Peabody Energy Corp (BTU) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for your patience and standing by. Welcome to the Peabody Third Quarter of 2017 Earnings Call. (Operator Instructions) Just a reminder, today's conference is being recorded and I would now like to turn the conference over to Senior Vice President of Investor Relations, Vic Svec.

Okay. Good morning, everyone, and thanks for joining BTU's third quarter earnings call. With us today are President and Chief Executive Officer, Glenn Kellow; and Executive Vice President and Chief Financial Officer, Amy Schwetz.

Before we begin, I'd like to point you to a supplemental presentation that will accompany today's remarks. This presentation can be found on our website at peabodyenergy.com. On Slide 2 of this deck is our statement on forward-looking information. We do encourage you to consider the risk factors that are referenced here, along with our public filings and furnishings with the SEC. I'd also note we use both GAAP and non-GAAP measures and we refer you to our reconciliation of those measures in our documents.

And with that, I'll now turn the call over to Glenn Kellow.

Thanks, Vic, and good morning, everyone. I can characterize Peabody's powerful third quarter performance with one word: action. This team is committed to doing what we say we're going to do and this quarter's results are a reflection of that mantra.

On Slide 3, you can see the significant steps we've taken across the board in recent months as we delivered on every one of the objectives we set out last quarter. Since our last call, we've repaid debt, repurchased shares, amended our credit facility, reduced interest expense, entered into sales of noncore assets and continued to chip away at releasing restricted cash.

Peabody also have benefited from the collective strength of its diverse platform, driving improved volumes, revenues and cash flows and delivering the highest adjusted EBITDA in 5 years. Whilst we're pleased with our actions to date, we are not about to hit pause. Instead, we're looking to continue the pace of this momentum and execute on our stated financial approach. I believe this strength will, in turn, enable more strength.

Through all of our actions, Peabody maintains constant vigilance towards safety. In recognition of this, I would like to applaud our Wambo underground mines rescue team for earning first place honors for the second time in 3 years at the highly contested Australian Underground Mines Rescue Competition. This skilled team will now represent Peabody and Australia at the International Mine Rescue Competition in 2018.

With that, I'll turn it over to Amy to discuss our performance in further detail.

Thanks, Glenn. Now let's turn to Slide 4 where we've highlighted the outstanding improvement in third quarter results over the prior year. Revenues improved 22% over the third quarter of 2016, led by strengthening in seaborne coal fundamentals. Australian revenues increased $251 million over the prior year on higher realized pricing and improved metallurgical volumes. I would also note that each region in the U.S. and Australia increased their total revenue contributions over the second quarter. We'll talk more about mining results in a moment.

Income from continuing operations net of taxes totaled $234 million for the quarter, led by robust mining performance as well as a net tax benefit of $84 million, partly offset by DD&A of $195 million and $40 million in net interest expense.

Let's unpack that a bit more. Peabody recognized a large tax benefit this quarter as the company monetized a portion of its $4 billion U.S. NOL position through tax loss carrybacks. We expect to have over $3 billion of U.S. NOLs going into 2018 with about 25% of the balance estimated to be limited by Section 382. And you'll recall that we have approximately that amount in Australia as well. We expect to receive about $78 million of cash in the fourth quarter and $20 million of cash in 2018 related to the refunds reported -- recorded this quarter. In addition, year-to-date, our Australian operations have generated about $250 million of taxable income that will be shielded by our Australian NOL position.

As we have noted, DD&A now includes the amortization of intangible assets recorded in fresh-start accounting related to some U.S. coal supply agreements. For the third quarter, contract amortization expense totaled $42 million. The vast majority of the intangible asset is expected to be amortized over the next 18 months. Also, a portion of our DD&A is recorded on a units of production method. So therefore, as our volumes increased, so did our DD&A.

During the third quarter, an additional 8 percentage points of preferred stock was converted to common shares, bringing total conversions through September to about 47%. As a result, the company recorded a noncash dividend of $24 million this quarter, leading to net income attributable to common shareholders of $201 million. I would note that since the end of the quarter, we have had additional preferred stock conversions bringing total conversions to 51%.

Diluted earnings per share from continuing operations totaled $1.49 for the quarter. In addition, adjusted EBITDA increased $281 million from the third quarter of 2016.

Now let's turn to Slide 5. From an operations perspective, the value of our exposure to domestic and seaborne met and thermal coal were once again highlighted this quarter. Both the U.S. and Australian platforms delivered very strongly, leading to total adjusted EBITDA of $411 million, the highest quarterly contribution since 2012. Emphasizing the benefit of a diversified portfolio, the Australian metallurgical segment led the company with aggregate adjusted EBITDA of $143 million, with the PRB not far behind at $113 million.

Taking a closer look at our operations on Slide 6. Third quarter adjusted EBITDA margins averaged 30% across 5 mining segments. Last quarter, we discussed the excellent performance of our Australian thermal segment. And this quarter was no exception. Despite geological conditions and ramp-up following an extended longwall move at an underground mine, Australian thermal led the company yet again in adjusted EBITDA margins of 37%, bringing year-to-date results to 38%.

Overall, sales volumes totaled 8.7 million tons, including 3.5 million tons of met coal volume -- met coal sold at an average price of $119.55 per ton. Thermal sales volumes totaled 5.2 million tons for the quarter, including 3.3 million tons of export thermal coal sold at an average price of $69.31 per short ton. That brings year-to-date export thermal coal sales to 9.1 million tons sold at an average price of $67.48. As expected, met coal shipments increased 75% compared to the cyclone-restricted second quarter of 2017. Performance was driven by record production and strong sales volumes from the North Goonyella Mine as rails improved.

Strong demand for quality Australian thermal and met coal led to realized revenues per ton increasing $48 per ton for the met coal segment and over $15 per ton for the thermal segment compared to the third quarter of 2016. Also as expected, metallurgical (inaudible) $31 per ton from the second quarter of 2017 to $78.42 per ton. Improvements were led by longwall performance, lower strip ratios and higher volumes and gives us a greater line of sight for the met coal segment to be within the full year cost and volume targets, as outlined last quarter.

I would note that we still weren't hitting on all cylinders in the quarter for met coal with our Metropolitan Mine still working through some geologic challenges in the current longwall panel.

Australian thermal cost per ton increased $5 per ton compared to the prior year, primarily due to geologic conditions following a longwall move at our underground thermal mine. One other item to highlight is the Middlemount joint venture, which is not included within our Australian segment results. In the third quarter, our share of the operations sold approximately 0.5 million tons of met coal and generated adjusted EBITDA of $8 million which represents our share of the JV's net income. This is a $10 million increase from the prior year. Through September, we have collected $62 million of net cash from Middlemount, including $6 million this quarter.

Taking a look at the U.S. The operations continued to deliver reliable results, contributing adjusted EBITDA of $197 million this quarter. On average, the Americas segment generated adjusted EBITDA margins of 25% with the PRB earning 27% adjusted EBITDA margins.

You've heard us talk before about the benefits of operating our 3 Powder River Basin mines as a complex, along with having 3 of the 4 most productive mines in the U.S. and having features such as dial-a-blend, our customized blending technology that allows us to meet customer specifications and maximize margins without inventory at our largest operation. Those benefits are especially evident this quarter as adjusted EBITDA margins increased 12% compared to the second quarter of 2017 even as revenues per ton decreased 3%.

I'll note that we are pleased to be maintaining or lowering our full year cost targets for all operating regions, including lowering the top end of our PRB cost guidance range. We have revised our Australian export thermal volumes due to rail disruptions as well as geologic issues and ramp-up from the extended longwall move at the Wambo mine and we have raised the lower end of our target range for Australian metallurgical volumes.

Let's now take a look at how we continue to strengthen the company through capital allocation on Slide 7. First, Peabody ended the quarter with $925 million of available cash and total liquidity of $943 million. Robust adjusted EBITDA contributions paved the way for the company to generate $240 million of operating cash flow this quarter, while paying approximately $135 million in Chapter 11 exit and settlement costs. Fourth quarter cash flows are expected to benefit nearly $120 million from reduction in Chapter 11 payment.

Working capital outflows were over $40 million excluding Chapter 11 exit costs, primarily due to an increase in accounts receivable from strong sales volume not yet received in cash. While we had a slight benefit from an inventory draw resulting from strong met shipments, it was not as much as we had anticipated due to robust coal production during the quarter. This led to an inventory decline of only about 200,000 tons or 25% of the balance for the met segment, ensuring ample inventory to meet anticipated customer demand in the fourth quarter.

Peabody also freed up about $25 million of its restricted cash balance, bringing the total balance as of September 30 to $538 million. While we continue to chip away at the balance, we are focused on the longer-term more impactful lower cost options of our multipronged approach. We are engaged with surety providers to expand coverage to Australia. We continue to explore the potential for our cash flow revolver over time and Australian bank guarantee facility and we are managing our liabilities the old-fashioned way by reclaiming land and reducing obligations. We are now targeting to release $200 million to $400 million of restricted cash through 2018.

Total cash flow decreased from June 30 as the company was very active with regards to its capital return initiatives this quarter. We voluntarily repaid $300 million of debt, executed $69 million of share repurchases and made $25 million of voluntary pension contributions to reduce future potential volatility, which we believe to be viewed favorably as we look to release restricted cash. And we didn't stop there. As of October 20, we executed a total of $100 million of share repurchases.

Before turning the call back over to Glenn, I'd like to highlight a few items with regard to our 2017 guidance. As we look towards the fourth quarter, we expect a modest seasonal easing in PRB sales volumes, which we expect to be partly offset by continued strong Australian shipments. For the year, PRB sales are now expected to be between 120 million to 125 million tons, driven by increased sales under existing contracts. We are committed to meeting customer demand and we are happy to do so at industry-leading margins that create value for our shareholders.

Looking ahead to next year, we now have approximately 88 million tons of PRB coal priced for 2018 at an average price of $12.27 per ton. This represents a blend of more than 20 products from our 3 mines, including 8,800 quality and lower quality products.

Related to our seaborne thermal coal export volumes, we have about 3 million short tons priced, some through hedges with limited margin cash at an average price of about $72 per short ton, which after making adjustments for both metric tons and quality, equates to a new capital price in the mid-80s.

Glenn will now cover current industry fundamentals and current policy actions by the administration.

Thanks, Amy. Let's take a look at global industry fundamentals beginning on Slide 8. During the third quarter, we continued to see strong seaborne coal pricing largely driven by demand from China and supply tightness due to Chinese production constraints and modest sourcing challenges from seaborne suppliers. It's worth noting that while China only accounts for about 1/5 of all seaborne coal demand, even slight changes to imports can lead to significant impact on the overall industry.

Year-to-date, Chinese coal import demand has been high, increasing 24 million tons with September imports at the highest monthly levels since 2014. Within seaborne thermal coal, Chinese imports were up to 15 million tons through September over the prior year on robust electricity generation that has increased approximately 6% and ongoing policy initiatives.

South Korea has also been a bright spot with imports increasing approximately 15 million tons through September on strong demand as nuclear generation has been curtailed. In regard to South Korea, I would also note that Peabody has transitioned to direct marketing into the country rather than through traditional agencies, allowing us to further maximize our underlying business.

Turning to India. Power generation has been up 5% over the prior year. But strong domestic coal production and destocking has muted coal imports. However, we have also seen recent depletion of coal inventories at utilities to near record low levels and that should favor additional import demand in the fourth quarter.

As we look at the full seaborne thermal coal outlook for full year 2017, we project demand to rise approximately 10 million to 15 million tons above 2016 levels. But we would note that this is a relatively small increase, a relative small increase has been sufficient to keep pricing levels at very healthy levels with the benchmark Newcastle products in the upper double digits for multiple months. In addition, substantial new coal generation continues to be built globally. In fact, industry sources confirm some 30 countries around the world on 6 continents have new coal field generation coming on between 2017 and 2018 with approximately 65 gigawatts starting up each year.

Turning now to seaborne metallurgical coal. Strong global steel output, particularly in China, has underpinned demand growth. In China, steel production is at record levels with steel exports down 30% through September. As a result, met coal imports rose 9 million tons during the first 9 months on strong demand and limited domestic production.

During the third quarter, seaborne metallurgical coal pricing was relatively stable with a hard coking coal sale amount of $170 per tonne on an index-based pricing mechanism. In addition, Peabody negotiated third quarter benchmark global PCI pricing at $115 per ton with additional settlement later in the quarter of $127.50. The fourth quarter settlement follows suit at $127.50 per ton also.

Moving to the U.S. on Slide 9. Mild weather and weaker gas pricing weighed on industry fundamentals in the third quarter. In fact, cooling degree days declined approximately 16% compared to the prior year for June, July and August in coal-heavy regions. Overall, U.S. electricity demand declined 2% through September. Whilst both the PRB and Illinois Basin are most competitive in natural gas over time, the PRB was a standout this quarter, increasing 8% as electricity demand for all other coal basins weakened and gas generation was down 12% year-on-year. In addition, PRB inventories grew to an average 55 days of maximum burn and that's down 5 days from 2016 levels.

For full year 2017, Peabody now expects U.S. coal consumption from electricity generation to be largely flat compared to 2016. Announced coal plant retirements continue to get headlines, yet our retirement projections remain on track. This year we continue to expect higher capacity utilization of U.S. coal plants to offset the impact of approximately 15 million tons of lower demand resulting from about 10 gigawatts of coal plant retirements.

For an early glimpse of 2018, we estimate U.S. utility demand to be largely stable with about 20 million tons of reduced coal demand expected from plant retirements which will largely be offset by higher capacity utilization from a nationwide coal fleet that this year is running at just over 50% utilization. Moves in natural gas prices and weather are again likely to be the large driver of demand movers in 2018.

On Slide 10, I'd now like to take a moment to discuss some encouraging policy changes that continue to advance the pro-energy economy and recognize coal as an essential part of the energy mix. In just the past year, over a dozen onerous regulations have been resolved and another dozen are currently under review. Just recently, the Environmental Protection Agency proposed to repeal the so-called Clean Power Plan. In addition, the Perry's study represents a good first step in examining grid complexity and the proposed FERC grid resiliency pricing rule promotes incentives to preserve valuable baseload-generating capacity including coal. You also heard EPA administrator Pruitt declare, "The war on coal is over."

I would note that we're also seeing favorable policy movements in Australia. There has been an important debate as this energy-rich nation has faced blackouts and higher electricity cost in part to an overreliance on unreliable energy sources. That's led to Australia just this month scrapping subsidies to renewables and requiring electricity retailers to guarantee reliability through a fuel neutral standard. Peabody believes that all consumers benefit from a reliable, resilient energy portfolio that uses a diversity of fuels. We also support high-efficiency, low-emissions technology today and over time advancement of carbon capture and storage technologies to reduce emissions.

That's the review of the industry fundamentals. And I'd like to summarize our progress on Slide 11 where last quarter we outlined our financial approach: generate cash, reduce debt, invest wisely and return cash to shareholders. I'm pleased to note we have made progress across the board.

First, as we discussed, we generated $240 million of operating cash flow this quarter, made just under $400 million of voluntary payments to improve the balance sheet and return cash to shareholders and still ended the quarter with $925 million of cash. We remain committed to maintaining cost discipline to enhance margins. We're also capturing the opportunities offered by buoyant seaborne cost fundamentals -- coal fundamentals. We are still targeting a liquidity level of approximately $800 million and recognize there will be times, such as this quarter, we were a bit above our targeted levels. We remain committed to quickly executing on our capital allocation initiatives. You may recall that last quarter we targeted a total of $300 million of debt repayments by year-end and we are pleased to have accelerated those repayments in the third quarter. We also amended our credit agreement, reducing the interest rate by 100 basis points and allowing greater flexibility for shareholder returns. We continue to target an additional $200 million of debt repayments by year-end 2018 and aim to have gross debt of $1.2 billion to $1.4 billion over time.

The third element of our approach is to invest wisely. Peabody has modest sustaining capital levels based on a well-capitalized platform. We also continue to pursue sales of noncore assets where the value proposition is compelling. For instance, you'll recall that in late 2016 we placed our Burton Mine on care and maintenance. We've now entered into an agreement to sell the majority of the inactive Burton Mine and related infrastructure for approximately $11 million which also reduces Peabody's asset retirement obligation by $53 million and frees up an estimated $30 million in restricted cash when that deal closes. In addition, as part of our long-term planning for the eventual closure of the Millennium Mine, we've entered into an agreement to sell our 50% interest in the shared coal handling and preparation plant and the associated rail loading facility to the facility's other partner. This reduces obligations while preserving throughput capacity for our remaining production.

We're often asked about industry M&A. So it's worth noting that we approach potential acquisitions with a critical eye and healthy skepticism. While acquisitions over time may make sense to improve our competitive position in the U.S. or upgrade our platform in Australia, it bears repeating that any potential targets must be viewed through several type filters. First, any acquisition should maintain the strength of our balance sheet. Second, we are highly focused on returns, both the level of returns above our cost of capital and the timing of payback. Third, targets would be expected to be in our coal regions of the Powder River Basin, Illinois Basin, seaborne met or seaborne thermal. Fourth, we would look for tangible synergies, physical, commercial, logistical and/or financial. And finally, we have noted that any target would need to add measurable value to shareholders and that means our shareholders. We continually evaluate ways to create shareholder value but are agnostic as to how that value is created.

In addition, too often in the mining and energy sectors, the default position has been to invest capital in volume growth rather than return that cash to shareholders. This is not our default position. Investments are weighted against the presumption that we will be returning cash to shareholders.

And that leads to the final element of our financial approach. Last quarter, we enacted a $500 million share repurchase program demonstrating that the board and management believe repurchases provide good long-term value, particularly at current trading levels. We also made it clear that this wasn't on-the-shelf program. Since authorization, we have repurchased [$100 million] of shares and intend to continue to execute under the program. We also amended our credit agreement to free up capacity to execute the size of share repurchases the board authorized. Our debt agreements contained some ongoing regulators to capital returns but we believe we have ample capacity to continue with repurchases.

Also as a reminder, our Board of Directors will regularly evaluate a sustainable dividend program which we are targeting to commence in the first quarter of 2018.

So to wrap up, we view this as a striking quarter for the Peabody team and our stakeholders. We are benefiting from our achievements on volumes, cost and realized revenues and we continue to pursue paths to create value with aggressive focus on what matters, generating cash, reducing debt, investing wisely and returning cash. We believe our strong cash flows and smart cash use can continue a virtuous cycle as strength brings more strength.

That concludes our formal remarks today. At this time, we are happy to take your questions. Operator?

(Operator Instructions) First, we'll go to the line of Jeremy Sussman of Clarksons.

So I think if I heard you correctly, you said you want to free up another $200 million to $400 million of restricted cash by the end of 2018 versus I think around $500 million and -- $300 million and $540 million now, did I hear you correctly?

Yes, so what I would say, Jeremy is -- and several of you've probably heard me say this before, is I want to free up all the cash. But what we're targeting between now and the end of 2018 is $200 million to $400 million of release of that restricted cash. We currently have about $536 million on the balance sheet. And we are doing that, I would say, through the traditional methods of reclaiming the 2 transactions that Glenn referenced in his remarks that will yield some cash back to Peabody, but then working with the financial community as well in really 3 ways. The first being what we've discussed in the past around returning over time to a normal cash flow revolver which we can utilize for LCs. The second being the extension of our surety program that we use for our U.S. obligations into Australia. And those efforts are well underway with a broker in place and discussions ongoing. And then finally, one that we haven't talked about in the past, which is looking to develop an Australian bank guarantee facility that we might be able to use in a way to provide guarantees to the government and other parties that we provide assurance to as a way to release that cash.

That's great and super helpful. I just have one, I guess, maybe 2 quick follow-ups. I guess first, on my calculations, I think you have over 20% free cash flow yield based on the forward curve. So I guess [are there other] meaningful restrictions on dividend payments in 2018? Or did the recent sort of amended provisions to your credit agreement take care of this? And then just on the operational front, I think your Australian met cost came in sub-$80 a ton this quarter which compares to kind of the midpoint of guidance of $90 a ton. So obviously, costs in the first half of the year were a bit higher. But great cost control this quarter. How should we think about things kind of on a go-forward basis?

Yes, so I guess I might start in reverse with the met coal question and just say that we're really pleased with the cost performance of our met segment in the third quarter. We had a strong line of sight into what that performance was going to look like given our met coal inventory volumes that we had at the end of the third quarter. So we're expecting -- and on a year-to-date basis, we're well within that range. As we look forward to the fourth quarter, cost within that range and really, the biggest variable on fourth quarter performance is going to be seaborne pricing. Maybe moving on to cash flow. We would agree that the free cash flow yield at this point is quite strong. And it's one of the reasons why we believe the stock represents such a great value right now and why we're executing on a share repurchase program. With respect to dividends going into 2018, the restrictions are really around the bond indentures and the credit agreement. As you know, we've got a $25 million dividend basket that begins in 2018. We also have the $450 million capital returns basket that we've created with this amendment. And finally, we do have a restricted payments basket that we've refreshed to $50 million but that will grow over time based on excess cash flow.

And Jeremy, maybe just to give a little bit more color. The met coal, as Amy said, we've been flagging that we were going to have a strong third quarter given that we've build up inventories. I think what surprised us was the strength of the production that occurred. As Amy indicated, we actually didn't draw down on the inventory to the extent. So I think that positions us well as we've indicated in what we still see as being strong markets. The strength off the bat, I want to sort of call out the North Goonyella team and [Mark Carter] for executing on that. They broke run-of-mine, they broke washed and yield production records in addition to the sales volumes. So a very strong performance from North Goonyella. As we look forward, yes, prices we would think -- would be indicated, Amy said, pricing is important or cost-linked prices are important -- price-linked costs are going to be important to determining those movements going forward. I'd also single out exchange rates in Australia as being important factor and also oil prices particularly for our surface operations would be a major factor in cost. We would be looking forward to giving guidance in the -- at the next call and we are working through our budgeting process at the moment.

Next, we have the line of Michael Dudas of Vertical Research.

Glenn, just [a bit further] on the global thermal market that seems to I think has probably surprised people even greater than what's happened in the global met side. I'm intrigued by your discussion about China in marketing and your strategy there. And given your current customers, are you looking to focus on certain areas relative to others? Are there other countries, other areas where you have competitive advantages? Or there's going to be much more attuned to more coal consumption even as nuclear and LNG dynamics continue over the next several years?

Thanks for that question. I indicated probably South Korea as being the area. And it comes at a time when we've seen an increase in imports around thermal for South Korea. And we've moved away from what is traditionally done being an agency basis to the direct marketing into those South Korean markets. And I think that's the signal to me of strength of our marketing group and what I believe to be a competitive advantage particularly in those Asia Pacific markets relative our peer group. Going forward, we're continuing to see, as I've indicated, something in the [60 gigawatts, 65 gigawatts this year, 65 gigawatts] next year perhaps around build-out of new thermal generation. And in addition to China, we're actually seeing it across Asian countries, Malaysia and then Vietnam, we're actually quite strong on a year-on-year basis. So we do have that Asia Pacific focus in the strategy as you've indicated. And I think we are well placed and well positioned. And as it turns out, we've got a pretty good -- and what we continue to regard as an underappreciated thermal platform from our Australian operations, very good cost performance. And as you can see for the margins, the ability to access those markets is particularly important. And as we continue to reiterate, I think we took advantage of that in the year-to-date and we'd expect to continue to do so in the fourth quarter.

The -- so I would say in a couple of quarters, you might exceed the PRB as a contribution on your EBITDA chart here on Page 5 or whichever one.

We like the internal competition that, that brings.

Which leads me to my follow-up. As you think about structuring contracts over time in the PRB and operations, [are you able] to manage much more to generate stable cash? Or is there going to be an element of upside given the relatively muted demand in maybe natural gas environment in the U.S.?

Well, I -- we look to generate both cash out of our U.S. operations but more importantly, returns as well. So 2-filter process there. I think as we think about the U.S. base, we often times think about it as the stable cash flows and we think about the Australian business as one that provides the thermal business, as one that provides relatively stable cash flows in all markets. And the met as one that provides fantastic cash flows in elevated markets. So it's a blended approach. But as we look across the platform, our focus is not just on cash generation, which is very important, but also on returns overall.

Next we have the line of John Bridges of JPMorgan.

I was just wondering, this may just be a shout-out on your PRB sales team, but I was intrigued looking at the railings from the EIA weeklies to see PRB railings going down. But then you have this nice performance and then you've actually raised your numbers for the year. So I'm just wondering about what the background is to those changes. And if you could -- well, you did mention the weakness in the heating -- sorry, cooling degree days. But I was just surprised by the divergence.

Yes, I think it's part of our contracting strategy where we look to meet those market requirements. But also say to double down on the returns focus that Amy had mentioned, that probably in part recognizes the strong and robust process we have around 3 mines, over a dozen active pits, the ability to meet customer requirements while still maximizing margins, what we believe as industry-leading margins across those 3 mines. So we did see strength in that third quarter as you've indicated. Looking forward, we probably think that the traditional shoulder season would likely see some decline in that. But I think as you've indicated, we're happy with both the strength of our PRB business and sales performance. And yes, we can give a shout-out to the team, but also the miners in delivering on those cost advantages and still preserving that margin, which we believe is quite strong.

Yes, impressive. And maybe while we're on U.S. coal. You are reporting sales prices for Illinois Basin in the 40s when the spot prices is sitting very unhappily down at the low end of the 30s range. Could you talk a little bit about the differences between your coal and the coal that's getting $30? And what you see going on there? And maybe the impact of gas pipelines coming out from the Marcellus?

Yes, well, the Illinois Basin, as you've said, as you're probably alluding to, is a competitive basin. We have seen prices come off. There's no doubt about that as folks have worked through production. I think the export -- having access to export markets has been helpful in that region as we've seen at a higher elevated [plated] pricing. Our competitive position, we believe in the basin stems from our access to particularly the Indiana submarkets, certain customers within that region. Obviously, our focus is on quality, not only BTU but the characteristics that are within our coal and the ability to mine that coal cheaply. So it has been a competitive basin. I think we have a strength in certain competitive attributes that we look to leverage and that's probably deriving the result that you're seeing.

Next we have the line of Mark Levin, Seaport Global.

Just a couple of quick questions, some smaller picture, some bigger picture. On the bigger picture one, it looks like for 2018, I think you had mentioned committing roughly 88 million tons. This year, you guys will sell between 120 million, 125 million, it looks like, out of the PRB. Is there a scenario in which, if you're not getting the prices that you want, whatever they may be, that you don't ship as many as 100 million, 125 million tons and you leave the coal in the ground? And just curious how you think about that unpriced position heading into '18.

Yes, I think to start, Mark, we're about where we'd expect to be at this point in time in terms of contracting and we'll expect to see some more activities going into the fourth quarter. But you -- what you can expect from Peabody from a contracting approach is that we like to go into the year very well committed. And so certainly, our approach has been that we like to give our miners strong production plans that they can look out over the course of the year to both maximize the margins under certain contracts and keep our costs as low as we can. So our contracting levels do inform our production levels in any given year. And as Glenn indicated, we're going through our production planning right now for 2018 and you'll expect us to highlight that as we round out 2017 with more concrete guidance in terms of where U.S. volumes are going to be, particularly in the Powder River Basin.

Yes. With reference to that, I think last quarter, Amy, you guys mentioned you were thinking flat production or flat demand '18 over '17. I think you guys alluded to that on the last call. Is there any reason why that would have changed either because of the benign summer weather or retirements, whatever the case may be? Is there -- and I know -- I think Rawhide was impacted a little bit by the Luminant plants and we'll see what happens there. But is there any change to that kind of thought process that PRB production in '18 would be flat with '17?

I think we felt like 2017 shipments have been robust. And so our PRB guidance range was slightly lower last quarter as we pointed to flat shipments. So I think that we'll be looking with interest as to the strength of the winter season and what that does for shipments as we round out that volume. I would say with respect to our lower quality coals that we talk about and we'll reference that we ship -- we don't just ship 2 to 3 products. We ship 20-plus products out of the Powder River Basin and we ship to 23 states and under -- over 50-plus contracts. So we don't view plant closures in a singular sense as being game changers to us. What we do look to is our strong cost position, particularly with respect to some of those "lower quality coals" as a way to maintain our competitive advantage in what may be a smaller production pie for lower quality coals.

A little bit of color on that. Obviously, the Luminant proposals haven't yet been approved as we understand it. And as Amy sort of was mentioning, it represents about 3% of our overall PRB volume. So we have scores of customers in the PRB. We service nearly half of the states. And we have been consistently indicating that we've been seeing a certain level of plant retirements occurring over the next few years. And as I reiterated, I think what we see overall is still consistent with that -- with those projections.

That's helpful. And 2 real quick ones and I'll get off the phone. One is, Amy, if you kind of look out 12 months from now, let's say we're successful or you're successful in getting a cash flow revolver in place, you continue to pay down debt and execute on your strategy as you guys have been doing so well. You've mentioned $800 million is the target kind of liquidity number now, you're above that now. But of that $800 million being the target. The first part of my question is what do you think is the appropriate amount of liquidity for the new Peabody to have -- assuming you do have a cash flow revolver in place? That's the first part of my question. And then the second part has to do with the sustainability of lower met coal cash cost, which Jeremy asked, obviously dependent upon prices and a myriad of other factors. But is there any reason why in 2018 that your met coal cash cost couldn't be below, let's say, either the midpoint or the low end of the range that you've put out there for met coal in '17?

So with respect to liquidity, we target $800 million and we're agnostic as to whether that comes in the form of cash or other forms of liquidity, i.e., a revolving credit facility over time or AR securitization to the extent there's capacity in excess of our letters of credit. What I would say is those, both the AR securitization today and probably a revolving credit facility in the future will initially be earmarked as ways to free up that trapped cash so as mechanisms to provide financial assurances going forward. With respect to metallurgical coal costs, we -- it's been a continued focus of the Australian platform really for not just the last year but probably the last 3 years in terms of finding ways to continue to move down that cost curve. We certainly like where we landed this third quarter. That was on the basis of really strong production across the board and tight cost control. We're going to look to continue that going forward and we don't see pressures right now above inflationary pressures, particularly going into the fourth quarter. As we look forward to 2018, we've got a little bit more planning that we need to do in terms of those operations. So we'll continue to guide the market towards that as we get new and better information. But from a macro perspective, we're not seeing significant -- or from a micro perspective, we're not seeing significant pressures within the business on those numbers.

Our next question comes from the line of Paul Forward of Stifel.

I just wanted to go back to a comment that Glenn had made earlier on the call about the North Goonyella Mine. It sounded that you'd had a record quarter there. That would definitely suggest a pretty strong bounce back at North Goonyella from the, I think last year's number was 1.3 million tons. But historically, this has been a mine that's been able to do up to, say, 3 or even more million tons per year. I was wondering if you -- Glenn, are we back to that point that we could anticipate that North Goonyella, if your performance is as good as it was? And over the past quarter or so, can it be sustained at a 3-plus million ton level?

Well, we certainly had a very strong quarter. And I think it's attributable to a number of factors that have really been efforts by the team over a multiyear period to improve the performance of North Goonyella. Last year's results though were impacted by a couple of things. We did have a extended longwall move, that was a planned move. It was the first time we moved those new shields. But secondly, we did encounter geological conditions that didn't impact on the overall performance. And in fact, we stopped that level of top caving from that system. As we've moved forward, the team have been really executing very well through most of this year and we'll hold them to account on what we'd expect as being the new normal going forward. I think when you look on a year-on-year basis, one of the issues about the great performance from North Goonyella may be that it does bring forward timings of the next move for on a year-over-year basis. They're on top of things that we continue to work through going forward. But it has been a very strong quarter and the expectation would be that we'd find ways to run at a level that was near that.

I appreciate that. And just I think you had mentioned in the press release planning -- long-term planning for the closure of Millennium. Just wondering if there's any kind of timing that you're currently anticipating? And obviously, you've got this agreement to sell the coal handling and prep plant that Millennium uses. Just wondering as you look over 2018 and '19, any impacts from this. Or is this -- is the closure a post-2019 event?

Yes, I think, as we've targeted and it's probably been, we've had our 2016 business planned out previously. And I think folks have identified Millennium as being one of those mines that we're looking to ease down as strip ratio and the cost position impacted upon that mine. At this point, I'd target an end of 2019 placing on care and maintenance. The decision to close was one that followed an extensive review of our options with respect to Millennium and the sale of the plant to the neighboring mine, which is a BHP Mitsui mine, enables us to really take on $20 million of cash, free up some reclamation activities over time, but also the way that contract was structured, each partner would have incurred each share of fixed cost going forward. But the agreement still enables us to have access to that facility. And so we don't expect, obviously, we will benefit from that going forward. But I think that's -- those sort of decisions and discussion around Millennium are very consistent with everything we've talked about in the past.

Next, we have the line of Lucas Pipes with FBR Capital Markets.

So I wanted to ask maybe a bigger picture question, Glenn and Amy. Obviously, you've alluded to the strength in the seaborne markets. And I wondered, given your asset position in Australia, at what point would you consider maybe taking more of a growth outlook on your business? What point do you think it could be -- could make sense to look at brownfield expansion? Or look even at some greenfield opportunities? I would appreciate your perspective.

Yes, our focus obviously -- when we look at the seaborne business, it's around that Wilpinjong and Wambo mines. There are life extension opportunities for those mines as we look forward over the next sort of 5 years. With respect to our met platform, we've said that our target has been around the mines of North Goonyella; Coppabella, which is a high-quality PCI mine; and Metropolitan remaining within the fold would be our 3 core areas. We'll be looking at life extension activities for those mines, potentially debottleneck -- put debottlenecking and any opportunity to sort of uptick those mines over a 5-year period. But that in essence will be the core. We do have a portfolio of potential developments. But I really caveat that with everything I talked about though in terms of critical eye, presumption about returning cash to shareholders, balance sheet comes first, returns focused. And I don't think they're things at this point in time that we would warrant earlier discussion or consideration of. So that's I think I've outlined what our focus is. It's on the existing portfolio. And anything with respect to over and above that would have to go through a pretty extensive lens.

Got it. This's a very helpful perspective, comprehensive answer, which I appreciate. And then Amy, I may have missed this earlier in the call, but would it be possible for you to tell us what amount of capital you could return to shareholders via buybacks for the remainder of 2017 under your indentures including the bond indentures?

So with respect to our credit agreement, the new terms that are in place frees up right around $500 million for capital returns, whether or not that's in the form of share repurchases or dividends. We do have a restriction in our bond indenture which limits us to 50% of the bond indenture definition of net income. That is one that is specific to that indenture. So there are some add-backs to that number as you would expect, particularly around noncash type items. What is helpful with respect to the bond indenture is the fact that, that is a cumulative builder. So it builds on a quarterly basis. So at this point in time, we think that we have really ample latitude given sort of the volatility in the technical trends in the shares to continue our repurchase program through the end of the year.

And lastly, we have the line of Matt Fields of Bank of America.

I wanted to ask about the announcement last week from Vista Energy about shutting down this couple of Texas plants that I recall were kind of big customers of your Rawhide Mine. Given -- first of all, is that announcement reflected in your 2018 guidance? And given the fact that those were, I think, pretty significant customers for that mine and the fact that it's your lowest BTU content in the Powder River, does that sort of throw the viability of Rawhide into question on a go-forward basis?

So I'll start with just reiteration of how we operate out of the Powder River Basin. So although we are 3 mines out of that basin, we do operate as a complex. And we have a great deal of flexibility to shift contracts to and from various mines depending on where we see the best margins being generated. I'll also highlight that oftentimes, our lowest quality coal is our cheapest coal to mine and I've highlighted Rawhide on numerous occasions as really being the low-cost producer in the Powder River basin. So those plants are customers of Peabody's. But this year, we're going to ship over 120 million tons out of the Powder River basin. So in the grand scheme of things, no one contract, no one customer, no one state is necessarily material to that mix. So we'll continue to go through our production planning exercise for 2018, match it up. But as Glenn had indicated earlier, we had anticipated a number of U.S. plant closures over this 5-year period of time. In fact, we've said that 50 gigawatts of generation coming out between now and over the next 5 years. So we don't anticipate, as we see individual plant closures come up, that they are either material or that they would be ones that we would adjust our production plans on unless we publicly disclose that.

Yes. And I was just at Rawhide last week, it was last Friday, and I'll back that [saying] to be able to compete. As we'd indicated, very strong margins coming from all of our PRB mines and we operate that as a complex. We do have a very extensive, diversified portfolio and we keep coming back. We believe we've got industry-leading margins in that area.

All right, great. And thanks for the disclosure about the limitations on dividends and your bond indentures. Given the fact that it seems like you want to deploy more capital to shareholders in 2018 and you sort of were able to amend the credit agreement, do you see yourself wanting to do some kind of consent solicitation or tender for the bonds to put in a more lax set of restrictions? Or do you -- are you confident enough in your 2018 ability to generate consolidated net income to sort of accomplish your capital return goals?

At this point in time, we do not see a need to adjust our bond indenture to meet the requirements of our capital allocation program. Our focus is really generating that capacity the old-fashioned way by generating net income which builds that basket over time.

And with no further questions here in queue, I'll be happy to turn it back to Glenn Kellow for any closing remarks.

Thank you, operator. And thank you for your questions and for participating in our call. It was indeed a lively quarter and we're not about to take our foot off the gas. I do believe we have the best assets, the best strategies and the best team in place to deliver on these objectives and I'd like to thank all of our employees across our global platform for their hard work and attention to safe, productive workplaces. To those on our call today, we appreciate your interest and support and we look forward to keeping you apprised of our ongoing actions as we conclude the year and look ahead to 2018. Operator, that closes today's call. Thank you.

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