Peabody Energy Corp (BTU) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy year end earnings call. Before the conference participants 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'll turn the conference over to the Senior Vice President, Investor Relations, Corporate Communication, Mr. Vic Svec. Please go ahead.

Good morning, everyone. Thanks very much for taking part in the conference call for BTU this morning. And with us today are Chairman and CEO Greg Boyce, Executive Vice President and CFO, Mike Crews, as well as President and Chief Commercial Officer Rick Navarre. Our forward-looking statements should be considered along with the risk factors that we note at the end of the release as well as the MD&A section of our filed documents, and we refer you to www.PeabodyEnergy.com for additional information. With that I'll turn the call over to Greg.

Thanks, Vic, and good morning, everyone. In 2009 Peabody turned in superior results in the face of the great recession. We reported our second best earnings in our 126 year history, second only to 2008. We expanded our US margins thanks to our contracting strategies and cost containment actions, shipped record thermal and met coal to China, unveiled a five-year plan to double our Australian exports, built out our Asian business development and trading activities, and raised our liquidity to record levels.

As operators, marketers, developers and portfolio managers, we have long designed Peabody to make money in all market conditions. And great money in good markets. Having weathered the worst of the global recession, we're looking at improving market fundamentals and are poised to deliver on the many growth opportunities we see.

Now turning to the improved market conditions, benchmark thermal coal prices have risen to reflect higher electricity demand, which is set to return to solid grades around the world and metallurgical coal prices this year are likely to set the second high benchmark. Global steel production is forecast to climb 9% in 2010. It's clear that China, India, and emerging Asia remain at a full throttle base that continues to dwarf the US and Atlantic. Industrial production soared at rates of 10 to 30% late in 2009, in places such as China, India, Korea and Taiwan. Last year, the Pacific seaborne markets were driven by one trend, China imports. This year, we see China maintaining or increasing the strong level of imports with the only limiting factor being the growth in imports by other Asian nations that are quickly recovering. As such, we appear on track for another year of 8% growth in Pacific seaborne coal demand.

China, of course, is the major force reshaping global resource markets. I'll address the simple question we've heard for years, is the import trend in China sustainable? In a word, yes. We're in a new paradigm, and I'm convinced that China will remain a significant importer based on domestic need, strategic intent, and aggressive actions to acquire resources outside of its boarders. In fact, we've seen China make more than $8 billion in coal investments outside of the country in just the last six months. That's driven by a number of factors, chief among which is a long-term recognition that this growing superpower is in need of basic resources.

India's growth follows closely behind China with Indian coal imports likely to rise at the fastest rate of any nation. In 2010 some 60 to 70-million tons of production or imports will be needed to replenish low inventories in China and India, not to mention the hundreds of millions of tons needed to satisfy added power plants and steel mills. The robust Pacific markets are having a flow on effect in the Atlantic by siphoning off volumes from South Africa and Russia that might otherwise go west. It is now clear that the pricing mechanism for Atlantic coal is not solely natural gas, as was traditional, but the increasing demand pull from the Pacific market.

Even the US coal markets are showing early signs of recovery, with electricity demand rebounding from a long cold snap and stabilizing GDP. The supply demand fundamentals over the past six weeks have been better than anyone expected, resulting in record coal inventory draws and elimination of the natural gas inventory overhead. Rick will discuss the markets in our commercial strategies in more detail in a few minutes. Now as we look at 2010 and beyond, Peabody has one priority focus area, and that's increasing shareholder value by serving the fastest growing markets. That means Asia internationally, and the PRB in Illinois Basin-served markets domestically. Peabody's assets and actions are rightly centered on these regions.

Not every Company earns the right to grow of course. For that you need a skilled management team, a world class asset base, safe low cost operations, expanding margins, the right contract strategies and a strong balance sheet. Peabody has all of these. Next, we need to deliver that growth. That's why we're expanding our Australian operations to take our export capacity up to as much as 15 million tons of metallurgical coal, and 17 million tons of thermal exports by 2014. We're advancing our access to transportation infrastructure in Australia, including new contracts with rail providers and construction of the NCIG terminal in Newcastle. We're expanding our activities in Mongolia with our joint venture, and we're starting our first full year with our new Asian coal trading comp in Singapore and business development office in Jakarta, and we're beginning operations later this year at Bear Run in Indiana, the largest new mine to be built in the eastern US in decades.

So to summarize, this year, we intend to lift our Australian met coal and thermal exports 20 to 30%, maintain production in the US and offset cost pressures by shifting greater volumes to higher margin mines. To continue to expand our business development and trading activities in Australia and Asia, and to invest our record cash position in organic growth projects, as we continue to pursue high value acquisitions and joint ventures. At Peabody, I believe we've assembled the best team, strategies and asset base in coal, and we're committed to capitalizing on them to satisfy the burgeoning growth in global coal demand and continue to create a significant shareholder value.

With that, I'll now turn the call over to Mike for a more detailed discussion of our financial performance.

Thank you, Greg, and good morning everyone. As testament to our 2009 performance, Peabody entered 2010 in a stronger financial position that it did a year ago, and at a time when economies are rebounding. 2009 was a year in which we increased US EBITDA to a record $1 billion, saw Australia's secondhand volumes rise 37%, tightly managed capital expenditures, operating costs and working capital to generate operating catch flow of more tan $1 billion, and we raised our dividend for the fifth time since our IPO.

I'll begin with a review of the income statement and operational highlights. 2009 revenues reached $6 billion, led by higher US prices. EBITDA from US mining operations rose 17%, leading consolidated EBITDA to $1.3 billion. The Australian operations delivered $438 million, and we had healthy EBITDA from trading and brokerage.

Let me take you through the EBITDA drivers in more detail beginning with the US, where margins grew 22% on higher prices and cost containment. Western revenues per ton rose 9% over prior year on improved PRB in Colorado pricing. Our unit cost in the west increased $0.89, of which one-third was sales related taxes and one-third was from a change in mix and lower PRB volume. Absent sales related taxes and mix, cost increased a modest 2% for the year, reflecting our cost containment efforts. All told, western margins expanded 12%.

In the midwest, revenues grew while costs were held in check with only a 1% increase for the year. Here again, our cost control has been effective. This drove margins 54% higher to $8.87 per ton.

Turning now to Australia. Met sales totaled 6.9 million tons with nearly 75% of the volume shipped over the back half of the year in line with our aggressive sales to China, and strengthening Pacific demand. That market strength led us to raise our met targets to 7.5 to 8.5 million tons for 2010. And on the seaborne thermal side, sales were 9.6 million tons. Here too, we expect to see a pickup at 2010, with higher sales targets of 12.5 to 13 million tons.

Australian revenues were $75 per ton. Our met prices averaged $135, above the April 2009 benchmarks, due to shipments of higher price carryover business, and our seaborne thermal prices averaged $72 per ton. With costs in Australia at $55, margins for 2009 were more than $19 per ton. Trading and brokerage results benefited from the expansion of our international trading platform and for business developed during 2008's robust market that was realized in 2009.

Shifting now to taxes, you'll recall our expense includes the effects associated with changes in the Australian dollar, which for 2009 added $74 million of noncash expense. Looking to 2010, we anticipate our effective rate will be approximately 25% asset remeasurement. Our earnings per share, excluding the remeasurement affects, was $1.92 per share. In 2009, we generated more than $1 billion of cash flow. 80% of which occurred in the second half. By year end, we had nearly $1 billion of cash on hand, and our liquidity reached a record $2.5 billion. Our capital spending was $317 million, and we had an additional $123 million of PRB reserve payments. These reserve payments are nearly complete with just $20 million left for 2010.

Our capital focus this year will be on advancing a number of planned growth projects. Our key investments include $100 million associated with additional investments in Australian expansions, approximately $185 million to complete the Bear Run mine in Indiana, and $60 million related to our share of the Prairie State Energy campus. CapEx for 2010 is expected to be $600 million to $650 million, including sustaining capital of $1 to [$1.50] per produced ton.

Turning now to our outlook. 2010 US volumes are expected to be 185 to 195 million tons. Planned PRB sales will be approximately 5 million tons lower than 2009. US revenue and costs are likely to be relatively stable, with the latest change in our 2010 earnings -- excuse me, with the largest change in our 2010 earnings to be from anticipated volume and price improvement in Australia. We raised our Australian sales targets to 26 to 28 million-tons with thermal export and met sales set to rise as much as 30% for 2009.

For the full year, we expect DDA will increase 15% as we raise our Australia output and begin production at Bear Run. First quarter EBITDA is expected to be approximately in line with the fourth quarter of 2009, given expected higher pricing for Australia that does not begin until April 1. Like last year, we anticipate providing 2010 EBITDA and earnings targets following the Australia settlements. And so with that overview of our 2009 financials, and our prospects for 2010, I'll now turn the call over to Rick.

Thanks, Mike, and good morning, everyone. I'll start this morning by reviewing market conditions in some detail, in line with our contracting and commercial strategies.

Looking to begin by offering one statement that summarizes our long-term market view. The demand for met and thermal coal from the industrialization of developing countries will continue to outpace the supply for the foreseeable future. This past quarter, we have seen very strong Asian markets become red hot, as favorable demand trends continue throughout the region. And in the US, we've experienced an acceleration of inventory drawdowns. As a result, the mood in the coal markets is extremely bullish in the Pacific. And brightening in the domestic market.

As Greg discussed, Peabody has positioned our assets to serve the fastest growing markets. Among other benefits, this position allows us to handle the tough times better and emerge more quickly when the markets rebound. Case in point, with recent prices of $95 to $100 per metric ton, the price of Newcastle thermal coal is up some 35 to 40%, just since the beginning of the fourth quarter. And Peabody has 6.5 to 7 million tons of Australian thermal coal available for pricing this year, and 9 to 10 million tons available in 2011. Met coal supplies are equally tight, and demand is growing with some customers pulling forward shipments when they can and paying premiums for prompt deliveries. For example, we have customers that have accelerated deliveries of carryover volumes of $300 per metric ton to receive those prompt deliveries, and we have just sold spot met coal into China above $200 per metric ton.

This obviously tells you how tight the supply situation is, and bodes well fort pending settlements for the coming year. Peabody has 4.5 to 5.5 million tons of met coal to be priced in 2010 and 9 to 10 million tons in 2011. What is driving the price improvement? The economic growth is returning to prerecession levels in the Asia-Pacific markets, led by China. China's power demand grew 21% in the fourth quarter alone. In China, coal imports more than tripled in 2009, reaching 125 million tons. And their net imports ended above 100 million tons with a record setting month of December. China supplies have been further tightened in early 2010 with intra county movements snarled by frozen and fogged in northern ports, which will require additional imports to fuel southern China, a trend that continues.

China is far from the only growth story. As we expected, India reached record coal imports of 80 million tons. India's thermal imports grew 70% in 2009, and its met coal use continue to increase despite the sharp first half fall off in demand. We expect that Australia will capture the majority of the Asian demand growth. While much is made of the tight infrastructure situation in Australia, the congestion is caused by record demand. This has been the story for most of the past decade.

Most businesses work very hard to have a line outside of their doors waiting to buy their product. Case in point, as the Vice Premier of China has recently said, a traffic jam is a sign of progress. So despite the sluggish start to 2009, the largest coal exporting nation, Australia, saw exports rise again to more than 275 million metric tons. Another record year. In fourth quarter, Australian exports were running at an annualized shipment pace of more than 300 million metric tons, showing continued growth to serve higher demand. And this is without the known capacity increases that are coming online in 2010 such as NCIG.

The cold snap that I referenced earlier in China was spread across the entire northern hemisphere, and has also boosted demand in Europe and the United States and with predictions of more extreme cold weather to come. The US markets finished 2009 with demand down 12%. From the declines in generation and steel making, as well as temporary coal to gas switching. The good news, in December, US stockpiles experienced the largest one-month decline in the past decade. And January is looking is just as strong. With generation up and production down, we believe that as much as 30 million tons of inventory has been erased in the last two months. Pulling forward the time line of the eventual supply demand balance in the United States.

In fact, coal production in 2009 declined 105 million tons and and we expect an additional decrease in production of an additional 20 to 25 million tons this year. That's due to high costs, permitting delays in the east, coupled with the expiration of higher priced contracts that subsidized high cost operations last year. On the other hand, demand should rebound some 60 to 80 million tons from improving economic conditions and higher gas prices. So if we have average weather going forward, we now believe stockpiles are on pace to return to normal by the end of the year. Nevertheless, the US recovery will not happen overnight.

Through this turbulent time, Peabody's contracting strategy has served us extremely well. We entered the year 100% committed in the United States, allowing us to be very patient as we look ahead to contracting for 2011, and opportunistic with significant unpriced volumes and market leverage for 2012 and beyond. So with a quick review of a very good global markets and improving outlook for the US market, we believe that Peabody's asset position and contracted status sets us up for both success in this year and for years to come. I'll now turn back to Greg for closing comments prior to us taking questions.

Thanks, Rick. I would like to thank the Peabody team for our success in steering through the worst economy in generations. Looking ahead, we see continued strong Pacific growth. And we're not swayed by the occasional fears that crop up regarding China growth. With this industrial production growth rate rising to the upper teens in the fourth quarter of last year, China is naturally tapping on the brakes toward its targeted 8 to 9% GDP rates which usually translate into 10 to 12% real rates.

We sometimes forget how good China is at managing towards high GDP year in and year out while still controlling their inflation. Our plans call for that same 8 to 9% growth and will need to be revised upwards should China exceed that pace. And in the US, we've just witnessed the extraordinary inventory reductions in just a short time as coal stockpiles draw down and gas declines to normal storage. Should the cold snap continue as expected next month, we could be looking at a much earlier return to normal stockpiles than anticipated, and our conversations next quarter will be somewhat different for the US. I feel very good about both the physical and financial reserves we have, as we fuel the world's recovery and target significant shareholder value in the coming years. So with that, we'd be happy to take your questions at this time.

(Operator Instructions). And we ask if you could limit yourself to one question and one follow-up. First we'll go to Michael Dudas with Jefferies. Please go ahead.

Good morning, everybody.

Good morning, Michael.

For anybody that would like to answer, the recovery we're seeing in Asia and the infrastructure issues in Australia that we witnessed in the prior cycle, how much pressure are you anticipating on infrastructure, labor, regulatory issues, and the fact that there is going to be a lot of competition for other new mines and expanded mines into that market over the next five years, how well is Peabody set up now to have a smooth transition to get that growth going forward, given all of the pressures that are probably going to be bound given the significant change that you indicate in your release today?

Well, Michael, I guess I would start out by saying that it's a great thing to have those kind of pressures because it just reinforces our view that demand far exceeds the ability to supply, so that certainly bodes well in terms of the pricing horizon that we see going forward. In terms of Peabody's ability to deliver, I think you can look back over the last couple of cycles, where we had tightness and based on our ability to manage our infrastructure, our stockpiles, our ability to secure additional rail and port when others may have had operational problems always helped us deliver better than expected.

Now on top of that, we have been anticipating that there is always going to be these periods of time when demand is going to outstrip physical capacity, even in an environment where the Australians are continuously expanding rail and port capacity. So what we have done is we've been very proactive, Rick mentioned NCIG, which will be coming on later this year gives us additional dedicated port stockpile and out at of Newcastle for our thermal coals and we have all the way back to our Excel acquisition, securitized additional capacity in Queensland, particularly out of Dalrymple Bay as that port continues to expand. The rail expansions for Dalrymple Bay are somewhat behind schedule but they expect to be fully online in the first half of 2010, leading to another significant increase in port capacity by the end of the year.

So any details Rick wants to add in terms of numbers, but suffice it to say we feel like both our internal processes and how we structure and drive our performance operationally, along with what is happening in terms of infrastructure expansions, gives us the capacity to grow with the market, and that's why we've got this year 20 to 30% growth rates on our Australian export coals.

I think that's right, Greg. We're very comfortable with where we are with capacity out of the ports and rail capacity and think that we can manage that very effectively going forward and then of course we would like to have more but we certainly have enough to meet the growth expectation that's we've outlined.

