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Peabody Energy Corp. (NYSE:BTU)

Q4 2009 Earnings Call

January 26, 2010 11:00 a.m. ET

Executives

Vic Svec - SVP and IR of Corporate Communications

Greg Boyce - Chairman and CEO

Mike Crews - EVP and CFO

Rick Navarre - President and CCO

Analysts

Michael Dudas - Jeffries

Brian Singer - Goldman Sachs

David Khani - FBR Capital Markets

Paul Forward - Stifel Nicolaus

Kuni Chen - Bank of America Merrill Lynch

Mark Liinamaa - Morgan Stanley

David Gagliano - Credit Suisse

David Lipschitz - CLSA

Curt Woodworth - Macquarie Research

Jeremy Sussman - Brean Murray

Pearce Hammond - Simmons & Company

Meredith Bandy - BMO Capital Markets

John Bridges - JPMorgan

Shneur Gershuni - UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Peabody Energy year-end earnings call. Following the conference, all the participants are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is been recorded. With that been said, I'll turn the conference over to the Senior Vice President, Investor Relations, Corporate Communications; Vic Svec please go ahead.

Vic Svec

Well thank you, John and good morning everyone. Thanks very much for taking part in the conference call for BTU this morning, and with us today our Chairman and CEO, Greg Boyce, Executive Vice President and CFO, Mike Crews, as well as President and Chief Commercial Officer, Rick Navarre. Our forward-looking statements should be considered along with the risk factors that we note at the end of the release as well as the MD&A section of our filed documents. And we also refer you to peabodyenergy.com for additional information. With that I'll turn the call over to Greg.

Greg Boyce

Thanks Vic and good morning everyone. In 2009, Peabody turned in superior results in the phase of the great recession. We reported our second best earnings in our 126 year history, second only to 2008. We expanded our U.S margins thanks to our contracting strategies and cost containment actions. Shipped record thermal and met coal unveiled the five-year plan to double our Australian exports, built out our Asian business development and trading activities and raised our liquidity to record levels. As operators, marketers, developers and portfolio managers we have long designed Peabody to make money in all market conditions and great money in good markets. Having weathered the worst of the global recession we're looking at improving market fundamentals and are poised to deliver on the many growth opportunities we see.

Now turning to these improved market conditions, benchmark thermal coal prices have risen to reflect higher electricity demand which is set to return to solid growth rates around the world and metallurgical coal prices this year are likely to set the second highest benchmark. Global steel production is forecast to climb 9% in 2010. It's clear that China, India and emerging Asia remain at a full throttle growth pace that continues to dwarf the U.S and Atlantic. Industrial production soared at rates of 10% to 30% late in 2009 in places such as China, India, Korea and Taiwan. Last year the Pacific seaborne markets were driven by just one trend, China imports. This year we see China maintaining or increasing its strong level of imports with the only limiting factor being the growth in imports by other Asian nations that are quickly recovering. As such we appear on track for another year of 8% growth in Pacific seaborne coal demand. China of course is the major force reshaping global resource markets.

I'll address the simple question we've heard for years. Is the import trend in China sustainable? In a word, yes, we are in a new paradigm and I’m convinced that China will remain a significant importer based on domestic need, strategic intent and aggressive actions to acquire recourses outside its borders. In fact we have seen China make more than $8 billion in coal investments outside of the country in just the last six months. As driven by a number of factors chief among which is a long-term recognition that is growing super power is in need of basic resources.

India’s growth follows closely behind China, with Indian coal imports likely to rise at the fastest rate of any nation. In 2010, some 60 million to 70 million tonnes of production or imports will be needed just to replenish low inventories in China and India. Not to mention the hundreds of millions tonnes needed to satisfy added power plants and steel mills. The robust Pacific markets are having a flow on effect in the Atlantic by siphoning off volumes from South Africa and Russia that might otherwise go west. It is now clear that the pricing mechanism for Atlantic coal is not solely natural gas as it was traditional but the increasing demand pull from the Pacific market.

Even the U.S. coal markets are showing early signs of recovery, with an electricity demand rebounding from a long cold snap and stabilizing GDP. The supply demand fundamentals over a past six weeks have been better than anyone expected resulting in a record coal inventory draws and elimination of a natural gas inventory overhead. Rick will discuss the markets and our commercial strategies in more detail in a few minutes.

Now as we look at 2010 and beyond, Peabody has one priority focus area and that’s increasing shareholder value by serving the fastest growing markets. That means Asia internationally and the PRB and Illinois Basin served markets domestically. Peabody’s assets and actions are rightly centered on these regions.

Not every company earns the right to grow of course for that you need a skilled management team, a world class asset base, safe low cost operations, expanding margins, the right contract strategies and a strong balance sheet, Peabody has all of these.

Next we need to deliver that growth that’s why we are expanding our Australian operations to take our export capacity up to as much as 15 million tonnes metallurgical Coal and 17 million tonnes of thermal exports by 2014.

We are advancing our access to transportation infrastructure in Australia including new contracts with real providers and construction of the NCIG Terminal in Newcastle. We are expanding our activities in Mongolia with our joint venture. And we are starting our first full-year with our new Asian Coal Trading Hub in Singapore and business development office in Jakarta. And we are beginning operations later this year at Bear Run in Indiana the largest new mine in the both in the Eastern U.S. in decades.

So to summarize, this year when you tend to lift our Australian met coal and thermal exports 20 to 30%, maintain production in the US and offset cost pressures by shifting greater volumes to higher margin mines. To continue to expand our business development and trading activities in Australia and Asia and invest our record cash position in our organic growth projects as we continue to pursue high value acquisitions and joint venture.

At Peabody I believe we’ve assembled the best teams' strategies in asset base and Coal and we are committed to capitalizing on them to satisfy the burgeoning growth in global coal demand and continue to create significant shareholder value.

With that, I’ll now turn the call over to Mike, for a more detailed discussion of our financial performance.

