Peabody Energy Corp

NYSE:BTU

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen to Peabody's Fourth Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct question-and-answer session. [Operator Instructions]

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

[Vic Svec]

Okay. Thank you and good morning, everyone. Welcome to BTU's earnings call for the fourth quarter and full year of 2018. 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 two of this deck, you'll find our statement on forward-looking information. We encourage you to consider the risk factors that we reference here along with our 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 this presentation as well as our earnings release. I'd also remind you that we adopted fresh-start reporting as of April 1, 2017, so most comparisons to metrics that are prior to that time do not provide useful information.

And with that, I'll now turn the call over to Glenn.

[Glenn Kellow, President & Chief Executive Officer]

Thanks, Vic, and good morning, everyone. Before Amy reviews the financials, I'd like to take a few minutes to put the quarter and year in context.

Let's begin on slide three. Peabody's fourth quarter performance concludes what I believe to be a year of considerable success even with some notable challenges. The fourth quarter brought strong revenues and our highest quarterly net income of the year. We had a lighter adjusted EBITDA performance given the GAAP quarter that was unique with no real contributions from either the idle North Goonyella mine or the new Shoal Creek mine.

Even so for the full year 2018, adjusted EBITDA margins totaled 25%, well above the average for the U.S. S&P 400 MidCap benchmark. Free cash flow of $1.3 billion exceeded targets. Liabilities reduced by more than $0.5 billion. Liquidity continued to build even after our recent acquisition and the execution of substantial capital returns to our shareholders.

In December 2018 as part of our seaborne met strategy, we successfully completed the acquisition of the Shoal Creek mine in Central Alabama, bringing a well-capitalized high-margin mine into our portfolio. We expect it will quickly position itself as one of the company's top adjusted EBITDA contributors.

We remain firmly committed to returning cash to shareholders and in just seven quarters have now repurchased $1.1 billion of common stock, representing more than 25% of our current market capitalization.

From an ESG perspective, our hard work around safety was recognized in 2018 when the coal processing facility at Kayenta Mine received the prestigious U.S. Sentinels of Safety award. We also received three of the four national reclamation awards this year from the Office of Surface Mining with Bear Run, wellbore and the former Big Sky mine in Montana earning recognition. And CFI International has just awarded us best ESG Responsible Global Mining Company for 2018.

With that, I'll turn the call over to Amy to discuss the financials and key industry fundamentals.

[Amy Schwetz]

Thanks, Glenn, and good morning, everyone. Fourth quarter revenues, totaled $1.4 billion marking an 8% decline from the prior year. Continuing strong seaborne pricing mitigated the impacts of lower sales volumes from the Seaborne Metallurgical and PRB segments.

DD&A of $176 million improved modestly from the prior year. For some time now, DD&A has been reduced due to the roll-off of contract amortization, recognized as part of our fresh-start accounting. This is a lower expenses are partially offset this quarter by the accelerated DD&A for Kayenta.

During the quarter we increased our provision for estimated equipment loss at North Goonyella by $70 million and that is excluded from adjusted EBITDA inline with last quarter's treatment. We also incurred $49 million in costs that are included in the adjusted EBITDA related to North Goonyella. This came in above the high-end of our expectations by about $4 million, primarily due to additional drilling activities from the now completed segmenting of the mine.

As part of our holistic liability management approach, we have significantly reduced our pension retiree healthcare obligations, through a combination of funding and program changes to best position the company for the future.

We have also benefited from favorable company-specific healthcare trend rates and higher discount rates. Those changes are evident in our financial results with our total liabilities being reduced more than $550 million in the past year.

The corresponding income statement impact of these changes was a net gain of $126 million related to mark-to-market adjustments on actuarially determined liabilities, which also benefited our discontinued operations where we recorded $27 million of net income.

Income from continuing operations, net of income taxes decreased to $145 million compared to the prior year, in part, due to lower fourth quarter 2018 revenues as well as non-recurring items in the prior year. As you may recall, we had some $83 million in gains on disposals and recorded a large income tax benefit in the fourth quarter of 2017 related to the repeal of AMP.

In the quarter we earned $253 million of net income attributable to common stockholders. Compared to the prior year, we benefited from our preferred stock fully converted -- converting to common in the beginning of 2018. Taking a quick look at the full year, revenues of $5.58 billion came in just above 2017 as strengthened seaborne prices overcame a 3% reduction in total sales volumes.

Income from continuing operations net of income taxes, totaled $646 million in 2018. Peabody delivered $4.28 in diluted earnings per share from continuing operations in 2018 reflecting the company's strong operational performance and progress on its share repurchase program.

With that recap, let's take a look at the operational performance from each of our segments on Slide 5. Fourth quarter adjusted EBITDA totaled $274 million compared to $416 million in the prior year. Adjusted EBITDA includes $49 million in idling and containment costs related to North Goonyella, as well as $5 million in acquisition costs associated with Shoal Creek.

