Peabody Energy Corp (BTU) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Peabody's Third Quarter Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded.

And I'd now like to turn the conference over to Vic Svec, Senior Vice President, Global Investor and Corporate Relations. Please go ahead, sir.

Okay. Good morning, everyone, and welcome to 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.

During our formal remarks, we'll reference a supplemental presentation. I'll remind you that's available on our website at peabodyenergy.com. And on Slide 2 of this deck, you'll find our statement on forward-looking information. We do encourage you to consider the risk factors referenced here along with our public filings with the SEC. I'd also note that we use both GAAP and non-GAAP measures and we refer you to our reconciliation of these measures in this presentation and our earnings release.

I would also remind you that we adopted fresh-start reporting as of April 1, 2017. Some of these comparisons to metrics that are prior to that time don't provide useful information.

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

Thanks, Vic, and good morning, everyone. Let's start on Slide 3. I would begin by noting that while we recognize that North Goonyella represents a major incident for Peabody and one we'll discuss further, it does not define our company.

We believe we are on the right path with the right strategies, and that is borne out by the strength of our diverse 23 mine platform and the quarter we have just turned in, by the accretive acquisition of the Shoal Creek mine and by another reaffirmation of our buyback program with authorization now raised to $1.5 billion.

Even amid the events of the North Goonyella mine, Peabody averaged 28% margins across its 5 mining segments and continued to benefit from the strength of its diversified platform. Our Australian thermal segment earned a top spot in operating results with 48% adjusted EBITDA margins.

We ended the quarter with $1.69 billion in liquidity, of which $400 million is earmarked to fund the Shoal Creek acquisition. We believe this will be a highly accretive transaction, adding about 2 million tons or more per year of seaborne high-vol A coking coal to our portfolio. The acquisition is moving through regulatory approvals and is dependent upon a new labor agreement negotiated by Drummond.

Our share buyback program progressed well in the quarter, with $325 million repurchased in the third quarter and $875 million executed over the past 5 quarters. As we near completion of the current $1 billion program, I'm pleased to note that we are again expanding the buyback authorization, this time by another $500 million in light of continued strong cash flows.

In addition, the company announced that we are increasing the quarterly dividend per share by 4% over the prior quarter. This follows a 9% increase in the per share dividend declared in July.

With that, I'll turn it over to Amy to cover the financials.

Thanks, Glenn, and good morning, everyone. Today I'll walk through the income statement and highlight our progress on a few areas within our financial approach, beginning on Slide 4. Revenues for the third quarter totaled $1.41 billion, down approximately 4% compared to the prior year. While seaborne coal pricing remained robust during the quarter, revenues were impacted by reduced sales volumes from the Australian platform and the PRB.

DD&A declined some $25 million versus the prior year to about $170 million, driven by continued contract amortization rolloff. And SG&A totaled $39 million for the quarter and was in line with our expectations. As previously stated, we expect SG&A to typically track to around $40 million per quarter.

Income from continuing operations net of income taxes declined approximately $150 million. About $49 million of this is attributed to a provision for equipment that has now been sealed in the completed longwall panel at North Goonyella. In addition, the prior year had an $84 million tax benefit, which is also reflected in the decline in net income attributable to common stockholders. Diluted EPS from continuing operations totaled $0.63 per share compared to $1.49 per share in the prior quarter.

Let's now cover some additional detail on our operating performance on Slide 5. Adjusted EBITDA totaled $372 million compared to $411 million in the prior year. Adjusted EBITDA includes approximately $9 million of expenses related to the events at the North Goonyella mine. Focusing on Australia, adjusted EBITDA eased about $5 million compared to the prior year.

Now let's look at the 2 segments there. As Glenn indicated, our Australian thermal platform again proved to be the standout performer with margins of 48%. Those expanded margins resulted from a 23% increase in the realized price per ton, while unit costs held largely flat. The segment also led the company in total adjusted EBITDA of $145 million in the third quarter, some $48 million more than the prior period.

Export thermal sales totaled 2.9 million tons at an average realized price of $92.08 per ton. The remaining 1.9 million tons were sold under a long-term domestic contract. I'll mention that expected 2018 thermal sales volumes are not indicative of our typical run rate and we would expect to see higher volumes in 2019.

The significant divergence that we noted in July between the 6,000 and 5,500 quality Newcastle thermal products continued throughout the quarter. During the third quarter, the 6,000 spec crop price rose 13% from the second quarter of 2018 to approximately $117 per metric ton. In turn, the 5,500 quality thermal product eased $6 to an average of $69 per ton.

Despite this widening in the spread, Peabody saw our realizations compared to the Newcastle index improve to the highest percentage of the year. This occurred even with some 70% of thermal volumes in the quarter having been previously priced at lower amounts. Even the healthy Japanese fiscal year settlement in the quarter of $110 per ton was only 95% of the average pricing for the third quarter.

We would expect our average realizations to hold in the mid-80% range of Newcastle quality for the fourth quarter. Industry-wide, we expect a higher availability of lower-quality Indonesian coal to lead a continued wide spread into 2019, although we expect that spread to come in over time.

Moving now to the Australian met coal segment, where results were most impacted by the events at North Goonyella. Adjusted EBITDA for the met coal platform totaled $91 million, about $52 million less than the prior year. You'll recall that we targeted about a $45 million impact from the longwall move and the subsequent event added an additional $9 million in cost. For both our seaborne product lines, we expect volumes at the lower end of our targeted ranges for the full year. It's worth noting that both our seaborne met and thermal cost fully incorporate the rail import fees as our export coal is sold FOB port.

Within the U.S., adjusted EBITDA declined $41 million from the prior year, largely due to expected reductions in shipments and a 4% increase in the average unit cost. Midwestern cost increased $2.18 per ton compared to the prior year, with the largest component of the increase being higher fuel cost. In the Western segment, costs per ton were impacted by repairs at the Twentymile mine.

The PRB, on the other hand, saw an improvement in cost despite a 6% reduction in volume. Margins for this segment reached 24% compared to 21% for the entire U.S. portfolio. We expect to deliver 2018 volumes near the higher end of our targeted range.

In the U.S., we quickly transitioned from an extended warm summer to cooler winter weather and natural gas prices have bobbed up above the $3.20 per MMBtu mark. As a result, we have seen a recent uptick in year-to-date shipments and have revised our U.S. Midwestern and Western sales volume.

For 2019, we have priced about 65% of our U.S. volumes, which is trending a bit lower than typical at this point in the year. This is first a reflection of our focus on margins. We are not in a hurry to commit to tons that do not meet our margin expectations. Secondly, we are still firming up our 2019 production levels.

Moving on, during the quarter, Peabody generated operating cash flow of $345 million and free cash flow of $298 million, reflecting low fixed charges. Capital expenditures for the quarter totaled $61 million. Additionally, Peabody collected approximately $7 million in cash from the sale of Millennium Mine resources, with the remaining balance expected to be received through July of 2019.

Total liquidity at quarter end reached $1.69 billion and included $1.37 billion in cash and cash equivalents. As Glenn noted, $400 million is earmarked for the acquisition of the Shoal Creek Mine. Liquidity also includes $246 million in revolver capacity and $78 million under our accounts receivable securitization.

Let's now focus on the components of our financial approach on Slide 6. On this chart, you can see our approach has been thoughtful, deliberate and actionable. Within financial strengths, we have reduced debt by approximately $550 million and completed pension contributions of about $90 million since April of 2017. Pension contributions have brought us to over 95% funded to better secure our needs in this area.

We've also completed about $80 million in lease buyouts, which are each evaluated on the best analysis of lease-versus-own economics. These debt repayments combined with the substantial earnings generation have provided the opportunity for strategic investment and significant returns -- or significant cash returns for shareholders.

In terms of investing wisely, we tend to put this in 2 buckets, capital investment and M&A opportunities. In regard to capital investments, we have injected about $270 million into the business. Our other investment category of course relates to the pending Shoal Creek transaction.

Of the $670 million of investments in the platform during the past 18 months, about 80% has been dedicated to our seaborne products. This is a clear demonstration of our evolution towards a seaborne emphasis and a trend you can expect to see continue into 2019.

The final and largest component of our capital allocation strategy is to return cash to shareholders. In August of 2017, we announced a $500 million share repurchase program. 15 months later, we're pleased to announce the third tranche, bringing our authorization to $1.5 billion. This is not meant to be a shelf program, but rather one we believe we can execute within a reasonable period of time. Case in point, we have repurchased $875 million of shares to-date. That's a total of 22.8 million shares, representing 17% of shares initially outstanding on a fully converted basis.

With us just $125 million from the ceiling of the expanded program and expected continued strong cash flows and robust liquidity, this most recent expansion to $1.5 billion was the appropriate next step. In fact the case for share buybacks is all the more compelling given the value we believe our current share price represents.

We also believe that dividends are an important piece of our shareholder return program, with total spend since initiation expected to reach $60 million in November. You'll note that in October we again increased our dividend to $0.13 per share. Total 4Q dividend cash outflows will be consistent with the prior quarter given the company's $325 million in share repurchases during the third quarter.

With that summary of our financial results and approach, I'll now turn the call back to Glenn to provide a detailed update on North Goonyella and the Shoal Creek transaction.

Thanks, Amy. If you'll turn to Slide 7, I'd like to walk you through where we are today regarding our progress at North Goonyella. Mine personnel are continuing with concrete sealing of the completed longwall panel and the company is transitioning to the assessment/planning phase.

This next phase involves mapping of the heated area and monitoring of temperatures, gas levels, seismic activity, surface air quality and camera imaging. These actions come before advanced planning for reventilation, mine reentry and potential restart of operations.

Continuing analysis is based on a network of 25 planned, remote gas monitoring points throughout the mine. The GAG unit that was initially used in the inertization of the underground environment has been deactivated and is on a standby mode and that's been the case for nearly 2 weeks.

With no ventilation or water management at present, the underground air quality is inert and there are indications of standing water in portions of the mine, with pumping being planned from the surface.

I'll discuss our next steps in a minute, but first will ask Amy to go through the financial considerations.

Sure. Peabody has taken a $49.3 million charge for equipment loss, including 78 shields and the ancillary equipment sealed in the completed 9 North panel. This charge is consistent with actions taken and conditions known to date, reflecting a more likely than not belief. The majority of this charge is expected to have a cash impact related to leased equipment.

The book value of North Goonyella following the charge is $284 million, including unmined panels in the north and south portions of the current seam and lower seam reserves as well as surface facilities. The mine also contains $61 million in leased equipment not within the sealed and mined-out 9 North panel.

In the fourth quarter, Peabody estimates $20 million to $25 million in containment, monitoring and planning costs, along with approximately $15 million to $20 million in costs to keep the mine in idle status, pending any future re-entry. These costs have been reflected in our full-year met cost guidance.

The company will take all steps to work safely, progress the plan and look to mitigate costs, while pursuing options for a resumption of activities at the appropriate time. Mitigation actions under consideration include pursuing means to access a small quantity of metallurgical coal remaining in the stockpile, assigning excess rail and port capacity for a limited time, and analyzing reprocessing of coal waste for potential sales into the thermal market.

As it relates to insurance coverage, the company has notified its carriers of a potential claim under the company's insurance policies that holds a relevant coverage limit of $125 million above a deductible of $50 million.

As a reminder, North Goonyella typically sells at or near the benchmark for high-quality hard coking coal, and prior to the incident, costs for full year 2018 had been projected at approximately $110 per short ton. Peabody has declared force majeure with customers for shipments covering upcoming months.

Okay, thanks, Amy. Now let's talk about the next steps and potential paths forward, which are on Slide 9. As Peabody enters the next phase, the North Goonyella team will continue to work from the surface and obtain greater knowledge of underground conditions in the mine. All phases involve review and collaboration with the Queensland Mines Inspectorate.

Multiple scenarios are being evaluated should mining be able to resume. If the next already developed 10 North panel is accessible, production will be targeted for the second half of 2019, whereas access to the Southern panels, what we call GM South, would likely extend to 2020 given development was in the early stages. The company is exploring all reasonable mine planning steps given the long-lived nature of reserves and the compelling margins of the mine during times of strong industry conditions. We would expect our equipment strategy to be part of this planning.

I might note that based on the market reaction, it would seem that the market contemplates an entire loss of North Goonyella. While we very much understand the concern, based on what we know today that conclusion is at best premature and at worst unwarranted.

I'd now like to turn to Slide 10 and what we expect to be an exciting addition to the Peabody portfolio. The Shoal Creek transaction represents a significant step towards upgrading the company's met coal portfolio. It also passes through all of the strict filters that we put in place to maximize shareholder value through our investments.

This planned transaction includes the mine, prep plant and supporting assets. What it doesn't include are any legacy liabilities other than reclamation. At this point, the sales process is moving through regulatory approvals having already passed U.S. Hart-Scott-Rodino review. Also, prior to closing, our agreement calls on the seller to deliver an acceptable labor contract with the union, including replacing participation in the multi-employer pension plan with a 401(k) program. Those negotiations are underway and we expect that there will be differences that will need to be resolved in order for the transaction to be consummated. At this point, we expect closing in the fourth quarter.

Let's review more on the mine profile on Slide 11. While Shoal Creek is located in Central Alabama, we very much consider it as seaborne met mine and it serves Asian and European steel mills. The mine will represent Peabody's eighth underground mine and our fifth longwall operation. Shoal Creek is well capitalized. For example, it has 2 complete longwall systems currently operating one at a time, with a second preinstalled in the panel.

Proven and probable reserves for the mine total more than 58 million tons. The current mine plan accesses about 17 million tons of reserves with minimal capital investment. The mine typically prices at or near the high-vol A index, which averaged about $185 per metric ton in the third quarter.

In addition, costs are within Peabody's previously targeted metallurgical coal range of $85 to $95 per short ton. I would emphasize that these costs include transportation expenses, which are favorable as the mine has direct access to shipping to the port of Mobile by a barge.

We believe the acquisition provides a number of strategic and financial benefits for Peabody and they are outlined on Slide 12. First, we continue to look for means of putting existing resources to work. In this case, the transaction is easily funded with available cash on the balance sheet. The projected returns exceed Peabody's weighted average cost of capital, with an expected rapid payback period at current robust seaborne prices. In addition, we believe the transaction represents an attractive valuation.

Since last year, we have indicated our design to upgrade our met coal platform. We believe Shoal Creek is certainly a step towards this goal, offering more than 2 million tons or more per year of high-quality coke and coal sales with the potential for healthy margins.

Next. I referenced the transportation advantages as the mine is strategically positioned on the Black Warrior River with access to seaborne demand centers through the Gulf of Mexico. We expect the Shoal Creek integration to be relatively seamless and will not increase our U.S. federal cash tax outlays given the company's significant NOL position.

Finally, the transaction increases our exposure to the most attractive demand centers. Currently, the mine ships to 2 long-term seaborne metallurgical coal customers that serve multiple plants in several countries across Asia-Pacific and Europe. Overall, we believe the transaction meets our high bars and we look forward to adding the operation into our portfolio.

As responsible portfolio managers, we will continue to evaluate all opportunities to create significant value for shareholders. So you will not see us execute any M&A transaction that does not meet our strict investment filters. Our operational focus remains on maximizing value from our existing platform, managing the North Goonyella incident and completing the Shoal Creek acquisition.

With that, let's now turn to Slide 13 for a brief discussion of seaborne supply and demand dynamics. Thermal spot pricing remains at robust levels on import strength from China, India and ASEAN nations. China has actually been a pleasant surprise in 2018 as domestic coal production has been unable to keep pace with strong consumption. Through the first 9 months of the year, China thermal imports are up 27 million tons on a 7% rise in power generation.

India's domestic coal production has also struggled to keep pace with growing electricity demand and lower utility stockpiles. As a result, India thermal coal imports are up approximately 20 million tons through September. We've also seen ASEAN import demand rise some 9% through the first 9 months as the buildout of new coal field generation continues.

Turning to supply, Australian exports are up 2% through September as lower quality Indonesian coal exports have increased 12% over the prior year. Seaborne metallurgical conditions also remain solid, with prices well above historical averages.

The low-vol hard coking coal spot pricing reached a high of $209 per ton during the third quarter, with an average of $189 per ton. In addition, the benchmark for low-vol PCI in the third quarter was settled at $150 per ton, with the fourth quarter PCI benchmark price at $139 per ton.

Overall, pricing has been supported by a 5% increase in steel production. Through September, India met coal imports increased approximately 4 million tons compared to the prior year, more than offsetting a 2 million ton decline from China.

