Peabody Energy Corp (BTU) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Peabody Energy first-quarter 2012 earnings call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded. I will now turn the conference over to Mr. Vic Svec, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Okay. Thank you, John, and good morning, everyone. Thanks again for taking part in the conference call for BTU. And with us today are Chairman and CEO, Greg Boyce, as well as Executive Vice President and Chief Financial Officer, Mike Crews. And 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, as well as the MD&A section of our filed documents. As always, we would also refer you to peabodyenergy.com for some additional information. And with that, I will turn the call over to Mike.

Well, thanks, Vic, and good morning everyone. In the first quarter, Peabody delivered higher revenue, EBITDA, operating profit, and cash flows, driven by increased contributions from both US and Australian operations. That is a strong start to 2012, in spite of Australian weather issues and some challenging US market conditions. Let's review the quarterly results, beginning with the income statement. First-quarter revenues rose 17% to $2 billion on increased Australian volumes and higher pricing in both the US and Australia.

Rising revenues led to an 18% increase in first-quarter EBITDA, to $513 million, even with approximately $41 million in weather impacts from Australia flooding that affected costs and reduced sales by approximately 260,000 tonnes. Impacts were limited to the first quarter, and some of the lower volumes should be recouped in the second quarter. Diluted earnings per share totaled $0.64, with adjusted diluted earnings per share of $0.67. This came in at the upper end of our original targets, given reduced DD&A, both from lower volumes and a production mix favoring lower DD&A operations along with a slightly lower tax rate. Compared with the prior year, earnings per share reflect higher operating profit, net of increased interest expense. We look for DD&A to normalize as we increase volumes from the Australia platform throughout the year.

Our effective tax rate was 25% for the quarter, and we now expect our full-year effective tax rate to be in the mid-20% range. I will now turn to the additional detail within our supplemental data. Australia sales volumes totaled 6.6 million tonnes in the quarter, an 18% increase over the prior year, due to new and expanded operations. Australian average realized pricing increased 27%, to $130 per short tonne, due to higher realizations on both met and thermal products.

During the quarter, our mix-adjusted average pricing was $188 per short tonne for met coal and $100 per short tonne for seaborne thermal coal. We shipped 2.9 million tonnes of met coal and sold 2.6 tonnes of seaborne thermal coal in the quarter, with the remaining 1.1 million tonnes in domestic thermal product. Our Australia costs of $85 per tonne reflect the anticipated change of mix related to our acquired operations, a higher percentage of met coal in the sales mix, and higher exchange rates. The weather also impacted cost by $6 per tonne in the first quarter, and we continue to target Australian costs to be in the upper $70s per tonne range for full-year 2012. Overall, Australia margins expanded 20% over the prior year, to $45 per tonne.

US sales volume was largely in line with the prior year. You will recall that we started the year with a fully priced book of business, and the team did a good job of shipping on those contracts. Realized prices were up over the prior year in both the Western and Midwestern US, while overall US cost -- overall cost increases were held to just 6%, leading to a 12% increase in gross margin per tonne. Our US margin improvement was notable, given the major industry pressures in the quarter. EBITDA from both Australia and US mining operations increased in the quarter, and trading and brokerage EBITDA also rose 5% on growing international operations.

Peabody had another strong quarter for operating cash flow, which rose almost 80%, to $395 million. Our ending cash balance for the quarter totaled $952 million. Capital spending was $239 million, and we reduced our 2012 capital spending target by $100 million, to $1.1 billion to $1.3 billion, to account for the current market environment. This includes sustaining capital of $1.25 to $1.75 per tonne of production, with most of the remainder associated with the expansion projects in Australia. During the quarter, our total debt-to-capitalization ratio improved to 53%, and we intend to further strengthen the balance sheet as the year proceeds.

Turning to our outlook, we continue to target 2012 Australia coal sales of 33 million to 36 million tonnes, compared with 25 million tonnes in 2011, which includes 4 million to 5 million tonnes related to the newly acquired operations. Regarding domestic volumes, we reduced our 2012 sales target by 10 million tonnes, to 185 million to 195 million tonnes, down from 204 million tonnes last year. This includes expectations of lower volumes from certain requirements-based contracts with utilities, as well as select customers with whom we may reach favorable commercial terms for restructuring sales contracts. Including trading and brokerage, Peabody's total 2012 sales are expected to be in the 235 million to 255 million tonne range.

For the second quarter, we are targeting EBITDA of $450 million to $550 million, and adjusted diluted EPS of $0.40 to $0.65. The ranges reflect Australian benchmark pricing per metric tonne of $210 for high-quality hard coking coal, $153 for low-vol PCI coal, and $115 for Australian export thermal coal, as well as expected reductions in US volumes. I also point you to our Reg G schedule in the release, regarding our ranges for DD&A, taxes, and other line items.

So, in summary, Peabody had a strong start to 2012 with higher revenues, earnings, and cash flows. Both US and Australian operations increased contributions. We are focused on further balance sheet improvement, even as we make prudent investments in our growth pipeline. And we are continuing to target growth in the Australia platform, while reducing US volumes to reflect market conditions. I will now turn the call over to Greg to discuss the coal markets and Peabody's position.

