Peabody Energy Corp (BTU) 2014 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Peabody Energy first-quarter 2014 earnings call. For the conference all the participant lines are in a listen-only mode.

There will be an opportunity for your questions. Instructions will be given at that time.

As a reminder today's call is being recorded.

I'll turn the conference over to the Senior Vice President, Global Investor and Corporate Relations, Mr. Vic Svec. Please go ahead.

Okay thank you John and good morning everyone. Thanks for taking part in the conference call for BTU. 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 well as the MD&A section of our filed documents.

We also refer you to peabodyenergy.com for additional information. And I'll now turn the call over to Mike.

Thanks Vic and good morning everyone. Peabody's first-quarter results reflect the progress we've made on reducing cost, lowering capital spending, completing asset sales and maximizing cash flows, which help mitigate the effects of challenging external environment.

I'll begin by discussing our quarterly results starting with the income statement and then provide an outlook for the second quarter. First quarter revenues totaled $1.6 billion, as a 7% increase in volumes was offset by lower realized pricing in the US and Australia.

Total shipments rose 7% to 61 million tons primarily on higher PRB volumes. Adjusted EBITDA of $177 million reflects lower metallurgical coal volumes and the impact of more than $90 million of lower pricing.

First-quarter results also include approximately $30 million of notable items that were not in our original targets. These include an arbitration ruling related to a commercial dispute under a terminated eastern US sourcing agreement, as well as port logistic issues where we experienced adverse weather conditions that delayed shipment loadings and impacted coal stock piles.

Adjusted EBITDA from US mining operations of $253 million reflects the impact of lower realized pricing and higher Midwest cost, partly offset by increased volumes and lower cost in our western operations. First-quarter Australian results were impacted by a decline in metallurgical volumes from the ramp-up of the longwall top coal caving system at North Goonyella and more than $70 million in lower realized pricing.

Turning to taxes, the total income tax benefit of $52 million came in below previously issued guidance largely due to evaluation allowance recognized on deferred tax assets related to lower projected taxable income in Australia. Diluted loss per share from continuing operations totaled $0.18, while adjusted diluted loss per share, which excludes the tax remeasurement impact, was $0.19.

Now let's review the additional detail within our supplemental schedules. In the US an 8% increase in volumes to 48 million tons reflects strong thermal demand in the US particularly in the PRB.

As expected revenues per ton declined 7% on the roll off of legacy contracts primarily in the Midwest and a greater share of PRB volumes in the mix. Midwest costs are being impacted by higher overburden ratios at one of our larger surface mines due to mine sequencing. Continued focus on cost improvements and increased PRB shipments led to a 4% decline in first-quarter western costs that partly offset the impact of lower realizations.

While Australian volumes of 8.2 million tons were in line with the prior year, our sales mix was more heavily weighted to thermal coal in the first quarter. We expect metallurgical coal sales to increase as production rates continue to improve at North Goonyella.

Australian revenues per ton declined 17% on lower realizations for both metallurgical and export thermal coal and a greater mix of thermal coal sales. During the quarter we shipped 3.2 million tons of metallurgical coal at an average price of $107 per short ton and we sold 3.1 million tons of seaborne thermal coal at an average price of $75 per short ton.

A strong focus on productivity improvements in Australia led to a 4% reduction in cost per ton to help to mitigate the impact of port logistic issues and lower metallurgical coal volumes. Trading and brokerage results of negative $1.9 million were primarily driven by the $15.6 million arbitration charge I referred to earlier that was partly offset by improved mark-to-market earnings.

Resource management adjusted EBITDA totaled $9.5 million on the sale of surplus land. We also completed the sale of a non-core Australian reserve that generated more than $60 million in cash. That's a review of our income statement and key earnings drivers.

Operating cash flow totaled $54 million in the first quarter and we reduced capital expenditures to $24 million, the lowest level in 10 years. We are lowering our annual capital spending target to $250 million to $295 million in 2014, which is mainly focused on maintaining the existing production levels.

Our cash balance increased to over $500 million and Peabody continues to have substantial liquidity of $2.1 billion. Now while our team has done a tremendous job of eliminating costs and tightening capital, we continue to take additional steps to maximize cash flows in the current environment.

We are targeting a further reduction of outside spending both in SG&A and through our procurement activities. We continue to pursue non-core asset sales. We are adjusting our mining methods and shifting production to increase productivity. We also look to fully realize the benefits of recent owner/operator conversions in Australia, and we are maintaining low capital spending while improving safety and operational performance. Peabody benefits from the sizable investments that have been made over the last several years and our newer fleet of equipment enables us to focus on sustaining current production with lower capital.

I'll close with a review of our outlook. For the second quarter we are targeting adjusted EBITDA of $140 million to $200 million and adjusted diluted earnings per share of a loss of $0.39 to a loss of $0.14. These ranges reflect lower seaborne metallurgical and thermal pricing, a lower expected tax benefit and a longwall move in Australia.

Both the quarter and the year will benefit from higher revenues as we finalize pricing under a long-term western coal supply agreement. This along with improving PRB fundamentals allow us to now project a smaller decline in 2014 US revenue per ton of 4% to 7%. I also refer you to our Reg G schedule in the release for additional quarterly targets regarding DD&A, taxes and other line items.

That's a brief review of our first quarter performance. For a discussion of the coal markets and other updates I'll now turn the call over to Greg.

Thanks Mike, and good morning everyone.

Peabody's global platform continues to perform well while our Australian results reflect the challenging seaborne markets and continued ramp-up of the longwall top coal caving system at the North Goonyella mine. Our team's culture of continuous improvement allows us to advance productivity enhancements, further reduce our costs and drive capital efficiency across our operations that benefit Peabody now and over the long term.

Let me first share our view of the current market fundamentals and long-term drivers, and then we'll discuss Peabody's position. The seaborne coal market is currently pressured by rising supplies that have outpaced demand growth. We are now near the end of the supply growth phase that began in 2012 when prices were sharply higher.

Most new projects have been completed and we estimate capital spending in the sector has been reduced by approximately one-half over the last several years. This is projected to limit future supply growth while demand continues to expand. We are now seeing signs that cutbacks are accelerating due to recent soft pricing levels. Increasing demand should lead to improving fundamentals in the back half of this year and into 2015.

In metallurgical coal imports continue to grow. India and Japan have been the bright spots, up 40% and 10% respectively year-to-date.

At the same time China has had a slower start to the year, but has recently announced a $175 billion stimulus package aimed at steel-intensive industries such as rail and housing, which is expected to accelerate economic activity in the second half of the year. Longer term metallurgical coal demand will be driven by urbanization, as countries such as China and India increase their steel intensity.

However within the seaborne thermal coal market we continue to see rising demand. Japan's year-over-year coal consumption has increased 15 months in a row, and coal generation has driven coal imports up 11% through February.

Japan's major utilities are increasing coal generation capacity and the nation recently reaffirmed its commitment coal. Developing nations including Pakistan, Mozambique and Indonesia have all announced plans to build new coal fueled power plants.

And China's coal generation is up 5% year-to-date, while domestic production growth has been limited resulting in a 13% increase in thermal coal imports through March. Rail costs in China are escalating as the market deregulates and labor costs are rising as well, all supporting additional future coal imports.

This year, China is also increasing coal to gas conversion activities, while installing emissions controls to a significant portion of their coal generating plants. These initiatives will boost coal demand while improving their emissions profiles.

Now turning to the US, we continue to see improvement in market fundamentals. We are raising our projection of current year demand growth by 15 million tons. Within the US markets coal demand rose 20 million tons in the first quarter from the cold winter and higher natural gas prices, driving one of the largest utility stockpile draw downs on record.

Southern Powder River Basin inventories are now at 44 days use, down significantly from year ago. And many utilities are reporting critical stockpile levels of less than 15 days. Prompt PRB prices are up more than 30% since last fall and are at the highest levels in over two years.

While the cold winter and competition from other commodities has impacted PRB rail performance, we are beginning to see improvements in service. But I would also note that Peabody's western shipments were up 10% over the first quarter of 2013.

All of this translates into coal's market share rising to 43% of total electricity generation in the first quarter, while gas has fallen to 23% on higher natural gas prices. I would also note that this winter's experience has elevated conversations from generators and reliability councils and regulators about the importance of low-cost reliable baseload coal generation in the US. It is again evident that policies and fuel choices matter.

I'd now like to discuss Peabody's operations. We've had great success in leveraging best practices across our platform in order to improve productivity. And within our Australian operations we continue to benefit from our transition to the owner/operator model, which will expand to more than 90% of our Australian production after the Moorvale mine is converted later this year.

Now Mike has reviewed our cost initiatives and capital spending targets, let me focus on a few projects for the year. First and foremost is finalizing the top coal caving system at North Goonyella. While we continue to make progress on the new longwall, it's taking longer than expected to debottleneck the rest of the system. Production rates are improving and we anticipate achieving targeted output by the end of the second quarter, increasing volumes of our highest quality metallurgical product.

Second is advancing the Gateway North mine extension which will provide replacing capacity as existing operations have to transfer position to a new reserve area. The project management team is in place and the slope construction is on track. And third is installing a new longwall at the Metropolitan mine to improve productivity and lower costs. The longwall installation has commenced and as this is a conventional longwall system we expect a normal ramp-up process.

So in closing, Peabody has spent the past several years sculpting a global platform. We've got an unmatched asset base to serve the highest growing markets and we are best positioned to manage through the current cycle and benefit as market conditions improve.

US demand continued to strengthen, seaborne fundamentals are expected to improve and significant urbanization and development of the Pacific Rim economies will drive ongoing demand for our products. Peabody continued to take the necessary steps to confront present market challenges and we're confident that these efforts will further advantage Peabody for sustainable long-term growth in the years to come. Now with that review of the global market conditions and Peabody's position, operator, we'll be happy to take questions at this time.

(Operator Instructions)

Neil Mehta, Goldman Sachs.

Good morning. Can you talk about the rail congestion issues that we've heard about at PRB? Other companies have commented on it. How's that impacted your operations if at all and how do you see that working itself out over time?

Well maybe just a minute to talk about our PRB operations, particularly our flagship operation, North Antelope Rochelle, and how it's situated. Given its location at the southern end of the Powder River Basin, we have a much better balance of shipments that go out through the southern part of the basin and those that go out through the northern part of the basin. That was the northern tier of rail that was most impacted by weather and congestion.

We also have I think probably a better balance of the two rail shippers out of the Powder River Basin and clearly Burlington Northern was disproportionately impacted by the conditions that were causing bottlenecks on the system. In addition we had strong deliveries under our contracts to our major utilities.

All of those added up to we were actually able to increase our shipments from a year ago. While we could have shipped more, we were still able to grow our volumes from where we were because of the inherent benefits and structure of the North Antelope Rochelle operation and the contractual mix that we have.

Great. Then on non-core asset sales you alluded to this in the comments, but in the first quarter it looks like you were able to execute a $70 million sale. Can you give us some more color on what that is and then what's the opportunity set for other non-core asset sales?

Sure. This is Mike, this is something we had alluded to in the last quarter that actually closed in this quarter. As we look at the portfolio for optimization, we start with items that are non-core or non-strategic.

This was a tenement that came over with the MacArthur acquisition and as we looked at the portfolio our plans for that particular asset when we would get to it and the realizations that we thought we might achieve and taking market conditions into account, it was contiguous with another party. So we felt like it had more value in their hands near term than ours and that's why we elected to sell that asset.

While we were able to complete that we are happy to generate some additional cash. As you noted it was Australia $70 million, so a little bit more than $60 million of cash on a US basis, bringing the asset sale total to a little over $130 million on two different transactions, one in the US and one in Australia over the past 12 months.

Great. Thank you very much.

Brandon Blossman, Tudor, Pickering, Holt & Company.

Good morning guys.

Good morning.

Let's do big picture. In the press release Greg, you have a comment of Southern Powder River Basin, Illinois Basin coal demand to grow 100 million tons by 2016.

Any incremental detail? Are we talking primarily basin switching there or are we talking incremental demand overall? Then is the rail infrastructure sufficient to meet that demand level?

Good questions Brandon, thanks. As we look at that growth it actually does come from both of those components. It comes from basin switching as we continue to see movement out of the eastern coals into the Illinois basin coals as well as higher utilization.

It's interesting when you listen to some of the major Midwest utility folks talking now about even some of the utility plants that were scheduled to be retired over the next couple years actually were running flat out during this past winter. That gets to my comments earlier about this higher conversation is taking place around how much of this can actually be shut down in the near-term.

But in terms of the growth out of the Illinois and the Powder River Basin, it is basin switching, it's higher utilization. Both of those basins are competitive. Certainly the PRB very much competitive given the forward gas curves and what we're looking at in terms of having to replace the gas storage capacity over the next couple of years.

Okay.

The other part of your question, sorry, was about the rail infrastructure was sufficient. Clearly the rail infrastructure is sufficient.

The railroads will have to manage their rolling stock, their locomotive power and their crews, but the kind of volumes that we're talking about moving have been moved in the past. So it's really a matter of managing the logistics on the rail and also with the advent of the other movements that they've got on the railroad system.

Just a follow-up. Western bit, how does that factor into that equation and export outlook for Western bit near term?

Well all of the export coal whether it's eastern, western by two minutes or whether it's Illinois Basin are really going to be dependent on what happens in the seaborne thermal markets. While we see demand continuing to grow, we need to see some of that excess supply continue to work itself off and/or demand outpace it before we see significant increase in exports out of the US. In fact our view is obviously exports are falling this year and will be under pressure for awhile.

Thank you very much, Greg.

Meredith Bandy, BMO Capital Markets.

Hi good morning. I was wondering first of all how much did North Goonyella impact costs this quarter and what sort of benefit might we see if you get to the full capacity by the end of next quarter?

Say a little broader than North Goonyella specific. We guided to the low-to-mid $70s on our cost and we're within that range for this quarter and continue to expect to be for the rest of the year.

What I would say is the overall impact of the underground operations, including the longwall move that we had at Wambo, was probably $4 a ton in total offset by improved productivity and cost reductions at the surface operations, particularly the PCI operations. So those were the two major moving parts.

Okay thanks. Then just as a follow-up. If you saw the Q2 pricing continue for some time would you -- do you think that you would consider closing any met operations?

Yes Meredith, I mean obviously as you look at our history we are very active operations portfolio managers. We've in the past reduced production in the Powder River Basin when it was necessary to do so, we've closed operations in the Illinois Basin, whether if you'll recall Willow Lake and Air Quality.

In fact Australia we closed the Wilkie Creek operations. So what we do is we look at our portfolio of operations, and I can guarantee you that this is taking place now, it's ongoing.

Our portfolio of met operations, we look at their competitiveness and then we go down through a process which says okay, structurally can we move these operations lower on the cost curve so they can remain competitive as the market moves? You've seen us do a lot of that. The whole owner/operator conversion strategy was a strategy to drive us down the cost curves.

Then we look at efficiencies, we move into a next phase, which is what we're actively moving into now where we aggressively talk to all of our suppliers, we look at all our efficiency activities, we look at our mine plans and we make those adjustments. I will just say that at the end of the day we have a view that our operations have to make money and they have to be sustainable.

So actively under review. Obviously with the change in the met environment here in this last quarter we've -- we're having some pretty serious looks at a couple of operations. But our main focus in Australia right now is to get our flagship met coal operation North Antelope Rochelle -- I mean North Goonyella up and running at normalized capacity. That will have the largest impact on our Australian platform.

Okay. Thank you very much.

David Gagliano, Barclays.

Hi. Thanks for taking my question. It's actually related to Meredith's question with regards to the Australia operations.

Obviously we've had pricing for Q2 come in lower than Q1 and just got the results here that show pretty lean operating margins already in Australia. So my question is how long does it take for the decisions to be made to shut in the [mech bath] here?

Maybe not shut it in outright, but perhaps slow the production. And should we expect that perhaps next quarter if we have a similar pricing environment?

Sure. As I say I think our history has shown that we don't take a long time to make those decisions once we've gone through the analysis. I mean the last thing we want to do is to prematurely close something that structurally can be changed.

I mean North Goonyella as we go through the start up obviously was a significant impact in the first quarter. And getting that up and running will make a very large difference in the performance at the platform.

We've got a couple of other operations that right now are getting significant scrutiny because at this lower price horizon they're much more challenged. Part of our decision process is what can we do to further improve their costs or operating performance and/or what's our view as to what the next quarter and the subsequent quarter price horizons might be?

Once we go through that analysis we make very quick decisions and we move very quickly. All I can say is we're in that analytical mode as we speak.

At a $120 benchmark, if that's where we are for now for a little while here, how much of that 16 million to 17 million tons of targeted met volume, how much of that is -- actually generates a positive operating profit as it's reported in, or as it's classified similarly to the reported results each quarter?

Well Dave, I don't want to go into the details or give specific percentages. First of all I would say I think we all recognize just in the last two weeks a fairly large number of met coal operations that are being shuttered at these prices. So our view is we are finally seeing that tipping point where people that have been reluctant that are at a higher part of the cost curve than maybe some of our high-cost operations are, are starting to make those changes.

But suffice it to say that if you factored in a healthy North Goonyella in the first quarter and you factored in taking out some of these port issues that caused a bit of you know, we would've had enough cushion in the first quarter to absorb some of the price impacts for the second quarter. So don't take the Australian platform's performance in the first quarter and say you got to take the price completely off of that to really see what's there.

But I would just say we recognize that there's been a downward price movement. We are actively looking at the portfolio in Australia, as we look at all of our portfolio, and we'll make the right decision as we have in the past based on the final analysis of the competitiveness of the individual operations.

Okay. Perfect, thank you.

Paul Forward, Stifel.

Thanks. You had a -- the CapEx number was all the way down at $24 million in the quarter and obviously your guidance is suggesting that, that number will be higher, the run rate will be higher in the other quarters. Just wondering considering that you have the projects still ongoing at North Goonyella and Gateway and Metropolitan, how did you keep that number so low in the quarter and what changes between the first quarter and the rest of the year?

Sure I think -- and we have had a lot of internal discussion around that because it is quite a low number, particularly compared to recent history. It's a -- there are no single items that are really sticking out in terms of timing. There's certainly timing of spending here, but this is really the business unit presidents on down taking a very concerted look at every dollar of spend. So it's a lot of small items in terms of replacement capital that's been deferred or reduced which is allowed us to bring our targets down for the year.

We would have ongoing land sale -- or land purchases that we do to support the operations and that's a systematic process every year that we undertake that we look at what our needs are, rescrutinize reprioritize and retime. So it's a lot of that just blocking and tackling looking at every dollar spent and it cutting and differing where we can.

The other thing Paul, sometimes it's just merely timing as how the dollars get spent during the course of the year. Because it's a bit -- a number of things that typically you do in the first quarter.

You do a lot of planning around engineering and finalizing and then you get into project execution in the back three quarters and that's where you start spending the money. So you wouldn't want to take one quarter and multiply it by four for the year.

Now the lower quarter did allow us to take, as Mike said, a much deeper look and be able to revise downward the entire year. But that's why you still see in the last three quarters of the year higher spending on a quarterly basis than what we had in the first quarter.

Okay thanks. Just as a follow-up. On those same -- on two those projects wanted to get your current views on Metropolitan and North Goonyella Eagle Field. Metropolitan last year did 1.5 million tons, North Goonyella Eagle Field did 2.3.

Once you've got the new longwalls operating as designed, what's your current view on if you could I don't know if you want to provide the detail how much incremental production will be coming from those lines relative to the what they did last year?

Sure Paul in the case of North Goonyella you'll remember that we noted that with the additional recovery that we would get from the top coal caving system, that we would expect probably an additional 0.5 million to 1 million tons on an annualized rate coming from that operation. Now from Metropolitan this is really primarily a change out of the longwall. It's a conventional longwall, you'll recall, and we would expect roughly stable production to come from that operation.

Okay thanks.

Curt Woodworth, Nomura.

Good morning.

Good morning Curt.

Just a question on the seaborne thermal exposure. Given that's been repriced down about $13 a ton, can you give us a sense for how much of that business is repriced on that April 1 benchmark? Also remind us the discount that your ASP typically is off that number, which I think historically has been around 6% or 7%?

Yes. I think when you look at the amount of our volumes that are priced off 's the vast majority of our seaborne thermal business prices April 1. And that's roughly in the ballpark around where our pricing comes out, given our quality relative to the benchmark.

Okay. Then just on the coal plant retirements for next year. I mean obviously there's a lot of consumption this year, plants that are going to retire in the next several years. How much do you think your gross exposure is, your volumes into those exposed plants?

I guess -- we don't have volumes that are exposed to any specific plant closure to the extent that those plant closures are -- because as we said most of those plant closures are going to be offset by higher utilization at other plants. So when you look at growth out of the PRB and the Illinois Basin, that 100 million tons that we talk about, that's actually -- we actually have positive exposure to that growth even though some individual plants may be closing.

Okay. So you don't have a number for the plants specifically that will close that you service?

Well to a certain degree it's a bit fungible. No, to give you a number of plants that are closing we'd have to give you the offsetting number of all the plants that are going to increase that we also serve.

So not sure I have a specific breakdown for you between those two. Suffice it to say net-net we anticipate our volumes are going to be up because there's going to be growth in the PRB and there's going to be growth in the Illinois Basin.

Mitesh Thakkar, FBR.

Good morning everyone and congratulations on the strong US performance.

Thank you.

My first question is, so when you look at the utility stockpiles of under 120 million tons for February, which I think is lower since 2006, with all issues going on in the northern PRB rails and stuff. What is the sense you are getting from utilities as to how should we think about normalized inventory levels and particularly heading into the summer?

Well if you start with heading into the summer I can tell you that there is a significant concern about having adequate stockpiles going into the summer. It's one of the reasons why we're seeing such a increase in request for proposals, particularly for the big Powder River Basin plants that are low in terms of days supply. So expect to see I think a lot of activity in terms of near-term business over the next couple of months as we go through the shoulder season and get ready for the summer.

I think longer term I think one of the things this winter has shown was the -- we don't have the final answer, yet is I think there's a lot of utilities that are rethinking what is an adequate inventory level that they ought to carry. We had seen those inventory levels start to shrink in terms of their normal operating inventories. But I think with how people got caught this winter with the cold weather, I think we may see normalized inventories begin to creep back up again as these utilities go back to holding a bit of extra inventory for the swing periods.

The view that the system was -- had latent responsiveness in it, we've talked a lot about that over the last number of calls and we always indicated we didn't think it was as loaded with excess capacity as people thought and I think this winter proved it very, very well. So longer-term, net-net I think normal inventory carries at the utilities will begin to rise.

Okay. Will the PRB issues prohibit utilities from building their inventories heading into the summer? Like you might want to build inventories but you can't get the coal. What are you going to do?

Obviously there's really a lot of discussions between the utilities and their railroad suppliers about making sure that they have adequate coverage to be able to run their coal plants this summer. I know those discussions are ongoing.

We're starting to see the whole system begin to open up in a bit better rail performance. We would expect now that the weather-related impacts of rail performance in the first quarter are hopefully behind us. Then we'll start to see some good rail improvements, which will maintain at least adequate stocks for the utilities to be able to run their plants during the summer load.

Great. Thank you very much guys. Appreciate it.

Luke McFarlane, Macquarie.

Hi guys. I got cut off a little earlier so I may have missed it. But did you go through exactly what the top coal caving issues you're still dealing with at North Goonyella are? It sounds like you're making progress, but is there any risk of it slipping into 3Q?

Glad you got back on. No, we haven't gone into it in detail, but as we talked at the end of the last call where we were then was a significant number of equipment issues specifically related to the longwall itself.

We had a very extensive team between the vendor, between the manufacturer, between the local supplier and our teams that are working through all of those components. Where we sit today, we've made great progress on those as evidenced by our increased equipment operating times since our last call.

As we also indicated once you got the actual longwall itself up and running, then we had the rest of the coal extraction system out of the mine to debottleneck. I would say we're into a lot of those issues right now in terms of the conveying systems, the coal clearing systems.

We've got some engineering fixes; the monorail is probably the last big fix that's going to take some time. The engineering fix is designed and that will be sorted out during the quarter.

So it's a combination of getting the operations to now be able to drive this significant piece of machinery and get the most out of it as well as debottlenecking the coal takeaway system. And as we look at where we're at today and through the end of the quarter, we're expecting to be at normalized levels by the end of the second quarter.

Cool, thanks. Then my second question, as we look out into 2015 in the PRB how do you expect to go into your contracting mode? Are you just going to do it as it comes or is it a matter of actually holding out for some of these higher prices to actually start flowing through to realizations?

Well as everyone knows we're 40% to 50% open based on this year's production rates. We haven't been contracting much this quarter.

You know the normal heavy contracting season would not have started yet. Right now the focus on this summer season and then once we get into the summer they'll begin to look at 2015 and beyond. So suffice it to say we see continued strengthening in the market and our contracting timing and philosophy will be centered around capturing the value of that increasing market.

Thanks.

Caleb Dorfman, Simmons & Company.

Greg, you discussed a lot about the improvement in dynamics to the domestic thermal market. Can you talk about how Peabody is going to respond to this?

Would you increase or do you have the capability increasing production in the Midwest? How do you think about ramping up or getting the PRB ready to ramp up before the pricing has really started to move up?

Well a couple things. I mean if you look at our platform, whether it's in the Powder River Basin or in the Midwest, we do have certain amount of incremental capacity that would be related to for instance working overtime in the Powder River Basin, or adding a working day in the Midwest. North Antelope Rochelle would continue to be our biggest focus in the Powder River Basin given the productivity and the margins that we get there and the quality of the coal.

In the Midwest we've got a number of operations that we could provide some increase. You know, at the end of the day if you're going to have to have significant increases in volume it's going to take a bit of operating equipment in order to do that.

Right now the time frames for some of that equipment are at the low end of the historical ranges because there hasn't been a lot bought. So there will be opportunities to capture the upside, but in terms of any major large amounts of volumes, they're going to be limited for a period of time until capital is actually spent.

So we're going to have to see price -- a nice price horizon for a longer period of time before people I think really start committing major capital. So net-net maybe you get a 5% or 10% increase in volumes over the next year to 18 months without significant capital. Beyond that you're going to have to get additional trucks and loading capacity in order to move larger volumes of coal.

That's really helpful. So when you're thinking about increasing the capacity, do you think the prices that we're seeing in the curve for the PRB are sufficient or do we need to see prices go back to the late 2011 level?

Well I think what we need to see is some more strengthening as well as some more longevity in terms of seeing that strength in the market. I'd be very surprised if a short-term blip -- people are going to see it more than just a short-term blip before they commit major capital for expansion.

Thank you.

Evan Kurtz, Morgan Stanley.

Good morning guys.

Good morning Evan.

Just a question on Australian met. I was wondering -- I know the C1 thermal market hasn't been particularly fantastic this year, but do you have an opportunity to take some of your met production bypass the wash plant and sell it into the thermal market, particularly for some of those lower grades?

You know we have a limited amount of crossover coal because of our operating platform. When you look at our met coal operations, North Goonyella, Metrop, Burton and the like, they have very little opportunity for crossover coals. Our PCI coals are kind of in a similar vein.

Our New South Wales Wambo operation, we've got some opportunity there and we take that opportunity when we can. So unlike a few others we don't have a -- it's the semi soft world that kind of moves back and forth between thermal and met coal and we're not a major or large component semi soft producer.

Got it, thanks. Just one question on the revenue outlook for the US.

I noticed you bumped the range up a little bit from last time. Is that purely because of an improving pricing outlook or is that also a little bit of mix in there as well?

So what we did -- we had a -- in the last quarter we had projected a decline, year-over-year decline of 5% to 8%. That improved; it's now at 4% to 7%.

So while it's a decline it's a lower decline. It's a combination of two things; improving PRB fundamentals and then also the finalization of some pricing associated with the western coal supply agreement.

Got it. Thanks guys.

You're welcome.

Dave Katz, JPMorgan.

Good morning. Thanks for taking my call. I was hoping to dive down at where the last call -- questioner was about the Australian met. I was hoping to dive down into the thermal. Would you guys be able to at all break down the -- obviously you provide the volume mix. Could you break down the revenue per ton of the thermal just on an overall basis?

On a seaborne basis we don't split out the thermal versus the met on a byproduct. Now historically we give some of those breakouts within Mike's remarks in terms of volume.

Our average price on our metallurgical coal in the quarter was $107 per short ton and on the seaborne thermal coal it was $75 per short ton.

Okay. How do you expect that to trend given the pricing trends that you're seeing specifically for the thermal over the next quarter or two?

Certainly you've got just a bit of price pressure that's come in with the new recent annualized contract pricing there. Obviously we'll wait to see over time what occurs with the nearer-term business to spot business because there is -- some of that goes out into the market as well.

Mix can also can also affect that. You'll see us have a higher mix of metallurgical coal as we get into the last three quarters of the year with some of the challenges that we had in the first quarter with North Goonyella.

Okay. On CapEx, you had $24 million in the first quarter, you've said obviously some of that was timing and it should move up to I guess around the $80 million level per quarter over the back half, or the back three quarters of the year. Looking out beyond 2014 given that some of what occurred in the first quarter was due to deferral's, what do you think a more normalized level in this sort of environment would be?

If you look at our full-year guidance of $250 million to $295 million we think we can hold our CapEx spending levels in total in that range over the next few years, certainly through the period in which we complete the LBA payments, which is at the end of 2016. That largely reflects the investments that we've made over the past few years in the portfolio.

So what we're doing is we've made those investments, we've capitalized the portfolio, whether it's owner/operator conversions in Australia, the investments that we've made in Bear Run, continued improvement the Powder River Basin, the El Segundo mine. The platform is there, it's capitalized and for us it's about leveraging the investments we've made over the past few years which drive those lower targets over the next say three years.

Excellent, thank you.

You're welcome.

Lucas Pipes, Brean Capital.

Good morning everybody. I wanted to circle back to your met platform down in Australia and I was just kind of curious if you had a sense on where it stands and what quartile it stands on the cost curve in Australia relative to the peers?

Well I think everybody's platform has got some in the lower quartile and some that are not in the lower quartile. And we've got some very competitive operations in Australia and as we talked earlier, we've got a couple of challenged or higher cost operations that we're looking at given the current market conditions.

Obviously getting North Goonyella, the new system up and running and up and running at normalized rates is a key component of moving that operation down the cost curve and overall lowering our Australian met coal cost curve. The operations that we picked up from the former MacArthur, our PCI operations, we've been hugely successful in moving those down the cost curve into the lower quartile given the improvements in the productivities and the volumes that we've been able to achieve since we took over those operations.

So the new longwall at Metropolitan, it's a conventional longwall but it's a significant improvement in terms of size and capacity and technology or operating capabilities from the existing longwall. So again, all designed to move those operations father down the cost curve.

I appreciate that. Earlier in the call you discussed some of the parameters around your production profile in Australia. And I wondered if you could also take a few moments maybe to elaborate on take-or-pay commitments or so on the rail side? So kind of costs that you would incur by nonoperating?

Well of course that's one of the factors that we look at when we analyze the portfolio. I mean I would just say that all of our costs are embedded in our financials out of Australia as they stand today.

The take-or-pay whether it's rail or port commitments, our commitments that can be traded and transferred and we're an active portfolio manager of our rail and port capacity to try and match that to our operating capacities at any point in time. So not really in a position to say exactly what our unused capacity is because it's an area where we're active participants in a marketplace down there.

But suffice it to say that we are managing it very aggressively. We continue to bring those costs down and as we look at what's embedded in our second-quarter guidance and our cost guidance for Australia for the year, we've incorporated all of those in that guidance.

I appreciate that. Good luck.

Lance Ettus, Tuohy Brothers.

Hi guys. You said -- you went through the steps of how you evaluate the portfolio and how you go about it. You said the current step I guess is you're looking at suppliers as part of that process.

Are you looking as far as getting better pricing from suppliers? Seems to me that some of the suppliers are still doing pretty well even with met coal at $120.

Yes. An active part of our program is going back and having conversations with all of our partners in terms of the value proposition around these operations. So it's supply chain, it's going back and talking to all of our commodity and parts suppliers and the like.

It's our services suppliers, our contractors. So it's an across-the-board look at everything that we're doing as well as our full internal suite of cost structure as well.

It's not solely a supply chain, but that's a major component of our cost structure. It's not only consumables but it's also services as well.

And do think these are bearing fruit so far or do you expect these to -- can you give us an order of magnitude on how much of a discount you think you can get or what's going on up there for the industry?

Well suffice it to say it has been bearing fruit. We think we've got more opportunity and the Australian team particularly is moving into what we call the next phase of all of these discussions. But I think it would be -- wouldn't be prudent to give any specific target levels as we go into those commercial discussions.

Kuni Chen, UBS.

Hi. Good morning folks.

Good morning.

I guess just on the met coal again. With the decline that we're seeing in the benchmark here, does all of that impact you in the second quarter or does some of that flow through into the third quarter as well?

Did you say that it flows into which quarter? I'm sorry, I didn't hear that.

Second quarter into third quarter.

I mean in any given quarter we typically have 20% to 30% of our volume that's going to have a carryover price. So there should be some spillover into the next quarter

Got you. And then as a follow-up, on the free cash flow side obviously you have your CapEx guidance, there's LBA payments this year, there could be a bit of a gap there between your operating cash flows and what those outflows would look like.

I guess what's your degree of comfort with the current level of cash cushion? I guess about $500 million? And what other sources of funding would you look to first?

Sure. Great question. We did have positive operating cash flow in the first quarter.

You know we continue to drive down capital spending. You referenced some of the major fixed charges. I guess what I would -- I think you've hit on some of the key levers there, but also we have some expectations for improvement in the second half.

We have increasing met coal volumes, you've seen stronger performance out of the US platform. We do have good cash on hand. We increased our cash to over $500 million in the quarter.

We have $2.1 billion of liquidity and that along with any proceeds from asset sales, I referenced the numbers that we've had in the last 12 months in terms of asset sale proceeds. So all those factors we think allow us to be able to manage any near-term issues.

Great. Good luck.

Thank you.

Michael Dudas, Sterne Agee.

Gentlemen, you've been very good with the answers today. I'm all set with questions. Have a good day. Thank you.

Thank you Michael.

Turn it back to you, Mr. Boyce, for any closing comments.

Well thank you operator. I'm glad we were able to answer that last question so quickly. I want to thank everybody on the call today. But I also want to thank the entire Peabody team for their focus on safe productive operations and the continued cost and capital management that we see throughout our platform.

As we say Peabody's got a leading presence in the key growth regions in Australia, the PRB and Illinois Basin and that will continue to allow us to supply the strongest markets and the markets with the most growth potential. We're going to continue to aggressively manage our costs and our capital in order to deliver shareholder value.

Appreciate your interest in BTU and we look forward to keeping you appraised of our progress. Thank you all.

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