Peabody Energy Corp (BTU) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for your patience in standing by. Welcome to the Peabody Fourth Quarter 2017 Earnings Call. Just a reminder, today's conference is being recorded. I would now like to turn the conference over to Senior Vice President, Global Investor and Corporate Relations, Vic Svec. Please go ahead, sir.

Okay, thank you, and good morning, everyone. Thanks so much for joining Peabody's Fourth Quarter and Year-end 2017 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 direct you to our supplemental presentation that will accompany today's remarks. It's available on our website at peabodyenergy.com.

Now on Slide 2 of the deck, you'll find our statement on forward-looking information. We do encourage you to consider the risk factors that are referenced here, along with any public filings with the SEC. I'd also note that we use both GAAP and non-GAAP measures. We refer you to our reconciliation of these measures in our earnings release as well as the supplemental presentation.

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

Thanks, Vic, and good morning, everyone.

Beginning on Slide 3. Our fourth quarter performance concluded what I believe to be a year of both considerable change and significant accomplishment. You'll recall that it was just this past April that we were relisted on the New York Stock Exchange and have observed a nearly 80% increase in BTU share price through year-end. Our 2017 revenues rose 18% over the prior year, led by robust seaborne coal pricing and higher U.S. demand. And adjusted EBITDA reached the highest level since 2012.

In 2017, Peabody increased liquidity to $1.24 billion as of year-end, released approximately $220 million of restricted cash and closed on and then upsized a $350 million revolving credit facility. I'll note that we refinanced our term loan, lowering our interest rate by 100 basis points and modifying terms to provide us with additional flexibility.

As part of our commitment to deleveraging, we repaid $500 million of debt, reaching our 2018 targets a year early. These voluntary payments, coupled with our meaningful cash position, reduced our net debt by nearly 50% since our emergence. In addition, we completed approximately $175 million in share buybacks and continue to execute on our authorized $500 million share repurchase program.

At the operational level, our global safety performance continues to surpass industry averages. While our incidence rate edged up overall from the prior year, our Australian platform had a record year, improving 17% from 2016. As always, we are ever vigilant on our journey of continuous improvement in safety.

We are continuing to see productivity improvements across the platform, in particular at North Goonyella, which had record annual production in 2017. Continued strong performance from the operations has led the team to significantly advance projects in mine planning, particularly at North Goonyella and Moorvale for our seaborne met platform and Wilpinjong and Wambo for our seaborne thermal platform.

I'd also like to give a shout out to our Australian logistics team. In the face of immense industry logistical and infrastructure challenges throughout the year, you'll recall Cyclone Debbie, rail outages and port backlogs, they ensured we delivered on our volume guidance ranges.

Moving to our sustainability initiatives in both the U.S. and Australia, our teams exceeded our goal through reclamation, restoring a total of 1.4 acres for each acre disturbed. In recognition of these recent actions, Peabody was recognized as the best global responsible mining company for environmental, social and government standards and performance for the second consecutive year by Capital Finance International. We were also awarded Coal Mining Company of the Year by Corporate LiveWire.

Through our combined actions, I believe we are further propelling a virtuous cycle as we begin 2018, whereby strength enables more strength. Already in the early days of the new year, all of the preferred shares converted into common stock as a result of sustained robust share price performance. And just in February, we closed on the sale of our 50% interest in the coal handling and preparation plant and associated rail loading facility utilized by Millennium. The sale reduces our operating costs, reclamation obligations and our other commitments. It also preserves throughput capacity for Peabody's remaining production through 2019.

Next, in what we believe to be the first of its kind, the company worked with insurers to successfully issue a first tranche of surety bonds in Australia. We expect to secure additional bonding over time. Through surety bonds, letters of credit and bank guarantees, we anticipate releasing nearly all of our remaining restricted cash in 2018.

Finally, the company just announced the initiation of a quarterly dividend, yet another step in our broader pursuit to return cash to our shareholders. We will introduce our 2018 priorities in a few minutes.

With that brief recap of a very busy year, I'll turn it over to Amy for additional details on our results.

Thanks, Glenn. No question that the fourth quarter capped a year of substantial achievement for Peabody, as evidenced by the financial results highlighted on Slide 4.

Fourth quarter revenues improved 5% over the prior year to $1.52 billion. The Australian metallurgical coal segment increased shipments 21% amid robust seaborne pricing, leading to Australia's largest quarterly revenue contribution in 5 years. For the year, Peabody reported revenues of $5.58 billion, an increase of 18% over 2016, driven by higher seaborne pricing and an 11% increase in PRB shipments on a strong rebound in demand. Australia's full year revenue contribution increased $632 million, as seaborne pricing remained vigorous throughout the year despite moderating volume.