Thanks, Mike, and good morning, everyone. It's clear that Peabody has started the year very strong, with increases in multiple key metrics. We remain very well-positioned for both 2012 and beyond. I plan to discuss the global and US coal markets, and then we will review Peabody's position. So, let's first look at the global coal markets, particularly in the Pacific, where demand is strong and pricing has stabilized. Coal-fueled generation growth continues to be led by China and India, with increases of 7% and 9%, respectively, so far this year.

April 1, Newcastle thermal coal contracts have settled within 15% of record levels. Global steel production and capacity utilization are rebounding, with steel prices well above last fall's trough levels. Reported spot prices for metallurgical coal are also edging above recent settlement numbers. And after a record 2011, China's net coal imports are already up more than 80% this year, and running at an annualized pace of 230 million tonnes. China has targeted generation growth of 7%, and that is twice the pace of coal production increases, requiring greater imports. We project total seaborne coal demand will rise some 10% in 2012, with the bulk of that growth coming from the Pacific markets.

Peabody projects that 385 gigawatts of coal-fueled generation will be added globally over the next five years. This equals thermal coal needs of 1.3 billion tonnes of coal per year. And global steel production growth is also expected to increase metallurgical coal demand by approximately 250 million tonnes over the same five-year period. Emerging Asia will continue to drive this growth through urbanization and industrialization. Should China continue to grow at 8.5% per year, China's annual coal use is likely to reach 5 billion tonnes by 2015.

And even as coal demand grows, global supply constraints are evident from a host of issues -- rising costs, transportation challenges, limited rail and port capacity, and weather. We estimate that mine closures, weather, and labor challenges alone already have reduced some 15 million tonnes of the industry's annualized global metallurgical coal supply in 2012.

Now, shifting to the US. Coal markets faced a weak first quarter, with coal generation off sharply due to low natural gas prices, mild weather, and a continued sluggish economy. We believe that US coal consumption could decline in excess of 100 million tonnes in 2012. A portion of the lower coal use stems from lower US electricity demand, due to the mild winter, while most relates to coal and gas switching. You will recall we said in January that the coal to gas switching could be as high as 85 million tonnes, should gas prices remain low.

On the positive side, US net exports should rise 15 million tonnes during the year. The impact of reduced demand is primarily affecting high-cost operations and producers with uncommitted volumes. On the other side of the supply/demand equation in the US, production curtailments accelerated through the first quarter and reached an estimated 12 million tonnes in March, which annualized to more than 140 million tonnes of lower shipments.

Now, turning from the global and US markets to Peabody, we believe that we are very well-positioned for the current industry dynamics, as well as those playing out over the next several years. First, in the US, to supplement Mike's comments, Peabody's commercial strategies allowed us to begin the year with a fully priced book of business for 2012. In the first quarter, our US output benefited from high customer deliveries, even as industry shipments fell 7% from the prior year. But we are also being very patient in contracting 2013 volumes. We priced just 9 million tonnes in the past quarter, with half relating to scheduled reopener contracts and most occurring in the early part of the quarter.

Peabody continues to leverage our unique position within the leading presence in the regions that are expected to experience the largest demand growth over the next years. We see Powder River Basin serving new power plants being completed and benefiting from anticipated regional shifts, due to new environmental rules. It also will substitute for declining Appalachian and lignite coal, and move to the seaborne market through the West and Gulf Coasts. Illinois basin coal is also expected to increase, based on greater scrubber installation, backfilling for Appalachia coals, and increased Gulf Coast export demand. Peabody continues to advance high-value US projects, including the extension at Gateway and Twentymile, progression of Bear Run to full production, and commercial and permitting development of West Coast port access.

Now, moving to Australia, we continue to target greatly expanded volumes this year. We sold 8 million tonnes of coal in Australia in 2005, tripled that number in 2011, and are targeting a 30% to 40% increase in volumes in this year. We are targeting metallurgical coal sales of 14 million to 15 million tonnes, and our products are closer to the port, closer to the end market, and of a better quality than that of most US producers. We also expect to increase Australian thermal coal exports to 12 million to 13 million tonnes this year. In Australia, we are targeting higher shipments from the second quarter and remainder of the year, as we benefit from expansions and improvement in our newly acquired operations.

As the year proceeds, we expect higher shipments from our Wilpinjong and Millennium mines, as they ramp up from expansions that saw first coal in late 2011, while the Burton Mine extension targets additional coal in the fourth quarter of 2012. Our integration of newly acquired operations is on track. We have increased capacity for over-burn removal at Coppabella, improved equipment utilization at the new mines, and shipped our first coal through Abbot Point from the Middlemount joint venture. Also in Australia, last week our North Goonyella employees overwhelmingly approved a new three-year labor agreement by a five-to-one margin.

All of this is aimed at continuing to increase Australia's earnings contributions, which was half of Peabody's total in 2011. These activities are consistent with Peabody's key focus areas for 2012 -- driving operational excellence, integrating newly acquired mines and projects into our Australian platform, advancing our organic growth portfolio, and strengthening our balance sheet. So, that is a brief look at our first-quarter results, market conditions, Peabody positioning, and key priorities. And with that, Operator, we would be pleased to take questions at this time.

(Operator Instructions). Michael Dudas, Sterne Agee.

