset or liability the positions were closed out and they turned to cash.

Okay, very good. And the -- what is is the risk that you'd say here in this ugly 2009 market that you can just run into un anticipated losses in the trading business? I know it's been fairly consistent, but what are you doing to protect yourselves against that? And what could we anticipate as investors? Mike and I will both tackle this question from a risk management standpoint. We've been very consistent and cautious in our trading methodology. And we have strong controls, and we keep a very tight risk, those are all theoretical at the end of the day. We have reduced credit limits for counter parties that we consider higher risk than they otherwise would have been before the economic crisis. Monitoring collections and performance across the board. And watching very closely.

Can we protect ourself from a non-performance situation? Not entirely, but I think we've done a lot to make sure we've minimized that risk quite a bit. While we feel good about it today, there's always one that could sneak up and get you. We think we have adequate reserves in our portfolio. we have been conservative and put reserves up to make sure we can with stand if somebody doesn't perform. That's really the risk today, I think it's also credit risk and we have reserves for credit risks as well. -- I think at the end of the day, we feel we've moved a lot of our business -- I'll make this one last point. Because of some of the exiting of some of the financial firms and trade shops, we've moved our business to monitoring exchanges such as the International Commodity Exchange, ICE, and London Commodity Exchange, those your money is carried through margin calls, et cetera, so you have a lot more chance of getting paid in those transactions. Okay, thank you.

Our next question is from the line of Jeremy Sussman Natixis Securities, please go ahead

I wanted to get into the cost side a little bit. I'm thinking about it from this standpoint. What type of potential for for cost declines, deflation, could we see next year given where diesel and raw material costs have come down to. How should we be thinking about that?

This is Mike. Let's talk about fuel first for a second. For 2008 on an average basis, we were at a $91.00 a barrel for crude, okay? In 2009 we're 75% hedged in the high $90s, now you'll recall at the end of the 3rd quarter, we were 63% hedged and that was over $100.00. And we've been watching the curve come down, and we're opportunistic in terms of layering on additional hedges at the lower end of the range, which resulted in the decline in that overall average for 2009. And then as well, we've talked about this in the past. We layer in these hedges over time. We were also opportunistic around 2010 and we increased our hedge position there as well to 50%. In terms of commodities in particular on a year over year basis, because of that hedge position that we have. We're targeting at target production levels, roughly a $30 million dollar improvement in cost related to commodities, year over year, across the platform.

Okay. Great, and then getting into --

Jeremy, I guess that would -- net net we'll see some improvement in '09 for the fall off in commodity prices, we won't see the full effect of it in the platform until 2010 if commodity prices stay down in the range they're at today. Given the way we layer in our hedges, and that's true whether it's diesel fuel, the natural gas hedges we put in place for our explosives, or in some cases, some of the currency exchange rate, foreign exchange hedges that we put in place.

So it's fair do say you'd be thinking about 2010 hedging at these levels to some extent?

Yeah, absolutely, we have -- as Mike indicated, we have a hedging program which hedges out for a 2 to 3 year period of time at different percentages.

Great. Getting into, you mentioned met coal shipments were down about a million tons because of deferrals, I guess the first question is, does this differ by quality in terms of what you shipped and what you didn't ship? And the second question is, I assume that you plan on shipping at some point this year that 1 million tons or are we talking about any cancellations there?

That's a good question, Jeremy, this is Rick. It does differ by quality, some of the lower qualities were ones that didn't move in the quarter, we were able to do some optimization and move some of the higher quality coals to our customers which allowed us to not miss the revenue by as much as we would have, just on the pure absolute numbers of the roughly 900 plus thousand tons that were deferred. That's point one, point two. We do in fact expect to ship those tons in 2009, at carryover pricing, and we've made it very clear to the customers that's what our expectation is, it won't happen in the first quarter, will be be spread out over the year. We won't have the shipping allocations to move that into the 1st quarter, so we will intend to ship that. Where there are some shipments we expect we may not be able to recover, it's a small amount. But in the total. We expect to get most of it back.

There are certain customers that don't have financial credibility. They don't have letters of credit and we're reluctant to ship to those customers in this market.

Sure. Makes sense. And lastly, just wanted to see if you could touch on the expansions in light of the environment, what's going on with the New Castle expansion and even some of the Queenlands, as well.

There's been a number of expansions going on in those markets to meet what's expected for the overall growth in export demand in Australia in the next 5 to 10 years, which we any in the long term is still needed and necessary, if you start in New Castle, you have NCIG Stage 1, which we are the second largest shareholder, that's moving on time, on schedule. That will bring on 30 plus tons of capacity, and it should come on around the 2010, 2011 time frame. And we'll have allocated capacities as a result of that. We're in the process of committing to NCIG Stage 2. Which would add another 30 million tons, that's moving forward with the consortium to get that started and get some of the capital moving to be able to make sure that comes in place.

So I think we're getting New South Wails in good shape with that, as well as the capacity expansions that are planned by PWCS. When you go north up into Queensland a couple things happening, we're seeing expansions at DVCT, going up to 85 million tons this year, we see that on track. It's delayed, but it should be on track at least for its new schedule of being in March -- to the second quarter of '09, being at about 85 million tons, we're not seeing any issues today. The other expansion is the Abbot Point expansion where they have to build the rail line, the northern missing link if you will, that's still up in the air based upon the viability of the rail extension, at least from our perspective. Others are still looking at that, we're waiting to see if we can get -- rail capacity that's at a reasonable price. Other than that, I think we're seeing good movement on that front.

Thank you very much. Great.

Our next question is from the line of Mark LINIMA with Morgan Stanley, please go ahead.

Hi, Rick, could I ask you to repeat what you said about global steel production estimates and how you came up to that number? I think I heard you say 20%down?

That's an annual number, Mark. Obviously we know in December you could look at the numbers and it was probably down in excess of 30%. Our estimates for the year is that global steal production will be down 20%, when you look at seaborn metallurgical demand, it is 210 million tons. That would imply you need at least a 40 million ton reduction in supply.

So it's more of an annualized current condition?

Exactly. We're looking quarter over quarter, you can't just shut it all down immediately, it's going to be -- what's the full year look like in 2009? Because you're seeing a significantly larger reduction right now, Mark, because of the destocking exercise going on. They're bringing down their stockpiles, bring down the stockpiles first, and then they'll ramp back up to a higher -- not a full capacity level, but a lower run rate, not at levels anticipate.

The you would agree that we're going through a bottoming process, and it could be better in the second?

As we think for sure.

And particularly when you factor in the Chinese incentive programs and spending programs are focused on infrastructure capacity. I mean, they're already starting to place orders for rail steel and bridge infrastructure steel we're starting to see some bridge in the China steel market where some of that money will flow through the second half of the year.

Sure. I think it's going to get better too, I was just surprised by the 20%. It seemed large to me. In that environment, when you're thinking about met coal contracts, that's one of the big question mark in the coal space right now, would you subscribe to the theory that thermal coal prices are going to put in a floor and then we would go up from there adjust it for yield and costs, what have you, or is it just going to be purely supply demand.

That's a tough call right now, Mark. I'd say it's a bit early to make that call. I think we haven't seen the full effects of the supply reductions and how that will balance on what happens in the market. I think if the supply reductions are significant enough and we don't see a 20% reduction, but we see the supply reaction being strong enough. It won't be just a yield issue, it will be a supply and demand issue, I think it's a bit early for us to make that call.

The only thing I would add to that. If you look at the sea born market. The hard coking coals, were in much closer and tighter demand than even the mid range to lower range coking coals, and virually all of the expansion that you saw over the last couple years was in the lower quality segments of the met coal ranges, particularly out of Australia. So rather than saying that we think that thermal coal is going to set the price for the whole range of coals, I think we are going to see hard coking coals being negotiated as a price. And then historically what happens in these times is we see a compression of the lower quality coals into the thermal market and more of that coal range being set by thermal. But we would expect a good quality hard coking coals to set their own price.

They would be at a much wider range than the absolute yield formula.

Great. And just quickly, are the international steel makers pressing for early settlement or do you think this is going to last a while?