Thank you. My follow-up I guess for Greg, in your prepared remarks, talked about the drivers in the Asian market, primarily China. You mentioned China's strategic intent. Could you elaborate on what you mean by that and what your internal analysis and people on the ground are seeing relative to how coal flows and investment is changing in both thermal and met inside China.

Well if you look at our view of what China's energy strategic intent, I think you have to look at the amount of global energy resources that they have been securing, whether it's oil, whether it's gas, and certainly in the back half of last year more significantly coal resources. But China views their own internal capabilities of delivering energy fuels as a limited resource. And they're out securing in these markets as much external resources for ultimate China delivery as they can. That's number one.

Number two, as it specifically relates to coal, it's our view that as China looked at the constraints of satisfying southern China's energy needs solely on the back of thermal coal transport and delivery out of northern China, I think they've come to the conclusion of northern China, I think they've come to the conclusion in the plan that they will convert their northern coal reserves to higher value products such as electricity for the north, electricity for the central part of China as well as coal to gas for industrial products, and they will increase and enhance their import capabilities in southern China. We see them building additional import ports, and actually going out and securing more import business to satisfy the demand in southern China. So I guess our view of their strategic intent is both an energy and total as well as a coal specific change.

Our next question is from Brian Singer with Goldman Sachs. Please go ahead.

Thank you, good morning.

Good morning, Brian.

Wanted to get some additional color on Australia costs. During the quarter it seemed like there could have been or should have been some currency effects but wanted to focus on how you see the cost trajectory going forward given both the in creased activity from you and others as well as the stronger Aussie dollar.

Sure: This is Mike. We were very pleased with where we came out in the fourth quarter. From the beginning of the year, we moved around quite a bit as we thought we would have additional met shipments in the second quarter and some of that went into inventory. You saw it come through with record met shipments that drove our costs higher in the third quarter. In the fourth quarter, we had good met shipments but they were lower than what we had -- fourth quarter was lower relative to where we were in the third quarter. So as a result there was a lower cost impact due to the shift to some more thermal coal and that along with some improving productivity led us to overcome the impacts of higher exchange rates.

Looking forward at 2010, at this point we had guided previously to 55 to 60 for 2009. We're sticking with that same target at this point for 2010. We are going to see likely some higher exchange rates and impact of higher commodity costs and we continue to focus on our cost reduction initiatives to be able to overcome some unfavorable impacts.

Thank you. And my follow-up is with regard to capital spending. Of the $600 million to $650 million, can you talk about how much is associated with Bear Run relative to some of the Australian met projects, and what additional spending beyond 2010 would be required, and then you also I think mentioned in your opening comments, the potential to invest some of your cash balances in acquisitions and joint ventures. If you could provide clarity on how you're thinking about that from a sizing perspective.

When you look at the increase in the capital spend from this year, specifically related to Bear Run, it's about $185 million to complete that mine in 2010, and then we have $100 million associated with our expansion projects in Australia. As you looked -- going forward into 2011 it's probably premature to talk about what the time of spending is relative to the projects and the different positions as to where we are in terms of completion of engineering, permitting and I think we would be providing guidance on information beyond 2010 at a later time.

Yes, I think if you tack a look at this year's capital, if you just add up the Bear Run, the extra 100 in Australia for the project development and then Prairie State, and then you add to that our sustaining capital run rate, you get up to that 600 to $650 million of capital. As Mike said going forward, the money we're spending in Australia this year for all of the projects except for the Metropolitan project where we'll actually start development, is for further detailed engineering, so we're probably a year away or longer before we can begin to talk about what we think more definitive capital estimates will be for those projects.

Great. Thank you.

Our next question is from David Conney with FBR Capital Markets.

Good morning, gentlemen.

Good morning Dave.

Could you give us an update on Mongolia and Tolgoi and what is the process and timing.

Well I think as with Mongolia, it's always a bit of early days to talk about what they're timing is going to be. It's a bit of a moving target, but I guess we'll tell you what we foe at this point in time. Obviously they've spent the fourth quarter of last year trying to detail where they want to go with Tavan Tolgoi. They have still not come to any final conclusions as to either the process or the time frame that they're going to use to go to tender and to potentially select bidders. Although we anticipate the first half of this year will be a very busy and active period of time for us as they come forward hopefully over the next two months with a more definitive schedule and process. Suffice it to say we continue internally to just gather as much information and develop and refine our proposals so that when it does come available for discussions we'll be ready to go. But that's -- Rick is involved in that process. Anything different timewise?

Not in timing. That sounds about right. What happened Dave last year that had been a road block on Tavan Tolgoi was the settlement of what was going on with OU Tolgoi which is a large copper project and we resolved that issue and the tax situation around that particular project. They can move forward I think much more confidently on Tavan Tolgoi.

And we have our Peabody Bolo joint venture which we created early first half of last year. We have resources on the ground, we have a good sized team in Ulan Bator, so we're very active and integral into what is happening in the mining sector in Mongolia. And when the government is ready to move, we'll be ready to move with them. All right. Great. Thank you. That's a good update. Just shifting over to the US. In the third quarter conference call or at one of the conferences, you might have mentioned that -- and this was I guess before the cold weather that hit not only the US but Europe and Asia, that maybe the US steam exports in 2010 could potentially be down versus 2009. Do you still have that same view, and then I would also like kind of a view of what you think the number of tons of met that could come out of the US?