Mike Crew

Thank you, Greg and good morning everyone as testament to our 2009 performance Peabody enters 2010 in a stronger financial position than it did a year ago, and at a time when economies are rebounding. 2009 was a year in which we increased U.S. EBITDA they were record $1 billion. So Australia's second half volumes rise 37%.tightly managed capital expenditures, operating costs and working capital to generate operating cash flows of more than $1 billion and we raised our dividend for the fifth time since our IPO.

I will begin with the review of the income statement and operational highlights. 2009 revenues reached $6 billion led by higher US prices. EBITDA from U.S. mining operations rose 17% leading consolidated EBITDA to $1.3 billion. The Australian operations delivered $438 million and we had held the EBITDA from trading and brokerage.

Let me take you through the EBITDA drivers in more detail beginning with the U.S. our margins grew 22% on higher prices and cost containment. Western revenues per tonne rose 9% over prior year on improved PRB and Colorado pricing. Our unit cost in the West increased $0.89 of which one-third was sales related taxes and one-third was from a change in mix and lower PRB volume. Absent sales related tax was a mix, cost increased a modest 2% for the year reflecting our cost containment efforts. Also western margins expanded 12%. In the Midwest revenues grew our cost for held and checked with only a 1% increase for the year. Here again our cost control has been effective. This drove margins 54% higher to $8.87 per tonne.

Turning now to Australia, met sales totaled 6.9 million tonnes with nearly 75% of our volume shipped over the back half of the year in line with our aggressive sales to China and strengthening pacific demand. That market strength let us to raise our met targets to 7.5 to 8.5 million tonnes for 2010. And on seaborne and thermal side, sales were 9.6 million tonnes. Here too we expect to see a pick up in 2010 with higher sales targets of 12.5 tonnes to 13 million tonnes. Our Australian revenues were $75 per ton. Our met prices averaged at a $135 above the April 2009 benchmark due to shipments of higher price carry-over business. And our seaborne thermal prices averaged $72 per ton. With cost in Australia at $55 margins for 2009 were more than $19 per ton.

Turning to brokerage results benefited from the expansion of our international trading platform and from business developed during 2008s robust markets that was realized in 2009. Shifting now to taxes, you will recall our expense includes the effects associated with changes in the Australian dollar which for 2009 added $74 million of non-cash expense. Looking to 2010, we anticipate our effective rate will be approximately 25% asset re-measurement. Our earnings per share excluding the re-measurement effects was at $1.92 per share.

In 2009 we generated more than $1 billion of cash flow, 80% of which occurred in the second half. By year end, we had nearly $1 billion of cash-on-hand and our liquidity reached a record $2.5 billion. Our capital spending was $317 million and we had an additional $123 million of PRB reserve payments. These reserve payments are nearly complete which is $20 million left for 2010.

Our capital focus this year will be on advancing a number of planned growth projects. Our key investments include $100 million associated with initial investments in Australian expansions approximately $185 million to complete the Bear Run Mine in Indiana and $60 million related to our share at the Prairie State Energy Campus. CapEx for 2010 is expected to be $600 million to $650 million including sustaining capital $1 to $1.50 per produced ton.

Turning now to our outlook, 2010 U.S. volumes are expected to be 185 million to 195 million tonnes. Plan PRB sales will be approximately 5 million tonnes lower than 2009. U.S. revenue and cost are likely to be relatively stable with the latest change in our 2010 earnings to be from anticipated volume and price improvement in Australia.

We raised our Australian sale targets to 26 million to 28 million tonnes with thermal exports and met sales set to rise as much as 30% above 2009. For the full year we expect DD&A will increase approximately 15% as we raise our Australia output and begin production at Bear Run. First quarter EBITDA was expected to be approximately in line with the fourth quarter of 2009 given expected higher pricing for Australia that does not begin until April 1.

Like last year we anticipate providing 2010 EBITDA and earnings targets following the Australia settlements. And so we have had overview of our 2009 financials and our prospects for 2010. I’ll now turn the call over to Rick.

Rick Navarre

Thanks Mike and good morning everyone. I’ll start this morning by reviewing the market conditions in some detail inline with our contacts and commercial strategies. Let me begin by offering one statement that summarizes our long-term market review. The demand for met and thermal coal from the industrialization of developing countries will continue to outpace the supply for this foreseeable future.

This past quarter we have seen very strong Asian markets become red hot as favorable demand trends continue throughout the region. And in U.S. we’ve experienced an acceleration of inventory draw downs as a result the mood in the coal markets is extreme bullish in the pacific and brightening in the domestic markets. As Greg discussed Peabody has positioned our assets to serve the fastest growing markets. Among other benefits this position allows us to handle the tough times better and emerge more quickly when the markets rebound. Case and point with recent prices of $95 to $100 per metric tonne the price of Newcastle thermal coal is up some 35% to 40% just since the begin of the fourth quarter, and Peabody has 6.5 tonnes to 7 billion tonnes of Australian thermal coal available for price in this year and 9 million tonnes to 10 million tonnes available in 2011.

Met coal supplies are equally tight and demand is growing with some customers point forward shipments when the can't pay the premiums for prompt deliveries. For example, we have customers that have accelerated deliveries of carry-over volumes of $300 per metric tonne to receive those prompt deliveries. And we have just sold spot met coal in the China above $200 per metric tonne.

As obviously told to you how tight the supply situation is and bodes well for the pending settlements for the coming year. Peabody has 4.5 million tonnes to 5.5 million tonnes of met coal to be priced in 2010 and 9 million tonnes to 10 million tonnes in ’11. Once driving the price improvement, the economic growth is returning to pre recessional levels in the Asia Pacific markets lead by China. China’s power demand grew 21% in the fourth quarter alone. And China coal imports more that tripled in 2009 reaching a 125 million tonnes and their net imports ended above a 100 million tonnes with a record setting month of December.

China’s supplies has been further tightened in early 2010 with inter country movements, smelled by frozen and fogged in northern ports which will require additional imports to fuel Southern China, a trend that continues.

China is far from the only growth story. As we expected India reached record coal imports of 80 million tonnes. India's thermal imports grew 70% in 2009, and as met coal use continued to increase despite the sharp first half fall-off in demand.

We expect that Australia will capture the majority of the Asian demand growth. How much is made of the tight infrastructure situation in Australia. The congestion is caused by record demand. This has been the story for most of the past decade. Most businesses worked very hard to have a line outside their doors waiting to buy their product.

Case in point as the Vice Premier of China has recently said a traffic jam is a sign of progress. So despite the sluggish start to 2009, the largest coal exporting nation Australia saw exports rise again to more than 275 million metric tonnes, another record year. In the fourth quarter Australian exports were running at an annualized shipping base of more than 300 million metric tonnes, showing continued growth to serve higher demand, and this was up without the known capacity increases that are coming online in 2010 such as NCIG.

The cold snap that I referenced earlier in China was spread across the entire Northern hemisphere, and has also boosted demand in Europe and United States, and the predictions of more extreme cold weather to come. The U.S. markets finished 2009 with demand down 12% from declines in generation and steel making as well as temporary coal to gas switching. The good news in December U.S. stockpiles experienced a largest one month decline in the past decade, and January is looking just as strong.

And with generation up and production down, we believe that as much as 30 million tonnes of inventory has been erased in the last two months. So its forward to time line of the individual supply demand balance in United States. In fact coal production in 2009 declined a 105 million tonnes and net decline is (inaudible). And we expect an additional decrease in production of an additional 20 million tonnes to 25 million tonnes this year. That’s due to high cost permitting delays in the East coupled with the exploration of higher price contracts that subsidized high cost operations last year.

On the other hand, demand should re-bounce on 60 million tonnes to 80 million tonnes from improving in economic conditions and higher gas prices. So we have average weather going forward we now believe stock piles are on pace to return to normal by the end of the year.

Nevertheless, the U.S. recovery will not happen overnight. Through this turbulent time Peabody’s contract inside U.S. served us extremely well. We entered the year a 100% committed in the United States allow us to be very patient as we look ahead to contracting for 2011 and opportunistic with significant un-priced volumes and market leverage for 2010 and beyond.

So that’s a quick review and the very good global markets and a improving outlook for the U.S. market. We believe that Peabody's asset position in contracted status sets us up for both success in this year as well as the years to come.

I will now turn back to Greg for closing comments prior to us taking questions. Greg

Greg Boyce

Thanks Rick. I would like to thank to Peabody team for our success in staring through the worst economy in generations. And looking ahead we see continuing strong Pacific growth and we are not swayed by the occasional fears or crop up regarding China growth whether its industrial production growth rate rising to the upper teams in the fourth quarter of last year China is naturally tapping on the [breaks torch] targeted 8% to 9% GDP rates which usually trying to laid into 10% to the 12% real rates. We sometimes forget how good China is at managing towards high GDP year-in and year-out while still controlling their inflation. Our plans call for that same 8% to 9% growth and well need to be revised upwards should trying to exceed that pace.

And in the U.S. we have just witnessed the extraordinary inventory reductions in just a short time as coal stock piles draw down and gas declines to normal storage. Should the coal snap continue as expected next month, we could be looking at a much earlier return to normal stock files than anticipated and our conversations next quarter will be somewhat different for the U.S. I feel very good about both the physical and financial reserves we have as well as we fuel the World's recovery and target significant shareholder value in the coming years. So with that we would be happy to take your questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). First we'll go to Michael Dudas with Jefferies. Please go ahead.

Michael Dudas - Jeffries

Good morning everybody.

Rick Navarre

Good morning Michael.

Michael Dudas - Jeffries

For anybody who would like to answer the recovery we have seen in Asia and the infrastructure issues in Australia that we witnessed in the prior cycle. How much pressure are you anticipating on infrastructure, labor, regulatory issues and the fact that a lot of competition for other new mines and expanded mines into that market over the next five years. How well is Peabody set up now to have a smooth transition to get that growth going forward given all the pressures are probably going to be bound given the significant change that you indicate in your release today.

Greg Boyce

Well Michael I guess I would start off by saying that it’s a great thing to have those kind of pressures, cause it just reinforces our view that demand far exceeds the ability to supply so that something bodes well in terms of the pricing arise and then we see going forward in terms of Peabody’s ability to deliver I think you can look back over the last couple of cycles where we had tightness and based on our ability to manage our infrastructure our stock piles our ability to secure additional rail and port when others may have had operational problems always helped us deliver better than expected.

Now, on top of that we have been anticipating that there is always going to be these periods of time when demand is going to out strip physical capacity even in environment where the Australians are continuously expanding rail and port capacity. So what we have done is we’ve been very proactive. Rick mentioned NCIG, which will be coming on later this year, gives us additional dedicated port stock pile and port loading capacity out of New Castle for our thermal coals and we have all the way back to our Excel acquisition secured additional capacity in Queensland particularly out of Dalrymple Bay as that port continues to expand.

The rail expansions for Dalrymple Bay are somewhat behind schedule but they are expected to be fully online in the first half of 2010 leading to another significant increase in port capacity by the end of the year so any details Rick wants to add in terms of numbers but surprising to say we feel like both our internal process and how these structure and drive our performance operationally along with what's happening in terms of infrastructure expansions gives us the capacity to grow with the market, and that's why we've got this year at 20% to 30% growth rates on our Australian export coals.

Mike Crew

Yeah. I think that's right Greg. We're very comfortable where we are with respect to the capacity on the ports and the rail capacity, and think that we can manage that very effectively going forward and then of course we would like to have more what we certainly have enough to meet the growth expectations that we've outlined.

Michael Dudas - Jeffries

Thank you. My follow-up I guess, for Greg and your prepared remarks, you talked about some of the drivers in the Asian markets primarily in China. You mentioned China's strategic intent, could you maybe elaborate on what you mean by that and what you're internal analysis and your people on the ground are seeing relative to how coal flows and investment is changing in both thermal and inside China?

Greg Boyce

Well, if you look at what our view of China's energy strategic intent, I think you just have to look at the amount of global energy resources that they have been securing whether it's oil, whether it's gas, and certainly in the back half of last year and more significantly coal resources that China views their own internal capabilities of delivering energy fuels as a limited resource, and they are out securing in these markets as much external resources for ultimate China delivery as they can, that's number one.

Number two, as it specifically relates to coal, it's our view that as China looked at the constraints of satisfying Southern China's energy needs solely on the back of thermal coal transport and delivery out of Northern China. I think they have come to the conclusion and the plan that they will convert their northern coal reserves to higher value products such as electricity for the North and electricity for the central part of China as well as coal to gas for industrial products and they will all increase and enhance their import capabilities in southern China we see them building additional import ports and actually going on an securing more import business to satisfy the demand in Southern China. So I guess our view of their strategic intent is both in energy and total specific change.

Operator

Your next question is from Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer - Goldman Sachs

Thank you. Good morning. I wanted to get some additional color on Australia costs. During the quarter it seems like there could or should have been some currency effects but really also wanted to focus on how you see the cost trajectory going forward given both the increased activity from you and others as well as the stronger Aussie dollar.

Mike Crews

We were very pleased with where we came out on the fourth quarter. As you know as we went through the beginning of the year we've moved around quite a bit as we thought we were going to have some additional met shipments in the second quarter. Some of that went into inventory. You saw it come through with record met shipments that drove our costs higher in the third quarter. In the fourth quarter we had good met shipments but they were lower than what we had. Fourth quarter was lower relative to where we were in the third quarter. So as a result it was a lower cost impact due to the shift to some more thermal coal and that along with some improving productivity led us to overcome the impacts of higher exchange rates.

Looking forward at 2010 at this point, we had guided previously to 55 to 60 for 2009. We're sticking with that same target at this point for 2010. We are going to see likely some higher exchange rates and impact of higher commodity costs. And we continue to focus on our cost reduction initiatives to be able to overcome some of those unfavorable impacts…

Brian Singer - Goldman Sachs

Thank you. And my follow-up is with regards to capital spending. $600 million and $650 million, can you talk about how much is associated with Bear Run that relative to some of the Australian met projects and what additional spending beyond 2010 will be required and then you also I think mentioned in the opening comments the potential to invest some of your cash balances and acquisitions and joint ventures, you could provide some clarity on how you are thinking about that from a sizing perspective.

Mike Crews

When you look at the increase in the capital spend for this year, specifically related to Bear Run, it's about $185 million to complete that mine in 2010 and then we have a $100 million associated with our expansion projects in Australia. Going forward into 2011, its probably premature to talk about what their timings of spending looks like relative to the projects in the different positions as to where we are in terms of completion of engineering permitting and I think we’d be providing guidance on information beyond 2010 at a later term.

Rick Navarre

Yes, I think if you take a look at this years capital, if you just add up the Bear Run, the extra 100 in Australia for the project development and then Prairie state and then you add to that our sustaining capital run rate, you get up to that $600 million to $650 million of capital. As Mike said going forward the money we are spending in Australia this year for all of the projects except for the metropolitan project where we will actually start development is for further detailed engineering. So we are probably a year away or longer before we can begin to talk about what we think more definitive capital estimates are going to be for those projects.

Brian Singer - Goldman Sachs

Great, thank you.

Operator

Our next question is from David Khani with FBR Capital Markets. Please go ahead.

David Khani - FBR Capital Markets

Good morning gentlemen.

Mike Crews

Hi, Dave.

David Khani - FBR Capital Markets

Could you give us a little update on Mongolia and Tolgoi what do you expect to start the process and timing?

Greg Boyce

Well I think as with Mongolia its always a bit our early days to really talk about what their timing is going to be it’s a bit of moving target, but I guess we will tell what we know at this point in time obviously they’ve spent the fourth quarter of the last year really trying to detail where they want to go with Tavan Tolgoi they still have not come to any final conclusions as to either the process or the time frame that they are going use to go to tender and to potentially select bidders although we anticipate the first half of this year will be a very busy and active period of time for us, as they come forward hopefully over the next two months with a more definitive schedule and process. Surprising to say we continue internally to just gather as much information and develop and refine our proposal so that when it does come available for discussion we’ll be ready to go, but Rick's involvement in that process anything different time wise?

Rick Navarre

No in time, that’s about right Greg I think you know what happen Dave last year that it had been road block on Tavan Tolgoi was the settlement of what was going with the all the Tolgoi and which is the large copper project, and they resolve that issue and we're going to resolve the tax situation around that particular project that can move forward I think much more confidently on Tavan Tolgoi.

Greg Boyce

I think from our perspective, we’ve got our Peabody-Polo joint venture which we created early first half of last year we have resources on the ground we’ve got a good size team in Ulaanbaatar. So we are active and integral into what's happening in the mining sector in Mongolia. And when the government is ready to move, we will be ready to move with them.

David Khani - FBR Capital Markets

Great, thank you, that's good update. Just shifting over to the U.S., in their third quarter conference call or one of the conferences you might have mentioned and this is I guess before the cold weather that hit not only U.S. but Europe and Asia that maybe the U.S. steam exports in 2010 could potentially be down versus 2009, do you still have that same view and then also I would look kind of a view, what do you think the number of tonnes of met that could come out of the U.S.?

Rick Navarre

Dave, I'll tackle that question. Certainly with the tightness in the metallurgical coal market, we do expect to see that the U.S. met exports would be up slightly compared to last year because last year, I would say they were pressured because prices were down into the $129 benchmark level which made it tougher some of the mines in Appalachian even compete on a delivered basis those levels, but we see five million tonnes to six million tonnes of additional metallurgical coal shipment in 2010 compared to 2009, that's our estimate. As it comes to thermal coal, frankly we still see a decline or at least flat on a thermal basis.

The reason we think that is because if you look at 2008, 2009 there were some high prices sold, lot of coal sold out of Appalachia on the equivalent of a $125 delivered prices, $125 API delivered coal prices into Europe, and today when you look at the prices at in the 80s, most appellation coals have to sell it for $30 tonne to be competitive, so they are out of the market, they are out of money by $15 to $20 right now. So the market needs to be well above $100, and we don't see that till '11 and '12.

David Khani - FBR Capital Markets

Okay great, that's great update. Thank you gentlemen.

Operator

The next question from Paul Forward with Stifel Nicolaus. Please go ahead.

Paul Forward - Stifel Nicolaus

In your fourth quarter results you had a $46 million loss from equity affiliates. I was just wondering if you could provide some details on what that was and what's the potential as we look into 2010 and beyond that you get some further losses that are realized in that line item.

Mike Crews

Sure Paul. This is Mike. That relates to our investment in Venezuela. Now that investment has served us very well over the last several years but as we gather to 2009 they had some significant operating issues coupled with the fact that their costs were going up significantly because Venezuela is really in a hyper inflationary environment. So, and we recorded that on an equity basis and we took our share of equity losses throughout the period. But given the cost position, the operating issues and the outlook in terms of the hyper inflation coupled with the political issues that we see in Venezuela we thought the most prudent thing for us to do would be to write off the remaining book value of that investment. And in the fourth quarter that was a $35 million non-cash charge. We have not made any cash infusions and we don’t plan to do so at this point. And when you look at 2010 because we've written off that investment we don’t anticipate a material impact during the year.

Paul Forward - Stifel Nicolaus

Okay, great. And on the, you mentioned on the [Denham] mine development, potential range of 3 million tonnes to 6 million tonnes. I was just wondering what might keep you from reaching the upper end of that range and is there any chance to accelerate the spending on that mine if it is a, if met coal prices stay strong.

Greg Boyce

Yeah two things Paul. Because we only, we looked at the five-year timeframe through 2014, we had the 3 million to 6 million only because of our timing and our ability to develop that mine, to get it to full production. When it's in full production we anticipate its going to be very close to that 6 million Tonne a year rate. We are just not sure whether that’s going to be 2014, 2015 and that’s why we have got that range for the five-year period. Your question about acceleration obviously that’s what the part of the moneys that are being spend that $100 million in Australia for all projects are obviously part of that is the Denham project and its all about what are the options to, if we can accelerate it and then to make sure we bring it in at the right cost and the right production size going forward. So, the range was really recognition that in 2014 we are bit unsure as to how quickly we can get full production in all.

Paul Forward - Stifel Nicolaus

Okay, thanks very much.

Operator

Next question is from Kuni Chen with Bank of America Merrill Lynch. Please go ahead.

Kuni Chen - Bank of America Merrill Lynch

First question is on Australia, you comment on the potential tax reform with there and the impact you guys of higher (inaudible) taxes, just talk about how you think about that and kind of what you see of the process they are going forward?

Greg Boyce

Yes, Kuni really at the top level there isn’t a Jurisdiction anywhere in the world that isn’t looking at their balances and looking at their tax programs. Australia is no different; they do this on a regular basis. What’s really initially been talked about is a federal review of taxation in Australia as you’ll know the royalty streams and their current regimes in Australia are all state-based. So, you are starting to get into an issue that would be states versus the federal commonwealth in Australia. Our view is there is a long time to come, whatever they do on a federal tax rate would have to be offset by changes in the royalty structure but you know this is very early days and we are not anticipating any changes in the near term.

Kuni Chen - Bank of America Merrill Lynch

Okay great and then, I got as a follow up outside Australia can you talk about some of the maybe sequential cost trends that you can see as we go through the year whether there are any meaningful long-wall moves or mix shifts or what not that could drive some volatility in the cost?

Mike Crews

Yeah I mean ultimately that we started this year as I mentioned earlier really comes down to the mix of the met and thermal volumes which we should have a little better inside into latter in the year in terms of long-wall moves we have two in the second quarter. So that’s probably the biggest impact are going on quarter-by-quarter basis

Kuni Chen - Bank of America Merrill Lynch

Okay great thanks.

Greg Boyce

Yeah just on the long-wall move just going across the platform for everybody’s benefit, you know we just complete our long-wall move at the end of the fourth quarter of last year 20 mile we are not anticipating another move there until the fourth quarter of this year, in North Goonyella we are not anticipating a move 2010 and two that Mike talked about on the Australia one would be at metropolitan in the second quarter and then one the long-wall at Wambo may bridge at the end of the first quarter beginning in the second quarter is to what are the timing looks right now as it would start in March and finish off in April.

Operator

Our next question is from Mark Liinamaa with Morgan Stanley, please go ahead.

Mark Liinamaa, Morgan Stanley

In the Powder River Basin given your longer term view are there any change at the margin and your thinking on timing of School Creek, and also out that way can you comment on what you think the utilization rate of the effective capacity is out there, given increase in investments by some new belt systems, would have you? Thanks.

Greg Boyce

Yeah. Two part question. I guess talking about School Creek, I mean there really hasn’t been any change. We've always said that School Creek would be number one depending on market development and number two our ability to utilize School Creek as a margin enhancement operation and by that I mean as we begin to ramp up School Creek when we make that decision, would be predicated on potentially resourcing some of our contract that (inaudible) there to increase our overall margins on those contracts.

So our thinking hasn’t changed, and it's the current market conditions have not affected that. I think in terms of excess of our capacity utilization, from our perspective with what we have internally, I think the issue is more rolling stock than it is conveyors, there is some capacity at some of the existing operations up there in terms of physical infrastructure, certainly we have some at (inaudible) based on the reductions that we put in place over the last two years, but we've also moved rolling stock as part of our capital reductions, so we wouldn't have the immediate ability to capture back all of that volumes.

It would take us a bit of time, some additional trucks and other equipment to being able to capture that back. So I think that is going to vary mine-by-mine in terms of an overall number, I'm not sure that we've one that we could really give you at this point in time in terms of capacity utilization.

Mark Liinamaa, Morgan Stanley

Okay. Thanks. And just quickly, you talked a little bit about Europe getting better. Can you comment on what you see as any changes in the Atlantic seaborne market next year? That will be it from me. Thanks.

Richard Navarre

I hope we didn’t lead people to believe that we thought that Europe was going to get better. What we trying to say is that where it used to be that European coal pricing was if you will a competition for European, against European gas. Because of the significant draw of South African coals into the Pacific Rim the competition for the European market now is basically carry-over pricing or flow-on pricing from the pacific markets. So on that context we see them and we see the pricing environment improved in Europe but the volume, actually the volume demand in Europe, we still, being soft and in fact coming down even further this year.

Mike Crews

Yeah, we did decline in the Atlantic market this year still Mark and that goes in my comment I made earlier about the export markets out of the U.S. With the decline in the Atlantic market we don’t see much room for U.S coals to move into the Atlantic market. I guess I'd further take Rick's comment about the fundamental sea change that we're seeing as a result of the Asian coal devouring South African coal which is probably over half of South African product, goes into the Asian markets with India and then China of course coming on strong this year. We're seeing its starting to pull on Columbia.

So what's going to be interesting is later in this year or early next year what your production is as to when the balance comes back into the Atlantic market, meaning coal stockpiles come down and gas stockpiles come down and the European coal burners have to come to market to buy coal. When they do that and most of their coal is being now sold into the Asian markets, it will be a pretty interesting situation on a supply demand and the tightness in that particular market when that happens, its going to be pretty interesting. We think that will take that market up quite nicely in the out years that’s why you see the curve and the curve shows that contango in the out years in the market.

Operator

We will go to David Gagliano with Credit Suisse. Please go ahead.

David Gagliano - Credit Suisse

My question, it’s a general one on met coal prices. Obviously it’s a really strong story right now and doesn’t seem to reflect the facts on our view, but is there a price where you start to get concerned about demand [destruction] either in the form of for example REIT production cuts. Obviously right Chinese steel inventories are pretty high, mills are making much money and price increases maybe running into a bit of resistance already or perhaps even overtime. Are you concerned about switching outright from (inaudible) as increasing scrap plans, other substitute etcetera? Do you think there is a price for that that starts to happen and are you hearing anything along those lines?

Greg Boyce

Well, I am going to guess Dave theoretically there is some price way up there in the stratosphere that makes all of that happen, but even if you go back to 2008, when we at 300 on the reference pricing and spot sales were getting up to 350 to 380, we didn’t see any erosion in terms of demand at that point in time because of pricing. Steel pricing is going up and as long as the demand is there for basic infrastructure in all of these developing countries particularly in China and India, I guess we do not see an upper limit at this point in time on met coal pricing that would cause any kind of steel cutbacks and or switching of production methodologies.

Operator

And we’ll go to David Lipschitz with CLSA. Please go ahead.

David Lipschitz - CLSA

Question for you on inventories. You said they have withdrawn down significantly. Is there any breakdown? Are you seeing more come out of the PRB or the Easter where you see most of the inventory cuts or just across the board?

Greg Boyce

We've seen, it's a bit across the board as far as the decline but what we've seen and where we ended the year where we are today David that we think that PRB inventories have come down quiet nicely. They didn't get in, because in the fourth quarter of last year when we had a lot of the coal to gas switching, a lot of that happened in to the eastern plants and not PRB burners. So what we're seeing now is that cap coal companies or the cap burners have a higher inventory levels in the PRB right now. So, we think that the PRB is down into the low 60's and could be coming down pretty rapidly in the next quarter.

Operator

The next question is from Curt Woodworth with Macquarie Research. Please go ahead

Curt Woodworth - Macquarie Research

So in terms of looking at the seaborne thermal markets for this year, I mean clearly China we think is going to be a pretty major supportive factor and December alone was pretty remarkable of them importing about 30 millions tons of thermal. So maybe 20% of the market and now you are hearing Indonesia is going to look to restrict some supply for a lot of their domestic growth and electricity demands, so I’m wondering what is your ability to potentially accelerate development, your thermal assets in Australia and if the traditional countries really comeback and are going to depend more heavily on Australia. What do you think upside could be to your volumes, maybe out to 2011-2012?

Rick Navarre

Well the biggest opportunity that we have is the on-schedule and better performance with the NCIG startup. I mean obviously the largest increase in export capacity on a thermal side basis is going to come out of the NCIG port. That's why that investment was such a great investment for us because of our ability to dedicate capacity through that port. Right now, it's scheduled to begin production in the second half of the year. They are still doing work on dredging of the channel. It will startup with handy sized vessels, and then as the dredging gets farther advanced, we'll go to a larger vessel. So I think the number one opportunity right now is NCIG coming online, and hopefully doing better than potentially expected.

The rest of it then becomes how the coal chain in Australia, particularly New Castle operates; I would note December was a record month for the existing PWCS port. On an annualized basis, they ran it about a 106 or 107 million tons of capacity. If we continue to see that kind of productivity improvement out of that port coupled with NCIG that immediately gives upside for 2010 and 2011 and 2012. From our perspective at a mine site basis, we've got capacity of Wilpinjong and Wambo for additional production. Right now, our schedule just is a flow on as to the port on the rail infrastructure build up.

Curt Woodworth - Macquarie Research

Okay, great and then on a follow-up. In terms of the net pricing strategy for this year. Are you going to try to have more quarterly price agreements to maybe take advantage of a tightening market or do you think that most of your volume is going to be committed for fiscal year basis? Thank you.

Rick Navarre

I think that’s yet to be determined at the end of the day. I think we have to, we know what BHP strategy is of course, that's to try to move to quarterly pricing and as you know how that process works. They tend to set the pace on a particular process and mostly it comes out. There is a lot of pushback from customers to try to keep annual pricing consistent with how they price their product and we're going to work with what we think gives us the best answer at the end of the day both from a price standpoint and working with our customers. There is pros and cons to both sides. So I think there is a lot more to be negotiated before we can really give you a final answer.

Operator

We'll go to Jeremy Sussman with Brean Murray. Please go ahead.

Jeremy Sussman - Brean Murray

So I have a two part question here. The first is that your 2010 guidance implies the 2 million Tonne per quarter run rate for met coal shipments, the mid point in guidance versus about 2.4 million this quarter. So kind of given the rail projects in Queensland that are going to be completed, what's the main reason for the higher Q4 figure and then also last quarter in your comments you mentioned shipping spot met coal at $160 and now you're shipping at $200. So care to put your crystal ball on and see where you see things going directionally?

Rick Navarre

Well I may defer my crystal ball on the second part of that question. First part of that question I think, Jeremy, one of the issues that we deal with every quarter is, we have a certain level of rail import entitlements that we schedule our production for. Now to the extent that other producers have production issues and capacity opens up, we've got a very aggressive team both in New South Wales and Queensland on our transportation and our logistics teams that will try and secure as much excess capacity as we possibly can get. We try and run with stockpiles on the ground so that as rail and port capacity opens up, we can react quick I mean very quick to fill that capacity.

Typically that’s the difference between what we forecast on a quarterly basis and what we actually can deliver. So, when I said in my earlier in the call, the ability of our Australian team to aggressively work to logistics chain has been a benefit to us. We anticipate we’ll always continue to be a benefit, what the recourses that we have there but when we put together a forecast, obviously we’ve got to be careful we don’t go far beyond what our entitlements are relative to port and rail capacity.

Jeremy Sussman - Brean Murray

Sure and now that’s helpful. And then just as a one follow-up. Can you give us an update on what’s going on at your North Goonyella Mine and maybe what you expect out of there this year?

Greg Boyce

Yeah would glad to. As everybody knows, we had about a week hiatus at the end of last year at North Goonyella as we were going through our renegotiations of what’s called an enterprise bargaining agreement or a labor agreement there. We got through the end of that process and both parties agreed to go through a new process that fair work Australia which is the government run labor agency has established in Australia where parties agree to have no more either strike or lockout activities. The parties agree to mediation and at the end of mediation, you go to binding arbitration. At the end of binding arbitration, there is a new agreement and so there are no more labor interruptions once you entered this process. We agree to that process with the union at the end of last year, that’s what brought that hiatus to an end. We are in mediation now, say it's going well by the report. There will be a few issues I’m sure, that will go to arbitration but I think the net, net result is a couple of things. We anticipate a more modern labor agreement at North Goonyella. The operation has been running well since the beginning of the year and there is nothing in the process that allows for any further labor interruptions because of the renegotiation of the enterprise bargaining agreement and without a long-wall move this year we're anticipating a good year at North Goonyella.

Operator

And we'll go to Pearce Hammond, with Simmons & Company, please go ahead.

Pearce Hammond - Simmons & Company

First question is on the coal ash, for a potential coal ash regulations in the US. How do you see that unfolding and would there be any immediate impact to Peabody?

Greg Boyce

The environment in Washington today is one where I am not sure anybody really wants to predict with any level of uncertainty, but I guess I would say the coal ash issue is one that from a regulatory and legislative environment, they’ve been dealing with since the passage of the original Resource Conservation Recovery Act years ago. The most recent information I have seen indicates that the coal ash will be regulated as a large volume low toxicity waste which is appropriate, that’s what it is. They’ll require probably better dam and perhaps some clay type liner activities for these coal ash ponds. So at the end of the day I think of things that the utility industry can manage. We're not anticipating a detrimental effect in terms of coal burn or ultimately the full end cost of coal production, coal base generation going forward. So that’s our current view unless something changes in the near term, but I think that's probably where it's going to wind up.

Pearce Hammond - Simmons & Company

Thank you, and then my follow-up is there's been a lot of chatter recently regarding the Illinois basin stealing some share from Central App. Do you think we're on the cause for some meaningful new announcements whereby some large power plants running Central App coal might switch to Illinois basin?

Greg Boyce

This is Greg. We've seen a lot of power plants looking for Illinois basin coal. Of course as they put up the scrubbers on their plants and they realize that for the long-term, that Central Appalachian, they are going to be in competition with exports from met coal, and the fact that there is declining reserve base, Permian issues, that they look to security and supply. They are going to continue to look at Illinois basin products most of the competitiveness of the Illinois basin. And we've long projected that that was going to happen and the two fastest growing regions were going to be, the Illinois basin and the PRB and as the decline in cap continues. So I think from standpoint we still believe that. Are there any eminent announcements that change that dramatically? I don't think so. I think it's just a continued evolution of where the coal use is going to come from, the coal is going to come from.

Pearce Hammond - Simmons & Company

Thanks and congrats again on a great quarter.

Operator

And we'll go to Meredith Bandy with BMO Capital Markets. Please go ahead.

Meredith Bandy - BMO Capital Markets

Good morning gentlemen. Thank you for your time. Most of my questions have been answered guys. I was wondering could you talk to U.S. contracting. I know you said, since you're so well priced for next year, you're sort of able to sit and wait, but in our utilities interested at these spot prices, I'm talking to people and getting some low pricing and are they just thinking no, I have too much on the ground, I'm not interested in contracting.

Rick Navarre

Well, yeah I think that stat is beginning to change of course over the last six weeks as we've seen, what’s happened how quickly inventories have come down. Many of the utilities you know obviously renewed the stockpiles were high, they went into the year with ample stockpiles. As they see them coming down, they are going to be coming back in and looking to get back into the markets back home. And of course if they could buy it at these prices cheaper before it runs back up, that’s something they're like to do. From our standpoint as I said earlier, we're being very patient because there is no reason for us to rush and that’s why we entered this particular part of the year 100% sold out. So we don’t have to rush in decisions on pricing.

Meredith Bandy - BMO Capital Markets

You had said that that they haven’t picked up their willingness to contract yet. Do you think?

Rick Navarre

Utilities are definitely willing to contract today at today's prices. There is an interest in doing that. Is there an interest on the part of the producers, is probably the question.

Operator

And we'll go to John Bridges with JPMorgan. Please go ahead.

John Bridges - JPMorgan

Just following on from the Illinois question. There has been some talk of exports in Illinois. Have you got involved in that business?

Mike Crews

Oh, we certainly a couple of years ago when the markets were strong John and in 2008, we exported a lot of business out of the Illinois basin and did some blending of Illinois basin coals of our Colorado coals but I've heard a lot of that same chatter and if you look at the market today you've have to sell Illinois basin coals at about $20 a Tonne to export it. So I think you'd better sell it in the domestic market. So we're still a bit, just the same comments I had earlier on cap. Right now the eastern markets need to move up a bit more before you can really see meaningful exports. If somebody is doing it, they're doing it at a pretty cheap price.

John Bridges - JPMorgan

Okay. And then looking at your accounts. You restated your Q4 2008 price substantially. Was there any particular driver for that?

Mike Crew

Yeah I mean, can you point me to which one you're referring to John?

John Bridges - JPMorgan

Well it's just a number of restatements. I'd say there is nothing from your side that drove it? The numbers differ from the numbers we had in our spreadsheet.

Mike Crew

The only thing that comes to mind is the convertible debt change that we made with the new accounting rules. We were able to piece of that that was reclassified from debt into equity.

John Bridges - JPMorgan

Okay.

Greg Boyce

We'll look at it and gets back with you, but we're not aware of anything John.

John Bridges - JPMorgan

Okay. And then the 20 mile long wall move, was that the reason for the weaker production out of there in Q4?

Mike Crew

Yeah. We had a couple of things going on at 20 mile, thanks for the question. We had a normal move at the end of the quarter, but in addition, we were moving the long wall from one section of a mine over to a newly developed section of the mine where we had a couple of brand new ventilation shafts that were being drilled. During the construction of one of those shafts the contractor had a bit of an issue which put it behind by about a week. So, in addition to our normal long wall move time, we had about 10 days delay tying into the new valuation shafts for that new section of the mine. So we were down a little bit longer then we normally would anticipate for a long wall move. All that’s been tied in, long wall started up at the end of the year and so we're not anticipating any of those issues back to normal long wall timing going forward.

Operator

And there is time for one more question. That will go to Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni - UBS

Most of my questions have actually been asked and answered. Just a couple of questions, you talked about your targets for costs for Australia that still be in the 55 to 60 range. Have you built in sort of any demiurge thoughts there on kind of what your average shift here would be and if its above that then we should expect it should go to the higher end of the range and so forth. If you just sort of give us the color there?

Mike Crew

Yeah in terms of the demiurge we were down a bit in 2009. As you look at 2010 we don’t expect to be material, it could be another $10 to $15 million higher and we could probably be in the $2 a Tonne range.

Shneur Gershuni - UBS

Okay

Mike Crew

So that’s likely to be front loaded we think in the first half of the year. We have NCIG coming on board in the second half and as we explained several times, the NCIG is a low to no demiurge port for us so that will help lower the overall average demiurge cost for us.

Shneur Gershuni - UBS

Great and just in terms of pricing signals, first on the PRB and then secondly on coking coal, you have some available capacity in the Powder River Basin. What kind of signals are you looking for to bringing it on? Would it be that you like to see inventories get to normal levels or would you like to see it to go below normal levels and then secondly on coking coal, you've talked a lot about inventories, in China and India on the thermal side. Can you talk about inventories of the steel producers? Has the restocking been done and this is just about demand in the recent strength or do you think that in part is due to both restocking and demand together?

Mike Crew

Yeah I think a lot of the restocking is taking place certainly in China and a number of place. I think certain facilities are still restocking. I mean the part of Asia that are just beginning to rebound in steel production such as Japan and others. I mean there are still restocking and demand. So I think that its going to be a pretty tight market and we think we’re clearly undersupplied in metallurgical coal, as it relates to the PRB and pricing signals, I mean of course we look at everything that’s going inventories and really it all gets down to what price is at the end of the day, where we think prices will settle out, need to settle out and we see a very steep contango in the PRB curve. We've seen PRB prices move up quite a bit in the last four weeks really, much faster than any other markets. If you look at typically the eastern markets will move faster with the Asian markets movement in fact because of the lower stockpiles and because of the ability to respond, we've seen PRB prices move up faster. So still ways to go. We still don't think there really need to be, and where they will be. So we’ll just, as we said be patient.

Shneur Gershuni - UBS

Is it fair to say just in your comments on the PRB that if the contracts there on it are something that you're looking for, that would give you an adequate return on capital that that's when you would start thinking about increasing production?

Mike Crew

You know, as we layer in good profitable business and we don't try to hold everything out to the spot basis, and try for the highest price same time, I think we take a good view of the market, try to leave as much unpriced as is reasonable base as per market conditions.

Rick Navarre

Mike, you have a follow-up on John's question.

Mike Crew

Yeah, back to the question around changes to 2008, there were two small non-strategic sales of assets that we reclassified, the discontinued operations. So there was an impact on revenues. You see the net impact is really not significant. It's just the [flip] between continuing ops and discontinued operations. During the current period, we restated the prior period to that fact.

Operator

And Mr. Boyce I'll turn it over to you for any closing comments.

Greg Boyce

Great, thank you. Well, I appreciate everybody's time on the call and interest in Peabody and BTU. I guess I would say a couple of things in closing. We really haven’t talked about it, but 2009 was a very strong year for our ability to execute internal to the business. It was our safest year ever. We reduced our incident rate by 20% prior year and when you look at transactionally across the platform, our ability to generate close to $1 billion in cash flow and build more liquidity than we have and our ability to deliver the results that we had were higher performance from our operations, our trading and our sales team, our finance team. It was across the board and I just want to thank all of the Peabody employees and we look forward to reporting progress on the second quarter call. As you can tell, we think 2010 will be an interesting year. Thank you.

Operator

Ladies and gentlemen, this conference is available for replay and starts today at 12:30 PM Central and will last till February 26 at midnight. You may access the replay at any time by dialing 800-475-6701. International callers please dial 320-365-3844. The access code is 139001. Those numbers again, 800-475-6701 or 320-365-3844 and the access code 139001. That does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Peabody Energy Corp. Q4 2009 Earnings Call Transcript
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