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Executives

Vic Svec – SVP and IR of Corporate Communications

Greg Boyce – Chairman and CEO

Mike Crews – EVP and CFO

Rick NavarrePresident and CCO

Analysts

Brian Singer - Goldman Sachs

Michael Dudas – Jeffries

Kuni Chen – Bank of America, Merril Lynch

Pearce Hammond – Simmon & Company

Mitesh Thakkar – FBR Capital Markets

Jeremy Sussman – Brean Murray

Shneur Gershuni – UBS

Curt Woordworth – Macquarie Research

Paul Forward – Stifel Nicolaus

Dave Martin – Deutsch Bank

Brian Yu – Citigroup

Jim Rollyson – Raymond James

Garrett Nelson – Davenport & Company

David Lipschitz – CLSA

Michael Goldenburg – Luminus Management

John Bridges – JP Morgan

Peabody Energy, Corp. (BTU) Q1 2010 Earnings Call April 22, 2010 11:00 AM ET

Operator

Ladies and gentlemen thank you for standing by and welcome to the Peabody Energy first quarter earnings release. For the conference, all the participants are in the listen only mode. However, there will be an opportunity for your questions and instructions will be given at that time. If you need any assistance during the call, please press star then zero and then the operator will assist you offline.

As a reminder, today's call is being recorded with that being said, I'll turn the conference over to the Senior Vice President in Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead Sir.

Vic Svec

Well thank you [John] and good morning to everyone. Thanks for taking part in the conference call for BTU. And with us today are Chairman and CEO, Greg Boyce, our Executive Vice President and CFO, Mike Crews as well as President and Chief Commercial Officer, Ric Navarre. We do have some forward looking statements today, they should be considered along with the risk factors that we know that the end of our release and the MBNA section of our final documents. And we also recorded at peabodyenergy.com for additional information. I'll now turn the call over to Greg.

Greg Boyce

Thanks [Vic] and good morning to everyone. Peabody posted outstanding results in the first quarter as we expanded margins, drove higher EBITDA and operating profit, increased contributions in the US and Australia and improved our cost structure. We also signed new Australian contracts at higher prices. Begin shipping from our new NCIG port at advance multiple organic growth projects at one notable acquisition initiative.

[Michael] review the quarter more in a moment, but I'd like to take a few minutes to assess market fundamentals and update you on our growth programs. I'll begin with the global seaborne markets where the power of China, India, Australia connection continues to be the story and a quarter that began with concerns about China's economy, the nation posted 12% growth in GDP which may tell you all you need to know about the Pacific markets.

And eligible call where seeing growing tightness throughout about by a 10% plus increase in expected steel production. Global steel making is dominated by China. We saw a first quarter production of 25%, as infrastructure build up continues, its consumer class expands and its manufacturing exports start to recover.

With other steel making nations rebounding, we're calling for a 20% plus hike in seaborne metallurgical demand in 2010 and we also see growing headroom for metallurgical pricing from rising scale prices. This occurs even as the world structurally short of coke and coal supplies. Australia will again supply nearly two thirds of global seaborne met this year and a handful of other nations make up most of the remainder.

Any disruption caused by weather logistics or other issues stretches the rubber band of supply – demand even further. Now thermal coal markets are equally buoyant in the Pacific, China's electricity generation increase 24% in the first quarter. China and India are leading the world in the new coal field plants, this year alone globally coal plants that will use 375 million tons of coal per year will begin operation.

So far in 2010, China's coal imports are up 227% against the weak first quarter of 2009. But more importantly, China's net imports total nearly 39 million tons. That's a 156 million ton annualize pays some 50% better than the last year's record pace. Now while the Atlantic thermal market remains soft for US exporters, we expect the overall Pacific seaborne thermal demand to increase by more than 50 million tons this year.

So what did all this mean for Peabody? We're now targeting our Australian met coal output increases of up to – we're now targeting Australian met coal output increases of up to 50% in 2010. These new targets have increased 2 million tons from the last quarter due to strong performance from our met mines in upgrading of some of our thermal coal to met quality.

We've signed second quarter met coal contracts for high quality hard coke and coal at $200 per metric ton with semi hard to hard coke and coal at a type range of a $170 to a $190 per metric ton. That's significantly above the prior year settlements. We've also signed some annual contracts for hard coke and coal at leveled more than 20% above these quarterly contracts.

The met market has continue to improve since the bench market settlements, current spot met business is being priced in the $240 to $250 range which goes well for increase to third and fourth quarter quarterly settlements. Peabody's Australia seaborne and thermal shipments are also said to expand by up to 35% in 2010. We have signed annual contracts at $98 per metric ton and are encouraged by the Poland market that exceeds a $100 per ton for the next several years. For any thermal market in the world, a $100 price for multiple years is certainly a notable milestone.

Now moving to the domestic US markets, we've seen improvements in the first quarter, thanks to stockpile reduction well in excess of the North. TRB stockpiles at customers are far lower than those in Central left. And outside of Central left, coal to gas switching is not a concern at current gas levels. We now expect US coal demand recovery of approximately 60 to 80 million tons in 2010 with relatively flat production.

We expect more improvement in US coal fundamentals as the economy continues its recovery. So I guess it's the US market backdrop, Peabody has an excellent position. [Powder ever] based in prices have increased more than 75% over six months and the full of prices remain well ahead of spot. And the US, Peabody's contracting strategy remains sound. With 2010 production under contract as the economy begins to recover.

Being patient in contracting for 2011, and holding a sizable open position for 2012. As we look towards more robust recovery in electricity generation and a return to normal stockpiles. As to look at global and US market conditions and Peabody's unique position and let's spend a few minutes on Peabody's growth initiatives to further enhance our ability to capitalize on the long term market's trend.

Peabody begins operation next month to bear run which will arise from 3 million tons this year to 8 million tons over time. And just two weeks ago, the first ship from the NCIG terminal and Newcastle set sail carrying our Wambo coal. We have the second largest interest in NCIG which will give us five to six million tons per year of added to input. And the team is moving ahead with the second pace of the NCIG expansion, once again increase in our trip with capacity when complete.

And there on the quarter, we have proved the capital for the one million ton per year expansion of the Metropolitan met mine in New South Wales. This is one of a number of projects that allow us to nearly double our Australian met and thermal export volumes by 2014. Now brief comments that our proposal from MacArthur Coal. We clearly like to prospects of adding low volume PCI coal which is a valuable product in the steel – met market place.

As certain levels, the ton of low volume PCI can replace a ton of coke. There are synergies with the addition of the volumes in growth portfolio versus pure operating in commercial synergies that drives our interest. I would say we would've expect it to be in due diligence at this point in time but that's not the case yet as we've not been able or have not been granted access to the limited confirmatory due diligence information that we believe we had agreed to last week.

We are still in discussions with MacArthur and we'll keep you posted as that unfolds. Because this is a pending transaction on a very public environment, we obviously will limit what we've discussed on this call. But we are still hopeful on advancing the proposal to a successful conclusion.

Peabody also is in a broad range of preliminary discussions with Coal India to explore long term coal supplies another possible cooperative ventures. While they have been no final agreements or decisions made regarding timing or structure, we believe India will be the fastest growing importer of coal through 2020. So it is quiet simply a market we wanna supply.

So that's to look at the improving industry fundamentals and our growth initiatives, I've summarize this way. Markets those are strong in the Pacific and recovering in the US. Our growth plans are in full implementation mode both organically and through M&A and I believe our quarter foretells a very good year. So here to tell you more about the quarter in the year is our CFO Mike Crews, Mike?

Mike Crews

Thanks Greg, we are again seeing the power of Peabody's global platform. Look better than expected results have exceeded both last quarter and last year. And as you can see from our outlook for 2010, there's much more to come from improving met and seaborne and thermal prices and growing export volumes. Particularly of a high value met coal, I'll begin with the review of an income statement in operational highlights.

Peabody's revenues increase 4% over last year even as are [EPAC] on US volumes. Our strategy of lairing in new business of entire sales prices helped to overcome lower plant production in the US. And Australian revenues were 24% above prior year due to higher metallurgical coal volumes. First quarter EBITDA reach 357 million, a solid 10% over last year and 60 million above last quarter. Our Australia results were strong despite weather related impact.

We also benefit of entire output from the underground operations in both the US and Australia. The Norkim [Yellow] Mine set production records in the quarter and higher production at the Wambo Mine accelerated its [long term] move into the first quarter. In the US, the 20 mile mine ramp up quickly following last quarter's move to a new mining area. Improved Colorado production combine of hired unexpected [Ferraby] shipment benefit at the quarter.

The increase mining contributions more than offset expected reductions from trading and brokerage. Let me take you through the EBITDA drivers and more detail beginning with the US or margins reach 29%. In the West, year – over – year cost were almost 2% lower which is notable giving the unfavorable mix end impact of one million of [pure Ferraby] tons than last year. The combination of higher average prices and lower unit cost drove over 16% margin expansion from prior year's level.

In the mid west, margins grew nearly $2 per ton. Higher average felt prices overcame to cause impact of lower market turning production. Turning now to Australia, our met sales total 2.3 million tons which were on part with last quarter in nearly three times greater than the first quarter last year but whether related impacts on production were mitigated by sales for inventory. And on the seaborne thermal size, sales were 2.3 million tons for the quarter.

Australian revenues average $72 per ton, our average net price about $122 was in line with last quarter get below the prior year which benefit of entire bench market prices. First quarter costs for $52 per ton, lower than both last quarter and last year. Your recall we get three longbow moves in the first quarter of 2009 versus just one this quarter. Improved longbow performance more than offset higher demurrage in the unfavorable impact of higher exchange rate.

We continue to target Australia cost of $55 to $60 per ton for 2010. At nearly $20 per ton, our Australian margins are now 28% compare to 25% last quarter and 23% a year ago. Rounding up the discussion, trading and brokerage and resource management contributed $37 million of EBITDA reflecting lower dollar affiliate in our expectations for fewer structure transactions on our trading business.

Shifting now the DeNA, you'll notice slightly higher levels due to the increase of Australia volumes consistent with our January guidance. Our effective tax rate was 26% excluding currency re-measurement which led to adjusted earnings per share of $0.52. Turning to the balance sheet, we continue to add our strong financial position and cash on hand now exceeds $1 billion with 2-1/2 billion of available liquidity.

We've spent approximately a 100 million in CAPEX during the quarter as we advance growth project in Australia as well as their run and our query state investments. Our full year capital expenditure forecast is 600 to 650 million. And now our outlook, second quarter EBITDA targeted in the $350 to $425 million range. Higher to first quarter due to improve pricing in Australia, partially opted by higher sales related cost and recovery from weather issues and in the US, our PRD cost will include both seasonal and for maintenance.

Adjusted EPS for the second quarter is targeted at 50 to 65% per share. A stronger than expected first quarter result combined with our second quarter target, our first half is in line with expectation. For the full year, we continue to expect US volumes of 185 to 195 million tons. And then Australia, given the strong market from our sell to first quarter performance, we are raising our sales target to 27 to 29 million tons.

Our Australian met sales are now 9-1/2 to 10-1/2 million tons. With thermal exports of 11-1/2 to 12 million tons including 1 million tons of thermal products being upgraded to met. EBITDA for 2010 is targeted to be $1.6 to $1.9 billion reflecting our view to the market for our un-price volumes over the second of this year with adjusted EPS of 245 to 315. With our higher operating profile, DeNA is expected to be 15% above 2009's level and our effective tax rate is now projected to be 25 to 30% driven by increasing earnings from Australia.

So at summary, we are pleased to provide guidance for 2010 which at the top end could see adjusted EPS increase almost 65% and EBITDA increase nearly 50% which would exceed 2008's record result. And so with that review of our first quarter result and expectations for second quarter and the full year, I'm now turning the call back to Greg.

Greg Boyce

Thanks Mike and at this point, we'd like to open up the call to answer any of your questions.

Question-and-Answer-Session

Operator

And ladies and gentlemen, if you would like to ask a question today, please press the star then one. You'll hear a tone indicating you've been placed in the queue. If your question gets answered, you wish to remove yourself from the queue, please press the pound key. Once again if you have a question, star one and we do ask if you could limit yourself to one question and a one follow up question. First to the line is Brian Singer with Goldman Sachs, please go ahead.

Brian Singer – Goldman Sachs

Thank you, good morning.

Unidentified Company Representative

Good morning Brian.

Brian Singer – Goldman Sachs

Wanted to dictate a bit more color on the cost side, I think you've mentioned in your comments in Australia some higher sales cost and then weather recovery in the US seasonal on the – certainly on – can you put some additional color on what that could mean in terms of cost per ton in its region and whether that these are as seeing some of these are temporary issue versus a more function on market conditions that could be more lasting.

Mike Crews

Sir, we'll just probably start with the US. This is Mike and now we're working to Australia. And when you look at the US, we were up slightly year – over – year some of that as a function of volume and some just also the benefit of higher sales prices which generates higher sales related cost. For the full year, we're targeting cost to be flat in the mid western region to slightly up. The reason they could be slightly up are some transition cost as we wind down our Farmersburg Mining in transition into the new pair of run mines. But overall, we’ve been very pleased with our Cost Containment Efforts when you see in the first quarter whether to materials and supplies, or repairs and maintenance, we had good results there.

When you look at the pattern over [basin], again very flat with Cost Containment Efforts. For the full year, we will actually be flat to slightly down as those Cost Containment Efforts worked through the system.

You know, I mention some seasonal and deferred maintenance desk that we ran so well in the first quarter. Shipments were so strong in the first quarter that some of that maintenance will push in to the second quarter so it may up, take slightly. But overall we feel good about our position for the year.

On the Australia side, we have got, we are guiding to $55 to $60 per ton in terms of where we came up this quarter. I mention a long law performance. So we had very good cost profile with our good production in balancing up the impact of whether the reason we continue to target up $55 to $60, you know we have upgraded our net volume targets that is a portion of it or we will have slightly higher currency impacts and then again the high class problem I think. As you have higher sales price since you’ll have higher sales related cost.

Brian Singer – Goldman Sachs

Great, thank you. And as a follow-up, really just thinking bigger picture here when you look at all the opportunity set organically versus acquisitions, you certainly have a big organic expansion in Australia and we’ve talked in the past about Mongolia and China.

But yeah, you know, as we’re going forward with the, in acquisition of Macarthur. Can you just talk about how you see opportunity to spend capital in this high or higher met coal environment and the organic opportunity set versus the acquisition opportunity set and where from here, which expect to see additional capital a bit forward we always talked about.

Mike Crews

Well, I think the good news is, we’ve got great opportunities. When you look at the organic platform and the expansion of our Australian Operations and the development of some new operations in Australia particularly focused on met coal. You know we’ve got great growth out of Australia with our existing platform and obviously our proposal to acquire Macarthur is structured to fundamentally around the Met coal Markets and serving the Pacific Rim and met coal demand.

When you look in the US, I mean over the last couple of years. We’ve, our capital has been focused in bringing our [Pottery Relation] Operations up to where they are today and which has allowed us to deliver the low cost and the Cost Containment Programs that we see, providing the results. As well as the new [Else Gondou] Operation in New Mexico and now that they run operation in the Illinois Basin.

I would say that we continue to have a – have a favor for met coal bubbles in terms of what we can do with our Australian Platform, additional acquisitions in Australia as well as elsewhere and we see Met coal being very strong particularly in the Pacific Rim, followed very closely behind by thermal coal in the Pacific Rim.

Brian Singer – Goldman Sachs

Can we interpret that and may take a little bit longer to go through some of the organic opportunities in, at Mongolia. Or it’s just that inorganically the China Market?

Mike Crews

Well I think the very nature of Mongolia means that those have a smooth, slower time frame. Then say the build out over Australian Platform and China as well. I mean it’s just not, you know the business does not move along quite as well in the case of Mongolia. They’re still working on, trying to put together a framework for larger scale developments in Mongolia.

And in the case of China obviously, particularly for Met coal. The opportunity is for Met coal, our scarce in China, that’s really good news for the Seabourn Market because that’s what’s driving the strength of the Seabourn Met coal Market today.

Brian Singer – Goldman Sachs

Thank you.

Operator

Next question is from Michael Dudas with Jeffries. Please go ahead.

Michael Dudas – Jeffries

Hello gentlemen.

Greg Boyce

Good morning.

Rick Navarre

Good morning.

Michael Dudas – Jeffries

Greg, maybe could you categorize your Outlook and what you’ve been seeing in the Global and Primary Pacific Base and the Retro Call Market which has lead you to making some pretty big capital allocation, potential decisions with Macarthur. How different is this cycle related to what we witness two years ago or we witness back in 2004, 2005. And though I could probably guess your answer, how sustainable do you believe this cycle is versus what we witness in the past?

Greg Boyce

Well, thanks. I hate to be so predictable but I probably am. You know I think our view has always been that this cycle really started back in the early 2000 time frame as China emerged to be the major industrializing country that it is. And now India rapidly passed on its heels. You know our view is, this is a continuation of the 2007, 2008 cycle that was only interrupted by the financial meltdown and I think you recall saying that you know, the fundamentals of supply and demand had not changed by the financial crisis and that once the economy has recovered, we’d be right back where we were in terms of China, India structurally short of Met coal. And Australia being the primary supplier of Met coal for the next several decades and that was the place that we wanted to be to grow our platform.

You know I think that we are in a long term, you know strong market environment for those commodities that China needs and Met coal and now emerging very strongly thermal coal to satisfy their growing economy.

Michael Dudas – Jeffries

You mentioned in your prepared remarks, what you’ve been witnessing in first quarter net import figures on the China in an annualized basis. [Pre-daunting] numbers, can those numbers continue with that rate for 2010 and as you plan your business over the next five years, is there a level of need from China and maybe you can add India to this that helps you feel comfortable with your growth plans on a net import basis?

Greg Boyce

Well you just look at what China has done in terms of the growth rates of both their met and thermal coals over the last 10 years and particularly where we sit in the last couple of years and it’s our view that these levels are sustainable. It fits within the long term plans for China to satisfy their energy and industrial needs. I mean, we’re lucky what’s going on internal to China. Involve in terms of the re-structuring of their coal producing sector both on the Thermo and the Met coal side. As well as their stated desires to develop and convert their coal resources closer in the interior regions and not rely on their coal resource to satisfy the full needs of their coastal cities as a long term driver for continued strong imports into China.

And you switched over to India and you have the same situation where the Indian Government has decided to significantly increase their imports, particularly of thermal coal to satisfy their energy demands. Provide reliability within their grid in their system. That’s not to say they won’t grow internal coal production but they believe they need a balance of strong growth internal with very strong growth with imports. Part of that was driving our discussions with coal in India today. And of course all of the countries based on the growth of their scale sector, need to rely on imports for Met coal.

Michael Dudas – Jeffries

Thank you, Greg.

Operator

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

Kuni Chen - Bank of America Merrill Lynch

Hey, good morning everybody.

Greg Boyce

Good morning [boy].

Kuni Chen - Bank of America Merrill Lynch

I guess, just on the – on the Met coal side. You know, if you think about you know, second half of this year. I guess what types of Met coal prices are you – are you baking in to your [self] and can you help us go from kind of a bench marked levels. Let’s say, you know 240 to 250 and then adjust down those quality differences to what your ultimate realizations could look like.

Greg Boyce

Well obviously, we don’t want to be too specific in terms of the exact numbers that we’ve used and one of the reasons why we have the range that we do on the annual guidance is a recognition that we do have two open quarters at the back half of the year where quarterly Met coal pricing has yet to be set. You know [surprising] to say, we are [caught in this] into the fact that stock rising today is 240 to 250. We are [caught in this] into the fact that the limited amount of annual pricing that we did, was that a significant [premium] to the second quarter quarterly pricing. And all indications are as the market continues to remain very strong from uprising environment perspective.

So, we’ve used the range and we’ve used that range to come up with the range of guidance that we have for the year. I think the other party or comment was, you know, not a 100% of the Met coal that we sell is the premium hard coking coal, top price product. And we do have a blend and in fact, you know, half of the additional Met coal for this year is conversion of what was thermal coal historically to a – to a Met coal product but that clearly is not at the highest end of the Met coal range. It would be at the lower end of the Met coal pricing range more and I, and a semi-soft type pricing environment.

So, you know, we are recognizing and we do have a view of strengthening through the year but I think we’ll leave it with that and not getting to specific price forecast.

Kuni Chen - Bank of America Merrill Lynch

OK. And then, I guess just as a follow-up. On the domestic markets, that doesn’t seem like you’ve really added much additional frontage committed for 2011 at this point. Is it more that the – that the utilities are holding off on asking for coal for next year or is it more from your stand point that perhaps they may be asking a bit more and you may be engaged in a more dialogue there but your view, what your commercial strategy is to, wait until later in the year to put those thumbs to bed if you could just give us some color on that dynamic.

Rick Navarre

Hey Kuni, this is Rick Navarre. On that, certainly we’re getting a lot of inquiries from customers since it relates to you know, coal demands for 2011, 2012 and beyond. And particularly, because of what happened with the winner in the draw down in the inventories was so significant. I think they’ve come back and they probably under ordered for their expectations and so we’re getting a lot of – a lot of feedback there. And you guys, we haven’t raised our production profile to match that yet.

We’re seeing strong improvement pricing the course in the VRB for example. From you know, up to you know mid 13’s and then growing up into 14 plus range and some of the other years. But what we’ll waiting to see within this [Lava] Room which we look in what the alternatives are with Central Operation, play all the regions out.

And you see that the decline is going to half in the Central Operation. It’s probably we going to be much more severe than any, as other expected over the next two years because of all the regulatory issues and the safety issues and all the other things that are happening. We think that VRB is underpriced and we’re going to – we’re going to wait to see what the right price is and as you look at today’s [Four Cannon] for cap pricing in the out years, it would imply a $30 plus VRB net back.

Now, that’s all map and that’s a net back number but it says to launch over the $13 to $14 in any event. So, we’re going to be real patient.

Kuni Chen - Bank of America Merrill Lynch

Thanks.

Operator

Our next question is from Pearce Hammond with Simmons & Company. Please go ahead.

Pearce Hammond – Simmons & Company

Good morning.

Greg Boyce

Good morning Pearce.

Pearce Hammond – Simmons & Company

First of all, congratulations on a very strong quarter.

Greg Boyce

Thank you.

Pearce Hammond – Simmons & Company

To the extent that you could, love to get your Outlook, long term potential for PCI specially the coke replacement. If you can’t talk about it, I certainly understand but.

Vic Svec

Well I think we might want to leave that for another day, surprising to say based on where we’re at with Macarthur. We feel very good about the long term prospects of PCI. You know it is a, it’s a specialty coal. It’s a, you know kind of domination to low ball in nature of the business. It is more online and in-tune with the hard coking coals versus an upgraded thermal coal.

So, you know I think there’s no question that it should be – it should be a strong market going forward but I better leave it with that.

Pearce Hammond – Simmons & Company

Well, great. And then can you provide an update on the Australian Tax Regime. Some of the potential changes there?

Vic Svec

Well, about the only update I can provide is, you know there’s been a lot of leak trial balloons. The so-called, the Henry Commission has gone through basically and exercise to look at what are all the possible mechanisms and tax structuring that they can put in place in part of those discussions as they have been, as I say floated out. Not officially released but floated out. In tale, maybe a national resource tax to replace the State Royalty System.

Without anything being officially released without any, anything to really look at, it’s hard to determine what direction they may go. Obviously, we would – we would certainly understand in this country if Washington was going to take all of the taxes away from the States. What kind of a [Burhaha] that would create, so more to unfold and really not a lot more specificity that's been released or ready to look at.

Pearce Hammond - Simmons & Company

Great. And then lastly, even the tragedy at Matthew's Mine in West Virginia and the increase scrutiny from MSHA and the Federal Government. How do you see that impact in your operations in the United States?

Vic Svec

Well I think it's, you know, I think we can all assume that there will be changes to both regulation as well as also to you know, the over side of mines as we have seen in the past. You know, when you look at our portfolio, the large or open, you know the surface Western operations and with our Midwestern operations. You know we still feel very, very good. We've got a strong safety record which has been as you know, setting records over the last several years.

But we anticipate that in certain operations. Particularly the underground operation depending on ventilation and alike, there'll be more cost over time. But as Rick said, we also anticipate that the significant volume impact will be in the Eastern Regions over time. And so it's - you know it's an evolution that we've plan on managing through and see more of the impacts in the East and in the West.

Pearce Hammond - Simmons & Company

Thank you.

Operator

Our next question is from Mitesh Thakkar with FBR Capital Markets, please go ahead.

Mitesh Thakkar - FBR Capital Markets

Yes. Hi, guys. How are you?

Vic Svec

Good morning.

Mitesh Thakkar - FBR Capital Markets

Morning. A real quick question on Macarthur deal. What are the kinds of next steps? I know you haven't been able to do the view diligence some stuff. But would you know how should we think about it in terms of the progression of the negotiations and stuff like that?

Vic Svec

Well, I think all we can say at this point is we look forward to potentially getting into the due diligence and we'll just labored at that obviously active discussions going on. I don't want to go on any further details.

Mitesh Thakkar - FBR Capital Markets

All right, fair enough. My follow up question is on your Australian pricing. Is that a specific reason as to why -- you know some of the contacts are based annually and some are quarterly or is it based on the request of a customer or is, how you feel comfortable doing it?

Vic Svec

Yes, it's a bit of -- it's bit of a mix bag, essentially BHP [Zip Price] as we all know at the $200 mark for the quarter.

Mitesh Thakkar - FBR Capital Markets

Yes.

Vic Svec

Spot pricing was admittedly a higher numbers on that and they wanted to institute quarterly pricing. And so that came in some more of a discount. So mostly customers chose quarterly pricing as the initial four ray into this.

Mitesh Thakkar - FBR Capital Markets

Yes.

Vic Svec

Some customers don't wanted the security of a long term contract or long term pricing and were going to paid at what we -- the hire price for that. And we are rolling to -- at the right premium lock in long term business. So it's a balance between of the customer's needs are and frank with more [stand points] just balancing our portfolio between spot and you know in term business.

Mitesh Thakkar - FBR Capital Markets

It sounds good. Thank you, thank you very much.

Operator

And next the line of Jeremy Sussman with Brean Murray, please go ahead.

Jeremy Sussman - Brean Murray

Hi, good morning.

Mike Crews

Good morning, Jeremy.

Jeremy Sussman - Brean Murray

You know obviously, there were some weather issues, but you guys still manage to a very strong quarter on the shipment side. I was wondering, along those lines in Australia you know sort of outside of the weather issues. Can you give us an update on kind of the [wail] and court expansions and how they moved in along over there?

Mike Crews

Sure, would be glad to. Maybe start with new castle first as we indicated the new NCIG port started operation and you know as that comes online, that [autumn] would build up to an additional 30 million tons or capacity at a new castle in the first phase.

Now there's still some work to be done in term of full dredging of the river area adjacent to the dock and so that will -- that wrap up will take the rest of this year before we get up to full capacity. In the mean time the PWCS Port new castle continues to make improvement. So you know what 2010 you know I make new castle until it probably be up 10% over last year.

Then we're looking at 2011, almost another 20 plus percent increase over where we think 2010 is going to be. And then there's additional capacity we added as we now we're looking towards what we call phase two of the NCIG port which I'll ultimately add, yet another 30 million tons or capacity and then PWCS has another expansion beyond as well.

So ultimately you know long term port a new castle, we think we'll continue to expand and expand in a timing matter. And the rail you know we've got the approved to shipping system through the ACCC. And so overall, that ford is running much better. So much down on the first quarter, a little bit on weather but also there was a grain derailment at limited access to cold trains into the port during the quarter.

Moving up to the port most important to us which is DVCT, you know the port has been expanded right now. The rail issues have been a limiting factor. There's a very, very major expansion, what they call the [Jolalen] Facility which is now looks like the May, June time frame as when we expect to begin to see the benefits in terms of rail shipments which will allow us to increase through the back of the year, some of the shipments through the DVCT.

Beyond that bend it gets to the -- you know the northern missing link [Gavet] Point and then a number of other expansions like [Gladstone] and some of the other ports in Queen's Land. It's over all lift, the rail and port infrastructure.

Jeremy Sussman - Brean Murray

Great, thank you very much.

Operator

And the next question is from Shneur Gershuni with UBS, please go ahead.

Shneur Gershuni - UBS

Hi. Good morning guys.

Unidentified Company Representative

Good morning.

Shneur Gershuni - UBS

Just a couple of quick questions, two questions I guess. One is, I wondering if you could remind us about your $300 roll over times, if there's kind of included in the number that you presented today. And if you could also talk about you know your second quarter dive and just given the -- your expectation for higher pricing relative to the first quarter. And how come your ETBIDA is not moving further up relative to the first quarter.

And then my second question is, I was wondering if you can give some color on your negotiations with the Indian kind of parties. Are you looking -- you know what your objectives or is it to you know looking to supply agreements, is it joint ventures and so forth.

Greg Boyce

Cheers, we're going to take -- try and take those on with [commodity], it'd been four questions or [inaudible]. I'll try to get through those; I'll start at the end. The negotiations with the -- you know with the [Coolest Coal] India and the group there coarsely are around -- been able to provide supply to the growing demand in India's we see it prefer. Primarily it's on the coal; there'll be some met coal issues as well.

But it's to a number of avenues that we're looking at its long term supply arrangements. It's through potential joint ventures of what we may work together where [free body] would operate the up properties and provide off take arrangements to India and potential equity ownerships and in properties where we can provide in a long term supply arrangement.

So I have looking at all types of options, including exporting call from United States into India. So a number of things happening in [the] certainly you're very interested in working with us. So I think I agree to that until we get more detail. If it comes back to the carry over business for the year, I would -- we expect to have roughly 900,000 tons. The majority of the carry over business that we have remaining will come through in 2010 and if whoever to pull. A lot of that former is part of our negotiations over the new supply agreements.

And how tight the market as we're able to pull those forward out of 2011. So we're pretty happy with that and that's for $300 business we're talking about or whereabouts of a metric ton basis. As obliged to the quarter, you know I think you know is this somebody mention earlier, we have a strong quarter despite what happened in -- with weather in Queen's Land and so we're able to continue to make shipments to move thing forward and get vessels that in the cube because we had inventories.

Obviously, so that we purchase in the second quarter so what it happens to have an impact to pull back overall. Our first-half in the year is very much in a line. Whom we thought it was going to be. So we're pretty place to that.

Shneur Gershuni - UBS

Great, thank you very much.

Operator

[Inaudible] Curt Woodworth with Macquarie Research, please go ahead.

Curt Woodworth - Macquarie Research

Yes. Hi, good morning. I was wondering if I were more color on that the quarterly pricing that you're doing for coking coal. How much to your business for coking coal is going to be done in the quarterly arrangements. And how is the -- what is the pricing mechanism going to be, as that just negotiate a recorder, is there a bench mark? That'll be helpful.

Mike Crews

So the right now there is a clear mechanisms to be honest with you that in overall in the industry kind of working to figure out how we're going to do quarterly negotiation. That's a pretty longer do annual negotiation. But I think those -- we'll find out here pretty quickly as before to begin to negotiate for Q3 going forward.

There really is in a bench mark that's accurate out there for metallurgical coal, there's a lot of specifics. It's a -- in the product and so that the people have tried to put in to see together. Some of the industrial publications but they're overly accurate and [though] reflect the supplies and qualities. But the qualities are -- the qualities -- should take that we have.

So we're still looking towards that. I guess if we look at where we are today, we are at essentially majority of our business are going to be on quarterly pricing with exception of small amount that we did on annual basis. Now, going forward, I suspect some of that will change because it's the quarterly price have begun to reflect market which they didn't in the first quarter or in the second.

The most recent negotiations, I think you'll see customers being at a little bit less concerned about doing to quarterly and then hit more interest than in going into an annual pricing with some will somehow been in premium. So we'll see how it checks out but right now, 90% of our businesses are going to be quarterly in for the foreseeable future.

But, which is not in the half of [seedling] tons in total as we said earlier.

Curt Woodworth - Macquarie Research

OK, it's great. That's interesting and then on the thermal, is all of that business is pretty much put the bend for this -- the current fiscal year at that $98 he mention in the press release.

Mike Crews

We have to finish the final negotiations with all of the customers but yes. Effectively, those re-prices we will set all and [inaudible] --.

Curt Woodworth - Macquarie Research

Yes.

Mike Crews

-- settle that business out and it's traditionally how it works and you know if there's any issues there.

Curt Woodworth - Macquarie Research

And then just, want to find a question on the online base and is there any potential for additional investments we made there for the next over years?

Mike Crews

Yes, we have three to four billion tons of coal as we look at you know the opportunities pretty all that basin and the pattern of on the basin with what we see happening into the declined rate that we see happening in the East. We think there certainly going to be more opportunities pretty all that basin to grow. You see is you know backing that up with the investments that we're making it Bear Run right now.

And obviously we have other properties that you know certainly we can bring online. That'll be low cost properties to serve as those markets that are going to need call.

Curt Woodworth - Macquarie Research

Great, thank you very much.

Operator

The next will be Paul Forward with Stifel Nicolaus, please go ahead.

Paul Forward - Stifel Nicolaus

Yes. Good morning.

Vic Svec

As well.

Paul Forward - Stifel Nicolaus

Just only Illinois base and following up on that last question. I think this last quarter of the first time, you've post a double digit margins from that reach. Just curious, you've got pretty strong visibility on what your contracts look like for the next couple of years. Pretty strong visibility on the cost, how sustainable do you see that double digit margin paying for the next couple of years?

Vic Svec

But I think its sustainable Paul then I think with what you see to major difference that's happen has a two [inaudible] -- there's been two major different just I think our cost have been. We help a lot and very well on cost [that we do discuss]. And do our cost reduction in this shipment. I think that's work that well, we're opening up low cost operations like Bear Run.

It'll start out at a little bit higher until it's full strive of 8 million tons to this year whom you running to three million tons. Or once it gets up to full speed it will be a low cost operation. And I think what you saw also was a lucky [know] in the mid -- in the Midwest. We have been historically signed long term business at the back up the opening of those properties.

And we had a lot of contracts that were marginal and most of those have re-priced in the last two years and that has in proof of margins quite a bit.

Paul Forward - Stifel Nicolaus

Great, and then also on the ranch that you gave him that coal out of Australia this year. A million and half to 10 and half million tons, that was encouraging to see you're able to raise that by a couple of million tons. Just wondering if you look at 2011 considering the projects you've got underway and the infrastructure limitations that you've -- that you see in front of you.

If the markets really got a hold up well for the lower end of the quality spectrum and you can keep crossing tons over from the thermal to the met side of the market. Where's your capacity next year? Made excluding the card at your anything like that. Where's your capacity to ship at the high-end of the range. If you could ship all the met coal you could, what could [Pee Buddy] do with 2011?

Vic Svec

Well, Paul as you know. We don't -- bit early to be giving specific guidance for next year. But I would say generally the expansion program and the new development projects that we have in Australia are heavily weighted towards the ladder part of that time frame, 2012 to 2014 as we talked about earlier, you know when we announce that program earlier this year and when you start talking about converting some of these thermal coals into the very low ends semi-soft.

You know there's only -- there's only so much capacity that you have to do that. So I guess what I'm saying is, I wouldn't expect major changes in 2011 at this point of time. We will continue to push the envelope as we have always done. And then maybe some more around the margin but don't expect major changes for 2011.

Paul Forward - Stifel Nicolaus

OK, thanks very much.

Operator

Our next question is from Dave Martin with Deutsche Bank, please go ahead.

Dave Martin – Deutsche Bank

Yes, thank you. Good morning. One of the first to ask you about balance sheet management and I understand you can't comment much on that Macarthur transaction but wanted to get your views on and what dot matrix are important to you or do you focus on and what's kind of your comfort level for those dot matrix.

Mike Crews

If it's the guys that we provide on that on the past, this has Mike has typically been -- and we focus on total digital capitalization.

Dave Martin – Deutsche Bank

Yes.

Mike Crews

And the range that we've look at is a bit about from 40% to 60%.

Dave Martin – Deutsche Bank

Yes.

Mike Crews

And you can see today, we're extremely low at the 40%, right around 41% level.

Dave Martin – Deutsche Bank

Yes.

Mike Crews

And we have indicated that for the right opportunities we reflex that up a bit and frankly that's what we do with the excel transaction, is reflex that sum and then bought it down over time base [follow] results of operations. So we have a targeted range we manage inside that range.

Dave Martin – Deutsche Bank

OK, that's fair and then secondly I wanted to ask you about the treating brokerage business. And you commented on this in you're prepared remarks. But operating earnings in that unit were down sequentially. I think you said there were few were structural transactions made in the quarter which draws about. Is that kind of a change in the way you're doing business? Or can you give us any guidance on how to model that going forward?

Rick Navarre

Hey, this is Rick. Training as we said as always a bit difficult to model. But I'll give you a bit of bit - a little bit more background. When you look at the first quarter of '09 compared to the first quarter of '10, significant volatility in the first quarter of 09'. So that's major driver of differences when you still look at those two quarters. On a sequential basis, in their structured transaction as we got a change to our business models but those are lovely.

When you do transaction and maybe improve that the portfolio and the contracts and sometimes those are market-market, sometimes those are cruel issues. So they can be a bit lovely as we look forward we still expect to do 30 to 40 million, $30 to $40 million per quarter.

Dave Martin – Deutsche Bank

Yes.

Rick Navarre

So that's the best modeling guide is I can give.

Dave Martin – Deutsche Bank

OK, that's helpful. Thank you.

Operator

The next were Brian Yu with Citi, please go ahead.

Brian Yu – Citigroup

Great, thank you. Jim, can you remind me what your annual split is between Hard Coking Coal and Semi-Soft and is there any difference to this ratio as we think about your open tons for the rest of 2010?

Greg Boyce

Yes, currently our split is essentially between high quality Hard Coking Coal and Hard Coking Coal, runs about 50 to 60% of our total volume out of the 9-1/2, 10-1/2 million tons. And then we have an equal split, the remainder – the remaining 30% and about 15% PCI and 15% Semi-Soft.

Brian Yu – Citigroup

OK, and with this supply for – the rest are open tons for?

Greg Boyce

Roughly, yes. I mean probably a little bit – a little bit slightly higher weight maybe going towards Semi-Soft just because we brought in some of that thermal cross over but that's a minor difference.

Brian Yu – Citigroup

OK, great. Thank you.

Operator

Our next question is from Jim Rollyson with Raymond James. Please go ahead.

Jim Rollyson – Raymond James

Good morning, guys, almost there.

Greg Boyce

Hi, good morning.

Jim Rollyson – Raymond James

Two quick ones. One, both of you guys made comments in regards to what’s going on in the Central App Market in regulatory side and kind of impacts on production fourth coming. Curious your thoughts on where you see the better opportunity as a fall off from that, in the PRB or the Illinois Basin?

Greg Boyce

Well, I think we feel good about both that’s why we've invested in both over the last three or four years. But obviously when we talked about the volumes that maybe impacted in the East, the Potter River Basin is going to be, you know the major supplier of those replacement tons in the near term.

Jim Rollyson – Raymond James

That's your answer and the second question, with regards to the net market and the strength we've seen, obviously everybody in the US and clearly as well in Australia, is responding to the market. You know you listen to some of this calls and we've got guys talking pretty nice growth in some of the lower grades generally when you get out to 2011 and 2012.

Kind of curious what your thought is on, is that volume we're hearing out of guys for growth, something you think has any impact on the market or we just structurally too short that it doesn’t matter or does this start maybe to widen out spread to between some of the better grades or some of the lower grades?

Greg Boyce

Well, a couple of things, I mean first you have to have projection to grow for that actually can be delivered and given all of the issues in and Central App, you know you have – you have to make your own assessments as to what's actually going to make to two ports and then be exported.

You the net backs are totally different between in East Coast US and a Queensland Port. And at the end of the day, you know we think that Australia is clearly going to be the major supplier. The Pacific Ports are going to have a leg up in all of those supplies.

So, you I think the East Coast will be, it will be good – it will be good business for those that can produce it and get it to the port. But I think the game is really the Pacific Rim, it's really Australia and that's why we're there.

Jim Rollyson – Raymond James

Very good. Nice quarter, thanks.

Operator

And we'll go to Garrett Nelson with Davenport & Company. Please go ahead.

Garrett Nelson – Davenport & Company

Good morning everyone.

Greg Boyce

Good morning.

Garrett Nelson – Davenport & Company

Going back to Illinois Basin, have you also seen a strengthening in pricing like we seen in the PRB over the last six months or increased interest in that tonnage? I know that some large Eastern coal burning utilities had been doing some test burns recently of Illinois Basin Coal and so that's why I asked.

Greg Boyce

You know as far as we see, we haven't seen quite the same run out in pricing that we seen in the PRB out of percentage base because the PRB was, because of their stock piles and other issues was pushed down pretty hard but we’re seeing a bit of certainly a strengthening in demand for all our basin coal and recently we had discussions in the last couple of days with major South Eastern Utilities regarding Illinois Basin supply because they are very concerned about the capability of their traditional CAP suppliers to meet their demand.

And so they are looking at those opinions and it depends on the utility and depends on, you know what kind of capital they want to invest with. They already got subscribers involved and installed whether they don’t, what they want with the PRB calls.

But clearly the customers who may have reluctantly, in reluctant to use all my basin coals in the past the chosen issue and because there's potential concerns around chlorine. Now, the good thing about Peabody's, most of our reserves are not high chlorine reserves are beginning to change their model there.

Garrett Nelson – Davenport & Company

Sure, thanks a lot.

Operator

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

David Lipschitz – CLSA

Hello everyone. Question on the – on the PRB, talk about how you think about the prices just not there compared to an Eastern prices are. What gets it to some type of an equivalent basis? I mean we're talking about this for 10 years now, what's stopping and what gets us there?

Greg Boyce

I think it's demand and ultimately the demand will strengthen, and the stock piles are down now back to more normal levels , and that was the first catalyze that we needed to see happen. Prices are always going to be suppressed when you have high stock piles. You see that in Central Adulation today.

They have high stock piles, they're competing with gas, they have – they're prices near term pricing is pretty low. Frankly, I don’t think it's a sustainable number where it's at, but particularly with their cost structures. It needs to go up.

Turning over time, and once again we don’t ever hold ourselves out outside of priority pricing is going to get equal to CAP as with $30. You know, we're not going to close the entire gap but we certainly don't believe $13 is the fare number either.

So, I think it’s just going to be strong demand and the opportunities are going to be too far between for the customer to get thermal coal.

David Lipschitz – CLSA

And, my follow up is, you talked about this port expansion and things like that in terms of Australia. Overtime is it going to be, is there enough coking coal there to supply everyone? If there was enough rail and port constraints or there's just not enough coking coal, or what's the short term and what's the long term issue?

Greg Boyce

Well, certainly Queensland in Australia is blessed with significant quantities of reserves of coking coal that would take time to develop and, you know I think there's no question that there are rather parts of the world whether it's Mongolia and ultimately longer term [Mosanbeak] which will start to develop some coking coal reserves.

But Australia is still has our platform shows. I mean it's got ways to go to be able to continue, and can continue to supply the Pacific Rim but, you know the rail and port will need to fall in behind or move ahead of. You know, building the infrastructure and the mining developments.

But there are additional coking coals reserves that can be develop. You just look at what some of the major holders of those reserves have talked about in terms of their development plans going forward.

But I think having said all of that you look at the demand for steel across the globe and particularly in the developing countries of China, India and the forecast of where steel production may have to go. Getting to my opening comments, we think that long term there – this is a structural great business to be in order to be able to supply both Pacific Rim met coal and ultimately Pacific Rim thermal coal as well.

David Lipschitz – CLSA

So, do you think base on where demand has been going recently that the ports are just for the next 5, 10, 50 years are just going to be behind?

Greg Boyce

Oh I think we've always said that port and rail will always be behind. Every time that you get an expansion, it will come quickly get consumed and then you'll be immediately into the next expansion. I mean NCIG is a perfect example of that.

We've barely have, you know the first vessel biding loaded form phase one at 30 million tons and we're very close to pulling together the final package to go to the next 30 million tons. And it's just, you know is just the nature of, you know the demand right now in the Pacific Rim is so strong.

We're talking about compound manual growth rates of 5 to 10% for both thermal and met coal in the Pacific Rim. I mean it's just very difficult for any said of infrastructures to ultimately bill and be ahead of that kind of growth. So we're always going to have that built it short time to fill it up, if not, filled up before it even gets operational and then build the next phase.

David Lipschitz – CLSA

Thank you.

Operator

And we'll go to Michael Goldenberg with Luminus Management. Please go ahead.

Michael Goldenberg - Luminus Management

Good morning.

Greg Boyce

Good morning.

Michael Goldenberg - Luminus Management

I wanted to focus a little on cost in Australia. Could you maybe provide us outside of [Royal OT's] or anything revenue related, the decline and cost from Q409 to Q110? Really impressive performance, especially on fewer shipments. So I wanted to figure out what were specific drivers for such a talent performance.

Mike Crews

Yes, this is Mike. I mean that, we did get some benefit in currency. We were opportunistic in terms of some hedges that we put on the benefit of the first quarter. But really what drove it was the fact that we had such strong performance in underground portfolio.

When you look at weather impacts and you know, we had some impact on production out of service operations. We were very fortunate that we had such good performance in the underground operation and that really drove our unit cost lower.

Michael Goldenberg - Luminus Management

Would you be able to disclosed what the cost were ex-royalties or the revenue related items and if you expect those costs to continue at cost per ton for the remainder of time?

Mike Crews

Every week. Beyond that I probably can't get to anymore specifics around the components of the cost.

Michael Goldenberg - Luminus Management

Well, would you expect a strong performance for remainder of time then?

Mike Crews

Well, I mean that's why we guided the 55 to 60 and, you know to the extent we take out in that range is going to be mainly driven by royalties and slightly higher you're over your demand.

Michael Goldenberg - Luminus Management

Got it. Thank you very much.

Mike Crews

You're welcome.

Operator

And with John Bridges with JPMorgan. Please go ahead.

John Bridges – JPMorgan

Hey, good morning everybody.

Greg Boyce

Good morning John.

John Bridges – JPMorgan

Hi. You mentioned the exporting US coal to India. Is that PRB or Illinois?

Greg Boyce

It would be anything that we can put together in a vessel at this point.

John, we're looking at a number of opportunities. Obviously long term and once get, you know once port capacity can be sorted out on the West Coast, the main interest is PRB coal into the Pacific Rim and into India. But having said that, you know there, we've had discussion about our entire portfolio which is both PRB and Illinois Basin coals.

And, you know we'll just have to see what materializes. But clearly our longer term interest would be large volumes of PRB coal.

Mike Crews

In interest to that John, I mean the question that we're always asked is about seeing customers with interest on test burns to the East and our answer is," We are" as far East.

John Bridges – JPMorgan

Nice one, and as a follow up, also following up from the previous question. The [going yellow] performance, is that a run off or is that some major improvement that you've achieve that are long [lost]?

Greg Boyce

Well, I think it's a – it's a quarter that's a combination of a huge amount of work both in terms of what's been done relative to the equipment underground as well as – as you know we've gone through a change with our, with the employee work base there in terms of the issues that we had in the end of the year relative to our contract renegotiations.

But I have to say based on the new agreement that we have emplaced, the work forces responded extremely well that coupled with, you know the work that we done on the equipment and the sustainability of the underground practices had led to a very high steady state for the quarter. And we've believed that – that is sustainable but, you know for right now we enjoy the quarter that we did.

John Bridges – JPMorgan

Excellent. Great quarter guys, well done.

Greg Boyce

Thank you.

Operator

And ladies and gentlemen that's all the time we have for your questions. I'll turn in over to Mr. Boyce for any closing comments.

Greg Boyce

Well, thank you all very much for your interest in Peabody. Obviously, based on our comments understand, we fell on the specific med and thermal market are just outstanding. We believe that is sustainable in long term as long as those countries in the Pacific Rim continue to grow with the rates that they're been growing at and beyond we will have a long term strength in those market place. We obviously are poise to increase our volumes and pricing through the year and from my perspective, we have the best leverage, the most leverage to those markets of any other US based companies.

So, we look forward to reporting next quarter. Thank you very much.

Operator

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

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Source: Peabody Energy Corp Q1 2010 Earnings Conference Call
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