With the acquisition of Shoal Creek, we modified our reporting segments to include the new mine within the Seaborne Metallurgical segment along with our Australian met coal asset.

With that, let's take a look at our seaborne thermal segment which continues to deliver outsized margins and durable adjusted EBITDA contributions. Fourth quarter margins of 42% were expanded nearly 10% over the prior year, reflecting higher export volumes and pricing as well as continued low costs. Once again the segment led the company and adjusted EBITDA contribution earning a $138 million in the fourth quarter.

The seaborne thermal segment exported 3.7 million tons at an average realized price of $77.42 per short ton. An additional 1.8 million tons were sold under our long-term domestic contract.

Peabody shipped a greater mix of lower CD coal in the fourth quarter resulting in an overall -- in overall realizations relative to the new capital benchmark than we saw in the third quarter. From a quality perspective, in 2019, we'd expect about 60% to 70% of our export volumes to be at the 6000 spec Newcastle product with the remainder closer to the 5500 product.

Turning now to our seaborne metallurgical segment, including about 65000 tons from Shoal Creek, the seaborne metallurgical segment shipped 2.3 million tons in the fourth quarter at an average realized price of $131.89 per ton.

As expected results were impacted by North Goonyella. Glenn will cover our plans for re-ventilation and reentry shortly. So, for now, I'll focus on the quarter. Seaborne met adjusted EBITDA totaled $26 million in the quarter which included $49 million of idling and containment costs related to North Goonyella. This compares to some $73 million in contribution from the mine in the fourth quarter of 2017.

As we targeted, sales volumes came down from the Millennium mine in advance of mine closure in the second half of 2019. Dragline repairs at Coppabella also impacted costs and volume in the quarter.

Shoal Creek adjusted EBITDA contributions were suppressed due to the required fair value inventory adjustment recorded in conjunction with purchase accounting. Our final 120,000 tons purchase with the mine shipped in January and are subject to the same fair value inventory adjustment, and therefore, we will have minimal adjusted EBITDA contributions for those January volumes and first quarter adjusted EBITDA. That said, the integration of Shoal Creek is well underway and we expect to ship about 2.5 million tons of high-quality hard coking coal from Shoal Creek in 2019.

Moving to the U.S. thermal operations. Adjusted EBITDA declined $18 million to $144 million in the fourth quarter. 6% lower volumes primarily in the PRB coupled with the roll-off of higher priced legacy contracts led to margins tightening. Both the PRB and Midwestern segments realized cost improvements compared with the prior year primarily reflecting favorable repair and maintenance spending.

Moving on to slide six, let's take a minute to discuss key highlights from the balance sheet and cash flow. In the fourth quarter, we generated operating cash flows of $229 million and collected some $25 million in cash from Middlemount.

As is typical, capital expenditures reached their high point for the year in the fourth quarter at $115 million.

You may recall early in 2018, we said we expected to generate free cash flow in excess of $1 billion. I'm pleased to note free cash flow generation totaled $1.36 billion. This reflects operating cash flows of $1.49 billion and investing cash flows before $387 million for the Shoal Creek acquisition of $130 million.

For the full year, we benefited from some $300 million of tax savings as a result of our substantial NOL positions in both the U.S. and Australia. Capital expenditures for the year totaled $301 million, right at the midpoint of our guidance range.

As you can see from Peabody's allocation of capital our focus is oriented towards the seaborne market. Approximately 80% of our investments specifically CapEx in the Shoal Creek acquisition were directed towards our seaborne portfolios reflecting the company's continued evolution towards an emphasis on higher-demand higher-margin products.

2019 CapEx is anticipated to be higher than 2018 as we further progress life extension projects in Australia, complete the purchase of the new North Goonyella Longwall and adding Shoal Creek. Peabody ended the year with $1.32 billion of available liquidity including $982 million in cash and cash equivalents.

We certainly recognized our current liquidity is in excess of our stated target at $800 million. But that's not to say, we haven't been deploying significant amounts of capital. We've repurchased $835 million of stock in 2018 with a $135 million brought back in the fourth quarter.

To put that in perspective in the fourth quarter we returned 91% of our free cash flow to shareholders through share buybacks and dividends. To-date repurchases under our $1.5 billion authorized programs totaled $1.1 billion, which equates to more than 25% of our market cap. And in 2019, we intend to keep our foot on the pedal.

Let's now turn to slide 7, and briefly discuss seaborne industry condition. While there certainly are macro concerns creating cost precaution including slowing global GDP growth, trade issues and easing commodity prices underlying seaborne met and thermal conditions remain quite positive. And in the U.S., the pace of coal retirement is expected to substantially ease in 2019.

Starting with seaborne thermal fundamentals, it's easy to read many of the headlines in the U.S. and Europe and believe global demand for coal is rapidly shrinking. That simply isn't the case. Over 80% of the roughly one billion ton per year seaborne thermal market is driven by the Asia-Pacific.

In fact IHS Markit projects that for every one gigawatt of coal fuel generating capacity that is being retired between 2017 and 2030, primarily in the U.S. and Europe three to four gigawatts are being added in the Asia-Pacific region.

Seaborne thermal coal prices remain at healthy level with 6,000 spec Newcastle product averaging $105 per ton in the fourth quarter. And while the spread between the 6,000 spec product and the 5,500 product is still wide it did converge a bit in the fourth quarter to reflect an average of $42 per ton that spread will likely continue to be influenced by the availability of lower quality Indonesian coal's relative to the higher quality products from Australia, Colombia, Russia and the U.S.

2018 demand growth was driven by China, India and the ASEAN nations. And longer-term, we expect the ASEAN nations to drive the majority of growth. As we all know, changes in China policy tend to have a meaningful impact on underlying resource prices.

In late 2018, China enacted coal import restrictions primarily targeted at thermal coal to support domestic producers. While December imports dropped significantly, full year imports were still up 16 million tons. 2018 marked an all-time high in domestic power consumption for China. And while efforts continue to be underway to support domestic Chinese producers, we believe there are a number of factors at play that we will watch carefully in 2019.

These Chinese undercurrents are dynamic and often have opposite effects. Serious safety concerns at some mines in China have led to increased safety checks and shutdowns at various mines. And yet, the government continues to target limitations to imports, which was demonstrated in sharper lease late in 2018.

At the same time, officials continue to target banded pricing for thermal coal. While each of these factors can and will have an impact on import demands, none of these individual actions should be viewed an isolation.

India also had sharp growth in thermal coal imports in 2018, rising 25 million tons. This is a story of domestic production not keeping pace with growing demand.

Growth from ASEAN nations surpassed that of China and came close to India with thermal coal imports rising nearly 20 million tons year-over-year. The growth in these nations is truly remarkable. Take Vietnam, for example, which more than doubled their imports in 2019 and was a net exporter just four years ago.

Turning now to seaborne metallurgical coal. Pricing continues to be quite robust even with recent easing. Premium hard coking coal spot pricing averaged $221 per metric ton in the fourth quarter, with an index settlement price of $212 per metric ton. Pricing for low-vol PCI also continued its strength, with the fourth quarter benchmark settlement of $139 per metric ton.

In the first quarter, 2019 price settled just over -- just above that at $141 per metric ton. Strong pricing levels are being upheld by favorable supply-demand fundamentals. And as we expected, Chinese met coal imports eased in 2018 as the company is favoring domestic supply and increasing their reliance on scrap steel.

On the other hand, India continued to be the growth driver. In 2018, India met coal imports rose 5%. And in 2019, we would expect India to become the second-largest met coal importer behind China. In our view, it won't be long before China is -- or before India is in fact the largest importer of met coal, as they whack the domestic quantity and quality to meet their steel making needs.

Let's move on to the U.S. thermal space on slide 8. We had a substantial year of coal plant retirements in 2018, with some 40 million tons of demand being retired. We expect impacts from 2019 retirements to be less than half of that.

Inventories reached their lowest levels since 2005 at the end of the fourth quarter. Inventory levels have been helped by U.S. thermal exports, rising an estimated 34% over the prior year. And I might add 2017 exports were at a healthy level as well.

We also saw favorable weather conditions late in 2018, resulting in higher natural gas prices. That being said, gas prices have been volatile and have since come down from high, seen in the fourth quarter. Heading into 2019, we expect elevated seaborne pricing levels to continue to support higher U.S. exports.

I'll now turn the call back over to Glenn to discuss the portfolio and our 2019 priorities.

[Glenn Kellow, President & Chief Executive Officer]

Thanks Amy. As we begin 2019, we do sell against the backdrop of positive seaborne conditions, a healthy balance sheet and the expectations of continued strong operating cash flows. We remain focused on enhancing shareholder value and continue to scope our portfolio to do so.

On that front, we have a number of initiatives underway in each of our operational units that I'd like to highlight. Let's begin with our seaborne and thermal coal segment where we are pursuing several life extension projects to maintain our export thermal coal volumes at both Wambo and Wilpinjong.

To provide an update, we're advancing an unincorporated joint venture with Glencore to extend the life of our Wambo surface mine in Australia. The transition of the mines through a JV is expected to begin in the second half of 2019 with production to commence in early 2020.

We will not only have access to stratified reserves, we’ll also improve our strip ratio over time which ultimately should drive lower costs. In addition, we expect productivity improvements and enhanced blending capabilities as a result of the JV.

You've also likely heard us talk about the Wilpinjong extension project which extends a life to the mine to 2030. In part, due to the extremely low-cost nature of Wilpinjong, we expect this project will realize substantial returns at a rapid pace.

In addition, the extension project allows us to continue to exit seaborne demand centers, while meeting the requirements of our long-term domestic contract. Combined, these projects are expected to require approximately $100 million in capital investments over each of the next two years. In total, we're targeting 11.5 million to 12.5 million tons of export thermal coal shipments from our Seaborne Thermal segment.

Let's focus now on our evolving Seaborne Metallurgical segment on Slide 10. We're pleased to layer in Shoal Creek to have seaborne met segment. As you probably recall, we purchased the operations for $387 million in cash in December. The mine is strategically located on the Black Warrior River in Central Alabama and it is a full seaborne met mine, as it serves Asian and Atlantic steel customers.

One of the conditions to closing on the transaction was the negotiation of the new labor agreement by the previous owners with the union workforce and a new labor agreement replaces the prior multiemployer pension liabilities with the 401(k) program.

Shoal Creek is well capitalized, requiring only modest capital investments going forward. 2019 capital is expected to be about $20 million falling to about $10 million in 2020. One of the many benefits of the mine is that in includes two longwalls. This eliminates the customary lag for all our moves and improves production levels.

And I'm pleased to report that the first longwall move was just completed with a seamless transition to the new panel with no downtime.

As a reminder, Shoal Creek has about 55 million tons of proven and probable reserves. With regard to coal quality, Shoal Creek is a high-vol A coal whose index averaged approximately $212 per metric ton in the fourth quarter. In 2019, we expect the mine will ship approximately 2.5 million tons of high-quality hard coking coal. Shoal Creek mine's two seams with a layer of interburden between them that compresses and widens throughout the mine.

Given the geology, we expect cost maybe invariable in any given period. We're targeting costs in the vessel of $85 to $95 per short ton for 2019 and for the mine to be a substantial adjusted EBITDA contributor. That was evidenced with Shoal Creek's performance through September 2018 when the mine delivered adjusted EBITDA margins of approximately 50%.

My view is that the workforce has reacted positively to having the ownership settled, having new labor agreement and being part of the Peabody organization. As you can see, we're equally enthused at our new addition. As we've been communicating for some time now, the Millennium mine will reach the end of its mineable reserves in 2019. We began ramping down mining activities in 2018 and recently transitioned to high-vol mining to access remaining economic reserves. In 2019, we expect the mine to produce a bit more than 0.5 million tons during the first nine months.

With regard to timing of overall met shipments and mine plan has sales volume more heavily weighted towards the second half of 2019 primarily at Coppabella and Moorvale. We're also progressing opportunities at our Moorvale Mine to utilize existing infrastructure to mine an adjoining lease to the south. This will allow us to extend the life of the mine beyond 2025.

Let's now move on to North Goonyella on slide 11. You'll recall we had identified two scenarios previously, should we ever resume production at the mine. One of those scenarios has longwall production resuming in the second half of 2019 with the other scenario targeting the second half of 2020. We're now progressing with a single base case that targets limited continuous miner volumes in late 2019 and will then have longwall production in the 10 North panel begin to ramp up in the early months of 2020.

While there's still much work ahead of us, our base case contemplates approximately two million tons of sales from North Goonyella in 2020. Coupled with Shoal Creek, this would manifest as substantial quality and quantity increase in 2020 from our seaborne met coal segment compared with what we target in 2019.

Let's walk through what we know at this point. At this time, all personnel remained aboveground and have utilized remote control cameras, gas monitoring and other equipment to evaluate underground conditions. Assessment tools reveal some damage within the mine in the form of several roof falls and damaged conveyer belts in limited areas. The majority of images suggest multiple areas of the mine as largely unaffected.

In an underground mine, it’s ventilation and pumping, it tends to build up methane gas and water and that's been occurring since September. We are continuing to work towards reducing water levels through ongoing pumping activities. All of our actions have been conducted in coordination with the Queensland mines inspector. Our approach for North Goonyella at this point begins with execution of a multiphase project to advance reventilation and reentry.

We now have completed segmentation of the mine into multiple zones, largely using vessel plugs across two of the main corridors as temporary ventilation control devices. This will allow us to manage and control airflow and monitor any changes in gas readings through these zones as we advance.

The project is being advanced through a stage gate approach that allows a periodic reevaluation of progress, cost and investments. Our current assessment indicates idling a reventilation and reentry costs to average approximately $30 million to $35 million per quarter in 2019.

We are estimating CapEx of approximately $110 million in 2019. That's primarily associated with the previously planned purchase of the new longwall. While our initial plan was to begin using the new longwall at GM South after completion of the 10 North panel, our current plan is to now mine 10 North with a new longwall as well.

Wrapping up inflows and outflows related to North Goonyella, we also expect cash outlays related to equipment settlements, which have already been accrued. In addition we're anticipating to collect insurance proceeds of $125 million in 2019 and we've recently filed that claim. That summarizes the outlook for our seaborne business.

Let's now turn to slide 12 and discuss the U.S. thermal operations where we continue to emphasize value over volume in the face of reduced coal demand. Across our U.S. thermal operations, we are targeting lower 2019 sales volumes relative to 2018.

In the PRB, we are reducing planned production from our flagship North Antelope Rochelle mine by 10 million tons. At current market levels, we are not generating margins we find acceptable for our investors. Relative to our PRB mines, coal from certain pits of North Antelope Rochelle is higher quality but also higher cost. With this planned reduction, we have approximately 90% to 95% of our PRB volumes priced for 2019.

In the Midwest, we are easing production across several smaller complexes to optimize margins. The likelihood as talked before about the benefits of operating our mines is complexes. We have the ability to move contracts, equipment and people in our mines.

In 2019, we are moving contracts between mines to deliver low-cost products to meet customer demand. There is demand for our products in Illinois Basin, pricing in some cases is not a level that provides a clear return of that cost of capital. So for now, we are scaling back production from our higher cost operations.

And as expected, western volumes will decline year-over-year given the announced closure of the Navajo Generating Station came through sole customer. Our base case is at the mines production in south will cease in the third quarter due to entry levels at both the mine and power plant.

With regard to the financial impact of the expected closure of the Kayenta Mine, we've been accelerating both the collection of revenue in light of the expenses post mining obligations.

As you may recall, the owners of the Navajo Generating Station are contractually obligated to fund a portion of reclamation retiree healthcare liabilities. While follow-on negotiations are ongoing regarding settlement amounts over the course of 2018 and into 2019, we've accelerated cash collections from the owners of NGS.

In part due to the planned closure of Kayenta, our reclamation cash outlays are expected to increase in the coming years. In 2019, we're anticipating companywide reclamation cash spend to increase to approximately $70 million to $75 million. This includes spending for Kayenta and Millennium.

Now that we've covered each of our operational units, let's discuss how that falls into our financial approach and capital allocation on slide 13. For some time now we've been executing on our stated financial approach of generating cash, maintaining financial strength, investing wisely, and returning cash to shareholders. Despite operational setbacks this year, we've never stopped delivering on this financial approach.

As Amy mentioned, we generated over $1.3 billion in free cash flow in 2018 and 94% of that was used for share repurchases dividends and the highly attractive Shoal Creek acquisition.

As I mentioned earlier, we expect to continue to generate strong operating cash flows, and in order to do so, are focused on managing costs and maximizing revenue from all operations, with a particular emphasis on value over volume.

We continue to remain focused on maintaining financial strength, especially, in the year that begins with macro concerns with the slowing global economy. That said, we are maintaining our debt and liquidity targets, while recognizing our current liquidity is above our targets of $800 million.

The next prong of our financial approach is investing wisely. For some time now we've discussed our strict set of filters that we apply to all investments. Basically we've been able to demonstrate the benefits of use those filters through the Shoal Creek acquisition.

As we noted last February, our 2019 capital expenditures are increasing relative to 2018. We're currently targeting between $375 million and $425 million CapEx with approximately 70% allocated towards our seaborne portfolios. About half of our expected capital is for major projects in Australia including United-Wambo JV, Wilpinjong extension project, and a new North Goonyella longwall.

The final piece of our financial approach is returning cash to shareholders. We've been extremely active on this front over the past 18 months, returning $1.1 billion in cash to shareholders through an upsize repurchase program and quarterly dividends. And we remain committed to returning cash to shareholders this year.

In January, we completed $75 million of repurchases and we just announced a declaration of another quarterly dividend to be paid in March.

With that, I'd like to turn the call over for questions. Operator?

[Operator]

Thank you sir. Ladies and gentlemen, at this time, we will now begin the question-and-answer session. [Operator Instructions] Jeremy Sussman from Clarksons Securities. Please go ahead sir.

[Jeremy Sussman, Clarksons Securities]

Yes, hi. Thanks very much for taking my question.

[Glenn Kellow, President & Chief Executive Officer]

Good morning Jeremy.

[Amy Schwetz]

Good morning Jeremy.

[Jeremy Sussman, Clarksons Securities]

Good morning everyone. So, maybe just since you finished on CapEx, I'll start there. If I take the CapEx guidance for 2019 and you're $400 million or at the midpoint. You noted some growth and extension projects in there. I guess I'm wondering what level is maintenance versus growth CapEx in there? And maybe if we look over the next, let's say, two to three years, kind of what is the sweet spot for CapEx for Peabody?

[Amy Schwetz]

Yes. Maybe just, starting with sustaining CapEx in general, we'd say about $200 million a year of sustaining CapEx. And then, incremental to that, from time to time, you will see us layer in, in projects as we have done this year. I think relative to where we were at last year, there's a few things impacting our capital expenditures as we move into 2019. And some of them actually have to do with events that occurred in 2018.

So generally, you think about three things that will drive the width of the CapEx range, whether that's carryover capital that occurs in any given year, is probably just timing between years, as well as capital opportunities that may arise in any given year. And 2018 is a year that both of those things happen. So we saw some capital flip out of 2018 into 2019. So, with that, we actually would have anticipated that we would come in sort of more towards the low end of our CapEx guidance in 2018.

However, we had some opportunities during the year to pay for some very accretive projects, particularly in the form of lease buyouts between $20 million and $25 million and so that was additive to our 2018 CapEx. Additionally, we've got about $20 million of capital planned in 2019 for Shoal Creek. And going forward, we would anticipate that to be more in the $10 million range for that mine.

[Jeremy Sussman, Clarksons Securities]

That's very helpful. Thanks, Amy. And maybe just a follow-up. So you're spending about $30 million to $35 million a quarter on North Goonyella in 2019, which is a decent amount. So I would take that as you all have some pretty good conviction of ultimately getting back in the mine and seeing longwall production by 2020, as you noted in the release and on the call. So, I guess, maybe what do you know today that you didn't know a few months ago that sort of gives you this, what seems to be, a bit of an increased confidence in getting back in there?

[Glenn Kellow, President & Chief Executive Officer]

Well, as we said, the fourth quarter was largely about initially consignment in that early part. And then we set about doing an assessment of the conditions underground through use of thermal imaging, the ability to get cameras down to look at parts of the mine. And certainly, as we've indicated, the vast majority of the mine remains unaffected.

There was some damage around some roof falls, some affected segments of conveyor belt that we think needs to be rectified. And that has helped to assist in this sort of stage reventilation process that we're talking about and reentry process. So we've now gone about segmenting the mine in 3, 3.5 zones. And we intend to in turn reventilate and reenter each of those segments in a staged way.

That will give us the ability to do further assessments at each stage as we advance. But that's the plan that we have outlined to-date and we are managing this as a project. We recognize the amount of dollars involved. We think the returns and value are there. And we'll continue to run this project through our investment filters. But that's what we know to-date and execution of the reventilation or reentry is what we're undertaking at this point.

[Amy Schwetz]

Glenn highlighted in his remarks and I'll add in for good measure here that we do have about $125 million of insurance proceeds that we expect to collect this year as well, which has not been factored into those expenditures that will also be used to cover some of the cash outlays for equipment as well.

[Operator]

Your next question comes from the line of Lucas Pipes with B. Riley FBR.

[Lucas Pipes, B. Riley FBR]

Hey, good morning, everyone. I want to follow-up on Jeremy's first question regarding capital. Should we be thinking about kind of the $200 million run rate for 2020? Or could we be seeing some of those incremental projects being layered on such as the life extension projects on the seaborne thermal coal site? Would really appreciate your perspective on 2020 CapEx specifically? Thank you.

[Amy Schwetz]

Well, it's pretty early days in terms of looking at 2020 CapEx, but what I would say is starting with that base level of sustaining capital of $200 million, we've anticipated about $100 million for Wambo and less in CapEx as well. So I think you will continue to see those projects have a little bit of a life to them as we extend out into 2020 and 2021.

[Lucas Pipes, B. Riley FBR]

Got it. That's helpful. And maybe to turn to the domestic side. So first, it appears that there was some contact roll-off on the PRB site, when I look at your committed prices for 2019 versus 2018. If you could give us a little bit more color around the moving pieces there and where you're contracting coal more recently? And then kind of higher level, what is your view on PRB demand for 2019 versus 2018? Thank you.

[Amy Schwetz]

Maybe starting with pricing. A couple of things are happening as we look at our 2019 pricing: first, we did have some higher priced contracts that have rolled off over the course of the year, but you also see a shift in that realization number towards a lower quality PRB coal.

As we look at the production that we've both removed from the plan and the volumes that we still have left to price that is around that 8,800 product which is -- would be the highest priced product out of the basin. And I would say we have been -- as we looked at contracting activities over the last month or so, we have been by and large on the sidelines not pleased with the margins that would be generated out of the basin at those levels. So we might not be in the best position to say where those contracts are pricing at this point.

[Glenn Kellow, President & Chief Executive Officer]

Maybe in terms of 2019 view on market obviously we closed through 2018. We draw down in inventory levels that were occurring. And I think going forward the dynamics will be related to weather conditions overall economic growth, but it is -- to watch the inventory levels remain at those low levels.

[Vic Svec]

And just a few points of punctuation on that. We are -- we do have a forward curve that's slightly below what at the average 2018 levels were on natural gas prices. As you know the U.S. burn for coal tends to be most correlated with that. We're at a year of lower retirements as we noted this year than the prior year which certainly benefits us, but it is still a year of retirement. So, with no additions obviously.

So, and you have the full year effect of some of those larger retirements that occurred last year. Probably in terms of the overall reduction in U.S. coal demand this year, we were expected to be relatively proportionate between the PRB and other regions.

[Operator]

And your next question comes from the line of John Bridges with JPMorgan.

[John Bridges, JPMorgan]

Hi. Good morning, everyone.

[Glenn Kellow, President & Chief Executive Officer]

Good morning, John.

[John Bridges, JPMorgan]

Hi. With respect to Goonyella you speak of the plan is being the base case. If you get down there and you're pleasantly surprised are there other cases which could perhaps get your mining earlier? When do you get the longwall machine available to you?

[Glenn Kellow, President & Chief Executive Officer]

That would be in the second half of 2019. I think John we're obviously managing this as a project. We look to debottleneck as we go and sort of stress the critical pass-through that project outcome. The team are focused on safely and quickly moving through this, and executing against the project plan. So there maybe some ability, but it's really too early to call that. And we'll certainly be updating as we move through the project.

[John Bridges, JPMorgan]

Okay, okay. That's helpful. And then, you mentioned another lease – what might the terms of would that be? Would that be a capital cost? Would that be a higher operating cost lease royalties related to that? Or is it going to be more business as usual?

[Glenn Kellow, President & Chief Executive Officer]

Sorry, John you cut out with us on that last question. What were you describing?

[John Bridges, JPMorgan]

Moorvale, you got the lease extension there. What can we model there after 2025? Will there be capital involved in picking that ground-up? Would there be different royalties? How would that be characterized?

[Glenn Kellow, President & Chief Executive Officer]

I think it's essentially very similar coal quality to the current Moorvale activity. It's an area to the south. We have the majority of that area to-date. I'd say that, we are evaluating it, so we haven't committed to the project. But it would essentially be lower infrastructure, a new box cut and via satellite development of that Moorvale complex. So low capital and similar profile is the way I would describe it.

[John Bridges, JPMorgan]

Similar costs?

[Glenn Kellow, President & Chief Executive Officer]

Yes.

[Amy Schwetz]

That's correct.

[John Bridges, JPMorgan]

Okay. Thank you very much guys.

[Operator]

Next we'll go to Michael Dudas with Vertical Research.

[Michael Dudas, Vertical Research]

Good morning, gentlemen, Amy.

[Amy Schwetz]

Good morning.

[Glenn Kellow, President & Chief Executive Officer]

Good morning.

[Michael Dudas, Vertical Research]

Maybe Amy, as you go into 2019 certainly you did indicate and the company's got through a lot of operational challenges, but also a very solid year. For 2019, how do we think about managing expectations on the balance sheet relative to the liability management very successful at certainly pace of acquisitions because of a little bit more certainty with the investment over North Goonyella does Peabody feel a bit more comfortable about being more active in the marketplace? Or is there caution in the supply-demand fundamentals that might lead to being a bit more tepid on that front?

[Amy Schwetz]

So as we think through our financial approach, Mike we talk – we talk about generating cash maintaining financial strength. We think we're doing that in terms of thinking through 2019 and what we've accomplished in 2018. And then, we talk about investing wisely and returning cash to shareholders. I think that some of the best way is to judge and the company -- what the company will do next is what we've done in the past. And I think one of the reasons why we wanted to highlight the activities that we undertook in both the fourth quarter of the year amidst some uncertainty around the mine and what's occurred in January between share repurchases and dividends is to indicate that we remain committed to our shareholders and providing returns to them over time.

[Michael Dudas, Vertical Research]

I appreciate the thought. And then maybe turning to the markets over -- thermal markets in the Asian region. How do you anticipate how volume out of Indonesia looks in 2019 given the pricing dynamics and certainly some of the favorable fundamentals that you talked about there? Is demand expectations picking up enough that will require a bit more export profit because there's going to be difficulties with that spread to effectively fill those needs and then provide better opportunities for your higher-quality coals?

[Amy Schwetz]

I think that we believe the supply and demand between those two products is the main driver of what is going on with thermal prices right now, meaning that lower -- the abundance of that lower quality product is driving that spread. And frankly, we don't see anything changing significantly as we move into 2019 in terms of that relative supply and tightness occurring at the higher quality spectrum and there being relative abundance in lower quality products. Of course, Indonesian policy can impact that, but although the spread is wide and the pricing for that product is still inducing exports out of Indonesia. So, I think that we see that dynamic staying in play as we look through the balance of 2019.

[Glenn Kellow, President & Chief Executive Officer]

Yes. And just a few major points around that. We saw Indonesia at about 365 million tons. If you go back a few years to 2015 that went up to probably at the end of the day 425 million to 430 million tons in 2018. That's probably a tough mark for them to increase on over time. They do have domestic market obligations to be thinking about another factors, but they have certainly been a go-to for additional lower CV kind of product for the latest couple of years remains to be seen if that trend continues or if it stabilizes or backs off from that point in 2019.

[Michael Dudas, Vertical Research]

My follow-up I guess relative to the positive trends you've and others have pointed out in Indian imports for thermal met is Peabody looking to benefit more improved marketing excess or some opportunities to better serve or be involved in that market over the next several years because those expense can be very important for everybody?

[Glenn Kellow, President & Chief Executive Officer]

It's already an important market for us and we are focused on that activity, but our overall strategy with marketing probably tends to be more the traditional markets of Japan, Korea Taiwan. India would probably rank the next in the mix and then China probably being in area that we'd have a lower amount of volume going towards. So we like the -- the higher-quality products that we have, tend to enable us to move into those traditional markets and get premiums associated with that. So I certainly think that continues to be a focus area for us, but there's no doubt India we see as an important market going forward.

[Operator]

Next question comes from the line of Mark Levin with Seaport Global.

[Mark Levin, Seaport Global]

Hey, great. So my first question has to do with M&A. You guys obviously went out and purchased a met coal asset in Alabama this year. There maybe - there is one that's in the market now, but without asking you to comment on that specifically, how do you guys think about 2019 in terms of potential for more U.S. met coal M&A?

[Glenn Kellow, President & Chief Executive Officer]

Yes. I think, I'd like to look at the Shoal Creek acquisition from a number of different perspectives. But it starts with the fact that, for us we saw it as a seaborne met acquisition. And what's unique when you look at the photos of Shoal Creek is that, the load out to the barge directly to wood -- through river transportation out to those seaborne export markets.

We believe that the valuation was attractive -- highly attractive. We like the quality of the coal and we think that the cost particularly on the waters is very, very competitive. I think Shoal Creek was somewhat unique. It's not signaling U.S. met play per se, it's really about the fact that we were looking at an enhancement to our seaborne metallurgical platform and it managed to tickle the rigid investment filters that we had.

[Mark Levin, Seaport Global]

Yes, that makes sense. And then the second -- or my follow-up question is for Amy. Amy when you think about the cadence of earnings throughout the year as we have to kind of put together or kind of quarterly estimates, can you maybe walk through some of the sort of key items that we should be thinking about in the first quarter and maybe second quarter? And how maybe things, absent the price, might look in the first half of the year versus the second half of the year?

[Amy Schwetz]

Yes. So I think maybe starting with the seaborne products, one of the things that we are focused on, you might call last -- recall last year, we anticipated early in the year that thermal volumes would be backloaded.

This year, we're anticipating a much more ratable pace to our thermal coal volume. Although I'll say that, we generally see AGL volumes more focused in the first and fourth quarter to deal with summer in Australia and electricity generation necessary as a result of that.

From a Met's perspective, we are going to see our met volumes this year backloaded. So Glenn commented on mine plans at Coppabella and Moorvale specifically. So we'd anticipate higher volumes for our Metallurgical segment in the last six months of the year and that will primarily be on the PCI side and PCI flag shipments.

And looking at the U.S., I think that the major drivers are going to be as they always are, the shelter season. So -- and we're having very favorable weather in the U.S. right now, and the first quarter tends to be a strong shipping quarter for us out of our U.S. business. I think that this year will not be an exception to that, but as we move into shelter season you'll start to see those volumes fall off a bit.

[Mark Levin, Seaport Global]

And just from a cost perspective, you were just kind of applying sort of the operating leverage piece, if you're in our shoes. Is there anything kind of discrete from a cost perspective that we should be thinking about in any given quarter?

[Amy Schwetz]

Yes. So I think just a couple of things around our longwall operations, starting with maybe North Goonyella and just saying that, early this quarter we have been still very heavily involved in drilling activities. So as we think about our quarterly range, we would expect that the first quarter will be a bit higher than the remaining quarters of the year, based on those activities. And then, moving on to our other longwall operations, we will have longwall move at Wambo and Metropolitan in the second quarter of the year.

[Mark Levin, Seaport Global]

Great. Thank you, guys, very much.

[Operator]

At this time, I'd like to turn it back over to Mr. Kellow for any additional or closing remarks.

[Glenn Kellow, President & Chief Executive Officer]

Well, thank you for your questions and participating in today's call. I'd like to thank all of our employees for your continued commitment to safety, hard work and dedication. And as we enter 2019, prepared for the opportunities and challenges ahead of us and look forward to your continued support as we remain focused on generating meaningful returns for our investors. We appreciate your continued support and interest in BTU. And operator, that concludes today's call.

[Operator]

Thank you, sir. This concludes Peabody's fourth quarter earnings presentation. Thank you for your participation.