Peabody Energy Corporation (BTU) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for your patience and standing by. Welcome to the Peabody Third Quarter of 2017 Earnings Call. At this time, all of you participant phone lines are in a listen-only mode and later there will be an opportunity here for your question. [Operator Instructions] Just a reminder, today's conference is being recorded. And I would now like to turn the conference over to Senior Vice President of Investors Relations, Vic Svec.

Okay. Good morning, everyone and thanks for joining BTU's third quarter earnings call. With us today are President and Chief Executive Officer, Glenn Kellow; and Executive Vice President and Chief Financial Officer, Amy Schwetz. Before we begin, I would like to point you to a supplemental presentation that will accompany today's remarks. This presentation can be found on our website at peabodyenergy.com. On Slide 2 of this deck is our statement on forward-looking information. We do encourage you to consider the risk factors that are referenced here along with our public filings and furnishings with the SEC. I would also note, we use both GAAP and non-GAAP measures and we refer you to our reconciliation of those measures in our documents. And with that, I'll now turn the call over to Glenn Kellow.

Thanks, Vic, and good morning, everyone. I can characterize Peabody's powerful third quarter performance with one word; actions. This team is committed to doing what we say we're going to do and this quarter's results are reflection of that mantra. On Slide 3, you can see the significant specific steps we have taken across the board in recent months as we have delivered on every one of the objectives we set out last quarter. Since our last call we repaid debt, repurchased shares, amended our credit facility, reduced interest expense, entered into sales of non-core assets and continued to [supervise] at releasing restricted cash. Peabody also benefited from the collective strength of its diverse platform, driving improved volumes, revenues and cash flows and delivering the highest adjusted EBITDA in five years. While we're pleased with our actions today, we have no doubt to hit pause. Instead we are looking to continue to pace this momentum and execute on our stated financial approach. I believe the strength will in turn enable more strength. Through all of our actions, Peabody maintains constant vigilance towards safety. In recognition to this, I would like to report our Wambo Undergound Mine Rescue Team for any first place honors for the second time in three years at the highly contested Australian Underground Mines Rescue competition. This skilled team will now represent Peabody and Australia at the International Mine Rescue competition in 2018. With that I will turn it over to Amy to discuss our performance in further detail.

Thanks, Glenn. Now let's turn to Slide 4, where we have highlighted the outstanding improvement in third quarter results over the prior year. Revenues improved 22% over the third quarter of 2016, lead by strengthening in seaborne coal fundamentals. Australian revenues increased $251 million over the prior year on higher realized pricing and improved metallurgical volumes. I would also note that each region in the U.S. and Australia increased their total revenue contributions over the second quarter. We will talk more about mining results in a moment. Income from continuing operations net of taxes totaled $234 million for the quarter lead by robust mining performance as well as a net tax benefit at $84 million partly offset by DD&A of a $195 million and $40 million in net interest expense. Perhaps I will add a bit more. Peabody recognized a large tax benefit this quarter as the company monetized a portion of its $4 billion U.S. NOL position through tax loss carry backs. We expect to have over $3 billion of U.S. NOLs going into 2018 with about 25% of the balance estimated to be limited by Section 382. And you will recall that we have approximately that amount in Australia as well. We expect to receive about $78 million of cash in the fourth quarter and $20 million of cash in 2018 related to the refunds recorded this quarter. In addition year-to-date our Australian operations have generated about $250 million of taxable income that will be shielded by Australian NOL position. As we have noted DD&A now includes the amortization of intangible assets recorded in fresh start accounting related to some U.S. coal supply agreements. For the third quarter contract amortization expense totaled $42 million. The vast majority of the intangible asset is expected to be amortized over the next 18 months. Also a portion of our DD&A is recorded on unit for production method. So therefore as our volumes increased, so did our DD&A. During the third quarter an additional 8 percentage points of preferred stock was converted to common shares, bringing total conversions through September to about 47%. As a result the company recorded a noncash dividend of $24 million this quarter, leading to net income attributable to common shareholders of $201 million. I would note that since the end of the quarter we have had additional preferred stock conversions bringing total conversions to 51%. Diluted earnings per share from continuing operations totaled $1.49 for the quarter. In addition adjusted EBITDA increased $281 million from the third quarter of 2016. Now let's turn to Slide 5. From an operations perspective the value of our exposure to domestic and seaborne met and thermal coal were once again highlighted this quarter. Both the U.S. and Australian platforms delivered very strongly, leading to total adjusted EBITDA of $411 million, the highest quarterly contribution since 2012. Emphasizing the benefit of a diversified portfolio the Australian metallurgical segment led the company with aggregate adjusted EBITDA of $143 million with the PRB not far behind at a $113 million. Taking a closer look at our operations on Slide 6; third quarter adjusted EBITDA margins average 30% across five mining segments. Last quarter we discussed the excellent performance of our Australian thermal segment and this quarter was no exception. Despite geological conditions and ramp up following an extended longwall move at a underground mine Australian thermal led the company yet again in adjusted EBITDA margins of 37% bringing year-to-date results to 38%. Overall sales volumes totaled 8.7 million tonnes including 3.5 million tonnes of met coal sold at an average price of $119.55 per tonne. Thermal sales volume totaled 5.2 million tonnes for the quarter, including 3.3 million tonnes of export thermal coal sold at an average price of $69.31 per short tonne. That brings year-to-date export thermal coal sales to 9.1 million tonnes sold at an average price of $67.48. As expected met coal shipments increased 75% compared to the cyclone restricted second quarter of 2017. Performance was driven by record production and strong sales volumes from the North Goonyella mine as rails improved. Strong demand for quality Australian thermal and met coal led to realized revenues per tonne increasing $48 per tonne for the met coal segment and over $15 per tonne for the thermal segment compared to the third quarter of 2016. Also as expected metallurgical costs declined a sizable $31 per tonne from the second quarter of 2017 to $78.42 per tonne. Improvements, were led by longwall performance, lower strip ratios, and higher volumes and gives us a greater line of sight for the met coal segment to be within the full year cost and volume targets as outlined last quarter. I would note that we will still want to hitting on all cylinders in the quarter for met coal with our Metropolitan mine still working through some geologic challenges in the current longwall P&L. Australian thermal cost per tonne increased $5 per tonne compared to the prior year, primarily due to geologic conditions; following a longwall move at our underground thermal mine. One other item to highlight is the Middlemount joint venture, which is not included within our Australian segment results. In the third quarter our share of the operations sold approximately 0.5 million tonnes of met coal and generated adjusted EBITDA at $8 million, which represents our share of the JV's net income. This is a $10 million increase from the prior year. Through September we've collected $62 million of net cash from Middlemount, including $6 million this quarter. Taking a look at the U.S., the operations continue to deliver [viable] results contributing adjusted EBITDA of a $197 million this quarter. On average the American segment generated adjusted EBITDA margins of 25% with the PRB earning 27% adjusted EBITDA margins. You've heard us talk before about the benefits of operating on three Powder River Basin mines as a complex. Along with having three of the foremost productive mines in the U.S. and having features such as [indiscernible] blend, our customized blending technology that allows us to meet customer specifications and maximize margins without inventory at our largest operations. Those benefits are especially evidenced this quarter, as adjusted EBITDA margins increase 12% compared to the second quarter of 2017 even as revenues per tonne decreased 3%. I will note that we are pleased to be maintaining or lowering our full year cost targets for all operating regions including lowering the top end of our PRB cost guidance range. We've revised our Australian thermal volumes due to rail disruptions as well as geologic issues and ramp up from the extended longwall move at the Wambo mine and we've raised the lower end of our target range for Australian metallurgical volumes. Let's now take a look at how we continue to strengthen the company through capital allocations on Slide 7. First, Peabody ended the quarter with $925 million of available cash and total liquidity of $943 million. Robust adjusted EBITDA contributions paved the way for the company to generate $240 million of operating cash flow this quarter, while paying approximately $135 million in Chapter 11 exit and settlement costs. Fourth quarter cash flows are expected to benefit nearly a $120 million from reduction in Chapter 11 payments. Working capital outflows were over $40 million excluding Chapter 11 exit costs, primarily due to an increase in account receivables from strong sales volumes not yet received in cash. While we had a slight benefit from an inventory draw resulting from strong met shipments it was not as much as we had anticipated due to robust coal production during the quarter. This led to an inventory decline of only about 200,000 tonnes or 25% of the balance for the met segment ensuring ample inventory to meet anticipated customer demand in the fourth quarter. Peabody also freed up about $25 million of its restricted cash balance, bringing the total balance as of September 30th, to $538 million. While we continue to chip away the balance, we are focused on the longer term, more impactful, lower cost options of our multi-pronged approach. We are engaged with surety providers to expand coverage through Australia. We continue to explore the potential for a cash flow revolver over time, an Australia bank guarantee facility and we are managing our liabilities the old fashioned way by reclaiming them and reducing obligations. We are now targeting to release $200 million to $400 million of restricted cash through 2018. Total cash flow decreased from June 30th, as the company was very active with regards to its capital return initiatives this quarter. We voluntarily repaid $300 million of debt, executed $69 million of share re-purchases and made $25 million of voluntary pension contributions to reduce future potential volatility, which we believe to be viewed favorably as we devoted to release restricted cash, and we didn't stop there. As of October 20th, we executed a total of $100 million of share re-purchases. Before turning the call back over to Glenn, I would like to highlight a few items with regards to our 2017 guidance. As we look towards the fourth quarter we expect a modest seasonal easing in PRB sales volumes, which we expect to be partly offset by continued strong Australian shipments. For the year PRB sales are now expected to be between 120 million and 125 million tonnes driven by increased sales under existing contracts. We are committed to meeting customer demand and we are happy to do so at industry leading margins that create value for our shareholders. Looking ahead to the next year, we now have approximately 88 million tonnes of PRB coal priced for 2018 at an average price of $12.27 per tonne. This represents a blend of more than 20 products from our three mines including [ATA] 100 quality and lower quality products. Related to our seaborne thermal coal export volumes we have about 3 million short tonnes priced some through hedges with limited margin cash at an average price of about $72 per short tonne which after making adjustments for both metric tonnes and quality equates to a new capital price in the mid 80s. Glenn will now cover current industry fundamentals and current policy actions by the administration.

Thanks Amy. Let's take a look at global industry fundamentals beginning on Slide 8. During the third quarter we continue to see strong seaborne and coal pricing largely driven by demand from China and supply partners due to Chinese production constraints and modest sourcing challenges from seaborne suppliers. It's worth noting that while China only accounts for about one-fifth of all seaborne coal demand even slight changes to imports can lead to significant impact on the overall industry. Year-to-date Chinese coal import demand has been high increasing 24 million tonnes with September being reported the highest monthly levels since 2014. Within seaborne thermal coal Chinese imports were up to 15 million tonnes through September over the prior year, on robust electricity generation that has increased approximately 6% and ongoing policy initiatives. South Korea has also been a bright spot with imports increasing approximately 15 million tonnes through September on strong demand as nuclear generation has been curtailed. In regard to South Korea I would also note that Peabody has transitioned to direct marketing into the country rather than through traditional agencies, allowing us to further maximize our underlying business. Turning to India, power generation has been up 5% over the prior year, but strong domestic coal production and destocking has muted coal imports. However we have also seen recent depletion of coal industries and utilities to new record low levels and that should favor additional import demand in the fourth quarter. As we look at the full seaborne and thermal coal outlook for full year 2017 we project demand to rise approximately 10 million to 15 million tonnes above 2016 levels. So we would note that this was a relatively small increase, a relative small increase has been sufficient to keep crossing levels at very healthy levels. We could then track [indiscernible] product in the upper double figures for multiple months. In addition substantial new coal generation continues to be built globally. In fact industry sources confirm some 30 countries around the world on six continents have new coal field generation coming on between 2017 and 2018 with approximately 65 gigawatts starting out this year. Turning now to seaborne metallurgical coal, strong global steel output particularly in China has underpinned demand growth. In China steel production is at record levels with steel exports down 30% through September. As a result met coal imports rose 9 million tonnes during the first nine months on strong demand and limited domestic production. Turning to the third quarter, seaborne metallurgical coal pricing was relatively stable with a high coking coal set amount of $170 per tonne on an index based pricing mechanism. In addition, Peabody [has now] showed third quarter bench mark low-vol PCI pricing at $115 per tonne with additional settlement later in the quarter of a $127.50. The fourth quarter settlement follows suit at a $127.50 per tonne also. Moving to the U.S. on slide nine, mild weather and weaker gas pricing weighed on industry fundamentals in the third quarter, in fact cooling degree days declined approximately 16% compared to the prior year for June, July and August, in coal heavy regions. Overall U.S. electricity demand declined 2% through September. I expect the PRB and Illinois Basin are most competitive in natural gas over time, the PRB was a standout this quarter increasing 8% as electricity demand for all other coal basins weakened and gas generation was down 12% year on year. In addition PRB inventories grew to an average 55 days of maximum burn and that's down five days from 2016 levels. For full year 2017 Peabody now expects U.S. coal consumption from electricity generation to be largely flat compared to 2016. Announced coal plant retirements continue to get headlines, the other retirement projections remain on track. This year we continue to expect high capacity utilization of U.S. coal plants to offset the impact of approximately 15 million tonnes of lower demand resulting from about 10 gigawatts of coal plant retirements. For an early glimpse of 2018 we estimate U.S. utility demand to be largely stable with about 20 million tonnes of reduced coal demand expected from planned retirements which would largely be offset by higher capacity utilization from a nationwide coal fleet that this year is running at just over 50% utilization. [Noticing] natural gas prices and weather our [indiscernible] be a large driver of demand in 2018. On Slide 10, I'd now like to take a moment to discuss some encouraging policy changes that continue to advance the pro energy economy and recognize callers on the central part of the energy mix. In just past year over dozen onerous regulations have been resolved and another dozen are currently under review, just recently the Environmental Protection Agency proposed to repeal the so called Clean Power Plan. In addition the Perry study represents a good first step in examining grid complexity and a proposed FERC grid resiliency pricing rule from those incentives to preserve valuable base load generating capacity including coal. You've also heard EPA administrator Pruitt declare the war on coal is over. I will make the [indiscernible] favorable policy movements in Australia. There has been an important debate as the energy administration has faced blackouts and higher electricity costs in part to a [major] reliance on unreliable energy sources. That's led to Australia scraping subsidies to renewables and requiring electricity retailers to guarantee reliability through a few mutual standard. Peabody believes that all consumers benefit from liable resilient energy portfolio that uses the diversity of fuels. We also support high efficiency, low emissions technology today, and over time advancement of carbon capture and storage technologies to reduce emissions. That's a review of the industry fundamentals and I would like to summarize our progress on Slide 11, the last quarter we outlined our financial approach. Generate cash, reduce debt, invest wisely and return cash to shareholders. I'm pleased to note, we have made progress across the board. First as we discussed we generated $240 million of operating cash flow this quarter, made just under $400 million of voluntary payments to improve the balance sheet and returned cash to shareholders and still ended the quarter with $925 million of cash. We remain committed to maintain cost discipline to enhance margins. We also capturing the opportunities offered by buoyant seaborne cost fundamentals -- coal fundamentals. We're still targeting a liquidity level of approximately $800 million and recognize there will be times such as this quarter where we are a bit above our target levels. We remain committed to quickly executing on our capital allocation initiatives. You might recall that last quarter we targeted a total of $300 million of debt repayments by year end and we're pleased to have accelerated those re-payments in the third quarter. We also amended our credit agreement reducing interest rate by 100 basis points and allowing greater flexibility for shareholder returns. We continue to target an additional $200 million of debt repayments by year end 2018 and aim to have gross debt of $1.2 billion to $1.4 billion over time. The third element of our [price] is to invest wisely. Peabody has modest sustained capital levels based on a well capitalized platform. We also continue to see sales of none-core assets where the value proposition is compelling. For instance you will recall that in late 2016, we placed our Burton mine [indiscernible]. We've now entered into an agreement to sell the majority of the inactive Burton and related infrastructure for approximately $11 million which also reduces Peabody's asset retirement obligation by $53 million and frees up an estimated $30 million of restricted cash when that deal closes. In addition as part of our long term planning for the eventual closure of the Millennium mine we have entered into an agreement to sell our 50% interest in the shared coal handling and preparation plant and the associated rail loading facility, to the facility's other partner. This reduces obligations while preserving [triple] capacity for our remaining production. We are often asked about industry M&A, so it's worth noting that we approach potential acquisitions with a critical eye and health skepticism. While the acquisitions over time may make sense to improve our competitive position in the U.S. or upgrade our platform in Australia, it bears repeating that any potential targets must be viewed through several tight filters. First, any acquisition should maintain the strength of our balance sheet. Second, we are highly focused on returns, but the level of returns above our cost to capital and the timing of payback. Third, targets would be specifically in our core regions of the Powder River Basin, Illinois Basins, seaborne met, or seaborne thermal. Fourth, we will look for tangible synergies, physical, commercial, logistical and/or financial. And finally, we have made the main target which needs to add measurable value to shareholders and that means our shareholders. We continually evaluate a widespread shareholder value but are agnostic as to how that value is created. In addition, [indiscernible] in the mining and energy sectors where the full position has been to invest capital in volume growth rather than return that cash to shareholders. This is not our default position. Investments are made against the presumption that we will be returning cash to shareholders. And that leads to the final element of our financial approach. Last quarter we enacted $500 million share repurchase program demonstrating that the Board and management believe repurchases provide good long term value particularly at current trading levels. We also made a [indiscernible] program. Since authorization we have repurchased 100 million of shares and intend to continue to execute under the program. We also amended our credit agreement to free up capacity directed to the size of share repurchases the Board authorized. Our credit agreements contained some ongoing regulators to capital returns that we believe we have ample capacity to continue with repurchases. Also as a reminder our Board of Directors will regularly evaluate a sustainable dividend program which we are targeting to commence in the first quarter of 2018. So to wrap up, we view this as a striking quarter for the Peabody team and our stakeholders. We are benefiting from our achievements on volumes, costs and realized revenues and we continue to surpass to create value with aggressive focus on what matters; generating cash, reducing debt, investing wisely, and returning cash. We believe our strong cash flows and smart cash use can continue a virtuous cycle as strength brings more strength. That concludes our formal remarks today. At this time we are happy to take your questions. Operator?

[Operator Instructions] First we will go to line of Jeremy Sussman of Clarksons. Your line is open.

So I think if I heard you correctly you said you want to free up another $200 million to $400 million of restricted cash by the end of 2018 versus I think around 500, 300 and 540 now, did I hear you correctly?

Yes, so what I would say Jeremy is that and several of you have probably heard me say this before is I want to free up all the cash, but what we're targeting between now and the end of 2018 is $200 million to $400 million of release of that restricted cash. We currently have about $536 million on the balance sheet and we are doing that I would say through the traditional methods of reclaiming the two transactions that Glenn referenced in his remarks that will yield some cash back to Peabody. But then working with the financial community as well in really three ways, the first being what we've discussed in the past around returning over time to a normal cash flow revolver which we can utilize for LCs. The second being the extension of our surety program that we use for U.S. obligations into Australia and those efforts are well underway with a broker in place and discussions ongoing. And then finally one that we haven't talked about in the past which is looking to develop an Australian bank guarantee facility that we might be able to use in a way to provide guarantees to the government and other parties that we provide assurance to as a way to release that cash.

That's great and super helpful. I just have one I guess maybe two quick follow ups. I guess first on my calculations I think you have over 20% free cash flow yield based on the forward curve. So I guess are there any meaningful restrictions on dividend payments in 2018 or did the recent sort of amended provisions to your credit agreement take care of this? And then just on the operational front I think your Australian net cost came in sub $80 a tonne this quarter which compares to kind of the midpoint of guidance of $90 a tonne. So obviously costs in the first half of the year were a bit higher but great cost control this quarter. How should we think about things kind of on a go forward basis? Thank you.

So I guess I might start in reverse with the met coal question and just say that we're really pleased with the cost performance of our met segment in the third quarter. We had a strong line of sight into what that performance was going to look like given our met coal inventory volumes that we had at the end of the third quarter. So we're expecting and on a year-to-date basis we're well within that range. As we look forward to the fourth quarter and costs within that range and really the biggest variable on fourth quarter performance is going to be seaborne pricing. Maybe moving on to cash flow, we would agree that the free cash flow yield at this point is quite strong and is one of the reasons why we believe the stock represents such a great value right now and why we're executing on a share repurchase program. With respect to dividends going into 2018 the restrictions are really around the bond indentures and the credit agreement. As you know we got a $25 million dividend basket that begins in 2018. We also have the $450 million capital returns basket that we have created with this amendment. And finally we do have a restricted payments basket that we've refreshed to $50 million but that will grow over time based on excess cash flow.

And Jeremy maybe just to give you a little bit color, the met coal as Amy said, we been expecting that we're going to have a strong third quarter, given that we build our inventories. I think what surprised us was the strength of that production that occurred. As Amy indicated we actually didn't draw down on the inventory to the extent. So I think that positions us well as we've indicated in what we still see as being strong market. The strength of the back I want to sort of call out [indiscernible] who is sitting on there. They have both run a mine, they have [whitewashed] and yield production records in addition to the size volume. So a very strong performance from those people. As we look forward, prices we would think as those would be indicated -- Amy said pricing is important. Cost of linked prices are important -- prices of linked costs are going to be important is internally the [greatest] move that's going forward. I'd also seem to have a [indiscernible] in Australia as being an important factor and also all prices are particularly fair so these operations would be a major factor in cost. We will be looking forward to giving guidance in the -- at the next call and we are working through our budgeting process at the moment.

Next we have the line of Michael Dudas of Vertical Research. Your line is open.

Glenn just to elaborate further on the global thermal market that seems to I think has probably surprised people even greater than what's happened in the global met side. And then seeing by your discussion about China and marketing and your strategy there and giving your current customers, are you looking to focus on certain areas, relative to others? Are there other countries, other areas where you have competitive advantages or this could be much more attuned to more coal consumption and as nuclear and energy dynamics continue over the next several years?

Thanks for that question. I've indicated probably South Korea as being the area and it comes at a time when we had seen an increase in ports around thermal for South Korea and we move to like from what is traditionally done being an agency basis to the direct marketing into those South Korean markets. And I believe that's a single [motive] of the strength of our marketing group and what I believe to be a competitive advantage particular in those Asia Pacific markets relative to our peer group. Going forward we are continuing to see as I've indicated, something in the 60s, 55 this year, 65 next year perhaps around build out of new thermal generation and in addition to China we're actually seeing it across ASEAN countries; Malaysia and Vietnam we're actually quite strong on a year-over-year basis. So we do have that Asia Pacific focus in the strategy as you've indicated and I think we are well priced and well positioned. And as it turns out we have got a pretty good and what we would continue to regard as an underappreciated thermal platform from our Australian operations, very good cost performance. And as you can conclude by the margins the ability to access those markets is particularly important then. As we continue to reiterate, I think we took advantage of that in the year-to-date and we expect to continue to do so in the fourth quarter.

So I would say in a couple of quarters, you might exceed the PRB as a contribution on the EBITDA chart on Page 5, or [chapter 1].

We like the internal competition that that brings.

My follow up. As you think about structuring contracts over time in the PRB operations are anything there as much more that generates this stable cash or is there going to be an element of upside given the growth of the muted demand and maybe natural gas environment in the U.S.?

We look to generate both cash out of our U.S. operations but more importantly returns as well. So two filter process there. I think as we think about the U.S. base we often times think about it as the stable cash flows and we think about the Australian business as one that provides -- the thermal business as one that provides relatively stable cash flows in all markets and the met as one that provides fantastic cash flows in elevated markets. So it's a blended approach but as we look across the platform our focus is not just on cash generation which is very important but also on returns overall.

Next we have the line of John Bridges of JPMorgan. Your line is open.

I was just wondering this may just be a shout out to your PRB sales team, but I was intrigued looking at the railings from the EIA weakness to see PRB [mines] went down but then you have this nice performance and then you have actually raised your numbers for the year. So I'm just wondering, what the background is to those changes and if you could sort of -- well you did mention the weakness in the heating -- cooling degree days but I was just surprised by the divergence.

I think it's part of our contracting strategy where we look to meet those market requirements, but also say to double down on the returns focus that Amy has mentioned is probably in part recognizes the strong and robust process we have around three mines. Over a dozen active piece the ability to meet customer requirements while still maximizing margins what we believe is industry leading margins across those three lines. So we did see strength in that third quarter as you have indicated. Looking forward we probably think that the traditional [shoulder] season would likely see some decline in that, but I think as you have indicated we are happy with both the strength of our PRB business and solid performance and yes we can give a shout out to the team. But also [indiscernible] delivering on those cost advantages and still preserving that margin which we believe is quite strong.

And maybe while we are on U.S. coal and you are reporting sales prices for NOL base in the 40s, when [small] price is sitting very unhappily down at the low end of the 30s range. Could you talk a little bit about the differences between your coal and the coal that's getting $30 and what do you see going on there, and maybe the impact of gas pipelines coming off from the Marcellus?

The Illinois Basin as we have said -- as you are probably alluding to is a competitive basin. We have seen prices come up there is no doubt about that as prices grow through production. I think having access to export markets has been helpful in that region as we've seen in our higher elevated competitive pricing. Our competitive position we believe in the basin stems from our access to particularly the Indiana sub-markets certain customers within that region. I must say our focus is on quality, not only BTU but the characteristics that are within our coal and the ability to mine that coal cheaply. So it has been a competitive basin. I think we have a -- strengthened certain competitive attributes that we look to leverage and that's probably deriving the results that you're seeing.

Next we have the line of Mark Levin, Seaport Global, your line is open.

Yes, congrats on a very good quarter. Just a couple of quick questions, some smaller picture, some bigger picture. On the bigger picture one it looks like for 2018 I think you'd mentioned committing you know roughly 88 million tonnes this year, you guys will sell between 100 and 125 it looks like out of the PRB. Is there a scenario in which if you're not getting the prices that you want whatever they may that you don't ship as many as a 100, 125 million tonnes and you leave the coal in the ground and just curious how you think about that on a price position heading into '18?

I think that to start, Mark, we're about where we'd expect to be at this point in terms of contracting and we'll expect to see some more activities going into the fourth quarter. But what you can expect from Peabody from a contracting approach is that we like to go into the year very well committed. And so certainly our approach has been that we like to give our miners strong production plans that they can look out over the course of the year to both maximize the margins under certain contracts and keep our costs as low as we can. So our contracting levels do inform our production levels in any given year and as Glenn indicated we're going through our production planning right now for 2018 and you'll expect us to highlight that as we round out 2017 with more concrete guidance in terms of where U.S. volumes are going to be particularly in the Powder River Basin.

With reference to that I think last quarter Amy you guys mentioned you know you're thinking flat production or flat demand '18 over '17, I think you guys alluded to that on the last call, is there any reason why that would have changed either because of the benign summer weather or retirements whatever the case may be? Is there -- and I think raw hide was impacted a little bit by the limited plants and we will see what happens there. But is there any change to that kind of thought process the PRB production in '18 would be flat with '17?

I think you know we felt like 2017 shipments have been robust and so our PRB guidance range was slightly lower last quarter as we pointed to the flat shipments. So I think that we'll be looking with interest as to the strength of the winter season and what that does for shipments as we round out that volume. I would say with respect to our lower quality coals that we've talked about and we'll reference that we don't just ship two to three products. We ship 20 plus products out of the Powder River Basin and we ship to 23 states and under -- over 50 plus contracts. So we don't view plant closures in a singular sense as being game changers to us. What we do look to is our strong cost position particularly with respect to some of those "lower quality coals" as a way to maintain our competitive advantage in what may be a smaller production tie for lower quality coals.

Little bit of color on that, obviously the illuminant proposals haven't yet been approved, as we understand and as Amy sort of was mentioning represents about 3% of our overall PRB volumes. So we have skills that have [sharpened those] in the PRB. We service nearly half of the states and we have been consistently indicating that we have been sitting at a certain level of plant retirements occurring over the next few years. And as I reiterated I think, what we see overall is still consistent with those projections.

That's helpful and two real quick ones and I will get off the phone. One is, Amy, if you kind of look out 12 months from now, let's say we're successful or you're successful in getting the cash flow revolver in place. You continue to pay down debt and execute on your strategies you guys have been doing so well. You have mentioned that $800 million as the target kind of liquidity number now, you're above that now but of that $800 million being the target. The first part of my question is, what do you think is the appropriate amount of liquidity for the new Peabody to have, assuming you do have a cash flow revolver in place? That's the first part of my question. And then the second part has to do with the sustainability of lower met coal cash costs, which Jeremy asked, obviously, depended upon prices and a myriad of other factors. But is there any reason why in 2018 that your met coal cash costs couldn't be below, let's say either the midpoint or the low end of the range that you have put out there from that coal in '17? Thanks very much.

So with respect to liquidity, we target $800 million and we're agnostic as to whether that comes in the form of cash or other forms of liquidity, i.e., a revolving credit facility over time or AR securitization to the extent that there is capacity in excess of our letters of credit. What I would say is those both the AR securitization today and probably a revolving credit facility in the future will initially be earmarked as ways to free up that trapped cash, so as mechanisms to provide financial assurances going forward. With respect to metallurgical coal costs it's been a continued focus of the Australian platform really for not just the last year but probably the last three years in terms of finding ways to continue to move down that cost curve. We certainly like where we landed this third quarter that was on the basis of really strong production across the board and tight cost controls. We're going to look to continue that going forward and we don't see pressures right now above inflationary pressures, particularly going into the fourth quarter. As we look forward to 2018, we have got a little bit more planning that we need to do in terms of those operations. So we will continue to guide the market towards that as we get new and better information. But from a macro prospective we are not seeing significant -- from a micro perspective we are not seeing significant pressures within the business on those numbers.

Our next question comes from the line of Paul Forward with Stifel. Your line is open.

Just wanted to go back to a comment that Glenn had made earlier on the call about the North Goonyella Mine, it sounded like you had a record quarter there. That would definitely suggest a pretty strong bounce back at North Goonyella from the -- I think last year's number was 1.3 million tonnes but historical this has been a mine that's been able to do up to say 3 or even more million tonnes per year. So just wondering, if you -- Glenn are we back to that point that we could anticipate that North Goonyella, if your performance is as good as it was over the past quarter so can it be sustained to that 3 plus million tonne level?

We certainly had a very strong quarter and I think it's attributable to a number of factors of really brilliant efforts by the team over a multiyear period to improve the performance of North Goonyella. Last year's results were impacted by a couple of things. We did have a extended longwall move that was a planned move, it was the first time we have moved those new [shields]. But secondly we did encounter geological conditions that did impact on the overall performance and in fact we stopped [indiscernible] from that system. As we move forward the team has been really executing very well through most of this year and we will hold them onto account on what we would expect as being the new normal going forward. I think when you look on a year-on-year basis one of the issues about -- great performance from North Goonyella may be that it does report timings of the next move on a year-on-year basis. There are some things that we continue to work through going forward. But it has been a very strong quarter and the expectation would be that we would find ways to run at a level that was near that.

Just I think you had mentioned in the press release planning -- long term planning for the closure of Millennium. Just wondering, if there is any timing that you are currently anticipating and obviously you have got this agreement to sell your coal handling and prep plant that Millennium uses. Just wondering, as you look over 2018 and '19, any impacts from this or is this -- or is the closure post 2019?

As we have targeted and as probably maybe -- we had our 2016 business plan out previously and I think that had identified Millennium as being one of those mines that we were looking to ease down as strip ratio and the cost of [indiscernible] that mine. At this point I would target an end of 2019 pricing on care and maintenance. The decision to close was one that followed an extensive review of all our options with respect to Millennium and the sale of the plant to the neighboring mine which is a BHP Mitsui mine enables us to really take on $20 million of cash, free up some reclamation activities at that time but also the way that contract was structured, each partner would have incurred its share of fixed cost going forward. But the agreement still enables us to have access to that facility and so we don't expect obviously we'll benefit from that going forward, but I think that -- those sort of decisions and discussions around Millennium very consistent with everything we have talked about in the past.

Next we have the line of Lucas Pipes of FBR Capital Markets, your line is open.

Hey, thank you and good morning everybody. So I wanted to ask maybe a bigger picture question, Glenn and Amy. Obviously you've alluded to the strength in the seaborne markets, and I wondered given your asset position in Australia, at what point would you consider maybe taking more of a growth outlook on your business? What point do you think it could make sense to look at Brownfield expansion, so look even at some re-sales opportunity? I would appreciate your perspective, thank you.

Our focus obviously when we look at the seaborne business it's around that Wilpinjong and Wambo mines. There are a lot of extension opportunities for those mines as we look forward over the next sort of five years. With respect to our met platform we've said that our [pattern] has been around the mines of North Goonyella, Coppabella which is a high quality PCI mine and Metropolitan remaining within the fold would be our three core areas. We'll be looking at large extension activities for those mines, potentially both debottlenecking and any opportunity to [indiscernible] those mines over a five year period, but that would in essence be the coal. We do have a portfolio of potential developments, but I really caveat that with everything I have talked about though in terms of a critical eye presumption of about returning cash to shareholders, balance sheet transfers, returns focused, and [that means that] things at this point in time that we would warrant -- earlier this discussion will consideration all. So I think of that line what our focus is, is on the existing portfolio and anything with respect to over and above that would have to go through a pretty extensive lens.

Got it, that's a very helpful perspective, comprehensive answer which I appreciate. And then Amy I may have missed this earlier on the call, but would it be possible for you to tell us what amount of capital you could return to shareholders via buybacks for the remainder of 2017 under your indentures including the bond indenture?

So with respect to our credit agreement, the new terms that are in place frees us right around $500 million for capital returns whether or not that's in the form of share repurchases or dividends. We do have a restriction in our bond indenture which limits us to 50% of the bond indenture definition of net income. That is one that is specific to that indenture. So there are some add backs to that number as you would expect to particularly around non-cash type items. And what is helpful with respect to the bond indenture, is the fact that is a cumulative builder, so it builds on a quarter basis. So at this point in time, we think that we have really ample latitude given sort of the volatility and the technical trends in the shares to continue our repurchase program through the end of the year.

And lastly we have the line of [indiscernible] of Bank of America. Your line is open.

I wanted to ask about, you announced last week from Vistra Energy about shutting down those couple of Texas plants that I recall were kind of big customers of your raw hide mine. Given -- first of all is that announcement reflected in your 2018 guidance and given the fact that those were I think pretty significant customers for that mine and the fact that it's your lowest BTU content in the Powder River, does that sort of throw the viability of raw hide into question, on a go forward basis?

So I will start with just reiteration of how we operate out of the Powder River Basin. So although we are three mines out of that basin we do operate as a complex and we have a great deal of flexibility to shift contracts to and from various mines depending on where we see the best margins being generated. I will also highlight that often times our lowest quality coal is our cheapest coal to mine and I've highlighted raw hide on numerous occasions as really being the low cost producer in the Powder River Basin. So those claims are customers of Peabody's but this year we're going to ship over 120 million tonnes out of the Powder River Basin. So in the grand scheme of things no one contract, no one customer, no one state is necessarily material to that mix. So we will continue to go through our production planning and exercise for 2018 and match it up, but as Glenn had indicated earlier, we had anticipated a number of U.S. plant closures over this five year period of time. In fact we said 50 gigawatts of generation coming out between now and over the next five years. So we don't anticipate as we see individual plant closures come up that they are either material or that there will be ones that we would adjust our production plans on unless we probably disclose that.

And I will just that, last week of what is last Friday and I will back that thing to be out to complete as we indicated. Very strong margins coming from all that PRB mines and we operate those as a complex. We do have a very extensive diversified portfolio and we keep telling that we believe we got industry leading margins in that area.

Great and thanks for the disclosure about the limitations on dividends and your bond indentures. Given the fact that you seem like you want to deploy more capital to shareholders in 2018 and you sort of were able to amend the closure. Do you see yourself one and two; do some kind of consent solicitation or tender for the bonds to put in a more lax set of restrictions or do you -- are you confident enough in your 2018 ability to generate consolidated net income to accomplish your capital return goals?

At this point in time we do not see a need to adjust our bond indenture to meet the requirements of our capital allocation program. Our focus is really generating that capacity the old fashioned way by generating net income which fills that basket over time.

And with no further questions here in queue. I would be happy to turn it back to Glenn Kellow for any closing remarks.

Thank you, operator, and thank you for your questions and participating in our call. It was indeed a lively quarter and we would like to -- back to thank you, your foot off the gas. I do believe we have the best assets, the best strategies and the best premium price to deliver on these objectives. And I would like to thank all of our employees across our global platform for their hard work and attention to safe productive work places. To those on our call today, we appreciate your interest and support. And we look forward to keeping you upraised of our ongoing actions as we conclude the year and look ahead to 2018. Operator that closes today's call. Thank you.