Peabody Energy Corp (BTU) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy third-quarter 2012 earnings call. For the conference all 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.

With that being said, I will turn the conference now over to the Senior Vice President, Investor Relations and Corporate Communications, Mister Vic Svec.

All right. Thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. And with us today are Chairman and Chief Executive Officer Greg Boyce, as well as Executive Vice President and Chief Financial Officer Mike Crews.

We do have some forward-looking statements. They should be considered along with the risk factors that we note at the end of our release. As always, the MD&A section of our filed documents. And as always, we refer you to peabodyenergy.com for additional information.

With that, I will now turn the call over to Mike.

Thanks, Vic, and good morning, everyone. In the third quarter, Peabody's cost-containment efforts led to strong operational results despite the challenging global markets. US operations turned in higher contributions and margins than the prior year. Australia delivered increased volumes of both met and thermal coal and we generated over $600 million in operating cash flows.

Looking first at the income statement. Third-quarter revenues exceeded $2 billion and rose 4% over the prior year on sharply higher Australia output and higher realizations in the US. Combined shipments for the platform totaled 67 million tons rising 6% over the prior year. Consolidated adjusted EBITDA totaled $460 million compared to $509 million in the prior year. These results came in above our guidance range due to strong shipments in the US and cost control across the platform. Compared to the prior year, adjusted EBITDA from US mining operations rose 7% due to higher pricing and lower costs.

In Australia, adjusted EBITDA declined $25 million as higher volumes largely offset $160 million of lower pricing.

Diluted earnings per share from continuing operations totaled $0.46. Excluding the non-cash remeasurement of income taxes, our adjusted diluted earnings per share was $0.51 compared with $0.90 in the prior year. You will recall that higher DD&A charges and interest expense continued to impact comparisons with the prior year as a result of our acquisition last October.

Our effective tax rate was 21% for the quarter excluding the effects of remeasurement. We expect a full year effective tax rate of approximately 15% which includes the $0.22 per share net tax benefit we recorded in the second quarter related to the integration of acquired assets.

Finally, as you know, we closed the Air Quality Mine in the third quarter resulting in after-tax non-cash charges of approximately $75 million, which is recorded within discontinued operations.

I will now turn to the additional detail within our supplemental schedule. US operations benefited from strong customer demand due to favorable gas to coal switching economics and hot summer weather. Shipments of 51 million tons were largely in line with the prior year despite the major decline in the broader US market. US revenues per ton came in 2% higher than the prior year as we increased realizations in both regions benefiting from our strategy of entering 2012 with a fully priced position.

We achieved a 1% reduction in average US cost per ton as a result of aggressive cost-containment activities along with higher B shipments -- PRB shipments in the West and increased production from the lower cost Bear Run Mine in the Midwest leading to an 8% increase in US margins per ton.

Turning to Australia, we saw improved production in cost from the operations that partly offset lower pricing compared to the prior year. Benchmark pricing for metallurgical coal was $315 per metric ton in the prior year compared to $225 settlements this past quarter. And benchmark pricing for annual seaborne thermal coal contracts was $130 per metric ton in the prior year compared to $115 per metric ton this year.

We shipped 8.5 million tons in the quarter rising 39% on higher volumes related to the acquisition as well as expanded operations. We sold 3.5 million tons of met coal at an average price of $154 per short ton and 3.2 million tons of seaborne thermal coal at an average price of $[93] per short ton. We also shipped 1.8 million tons of thermal coal under domestic supply contracts. Australian costs of $76 per ton declined 2% from the prior year due to improved performance at Longwall operations and volume increase following recent expansions at the Wilpinjong and Millennium mines. These improvements more than offset a mix shift toward higher cost met production and the inclusion of the acquired operations.

We continue to target Australian costs in the upper 70s per ton for the full year.

Regarding Peabody's overall cost containment initiatives, we will continue to aggressively pursue savings in all areas of the business. You'll note that we have identified approximately $100 million of annual overhead and other savings, primarily through lower outside services spending, elimination of contractors throughout the platform, and workforce reduction. This is in addition to our multiple process improvement initiatives that are a staple of our operational approach at all levels.

These reductions are a result of overall belt tightening across the business as well as the volume reductions we targeted and the deferral of growth projects. In these choppy markets, it is vital we control what is controllable and continue the drive to be at the lowest end of the cost curve in order to maximize margins.

Turning now to the balance sheet. Third quarter operating cash flows of $616 million led to a $648 million cash balance at September 30. Capital spending totaled $308 million in the quarter and $742 million to date this year. You will recall we cut back the midpoint of our full-year capital targets by $250 million since January to $1 billion to $1.1 billion.

Looking at our capital spend going forward, we are finishing late-stage growth projects in Australia while deferring several other projects across the platform. These actions, combined with a continued focus on lowering our sustaining capital needs, will lead to meaningfully reduced 2013 CapEx compared to 2012 levels. We will provide greater detail regarding the planned spend when we review our annual results in January.

Peabody continues to focus on strengthening the balance sheet through de-leveraging with more than $300 million in debt repayments year to date. We also have no material debt maturities until 2015.

I will close with a review of our outlook. For the full year we are now targeting US sales of 188 million to 192 million tons and Australia sales of 31 million to 33 million tons. Including trading and brokerage volumes, Peabody's total 2012 sales are expected to be in the 240 million to 250 million ton range.

Adjusted EBITDA for the full year is targeted at $1.75 billion to $1.85 billion with adjusted diluted earnings per share of $2.10 to $2.30. For clarity, the tax benefit realized in the second quarter is also included in our full-year guidance range for adjusted diluted EPS.

These ranges anticipate lower Western shipments, longwall moves in Colorado and Australia as well as a decline in benchmark met and seaborne thermal pricing. I also point you to our Reg G schedule in the release regarding our ranges for DD&A, taxes and other line items affected adjusted diluting earnings per share.

With that discussion of third-quarter results and outlook for the full year, I will now turn the call over to Greg to review the coal markets and Peabody's position.

Thanks, Mike. Our third quarter is a credit to the Peabody teams, both in Australia and the US. They operated well, contained costs, and maintained good volumes in some challenging markets. I will review market conditions and then discuss our actions to best position the Company across the operational, commercial, and financial platforms.

First, a look at the coal markets where demand continues to be affected by sluggish US GDP along with the recession in Europe and deceleration of growth in China. The current economic picture has impacted near-term markets for both met and thermal coal though we see several bright spots despite these headwinds.

In metallurgical coal markets our near-term outlook remains cautious while the mid- to long-term view is positive. There are signs in met coal pricing in the thin spot markets is beginning to stabilize and projections call for increased growth in global steel production in 2013. I'll make a few more observations on metallurgical coals.

We believe the Chinese government will continue to provide favorable monetary and fiscal policies to spur greater growth in key manufacturing sectors while implementing robust infrastructure spending in line with the current five-year plan, both keys to sustaining 7% to 8% GDP growth. There are signs that China's steel production is picking up in the first half of October following the return from the recent holidays. Current international market prices remain below delivered domestic Chinese pricing at coastal markets which should encourage greater imports. And longer term metallurgical coal growth remains positive as emerging Asia continues to build out major infrastructure and manufacture consumer goods as populations move to the cities and up to the middle class.

Now turning to international thermal coal markets, increased generation continues to drive growth in seaborne demand. I would note that this demand has been necessary to absorb the increase in thermal coal supplies during the first half of the year particularly from Indonesia, the United States, and South America. The coalfield generation is up 26% year-to-date in Japan as [high CV] Australia coal fuels plants that are running flat out to offset significantly reduced nuclear generation.

Europe is seeing double-digit generation growth as the UK, Germany, Italy, Spain and France all increased thermal generation. Here too nuclear is declining and high natural gas prices make coal generation extremely attractive.

India thermal generation is up 11% year-to-date and coal imports point to another record year as the nation works to meet summer -- to meet growing power needs as evidenced by the blackouts this summer. And while China's thermal coal generation is up just 2% year-to-date, net thermal coal imports have risen more than 50%.

The result is thermal coal pricing that remains near triple digits for 2013 benchmarks in Europe and Australia.

That is a bit of review of the demand side for our key products. We also see pullbacks on the supply side globally from met and thermal coal exporting nations. India's response -- Indonesia's response has been significant with thermal coal exports at or below prior-year numbers for the last four months, and producers at the high end of the cost curve cutting back.

China's domestic rail shipments are down approximately 12% in recent months and the country has announced production cuts of at least 150 million tons of annualized output from small inefficient mines. This opens the way for even greater imports.

A number of Australian producers have announced mine closures, rationalization of production, reductions in ships and workforce, and reduced investment. And we have also seen significant pullbacks from the US as the cost curve doesn't support exports of East Coast steam coal or lower quality met products at this time.

In the United States, we continue to estimate a decline of approximately 120 million tons in coal use this year. The worth of this impact has already occurred with the US down some 100 million tons mostly from coal to gas switching that was frontloaded in the first half of the year. Since spring, natural gas prices have shown robust price increases. Weekly storage injections remain below average, and [problem] gas prices are above $3.50 per million BTU with a forward strip above $4. This is favorable for both Powder River Basin's and Illinois Basin demand.

And we expect accelerated US supply reductions in the fourth quarter as previously announced cuts take hold, train cycle times are slowing, and more high-cost production comes offline. As we look toward 2013, coal inventories clearly will take some additional time to work down. Powder River Basin plants are at 70 to 80 days burn with Central Appalachia still above 120 days. But both Peabody and the EIA project an increase in domestic coal consumption of some 40 million to 60 million tons in 2013, helping rebalancing stockpiles to more normal levels.

To conclude the market overview, the US coal demand is on the upswing after trial consumption in the first half that will fully balance supply demand picture is contingent on improved natural gas prices, rationalize US production and a drawdown of inventories. And the world is not out of the woods economically and key concerns remain. Still, we are seeing signs of global supply demand balance and look toward greater recovery in 2013. In fact, Wood Mackenzie has just projected that coal will overtake oil as the world's largest energy source next year.

Now Peabody is well-positioned across our platform as we look to the fourth quarter and 2013. In the US, our results demonstrate several strategies that are paying off, positioning our assets in the regions at the low end of the cost curve, targeting further cost reductions by pursuing across the board cost initiatives and locking up contracts early for 2012, which has helped to bring about increased year-over-year revenues per ton.

