Peabody Energy Corp (BTU) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Peabody Energy first quarter earnings release.

For the conference, all 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 will turn the conference over to the Senior Vice President in Investor Relations in Corporate Communications, Mr. Vic Svec. Please go ahead, sir.

Thank you, John. Good morning to everyone. Thanks for taking part in the conference call for BTU. And with us today are are Chairman and CEO, Greg Boyce; our Executive Vice President and CFO, Mike Crews; and President and Chief Commercial Officer, Richard Navarre.

We do have some forward-looking statements today. They should be considered along with the risk factors that we note at the end of our release in the MDA section of our file documents. And we also refer you to peabodyenergy.com for additional information.

I will now turn the call over to Greg.

Thanks, Vic, and good morning, everyone.

Peabody posted outstanding results in the first quarter as we expanded margins, drove higher EBITDA and operating profit, increased contributions in the US and Australia and improved our cost structure. We also signed new Australian contracts at higher prices, began shipping from our new NCIG port and advanced multiple organic growth projects and one notable acquisition initiative. Mike will review the quarter more in a moment, but I would like to take a few moments to assess market fundamentals and update you on our growth programs. I will begin with the global seaborne markets where the power of China/India/Australian connection continues to be the story. In a quarter that began with concerns about China's economy, the nation posted 12% growth in GDP which may tell you all you need to know about the Pacific markets.

In metallurgical coal, we're seeing growing tightness brought about by a 10% increase plus increase in expected steel production. Global steel making is dominated by China which saw first quarter production up 25% as infrastructure buildout continues, its' consumer class expands and its' manufacturing exports start to recover. With other steel-making nations rebounding, we're calling for a 20%-plus hike in seaborne met coal demand in 2010, and we also see growing headroom for met coal pricing from rising steel prices. This occurs even as the world is structurally short of coking coal supplies. Australia will again supply nearly two-thirds of global seaborne met this year, and a handful of other nations make up most of the remainer. Any disruption caused by weather, logistics or other issues stretches the rubber band of supply and demand even further.

Now thermal call markets are equally buoyant in the Pacific. China's electricity generation increased 24% in the first quarter. China and India are leading the world in new coal-fueled plants. This year alone globally, coal plants that will use 375 million tonnes of coal per year will begin operation. So far in 2010, China's coal imports are up 227% against a weak first quarter of 2009. But more importantly, China's net imports totaled nearly 39 million tonnes, that's a 156 million ton annualized pace, some 50% better than last year's record pace. Now while the Atlantic thermal market remains soft for US exporters, we expect the overall Pacific seaborne thermal demand to increase by more than 50 million tonnes this year. So what does all this mean for Peabody? We're now targeting our Australian met coal output increases of up to 50% in 2010.

These new targets have increased 2 million tonnes from the last quarter due to strong performance from our met mines in upgrading of some of our thermal coal to met quality. We signed second quarter met coal contracts for high quality hard coking coal at $200 for metric ton, with semi-hard to hard coking coal in a tight range of $170 to $190 per metric ton. That is significantly above the prior-year settlements. We have also signed some annual contracts for hard coking coal at levels more than 20% above these quarterly contracts. And that market has continued to improve since the benchmark settlements. Current spot met business is being priced in the $240 to $250 range which bodes well for increased third and fourth quarter quarterly settlements.

Peabody's Australia seaborne thermal shipments are also set to expand by up to 35% in 2010. We have signed annual contracts at $98 per metric tonne and are encouraged by the forward markets that exceed $100 per tonne for the next several years. For any thermal market in the world, $100 price for multiple years is certainly a notable milestone. Now moving to the domestic US markets, we've seen improvements in the first quarter, thanks to stockpile reductions well in excess of the norm. PRB stockpiles of customers are far lower than those in Cental Ap, and outside of Central Ap, coal-to-gas switching is not a concern at current gas levels. We now expect US coal demand recovery of approximately 60 million to 80 million tonnes in 2010 with relatively flat production. We expect more improvement in US coal fundamentals as the economy continues its recovery. So against this US market backdrop, Peabody has an excellent position.

Powder River Basin prices have increased more than 75% over six months and the forward prices remain well ahead of spot. And the US, Peabody's contracting strategy remains sound. With 2010 production under contract as the economy begins to recover, being patient in contracting for 2011 and holding a sizeable open position for 2012 as we look toward more robust recovery in electricity generation and a return to normal stockpiles. That is a look at global and US market conditions and Peabody's unique position.

And let's spend a few minutes on Peabody's growth initiatives to further enhance our ability to capitalize on the long-term market strength. Peabody begins operation next month at Bear Run which will rise from 3 million tonnes this year to 8 million tonnes over time. Two weeks ago, the first ship from the NCIG terminal in New Castle set sail carrying our Wombo coal. We have the second-largest interest in NCIG which will give us 5 million to 6 million tonnes per year of added throughput; and the team is moving ahead with the second phase of the NCIG expansion, once again, increasing our throughput capacity when complete. And during the quarter, we approved the capital for the 1 million-tonne-per-year expansion of the met mine in New South Wales. This is one of a number of projects that allow us to nearly double our Australian met and thermal export volumes by 2014.

