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Edited Transcript of BTUUQ earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Peabody Energy Corp Earnings Call

ST. LOUIS May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Peabody Energy Corp earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy B. Schwetz

Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer

* Glenn L. Kellow

Peabody Energy Corporation - President, CEO & Director

* Vic Svec

Peabody Energy Corporation - SVP, Global Investor and Corporate Relations

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Conference Call Participants

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* Jeremy David Kliewer

Deutsche Bank AG, Research Division - Res136932864858earch Associate

* John David Bridges

JP Morgan Chase & Co, Research Division - Senior Analyst

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Mark Andrew Levin

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

* Scott Schier

Clarksons Platou Securities, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you standing by, and welcome to the Peabody's first quarter earnings call. As a reminder today's call is being recorded.

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

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Vic Svec, Peabody Energy Corporation - SVP, Global Investor and Corporate Relations [2]

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Okay. Thanks, Amanda, and good morning, everyone. Welcome to BTU's Earnings Call for the First Quarter of 2019. With us today are President and Chief Executive Officer, Glenn Kellow; as well as Executive Vice President and Chief Financial Officer, Amy Schwetz.

During our formal remarks, we'll reference the supplemental presentation, and that's available on our website at peabodyenergy.com.

Now on Slide 2 of this deck, you'll find our statement on forward-looking information. We do encourage you to consider the risk factors that we reference here as well as our public filings with the SEC. And I'd also note that we use both GAAP and non-GAAP measures. We refer you to our reconciliation of those measures in this presentation as well as in our earnings release.

I'll now turn the call over to Glenn.

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [3]

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Thanks, Vic. And good morning, everyone. Before Amy tells us the financials in more detail, I'd like to spend a few minutes reviewing the highlights of the quarter.

First of all, this was our first full quarter of ownership following the highly accretive Shoal Creek Mine purchase. I'm pleased to note that the mine had an outstanding quarter. In fact, Shoal Creek rose to the top earnings contributor for Peabody in this period. Although its early days, its first quarter cash flows imply a payback period pace of less than 2 years.

Next, our seaborne thermal segment once again delivered leading margins in the quarter. On average, over the past 2 years, our seaborne thermal segment has delivered 40% adjusted EBITDA margins.

Also, we reached an agreement for the maximum insurance recoveries for North Goonyella in the quarter. We recorded a benefit to operating profit, including a portion to adjusted EBITDA, and have already collected all $125 million in cash proceeds.

Once again, we generated strong cash flows and returned even more to our shareholders. In fact, we returned nearly double our free cash flow to shareholders this quarter. We bought back shares, issued our ongoing quarterly dividend and deployed another tool in the kit with the supplemental dividend.

The quarter wasn't without some short-term external challenges on several fronts though. I believe the strength of the platform will be more evident in the second half of 2019. This year, we expect to generate more than half of our adjusted EBITDA in that second half of the year.

Throughout 2019, we are looking to build on our strengths and implement 3 strategies to create value: First, we are continuing to reweight our investments toward greater seaborne thermal and met coal access to capture higher-growth Asian demand. To that end, in the first quarter, our seaborne segments comprised more than 60% of mining adjusted EBITDA.

Second, we are optimizing our lowest-cost, highest-margin U.S. thermal assets in a low capital fashion to maximize cash generation. Our U.S. thermal platform continues to represent strong cash flow generation that well exceeds capital requirements.

Third, we are executing our financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders, having returned more than $1.4 billion in cash to shareholders since August 2017.

I'd like to take a moment here and reflect on the first and third components of our strategy: greater seaborne access and execution of our financial approach. Shoal Creek is both an example of strategic execution and financial strength. The acquisition upgrades our seaborne met portfolio as the mine exclusively sells to Asian and European steel mills. Shoal Creek offers a substantial increase in both the quantity and the quality of our met coal portfolio.

Shoal Creek delivered exceptional operational results in the first quarter. For some time now, we have outlined a strict set of investment filters. One of those filters is to provide a reasonable payback period. The mine's first quarter operating cash flows imply a record payback period of less than 2 years. And to be clear, that's less than 2 years from the day the first dollar was invested as opposed to organic investment that may not catch flow for multiple years.

Shoal Creek also clearly meets each of our other investment filters. It's a strategic portfolio fit as it expands our seaborne metallurgical coal assets. It maintains our financial strength as the acquisition was financed with cash on hand and at a highly attractive valuation of 2x adjusted EBITDA. The acquisition is expected to generate returns well above our weighted average cost of capital of 10%. It provides tangible synergies as we were able to move quickly to monetize our NOL position, and we are realizing synergies from our shared services platform.

And certainly not the least, it creates significant value for our shareholders. As both CEO and investor, you can imagine that I've challenged the team to find more of these opportunities within our strict filters.

I'll now turn things over to Amy to cover the financials in more detail.

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [4]

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Thanks, Glenn. And good morning, everyone. I characterize the first quarter performance as quite positive given the timely settlement of the North Goonyella insurance claims, improved seaborne thermal performance and cash discipline, even while we gave some back -- some of those benefits back due to U.S. rail issues from the substantial flooding.

Let's delve into the details. Peabody's first quarter revenues of $1.25 billion reflect the impact of 16% lower volumes. Winter weather and severe flooding across the Plains states heavily impacted rail performance beginning in early February. Rail outages and delays primarily impacted PRB shipments, which were down 22% over the prior year.

We did recognize the benefits of $125 million for the North Goonyella insurance claim in the quarter, the maximum recovery allowed under the applicable insurance policies. Approximately $34 million offset recovery costs in the quarter and therefore was recorded as a benefit to adjusted EBITDA. The remaining $91 million of insurance proceeds related to the known equipment losses from current and prior quarters. That amount was excluded from adjusted EBITDA given the related charges were excluded when incurred.

First quarter DD&A was largely stable with the prior year as well our contract amortization was mostly offset -- or mostly offset accelerated DD&A related to the planned Kayenta Mine closure and the inclusion of Shoal Creek. Over the course of the year, we expect DD&A to decline, and we're targeting full year expense of $600 million to $650 million.

SG&A for the quarter was in line with the prior year and below quarterly guidance ranges. And I would note that Peabody's SG&A as a percentage of revenue remains the best in the sector.

Income from continuing operations, net of income taxes, totaled $133 million compared to $208 million in the prior year. Diluted earnings per share totaled $1.15, marking a $0.32 improvement over the prior year. First quarter EPS benefited from the company's ongoing share repurchase program and the conversion of preferred stock in the prior year.

First quarter adjusted EBITDA totaled $254 million versus $364 million in the prior year. Adjusted EBITDA included the impact of $23 million related to PRB logistical challenges in the quarter and $37 million in reventilation and reentry costs related to North Goonyella, partly offset by the aforementioned $34 million of insurance proceeds benefits.

Let's begin with our seaborne thermal segment, which, once again, was the leading segment with 38% adjusted EBITDA margins. Seaborne thermal export shipments increased 24% over the prior year to 2.6 million tons with an average realized price of $80.40 per short ton. The operations benefited from improved operating performance at the Wambo complex, in part due to no-longwall move in the quarter at Wambo. In fact, the Wambo underground mine led the segment in adjusted EBITDA margins this quarter. From a mix perspective, Newcastle spec shipments comprised 71% of export sales. That's slightly above the high end of Peabody's full year expectations.

Seaborne thermal adjusted EBITDA of $95 million increased 54% compared to the prior year results. Continued high demand for seaborne thermal coal, coupled with Peabody's low-cost operations, resulted in increased volumes, higher pricing and lower cost. Cost per ton totaled $35.03 in the quarter, marking a $2.06 decline from the prior year.

Let's now turn to the seaborne met coal segment, which shipped 2.3 million tons in the quarter at an average realized price of $142.33 per ton.

As we guided previously, first quarter volumes were less than ratable, largely due to mine sequencing plans at Coppabella. Strip ratios were temporarily higher due to required rehandle of legacy overburden from the prior owner. In addition, costs were elevated due to the cumulative impact of the dragline outage. Combined, these factors at Coppabella resulted in about $8 per ton of higher cost year-over-year for the segment.

In addition, Shoal Creek shipped its remaining acquired inventory in January, resulting in elevated costs associated with the tons required to be recorded at fair value. This adjustment increased segment costs by approximately $3.50 per ton in the quarter. As a result, segment costs totaled a bit north of $103 per ton, excluding impacts from North Goonyella.

Every other met mine in the category, with the exception of Coppabella, delivered cash cost within or below the company's original annual cost guidance range. And this includes Shoal Creek, with its cash costs came in at the lower end of its guidance range of $85 to $95 per ton. Even with the longwall transition during the quarter, the mine led the company's 23 operations in adjusted EBITDA contribution.

With regard to North Goonyella, as expected, first quarter project costs came in above the first quarter cost guidance range. We had noted previously we would look to mitigate those costs throughout the year, and we were able to do so this quarter with the sale of approximately 90,000 tons that contributed some $4 million to adjusted EBITDA. These sales, along with the recognition of the insurance claim of $34 million, mitigated project-related costs that totaled $37 million.

You'll also recall that our investment at Middlemount Mine adds some 2 million tons of incremental economic metallurgical coal exposure to Peabody. Our share of Middlemount shipped some 400,000 tons in the first quarter. Equity affiliate accounting mandates that Peabody is required to report Middlemount's results as the company shared the mine's net income, which totaled $3.9 million in the quarter. To give you a deeper sense of the income statement components, this included about $7.5 million in DD&A, ARO, net interest expense and income taxes. We expect Middlemount's performance to strengthen over the course of 2019 on improved mining conditions.

Let's now move on to the U.S. thermal segment, where winter weather and severe flooding limited rail performance and shipments from the PRB, suppressing our adjusted EBITDA by an estimated $23 million. Across the entire southern PRB, March shipments marked the lowest levels in over 20 years given these rail outages and delays.

Peabody saw first quarter PRB shipments decline 22% to 25.3 million tons, even following a strong start to the year in which January shipments were above our ratable averages. Railroad closures and rerouting of shipments, particularly for the midsection of the U.S. where many of our PRB customers are concentrated, drove lower volumes. They also resulted in $1.02 per ton increase to PRB costs from the prior year. The good news is that the PRB largely seemed to recovered from these issues and customer stockpiles are at their lowest levels since 2014.

Midwestern and Western adjusted EBITDA rose year-over-year. The Midwestern segment benefited from lower repairs and higher realized pricing. Strong performance from the Twentymile Mine contributed to an $11 million increase in the Western segment's adjusted EBITDA over the prior year. In addition, Western realized revenues per ton rose, in part, due to accelerated billings associated with the planned closure of the Kayenta Mine in the third quarter of 2019.

In total, the U.S. thermal operations earned total adjusted EBITDA of $112 million compared to $138 million in the prior year, even with some 8 million tons of lower sales volume.

Turning now to Slide 6. Let's discuss key balance sheet and cash flow metrics. We ended the quarter with $798 million of cash and cash equivalents and $1.1 billion in available liquidity, even after nearly $315 million in cash returned to shareholders in the quarter. Operating cash flows of $198 million and CapEx of $36 million led to free cash flow totaling $162 million in the first quarter.

During the quarter, we deployed another tool in our capital allocation kit with a supplemental dividend of $200 million or $1.85 per share, further underscoring our commitment to returning cash to shareholders. I would note that our ongoing quarterly dividend pace and supplemental dividend already equates to a 2019 yield of some 8% based on our current share price.

We have been consistent in stating that our default position has been to return cash to shareholders, and we have made substantial progress on that front with $1.42 billion of cash returned through buybacks and dividends since August of 2017. We plan to return an amount equal to or greater than our free cash flow to shareholders in 2019, and the first quarter was no exception with cash returns nearly doubling our free cash flow in the quarter.

As our actions show, we are willing and able to be flexible with regards to our approach and we remain committed to returning cash to shareholders. We have approximately $357 million remaining under our authorized share repurchase program, and we'll continue to implement buybacks as we believe our shares represent a compelling investment opportunity. Our commitment to shareholder returns is evident not only in the absolute quantum of cash returned, but also in the progression of our net debt balance over the past year.

I'd now like to turn the call over to Glenn to cover the industry conditions on Slide 7.

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [5]

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Thanks, Amy. The first quarter of 2019 was marked by a series of the unusual near-term challenges to the coal industry logistics chain in multiple parts of the world: traditional coal flows were altered by flooding here in the U.S. in the Plains states; port restrictions in China; wet weather and train derailments in Australia; and a cyclone in Mozambique.

While in some instances these challenges simply resulted in a shifting of products between multiple demand centers, in other instances coal flows were disrupted. In China, cutting through the noise and looking at the math, Chinese imports are largely in line with prior year levels for this time of the year and Australian coal exports were up some 2 million tons. That's not to say that traditional coal flows weren't disrupted as China shifted the mix of their imports a bit, but overall demand remained.

Specific to seaborne thermal pricing, low LNG prices, above average stockpiles in several large importing nations and a mild winter all contributed to a rebasing of pricing. Newcastle pricing reached a 2-year trough pricing level in April and have since rebounded. And our 2019 committed volumes are locked in, in prices above Newcastle prices. And that's even when those volumes -- noting that those volumes include a portion of the lower PCI-priced product as well.

Our 2019 seaborne thermal price volumes include a little more than 2 million tons linked to the Japanese reference price settlement, which was recently settled at $94.75 per tonne. Including these expected commitments, we now have some 5.7 million short tons of Australian export thermal coal priced for the last 3 quarters of 2019 at an average price of $83 per short ton.

And as expected, we've seen a converging of the spread between the Newcastle's spec product and API 5. The 2019 forward curve price ratio as of the end of March was approximately 70% versus closer to 60% just a quarter ago.

Our Australian mines are well positioned to meet the growing seaborne thermal demand centers. Over 80% of global seaborne demand stems from the Asia-Pacific region, even with customs clearance delays in China during the quarter. Getting into some specifics, Chinese thermal coal imports eased 8% in the quarter. While our internal estimates would have projected Chinese imports to be down year-on-year for all of 2019, recent news from China actually indicates a goal of imports being on par with 2018 levels.

India's thermal coal imports are up some 16% through March given the demand for higher CV industrial coals that cannot be supplied by domestic producers. ASEAN continues to prove to be a strong driver of seaborne thermal demand as well with imports up 23% year-to-date. We expect this trend to continue with ASEAN demand leading the growth in 2019 of seaborne thermal coal demand.

Moving now to seaborne met coal. Tight supply/demand fundamentals continues to support robust seaborne met coal prices. Spot hard coking coal prices averaged $206 per tonne in the quarter, with the first quarter settlement locked in at $210 per tonne.

Continued safety checks in China, strong steel production and quality limitations on domestic supply are leading to tight domestic supplies, which in turn have resulted in netbacks supportive of imports. As a result, met coal imports rose 35% through March.

Looking ahead, we are estimating 2019 met coal imports to increase some 5 million to 10 million tonnes over 2018 industry-wide, with India leading the growth in demand. Global steel demand rose 5% last year and we're expecting an additional 2% of growth this year. Supply increases are largely expected to be sourced from Australia.

It occurs to me that the industry conditions for coal are often miscast, particularly in relation to seaborne coal demand. So it's worth taking a moment to offer some context on Slide 8. We have begun to emphasize what I would call a surprisingly sustainable case for coal. Well, the choice is not one of good versus evil but a pursuit of 2 goods: abundant reliable energy supply and reduced emissions.

For the first time ever in 2018, global coal fuel generating capacity topped 2,000 gigawatts. That's a massive 62% increase since the year 2000. And some 50 gigawatts of new coal fuel generation are expected to come online this year alone. To put that in perspective, each gigawatt uses about 3 million tons of coal per year. Coal also is an essential ingredient to original steelmaking, which consumes 1 billion tons of coal each year. And coal provides about 70% of the energy needed to create cement.

Life expectancy, educational attainment and income all correlate with per capita electricity use, and more of the world's electricity is fueled by coal than any other source. Simply put, the world plans and needs to use coal for the foreseeable future. Our seaborne portfolio is well positioned to serve this growing demand for some time with some 570 million tons of coal reserves between Australia and Shoal Creek.

That said, recent industry challenges might paradoxically enable greater financial strength for those that take a contrarian position and remain. A world that have used coal for many decades more into the future also need sustainable coal companies more than ever.

Let's now review the U.S. thermal space on Slide 9. Customer demand remained strong in the first quarter even though shipments were impacted by rail outages and delays due to heavy flooding across the Heartland. In fact, implied customer demand by the way of coal nominations with the rail was some 60% higher than actual trains loaded in March. Production declines of 12% outpaced our internal estimates given rail outages and delays.

PRB shipments were down some 5 million to 10 million tons on weather impacts. Reduced coal shipments have further driven down already low utility stockpiles. In fact, 7 PRB utility stockpiles declined 4 million tons in March, which compares to an average build of 1 million tons in the month. U.S. coal fuel generation declined some 9% in the first quarter as total load was down and increased natural gas generation brought with it excess capacity and continued weak gas prices. Natural gas generation rose 11%, while all other fuel sources declined with wind generation down some 6% year-to-date.

In 2019, we expect retirements and gains by natural gas to continue to weigh on coal demand. On the other hand, strong seaborne pricing provides an outlet for U.S. thermal exports.

I'd now like to turn things back to Amy to discuss expectations for the upcoming quarter.

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [6]

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Thanks, Glenn. We are anticipating a strong second half of 2019 that will contribute more than half of our full year adjusted EBITDA. PRB, seaborne met and seaborne thermal volumes are expected to escalate throughout the back half of the year. In addition, met coal costs are expected to decline from elevated Q1 levels. Second quarter performance is expected to be impacted by 2 longwall moves in Australia, and PRB shipments are targeted to be in line with the first quarter as rail recoveries offset typical shoulder season demand.

We are expecting a strong seaborne thermal shipments, and in line with this, are increasing our full year guidance range by 250,000 tons at the midpoint. Given elevated met costs in the first quarter, we are tightening our met coal cost guidance to $90 to $95 per ton.

Related to North Goonyella, in the first quarter, we completed segmenting of the mine into multiple zones to facilitate a phased reventilation and reentry. In addition, all physical activities in advance of reventilating the first segment of the mine have been completed. Gas readings are at acceptable levels, and we are currently complying with a directive concerning documentation from the Queensland Mines Inspectorate following a thorough review. This has resulted in a multi-week delay to our initial project plan. Should our reventilation and reentry plan now progress as originally contemplated, we would expect to produce approximately 2 million tons from North Goonyella in 2020. If further delays occur, we will evaluate our plans, including longwall production target, quarterly project costs and capital expenditures.

From a cash perspective, we pushed out some project capital spending primarily related to the Wambo JV into 2020. As a result, we've lowered our 2019 CapEx guidance to $350 million to $375 million. And we are continuing to accelerate cash collections to support reclamation and postretirement liabilities at Kayenta.

We remain focused on delivering results and generating value, and we believe we've done a good job of that this quarter. As discussed, we recognized the maximum allowable amount of the North Goonyella insurance claim. We've lowered our capital guidance and raised our seaborne thermal volume guidance. And we've delivered SG&A below our average quarterly rate.

And while we flagged lower-than-ratable first quarter volumes, our expectations did not take into account the severity of rail issues. Had PRB rails performed in the normal fashion, we would have generated over $275 million of adjusted EBITDA this quarter.

Furthermore, we remain committed to executing on our financial approach of generating cash, maintaining financial strength, investing wisely and returning cash to shareholders.

On the heels of our highly accretive Shoal Creek acquisition, we are continuing to pursue opportunities to create substantial value for our shareholders. For some time now, we've discussed our strict set of investment filters, and we will continue to employ these filters as we evaluate both internal and external investment decisions.

In addition, we are committed to returning our shareholders an amount equal to or greater than our free cash flow in 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Lucas Pipes with B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [2]

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I wanted to first ask a question on the seaborne thermal coal side. I believe you said you sold 2.6 million tons. So if I kind of start at the midpoint of the guidance range, I think you would sell about 9.7 million tons over the remainder of the year, and then that would leave about 4 million tons that are unpriced. And I wondered if you can give us some perspective as to what sort of the quality this is, what sort of price we might be looking at.

And then also just in terms of cadence, when do you expect how many volumes on a quarterly basis between now and year-end?

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [3]

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Sure. So starting with our price position. In Q2 to Q4 of the year, we've got about 5.7 million short tons of that price. That sets about $83 per ton. And that does include some API 5 tons in that mix, but we are -- but the balance of our tons to sell throughout the remainder of the year is weighted towards that lower quality spec. So about 40% to 50% of our unpriced seaborne export volumes will be that Newcastle spec tonnage.

If we look at our thermal volumes for the remainder of the year, we do anticipate -- well, we have a longwall move at Wambo beginning this quarter so that will suppress volumes a bit. That -- so will see a ramp once again into the back half of the year, and that's a component of our second half of 2019, comprising more than half of our EBITDA for the year.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [4]

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

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [5]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [6]

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

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [7]

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

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Operator [8]

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

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [9]

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So a couple of quick questions, one about the cadence of EBITDA particularly as it relates to Q2. I think you mentioned 2 longwall moves in Australia, flat PRB shipments and a couple of other extra, a couple of other items. So when you -- if you were to use the $254 million base -- I realized there's a $34 million insurance recovery benefit in there. But if you were to use the $254 million base, what would Q2 -- or how would you expect Q2 to look just directionally versus Q1 from an EBITDA perspective?

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [10]

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Sure. So if you -- you've noted a number of the moving parts, Mark, starting with obviously no insurance proceeds in the second quarter. And thermal pricing had come off a bit. As we go in from -- go from Q1 to Q2 that will be a factor. And we do have the 2 longwall moves in Australia.

A couple of positives that we're anticipating for the quarter is those flat PRB shipments. But those flat PRB shipments will be at a more ratable cadence than what we saw in the first quarter, so that should improve our PRB costs going into the second quarter. And then lastly, as we noted in our release, we are anticipating North Goonyella costs to come in more at the low end of the range.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [11]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [12]

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

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [13]

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

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [14]

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Sure. I'll walk you through that, Mark. So we've -- as we'd indicated, we've essentially done all of the engineering, all of the activities required to prepare to reventilate that first segment. As Amy indicated, gas levels would support our ability to do that. So we are ready to go from our perspective.

The Queensland Inspectorate who had been working with us as we've continued to progress and develop the plans and done the activities on site have asked to review a number of documents in terms of working through the details of that. That has put us behind some weeks from where we thought we would be. And it's difficult to sort of quantify how long that will take place. It could be imminent. It could be a little bit longer than that.

Our focus at this point is working through that process, responding to their request for information and then being able to -- as I said, everything is ready to flick the switch and to be able to reventilate. And that will enable us then to monitor and then reenter the mine and have a better assessment. At that point, we'd look to reexamine the overall timing and sequencing on the project plan. But just to reiterate, we're ready to go. So we're just working through that, what is the final part of the process.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [15]

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Got it. And to be clear, there's been no rejection of the plan. It's just an administrative hold-up. Is that the best way to frame it?

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [16]

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No. It's dotting the Is and crossing the Ts around supporting documentation with respect to a lot of procedures and protocols that are on site. We've had no feedback that, that's not the right plan. We've had no feedback that anything additional from an engineering or technical perspective is required. The focus appears to be to ensure that we have a full and robust complete set of risk assessments and protocols to support the reventilation or reentry process as of this first phase.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [17]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [18]

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

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Operator [19]

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We take our next question from Chris Terry with Deutsche Bank.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Res136932864858earch Associate [20]

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This is actually Jeremy from his team. Regarding your seaborne thermal volumes, you have about 2 million tons contracted out for 2020. That's about half the level that you guys had at this point last year. So is this based on customers and clients looking for lower prices in the future? Or are you guys actually are trying to get towards more of a spot market rate?

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [21]

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So we generally contract out more than a year in 2 ways. The first would be tons that are priced under the JFY. So there will be some tons that are carried over from these settlements that we saw of 92 -- or $94 into Q1 of next year. We also use our hedge book from time to time to lock in those tonnages. And so this more of a reflection of where that book stands to date and not necessarily an indication of where demand stands in the market. And we do have 1 large JFY customer that's on a calendar year basis as well, which impacts that.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Res136932864858earch Associate [22]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [23]

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I'm sorry. Could you repeat that question? I'm not sure I follow.

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Res136932864858earch Associate [24]

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The $300 million that you've returned to shareholders in 1Q, how much of that was generated in 2019? Just trying to figure out (multiple speakers) between generation and the actual payback.

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [25]

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

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Jeremy David Kliewer, Deutsche Bank AG, Research Division - Res136932864858earch Associate [26]

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Right. But of the $162 million that was generated in 1Q, was any of that returned to shareholders yet?

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [27]

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I guess I would view the cash as fungible in the mix. So certainly there will be working capital movements that are in that mix. Generally, we both collect and pay within 30 days of a coal shipment. So yes, there will be working -- positive working capital movements or working capital movements that go into that mix.

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Operator [28]

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We'll take our next question from Scott Schier with Clarksons.

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Scott Schier, Clarksons Platou Securities, Inc., Research Division - Analyst [29]

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

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Vic Svec, Peabody Energy Corporation - SVP, Global Investor and Corporate Relations [30]

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Certainly, you've seen imports come off in the U.S. That's not entirely unexpected. We've always viewed the U.S. as a bit of a swing supplier, and API 2 has been their primary destination. We don't swim in those waters primarily. We're in the Asia-Pacific area, primarily through our Australia thermal coal shipments. Those have actually come -- they came down and then retraced pretty nicely, and in fact, that lower quality products is almost even with where it would have been a quarter ago. And we did see some easing in there for some compression from the Newcastle coming down, which was something that was contemplated.

Now I will point out that, that Newcastle product is in a slight contango for probably 4 to 5 years running in what is a pretty liquid market out there. So having hit that floor and come back, it seems to have some decent legs to it.

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [31]

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And maybe I'd jump in there too because I believe your question was on U.S. thermal. And clearly, it probably wouldn't impact on PRB shipments to that degree. And then as we look at the Illinois Basin, that's probably going to be a question around the extent to which producers have hedged those shipments and maybe have take-or-pay commitments on the logistics chain that may take place, so potentially that would move it out of a 2019 issue to more towards the back end or into 2020 potentially.

But when we look at our Illinois Basin position, it's actually more of an Indiana position we often refer to as the sub market within that activity, which focuses probably more on domestic customers and competition is within that basin versus significant export competition.

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [32]

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

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Scott Schier, Clarksons Platou Securities, Inc., Research Division - Analyst [33]

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Great. That's excellent color. Switching gears, could you talk about any potential for more M&A? Obviously, you guys recently closed Shoal Creek. But are there any other assets out there that look attractive at this stage as you come and turn your focus to your seaborne portfolio?

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [34]

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Look, I think we've repeatedly said that our default position is to return cash to shareholders. And -- but we also have been clear on what -- the way we would think about deployment of any reinvestment back into the business, be it sustainable capital, life extension capital, growth capital or M&A. And I think Shoal Creek represented a good example of the sorts of things we'd be prepared to do. But they don't necessarily come along all the time. And I think we have also demonstrated that we are prepared to be disciplined in that front.

But if there's another Shoal Creek asset, we'd be more than interested in looking at execution of that. And we've been clear, as I said, on our investment filters. And we think a Shoal Creek type deal ticked all of those boxes as we've articulated. But I mean going back, our default position is to return cash to shareholders, and we also have been doing that in quite significant space.

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Operator [35]

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

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John David Bridges, JP Morgan Chase & Co, Research Division - Senior Analyst [36]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [37]

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Sure. So the most significant component that we see coming down over time is we do have sales contracts that were established in fresh start that are amortizing. Over time, we'll see a chunk of that come off in 2019 and then that number be cut by about 1/3 as we move into 2020 and those sales contracts roll off in their entirety.

The big movements that we're seeing in 2019 itself are truly around our 2 mines that are closing during the year: Kayenta being the largest impact of that, but also Millennium. And that's just being partially offset not by large amounts but being partially offset by the inclusion of Shoal Creek depreciation and depletion over that period.

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John David Bridges, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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Okay. That's very helpful. And then in your introduction, you spoke about a cyclone hitting Mozambique. I've not seen a lot of comment from the company there. But what are you seeing in terms of exports from there especially given that they have had a second cyclone there?

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Vic Svec, Peabody Energy Corporation - SVP, Global Investor and Corporate Relations [39]

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Yes. They have certainly been coming up the curve the last year or 2, up of obviously a base of near 0. But probably no additional color except obviously, our thoughts are with those who are affected from the cyclone. And it was just one more example of supply disruptions, which typically over the last couple of years had been exacerbated from a relatively benign period there and a sign of those supply/demand conditions, which remain pretty snug out there on the met side.

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John David Bridges, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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Snug, I like that. Well then, congratulations.

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Operator [41]

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

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [42]

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Shoal Creek, so it seems like out of the box a very good asset for you. Can you just share a little bit about how productivity trends have been? And as you look through as -- since transitioning to a Peabody asset from Drummond, have there been any major changes in structure or management there? And also just remind us again the customer base and type of contracts that are being provided in that -- from the shipments out of Alabama.

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [43]

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So off well out of the gates, as you've indicated. And we're pleased with the strong quarter that they've had. And I didn't highlight, they've also had a strong quarter from a safety perspective as well, which is probably the best news from our perspective. But production has followed that.

There has been one or 2 changes amongst our management and -- but the team has really looked to embrace and work hard at integration across a number of Peabody systems and processes. And we've seen pretty good productivity to date. Customers and contracts are Europe and Japan. In fact, we cover some of the same customers out of Australia as well. So there is a natural overlap around that and they tend to be longer-term type contracts through that period.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [44]

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Appreciate that, Glenn. And my follow-up would be, you mentioned in the previous -- answered a previous question about M&A and opportunities there. But how do you look at what Peabody -- you said you had 23 mining operations contributing to results this quarter. How are you looking how those operations look over today and in their immediate future relative to, say, what your plans were when you had your Investor Day, was it 1.5 year or so ago, to looking at how that's all played out? And what -- how that portfolio could maybe shift as we move to '19 into '20, again, trying to maximize the returns and value given some of the -- given what's going on in North Goonyella, et cetera to maybe accelerate some of the generation and value creation?

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [45]

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Well, I think we've seen and -- what we've outlined 2 years ago, and we've been consistently executing against that. You continue to see us reweight those investments towards the seaborne markets, seaborne thermal, seaborne met. The move into Shoal Creek was also a desire not only in seaborne but to upgrade the quality that is taking place. It wasn't -- I think it was 3 years ago that, at one point, we were looking at the potential of nearly 5 million tons of met coal.

So I think that strategy has continued to be successful in its execution, notwithstanding where we're at with North Goonyella. We're now focused with getting that mine back on its feet. But we've committed to large extension projects at Wilpinjong and at Wambo, and you've seen those go through. And you can understand with those average 40% returns why we're attracted to that in a high-growth term. And we continue to work hard on the portfolio in the U.S. to ensure that it is generating cash, it is maintaining competitiveness. And I think that they're executing that extremely well. You look at their performance this year versus last year, and adjusted for the weather impacts, they have actually held up very, very strongly.

Unfortunately, Kayenta, 2 years ago, we would have foreseen or would have desired that plant, which is economic. And we think that's a compelling case. We probably didn't foresee the extent to which that would move out of the portfolio. And now we're looking at transitioning that mine into reclamation. So its a good question in terms of a walk down memory lane. But I think it's an example of -- so in having to be consistently executing against the strategy that we articulated 2 years ago. And I think we are continuing to see many of those benefits today.

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [46]

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

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Operator [47]

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

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [48]

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

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [49]

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Sure. So I would comment just as we think about the supplemental dividend and deploying that as a tool, we were very careful not to call it a special dividend. And I think it's something that our Board of Directors takes a look at our dividend levels on a periodic basis.

In the first quarter specifically, although we like buybacks, we frankly favor them given our current share price, we recognized that to deploy capital in a large scale, it was going to be difficult given liquidity in the market at that point in time. And so we saw this as an opportunity to show some flexibility in terms of how we deploy capital returns. And I think we wanted to be careful that we acknowledge that this was a supplemental and not necessarily a special.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [50]

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Meaning there could be more supplemental dividends depending on the circumstances?

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Amy B. Schwetz, Peabody Energy Corporation - Executive VP, CFO & Principal Accounting Officer [51]

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

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Operator [52]

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

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Glenn L. Kellow, Peabody Energy Corporation - President, CEO & Director [53]

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

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Operator [54]

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Thank you for your participation. You may now disconnect.