ST. LOUIS Oct 27, 2015 (Thomson StreetEvents) -- Edited Transcript of Peabody Energy Corp earnings conference call or presentation Tuesday, October 27, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Vic Svec Peabody Energy Corporation - SVP Global Investor & Corporate Relations * Amy Schwetz Peabody Energy Corporation - EVP & CFO * Glenn Kellow Peabody Energy Corporation - President & CEO ================================================================================ Conference Call Participants ================================================================================ * Michael Dudas Sterne, Agee & Leach, Inc. - Analyst * Conor McKinnon Goldman Sachs - Analyst * Brian Yu Citigroup - Analyst * Lucas Pipes FBR Capital Markets - Analyst * Matthew Fields BofA Merrill Lynch - Analyst * Jeremy Sussman Clarksons Platou Securities - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Q3 earnings call. (Operator Instructions) As a reminder, today's call is being recorded. I'll turn the conference now over to Mr. Vic Svec, Senior Vice President Global Investor and Corporate Relations. Please go ahead. -------------------------------------------------------------------------------- Vic Svec, Peabody Energy Corporation - SVP Global Investor & Corporate Relations [2] -------------------------------------------------------------------------------- Okay. Thanks, John, and good morning, everyone. Thanks very much for taking part in the conference call for BTU. With us today are President and Chief Executive Officer, Glenn Kellow; Executive Vice President and Chief Financial Officer, Amy Schwetz; as well as our Senior Vice President of Finance, Walter Hawkins. We do have some forward-looking statements today. I would remind you they should be considered along with the risk factors that we note at the end of our release as well as the MD&A section of our filed documents. We also refer you to peabodyenergy.com for additional information. With that, I will now turn the call over to Amy. -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [3] -------------------------------------------------------------------------------- Thanks, Vic, and good morning, everyone. Peabody's operating segment turned in solid results this past quarter with all three US regions generating good margins despite lower revenues and our Australia and trading and brokerage segments outperforming the prior year. I'll begin by discussing our third quarter financial results, which highlight the recent operational improvements we have been making as well as the Patriot charge in discontinued operations. I will then review our liquidity and conclude with an update of our full-year guidance. Let's start with a review of the income statement. Third quarter revenues totaled $1.4 billion compared to $1.7 billion in the prior year primarily due to a 7% reduction in volume and realized price declines in the US and Australia at 7% in 23% respectively. Adjusted EBITDA totaled $129 million and reflects strong operational performance across the portfolio despite the weak pricing environment. Recent initiatives to increase productivity and reduce costs led to benefits that partially offset the nearly $120 million in lower pricing and $124 million in hedge losses. Moving down the income statement, we recorded third quarter income tax expense of $7 million compared to $79 million in the prior year. You might recall that our prior year tax item was affected by the repeal of the Australian Minerals Resource Rent Tax in 2014. Loss from continuing operations totaled $144 million in the third quarter. Diluted loss per share from continuing operations totaled [$8.08] as adjusted for the recent [1 for 15] reverse stock split that took place on October 1. Adjusted diluted loss per share totaled $8.13. We also recorded a third quarter charge at $155 million in discontinued operations for certain patriot liabilities related to black lung and the combined benefits fund Coal Act. Peabody has remained secondarily liable for these by statute since the spinoff. This wasn't unexpected given Patriot's recent bankruptcy and we would expect cash payments to initially be approximately $15 million per year and to decline over time. I will now review the supplemental information. In the US, adjusted EBITDA of $238 million reflects lower Midwest and Western shipments as well as a reduction in realized pricing. US cost per ton declined 5% despite a volume decline of 2.5 million tons compared with the prior year as our team continues to take aggressive actions to maneuver our minds down the cost curve. Within the PRB, revenue per ton of $13.42 improved from the prior period due to a mix of higher value shipments. Also, our PRB cost per ton improved slightly resulting in a 5% gross margin expansion to $3.39 per ton. You'll recall that we began the quarter still working through challenging mining conditions in the PRB. But as expected, our minds have now recovered and are shipping at customary rates. In the Midwest, volume declined 1 million tons due to lower demand as a result of increased natural gas switching while costs improved over $2 per ton on lower fuel expense and cost reduction actions. Western volumes declined 24% due to lower demand from natural gas competition, a planned reduction in volumes associated with export shipments from the Twentymile Mine as well as a Longwall move. The move also affected costs per ton and suppressed margins compared with the prior year. Turning to Australia, adjusted EBITDA rose $25 million to $35 million as lower costs more than offset a reduction in volume and $110 million impact from lower pricing. Third quarter cost declined over $18 per ton compared to the prior year representing a record low for this platform. And we continue to benefit from lower currency and fuel expense as well as recent productivity improvements. Met coal volumes declined 11% from the prior year mainly due to the planned reduction at the contractor operated [merc] Burton mine and the end-of-life closure of the Eaglefield mine in late 2014. In spite of lower realized pricing, met gross margins improved over $7 per ton as cost per ton declined 28%. I would note that the cost includes both royalties and rail import expenses, unlike some of our peers. Australian thermal coal cost per ton declined 25% to $29.47. This segment's low costs are anchored by the Wilpinjong Mine, one of the premier thermal assets in Australia. Trading and brokerage adjusted EBITDA totaled $29.4 million, which included favorable New South Wales thermal positions that were settled during the quarter. The results also reflect a $7 million gain related to a negotiated settlement. We see the benefit this quarter from a number of steps we recently implemented to reduce SG&A, such as delayering the organization and closing offices. This resulted in a 29% improvement from the prior year and reached the lowest quarterly level in nearly a decade. Corporate hedge losses totaled $117 million in the quarter primarily related to currency. Consistent with our recent approach in this area, we reduced the duration of our currency program, have not layered on any additional material currency hedges in nearly 2 years and all existing currency hedges will expire by the end of 2017. We have also included a summary of our hedge positions in the supplemental financial statements, which reflect our lower 2015 currency and fuel requirements. That's a review of our income statement and key earnings drivers. Now let's turn to our cash and liquidity position. In this area we have dual financial objectives of optimizing liquidity while reducing debt. The Company ended the quarter with $1.8 billion of liquidity, including $1.4 billion under our fully committed revolver and $334 million in cash. Our liquidity also reflects third quarter CapEx payments of $26 million and operating cash flows of $34 million, which included $89 million in interest payments. During the quarter liquidity declined approximately $250 million, primarily due to $195 million of letter of credit support for existing surety bonds and bank guarantees. We also completed approximately $180 million in PRB reserve and interest payments. As a reminder, our bank guarantees are primarily used to support reclamation obligations in Australia. We expect liquidity to decline in the fourth quarter as a result of PRB reserve installments of $188 million, interest payments of $136 million and additional letter of credit support. And we remain focused on maintaining adequate liquidity heading into 2016. Looking forward, Peabody is scheduled to complete its last committed annual PRB reserve installments of $250 million in late 2016. The last [Viva] Health Benefit trust payments are scheduled to be paid in the amount of $75 million in 2016 and $70 million in January of 2017. This agreement is currently before the court. Our foreign currency and fuel hedge positions also begin to meaningfully roll off next year. With respect to the collateral package under this secured credit facilities, total consolidated net tangible assets were $10.1 billion at September 30, with $3 billion in principal property and $2.4 billion in non-principal property. Turning to our Outlook. Relative to the third quarter, fourth quarter adjusted EBITDA results are primarily expected to be impacted by normalized trading and brokerage results and a decline in seaborne coal prices. Our full-year financial targets include reducing our US sales volume targets 5 million tons as a result of working with customers to defer shipments into 2016; raising the low end of our Australian net volume guidance to approximately 15 million tons; lowering our overall Australian cost per ton range to $50 to $52, nearly 25% below 2014 levels; trimming SG&A expenses further to $170 million to $175 million; and reducing CapEx to $140 million to $150 million as we continue to tightly manage capital while benefiting from previous investments across the platform. That's a brief review of our third quarter performance as well as our 2015 targets. Now I'll turn the call over to Glenn. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [4] -------------------------------------------------------------------------------- Thanks, Amy, and good morning, everyone. Our operations continue to deliver in the third quarter and these results have helped to offset coal fundamentals that remain challenged as slowing global growth cast a shadow over the broader commodities sector. Safety remains a key component of our operational results and I am pleased to note that we are on track for yet another year of record safety performance driven by a 20% improvement in Australia. I would also like to recognize our [Wambo] mine, which was recently named rescue team of the year, the highest honor in the Australian mine rescue competition. Today I will discuss our view on market conditions then provide an update on our full areas of management emphasis. Within the coal markets, sluggish GDP growth and weak industry data from China have led to further decline in global coal demand. This, in turn, has diminished the benefit of recent production cutbacks. US coal fundamentals also face headwinds as surplus natural gas has suppressed prices and continue to weigh on domestic coal demand. Certainly China's economy remains a key component for coal trends. Recent domestic steel consumption has declined due to oversupply in the property sector and has paved the way for a rise in steel exports, which reached record levels through September. As a result, metallurgical coal demand in other regions has declined. So has fourth quarter benchmark pricing for high-quality hard coking coal and low vol PCI, which leaves 4% and 3% from prior settlements respectively. At the same time, lower electricity consumption and strong hydroelectric generation due to heavy rainfall have led to reduced Chinese seaborne thermal coal demand, which has more than offset at [70%] year-to-date import gain in India. Weakening currencies have continued to put downward pressure on seaborne thermal coal prices though this actually benefits, of course, Peabody's Australian portfolio. Whilst we've been disappointed by the modest amount of marginal production that has come out of met coal markets, we projected met coal supply to fall below 300 million tons in 2015, primarily due to declining US exports, and we expect additional [coal timelines] going forward as an estimated 80% of seaborne met coal production is not covering cash costs at current pricing. Seaborne thermal coal markets tell a similar story as continued cost pressures have eroded US and Indonesian supplies while Australian produces benefit from falling oil prices and favorable currency rates. Longer-term, supply reductions are underpinned by the sizable withdraw of capital investment within the coal industry. In fact, Peabody estimates that capital spending by top coal producers has declined some [70%] from the historical highs we saw in 2012. We believe this limited capital investment is insufficient to sustain current production and coal prices will need to rise well above levels we see today to incentivize new investment. And over time we expect the gradual reduction in supply, as well as increased coal demand, to lead to improved fundamentals. Turning now to the US coal market, Peabody projects US coal demand to decline 100 million tons this year largely due to lower natural gas prices. That's at the higher end of our original estimate for January. And while we are among the most bearish at the time, unfortunately the projection has proven to be accurate. Coal share of US electricity is expected to be 35% this year compared to 31% for natural gas. We have the benefit of spanning the two best thermal coal regions in the US: the PRB and the Illinois Basin. While lower demand has impacted all major coal basins, we've seen the greatest percentage of both consumption and production declines in regions outside of the PRB. In our view, PRB coal is most competitive against natural gas as well as other coal regions. In fact, the PRB's average delivered cost is more than 20% below the Illinois Basin based on 2014 EIA data. Peabody expects 2015 US coal supply to decline 90 million tons; however, supply cutbacks have continued to lag behind demand reductions leading to rising coal inventories. Looking ahead, based on today's snapshot of forward gas prices, Peabody would expect 2016 coal demand to be below 2015 levels. But ultimately, coal demand will rise or fall in sensitivity to national gas price movements. I would remind you that Peabody is 85% priced for US coal deliveries based on 2016 production levels. We look for US coal demand to rise above current levels in coming years as natural gas prices increase in line with third-party projections. We believe gas prices will strengthen as LNG exports increase, onshore demand rises and additional pipeline opportunities to Mexico take shape. In regard to the US regulatory environment, I would like to briefly touch on the EPA's carbon rules. We've seen early opposition from Congress, legislatures and other groups and we expect the regulations to face significant judicial challenges. That's particularly true in light of the Supreme Court's MATS ruling in regard to EPA overreach and, most recently, the judicial [stay] over the waters of the United States. At the same time, it is imperative that the courts provide clarity in swift fashion. Some utilities are already making investment decisions based on the current rules even though ultimate deadlines are still many years away. The current plan is poor policy and poor law. Even so, I would note that under the plan the EPA still expects coal to fuel 30% of US electricity generation in 2025. Those are levels we've seen at times in 2015. Now that we've covered the coal markets, I'd like to review our actions with a new [feature of our four overs] emphasis and highlight a few specific points that benefit Peabody. First, we'll begin with our operations. I'm pleased to note that all of the Company's US mining assets are EBITDA and cash flow positive. Also, four out of our five operating segments average gross margins above 25% and even our Australian med coal segment perform better than the prior year despite significantly lower coal prices. These are strong margins based on where we are in the cycle and these performance is a credit to the significant improvements our team has made across our operations. As we discussed last quarter, Peabody's advanced a number of initiatives to improve productivity and reduce costs. We also lowered coking coal and low vol PCI volumes at several of our Australian mines through respond to current fundamentals and preserve our high-quality reserves for better markets. During the quarter, Peabody executed the [toll washing] agreement between our Millennium Mine and a neighboring [prep] plant. This agreement is an example of how the Company is working with partners to maximize value, reduce fixed costs and make the most efficient use of our assets. And in the US we have successfully transitioned into the newly completed Gateway North mining extension. This project is a low capital intensity solution completed for less than $75 million and funded within the Company's lower CapEx profile you've seen recently. The extension makes efficient use of the existing infrastructure and a highly productive workforce. While adding some 30 years of mine life and maintaining the production profile of one of the lowest cost operations in the region. Our secondary of emphasis is at the organizational level. We have succeeded in our recent efforts to [deline] and streamline the organization. Our new operator model is based around our internal manner of speed, focus and purpose and we are already realizing benefits from rationalized activities, consolidated reporting relationships and a shared services initiative. As Amy mentioned, our improvements to SG&A have been what we would regard as impressive with third-quarter costs declining nearly 30% compared to 2014 levels. Third, regarding portfolio optimization, Peabody has an unmatched collection of call assets with access to some of the best markets. We have more than 7 billion tons of reserves, 0.5 million acres of surface land and ownership interests in ports and generation projects in multiple countries. And this substantial asset base provides us with option value going forward. While we may look to monetize certain assets within our larger portfolio, we are committed to maintaining a diverse platform in terms of both region and products. In the US we benefit from our positions in the PRB and Illinois Basin and in Australia we have world-class thermal operations. And we do believe that our Australian med assets offers the greatest tool as markets improve. We are currently advancing multiple assets on processes for certain operating and [on-mining] assets. Our criteria for evaluating opportunities include strategic fit, value considerations, potential growth and capital or cash requirements. Certainly this is a challenging environment and we remain focused on opportunities that include appropriate assets at acceptable valuations. And on the fourth area of emphasis -- financial -- Peabody is focused on optimizing liquidity during these difficult markets with a strategic eye towards deleveraging. As with many businesses in a cyclical market, we retain a large revolver to address potential liquidity needs while continuing to assess liquidity targets based on cash from our operations, assets, our proceeds and other business requirements. At the same time, we continue to evaluate ways to reduce leverage including debt exchanges and buybacks. Our evaluation set a number of criteria including the economic transactions, tax efficiency, runway, impact on interest expense and timing. Regarding both potential deleveraging transactions and asset sales, the behind-the-scenes activity is substantial. But we also are committed to the premise that making the right deal is as important as the timing. In conclusion, these are undoubtedly difficult, if not unprecedented times for the coal sector. But despite the current environment, I believe that we have a number of inherent strengths that benefit the Company. We have an unmatched portfolio with access to some of the best markets. Our operational performance continues to demonstrate the strength of our underlying business. We have significant advantages from our diverse operations, particularly in the PRB, Illinois Basin and Australia. And finally, a duel financial focus remains on optimizing liquidity and deleveraging. We believe that long-term global coal demand is favorable, even though it's effects have been masked by near-term industry headwinds, and Peabody continues to take necessary steps to improve our operations in business and we recognize that there is more to do. Before we move into the Q&A session, I would like to take a moment to recognize Greg Boyce, our current Executive Chairman. As recently announced, Greg will be retiring from Peabody at the end of December following a distinguished four decade career in the resource sector. We thank Greg for his commitment to the Company and industry and wish him all the best in his retirement. I would also like to welcome our incoming non-Executive Chairman Bob Malone. Bob has extensive global energy and mining experience at the executive and operational level. He has also served as our independent lead director since early 2013. We look forward to his valued council and his new role beginning in January. With that, operator, we would be happy to take questions at this time. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) First, we go to the line of Michael Dudas with Sterne, Agee. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [2] -------------------------------------------------------------------------------- Good morning, everyone. Glenn, following up on your four tenets from how you're trying to reshape the Company, do you have any -- as you look from a financial standpoint the optimal liquidity balance sheet where the Company needs to be given where the coal fundamentals you project -- maybe looking off 2017 and 2018, given where you are today. And I guess you can't get there quick enough to get some of these fixed payments off of your books. Do you have a little more granular aspect to where that might be and how that plays into your -- to either accelerate or to take your turn on getting the right body for assets on a sales basis. -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [3] -------------------------------------------------------------------------------- Sure, Michael. This is Amy. I might touch on some each key points and ask Glenn to weigh in as well. As we look at our liquidity, it is obviously an iterative process depending on where the market's at at any given point in time. So as we look at what our liquidity needs are, we're looking at what our cash flow from operations are, what our CapEx profile will be, fixed charges over time. That's why we've maintained a relatively large revolver for so many years. The $1.65 billion revolver is something that we have felt is key to our arsenal in terms of maintaining adequate liquidity for the business. So we are obviously looking forward to those fixed charges rolling off in 2016 and 2017, as you indicated. Both the Viva payments, which as indicated, we have asked for some clarification around as well as our hedges and the LBAs next year. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [4] -------------------------------------------------------------------------------- Yes, in terms of the longer-term picture around deleveraging, we have often talked about (inaudible) a little in terms of debt multiples. And that would be certainly something that we would like to move towards over time. You did mention the four areas of focus in terms of continuing to reduce cost and I hope we're demonstrating that. There is a number of activities which I have outlined with respect to what we're thinking about with our portfolio. But I would like to emphasize we did talk about making the right deal is as important as the nature of the timing. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [5] -------------------------------------------------------------------------------- Can you characterize the interest and opportunities you are seeing from potential buyers in the marketplace? And is the oversupply nature of certain projects and properties making it more difficult for you to get to that reasonable price? -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [6] -------------------------------------------------------------------------------- I would say that that's a general statements in the industry but I would like to say that it is asset specific and market specific. And I would like to reiterate that I do believe we have probably the premier coal portfolio around the globe and not any in terms of our producing assets but also we have significant land positions, infrastructure assets and reserve positions, et cetera. So I think we are seeing buyer interest for the right assets. And I would say that that is also both in some of our non-core areas but also I'm talking about operating lines. -------------------------------------------------------------------------------- Michael Dudas, Sterne, Agee & Leach, Inc. - Analyst [7] -------------------------------------------------------------------------------- Thanks (inaudible). -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- The next question is from Justine Fisher with Goldman Sachs. -------------------------------------------------------------------------------- Conor McKinnon, Goldman Sachs - Analyst [9] -------------------------------------------------------------------------------- Hi, everyone. This is Conor McKinnon filling in for Justine. I first question was on the topic of liquidity too. You said in the press release this quarter you provided an additional $195 million in collateral to existing surety bond providers in the form of LCs. Could you give us a little more color on that? What drove it? Are there specific credit metrics that your surety providers are looking at? Maybe what geography that came in and what might drive more of the same in coming quarters? -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [10] -------------------------------------------------------------------------------- Sure, Conor. I think as you look at our surety and bank guaranteed facilities, it's probably important to remember that they are bilateral agreements. So the level of collateral can vary by provider. We did have about $200 million of LC support for surety bonds and bank guarantees provided by the end of the quarter. As we look at our surety bonds, we have $540 million of bonds outstanding. About $80 million of that relates specifically to Patriot. About 70% of that value requested collateral during the quarter and we posted $120 million of LCs related to that exposure. We also have $365 million of bank guarantees outstanding in Australia. So about 20% of that value, or $80 million requested collateral during the third quarter. And we posted $80 million of -- well 100% collateral for those that requested. It's probably worth noting as well that in addition to that collateral posted, we have about $175 million LCs for other obligations such as port agreements, pension support, workers compensation, which has been in place for some time and it's just a standard mechanism for doing business with some of those parties. As we look at our LCs, it obviously reduces availability under our revolver but it's not a cash outflow. -------------------------------------------------------------------------------- Conor McKinnon, Goldman Sachs - Analyst [11] -------------------------------------------------------------------------------- Great. Thank you. And then my follow-up was related to Patriot, which you touched on briefly a little bit earlier. So we know that there's been a legal dispute as part of their second filing related to the Viva payments, which had been scheduled to be made by Peabody. Could you give us a little update there as far as what exactly the dispute is over? -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [12] -------------------------------------------------------------------------------- Sure. And I might just take this opportunity to go through Patriot in a bit more detail as well in terms of the number of moving parts that are outstanding with respect to the issue. You mentioned specifically the Viva and credit support, which both are related to the 2013 settlement agreement as part of Patriot's first bankruptcy. In 2013 we agreed to cap certain liabilities that we had on our balance sheet already that were associated with retiree healthcare. And we agreed to fund those on an accelerated basis in the total of about $310 million into a Viva. We made two payments of roughly $165 million in total to the Viva of there's the two remaining payments that I referenced in my remarks -- $75 million in 2016 and $70 million in 2017 that we discussed. We also provided $120 million of credit support for a variety of obligations as part of the agreement. And Patriot was required to reimburse Peabody as part of that agreement. Peabody has met its obligations, as you know, both with respect to the Viva payments and the credit support. However, Patriot has failed to reimburse us for more than $20 million of credit support that has been drawn upon. And because of this, because terms of the settlement have been breached by Patriot, we asked the US Bankruptcy Court in Missouri, which is the court that originally approved the 2013 settlement to determine what obligations, if any, remained for Peabody based on that breach. So that's that Viva that you have seen in the news recently. I also may just provide a bit more detail on the black lung and combined benefit fund Coal Act liabilities where we remain secondarily liable by statute since the spinoff. We took a third quarter charge of $155 million as we deemed during the quarter that it was probable Peabody would be required to fund an incremental portion of these liabilities given the status of Patriot's case. You'll recall that we had discussed these secondarily liability obligations in the past. So it wasn't unexpected to us at the time. And with respect to those applications, we would expect that that would -- that cash would start out at approximately $15 million a year and that would decline over time. We have had a third element of the case that related to Patriot's salaried retiree healthcare liabilities. These liabilities have remained on our balance sheet since this spin. We recently reached a settlement agreement on these payments replacing a prior agreement. And these liabilities, which were fully accrued, we would expect to realize a modest benefit moving forward under the terms of the settlement agreement. The fourth item that I will touch upon is related to the 1974 UMWA pension plan, or the [MEPP]. There is a pending lawsuit by the pension plan that alleges that Peabody and another producer may be liable under the MEPP as a result of the 2015 bankruptcy. And obviously given that it's ongoing litigation, we are limited by how much detail we can get into on this topic but we believe we have a strong position and we will work to vigorously defend against any claims. Peabody was not a signatory to that labor agreement that requires contributions into the MEPP. And in addition to that, at the time of the spin it was pretty well-funded at above -- at a 90% level. And Patriot continued to make payments into the MEPP for their eight years of operation. So let me reiterate, with respect to that, we do not see the trustees prevailing as probable in that case but, if so, we would estimate that any payments would be made over multi-decade period. -------------------------------------------------------------------------------- Conor McKinnon, Goldman Sachs - Analyst [13] -------------------------------------------------------------------------------- Great. That's very helpful. That's all I had. Thanks a lot. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Next we'll go to Brian Yu with Citi. Please go ahead. -------------------------------------------------------------------------------- Brian Yu, Citigroup - Analyst [15] -------------------------------------------------------------------------------- Great. Thanks and good morning. The first question is with -- you guys came out with a CapEx budget. I know it's been early for 2016 but do you see this as a sustainable level heading into next year given that you are guiding for a bit lower production? -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [16] -------------------------------------------------------------------------------- Good morning, Brian. Yes, you'll recall that we have benefited, or are benefiting, from a well capitalized platform in prior years. And the team have been focused on looking to optimize and manage through a lower capital profile. We've said because of that, and building up of that position, we'd be able to do the lower levels for a number of years. Having said that, we've lowered the guidance this time around. And I think that is in part related to the improvement in the Australian dollar. Also the team continues to surprise on innovative ways of looking to manage capital. So maybe not quite at the levels we've lowered guidance but at the lower levels we see those occurring for a number of years. -------------------------------------------------------------------------------- Brian Yu, Citigroup - Analyst [17] -------------------------------------------------------------------------------- Okay. That's helpful. And then second is on rails. Yesterday there was some of the eastern coal producers said that they are getting some breaks from the rails, both eastern rail companies as well as west, to try to make their product a bit more competitive. And I'm wondering if on the PRB side you guys are seeing the same thing where the rail companies are being bit more flexible with their rates so your coal could be either more competitive to existing markets or perhaps travel a bit further. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [18] -------------------------------------------------------------------------------- Yes. I think that certainly is encouraging to hear. We actually -- as you're probably aware, we don't have insight specifically into that. These are direct discussions between our utility customers and the rails. Having said that, we continue to reiterate we believe that PRB is the most competitive of the basins with respect to both coal-on-coal competition and coal-on-gas. But it is encouraging to continue to see that. We would expect fuel surcharges to be one area that would provide opportunities; however, in the overall contract structure that would benefit our customers. -------------------------------------------------------------------------------- Brian Yu, Citigroup - Analyst [19] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- We will go to Lucas Pipes with FBR. -------------------------------------------------------------------------------- Lucas Pipes, FBR Capital Markets - Analyst [21] -------------------------------------------------------------------------------- Good morning, everyone, and thanks for taking my question. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [22] -------------------------------------------------------------------------------- Good morning, Lucas. -------------------------------------------------------------------------------- Lucas Pipes, FBR Capital Markets - Analyst [23] -------------------------------------------------------------------------------- I wanted to follow up on asset sales and maybe focus a little bit more specifically on the US market. And my question is what sort of level of interest are you seeing today? And what are -- maybe you could comment on why we haven't seen a deal yet, if there are any stumbling blocks that you could share with us in this market environment. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [24] -------------------------------------------------------------------------------- Perhaps I'll talk about -- you know I'm not to be able to talk about specific assets or specific sorts of activities. But I could perhaps give you a bit of color about what our thinking is with respect to that asset sales. It is not necessarily US specific. Firstly, it would be around our strategically objectives and how well the particular asset or activity fitted into that; looking at its overall growth profile; of course how we look at enhancing value on a discounted cash flow basis and asset and net asset basis as we accelerate the potential to accelerate future cash flows; the assets cash generation profile; our future capital needs for it, including what we would see as being bonding or collateral requirements; and how the overall transaction would support our financial objectives of optimizing liquidity and deleveraging. So as I've said, we have a number of processes underway. I would go back to what I said earlier about it's important for us that we do both the right deal as with respect to meeting the criteria as well as the timing activities. We have seen buyer -- continue to see buyer interest for the right assets in the right locations. -------------------------------------------------------------------------------- Lucas Pipes, FBR Capital Markets - Analyst [25] -------------------------------------------------------------------------------- That's helpful. And since you mentioned the use of DCF approach for the valuation of these assets, could you give us a range of a discount rate that you would employ in your analysis? -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [26] -------------------------------------------------------------------------------- Unfortunately we don't typically publish or disclose that indicator. -------------------------------------------------------------------------------- Lucas Pipes, FBR Capital Markets - Analyst [27] -------------------------------------------------------------------------------- All right. Okay. Thank you for that. And then I think in your prepared remarks you mentioned a hauling arrangement. I didn't catch all of the details and I wondered if you could maybe provide a little bit more color around that proposal. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [28] -------------------------------------------------------------------------------- It's more of an example, I think, of the sorts of things. And you saw us earlier in the period work with Glencore on our Wambo surface activity. We had announced plans to work with them on lowering CapEx, lowering cost through a partnering concept. Similarly here at our Millennium Mine we have been able to work with a neighboring operator who has capacity in their coal plants through a tolling arrangement that actually have a win-win for both parties by lowering our overall cost and increasing productivity. So I think it is -- I just use it as color to paint the sort of innovative thinking between the continuing to work through as we focus on all aspects of our business and drive that operational performance. -------------------------------------------------------------------------------- Lucas Pipes, FBR Capital Markets - Analyst [29] -------------------------------------------------------------------------------- Okay. Got it. Thank you very much and good luck. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [30] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question is from Matthew Fields with Bank of America Merrill Lynch. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [32] -------------------------------------------------------------------------------- Hi, everyone. I just wanted to follow up on the LC question. Can you mention what jurisdiction the $195 million of LCs that you posted were related to? -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [33] -------------------------------------------------------------------------------- This is Amy. It does depend a bit on terms of what we're looking at with respect to the bank guarantees that -- as I had mentioned, we posted $80 million of collateral related to that. That is specific to Australia. And the remainder is generally within the US. -------------------------------------------------------------------------------- Matthew Fields, BofA Merrill Lynch - Analyst [34] -------------------------------------------------------------------------------- Okay. And then you mentioned that I guess $540 million of your surety bonds are [offending]. 70% requested additional collateral and you posted [$120 million]. Does that mean that we should expect the additional $260 million that have requested it to eventually be posted? -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [35] -------------------------------------------------------------------------------- Those arrangements -- with the piece of collateral that we've already provided, that has been based on negotiated terms with those specific sureties. I think as you look at time progressing, we will continue to have discussions with our surety bond providers and with our banks to provide guarantees about collateral requests and we do plan on continuing to up date those as part of our reporting cycle. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- And ladies and gentlemen, we have time for one more question. We will go to Jeremy Sussman with Clarksons. Please go ahead. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [37] -------------------------------------------------------------------------------- Yes, hello. Thanks very much for taking the question. First question, in terms of Australian costs, obviously very good numbers there and bringing guidance down to [50 to 52] versus [53 to 56] previously was nice to see. Can you maybe give us a breakdown of currency, productivity, fuel, et cetera, in terms of I guess where costs are now versus where they were previously? -------------------------------------------------------------------------------- Amy Schwetz, Peabody Energy Corporation - EVP & CFO [38] -------------------------------------------------------------------------------- Sure, Jeremy. As we look at our Australian cost, the $18 improvement, the vast majority of that is actually related to fuel and FX. And I think one of the things that differentiates us in the US segment is our exposure to the lower [A] dollar in the current environment. The balance of that is related really to productivity improvements in mix but sort of out weighted towards that FX than fuel. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [39] -------------------------------------------------------------------------------- Okay great. And maybe just one more. If you -- can you just remind us when you can close -- you've talked about potentially closing Burton, I believe, if market conditions remain weak. What with this -- I guess from a tiny perspective, what should we look to on this front and maybe what would this do to your overall cost profile? Or maybe put another way, what would the financial benefit be versus where things are today? Thank you very much. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [40] -------------------------------------------------------------------------------- So the effects are raising Burton. So the Burton story has been one in which we have been restructuring that contract to try and get the best optimum outcome we can with any of the constraints that the contract mining activity really has on us. We see the ability in 2016 to evaluate the continued future of that mine. And we would be looking to make a decision to talk about it in 2016. It is our highest cost operation. It is cash negative. And therefore, if you back that out, both of those elements we would expect to see an improvement as a result across the portfolio. So I want to take away from [the thing] managing Burton. I think they've done a great job in terms of reducing cost, the contract renegotiation are great. It actually has very good safety performance going through the mine. I don't want to take away those factors. However, having said that, in this environment it does stick out as a mine that we would be looking to have under a great deal of scrutiny in the portfolio. -------------------------------------------------------------------------------- Jeremy Sussman, Clarksons Platou Securities - Analyst [41] -------------------------------------------------------------------------------- Understood. Thanks very much and good luck. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [42] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Mr. Kellow, I will turn it back to you for any closing comments. -------------------------------------------------------------------------------- Glenn Kellow, Peabody Energy Corporation - President & CEO [44] -------------------------------------------------------------------------------- Well thank you, operator. And thanks to everyone for joining our call today. I would also like to extend my appreciation to the entire Peabody team for their focus on safe, productive operations in workplaces. There is no questioning the pressures from on growing market weakness but I remind you that Peabody benefits from exceptional global asset base, strong operational performance and commitment to take a fresh look at the many dimensions of our business. Thank you for your continued interest and we look forward to discussing our progress with you as key milestones arise. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
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