Peabody Energy Corp (BTU) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Peabody Energy Q4 earnings call.

(Operator Instructions)

As a reminder, today's call is being recorded. I will turn the conference now over to the Senior Vice President, Global Investor and Corporation 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; President and CEO Elect, Glenn Kellow; and Executive Vice President and Chief Financial Officer, Mike Crews.

Now, we do have some forward-looking statements today. They should be considered along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents. And we also refer you to peabodyenergy.com for additional information. With that, I will now turn the call over to Greg.

Well, thanks, Vic and good morning, everyone. In 2014 the Peabody team delivered on a number of key initiatives. The result, a record year in safety and proved operational performance, increase productivity, lower cost, and reduced capital spending.

There is no question that this has occurred against a highly challenging backdrop. The decline in seaborne pricing is lasting longer than anticipated, and clearly impacted our results. But our response shows that Peabody continues to take the necessary steps to lessen the effects of the extended downturn and sculpt a stronger, more competitive Company for the market upturn.

This morning I'll review Peabody's perspective on current market dynamics and our positioning, before turning the call over to Glenn for a look at our operating performance and key priorities, and then to Mike to review our financials.

The recent sell-off in the commodities sector has resulted in significant declines in copper, iron ore, and oil due to concerns over global economic growth and supply. The mining and energy sector downturn has further impacted global coal fundamentals that have been weakened by strong seaborne supplies and slowing import demand. But while these factors have delayed the recovery, I'll discuss the underlying catalysts that will drive improvement.

In 2015 we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011. This is based on a moderate rise in global steel production, along with Australian metallurgical coal export growth, that will be offset by supply reductions from the US and Canada.

Drilling down on metallurgical coal demand, Indian imports grew nearly 20% in 2014 and are expected to continue to rise as the economy grows and infrastructure continues to be built out. In China, metallurgical coal import demand is expected to stabilize as the year progresses. And over time, Chinese seaborne demand is anticipated to expand as domestic production is rationalized and greater amounts of high quality coal imports are required.

Regarding global metallurgical coal supply, we expect some 15 million tons of already announced cuts will be realized in the first half of the year, with additional reductions likely, based on current pricing. A sizable percentage of global metallurgical coal is uncompetitive at current prices. And US production is likely to be disproportionately impacted, leading to at least a 10 million-ton decline in US metallurgical coal export this year.

It's clear that investments in metallurgical coal projects have all but dried up in the past two years, and new projects can take years to bring online. Yet this is a depleting resource, and we expect that the sharp pullback in investments, declining production, and increased coal demand will result in supply shortfalls over time.

Now in the seaborne thermal coal markets, while China's electricity demand grew 4%, coal imports declined in 2014, mostly due to flat coal generation resulting from increased hydropower capacity, and to a lesser degree uncertainty around coal quality regulations. Rising coal generation is expected in 2015, while hydro growth will slow significantly.

Coal generation in India rose 13% in 2014, as coal imports surged more than 25 million tons due to expanding demand and an inefficient domestic production. Thermal imports are expected to remain strong, as India's government works to supply power to hundreds of millions of people who currently don't have adequate electricity.

So if we turn to the US, 2014 coal demand was consistent with 2013. Strong consumption in the early part of the year was muted later by approximately 25 million tons associated with utility coal conservation due to rail constraints and additional demand lost due to mild weather. PRB inventories recovered to some 50 days of supply in the fourth quarter when inventories building due to mild weather, coal conservation, and improving rail performance.

Looking forward we see 2015 US coal demand declining 50 million to 60 million tons in total, due to lower natural gas prices. But at the same time, we believe PRB coal will remain competitive with natural gas, leading to PRB consumption rising up to 20 million tons this year.

By 2017 we're projecting a total increase in utility coal consumption of 10 million to 30 million tons, as coal rebounds to approximately 40% of US electricity. More importantly for Peabody, we expect PRB and Illinois Basin demand to grow 50 million to 70 million tons during this time. Demand for these low-cost basins is anticipated to represent a greater share of the US coal generation profile as gas prices increase, demand from other regions is displaced, and coal plant retirements are offset by higher plant utilization rates at the remaining coal fleet.

So that's a summary of the global and US coal fundamentals. I believe Peabody's strengths position us well, even in these challenging conditions. We'll continue to respond to fundamentals in the coal markets with the best team in the industry and the best asset base.

Now at this time, I would like to turn the call over to Glenn Kellow, who we just named the President and CEO Elect. This announcement is part of a phased succession planning process that has been underway for several years. Glenn will take over as CEO at our Annual Meeting in May. I'll remain as Executive Chairman.

Since joining Peabody in 2013, Glenn's experience and fresh perspective have been instrumental in refining Peabody's strategy and delivering significant operational improvements. Glenn has nearly 30 years of global mining and energy sector experience gained in multiple countries, and includes executive positions across a range of commodities, including oil, gas, and coal.

You have heard from Glenn before on these calls as Chief Operating Officer, but you'll be hearing and seeing much more of him in the future. With that, I'm proud to introduce Peabody's next CEO, Glenn Kellow.

Thank you, Greg and good morning, everyone.

It is a privilege to take on this role of Peabody Energy, a Company with a proud heritage going back some 132 years. I look forward to continuing to work closely with Greg on the transition, with the primary mission of creating superior value over the long term.

I'd always been an admirer of the Company from a distance, and while the markets have obviously been challenging, my respect for the quality of both the people and activities has only grown since joining. I'm pleased to have been a part of the achievements this year and to be surrounded a great team as we continue to build on what is already a strong and competitive platform.

Any discussion of our operational achievements begins with safety. In terms of reportable incidents, 2014 was the safest year in Peabody's history, and by a wide margin. Our record safety performance was driven by a 36% improvement in Australia, and we continue to operate under an improvement mindset.

In Australia, strong operational efforts led to record volumes last year of 38.2 million tons, which includes 17.6 million tons of metallurgical coal sales and 13 million tons of thermal coal exports. And in the US, our North Antelope Rochelle Mine in the PRB produced a record 118 million tons in 2014, and this remains the world's largest and most productive service mine. Overall, as global operations performed well in 2014 and we advanced multiple cost reduction initiatives to help mitigate external market pressures.

Over the past two years, our aggressive cost reduction programs and productivity improvements have generated over $500 million in savings. And in 2014, Peabody achieve the lowest US and Australian operating cost per ton since 2010.

Our cost reductions have come from a number of initiatives, including completion and continued benefit from our owner-operated conversions in Australia, increasing 2014 productivity in the US and Australia by 7% and 20% respectively. We installed two new longwall systems at the Metropolitan and North Goonyella mines, and continue to enhance our mining methods. At North Goonyella, the new longwall top coal caving system operated at higher levels after being fully commissioned, with second half production rates improving nearly 100% over the first half.

We continue to leverage our global scale by reviewing our major procurement contracts. We also continue to in-source more maintenance, expanded our condition-based monitoring systems, and raised our equipment availability to lower operating costs. And at our contract-operated Burton mine in Australia, we reduced production and restructured the contract mining agreement to improve the position of our highest cost operation on a unit basis.

Peabody continues to see opportunities to further reduce costs and create value. In the fourth quarter, we initiated a 50/50 joint venture between Peabody's Wambo Open-Cut Mine and Glencore's United Mine in New South Wales, Australia. The joint venture is expected to begin in 2017 and deliver significant synergies by improving productivity, lowering costs, and extending the mine life. This is also a model that we would be open to replicating at other mines or reserves in the future.

We believe that Australia holds a number of inherent competitive advantages over other supply sources. It has high-quality products that are location-advantaged with shorter rail hauls and shipping distances to the high-growth Asian marketplace. Clearly, the currency of wind is at our back right now. Australia is also in the process of completing a free trade agreement with China that will provide a further advantage compared with other production regions.

Peabody's capital spending remains focused on sustaining existing production, and reflects our safety and productivity improvements. In 2015 we will be finalizing the Gateway North extension. The project is ahead of schedule and is set to be completed in the first half of this year, with a similar volume and cost profile as the existing mine.

We are also advancing our Wolf Creek extension in Colorado, which will extend the life of our 20 Mile Mine at lower production levels of approximately 4 million tons per year. We believe that our previous investments, relatively young fleet of equipment, and focus on capital efficiency allow us to maintain low levels of spending for the next few years.

That's a review of the operations. I would now like to turn to our key priorities ahead.

Over the past decade, Peabody has built a leading position in the low-cost US regions, the PRB and the Illinois Basin. We've developed a major Australian metallurgical and thermal platform, and continue to focus on a strong global presence, aimed at serving the high-growth Asian markets.

While the longer-term strategy remains, we continue to respond to the market conditions in the short term. Looking forward, what I see as our key priorities for 2015 are: first, we are committed to continuously improving safety and productivity, with a driver of cost efficient and sustainable mining practices.

Second, we are focused on maintaining adequate cash and liquidity, and we will continue to have strong capital discipline. Third, the team is taking another look at our operations and corporate activities to identify additional cost reduction opportunities. We are also implementing a shared service center to lower annual overhead costs.

Fourth, we will continue to enhance the quality of our assets through a strategic portfolio management. This includes pursuing asset sales where they make sense and developing options for our highest quality projects when conditions allow. And finally, we are continuing our global call advocacy initiatives to increase understanding and support for sustainable mining, energy access, and clean cost solutions.

Our 2015 priorities are focused on improving our platform and managing through the current part of this cycle. We remain well positioned to capitalize as markets improve.

Now, I'll turn the call over to Mike Crews for a discussion of our financial results and our guidance targets.

Thanks Glenn, and good morning everyone. Peabody's 2014 results reflect the significant operational improvements that Glenn mentioned, as well as challenging market conditions that have pressured our financial performance. I'll discuss our financial results for the year, the steps we're taking to further strengthen the business, and our guidance targets for 2015 and the first quarter.

So let's start with a review of the income statement and supplemental information. 2014 revenues totaled $6.8 billion compared with $7 billion in the prior year, primarily due to lower realized pricing in Australia. Total volumes of 250 million tons were comparable to the prior year, as increased US and Australia shipments offset reduced trading and brokerage volumes.

The effects of low prices continued to be felt in a major way in 2014. Full-year adjusted EBITDA of $814 million was impacted by more than $550 million related to lower realized pricing. Peabody was able to offset $275 million of this impact through decreased cost and increased productivity.

Adjusted EBITDA also includes $26 million in charges related to an organizational restructuring program and a lump-sum pension settlement offered in the US. You will recall that our October guidance excluded this planned charge. On that basis, 2014 adjusted EBITDA exceeded our guidance, with stronger performance due to Australia cost containment actions, a faster than expected Colorado longwall move, and successfully obtaining a new mining permit at Wilpinjong that resulted in stronger fourth-quarter volumes.

Now let me turn to the US operations, which generated $1.1 billion in adjusted EBITDA last year. This is a slight decline from 2013, due primarily to lower realized pricing in the Midwest. Midwest revenues include the finalization of a customer sales agreement that have been shipped on provisional pricing. This had a $1.56 ton per impact in the fourth quarter. Our Midwest gross margin per ton also reflects increased costs due to our rise in overburden ratios.

In the Western US, Peabody increased PRB shipments to the highest level since 2011, despite rail constraints. And Western realizations improved 1% as a result of higher contract pricing. Western cost per ton decreased 1% on additional PRB volumes and cost containment activities, resulting in an expanding margin per ton.

Turning to Australia, 2014 adjusted EBITDA of $74 million reflects lower seaborne coal prices, but also significant strides in further cost reductions and productivity improvements. Australian cost per ton declined another 8% in 2014 to $68.05, their lowest level since 2010. This builds upon our improvements in 2013 and reinforces the advantages of our Australian portfolio.

We continued to reduce costs at the corporate level as well, where SG&A declined 7% to the lowest level in five years. Our comprehensive repositioning program included office consolidation and workforce reductions. We expect added improvements as we drive efficiency and consolidate shared services.

Moving down the income statement to other operating income, we incurred a $154 million impairment charge in the fourth quarter. This was related to the Burton Mine in Australia, along with certain undeveloped properties in the US.

We also recorded a valuation allowance of $52 million on deferred tax assets at the Middle Mountain Mine in Australia. That's included in loss from equity affiliates on the income statement. Note that due to the tax-related nature of this item, it has been excluded from adjusted EBITDA.

Turning to taxes, we recorded 2014 income tax provision of $201 million compared with a $448 million prior-year benefit. This is primarily due to a $284 valuation allowance in the US, a prior-year tax benefit related to impairments, and lower year-over-year benefits related to the repeal of the Australian Mineral Resources Rent tax.

As a result, diluted loss per share from continuing operations totaled $2.83. Adjusted diluted earnings per share, which excludes the impact of re-measurement and impairment, totaled a loss of $2.27 per share. And adjusted diluted EPS includes the valuation allowance in the US and at Middlemount, as well as the restructuring and pension charges, which all have a combined impact of $1.26 per share.

That's a review of our income statement and key earnings drivers. In addition to cost containment, Peabody has taken aggressive actions to lower capital and complete asset sales in response to recent industry conditions.

Capital expenditures declined to $194 million in 2014, operating cash flows totaled $337 million, and we generated approximately $130 million in asset sale proceeds. Even with these actions, we experienced a $146 million cash decline last year as a result of lower coal prices.

Looking forward, Peabody has annual cash obligations of nearly $1 billion that relate primarily to interest payments, capital investments, PRB lease installments, and VEBA payments. You will recall the annual PRB and VEBA payments of about $350 million end in two years.

Given these obligations and current market conditions, the Company has made the decision to reduce the quarterly dividend. Peabody will continue to take the proactive steps needed to manage through the toughest part of the prolonged downturn, preserve cash and liquidity in the near term, and position the Company for success when markets rebound.

I'll now turn to Peabody's 2015 targets. For the first quarter, Peabody is targeting adjusted EBITDA of $160 million to $200 million and adjusted diluted loss per share of $0.39 to $0.32. Targets reflect the full-year trends I'll discuss in a minute, as well as lower seaborne thermal coal pricing, expected lower resource management contributions, and two Australian longwall moves. I refer you to our Reg G schedule in the release for additional quarterly targets.

Now regarding our full-year financial targets, US revenues per ton are targeted to decline 2% to 4% in 2015. This is primarily due to the roll-off of higher-priced legacy contracts in the Midwest and a change in Western volume mix, as higher PRB deliveries will be partly offset by reduced Colorado volumes, related mainly to lower export shipments. US costs are expected to improve 2% to 4%, reflecting cost reduction efforts and increased Western shipments, partly offset by higher overburden ratios. And Australian costs per ton are targeted to improve 2% to 4% as we continue to benefit from further cost containment efforts that more than offset normal inflation pressures and two additional longwall moves in 2015.

I'd like to review two major external cost pressures, which now may provide a tailwind to costs moving forward. Benefits from the recent decline in oil prices and the Australian dollar relative to the US dollar are incorporated in our 2015 cost reduction targets. The drop in oil prices and exchange rates provide Peabody with further potential benefits in 2016 and beyond.

For instance, just within the past six months the potential cost benefit from our unhedged fuel and FX position for 2016 has improved by more than $250 million. And the implied longer-term benefit would be even greater.

So that's a brief review of our 2014 performance, as well as our financial targets. Operator, we would be happy to take questions at this time.

Certainly.

(Operator Instructions)

Michael Dudas, Sterne Agee.

Good morning everybody, and congratulations Glenn.

Thank you.

I guess my first question for Michael. Looking at --a lot of noise in the fourth quarter earnings results, and you went through that pretty quickly toward the end of your prepared remarks. Could you just highlight --it looks like you if net everything out, you could get maybe a little bit of a positive in the earnings in Q4, so -- and then maybe a little better uptick to what you reported. Could you go to the a little more carefully? It seems like it could have shown up a little better, given all the noise?

Sure. At the EPS level, and you look at what we reported on an adjusted basis, it was $1.21 loss for the quarter and $2.27 loss for the year. But then there were a number of items that were included. For example, the restructuring and pension charge, which was $26 million, that was not reflected in our guidance. That was about a $0.10 a share impact.

And then we had that valuation allowance that we recorded at the equity investment level for Middlemount. That was about a $0.20 impact. And then finally, the valuation allowance we needed to take against the US tax assets was a $0.96 impact. And that's where we reflect in total for those items that are included in that $1.21 loss and $2.27 loss for the year a total of $1.26.

Got it. (inaudible), all those down, okay. Follow-up would be towards the end of your comments about oil and FX. So you mentioned this $250 million figure over the past, this much impact. Could you remind us about policy regarding hedging on each of the currency and on the energy price? And if things were to stay at the same level of exchange rate or oil price, say a year from now heading into 2016, how much more additional positive tail wind could we likely anticipate, given your expected volume forecast?

Sure. So both fuel and FX we hedge on a programmatic basis, primarily to limit volatility. And it's on a sliding scale over a 12-, 24-, and 36-month basis. And those targets are typically 70%, 50%, and 30%. So for both fuel and FX, we're hedged in that 70% range for 2015.

When you think about our cost targets that we gave for both the US and Australia with a decline of 2% to 4%, about half of that in the US comes from fuel, and in Australia, about half -- about 50% of that number comes from both fuel and FX. And then the way you've characterized it is the way we look at it as well.

If you hold everything constant at the exchange rates and the forward points that have for foreign exchange, we're hedged below, we have slowed down our hedgings and we're below our targets for 2016 at about 42%. That's where that $250 million number comes from, it's looking at the forward points for both fuel and FX, and that derives that number for 2016.

That's it, Michael. Thank you.

Mitesh Thakkar, FBR Capital Markets.

Good morning, gentlemen.

Good morning.

Good morning.

Hello?

Mitesh, can you hear us?

Yes. So thanks for taking my call.

My first question is just on your Australian cost guidance for 2015. If you were to give us some color around how much of the improvement on a year-over-year basis comes from foreign exchange tailwinds and crude oil tailwinds? There's also a mix shift between steam coal and met coal. And there is a full-year impact of Goonyellla ramp-up and Burton idling, and also contractor conversions.

When you put all this together, how should we think about different buckets for getting the cost benefit you mentioned? I know the currency and crude is 70% hedged, but still just on an approximate basis?

So as we mentioned, and on the remarks and in the release, we're targeting a 2% to 4% decline in Australia costs year over year. As just noted on the previous question, about 50% of that is due to -- the benefit is due to lower fuel prices and lower exchange rates on a year-over-year basis.

Then when you look at the moving parts on the rest of the changes, you're going to have normal inflation, a bit of increase in overburden removal costs. We look to offset that with a little bit lower royalties and improved longwall performance with the full year at North Goonyella.

I think those are the significant items. We still had the owner-operator conversions that we look to leverage with additional productivity improvements, as well.

Right. And just a follow-up, you've mentioned that, and this is more macro question, 2017 you expect coal generation to become 40% of the total electricity generation. Can you walk us through a little bit of your assumption, how you are treating the mass-related retirement, what's the impact from that, as well as potential greenhouse gas rules in 2020, 2021, whatever it is?

Sure, Mitesh. This is Greg.

As you look at going out through 2017, where we get that 40% of electricity, there's still going to be 240 gigawatts of coal-fueled generation remaining in the US. And we see that fleet running at a higher utilization level than where it's been running, not only given its location, but given the demands for base load electricity. So as you look at -- and that incorporates our views as to what retires between now and then for both the naturals and the other near-term regulatory requirements.

So that nets up to an increase by 2017 in total US coal demand of somewhere between 10 million and 30 million tons. But more importantly for PRB and the Illinois Basin demand, which is critical to us, up about 50 million to 70 million tons over that timeframe. So, that's kind of the building blocks. Beyond 2017, we see that fleet remaining at a very high utilization rate for a number of years going forward.

So no impact of greenhouse gas regulation is Incorporated in it?

Well no. Even if current greenhouse gas regulations wouldn't take place until post-2020, we don't think what is out there currently is going to stand the test of time in terms of final regulations. But any of that would be in the early 2020s to mid-2020s in terms of any potential impact. So none of that would be included, and I don't think anybody forecast it at any time before 2020 and beyond.

Great. Thank you very much, and good luck.

Paul Forward, Stifel.

Thanks, good morning.

One quick question would be looking at that Australia cost -- the cost in the fourth quarter, you were down below $62 per ton. The projection of a decline of 2% to 4% in 2015 suggest, call it a $66 per ton figure in Australia. Can you talk about whether you might be able to exceed that 2% to 4% and make it look more like the fourth quarter results? Or what might keep you from being able to keep posting cost like you did in the fourth quarter on a sustainable basis?

Yes. Sure, Paul. This is Mike. The two big components there for that very good performance on cost in the fourth quarter were our cost containment activities and also really longwall performance. With longwalls when they run well, you really get a great cost result. As you look into our guidance for next year and our guidance for the quarter, we do also have two additional longwall moves in 2015 versus 2014. So that's going to have an impact on the cost position.

Okay, great. And just as a follow-up, I wanted to say congratulations to Glenn on the transition. I just wanted to give you a chance here to talk about 2015 has started off as a disappointing year with the dividend cut, obviously forced by market conditions. But you've got the chance here to think about 2015 and beyond going forward. How do you see the firm 's strategy shifting under your leadership?

Well, thank you, Paul. And as Greg had indicated, I actually was involved in the 2014 strategic planning processes that the Company had undertaken. So I wouldn't expect to see dramatic shifts as a result. Obviously, current market conditions, as we talked about, had necessitated shorter-term responses.

When I look forward, I do see our number one priority always being to continuously improve the safety and health of our operations. But beyond that, and with respect to strategy, we do operate in the low-cost basins in the US, whilst having significant exposures to those growing Asian markets via, as we've talked about, our high-quality Australian platform.

But our near-term focus with the market, it is there, and we continue to take the necessary steps to work through this downturn whilst at the same time maintaining that strong position to benefit when coal markets do improve. And this has implications on the corporation, both commercially, financially, operationally, and all corporate levels.

You do talk about the transition, and I do indicate that Greg and I are working closely together on the remaining elements of the transition. And I'm fortunate to have his counsel and support through that time. But my focus will be longer term, having that overarching commitment to create superior value.

Okay. Thanks very much, Glenn.

John Bridges, JPMorgan.

Hi. Thanks for taking the question. I just wanted to dig a little bit more into that response on the 2017 mix. And in particular, there is a sort of implied assumption that the gas price is going to be higher. I just wanted to know what sort of gas price underpins the assumption of 40% of coal generation in 2017? Thank you.

Yes. While we don't necessarily talk about our specific gas price forecast, we do anticipate by 2017 there will be an upward trend in gas pricing over where gas prices are today and where the forecast are for 2015. So enough to make sure that Powder River Basin and Illinois Basin are clearly in the money, and that's what drives the increase over that period of time.

Okay. And then I'd like to congratulate Glenn, and also ask about Goonyella. You spoke about the 100% increase in production there. What do you think the new run rate is going to be from what Goonyella with the top caving?

Well when you look at the historical run rate in North Goonyella, I think we had anticipated that we were going to get an extra 500,000 tons a year out of North Goonyella for that total run rate. So, I think we were right. That was the guidance we gave at the time, and I think everything we see right now is is it's going to fall right into place.

I would also add that we've closed the Eagle Field Mine, depleted the resource, which was also feeding the prep plant at North Goonyella and was always part of that complex. So net/net there's going to be a slight increase long term in the annual run rate at North Goonyella Mine, but the actual increase out of the prep plant will be lower than the total output from the mine.

Okay, that's great color. Many thanks for that. Congratulations, and keep up the good work. Thank you.

Justine Fisher, Goldman Sachs.

Hi. Sorry, this is Justine. Can you guys hear me?

Yes.

Great. Sorry, thanks. The question that I had is actually on the -- obviously on the debt side, and I'm not going to ask the question that I think everyone has been asking all the other coal companies, which is, would you issue secured debt to help refinance upcoming unsecured maturities like you're 7.375% at 2016, but what I did want to ask is to confirm that your US assets are currently unencumbered and the Australia physical assets are unencumbered? In other words, that only the equity in the Australia assets secures are revolver? And then as a follow-up, can you confirm what you're secured debt issuance capacity is for us, please?

On the security side on existing revolving credit facility in term loan B, it's secured by stock pledges on the non-US side. So you are correct. On the secured, when we moved to the covenant, we're at 3.5 times on a net secured debt basis. So that would be the limitation.

3.5 times leverage, like 3.5 times trailing?

Yes, the covenant is 3.5 times net secured debt to EBITDA.

Okay. So the covenant does not have to do with the consolidated net tangible assets? Because I think we had looked at it, and it seemed to be a percent of the Company's consolidated net tangible assets. Is that superseded by the debt to EBITDA covenant?

Yes, I'm sorry, I'm talking totally about the covenant aspect of that. As it relates to the bond indentures, there's a 15% basket on consolidated net tangible assets.

Okay, and is that -- sorry, this is the last question. Is that in addition to the term loan that you have outstanding? So is that 15%, which I think is something like $2 billion maybe, is that in addition to the secured debt, or does that include the existing secured debt that you have?

The term loan B is approximately $1.2 billion and the basket would be independent of that.

Okay, fabulous. All right. Thank you very much.

You're welcome.

Evan Kurtz, Morgan Stanley.

Hi. Good morning, everyone. And congratulations, Glenn.

Thank you.

Just a quick question on asset sales. It seems like the market was loosening up a little bit towards the end of the last year. We will see what the appetite is for deals in 2015. But could you maybe walk us through some of the potential assets that you would look to sell, and maybe give us a ballpark on a range of what could be out there going forward?

Sure. I think as you saw throughout 2014, the focus for us in the current market conditions was where we could get away non-core, non-EBITDA generating assets for prices that we thought were reasonable, we did so. We do still see a viable market for that, and we do continue to work through that resource management activities on areas that we don't believe are core to us.

On top of that, as you indicated, the market has become challenging. But we do continue to work through, and where it makes sense we would contemplate sales. But the primary focus to date, and what we've been able to get away, has been around those resource management positions.

Got it. Okay, thanks. And then just maybe a follow-up on Justine's question. What is the timing, do you think, for when you might go to market to do something about that 2016 note?

Yes. I think the maturity date on that is November of 2016. Those bonds do contain a make-whole provision. So there's an economic penalty associated with that. So that's something we'll continue to evaluate, the timing, the cost of the make-whole, the market conditions. And then once we make a decision on that, I think we'd look to update the market at that time.

Got it, Okay, thanks.

Matt Farwell, Imperial Capital.

Good morning. Just one more question on the incurrence. Taking it one step further, do have an estimate of what you're secured and current capacity is at this point?

How much we could secure at this point?

Yes.

Is that what you're asking? I don't have an estimate at this point.

Okay. And then just one other question related to diesel. Would you consider more aggressively locking in your fuel costs at these low prices?

Yes, particularly in the near term. That's something that, when we look at our hedging, as I mentioned, we do some on a programmatic basis. But then we also have a strategic discussion. And we will take a view from time to time, given the pronounced decline here I think it would be prudent to lock up some of this currently in the near term. So yes, that's something that we're taking under consideration in terms of preserving that value for our 2015 results.

Do you expect that the lower fuel costs could translate into improved economics in markets like Texas, due to just lower transportation costs?

Yes. I mean, as we look at falling oil prices, we see a number of benefits outside of just a lower cost. And you've identified one of them. To the extent that the fuel surcharges for the shipping of coal on the railroads is reduced, that makes coal-- it lowers the rate at which coal is competitive into those markets, and it allows it to travel a further distance. But in reality, you also have to look at the significant catalyst that lower oil, and therefore lower gasoline prices and fuel prices, have on economic activity as we go forward through 2015 and 2016 if the entire oil space stays at a lower level.

In addition, one of the things that we saw in the fourth quarter was much stronger rail performance than we would have anticipated. And part of that was as soon as the oil price started to fall off as quickly as it did, we were seeing the railroads begin to move equipment into now the coal space in order to deploy that capacity.

And then of course with lower unconventional oil production, we're seeing lower associated gas production. So as you start to look at all of these on a go-forward basis, net/net for Peabody, falling oil prices and a sustained lower oil prices is a significant positive and a good catalyst for the longer -- for the medium and longer term.

Sounds good. Well, thank you very much for taking my questions.

Caleb Dorfman, Simmons & Company.

Good morning.

Morning.

First off, can you just discuss the strategy that you are going to be taking towards the New Castle market following the massive deterioration in pricing? And does the shift in the Australian dollar make all your tonnage still be in the money and free cash positive, or do you perhaps consider at some point cutting some production going into the New Castle market?

The New Castle market?

New Castle.

I think as you look at the New Castle market right now, it's interesting that we're seeing currently a fair disconnect between what you're seeing in terms of screen trading and what you're seeing in terms of physical transactions out of New Castle. Obviously, our big operation out of Wilpinjong is the lowest cost operation, thermal operation in Australia. So, we continue to see strong deliveries out of Wilpinjong. And we do a fair bit of blending with Wilpinjong and our Wambo operation, particular with our longwall at Wambo. When it runs, it is again in the lower quartile of production out of New South Wales.

So we watch it pretty closely. We watch the total demand, and the volumes have been strong. And right now we're starting to see the physical tighten versus what's happening with the financial. So as Glenn indicated earlier, safe, low-cost, increase productivity, continue to manage those, and those thermal products out of New Castle and New South Wales will continue to be competitive.

Can you give us any idea of how much of a premium you are seeing in the physical market over the financial market right now? What should we think about for physical 2015 pricing?

It's been about probably $5 to $7 in terms of the disconnect that you've seen between the very near prompt, and then a little bit of backwardation as you go out a couple of months. And of course, the hope would be that the longer view moves up to meet that near term as time goes by.

That's helpful. And then, Greg, can you sort of discuss the Board's decision-making process on the dividend, and looking at it on a quarterly basis? What sort of triggers are you looking at on a quarterly basis?

Well, I think as Mike explained, in terms of talking about our decision to reduce the dividend, first and foremost we've got a two-year period here where we've got a fairly high fixed cash requirements. And over one-third of that is due to a couple more LBA payments and a couple more of these VEBA payments.

As we look to where we stand, the Board looks on a quarter-by-quarter basis, and out on a bit of a forward basis in terms of where the market is, where the market metrics are, where the settlements are turning out. And so as we look at the first quarter, we looked at 2015, we thought it was prudent to go ahead and reduce the dividend and conserve that cash. And the Board will look at that on a quarterly basis, as we always have, with the dividend.

We'll look at cash forecast, we'll look at movements in pricing. Obviously if we got nice movements in the markets, which would generate a different cash flow perspective, the Board would take that into consideration. But that was really, as you look at fundamentally, we want to make sure during this two-year period of time. Good news is, we've got these large reserves from North and Upper Shell that we'll be done paying for in two years. We just need to make sure that we get that done.

And that gives us about a seven-year breathing room beyond that to where we're not going to have any reserve or LBA payments. So the cash generation becomes pretty significant just about in any market condition at that point in time.

Thanks, and congratulations on your transitions.

Thank you.

Brandon Blossman, Tudor, Pickering, Holt and Company.

Good morning, gentlemen.

Morning.

Good morning, Glenn.

Let's see. One following up on a question Paul had earlier on Aussie cost and the trajectory through 2014 and how that matches up with the 2015 guidance. Yyou suggested that two longwalls in Australia were at least part of the equation there. Could you, at least, with some precision, talk about what the order of magnitude of the cost of those two longwall moves would be relative to not having them at all?

I think trying to dissect it too finely is a bit difficult. I talked about 50% of this being around oil and FX. So that leaves you with the other 50%. You start to look at the normal inflation, and then that coupled with the impact of the cost of the longwall moves themselves is what we would look to offset what the cost containment activities. That's probably about as fine as I can go with it.

The other thing I would remind everybody is we've reduced our costs 8% in 2014. So we are institutionalizing that lower cost, and then guiding to a lower number beyond that. So this is a continuously lower cost drive within that platform.

And the team aren't stopping there. So, we do still believe there's some additional opportunities available to us that we are continuing to execute, both across the Australia platform, the US platform, and we have touched on the things that we are doing across the corporate activities, as well, which will result eventually in a lower run rate.

Fair enough, And of course everybody just likes to see that fourth quarter, very attractive fourth quarter number repeated at some point next year.

As would we. Dual prong stretch targets.

Fair enough. All right. And then on the Australian, on the revenue side of the equation. Can you give the fourth-quarter breakout for seaborne, thermal volumes and pricing? Not the full year, but just the fourth-quarter numbers? And then any directional or commentary on what that looks like relative to full-year 2015? And then what's embedded in the first quarter, again just directionally first quarter, seaborne, thermal pricing?

Well, the met volume in the fourth quarter was about -- it was 5 million tons. So, and I believe we had the -- and I'm just looking for it as we speak. So the price for the met coal in the fourth quarter was about $88 at 5 million tons, and the price for thermal was about $66 per ton.

Okay, that's helpful. And then again, directionally relative to Q1 and full-year 2015, how should we think about that thermal pricing?

Well, you are clearly seeing a bit of softness on the New Castle price for that seaborne business relative to what you would have had for the Japanese fiscal year in 2014. That business, which would have been signed April 1, and you seen some decline in the price as the year advanced. So you will see that reflected certainly in the Q1 pricing relative to Q4. And that in fact you saw incorporated in our guidance for our Q1 relative to Q4 for EBITDA.

All right. Thanks.

Neil Mehta, Goldman Sachs.

Good morning.

Morning.

Congratulations on the transition, Greg and Glenn. On PRB, two easy questions here. First is on rail congestion, and any update there in terms of whether you're seeing a pick-up in traffic? And the other is on coal-to-gas switching points as you think about PRB. Where do you think that that level is on a gas parity basis? Is it around where we are now, or is it lower? And I'll leave it there.

Yes, maybe with respect to the rail performance, we did see quite a degree of improvement in that fourth quarter, and it was the best period of the year. I think we still continue to see that as we roll forward through into January, and it's been well-publicized, the improvements and focus that the rails had in this area, in addition to what the team had outlined in terms of what we expect to see, a positive impact by reductions in oil and gas prices. We've typically looked, with respect to competitiveness, at the PRB continuing to remain strong and competitive around about that $2.50 to $2.75 mark. And so that's what we would see going forward.

Thank you, Glenn.

Jeremy Sussman, Clarkson Capital.

Yes, hello. Good morning. And Greg, I have enjoyed working with you over the years. So congratulations. And Glenn, look forward to working with you, as well.

Thanks, Jeremy.

In terms of -- just a quick question. In terms of -- if we assume spot AUD at $0.79, can you give us a sense of how much uplift you could see in both 2015 and 2016? And maybe using your ear, I guess implied Aussie cost guidance of about $66 a ton as the base?

Well, yes. With the -- and what we are doing -- the numbers that I've provided both for 2015 and 2016 are based upon the current four. So it takes into account our hedge position, the average price at that hedge position, and the current forward for the unhedged position. So again, for 2015 with our 2% to 4% decline in cost guidance, about half of that relates to fuel and foreign exchange. As you look forward into 2016 with a hedge percentage that is in the low 40% range, that looks at about a $250 million benefit over the past six months, given the decline in forward rate.

Okay. Just to be clear, so if the curve stays where it's at, you could receive -- you would receive about an additional $250 million benefit in 2016?

That is correct.

Okay.

And that's oil and foreign exchange both for Australia.

Okay. And is it safe to say that foreign exchange is a much larger portion of that?

Absolutely.

Okay, great. Well, that's all I have. Congratulations, and thanks very much.

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

Thank you, operator. And thanks for everyone for joining our call today.

The industry still has a number of obstacles to overcome, but as we've seen in the past, markets can move rapidly, leading to exaggerated under-performance during market weakness and significant out-performance in upcycles. Peabody has and continues to take aggressive action to combat the market downturn.

And we have a diverse global platform built to endure even the most challenging cycles. We appreciate your interest in BTU, and we look forward to updating you on our progress as the year proceeds.

Thank you.

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