We haven't seen any indications of anybody pressing for settlements pressing at this point in time. There has been relatively little discussion at all. We'll just have to -- it's a wait and see approach at this point?

Great. Thanks and good luck with that.

Thank you.

Next on the line is Shneur Gershuni of UBS, please go ahead.

Good morning, guys. I wanted to follow up on the market commentary . You noted there were 30 million tons, on an annualized basis, shuttered with respect to met coal. I was wondering if you could break it down by region and how many of those tons do you think will be be permanently lost just due to the fact that those lines may not be able to come back on once they're

Let me try to give it to you by region. I'm not sure I'm in a position today to give you how much of that's permanently -- we'll have to do a little more work on that, and look at the qualities of each product. And I'm sure we have an estimate there. Just roughly on the 30 million tons, in Australia we've seen almost 18 million tons of production cuts to date. On a small portion of the population there. In Canada we've seen as much as 6 million tons, Russia we've seen 4 to 5 million tons and the US we've seen almost 6 million tons, that gives you a sense of where we're seeing that. From what we're seeing, we've just begun to touch the surface on some of these folks, and if Mark's right, and we only see a 15% reduction, or a lower than 20% reduction in steel demand we'll be great.

Okay. And I was wondering if we can chat about the PRB. Are you getting any requests for test burns from any new utilities or existing customers to try to take utilization up a little bit? Or has it fallen off with the way prices collapsed in the east? And also, how many more tons do you think that other producers need to cut off.

Well, the PRB side, we've seen some of the first shipments, which I think is encouraging from our-- (inaudible)-- we sent shipments to Japan and China, that's out of the PRB, so I think that was a first. That was good. As it looked, as to the US , right now, what I would tell you is that the customers are taking the PRB coal rapidly, it's very cold and they're not looking for new test burns, they are looking for coal to keep everything running, even though they have high stockpiles. We really haven't had any discussions in the last couple months around new test burns at this

And just how many tons do you think need to come out of the PRB to bring inventories to more normalized levels?

I think you have to look at the stockpiles to make your estimate on the stockpiles, if you think they're in the high 60s, what do you think the normalized stockpile level is. Is that 10 to 15 million tons-- 20 million tons, that's probably where I would put my guess as opposed to what it does to supplies, stockpiles are a bit high.

One final question. Just with respect to the tax rate, it was clearly much lower than you had guided last quarter and so forth, and kind of helped you out in this quarter, I was wondering if you could reconcile where the difference came and so forth.

Sure, this is Mike. We've had this phenomenon throughout the year, which is the rate has been moving largely around the re-measurement of our tax liabilities that we are required to do and that are based on Australian dollars. And that was a $33 million dollar detriment in the first half of the year. We clawed back $36 million in the fourth quarter. If you look at the full year tax rate, that was roughly 3%. We came in at a 16% rate, we had guided to 20 to 25%. That was the bulk of the difference.

Perfect. Thank you very much.

I think everyone should remember that that's part of the platform now, with the exchange rate in Australia. When we do put together our tax guidance, it is with an estimate of what the exchange rate will be for a quarter or for the year. And any time that moves in either direction, we're going to have as Mike said the first half of last year, we had the impact of the higher taxes, and then in the fourth quarter because of the exchange rate movement, we had the favorable impact. Overall I think we try to average that, if you look over the course of the average for the year, try to come as close to that range as we can. It's a natural part of the embedded part of our business going-forward.

The next question is from the line of John Bridges from JPMorgan. Please go ahead.

Hi, I'm wondering if you could give us a little bit of background on this Polo deal you announced this morning If there's anything to report on the Syngas, that as well.

Sure, let's start with Polo first, and the joint venture that we're looking at forming there. As everybody knows, we've been active in the China Mongolian region now for several years, we've been pursuing a number of opportunities in Mongolia. To get an entree into what -- there's no question when you look at the south Gobi, the coal deposits there are world class, and sit in close proximity to the best market in the world. Getting a foothold in there is something we've been attempting to do.