Greg, to maybe expound on your comment about the first-quarter issues regarding global metallurgical coal production, do you see a lot of those attributes continuing as we move through 2012? And does the market maybe not pay as much attention to that as it should, given the production issues we have had in this sector over the past few years?

Yes, thanks for the question, Michael. And your premise, we would agree with. I think we too often look at what name plate capacity of installed production is, as we look at our supply and demand balances. And we don't really take into account what effective capacity is, which is always impacted by transportation, port, weather, geologic issues. It is a mining business and a natural resource business. And as we are seeing unfolding in Australia right now with BMA, labor issues. So, you can go over the last three or four years across the globe, and the effective annualized metallurgical coal capacity is always lower than name plate capacity, which provides a shortness in the market, which has been there and we project will be there for the foreseeable future.

My follow-up, Greg, would be in your comments regarding -- or Mike's comments regarding first-quarter US volume shipments were pretty good for Peabody and not so good for the rest of the industry. Do you see that kind of normalizing in the next few quarters? And the 10 million tonnes that you reduced on your guidance today -- is that set up more towards 2013 and beyond? And as the year progresses, could we see further rationalization of some of your output goals? Thank you very much.

Yes. I think as we look at volumes for 2012, related to the first quarter -- because we entered the year fully contracted, our customers were taking their coal on a ratable basis, while others that had uncommitted positions, you would have to assume were falling off. So, we were able to actually have a very strong shipping quarter. Now, as we go into the next three quarters of the year, as we said last call, we have had a number of customers who have looked at their volume needs for the year. We have some requirements contracts, which will have lower burns this year, as well as other customers who have fairly healthy stockpiles, that we have had some commercial discussions around rescheduling those shipments.

Some of those will be in '13 and some of those will be in '14, in terms of the replacement volumes. And that isn't always necessarily tonne for tonne; when we negotiate these changes to these contractual positions, we look at the NPV value of the contract. We try and maintain that value. And so, it's a combination of timing, volume, and future price that we set, as we make those contractual changes. To the extent what does the rest of the year look like -- as we indicated, I think there is the potential that we will see some continued decrease in coal demand for the rest of the year, which will require potentially some additional reductions across the industry.

Thank you, Greg.

Shneur Gershuni, UBS.

Just two quick questions here, and maybe as a follow-up to Mike's question -- you have the production cut in place at this point. There is still ongoing discussions. Can you sort of walk us through how the operation actually changes? Are you in fact idling a drag line, some shovels and trucks, or are you just sort of reducing overtime? Give us a sense how that works and how that would impact the fixed-cost absorption, if you can.

At this point in time, we have been able to manage the production cuts through lower overtime, changes in some of the operating schedules, which in effect means that you are not running your equipment at the highest utilization that you normally would have. All of that will impact, to a certain degree, the [divisor] that we have. It will put pressure on the cost base. But where we sit today, we believe all of that is manageable. Because our volumes are fully contracted, we can't make any changes unless we actually negotiate with our customers about what those changes may be. Others who did not have committed positions, they have the ability to make changes under a different scenario. But at this point in time, it's lower utilization on equipment and lower hours and working schedules in the operations.

Great. A follow-up question about your commentary about the coal markets globally and met coal in particular, but if you want to comment thermal as well -- you have a positive view for the second half. Is it related to general demand conditions? You sort of talked about a 50 million-tonne increase in demand over a couple of years, and so forth. Or is it some of your interest in met and pricing related to the industrial actions in Australia and recent weather issues, as well too. I was wondering if you could parse what is related to the issues versus demand.

I think the main driver right now we are seeing is demand pickup, the early signs of increasing demand pickup through the back end of the year. China's steel production for the first part of April is just running at a torrid pace. As we know, China imports were up 80% year to date; that was a combination of both thermal and met coal. And so, I would say the bulk of it is we see strengthening in the demand side, but we also see that -- and we have always had a view that supply side was -- going back to our earlier conversation, the effect of supply-side capacity was lower than name plate, which maintains this structural deficit, in terms of supply.

Great. Thank you very much.

Jim Rollyson, Raymond James.

Circling back on the US side -- you mentioned, Greg, preserving the NPV of your contracts. And it maybe isn't volume tonne for tonne, which I assume means or implies that maybe you get a little bit better pricing, all-in, on a little bit fewer tonnes or somewhat fewer tonnes, just given the way the market is running so far this year. And I noticed in the quarter your all-in US average pricing came out a little bit better than we were thinking. And I'm kind of curious, just a little bit of color for the rest of the year -- should we expect US average pricing -- and I realize the mix can bounce around, but should we expect pricing generally to be as strong as 1Q or maybe even stronger? Especially if you get some adjustments to preserve your NPV? Is that a fair thought?

Well, I think -- this is Mike. I think when you look at the -- when we talk about working with our customers, there is a couple different ways that we can go. You can look at cash payments that impact realization on a near term. You can look at pushing out volume. You can talk about the pricing and how that would impact later periods. We did have good, strong, year-over-year growth there. We were fully committed here. And we are encouraged by the revenue growth that we have had, as we work through the negotiations on some of these volumes that would ultimately have an impact on the ultimate revenue realization.

What I will say, as it relates to the US platform -- even with the guidance that we have given around taking out 10 millions tonnes -- and we have said this before and I am happy to say that we still believe that we are going to have stable margins in the US. And when we look at the cost position that we have, and relative to what we think the inflation may be, which goes to the question of which -- with lower volume, could have a little bit of an uptick in cost? But we are looking at mid- to high-single-digit cost increases between the Midwestern platform and Western platform, and that helps preserve the margin. And that, coupled with contracts that have been layered on in prior periods in strong markets, leads us to a favorable position in the US.

That is certainly helpful. And as a follow-up, Greg, you kind of began the year thinking 33 million to 36 million tonnes of volume out of Australia. Even despite the little bit of weather kind of issues you had later in the quarter, you are maintaining that. Is that a function of just expecting to be able to make it up as you go through the last three quarters? Or what is driving it, given the $41 million hit you had in 1Q?

Yes, in terms of the sales volumes for Australia for the year, it is a function of us looking at our ability to recoup those tonnes during the course of the last three quarters of the year. So, at this point, we are maintaining our sales targets. I was down in Australia just two weeks ago, and as we looked at the next three quarters, feel comfortable we will be able to achieve and maintain those existing original targets.

Outstanding. Great quarter, guys.

Thank you.

Andre Benjamin, Goldman Sachs.

My first question would be -- what are your domestic utilities saying about their level of inventory versus both normal levels and maximum? I'm trying to understand how many might say that they are close or at their max. And are you seeing a lot of them dump the stacks into the spot market or even into the export market?

When you look at overall inventories in the US, they are estimated around 100 -- mid-90s tonnes, which is a high level. It's different by region. The cap region is the highest, in terms of volumes and number of days supply. We don't have a significant number of those pure [cap] power plant customers. Illinois basin is up there, and then the Powder River Basin has started to come up. So, we are not with anybody right now that is saying -- look, we are up to the rafters and we can't take another delivery.

But they are all looking at their inventory levels, looking at the fact that we are now in the shoulder season, trying to anticipate what a summer burn may be, and then looking at -- how do they make sure nobody gets into a crisis situation? And so, those are the customers that we are talking to. And we have talked to some of our Illinois basin customers and we have talked to some of our Powder River basin customers. We have a few other requirements contracts, particularly one in the Southwest, where the burn is anticipated to be lower than it has been historically. And so, we have been -- we have adjusted those production levels, as well.

Thank you. As someone that has been working to get into China, you have been working with some of the suppliers, so a question about the supply side in China. I know their domestic met coal production has grown at a pretty healthy rate over the last few years. I was wondering if you could discuss what you are hearing about willingness to continue growing domestic met coal production, relative to recent growth rates, and what the cost of that production will be versus, say, your cost in Australia. Or, alternatively, what kind of price you think you need to see in order to continue to incentivize that growth.

In terms of what we are seeing out of China, we are seeing some of the same signals that others are. Recently, China indicated that metallurgical coal was a, quote, precious resource, that they were going to slow the growth rate and more closely control the new production of metallurgical coal, which indicates to us that the seaborne market levels that we see today and we have seen in the past are not a particular concern to China, in terms of their ability to source coal from outside of China, in order to keep their steel industry moving forward on a strong basis.

On the thermal side, they have -- the sheer magnitude of the demand for thermal coal in China and the bifurcated nature of the country where you have heavy demand load in the southeast provinces, coastal areas for the electricity, versus the coal regions in the north and the west, indicate to us -- and I think the data is now showing that growing imports of thermal coal is a fundamental part of the China strategy to meet their energy needs going forward.

And just one statistical point on that -- our estimate is, year to date through March, net coal imports by China are up some 40%. So, that is definitely a good trend line we look forward to continuing.

Brian Gamble, Simmons & Company.

Greg, wanted to dig a little bit into the -- your figure of north of 100 million tonnes of coal burn lost during 2012. If you look at announced supply cuts, you look at current inventory levels, and then look at the 100 million that you are talking about, does that mean that you are expecting significantly more supply cuts from the producers or significantly greater availability to stockpile, from a utility standpoint, to get to that number?

Well, I think what we are looking at right now is just to look at the demand side, and we estimate where we are relative to what we lost in the first quarter with a mild or nonexistent winter, plus what we have had in terms of coal to gas switching. Then you roll forward through the next three quarters and assume -- the best we can assume right now is normal weather patterns and gas staying in the range that it is now. That is where we come up with a demand loss of in excess of 100 million tonnes. We kind of flagged that 85 million tonne number for gas only in our last call.

Now, how will that reduction in demand translate into production for the year, vis-a-vis where the inventory levels are? I mean, that really remains to be seen, in terms of what the entire industry does. As we looked at -- you can look at announced production cuts, but they don't come close to the number that we actually saw in March, where volumes were down 13%, which annualized to 140 million tonnes, which would give you the sense that if we maintain that pace through the end of the year, we will actually see some reductions by the end of the year in the inventories. Now, our view is it's probably a bit too early to actually make that as an affirmative statement, but we also think that we are going to see more production cuts announced going forward.

And then, as a follow-up along those same lines -- when you look out to '13, look at your open book, as you mentioned, you might be deferring some tonnes from '12 into '13, due to the nature of contracts or due to lower burn levels. But you still have a decent levels of open tonnage for '13, as does the rest of the industry -- in fact, you are probably doing just fine in relative terms. But when you think about the ability to hold off signing contracts for '13 or the ability to hold off making decisions about a production footprint for '13, how long can you do that? Do signings for '13, especially the PRB where the tonnage is greater, need to start before summer? Or can they wait until the fall to really begin, and still allow you to get to the production footprint that you would like to be at for the year?

Yes, we have time to certainly wait till the back end of the summer season into the early part of the fall, in order to begin to make any decisions around what our ultimate production levels next year will be. So, I think the plan right now, we are going to see what that summer burn looks like, get a better sense as to what the inventories are looking like toward the latter part of the summer, and that will be the stronger metrics going into next year.

Brian Yu, Citi.

Greg, my first question has to do with China's met coal demand. From the numbers I could tell, it looks like they are increasing their imports overall, but they are actually getting a greater portion from a cross-border trade with Mongolia. And so, from your perspective, is the thought that as the year progresses, their steel production ramps up, they will get more from Australia? And then, secondly, along the same lines, you guys have a couple initiatives in Mongolia. And I was wondering if that fits into your longer-term view of trying to supply that market from both sides.

Yes, first of all, in terms of increasing from Australia, I think the answer is yes. Part of the issue in the first quarter was there wasn't a lot of excess coal coming out of Australia, because of not only the weather issues, but also some of the labor issues that were occurring. So, there wasn't a lot of -- to our knowledge, really any excess to come out of Australia. But we think that will change, obviously, going through the next three quarters.

In terms of Mongolia, that is part of what we would like to accomplish with our Mongolian strategy, both with the TT project as well as with our Peabody Winsway joint venture exploration work that we are doing in Mongolia. And that would be to be a supplier of metallurgical coal from Mongolia into China, as well. As we look at our long-term supply/demand balances, we have always assumed production out of Mongolia, land-based imports into China, but also see strong growth out of Australia, as well. So, it is a two-pronged strategy for us, and we don't see one as being detrimental to the other.

Okay. Second question I have is just with the reduction in the US, is there a way to tell from your customer base that the reduction in burn is due mostly to blending activities and the farther east plants? Or do you see gas switching actually impacting the dedicated PRB plants in the Midwest and Texas area?

Yes, I think there is no question that we are seeing gas impacting across the country. That is just the reality of gas at the prices that it's at today. And how much that -- how long that continues, we will see. Ultimately, we view it as a reversible trend, particularly at these levels. But almost all plants are facing competition from gas.

Okay. Thank you.

Justine Fisher, Goldman Sachs.

My first question is on pricing power in the US -- if we look at the coal curve, the front end of the curve is pretty low -- and admittedly, probably transactions from coal companies to utilities aren't taking place at those low levels. But it is pretty low versus the outer years. And then, the production cuts look like they are going to meet demand, but not necessarily create a tightness in the market. So, what do you guys think is necessary -- needs to happen in this market? And maybe, what is the first indicator that you would look for, for coal companies to create some pricing power for themselves? Such that when you do go back into the market, whether it's in the summer or the fall, you can actually price it at levels that maybe you were doing a year ago, or that would generate some decent margin.

Well, I think we are going to -- as we said earlier, we want to watch what happens with coming out of the summer burn season, with the level of summer burn, as well as how production volume reductions that we are now seeing flow through to inventory management. And that will really set the stage for 2013, in terms of not only volume, but how pricing is set across -- particularly, the PRB platform, but all of the platforms. So, it's a bit early to tell. As we have said before, there -- we are not going to mine for practice, in terms of the Powder River basin. We are going to make a margin on everything that we sell, or we will wait until we can make a margin on what we sell. But it probably is significantly early right now to really determine what the outcome for '13 is going to be. A normal or a normal to warmer than normal summer goes a long way; it's the highest burn season of the year, in terms of coal.

Okay. And then, the next question was on debt repayment -- I know that you guys had highlighted when you made the Macarthur acquisition that you would look to repay debt going forward, and you highlighted at the beginning of the call the focus on the balance sheet. Is there an amount that you guys are anticipating paying down through the rest of this year? Have you held off on that, for example, during the first quarter, because of the weakness in the market? How much debt -- or revolver/term loan repayment can we anticipate this year, given market conditions?

This is Mike. It would be difficult to get into a specific number at this point. We have been encouraged by our cash flow generation in the first quarter. But at the same time, we are going to do our analysis looking outward over the next three quarters. We have still met settlements we need to have in the third quarter and the fourth quarter. We still have some of the issues that we are working through in the US. So, I can tell you that we are generating good cash flow. To the extent we have excess cash flow, our highest priority is going to be around debt reduction as a use of that cash.

Great. Thanks very much.

John Bridges, JPMorgan.

We are probably doing this supply/demand thing to death, but you mentioned the prospect for 15 million tonnes of exports from the US. But if you price that back to Central Appalachia, that is sort of $57, and these guys talk about costs being $70. So, I just wonder -- how long do you think we can continue to export at this level? Or do you see something else going on?

Well, I think with the -- when we look at an increase in exports, most of that is probably coming from new thermal exports out of the Illinois basin, Powder River basin hand. The predominant driver of East Coast exports has been the thermal export versus met. But then, also, if you look at, John, a view that met will strengthen through the back half of the year, that should at least sustain a certain level of met coal exports coming out of the US, for those that have a lower cost position. So as we ramp all of that up, we see -- we do see an increase of exports out of the US this year. And then, of course, over the next four or five years, with the growth in port capacity, we see a significant increase opportunity for thermal coals out of the West and Illinois basin, either through expanded Gulf port capacity or new capacity on the West Coast.

Okay. And then, as a follow-up, the increased imports into China -- one of the issues, though, seems to be that rather than buying benchmark Newcastle coal, it's other grades. Are you tweaking your strategy to take that into account?

Well, part of our Indonesian strategy that we have had within our Asia platform and our trading platform has been to secure supplies of Indonesian coal, because there is a fair amount of the lower-quality coals that China imports, particularly out of Indonesia. We have a lot more data around that when we started -- when they started to talk about their lignite imports. But that has always been part of our Indonesian strategy, to secure some supply from Indonesia, because not only does it go to China, but it also serves that Indian market.

But I will tell you, even within the context of our Australian platform, our signature products are the high-end, normal Newcastle products. But to the extent that we now have a market for some higher-ash type products, we have been taking advantage of that out of our Australian platform, to move those products into the Indian and the Chinese market, which just allows us more operating flexibility and revenues out of Australia.

Holly Stewart, Howard Weil.

First question -- how does the request for deferrals in the PRB right now compare to 2009, and maybe even 2002?

2009, yes, it's probably similar at this point in time, based on what we were seeing back in 2009. I'm not sure I would have enough data to go back to 2002; but certainly for 2009, we are seeing things somewhat similar.

Okay, okay. Just curious, because we are obviously lower on gas. And then, just as we have -- I guess my follow-up would be -- as we have had a better view on the contribution related to Macarthur, can you review the met mix in the first quarter? And then, how we should think about it going through 2012?

Overall, the met mix, Holly -- as we looked at Q1, the hard coking coal was probably 40%, the semis were maybe another 20%, and then the PCI was probably about 40% of that.

Perfect. Thanks, gentlemen.

Lucas Pipes, Brean Murray Carret & Co.

First, on your realized price in Australia, it looked extremely strong for the first quarter, hardly unchanged from the fourth quarter. Could you maybe walk us through the various drivers that supported Q1 prices there at roughly Q4 levels, despite the benchmark for met coal coming down pretty significantly during that time?

In the case of Q1, we had some carryover volumes there on the price side, and we also had a good mix on the met coal side that continued to set that forward.

I think the other aspect is with the acquisitions coming in, those are higher priced. So, our overall mix, because we have a higher met coal proponent now, drove the average up versus the thermal and the domestic coals that were part of the previous base.

So, we should also expect some carryover from Q1 into Q2, is that a fair assumption?

There will be modest amounts of that, as well, with the weather impacts that we had.

Okay, great. Thank you. And then, to stay in Australia -- first, your guidance assumes a pretty nice ramp-up over the course of the year, in terms of met coal in particular. Could you walk us through when you expect these volume increases to materialize?

Yes, we don't -- we typically don't give specific guidance, as it relates to quarter to quarter, on volume. I can tell you on a ratable basis, when you look at met 2Q to 4Q, it's probably 3.7 million to 4 million tonnes.

Curt Woodworth, Nomura.

Wanted to follow up on the seaborne thermal market. So, the import data, obviously, has been very strong out of China, and yet the comment in your press release that you think their domestic production is only going to grow about half the rate of their overall electricity generation requirement. So, on a base of -- I think it's over 3 billion tonnes in China, that would lead you to a pretty significant import number for the year for thermal. So, I am just wondering what gives you the confidence on the China production number? And then, if you could tie that into what we are seeing recently in the market, where most of the seaborne thermal price indices have been moving lower, yet the imports have been rising. And do you see any catalyst to get the price metrics starting to move more positively from here?

Well, a couple of things. First, on the Chinese situation, we are -- on a trend basis, we rely on what the Chinese themselves are saying relative to what their production growth is going to be over the next couple of years. Even if you make an assumption that they are likely to exceed that, there is still a significant gap between what their generation needs are and what their internal domestic production is going to be. And that is why we forecast a healthy increase in overall imports this year and over the next four to five years.

In terms of pricing, Newcastle pricing was within 15% of its all-time record pricing. We have seen a bit of a widening between the European and the -- or the Atlantic and the Pacific market, partly because of increased exports out of the East Coast of the US. But the Pacific market pricing has remained very strong.

Okay, thanks. And my follow-up question is on Macarthur -- can you give an update for some of the metrics this quarter, in terms of cost performance and volume, and how you see that trending for the rest of the year?

Well, in terms of overall volume performance, I will tell you that the mines we acquired from Macarthur, Coppabella, and Moorvale actually had a good quarter, in terms of coming in at our forecasted levels. They have made good progress down the improvement plan that we had established. We have added overburden capacity at Coppabella, and the equipment availabilities and productivities are increasing slightly ahead of the schedule that we had outlined. So, overall, in terms of first-quarter cost performance, they were slightly ahead of schedule, and we anticipate that we can keep that trend going through the rest of the year.

Okay. Thanks very much.

Brandon Blossman, Tudor, Pickering, Holt.

