Ladies and gentlemen. Thank you for standing by and welcome to the Peabody Energy Quarterly Earnings Conference Call. For the conference, all the participant lines are in a listen-only mode. However there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. As a reminder, today's call is being recorded. With that being said, I'll turn the conference now to Mr. Vic Svec. Please go ahead, sir.

Well thank you John and good morning everyone. Thanks for taking part in the conference call for BTU. Today our Chairman and CEO, Greg Boyce will provide and overview of Peabody's opportunities and our outlook. Our new Executive Vice President and Chief Financial Officer, Mike Crews will review the very strong quarter. And President and Chief Commercial Officer, Rick Navarre will discuss our position within the terrific markets and our major projects. I'll remind you that forward-looking statements should be considered along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents. And we also refer you to peabodyenergy.com for additional information. And I'll now turn the call over to Greg.

Thanks Vic and good morning everyone. We've got an outstanding quarter. We would like to review with you today. For starters, Peabody had just completed its best quarter based on a number of financial measures and we've also set one additional record, the safest first half in our 125-year history. I want to applaud the 7000 members of the Peabody team for this excellent performance. You'll hear more on our specific results in a few minutes. I would like to focus on the global energy and coal markets and while they will continue to push our results higher in the months and years ahead. With the recent oil and gas prices near record levels for even the long-dated products, the world is returning to coal in growing amounts. That is why coal remains the fastest growing fuel in the world for each of the past five years. Within the global coal markets, the dynamics we first told you about years ago are only growing stronger. Global coal demand is growing in both the thermal and met front. Even that some of the largest coal producing nations either can't export more or are limiting exports to fuel internal growth. Global steel [ph] demand continues to grow at 6% per year, requiring ever more met coal. A new coal fuel generation is being developed in scores of nations around the world; all of this leading to a 7% compound growth rate in seaborne coal demand. On the supply side, major coal exporters are straining to keep up against the sustained demand growth. All aspects of the coal chain are under pressure and more nations than ever are seeing the valuable resource that their coal represents, forcing coal suppliers to keep greater amounts of coal at home. Combined, these effects are driving continued…

Thanks Greg, and good morning everyone. I'm happy to be here as Peabody's new CFO and I look forward to working with each of you. There is no better way to begin my tenure than by reporting a series of quarterly records. Let me begin with a review of the income statement. Second quarter revenues totaled $1.53 billion, 43% above last year on a combination of higher prices and volumes throughout our global operations. In particular, Australian volumes increased 15% with realized prices significantly above prior year. And in the U.S., rising volumes reflect both growing export demand and increased Western shipments in the Eastern markets. The combination of higher volumes and pricing also drove EBITDA from the mining operations to more than double last year's level. And with an additional $38 million from trading and brokerage, EBITDA for the second quarter was a record $447 million. Second quarter operating profit rose 92% to $344 million, driving a 138% increase in pre-tax income over last year. Income tax expense rose to $44 million for the second quarter and $88 million year-to-date. This reflects higher expense associated with improved profitability and $33 million of adverse exchange rate impact. This higher expense was partially offset by $45 million benefit from an increase in the value of our Australian tax assets related to higher expected future earnings after signing the contract. For the full year, we remain on track for a tax rate close to 30%. Finally, income from continuing operations totaled $243 million and earnings per share was $0.89; both significantly above last year's level. Now, let me take you through the supplemental schedule. For the quarter, U.S. revenues were driven by increased volumes as well higher realized pricings in almost all operations. On the volume side, U.S. sales tonnage and could…

Thanks Mike and good morning to everyone. As Craig had noted earlier, the sharp and sustained growth in both metallurgical and thermal coal demand is working out very well for Peabody. I would like to spend a few moments on how we are using our leading position to create value in these very strong markets. To begin with, the current market conditions are providing great opportunities for seaborne coal suppliers such as Peabody. And we have the greatest leverage of the any of the U.S-based companies with over half of our EBITDA expected to come from our international sales platform. In our last call, we were just settling met coal agreements for the contract year that begins in April. I am pleased that the settlements came in at the expected $300 per metric ton benchmark level for the highest quality coking coal. In thermal coal, the seaborne markets settled up the reference price of $125 per metric ton. And since then, prices have continued to move up sharply in these markets. Thermal coal out of Newcastle has risen as high as $200 per metric ton, since the beginning of the year. Semi-soft coking coal recently settled above many expectations around $240 a metric ton. And we are seeing met coal sales right now on the spot markets that are fetching $300 plus per ton. This bodes extremely well for the next contracting season. As you'll recall, when went into '08, we had significant excellent legacy contracts that we expected to roll off in '09, which will hopefully double our unpriced position in 2009 from what we had at the beginning of 2008. This has very favorable implications for Peabody. We have as much as 14 million tons of Australian coal that's unpriced for 2009 and up to 24 million tons…

[Operator Instructions]. And first we have the line of Michael Dudas with Jeffries & Company. Please go ahead. Michael Dudas - Jeffries & Company: Good morning, Greg, Rick and welcome Mike.

Good morning. Michael Dudas - Jeffries & Company: My first question it is regarding PRB. Rick you outlined some of the demand drivers that you've seen through the first half of the year. Talk a little bit about maybe your surprise that maybe the PRB is not meeting some of the production growth outlook. And are we going to continue to see pushback because of either rail or utility decisions on that? And if that's the case, do you think that the steep contango will continue in the future as we start to see spot prices maybe a bit higher as it had been towards draw down of the rivers?

That's a great question Mike. I think, I think to start with, I mean to everybody else on the call, I mean the PRB forward market is in steep contango and which really gives you the indication of what strength of the market is in the out years. As compared to looking at the spot market if you will for 2008 which is doing not really well to what's happening in the market. The contango shows there is significant demand in the out years. And as we talk to our customers what we are finding out is, there is always a concern that there wasn't going to be enough switching that already occurred. We are continuing to see, customers that have switched were in a higher blend of PRB coal, if they can. Or we are seeing new customers come to the table, and test running, burning to shorten their blend. Usually once they start blending PRB coal, at 10% or 15% level, they definitely increase it because they find it, that it is easy to burn and that it's something that is economical. And right now as you said, its... when you look at the cost structure and the net back scenario, PRB coal it is still significantly cheaper than the alternative which is Appalachian or Northern App coal which may not have been available to the customers. So we think it's..., I mean I think the railroads are going to perform stronger. We've had obviously a large flood in the Midwest that really stalled some of the production issues out of the Powder River Basin. But I think, all in all, as we look at our platform specifically, with the work that we have done, we feel very confident that we are going to be able to meet expanded production profile but we've already committed to for 2008 for our customers. So we are very, very bullish on PRB, have been for sometime and we are very committed even last conference call when were telling folks that the prices were much higher than what you they were seeing in the traded markets and then it was just a matter of time before the longer-term markets caught up. Michael Dudas - Jeffries & Company: My follow up Rick is regarding your prepared remarks in the press release about the Illinois Basin, your potential I assume mine development opportunities for you. Talk a little bit about timing, expense maybe generally not be to too specific and is this investment relative to the utilities you are looking to enter the long-term contracts, are they concerned about PRB for the Appalachian region? Which region is going to be impacted relative to the investment that you and maybe others might pursuit with in the Illinois Basin?

Sure, well if we look at the U.S. market and look at the global, what's happening globally, I think we're seen a huge pull out of Central Appalachian and Northern Appalachian for the exports. And we already, those are... and we already knew that the Central Appalachian market was going to be declining from production standpoint. So you've got... that is factored into the situation as well. So now you got customers looking for really where can I get additional coal, if I can't get it from if CAP or NAP, I've got to buy it from the Illinois Basin or I'm going to buy it from Powder River Basin. So the Powder River Basin, is we know what the growth profile has been on the PRB. For many years, we've expected the return from the Renaissance and the Illinois Basin and once many of the utilities started to install scrubbers, and we're seeing that happening. So there'll be competition head-on-head between the PRB and the Illinois Basin. The good news is we've seen both prices go up significantly in the last six to nine months. And as we look to and talk to utilities, they are trying to secure supply from really those regions that are reliable, the Illinois Basin and the PRB, and that's the kind of conversations we're having with customers. As they look around and they see Peabody sitting with a 4 billion ton reserve base, being a reliable producer, having a few prime properties that we may bring on board at the right price with the right long-term base load contract, and that's the kind of discussions we are having with customers. Obviously, to your point capital Mike, capital costs have increased substantially to build a new coal mine, whether it be in the PRB, or whether it be in the Illinois Basin. That's impacting costs, price; a lot of factors. But I think that's why you'll see people coming to talk to Peabody and others, because we have the ability to put those type pf coal mines in that has the size and scale and can make that investment. Michael Dudas - Jeffries & Company: Thank you, Rick.

Our next question is from the line of Paul Forward from Stifel Nicolaus. Please go ahead.

Hi, good morning. Thanks, and just maybe to follow-up; Rick, you'd mentioned that a quarter ago, you've suggested that the prices that you were looking at were higher than the traded markets. Is that the case now?

For the PRB?

Just in general.

Well obviously you can't really... I guess Paul, it's hard to generalize and frankly because the markets have, you know particularly in European markets had pulled back a bit in the last couple of weeks. I'd say that the contraction markets are really stronger than the financial markets right now. And that's very evident, because the financial markets have been under pressure with a lot of traders have exited positions but it wouldn't change much from a contracting standpoint, because we haven't see anything change in the fundamentals. We haven't seen demand go down and we haven't seen a supply change. So I'd say if you want to look at the international markets first that clearly we believe physical market is stronger than paper market to day. As we look at around the U.S., I'd say the same is true, maybe that's of the same magnitude but we are very comfortable in being able to give prices that are far above what we are seeing in the traded markets around our own platform. If you call last quarter, we were taking about $14, $15 PRB coal and we've... that was significantly below what the contractual market was at that point in time, particularly for the long term.

Okay, great thanks for that color and just want to look at also the Australian. Your Australian, I believe pricing in the quarter was $95 a ton and you'd mentioned the carryover volumes weigh that down and so we should see an improvement in third and fourth quarter. When you look at that $95 figure in the second quarter, how much of that was weighed down by carryover contracts that we have rolled after in the second quarter and maybe is there a run rate that would be more reflective of what the kind of current or let's say the second half '08 average pricing might look like out of Australia?

Let me back it. I would say obviously you are going to have blend no matter how you at Australia because you are going to have the domestic thermal business at low prices and you are going to have the legacy and you are still going to have a mix of legacy contracts that do not rollover, that were embedded into that $95 cost structure. So you are not going to get to the average of current spot thermal, current met for a couple of years until you start to get through that big rollout of the other legacy contracts. But as it relates to carryover business specifically, Paul that about a $20 million number this quarter that we had to carry into this. And so you probably have still got another 10 or 15 to roll into to the rest of '08 that will carry through until ... we were fortunate enough to get out of some of the carryover business as we... but we did, some of it we, we could so. And we noted that end of the first quarter we were going to have that impact. So you will see pricing and revenues certainly ramp up, maybe on a average kind of $20 a ton, as we go into the next quarter out of Australia. And then as you look into 2009, you should see a significant uplift as we get out of the first quarter of '09 and then double the amount of thermal coal that we have available for sale compared what we had in '08 and also roll off some legacy semi-soft PCI contracts as well.

Okay great. Maybe lastly is there, do you see a possible third quarter impact of trading from the sulfur credit markets collapsing after the recent Clean Air Interstate court ruling?

For probably a lot of utilities that we were holding those positions, the answer is probably yes. For Peabody the answer is really no, it shouldn't be an issue at all.

Okay great. Thank you.

Next question is from the line of Pearce Hammond with Simmons & Company. Please go ahead. Pearce W. Hammond, Jr. - Simmons & Company: Yes if you could give me an update on your hedges on diesel and then just a quick update on your total diesel usage?

Sure, this is Mike. We use approximately 130 million gallons across the platform a year. For the rest of 2008, we're hedging at above a 60% level and then for 2009, at roughly half. Pearce W. Hammond, Jr. - Simmons & Company: At what price would you hedge that?

For 2008 it is $92 on average and for 2009 it's $98. Both clearly below current market levels. Pearce W. Hammond, Jr. - Simmons & Company: Great and then Mike to get a thought on areas of future investment globally for Peabody and if Peabody's management team could discuss specifically... but just some areas of interest around the world that Peabody is contemplating as additional investment?

Well sure this is Greg and I will take a... cover that question Pearce. You know we have said all along that what we want do it. We want to continue to expand in the high growth markets. And if you look at where those are going to be, if we kind of rank the global markets, obviously we think that the met coal market is going to remain strong for a long period of the time than the seaborne, and trade of thermal coal markets will remain very strong, and then because of the strength of both of those markets that pull into the Illinois Basin and in the Powder River Basin for, opportunities for volume growth, we believe are going to be very high. So as we look at... those are probably really the four major areas for new mine development investments that we're looking at. Obviously we've School Creek project in the Powder River Basin, we're still going through the permitting process on and the engineering for. We've talked a bit about our plans in the Illinois Basin for new mine developments there. And then from the international side, we've got a number of opportunities in Australia that now that we've got the platform up and running and performing well, we're looking at what the opportunities that we have to grow organically in Australia similar to what we've done everywhere, every other platform that we have. And we do have some opportunities that we're starting to put some good engineering average into. That takes this into the real greenfield, new area developments. Mongolia is one of those. Clearly our initiatives in China will be another one of those and then you mentioned Mozambique. In Mongolia and Mozambique, the real focus will be met coal developments and China would be both thermal coal and when I say thermal coal in China that includes coal for their chemical feedstock business as well as coal for power generation. Mozambique in particular, we've had a number of times that we've spent over in Mozambique and we continue to look at the structure of the industry what's happening in terms of the infrastructure development in Mozambique, both in terms of rail and port developments and then looking at the types of lease holdings that are available in Mozambique and/or development partners. Pearce W. Hammond, Jr. - Simmons & Company: Great, thank you very much.

Our next question is from the line of Jeremy Sussman with Natixis Bleichroeder. Please go ahead.

Hi good morning.

Good morning, Jeremy.

Good morning. Congratulations on a nice quarter here.

Thank you.

I guess first question, it looks like you guys signed about 30 million tons of coal in two stops kind of through 2010 since last quarter. Could you tell me, just give us a rough breakdown of where this came from and then maybe following up on one of Paul's question, just kind of a rough impact of how we should look at kind of the out years relative to where the, I guess the traded markets are looking?

Sure this is Rick, I'll take that question. We sold about 30 million tons for 2009 and '10 and about half of that was a probably in the Powder River Basin. And one other thing is some of that was sold under new agreements, long-term arrangements. Some of those arrangements go out as far as 2013. So I'm trying to give you a sense of a term that the customers are willing to terms. And some focus on 40% of that business was just standard reopener business that was... we already had the contract and entered re-opener formula that we had to conclude that business in 2008. But as we look at it, you know as I said, term business, good business, certainly the time we were selling that coal in above the long term forward contracts, we're seeing the contracts begin to the respond -- the forward markets begin to respond and improve as we are seeing north of $20 plus now in the forward markets for 2010 and '11. Those prices are very attainable in those markets. And if you look at what we priced out of the tons from PRB, near about 45% above what we have realized this year were PRB sales.

Okay, that's very helpful, thank you. And then I the guess you mentioned about of 5.9 million tons of exports in the U.S and now regarding Illinois, exports from the Illinois Basin because I would have imagined that's where certainly a decent amount of that's coming from. Are you still seeing higher prices overseas in the U.S and how do you look at something like that, when you are kind of going through your potential development plans out going forward in Illinois?

Well the biggest piece of our exports book of business was probably Central Appalachian and the Illinois Basin and Colorado, that's probably the three primary products that get the most attention. And generally speaking we can sell those for a premium to what we would get at the U.S. market right now. But at same time, those prices are very attainable in this market. And if you look at what we priced, out of tons for PRB, they are about 45% above what we will realize this year for PRB sales.

Okaythat's very helpful thank you. And then I guess you mentioned the 5.9 million tons of exports in the U.S. and now regarding Illinois, exports from the Illinois Basin because I would imagine that's where certainly a decent amount of that's coming from. Are you still seeing higher prices overseas in the U.S. and how do you look at something like that when you are kind of going through your potential development plans, going forward in the Illinois?

Thebase piece of our export book of business was probably Central Appalachian and the Illinois Basin in Colorado. You said that's probably the three primary products that gets the most attention and generally speaking we can sell this for a premium to what we will get at the U.S. market right now. But at the same time, there is also a significant transportation issues that have to dealt with in order to move that much coal. But we did move, actually I have got numbers even higher than that. I think it's been almost 7 million tons in total. But as we do look forward at new developments in the Illinois Basin, I mean part of the things that we look at are the location, and the key content in the quality of the product. We can bring on U.S. quality scrubber coal that is very much in demand for U.S. power plants. At the same time we can tap in the resources that can not only provide that market but can also provide a higher e-content a little bit lower sulfur that's in high demand in the European markets and also get's on the river very easily. That will command a premium. That type of products, projects that we are going to be looking at.

Great. Thank you very much.

And next from line of Mark Liinamaa with Morgan Stanley. Please go ahead Mark Liinamaa - Morgan Stanley & Co. Inc.: Can you talk a little bit more about the improvements in transportation infrastructure in Australia. Whether we could expect to see any damaged [ph] charge improvement, or whether some of those can be shared with customers and combined with the improvements in your platform over there. Maybe is it too early to take a step of which you think you might be able to produce next year?

Well, this is Greg, I think in terms of trying to provide any guidance for next year, it is too early to look at that. I suffice to say let's look at the core and the real infrastructure in Australia. We did have a good quarter, this quarter in terms of our Australian platform. One other things that we indicated in previous calls that we thought the key is to being successful in Australia this year was to make sure that our operations were running well enough to have coal, stockpiled and available to ship, when shipping capacity and rail capacity was available and may become available from the invariable issues that other producers have at times in Australia. Our team is able to do great job in the second quarter of not only moving our volumes, but also to be able to pick up some excess capacity, we will get a little more advantage of that, or some of that will carry over into the third quarter this year. And we continue to look for those opportunities as they arise. We are seeing in Newcastle a pretty much more the same in terms of both the rail and port situation there. The queue of ships have actually come up slightly here in the last little bit, maybe in a 40 to 45 vessel range and ideally we would like to have that down to 20 number. And so for the rest of this year, our Newcastle we are projecting a slight increase in our shipments but not a major shift given continued work on the rail and the port issues. Dalrymple Bay, we are expecting to see some improvement through the back half of the year and more importantly next year, when they complete yet another phase of their expansion projects. This year, they might come in around a 50 million ton ship mark. Next year they are projecting... early projections that may rise to 63 million to 65 million tons of shipping. So, we should get a commensurate increase in that shipping capacity next year out of Australia. So, on balance we're seeing slow minor improvements, but our team is also working very aggressively to try and capture any openings that come up from other issues at other producers. Mark Liinamaa - Morgan Stanley & Co. Inc.: Thanks. And just back to the Powder River Basin, there has been trade press commentary that new source review requirements could be triggered depending on the amount of investment that had to be done to switch to Powder River Basin coal. How much truth is there to that, is that effecting utility decisions at this point?

Mark, this is Rick, we haven't heard that. That's an issue at all. I mean it's such a minor amount of investment that's put in, and actually at the end of the day it doesn't increase the... generally it's going to have a de-rate associated with it although a small amount, and so it's not going to increase our efficiency which is usually where you get kind of caught up in the new source reviews. So, we haven't heard much. Mark Liinamaa - Morgan Stanley & Co. Inc.: So, it's not an issue, then that's alright. Very good.

I mean people are asking whether are there any dust suppression equipment and things of that nature to bring in Powder River Basin coal, that's what they'll bring in to burn. Guys that are going from zero PRB to 10% or 15%, I think are minor investments in dust suppression equipment and other loading type of issues and that's really not improving plant capacity. Mark Liinamaa - Morgan Stanley & Co. Inc.: That's great. Thank you very much guys.

Our next question is from David Gagliano with Credit Suisse. Please go ahead.

Hi, thanks. I wanted to just come back to Rick's comments early about the commitments made in the second quarter, specifically in the Powder River Basin. I think you mentioned that you've committed sort of 45% above current year PRB utilizations. So, my question is, we are backing into... because I don't think that number is disclosed. But we are backing into sort of $11 to $12 realized price this year, which suggests sort of, I guess $16,$17 price on the stuff that was committed in the second quarter. Is that a reasonable estimate?

I was talking about the premium product Dave. So, you are right, the number is not disclosed and so it's a much higher number than that because the premium PRB product has been... $11 as weighted down by... bioproducts and in terms business. So, you got a higher realization out of 8800 product. So we are talking about a 45% realization over that platform. And if... you have a similar number I guess, over the rest of it, if you want to look at it that way. But it's not that you are selling PRB 8800 for $16, because that's not a good conclusion. You are selling platform from an average of 16 for that small amount that was sold.

Okay. Good, that's helpful.

Yes, I think premium number would be higher than that.

Okay, alright.

And then you are seeing even continued improvement from that point we have seen even stronger markets, recently and as we look forward and look at the backlog of outstanding request for business and what we are seeing with the net back pricing, we've got very confident that that number is going to continue to get stronger.

Okay, good. That's what I needed to hear. On the... just on the strategic outlook, I thought it was very interesting. Obviously international commentary is very helpful in the press release and also the commentary about where you are focusing. I was wondering, I haven't heard much about South America. We have heard things about... potentially some significant incremental coal demand coming out of South America. I am wondering if you could share your thoughts with regards to where you think that coal is going to be sourced and/or if you are interested in getting more involved in South America?

Well, it's Greg. When you are talking about South America really in terms of major producing regions or a potential to be major producing regions, you're are talking about Venezuela and Colombia. You know, we're in Venezuela. I mean everybody is well aware of the turmoil that Venezuela has kind of been going through. W see it is very unlikely that there's going to be major investment in new mine developments in the near term in Venezuela. So they're going to be where they're at and maybe struggle to maintain that level of production. When you look at Colombia, lot of discussions and a lot of talk about how Colombia is going to increase production to a next level. But every time you turn around, they are being delayed. They still have labor issues. They have permitting issues. Suffice to say is our view is they will increase over time. Probably going to be bit slower than what some people think, and most of that is very good quality thermal coal probably going to be almost exclusively dedicated for the European market, now that South Africa continues to over time short that market. So at the end of the day if you look at where are major sources of additional coal for the seaborne markets, in the near term, it's Illinois Basin coal and it's PRB coal as you continue to have Colorado, Illinois and Eastern coals exported out of the U.S. and the PRB back drilling for all of those coals.

Okay, fair enough. I appreciate the color, thanks.

Next question is from the line of Shneur Gershuni of UBS, please go ahead.

Hi good morning guys.

Good morning.

Just a couple of quick questions, with respect to the Powder River Basin, I was wondering if you can sort of give us some comments with respect to that customer settlement and also the past experiences that you are experiencing there. Are you seeing the inflation that other's have talked about?

Hi, this is Rick. The customer settlement actually was not in the Powder River Basin, but is related to a southwestern contract that we have. It's more of a cost plus arrangement that we have. It's kind of a longstanding agreement and we were able to recoup, our retiree healthcare and reclamation costs on a go-forward basis, as well as historically on a long-term customer contract. So that's essentially what happened with that particular contract and was fortunate that happened in the quarter where we experience $40 million of flooding and a other negatives down quarter in resource management to help us buffer that a little bit. As it relates to the cost structure in the PRB, let me ask Mike to give a little bit of color on that.

Sure with respect to the Western operations, approximately 30% of the increase relates to sales-related costs, higher taxes and loyalties. In addition you see that the per ton cost would be higher. We had the two outages at North Antelope Rochelle. The first one was scheduled at the beginning of the quarter and this was for the high end of the new load out facility. With the Midwestern flooding and the reduced loadings of rail availability that we had in the basins, we elected to accelerate that second outage from the third quarter into the second quarter, and that was another 2.3 million tons in the quarter. So, and then the rest of the increase is primarily related to the higher fuel costs and other commodity costs.

I was wondering my follow up if we can, turn to the IOB to the Illinois Basin for a second here. Lot of good discussion on the call today. I guess, what I wanted to ask with respect to the Illinois Basin is just, are you seeing any request for test burns. Is any anybody have any issues with chlorine and sulfur and then, also you had commented about new source review I think to Mark's question. Were you referring just with respect to there wouldn't be a new source review for utilities that used to blend or are you saying that even if they were to swap out the entire boiler and switch completely to, Power River Basin that there wouldn't a new source review on to that scenario?

Yes this is Greg. I think in terms of the new source review, we are really talking about the minor increases in blending and the material handling changes that utilities have to put in place to handle the little bit slightly larger volume in a little bit dustier western coal. So they have dust suppression system, spray systems and the like. Now we are talking about somebody going in and doing a major retrofit to their boiler, to either increase capacity or to completely change out their boiler configurations. Then they will have to at least go through an analysis to see whether they do have to submit a new source review. I mean that issue has been brewing for a number of years. It first started out in terms of this major maintenance that utilities were doing and then, whether the outcome of a major maintenance program and overall program actually increase the outlook of the plant. So when you are talking about a complete change over and a major overhaul, it's case by case basis, but each utility and each plant would at least go through an internal determination as to what have they needed to submit a new source performance review.

And I'd just add one thing, we have had customers, I can't count the number of customers that have switched since 1990, 100% to PRB coal from other sources and have not been challenged on new source reviews. So I think this is some smoke coming from somewhere else that doesn't really have any impact on the real market here. At the end of day, I think this is looking for the enemy behind the tree.

You had a question on the Illinois Basin maybe you can just add that one again?

Yes. The question with Illinois Basin is are you seeing test burns and have there been any issues with chlorine. Everybody is pretty happy with taken the Illinois Basin is substituting it for Central App coal.

No we don't typically see test burns in Illinois Basin. That coal has been burnt for a lot of years, and the folks we were talking to, have burned Illinois Basin at times or currently burning Illinois Basin coal. When we bundle Illinois Basin coal for the export market it's hugely in some kind of a blend situation. So nobody is really asking for coke, any kind of test burn basis, that is buying coal.

Yeah, and there is no question, that there are certain fields in the Illinois Basin that have high chlorine and then we have seen some others that try to bring on coal mines, not really aware of that issue. And there's been, had some vulnerability issues with the customers. The customers don't like to burn coal, because it's not very good for the plant and for all the equipment. From our standpoint, we've been burning Illinois Basin coal since 1880. So we pretty much understand the characteristics. Also we understand which fields of ours have a little bit higher chlorine and which ones don't. And I can assure you we're going to be bringing on the ones that have the lower chlorine.

Okay. But so, I mean so overall you are seeing that some historically that have burnt in the past are starting to... are beginning to burn a little bit more now. I mean clearly do you think that this will have an impact on pricing and kind of are you expecting prices to move up more than the double that you've already seen because --

It's already moved up double and I think that as I said and we've said this time and time again, we think the markets are extremely interconnected. What happens on global market... looks back to what's happening in the U.S. So, regardless of some of the... you may see certain economic factors that are happening in the U.S. that would lead us to come to one conclusion but that's not really what's driving the overall commodity market and the coal market. At the end of the day it's a global factor, so as the prices around the world continue to increase and stay strong because of the shortage of supply and the high demand, you are going to see ripple back into the Illinois Basin and you are going to see strong pricing to be maintained in the Illinois Basin. And likewise even cost structures have changed around the world as well.

Okay, great. That pretty much answers my questions. Thank you very much.

Thank you.

And next we have line of David Lipschitz with Merrill Lynch. Please go ahead.

Hey everyone.

Good morning David.

Good morning. A question for you. We haven't... two years ago, it was a big topic and it seems to have waned out, what's going on with coal-to-liquids?

Well coal-to-liquids coal-to-gas, it's really a story of two different parts of the world. You got the U.S. as one part and you got the rest of the world as the other. Let's look at what's happening outside of the U.S. Coal-to-liquids, coal to industrial feedstock gas, coal to natural gas is really taking off. You've got a significant amount of new construction and plants coming online in China. You've got coal-to-liquids plant now operational in Australia. You've got... and on the drawing board a number of locations elsewhere. And then of course, you've got continued expansions of the coal-to-liquids platform in South Africa. So, then you get at the U.S. and just say where do we stand in the U.S? It's a combination here of both the ever-rising capital costs for these types of facilities still looking to find contractual commitments for off takes that go out longer than say a five-year period of time. You'd like to see something in the ten-plus years before you commit the capital. And then lastly, there is still the lack of a full regulatory program and permitting program for CO2 capture and storage, which most of the folks, particularly ourselves are looking at these types of facilities, are looking for those things to come into place at some point early on in the project life. But having said all of that, major expansions internationally, our view is the U.S. will catch up as soon as we get beyond the uncertainties of the election get into '09 and '10 and start to bring some certainty around the permitting and the legal environments around carbon storage.

Do you think we're before when the U.S. has built, five years, ten years?

Hopefully, coal-to-gas will be in the earlier part of that timeframe. Major large scale coal-to-liquids, maybe a five year timeframe.

Another quick question; on the Illinois Basin, did you... when you say double digit, I mean was it a six handle or double to a seven handle?

We sold it definitely with a seven and then frankly there is, we've got sales that are higher then that.

Okay.

Particularly, you get some of the industrial customers and others, where you can get a three digit number.

Thank you.

And next in line is Justine Fisher with Goldman Sachs. Please go ahead.

Good morning.

Good morning, Justine.

The first quarter I have is about the export market. You said that you guys had exported about 7 million total tons and would you say what percentage of that is PRB?

It's a small percentage Justine, this is Rick. I mean out of the 7 million tons, I think we'd say it's a bit just shy of a million tons. Most of the PRB coal right now is going in as back fill for the exports that are moving out of the Eastern part of the U.S. We are still looking at prospects to be able to expand that by looking at all the opportunities that are potentially there to go out of Vancouver, or some other way in the West Coast. It's more... it needs to be more of a West Coast move. We've moved in and out of Europe, but until we can turn it into a West Coast move, it's probably just going to be used as a back fill, which is fine, at this point.

Just as a clarification Justine, not all of that 7 million ton's have been shipped. That's what we have sold and some of that is for shipments; the back half of this year and all the way through 2010.

Okay, and then, are you seeing any additional long-term contract desire, for exports out of either of Illinois Basin. I guess now PRB exports and then PRB are minimal than, are people like European customers for example, approaching you for the long-term contracts out of Illinois Basin?

Yes, we've signed contracts through 2011 for export business.

Okay. And so then going back to when you mentioned in the prepared remarks I think that U.S exports total might go above 100 million tons. It seems that maybe some of that would come from the Illinois Basin but the bulk would have to come from Appalachia if exports got that high?

I think that's fair. I mean there's no question about it. The bulk of it is going to come out of the Central Appalachia and Northern Appalachia. Then you are going to have the Illinois Basin that's going to ship out of the Gulf and so, that's where you are going to see the majority of the exports. But there's... the coal still is going to be needed in the United States. So we still have to go somewhere we got to fill the void. And as we said, we think that's coming from Colorado, Illinois; Colorado is also going to be an export product as well, but... and then the PRB.

And then so I guess if Appalachia is going to be the market that continues to see this export pull, looking at where the patriot stock is now, I mean would you guys get back into Central Appalachia or are you sort of still out of that market and just only looking to really backfill?

WellI think the issue with us is a couple of things; first of all we still have with our trading platform, and some of our volume, long-term volume commitments that we had for brokerage turn's out of Central App. As Rick said earlier in the call, we are still shipping Central App coal as part of our export strategy. That's number one. So we haven't really left. Number two, we think there is much more opportunity now for us to with the Illinois Basin and the Powder River Basin as the backfill and then with the Illinois Basin and the Colorado Basin as direct exports. So when you look at these markets they're all connected. Its getting to be very much a fungible commodity. It really doesn't matter whether you are directly a producer in Central App, you're going to get whatever flows out of this country in terms of exports is going to impact every single coal market in this country.

And we'll move on to Jim Rollyson with Raymond James. Please go ahead. James Rollyson - Raymond James & Associates: Hey guys, follow up on logic. You said, you talked about a 100 million tons getting there maybe next year or so. Where do you think true export capacity is and have you heard anybody talking about expanding that?

Well the port... this is Rick. The port capacity, obviously if you go to, lot of places you will see a name playing capacity, if you will of all of port facilities in United States. That number is somewhere between 165 and 175 depending upon who you talk to. We would tell you that the practical capacity in our view, after assessing the facilities and owning 37% of DTA and using facility, it is probably about a 125 million ton. This country has done that in the past. So and that's why U.S. has become one of the major swing supplier in this tight markets globally. Because we have the only place in the world, where we have unconstrained port capacity and capabilities to move the product. So that's why we continue to see this having a lot of legs for some period of time, because as you look around the globe, we can offline go down country by country out of the 12 to 13 major exporting countries, you will see everyone of stuffed up with congestion, with probably the exception in United States. And the United States has the ability to move it, because they have the ability to backfill it from somewhere else in the country. Otherwise, if we didn't have the PRB or the Illinois Basin to backfill, we will be doing what the other countries are doing, restricting exports. James Rollyson - Raymond James & Associates: Sure and I actually the reason I asked is obviously you talk a lot earlier about, kind of the rest of the world and what's going on with supply and demand setting the price curve and so long as we got that excess capacity. It obviously had a big impact here. Say we go out 3 or 4 or 5 years, whatever the number is and we get to that 125 million tons. What do you think happens with relationship between U.S. pricing and the rest of the world with that point?

I think States, this makes the market even stronger and tighter. We will get to that level of production that has been, if the world and the world needs a 125 million tons out of the United States to fulfill the demand. It's going to be tough because what is going to be happen then is there is going to be shorter run at well because that 125 million ton you have to add some additional investment in full capacity. You have to have additional investment to the bottleneck and frankly we all know and its no secret that we know the cap production is declining even in these market conditions with these prices, cap production continues to decline so at some point of time, you are going to reach that bottleneck or you can't backfill that numbers.

I think the other outcome of those kind of volumes under the export basis, we are already seeing Central Alp and North Alp begin they have really going to reached a priority on a net back bases with what's happening in Europe. But if we get up to, we get up to those 125 million tons of export, that's when, that will be kind of the PRB really gets the full parity pricing with the international coals. So its going to be a significant..

We've already seen a significant movement in the Powder River Basin that will just take it all the way up, continue to push it up to that parity level. James Rollyson - Raymond James & Associates: Very good. Thank you, guys.

Our next question is from Luther Lu with FBR Capital Markets. Please go ahead.

Yes good morning

Good morning

Rick could you give us some of your thoughts on the recent volatility in the international coal prices particularly API 2, went up significantly and then dropped significantly in the past couple weeks?

Yes we've seen it, its just that when we look at API 2, we've got well over $200, Newcastle well at $200, and then you seen that retreat in the last two weeks. I think it's a... there's a lot of traded activity and those markets are not really that physical at the end of the day. So there's not a lot of physical contracting; as I talk to people on the physical side, we are still seeing strength. But I think a lot of the retreats tied to a softening of oil and gas prices. And then traders having that mentality to move with the overall energy sector and so you're seeing a decline because oil prices are declining. Because if you look at API 2 it was essentially running at parity with EU gas

Okay.

And so it was running close to gas level, gas has since come down a little bit, so you have seen the API 2 drop off a bit because of that.

Okay.

And then I think that's why you... what your seeing in there.

I see. Okay and I want to go back to the Midwest expansion; can you just... I know Mark asked that question, but can you just give us a little more detail as far as the size of the project, timing of the project?

Yeah, Lu that we're looking at a lot of these projects and we have had a number of these on the drawing board for long period of time. We have been... as we have said in the past, we never left the Illinois Basin knowing that the market was going to return once scrubbers were installed and that was going to be a key growth market for us in the future. And as we look at it now, we think we're very well positioned and we're talking to a select number of customers that are looking to reliable supply on a long-term basis, and it would be premature for me to really give you any more detail than that, until we get into secure base load agreements with some of these customers.

I guess the only thing I would say is, we are in late-stage discussions in development. We are not in the early stages.

Our next question is from John Bridges with J.P. Morgan, please go ahead.

Hi Greg, everybody.

Hi John.

Just wanted to follow-up; you've made the point that the published prices for PRB is $20. Is that an indication to what your getting in 2010?

As I said earlier we can attain those prices, John in for PRB price insurance.

Okay.

As we've always said John, we're not happy getting published prices. That's not why we have marketing and sales department.

I know, in the past you've mentioned that you are getting better than the published or well you made better... made a comment like that. But there is nothing this time around. The 45% over this year's number, is that for the average of the contracts you've signed in '09 and '10 or is that for '09?

That'll be the average for the '09 uplift over '08 prices. So, and then you would see probably a similar number from '08 to '10 of course as well. If not, even a little bit higher than that because it's going to be more of a contango pricing situation.

Right, right. School Creek, I thought you raised go ahead with that thing a year or two ago. What's still required to take that forward and if you can remind us of the capacity of that thing as well?

Okay. School Creek, we are in the final stages of the permitting process for Schools Creek. Likely we'll get final permits for that, first part of next year. And what we have not done yet is we have not committed the major capital commitments for any of the mining equipment for School Creek. That's something that we continue to look at the timing as to when we develop that. So, that would be the next phase of the project. The latter part of this year, we wind up assuming full control over the surface facilities there which is the lowdown on the rail loops. So, we'll have that capacity in place. The School Creek normally, as the capacity right now, with those surface facilities of 25 to 30 million tons a year depending on how we capitalize the mining equipment. We could start out at a slower rate, anywhere from 10 to 15 million tons and then building through those rates over time. So, we are very encouraged with obviously where the market has moved, in terms of the contango in the out years and so more to follow on School Creek.

And will go to the line of Ann Kohler with Caris. Please go ahead. Ann Kohler - Caris & Company: Yes, hello. A question, kind of following up on the last several that have been answered; you'd certainly talking about the rather significant increase in export volumes over the next couple of years with infrastructure being put in place and then certainly you have the national decline that you'll have in Central App and then overall just general demand as the economic expands. I guess certainly looking at the dynamics, I mean what do you think or you are looking here at School Creek which without significant volumes is certainly you are one of the few that are going to be able to meet that increased demand as we move into the next decade. Given the lead time on all of these projects, whether they be School Creek or whether they be in Illinois Basin, and given the capital involved, I mean shouldn't there be some greater movement on the part of utilities seeing what's ahead of them to move forward and looking at securing longer term contracts so that they can go ahead with the development or that you can go ahead with the development of these kinds of reserves and if that isn't happening, why is that not happening?

It's one of the great questions. And I think what you are seeing now is that the customers are waking up to that realization. They are seeing... it took them a while to understand that they lost a significant amount of tonnage to the export market. And once that realization came about and they've realized what the pricing was and they started seeing what was happening around the globe and how it was impacting, what was happening in their backyard, in middle America or wherever that might be; realizing it does impact them, they are coming to the table and saying we need to secure long-term business. Because they don't want to be left at the table, not having that long-term business and they want to do it with somebody who is reliable, because there has been a number of cases out there where there has been customers that have signed up with some other smaller producer's for some long-term business out of some of these basins that and it hasn't happened, or they've not... they've stood behind the pricing or whatever the issue is. So we're seeing more of that. We're seeing the big customers coming to the table and suggesting that they what to be part of that, they want partner with us to do that and they understand. Capital costs have risen significantly, so for us to make that commitment it does take a partnership with the customer, because the capital costs have more than doubled the lead times are huge; just any type of equipment. Just to get a truck up in the surface mine is now 30-month lead time to get a brand new piece of equipment for a truck and you can't really deal with used equipment when everything else in the world has been used at full capacity. So I think your points there on we're seeing customers coming to the table to talk about it, because they need to. Ann Kohler - Caris & Company: And whether sort of, I guess a time line that we kind of, I mean I will assume that given the dynamics I mean the concern also may be is the issue of global warming legislation having some impact on their decisions as well. But, I mean, I would assume here that given the kind of scenario that you are talking about, these investments need to be taking place now if not last year, to be able to meet the kind of demand numbers that you are talking about.

Yes that's exactly right. I think from a legislation standpoint, I mean obviously everybody would love to see a regulatory framework that is adopted that people can put some confidence in so that they can work around that. It hasn't happened and I think people realize it will take longer than they have time to wait. But, I think they know at the end of the day that the cheapest form of electricity, even with any type of regulation will still be coal. And so the coal plants that are out there, they expect to run those coal plants as hard as possible to create energy. Because I think frankly we haven't been building anything else, so if anything people looking at coal as we are going to have shortage we have to run these coal plants harder than being run right now.

The next question is from the line of with Greg Steinberg [ph] with Lehman Brothers. Please go ahead

Hi. Most of my questions have been answered; have a couple of follow ups. Just with respect to your met coal contracts, are there indications for '09 met coal here pricing and our customers, have you signed any contracts for that beyond March '09?

Beyond March of '09. No the contracting season won't start in earnest until, either probably early... the earliest the fall of this year or some time in the very beginning of '09. But I guess as an indicator I think you can look to the spot markets that and there is the vessels being traded at North or at least equal to $300 per metric ton. So we haven't seen anything fall of and just last week, we saw the semi-soft coking coals settle at a number that was probably $20 to $30 higher than expectations at about $240 a ton which was lower quality coking coal. So frankly we haven't seen any let up. If you look at global steel demand it is still expected to be double-digits going forward. So I think that there is really all the indicators point to long-term strength in this market.

Okay. Customers, are they asking you for longer-term contract?

No that's traditionally just not the way the market behaves for met coal settlements and they haven't really changed that and it's been just the way they react. And that may ask, and try to get term but pricing generally has always settled annually and it just hasn't changed. So there is just really not much in the way of international seaborne metallurgical business. Now there is some domestic metallurgical business that happened in the U.S. where you may get turn business for two or three years out of U.S. steel companies.

And next questions from the line of Wee Natwell [ph] with Francis Capital Management. Please go ahead.

Thank you. We discussed this partially on the call, could you push to add a little bit more of company's restricting exports. I think China, South Africa and Vietnam are restricting exports of coal. Are there any other countries and could you maybe expand on that little bit more please?

Well yes, we could go country by country but, I think the data is all out there. I mean right now, China clearly has been at the top of the list. Their export license is going to be down from where people thought they were going to be this year. Vietnam has been restricting their exports particularly into the Chinese markets. Indonesia is now telling all of their domestic producers that they have got to supply their internal needs first, ahead of their ability to export, one of reasons why we have seen Indonesia basically flat year-over-year in terms of growth. South Africa is severely short of coal. I mean that's just came out with an estimate that they think they have got over the next five years or more. I guess it was 2017 where they need another 100 million tons of coal developed and they are 40-45 million tons short on their stockpiles, so where they are liken to be today. And Russia now is a country that in a major way is starting to restrict not only metallurgical coal but thermal coal, as they continue to build new generation, so that they can free up gas for exports on the gas. So that's kind of some of the major producing countries that have been traditional export countries over the last four, five years.

Thank you and if you are signing contract for term for several years in the steam area. And I realize there is contango in the PRB but if you can do something with Illinois Basin or other regions. Would you have to do the contract at a lower price than you would book coal after to this today or for '09, if you do have three-four five year contract, will there have to be a backwardation in the pricing pattern or could you do a flat or even rising pricing pattern for term contract?

Well we not really want to get in the contract specific. Suffice it to say our view of the world is energy prices are going to continue to rise in real terms and our contracting basis will be recognition of our view of energy prices going forward.

And just not... and one thing I add Wayne [ph] is that this is Rick, three to five years, certainly it is not anything that we will be given. You wouldn't be given discounts on three to five-year contracts. You got a business for talk about the base book business is the traditional 10 to 20 year contracts that have escalation provisions, laws protection and those types of issues.

And we have time for one more question. That will be from the line David Epstein with Advent. Please go ahead.

Hi, your comments about inventories, you might have thrown figures 17% below last year. Can you just help me at that a little bit? I thought I have been seeing some other inventory number showing that we good bit of above last year... even on the days of demand basis?

Well we think right now, our best estimate is that we have gone from 52 days last year at the same time down to 43 days on a overall U.S. basis and if you look across each region, you will see that every single region is essentially down from target levels and with PRB may be being right out flat, but coming down quickly. It's come down very quickly, and will probably continue to come down a bit. So, we think that the issue around stockpiles instead of being a story about what is it going to do because of the surplus of stockpiles its going to more of an issue that the stockpiles are getting shorter; and frankly when you start to couple that with what we're seeing around the world and seeing how many stock piles -- how many shortages we are seeing in other countries that are below 10 days of inventories in some cases, we knew it was a much bigger shortage than people had really factored in.

The U.S. data you are citing is that from the EIA or is that your own view or what?

Its our own data, which is combination; we look at all the information, and we try to come up with our best estimates that we back tested every quarter to make sure to see how close we are as we know others come out and they read they change our data after they release it, we think we've got a pretty good source and we've got a lot of guys to do a lot of analytics around this, so we feel pretty comfortable that our data is accurate as it can be, let's put it that way. Without going out and inventorying every file.

And with that I will turn it back to presenters for any closing comments.

Okay, well thank you all very much for joining us this morning as you can see it was a very strong quarter for Peabody. The secret has been the ability to move the tons particularly out of the Australia. As we indicated earlier, in earlier quarter's that was our focus we've remained focused on it. And the markets across the globe continue to be very strong going forward. So we look forward to our next quarterly conference call in October. Thank you very much.

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