Our joint venture with Polo would anticipate them providing all of the coal licenses that they have, exploration licenses, as well as a couple of properties, one of them is in production now with the domestic consumption in Mongolia we have the ability to earn up to a 50% interest in the Mongolian joint venture. We're really excited about it, they've got a good workforce on the ground. They have a great ability to put together a very good portfolio of perspective properties, particularly in that south Gobi region where we're talking billions of tons of prospective reserves of both high quality met coal and thermal coal.

In case of the Kentucky Syngas, that's obviously a project we've continued to work with with Conoco Phillips. We're in a stage where we're doing some engineering to look at the capital costs of that facility, and then in addition, there's a test well being drilled to look at the aspects of CO2 disposal in the western Kentucky region. We are doing that with the state of Kentucky. That's really the current status of it, obviously, in today's natural gas environment, we're trying to be very cautious in terms of how we advance that project, but keep it in the cue if you will, for future development.

What infrastructure do you need out there in Mongolia? Is this a distant project?

Our hope is that we will begin to see small amounts of production over the course of the near term, and that would be during the course of this year and next and beyond. Currently given the status of rail infrastructure and electricity and the like, we're not talking about PRP quality operations initially. These will be more in the million to 2 to 3 million ton range and most of that coal will be trucked into China. Some of it goes on to the railroad. That's the Trans Siberian rail lines that go, in fairly close proximity to these properties. Ultimately the longer term is to have, the equivalent of PRB operations in the south Gobi serving the China market and the export market in the Pacific rim.

Any thoughts on China reserves, they don't report very big reserves, so is that a real reserve number or is there alot more to be discovered? Are they going to be very dependent on Mongolian coal?

Well, I think the China numbers, they typically will report resources because there hasn't been enough definition drilling to classify it in the SEC or reserve categories, our view has always been that China has reserves that they are continuing to discover. But what they don't have is huge qualities of high quality mettalurgical coal which the south Gobi region of Mongolia have. And a lot of China reserves they haven't found are in the extreme western part of China. Mongolia is closer to the demand load for both met and thermal load in China. We think there's synergi between the south Gobi region and demand in China.

Just a final tax one, thanks for the explanation of the tax rate in '08. Are there any takeaways that we can carry forward into what we can expect for 2009?

Well, the outlook for the tax rates, it's a little murky at this point given the fact that we haven't provided earnings guidance, I mean, as a ballpark rate. I'd say for 2009 you can start with the 20% rate.

Many many thanks.

And next we go to Pierce Hammond with Simmons & Company, please go ahead.

Good morning. Rick, I just wanted to clarify, did you state earlier that you thought US coal demand would be down 60 to 70 million tons this year?

I did, Pierce. And breaking that down, it was basically four factors, I think that we were going to see an overall stockpile reduction which we talked about that we think is required. At current stockpile levels, and maybe that won't happen. So that number could be as high as 15 to 20 million tons, we think there's obviously, with GDP and the economy down, the industrial load is down, you're going to see a decline in overall demand for electricity. I'm going to give you some ball parks on these numbers, because we've refined them a little tighter. I'll call it 15 to 20 million tons and exports. Obviously you know last year exports was a very big number in the US because of the weak dollar and the high prices for the international coals compared to the coals out of the central Appalachia, and exports rose in excess of 20 million tons, we think that's unlikely to happen this year. We'll lose a lot of that out of Appalachia, so you may scale back another 15 to 20 million tons off the export number, and the wild card in all of this is gas prices, in the past, gas has been talked about alot as displacing coal, but rarely has it done that. Except in some small situations on the margin in the east. And but this year with what we're seeing is with gas prices where they are, and the economy where it is,you may see a number that could be 10 to 15 million tons of gas, we just don't know right now. When you get in the shoulder seasons, you won't see it as much in the peak seasons, because both gas and coal will run. When you put all those together, it gets you in that range of 60 to 70 million tons.

Thank you, that was great color. One other question, I know this is hard to answer, I'd like to get your perspective since you have operations in China. Do you think the Chinese economy has stabilized and maybe is on the way back up? Or do you expect things maybe to get a little worse there as the year progresses?

