Peabody Energy Corp (BTU) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Q2 earnings call.

(Operator Instructions)

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

Okay, thank you, John, and good morning, everyone. Thanks for taking part in the conference call for BTU. With us today are President and CEO, Glenn Kellow; and our newly appointed Executive Vice President and Chief Financial Officer, Amy Schwetz.

Amy is a financial executive with two decades of experience and a recognized leader within Peabody. She has held both domestic and international posts with Peabody over the past ten years. Some of you may also recall Amy from her position within Investor Relations several years ago and we are pleased to welcome her to this new role.

And also with us today is Senior Vice President of Finance, Walter Hawkins. We do have some forward-looking statements today. I would encourage you to consider those, along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents. We also refer you to peabodyenergy.com for additional information. With that, I'll now turn the call over to Amy.

Thanks Vic, and good morning, everyone. I've been pleased to be part of Peabody's finance team at both the corporate and operational levels and I look forward to getting reacquainted with many our investors and analysts over time.

Beginning this quarter, we are expanding Peabody's segment reporting disclosures to provide you with additional information and highlight the significant strides the Company is making in reducing both operational and administrative costs. I would note that we have also updated our historical supplemental financial information, which is available on our website.

I'll begin by discussing our financial results, then review initiatives aimed at improving the Company's financial position. I will conclude with our many full-year guidance elements.

Let's start with a review of the income statement. Second-quarter revenues totaled $1.34 billion compared to $1.76 billion in the prior year, primarily due to a substantial 16% reduction in volume, along with realized pricing declines in US and Australia of 8% and 19%, respectively.

Adjusted EBITDA totaled $87 million. This includes $21 million in restructuring charges that were previously announced. Major factors also affecting adjusted EBITDA include $115 million in lower pricing, $113 million in hedge losses and $40 million in PRB weather impacts. These factors were largely offset by lower costs at the operating level and a sharp decrease in SG&A expenses. We will explore more of these drivers in a moment.

Similar to other Companies across the commodity sector, the Company recorded a $901 million impairment charge in the quarter. About $700 million is associated with the revaluation of certain Australian met coal assets, largely from our 2011 acquisition. And the remaining $182 million is attributed to US assets that are unaffiliated with our mining operations.

Despite significant improvements in the met coal operation the revaluation of Australian assets was a result of the recent significant reduction in met coal pricing, as well as our ongoing strategic review of assets for sale and non-development. We believe in the long-term value of the Australian platform, and this business provides significant upside as our cost repositioning takes hold and markets improve.

Turning to taxes, we recorded a second-quarter income tax benefit of $93 million compared with a $4 million prior-year expense. This is primarily due to a benefit from the reallocation of valuation allowance between other comprehensive income and income from continuing operations.

Loss from continuing operations totaled $1.01 billion in the second quarter, largely due to the impairment charge. Diluted loss per share from continuing operations totaled $3.71, including $3.06 per share impact related to asset impairments. Adjusted diluted loss per share totaled $0.65, which includes $0.07 per share from the restructuring charge.

I will now review the supplemental information where we have broken out our PRB and Western mining segments in the US and our metallurgical and thermal segments in Australia. In the US, adjusted EBITDA of $212 million reflects lower shipments in all regions, as well is a reduction in realized pricing.

Despite 6.4 million tons in lower volumes, US cost per ton declined 4%. That's a credit to the team, given the challenge of fixed-cost distribution over materially lower volumes.

Within the PRB, revenue per ton of $13.47 declined from the prior period primarily due to $1.27 per ton contractual true-up that benefited the second quarter of 2014. During the quarter, heavy storms in Wyoming deferred 5.5 million tons of PRB shipments and resulted in approximately $0.65 per ton margin impact, which totaled $3.11 per ton.

Our PRB operations received more than it's average annual rainfall in less than two months late in the quarter. While wet weather continued during the first several weeks of July, shipments are ramping back up. You'll recall that we have been fully committed in price for 2015 volumes for some time.

In the Midwest, volumes declined 1 million tons due to lower demand, while costs improved 12% on lower fuel expense and cost reduction efforts. So we were pleased that we were able to expand unit margins by 13%, even with the reduced volumes. The Western US segment is comprised of our Twentymile Mine in Colorado and the Kayenta, Lee Ranch and El Segundo Mines in the Southwest, which primarily serve their local markets.

Total volumes declined 28% due to lower demand and lower export shipments from Twentymile. However margins were down only 2%, as improved revenue per ton and cost reduction efforts offset lower volumes.

Turning to Australia, adjusted EBITDA rose by more than $50 million to $56 million, as lower costs more than offset a reduction in volume and a $90 million price impact. Australian cost per ton declined by over $20 to $52 per ton, with the majority of the benefit from lower currency and fuel prices.

This performance offers a solid demonstration of how Peabody benefits from our Australian platform apart from the effects of currency hedges. We also expect to make additional improvements to the platform. During the quarter, the Burton Mine added several dollars per ton of cost to our metallurgical segment, and we will evaluate the loss, making Burton Mine life beyond the middle of 2016.

Metallurgical coal volumes declined by 17%, mainly due to the planned reduction at the contractor-operated Burton Mine and the end-of-life closure of the Eaglefield Mine in late 2014. Net cost per ton declined 25% to $79 per short ton, a value that includes both royalties in rail and port costs. Glenn will review the actions we have taken to further reduce costs, given the recent market declines.

Australian thermal coal cost per ton also declined 25% to $29.91. This segment's low costs and $12 per ton margins are anchored by the Wilpinjong Mine, one of the premier thermal assets in Australia.

Our sharp focus on creating a leaner organizational structure in the quarter led to a substantial 30% decline in SG&A costs from the prior year. That's the lowest quarterly level in nearly a decade.

Corporate hedging losses totaled $106 million in the quarter, primarily related to currency. We have modified our currency hedging strategy to reduce the duration of the program. We have not layered on any additional currency hedges in nearly a year, and the majority of the remaining hedge losses will roll off over the next two years.

With regard to our currency sensitivity, I would note that a $0.05 reduction in the Australian dollar would result in a $27 million adjusted EBITDA benefit in the second half of 2015 and a $69 million benefit in 2016. And we have already seen nearly a $0.05 decline in the Australian dollar since the end of the second quarter.

With respect to the collateral package under our secured debt facilities, the Company's total consolidated net tangible assets were $10.3 billion at June 30, with $3 billion in principal property and $2.6 billion in non-principal property. I would also note that the impairment and restructuring charges are excluded from our credit agreement calculations, which can significantly differ from our reported financial statements.

That's a review of our income statement, key earnings drivers and collateral update. I will now discuss Peabody's cash flows and liquidity, where our near-term approach is to maximize liquidity.

Over time, we intend to use excess proceeds from asset sales, lower fixed obligations and improving coal markets to reduce debt. We continue to maintain tight capital discipline, with CapEx totaling $26 million in the second quarter.

Operating cash outflows totaled $60 million, which includes an $8 million cash outflow for debt extinguishment costs. The Company ended the quarter with $2.1 billion of liquidity, including $487 million in cash and $1.5 billion under our fully committed revolving credit facility.

We are fully aware of the adverse impact that coal markets have had on our equity and bond pricing, but I believe Peabody has a number of advantages that differentiate us. We have substantial liquidity, with no material debt maturities for more than three years. We continue to qualify for self-bonding and we have had Wyoming, Illinois and Indiana recently renew our self-bonding applications. We are making substantial cost improvements. And we have a large portfolio of assets and reserves located in the strongest mining regions.

Independent of market changes, Peabody has multiple cash payments that simply fall off over the next several years, including $275 million of annual LBA reserve payments that end in late 2016, $75 million of Viva Health benefit trust payments that conclude in January of 2017, and over $300 million from the roll-off of foreign currency and diesel fuel hedges based on forward prices. Glenn will further outline our financial focus as part of our key areas of emphasis.

Turning to our outlook relative to the second quarter, third quarter adjusted EBITDA results are primarily expected to be impacted by lower benchmark met coal prices, higher PRB shipments on improved weather and a longwall move in Colorado. Regarding our full-year financial targets, we lowered our Australian met sales guidance by 1 million tons to 14 million to 15 million tons as a result of actions taken at a number of our met coal mines. We have 89 million tons of 2016 PRB sales contracted at an average price of $14.23 per ton. We are again revising down our cost estimates in Australia, with Australian cost per ton now targeted to be $53 to $56, nearly 20% below 2014 levels.

For the first time, we're introducing annual SG&A guidance. Our 2015 target of $170 million to $180 million implies an $80 million to $90 million run rate for the second half as we realize the benefits of our restructuring program. And we further reduced our capital spending to a range of $160 million to $170 million as we benefit from the previous investments across the platform.

That's a brief review of our second-quarter performance, as well as our 2015 targets. Now I'll turn the call over to Glenn.

Thanks, Amy, and good morning, everyone. It is a pleasure to welcome Amy to the leadership team. She has broad experience across operations, financial management and capital markets, and has been hands-on in contributing to the substantial operational improvements you have seen from Australia over the last few years.

There is no question that these are difficult, and indeed, unprecedented times for both coal markets and related capital markets. In recent months, thermal and met prices eased further, coal bond and equity prices declined and several coal peers announced restructurings and were delisted from the stock exchange.

Yet even amid these challenges, Peabody has accelerated a host of initiatives to improve our business and create a stronger platform now and as we move forward. Make no mistake, Peabody is committed to work through these highly demanding conditions as we take aggressive actions on multiple fronts to preserve and enhance long-term value. Today I'll provide context for the current state of the markets and then discuss specific actions we are advancing within each of our four cornerstone areas of management emphasis.

Within the coal markets, seaborne coal prices came under pressure on concerns over global economic growth, along with a reduced steel production that outpaced supply reductions. In the US, coal demand continued to be impacted by lower natural gas prices and milder summer weather up until recently.

Regarding current global coal market drivers, in China weakness in the property sector and significant volatility in equity markets weighed on the overall economy and impacted coal consumption. As a result, domestic demand for steel fell 4% during the first half of the year and metallurgical coal imports declined 30%. China transitioned to become a net exporter of metallurgical coal on an equivalent basis, through its (technical difficulty) and coal shipments. Steel demand issues and quality standards also pressured PCI coal usage.

On the other hand, I would suggest that China met coal imports rebounded in June. And while multiple headwinds remain, China and Australia recently signed a bilateral free-trade agreement to eliminate an existing 3% tariff on metallurgical coal by January 2016 and phase out a 6% thermal coal import tariff over a two-year period. This marks an additional differentiator in support of Australian competitiveness in global markets.

In sharp contrast to China weakness, India's imports are showing continued strength, with seaborne met coal demand rising 24% through June and thermal coal import demand increasing 35%. India's domestic coal quality generally cannot meet steel-making needs and we would expect additional import demand as the economy grows, new blast furnace capacity is added and infrastructure spending increases.

Turning to seaborne coal supply, coal production consignments are taking hold. In 2015, seaborne metallurgical coal supplies expected to decline 15 million tons to approximately 295 million tons. We would expect additional supply reductions around the world and some third-party reports have indicated that even 80% of Chinese met coal production and the majority of seaborne met coal production is now not covering cash costs.

We also would agree with consultant Wood Mackenzie who forecast this year met coal production to China, with Chinese steel demand growing for many years to come. We are also seeing supply reductions in thermal markets, with a 17% decline in Indonesian exports and a nearly 50% reduction in US exports in June.

Through the first half of the year, Chinese domestic production declined 6% as the government works to address oversupply concerns. And Peabody believes lower prices will continue to accelerate global supply cutbacks as the year progresses. Over time, Peabody expects seaborne fundamentals to improve as China's economy stabilizes, steel and coal fueled generation capacity is brought online and additional protection consignments take hold.

Looking now US markets, as a result of lower natural gas prices we expect 2015 US coal demand to decline 90 million to 100 million tons compared to 2014 levels. Through June, US coal generation declined 14%. Overall US coal production is down 8% through the first half of the year with the rate of production declines doubling in June.

Additional supply cutbacks are expected to take hold in the coming months and largely impact higher-cost regions. Peabody expects coal share of US electricity generation to rebound from 35% this year to the upper 30%s by 2017.

And while all regions are losing demand due to lower gas prices this year, we look for the PRB and Illinois Basin to rebound to higher levels than 2014. By 2017, as natural gas prices lift and higher coal plant utilization and basin switching are becoming expected requirements.

Overall, the PRB enjoys a considerable cost advantage to other regions. On average, PRB coal dispatches approximately $8 lower per megawatt hour than the next lowest coal cost region, the Illinois Basin.

I would also like to briefly touch on US Supreme Court's recent MATS ruling regarding power plant emissions. Peabody views the decision as a positive for the coal industry and that it is another sign that aggressive BPA overage is being counted. Other groups have also increased their vested account of BPA overage leaving Congress, the states, business and consumer groups.

As you recall on the last quarterly update, I discussed Peabody's four areas of management emphasis. Now I'd like to provide a detailed review of our progress for each of these items. First, in terms of operational excellence, you've seen us advance a number of initiatives in the second quarter to increase productivity, lower costs and improve cash flows.

The actions by the team drove solid margin expansion in Australia in the third quarter. As we saw a continued deterioration in met coal process recently, we've initiated additional actions, including the elimination of more than 300 positions across most of our Australian mining operations.

We also are aiming to preserve coking coal and low-volume PCI volumes for better markets by reducing annual production at the North Goonyella, Coppabella and Metropolitan Mines. As a result, we are lowering 2015 metallurgical coal targets by approximately 1 million tons. I would offer my compliments to the entire team on continued cost containment successes, even as the Company delivered sharply lower volumes in the second quarter.

Next, we are pursuing a leaner organization through a three-pronged approach which includes focusing on activities, delayering the organization and implementing a shared services model. As part of this initiative we have announced we are reducing approximately 250 salaried positions, representing nearly 25% of our corporate and regional support staff. In fact, we have essentially removed an entire level of middle management from our organization.

We're also working to streamline our reporting relationships and consolidate activities through office closures both domestically and internationally. Most recently we announced the closures of our US regional offices in Indiana and Wyoming, and we continue to evaluate other options for consolidation. As a result of our ongoing efforts, we expect a 20% improvement in SG&A for full-year 2015.

Third, within the area of portfolio management, you saw significant activity in the third quarter. Soon after taking over my new post I pointed a new head of corporate development as part of our new focus on divestitures. In recent months we have entered into transactions for $35 million in non-core land and reserves in the Midwest and Australia, with nearly half of that coming through in the first few weeks of the new quarter.

While these are tough times in the market, there is still buyer interest for the right assets. As we move forward, we will evaluate potential opportunities based on benefits of liquidity and our views of long-term value.

And fourth, we are working to maintain financial strength by ensuring adequate liquidity through operational improvements, cost reductions and asset sales. Amy has reviewed in detail our approach to maintain cash and liquidity while deleveraging over time.

Given the current state of the markets and our eye on liquidity, we announced today that we have suspended the dividend for the quarter. The Board of Directors has also authorized a reverse split of common shares subject to upcoming shareholder approval, to ensure investor access and provide lower listing costs.

Our actions to increase efficiency, streamline processes and reduce costs remain essential, while we continue to believe that market factors affecting Peabody are largely cyclical, with stronger industry fundamentals returning in the future. In fact, I remain optimistic about the solid long-term thesis of BTU.

Let me recount our many advantages. We have leading positions in the best US coal basins, as well as the world's largest and most productive coal mine. We have an Australian platform that benefits from quality, location and a strong US dollar.

Our met coal assets are well-positioned and our firm operations are extremely competitive relative to peers. Our business is well-capitalized and reserve-rich, both in the US and Australia. We have a team that continues to drive lower OpEx, CapEx and SG&A spending in a way that positions us very well.

We have underlying potential cash flow drivers in the next 30 months, however, as our Australian hedges and fixed charges roll off. We have substantial non-core assets that can be monetized even as we maintain an eye towards value. And we have $2 billion of liquidity and more than three years before our next substantial maturities, offering a long runway for markets to heal.

In conclusion, I appreciate the difficult times that all stakeholders have experienced of late. And I assure you that we are committed to moving with speed, focus and purpose towards preserving and enhancing value for the long term. With that, operator, we would be happy to take questions at this time.

(Operator Instructions)

Jeremy Sussman, Clarkson.

Yes, hello and thanks for taking my questions. First question I have, one of the things we have noticed, a lot of the global competitors that we also cover clearly have lowered costs in part on the volume growth side. As I look through your guys' results, one thing I've noticed is that you've managed to keep unit costs flat to down despite lower volumes. Can you maybe elaborate on what you have been doing and what we should see going forward here?

Good morning Jeremy and thanks for the question. I think the first part of it is, you are right, obviously we've seen some production increases from some of our competitors or peers, in terms of lowering the cost structure that you've seen. Potential margins are cash negative.

Our approach has been a structured approach. The first is we've talked for some time about how overall programs through reducing lower cost. Those have been about the annual operating conversions in Australia, as they've been about benchmarking activities and driving across the portfolio. They've been about condition base monitoring and leveraging procurement.

Those things are all, as you see, taking effect. And we still think there is additional runway ahead of us to continue to initiate those activities.

The second thing is we do benefit from having Australian cost base at this particular point in time. And you have seen us talk about the impact of hedging. And for this quarter we have recut our segment and you can see the full benefit of that.

We've also been undertaking a range of initiatives on SG&A, and we've been talking about that in terms of delayering the organization, refocusing the organization. And you have seen the benefits there.

I think the thing that is new in this quarter that we haven't talked about to date, is that we don't believe producing into troubled spot markets of an incremental cash negative position is the path to long-term value. And so as a result, what we have been attempting to do, and we have touched every single one of our Australian operations through this process, is look at what might be an ideal sweet spot with respect to operating volumes.

And in some instances that is been out of the term what would otherwise be variable cost to take out fixed costs through that process. And so that maybe changing shift patents, reducing [wasper] systems, or in fact actually parking equipment. So in that way, that's where we've entered into that new phase and you've seen cost performance being very strong despite the production.

Thanks, that's very helpful. By the way, I appreciate the increased disclosure in the release. That's helpful for all of us.

Just a follow-up, two-part question. First, I think this is easy, you signed 14 million tons of new PRB coal this quarter. What was the price you sign at?

And then second, can you elaborate a little bit about Burton? You mentioned it on the opening remarks. Maybe for argument sake, let's say that everything stays the same for the next 12 months. What type of annual savings could we see from this mine? And can you talk about how we should think about take-or-pay liabilities on the rail import side that may exist? Thanks very much.

Jeremy, regarding the Powder River Basin, while we don't disclose the specific price in the quarter that we contracted at, we have said in the past and it continues to apply, that we do sign new business above the OTC and above the strip. That is related to what is typically then a good premium that Peabody has been able to obtain. It's also related to the fact that in this business, longer-term type of contracts, those that require a certain amount of volumes associated with them over time, almost always tend to trade above what can be very thinly- traded spot volumes that are associated out there.

What we can say, and I believe what we've already said, is that we have almost 90 million tons of volumes that are priced for the Powder River Basin for 2016. That's an average revenue per ton of $14.23. And then I would also point you to the additional disclosures which you had referenced regarding historic revenues per ton and margins on the Powder River Basin, which are superior to our peers out there. So we are pleased to be able to provide that additional disclosure.

Thanks, Vic. Maybe onto the Burton question?

Sure. With respect to Burton -- this is Amy -- Burton does add several dollars of cost to our met coal platforms, depending on the quarterly performance. Take-or-pay for our met coal operations is right around $10 per ton. We have experienced some success in terms of trying to offload capacity to other producers in the Bowen Basin as we have adjusted our production volumes. And in a scenario where we further drop production from Burton, we would look to do the same.

I think probably going back in time you can see that Burton has been a focus area for us. We talked some time ago about restructuring that contract to be able to work through lower volumes at Burton. And as we flagged, it is certainly a mine that is under increased scrutiny as we look to right about the middle of next year, whether it be important milestones about whether we continued that activity or not.

Understood, thank you very much for the answers.

Paul Forward, Stifel.

Thanks a lot. And thanks for the disclosure on the forward sales on Powder River Basin for next year, 89 million tons at $14.23. Wondered if you might offer up a little bit -- does that skew more toward a 8,800-plus North Antelope Rochelle type coal?

And follow-up to that is that as you look over the next couple of years, what's the outlook for some of the lower end coal in the Powder River Basin? And can you anticipate rotating more production to North Antelope Rochelle?

Thanks, Paul. In reference to your first question, the majority of that is probably oriented toward North Antelope Rochelle. And by way of background, we are pleased to have what is the largest and most productive coal mine, really in the world, with North Antelope Rochelle. Well over 100 million tons a year of production, which is a growing percent of the US total. We point out that one mine produces more than the entire state of West Virginia, so it allows us good economies of scale as well.

But to your question regarding the pricing, it would skew a bit toward the 8,800. Now regarding the 8,400 product, those quite often can fill particular niches on the part of customers. So we have that lower BTU product available for both the Caballo Mine, as well as the very low-cost Rawhide Mine, which as among the very best overburden ratios that we have seen anywhere in the world. So we continue to satisfy those customer needs from those operations.

All right. Looking at the Illinois Basin, you had a first-half 2015 production, or sales run rate was around 22 million tons a year. Wondering if you could look at those mines in 2016 and say is the mix going to change? Or are there any of those assets that look to be uncompetitive in this market? And potentially allowing a narrowing of the number of operating assets, you've got the Illinois basin. Or are they all looking to continue operating, potentially growing, as market recovers in 2016?

As we've talked about in the past, we think we've got a pretty strong portfolio, very strong portfolio, in the Illinois and Indiana Basin. In particular, our mines we believe in the Indiana sub-basin have certain strategic advantages on proximity to customers. Although we recognize it as being a growing area, as clearly there has been increased competition that comes into this sector, and so any additional expansion, I'd say we'd certainly be very judicious with respect to making investment capital decisions over time.

All right, thanks, Glenn.

Evan Kurtz, Morgan Stanley.

Hi, thanks for taking my question. First off, wanted to thank you for some of the increased disclosure on both Australian met and splitting apart some of the assets in Western coal. But I did have one question. It seems like in some of your cost per ton figures now, you may be stripping out some of the hedge losses. I wanted to confirm that, and also to understand is all of that change only happening in Australia? Or is there also some hedge loss components coming out of the Western coal numbers?

This is Amy here. That change was made across the board in both the current period and as it relates to the historical periods, and what has been posted out to the websites as well. I think in particular, you see the significant movement in the Australian cost per ton number from where we might have been guiding to in the previous quarter. If we strip that impact out and looked at our guidance, or what our guidance would have been, last quarter versus where we are at this quarter, we still improved that guidance range by $1 to $2 a ton after the impact of hedging.

Okay great. And I'm sorry, did I miss that, there is no hedging impact on the Western cost numbers?

That is correct.

Okay great. And then to drill down on some of the qualitative guidance that you put out there for next quarter. You came out with a couple of positives and negatives. Improved volumes out of the PRB, but that's going to somewhat be offset by met coal pricing and the longwall move. Is it too early to say whether you expect overall results to improve or decline in the quarter?

At this point, we have suspended our practice of giving guidance. We will say the major factors that we expect to impact the third quarter would be the decrease in met coal pricing, the improved conditions in the PRB, as well as the longwall move in Colorado.

Okay and then one final one, if I may. Any color on what happened with the PCI price in the third quarter would be really helpful. We've seen it compress a little bit as all met coal pricing comes down, but then it really blew out this quarter. What is driving that?

I think from where we see, we believe that the lower coal prices and the reduction in blast furnace utilization that's been taking place. I think utilization rates now are about 72% this year compared to 76% last year.

The fuel makers need to run at minimum levels of Coke production to keep the factory running. And as a result, producers tend to slow that process in weak demand cycles. And so I think as we saw the settlement band within what would be historical levels, we did note that it settled at 78%. Still above that long-term historical average.

However, as a result of those movements in the PCI market, you have seen us announce a number of initiatives. And specifically I'll talk about Coppabella, where we are looking at reducing on an annualized basis, about 1.2 million tons at Coppabella, using the methodology that I've been talking about before in terms of preserving margin and reducing cost.

And Evan, to circle back on your questions on hedges in the event that this wasn't clear, the impact of both currency and fuel hedges has been pulled out of all of our segments from both a current-period perspective and any of the historical periods that have been presented.

Great, thanks for that. I will have a closer look on the website. Appreciate it.

Thanks for that.

Matthew Fields, Bank of America Merrill Lynch.

Hey, guys, and hey, Amy, congratulations on the new position. I just wanted to follow-up a little bit on Evan's question about Australian cost per ton. And so you answered it, in that last quarter the costs were about $65 a ton. But if you do the math on a blended basis from your six months that you are here, it implies that it was $55 per ton in the first quarter. So that $10 per ton is purely the hedging costs that you are not showing any more?

That is correct. Those hedging costs have been pulled out and included on a separate line item in the supplemental financial information.

Okay. And then at some point though, those costs are flowing through your income statement, though, no?

They are. And they would flow through the cost of sales line item on the income statement.

Okay. And then is that why in your guidance table you knew $53 to $56 per ton cost guidance did not have a previous comparison?

That's exactly right, so --

Because that $62 to $64 is not comparable anymore?

That's exactly right. We didn't want to confuse the issue there. This new guidance methodology, or the new cost per ton methodology, is stripped of the impacts of hedging. And then you'll note that we have included the supplemental table in the earnings release as well, that gives you some additional information as to our hedge position going forward in 2015 and into 2016 and 2017.

Okay, thanks very much. And then one follow-up. Where bond prices are, with where they are, what they are, in the $0.20, $0.30 on the dollar, are you planning to be buying these up in the open market?

So I would say that given both our equity and our bonds are publicly traded, you can probably appreciate that we can't comment on specific strategies. Our objective is always to preserve and enhance the Company's value. At this point time, we really think that is done by focusing on our areas of emphasis. Particularly in the area of financial strength, you'll see that our current near-term goal is to maximize liquidity and reduce leverage over time.

Okay. And then on the back of back, if you are not going to be buying bonds back in the open market, I guess a good way to take advantage of the discount to, in fact delever, would be to exchange, based on current prices and your first in capacity, you could do quite a lot, it seems, especially with the $1.5 billion 2018 maturity looming. Can you talk about that? And your appetite and outlook for how to deal with that maturity, please?

As it relates again, we are not point to get into the specific strategies as it relates to our debt or equity at this point in time. The 2018 maturity is about three years away, so we feel like we have plenty of runway to deal with that as the date approaches.

Okay, thanks very much.

Matthew Korn, Barclays.

Good day, everyone, thanks for taking my call.

Good morning, Matthew.

Glenn, what are your thoughts right now on where we are on the seaborne met coal balancing process? Is the 15 million tons you described, is that enough once executed? Is there any sign you're seeing that these Chinese miners who you pointed out, are deeply underwater now? That we're going to see a substantial drop-off there in the near to medium term?

I think you've seen a range of supply cutbacks that we have been predicting. I think what's been on top of that has been uncertainty about the demand side as well.

I think what we've done is seek to both lower our costs in our Australian position. But we've also, as you've see announced, take out some 3 million tons per year on an annualized rate across what we previously announced at North Gonyella. Now what we are flagging at Metropolitan, and as I talked about before in the PCI space, look to reduce at Coppabella.

You've also have seen other notable large producers recently talk about lower guidance with respect to met coal production. I think certainly on the supply side, we have seen an acceleration of those initiatives. The question is going to be, as we would to demand signals that would assist in improving steel making, both on a global scale and particularly around with respect to China.

Let me follow-up with that on a domestic question. How firm are your domestic utility-priced contracts holding now? Are you getting any pressure from utilities who are seeing the low spot prices? Or are utilities, are they starting to see the potential for supply threats driven by the current prices?

Certainly we have taken the view over time, and this has been tested in all venues, that our contracts are sacrosanct from a pricing perspective. The only time we work with customers and customers work with us are sometimes around volumes, depending on how the rails are moving and other elements there. The contracts are contracts and that's been well established through the years.

Thanks, Vic. Appreciate it, guys.

Thank you.

Pavan Hoskote, Goldman Sachs.

Thank you, good morning, everyone. Thanks for taking my question. We'll start off with Australia. There clearly are a lot of moving pieces here. You've got secular cost cutting potential. And then on the hedging front, you've got favorable price contracts that potentially roll off next year, offset by unfavorable currency hedges rolling off that impact costs.

If you assume met coal and [comma] coal prices stay at these levels, and Australian exchange rates stay at these levels as well, what do you estimate 2016 and 2017 Australian trend to be? I'm not looking for exact numbers, but just conceptually trying to see what a trend might be.

Maybe first part of that I will address the cost situation. From our hedging perspective we have given quite a bit of detail that we started last quarter in terms of breaking out our current hedge position for the remainder of 2015, 2016 and 2017. What we would say, all other things being equal, if you looked at the forward rate position, that would have an implied EBITDA improvement through each of those years that would accelerate.

With respect to pricing rolling off, we participate in the met coal market on a quarterly basis. This is a question maybe with respect to thermal, which would be an annual price contract on about 40% to 50% of our volumes.

Got it, that's helpful. And then on a separate topic, as we speak a lot of industry [partismans], there is the expectation that a lot of US coal companies may file for bankruptcy this year and some of them already have. How do think that impacts the competitive landscape for the remaining public Companies like yourselves?

Because on the one hand these companies can then come back with a better cost structure at the corporate level, and that might be negative for the supply. But on the other hand, maybe this can drive greater industry consolidation and take high-cost production off-line. Wanted to see what your perspective is on this.

I am not going to speculate about particular Companies, particular mines, et cetera. But I would think as an overall statement, we would expect some rationalization of production to come as an outcome, particularly where mines are cash negative today and in the foreseeable future. So I'm not going to speculate on how exactly that would play out.

I can say what we are focused on is improving our competitiveness across a range of activities. We have outlined in quite a bit of detail what we have been doing on the operational front, what we have been doing on the corporate SG&A front, what we are continuing to do from a financial and a portfolio perspective. And so I'm probably more focused on our business and the things that we are looking to drive. And you shine a lot of activity with respect to that out of the quarter, that I am necessarily on some of the actions of our competitors.

Got it. And you may want to answer this or may not, but as you look across the industry and you're starting to see reductions that you referenced in your opening comments, do you think these reductions are essentially infrequent aliment or do think these mines are being permanently taken off the market?

I think that's also on a case-by-case basis. I think we're going to see a range of things that are probably taking place. I think where there are mines that have been retained through whatever hedging contracts that have been there, take-or-pay commitments that have been there, people wanting to avoid abandonment and reclamation-type liability decisions from being triggered, those sorts of activities may change the decision, particularly of businesses with mines that are cash negative, to fully close those activities.

With respect to curtailment, a lot of it's going to depend on the surface or the underground, other mines being maintained, is the equipment being maintained. I think like underground activities, are they dewatering, roof conditions, et cetera. I don't think it's necessarily the case that you are going to be able to see curtailed or suspended operations ramp back up completely.

The answer is it is going to depend. It's really on a mine-by-mine, a case-by-case example on how things will emerge.

In our case, what I've indicated is that in the reduction that we've taken up, we've essentially done it through elimination of what we were looking at in terms of fixed costs. So there have restructuring of rosters, looking at production schedules, those sorts of things. And over time we could bring that activity back, if there were clear and consistent market triggers that indicated that was the case.

Got it, thanks a lot.

Daniel Scott, Cowen and Company.

Hey, good morning, guys.

Good morning, Daniel.

You guys have talked a lot about India as the one bright spot in the export market. How much are you guys participating directly to India met coal sales?

I think India has certainly been one of our largest customers. I think for the six months to date it has been certainly in the top three customers, including the traditional markets of Korea and Japan. And as we've probably seen, we have been either respondent, and China would rank fourth outside of that group. So it's been a key customer for us and an increasing customer over time.

And then just to broaden it, the industry as a whole is seeing India rise to the largest coal importing nation this year. You're seeing strength on the thermal side, of course. As people may point out, they're looking to increase production or they are increasing production.

But the fact is they continue to have substantially larger growth in imports than they do on production from a percent standpoint. So we are benefiting from that. That's on the thermal side, but we are also seeing increased met coal support as they build more blast furnaces along the coast.

Great. On the back of Jeremy's question about the Burton Mine, I think you said several dollars per ton of drag on the met coal production costs. I assume that is in guidance for the full year. And if so, does that mean that if you take Burton off-line next year, that $50 a ton is within your sights?

We would certainly expect our costs to go down if that was the case. But won't comment on the delta of that at this point.

Okay, fair enough. It looks like a big cut in the trading activity tonnage. Is there something particular behind that?

I think its consistent with -- you are getting a general theme of our desire not to participate in the spot markets at the current market conditions. And our trading activity is still important to us from a blending perspective and the ability to supplement and enhance our equity tons.

But we are certainly not going to be out there stimulating and enhancing production and stimulating a lot of lower market activities. And we don't believe the -- certainly it would make sense and we believe the margins are there to do that. So we have seen a little bit of a pullback on our volumes as a result, in that space.

Okay, makes sense. My last question, Alliance, earlier on their call and in the release, talked about a 13.5% drop in sequential production in the Illinois Basin. Can you speak to what you guys are seeing there as operators relative to that statement? How much that is a [murian] foresight issue or whether that is broader? Because how would that happen since the quarter ended?

I think certainly the longwall disruption for foresight is impacting those production figures. Probably too soon, or we can't speculate on one that will return to production at this point in time, but that's definitely been a factor in those production declines.

Okay, thanks very much.

I will turn things back over to Mr. Glenn Kellow for closing remarks.

Thank you. And thanks, everyone, for joining our call today. I also appreciate the good work of the Peabody team, both the staff and operational level.

Whilst these are unprecedented times, I do firmly believe in the quality of our assets and the quality of our people. Thank you for your continued interest. We have a great deal of work ahead of us and we look forward to keeping apprised of our progress.

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