Now a brief comment about our proposal at Macarthur Coal. We clearly like the prospects of adding low-vol PCI coal, which is a valuable product in the steel met marketplace. At certain levels a tonne of low-vol PCI can replace a tonne of coke. There are synergies, but it's the addition of the volumes and growth portfolio versus pure operating and commercial synergies that drives our interest. I would say we would have expected to be in due diligence at this point in time but that is not the case yet as we have not been granted access to the limited confirmatory due diligence information that we believed we had agreed to last week.

We are still in discussions with Macarthur and we'll keep you posted as that unfolds. Because this is a pending transaction in a very public environment, we obviously will limit what we discuss on this call. But we are still hopeful of advancing the proposal to a successful conclusion. Peabody is also in a broad range of preliminary discussions with Coal India to explore long-term coal supplies and other possible cooperative ventures. While there have been no final agreements or decisions made regarding timing or structure, we believe India will be the fastest-growing importer of coal through 2020. So it's, quite simply, a market we want to supply.

So that is a look at the improving industry fundamentals and our growth initiatives. I would summarize this way. Markets are strong in the Pacific and recovering in the US, our growth plans are in full implementation mode both organically and through MNA, and I believe our quarter foretells a very good year. So here to tell you more about the quarter and the year is our CFO, Mike Crews. Mike?

Thanks, Greg.

We are again seeing the power of Peabody's global platform with better than expected results that exceeded both last quarter and last year. And as you will see from our outlook for 2010, there is much more to come from improving met and seaborne and thermal prices and growing export volumes, particularly at the high-volume met coal. I will begin with a review of the income statement and operational highlights. Peabody's revenues increased 4% over last year, even as we ease back on US volumes. Our strategy of layering in new business at higher sales prices helped to overcome lower plant production in the US. And Australian revenues were 24% above prior year due to higher metallurgical coal volumes.

First quarter EBITDA reached $357 million, a solid 10% over last year and $60 million above last quarter. Our Australia results were strong despite weather-related impacts. We also benefited from higher output from the underground operations in both the US and Australia. The North Goonyella Mine set production records in the quarter and higher production at the Wombo Mine accelerated its longwall move into the first quarter. In the US, the Twentymile Mine ramped up quickly following last quarters move to a new mining area. Improved Colorado production combined with higher-than-expected PRB shipments benefited the quarter. The increased mining contributions more than offset expected reductions from trading and brokerage.

Let me take you through the EBITDA drivers with more detail, beginning with the US where margins reached 29%. In the West, year-over-year costs were almost 2% lower, which is notable given the unfavorable mix at impact of 1 million fewer PRB tonnes than last year. The combination of higher average prices and lower unit costs drove a 16% margin expansion from prior-years level. In the Midwest, margins grew nearly $2 per tonne, higher average sales prices overcame the cost impacts of lower market driven production.

Turning now to Australia. Our met sales totalled 2.3 million tonnes, which were on par with last quarter and nearly three times greater than the first quarter last year. The weather-related impacts on production were mitigated by sales from inventory. And on the seaborne thermal side, sales were 2.3 million tonnes for the quarter. Australian revenues average $72 per tonne. Our average met price of $122 was in-line with last quarter yet below the prior year, which benefited from higher benchmark prices. First quarter costs were $52 per tonne, lower than both last quarter and last year. You will recall we had three longwall moves in the first quarter of 2009, versus just one this quarter.

Improved longwall performance more than offset higher demurrage and the unfavorable impact of higher exchange rates. We continue to target Australia costs of $55 to $60 per tonne for 2010. At nearly $20 per tonne, our Australian margins are now 28% compared to 25% last quarter and 23% a year ago. Rounding out the discussion, trading and brokerage and resource management contributed $37 million of EBITDA reflecting lower volatility in our expectations for fewer structured transactions in our trading business. Shifting now to [DD$A], you will notice slightly higher levels due to increased Australian volumes consistent with our January guidance. Our effective tax rate was 26% excluding currency remeasurement which led to adjusted earnings per share of $0.52.

Turning to the balance sheet, we continue to add to our strong financial position, and cash on hand now exceeds $1 billion with $2.5 billion of available liquidity. We spent approximately $100 million in CapEx during the quarter as we advanced growth projects in Australia as well as Bear Run and our Prairie State investment. Our full-year capital expenditure forecast is $600 million to $650 million. And now our outlook. Second quarter EBITDA started in the $350 million to $425 million range, higher in the first quarter due to improved pricing in Australia, partially offset by higher sales-related costs and recovered from weather issues; and in the US, our PRB costs will include both seasonal and deferred maintenance. Adjusted EPS for the second quarter is targeted at $0.50 to $0.65 per share. Our stronger-than-expected first quarter results combined with our second quarter targets for a first half is in line with expectations. For the full-year, we continue to expect US volumes of 185 to 195 million tonnes.

And in Australia, given the strong markets and our solid first-quarter performance, we are raising our sales targets to 27 million to 29 million tonnes. Our Australian met sales are 9.5 million to 10.5 million tonnes, the thermal exports have been 11.5 million to 12 million tonnes, including 1 million tonnes of thermal product being upgraded to met. EBITDA for 2010 is targeted to be $1.6 billion to $1.9 billion reflecting our view of the market for our unpriced volumes over the second half of this year with adjusted EPS of $2.45 to $3.15. With our higher operating profile, DD&A is expected to be 15% above 2009's levels, and our effective tax rate is now projected to be 25% to 30% driven by increasing earnings from Australia.

So in summary, we are pleased to provide guidance for 2010, which at the top-end could see adjusted EPS increase almost 65% and EBITDA increase nearly 50%, which would exceed 2008's record result. And so with that review of our first quarter result and expectations for second quarter and a full-year, I will turn the call back to Greg.