Well, I think we kind of view the Chinese economy in two sections, one is the trade dependent sector in the economy, the other is their internal demand. Their domestic demand and ability to spend on infrastructure. I think indications that we're seeing out of China is they're still trying to get their arms around the fully trade reduced impacts to the southern economy in China. They're still very positive about their ability to stimulate their internal demand and infrastructure. I think the number I heard the other day was they expect they're spending program will add about 1% to their underlying GDP over this year and next year. So overall, we're looking at China coming in in the range of 6% to 8%. Probably be difficult to get above the 8%, we think they have the ability to continue to stimulate their economy to make sure that they stay above 6%, so that will be the kind of range we would look at for planning purposes this year, obviously getting better next year as they continue to pump more money into the economy.

Great and congratulations on a good quarter.

And ladies and gentlemen, I'll give everyone an opportunity to ask a question. If you would please limit yourself to one question and one follow-up. Next we'll go to James Rollyson of Raymond James & Associates

Thanks, everyone, a couple follow-ups, one on the cost side on Jeremy's question. We were talking about the raw materials impact and how some of that is muted until your hedges roll forward. Can you talk about how you feel about that on the other side, which is your higher priced contracts you signed over the last year or so, that will help you a little bit, so you have the royalty impact. And maybe how reduction in your production at least in the West, how those two factors might also impact your cost on a unit basis, how you guys think about that?

Sure. This is Mike. We spent a few minutes on commodities, and I explained that the impact in '09 is rather limited. One other significant component is FX on the Australia platform, and due to the hedging position that we have there, you're going to see a cost reduction more in the neighborhood of $2.00 a ton. You problaby would have expected something larger than that. That's what we're looking at for the FX. Flipping back to the US , you make a great point and it's one that we're focused on, it depends on where we're going to come out with volume. And we'll be sub- optimized in certain of these locations. In the event we produce at the targeted levels we have, the US costs are likely to be up 5% to 10%, and that does also include a component for higher royalties and taxes due to higher averaged

That's kind of the fully loaded picture if everything goes the way you're looking at it right now?

Correct.

And let me emphasize on the taxes and royalties, I think the comment was made in Greg's remarks, we will have a higher cost component in the west because of the higher taxes and royalties. We pay that almost 30% plus percent on PRB revenues, that's the bad side of the equation, the goods ide of the equation is the fact that we will have higher revenues than last year, we are essentially sold out for 2009 and if you look at 2010, we're 75% to 80% sold out as well. Soy think we have a really good job of locking in the book, taking advantage of where the market was, seeing -- using our trading goggles if you will, to get the vision of what's happening and how quickly we move to lock in the longer term position to lock in good prices, we feel great about where we are from that standpoint and it will add a little bit to cost. It will be offset.

The high class problem.

The high class problem, very well said.

Back to Australia for a second. I only gave you one component which would be the favorable impact of currency, we will have some sub optimized locations on volume as well, which will put pressure on costs, and then the -- we will also see a little bit of favorable impact as well. The real lever here is what we talked about in '08 versus '07 which are the higher royalties. The new royalty scheme that was put in place in Queensland that had an annualized $40 million dollar impact. $20 million in the second half of 2008 And we'll also see -- experience higher royalties in New South Wales as well. We would anticipate our cost would be up in Australia year over year.

Rick, you and Greg have talked in the past about the premiums you used to see in the market relative to say where NYNEX prices were trading, and the contracts you signed over the last 12 months or so, probably longer than that. in the PRB for sure, have been at levels higher than the market. I remember last quarter everybody talked about NYNEX was falling rapidly. Contracts were getting done at wide premiums to the market. What do you think about that today? I mean, it doesn't sound like a lot of business has been done in the last 30 or 60 days, you think the contract market is at or above or below where NYNEX is today?

What little business that has been done on our side, it's the -- relationship is still the same. I mean, reliable production quality producer, good credit, all the things that go well. It gets you better than an OTC price. And certainly we're seeing that, and we expect to continue to see that frankly. On the NYNEX side, you said it dropped quickly, we're not selling a lot of NYNEX product other than our trading shop. I would tell you the physical market is going to be a bit stronger there as well than the actual traded market.

Perfect, thanks, guys.

Next to the line of Luther Lu with FBR Capital Markets, please go ahead.

Good morning.

You guys had a fantastic quarter. I wanted to focus a little bit on the balance sheet. One item that jumped at me is the other long term liabilities that went from $1.52 billion at the end Q3 to $1.92 billion to Q4. Is that the pension liability and can you speak a little bit about that?

Yes, Luther, this is Mike. The the largest component of that is the adjustment that we make for pension. The accounting reference is FAS-158, you have to true up your net liability and with the decline in asset values, there's a $200 million impact on that line. And also this is fairly consistent of the impacts around other current assets, other assets and short and long term liabilities are the changes in the Mark to market of our portfolio for hedging and foreign exchange. So there's another in the long term category, there's another $70 million increase in liability on the FX portfolio, and roughly the same amount for fuel.

Okay. Could you just drill down on the pension stuff a little deeper. How can you tell how much of your pension is funded?

Well, at the end of last year, we were 89% funded. We're still working through what our asset values are. Like other companies, we've seen a significant decline early in the fourth quarter, although we've seen it rebound off the late November number. But relatively speaking we have had an increase in the net liability. Now what that speaks to is what the funding is going to be for next year, what the changes in law -- we've been actively monitoring that. We will be able to fund that out of operating cash. Our funding requirements will be less than $100 million.

Given the weak market, particularly weak coal market has your spin-off company come in contact with you guys perhaps renegotiating some of the contracts --

We've got -- no, when you -- as Rick mentioned earlier, you know, we've had discussions with all of our customers, indicating that we -- they have all of the carry over tons that they have. We expect those deliveries to take place at the old contract pricing. We have not had people putting requests in for renegotiated contracts. Our expectations are, and what we have clearly communicate before, anybody picked up the phone was that we expected the deferrals wHen they made the deferrals, would come through this year at contract pricing.

Our next question is from the line of Lawrence Jones Barclays Capital Please go ahead.

Good morning. Obviously, fourth quarter free cashflow was very strong, it looks like you generated a considerable amount of cash for working capital. I notice that accounts payable and accruals -- I was hoping for some color there.

Yeah, this is Mike. There's a component within there that relates to our tax position, we have increasing tax accruals for our significant profitability in Australia, a lot of that will get paid out next year, and then again with respect to that category like the other liabilities there's been an impact in the short term portion of our hedge liabilities, so that's gone up approximately $200 million.

I would say the other aspect of that is, Rick indicated earlier, we spent a lot of time with all of our customers, both in terms of our credit issues, as well as, we made sure and we make sure that we are getting our collections on a timely basis. We happen to have a very good fourth quarter in terms of collections and the accounts receivable side.

Okay, that's great. And then my second and final question is around cash taxes. Can you provide us with cash taxes just roughly for 2008 and kind of how we should think about that in '09? 50% of pretax income or book taxes?

Well, I can give it to you on a dollar basis, it was $66 million dollars in 2008 and we're targeting $140 million to $175 million in 2009.

That's perfect, thank you.

And ladies and gentlemen, we have time for one last question, that will be from the line of Gordon de Walt with Hallium.

Most of my questions have been is addressed. But John had asked a question about Polo. Could you talk more specific. What kind of capital expenditures you would be expecting from that acquisition in 2009 and beyond. And any breakout detail on CapEx for 2009 would be helpful?

Well, the way that we've designed the program is the investments that we would maybe in 2009 would go into the joint venture, and it would be that investment that would be used to fund the development of projects through 2009 and into 2010. So essentially, assuming we go forward at the full amount, that would be the capital expenditure for the year.

That would be for '09 and 2010?

'09 and part of 2010. If we have a good success rate in terms of drilling and developing reserves over there, then we may see more in 2010. But that $73 million total would be envisioned to take care of all of '09 and into '10.

Any color on overall capital expenditures for 2009?

At this point other than the sustaining component which Mike referred to being in that $1.00 to $1.50 range, we'll wait until we pull together our full year guidance to complete the rest of the capital picture.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation.