Peabody Energy Corporation (BTU) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by and welcome to the Peabody's First Quarter Earnings Call. [Operator Instructions] And I'd now like to turn the conference over to Mr. Vic Svec, Senior Vice President, Global Investor and Corporate Relations. Please go ahead, sir.

Okay. Thanks Amanda and good morning, everyone. Welcome to BTU's earnings call for the first quarter of 2019. With us today are President and Chief Executive Officer, Glenn Kellow; and Executive Vice President and Chief Financial Officer, Amy Schwetz. During our formal remarks, we'll reference a supplemental presentation and that's available on our website at peabodyenergy.com. Now on Slide 2 of this deck, you'll find our statement on forward-looking information. We do encourage you to consider the risk factors that we reference here as well as our public filings with the SEC. And I'd also note that we use both GAAP and non-GAAP measures, we refer you to our reconciliation of those measures in this presentation as well as in our earnings release. I'll now turn the call over to Glenn.

Thanks, Vic, and good morning, everyone. Before Amy covers the financials in more detail, I'd like to spend a few minutes reviewing the highlights of the quarter. First of all, this was our first full quarter of ownership following the highly accretive Shoal Creek Mine purchase. I'm pleased to note that the mine had an outstanding quarter. In fact, Shoal Creek rose to the top earnings contributor for Peabody in this period. Well only its only days it's first quarter cash flows imply a payback period pace of less than two years. Next, our Seaborne thermal segment once again delivered leading margins in the quarter. On average over the past two years our Seaborne thermal segment has delivered 40% adjusted EBITDA margins. Also we reached an agreement for the maximum insurance recoveries for North Goonyella in the quarter. We recorded benefits to operating profile including a portion to adjusted EBITDA and have already collected all $125 million in cash proceeds. Once again, we generated strong cash flows and returned even more to our shareholders. In fact, we returned nearly double our free cash flow to shareholders this quarter. We bought back shares, issued our ongoing quarterly dividend and deployed another tool in the kit through the supplemental dividend. The quarter wasn't without sum short-term external challenges on several fronts though. I believe the strength of the platform will be more evident in the second half of 2019. This year we expect to generate more than half of our adjusted EBITDA in that second half of the year. Throughout 2019, we're looking to build on our strength and influence three strategies to create value. First; we're continuing to reweight our investments toward greater Seaborne thermal and met coal access to capture higher-growth Asian demand. To that end, in the first quarter our Seaborne segments comprise more than 60% of mining adjusted EBITDA. Second, we're optimizing our lowest cost, highest margin US thermal assets in a low capital fashion to maximize cash generation. Our US thermal platform continues to represent strong cash flow generation that well exceeds capital requirements. Third, we're executing our financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders having return more than $1.4 billion in cash to shareholders since August, 2017. I'd like to take a moment here and reflect on the first and third components of our strategy, Greater Seaborne access and execution of our financial approach. Shoal Creek is both an example of strategic execution and financial strength. The acquisition upgrades our Seaborne Met portfolio as the mine exclusively sells to Asian and European steel mills. Shoal Creek offers a substantial increase in both the quantity and the quality of our met coal portfolio. Shoal Creek delivered exceptional operational results in the first quarter. For some time now, we've outlined a strict set of investment filters. One of those filters is to provide a reasonable payback period. The mine's first quarter operating cash flow imply a record payback period of less than two years. And to be clear, that's less than two years from the day the first dollar was invested as oppose to organic investment that may not cash flow for multiple years. Shoal Creek also clearly meets each of our other investment filters. It's a strategic portfolio fit as it expands our Seaborne Metallurgical coal assets. It maintains our financial strength as the acquisition was financed with cash on hand and at a highly attractive valuation of two times adjusted EBITDA. The acquisition is expected to generate returns well above our weighted average cost of capital of 10%. It provides tangible synergies as we're able to move quickly to monetize our NOL position and we're realizing synergies from our shared services platform. And certainly not least, it creates significant value for our shareholders. As both CEO and investor, you can imagine that I've challenged the team to find more of these opportunities within our strict filters. I'll now turn things over to Amy to cover the financials in more detail.

Thanks Glenn and good morning, everyone. I characterized the first quarter performances is quite confident given the timely settlement of the North Goonyella insurance claim, improved Seaborne thermal performance and cash discipline. Even while we gave some of those benefits back through the US rail issues from the substantial playing. Let's delve into the details. Peabody's first quarter revenues of $1.25 billion reflect the impact of 16% lower volumes. Winter weather and severe flooding across the plain states heavily impacted rail performance beginning in early February. Rail outages and delays primarily impacted PRB shipments which were down 22% over the prior year. We did recognize the benefit of $125 million for the North Goonyella insurance claim in the quarter. The maximum recovery allowed under the applicable insurance policies. Approximately $34 million offset recovery cost in the quarter and therefore was recorded as a benefit to adjusted EBITDA. The remaining $91 million of insurance proceeds related to the known equipment losses from current and prior quarter. That amount was excluded from adjusted EBITDA given the related charges were excluded when incurred. First quarter DD&A was largely stable with the prior year as lower contract amortization was mostly offset or mostly offset accelerated DD&A related to the Kayenta Mine closure and the inclusion of Shoal Creek. Over the course of the year, we expect DD&A to decline and we're targeting full year expense of $600 million to $650 million. SG&A for the quarter was in line with the prior year and below quarterly guidance ranges and I would note that, Peabody's SG&A as a percentage of revenue remains the best in this sector. Income from continuing operations net of income taxes, totaled $133 million compared to $208 million in the prior year. Diluted earnings per share totaled $1.15 marking a $0.32 improvement over the prior year. First quarter EPS benefited from the company's ongoing share repurchase program and the conversion of preferred stock in the prior year. First quarter adjusted EBITDA totaled $254 million versus $364 million in the prior year. adjusted EBITDA included the impact of $23 million related to PRB logistical challenges in the quarter and $37 million in re-ventilation and re-entry cost related to North Goonyella partly offset by the aforementioned $34 million of insurance proceeds benefit. Let's begin with our Seaborne thermal segment, which once again was a leading segment with 38% adjusted EBITDA margins. Seaborne thermal export shipments increased 24% over the prior year to 2.6 million tons with an average realized price of $80.40 per short ton. The operations benefitted from improved operating performance at the Wambo complex in part due to no longwall move in the quarter at Wambo. In fact, the Wambo underground mine led this segment in adjusted EBITDA margins this quarter. From a mix perspective, Newcastle-spec shipments comprised 71% of export sales that's slightly above the high end of Peabody's full year expectations. Seaborne thermal adjusted EBITDA of $95 million increased 54% compared to the prior year results. Continued high demand for Seaborne thermal coal coupled with Peabody's low cost operation resulted in increased volumes, higher pricing and lower cost. Cost per ton totaled $35.03 in the quarter marking a $2.06 decline from the prior year. Let's now turn to the seaborne met coal segment which shipped 2.3 million tons in the quarter at an average realized price of $142.33 per ton. As we guided previously, first quarter volumes were less than ratable. Largely due to mine sequencing plans at Coppabella. Strip ratios were temporarily higher due to required re-handle of legacy overburden from the prior owner. In addition, costs were elevated due to the cumulative impact of the drag line outage. Combined these factors at Coppabella resulted in an about $8 per ton of higher cost year-over-year for the segment. In addition, Shoal Creek shipped its remaining acquired inventory in January resulting in elevated costs associated with the tons required to be recorded at fair value. This adjustment increased segment cost by approximately $3.50 per ton in the quarter. As a result, segment cost totaled a bit north of $103 per ton, excluding impacts from North Goonyella. Every other met mine in the category with the exception of Coppabella delivered cash costs within or below the company's original annual cost guidance range and this includes Shoal Creek because it's cash cost came in at the lower end of its guidance range of $85 to $95 per ton. Even with the longwall transition during the quarter, the mine led the companies 23 operations in adjusted EBITDA contribution. With regard to North Goonyella, as expected first quarter project cost came in above the fourth [ph] quarter cost guidance range. We've noticed previously we would look to mitigate those costs throughout the year and we were able to do so this quarter with the sales approximately 90,000 tons that contributed some $4 million to adjusted EBITDA. These sales along with the recognition of the insurance claim of $34 million mitigated project related cost that totaled $37 million. You'll also recall that our investment in Middlemount Mine add some 2 million tons of incremental economic metallurgical coal exposure to Peabody. Our share of Middlemount shipped some 400,000 tons in the first quarter. Equity affiliated accounting mandates that Peabody is required to report Middlemount's results as the company's share, the mine's net income which totaled $3.9 million in the quarter. To give you a deeper sense of the income statement component this included about $7.5 million in DD&A, ARO, net interest expense and income taxes. We expect Middlemount's performance to strengthen over the course of 2019 on improved mining conditions. Let's now move onto the US thermal segment where winter weather and severe flooding limited rail performance and shipments from the PRB. Suppressing our adjusted EBITDA value in estimated $23 million. Across the entire southern PRB March shipments mark the lowest level in over 20 years given these rail outages and delays. Peabody [indiscernible] quarter PRB shipments declined 22% to 25.3 million tons even following a strong start to the year in which January shipments were above our ratable averages. Rail road closures and rerouting of shipments particularly for the mid-section of the US, where many of our PRB customers are concentrated drove lower volumes. They also resulted in a $1.02 and $1.02 per ton increased to PRB costs from the prior year. The good news is that the PRB largely seems to recover from these issues and customer stockpiles are at their lowest levels since 2014. Midwestern and Western adjusted EBITDA rose year-over-year. The Midwestern segment benefitted for lower repairs and higher realized pricing. Strong performance from the Twentymile Mine contributed to $11 million increased in the western segments adjusted EBITDA over the prior year. In addition, Western realized revenues per ton rose in part due to accelerated billings associated with the plant closure of Kayenta Mine in the third quarter of 2019. In total, the US thermal operations earned total adjusted EBITDA of $112 million compared to $138 million in the prior year, even with some 8 million tons of lower sales volumes. Turning now to Slide 6, let's discuss key balances sheet and cash flow metrics. We ended the quarter with $798 million of cash and cash equivalents and $1.1 billion in available liquidity even after nearly $315 million in cash returns to shareholders in the quarter. Operating cash flows of $198 million and CapEx of $36 million led to free cash flow totaling $162 million in the first quarter. During the quarter, we deployed another tool in our capital allocation kit with a supplemental dividend of $200 million or $1.85 per share further underscoring our commitment to returning cash to shareholders. I would note that our ongoing quarterly dividend pace and supplemental dividend already equates to 2019 yield of some 8% based on our current share price. We have been consistent in stating that our default position has been to return cash to shareholders and we've made substantial progress on that front with $1.42 billion of cash returned through buybacks and dividends since August, 2017. We plan to return an amount equal to or greater than our free cash flow to shareholders in 2019 and the first quarter was no exception. With cash returns nearly doubling our free cash flow in the quarter. As our action show, we're willing enable to be flexible with regards to our approach and we remain committed to returning cash to shareholders. We have approximately $357 million remaining under our authorized share repurchase program and will continue to implement buyback as we believe our shares represent a compelling investment opportunity. Our commitment to shareholder return is evident not only in the absolute form of cash returns, but also in the progression of our net debt balance over the past year. I'd now like to turn the call over to Glenn to cover the industry conditions on Slide 7.

Thanks Amy. The first quarter of 2019 was marked by series of unusual needs and challenges to the coal industry logistics chain in multiple parts of the world. Traditional coal flows were altered by flooding here in the US in the Plains States, port restrictions in China; wet weather and train derailments in Australia; and a cyclone in Mozambique. While in some instances these challenges simply resulted in shifting of products between multiple demand centers. In other instances coal flows were disrupted. In China, cutting through the noise and looking at the math. Chinese imports are largely in line with prior year levels for this time of the year and Australian coal exports were up some 2 million tons. That's not to say that traditional coal flows weren't disrupted as China shifted their mix of their imports a bit. But overall demand remained. Specific to seaborne thermal pricing, low LNG prices, above average stockpiles in several large importing nations and a mild winter whole contributed to rebating of pricing. Newcastle pricing reached a two-year trough pricing level in April and since rebounded. And our 2019 committed volumes, our [indiscernible] prices above prompt Newcastle prices and that's even when - volumes - loading that those lines included portion of the lower - product as well. Our 2019 seaborne thermal price volumes include a little more than 2 million tons linked to the Japanese reference price settlement which was recently settled at $94.75 per ton. Including these expected commitments, we now have some 5.7 million short tons of Australian export thermal coal priced for the last three quarters of 2019 at an average price of $83 per short ton. And as expected we've seen it converging in the spread between the Newcastle-spec product and API 5. The 2019 forward curve price ratio as of the end of March was approximately 70% versus closer to 60% just a quarter ago. Our Australia mines are well positioned to meet the growing seaborne thermal demand centers. Over 80% of global seaborne demand stems from the Asia Pacific region even with customs clearing clearance delays in China during the quarter. Getting into some specifics, Chinese thermal coal imports these 8% in the quarter. while our internal estimates will have projected Chinese imports to be down year-on-year April, 2019 recent news from China actually indicates a goal of imports being on par with 2018 levels. India thermal coal imports are up 16% through March given the demand for higher-CV industrial coals that cannot be supplied by domestic producers. ASEAN continues to prove to be a strong driver of seaborne thermal demand as well, with the imports up 23% year-to-date. We expect this trend to continue without the on demand leading the growth in 2019 seaborne thermal coal demand. Moving now to seaborne met coal. Tight supply and demand fundamentals continues to support robust seaborne met coal prices. Spot higher taking coal prices averaged $206 per ton in the quarter with the first quarter settlement locked in at $210 per ton. Continued safety checks in China, strong steel production and quality limitations on domestic supply are leading to tight domestic supplies which in turn resulted in net back supported of the imports. As a result, met coal imports rose 35% through March. Looking ahead, we were estimating 2019 met coal imports to increase some 5 to 10 million tons over 2018 industry wide, with India leading the growth in demand. Global steel demand rose 5% last year and we were expecting additional 2% of growth this year. Supply increases largely expected to be sourced from Australia. It appears to me that the industry conditions for coal are often [indiscernible] particularly in relation to seaborne coal demand. So it's worth taking a moment to offer some content on Slide 8. We've begun to emphasized what I would call a surprisingly sustainable case to coal, where the choice is not one of good versus evil, but pursued at too goods abundant reliable energy supply and reduced emissions. For the first time ever in 2018, global coal fuel generating capacity top 2,000 gigawatts that's a massive 62% increase since the year 2000 and some 50 gigawatts of new coal fuel generation are expected to come online this year alone. To put that in perspective, each gigawatts used about 3 million tons of coal per year. Coal also is an essential ingredient in the original steel making which consumes 1 billion tons of coal each year. And coal provides about 70% of the energy needed to create some [indiscernible]. Life expectancy, educational attainment and income all correlate with per capital electricity used and more of the world's electricity is fueled by coal than any other source. Simply put the world plants and [indiscernible] coal for the foreseeable future. Our seaborne portfolio is well positioned to serve this growing demand to sometime - and some 570 million tons of coal reserves between Australia and Shoal Creek. That said, recently industry challenges make paradoxically enabled greater financial strength for those who take [indiscernible] position [indiscernible]. A world of use coal for many decades more into the future, also need sustainable coal companies more than ever. Let's now review the US thermal space on Slide 9. Custom demand remain strong in the first quarter even though shipments were impacted by rail outages and delayed due to heavy flooding across the across the heartland. In fact, implied customer demand by way of coal nominations with the rail were some 60% higher than actual trends loaded in March. Production declines of 12% outpaced their internal estimates given rail outages and delays. PRB shipments were down some 5 million to 10 million tons on weather impacts. Reduced coal shipments have further driven down already low utility stockpiles. In fact, seven PRB utility stockpiles declined 4 million tons in March which compared to an average build of 1 million tons in the month. US coal fuel generation declined 9% in the first quarter. As total load was down, an increased natural gas generation, grow with the excess capacity and continued weak gas prices. Natural gas generation rose 11% while all other fuel sources declined with wind generation down some 6% year-to-date. In 2019, we expect retirements and gains by natural gas to continue to weigh on coal demand. On the other hand, strong seaborne pricing provides an outlet for US thermal exports. I would now like to turn things back to Amy to discuss expectations for the upcoming quarter.

Thanks Glenn. We're anticipating a strong second half of 2019 that will contribute more than half of our full year adjusted EBITDA. PRB, seaborne met and seaborne thermal volumes are expected to escalate throughout the back half of the year. In addition, met coal costs are expected to decline from elevated Q1 level. Second quarter performance is expected to be impacted by two longwall moves in Australia. And PRB shipments are targeted to be in line with the first quarter as rail recoveries offset typical shoulder season demand. We are expecting strong seaborne thermal shipments and in line with this are increasing our full year guidance range by 250,000 tons at the midpoint. Given elevated met cost in the first quarter we're tightening our met coal cost guidance to $90 to $95 per ton. Related to North Goonyella, in the first quarter we completed segmenting of the mine into multiple zones to facilitate a phased re-ventilation and re-entry. In addition, all physical activities in advance of re-ventilating the first segment of the mine have been completed. Gas ratings are at acceptable levels and we're currently complying with the directives concerning documentation from the Queensland Mines Inspectorate, following a thorough review. This has resulted in a multi-week delay to the initial project plan. Should our re-ventilation and re-entry plan now progress as originally contemplated, we would expect to produce approximately 2 million tons from North Goonyella in 2020. If further delays occur, we will re-evaluate our plans, including longwall production targets, quarterly project costs and capital expenditures. From a cash perspective we pushed out some project capital spending primarily related to the Wambo JV into 2020. As a result we've lowered our 2019 CapEx guidance to $350 million to $375 million. And we're continuing to accelerate cash collections to support reclamation and post retirement liabilities at Kayenta. We remained focused on delivering results and generating value and we believe we've done a good job of that this quarter. As discussed we recognized the maximum allowable amount of the North Goonyella insurance claims. We've lowered our capital guidance and raised our seaborne thermal volume guidance and we've delivered SG&A below our average quarterly rate. And while we flag lower than ratable first quarter volumes our expectations did not take into account the severity of rail issues. Have PRB rails performed in the normal fashion we would have generated over $275 million of adjusted EBITDA this quarter. Furthermore, we remain committed to executing on our financial approach at generating cash, maintaining financial strength, investing lively and returning cash to shareholders. On the heels of our highly accretive Shoal Creek acquisition we're continuing to pursue opportunities to create substantial value for our shareholders. For some time now, we've discussed our strict set of investment filters and we will continue to employee these filters as we evaluate both internal and external investment decision. In addition, we've committed to returning our shareholders an amount equal to or greater than our free cash flow in 2019 and with that, I'd like to turn the call over for questions. Operator?

[Operator Instructions] we'll take our first question from Lucas Pipes with B. Riley FBR.

I wanted to first ask question on the seaborne thermal coal side. I believe you said you sold 2.6 million tons sold, if I kind of start at the midpoint of the guidance range. I think you would sell about 9.7 million tons over the remainder of the year and then that would leave about 4 million tons that are unpriced. And I wondered if you can give us some perspective as to what sort of quality this is, what sort of price we might be looking at and then also just in terms of cadence, when do you expect how many volumes in a quarterly basis between now and yearend [ph]? Thank you very much.

Sure, so starting with our price position. In Q2 to Q4, the year we got about 5.7 million short tons of that price, that said about $83 per ton, that does include some API 5 tons in that mix. But the balance of our tons feel throughout the remainder of the year, is weighted towards that lower quality spec. so about 40% to 50% of our unpriced seaborne export volumes would be that Newcastle-spec tonnage. If we look at our thermal volumes for the remainder of the year, we do anticipate while we have a longwall move at Wambo beginning this quarter so that will suppress volumes a bit, but so we will see a ramp once again into the back half of the year and that's a component of our second half of 2019 comprising more than half of our EBITDA for the year.

Got it. That's very helpful. Thank you very much for that Amy. And then switching to the domestic side obviously Q1 was impacted with the weather issues and I just wanted to kind of put it directly. Do you expect to make up the shortfall over the remainder of the year? So I think that it was a roughly $20 million impact or so, should that all come back to Q2 spread out over the course of the year or was this just lost EBITDA?

Yes, well no we don't expect it to be lost EBITDA. As you saw the - through the chart that we outlined on the 9, the rail just started to recovery already so much so that we would typically expect Q2 to see a reduction due to the traditional shoulder period. We're probably expecting now to be about flat to offset that with the improved rail performance that we've been seeing. So we would expect to look to recover most if not all of those tonnes through the balance of the year, but it will take more than the second quarter.

And Lucas I would note that, if you think about the impact that we saw in the first quarter as a result of this. It is because we've done everything but take the coal out of the pit in these instances. So the mine got ready for the second quarter when we saw rail shipments improving. There's - we standby with coals in the pits ready to load out of the PRB and as Glenn pointed out, we would generally see the sort of fall off as we move into April and May and more mild weather and this year, we're anticipating we're going to be about flat quarter-on-quarter.

What was unusual about what we saw well was, clearly probably the biggest impact in a month in the PRB in nearly 20 years. But what was unusual was way your customer was incredibly important and unfortunately looking at how that played out and predominantly [indiscernible] being impacted by the flooding. It appears as though some people may being better off than others, as that worked its way through based on the location of where our customer deliveries were occurring through that month in particular.

Got it. Very helpful. I appreciate all the detail and best of luck.

We'll take our next question from Mark Levin with Seaport Global.

So a couple quick questions, one about the cadence of EBITDA particularly as it relates to Q2. I think you mentioned two longwall moves in Australia, flat PRB shipments and a couple of other items. So when you - if you were to use the $254 million base and realized there's $34 million insurance recovery benefit in there. But if you would use the $254 million base, what would Q2 or how would you expect Q2 to look just directionally versus Q1 from an EBITDA perspective.

Sure, so if you noted a number of the moving parts Mark and it's starting with obviously no insurance proceeds in the second quarter. Thermal pricing has come off a bit as we go in from go from Q1 to Q2, that will be a factor and we do have the two longwall move in Australia. A couple positives that we're anticipating for the quarter is those flat PRB shipments, but those flat PRB shipments will be at a more ratable cadence than what we saw in the first quarter, so that should improve our PRB cost going into the second quarter and then lastly, as we noted in our release we're anticipating North Goonyella cost to come in more at the low end of the range.

Got it and when you put all that together does that look more flat or down or how would you kind of think about that, just relative to the quarter?

I think so much of it is going to be dependent on the pricing that we see that it may be difficult to handicap that at this point in time and we also will need to see how significant that rail recovery is as we look from May to June.

Got it. Okay great and then to North Goonyella for a second and some of the issues maybe that you flagged in the press release and in your comments. Can you maybe frame for us what a worse case situation looks like? It sounds like that the bottleneck is administrative now, but maybe walk us through like what happens if things don't go the way we hope they do which is to say that you're in the mine and weeks or months or whatever the case maybe. But maybe explain what the bottleneck is and how we should be thinking about this, if things don't go the way we want them to.

Sure, I'll go through that Mark. As we'd indicated we've essentially done all of the engineering all of the activities [indiscernible] re-ventilate that first segment as Amy indicated, gas levels would support our ability to do that. So we are ready to go from our perspective. The Queensland Inspectorate who have been working with us as we've continued to progressed and developed the plans and done the activities on site, have asked to review a number of documents in terms of working through the details of that. That has put us behind some weeks and where we thought we would be and it's difficult to sort of quantify, how long that will take place. It could be eminent. It could be a little bit longer that. Our focus at this point is working through that process responding to their request for information and then being able to as I said everything is ready to flick the switch and to be able to re-ventilate and that will enable us into monitor and then re-enter the mine and have a better assessment. At that point we look to re-examine the overall timing and sequencing on the project plant. But just to reiterate we're ready to go, so we're just working through that what is the final part of the process.

And to be clear, there's been no rejection of the plan it's just an administrative hold up, is that the best way to put that at this point?

It's dotting the I's and crossing the T's around supporting documentation with respect to assist out procedures and protocols that are on site. We've had no feedback that that's not the right plan, we had no feedback that anything is additional from an engineering or technical perspective is required. The focus appears to be to ensure that we have a full and robust complete set of risk assessment and protocols to support the re-ventilation and re-entry as of this first phase.

Got it and that's very helpful. And then just one last question as it relates to CapEx. I know you, it looks like you spent a de minimis amount of CapEx this quarter so that there's a big CapEx spend to get to the even the bottom end of your range Q2 to Q4. Amy, meaning how will that effect the trajectory of cash returns Q2 to Q4?

Well I think what is does Mark is, even though we're anticipating larger EBITDA contributions in the back half of the year it probably makes our free cash flow a bit more ratable over the course of the year based on the basing of CapEx. We do have some term fee spending that we'll see over the course of the year including some payments on the longwall to be installed at North Goonyella as we move over the course of the year. I think the delay of the Open-Cut and into 2020 has provided us an opportunity to bring CapEx down over the course of 2019 which we see as a positive thing in terms of increasing our cash balances for shareholder returns over the course of the year.

Thank you. We'll take our next question from Chris Terry with Deutsche Bank.

Regarding your seaborne thermal volumes, you have about 2 million tons contracted out for 2020, that's about half the level that you guys had at this point last year. So this based on your customers and clients looking for lower prices in the future or you guys actually find to get towards more of a spot market rate.

So we generally contract out more than a year in two years. The first would be tons that are priced under the JFY. So there will be some tons that are carried over from this settlement that we saw or $94 into Q1 of next year. We also use our hedge book from time-to-time to lock in those tonnages and so this is more of a reflection of where that book stands to-date and not necessarily an indication of where demand stands in the market. And we do have one large JFY customer that's on a calendar year basis as well, which impacts that.

All right, switching up to free cash flow. Off the $300 million or so that you guys have returned so far this year, how much of that was generated in 2019 versus 2018 just trying to figure out how much delay that would be in, any kind of generation this year versus paybacks to shareholders?

I'm sorry, could you repeat that question. I'm not sure I follow.

The $300 million that you're returning to shareholders in 1Q, how much of that was generated in 2019 just trying to figure out [indiscernible] between generation and actual payback?

Sure. So I would say what we've done in Q1 has actually reduced our cash balances and increased our net debt position fairly substantially. So we generated free cash flow of about $162 million in the first quarter and we returned over $300 million of cash to shareholders over that same period.

Right, but off the $162 million that was generated in 1Q was any off that returned to shareholders yet?

I guess I would view the cash is spongeable in the mix - so certainly there will be working capital movements that are in that mix generally, we both collect and pay within 30 days of a coal shipments, so yes there will be positive working capital movements or working capital movements that go into that mix.

All right, thank you. Good luck.

We'll take our next question from Scott Shair [ph] with Clarksons.

I was hoping you could talk a little bit more about your thermal demand expectations especially in the domestic market, is there any worry that with the recent fall and international thermal pricing, it could result in more tons competing in the domestic market?

Certainly you've seen imports come off in the US that's not entirely unexpected we've always viewed the US as a bit of swing supplier and API 2 has been their primary destination, we don't swim in those waters primarily we're in the Asia Pacific area primarily through our Australia thermal coal shipments those have actually came down and then retraced pretty nicely and in fact that low quality products is almost even with where it would have been a quarter ago and we did see some easing and therefore some compression from the Newcastle coming down which was something that was contemplated. Now I will point out that Newcastle product is in a slight [indiscernible] probably four to five years running and what is a pretty liquid market out there. So having hit that floor and come back it seems to have some decent legs to it.

Maybe I'd jump in too because I think the question was on US thermal and clearly it probably wouldn't impact on PRB shipments to that degree and then as we look at the Illinois Basin that's probably going to be a question around the extent to which producers have hedged those shipments and maybe have taken pay commitments on the logistics chain that may take place. So potentially that would move it out of 29 issue to more towards the back end or into 2020 potentially. But when we look at our Illinois basin position. It's actually more of an Indiana position we've often referred it to as sub market within that activity, which focuses probably more on domestic customers and competition is within that basin versus significant export competition.

And just maybe the triple bound on that Scott as it relates specifically to Peabody. We're fully committed in the Illinois Basin for the year at an average price of about $42 at ton, so we'll continue to watch these dynamics as it relates to API 2 moving into 2020 and beyond, but we feel very good about our position for 2019.

Great that's excellent color. Thank you for that. Switching gears, could you talk about any potential for more M&A obviously you guys recently closed Shoal Creek but are there any other assets out there that look attractive at this stage as you kind of turn your focus to your seaborne portfolio.

I think we've repeatedly said that our default position is return cash to shareholders and but we've also been clear on what the way we would think about deployment of any reinvestment back into the business be it sustainable capital, life extension capital, growth capital or M&A. and I think Shoal Creek represented good example, the sorts of things we'd be prepared to do, but they don't necessarily come along all the time and I think we've also demonstrated that we're prepared to be disciplined in that front. But if there's a another Shoal Creek asset we'd be more than interested in looking at execution of that and we've been clear as I said on our investment filters and we think Shoal Creek's high field ticked all of those boxes as we've articulated. But then go back out the full position is to return cash to shareholders and we've also been doing that in quite significant space.

Great, thank you for that and thank you for taking my questions and good luck going forward.

We'll take our next question from John Bridges with JPMorgan.

I just wondered you mentioned DD&A coming down which makes sense. I recall some longer term guidance the DD&A, amortization was coming down over the next few years. I just wondered if you could give us any sort of indication as to direction of those sort of non-contract items.

Sure so the most significant component that we see coming down overtime is we do have sales contracts that were established in fresh start that are amortizing overtime. We'll see a chunk of that come off in 2019 and then number will be cut by about a third as we move into 2020 in those sales contracts roll off in their entirety. The big movements that we're seeing in 2019 itself are truly around our two mines that are closing the year Kayenta being the largest impact of that but also millennium and that's just being partially offset not by large amount, but being partially offset by the inclusion of Shoal Creek depreciation and depletion over that period.

Okay that's very helpful and then in your introduction you spoke about cyclone hitting Mozambique. I'm not seeing a lot of comment from the company there, but what are you seeing in terms of exports from there especially given [indiscernible] cyclone now.

Yes they've certainly been coming up the curve the last year or two off of obviously a face of near zero, but probably no additional color except to obviously our thoughts are with those who are affected from the cyclone and it was just one more example of supply disruptions which typically over the last couple of years have been exacerbated from a relatively benign period they're in the sign of those supply demand conditions which remain pretty snug out there on the met side.

Snug, I like that. Good choice.

We'll take our next question from Michael Dudas with Vertical Research.

Shoal Creek so seems like they're out of the box, very good assets for you. Can you just share a little bit about how productivity trends have been and as you look through as we're transitioning through a Peabody asset in Drummond as there's many major changes in structure or management there. And also to just remind us again the customer base and type of contracts that are being provided in that from shipments [indiscernible] available.

So off well out of the gains as you've indicated and we're pleased with the strong quarter that they've had and I didn't highlight as they've also had a strong quarter from a safety perspective as well which is probably the best use from our perspective, but production has followed that. there has been one or two changes amongst my management and the team have really love to embrace and work hard in the integration across number of Peabody systems and processes and we've seen pretty good productivity to-date. Customers and contracts are Europe and Japan. In fact we cover some of the same customers out of Australia as well so there's a natural overlap around that and they tend to be longer term type contracts through that period.

Appreciate that Glenn and my follow-up would be, you mentioned after a previous question about M&A and opportunities there but how do you look at what Peabody, you said you had 23 mining operations contributing to results this quarter. how are you looking - how those operations look over the today and in their immediate future relative to say what your plans were when you had your investor day was year and half or so ago to looking at how that's all played out and what - how that portfolio could maybe shift as being 19 and the 20 again trying to maximize the returns and value given what's going on in North Goonyella etc. to maybe accelerate some of the generation and value creation.

Well I think we've seen and would have outlined two years ago and we've been consistently executing against that, you continued to see as re-wake those investments towards the seaborne thermal and seaborne met. The movement to Shoal Creek was also a design not only in seaborne but they're upgrading the quality that has taken place. It wasn't - I think it was three years ago that at one point we were looking at the potential of nearly 5 million tons of met coal. So I think that strategy has continued to be successful in its execution notwithstanding where we're at with North Goonyella are now focused at getting that mine back on its feet. We've committed to life extension project at [indiscernible] and at Wambo and you've seen those go through and you can understand with those average 40% returns why we're attracted to that in a higher process center and we continue to work hard on the portfolio in the US to ensure that it is generating cash, it is make sound competitiveness and it seem [indiscernible] been executing that extremely well. If you look at their performance this year versus last year and adjust for the weather impacts. They've actually held up very, very strongly. Unfortunately Kayenta, two years ago we would have foreseen or would have desired that plant which is acknowledge [ph] and we think there's a compelling case, we probably didn't foresee the expense at which that would move out of the portfolio and now we're looking at the - transitioning that mine into reclamation. So it's a good question in terms of walk down memory lane but I think it's an example of the team having to be consistently executing against the strategy that we articulated two years ago and I think we're continuing to see many of those benefits today.

And clearly part of our job is to be portfolio managers and Shoal Creek is an example of that know we hit on this a lot but recognizing we've been - we've set for a number of quarters in a row that we've a desire to upgrade our met coal portfolio. This was an opportunity to plot that in, so we see our opportunities as both what we have but also opportunistically making portfolio moves overtime to continue to increase the strength of the portfolio.

Appreciate your thoughts there Amy. Thank you very much.

We'll take our last question from Lucas Pipes with B. Riley FBR.

Amy, I wanted to circle back on the supplemental dividend and kind of what sort of metrics you were looking at for returning capital that way versus buying back more stock for example? Thank you.

Sure, so I would comment just as we think about the supplemental dividend and deploying that as tool. We were very careful not to call it a special dividend and I think it's something that our Board of Directors takes a look at our dividend levels on a periodic basis. In the first quarter specifically although we like buybacks we frankly favor them given our current share price. We recognized that to deploy capital in a large scale it was going to be difficult given liquidity in the market at that point in time. So we thought this was an opportunity to show some flexibility in terms of how we deploy capital returns and I think we wanted to be careful that we acknowledge that this was a supplemental and not necessarily a special.

Meaning there could be more supplemental dividends depending on circumstances.

What I would say is, although we favor share buybacks at this point in time we recognized that one, it may not be possible to deploy the amount of capital that we want to deploy in that manner or cash flow projections frankly may change short-term and we've talked about liquidity targets of being around $800 million. We've operated above those levels and so we've tried to make strides over the last several quarters to operate closer to that targeted liquidity level.

Got it. That's very helpful thank you and best of luck.

At this time, I'd like to turn the conference back over to our presenters for any closing and additional remarks.

Thank you operator and thank you for your questions and participating in today's call everyone. To all of our employees listening today I want to thank you for your consistent dedication in safety and operational improvements and all of our current and future investors we look forward to continuing to create value for each and every one of you. We appreciate your continued support and interest in BTU and operator that concludes today's call.

Thank you for your participation. You may now disconnect.