During the quarter, we only committed a small amount of new US business for 2013 and priced a modest amount of reopeners. Now as we move through the budgeting process this quarter, we will determine our appropriate production levels for 2013 and we are already 80% to 85% price next year assuming this year's output levels.

In Australia, the team had a solid operational performance during the quarter that saw strong output and lower cost. Volumes at Wilpinjong and Millennium have reached record levels, following their expansions. We continue to shift to owner operations at Wilpinjong and Millennium and these moves are on track. In fact, employees at Millennium just ratified the workplace agreement with greater than 90% approval. The Burton extension project is wrapping up with production from the new coal area scheduled to begin in December. And we have seen some improved performance in contractor run operations that you may recall had creative challenges in the second quarter.

Our corrective actions at Coppabella and Moorvale have been continuing on pace, with the bulk of these improvements to being completed this year.

As we look forward to 2013, we continue to implement a number of actions to respond to market conditions. We are exercising capital discipline, spending capital all in to complete late stage development projects and owner operator conversions, driving costs out of business both at the corporate level and operations, optimizing our production levels to best manage our priced, unpriced levels and evaluating sales of nonstrategic assets. All of this is aimed at enabling Peabody to continue to weather the current market challenges and position ourselves to benefit from eventual recovery.

So that is a brief review of the markets and Peabody. With that, Operator, at this time we would be pleased to answer questions on the line.

(Operator Instructions). Michael Dudas, Sterne, Agee.

Good morning, gentlemen, and good luck tonight. First off, regarding what PRB utility utilization and coal production trends you have seen since the bottom in the spring, and what you mentioned about the current and 12-month strip for gas, how should the market balance the potential for PRB mine overproduction, which has happened in the past, and where current near published pricing is for [84 and 8800] type coals which I think renders much of the basin on economic at current levels?

Well, I guess my own sense is, first of all, you -- assume when you said good luck you were talking about the Cardinals.

But I think that you are going to see that the producers are going to be very respectful of their cost positions as new production or production gets recovered from what's been taken out of the market over the last 12 months and certainly over the last six months. I mean, obviously, there's been a lot of changes. People have been deferring capital. Not all of the production that was in place is amazingly recoverable. You'll have some over time that you can bring back in.

But all of that comes in at a bit higher cost structure than what people currently have. So I think that there is going to be a good level of caution as people bring production back into the market to meet that growing demand.

And my follow-up is, you mentioned in your prepared remarks, Greg, 150 million tons or so of Chinese capacity coming offline because from the small, inefficient mines. Do you think that is just a continuation of the government's plans or has that been accelerated somewhat because of market prices within the country and given where opportunities for where we are given benchmark prices are, and what the cost curve is in China?

While I think fundamentally it is part of the government's plan to restructure the industry. Obviously it is probably helped a bit by current market conditions, but when you look at the cost structure in China it's -- the import market is very competitive, certainly in the southern part of China with their own internal domestic production. So I think the market is helping them achieve their long-term goals and that is to have larger enterprises have a lot less smaller, higher cost, less efficient and less safe operations in the sector.

Jim Rollyson, Raymond James.

Good morning, everyone. Greg, you mentioned, in the prepared remarks your comment about the seaborne thermal market may be growing by another 100 million tons next year. Kind of curious, A, where you see the exports kind of originating from around the globe and B, what kind of international benchmark pricing do you think you need to get there?

Yes, thanks. I think the 100 million tons was actually what our forecast for growth for this year and 2012 we see additional growth in '13 through '16. Almost all of that growth comes from new generation being built globally. Between now and 2016 we still see 390 gigawatts of new coal-fueled plants being built particularly with a heavy emphasis on China and India and the rest of the Pacific Rim.

This year, year to date, we have seen a significant increase early in the year from Indonesia filling that volume. As prices earlier in the year were higher, we saw more exports out of the US. Colombia has picked up a bit and in the first half of the year South Africa was operating fairly well. Of course, you roll forward now to where we sit today as the US exports became higher cost and prices had fallen a bit, they came out of the market. Colombia increases have stabilized. South Africa is starting to have problems across their entire mining spectrum, given their unrest. And Indonesia, over the last four months, has been down as they have rationalized their export capacity, given where prices are falling.

So I think to a certain degree, it encourages us that as we saw that little bit of dip in seaborne pricing, the market responded fairly quickly which would give us an indication that we were, that would have been the floor, if you will, on prices going forward. And now as economic activity in 2013 hopefully begins to improve we'll see both increase in demand and upward pressure on pricing.

Thanks for the color. And as a follow-up you guys have done of a phenomenal job obviously on trying to hold the cost line. Talked about the $100 million in additional overhead tightening of the belt I think you mentioned. Just curious where kind of around the -- if you would walk around the Peabody platform where you have seen this and maybe how much of that has actually already happened versus how much is yet to show up in the numbers?

Sure. This is Mike. In response to the current market conditions, we have been looking not only at the fourth quarter, but also 2013 so it was a concerted and combined approach. When you look at overall cost reductions, really no-cost category was safe. We look at personnel, we look at contractors, we look at outside spend, we look at T&E.

So as it relates to that from a headcount perspective we've got roughly 925 positions that are coming out of the platform which is a combination of corporate and admin positions. But the largest bulk of that is really going to be related to contractors, both at the corporate level, but even larger on the operating level. And then, we frankly have some open positions that we are going to eliminate going forward.

So it's never [debt] that starts to benefit in the fourth quarter, but we really expect to see the full benefit in 2013 and it is targeted, specific and, we believe, realizable next year.

The only thing I would add to that is, we have we are benefiting from a significant number of investments and processes that we have been putting in place and building upon over the last year and a half. Simple things like investment in technology that will allow us to have the best videoconferencing capabilities around our platform. So, as we look at how do we reduce, as Mike said travel, when you are flying globally all the time, that gets pretty expensive in today's environment. But now that we have got the technology in place, we can significantly and have significantly reduced that. So that is one sustainable aspect.

The other one is in our asset management and our maintenance programs, across the group, where historically you would do major repairs based on ours. Well, we have invested and implemented pretty sophisticated systems to where we look at the actual condition of engines, wheel motors, major gear boxes of conveyor systems and we do the analytics to only do those repairs that are required on a condition basis. And so what we're seeing is we are getting extended hours, we are getting lower mean time between failures, but we are getting longer life out of our components which is significantly reducing our maintenance repair costs. We see a lot of that as sustainable as we go forward. So those are the kinds of things in addition to, as Mike said, opening up the cupboards and pulling out everything that you would -- in good times you would like to do, but when you get into these kinds of markets, you get really tight and you say what is absolutely necessary, that is what we'll do to be safe and get called to market.

Great. Good job. Thanks.

Brian Gamble, Simmons & Co.

Good morning, everybody. Wanted to focus specifically on the net market, if we could. Some comments in here around your expectations for the global markets and specifically related to -- and in your comments about China and continued growth there. How much of your forecast for 2013 as far as either the balancing or maybe the slight improvements in that benchmark pricing is based on China continuing to grow demand versus, I guess, production rationalization both in Australia and in other geographies?

I think it's always difficult to put an exact percentage on one versus the other. I will tell you that our forward view is we assume that China is going to be around that 7.5% GDP level, and then we look at how that drives both their steel demand as well as their coal-fueled generation demand for thermal generation.

We do not anticipate significant recovery in the European market in 2013. We see modest improvement, would like to see modest improvement in the US market. So, as we take all of those into factor, and then we then overlay what we believe will be reduced supply, particularly out of the US because of the current market conditions and some rationalization among the high-cost producers in Australia, that gives us our forward view for 2013.

And are you baking in a specific price within your forecasting for next year on the met side?

We certainly have our views on price, but we don't normally share those.

I realized that, I thought you might want to throw it out there, but that is okay, no problem. And then my follow-up is on the US market, great volume for the quarter, the extra data was outstanding, some good numbers out of PRB. Are the shipments that went out during Q3 more a reflection of the hot summer and, therefore, utility's ability to take some of the deferred tons from earlier in the year or is it incremental to what they thought burn would be and, therefore, more positive as we roll into 2013 as far as what that ratio of coal versus gas within the power mix could potentially be.

Well, certainly, you saw an increase in the coal component of generation in the third quarter. And with gas prices $3.50 and above and forecasted to be above $4 for next year, we see a significant amount of gas to coal conversions through the back half -- through the rest of this year and then through 2013. Particularly, I mean, PRB is essentially all on the money, Illinois Basin when you get up to $4 will be predominantly all in the money as well, relative to competition with gas.

But there's no question the hot summer also helped the burn. And so we saw, to a certain degree, strong offtake from the utilities through the early part of the third quarter. So what we are seeing right now is a bit of a slowdown in overall PRB shipment train sets which you normally would have in these shoulder seasons pulled out and we'll just have to see how the winter materializes. If you will all recall, last winter was pretty nonexistent. Normal winter, we expect a continued rebalancing of inventories through the winter and in the summer next year.

Thanks, Greg.

Shneur Gershuni, UBS.

Good morning, everyone. I have two questions. One on revenue, one on cost. I guess it's more a follow-up as well, but you had mentioned production cuts in China and it was tough to tell whether it is more thermal or more met. And I was wondering if you can talk about that in context with also the type PCI spread that you -- that you guys had mentioned this morning being the $125 versus the benchmark of $170 and kind of that's a tighter spread than we would've thought and if you think that is going to continue to trend that way or trend the other way? Wondering if you sort of give us a little color on that?

Well, as you look at the production cuts in China, certainly it was a combination of the two although they would've been a bit more weighted towards thermal coal versus metallurgical coal. They have classified metallurgical coal in China as a special resource and it is controlled to a much higher degree, the production of it, than thermal coal. But I think the majority of what we're seeing right now is actions to reduce a lot of these small thermal coal operations in China.

In terms of the spread between the low-vol PCI and the hard coking coal, you are right it did tighten slightly in this quarter. I think it is about -- PCI was about 74% of hard coking coal versus where it had been running in that 72% range. Even with hard coking coal at these price levels, we are still seeing demand for the low-vol PCI coals. In any market they provide an incentive -- there's a built-in incentive, economic incentive and cost incentive for steel mills that can use PCI coal to put that into their mix. And I think that is what we are seeing in terms of the underlying strength at this point in time in the marketplace for PCI. And when I say strength it is relative to the spread on hard quality coking coal.

And maybe as a follow-up with respect to cost, we definitely saw improvement quarter over quarter. I was wondering if you could talk about two aspects. One, when you gave guidance earlier about what you needed to do with respect to MacArthur, you talked about an extra $100 million in overburden work this year. You have seen some improvements here as well to just in the last quarter.

When all else equal -- obviously there can be inflation in some other areas -- where do you expect the trends in cost to be in 2013 if you were to hold certain things flat relative to this year? And if you can also talk about in context to the Powder River Basin as well too. If things were to pick up, would fixed operating leverage actually be a nice benefit as we look at 2013 as well from that region too?

Yes, I mean -- Mike can dive in after this if he has any specifics to add. Let me just talk to it from a little higher level. You know, you can see the type of benefits we get from pretty aggressive cost management and cost control activities with our current results.

I can assure you we are going to continue to be pretty passionate about that as we go through the next 18 months. But it's -- when you look at cost reductions or you look at the cost equation, you have got to take a view on what oil pricing is going to be because we have a high sensitivity in our platform to those costs. We have yet to see what kind of increases we are going to see from suppliers for whether it's what -- particularly from maintenance and repair items going forward. We have got some views on where we think labor costs are going to go, but until we finalize a few outstanding settlements, we are not going to see the full picture there.

And so -- and the last part of all of that is what the volumes are going to be for next year. And we haven't fixed those volumes yet either in the US or the Australian platform. So all of those are moving parts that, based on what we're seeing right now, are going to put probably more pressure on the cost structure rather than less.

Now having said that, we have obviously got our owner operated conversions in Australia which we are expecting significant benefits from. And as Mike talked about, we have got this cost-reduction initiative that is already on a 2013 basis looking to pull $100 million out of our overhead cost structure.

So what is that saying net net? I can just tell you that we are going to be aggressively managing costs. We are not anticipating significant increases. It is a bit too early to really indicate and give guidance as to where we think those costs are going to be and at what level. Mike, got anything to add?

Yes, I think you have hit on the key points. A lot of this is volume dependent, but particularly on the America side, we are looking to balance any inflationary pressures with cost containment. That is the goal that has been given to the teams and they have responded with some of the targeted efforts that they have come back with. When you look at the moving parts in Australia, you have got higher royalties, higher exchange rate impact, the carbon tax and the inflation that they have there.

But then, as Greg said, some of the mitigating factors you would have would be the owner-operator conversions and you asked about the overburden, remediation plan at the PCI operations which are on track, which would lead us to an expectation for lower costs in the PCI mines next year.

Great. Thank you very much.

Meredith Bandy, BMO Capital Markets.

Good morning. Congratulations on a great quarter.

Thank you.

Sorry to bring the house down a bit, but I wanted to ask you about some of the headlines (inaudible) about Patriot bankruptcy. And I think probably just jawboning, but in terms of the unions, they're looking to you and potentially Arch to pay some of those liabilities. If you could just expand on Peabody's stance on that.

Well, I don't think our stance has really changed from prior calls. When Patriot was spun, it was a viable enterprise. It went out, did mergers, organized their own bank credit lines. You know, went through all of the things that a stand-alone business would do. The liabilities that the union is talking about were liabilities that Patriot had and as far as I know are continuing to get paid as part of our -- we had two components. We have and as we have disclosed in our 10-K, we have got a potential liability related to black lung, although Patriot had arranged letters of credit with a government for those, and continues to make those payments.

And then we had entered into a contract to pay some of the liabilities for some other retirees, a group of retirees for Patriot, that is still in place and we still make those payments today. So I think we are going to hear a lot of noise; that is probably to be expected. But I think from our view it's a -- these are Patriot questions. They are Patriot issues. And to the extent of our liability there as, we have disclosed those in our filings and we don't see anything beyond that.

And to the liability that you are speaking of for some retirees, is that related to I think Vic quoted a $600 million? In --

That's correct.

And so that is included when we go to your balance sheet, that is already included in your other liabilities right now?

That is correct.

Okay, thank you very much for that clarification.

Mitesh Thakkar, FBR.

Good morning, gentlemen. Congratulations on the quarter.

Thank you.

I have a quick question, a little bit on the CAPEX side, given the softness in the met market and it is a little bit softer than the last quarter, so how to think about your CAPEX plans? Any consideration for the existing growth plans to get to your 2015 target and [are there] opportunities like Mongolia? I know you guys have been cited in a couple of media reports of in which, you know, you are considered to be one of the selected parties for developing the infrastructure in Mongolia? How do you balance those needs against your existing growth plans? Thank you.

Yes. I think you can look at the actions that we have taken to date particularly with our growth profile. The Codrilla development was one of those where we took the opportunity, given market conditions, to step back. We are going to do some more engineering, more drilling and bring that forward at a later date. And the only capital that we are really spending in Australia right now are on completion of projects that were 75% to 80% or more already complete when the market started to move, particularly when we saw this quarter's settlements and the owner-operator conversions where all of the equipment had been ordered. We are well down the path and the economic value to us for implementing those conversions is still extremely high and so those are proceeding.

All of the other projects that we had, we've retimed. We've slowed down, we've pared back in terms of capital spend. So, that's our Australian management of our capital spending related to, particularly, around met coal growth.

In terms of Mongolia, I would just tell you that we are not planning on spending money on infrastructure in Mongolia. We are -- continue to have discussions with the Mongolian government and others around the development of TT and how best to do that. We have been asked to give them advice on the infrastructure demands and requirements and what infrastructure should be built in order to best develop and utilize the TT resources across the entire TT platform East and West and we are continuing to do that.

But we would look to project type financing and other types of financing mechanisms if and when TT gets to a point where all of the agreements are put in place and development might take place.

Any updates on the timing or anything like that? I know it is a little premature, but if you have something which you can share with us.

No, there's nothing, nothing specific in terms of timing. We are just starting once again to have some preliminary discussions with the new government, but they still have things that they need to do to put in place to really kick those discussions off in earnest. So in the near term, we do not see that moving very quickly.

Great, thank you very much. I appreciate it.

Paul Forward, Stifel Nicolaus.

Good morning. One line item I want to ask about. There was in the third quarter '12 there was $21.2 million of losses from equity affiliates which we are assuming is mostly Middlemount. I was just wondering if you could talk about what is going to have to happen in 2013 as far as either pricing or continued investments there to turn that from a negative to a positive number?

Yes, just as a high level around Middlemount, what you are seeing right now is it was really an impact of lower production levels as we were continuing to ramp up that operation. We've just received during the quarter the permits in order to go up to its nameplate capacity where it is most efficient.

The management team at Middlemount is working with both owners, ourselves and [Yanco] to determine the timeframe and how best to now and over what time frame Middlemount would grow to its normalized production. And obviously all of that has to do with the forward view on the cost structure as well as the market.

So all of those discussions are currently in place. There have been no decisions yet at this point in time and we will just -- we will see what the outcome of that engineering work and financial work and see where the partners go.

But you are right. It's an operation that we need to make sure that we bring forward at the right timeframe and under the right basis based on where the market demands are.

Okay, thanks. And also wanted to ask, you had talked about a 40 million to 60 million ton increase number in 2013 for US power plant demands. Just wondering if you could give us a little bit of a breakdown on what's Peabody's view? Is that all going to be PRB in Illinois Basin Illinois Basin, or is it -- how do you see the regional shifts happening on that demand in 2013?

Yes, I think essentially our view is it's almost all PRB in the Illinois Basin. And it will be a bit different the [base -- bend on] plant by plant where their stockpile levels are as we come through the end of the year. Obviously the PRB stockpiles on days burn are better off than the Illinois Basin and both of those are significantly better off than Central App. We also see additional production coming out of Central App. So what the real flowthrough impact to mine site production in the PRB and the Illinois Basin is going to be pretty mooted because of the -- because of stockpile drawdowns. But we certainly feel good about the level of new demand as we look at coal recapturing market share back from gas at the forecasted gas prices for next year.

All right. Thanks, Greg.

Brandon Blossman, Tudor, Pickering & Holt.

Good morning, gentlemen. A couple of follow-ups, probably for you, Greg. I guess one, this is generalities, but low-vol PCI market supply demand, at $125 million or the low 100s just in general on a go forward basis, your view of the cost curve there for the industry as a whole. Do we lose production? Is there a meaningful uneconomic production at that price point?

I think there is uneconomic production. Whether it is meaningful or not remains to be seen. When we picked up and purchased MacArthur, that put us as being the largest producer. With the work that we have done at Coppabella and Moorvale, we feel very good where we stand on the cost curve, but there's a lot of other operations that are challenged, particularly if it were to get down to the lower number you were talking about. And we have already started to see some production come out at the market even at today's pricing.

So we are at that point, and I would say we are probably at that point relative to the hard coking coal price as well. When you look at today's prices, we have already seen what that has done to exports out of the East. We have got high-costs coming out of Western Canada. You have got some smaller high-cost operations even in Australia that are going to have to make some adjustments and we have already seen some of those across just about all of the producer bases in Australia at today's hard coking coal price. So, both of those are other indications to us that the market will, if you will, has bottomed out and we should start to see forward movement.

That's helpful color. And going a little bit nearer term into the US, Powder River Basin obviously third quarter was good, reasonably good on a year-over-year basis, exceptional in a quarter-over-quarter basis. It looks like production out of the Basin, at least shipments out of the Basin, have fallen quite a bit coming into the fourth quarter. Presumably it looks like fundamentals haven't changed that much, burn should be okay.

Are we seeing folks just kind of taking the opportunity for a breather and pulling down, drawing down inventories or do you guys think that there's actually meaningful reduced burns on a year-over-year basis?

Well, I think first of all you have to remember we are in that timeframe that -- the shoulder months -- where we normally see these types of variations in any given year because we have gone from the hot summer burn, now we are transitioning through fall and waiting to see how cold the winter is, and kind of the heating degree days we need to have going into the winter. What we are seeing right now I think is what we would typically see in the cycle.