As a reminder, Peabody adopted fresh-start reporting in April, so certain income statement items are not comparable to prior periods. Income from continuing operations, net of income taxes, totaled $378 million this quarter and benefited from strong operational results, $83 million of gains on disposals, $45 million in gains on net mark-to-market adjustments related to actuarially determined liabilities and a net tax benefit of $82 million, partly offset by DD&A expense of $179 million and $36 million of interest expense. Gains on disposals included the previously announced Burton transaction as well as a non-core liability management transaction, both of which are excluded from our adjusted EBITDA results. These transactions demonstrate our continued commitment to a strong balance sheet.

Interest expense totaled $36 million for the quarter. In addition, we incurred an $8 million one-time noncash charge as a result of our fourth quarter debt repayment. Once again this quarter, we recorded a net tax benefit that we expect to materialize as cash in future periods. Fourth quarter taxes include an estimated tax benefit for newly enacted tax legislation, primarily related to AMT credits. We expect these credits to be refunded in 2019 and beyond.

Last quarter, we indicated we expected to receive about $78 million in refunds in the fourth quarter. Although the timing was delayed from the fourth quarter, I'm pleased to note that we have received the majority of that cash already in the new year. During the fourth quarter, 9% of the originally issued preferred stock was converted to common shares and the semi-annual preferred stock dividend was granted. As a result, we recorded a $41 million noncash preferred stock dividend charge.

As of the end of January, all preferred shares have been mandatorily converted into common stock after our share price exceeded the conversion price threshold. This simplifies our capital structure and is expected to increase trading liquidity, while ensuring future earnings fully accrue to common shareholders.

With the full conversion in January, we respect -- we expect to record a noncash preferred dividend charge of $103 million in the first quarter of 2018. Diluted EPS from continuing operations for the quarter totaled $2.47.

And finally, adjusted EBITDA increased 42% over the fourth quarter of 2016 to $416 million. This includes $6.5 million of restructuring expense related to the future closure cost of the Millennium Mine.

To put our performance in context, Peabody reported its largest adjusted EBITDA result in 5 years of $1.49 billion in 2017. Both platforms provided significant contributions to reach this mark. In fact, Australia's adjusted EBITDA contribution of $907 million reflects the platform's largest operating result since 2008. While Australia certainly benefited from robust seaborne pricing, productivity improvements contributed to lower costs and adjusted EBITDA margins of 36%.

Let's now turn to Slide 5, where we'll discuss the operational results in a bit more detail. The benefits of our diversified portfolio have been highlighted once again this quarter. Strong Asia Pacific demand for our Australian met and thermal products led to a nearly $120 million improvement in adjusted EBITDA over the fourth quarter of 2016. The Australian thermal platform increased its adjusted EBITDA contribution 28% from the prior year, as higher new capital pricing more than offset the impact of volumes that eased 700,000 tons due to tough geological conditions.

The met operations had a great quarter as well. The team was able to ship 4 million tons of coal in the fourth quarter, even with higher than normal port congestion at the Dalrymple Bay Coal Terminal. As you may recall, DBCT is the primary port we use to ship our met coal from Queensland. Since year-end, that congestion has eased.

Spot premium low-vol hard coking coal prices eased a bit compared to the prior year, averaging $205 per tonne in the fourth quarter of 2017 compared to approximately $265 per tonne in the fourth quarter of 2016. Even so, the met segment generated adjusted EBITDA of $200 million, a $95 million improvement over the prior year. The Americas generated $162 million of adjusted EBITDA this quarter, led by the PRB, reflecting the stability in the platform compared to the prior year.

Let's now take a look at our segment operating performance on Slide 6. Fourth quarter and full year adjusted EBITDA margins averaged 30% across our 5 mining segments, and we had a bit of healthy competition going on this quarter within the Australian platform. Both segments reported highly competitive margins.

The met segment earned 39% adjusted EBITDA margins, just edging above the Australian thermal segment, which reported 38% adjusted EBITDA margins in the fourth quarter. This kind of impressive results from our Australian thermal segment is not unusual. In fact, this segment has consistently delivered extremely low costs, resulting in highly competitive margins.

These outstanding results were threefold: operational strength, robust seaborne fundamentals and solid execution. Australia delivered 8.8 million tons of coal this quarter, contributing to total 2017 volumes of 30.9 million tons, which included 11.7 million tons of met coal and 12.5 million tons of export thermal coal. In the fourth quarter alone, we sold 4 million tons of met coal at an average price of $127.14 per ton and 3.4 million tons of export thermal coal at an average realized price of $72.89 per ton. Both results were improvements over the prior year, with total thermal realized pricing increasing 15% over the fourth quarter of 2016 to $55.22 per ton.

As we had anticipated, the Met Mine sustained their improved second half cost profile, recording sub-$80 cost per ton. North Goonyella had another great quarter, as productivity improvements led to a record run-of-mine production in the fourth quarter, beating the record it set in the third quarter. Australian thermal costs increased slightly from the prior year to $33.98 per ton. But this was largely driven by higher sales-related royalties as pricing improved. That's the only kind of cost increase we like to see at Peabody.

Strengthening seaborne fundamentals and continued low costs across the thermal platform paved the way for the Australian thermal segment to report $103 million of adjusted EBITDA this quarter. These powerful fourth quarter results capped a year of outstanding results for the Australian platform and contributed to full year adjusted EBITDA margins of 36%. That's an increase of $23 per ton over the prior year.

Before we turn to the U.S., let's discuss Middlemount's results, which as you may recall are excluded from the Australian platform's results. In 2017, our share of the operation sold approximately 2.1 million tons of met coal and generated net income of $43 million. That's an increase of $29 million over the prior year. In addition, we have collected approximately $80 million of cash in 2017 from Middlemount, including $17 million in the fourth quarter.

Switching gears to the U.S. As a whole, the platform delivered fourth quarter adjusted EBITDA margins of 22%. Revenues increased modestly over the prior year, primarily due to the benefit of a contractual settlement related to sales volumes. Costs increased modestly, largely due to planned repairs in the Midwest, where reliability inspections lead to an increased scope on planned maintenance, setting us up for strong cost performance in 2018.

For the year, the U.S. earned average EBITDA margins of 25%, largely due to improved cost performance in the Western segment and higher PRB volumes. The Western segment benefited from a higher mix of Twentymile volumes, as we exported just under 800,000 tons, as well as favorable ratio at Kayenta. PRB volumes increased 11% to 125 million tons, with an average realized pricing of $12.58 per ton.

Before we turn to the progress we've made on our financial approach, I'd like to take a minute to discuss our new 2018 guidance targets. As we look ahead to the full year 2018 results, we expect volumes to largely be in line with 2017 results. Related to our Australian thermal export thermal sales, we are targeting 11.5 million to 12.5 million tons in 2018, as our domestic coal shipments are expected to increase to meet customer contractual agreements.

As we always do, to the extent our domestic sales are lower, we would attempt to move available capacity into the export market. We are targeting 11 million to 12 million tons of met coal shipments in 2018, even as we are undergoing a longwall move at North Goonyella and ramping down production at Millennium in anticipation of its closure in the second half of 2019.

As a reminder, we also have economic exposure to about 2 million tons of met coal through our Middlemount joint venture.

You've heard us say before that in the U.S., we like to enter a year substantially priced. At this time, we have about 90% of our U.S. volumes priced heading into 2018. Based on that and where we see current demand, we are targeting to deliver between 115 million and 125 million tons of PRB coal this year. In addition, our Illinois Basin and Western volumes are in line with the prior year.

With a deliberate and continued focus on cost and productivity improvements, we are targeting met costs of $85 to $95 per ton, in line with 2017 results. While we expect continued productivity and cost improvements to mitigate inflation, major fluctuations in the Australian dollar and sales-related royalties as well as our midyear longwall move at North Goonyella, could impact these ranges throughout the year.

In addition, we are lowering our PRB cost guidance ranges to $9.25 to $9.75 per ton, even as we are lowering volumes, as we expect to benefit from reduced repairs in 2018. I note that fuel is a large component of cost across all of our surface operations, which could also lead to changes in our cost guidance throughout the year. We are targeting approximately $150 million of SG&A expense this year, including $35 million of noncash expense.

Looking at interest expense, we expect to incur between $143 million and $153 million of expense this year. This includes interest on our funded debt as well as surety bonds and letters of credit and noncash amortization of debt issuance costs. We are targeting 2018 capital spending of $275 million to $325 million, which contemplates approximately $85 million of major project spending and reflects approximately $40 million in lease buyouts we plan to execute in 2018 versus continuing to lease.

Specific to the first quarter, results are expected to benefit from continued strong seaborne coal pricing, offset by lower Australia volumes due to scheduled longwall moves at Metropolitan and Wambo.

Turning to Slide 7. We previously outlined a financial approach of generating cash, reducing debt, investing wisely and returning cash to shareholders. Peabody's operational and financial approach has resulted in substantial cash generation that is continuing into 2018. We ended the year with over $1 billion of cash and an additional $232 million of available borrowing capacity under our new revolver and accounts receivable securitization facility, putting liquidity at $1.24 billion, comfortably above our target of $800 million.

As we've said before, at any given time, our liquidity may be above or below our targeted level for a time. We intend to continue to execute on our financial approach, prioritizing returning cash to shareholders.

Not only did our operations generate meaningful cash flows, but we also liberated $175 million of restricted cash in the fourth quarter, most of which we got back in December. This was partly due to our $350 million revolver, which enabled us to replace cash collateral with letters of credit that's freeing up that cash for other purposes. We're now left with just over $360 million of restricted cash as of the end of December.

I've talked before about executing a multipronged approach towards bringing up that cash.

On top of our excellent reclamation performance and the sale of assets reaching the end of their economic lives, another successful action was creating an Australian surety bond market with broad support. I'm very excited to say that we made significant progress on that front by working with insurers to initiate an initial tranche of approximately $115 million of surety bonds in January.

