Peabody Energy Corp (BTU) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Q3 earnings call. (Operator Instructions). As a reminder, today's call is being recorded.

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

Okay, thanks, 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, President and Chief Operating Officer Glenn Kellow, and 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. As always, we refer you to PeabodyEnergy.com for additional information.

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

Thanks, Vic, and good morning, everyone. Peabody's third-quarter results are a credit to the teams in the US and Australia for a strong operating performance, a continued drive to take costs out of the business, and better-than-forecast shipments in the quarter.

These clearly are challenging times, but for those of us with a longer time horizon in the resources sector, we know that the industry has faced major downdrafts before. Peabody is doing what it takes to carefully manage through current industry conditions, and we expect to come out stronger and more competitive on the other side of this cycle.

Today, I'd like to begin with a perspective on the current industry forces at play, and then discuss Peabody's positioning and our path forward.

The seaborne metallurgical coal market saw tepid Chinese imports and steel production growth, while India remained a bright spot. India's metallurgical coal imports increased over 20% through September, further indication of the country's strong reliance on the seaborne market to meet the vast majority of its metallurgical coal needs.

On the supply side, lower prices have driven out capital and pressured high-cost operations. Peabody estimates that some 30 million tons of annualized metallurgical coal reductions have been announced in 2014, with more than 20 million tons of that capacity yet to be removed from the market over the next few quarters.

The seaborne thermal coal market is experiencing a similar dynamic, as easing China import growth is increasingly mitigated by growing India demand. In fact, in September, higher India thermal coal imports more than offset the decline from China.

Recently announced coal quality restrictions and coal import tariffs appear designed to support China's struggling domestic producers. And while the net volume impact of these actions is unknown, they have clearly impacted near-term market sentiment.

We expect Australian coal exports, however, to remain very competitive in the global market, due to their superior overall quality, advantaged cost profile, the declining currency, and location to these high-growth markets.

Peabody recently completed a more thorough review of China, and when we look through the short-term fluctuations, we are confident that coal will be the dominant energy source for decades to come. China will continue to depend on coal for economic development and affordable energy to support major urban population growth, and China is taking dramatic steps to improve emissions by installing more control technologies.

This year alone, China is adding approximately 150 gigawatts of NOx controls. That's equivalent to half of the entire US coal fleet, with more to come.

In contrast to near-term concerns in China, India has a far stronger trajectory. India's thermal coal import growth has recently accelerated and was up 56% in September to a new monthly record of 14 million tons on growing coal generation and a host of domestic production challenges.

Utility stockpiles in India are at their lowest level in 25 years, as over half of India's coal plants have less than one week of inventory, resulting in power rationing in some areas, and the country has increasingly turned towards coal imports to meet domestic demand growth.

Economic growth is expected to pick up and drive even greater demand for coal, as India imports nearly 20% of its thermal coal needs and the majority of their metallurgical coal requirements. India's government is pursuing aggressive structural reforms and is working to provide widespread access to electricity throughout the country.

There is other notable dynamics globally, which include the significant buildout of coal generation in developing markets where coal provides affordable power for millions of people. We see new coal generation being built in Egypt, Malaysia, Pakistan, Vietnam, and Indonesia, to name a few.

Now in the US, coal volume is on pace to increase 15 million tons in 2014, reflecting the competitiveness of coal even with the mild summer and continued rail constraints. US coal generation increased 3% through September, despite summer cooling degree days that were 8% below normal levels in the coal-heavy regions.

PRB inventories ended the summer at their lowest level in nine years, and the restocking period is expected to continue through 2015 and beyond as some utilities look to increase stockpiles in response to rail constraints. Transportation concerns have impacted an estimated 20 million to 25 million tons of PRB volumes industrywide so far this year and have led to greater coal conservation at certain utilities. Yet incremental improvement is expected, as carriers invest in a record amount of capital to improve fluidity and meet record demand across their network.

If utility coal conservation measures ended and inventories were rebuilt to normal levels, utilities would require an additional 50 million to 60 million tons of Southern Powder River Basin coal.

Rail issues have also pressured spot coal prices. Still, in the third quarter, Peabody priced PRB contracts above traded indices and finalized a six-year, 40 million ton coal supply agreement.

Peabody is taking actions now that will improve our competitive position and take advantage of market recoveries. We are advancing a number of initiatives to manage through the remains of the down cycle. While there is no doubt that market headwind still exists, Peabody is taking the appropriate action to provide near-term progress and shape our platform to be even stronger in the future.

For a further discussion of our operational activities, I will now turn the call over to Glenn.

Thanks, Greg, and good morning, everyone.

Peabody's strong third-quarter results reflect the success we have made in implementing sustainable cost improvements across our 26 global mines and strong operating performance.

Let me first start with a brief update on safety. Our Australian operations have had a record safety performance year to date and we are continuing to invest in safety programs and systems across the platform. This includes proximity detection technologies, contractor safety programs, and other initiatives as part of the overall NMA coal safety program targeted towards zero incidents.

Turning to our mining platform, we are improving the way we manage our four longwall mines to maximize productivity and we are seeing strong performance from our North Goonyella and Metropolitan longwall mines in Australia.

Production is up more than 55% and productivity increased 40% over the second quarter at North Goonyella. We are now focused on increasing uptime and enhancing yields, which we expect will provide further benefits.

The scheduled third-quarter longwall moves at the Metropolitan and Wambo mines went very smoothly, with Metropolitan reaching record production and sales levels in August.

The Company's US platform continues to perform very well, even with rail performance issues that impacted our PRB shipments by approximately 2 million tons in the third quarter. Lower shipments were offset by strong operating performance and cost-saving initiatives.

Across our global operations, we have remained focused on further improving productivity. I am pleased to report that productivity has increased 7% at our US operations and nearly 20% at our Australian operations over the first nine months.

The improved productivity, strong operating performance, and continued cost reductions have all helped to mitigate some of the external market pressures. This is best reflected in Australia, where, despite our high metallurgical coal mix, costs per ton have fallen to the mid-[$]60 level. We are working to maximize yields, drive down costs in our supply chain, and benefit from recent owner-operator conversions.

We successfully completed the Moorvale Mine conversion during the quarter and we now have over 95% of our Australian production under the owner operated model. This has resulted in the elimination of contractor margins, improved workforce alignment, and increased productivity, as we're able to optimize new equipment utilization and improve mining methods and planning.

However, we are not done with our cost-reduction initiatives. We are further reviewing all opportunities to better shape our organization and drive costs out of the business.

Peabody benefits from a well-capitalized platform and we continue to make improvements to our maintenance programs. These include further enhancements to condition-based monitoring to increase our equipment availability, lower operating costs, and lower capital expenditures.

Peabody's capital spending is primarily focused on sustaining capital and includes the Gateway North extension. The project is ahead of schedule and is set to be completed in mid-2015 with a similar volume and cost profile as the existing mine.

Our team has clearly done a great job on a number of fronts in the face of current industry conditions, and we continue to be focused on emphasizing operational excellence, including safety and maximizing production from higher-margin operations; optimizing capital and lowering costs; and we have demonstrated reduced production at higher-cost mines, adjusting the organizational structure to optimize the delivery of services, increase sustainability, and reduce SG&A costs; continuing to optimize the portfolio through reserve, property, and asset sales; and retaining optionality for future growth as markets recover.

We will continue to control what we can and are prepared to take the necessary actions to manage through the current markets.

Now I will turn the call over to Mike Crews for a discussion of our financial results.

Thanks, Glenn, and good morning. We were pleased that third-quarter adjusted EBITDA came in above the high end of our increased guidance, as solid production and cost performance led to strong operating cash flow in the face of ongoing market weakness.

I will first review our quarterly results, starting with the income statement, and then provide an outlook for the remainder of the year.

Third-quarter revenues totaled $1.7 billion, primarily driven by lower prices in Australia. Adjusted EBITDA of $216 million reflects our cost-containment actions that Glenn discussed in detail, which helped to offset the continued pressure from low seaborne market pricing.

Taking a look at the major components of operating results, US operations generated adjusted EBITDA of $282 million.

Midwest revenues per ton declined 5% on the expected rolloff of legacy contracts. Stripping ratios improved in the third quarter at multiple surface mines in the Midwest, compared to the second quarter, leading to costs per ton that were in line with the prior year.

Western revenues per ton improved 3% as we benefited from layering in sales in prior periods across the region. Costs per ton increased slightly in the West as a result of increased sales-related costs from higher pricing and a 2% volume decline due to continued rail performance issues.

In Australia, adjusted EBITDA of $17 million reflects a $130 million lower seaborne pricing, compared with the prior year, as well as longwall moves at two operations. Australian volumes increased to 10 million tons in the quarter.

During the quarter, we shipped 4.6 million tons of metallurgical coal at an average price of $88 per short ton and we sold 3.4 million tons of seaborne thermal coal at an average price of $66 per short ton, with the remainder delivered under a domestic thermal contract.

Our cost-containment programs and improved longwall performance led to average Australian costs per ton of $65.70, which is lower than any time since the first quarter of 2011. Our cost management also extends to SG&A, where we saw a 4% reduction in the quarter and a 7% year-to-date improvement.

Turning to taxes, income tax expense of $79 million includes the write-off of $70 million of tax assets following the repeal of the Minerals Resource Rent Tax in Australia.

Diluted loss per share from continuing operations totaled $0.58 and adjusted diluted loss per share, which excludes the impact of remeasurement, was $0.59.

That's a review of our income statement and key earnings drivers. Cash on hand at September 30 was $467 million, with total liquidity of $2.3 billion. Operating cash flow was $170 million in the third quarter, which was significantly higher than the first two quarters of the year, due in part to favorable movements in working capital.

We continue to aggressively manage capital expenditures, which totaled $43 million and led to free cash flow of $127 million before LBA payments of $89 million.

With our lower year-to-date capital expenditures, we are again reducing our full-year capital spending range to $200 million to $220 million.

While we are pleased to be generating positive free cash flow, it is not at a level that would allow us to achieve further debt reduction. We continue to pursue asset sales and remain focused on maintaining financial flexibility and adequate liquidity.

I will close with a review of our outlook. For the full year, we are targeting adjusted EBITDA of $765 million to $815 million and adjusted diluted loss per share of $1.48 to a loss of $1.38. Compared with the third quarter, our adjusted EBITDA ranges reflect continued strong production in cost performance, reduced spot pricing on seaborne thermal coal, and reduced production from our low-cost Wilpinjong Mine in Australia. The mine has had excellent production levels to date, which will lead to the mine reaching its annual permit levels prior to the end of the year.

I would also note that we are advancing several options to streamline the organization and reduce overhead costs. This includes a voluntary separation program, along with additional workforce reductions. Our financial targets exclude the impact of this restructuring, the costs of which depend on the voluntary program acceptance rate.

Finally, we have made the following full-year guidance updates based on actual year-to-date performance. Total coal sales of 245 million to 255 million tons, including US sales of 185 million to 190 million tons and Australian sales of 36 million to 38 million tons; higher metallurgical coal sales of 16 million to 17 million tons; and Australian seaborne thermal coal sales of 12 million to 13 million tons, due to strong year-to-date production.

US revenues per ton now 2% to 4% below 2013 levels and lower Australian costs of approximately [$]70 per ton. 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 third-quarter performance. Operator, we would be happy to take questions at this time.

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

First one for Glenn. Regarding your pretty impressive cost performance amongst your Australian mines, do you get a sense that the rest of the industry, given where current currency levels are, and for you guys [itself], is there much more owner-operator conversion or much more stronger cost-reduction opportunities to allow some of the thermal and met production to not come off line at the higher cost end of the curve and delay what could be an interesting price recovery?

Thanks for the question. Just in general, we probably wouldn't expect that Australia would be at the high end of the cost curve, from a generalization from an industry perspective.

Focusing on Peabody, we certainly have benefited from our owner-operator program, but in a way that meant that we were -- because we were previously contract mining, we were probably starting a little bit behind the rest of the pack. Now with 95% of our platform under owner-operator activities, we can expect to reap the benefits of that through the programs that we have outlined.

We still -- we've had a fair bit of success in cost reduction to date, but we still think that there is further benefits ahead in terms of our own platform from increasing productivity and continuing success of the cost activities that we've already outlined.

My follow-up is maybe for Greg on the Powder River Basin rail service. It seems like you were outperforming so many other producers in the rail access and the ability to ship coal. But relative to the summer and the lack of availability, would the rail issue be much more keeping the utilities from wanting to lock in longer-term business or actually try to replenish because they just have zero confidence in the rail companies to deliver the coal that they need?

I think it's a two-part scenario, Michael. I think in the very near term, and we have talked about this in the past, we are not seeing much activity and that's probably affecting the OTC, because near-term deliveries are still problematic. Everybody is focused on getting their contractual deliveries, and additional volume, as it becomes available on the railroad, is going towards trying to maintain and meet those contractual requirements.

But as our multi-year deal that we announced and talked about would indicate, utilities are looking through near-term rail issues. We have seen these in the past. The railroad hires more people. They get more locomotives and they debottleneck the track and the turnaround times, cycle times, and the system opens up. And so, the utilities are really looking beyond that.

So our multi-year discussions actually are stronger today than any kind of near-term improvement in volumes. So when we talk about the potential for next year, not only do you have getting back to normalized utility demand so that we eliminate what's been going on with coal conservation, but depending on the fluidity in the rail system, there is a significant amount of pent-up demand to rebuild inventories.

Then the third piece is we have got utilities that are now rethinking what is an appropriate level of normalized inventory. That really started with the polar vortex of last winter, but the rail issues have compounded that thinking. So we see, once the rail system opens up, a strong pull for a number of years.

I appreciate your thoughts. Thank you.

Caleb Dorfman, Simmons.

Do you already announce the production code to Burton operation, is the process of looking at all the possible operations now complete or are you still considering additional production cuts? I know you have already done a lot on the cost-savings side, so I don't know how that rolls into that thinking.

First, I would say that the process is never complete. It's an ongoing process. As the market moves, so we have to adapt to the market.

I think, as we have talked before, the approach that we take is where we get to a point with any operation where we believe that we've made all the cost improvements, the operating and productivity improvements that we can, and we are still not competitive, we make those tough decisions to shut those operations down.

We have done it here in the US in the Midwest. We have scaled back Caballo in the PRB. We shut down Wilkie Creek, and then, of course, the Burton announcement during this past quarter.

Given what Glenn and the team are doing with our operations in Australia, particularly the met coal operations, in terms of reducing those cost structures, improving yield and performance and productivity, we are in a position where we want to focus on that as task one. As long as they are competitive, we will continue to manage and maintain those operations.

So that's the process that we go through. Can we go in and make sure that we've optimized those operations in all of their aspects? Once we get to that point, if they are not competitive, then we will make the hard decisions relative to whether they continue to operate or not.

Thanks. I know that you mentioned that you expect realizations in PRB to be higher in 2015 than 2014. Do you expect a similar margin-expansion opportunity or what further cost-savings initiatives could we expect to see implemented in the PRB which could help margins actually expand?

Sure, this is Mike. We do expect to have higher realizations year on year, based upon the contracts that we have layered in.

The ultimate margin for 2015 will depend on where we come out on the cost position and we're still in the middle of the budget process. It also depends on the volume that we have out of the PRB and you are well aware of logistical issues there. So it's a combination of volume, mix, and ultimate realizations that will drive that margin.

Thank you.

Brandon Blossman, Tudor, Pickering, Holt & Co.

This is a follow-up on Caleb's question and to put a finer point on it. PRB pricing, you get a directional indication year over year and indicate that prices are better than the screen would be showing. Any kind of order of magnitude there or just maybe, if not that, just color on price sensitivity for the utilities when they are thinking about multi-year PRB contracts?

I think the best we can do in terms of the directionality we have given you relative to 2015 versus 2014 on PRB, but the discussions with utilities, when you're talking -- and we have talked about this a lot over the years, when we are talking about large volume multi-year contracts, the discussions around pricing are much different than somebody that is coming in to buy one train for delivery this month.

Utilities are looking for, obviously, certain quality parameters, depending on the utility. They are looking for the ability and the surety that they're going to get deliveries and supplies from each of the producers, and then, of course, for each of utilities, it depends on the rail network that they've actually contracted with.

But when you look at a multi-year deal, the indices may give you some near-term direction and some direction in the market, but we have always accomplished a premium to those in terms of our multi-year contract sales.

Fair enough. And then, just another kind of vague question relative to the PRB. Given that strip ratios do, as we know, increase over time in the PRB, are you comfortable or even pleased with the direction of those multi-year contract discussions?

Yes, absolutely. I would say that we don't enter into multi-year contracts if we are not pleased with the financial returns and the margins that we are going to accomplish over those multi-year.

Then, of course, when we look at what the long-term effects of increasing PRB strip ratios, we look at the entire scenario out there, what it costs for our replacement reserves, what our general recovery mechanisms are. All of that goes into the expectations that we have for multi-year improvements in pricing in our multi-year contracts.

Thanks, Greg, for all the color. Appreciate it.

Evan Kurtz, Morgan Stanley.

First question here is on the currency. Seen a pretty big move since the last time we talked on the AUD. I was just hoping you could provide some guidance, how you're hedged. What kind of exchange rate should we be thinking about for next year?

For next year, we are -- it's interesting because we had actually slowed down putting on additional hedges, but because of the cost-containment efforts, that base spend has come down, so we're pretty well back in a similar position where we'd normally be going into the next year.

So we're about 70% hedged, based upon our current estimates. If you look at that relative to what the forward rate is for the unhedged piece, the all-in effective rate would be about 92 at current exchange rates, which is just slightly above where we are for 2014.

Got it, that's helpful. Thanks. Then going out beyond that, are you hedged at all in 2016?

Yes, we're hedged at a lower -- much lower level into 2016.

Okay, and maybe just one last one, if I could. On the dividend, just wondering if your thinking has changed about that at all. Assuming worst-case scenario and prices are stuck near current levels for met and thermal in the US, you are pretty close to cash breakeven and maybe a little bit negative when you start to factor in LBAs.

Is it worth it to keep that $90 million dividend in place through that period or would you think maybe it's just better to keep the high level of liquidity on the balance sheet?

Yes, it's a fair question. It's something that we think about quite a bit. We recognize investors need and desire to have capital returned.

At the same time, you have to take into account the current economic conditions, our financial needs, and then just investor expectations in general. So it's something that we continue to look at. We review it with our Board of Directors at least annually and sometimes more frequently, so it's something that you have to continue to evaluate, based upon some of the pros and cons that you mentioned.

Yes, I would add one of the things we want to do is make sure that we are not being too variable here. When you look at our fixed charges, we've got about $350 million of fixed charges that roll off after the next two years. That's the last two of our LBA payment in the Powder River Basin and the last of our VEBA payments for the Patriot settlement.

So once you get to, say, a 2017 timeframe, our fixed costs, if you will, come -- including if we were to -- main as you would look at including dividends, would be a substantially lower number, and so we not only look at the next quarter or the next two quarters, but we try and look out over a little bit longer period of time, and our focus is maintaining our liquidity, which Mike and the team, between the operating performance and our relationships, we have been able to maintain strong liquidity.

Thanks for the color, guys.

Brian Yu, Citi.

I know in the prepared comments, you guys had discussed the China tariffs. I was wondering if you might be able to shed some light on what you guys are seeing from the trading operations? Any near-term impact to volumes, and how is that tariff being handled in terms of who it's impacting? Is it the buyers on the China side or are the sellers bearing the burden of that tariff?

As you mentioned, we did see the impact of new tariffs being introduced of 3% for coking coals and up to 6% for thermal coals.

The impact was actually muted somewhat by the larger state-owned enterprises actually raising the domestic price, which also offsets recent moves in the Australian dollar for the Australian production. So we have seen a little bit more of a muted effect coming through than what might otherwise have been expected because of that domestic position.

Also, looking ahead, we are aware that Australia is negotiating a free trade agreement with China that could possibly include exemption of the tariff, and those following it closely would be aware that Indonesia is already exempt, of which we continue to source coals through our coal trading platform.

Okay, that's helpful. So, just so I understand it correctly, basically what you guys are seeing is domestically in China, prices are going up, so that effectively, at least for now, offsetting any impact on the tariffs for the importers?

Yes, I wouldn't suggest (multiple speakers) it's a full offset, but certainly it has a muted effect as a result.

Okay. Then the separate question, I guess, just on CapEx, I know you guys get asked this a lot and you continue to reduce it, which is good, because you have made all these investments in new equipment. Are we getting to a point where you are seeing that bottom of how much you could take that spending down by? And then, along those lines, when would we -- when should we expect to see an uptick in CapEx as those new equipment begin to age to a point where you're going to have to reinvest?

I think it's something that we continue to define going forward, and I think we've been somewhat surprised by the success of both the programs that are positive over the last couple of quarters, and particularly as we move into further enhancements to our condition-based monitoring activities, we are continuing to benefit from that well-capitalized platform that you have been talking about.

I wouldn't -- I think the guidance that we have given would be pretty solid guidance, though, going forward, and at least to the period -- the horizon that we have talked about in terms of our LBA payments beginning to roll off, so certainly into that -- through 2015, 2016 into the 2017, 2018 period.

Okay, that's helpful. Thank you.

Timna Tanners, Bank of America Merrill Lynch.

I wanted to ask you, first, you talked about pursuing further asset sales, so I was just wondering what color you can provide there and the receptiveness of the market in the current environment to these kinds of sales?

Thanks, Timna. You make a couple of good points there. Over the last couple of years, we have really made a concerted effort to try and monetize assets to generate excess cash flow to reduce our leverage position.

We have had some success. I remind everybody we have sold about $175 million worth of assets, mostly reserves in the US and Australia, since June of last year. We have also been pursuing the sale of some non-core operating assets.

But as you point out, the market is pretty challenged, and given the decline of the market conditions over the last 12 months, we have said before we are not really looking to sell assets at the low-cycle valuations.

Wilkie Creek, we thought we had a deal done. We had a $5 million nonrefundable payment for that, but it did not close, and we continue to look across our entire platform for additional -- particularly these non-core reserve transactions where we can get respectable value from other folks who would value those as part of their portfolio.

So overall, it's something we spend a lot of time on, we continue to work on, but we recognize it's a challenged market for asset sales right now and we are not wanting to go out and sell at the bottom of the cycle.

That makes sense. Okay. The only other thing I had was just a follow-up. I know you gave the guidance for the end of year, but just given that the end of the year is quickly approaching, I was just wondering -- I think I've asked this before, sorry -- but can you give us some framework for how to think about what could drive you to the high end of your guidance versus the low end? What are the big drivers as you look into the last couple weeks of the year?

Yes, I think we have also talked about the range and what drives the range that we have for any given quarter, and it's typically driven by shipment timing, and then also production as we head into the end of the quarter.

When you see just with the third quarter alone in terms of the guidance, the fact that we had raised it and then had some continued strong performance through the end of the quarter. So it's two of those, and then we do have a longwall move in the fourth quarter at Twentymile, so it just depends on how that comes out in terms of the costs incurred, how quickly they can ramp back up online and regain some additional production.

Okay, well, thanks again.

Justine Fisher, Goldman Sachs.

Just a question on the significant PRB contract that you signed. I know that you said that numerous utilities are out there thinking about how they are going to treat their inventories, but do you think that there are a lot of opportunities like this out there in the market, i.e. -- and I'm not asking you to disclose anything that your competitors might be doing, but might we see similar things like this from other PRB producers in this earnings season or next earnings season where we do start to see numerous large multi-year contracts being signed, or do you think that this was one interesting opportunity that you guys were fortunate to win?

I can't speak to the others, but we would not anticipate that this would be our last opportunity.

Okay. Then, also, can you talk about in the Midwest for the next quarter or two where the strip racers are going to go? The costs were pretty impressive there this quarter, and I was just wondering how you expect those to trend. I know we were talking about PRB strip ratios earlier, but I was wondering if you could comment on the Midwest.

Yes, just give me a second. I am looking at my notes. I think the high point on the stripping ratios was in the second quarter and we got past that, which is why we saw benefit into the third.

I think if there is any uptick in the Midwest in the fourth quarter, it's going to be minor. There could be a little bit of strip ratio, but it's mostly just timing of repairs.

Okay, thanks. Then I have one more question, if you don't mind, on payables. I know they were done a lot in the second quarter and then up this quarter, which I think probably helped the cash flow from operations number. Can you guys give us guidance as to whether we might see that go down again in the fourth quarter and how you are thinking about working capital for the rest of the year?

Yes, there was some benefit in payables, also inventory drawdowns and a little bit lower accounts receivables, so it was a combination of all three. Just in terms of -- I don't think we project that to significantly reverse into the fourth quarter.

The fourth-quarter cash flows are really going to be driven by, which I guess would impact working capital, would be the interest payments. The large interest payments are made in the second quarter and the fourth quarter, and then also the large LBA payment. Those will be the big drivers of cash flow in the fourth quarter.

Okay, excellent. Thank you very much.

Jeremy Sussman, Clarkson Capital.

In terms of your Aussie costs, I want to extrapolate into 2015, so obviously costs coming in around the $66 a ton level versus your full-year guidance now at $70, which obviously includes the first half of the year, which was above $70.

I just want to get a sense. I guess you said you were 70% hedged currency for next year. Obviously, it looks like that other 30%, if it's held flat, stays in your favor. It doesn't sound like there were a lot of unusual events in the third quarter, so should we be thinking about mid to upper $60s for costs next year with, let's say, all else equal, or how should we think about that?

Obviously, it's a bit early for us to be giving specific guidance around costs, either in the US or Australia, and we look forward to providing everybody with our targets in our next quarterly call.

But if you just look at the operating performance of the Australian platform for this past quarter as an indicator of what we think is the horsepower of that platform when we have got the owner-operator conversions behind us, when the longwalls are running well and there is not a lot of extra moves in the longwalls, and that's one of the things that we are still working through next year is in terms of how many longwall moves we will have, based on our production volumes.

Directionally, if you make your assumptions around exchange rates being flat or hedged, and so you've got some -- and there are no other major changes in fuel or any of those other consumables, you can look at we're going to have the normal pressures of geologic changes, strip ratio and/or yields on the underground operations. But we would look at the third quarter of this year as being a good, solid, strong quarter, which indicates the strength of that Australian platform, as Glenn and the team have guided, running at a very, very strong level.

Great, that's super helpful. Just maybe a follow-up on the rails. Could you just give us a general sense on whether you have seen some improvement out of one or both or how we should think about that over the next 12 months?

It's interesting. I guess we would have liked to have seen more improvement by now than we have seen, although we have seen some incremental improvement.

But what's really interesting is obviously the demand continues to rise or the anxiety level of utilities continue to rise in terms of the amount of coal that they want to increase.

It seems like the more we get ahead, the more we get behind, but we would anticipate through 2015 when you really drill down to the capital spend, the horsepower addition, the people additions that all -- the two railroads are adding out of the West, 2015 we would anticipate to be a much stronger year.

Perfect, thanks very much.

Mitesh Thakkar, FBR Capital Markets.

Good morning, everybody, and congratulations on the solid quarter. Just a quick question, and Greg, you've touched a little bit on this. On the impact of diesel, we saw energy markets were back a little bit. How should we think about sensitivity in terms of your PRB mines and even Australia, what's the impact of lower energy cost? If you can give us some sensitivity with respect to, like, a $10 a barrel change in oil, including your hedge position, that will be great.

This is Mike. When you look at 2015, a $10 a barrel change in price is about $12 million, net of our hedge position, so it's a much smaller variability versus, say, our FX assumptions.

Okay, great, and this is not just PRB; across your platform, right?

No, that's across the platform.

Okay, great. Just going back on the Aussie cost, if I remember this correctly, you guys had some longwall moves planned for the third quarter. A, were all those longwall moves completed during the quarter? Is there any rollover in the fourth quarter?

And just following up on Jeremy's question, I know you can't give me the exact guidance, but if you look at your third quarter or maybe your back half of 2014, is that more consistent looking into 2015 or are there things outside of FX and energy which we should be aware of, which we -- be cautious about, not assuming or annualizing it?

Maybe -- I might answer the first part and I will hand over to Mike around the quarter. In terms of the longwall performance in Australia, yes, the longwalls that we had indicated and flagged all went well. In fact, we pointed to a record coming out of that at our Metropolitan mine in both production and sales. Mike talked about a move in the US this quarter and that's on track and on schedule. Pass over on cost.

Yes, so back on the costs, we have guided to $70 -- approximately $70 per ton for this year. As we look into 2015, and I do -- we would be happy to provide you color when we have that color, but we're still working through the budget process.

But the key levers are going to be stripping ratios tend to increase over time, so your overburdened removal costs go up. You have inflation on your input costs, and then, ultimately, the mix of met versus thermal will have an impact as well, and then we will look to offset those inflationary costs where we can with productivity improvements.

You'll recall we don't have the carbon tax in 2015, which we had this year. That's about $1 a ton benefit. Then we will really look to see -- to get the annualized benefit of our cost-containment activities in 2015 that arose in 2014, and we will continue to look at additional cost-reduction opportunities as well, to keep that cost position in line.

Lucas Pipes, Brean Capital.

Greg, you mentioned increasing demand for PRB as the rails are improving. Yet when I look at your 2015 contract position, I believe you're pretty fairly hedged out. How are you thinking about your contracting strategy in the current market environment?

First, I would remind everybody the numbers that we provided, the 15% that we are hoping, is based on our 2014 expected volumes. Any growth that we get in 2015, we haven't yet added into our open position, and so we do have the ability to take advantage of a strengthening market in 2015.

Then it's really just going to depend on the curve of the recovery of the railroads as they continue to add people and equipment and debottleneck the system. We anticipate there is going to be some of that and that's why we are -- we will try and provide as much forward view as we can in January when we provide our 2015 targets, but that's the difference between the 15% based on 2014 volumes versus what we might anticipate in 2015, and we're still going through all of that and still want to see how the railroads incrementally continue to improve going through the end of this year.

That's helpful. Thank you. Then maybe to switch to the met coal market more macro, big picture. You reiterated some of the other estimates that we have seen, about 20 million tons of met coal production cuts taking place so far. How many of those, do you think, have been implemented up to this point in time?

I think your number was probably closer to on track on 30 million tons of announced cuts. We think about 10 million of those only have been implemented, so we would expect to see further reductions as people work through the mine closures or mine suspensions, work through the inventory stockpiles they've been building up. They are still ahead of us, the vast majority of that would still be ahead of us in the coming quarters.

Thank you.

Paul Forward, Stifel.

I wanted to ask about the Wilpinjong permit issue. I guess you have been so productive at that mine so far this year that you're bumping up against the full-year permit limitation. I was just wondering if you could talk about how firm those limitations are, and can you put any numbers on maybe what the missing volumes might be in the fourth quarter, relative to the run rate that we've already seen for the first three quarters?

It's an unusual and good problem to have, which shows the strong production performance that continues to go through the mine.

We have two permit restrictions, one applies to run-of-mine activity, the other around the amount of rail restrictions. We are looking over time at ways that we can potentially increase those limits. The production impacts are included within that fourth-quarter guidance number.

Yes, and that's why you saw when we looked at the reasons we gave in the release around the key movers on our outlook for the fourth quarter, that was one of those, along with a little bit lower spot [sequent] thermal pricing.

Okay, and you had mentioned 50 million to 60 million tons of PRB coal demand could eventually come back. Just wondering as you do that modeling work to say, well, there is a certain amount of restocking need and then a certain amount of growth demand, is there a sensitivity around that number on what natural gas might be, or can you talk about what your gas price assumptions are and going into making that estimate of a 50 million to 60 million ton recovery?

Basically, Paul, what we do -- we have got an assumption in there that gas will not displace PRB coal during the course of the next year to 18 months.

As you know, we have said that it's a $2.50 to $2.75 gas price that is required to begin to erode and displace PRB on a competitive-cost basis.

As we look at just what it takes to get the inventory volumes from less than 40 days by the end of the year to back up to 50 days in 2015, and then you look at then replacing the coal -- the coal that has been lost this year, the 25 million tons or so so far to coal conservation, which all would have been burned if it was available because it was all more competitive than gas, that's where we come up with that number, plain and simple.

So we make the underlying assumption that gas stays above that $2.50, $2.75 range to displace PRB coal.

Got it, thanks.

John Bridges, JPMorgan.

I was just wondering, the pullback in the price received in Australia from 73 to 67, what were the drivers of that and how should we think about that going forward?

I'm sorry. Can you repeat that, John? You cut out just a little bit there.

Sorry. The price received in Australia down a bit in the quarter compared with Q2, just wondered what the drivers of that was and how we should think about that going forward?

Yes, John, this is Mike. We typically have some carryover volume from quarter to quarter, but with the rollover pricing, we wouldn't have had that carryover benefit in the current quarter. That's the largest component of the difference.

Okay, so 67 is good number going forward, just bearing in mind fluctuations in mix?

Yes, I mean, you do have to keep in mind mix, so that would be the key driver of any variance.

Okay, cool. Then just following up a little bit on the Midwest strip ratio issue. You've pulled back on that. Any sense as to where that's going to go next year?

Obviously, we're still finalizing our operating plans and our engineering plans for next year, John. But I think it's safe to say that almost all -- all operations see increasing strip ratios over time. That's just the nature of the open cuts, so we will have directionally an upward trend. The magnitude of that, at this point we are still finalizing our operating plans.

Okay, yes, I am just trying to get to the sustainable versus the unsustainable cost cut issues. Anyway, well done on the numbers, guys. Best of luck.

Mr. Boyce, I'll turn it back to you for any closing comments.

Thank you, Operator, and I want to thank everyone for joining our call today.

I'd like to extend my appreciation to all members of the Peabody team and really call out their outstanding efforts to lower costs, improve productivity, and set higher and higher standards for safety performance. Obviously, these actions will continue to help us maintain our financial health, which we are focused on, and continue to position Peabody for the future growth and long-term value creation as these markets turn.

We appreciate your interest in BTU. We look forward to updating you on our progress. Our next call will be in the new year. Thank you very much.

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