Within seaborne metallurgical coal supply, overall growth remains limited, with the greatest increases from Australia and the U.S. Through September, Australian metallurgical coal exports were up 2 million tons compared to the prior year. However, this is off a lower base in 2017 as Australian export volumes were impacted by Cyclone Debbie.

Moving to the U.S., utility stockpiles ended the quarter at the lowest level since 2005 in absolute levels, with the decline of domestic consumption overcome by a 12 million ton reduction in U.S. production as well as a 13 million short ton increase in exports. No question that U.S. industry conditions have been challenged with continued effects of low natural gas prices, coal plant retirements and increased renewable generation.

On the other hand, natural gas storage is low and the colder than expected early fall season has driven gas prices above the $3 range at Henry Hub and in a number of regions. With coal stockpiles already low and generators less contracted than normal, we will be watching conditions closely and we would expect to see some benefit to coal fundamentals should these trends play out.

Before we move to questions, I'd like to review some of our priorities for the fourth quarter. First, we are advancing the assessment and planning phase at the North Goonyella mine. Second, we are preparing for the completion and integration of the Shoal Creek Mine. Next we are committed to driving strong fourth quarter shipments from our Australian thermal platform. We're also focused on contracting our 2019 U.S. volumes provided margins are acceptable. And finally, we will continue to advance our financial approach, which includes returning cash to shareholders.

That concludes today's formal remarks. At this time, we'd be happy to take your questions. Operator?

(Operator Instructions) And we will hear first from Lucas Pipes of B. Riley FBR.

I have a long list of questions. I'll try to keep it focused. First, I wanted to touch base on the share repurchases. It looks like you bought back stock earlier in the third quarter. Obviously, this can lead to some questions regarding what happened at North Goonyella and such.

So maybe if you could just kind of share your thoughts on the timing of share repurchases during Q3? I assume it's probably related to a blackout period, but I'll let you elaborate on that.

And then just in general, great to see the increase in the share repurchases. And I think you alluded in your prepared remarks to your attractive share price. But should we expect you to execute against this increased authorization here in short order?

Sure. I'll start out. With respect to the buybacks in the quarter, they were executed in sort of the first half of the quarter, July and into August. Obviously we had the large block purchase of 300 million shares.

As we moved into negotiations on the Shoal Creek Mine, we were not in the market actively acquiring shares due to a subject matter blackout. And then obviously approaching the end of the quarter and events at North Goonyella limited our opportunities to buy back shares during that period of time as well.

But as we moved through the month of November -- or I'm sorry, October, got a handle on the events at North Goonyella in terms of our plans for the future. It became clear to us that the liquidity was there for us to continue the share buyback programs as we made our way into the fourth quarter and beyond. So at that point in time, we thought it would be appropriate next step to increase the authorization to $1.5 billion.

I think you've seen through our actions and overall I think we prefer to be judged by our actions and not always what you read from other parties, that we've been very committed to shareholder returns over the last 15 months. We've completed $875 million of share repurchases in less than 15 months, so we clearly have a track record of breaking these -- breaking this program into tranches that we don't view as shelf programs, but we view them as programs that we fully intend to execute against. And obviously is dependent on certain factors, including our liquidity level.

But as we pointed out during this call, we're quite happy and quite comfortable with our liquidity levels currently and we believe that we have firepower to get back out in the market from a share repurchase perspective.

To turn to my second question. On Slide 16, you break out some of your hedged position on the Australia export thermal coal side, and obviously historically that disclosure was great given that the quality spreads were relatively minor.

Now I get a lot of questions on the quality side and I wondered is it possible for you to maybe give us a little bit of a flavor as to how quality spreads would factor into your hedge position or not. I'll leave it here for now. I would appreciate your thoughts.

So in general as we're putting in hedge positions, those are -- those do reflect the Newcastle benchmark and that typical ash spec out of Newcastle. We generally do not hedge that higher ash product in the mix, and so that's something that we keep an eye on as we are locking in both contracted volumes of traditional Newcastle quality and as we're looking at hedges.

And we will move next to Michael Dudas of Vertical Research.

Glenn, you mentioned in your prepared remarks regarding the North Goonyella situation and we appreciate the more granular update on that. You mentioned the market reaction from being premature to unwarranted.

From the day of the announcement of the accident or the fire to where we are today, where in your opinion are we on that scale? And what are some of the metrics that we need to focus upon to move closer to the unwarranted relative to premature?

Well, obviously we've now transitioned from the -- from what I'd consider to be the focus on containment of the incident. And we've marked -- that was originally achieved through a number of steps, the gagging unit, creating an inert environment, putting the plugging into the 1 in 4 and the 1 in 7 drifts, to where we reported that the smoke had effectively dissipated.

We're now transitioning to one in which we then plug the old 9 North longwall panel. And we're in the process, which we expect to complete within the next week or so, of concreting, so permanently sealing that old 9 North longwall panel. That gives us the opportunity to move into this assessment phase, which will assist in the planning phase, which will be around about looking at re-ventilation of the mine, which will be an important milestone. And then re-entry of the mine.

And we're -- obviously that re-entry, why that would typically be important would be to do an assessment of the mine conditions. We've been trying to accelerate that through the use of the monitoring methodologies that we've deployed and the techniques that we've deployed. Probably the most effective that we've been seeing to-date has been the use of camera imaging, where we've actually been able to from -- and bear in mind, this seam is 350 to 380 meters in depth. So when we do activities, it's from the surface at this point.

But that camera imaging has been helpful and will continue to be helpful as we build literally an underground picture or a picture of the underground conditions at the mine, combined with the 25 gas monitoring activities. So this next phase will enable us to do that assessment. As I said, I think re-ventilation will be an important milestone, and then subsequently, re-entry or planning for re-entry.

Within that, in parallel, we'll be working the multiple alternatives. And if conditions exist, obviously our preference is to be able to go into that 10 North panel given that it's an already developed panel. And that's why we've flagged a startup for that, which would be production in the second half of 2019. Clearly, that's our preference if the conditions and the assessment warrants it taking place.

And my follow-up, Glenn, would be regarding Shoal Creek. A little more thoughts on the timing of this negotiation with the union and the vote and how that ties into your year-end closing?

And then maybe with the due diligence you did on the project, the quality -- the amount of capital that's been sent -- spent rather and the relationships with the customers that Drummond had and how that fits into maybe your overall marketing scheme going forward?

Yes, a good question. So on Shoal Creek, we think it's a well-capitalized mine. I indicated the 2 complete longwall systems, the fact that they assemble the panel -- the longwall ahead of the panel to mitigate any impact of movement. This mine had operated at much higher levels historically, and as it's moved across into a new mining area, it also has relatively new surface facilities. So we think that's somewhat unique about the mine and it is well capitalized.

Secondly, why we were interested in it? And as I have reiterated -- and if you -- you can see that from the photo. The mine's prep plant is literally on the water and has the ability to ship products directly to the port or barge products directly to the port without having to go through rail or road transportation. And we think that -- that's why we considered a seaborne mine and we think it's somewhat unique in those characteristics.

We're not a party to the union negotiations. That's being done between Drummond and the union. They're progressing through that. But as I said, we're not a party. But at this point, we've got no reason to believe that closing wouldn't be what we indicated within that -- within the fourth quarter.

Yes, we know these customers. And clearly, that's one thing that we believe, having that global footprint and being able to continue to market these customers within our existing trading activities and operations and offering a more holistic blend quite frankly with a high-vol A product will be beneficial to us.

And our next question comes from John Bridges of JPMorgan.

Following on from Mike's question, you mentioned 2 contracts. Are those annual contracts, the old style annual contracts negotiated once a year?

So we would assume -- well, we'll be negotiating new contracts with the customers over time, so I wouldn't want to comment on probably what was in place for the seller. But what I would say is I would anticipate these to be sold in similar manner to which our coal -- our metallurgical coal out of Australia is sold. So relatively quick pricing mechanisms in terms of market movements.

Okay, okay. I was afraid there might have been some sort of legacy constraint there. You mentioned that you're relatively undersold for the U.S. in 2019. Is that sort of consistent with your positive view on coal prices that you anticipate prices are going to improve into the New Year?

Well, I think it's a combination of factors. I think we've seen customers probably -- utilities looking to not commit. And this is a trend that's been going on for a number of periods. So even though contracting had picked up a little bit over the last quarter, I think by historical levels contracting out over terms has continued to decline.

We'd also -- you're right, in terms of a range of factors around price and conditions that could lead to a more positive environment through 2019. But we indicate that -- we would also, though, only be looking to contract provided that we believe margins are acceptable to us as a company.

So as you had indicated, we think about that 65% prior to 75% committed of 2018 volumes, is it sort of the lower end of where we've been over the last 5 years? But we think it's appropriate to take that forward at this point in time. Obviously, over the remaining period of the quarter -- as I said, if we can contract at attractive margins, we'll continue to do so.

And our next question comes from Mark Levin of Seaport Global.

A couple of quick modeling questions. Just want to make sure I understand. So just looking at your PRB implied guidance of -- I'm sorry, your PRB guidance of $11.81, I guess that would imply an $11.20 PRB price in Q4 to get to that number. And then on the met side, the implication is it would be $114 I think to get to 100 year full year guidance -- $100 full year guidance. Is that correct?

Yes, you're spot on, Mark. The fourth quarter for our met coal portfolio is impacted by not only those costs that I talked about for North Goonyella, so both the cost associated with dealing with the situation in the fourth quarter, but also sort of those idle type costs attributable to the fourth quarter, as well as a longwall move at Metropolitan during this period of time.

So we're seeing elevated costs on those events. But that is a -- I would say a fully-loaded cost for the met coal platform inclusive of the events at North Goonyella.

So is it reasonable to assume or extrapolate from that Q4 number that with those idle costs in there that -- I know you don't want to give '19 guidance, but we kind of have to think about what met coal costs will look like at least in the beginning portion of '19. Is that sort of $114 number in the right zip code of what we should expect met coal cash costs to be while North Goonyella is out or down?

I would suspect it will be a bit high, Mark, due to the longwall move that's factored into those costs. One of the things that we've been discussing internally is obviously for -- if this is going to be a longer period of downtime, we'll continue to work to pare back those idle costs over a period of time.

So in some ways the more money that we spend over the next couple of quarters, the quicker return it likely signals for North Goonyella. But I would highlight in that -- in thinking forward that we do have a longwall move in there as well.

And last question just around the PRB for a second. So a lot of good things going on you highlighted whether it's gas above $3 or inventories where they are or even the number of retirements in '19, likely -- at least we think likely to be less in '19 than they were in '18.

Your early kind of thoughts maybe on the demand environment for 2019 versus 2018? Does it -- I realize the winter we don't know yet and we don't know what gas is going to do, but do you think PRB demand can be up in 2019 versus 2018? Is that a reasonable expectation at this point or is flat kind of the way you guys see it?

Well, I think it's in a -- a little bit contrarian to that. I think we should take the 5-year picture that the overall market is in decline. But 2018, as you indicated, was the -- probably the biggest year of that in terms of retirements. And how we see it playing out is purely going to be a function of GDP. And gas prices and weather conditions will determine what that movement is going through into 2019.

Yes, we've seen already this year that gas prices as always expected are the largest determinant in any given month on dispatch. And as we've started to see those gas prices perk up not just at Henry Hub, but, as we noted, in a number of the regions, you're starting to see the coal burn equalize a bit with year-over-year, whereas that had been running down 4% to 5% versus prior year before that time. Clearly, $0.20 a million, $0.30 a million makes an enormous difference on that kind of a predicate.

And we'll hear next from Matthew Fields of Bank of America.

I didn't see in this in the third quarter report or the presentation your previously stated long-term debt target of $1.2 billion to $1.4 billion. Is that still the case or is that kind of gone by the wayside at this point?

No. You can assume that remains unchanged in a principle around which we -- we're running the business based on our earnings profile, so that was an omission and not a change by exception.

You want to talk on the liquidity targets as well...

Yes. I guess I would say overall to Matthew our liquidity target at $800 million remains unchanged even with the acquisition of Shoal Creek added into the mix. We would intend to add Shoal Creek into our AR securitization program. Over time it has relatively limited collateral needs in terms of surety bonding being an underground mining operation.

And just as a reminder, as we think about that $800 million of liquidity, we do see that as a true liquidity and not a cash target, so a combination of cash and availability under our facilities.

And then maybe more abstractly, if you'll indulge. If you were to theoretically cut PRB volumes in half, take 50 million or 60 million tons out of the market, what do you think the effect would be on price in that basin?

Yes. Matt, you can probably appreciate we're not going to touch that question I think. So is that okay?

Yes, for regulatory concerns we wouldn't address that question. I think the best way for us to compete in the Powder River Basin is to stay focused on what we can control; that is our cost at the mining operation. And we are constantly working with our customers to try and understand their needs and match our production to those demands.

Do you think it makes sense for you to consolidate some of the mines in that basin in the case that it may be oversupplied, to your earlier points?

Matt, we've been pretty clear and consistent on what our investment filters are and the criteria. And we've also said that we're not going to try and solve other people's problems in the mix. So we're focused on our own portfolio, the things that we can control. And we'll -- provided those margins are acceptable, we'll look to meet customer requirements.

And we will go to a follow-up question with Lucas Pipes of B. Riley FBR.

Just to kind of go back to the export thermal coal side and your hedges there. Should we essentially assume that the 3.3 million tons that you have hedged only apply against kind of your higher quality products? And then estimate the un-priced tonnage more of a split of developing [your] volumes?

Yes, there are 2 components seen in that -- in the amount that's already been put to bed. One is -- and you're talking Q4 or 2019?

That would be 2019 in this case.

Got you. Yes, the -- I think that the quality on Q4 is primarily weighted toward the higher ash product and they were committed in fairly early days. On that 2019 product, we're seeing a couple things going on there.

First of all, tons that would have been put to bed throughout the year, including earlier in the year before the particular strength that we've seen on the better quality product in the second half. And then keep in mind too, you've also got some first quarter Japanese fiscal year product, that sort of [10] pricing that would also play into that.

And then a second follow-up question. You mentioned some of the trapped equipment at North Goonyella. To what extent does it include new equipment? I know you -- you were investing in North Goonyella. And kind of what I have in the back of my mind is the new longwall system being installed in 2019.

But could you maybe share with us to what extent any of the equipment you mentioned -- some of which I think you've written off now. Others that is still underground in the non-permanently sealed sections to what extent is --

Yes, so --

-- it new equipment?

So none of it is -- none of it I'm aware is new equipment or certainly no equipment associated with GM South. What it essentially is, is the 78 shields that were remaining on the wall that were leased from Yancoal. There's 1 or 2 other pieces of borrowed and leased equipment.

It may come as a surprise to you, but it's not atypical in that region where mines lend to each other equipment through various means to cover surge in peak periods. So we've got a little bit of other people's kit in there, but -- and that's just around moving the shields effectively. We would -- the new wall -- sorry, the existing wall was being assembled and is in various locations on the 10 North panel. And I know there has been sort of a -- yes, so it's in various forms of being assembled.

We also, as would be customary, would have taken out some of the equipment to the surface where it needed rehabilitation or remediation or ongoing maintenance. That's a fairly standard part of any move. I think the full assessment of equipment is obviously part of this phase that we will go through.

And also when we think about running a new longwall system, at some point that's obviously going to be a combination of the potential to have the available shields, the shields that were already under construction in GM South or some other type of point. So they could be brought to deploy in a new panel development or the new panel activities. So hope that's helpful or not, Lucas.

Yes. And just as an explanation point, Lucas, the new longwall, no portion of it is underground. It's actually not on site. It's still being manufactured. So just a -- I know Glenn said we don't -- we're not aware of any new equipment underground, but certainly nothing associated with that new longwall.

Correct.

And with no other questions in the queue, at this time I will turn the call back to Glenn Kellow for any additional or closing remarks.

Okay, thank you, operator. And thank you for your questions and for joining today's call. I'd like to express my appreciation to all of our employees for your hard work and dedication.

At the start of the call, I mentioned that an event like North Goonyella does not define Peabody. I also say that this event does not change our strategy or mission as I hope you've seen, and that is to create superior value for shareholders.

We will continue to generate cash, protect our strong balance sheet and commit to meaningful shareholder returns. We appreciate your continued support and interest in BTU. And, operator, that does conclude today's call.

And so thank you everyone for your participation. You may now disconnect.