Peabody Energy Corp (BTU) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Q1 earnings call.

(Operator Instructions)

As a reminder, today's call is being recorded. I'll turn the conference now to Mr. Vic Svec, Senior Vice President, Global Investor and Corporate Relations. Please go ahead.

Okay. Thank you, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are CEO-elect, Glenn Kellow; and Executive Vice President and CFO, Mike Crews.

We do have some forward-looking statements and 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. And with that, I'll now turn the call over to Mike.

Thanks, Vic, and good morning, everyone. Peabody's first quarter results reflect continued benefits from the cost reduction initiatives we have undertaken, which largely offset the sharp impact of lower coal prices year-over-year. We also took steps to improve our liquidity and extend maturities during an active quarter. I'll begin by discussing our financial results and the steps we have taken to strengthen our financial position. I will end with a review of future potential cash benefits and changes to our full-year guidance.

Let's start with a review of the income statement. First quarter revenues totaled $1.54 billion, compared to $1.63 billion in the prior year, primarily due to lower realized pricing on similar volumes. Adjusted EBITDA declined 6% from the prior year, to $165.6 million, as $100 million impact from lower pricing was nearly offset by cost improvements that took place in the US, Australia and at the administrative level.

First quarter results also include more than $100 million of commodity and foreign currency hedge losses. I would note that we have provided additional disclosure in the earnings release and supplemental financial information to present the results from our mining operations before hedging, that is, based on the commodity prices and exchange rates for each period. We have also separately presented the impact of hedging.

Turning to taxes, we recorded a first quarter income tax benefit of $3 million compared with a $53 million prior-year benefit. This is primarily due to a current year valuation allowance in the US and lower year-over-year benefits related to the repeal of the Australian Mineral Resources Rent Tax.

Loss from continuing operations totaled $164 million in the first quarter, which includes the hedging losses I mentioned earlier and $62.1 million related to the debt extinguishment charge. Diluted loss per share from continuing operations and adjusted diluted loss per share totaled $0.62, which includes the $0.23 per share impact of the refinancing.

Now turning to the supplemental information, I'll review the US and Australian results in more detail. In US Mining operations, shipments were stable, as higher PRB volumes offset the declines in other regions. US revenues declined 2%, due to lower realized pricing in the Midwest, while cost per ton improved 3% on productivity improvements and continued cost containment initiatives. The greater mix of PRB sales is reflected in both revenues and costs and, along with lower fuel prices, contributed to stable margins. Overall, US adjusted EBITDA increased modestly to $254 million, as cost reductions overcame the expected impact of lower pricing, as well as a $15 million increase in commodity hedge losses versus the prior year.

In Australia, volumes increased 7% from the prior year on higher metallurgical coal shipments. And you'll recall that last year at this time, we were finalizing the installation of the North Goonyella top coal caving system. The decline in revenues per ton in Australia reflects lower pricing compared to the prior year. Australian adjusted EBITDA declined $26.3 million, to a loss of $24.5 million, which includes the negative impact of hedging of $67.2 million year-over-year.

Before hedging, our Australian mining operations results increased $41 million, to $61.9 million. This includes approximately $110 million of lower pricing and $150 million in lower cost, which is comprised of $75 million from improved cost and $75 million from lower currency and fuel prices at the operating level. Excluding the impact of hedging, all of our Australian mines would have generated positive results in the first quarter except for the contractor operated Burton Mine. Additionally, first quarter results include the impact of approximately $25 million related to temporary operational issues at Coppabella and North Goonyella, both of which are now resolved.

Australian costs declined $8.80 per ton, or 12% versus the prior year, to $65 per ton, as a result of improved operating performance, lower fuel prices, and the repeal of the carbon tax. Included in our first quarter cost is nearly $10 per ton of additional cost from currency and diesel fuel hedging, and we expect to realize the full benefit of these lower input costs over time.

Turning to SG& A, the benefits of our cost containment program initiated in late 2014 are now beginning to be realized, with first quarter expenses down 17% to their lowest level in six years. Going forward, we expect further improvements as our program is fully implemented. That's a review of our income statement and key earnings drivers.

In addition to cost reductions, we also continue to maintain tight capital discipline, with investments totaling $25 million in the first quarter. Operating cash flows were $3 million, which includes a $58 million cash outflow for debt extinguishment costs. During the quarter, cash balances rose to $637 million, which included $330 million of incremental cash related to the recent notes offering, of which $94 million was paid out on April 15 to redeem the remaining 2016 notes.

So in response to ongoing weak market conditions, we continue to execute a comprehensive financial strategy designed to ensure adequate liquidity, maintain financial flexibility, and position the Company to take advantage when market fundamentals improve. In February, we proactively amended our credit agreement to provide additional flexibility by relaxing our financial covenants for the life of the agreement. This action facilitates our continuing access to the $1.65 billion revolver.

In March, we elected to refinance the 2016 notes with a $1 billion offering of seven-year second lien notes which are callable in three years. Not only was the offering successful in extending our debt maturities, it also gave us an opportunity to secure additional liquidity to help meet a temporary increase in our near-term obligations. As a result of these actions, Peabody has a substantial liquidity position of over $2.2 billion and no significant maturities for more than three years.

Now independent of market changes, there are several other positive developments that will potentially contribute $685 million in annual lower cash outlays over the next two years -- including $275 million of annual LBA reserve payments that end in late 2016; $75 million of Viva Health Benefit trust payments, as final installments are completed in January 2017; and $335 million of potential benefits from the roll-off of foreign currency and diesel fuel hedges, based on forward diesel fuel prices and exchange rates as of March 31. We have not executed any new currency hedges since last year, as we scaled back our rolling 36-month program.

Finally, as Glenn will discuss, we are aggressively evaluating alternative ways to improve our capital structure and increase shareholder value. This can be realized in a number of ways, including sales of assets and minority interest in operating mines. Another option is the creation of an MLP, which we have studied in depth. We like the opportunity for another source of capital, but have been cautious to date, given capital market sentiment regarding the coal sector and other alternatives for the assets that can be used to create an MLP. However, it remains an interesting option for us going forward.

Now, turning to guidance. For the second quarter, Peabody's targeting adjusted EBITDA of $135 million to $175 million and adjusted diluted loss per share of $0.59 to $0.49. Targets reflect a shoulder period in US shipments and lower seaborne coal prices. I would refer you to our Reg G schedule in the release for additional quarterly targets.

Regarding our full-year targets, we lowered our US volume guidance by 10 million tons in response to weaker market conditions this year. We lowered our Australian cost per ton range to $62 per ton to $64 per ton and updated our US revenue and cost per ton range to be 3% to 5% lower than 2014, and we reduced our capital spending to a range of $170 million to $190 million, as we benefit from the previous investments we've made across the platform.

So that's a brief review of our first quarter performance, as well as our 2015 targets. Now I'll turn the call over to CEO-elect, Glenn Kellow.

Thanks, Mike, and good morning, everyone. While commodity weakness clearly continued during the quarter, the Peabody team achieved excellent safety results and cost reductions, both at the operating and administrative levels, that nearly overcame the down draft from pricing. We also know that there is much more to be done, and I will highlight a number of initiatives that are aimed at improving the business and driving significant value over time.

First, let's take a look at the dynamics within the global coal markets. Clearly, seaborne coal prices have remained lower for longer, due to slowing global GDP and weaker import demand, along with supply growth that up until recently has been abundant. Over the last two quarters, the fall in US gas markets has also resulted in significant competition in electricity generation. With that, we are keeping a critical eye on several trends that would drive improvement as they unfold.

Within the seaborne metallurgical coal markets, we've seen numerous signs that production caps are starting to materialize. In fact, global export supply is expected to decline 10 million tons following three years of pronounced growth, based on flat Australian supply and North American curtailments. US producers are facing additional pressure, as a weaker Australian dollar has outpaced the decline in seaborne metallurgical coal pricing. As a result, first quarter US metallurgical coal exports fell by 3 million tons, nearly as much as the entire decline last year.

I would note that this marks another contrast between US and Australian met coal, where even the new met coal settlements represent a sequential increase in pricing on an Australian dollar basis. We estimate that 25 million tons of metallurgical supply CapEx were announced in 2014, with roughly half of that amount realized through actual reductions. The remainder is expected to come out of the market this year, and we've also seen an additional 10 million tons of reductions announced in the first quarter. Given recent price declines, we would expect further reduction announcements as a significant amount of global production is challenged.

China and the US remain as the marginal cost producers, and are disadvantaged with high production costs, strong currencies and lower average quality. In met coal markets in particular, familiar seeds of a trough peak cycle are being sown, where underperformance often leads to future outperformance. Although the operating costs for many producers have certainly declined steepening the cost curve, we've also seen a significant pullback in capital investment. Fixed investment in met coal mines has declined in China and other countries, and we project the incentive price to induce significant new Australian capacity needs to be up to $180 per ton, well above the levels we see today.

In seaborne thermal coal markets, major producers in Australia and China have announced significant production cutbacks during this quarter, with additional reductions likely at current prices. Indonesian coal exports, for example, have dropped nearly 10% in the first quarter, a major trend reversal from the world's top thermal coal exporting nation. Looking now at global demand, India coal imports have continued a strong trajectory and have helped to curb the impact of reduced Chinese seaborne demand. In the first quarter, India metallurgical coal imports increased 49%, reaching levels equal to China. At the same time, India's coal generation increased 6% through March, and the government recently sanctioned a 35% rise in thermal coal imports for the fiscal year.

In 2015, we expect India to surpass China as the largest coal importer, and India has stated that it will continue to rely on the seaborne market, as the economy expands and domestic production fails to keep pace with growing demand. In contrast, Chinese seaborne demand has been constrained by recent supporting measures and sluggish economic growth, driven primarily by the property sector. To date, we have seen a higher degree of support for the domestic miners than we would've expected and not as much stimulus on the demand side, although this is starting to improve. We expect Chinese imports to decline in 2015, yet we believe imports will rebase, as excess property supplies are eliminated, growing economic stimulus actions take hold, and policy restrictions ease over time.

While the timing of China's recovery is uncertain, already we have seen China take steps to loosen credit and tax policies to support the property market, and local governments have recently announced plans to boost infrastructure spending this year. The demand effects are being met by reduced supply. In the first quarter, Chinese domestic production fell 3.5% below the prior year and the China National Coal Association is targeting a 5% decline in coal production in 2015. Estimates suggest that some 80% of Chinese coal producers are operating at a loss.

It's important to note that while we discuss China at length, for good reason, in the first quarter, some 90% of Peabody's Australian met coal exports and 75% of our thermal coal exports went to traditional market and emerging Indian customers. Across Asia, we are encouraged by the significant buildout of new coal fueled generation and coastal steel capacity that is expected to come online within the next few years, and we expect urbanization and industrialization trends to continue to support the long-term seaborne demand. And contrary to some reports about peak coal usage, consultant Ward & McKenzie has recently confirmed its view that coal will surpass oil within several years as the world's largest energy source.

Now let's turn to the US markets. In response to continued lower natural gas prices, we have updated our projected 2015 US coal demand to decline 80 million to100 million tons from prior year levels. Through March, coal generation has fallen 14%. Weak demand and improved route performance has led to a rapid recovery in PRB stockpiles, which have increased to approximately 70 days of supply. We expect US coal production to decline as the year progresses, with proportionately larger supply reductions taking hold in higher cost regions.

Although the decline in natural gas prices has impacted demand and prices across the United States, the PRB remains best positioned to manage through the current natural gas environment, due to its low delivered costs. In early 2015, utility bidding for new coal agreements has been somewhat suppressed, yet we continue to see bidding above the OTC market for 2016 delivery.

Over the next several years, Peabody projects natural gas prices to rise modestly, as export facilities and pipelines are completed, onshore demand, and production growth is constrained. Just since November, half of US oil rigs have been closed due to depressed prices. With an estimated 40% to 50% of US natural gas production directly related to oil pricing through associated oil and liquids drilling, the full impact of the decline in oil prices has not yet been accounted for in natural gas production. By 2017, we expect coal's share of US electricity generation to return to nearly 40%. And PRB and Illinois Basin demand is projected to increase, as natural gas prices recover and higher coal plant utilization and basin switching offset expected retirements.

As a result of current markets, we are intensely managing the following four cornerstone areas of emphasis critical to Peabody's success during this part of the market cycle, operational, SG&A, financial and portfolio. And as you would expect, with new leadership comes the opportunity to bring fresh perspectives. First, at the operational level. We continue to drive improvements in safety, productivity and costs. Through March, Peabody's global safety results were strong and we are on track for another year of improved performance, as our robust safety programs continue to yield results.

At the same time, we continue to target increases in productivity, with our global workforce down some 20% in the past three years. While we've implemented substantial cost initiatives across the platform, we clearly are not done. We're actively pursuing additional cost reductions through procurement and maintenance programs and other operational improvements. We have again reduced our capital spending targets, and we believe that our previous investments, relatively young fleet of equipment, and focus on capital efficiency will allow us to maintain low levels of spending for the next few years.

Our secondary of emphasis is SG&A. In the first quarter, we achieved the lowest selling and administrative expense levels in more than five years. We have closed project development offices in Ulan Bator, Mongolia and [Urumqi], China, as well as our regional office in Flagstaff, Arizona, and we have transferred trading activities from Singapore. We are delayering the organization and streamlining work flows, and we would expect further benefit from the implementation of our global shared services center.

I have a vision of a leaner corporate group, and you will see additional cost reductions in this space. To set the tone from the top and align on a personal level with the Company's ongoing cost reduction strategies, Greg Boyce and I have taken a voluntary and temporary base salary reduction for the remainder of 2015. I would also note that all Board members have taken this same action for their annual retainers.

Third, within the financial area, we're taking all necessary actions to maximize cash and liquidity. Mike has covered this area well, following recent actions to amend our credit facility and refinance the 2016 notes. And fourth, within our portfolio, we are looking methodically at all potential opportunities. You'll recall that cash proceeds from assets sales were $130 million in 2014. Peabody is committed to portfolio optimization through asset sales and joint ventures, including sales of non-core reserves, service lanes, and partial interests in active operations. In certain markets, we have seen an increase in buyer interest.

In the US, Mike discussed our thinking on alternative structures, such as an MLP. In Australia, we are undertaking a strategic review of our large portfolio tenements, a process that is well underway. And with respect to our active mining sites, we are evaluating options for our highest cost operation, the Burton Mine, where the current contract and miner agreement is set to expire next year and follows our renegotiation of this contract to provide more flexibility.

That's a summary of the coal markets and Peabody's positioning. We have said we would continue to manage capital and drive improvements in productivity and costs, and we are delivering on those fronts. We said that current movements in fuel prices and the Australian dollar would be a longer-term benefit for us, and we've shown greater insight into what is on track to be a significant tailwind as hedge transactions expire.

So when we say that we will manage for the current downturn with speed, focus and purpose, know that our team is fully committed to continuous improvement across every level of our organization. While this will require ongoing changes in the way we do business, I'm confident we will be better positioned to combat near-term challenges and we will be in an excellent position to capitalize on the market upturn.

With that, Operator, we would be happy to take questions at this time.

(Operator Instructions)

Matthew Korn, Barclays.

Good morning, gentlemen. Thank you for taking my questions. Expectations for coal burn here in the US are down meaningfully again. It seems that particularly Appalachia is under heavy pricing pressure. We'll probably see substantial production losses there.

So I guess my first question is, are we finally getting ready -- are we finally getting towards a steady state level of utility coal burn here in the US? Is that 800 million tons? Is that 750 million? So what's your view there?

And the second question would be, in the Midwest, very profitable region for you, I think it's often overlooked relative to the Aussie mines and the PRB. What's the opportunity there, you think, in terms of volumes or market share gains, if we do reach this kind of stabilized market? Thanks.

Thanks, Matthew. I think the first question is around what we're seeing. And we've signaled an 80 million to 100 million reduction in the US. But also, as a longer-term, we do think in particular markets we'll actually see an improvement in market share coming from within the markets.

So just focusing overall on the US, we do have some factors associated with the movement in the impact of mats in this year. But I think the larger impact about 2015 is really a story around gas. And as you've indicated, at these levels-- and we previously talked about PRB being competitive between the $2.50 to $2.75 mark, the Illinois basin, $3.50 to $3.75. And as you go further east, prices above $4.00, you'll probably recall for those markets.

So as you've indicated, your thesis is what we'd agree with, and that would be that we'd see, working our way from East to West, as being the most challenged during this environment. As we've indicated, though, longer term we do see through utilization in particular markets, a 50 million to 70 million ton increase associated with those markets, improved burn.

With respect to your question about Midwest, we do concur that we've got a great set of assets there. At these price levels, in terms of gas on coal competition, we are seeing increased competition in the basin.

I would highlight that our assets and our mines tend to be located in particular subregions, which what we believe is not only do we have low-cost mines, but we believe we have certain geographic and strategic advantages with respect to our access to key customers in those markets. So we feel as though we're very well-positioned competitively in the Illinois basin.

Thanks, Matthew.

Michael Dudas, Sterne Agee.

Good morning, gentlemen, and thanks for all the additional color and disclosure from the first quarter results. First question, as you think about taking over as the new CEO next month, officially, it sounds like you have an aggressive plan in front of you. Are there any sacred cows or any assets that are untouchable, or any structures that you just don't think are going to fit with how you see the future of the coal business globally and how Peabody factors into that?

Thanks for that. I think, as I've said before, I have been part of the strategic review process in 2014. So I have had the opportunity to look closely at Peabody's assets and work through the coal markets through that period. But also, as we've indicated, I think it does provide the opportunity to have a fresh perspective and to build off that.

I think the primary focus will be one of shareholder value and shareholder returns driving the decisions. Clearly, we've said as we step through the strategy, it's about cash and liquidity. It's then about deleveraging through that process. I think, as we are clearly flagging, we're open to a broad range of measures and tools and avenues that will enable us to achieve those objectives.

Is that an ongoing -- is it a six months, we'll hear from something, three months? Are you going to update the investors from a strategic standpoint or just as things occur?

I think clearly we'll be providing updates on a quarterly basis, but I expect that process will be ongoing. And I think today we've highlighted the four areas that are the immediate focus, as I said continuing to drive costs down in operations, a leaner corporate structure, and driving SG&A.

Mike talked about the steps we've taken with respect to the capital structure, but also the options that may be available to us, and clearly working the portfolio. So we talked about, in the release, that we've kicked off a strategic review of our significant Australian tenement position. So we will provide updates as appropriate.

Appreciate that. My follow-up for Mike Crews is that regarding hedging strategy going forward, could you maybe clarify it a little bit more. If we see significant further weakness in the currency or energy markets, would that encourage additional hedging to lock in, or is the program going to continue, are you buying back hedges? Just a little bit more certainty in how we can model out where some of these potential benefits can actually be realized.

Sure. So as we've talked about before, we typically have hedged on a rolling 36-month program with levels at approximately the 70%, 50%, 30% level over the 12-, 24-, 36-month periods. When you look at where the hedge positions sit today, there's probably two main factors there around your question.

The first is on the crude side, when the market moved towards the end of the year, beginning of 2015, we did go ahead and flex up to capture those opportunities. We felt like the opportunity for lower crude prices was limited relative to the potential rebound, so we did flex up there.

At the same time, on the currency side, we sit at a little over 40% in 2016 and a little over 20% in 2017, which would be below our normal target ranges. And we have not put any currency hedges on since last year. So we've scaled that program back a bit.

Typically, we've found if you're going to have a hedging program over a longer dated period is good. Programmatic purchasing is good to take some emotion out of it that can creep in. But we will take -- when you see some severe dislocations like we did on the crude side -- we will go ahead and potentially take a position to top it up where we think that may add value.

The other factor on FX, as well, has been that even with the existing hedge positions, the team has been very good at taking cost out. So in effect, that denominator changes and your hedge rate rises, just solely by the fact that you have lower requirements.

So we're trying to take that into account as we reduce our cost position, as well. So it's a little bit of both. There's very active management there.

Excellent. Thank you, gentlemen.

Evan Kurtz, Morgan Stanley.

Good morning, gentlemen. So a couple questions on the MLP. That's interesting and new. As you look at across the portfolio, obviously, you have to make some decisions about what assets make sense to put in an MLP and think about reserve life and cost and tax basis and so forth. So what assets are we talking about here?

Does it make sense to put PRB assets into an MLP, or are you looking more at the ILB assets? And then any comments on timing of when you might actually execute on an MLP strategy would be interesting to hear.

Sure. This is Mike. And I think you've touched on a couple of the different issues. We've spent a fair amount of time looking at the MLP structure.

We've seen other people do it and be successful. They typically have generated a new source of capital, another class of investors, traditionally have traded at a premium to the C corps, although that is eroded here recently over time.

Compound -- or I guess, contrasting against that would be the coal market settlement today, the fact that you've seen higher priced contracts roll off. That puts a bit of pressure on near-term cash flows. Because as you think about an MLP structure, it's all about stable cash flows and then growing those distributions over time.

As it relates to individual assets, I'd rather not get into specific assets at this point, because as Glenn talked about, the portfolio review and what assets we may look at as part of that process, this really runs the gamut. You may have asset A that looks right for just outright divestiture which is mutually exclusive, frankly, from inclusion in an MLP structure. And you may have a different asset that you think is more strategic which may lead you to a minority interest position, from an M&A perspective.

So it's something that we're going to continue to look at. And as some of the market sentiment improves and we sort through some of what the alternative opportunities may be for assets that we have under review, that's when we would look to provide an update around an MLP structure.

Got it. And just as a follow-up, what is the appetite out there right now for asset sales? You mentioned you did 130 last year. Has the recent leg down in met coal pricing impacted that at all? Are you still seeing opportunities? It sounds like you guys are increasing your focus, but is the market there for you?

Not only are we increasing our focus, but it's been interesting that both in Australia and also in the US, we've seen some recent consolidation here in the US and that felt like it may have perked up some additional interest around other potential transactions in people's minds. So we're seeing increased buyer interest, both in the US and international.

But I would say it's both asset quality specific and location specific.

Thanks for the color, guys.

John Bridges, JPMorgan.

Thanks, guys. I was pleased to hear your optimism for the gas price in the US. We're looking forward to that higher price. But then in terms of asset optimization, portfolio optimization, if you've got that optimism for US assets, and given the current weakness, would you be more focused on Australia as an area for divestment?

Firstly, with respect to gas prices, our views would probably be consistent with what we'd see as the majority of third-party views. So I wouldn't -- to reach our sort of assumptions and to get inside our thinking, I wouldn't expect to see anything significantly outside of what we see from third parties.

With respect to our portfolio, what we've indicated is looking at our tenement positions, which we've had a pretty good processing play in the US over quite a long period of time of successfully executing reserve sales quite well on a year-by-year basis, we haven't had that same focus around the Australian business. And certainly, the processes that we've been doing at the moment are that we have a significant reserve portfolio, not only in terms of what we had prior to MacArthur, but with the MacArthur acquisition.

And it's one in which we look at the types of tenements, how that would fit it into our overall structure. And we are looking at opportunities either potentially for outright sale or for taking joint venture interests in through those positions.

So with respect to our own assets in the US, as you know, we believe that our focus areas, in being the PRB and the Illinois basin, still continue to compete strongly with gas going forward and still continue to be important areas for what we consider to be additional burn requirements from those particular sources. And so our assets being in what we would consider to be higher growth areas and also with what we regard as being very good quality assets in the US in those areas would indicate that we like our portfolio there.

Okay. Perhaps a follow-up, a bigger picture question. Peabody's been unique as an international pure play coal company, and that was a very attractive profile when the coal space was exciting.

In this more difficult area -- time, then your competition internationally are much, much bigger than you are and it probably makes it very difficult for you. How do you think about remaining with this current profile?

I think we regard ourselves as being strong international competitors. I think we operate 26 mines around the globe. We regard that we've got some of the best mines on the planet.

And I think certainly from our operational capabilities, we believe -- and I'd like to think that we've proven -- that we can add value for activity. So we think we compete very strongly on an international basis.

Okay. Thank you.

Justine Fisher, Goldman Sachs.

Good morning. The first question I have is on the Midwest segment. So obviously, we've seen some consolidation there. But I think a lot of investor focus on that part of the market has made them focus on the good margins that you guys and competitors have generated there for a while.

But with increased competition and increased tonnage in that market, I think people are looking at how sustainable those margins are over time. So can you talk to number one, how sustainable are they?

If we see a weaker US coal market, can you guys continue to post double-digit margins in that segment? And then also on your view on the recent consolidation, how that will affect the basin, please.

Justine, this is Mike. We've been very pleased with the Midwestern portfolio that we've had over the years. And I think there's probably three different ways to look at it.

We've transitioned in certain places, like with our Bear Run Mine, to have a large-scale surface operation, which is in our sweet spot strategically. We've had the low-cost Gateway Mine that has performed very well in all market conditions and has resulted in the additional capital that we put in the follow-on Gateway North Mine. And then in the Indiana area, we have a strategic advantage around transportation differential.

So we continue to believe that we can compete and take advantage of what we see as market improvements to 2017, as we've highlighted, based upon higher gas prices over time and increased plant utilization even in the face of [nats]. So again, we think we can compete very well there in terms of consolidation, as that impacts us. As I said, I think we continue to look very strongly at our portfolio and execute against the advantages that we think that we have.

Okay. And then the second question is on Australia costs. So obviously, if there was the $25 million one-time costs there in the first quarter, I can see that that accounts for maybe $2 to $3 a ton of lower costs through the rest of this year, which is why your guidance is lower than what the cost was in the first quarter. But can you help us understand, given that's one step-down, but then as the fuel hedges roll off, should we expect a 2%, 2%, 2% cost decline over the next, say, eight quarters as those hedges roll off, or will that be more of a step function in cost decline in Australia?

Yes. Thanks for that. And as I -- we broke out the detail around the hedges and in effect, grossed this up, so you could look at the operations the way we do, independent of hedging. But it may be helpful just to, as you think about net-net cost positions, in Australia, we benefited just a little less than $1 a ton from fuel on a net basis. So both for the US and Australia, about half of the benefit, just on a pure mark to market basis that took place, net of the hedges, we realized about half of that.

Now on the FX -- and we would expect that both for the US and Australia to continue throughout the year, based upon where pricing is today in the hedge position. As you look at foreign exchange with the hedge positions that we had in, FX net-net was about flat.

The hedge losses that we had were largely overcome by the change in the exchange rate on the unhedged position. But as you look forward to the end of the year, we see the potential for about $1.50 a ton in cost improvement. So I think that helps in terms of what you're looking at and provides some insight to the guidance that we have around our $62 to $64 cost improvement.

Excellent. Thank you very much.

You're welcome.

Matt Farwell, Imperial Capital.

Thanks for taking my question. Curious about the PRB, with gas below $3.00. How will you valuate production decisions in 2016? You have a very strong contract, but for 2015. But how will that change in 2016? How will you reevaluate your production if gas stays below that level?

Thanks, Matt. I think as you've probably seen, we made the decision to lower the guidance by 10 million tons for this year and we'll continue to evaluate 2016 production levels. I would say, though, that we have been seeing bids above the OTC, because of the liquidity that's in that market and we're still yet to move into full swing of the 2016 contracting season. So it really is market specific.

I think what we also have in place, though, is that we do have for already committed based on 2016 versus 2015 levels some 75 million tons that we see prices 9% or so above 2015 levels. So we do have that, and that's a benefit of the layering in strategy that we've had over quite a number of years. But we do have that base business or contracts built-in for the 2016 position already.

And just to back things up on a regional basis, this tale of two markets really is playing out over time. If you look at 2015 -- and no question it's going to be a difficult year from a consumption standpoint -- but year-to-date, you're seeing consumption in Appalachia, that's a blend of Central App and Northern App, down some 25%.

On the other hand, Powder River Basin, not immune to things, but down only 10% so far. And frankly, the frames have continued to draw, the utilities are continuing to pull on that, understanding that it is that low cost option.

As we move forward, that story continues. We talked earlier about growing to 2017, where we see the 50 million to 70 million tons of increase from 2014 levels, which would mean an even greater increase from 2015, based on capacity utilization, based on the facts that PRB continues to be the lowest cost delivered, and Illinois Basin right behind that, whereas Central App, and to a lesser degree Northern App, is affected by those plant retirements, sitting right on top of Marcellus and other challenges along those lines. So PRB remains the go-to source and one that we're pleased to be the number one producer in.

That's very helpful. And if I could just ask one more question, credit related. The recent financing, you designated certain assets as non-principle property. And I was wondering if you could just give us a little more color as to what types of assets would fall into that basket.

Yes. This is Mike. Probably the best way to look at it is really what's in principle properties, which is assets with a gross value in excess of 1% of consolidated net tangible assets. Typically those are real estate properties. And then non-principle properties would be everything else.

So at December 31, the value of the principal properties was about $3 billion, and $2.7 billion on the non-principle. And then as part of our SEC filings going forward, we will provide quarterly updates on how those values change over time.

Thank you very much.

Brandon Blossman, Tudor Pickering Holt.

Good morning, gentlemen. Let's see, I guess one on Australian costs, just a couple details. The $62 to $64 guidance for the full year, is that a range that is to some degree predicated on a change in FX rates, or is that just straight up, the range of operational outcomes with holding FX constant?

No. This is Mike. What I had said is the roughly $1.50 a ton for the full year would be the FX component, based upon current exchange rates. There's still operational improvements that we would expect to see that would make up the larger component of that range of cost reduction.

Okay. And is it fair to assume that the Coppabella and North Goonyella issues in the first quarter were relative surprises, i.e. put you towards the bottom end of your guidance range? Or was the Coppabella something that was in the mine plan?

No, you are correct. We had an unscheduled belt replacement at North Goonyella, and then we had some vendor blasting issues at Coppabella, both that came up during the quarter which helped push us to the low end of our guidance range. But both of those have been remediated, at this point.

Good news. And then, Mike, also, just conceptually, as you move forward through your strategic review, what could change in the broader market that would take the MLP off the table or put it on the front burner?

I think what would -- it depends on what assets we ultimately decide are MLP eligible, whether we decide to take other actions with those assets that would take them out of the running for that. And then improved market sentiment around the coal sector, I think, would raise the opportunity for an MLP structure.

Fair enough. Thank you very much.

You're welcome.

Brett Levy, Jefferies.

Can you talk about when the hedges run off and when you start to feel the benefit of free markets and the dollar and some of the other things that you've got hedged right now?

Sure. If you have the release in front of you, on page 6 is where we've tried to lay that out. So the largest component of that being the Australian dollar. So our hedge rate, or percentage hedge, drops from 66% for the rest of 2015 down to 42% in 2016 and 22% in 2017.

So when you look at the all-in effective rates, because even with those hedge rates, they come down over time, as we've layered in hedges as the rate has come down, so the potential cash benefit -- and these are compared to 2015 -- so in the middle of that table, it says that 2016 has the potential to be better than 2015 by $170 million. And then cumulatively, as you get out to 2017, that approaches $290 million.

The fuel's on a bit smaller scale, but a similar relationship. So there's $30 million of potential benefit in 2016 and another $15 million for a cumulative $46 million in 2017.

So all in 2016 versus this year, potential benefit of $200 million, and then 2017 is $335 million. Now when you combine that -- so that would be lower cost, which would be a cash benefit -- then you combine that with the LBA payments and Veba payments that roll off by January of 2017, that's how you get to the total potential benefit of $685 million

All right. And then in terms of your covenants right now, is there a particular bond that might be in your sights, given that everything is at a discount, that would enable you to skirt some covenants, as you work through?

Sure. The primary covenants inside the credit agreement, there's two. There's a leverage ratio of debt to EBITDA of 4.5 times, which is on a net first lien secured basis. And then we have an interest coverage ratio that's on all cash interest of 1 times. As part of that credit agreement amendment I discussed in February, we relaxed up or down, as the case may be, on those covenants for the life of the facility, which is out to 2018.

Any bonds you'd buy back?

You know, at this point, our primary focus is on cash and liquidity, number one. One A, very close to one, is deleveraging. So as we complete this review of the portfolio and look to generate asset sales and cash proceeds therefrom, we would look to reduce our debt wherever it makes the most sense.

Thanks much, guys.

You're welcome.

And we have time for one more question. We'll go to Paul Forward with Stifel.

Thanks. I just wanted to ask about the lower volume outlook for 2015 in the US, and looking specifically at your PRB and Southwest assets, essentially you've got six big mines in the region. When you look going forward over the next two, three years at customer commitments, planned plant retirements, et cetera, do you think about that portfolio as likely to shrink or change in some meaningful way?

Maybe part of the answer to that is with respect to our Colorado asset. And certainly, as we've talked about, we're in the process now of transitioning to the Wolf Creek scene, and that, we've indicated, would be at a lower run rate, sizing around about the 4 million ton sort of rate, which is sized on local market access without reliance on exports or other markets outside of that region. Now we have the ability and the capacity to flex up, if required.

Other than that, with respect to, you indicated the PRB, although we are looking at overall decline in the US market, we really do feel as though the PRB continues to perform competitively against gas at these sorts of levels. We are anticipating, as we indicated, as other third-party estimates are, that over time, gas will move. And we would indicate that given our strong low cost position in the PRB, that that will continue to be a reliable low-cost supplier from the region.

Great. And just wanted to ask, as well, I think, Glenn, if you do your strategic reviews, one of the areas you talked about was SG&A. You had a $10 million reduction year-on-year to $49 million in the latest quarter.

Is there a reachable level that you'd say on a quarterly run rate you'd plan to target? Is there a potential in 2016 that you could take out another $10 million a quarter relative to that $49 million number, or have we seen most of the heavy lifting that's possible, as far as taking costs out of that SG&A line already?

Well, I think, as we've noted that we've achieved the lowest levels in over five years at that quarterly run rate. We haven't given a guidance about SG&A. But I'm also flagging that my view is that we can have a leaner corporate structure. And it is something that the team is focused on.

So we're certainly be working hard on that. And I think there are a number of options available to us as we continue to work through that. So I would envisage as time unfolds that you'll see progress in that space.

Okay. Thanks.

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

Thank you, Operator. And thanks to everyone for joining our call today. I'd also like to thank the women and men of Peabody, who continue to manage safe, low-cost operations regardless of market movements.

With the industry having shown extended weakness, Peabody is committed to driving a sustainable successful organization without regard to external market forces. Whilst these times are challenging, I am confident in our team's ability to take prompt and strategic action will improve the strength of our platform. Thank you for your continued interest, and we look forward to keeping you appraised on our ongoing efforts.

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