I'll tackle that question. Certainly with the tightness in the metallurgical coal market, we would expect to see the US met exports would be up slightly compared to last year. Because last year they were pressured because prices were down and into the $129 benchmark level which made it tough for some of the mines in Appalachia to even compete on a delivered basis at those levels. But we see 5-6 million tons of additional metallurgical coal shipments in 2010 compared to 2009. That's our estimate.

As it comes to thermal coal, frankly we still see a decline. Or at least flat on a thermal basis and the reason we think that is because if you look at 2008 and 2009, there were some high prices sold, a lot of coal sold out of Appalachia on the equivalent of $125 delivered prices, $125 API delivered coal prices into Europe. And today, when you look at the prices in the 80s, most Appalachian coals you would have to sell for $30 a ton to be competitive. So they're out of the market and out of the money by $15 to $20 right now, so the market needs to be well above $100 and we do not see that until 2011 and 2012.

That's a great update. Thank you, gentlemen.

And the next question is from Paul Forward with Stifel Nicolaus. Please go ahead.

Good morning.

Good morning, Paul.

In your fourth quarter results you had a $46 million loss from equity affiliates. I was wondering if you could provide some details on what that was and what is the potential as we look into 2010 and beyond that you get some further losses realized in that line item?

Sure. Paul. This is Mike. That relates to our investment in Venezuela. And now that investment doesn't serve us well over the last several years but as we got into 2009 they had significant operating issues coupled with the fact that their costs were going up significantly because Venezuela is in a hyper inflationary environment and we recorded that on an equity basis and we took our share of equity losses throughout the period. But given the cost position, the operating issues, and the outlook in terms of the hyper inflation, coupled with the political issues that we see in Venezuela. We felt the most prudent thing to do would be to write off the remaining book value of that investment and in the fourth quarter that was a $35 million noncash charge. We have not made any cash infusions and do not plan to do so at this point. And when you look at 2010, because we've written off that investment, we do not anticipate a material impact during the year.

Okay. Great. And you mentioned on the Denim Mine development, potential range of 3 to 6 million of tons and I'm wondering what might keep you from reaching the upper end of that range and is there any chance to accelerate spending on that mine if met coal prices stay strong?

Yes. Two things, Paul. Because we only -- we look the five year time frame through 2014 we had the 3 to 6 million only because of our timing and ability to develop that mine to get it to full production. When it's in full production, we anticipate it's going to be very close to that 6 million-ton a year rate. We're just not sure whether that will be 2014, 2015 and that's why we have that range for the five-year period. Your question about acceleration, obviously that's what part of the monies that are being spent, the $100 million in Australia for all projects, part of that is the Denim project and it's all about what are the options to, if we can accelerate it, and then to make sure we bring it in at the right cost and the right production size going forward. So the range was really recognition that in 2014, we are a bit unsure as to how quickly we can get full production up.

Okay. Thanks very much.

Next question is from Kuni Chen with Banc of America - Merrill Lynch. Please go ahead.

Hi. Good morning, everybody.

Good morning.

The first question is on Australia. You comment on the potential tax reform over there and the impact to you guys of higher ROT taxes. Just talk about how you think about that and kind of what you see as the process there going forward.

Yes, Kuni, at the top level, there isn't a jurisdiction anywhere in the world that isn't looking at their balances and looking at their tax programs. Australia is no different. They do this on a regular basis. What is really initially been talked about is a federal review of taxation in Australia. As you'll know, the royalty streams and the current regimes in Australia are all state based so you're starting to get in an issue that would be states versus the federal Commonwealth in Australia. Our view is there is a long time to come. Whatever they do on a federal tax rate would have to be offset by changes in the royalty structure. But this is very early days and we're not anticipating any changes in the near term.

Okay. Great. And then just as a follow-up, also on Australia, can you talk about some of the maybe sequential cost trends that you can see as we go through the year, whether there are any meaningful Longwall moves or mix shifts or what not that could drive some volatility in the cost.

Yes, I mean ultimately we saw this year, as I mentioned earlier, it really comes down to the mix of the met and thermal volumes which we should have some -- a little better insight into later in the year. In terms of Longwall moves, we have two in the second quarter. So that's probably the biggest impactor on a quarter by quarter basis.

Okay. Great. Thanks.

Just on the Longwall move, just going across the platform for everybody's benefit, we just completed our Longwall move at the end of the fourth quarter of last year at 20-mile. We're not anticipated another move there until the fourth quarter of this year. North Goonyella we're not anticipating a move in 2010 and the two Mike talked about in Australia, one at Metropolitan in the second quarter and then, the Longwall at Wambo may bridge the end of the first quarter beginning of the second quarter as to where the timing looks right now as it would start in March and finish up in April.

And your next question is from Mark Wiltamuth from Morgan Stanley.

Hi, all. In the Powder River Basin, given your long strew, is there any change in the timing of school creek. And also out that way, you can comment on what you think the utilization rate of affective capacity is out there given recent investments by some in new belt systems, what have you. Thanks.

Two part question, I guess talking about School Creek, there hasn't been any change. We've always said that School Creek would be number one dependent upon market development, and number two, our ability to utilize School Creek as a margin enhancement operation, and by that I mean as we begin to ramp up school creek when we make that decision would be predicated on potentially sourcing some of our contracts at Rawhide at Caballo there to increase our overall margin on those contracts. So our thinking hasn't changed and its -- the current market conditions have not affected that.

I think in terms of excess or capacity utilization, from our perspective, with what we have internally, I think the issue is more rolling stock than it is conveyors. There is some capacity at some of the existing operations up there in terms of physical infrastructure, certainly we have some at Caballo and at Rawhide based on the reductions we put in place over the last two years. But we've also moved rolling stock as part of our capital reduction. So we would not have the immediate ability to capture back all of that volumes. It would take us a bit of time, some additional trucks and other equipment to be able to capture that back. So I think that will vary mine by mine. In terms of an overall number, I'm not sure we have one we could give you at this point in time in terms of capacity utilization.

Okay. Thanks. And just quickly, you talked a little bit about Europe getting better. You can comment on what you see as any changes in the Atlantic seaborne market next year. That will be it for me. Thanks.

Yes, I'm not -- I hope we didn't leave people to believe we thought that Europe was going to get better. What we were trying to say is that where it used to be that European coal pricing was, if you will, a competition for European -- against European gas, because of the significant draw of South African coals into the Pacific Rim, the competition for the European market now is basically carry overpricing or flow on pricing from the Pacific markets. So in that context we see the pricing environment proved in Europe but actually the volume demand in Europe we still see as being soft. And in fact, coming down even further this year.

We see a decline in the Atlantic market this year, still market. And that goes to the comment I made earlier about the export markets out of the US. With a decline in the Atlantic market we do not see much room for the US coals to move into the Atlantic market. And I would further take Greg's comment about the fundamental sea change that we're seeing with regards to the Asian pull that of not only south African pole, which about half goes into the Asian market and then China coming on strong this year we're seeing it start to pull on Columbia. So what will be interesting is later in this year or early next year, whatever your prediction is as to when the balance comes into the Atlantic market, meaning coal and gas stockpiles come down and the European coal burners have to come to market to buy coal. When they do that, and most of their coal is being now sold into the Asian markets, it will be an interesting situation on the supply-demand and the tightness in that particular market, it will be interesting. We think it will tick that market up quite nicely in the out years and that's why you see the curve and the curve shows that. Contango and the outyears in the market. Thank you very much.

And we'll go to David Gagliano with Credit Suisse. Please go ahead.

Hi, everybody. Thank you for taking my question. My question is a general one on met coal prices. Obviously it's a real strong story right now and doesn't seem to be reflected in our stocks in our view. But is there a price where you start to get concerned about demand construction and given the form of out right steel production cuts, and Chinese inventories are still pretty high, mills aren't making much money and price increases pay be running into a bit of resistance already or perhaps even over time, are you concerned about switching out right from BOF to BAF and do you think there is a price where that starts to happen and are you hearing anything along those lines?

Well I mean I guess theoretically there is some price way up there in the stratosphere that makes all of that happen. But we -- if you go back to 2008 where we went to $300 on the preference pricing and the spot sales were up to $350 and $380, we didn't see any erosion in terms of demand at that point in time because of pricing. Steel pricing is going up. And as longs the demand is there for basic infrastructure on all of these developing countries, particularly in China and India. I guess we do not see an upper limit at this point in time on met coal pricing that would cause any kind of steel cutbacks and/or switching of production methodologies.

Okay. Sounds good to me. Thanks.

And we go to David Lipschitz with CLSA. Please go ahead.

Yes. Thank you. Question on inventories. You said they were drawn down significantly. Is there any break down and you see more come out of the PRB or the east or where do see most of the inventory cuts, or is this across the boards?

We've seen it's been across the board as far as the declines but what we've seen and where we ended the year and where we are today, Dave, is that we think PRB inventories have come down quite nicely. And because in the fourth quarter of last year, when we had a lot of the coal to gas switching, a lot of that happened into the eastern plants and not the PRB burners. So what we're seeing now is that the cap coal companies or the cap burners have a higher inventory levels than the PRB right now. So we think that the PRB is down into the low 60s and could be coming down pretty rapidly in the next quarter.

Okay. Thank you.

And our next question is from Curt Woodworth with Macquarie Research. Please go ahead.

Yes, hi, good morning.

Good morning, Curt.

So in terms of looking at the seaborne thermal market for this year. Clearly China we think is going to be a pretty major supportive factor and December alone was pretty remarkable with them importing about 13 million tons of thermal so maybe 20% of the market. And now you're hearing Indonesia will need supply for domestic growth and electricity demand and so I'm wondering what is your ability to potentially accelerate development of your thermal assets in Australia and if the traditional countries really come back and are going to depend more heavily on Australia, what do you think upside to be to your volumes maybe out to 2011, 2012?

Well the biggest opportunity that we have is the on schedule and better performance with the NCIG startup. The largest increase in export capacity on a thermal side basis is going to come out of the NCIG port and that's why that investment was such a great investment for us because of its ability -- our ability to dedicate capacity through that port. Right now it's scheduled to begin production in the second half of the year. They are still doing work on dredging of the channel. It will start up with handy size vessels and then as the dredging gets farther advanced we're -- we'll go to larger vessels. So I think the number one opportunity right now is NCIG coming online and hopefully doing better than potentially expected.

The rest of it then becomes how the coal chain in Australia, particularly Newcastle, operates. I would note December was a record month for the existing PWCS port on an annualized basis they ran at about 106 or 107 million tons of capacity. If we continue to see that kind of productivity improvement out of that port coupled with NCIG, that immediately gives upside for 2010 and 2011 and 2012. And from our perspective from a mine site basis we have capacity at Wolf and John and Longbow for additional production, right now, our schedule just is a flow on as to the port and rail infrastructure buildup.

Okay. Great. And then on a follow-up, in terms of the met pricing strategy for this year, are you going to try to have more quarterly price agreements to maybe take advantage of a tightening market or do you think most of your volume will be committed for fiscal year basis?

Thank you, I think that still has to be determined at the -- at the end of the day we know what VHP strategy is and that's to try to move to quarterly prices and you know as that process works they tend to set the pace on the particular process. And we'll see where it comes out. There is a lot of pushback from customers to keep annual pricing consistent with how they price their product and we'll consider from a price standpoint and working with customers. There is pros and cons from both sides. So I think there is more to be negotiated before we can give you a final answer.

Okay. Thank you.

And we'll go to Jeremy Sussman with Brean Murray. Please go ahead.

Hi. Good morning.

Good morning Jeremy.

I have a two part question. Your 2010 guidance implies a 2 million-ton per quarter run rate for met coal shipments, the mid point of guidance versus 2.4 million this quarter. And given the rail projects in Queensland that will be completed, what is the main reason for the higher Q4 figure and then also last quarter in your comments you mentioned shipping spot net coal at $160 and now you're shipping it at $200 so care to see putting your crystal ball on and deferring where it's going.

I may defer to the crystal ball for that. Jeremy, one of the issues that we deal with every quarter is we have a certain amount of port and rail entitlements that we schedule our production for, and to the extent that other producers have production issues and capacity opens up, we have a very aggressive team both in New South Wales and Queensland on our transportation and logistic teams that will try and secure as much excess capacity as we can possibly get. We try and run with stockpiles on the ground so that as rail and port capacity opens up, we can react quick, I mean very quick, to fill that capacity. Typically that's the difference between what we forecast on a quarterly basis and what we can actually deliver. So what I said earlier on the call, the ability of our Australian team to aggressively work the logistics chain has been a benefit to us. We anticipate it will always continue to be a benefit with the resources that we have there. But when we put together our forecast, obviously we have to be careful we do not go far beyond what our entitlements are relative to port and rail capacity.

Sure. No, that is helpful. And then just one follow-up. Can you give us an update on what is going on at your North Goonyella mine and what you expect out of there this year.

Yes. I would be glad to. As everybody knows we had a -- about a week hiatus at the end of the last year at North Goonyella as we were going through our renegotiations of what is called an enterprise bargaining agreement or a labor agreement there. We got through the end of that process and both parties agreed to go through a new process that Fair Work Australia, which is the government-run labor agency, has established in Australia, where parties agree to have no more either strike or lockout activities. The parties agree to mediation, and at the end of the mediation, you go to binding arbitration. At the end of binding arbitration, there is a new agreement, and so there are no more labor interruptions once you enter this process.

We agreed to that process with the union at the end of the last year. That's what brought that hiatus to an end. We're in mediation now. I would say it's going well by the reports. There'll be a few issues I'm sure that will go to arbitration but I think the net-net result is a couple of things. We anticipate a more modern labor agreement in North Goonyella, the operation has been running well since the beginning of the year, and there is nothing in the process that allows for any further labor interruptions, because of the renegotiation of the enterprise bargaining agreement. And without a Longwall move this year, we are anticipating a good year at North Goonyella.

Great. Thank you very much.

And we're go to Pearce Hammond with Simmons and Company.

Good morning.

Good morning.

First question is on potential coal ash regulations in the US. How do you see that unfolding and would there be any immediate impact to Peabody?

The environment in Washington today is one where I'm not sure anybody wants to predict with any level of certainty, but I guess I would say the coal ash issue is one that from a legislative environment they've been dealing with since the passage of the original Resource Conservation Recovery act years ago, the most recent information I've seen indicates that the coal ash will be regulated as a large volume, low toxicity waste which is appropriate, that's what it is. They'll require probably better dam and perhaps some clay-type liner activities for these coal-ash ponds. So the at end of the day it's things we think the utility industry can manage and we're not anticipating a detrimental affect in terms of coal burn or ultimately the full end cost of coal production. Coal based generation going forward. So that is our current view unless something changes in the near term but I think that's probably where it's going to wind up.

Thank you and then my follow-up, there has been a lot of chatter regarding Illinois basin stealing some share from Central App. Do you think we're on the cusp of meaningful assets announcement where Illinois may switch Illinois basin?

We've seen a lot of plants look for Illinois basin coal as they put the scrubbers on the plants and they realize for the long-term that central Appalachia will be in competition for exports for met coal and there is declining reserve base and permitting issues and if they look to supply they'll look at Illinois basin products and the competitiveness of the Illinois basin and we long projected that was going to happen and the two fastest regions were going to be the coal basin and the PRB and the decline in cap continues. So from our standpoint we still believe that. Are there any imminent announcements to change that announcement, I don't think so. I think it's just a continued use of where the coal is going to come from.

Thanks and congrats again on a great quarter.

And to Meredith Bandy with BMO Capital Markets, please go ahead.

Thank you, gentlemen. Most of my questions have been covered. Could you talk to US contracting and since your so well priced from last year you're able to sit and wait. But are utilities interested at these spot prices in talking to people and getting some low pricing in or are they just thinking no, I have too much on the ground, and I'm not interesting in contracting?

I think that's beginning to change over the last six weeks as we've seen what has happened. Quickly inventories have come down. Many of the utilities -- we knew stockpiles were high and they went into the year with ample stockpiles as they see them coming down, they'll be coming back and looking to get back into the market to buy coal. And of course, if they can buy it at these prices cheaper before it runs back up, that's what they would like to do. From our standpoint, we're being very patient because there is no reason for us to rush and that's why we entered this particular part of the year 100% sold out. So we do not have to rush into decisions on pricing.

So you would say that it hasn't -- but they haven't picked up their willingness to contract yet, do you think?

Utilities are definitely willing to contract today at today's prices. There is an interest in doing that. Is there an interest on the part of the producers is probably the question.

Okay. Thank you very much.

And we go to John Bridges with JPMorgan. Please go ahead.

Good afternoon, Rick.

Good morning, John.

Yes. Just following on from the Illinois question, there has been some talk of exports from Illinois. Have you got involved in that business?

No, certainly a couple of years ago when the markets were strong, John, in 2008, we did some blending of our Illinois basin coals to our Colorado coals, and I've heard that same chatter, and if you look at the market today, you would have to sell it at $20 a ton to export it, so I think you would be doing better to sell it in domestic market. So same comments I had earlier on cap. Right now the eastern markets need to move up before you see meaningful exports. If somebody is doing it, they're doing it at a pretty cheap price.

Okay. And then looking at your accounts, you restated your Q4 2008 quite substantially. Was there any particular driver for that?

Yes, I mean you can point me to which one you're referring to, Paul -- or John, I'm sorry.

Well it's just a number of restatements. So there is nothing from your side that drove it? The numbers differ from the numbers we had in our -- in our sheet.

The only thing that comes to mind is the convertible debt change that we made with the new accounting rules. There was a piece of that classified from debt into equity.

Okay.

We'll look at it and get back with you, but we're not aware of anything, John.

And the 20-mile Longwall move, was that the reason for the weak production out of there in Q4?

Yes. We had a couple of things going on at 20-mile, thanks for the question. We had a normal move at the end of the quarter. But in addition, we were moving the Longwall from one section of the mine over to a newly developed section of the mine where we had a couple of brand new ventilation shafts that were being drilled during a construction of one of the shafts the contractor had an issue which put it behind for about a week. So in addition to our normal Longwall move time, we had about 10 days delay in tying into the new ventilation shafts for the new section of the mine so we were down a little bit longer than we normally would anticipate for a Longwall move. All of that has been tied in. Longwall started up at the end of the year and so we're not anticipating any of those issues back to normal Longwall timing going forward.

Okay, great. Guys. And congratulations on the results.

Thanks.

And we have time for one more question. We'll go to Shneur Gershuni with UBS. Please go ahead.

Most of my questions have been answered. Just a couple of questions. With respect to you talked about your targets for costs for Australia to be in the 55-60 range. Have you built in any demerge ship cost there and if it is above that that we should expect it to go to the higher end of the range and so forth. If you could give us some color there.

In terms of the demerge, we were down in bit in 2009 and in 2010 we do not expect it to be material. It could be another 10 to $15 million higher and we could be in the $200 a ton range. So that's likely to be front-loaded we think in the first half of the year.

Because we had NCIG coming on board in the second half and as we've explained different times, the NCIG is a low to no demerge port for us so that will help lower the overall average of demerge cost for us.

Great. And just in terms of pricing signals, first on the PRB and secondly on coking coal, you have some available capacity in the Powder River Basin. What kind of signals are you looking to bring it on? Would you like to see inventories get to normal levels or would you like to see it go below normal levels. And secondly on coking inventory you talked about China and India on the thermal side. You can talk about steel producers? Has the restocking been done and do you think in part it's due to both restocking and demand together?

I think a lot of the restocking has taken place certainly in China and in a number of places. I think certain facilities are still restocking. I mean the other parts of Asia that are just beginning to rebound in steel production such as Japan and others, it's in part restocking and demand and so we think it will be a pretty tight market and we think we're clearly under supplied in metallurgical coal. As it related to the PRB and pricing signals, we look at everything that is going on, inventories and really it all gets down to what the price is at the end of the day, where we think prices will settle out and need to settle out and we see a very steep contango in the PRB curve.

We've seen PRB prices move up quite a bit in the past four weeks. Much faster than the Asian markets. But because of lower stockpiles and the ability to respond we've seen PRB prices move up faster. But we're still a ways to go and we still do not think they're where they need to be and where they will be but we're being patient.

And is it fair to say that your comments on the PRB, if the comment is there and if there is something there to give you an adequate return on capital, that's when you would start thinking about increasing production.

We layer in good profitability business and we do not try to hold everything out to the spot basis and try -- for the highest price. At the same time I think we take a good view of the market and try to leave as much unpriced as reasonable based upon market conditions.

Great. Thank you very much.

Mike, you have a follow up on John's question?

Yes. Back to the question around changes to 2008, there were two small nonstrategic sales of assets that we reclassified to discontinued operations so there was an impact on revenues. You see the net impact is not significant, it's just a flip between continuing ops and discontinued operations, if you do it in the current period, you restate the prior period to that effect.

And Mr. Boyce I'll turn it over to you for any closing comments.

Great. Thank you. Well I appreciate everybody's time on the call and interest in Peabody and BTU. I guess I would say a couple of things in closing. We really haven't talked about it but 2009 was a very strong year for our ability to execute internal to the business. It was our safest year ever. We reduced our incident rate by 20% from the prior year and when you look at transactionally across the platform, our ability to generate close to $1 billion in cash flow and billable liquidity that we have and our ability to deliver the results that we had were higher performance from our operations, our trading and our sales team, our finance team, it was across the board and I just want to thank all of the Peabody employees and we look forward to reporting progress on the second quarter call. As you can tell, we think 2010 will be an interesting year. Thank you.

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