Now clearly, if inventories were more normal, we might not see the slowdown quite as much as we are seeing it right now, they are clearly taking advantage of the shoulder season in high stockpiles. But that doesn't appear at this point to be significant and I think everybody is now trying to determine and anticipate what the winter burn is going to look like.

Thank you. That's helpful.

Justine Fisher, Goldman Sachs.

Good morning. My first question is just on what you are seeing from the utilities as far as pricing goes. On the volume side it seems 3Q is really good, you are all waiting to see what they do for the shoulder season. When they are coming back to buy more volumes from you, whether it's to price some 2013 coal although I know you said it was just a bit that you had priced or in the third [quarter] are you guys seeing leverage on your end on the pricing side or is it just higher volumes? Do you see the utilities are actually willing to pay much higher prices on the curve and they are willing to give there too? Or is it just that they are buying more?

I guess I would just say if you look at how much we sold, which was very, very little in the third quarter, that kind of gives you the sense as to where the discussion environment is with the utilities. So there's not a huge amount of volumes that are being sold and I think that is reflective of prices and those discussions are not where, certainly, we would like them to be, I suspect, probably where others are.

Thanks and then, my follow-up is just on the balance sheet. You guys ended the quarter with a really good cash balance and I was wondering -- A, if you could talk to us about what was in operating cash flow that made that cash balance so high? Whether it was working capital or something else. And then, B, as far as using that cash going forward, I know your term loan matures in 2015. I don't know whether you are thinking of paying that down or whether the shelf you filed recently had to do with accessing the capital markets to repay the term loan, but how are you thinking of your cash balance in that 2015 maturity?

So, as it relates to the cash performance in the quarter, you are right. We had $616 million of operating cash flow. We did have good strong enough performance, but at the same time we did have some fairly significant working capital benefits. On the receivables side when you look quarter to quarter, we had some higher shipments in the month of June relative to the month of September, so that was a natural decline which was a cash inflow. We also had some increases in payables as we had accrueds for taxes and interest and royalties, and things of that nature. And some of that will turn around in the second -- in the fourth quarter.

So then, as you look at -- you look at use of cash going forward, we have said our number one priority is deleveraging. We will continue to look at what that cash generation looks like, particularly in the fourth quarter, and make some decisions. We do have -- we have got $35 million of scheduled repayments on term loans in the fourth quarter, but really when you look at near-term maturities, you have got $75 million across those term loans in '13 and '14 with no significant maturities until 2015.

Having said that, that is all pre-payable debt, so it is something that we would target to the extent we had excess cash flow from operations, asset sales, any of those portfolio optimization activities.

And just to follow up, you ask about the shelf. There is no signal there. That was really just replacing a shelf that expired in August.

Great. Thanks very much.

Brian Yu, Citi.

The first question that relates to just [rail] rates, I think it was last week I heard some news that maybe some of the Australian rail guys were starting to cut their prices to help facilitate the competitiveness of PRB now that it is more in the money. I was wondering if you could comment on it or anything (technical difficulty) built on their end?

Well, at the end of the day the rail rates are contract and the rail is contracted by the utility customers. So in general, other than a little bit of the export business that we do directly with the railroads, we are not involved in those discussions.

I would say that the railroads have always taken a view that they are a participant in this market. They understand that coal at the end of the day has to be competitive, particularly with gas, and they participate in making sure that where we can collectively -- as coproducers, utilities and the rails -- that we can supply coal on a competitive basis. But beyond that, as I say, the vast majority of the business is directly contracted between the rails and the utilities.

Okay. Then, the second thing I could have is just (technical difficulty) Coppabella (technical difficulty) either you're expecting improvement in costs here, the one term coking activity nonrecurring. Can you give us a sense of how much has been spent there? I've got a mine that was -- maybe it was closer to $100 million for this year. I was wondering if you could speak to -- is that [small], reasonably accurate estimate? And that is the size improvement that you expect for 2013 just purely on those assets?

As it relates specifically to those two assets I think it would be hard to comment at this point. We are right in the middle of the budget process and, again, it is going to -- as we talked about on some of the other overall macro cost issues, it is going to really be volume dependent. So I think it would be difficult to give you an answer on those two specific properties today.

Okay. Thank you.

Mark Levin, BB&T.

Most of my questions have been asked and answered. Real quickly just on FX, and thinking about how to -- what the FX impact might look like in 2013. I know you guys have some hedges that I think are rolling off, but maybe remind us how to think about that going into '13.

Sure. Yes, we have a rolling hedge program so we are about 60% hedged based on our current estimates, the requirements for 2013 at an average hedge rate of about $0.90. So then as it relates to sensitivities on '13, a $0.05 change in FX rates would be about $68 million.

$68 million. Great. That's very helpful. Appreciate that.

And then secondly as it pertains to asset sales and I think you had referenced that earlier that that, that here is something that you guys, I know, are always looking at as one would expect. Sort of Wilkie Creek process, but is there -- are there any other sort of areas or regions or large asset sales that one might think could happen or what you are looking at basically is just small stuff here and there?

Yes, beyond Wilkie Creek we have our resource management segment that we look at across 9 billion tons of reserves. We are always looking at things that may not be non-core or non-strategic or something that may be a little further down the line for us relative to some others. So that is really the first place that we would start.

But having said that, it's really looking and we also look at maybe potentially some of the longer term tenements that we may have in the Australia portfolio. So those are two of the primary areas where we would be focused.

Richard Garchitorena, Credit Suisse.

First question, looks like trading operations margins came down a little this quarter. Anything specific to highlight there?

Yes, we were pleased with the volume that we had which is really US and Australia export shipments. But it was really due to lower realizations which led to lower margins in this current market environment on those shipments.

Okay. Great. And one follow-up, more an industry question. Given the fact that utilities look like they are less anxious to sign contracts today, do you think going forward we may see a change in terms of the contracts? Maybe have some tie to natural gas pricing indexed based contract pricing or maybe shorter contract license. Historically you done one, two, three or four contracts. Anything you think that may change, given the current environment or -- ?

We are not anticipating significant change. I mean, I don't see a tie to natural gas. At the end of the day, coal producers need to be able to have a return on their investments. The utilities understand that. They also understand that coal is going to be a significant component of the mix.

And so it is when you look at both of those relationships, I think you are still going to see a significant amount of business that is contracted out over a three-year time frame. That doesn't mean we are not going to see some increase in shorter term purchases we already have. But they are still going to have to be base lower and three years I'm talking out of the Powder River Basin. There has to be some baseload contracting in order for companies to make the capital investments in mining rolling stock and equipment to maintain productive capacity. And the utilities understand all of that.

So, I think other than a bit of the additional spot purchasing and shorter term purchasing, we are not anticipating significant changes.

Andre Benjamin, Goldman Sachs.

Good morning. Two quick questions. I guess, first, on the cost side, I just wanted to make sure we are accurately capturing this $100 million of incremental cost savings you are targeting. How much of it should be in just SG&A which seems to be running about $270 million to $280 million run rate versus say unit costs given you said some of that is contractor cost which I think come out of cost of sales. And then how much should be -- it seems like most of it is Australia and overhead and if -- does any of that flow through the US?

Yes, I think the best estimate at this point would be about 30% on an administrative basis. And then another 70% as it relates to the operating platform.

And then on the capital side, I guess, similarly we know it is too early for formal guidance, but I think your color was that the cost should be down meaningfully, and I'm just trying to understand is that just a few percent, hundreds of millions of dollars, et cetera? Or and is that level of spending consistent with say your original goal of hitting 40 million tons in Australia by 2015 and what would make you potentially take that back up?

Those are all great questions that we'll probably have to wait till January to give you a whole lot more color on. But suffice it to say when we used the phrase meaningful, we didn't use that lightly. We are anticipating that our capital program will be reduced for next year and it will be meaningful productions.

The second part of your question is how will that impact volumes by 2015. We'll have to see. We are completing, as I talked earlier in the call, a little bit of capital that we are spending is to complete a couple of projects that were so -- that were very far advanced, which are providing us more volume. We are already seeing that at Wilpinjong. We will be seeing that out of Millennium, and we have got one or two others of the same basis. The longwall top coal caving at North Goonyella, for instance, which will be going into next year.

So, we will give you a better sense and more color at that point in time.

Dave Martin, Deutsche Bank.

I had a couple of remaining items. First coming back to the Asian met coal market. I know you mentioned about lower production in China. Curious as to what you're seeing with Mongolia output, given lower global prices, or is it just that this is viewed as low-cost delivered supply and won't be impacted much?

Yes, we haven't seen a significant change in current production out of Mongolia, maybe starting to see a slight change in terms of people's forecast for increases and how quickly those increases may come into the market. But current production seems to be moving at similar levels.

And then as a follow-up, I believe, Mike, you said that your met coal realization in the third quarter was [154] which was well below benchmark and what we had been modeling. I was curious if you could comment on the mix of that business? Maybe that was a primary driver for maybe it's that you are just a much larger spot player than I would have thought.

Yes, I mean, we did -- we did have some carryover volumes as we referenced in the last call. We also have with the transition we have not yet moved into the new mining area at Burton. So we have had a bit of a quality impact. There is a bit of a quality issue in that as well.

So, and then you also as you referenced with the quality adjustments, that's why you are going to see an average that is below just the headline for high-quality hard coking coal.

Lucas Pipes, Brean Capital.

Good morning, gentlemen. If we say like the met coal benchmark price remains in the $170 range into 2013, would you look to rationalize some existing met coal production or rather further delay some growth projects in Australia?

I think we have already delayed the growth projects based on the current pricing that we are seeing for this quarter. So, we continue to look at the cost reductions, aggressively manage our cost, to continue to weather if the market were to be another quarter at that kind of level.

Thank you very much.

That will conclude our Q&A session. I will turn it back to you, Mr. Boyce, for any closing comments.

Well, thank you very much and I would like -- once again like to thank the Peabody team for a very strong quarter and their good efforts during the quarter. As you can tell our global market view remains cautious though we have seen some early signs for optimism. We are going to continue to take all of the steps to best position ourselves to work through these challenging markets. But and then come across much stronger on the other side. I think this quarter gave you a lot of visibility into the things that we are working on and those things that are being very successful. So we look forward to keeping you informed on our progress and we really appreciate your support of BTU. Thank you very much.

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