With the addition of those surety bonds, I'm pleased to note that we've already met our $200 million to $400 million target, but we aren't about to stop. We are now targeting to free up nearly all of the remaining restricted cash balance in 2018. Cash that is currently restricted would ultimately be replaced through a combination of letters of credit, bank guarantees and surety bonds.

Over time, these successes may allow us to utilize our revolver and accounts receivable securitization as significant sources of available liquidity, bringing up cash for other uses.

The second piece of our financial approach has been to reduce debt. Earlier in the year, we targeted $300 million of debt repayments in 2017, with an additional $200 million to follow in 2018. Given the company's strong cash position, we accelerated our planned 2018 debt repayment to December, thus completing a total of $500 million of repayments in 2017.

Deleveraging benefits Peabody on multiple fronts, including providing access to alternative sources of liquidity and lowering fixed charges. Since April, we've reduced our net debt position nearly 15% -- nearly 50% to approximately $450 million. Over time, we continue to target total gross debt of $1.2 billion to $1.4 billion.

The third piece of our financial approach is investing wisely. We have been clear about the filters we consider when evaluating potential M&A activity, but let's talk a minute about investments in the business. We have made significant investments in our reserves and equipment in the past and as such are able to maintain modest sustaining capital levels. 2017 capital expenditures totaled $199 million.

Looking ahead to 2018, we are beginning to selectively accelerate some life extension projects, namely at North Goonyella, Wilpinjong and Wambo, which are contributing to higher 2018 CapEx. These projects will extend the lives of our highest quality met and thermal mines, as well as our premier low-cost thermal mine in Australia. In addition, we believe these projects will provide meaningful returns with a reasonable payback period.

Specific to North Goonyella, we are purchasing a new longwall and will be accessing near -- new reserves in the Southern area over time. While the new longwall won't be fully functional until 2019, its advancement has a secondary benefit as well. We expect to be able to reduce downtime during longwall transitions in 2018 and 2019. Said otherwise, we expect to realize cost savings before the new longwall is even being utilized. We will also be optimizing the mine plan through accessing higher-quality reserves.

The final piece of our financial approach is returning cash to shareholders. While debt reduction was job one in 2017, we are pleased to be able to begin implementing our shareholder return program during the year. In addition to the significant uplift in share price from an emergence value of $22.03 per share, we executed 35% of our total $500 million share repurchase program since August. We bought back $107 million worth of shares in the fourth quarter for a total of $176 million in 2017. As we begin 2018, our focus now shifts more fully towards greater returns of cash to shareholders.

On that note, we announced this morning that the board has declared a quarterly dividend of $0.115 per share to be paid in March. This marks an important next step in Peabody's commitment to shareholder returns and further demonstrates the company's strong financial position and robust cash generation potential. The dividend represents an annual yield of 1.5%, based on BTU's average share price during the second half of 2017. The board will evaluate future dividends on a quarterly basis in light of alternative means to create shareholder value.

Recognizing that near-term debt and liquidity targets have been achieved, we are evolving our financial approach to maintain financial strength while more greatly targeting the return of cash to shareholders in 2018. We look to generate cash, maintain financial strength, invest wisely and return cash to shareholders.

I'll now turn the call over to Glenn to cover industry fundamentals and key priorities for 2018.

Thanks, Amy.

On Slide 8, I'd like to touch on global industry fundamentals, which remained strong throughout the majority of 2017 due to stable Asia Pacific demand and overall supply tightness. First, seaborne thermal coal demand rose approximately 25 million tonnes in 2017 against a base of 925 million tonnes. South Korea led demand growth, increasing 16 million tonnes over the prior year on new coal capacity and limited nuclear availability.

Import demand was also supported by a 5% increase in China electricity generation as well as solid economic growth and rising coal fuel generation in other developing ASEAN countries. Whilst India coal import demand was tempered for the better part of the year, their fourth quarter imports surged 17%, as domestic stockpiles were depleted and domestic production continues to lag.

Overall, seaborne thermal coal demand outpaced supply in 2017, as we saw declines in exports from Australia, Colombia and Indonesia due to weather impacts. As a result, pricing for the benchmark Newcastle product remained elevated, holding at an average of $95 per metric ton during the last 6 months of the year and above that level now.

Moving to seaborne metallurgical coal. 2017 global steel production rose 5%, largely driven by increased production in China and India. Also of note, we saw significant steel production growth in just about all major steel producing regions. Chinese steel production output reached a record high during the year, leading to an approximately 10 million tonne increase in imports.

In addition, Indonesian -- Indian metallurgical coal imports increased approximately 6% compared to 2016. For the full year, total Australian metallurgical exports declined more than 15 million tonnes due to impacts of Cyclone Debbie in the first quarter as well as logistical constraints and industry-wide operational challenges.

As supply and demand fundamentals remained tight in the fourth quarter, prompt seaborne metallurgical coal prices rose to an average of $205 per tonne, with the index-based pricing settlement for premium hard coking coal set at $192 per tonne. The low-vol PCI price was settled at $127.50. Looking ahead to this first quarter, Peabody settled a benchmark low-vol PCI price of $156.50 per tonne. That's nearly $30 per tonne above the prior quarter settlement.

As we begin 2018, we are watching a few key drivers that we expect to impact seaborne coal demand. Changes in Chinese policy can result in meaningful changes to Chinese imports. Furthermore, continued growth in India and other ASEAN countries will likely drive demand this year.

As we saw in 2017, even small changes in demand or disruptions in supply can result in meaningful impacts to pricing, given current supply tightness. Both seaborne met and thermal coal supplies remain tight on continued logistical and operational constraints across the industry. In fact recently, we've seen a number of global coal companies reduce 2018 production guidance for both seaborne met and seaborne thermal coal.

Turning to Slide 9. Mild weather curbed natural gas prices and led to a 15 million-ton decline in coal generation in 2017. Despite overall decreases in coal and natural gas generation, the PRB once again proved to be a bright spot, increasing 16 million tons over the prior year.

Another encouraging piece for U.S. fundamentals has been a reduction in utility stockpiles. Through December, coal inventories declined 26 million tons on strong domestic PRB demand and favorable seaborne coal pricing that was supportive of exports. Significant to Peabody, Southern PRB utility stockpiles declined 16% from the end of 2016 levels to 54 days of maximum burn. And in January, we have seen healthy stockpile draws well beyond the 10-year average.

As a percentage of our overall portfolio, Peabody is not a substantial seaborne supplier from the U.S. However, we do keep an eye on netbacks and will export tons from our U.S. operations when economics make sense. Colorado and Illinois Basin represent our best opportunities for exports, given access to ports and margin realizations. In addition, we benefit as other producers move tons from domestic supply to the seaborne business. We exported just under 800,000 tons in 2017 from our U.S. operations and have already a similar amount committed for 2018. Our focus is on returns and we generally capitalize most on exports from Australia.

Looking ahead to full year 2018, changes in electric power sector consumption of coal are expected to be largely driven by natural gas prices on a regional basis and availability of renewable generation. I'll note that on average, every $0.20 movement in natural gas prices equates to about 25 million tons of increased or decreased utility coal demand over the course of the year in the United States.

Turning now to Slide 10. We will continue to advance our stated financial approach: generate cash, maintain financial strength, invest wisely and return cash to shareholders. I'd now like to spend a few moments walking through our key priorities for 2018.

As always, we begin with a focus on safe productive operations and return maximization. Within the United States, we'll be focused on further reducing our unit costs and improving coal's competitiveness against natural gas. We will also be continuing to take actions to preserve coal plants from premature retirement. For example, we plan to continue working with the tribes to facilitate a transition of the Navajo Generating Station to enable a life beyond the closure currently planned at the end of 2019.

In Australia, we will be placing great importance on improving both production and logistical efficiencies to best capitalize on healthy seaborne coal conditions. Fourth, we'll be evaluating opportunities to further upgrade our metallurgical coal platform, including the development of the new longwall investment at North Goonyella that Amy previously discussed. In addition, we continue to work on extending the life of the Moorvale Mine. These actions are expected to underwrite double-digit met volumes for the foreseeable future.

Within our Australian thermal coal segment, we will continue to work on life extensions and progress the Glencore joint venture at Wambo and we'll strategically layer in longer-term commitments to seaborne coal volumes to take advantage of the current strength in the pricing environment. For instance, we have priced 4 million tons of Australia thermal coal for 2018 at an average realized price of $74 per short ton.

Finally, as Amy indicated, we are working with our insurers to finalize the first of its kind surety bond program in Australia, yet one more stride towards our goal of releasing nearly all our remaining restricted cash in 2018. That wraps up our formal remarks today. At this time, we'd be happy to take your questions. Operator?

(Operator Instructions) And we'll take our first question from Paul Forward with Stifel.

I wanted to ask about the -- a little more about the life extension projects that you talked about. In Australia, you'd mentioned the new longwall at North Goonyella is the big one. What -- could you provide some details on the other ones? And specifically, kind of what's the magnitude of the tons per year that we're talking about that could be added with these extensions?

Sure. I'd maybe start by -- so we've talked about the extension project at North Goonyella, which will extend the life of that mine through 2026. We also have extension projects at our Wambo surface operation, which includes the joint venture with Glencore that Glenn referenced, and at our Wilpinjong Mine.

These extension projects really provide us access to those reserves over the long term. It's not necessarily expected to greatly increase our volume over the period, but does underwrite a stable production profile for some time out of the thermal platform.

What I would say about our CapEx and really, the elevated levels that we're seeing in 2018, which could continue a bit into 2019, is it really is about those high-quality projects at those operations that we think are really our best-in-class out of Australia between the quality of the North Goonyella and Wambo coal and the low-cost profile at Wilpinjong. And over time, we really see that sustaining profile to look closer to the $200 million a year or just under $200 million a year that we saw in 2017.

And maybe a little bit more color on the North Goonyella decision, which I think is a good news story. So the longwall top coal caving system itself, which was introduced in 2013, was a leased system. You may recall that at the end of 2016, we actually discontinued longwall top caving at North Goonyella and continued using a conventional methodology into 2017. 2017, as we've indicated, we had record production through the year and that accelerated with record production in Q3, record production in Q4.

When we looked at the mine plan, we think there was an opportunity to reach a sequence of lower-quality panel and going to a higher-quality area, which as Amy said, has extended the life to 2026. All 3 factors mean that we've made the decision to move into that Southern area in 2019.

In large part, this is reflecting the success of North Goonyella, particularly through the 2017 period. It's a better match for the conventional methodology that we're mining now to the geology. It has benefits in both 2018 and 2019 in lower maintenance costs on the longwall moves, and we also expect to reduce both moves as a result.

Also on met and as we've been working through and we've updated you of our work around strengthening the met platform, we also think there's some opportunities at Moorvale. And those actions which we've talked about will enable us to underwrite a double-digit met volume into the foreseeable future.

Glenn, I was just going to follow up on that double digits. So that's -- you're guiding 11 million to 12 million short tons per year, well, that will be in 2018. Just to clarify, so you're talking about a platform that you'd anticipate would stay in that kind of above 10 million short tons per year going forward? Wanted to clarify that, that was true. And then also, think about as you look at this platform, would you anticipate any product mix shifts over time of significance within that?

Well, yes, Paul, that's exactly what I've been saying. I think most investors would note probably that we've been looking at a decline in our met platform that we've been talking about for a couple of years, but also aware that we've been undertaking a number of actions to look to optimize our mine plan. I've announced a few of those in the past. I think this step at North Goonyella and further actions at Moorvale will enable us to support a double-digit number going forward. The mix issue?

Yes, in terms of product mix, we are starting to see a little bit of shift in that already, as Millennium production declines in 2018. So you'll see this year, just in terms of product mix, that we're targeting more around the lines of 55% to 60% of PCI coal in the mix versus hard coking coal. In the past, that mix has been closer to 50-50.

And we'll go next to Mark Levin with Seaport Global.

I wanted to ask a little bit -- I wanted to ask a question in the United States. So when looking at your PRB guidance for '18 versus '17, it looks like you're guiding to down, anywhere from flat to 8%, with a midpoint of down 4%.

And I'm just trying to understand -- I mean, obviously, there's maybe some more optimism around the fact that inventories are a lot lower, natural gas prices clearly not great at $2.75, but not horrific either and the weather has been a lot better. So maybe if you could talk a little bit about the reasons why you think your PRB production will be down year-over-year?

Yes, and I think down would be marginally down in the grand scheme of things, with the midpoint being just under our 2017 levels. I think in general, we're contemplating a number of things for 2018. Obviously, we take into account what we see is the demand based on plant closures.

And also, I will say we have an outlook that we like to go into the year nearly fully committed for our tons across the platform and the PRB is no different than that. So as we look at 2018, we looked at what we saw our customers needing. We looked at where we thought we needed to produce in order to keep our costs extremely competitive, particularly against natural gas and we've elected to kind of be in that range of 115 million to 125 million tons.

We'll take a look at where our customer requirements are later as we progress through the year and see where we end up, but we are very focused on maintaining strong margins out of that basin. We count on the PRB to be the anchor to our U.S. platform. We like to see both strong margins and strong cash generation out of that platform.

And Amy, when you guys -- I think you referenced being 90% of your U.S. volumes are priced. How does that break out in terms of the PRB versus the Illinois Basin? Or is it ratable? I mean, is it 90% in both basins? Are you fully priced in the PRB? I mean, how should we think about that?

Nearly all of that uncommitted tonnage would be in the PRB. So for the rest of our U.S. basins, we are essentially fully committed.

Got it. That's great. And then my last question, it seems like the focus is going to be, at least with regard to the cash that you generate, toward returning it to shareholders, either through buybacks and you guys announced the dividend this morning.

I'm just curious, has management or the board's view toward selective asset acquisition opportunities, either in Australian met or Australian thermal, has that changed at all? Is that something you guys would look at? Or is there a clear preference on just returning cash to shareholders and then focusing on the internal projects you're talking about?

Well, I think our position hasn't changed. And I've mentioned perhaps on the last call that we've got a critical eye and healthy skepticism around acquisitions. I did outline the filter around that being ensuring that our financial approach of maintaining financial strength becomes paramount.

We would look at any investments having to be against the criteria of returning cash to shareholders as a default position. Returns would need to be above our cost of capital off a reasonable payback period. Strategy is key, so that's Powder River Basin, Illinois Basin, seaborne met, seaborne thermal and we'd look to the existence of physical, commercial, logistical and financial synergies.

And any opportunity must present significant value, most importantly to our shareholders as opposed to others. So that critical eye and healthy skepticism still remains amongst management and the board.

And we'll go next to Lucas Pipes with B. Riley FBR.

I wanted to follow up on the CapEx side as well and you identified these 3 discrete items that push CapEx up a little bit here. So I wondered, could you maybe take another crack at breaking it down in between sustaining capital in the U.S., sustaining capital in Australia, outside of these extension and Goonyella project?

And then I think, Amy you mentioned you expect capital to return to $200 million sustaining longer term. How quickly do you expect to get back to that level?

So I think 2017 is probably a pretty good proxy for what our recurring sustaining capital level is and that's really spread fairly evenly between the 2 basins. These projects that we're talking about really impact 2018 and 2019, and based on our project pipeline right now, we would assume that 2020 is a return to more normalized, sustaining-only capital spend.

The one thing that I would point out in addition is we're going to continue to make economic decisions about aspects of our capital spend. And I did point out in my remarks that we've got about $40 million of spending in Australia in 2018, that 12, 16 months ago, we would have assumed that we needed to make new arrangements to lease -- to re-lease equipment going forward and obviously, that has an impact on operating cost.

Based on the cash that we currently have on hand, we do see an opportunity to end those leases, pay them off. And although it's a bit of an increase to capital spend in 2018, we think it's the right economic decision. So we'll continue to try and do things like that over time to create value for our shareholders.

That's very helpful. I had a whole number of questions on the tax side, maybe just to check them off. First, I think Amy, you mentioned in the prepared remarks, that you'll have a return of cash coming through here in the first quarter. Could you remind us how much that is?

And then also, I think with the AMT credit carryforward, that could be cash coming in 2019 and maybe also 2020, how much would that be? And then to finish off the tax question, a little bit off the wall, you've pivoted to Australia for met coal some while ago. With the tax reform impact, how you think about met coal out of the U.S.?

Sure. So a couple of things. One, with the third quarter 2017 benefit that we took, that was divided into 2 tranches. A refund that we originally expected to get in 2017, that was about $78 million. We've received most of that refund already this year. We expect the remainder of that to come in over the first 6 months of the year. We'll additionally file another refund later on this year for an incremental $20 million-ish on that amount.

With respect to the AMT credits, that was about an $85 million benefit that we took in the fourth quarter. Those numbers will -- or those refunds will start coming in, in 2019, about half of that amount in 2019 and then that trickles down over time. So about half of the remaining in 2020 and the remainder in 2021.

And maybe with respect to the strategic question around U.S. met, clearly tax reform, positive to U.S. economy; potential infrastructure action, positive to U.S. economy. So that should be positive to the U.S. met market, positive to the global met market, I imagine, off the strengthening around that. Our strategy hasn't changed. Seaborne metallurgical coal is our focus, and I outlined the criteria around that just prior.

And we'll go next to Jeremy Sussman with Clarksons.

If I look back, I think you spent about 3/4 of $1 billion in 2017 on bankruptcy payments and buying back debt. So if I take your current cash balance of just over $1 billion, restricted cash that it sounds like now you believe will all get unrestricted this year and sort of just some assumptions around implied free cash flow based on your guidance, clearly, you're going to end up with a little more cash on the balance sheet than you'll need.

I guess, how should we think about priorities in terms of what you're going to do with the cash in '18? Is it buybacks? Is it special dividends? Is it M&A? How should we think about this?

We've just announced a dividend, the reintroduction of a quarterly dividend program. We've taken some pains in the past to outline our capital returns approach, which has been now on top of the quarterly dividend, has been the buybacks. We still have room under that program, and we'd look to execute against that in the period ahead.

If we continue to execute in the way that you indicate and I'd also like to give a big shout out to both our Australian reclamation efforts with our operating team and also the finance and the treasury groups for what was the first of its kind surety program in Australia, that looks as though it's going to continue to be executed, to enable another arm at getting access to that restricted cash. We're happy to reassess our targets as we continue to execute, once we've executed on it.

Yes, I would just -- I would double down on that, Jeremy. I think that we purposely evolved our thinking in terms of where we're at from reduce debt to maintain financial strength. We understand the shifting as we progress into 2018, from really debt reduction to shareholder returns.

We think that we've got a couple of good programs that are going to enable us to do that now in terms of the initiation of the sustainable dividend as well as what we have left in our share buyback program, and we'll continue to have discussions going forward about whether or not those programs need to be supplemented.

As of right now, I will say that those 2 mechanisms remain our preferred mechanisms to generate shareholder returns, aside from a special dividend. But obviously, we'll continue to evaluate as we move forward.

Appreciate the color. And maybe just one unrelated follow-up. So if I think about when the new longwall system is installed at North Goonyella, how should we think about production, annual production, coal quality and your cost profile there, basically compared to what we're seeing today?

And also in Australia, are you guys happy with kind of the current JV structure at Middlemount? Or is that something that you think could maybe get altered one way or the other?

Well, I think moving forward, maybe specifically with North Goonyella, we are trying to put them in the best position possible to continue the strong production performance that they have seen. We've got a large reserve area at North Goonyella. We've got a great product quality, and we want to ensure that we're getting as much out of that mine from a productivity standpoint.

So our goal would be to maintain current productivity levels. And actually, as we transition, one of the reasons why we're transitioning into that Southern area early is because we really like the coal quality in that area of the reserve. So we're very confident that that's going to be a premium product out of that reserve area going forward.

Yes, and their journey over the last 3 years has been quite remarkable and clearly, we'll be attempting to help them but also challenge them going forward.

Yes, with respect to Middlemount, what I would say is we have a good relationship with our joint venture partner there. It is one that has started to pay us -- to pay dividends, literally, in the last several months. I don't necessarily see us looking to change that situation.

But I think what we are trying to do for our investors is highlight that, that 2 million tons of exposure to relatively low-cost met coal can't be ignored. It does provide us that exposure and an effective mechanism to return cash to us as a 50% owner of the operation, again, $17 million in the fourth quarter alone, with respect to cash generation.

And we'll go next to Michael Dudas with Vertical Research.

Glenn, looking out to annual contract negotiations for thermal coal in Asia into next couple of months, certainly, how do you foresee the earliest round of negotiations, given where markets are and the urgency of the customer base to secure, who've been surprised with some of the tightness in the market? My follow-up would be India, it seems like there's some interesting things going on there. Can some of that momentum continue into 2018 and benefit the market?

Yes, thanks for the question. I think we obviously don't participate or don't take the lead in the JFY negotiations. As I understand it, those negations will take place in the -- towards the end of this month, they would be expected to commence. As you've indicated though, conditions at the moment for seaborne thermal have been quite supportive. What I can say from bilateral negotiations that we would participate in, they've been quite constructive, at levels which would be above the fourth quarter sort of averages of last year. So I think those conditions are currently quite favorable as we move into that JFY settlement. Specifically India, that's right, there are both demand issues, but also there are supply-side challenges, have probably meant that we are moving into this first quarter into 2018 with supported demand for Indian imports as well. So in the short term at least, the conditions around seaborne thermal are quite constructive.

And Mike, I might just note that we generally price about 3 million tons under that JFY contract. So with that, we will have 50% of our thermal export volumes at the current guidance range priced for 2018 at levels that we think will continue their strong performance in 2018. We've come to expect that from them.

And we'll take our last question from Daniel Scott with MKM Partners.

I just want to ask Amy, on the Powder River Basin guidance for 2018, obviously, the cost looks very good. The realized price is now guided to $12 a ton at 90% hedged, or maybe even a little more, and it was $12.27 previously. Is that incremental decline in the hedged book? Is there any slippage or cancellations or deferrals? Or is that all just lower market prices?

We do have a tiny bit of deferrals in there. I wouldn't say it's incredibly material to the mix as you look at what's been pushed into 2019. What it is reflective of is our strategy to try and sell the products that we generate the highest margins on. So you would anticipate that, that incremental tonnage was not 8800 coal in the mix, and that's okay with us. What we like to do is to take a look at the products that we can sell at a cost profile that is most competitive and ensure that we're generating the largest margin possible out of those reserve basins. So obviously, what we see quoted a lot is a price for that more, higher-heat coal and we will tend to go where the margins are at.

And that comes from the fact that we have over a dozen open pits in the Powder River Basin across those 3 mines. We do allocate people, equipment and contracts as necessary to optimize margins and you did note the reduction in cost there. And I think that overall story is consistent with the strategy.

Okay, great. That's helpful. Second, I just want to piggyback on the question about, from the capital expenditures in Australia to extend the 10-plus million ton a year production rate. And there is -- you did mention a mix change to where it's now 55, 60 of PCI. Once all the spending is completed, is that still going to be the mix? Or is it going to revert back some?

I think that's generally a pretty good mix to take a look at going forward. We always try and true that up as much as we can in any given year based on what we have going on. But as of right now, I'd say that, that mix is probably what we view as the new norm.

Okay. And then lastly, could you speak a little bit to kind of Australian port and rail performance now? It's pretty clear that, that Dalrymple Bay maintenance outage impacted pricing and now they're back on line, but generally, spot and prompt pricing is still extremely high on the seaborne market. Is there continued logistical issues in Australia? Or is it still just supplies outpacing demand? Or vice versa, I'm sorry.

I think there's no doubt -- no doubt the conditions have improved. I'm not sure I'd say it's back to normal levels, but there is no doubt that conditions have greatly improved.

And that concludes our question-and-answer session. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Yes, thank you for joining us today and for participating in our call. Improved market conditions and Peabody's execution have fundamentally altered the trajectory of the company in the most positive of ways, and I credit our team of more than 7,000 employees for a job well done. Whilst we had a highly successful year, we are not complacent. Rather, we enter 2018 committed to actions that will drive continued valuation uplifts throughout the commodity cycle. I'd like to thank our shareholders for your interest and support as BTU continues to deliver results and generate value in 2018 and beyond. Operator, that concludes today's call.

Thank you, everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect.