Peabody Energy Corp

NYSE:BTU

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for your patience and standing by. Welcome to the Peabody Fourth Quarter 2017 Earnings Call. Just a reminder, today's conference is being recorded.

I would now like to turn the conference over to Senior Vice President, Global Investor and Corporate Relations, Vic Svec. Please go ahead, sir.

[Vic Svec, SVP, Global Investor and Corporate Relations]

Okay. Thank you, and good morning. Thanks so much for joining Peabody's fourth quarter and year-end 2017 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 direct you to our supplemental presentation that will accompany today's remarks. It's available on our website at peabodyenergy.com.

Now on Slide 2 of the deck, you will find our statement on forward-looking information. We do encourage you to consider the risk factors that are referenced here along with any public filings with the SEC. I would also note, we use both GAAP and non-GAAP measures. We refer you to our reconciliation of those measures in our earnings release as well as the supplemental presentation.

And I'll now turn the call over to Glenn Kellow.

[Glenn Kellow, President and CEO]

Thanks, Vic, and good morning, everyone.

Beginning on Slide 3, our fourth quarter performance concluded what I believe to be a year of both considerable change and significant accomplishment. You'll recall that it was just past April, that we really listed on the New York Stock Exchange and have observed a nearly 80% increase in BTU share price through year-end. Our 2017 revenues rose 18% over the prior year led by robust seaborne coal pricing and higher U.S. demand and adjusted EBITDA reached the highest level since 2012.

In 2017, Peabody increased liquidity to $1.24 billion as of year-end, released approximately $220 million of restricted cash and closed on and then upsized a $350 million revolving credit facility. I’ll note that we refinanced our term loan lowering our interest rate by 100 basis points and modifying terms to provide us with additional flexibility.

As part of our commitment to de-leveraging, we repaid $500 million of debt reaching our 2018 targets a year early. These voluntary payments coupled with our meaningful cash position reduced our net debt by nearly 50% since our emergence. In addition, we completed approximately $175 million in share buybacks and continue to execute on our authorized $500 million share repurchase program.

At the operation level, our global safety performance continues to pass industry averages. While our incidence rate edged up overall from the prior year, our Australian platform had a record year improving 17% from 2016. As always, we are ever vigilant on our journey of continuous improvement and safety.

We are continuing to see productivity improvements across the platform in particular North Goonyella which had record annual production in 2017. Continued strong performance from the operations has led the team to significantly advance projects in mine planning particularly at North Goonyella and Moorvale for our seaborne met platform and Wilpinjong and Wambo for our seaborne thermal platform.

I would also like to give a shout out to our Australian logistics team. In the phase of immense industry logistical and infrastructure challenges throughout the year, if you recall Cyclone Debbie, rail outages and port backlogs they ensured we delivered on our volume guidance ranges.

Moving to our sustainability initiatives in both the U.S. and Australia, our teams exceeded their goals to reclamation restoring a total of 1.4 acres for each acre disturbed. In recognition of these recent actions, Peabody was recognized as the best global responsible mining company for environmental, social and governance standards and performance for the second consecutive year by Capital Finance International. We were also awarded coal mining company of the year by Corporate LiveWire.

Through our combined actions, I believe we have further propelling a virtuous cycle as we begin 2018 whereby strength enables more strength. Already in the early days of the New Year, all of the preferred shares converted into common stock as a result of a sustained robust share price performance. And just in February we closed on the sale of our 50% interest in the coal handling preparation plant and associated rail loading facility utilized by Millennium.

The sale reduces our operating costs, reclamation obligations and our other commitments. It also preserves throughput capacity for Peabody's remaining production through 2019.

Next in what we believe to be the first of its kind, the company worked with insurers to successfully issue a first tranche of surety bonds in Australia. We expect to secure additional bonding over time through surety bonds, letters of credit and bank guarantees we anticipate releasing nearly all of our remaining restricted cash in 2018.

Finally, the company just announced the initiation of a quarterly dividend yet another step in our broader pursuit to return cash to our shareholders. We’ll introduce our 2018 priorities in a few minutes with that brief recap of a very busy year.

I’ll turn it over to Amy for additional details on our results.

[Amy Schwetz, EVP and CFO]

Thanks Glenn. No question as the fourth quarter had the year of substantial achievement for Peabody as evidenced by the financial results highlighted on Slide 4.

Fourth quarter revenues improved 5% over the prior year to $1.52 billion. The Australian Metallurgical Coal segment increased shipments 21% at mid robust seaborne pricing leading to Australia's largest quarterly revenue contribution in five years.

For the year, Peabody reported revenues of $5.58 billion, an increase of 18% over 2016 driven by higher seaborne pricing and a 11% increase in PRB shipments on a strong rebound in demand. Australia’s full year revenue contribution increased $632 million as seaborne pricing remained vigorous throughout the year despite moderating volume. As a reminder, Peabody adopted fresh start reporting in April. So certain income statement items are not comparable to prior periods.

Income from continuing operations net of income taxes totaled $378 million this quarter and benefited from strong operational results. $83 million of gains on disposals, $45 million in gains on net mark-to-market adjustments related to actuarially determined liabilities, and a net tax benefit of $82 million partly offset by DD&A expense of $179 million and $36 million of interest expense.

Gains on disposals included the previously announced Burton transaction, as well as the non-core liability management transaction both of which are excluded from our adjusted EBITDA results. These transactions demonstrate our continued commitment to a strong balance sheet.

Interest expense totaled $36 million for the quarter in addition we incurred an $8 million one-time non-cash charge as a result of our fourth quarter debt repayment. Once again this quarter we recorded a net tax benefit that we expect to materialize as cash in future periods.

Fourth quarter taxes include an estimated tax benefit for newly and active tax legislation primarily related to AMT credits. We expect these credits to be refunded in 2019 and beyond.

Last quarter we indicated, we expected to receive about $78 million in refunds in the fourth quarter. Although the timing was delayed from the fourth quarter, I’m pleased to note that we have received the majority of that cash already in the New Year.

During the fourth quarter, 9% of the originally issued preferred stock was converted to common shares and the semi-annual preferred stock dividend was bringing in. As a result we recorded a $41 million non-cash preferred stock dividend and charge.

As of the end of January, all preferred shares have been mandatorily converted into common stock after our share price exceeded the conversion price threshold. This simplifies our capital structure and is expected to increase trading liquidity while ensuring future earnings fully accrued to common shareholders.

With the full conversion in January, we expect to record a non-cash preferred dividend charge of 103 million in the first quarter of 2018. Diluted EPS from continuing operations for the quarter totaled $2.47.

And finally, adjusted EBITDA increased 42% over the fourth quarter of 2016 to $416 million. This includes $6.5 million of restructuring expense related to the future closure cost of the Millennium mine.

To put our performance in context, Peabody reported its largest adjusted EBITDA result in five years of $1.49 billion in 2017. Both platforms were up provided significant contributions to reach this mark. In fact Australia's adjusted EBITDA contribution of $907 million reflects the platform's largest operating result since 2008. While Australia certainly benefited from robust seaborne pricing, productivity improvements contributed to lower cost and adjusted EBITDA margins of 36%.

Let's now turn to Slide 5 for we’ll discuss the operational results in a bit more detail. The benefits of our diversified portfolio has been highlighted once again this quarter. Strong Asia-Pacific demand for our Australian met and thermal products led to a nearly $120 million improvement in adjusted EBITDA over the fourth quarter of 2016.

The Australian thermal platform increased its adjusted EBITDA contribution 28% from the prior year, as higher new capital pricing more than offset the impact of volumes that eased 700,000 tonnes due to tough geological conditions. The met operations had a great quarter as well the team was able to shift 4 million tonnes of coal in the fourth quarter even with higher than normal port congestion at the Dalrymple Bay Coal Terminal.

As you may recall, [PVCT] is a primary port we used to ship our met coal from Queensland. Since year end that congestion has eased. Sub premium low-vol hard coking coal prices eased a bit compared to the prior year averaging $205 per tonne in the fourth quarter of 2017 compared to approximately $265 per tonne in the fourth quarter of 2016.

Even so, the met segment generated adjusted EBITDA of $200 million, a $95 million improvement over the prior year. The Americas generated $162 million of adjusted EBITDA this quarter, led by the PRB reflecting the stability in the platform compared to the prior year.

Let's now take a look at our segment operating performance on Slide 6. Fourth quarter and full year adjusted EBITDA margins averaged 30% across our five mining segments. And we had a bit of healthy competition going on this quarter within the Australian platform. Both segments reported highly competitive margins. The met segment earned 39% adjusted EBITDA margins just edging above the Australian thermal segment which reported 38% adjusted EBITDA margins in the fourth quarter.

This kind of impressive results from our Australian thermal segment is not unusual. In fact, this segment has consistently delivered extremely low cost resulting in highly competitive margins. These outstanding results were three-fold: operational strength, robust seaborne fundamentals, and solid execution.

Australia delivered 8.8 million tonnes of coal this quarter, contributing to total 2017 volumes at 30.9 million tonnes which included 11.7 million tonnes of met coal and 12.5 million tonnes of export and thermal coal.

In the fourth quarter alone, we sold 4 million tonnes of met coal at an average price of 127.14 per tonne, and 3.4 million tonnes of export thermal coal at an average realized price of 72.89 per tonne. Both results were improvements over the prior year with total thermal realized pricing increasing 15% over the fourth quarter of 2016 to 55.22 per tonne.

As we had anticipated, the met mine sustained their improved second-half cost profile, recordings of $80 cost per tonne. North Goonyella had another great quarter as productivity improvements led to a record run a mine production in the fourth quarter beating the record it set in the third quarter.

Australian thermal cost increased slightly from the prior year to 33.98 per tonne, but this was largely driven by higher sales related royalties as pricing improved. That's the only kind of cost increase we'd like to see at Peabody.

Strengthening seaborne fundamentals and continued low cost across the thermal platform paved the way for the Australian thermal segment to report $103 million of adjusted EBITDA this quarter. These powerful fourth quarter results kept the year of outstanding results for the Australian platform and contributed to full year adjusted EBITDA margins of 36%. That's an increase of $23 per tonne over the prior year.

Before we turn to the U.S., let's discuss Middlemount's results which as you may recall are excluded from the Australian platforms result. In 2017, our share of the operation sold approximately 2.1 million tonnes of met coal and generated net income of $43 million. That's an increase of $29 million over the prior year. In addition, we've collected approximately $80 million of cash in 2017 from Middlemount including $17 million in the fourth quarter.

Switching gears to the U.S., as a whole, the platform delivered fourth quarter adjusted EBITDA margins of 22%. Revenues increased modestly over the prior year primarily due to the benefit of contractual settlement related to sales volumes.

Cost increased modestly largely due to planned repairs in the Midwest where reliability inspections led to an increase scope on plant maintenance, setting us up for strong cost performance in 2018.

For the year, the U.S. earned average EBITDA margins of 25% largely due to improved cost performance in the western segment and higher PRB volumes. The western segment benefited from a higher mix of 20 mile volumes as we exported just under 800,000 tonnes as well as favorable ratio at Kayenta. PRB volumes increased 11% to 125 million tonnes with an average realized pricing of 12.58 per tonne.

Before we turn to the progress we've made on our financial approach, I'd like to take a minute to discuss our new 2018 guidance targets. As we look ahead to the full year 2018 results, we expect volumes to largely be in line with 2017 results. Related to our Australian thermal export thermal sales, we're targeting 11.5 to 12.5 million tonnes in 2018 as our domestic coal shipments are expected to increase to be customer contractual agreements.

As we always do, to the extent our domestic sales are lower, we'd attempt to move available capacity into the export market. We are targeting 11 million to 12 million tonnes of met coal shipments in 2018 even as we're undergoing a longwall move in North Goonyella and ramping down production at Millennium in anticipation of its closure in the second half of 2019.

As a reminder, we also have economic exposure to about 2 million tonnes of met coal through our Middlemount joint venture. You've heard us say before that in the U.S., we like to enter our year substantially priced. At this time, we have about 90% of our U.S. volumes price heading into 2018. Based on that and where we see current demand, we are targeting to deliver between 115 and 125 million tonnes of PRB coal this year.

In addition, our Illinois basin and Western volumes are in line with the prior year. With the deliberate and continued focus on cost and productivity improvements, we are targeting met cost of $85 to $95 per tonne in line with 2017 results.

While we expect continued productivity and cost improvements to mitigate inflation, major fluctuations in the Australian dollars and sales related royalties, as well as our mid-year longwall move at North Goonyella could impact these ranges throughout the year.

In addition, we're lowering our PRB cost guidance ranges to 925 to 975 per tonne even as we're lowering volumes as we expect to benefit from reduced repairs in 2018. I'll note that fuel is a large component of cost across all of our service operations which could also be the changes in our cost guidance throughout the year.

We are targeting approximately $150 million of SG&A expense this year including $35 million of non-cash expense. Looking at interest expense, we expect to incur between $143 million and $153 million of expense this year. This includes interest on our funded debt, as well as surety bonds and letters of credit and non-cash amortization of debt issuance cost.

We are targeting 2018 capital spending of 275 million to 325 million which contemplates approximately 85 million of major project spending and reflects approximately 40 million in lease buyouts we plan to execute in 2018 versus continuing to lease.

Specific to the first quarter, results are expected to benefit from continued strong seaborne coal pricing, offset by lower Australia volumes due to scheduled longwall moves at metropolitan and Wambo.

Turning to Slide 7, we've previously outlined a financial approach of generating cash, reducing debt, investing wisely, and returning cash to shareholders. Peabody's operational and financial approach has resulted in substantial cash generation that is continuing into 2018.

We ended the year with over a billion dollars of cash and an additional $232 million of available borrowing capacity under our new revolver and accounts receivable securitization facility putting liquidity at $1.24 billion comfortably above our target of 800 million. As we said before, at any given time, our liquidity may be above or below our targeted level for a time. We intend to continue to execute on our financial approach, prioritizing returning cash to shareholders.

Not only did our operations generate meaningful cash flows, but we also liberated $175 million of restricted cash in the fourth quarter, most of which we got back in December. This is partly due to our $350 million revolver which enabled us to replace cash collateral with letters of credit, that spring up that cash for other purposes.

We're now left with just over $360 million of restricted cash as of the end of December. I talked before about executing a multipronged approach towards bringing up that cash. On top of our excellent reclamation performance and the sale of assets reaching the end of their economic lives.

Another successful action was creating an Australian surety bond market with broad support. I’m very excited to say that we made significant progress on that front by working with insurers to initiate an initial tranche of approximately $115 million of surety bonds in January.

With the addition of those surety bonds I’m pleased to note that we’ve already met our $200 million to $400 million target, but we aren’t about to stop. We are now targeting to free up nearly all of the remaining restricted cash balance in 2018.

Cash that is currently restricted would ultimately be replaced through a combination of letters of credit, bank guarantees and surety bonds. Over time these successes may allow us to utilize our revolver and accounts receivable securitization as significant sources of available liquidity bringing up cash for other uses.

The second piece of our financial approach has been to reduce debt earlier in the year we targeted $300 million of debt repayments in 2018 with an additional 200 million to follow in 2018. Given the company's strong cash position we accelerated our plan 2018 debt repayment to December thus completing a total of $500 million of repayments in 2017.

The leveraging benefits Peabody on multiple fronts including providing access to alternative sources of liquidity and lower and fixed charges. Since April we reduced our net debt position nearly 50% to approximately $450 million. Over time we continue to target total gross debt 1.2 billion to 1.4 billion.

The third piece of our financial approach is investing wisely. We have been clear about the filters we consider when evaluating potential M&A activity, but let’s talk a minute about investments in the business. We have made significant investments in our reserves and equipment in the past and as such are able to maintain modest sustaining capital levels. 2017 capital expenditures totaled $199 million.

Looking ahead to 2018 we are beginning to selectively accelerate some life extension projects namely at North Goonyella, Wilpinjong and Wambo which are contributing to higher 2018 CapEx. These projects will extend the life of our highest quality met and thermal mines as well as our premier low cost thermal mine in Australia. In addition we believe these projects will provide meaningful returns with a reasonable payback period.

Specific to North Goonyella we purchasing a new longwall and will be accessing new reserves in the Southern area over time while the new longwall won’t be fully functional until 2019 it’s advancement has a secondary benefit as well. We expect to be able to reduce downtime during longwall transitions in 2018 and 2019. Said otherwise, we expect to realize cost savings before the new longwall is even being utilized. We will also be optimizing the mine plan to through accessing higher quality reserves.

The final piece of our financial approach is returning cash to shareholders. While debt reduction was job one in 2017 we’re pleased to be able to begin implementing our shareholder return program during the year. In addition to the significant uplift in share price from an emergence value of 22.03 per share we executed 35% of our total $500 million share repurchase program since August. We bought back $107 million worth of shares in the fourth quarter for a total of 176 million in 2017.

As we begin 2018 our focus now shifts more fully towards greater returns of cash to shareholders. On that note we announced this morning that the board has declared a quarterly dividend of 11 and half cents per share to be paid in March.

This marks an important next step in Peabody commitment to shareholder returns and further demonstrate the company's strong financial position and robust cash generation potential. The dividend represents an annual yield of 1.5% based on BTU’s average share price during the second half of 2017. The Board will evaluate future dividends on a quarterly basis in light of alternative means to create shareholder value.

Recognizing that near term debt and liquidity targets have been achieved, we are evolving our financial approach to maintain financial strength while more greatly targeting the return of cash to shareholders in 2018. We look to generate cash maintain financial strength, invest wisely and return cash to shareholders.

I’ll now turn the call over to Glenn to cover industry fundamentals and key priorities for 2018.

[Glenn Kellow, President and CEO]

Thanks Amy.

On Slide 8, I'd like to touch on global industry fundamentals which remained strong throughout the majority of 2017 due to stable Asia Pacific demand and overall supply tightness. First seaborne thermal coal demand rose approximately 25 million tonnes in 2017 against the base of 925 million tonnes.

South Korea led demand growth increasing 16 million tonnes over the prior year on new coal capacity and limited nuclear availability. Import demand was also supported by a 5% increase in China, electricity generation as well as solid economic growth and rising coal fuel generation in other developing Asian countries.

Whilst India coal import demand was tempered for better part of the year the fourth quarter import stood 17% as domestic stock piles were depleted and domestic production continues to lag. Overall seaborne thermal coal demand outpaced supply in 2017 as we saw declines in exports from Australia, Colombian and Indonesia due to weather impacts.

As a result pricing for the benchmark Newcastle product remained elevated holding at an average of $95 per metric tonne during the last six months of the year and above that level now.

Turning to seaborne metallurgical coal, 2017 global steel production rose 5% partly driven by increased production in China and India. Also note we saw significant steel production growth in just about all major steel producing regions. Chinese steel production output reached a record high during the year leading to an approximately 10 million tonne increase in imports.

In addition, Indian metallurgical coal imports increased approximately 6% compared to 2016. For the full year total Australian metallurgical exports declined more than 15 million tonnes due to impacts of Cyclone Debbie in the first quarter as well as logistical constraints and industry-wide operational challenges.

As supply and demand fundamentals remain tight in the fourth quarter [indiscernible] seaborne metallurgical coal prices rose to average of $205 per tonne with the index-based pricing settlement from premium hard coking coal set at a $192 per tonne. The low-vol PCI price was settled at a $127.50.

Looking ahead to this first quarter, Peabody settled a benchmark low-vol PCI price of $156.50 per tonne that’s nearly $30 per tonne above prior quarter settlement. As we begin 2018 we are watching a few key drivers that we expect to impact seaborne coal demand. Changes in Chinese policy can result in meaningful changes to Chinese imports.

Furthermore continued growth in India and other Asian countries will likely drive demand this year. As we saw in 2017 even small changes in demand or disruption in supply can result a meaningful impact to pricing given current supply tightness.

Both seaborne met and thermal coal supplies remain tight on continued logistical and operational constraints across the industry. In fact recently we have seen a number of global coal companies produced 2018 production guidance for both seaborne met and seaborne thermal coal.

Turning to Slide 9, mild weather good natural gas prices have led to a 15 million tonnes decline in coal generation in 2017. Despite overall decreases in coal and natural gas generation, the PRB once again proved to be a bright spot increasing 16 million tonnes over the prior year.

Another encouraging piece for U.S. fundamentals has been a reduction in utilities stockpiles. Through December, coal inventories declined 26 million tonnes on strong domestic payout day demand and favorable seaborne coal pricing that was supportive with exports.

Significant to Peabody, seven PRB utility stockpiles declined 16% from the end of 2016 levels, 54 days of maximum burn. And in January, we've seen healthy stockpile drawers will be on the 10-year average.

As a percentage of our overall portfolio, Peabody is not a substantial seaborne supplier from the U.S. However, we do keep an eye on net packs, and we'll export tonnes from our U.S. operations when economics make sense. Colorado and Illinois basin represent our best opportunities through exports given excess to ports and margin realizations.

In addition, we benefit as other producers move tonnes from domestic supply to the seaborne business. We exported just under 800,000 tonnes in 2017 from our U.S. operations and I've already a similar committed for 2018. Our focus is on returns and we generalize capitalize most on exports from Australia.

Looking ahead to full year 2018, changes in electric power sector consumption of coal are expected to be largely driven by natural gas prices on a regional basis on availability of renewable generation. I'll note that on average, every $0.20 movement in natural gas prices equates to about 25 million tonnes of increased or decreased utility coal demand over the course of the year in the United States.

Turning now to Slide 10, we will continue to advance our stated financial approach to generate cash, maintain financial strength, invest wisely and return cash to shareholders. I'd now like to spend a few moments walking through our key priorities for 2018.

As always, we begin with a focus on safe productive operations and return maximization. Within the United States, we'll be focused on further reducing our unit costs and improving coal's competitiveness against natural gas. We will also be continuing to actions to preserve coal plants from premature retirement.

For example, we plan to continue working with the tribes to facilitate the transition of Navajo generation station to enable a lot beyond the closure currently planned at the end of 2019.

In Australia, we'll be placing great importance on improving both production and logistical efficiencies to best capitalize on healthy seaborne thermal conditions. Thermal will be evaluating opportunities to particularly upgrade on metallurgical coal platform including the development of the new longwall investment at North Goonyella that Amy previously discussed. In addition, we continue to work on extending the life of the Moorvale mine. These actions are expected to underwrite double-digit met volumes for the foreseeable future.

Moving now to Australian thermal coal segment. We will continue to work on life extensions and progress the clinical joint venture at Wambo, and we'll strategically layer in longer term commitments for seaborne coal volumes to take advantage of the current strength in the pricing environment. For instance, we've priced 4 million tonnes of Australia thermal coal for 2018 at an average realized price of $74 per short tonne.

Finally, as Amy indicated, we're working with our insurers to finalize the first of its kind surety bond program in Australia. Yet, one more stride towards our goal of releasing nearly all our remaining restricted cash in 2018.

That wraps up our formal remarks today. At this time, we'd be happy to take your questions. Operator?

[Operator]

[Operator Instructions] And we'll take our first question from Paul Forward with Stifel.

[Paul Forward, Stifel]

I wanted to ask about the - little more about the life extension projects that you're talking about in Australia. You had mentioned the new longwall at North Goonyella is a big one. Could you provide some details on the others ones? And specifically, what's the magnitude of the tonnes per year that we're talking about that could be added with these extensions?

[Amy Schwetz, EVP and CFO]

Sure, I'd maybe start by - so we've talked about the extension project at North Goonyella which will extend the life of that mine through 2026. We also have extension projects at our Wambo surface operation which includes the joint venture with Glencore that Glenn referenced and at our Wilpinjong mine.

These extension projects really provide us access to those reserves over the long term. It's not necessarily expected to greatly increase our volume over the period, but does underwrite a stable production profile for some time out of the thermal platform.

What I'd say about our CapEx and really the elevated levels that we're seeing in 2018 which could continue a bit into 2019 is that it really is about those high quality projects at those operations that we think are really are best in class out of Australia between the quality of the North Goonyella and Wambo coal and the low cost profile at Wilpinjong.

And over time, we really see that sustaining profile to look closer to the $200 million a year or just under $200 million a year that we saw in 2017.

[Glenn Kellow, President and CEO]

Maybe a little bit more color on the North Goonyella decision which I think is a good new story. So the longwall top coal caving system itself which was introduced in 2013 was a leased system. You may recall that at the end of 2016, we actually just continued longwall top caving at North Goonyella and continued using a conventional methodology into 2017.

2017 as we've indicated, we had record productions through the year, and that accelerated with record production in Q3, record production in Q4. When we've looked at the mine plan, we think there was an opportunity to resequence a lower quality panel and go into a higher quality area which as Amy said has extended the life to 2026.

All three factors mean that we made the decision to move into that southern area in 2019. In large part this is reflecting the success of North Goonyella particularly through the 2017 period. It's a better match for the conventional methodology they're mining now to the geology. It has benefits in both 2018 and 2019 in lower maintenance cost on the longwall moves, and we also expect to reduce both moves as a result.

Also on met, and as we've been working through and we've updated you about work around, strengthening the met platform, we also I think there's some opportunities at Moorvale. And that is actions which we've talked about - will enable us to underwrite a double digit met volume into the foreseeable future.

[Paul Forward, Stifel]

I was just going to follow up on that double digit. So that's - you're guiding 11 million to 12 million short terms per year or that will be in 2018. Just clarify, so you're talking about a platform that you would anticipate would stay in that above 10 million short terms per year going forward.

I wanted to clarify that that was true. And then I also think about as you look at this platform, would you anticipate any product mix shifts over time of significance within that? Thanks.

[Glenn Kellow, President and CEO]

Well, Paul that's exactly what I've been saying. I think most investors would know probably that we've been looking at a decline in our met platform that we've been talking about for a couple of years, but also be aware that we've been undertaking a number of actions to look to optimize our mine plan, I've announced a few of those in the past.

I think this step at North Goonyella and further actions at Moorvale will enable us to support a double digit number going forward. The mix issue…

[Amy Schwetz, EVP and CFO]

Yes, in terms of product mix, we are starting to see a little bit of shift in that already as Millennium production declined in 2018. So you'll see this year just in terms of product mix that we're targeting more around the lines of 55% to 60% of PCI coal in the mix versus hard coking coal in the past that mix has been closer to 50-50.

[Operator]

And we'll go next to Mark Levin with Seaport Global.

[Mark Levin, Seaport Global]

I wanted to ask a question in the United States. So when looking at your PRB guidance for '18 versus '17, it looks like you're guiding to down anywhere from flat to 8% with a midpoint of down 4%. And I'm just trying to understand, I mean, obviously there is maybe some more optimism around the fact that inventories are a lot lower, natural gas prices clearly not great at 275, but not horrific either, and the weather has been a lot better. So maybe if you could talk a little bit about the reasons why you think your PRB production will be down year over year.

[Amy Schwetz, EVP and CFO]

And I think down would be marginally down in the grand scheme of things with the midpoint being just under our 2017 levels. Thinking in general, we're contemplating a number of things for 2018. Obviously we take into account what we see as the demand based on plant closures. And also I'll say we have an outlook that we'd like to go into the year nearly fully committed for our tonnes across the platform and the PRB is no different than that.

So as we look at 2018, we looked at what we saw our customers needing, we look at where we thought we needed to produce in order to keep our cost extremely competitive particularly against natural gas, and we've elected to kind of be in that range of 115 to 125.

We'll take a look at where our customer requirements are later as we progress through the year and see where we end up but we are very focused on maintaining strong margins out of that basin. We count on the PRB to be the anchor to our U.S. platform. We'd like to see both strong margins and strong cash generation out of that platform.

[Mark Levin, Seaport Global]

And Amy, when you guys - I think you referenced being 90% of your U.S. volumes are priced. How does that break out in terms of the PRB versus the Illinois basin? Is it ratable? I mean, is it 90% in both basins or you fully priced in the PRB? I mean, how should we think about that?

[Amy Schwetz, EVP and CFO]

Nearly all of that uncommitted tonnage would be in the PRB. So for the rest of our U.S. basins, we are essentially fully committed.

[Mark Levin, Seaport Global]

And then my last question, it seems like the focus is going to be at least with regard to the cash that you generate toward returning it to shareholders either through buybacks, and you guys announced the dividend this morning. I'm just curious. Has management or the Board's view toward selective asset acquisition opportunities either in Australian met or Australian thermal, has that changed at all? Is that something you guys would look at, or is there a clear preference on just returning cash to shareholders and then focusing on the internal projects you're talking about?

[Glenn Kellow, President and CEO]

Well, I think our position hasn't changed. I've mentioned perhaps on the last call that we've got a critical eye and healthy skepticism around acquisition. So I did outline the filter around that ensuring that our financial approach of maintaining financial strength becomes paramount.

We would look at any investments having to be against the criteria of returning cash to shareholders as the default position. Returns would need to be above our cost of capital for a reasonable buyback period. Strategy is key, so that's Powder River basin, Illinois basin, seaborne met, seaborne thermal.

And we look to the existence of physical, commercial, logistical, financial synergies. And any opportunity must present significant value most importantly to our shareholders as opposed to others. So that critical eye and healthy skepticism still remains amongst Management and the Board.

[Operator]

And we'll go next to Lucas Pipes with B. Riley FBR.

[Lucas Pipes, B. Riley FBR]

I wanted to follow up on the CapEx side as well. You identified these three discrete items that push CapEx up a little bit here. So I wondered could you maybe take another crack at breaking it down in between spending capital in the U.S., sustaining capital in Australia, outside of these extension in Goonyella project.

And then I think Amy you mentioned you expect capital to return to $200 million sustaining longer term. How quickly do you expect to get back to that level? Thank you.

[Amy Schwetz, EVP and CFO]

I think 2017 is probably a pretty good proxy for what our recurring sustaining capital levels is, and that's really spreads fairly evenly between the two basins. These projects that we're talking about really impact 2018 and 2019. And based on our project pipeline right now, we would assume that 2020 is the return to more normalized sustaining-only capital spend.

The one thing that I'd point out in addition is, we're going to continue to make economic decisions about aspects of our capital spend. And I did point out in my remarks that we've got about $40 million of spending in Australia in 2018 that 12, 16 months ago we'd have assumed that we needed to make new arrangements to re-lease equipment going forward. And obviously that has an impact on operating cost.

Based on the cash that we currently have on hand, we do see an opportunity to end those leases, pay them off. And although it's a bit of an increase to capital spend in 2018 we think it's the right economic decision. So we'll continue to try and do things like that over time to create value for our shareholders.

[Lucas Pipes, B. Riley FBR]

Thank you, Amy, for that additional color on the leasing item as well. I had a whole number of questions on the tax side maybe just to check them off. First, I think Amy you mentioned in the prepared remarks that you have return of cash coming through here in the first quarter. Could you remind us how much that is? And then also I think with the AMT credit carry-forward that took the cash coming in at 2019, that may be also 2020, how much would that be?

And then to finish off the tax question, little bit off the wall, you've pivoted to Australia for met coal some while ago. With the tax reform impact, how you think about met coal out of the U.S.? Thank you.

[Amy Schwetz, EVP and CFO]

So, a couple of things. One with the third quarter 2017 benefit that we took that was divided into two tranches. A refund that we originally expected to get in 2017, that was about $78 million. We've received most of that refund already this year. We expect the remainder of that to come in over the first six months of the year. We'll additionally file another refund later on this year for an incremental $20 million-ish on that amount.

With respect to the AMT credits, that was about $85 million benefit that we took in the fourth quarter. Those refunds will start coming in 2019, about half of that amount in 2019. And then that trickles down over time. So, about half of the remaining in 2020 and the remainder in 2021.

[Glenn Kellow, President and CEO]

It might be with respect to the strategic question around U.S. met, clearly, tax reform positive to U.S. economy, potential infrastructure action, positive to U.S. economy. So that should be positive to the U.S. met market, positive to the global met market. I imagine the strengthening around that.

Our strategy hasn't changed. Seaborne metallurgical coal is our focus, and I outlined the criteria around that just prior.

[Operator]

And we'll go next to Jeremy Sussman with Clarksons.

[Jeremy Sussman, Clarksons]

If I look back, I think spent about three quarters of a billion dollars in 2017 on bankruptcy payments and buying back debt. So I take your current cash balance of just over a billion restricted cash. It sounds like now you believe it will get unrestricted this year and sort of just some assumptions around implied free cash flow based on your guidance. Clearly you're going to end up with a little more cash on the balance than you'll need.

I guess how should we think about priorities in terms of what you’re going to do with the cash in 2018 is it buyback, is it special dividend, is it M&A how should we think about this?

[Glenn Kellow, President and CEO]

We've just announced a dividend of reintroduction of a quarterly dividend program. We’ve taken some pains in the past to outline our capital returns approach which has been now on top of the quarterly dividend has been the buybacks. We still have room under that program and we look to execute against that in the period ahead.

If we continue to execute in the way that you indicated and I’d also like to give a big shout out to both our Australian reclamation efforts and with our operating team and also the finance and the treasury groups for what was a first of its kind surety program in Australia, but looks as though it’s going to continue to be executed to enable another arm of getting access to that restricted cash. And we’re happy to reassess our target as we continue to execute once we've executed on.

[Amy Schwetz, EVP and CFO]

Yes, I would double down on that Jeremy. I think that we purposely evolved our thinking in terms of where we’re at from reduce debt to maintain financial strength. We understand the shifting as we progress into 2018 from really debt reduction to shareholder returns. We think that we got a couple of good programs that are going to enable us to do that now in terms of the initiation of the sustainable dividend, as well as - what we have left in our share and our share buyback program and we’ll continue to have discussions going forward about whether or not those programs need to be supplemented.

As of right now, I will say that those two mechanisms remain our preferred mechanisms to generate shareholder returns aside from a special dividend but obviously we’ll continue to evaluate as we move forward.

[Jeremy Sussman, Clarksons]

And maybe just one unrelated follow-up. So if I think about when the new longwall systems installed at North Goonyella, how should we think about production, our annual production coal quality and your cost profile there basically compared to what we're seeing today and also in Australia? Are you guys happy with, with some of the current JV structure Middlemount or is that something that you think can maybe get altered one way or other?

[Amy Schwetz, EVP and CFO]

I think moving forward maybe specifically with North Goonyella, we are trying to put them in the best position possible to continue the strong production performance that they have seen. We’ve got a large reserve area at North Goonyella, we got a great product quality and we want to ensure that we're getting as much out of that mine from a productivity standpoint.

So our goal would be to maintain current productivity levels and actually as we transition one of the reasons why we’re transitioning into that Southern area early is because we really like the coal quality in that area of the reserve. So we’re very confident that that’s going to be a premium product out of that reserve area going forward.

[Glenn Kellow, President and CEO]

And the journey over the last three years has been quite remarkable and clearly we’ll be attempting to help them but also challenge them going forward.

[Amy Schwetz, EVP and CFO]

With respect to Middlemount, what I would say is we have a good relationship with our joint venture partner here. It is one that has started to pay dividends literally in the last several months and I don’t necessarily see us looking to change that situation.

But I think what we are trying to do for our investors is highlight that that 2 million tonnes of exposure to relatively low cost met coal can be ignored. It does provide us that exposure and effective mechanisms to return cash to us as a 50% owner of the operation, again $17 million in the fourth quarter along with respect to cash generation.

[Operator]

And we'll go next to Michael Dudas with Vertical Research.

[Michael Dudas, Vertical Research]

Glenn looking out to annual contract negotiations for thermal coal in Asia into next couple months, certainly how do you foresee the early strong negotiations given where markets are and the urgency of the customer base to secure who have been surprised of some of the tightness in the market. Like how up would be India seems like there is some interesting things going on there, can some of that momentum continue into 2018 and benefit the market?

[Glenn Kellow, President and CEO]

I think we obviously don’t participate or don’t take the lead in the JFY negotiation as I understand that those negotiations will take place - towards the end of this month they would be expected to commence. As you’ve indicated though conditions at the moment for seaborne thermal have been quite supportive.

What I can say from bilateral negotiations that we would participate - I think quite constructive at levels which would be above the fourth quarter sort of averages of last year. So, I think those conditions are currently quite favorable as we move into that JFY settlement.

Specifically India that's right there, they have demand issues but also their supply side challenges have probably met that we are moving to this first quarter into 2018 with supported demand for Indian imports as well. So, in the short-term at least the conditions around seaborne thermal are quite constructive.

[Amy Schwetz, EVP and CFO]

And Mike I just note that we generally price about 3 million tonnes under that JFY contract, so with that we will have 50% of our thermal export volumes at the current guidance range priced for 2018 at levels that we think will continue their strong performance in 2018. We’ve come to expect that from them.

[Operator]

And we’ll take our last question from Daniel Scott with MKM Partners.

[Daniel Scott, MKM Partners]

I just want to ask Amy on the Powder River Basin guidance for 2018 obviously the cost looks very good. The realized prices is now guided to $12 a tonne at 90% hedged or maybe even a little bit more and it was $12.7 previously. Is that incremental decline in the hedged book, is there any slippage or cancellations or deferrals or is that all just lower market prices?

[Amy Schwetz, EVP and CFO]

We do have a tiny bit of deferrals in there, I want to say it’s incredibly material to the mix if you look at what’s been pushed into 2019. What it is reflective of is our strategy to try and sell the products that we generate the highest margins on. So you would anticipate that incremental tonnage was not 8800 coal in the mix and that’s okay with us.

What we like to do is to take a look at the products that we can sell at a cost profile that is most competitive and ensure that we’re generating the largest margin possible out of those reserves basin. So obviously what we see coated a lot is a price for that more higher heat coal and we will tend to go where the margins are at.

[Glenn Kellow, President and CEO]

And that comes from the fact that we have over dozen open pits in the Powder River Basin across those three mines. We do allocate people, equipment and contracts as necessary to optimize margins and we did note the reduction in cost there. I think that overall story is consistent with the strategy.

[Daniel Scott, MKM Partners]

Second I just want to piggyback on the question about from the capital expenditures in Australia to extend 10 plus million tonne of your production rates and there is - you did mention a mix change towards now 55.60 of PCI. Once all the spending is completed, is that still going to be the mix or is it going to revert back some?

[Amy Schwetz, EVP and CFO]

I think that’s generally a pretty good mix to take a look at going forward. We always try and true that up as much as we can in any given year based on what we have going on but as of right now I'd say that that mix is probably what we view as the new norm.

[Daniel Scott, MKM Partners]

And then lastly could you speak a little bit to kind of Australian port rail performance now, it’s pretty clear that, that Dalrymple Bay maintenance outage impacted pricing and now they are back online but generally spot pricing is still extremely hot on the seaborne market. Is there continued logistical issues in Australia or is it still just supplies outpacing demand or vice versa?

[Glenn Kellow, President and CEO]

I think there is no doubt the conditions have improved. I’m not sure - I’d say it’s back to normal levels but there is no doubt that the conditions have greatly improved.

[Operator]

And that concludes our question-and-answer session. I'd like to turn the conference back to our speakers for any additional or closing remarks.

[Glenn Kellow, President and CEO]

Yes, thank you for joining us today and for participating in our call. Improved market conditions and Peabody's execution have fundamentally altered the trajectory of the company in the most positive ways. And I credit our team of more than 7,000 employees for a job well done.

Whilst we had a highly successful year, we are not complacent rather we enter 2018 committed to actions that will drive continued valuation uplifts throughout the commodity cycle. I'd like thank our shareholders for your interest and support as BTU continues to deliver results, and generate value in 2018 and beyond.

Operator, that concludes today's call.

[Operator]

Thank you everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect.