Ladies and gentlemen thank you for standing by, and welcome to the Peabody Energy quarterly Earnings 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 will turn the conference now to the Senior Vice President, Investor Relations and Corporate Communications, Mr. Vic Svec. Please go ahead.

Well thank you John. Good morning everyone. Thanks for taking part in the conference call for BTU. Today our Chairman and CEO, Greg Boyce, will provide an overview of Peabody's position and our outlook. Our Executive Vice President and Chief Financial Officer, Mike Crews, will review our record quarter. And President and Chief Commercial Officer, Rick Navarre, will discuss the market fundamentals. Our forward-looking statements should be considered along with the risk factors that we note at the end of our release, as well as the MDNA section of our filed documents. And we also refer you to peabodyenergy.com for additional information. And I will now turn the call over to Greg.

Thanks Vic and good morning everyone. During this time of unprecedented economic events, we’re obviously pleased to be reporting the best quarter and forecasting the best year in Peabody's 125 year history. Mike will speak more to the quarter in a moment and discuss our record revenues, EBITDA, operating profit, earnings and cash flow. Our approach is to be profitable in all market conditions, with the intent to make superior profits in strong markets. It’s the scope and breadth of Peabody's portfolio that differentiates us from others in the coal space, and clearly this quarter highlights our earnings capacity. In fact, there are two compelling themes around differentiation that give us strength during these troubled economic times. The first is how coal is different from other commodities? And second, how Peabody is unique among coal companies? Let's first focus on coal as a commodity. I believe that coal is far better able to weather the economic downturns than most other commodities for several reasons. Coal is overwhelmingly an electricity fuel. Electricity is a basic staple and in developed nations is far less elastic to GDP and other commodities. For instance, a 1% decline in GDP in the US would only translate into a 0.5% reduction in electricity. And coal fueled electricity is more protected given the around-the-clock baseload nature of the generation. Let's take a look at the effect in emerging economies. I will tell you that Rick and I just returned from China last week, and the signs we saw were not of downturns, but instead an easing on the pace of economic growth. We still believe emerging economies will continue to grow, with China leading the pack with 8% to 10% growth. That translates into 11% to 14% electricity demand expansion in the world's largest electricity market. On…

Thanks Greg and good morning everyone. I'm pleased to report a very strong third quarter that set records in every meaningful category and generated significant operating cash flow. Let me begin with the income statement highlights. Third quarter revenues were $1.9 billion. That's a nearly 60% improvement over the prior period and reflects both higher volumes and increased prices across our global operations. In Australia, revenues per ton more than doubled, and volumes grew 21% from our expanded production base. In the US, revenues per ton improved 15% on slightly higher volumes. EBITDA was a record $610 million with a 32% EBITDA margin. Mining operations nearly tripled prior year levels led by a $410 million increase in Australia. Trading and brokerage was again a strong contributor, benefiting from opportunities in the US and international markets. Third quarter operating profit of $490 million exceeded the second quarter record by 43% and last year by 324%. Pretax income grew to $440 million and our higher profitability led to income tax expense of $60 million. Favorable exchange rate movements reduced income tax expense by $63 million in the quarter, lowering the effective tax rate to 14%. We're now targeting a tax rate in the 20% to 25% range for 2008. Finally, income from continuing operations and earnings per share were both records, totaling $377 million and $1.38 per share. Now let me take you through the supplemental schedule. Beginning with the US, our tons sold were nearly 51 million, which was higher than last year and the second quarter largely due to our western operations. This was the first full quarter that the new, low-cost El Segundo Mine was in-service. And the North Antelope Rochelle Mine rebounded well from last quarter's downtime to complete installation of the new load out facility, the last…

Thank you Mike, and good morning everyone. What I would like to do today is walk you through our view of the global and domestic coal markets during this extraordinary time. Generally you would expect that physical coal markets, the financial coal markets and of course the equities to be closely aligned. However, in recent months this relationship has become extremely disconnected. The easing of the physical markets has been magnified in the paper coal markets, as banks and hedge funds have unwound their positions to preserve cash and the fund redemption’s, creating a large selling overhang unrelated to the coal fundamentals. The supply-demand balance has also been complicated by very mild, late summer weather across the Northern Hemisphere, along with concerns of an economic downturn. These are a lot of pressures for the market to digest at once. Yet looking at the fiscal coal market indicators, you still see a world using a growing amount of coal and facing very tight and increasingly uncertain supplies. On the global front, we've seen pullbacks in steel demand and economic concerns that could slow the growth in electricity generation in the near-term. Worries about the demand side though appear to be currently outpacing the reality. In China for instance, past expectations of 9% to 10% controlled economic growth have generally led to much higher actual performance. And the Chinese government and many companies tell us, they expect an 8% to 10% growth rate in the next year. This while it may be an easing, it's hardly the dramatic drop-off voice by those expressing an extreme bearish macro sentiment. More importantly, coal transactions for physical delivery in recent months have been at very strong levels for both thermal and met coal. Recent activity in Australia has been above the April benchmark levels and…

(Operator Instructions). We have on line Jim Rollyson with Raymond James. Please go ahead.

Good morning gentlemen and Christine.

Good morning Jim.

Greg, you look at some of the things you have said and we have all been focusing on how the physical market has been acting relative to the financial markets and obviously there is quite a disconnect that you have laid out. Can you spend a minute and talk about as you go forward into '09 and '10, you have obviously spent a great deal of time and effort locking up coal at these higher prices and establishing a pretty strong cash flow build as you go through the next couple of years. Has your outlook on how you spend that cash flow changed in the last three months in terms of, obviously you have got a real situation in the financial markets, has that changed your thought process of where you might spend that cash versus what you might have thought five or six months ago?

I think the answer to that question is yes. If you asked us as has this been asked in our previous conference calls, we probably would have rated organic growth opportunities highest on our list, given the very high prices for acquiring assets, that is number one. Number two, where our own equity value was, so as we look at the opportunities for cash today, clearly we want to make sure that where any opportunistic acquisitions might come about given the current valuations. We want to be prepared to participate in those, and we also want to make sure that in terms of where the market unfolds over the next couple of years that our growth profile from organic development matches that market demand, which based on everything we see around the globe, we are still going to see growth but we believe it is going to be slower than we might have anticipated six months ago. Ultimately, we have got to continue to look at the valuations of our internal valuations. As we indicated, we were in the market in the third quarter on share repurchases. So I would say that previously organic growth was the top of the list. That deck is shuffling in terms of the use of cash.

Very good. As a follow-up, if you look at your updated guidance for the year and factoring in the third quarter, it obviously implies that fourth quarter is quite a bit lower than what you have been plugging in or certainly what The Street has and what you did for the third quarter. Can you just step us through the sequential decline and where that stems from?

Well, I think what you have to focus on is the year, and you have to focus on the fact that the third quarter was a great quarter for us. We have always said that timing of vessels in Australia, these are very high-value vessels. The timing of how our production comes out particularly out of Australia is going to impact quarter-to-quarter. The fact that we are raising our annual guidance indicates that we expect the end of the year to continue to be very strong. How that flowed between the third quarter and the fourth quarter, maybe that has changed slightly. Overall, our back half of the year is stronger than we had originally anticipated. Now if we continue vessel movements and our volumes continually strong, because of the performance of the ports, we will have another very good quarter in the fourth quarter. The other aspect is we had a strong trading quarter in the third quarter. We wish we had a great crystal ball to tell us exactly how many counterparties will still be in the trading arena, what the volatility will be and what the liquidity will be. We do not have it right now. So we have tried to the factor the vessels. We have tried to factor the trading and the other aspects into our forecast for the rest of the year.

Excellent, thank you. Good quarter.

Thank you.

The next question is from the line of Paul Forward with Stifel Nicolaus.

Thanks. Good morning.

Good morning.

We had, you mentioned in your remarks, a very mild summer domestically for weather and power demand, especially the second half of the summer. Gas may be cutting into coal demand in some areas. At what point, do you look at this and look at the strong utility coal stockpiles in the states that are using PRB coal and decide to idle some production in the PRB or elsewhere?

Yes, I think, Paul, good question. Obviously we would ascribe it to the global cooling which took place through this year. When you look at whether the entire Northern Hemisphere, whether it was China, whether it was North America, whether it was Europe, coal demand because of weather-related factors this summer were down and that is part of what we are seeing in the marketplace. So that clearly has an impact. I will tell you and everyone as we now are planning for our production next year in 2009, we have already trimmed the volumes that we expect to come out of the Powder River Basin.

So that is trimming some of the growth but as far as idling any existing capacity, is that something that you would expect possibly competitors due to maybe weaker margins that it will be their job to do it first rather than yourselves?

Well, I think, first of all, we have to look at right now the way we see 2009. We still see growth in the coal market. The exports for this year, we expect will come in around that 85 million ton range. We have tempered our view as to the extent of exports for next year. We still expect them to at least be at the levels that we are seeing this year perhaps, slightly up. With the production volume issue that we have seen in the east, particularly this quarter, which we expect to continue, PRB volumes are going to need to grow just to satisfy existing demands. The question is, how much do they grow by? As I indicated, we have already taken the position that we are going to reduce our volumes that we had planned for next year. What others decide to do remains to be seen.

Hi, Paul. This is Rick. I would also remind you that we are essentially fully contracted for the most part for the PRB. So we would have to be cutting back and taking backorders. What we have in our total portfolio to be repriced, a lot of that is reopener business, that just gets repriced but it is already been sold.

Okay. Thanks for that.

Our next question is from the line of Michael Dudas with Jefferies. Please go ahead.

Good morning, everybody,

Good morning, Michael.

Good morning, Michael.

Maybe somebody can address the issue about the low credit accessibility that we are witnessing in the marketplace, maybe from a producer perspective, primarily on the east coast but also internationally and maybe Indonesia, Vietnam, some of the burgeoning markets for maybe new virgin capacity, Mozambique or Mongolia, how that might impact that supply increase? Also from the trading market, given that you have had a very good year of trading business on the coal side, how do see that? Is that going to further cause volatility in the financial market and maybe obfuscate some of the issues in the fiscal market because there will be a lot less liquidity in the financial side?

Mike, let me take that. I think when you look at it clearly. There is obviously a lot less liquidity in the global market as it relates to cash as well as favorable credit lines. So when you look at projects, new projects and look at where new coal mines were planned to be built to respond to the growing demand, we see that backing off quite a bit because we do not see the availability of capital, except for those with very strong balance sheets. So there are a lot of projects we have put on hold and are those projects in Indonesia, Mozambique and other places? I think those are all going to be tougher places to do business in the future because of not only the financial risk, but they are going to have country risk as well. So I think those projects will be further down the line when it comes to projects that might get financed. As we look at where Peabody sits, I think we have adequate capital to execute our strategies. I think when you talk about the eastern part of the United States, we all know that there are smaller players there that will be strapped for capital. We also know that there has been at least and these are just public announcements, ten forced measures in the last two weeks out of these. With that type of activity and those continuing, you are going to see, if you see more of that, it is going to be tough for the financial markets to respond to that. So that the answer is, yes. It is going to be tight. It is going to impact not only expansion projects. I think it is going to impact sustaining CapEx for folks, who are not going to be able to do get the capital to even buy that new equipment that they need at their property. As it relates to trading, clearly with the exit of some of the banks from the trading market, it will reduce liquidity and we have been in this business for ten years when there was very little liquidity from the very beginning and that made money every year doing that. So we still think it is a good business to be in and we will continue in it. The intelligence alone is worth a lot more than we probably gained just the financial segment that we have. There will be fewer players, they will come back eventually because the market has volatility to it and that is a good place to trade. As we see it, are we going to be able to replicate the trading earnings next year? We will come out and talk about that in our '09 guidance, but it would probably be difficult at this point in time without this many players in the market.

Thank you. My follow-up is regarding, you mentioned at third quarter you retired $100 million. Is that debt and equity combined?

No, that was just repayments on our revolver. So we had a zero balance on our revolver at the end of the quarter.

What was the approximate amount of shares done in the third quarter and can you remind us what the Board has authorized for Peabody to allocate and how comfortable relative to covenants or so that you can ramp up such a purchase?

Sure. This is Mike. The Board authorized us to repurchase 5% of our outstanding shares. Previously, we had repurchased 2.2 million. During the third quarter of this year, we started buying and we ultimately averaged out at about the high 40s and we were repurchasing shares until we were blacked out for the quarter. So overall what we have left on that program is approximately 10 million shares, well within our existing available liquidity on our revolving credit facility.

Thank you, gentlemen.

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

Good morning. Thank you. My first question is with weakening and you touched upon this a bit. With some of the weakened valuations out there, are there any particular areas that you are seeing some reserves that might be attainable that previously were too expensive?

I would just tell you, Jeremy, it is pretty much across the board right now. Obviously, there are reserves that are still owned by major mining houses and they are in good shape. Whether it is Australia, whether it is Indonesia, whether it is here in the US, there are reserves that for some of the junior players are becoming potentially available at very attractive valuations. Whether ultimately anything could get concluded remains to be seen, but we are starting to see more availability in that marketplace than we would have seen three months ago.

Great. No that is helpful. Then you mentioned that in Australia your $35 legacy contracts are up for re-pricing. I assume you are talking about the Wilpinjong Mine there. How much of that actually, if that is not right, let us know, but how much of that comes off the book for re-pricing?

This is Rick. It is not the Wilpinjong Mine. The Wilpinjong actually that is the domestic contract that is not open for re-pricing. These are export tons primarily out of the Wambo location, and it is about 3 million tons in total, not all of the 35. It is between 35 and 55, but to give you a sense, that 3 million is probably at about 45 on average.

Jeremy, these were contracts that we inherited with the Excel acquisition. When Excel was looking to finance those expansions they sold these tons forward at pricing that would have been in existence in 2005 and 2006. As Rick said, they are now coming off, coming to their end.

Got you. Oh that is helpful. Then lastly, in terms of foreign exchange, you mentioned that hurt a little bit this quarter, but obviously we have seen a shift with the Aussie dollar. So when do you think we could start to maybe see that actually helping going forward?

Hey Jeremy this is Mike. With our hedge position for the rest of the year we are 85% hedged at an average rate of about 80. For 2009, we are also 85% hedged at an average rate in the low 80s. So even if you take today's rates, which have collapsed only recently and if you assume that you had that for the rest of 2009, an all-in effective rate for 2009 is going to look very similar to the all-in effective rate for 2008.

Got you. Okay, thank you very much, that is helpful.

Thanks Jeremy.

Next from the line of Mark Liinamaa with Morgan Stanley. Please go ahead.

Thanks. I will be interested, if you could try and frame the absolute downside. Clearly the market is very worried about the supply-demand balance for US coal next year and into 2010, and when you look at the combination of economic weakness, lighter industrial load, steel, exports, in your serial planning, how long could it go?

Well, I think that is a million dollar question for a whole lot of sectors including the market.

Yes, absolutely.

As we look at where global economies, all you can do is just pick different scenarios for the global economy and what that would result in terms of demand for our products. Quite frankly, we in terms of downside on thermal coal, international thermal coal and US thermal coal, flat is about as low as you think you possibly could go, because of the amount of new capacity that is being built, whether it is here in the US or more importantly, internationally. China effectively, a downside case in China is 8% growth which still has 10% plus electricity growth rate in the world's largest market, which is going to require significant volumes of thermal coal. So the thermal market we think is going to continue to have growth through this time period and it is just picking, whether it is good growth or whether it is a medium growth.

2009 flat is a worse case type thing? I know it is a difficult question to answer, but clearly that is something that investors are concerned about.

I mean, from our perspective that is the planning scenario that we are using.

Okay.

That is all I can tell you.

Well thanks. And, any thoughts on China and plans to limit exports on coke or anything like that next year? Are you hearing anything about that? That will be it for me, thanks.

Well the fact is China has continued to limit exports and they have just imposed a fairly significant export tax on coke. In terms of even thermal coal, they have yet to release any additional export licenses for this year. So we anticipate that China is going they are energy short. We were just over there last week as we said. I mean, they are with all of their growth, they were having power brownouts, because of their inability to ultimately meet their existing demand and they are still anticipating 8 to 10% growth in their economy. Much more of it redirected to infrastructure development and internal growth rather than the export growth that they have had in the past. It still remains strong.

Thanks very much, good luck.

Next from the line of David Gagliano with Credit Suisse. Please go ahead.

Hi. I was wondering if I could ask Mark's question in a bit of a different way. Based on your market intelligence, what do you think is the marginal cost of producing thermal coal in Central Appalachia and in the Powder River basin? Also, if you could frame it in terms of the global hard coking coal market as well that would be great. Thanks.

Dave it is Rick. Let me start with Appalachia and I can take it from public data and from also personal information from looking at financials of smaller coal companies that get presented to us to look at from acquisition standpoints. And, you can see that you are talking about an $80 to $90 cost for thermal coal, at the marginal level, the highest cost producer, the tail end of the cost curve. So you are going to need $90 to $100 to clear that market for Appalachia. We have seen thermal and we have seen metallurgical coal from some of the met producers out of Appalachia in the $120 plus range. I would say that is a marginal number. For the marginal metallurgical coal it is in excess of $100. So that is probably a realistic number to think about from that standpoint. PRB, it is more of a flat cost curve, difficult one for me to give you any direct view on that one. It is pretty flat at the end of the day. What I can tell you on the PRB is that obviously costs have gone up because of commodity costs. Even though they have dropped a bit, they are still higher than where they have been with respect to diesel fuels and explosives, and having said that the cost of reserves in PRB has gone up fivefold in the last five years. So that is certainly a big number. The ratios have increased significantly. So you are seeing that the marginal cost has gone up quite a bit in the PRB.

Perfect. Thanks Rick, I appreciate it.

Next from the line of Shneur Gershuni with UBS. Please go ahead.

Hi good afternoon.

.:

Oh, good morning still. My first question is on the supply side. You did talk about 25 million tons of incremental demand for metallurgical quality coal or low-vol coking coal. You also talked about a demand expansion with respect to electricity use in China and so forth. I was wondering; if you could first address where you think Chinese coal production can grow to next year? Will there still be a deficit relative to their demands and so forth? Secondly, if you can also talk just about the supply with respect to where you see supply coming online with respect to the met coal market as well too.

Okay. Well maybe just starting in China, clearly China has been growing a couple of hundred million tons a year in terms of their productive capacity and that has struggled to keep up with, in fact has not kept up with their internal demand. You know, at a slightly slower growth, we think that China perhaps has the ability to meet their demands, their stockpiles. They run stockpiles that are about 14 days rather then what we run in this country, so they together stockpiles healthy. Net-net, they are still very tenuous in terms of being able to satisfy their demand internally. The number, 2.7 range billion tons of supply, demand and supply that is a number that we can use at this point in time. I think for the rest of the globe, as Rick indicated, we think the growth of supply is going to be very tight. We have just come off up until recently the first half of this year with strongest thermal markets we have ever seen, and when you add up all the major exporting nations, they could not even increase a ton of output based on that. It just shows you the nature of the supply side of this business. So we think that is not going to change and in fact, based on current status of the availability of liquidity and credit, probably get even tighter.

Just to clarify one point there, so effectively with respect to China, just focusing on that for a minute, you are basically saying you do expect it to still be effectively in deficit or precariously close to at the very least?

That is correct.

Okay. I was wondering if you could talk about costs as well too. Have we potentially seen the peak on input costs? Is this quarter potentially one of the worst quarters outside of except for labor per se? Are you expecting that potentially that we could see some margin expansion next year just due to some of the input costs coming in relative to where they have been in the last four to six months?

Well, clearly if you run oil out at $70 a barrel through all of next year, you are going to see a significant easing of at least that cost pressure. We have yet to see significant reductions in either our evanesce materials or the equipment costs or steel costs, although we expect that that ought to start easing based on what is happening in the steel market. So, net-net, yes, unless things change rapidly here, we would expect an easing of the cost pressures from what we have had over the last two years.

Is there a temptation to take advantage of oil where it is right now and hedge in some of the costs or do you want to watch and wait a little bit?

This is Mike. On the crude oil side for next year, we are 63% hedged already. That is at a price around $100 a barrel.

Right. I am saying looking out where you see it right now, do you sit there and say maybe we should take that up to 85% or 90%? Is there an opportunity to layer in some hedges at this level?

You are right. There is and that is the position that we have taken in the past and we will continue to take where we like to, we layer it in and we have target percentages to make sure that we manage the volatility. Clearly as it comes down, we have been in the markets trying to average down our position.

Alright, perfect. I think I used up my two questions. Thank you.

Next with line of Brian Gamble with Simmons. Please go ahead.

Yes, good morning.

Good morning.

I just wanted to touch on the Australian market first if I could. You mentioned export growth of 3% this year but you seem to be performing quite well. Could you go over two things? One, has the new market on the global basis supply/demand balance in general slowed down some of the expansion plans in the region or is it steady as she goes? Two, what has enabled you to benefit versus some of the other that might be under some pressure?

Well, I have multiple questions there. In terms of where we see the development of new projects, particularly out of Australia, we see it affected by the availability of cash to develop those projects, not really affected by whether the market is going to be strong enough to absorb that product. As we said earlier, we still see positive seaborne thermal coal demand growth going forward. So we are still going to need additional coal. So it is more affected by the liquidity. We have been successful increasing market share because of the platform buildup that we had in Australia as a result of the Excel acquisition. We had the new mine at Wilpinjong. We had expansions at Wambo and we had the new Millennium Mine come on in the met coal region up in Queensland. So that was built into our program. We were able to purchase that portfolio, which was developing new projects early in the stage and got into the market early. So I think that was really the reason why we were successful. Lastly, I think your question on ports, as you know we are a developer of NCIG port, that is still under construction with an anticipated startup and begin shipping in 2010 and we have committed for volumes out of the new Aavid point expansion process in the northern link out of Queensland. So both of those over time significantly increase our availability of port capacity particularly beyond 2010.

Inventory stockpiles in the US, east versus west, do you have date of demand cover?

This is Rick. Looking at the eastern US, you have got for the eastern producers; you have got a lot less inventory on hand. You are actually probably below target by 7 or 8 days in total. So you have got a pretty thin inventory situation in that part of the world. As far as the Powder River Basin, of course we got almost to target at the end of last quarter. Because of the weather in this quarter, we have gone above that and we are probably about 4 or 5 days above target right now. So a little bit heavy on inventory at the power plants for PRB.

You are referring to target as a five-year average? Is that right?

We are referring to targeted days on the ground. We do not look at it as a five-year average. We look at the targeted days of burn that they want to have.

Okay. Thank you very much.

Our next question is from the line of David Lipschitz with Merrill Lynch.

Yes, good morning.

Hello, David.

Hello. In terms of your dealings with your utility customers, as the physical market has fallen off some, where are length of term and all that type of stuff going right now? Are people looking for longer, shorter, just give me the shortest deal possible?

I think right now, we have not seen a significant change in any of the buying behavior at this point in time. You also got to understand there really has not been much buying or selling going on in the last month. I think everybody is in the market side is waiting to see how this thing settles out. We are perfectly fine to wait as well because in our view, the markets have submarined well below the bottom. When the customers and everybody has time to come up for air and look around, they are going to see that the coal supply and demand fundamentals are exactly the same as they were for the most part and we will be back to talking more about term business. So we have not seen much change like I said, but there has not been a lot going on in the last month either.

Other questions, in terms of South America, what is your outlook for Columbia, Venezuela and that market in terms of what you believe that market looks like, in terms of getting more involved with it and things like that?

Well, Venezuela clearly is a market that we are already involved in with the ownership of the largest mine in Venezuela, but that mine is about 7 million tons a year, but it is not producing up to it is capacity this year. It is probably a little bit lower than that this year. Do not see much expansion going on in Venezuela. Tough market so you will not see any more coming out of Venezuela. Columbia, that is a market that we will probably grow at 5, 5 to 10 million tons a year of capacity. We are not in that market right now. There is only really three major coal mines in that market but it is a good market for export coal into Europe and some into the US.

Is that a market you would like to be in?

At the right time, for the right price and the right set of assets, absolutely.

Okay, thanks.

It fits our profile from a trading standpoint.

Okay, thanks.

We have a question from the line of Luther Lu with FBR Capital Markets. Please go ahead.

Good morning.

Good morning, Luther.

Rick, I want to follow-up on the marginal cost question. You mentioned that the Central App marginal cost is $80 to $90 per ton. Then how many tons is produced at that price?

Well, Luther, you have got about 200 million tons being produced in Appalachia. At the end of the day, we are just looking at the tail end of the cost curve and I could not tell you exactly how many tons. It is enough to make it to set a price because if you do not have a price that is above $80 or $90, you are going to lose a lot of tons out of that market, which is already a fragile market. So is it 10 million tons or is it 20 million tons? I think the point is not really that, it is big enough to make a difference.

Okay. Big enough to make a difference. That is good to know. Then this question is for Greg. Recently you mentioned in an interview that you had planned to open up a School Creek mine in the Powder River Basin in 2009, so that you can take down the production at Rawhide and Caballo to increase the margins. Is that plan still in place?

Yes, we are still finalizing those plans, Luther. We anticipate getting the final permits sometime in the first half of 2009. As we have always done with our portfolio, we are going to look at ways to maximize our margin. The School Creek operation is going to be producing at 8800BTU quality product. The margin on that product is higher than we have at other operations. So we will begin to migrate volumes from those other operations down to School Creek as we bring it up, so that we can maximize the overall margin that we get out of our total Powder River Basin production.

So would the increase in the capacity in Powder River Basin somehow keep a lid on the Powder River Basin price?

We are going after margin expansion with bringing on School Creek at this point in time. We are not looking at volume expansion. You know, obviously what the market needs is what will get produced.

Okay. Thank you.

Next we go to the line of John Bridges with JPMorgan. Please go ahead.

Hi, congratulations, great results.

Thank you John.

The Australian stuff took a while to get going. What actually fell into place in this quarter to give you the big boost?

Well it is a couple of factors. Obviously the Australian platform, the volumes performed well. You know, incrementally we did get better performance in terms of our ability to ship the product to market. That was number one. Number two, we got the full benefit of the revenue stream based on the re-pricing of the Australian platform as of April 1. Remember, we had a bit of carryover in the second quarter. We did not have any in the third quarter. Plus the team in Australia did a good job maximizing the higher value product shipments in terms of the ability to move material out through those ports. So you add all of those things up load emerge, it was a very good quarter out of Australia.

So you got the trifecta.

Yes.

Congratulations on that policy. With respect to the global industry, one of the things we saw recently was the big growth in planned Indian thermal coal demand although there is some hopes there that they are going to be able to satisfy that domestically, any comments on that?

Well we still see strong demand growth out of India. Whatever that level is, it will still be higher than we will see in other locations. We still anticipate that their input or their import growth will be one of the highest growth rates in the world. They are trying to develop additional coal resources. In our view, they are going to become a significant importer of both thermal and additionally met coal going forward.

I wish it’ll be helpful.

The view of the government as well as Coal India, which is the big producer there, is expecting to import coal as well. So they definitely are looking at the same way.

Okay, great. That should help over the next couple of years. Thanks a lot. Good luck.

Thank you.

We go the line of Justine Fisher with Goldman Sachs. Please go ahead.

Good morning.

Good morning.

So my first question is regarding capital investment in this environment. I agree with you that the credit crunch is making this commodity down cycle interesting and that it should limit the capital availability to invest in commodity supply. I think the two other interesting things going on is that first of all, a long string of strong use for commodity companies has made companies like yourselves quite well capitalized to still take advantage of investment opportunities despite the credit crunch that may affect smaller players. You know even though prices are down from that in thermal coal, the margins are still pretty strong and a lot of investments may still be profitable even though prices have declined. So I am wondering how you would think those other two factors of this cycle might affect the credit crunch that could limit supply. Maybe another way to more specific way to ask the question is what percentage of the new projects that have been announced let's say over the last year, would you say if you could were financed by projects, were based on project finance or trying to be financed by your new credit facilities as opposed to financed by a large mining companies that may still have the wherewithal to pursue them?

Well obviously, there is a lot that you have asked there Justine…

Sorry, that was a novella of a question.

That is okay. I mean I think, let's just take a look for instance in a location like Australia, where we were seeing a lot of projects on the board. The projects that were designed by the large mining companies, I mean, obviously they will look at their own investment decision making process and determine whether they want to move forward with those. There was a substantial amount of new projects that were being developed by the smaller equity players and the thinly capitalized players. Where they were using the ability to issue equity to raise the capital, to expand operations that door is completely closed. Then, where they were using the ability and then coal funding that with debt, they just do not have access to those marketplaces given their capital structures. You can use that same example in places like Indonesia, in places like the Eastern part of the US. So there is no question that the current state of the capital markets and the access to liquidity is going to impact those participants in the marketplace. What percentage of that in the past has been debt versus equity financed; I am not sure we have a real good number in terms of a global basis. Suffice it to say there was significant number of the smaller players that that was their finance model, no different than it would be in the gas market here in the US. So, there is clearly going to be an impact on future volume growth.

Same thing when you look at the US Justine and you look at Central Appalachia. We all know there are hundreds of producers in Central Appalachia of this and many small producers that are living on a shoestring even with these margins. At the end of the day, they are not going to be able to get access to capital. Regardless of what the margins are, the banks are not going to lend money to those types of companies.

And, along those lines, I know we are talking when you had your analysts day in New York about steel players trying to get into the coal markets, and I was wondering if you are steel mills have been cutting their production estimates, but it seems that they are also still quite well capitalized. Are you still seeing the interest in met coal? I mean, this applies to both Australia and Central Appalachia given the acquisitions we have seen over the last couple of months. Are you still seeing steel players interested in taking advantage of reserve opportunities as you are or do you think that it is going to sway back to the coal companies being the coal acquirers as opposed to steel companies?

We are still seeing interest by the coal companies, by the international coal companies and that gives us confidence in our own projections Justine, which you know we do a lot of work on. Steel companies rather, they continue to look at these metallurgical coal assets, because scarcity of supply. They are buying these assets and the prices that they are paying for these assets would indicate that their view of a very tight supply situation going forward. So it confirms our view.

Okay. Then on the PRB, when you reported your second quarter results, you had about 35 to 40 million tons of US coal unpriced. I am assuming a decent chunk of that was from the PRB just given your breakdown in the US, and then now you are mostly committed. So I know that you are pretty bullish on the trajectory that PRB prices might take in June and now all that coal is committed. So I am wondering first of all, why did you commit all that coal over the quarter given that there is still the fourth quarter left? Then second of all, you had mentioned that there were new demand opportunities for PRB like coal-by-wire and backfilling in the east. I am wondering if any of the tons you did commit during the third quarter were to those new pockets of demand like coal by wire or backfilling in the east?

The answer is yes. We did commit coal about 20 million tons during the quarter to PRB, most of it in the upper teens to give a sense for where it was, where the market was at that time, which is much higher than what you saw in the traded market if you will or the OTC market. Alot of those opportunities hold on to buyers that were buying more PRB coal than they traditionally bought, which they were using to transmit by wire or because of backfill opportunities or test burns, butat the same time, I would say that when you go back to the 35 million tons in the previous quarter, we did not commit all of that coal. What we did is we committed as I said, approximately 20 million tons. The rest relates to what Greg mentioned earlier is, we trimmed our production forecasts for 2009 by 5 to 10 million tons in the PRB to match demand.

The next question comes from the line of Mark Caruso, Millennium Partners. Please go ahead.

Hi it is Jeff Gildersleeve. Just on the performance trading and marketing is very good, the way you account for that, that is all cash in the quarter?

No, we account quarter to mark-to-market basis, of course as we are required to for trading. The cash aspect is going to vary but typically when we look at the cash element of our trading portfolio, it is a pretty short dated book. So 80% of it is going to come to cash in probably a 24-month period. So if you look at it for that quarter, maybe one-third of that 52 maybe is cash because some of these positions are put on and they are '09 positions and '10 delivery.

Okay.

In total, that is how you have to look at the entirety of the quarter?

Do you have the exact mark-to-market in the quarter, how much it was?

Well, the mark-to-market that we were able to record was $52 million and that is the mark-to-market position.

Okay. So that is non-cash

Well, it is not non-cash, some of it. We marked $52 million but we had positions that were previously marked in earlier quarters that turned into cash.

That you realized in the quarter.

That we realized, yes.

Okay.

So our total marked position is probably that we have to still collect is closer to a $300 million number in total.

Okay.

You can see that when you look at the balance sheet.

Right. Also, just as far as you mentioned capital constraints in the market. On the trading side, have you found more opportunities or less opportunities given that other players that are less capitalized probably can not participate?

Well, from a trading standpoint, it is always better to have more participants in a market because it creates liquidity. As I said earlier, we have been in this business for 10 years from trading coal and players come in and players leave and we are the one constant that stays obviously because it helps us around our production profile. It also helps us optimize our contract backlog as well as gain market intelligence. So we have seen a few players obviously exit which as they have exited, they have been heavy selling positions which is what is caused the significant volatility and the dip in the traded markets, which is not reflective of the physical markets. That will turn and over time and most of the positions that we are doing and we do a lot of brokerage business, it is back-to-back. So we will still be trading in this market.

Alright. Thank you.

Our next question is from the line of Michael Goldenberg with Luminous Capital Management. Please go ahead. Michael Goldenberg, your line is open. Please go ahead. We will go to Brian Finkelstein with Catapult. Please go head.

Good quarter. I just had a question. Australia performed exceptionally well this quarter compared to Q2 and is $7 million, is that a more reasonable run rate if you have all vessels lined up, or would it be in between the $5.5 million and $7 million going forward?

Yes, our forecast for volumes for the year was that $22 million to $24 million for the year so that would be our normal quarterly run rate.

Closer to a 6, no. What we thought for this year is probably about a 6 million ton average to get to the top end of the guidance that we would given for the year around in terms of quarter. As we go into next year, we will be looking at a number, but that is an average as you understand because some of these mines are being brought up to fuller capacity in the back half of the year.

Okay. Got it. Then just one follow-up. You have talked recently about a possible Illinois expansion. If you would comment if you have gotten any further on that project?

Well, I think what we have said all along is new developments in the Illinois basin would be predicated on entering into long-term sales contracts to baseload those operations. We continue to do permitting and engineering on new operations in the Illinois basin. When we are at a point to actually make any a formalized announcement, we will do that. Suffice it to say for right now we are in the engineering and the permitting phase.

I know in other regions it takes, or some people have talked about five to seven years for Northern App. Can you bring up mines in Illinois in a couple year timeframe or is it still a longer timeframe?

No, it is a couple of year timeframe. It is not the length of time that it would take for those deep mines in Appalachia.

Okay, thanks.

Our next question is from the line of Sanil Daptardar with Sentinel Asset Management. Please go ahead.

I think you talked about trimming some production in the western region in 2009. Did I hear it correctly? Is there any reasons for that or is it because of the market demand?

What we talked about was reducing our growth expectations in the western region for 2009 and that is just basically a reflection of certainly where our stockpiles are today, where we see where demand is and we had an unsold position because of where the market was. So we have trimmed that unsold position and our growth expectations for 2009.

Yes. As we look at the prop pricing right now that is available, we are not going to produce coal for those prices.

In the case of Australia, you are still continuing on the position that you have basically of growing the production there in 2009, right, to 24, 25 million tons?

That is correct.

A question on the cost side. I just wanted to know how much is oil in terms of your cost in percentage of your cost?

We use 130 million gallons across the platform. So whatever price forecast you are going to use for oil, just apply it against that now. Right now because of our hedging position at $10 change in the oil price.

About $3.5 million on an unhedged basis, so and then two-thirds of that number, a little less than two-thirds of that number is hedged.

This is all reflected in cost of goods sold, right?

Correct. So in excess of $400 million across on an annual basis would be spent probably this year or roughly that number $400 million would be spent on fuel when you look at the total cost of sales.

Okay, thanks. You had mentioned earlier on the call and the presentation, you painted a quite bullish picture about 300 gigawatts of coal-fired plants coming under construction and so forth, and that could add about 1 billion tons of coal. What is the time frame that you are looking at? It is about five years down the road or just going to give…?

That is three to four years view of demand.

In terms of the metallurgical coal, that 25 million additional tons?

Well, that just represented a 3% growth rate off of today's steel production levels would be. We did not really reflect in there. Steel had been growing obviously quite rapidly and much higher than a 3% rate. If you were to just look at numbers in terms of 3% growth rates, that is about 25 million tons. We did not put a forecast in terms of that growth out at this point.

China would be the most consuming nation of the metallurgical coal that is on the seaborne market?

It would be China, it would be India, and still parts of Europe still have metallurgical coal growth and a number of other countries. It would be India and China and Brazil would be the top countries.

Primarily China produces its own metallurgical coal. So any cutback in steel production in China generally does not have a direct, necessarily a direct impact to the metallurgical seaborne market as much as you would think because you have still got the other countries that are producing the coal, India, Brazil, and others.

Our final question today will come from the line of Adam Comora with EnTrust Capital. Please go ahead.

Hi, Greg. Thanks a lot. I just wanted to follow up on the metallurgical coal market. Everybody had been talking about good pricing being realized earlier in the third quarter. I am just curious what is the current state of negotiations? When do you think you will start contracting out the rest of your production? Any thoughts or any color you could give us on where you think contracts may settle out for next year's coal year on the high-quality benchmark metallurgical coal?

Well, I think all we can really say at this point in time is, it would be normal for those negotiations in earnest to be right after the first of the year, in the first quarter of next year remembering that the target date is April 1st to conclude those negotiations. All I can say at this point is our view is the higher quality metallurgical coals are still in short supply around the globe, irrespective of where ultimately steel demand for next year comes out to be. Remember that even with an easing of steel prices, the steel manufacturers still have substantial margins in steel. So, we will just have to watch it closely over the course of the next couple of months, leading up to the negotiations in the first quarter. Certainly for the higher quality metallurgical coal products, they are still in very tight supply on a global basis.

Okay, thanks.

Mr. Boyce, I will turn it back to you for any closing comments.

Well, thank you all very much for participating this morning. As you now see, it was an extraordinary quarter for the company in what are extraordinary times. Our forward view in terms of where these markets are going is not one that is walking off the cliff. It is one of easing growth rates but of positive movement going forward. So we look forward to reporting back on our final year in January and updating everyone in terms of our '09 forecast at that point in time. Thank you very much.

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