Thanks, Mike, and at this point, we would like to open up the call to answer any of your questions.

(Operator Instructions). We do ask you to limit yourself to one question and one follow-up question.

First to the line of Brian Singer with Goldman Sachs. Please go ahead.

Thank you, good morning.

Good morning, Brian.

I wanted to get a bit more color on the cost side. I think you mentioned in your comments in Australia some higher sales cost and weather recovery in the US, seasonal and deferred maintenance. Can you put some additional color on what that could mean in terms of a cost per tonne in each region and whether these are - - as I assume some of these are temporary issues versus more function of market conditions that could be more lasting.

Sure, we'll just - - let me start with the US. This is Mike, and then we'll work into Australia.

When you look at US, we were up slightly year-over-year. Some of that is a function of volume and some of it is also the benefit of higher sales prices which generate higher sales-related costs. For the full-year, we're targeting costs to be flat in the midwestern region to slightly up. The reason they could be slightly up are some transition costs as we we winddown our Farmersburg Mine and transition into the new Bear Run Mine.

Overall, we've been very pleased with our cost-containment efforts and you see in the first quarter, whether it's material and supplies, or repairs and maintenance, we have had good results there. When you look at the Powder River Basin, again very flat, good cost-containment efforts. For the full-year, we will likely be flat to slightly down as those cost-containment efforts work through the system. I mentioned some seasonal and deferred maintenance steps. We've ran so well in the first quarter and shipments were so strong in the first quarter that some of that maintenance will push into the second quarter so it may uptick slightly. But overall we feel good about our position for the year.

On the Australia side, we have got - - we're guiding to $55 to $60 per tonne. In terms of where we came out this quarter, I mentioned the longwall performance. We had good cost profile with our good production and balancing out the impact of weather. The reason we continue to target a $55 to $60, - - we have upgraded our met volume targets, that is a portion of it. We will have slightly higher currency impacts and then, again, the high-class problem as you have higher sales prices, you will have higher sales-related costs.

Great, thank you and as a follow-up, I was really thinking the bigger picture here. When you look at all of the opportunities that organically versus acquisitions, you certainly have a big organic expansion in Australia and you've talked in the past about Mongolia and China. But you now are going forward with an acquisition of Macarthur. Can you just talk about how you see opportunity to spend capital or high or higher met coal environment and the organic opportunity set versus the acquisition opportunity set and where from here that we should expect to see additional capital deployed beyond what we have talked about?

Well, I think the good news is we have great opportunities. When you look at the organic platform and the expansion of our Australian operations and the development of some new operations in Australia, particularly focused on met coal. We've got great growth out of Australia with our existing platform and, obviously, our proposal to acquire Macarthur is structured fundamentally around the met coal markets and serving the Pacific Rim met coal demand.

When you look the in the US, over the last couple of years, our capital has been focused in bringing our Powder River Basin operations up to where they are today, which has allowed us to deliver the low-cost and the cost-containment programs that we see providing the results, as well as the new El Segundo operation in New Mexico and now the Bear Run operation in the Illinois basin. I would say that we continue to have a favor for met coal, both in terms of what we can do with our Australian platform, additional acquisitions in Australia, as well as elsewhere. We see met coal being very strong, particularly in the Pacific Rim, followed very closely behind by thermal coal in the Pacific Rim.

Should we interpret that it may take a little bit longer to go through some of the organic opportunities in Mongolia or access more organically the China market?

Well, I think the very nature of Mongolia means that those have a slower timeframe than say the buildout of our Australian platform and China as well. I mean the business does not move along quite as well. In the case of Mongolia, they're still working on trying to put together a framework for larger-scale developments in Mongolia. And in the case of China, obviously, particularly for met coal, the opportunities for met coal are scarce in China. That is really good news for the seaborne market because that is what is driving the strength of the seaborne met coal market today.

Thank you.

Next question is from Michael Dudas with Jefferies. Please go ahead.

Hello, gentlemen.

Morning.

Morning.

Greg, maybe could you characterize your outlook in what you've been seeing in the global - - primarily Pacific Basin metallurgical coal market which has led you to making some pretty big capital allocation potential decisions with Macarthur. How different is this cycle relative to what we witnessed two years ago, or what we witnessed back in 2004-2005? And though I can probably guess your answer, how sustainable do you believe this cycle is versus what we witnessed in the past?

Thanks. I hate to be so predictable, but I probably am. Our view has always been that this cycle really started back in the early 2000 timeframe as China emerged to be the major industrialized country that it is and now India rapidly fast on its heels. Our view is this is a continuation of the 2007-2008 cycle that was only interrupted by the financial meltdown. And I think you will recall us saying that the fundamentals of supply and demand had not changed by the financial crisis and that once the economies recovered, we would be right back where we were in terms of China-India structurally short of met coal and Australia being the primary supplier of met coal for the next several decades. And that was a place that we wanted to be and grow our platform.

I think that we are in a long-term - - strong market environment for those commodities that China needs and met coal and now emerging very strongly thermal coal to satisfy their growing economy.

You mentioned in your prepared remarks what you have been witnessing in first quarter net import figures out of China on an annualized basis, pretty daunting numbers. Can those numbers continue at that rate through 2010? And as you plan your business over the next five years, is there a level of need from China, and maybe you can add India to this, that helps you feel comfortable with your growth plans on a net import basis?

Well, you just look at what China has done in terms of their growth rates of both their met and thermal coals over the last 10 years and particularly where we sit in the last couple of years and it's our view that these levels are sustainable. It fits within the long-term plans for China to satisfy their energy and industrial needs. We look at what is going internal to China, both in terms of the restructuring of their coal-producing sector both on the thermal and the met coal side, as well as their stated desires to develop and convert their coal resources closer in the interior regions and not rely on their coal resources to satisfy the full needs of their coastal cities as a long-term driver for continued strong imports into China.

And you switch over to India and you have the same situation where the Indian government has decided to significantly increase their imports, particularly of thermal coal to satisfy their energy demands, provide reliability within their grid and their system. That is not to say they won't grow internal coal production, but they believe they need a balance of strong growth, internal with very strong growth with imports. Part of that is what is driving our discussions with Coal India today and, of course, both the countries based on the growth of their steel sector, need to rely on imports for met coal.

Thank you, Greg.

The next question is from Kuni Chen with Bank of America-Merrill Lynch. Please go ahead.

Good morning, everybody.

Good morning.

I guess just on the met coal side, if you think about the second half of this year. I guess what type of met coal prices are you baking into your assumptions? And can you help us go from kind of the benchmark levels, let's say, 200, 240 to 250 and adjust down those quality differences to what your ultimate realizations could look like?

Well, obviously, we don't want to be too specific in terms of the exact numbers that we have used. And one of the reasons why we have the range that we do on the annual guidance is a recognition that we do have two open quarters at the back half of the year where quarterly met coal pricing has yet to be said. Suffice it to say we are cognizant of the fact that spot pricing today is 240 to 250. We are cognizant of the fact that the limited amount of annual pricing that we did was at a significant premium to the second quarter, quarterly pricing. And all indications are the market continues to remain very strong from a pricing environment perspective. So we have used a range and we've used that range to come up with the range of guidance that we have for the year.

I think the other part of your comment was not 100% of the met coal that we sell is the premium hard coking coal top-price product. We have a blend, in fact half of the additional met coal for this year is conversion of what was thermal coal historically to a met coal product. But that clearly is not at the highest end of the met coal range, it would be at the lower end of the met coal pricing range more of a semi soft type pricing environment. So we are recognizing and we do have a view of strengthening through the year, but I think we'll leave it at that and not get into a specific price forecast.

Okay. I guess just as a follow-up on the domestic markets, doesn't seem like you have really added much additional tonnage committed for 2011 at this point. Is it more that the utilities are holding off on asking for coal for next year, or is it more from your standpoint that perhaps they may be asking a bit more and you may be engaged in more dialogue there? Your view, your commercial strategy is to wait until later in the year to put those tubs to bed, if you can give us some color on that dynamic.

Kuni, this is Rick Navarre. On that certainly we're getting a lot of inquiries from customers as it relates to coal demands for 2011, 2012 and beyond. And particularly, because of what has happened with the winter and the drawdown in the inventories was so significant, I think they have come back and they probably under ordered for their expectations. So we're getting a lot of feedback there and you're right, we haven't raised our production profile to match that yet.

We're seeing strong improvement in pricing of course in the PRB, for example, from up to mid-13's and throw in a up into a 14-plus range in some of the outer years. But we're waiting to see, we think there is a lot more room. We look at what the alternatives are with Central Appalachia and play all the regions out. You see that the decline that is going to happen in Central Appalachia is probably going to be much more severe than any of us ever expected over the next two years because of all of the regulatory issues and the safety issues and all the other things that are happening. We think that the PRB is underpriced and we're going to wait to see what the right price is. And if you look at today's forward curve for Cap pricing in the out years, it would imply a $30 plus PRB net back. That is all math and that's a net back number but, as I said, it's a lot stronger than $13 to $14 in any vent. So, we're going to be patient.

Thanks.

Our next question is from Pearce Hammond with Simmons & Company. Please go ahead.

Good morning.

Good morning, Pearce.

First of all, congratulations on a very strong quarter.

Thank you.

To the extent you that could, I would love to get your outlook, long-term potential for PCI, especially the coke replacement. If you can't talk about it, I certainly understand.

Well, I think we might want to leave that for another day. Suffice it to say, based on where we are at with Macarthur, we feel very good about the long-term prospects of PCI. It's a specialty coal, it dominates the low-ball nature of the business, it's more in line and in tune with the hard coking coals versus a upgraded thermal coal. So I think there is no question it should be a strong market going forward. I better leave it that the that.

Great.

And then can you provide an upgrade on the Australian tax regime, some of the potential changes there? Well, about the only update I can provide is - - there has been a lot of leaked trial balloons. The so-called Henry Commission has gone through basically and exercised a look at what are all the possible mechanisms and tax structurings that they can put in place, and part of those discussions that they have been, as I say, floated out, not officially released but, floated out, entail maybe a national resource tax to replace the state royalty system.

But without anything being officially released, without any, anything to really look at, it's hard to determine what direction it may go. Obviously, we would, we would certainly understand in this country if Washington was going to take all the taxes away from the states, what kind of a brouhaha that would create. So more to unfold and really not a lot more specificity that has been released or really to look at.

Okay, great. And then lastly, given the tragedy at Matthew's Mine in West Virginia and the increased scrutiny from MSHA and the Federal Government. How do you see that impacting your operations in the US?

Well, I think it's - - I think we can all assume that there will be changes to both regulations as well as also to - - the oversight of mines as we have seen in the past. When you look at our portfolio of large open - - the surface Western operations and with our Midwestern operations - - we still feel very, very good. We've got a strong safety record which has been setting records over the last several years. But we anticipate that in certain operations, particularly the underground operations, dependant on ventilation and the like, there will be more cost over time. But as Rick said, we anticipate that the significant volume impact will be in the Eastern regions over time. And so it's an evolution that we plan on managing through and see more of the impacts in the East than in the West.

Thank you.

The next question is from [Natesh Natar] with FBR Capital Markets. Please go ahead.

Yes, hi, guys. How are you?

Good morning.

A real quick question on Macarthur deal. What are the next steps? I know you haven't been able to do due diligence and stuff. But how should we think about it in terms of the progression of the negotiations and stuff like that?

Well, I think all we can say at this point is we look forward to potentially getting into the due diligence and we'll just leave it at that. Obviously, active discussions going on, don't want to go into any further details.

Fair enough. My follow-up question is on your Australian pricing. Is there a specific reason as to why some of the contracts are based annually and some are quarterly? Or is it based on the request of the customer? Or, is it how you feel comfortable doing it?

I think it's a bit of a mixed bag. Essentially, BHP set the price as we all know at the $200 mark for the quarter.

Yes.

Spot pricing was admittedly a higher number than that and they wanted to institute quarterly pricing and so that came at somewhat of a discount so most of the customers chose quarterly pricing as their initial foray into this.

Yes.

Some customers, though, wanted the security of a long-term contract and a long-term pricing and we're willing to pay the - - bit higher price for that and we were willing to at the right premium, lock in long-term business. So it's a balance between what the customers needs are and frankly from our standpoint, just balancing our portfolio between spot and term business.

Sounds good. Thank you, thank you very much.

Next to the line of Jeremy Sussman with Brean Murray. Please go ahead.

Hi, good morning.

Good morning, Jeremy.

Obviously, there were some weather issues that you still managed a very strong quarter on the shipment side. I was wondering along those lines in Australia - - sort of outside of the weather issues, you can give us an update on the rail and port expansions and how they moving along over there?

Sure, we would be glad to. Maybe start with Newcastle first. As we indicated the new NCIG port started operation and that comes on line, that ultimately builds up to an additional 30 million tonnes of capacity out of Newcastle in the first phase. Now there is still some work to be done in terms of full dredging of the river area adjacent to the dock and so that ramp-up will take the rest of this year before we get up full capacity? In the meantime the PWCS Port in Newcastle continues to make improvements. So - - 2010, I think Newcastle and total will probably be up 10% over last year. Then we're looking at 2011, almost another 20%-plus increase over where we think 2010 is going to be. And then there are additional capacities we added as we now are looking towards what we call Phase 2 of the NCIG Port which will ultimately add yet another 30 million tonnes of capacity, and then BWCS has another expansion beyond as well.

So, ultimately, long-term the Port of Newcastle we think will continue to expand and expand in a timely manner. And the rail, we've got the approved shipping system through the ACCC and so, overall, that port is running much better. Somewhat down in the first quarter, a little bit on weather, but also there was a grain derailment that limited access to coal trains into the port during the quarter. Moving up to the port most important to us which is DBCT, the port has been expanded. Right now the rail issues have been the limiting factor. There is a very, very major expansion, what they call the Jill Allen facility, which is now looks like the May-June timeframe is when we expect to begin to see the benefits in terms of rail shipments which will allow us to increase through the back of the year some of the shipments through DBCT. Beyond that it gets to be - - the northern missing link, Abbott Point and then a number of other expansions at Gladstone and some of the other ports in Queensland to overall lift the rail and port infrastructure.

Great, thank you very much.

The next question is from Shneur Gershuni with UBS. Please go ahead.

Hi, good morning, guys.

Morning.

Just a couple of quick questions, two questions I guess. I was wondering if you could remind us about your $300 rollover tonnes, if they're included in the numbers you presented today? And if you could also talk about - - your second quarter guidance just given the, your expectation for higher pricing relative to the first quarter? And how come your EBITDA is not moving further up relative to the first quarter?

And then my second question is I was wondering if you could give some color on your negotiations with the Indian counter parties? Are you looking - - what your objectives are, is it to look into supply agreements, is it joint ventures, and so forth?

Shneur, this is Rick, let me try to take those on. I think there might be four questions there. But anyway, I will try to get through those. I will start at the end.

The negotiations with the Coal India and the group there are around being able to provide supply to the growing demand in India as we see it, primarily thermal coal and there will be some met coal issues as well. But it's through a number of avenues that we're looking at. It's long-term supply arrangements, it's through potential joint ventures of when we work together when Peabody would operate the properties and provide offtake arrangements to India, and potential equity ownerships in properties where we can provide them with long-term supply arrangements. So we're looking at all types of options, including exporting coal from the United States into India So a number of things are happening and they certainly are very interested in working with us. So I think I will leave it at that until we get more detail.

As it comes back to the carryover business, for the year, we expect to have roughly 900,000 tonnes, the majority of the carryover business that we had remaining will come through in 2010. And we were able to pull a lot of that forward as part of our negotiations over the new supply agreements and how tight the market is, we were able to pull those forward out of 2011. So we're pretty happy with that and that is the $300 business you were talking about or thereabouts on a metric tonne basis.

As it relates to the quarter, I think as somebody mentioned earlier, we had a strong quarter despite what happened with weather in Queensland, and so we were able to continue to make shipments and move things forward and get vessels in the queue because we had inventories. Obviously, some of that reverses in the second quarter so it happens to have an impact overall. Our first half of the year is very much in line with what we thought it was going to be. So we're pretty pleased with that.

Great, thank you very much.

We'll go to Curt Woodworth with Macquarie Research. Please go ahead.

Hi. Good morning. I was wondering if you could put a little more color on the quarterly pricing that you're doing for coking coal. How much of your business for coking coal is going to be done in the quarterly arrangements and how is, what is the pricing mechanism going to be? Is that just negotiated every quarter, or is there a benchmark? That will be helpful.

Right now, there isn't a clear mechanism to be honest with you. And we're all in the industry kind of waiting to figure out how we're going to do quarterly negotiations that took pretty long to do annual negotiations. But I think we'll find out here pretty quickly as we begin to negotiate for Q3, going forward. There really isn't a benchmark that's accurate out there for metallurgical coal. There is a lot of specifics - - in the product.

People have tried to put indices together, some of the industrial publications. But they're not very accurate and don't reflect the volumes and quantities, the qualities, I should say, that we have. So we're still looking towards that. I guess if you look at where we are at today, we are at essentially the majority of our business is going to be on a quarterly pricing with the exception of a small amount that we did on an annual basis. Going forward, I suspect some of that will change. Because as the quarterly prices begin to reflect market which they didn't in the first quarter or second quarter, the most recent negotiations. I think you will see customers being a little bit less concerned about going to quarterly and maybe more interested in going into an annual pricing with some element of premium. So we'll see how it shakes out. But right now, 90% of our business is going to be quarterly for the foreseeable future, which is 9.5 million to 10 million tonnes in total as we said earlier.

Okay. That's great, that's interesting. And then on the thermal, is all of that business pretty much put to bed for the current fiscal year at that $98 you mentioned in the press release?

We have to finish the final negotiations with all of the customers but, yes, effectively those are the prices we will settle, and settle that business out. It's traditionally how it works and we don't think there's any issues there.

And one final question on the Illinois Basin. Is there any potential for additional investments to be made there over the next several years?

Yes, we have 3 billion to 4 billion tonnes of coal that as we look at the opportunities for the Illinois Basin and the Powder River Basin. With what we see happening in the decline rate that we see happening in the east. There are certainly going to be more opportunities for the Illinois Basin to grow. You see us - - backing that up with the investments that we're making in Bear Run, right now. And, obviously, we have other properties that certainly we can bring on line that will be low-cost properties to serve those markets that are going to need coal.

Great, thank you very much.

We next go to Paul Forward with Stifel Nicolaus. Please go ahead.

Yes, good morning.

Hi, Paul.

Just on the Illinois Basin, following up on that last question, I think the last quarter is the first time you have posted double-digit margins from that region . Just curious, you've got pretty strong visibility on what your contracts look like for the next couple years, pretty strong visibility on costs. How sustainable do you see that double-digit margin being for the next couple

I would like to think it's sustainable, Paul. I think what you see is a major difference that's happened, it there has been two major differences. Our costs have been, we held the line very well on costs, we reduced costs under our cost reduction initiative. I think that has worked out well and we're opening up low-cost operations like Bear Run. It will start out maybe a little bit higher until it reaches full stride of 8 million tonnes. For this year it will only be running at 3 million tonnes, but once it gets up to full speed, it will be a low-cost operation.

I think what you saw also is in the midwest we have been historically signing long-term business to back up the opening of those properties, and we had a lot of contracts that were marginal and most of those have repriced in the last two years and that has improved our margins quite a bit.

Great. And then also on the range that you gave on the met coal out of Australia this year, 9.5 million to 10.5 million tonnes. That was encouraging to see that you were able to raise that by a couple of million tonnes. Just wondering if you look at 2011, considering the projects you've got underway and the infrastructure limitations that you see in front of you. If the markets really going to hold up well for the lower end of the quality spectrum and you can keep crossing tonnes over from the thermal to the met side of the market. Where is your capacity next year? I mean excluding Macarthur or anything like that. Where is your capacity to ship at the high end of the range if you could ship all the met coal you could? What could Peabody do in 2011?

Well, Paul, - - it's a bit early to be giving specific guidance for next year. But I would say generally that the expansion program in the new development projects that we have in Australia are heavily weighted towards the latter part of that timeframe, 2012-2014 that we talked about earlier when we announced that program earlier this year.

When you start talking about converting some of these thermal coals into very low-end semi-softs, there is only so much capacity that you have to do that. So I guess what I'm saying is I wouldn't expect major changes in 2011 at this point in time. We will continue to push the envelope as we have always done and there may be some more around the margin, but don't expect major changes for 2011.

Okay, thanks very much.

Our next question is from Dave Martin with Deutsche Banc. Please go ahead.

Yes, thank you. Good morning. I wanted to first ask you about balance sheet management,and I understand you can't comment much on Macarthur transaction. But I wanted to get your views on what debt metrics are important to you or do you focus on? And what is kind of your comfort level in those debt metrics?

The guidance that we've provided on that in the past , this is Mike, has been typically, and we focus on total debt to total

Yes.

And the range that we've looked at has been about from about 40% to 60%.

Yes.

And you can see today that we're extremely low at the 40%, right about 41% level.

Yes.

And we have indicated that for the right opportunities, we would flex that up a bit and frankly that is what we did with the Excel transaction was that it flexed up some and then we brought it down over time based on our results of operations. So we have a targeted range and we manage inside that range.

Okay. That's fair. And then secondly, I wanted to ask you about the trading brokerage business. And you commented on this in your prepared remarks, but operating earnings in that unit were down sequentially. I think you said there were fewer structural transactions made in the quarter, which drove that. Is that kind of a change in the way you're doing business? Or can you give us any guidance on how to model that going forward?

This is Rick. Trading, as we've said, is always a bit difficult to model, but I'll give you a bit more background. When you look at the first quarter of 2009 compared to the first quarter of 2010, significant volatility in the first quarter of 2009. So that is a major driver of differences when you look at those two quarters. On a sequential basis, there is structured transactions, we haven't changed our business model but those are lumpy. When you do transactions and maybe improve the portfolio or contracts and sometimes those are mark-to-market and sometimes those are accrual issues. So they can be a bit lumpy. As we look forward, we still expect to do $30 million or $40 million per quarter.

Yes.

So that is the best modeling guidance I can give you.

Okay, that is helpful. Thank you.

We next go to Brian Yu with Citi. Please go ahead.

Great. Thank you. Can you remind me what your annual split is between hard coking coal and semi-soft. Is there any difference to this ratio as we think about your open tonnes for the rest of 2010?

Currently our split essentially is between high-quality hard coking coal and hard coking coal runs about 50% to 60% of our total volume out of the 9.5 million and 10.5 million tonnes. And then we have an equal split of the remaining 30% at about 15% PCI and 15% semi-soft.

Okay. And would this apply for the rest of your open tonnes for - -?

Roughly. Yes, we would be a little bit slightly higher weight maybe going towards semi-soft just because we brought in some of the thermal crossover but that is a minor difference.

Okay. Great. Thank you.

The next question is from Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys, almost there.

Hi, good morning.

Two quick ones. One, both of you have made comments in regards to what is going on in the Central Ap market and the regulatory side and kind of impacts on production forthcoming; curious your thoughts on where you see the better opportunity as a fallout from that, in the PRB or the Illinois Basin?

Well, I think we feel good about both. That is why we have invested in both over the last three or four years. But, obviously, when we talk about the volumes that may be impacted in the East, the Powder River Basin is going to be the major supplier of those replacement tonnes in the near term.

And that is a fair answer. In the second question, with regard to the met market and the strength we have seen, obviously, everybody in the US and clearly as well Australia, is responding to the market. You listen to some of these calls and we have guys talking pretty nice growth in some of the lower grades generally when you get out to 2011 and 2012. I'm kind of curious what your thought is is on is that volumes we hearing out of guys for growth something you think has any impact on the market or are we just actually too short that it doesn't matter? Or does this start maybe to widen out spreads between some of the better grades or some of the lower grades?

Well a couple of things. I mean, first you have to have projections of growth that actually can be delivered and given all of the issues in Central Ap, you have to make your own assessments as to what is actually going to make it to ports and then be exported. The netbacks are totally different between an East Coast US and a Queensland port. And at the end of the day, we think Australia is going to clearly be the major supplier. The Pacific ports are going to have a leg up on all of that supply. So I think the East Coast will be - - it will be good business for those that can produce it and get it to the port, but I think the game is really the Pacific Rim, it is really Australia and that is why we're there.

Very good. Nice quarter. Thanks.

We'll go to Garrett Nelson with Davenport and Company. Please go ahead.

Good morning, everyone.

Morning.

Going back to the Illinois Basin, have you also seen a strengthening in pricing like we have seen in PRB the last six months or increased interest in that tonnage? I know that some large Eastern coal-burning utilities have been doing test burns recently of the Illinois Basin coal and so that is why I asked.

We haven't seen quite the same run-up in pricing that we've seen in the PRB on a percentage basis because the PRB was because of the stockpiles and other issues, was pushed down pretty hard. But we're seeing a bit of certainly of strengthening in demand for Illinois Basin Coal, and recently, we have had discussions in the last few days with major Southeastern utilities regarding Illinois Basin supply. They're very concerned about the capability of their traditional cap suppliers to meet their demand. So they are looking at those options. It depends on the utility and depends on the kind of capital they want to invest, whether they've already got scrubbers and (inaudible) installed or whether they don't, whether they want to look at the PRB coals. But clearly, customers who may have reluctantly been reluctant to use Illinois Basin coals in the past, the fusion issues and because of potential concerns around chlorine. Now the good thing around Peabody, most of our reserves are not high-chlorine reserves are beginning to change their motto.

Thanks a lot.

We go to David Lipschitz with Credit Agricole Securities. Please go ahead.

Good morning, everyone. Question on the PRB. Talked about how you think the price is just not there compared to what Eastern prices are. What gets it to some type of an equivalent basis? We have been talking about this for 10 years now. What stopped it and what gets us there?

I think it's demand. Ultimately the demand will strengthen and stockpiles are down now to more normal levels and that was the first catalyst that we needed to see happen. Prices are always going to be suppressed when you have high stockpiles, you see that in supply places today.

They have high stockpiles, they are competing with gas, their prices, near-term prices, are pretty low. Frankly, I don't think it's a sustainable number where it's at but particularly the cost structures, it needs to go up. So I think over time and, once again, we don't ever hold ourselves out and say the parody pricing is going to get equal to cap, it it's $30 we're not going to close the entire gap. But we certainly don't believe $13 is the fair number either. So I think it's just going to be strong demand. The opportunities are going to be few and far between for the customers to get thermal coal.

My follow-up is, you talk about these port expansions and things like that, in terms of Australia. Over time, is it going to be - - is there enough coking coal there to supply everyone if there was enough rail and port constraints, or is there just not enough coking coal. What is the short-term and long-term issue?

Well certainly Queensland in Australia is blessed with significant quantities of reserves of coking coal. And that would take time to develop and I think there is no question that there are other parts of the world, whether it's Mongolia and ultimately longer-term Mozambique, which will start to develop some coking coal reserves. But Australia still, as our platform shows, it's got a ways to go to be able to continue to supply the Pacific Rim. But - - the rail and the port will need to fall in behind or move ahead of building the infrastructure and the mining developments. But there are additional coking coal reserves that can be developed.

You just look at what some of the major holders of those reserves have talked about in terms of their development plans going forward. But I think having said all of that, you look at the demand for steel across the globe and, particularly in the developing countries of China, India and the forecast of where steel production may have to go getting back to my opening comments, we think that long-term this is a structural, great business to be in in order to be able to supply both Pacific Rim met coal and, ultimately, Pacific Rim thermal coal as well.

So do you think based on where demand is going recently, that the ports just for the next five, 10, 15 years are going to be behind?

Well, I think we have always said that we think that port and rail will always be behind. Everytime that you get an expansion, it can quickly get consumed and then you'll be immediately into the next expansion. NCIG is a perfect example of that. We barely have the first vessel being loaded from Phase 1 at 30 million tonnes and we're very close to pulling together the final package to go to the next 30 million tonnes.

It's the nature of - - the demand right now and the Pacific Rim is so strong, we're talking about compound annual growth rates of 5% to 10% for both thermal and met coal in the Pacific Rim. I mean it's just very difficult for any set of infrastructures to ultimately build and be ahead of that kind of growth. So we're always going to have that build it, short time it's filled up, if not filled up before it even gets operational and then build the next phase.

Thank you.

We'll go to Michael Goldenberg with Luminus Management. Please go ahead.

Good morning.

Good morning.

I wanted to focus on costs in Australia. Could you maybe provide us outside of royalties anything revenue related that decline in costs from Q4 2009 to Q1 2010 that really impressive performance especially on fewer shipments. So I wanted to figure out what was specific drivers for such a stellar performance.

This is Mike. I mean we did get some benefit from currency. We were opportunistic in terms of some hedges that we put on the benefit of the first quarter. But really what drove it was the fact that we had such strong performance in the underground portfolio. When you look at weather impacts and - - we had some impacts on production out of surface operations. We were very fortunate that we had such good performance in the underground operations and that really drove our unit costs lower.

Would you be able to disclose what the costs were, x royalties, on the revenue related items? And if you expect those costs to continue at cost per tonne for the remainder of 2010?

Beyond that, I probably can't get into anymore specifics around the components of the costs.

Well, would you expect that strong performance for the remainder of 2010 then?

Well, that is why we guided to 55 to 60 and to the extent we tick up in that range it's going to be mainly driven by royalties and slightly higher year-over-year.

Got it. Thank you very much.

You're welcome.

And John Bridges with JPMorgan. Please go ahead.

And good morning, everyone.

Good morning, John.

Hi. You mentioned exporting US coal to India. Is that PRB or Illinois?

It would be anything that we can put together in a vessel at this point. John, we're looking at a number of opportunities. Obviously, long-term - - once we get - - once port capacity can be sorted out on the West Coast, the main interest is PRB coal into the Pacific Rim and into India. But having said that, we have had discussions about our entire portfolio which is both PRB and Illinois Basin coals. And we'll just have to see what materializes. But clearly our longer-term interest would be large volumes of PRB coal.

Interesting.

And John, the question that we are always asked is while we are seeing customers with interest on test burns to the East and our answer is we are, it's the Far East.

(Laughter) Nice one. And as a follow-up, also following up for the previous question. The Goonyella performance, is that a one off or is that some major improvement that you have achieved?

Well, I think it's a quarter that is a culmination of a huge amount of work both in terms of what's been done relative to the equipment underground as well as, as you know, we have gone through a change with the employee workbase there in terms of the issues that we had at the end of the year relative to our contract renegotiations. I would have to say based on the new agreement that we have in place, the workforce has responded extremely well. That coupled with the work we have done on the equipment and the sustainability of the underground practices has led to a very high, steady state for the quarter and we believe that that is sustainable. But for right now, we enjoyed the quarter that we did.

Excellent. Great quarter, guys. Well done.

Thank you.

Ladies and gentlemen, that is all the time we have for your questions. I will turn it over to Mr. Boyce for any closing comments.

Well thank you all for very much for your interest in Peabody. Obviously, based on our comments, understand we feel - - I mean the Pacific met and thermal markets are just outstanding. We believe that is sustainable and long-term as long as those countries in the Pacific Rim continue to grow at the rates they're growing at, and beyond we will have a long-term strength in those marketplaces. We obviously are poised to increase our volumes and pricing throughout the year. And from our prospective we have the best leverage to most levers of those markets of any other US based company. So, we look forward to reporting next quarter. Thank you very much.