PRB, to finish that off -- so, the basin as a whole, particularly in March, production is down quite a bit year over year. But commercially, you guys seem to do exceptionally well against that. How do we reconcile that on a go-forward basis? It seems like in general, PRB burns are down quite a bit. Your guidance is down now 5%, essentially on a year-over-year basis, if that. How does that reconcile itself over the next three quarters?

Well, I think you have to look beyond our platform, and there was a fair bit of uncommitted capacity from the Powder River basin. We will have to see what occurs with that capacity. As I said earlier, we were fully contracted. And so, to the extent that we reduce volumes for the year, that has to be after we have had the ability to negotiate contract changes with our customers.

We have been able to do a certain amount of that, and that has led to -- and not all of our reductions at this point are coming solely out of the Powder River basin, but a good percentage of it. And so, we are still continuing some discussions, but I think we are going to have to wait and see what the rest of the Powder River basin looks like over the course of the next two to three weeks.

Greg, I think it was in Mike's prepared comments, it sounded like you had anticipated some contract deferrals in your current guidance, the down 5%.

Yes, that is correct. That was incorporated in the guidance that we provided.

Okay, that is great. Okay. Good news there. Second question, and this is more of a conceptual question -- but the Illinois basin, it is probably one of the few areas of obvious growth in the near term. Can you just comment on customer demand globally for that product as an export product? And then, recent developments on the trip from the mine out to a port?

Well, I think the demand will continue to strengthen for Illinois basin coals, as we get more global customers trying that product. It's a product that typically needs to be blended, because of its quality constraints. And to a certain degree, its global reach currently is limited by the size of vessels that can be loaded out of the Gulf Coast. And so, we see growth there. We have -- it has been growing, and our total level of exports this year are up a couple million tonnes over what they were last year. But those are the two issues that Illinois basin continues to need to work on, relative to seamlessly flowing into the international marketplace.

Dave Martin, Deutsche Bank.

Wanted to start with a clarification on the 2013 contract position in the US -- in your comments, you noted that you priced only 9 million tonnes for 2013. You also mentioned that some tonnes have been pushed out until next year. My questions are really -- are those two items essentially the same thing? And then, secondly, I'm trying to understand the other moving parts, because you are pointing to a total contract position of -- or price position of between 40% and 50%, which is down modestly from what you said three months ago.

Yes, just to clarify that -- essentially, 9 million tonnes, if you think of it on a base that is nearly 200 million tonnes, gets you to that 5% number. That would have been the change from what we would have told you back in January. The tonnes that we have talked about, in terms of reductions, relate to anticipated reductions in 2012 numbers, really doesn't apply to '13 at all. And to the extent that that gets resolved through negotiated settlements, that of course would change our unpriced position and you would see that in our next quarter data.

Yes, okay. And then, secondly, I just wanted to ask about India and the global market. If you could comment on recent developments in India related to thermal coal -- and I say that in the context that there has been some reports recently that have suggested their coal plant additions over the next five years hadn't been what they thought they would be, maybe only a few months ago. My question is -- do you see it that way? And does that impact your growth plans?

As we look at India, I think we all project India to be slightly slower, in terms of delivering what they say they are going to deliver. But having said that, they have in the last couple of years rapidly emerged as a major import growth country. Their coal-fueled generation this year is up 9% through March. We expect their thermal -- in 2011, their imports of thermal coal increased about 85 million tonnes. It was almost 35%. They have about 70 gigawatts of coal-fueled generation that is expected to come online over the next five years, which is about 250 million to 300 million tonnes of thermal coal.

So, a little slow getting out the gate; but what we are seeing right now is they are going to be lifting the imports at very high levels, 100 million to 200 million tonnes over the next five years, as they continue to complete this thermal generation buildout. They have a fairly explicit plan right now to encourage imports, and generation build is along the coast with port -- import port capacity being built. So, I guess what we are saying is -- yes, a bit slow out of the gate, but we expect them to come in line with the projections that we had for them.

Richard Garchitorena, Credit Suisse.

So, my first question, just want to touch on the Australian costs -- you mentioned Q1 was higher by roughly $6 a tonne from higher -- impact from higher -- from currency, weather, et cetera. Should we expect Q2 to Q4 to come down by that same amount, if you assume all else equal?

Yes, when you look at -- this is Mike. When you look at -- our prior guidance, we said we would be in the high $70s. As you think about that $6 a tonne, that was relative to our expectations. We continue to guide into the high $70s for the rest of the year, for the combination of some of the things that I mentioned. You have the acquired mines that came into the platform, that raise our cost. You have an overall higher percentage of met mix. We may have some foreign exchange impact later in the year. That is really what is driving us to that higher $70s target toward the back half of the year.

And then, as you think at -- okay, well, where you are today relative to where you think you are going to be toward the end of the year with the expanding volumes that we expect over the latter three quarters, that would bring you back down into that guidance range that I was mentioning. I guess the one other item is, we do have the carbon tax that comes in, which is -- we project to be a $2 a tonne impact, because it only comes in for the second half of the year. That is another $1 a tonne in that equation.

Okay, great. Thank you. And then, my follow-up to that -- can you give us any color on where you would see costs going three or four years out, once you have progressed with the expansions, possibly move forward more with the Macarthur projects?

I think it's difficult to look at cost projections too many years out. When you look at factors that are going to impact that, we will get to steady state, both on the existing Australia platform. We have development projects out of the acquired mine platform. Foreign exchange is always a wild card. We talked on the last quarter call about labor inflation. And what we do is we look to offset that with our increasing volume, better sweating the assets, and significant cost containment efforts over the next several periods.

Great. And then, my other question is just broader-based -- given the fact that we know that the US market is quite depressed at the moment and probably going to stay that way for some time, and the strength in the Australian business -- any updated thoughts, in terms of how you can potentially monetize the Australian assets more?

Well, right now, as you know, we are going through a sale process for Wilkie Creek, which has had very, very strong interest, in terms of that asset. I think in terms of the rest of the asset base in Australia, our focus right now is to integrate the newly acquired mines, complete the project program that we had for not only our existing operations expansions, but also the new project build within the old Macarthur platform, that being getting Middlemount up to its full capacity and then completing Codrilla. And then, we will watch over time and see how that happens. But given the value in that platform, the substantial value in that platform, we don't have plans to monetize that at this point in time. We are looking at that as a significant component of our growth engine.

Mark Levin, BB&T Capital Markets.

Two questions -- the first as it pertains to all of the Aussie labor issues that are going on right now, specifically with BMA. You mentioned that you settled with North Goonyella. Can you remind us what other labor contracts -- or try to give us some parameters to think about what else is going to happen this year from a labor perspective, as it affects Peabody?

Sure. As we entered the year, we had a number of operations that had contracts that needed to be renegotiated this year. For us, the big one was North Goonyella. We also have an agreement at our Wambo underground that we are in the process of discussing with the employees. And we will hope that a vote there will occur before the end of April or early part of May. A number of our contractor mines also have negotiations.

Our Burton operation, Wilpinjong operation, and Millennium are all contractor-operated, and those individual contractors are in negotiations for labor agreements there, as well. So, at this point, we are optimistic, with having completed North Goonyella, that that sets a good template for the other operations that we are negotiating. And historically, the contractors that we are using have had very, very good relationships with their union workforce.

Okay, great. And then, the follow-up question relates specifically to Wilkie Creek. Obviously, as you mentioned, you referenced a lot of interest in it. Can you maybe give us some parameters, the economics of that mine, maybe what kind of EBITDA that mine generated last year? Or at least, what the cost structure is and the pricing that you get?

I think all I can really tell you, the middle of the sales process is -- it's been a good operation for us. Reasons why we decided to monetize Wilkie Creek was it was really sitting outside of what is now our core areas in the New South Wales, Southern New South Wales, and Bowen basin operating regions. Wilkie Creek is a 2.5 million-tonne-a-year operation, with a potential to grow, based on port and rail planned improvements. And it's been a good quality thermal coal moving into the Pacific Rim, and probably ought to leave it there. Suffice it to say, there has been very strong interest.

Just from an accounting standpoint as it relates to that, it's a discontinued operation. So, as you think about the continuing operation information, you see in the current and prior periods, they are clean, exclusive of anything related to Wilkie Creek.

Great. Last question has to do with PRB production in 2012 -- you guys have -- last year, I think the numbers were sort of 470s, 480s. Where do you see PRB production landing in 2012? What is your best guess?

Well, suffice it to say, PRB will be a contributor to the lower numbers for the US for the year. But I think it's too early to predict exactly where that number and what the component of it is. Obviously, significantly down in the last part of March. If you just looked at the uncommitted positions that people had, you can come up with a number that is 10%.

David Gagliano, Barclays Capital.

I have two quick ones -- one, could you -- in the remarks, I did hear something about one of the ways to maintain the NPV was to receive upfront cash payments. And I am wondering if you could give us a little more color on that. How much -- can you quantify the total dollar amount of upfront cash payments you received in the first quarter? And how should we expect those to progress over the balance of this year? That is my first question.

As I think -- first off, we talked about anticipated reductions in volume. We talked about the nature of the way that you can deal with those contract restructurings, which can be a combination of cash payments and/or deferral of volumes, or restructurings of volumes to later periods at different prices. Specifically, because it's early days here, we haven't had any significant cash payments, relative to the currently reported results.

Okay. That is helpful. And in terms of forward-looking, should we expect, in terms of material amounts of cash payments? Or is that not --?

Typically, they are not material by us. Typically, it's the best situation is when we can restructure the contracts, pick up volumes, and pricing for the near term in '13 and '14. So, I think -- we have some ongoing discussions going on. And so, we probably ought to not go into any more detail relative to specifics on our restructuring.

Okay. And my last question -- what were the Macarthur cash costs in the first quarter?

They were embedded within the costs that we indicated for our Australian platform.

Yes, we won't be separating out the former acquired properties. Those will be reported within the segments, on a go-forward basis. But suffice to say, we are maintaining our full-year guidance on that cost line.

And Mr. Boyce, I will turn it back to you for any closing comments.

Thank you, Operator. I guess in closing, I would first like to thank Peabody employees for the strong first-quarter results and the ongoing actions we are taking to adapt to the changing conditions and markets. It's something we are all watching very closely and staying very nimble. But I also thank everybody on the call. We will continue to execute our plan for '12. We look forward to keeping you apprised and continuing to deliver expected and strong results. So, thank you all very much. We will talk next quarter.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.