Peabody Energy Corp (BTU) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Q2 2017 Earnings Call. (Operator Instructions) And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Vic Svec, Senior VP of Global Investors and Corporate Relations. Please go ahead, sir.

Okay. Thank you, and good morning, everyone. We welcome you to the quarterly conference call for BTU. With us today are President and CEO, Glenn Kellow; and Executive Vice President and CFO, Amy Schwetz.

As a supplement to our call today, we have prepared a brief presentation. That's available on our website at peabodyenergy.com. On Slide 2 of this deck, you'll find our forward-looking information. We encourage you to consider the risk factors referenced here, along with our public filings and furnishings with the SEC.

I would also note, we use both GAAP and non-GAAP measures, and we refer you to our reconciliation of those measures in our documents.

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

Thanks, Vic, and good morning, everyone. At Peabody, we've had both a very active and a very productive quarter. Simply put, we believe there is a lot to like about what we'll talk about today. You'll recall in May, we identified a robust agenda of priorities for the second quarter. I'm pleased to report, we have made significant progress on all fronts.

Let me begin at the highest level on Slide 3 with what I consider to be a very solid set of accomplishments. First, we have long talked about the strength of our diversified portfolio. These benefits were fully demonstrated this quarter, with substantial contributions by both our U.S. and our Australian segments.

Our mining results were led by our Australian thermal segment, which rose to be the top performer in total adjusted EBITDA and generated record margins of 44% during the quarter. We have repeatedly said how Australian thermal segment might not get the attention it deserved. And we suspect, with results like this, it will be difficult to ignore.

Next, we pledged to formalize our debt-reduction targets and shareholder return initiatives in the second quarter. We have completed this process and have already made progress on our new targets in recent days by voluntarily paying down $150 million of our term loan. We look to continue this momentum by targeting a total of $500 million in debt reduction over the next 18 months.

Amy will discuss the benefits to shareholders of deleveraging, but we're not stopping there. The Board of Directors has authorized a $500 million share repurchase program effective immediately in recognition of the good long-term value that we believe BTU represents and the tangible benefits of the buyback program to our shareholders.

In regards to our 2017 guidance ranges, we are largely maintaining our very positive 2017 targets outlined last quarter, and Amy will touch on these shortly.

Now last quarter, we also said we would revisit our long-term met portfolio for opportunities, given recent changes in met coal pricing. As part of our strategic review process, we're pleased to report that we're extending the life of our Moorvale mine, which will allow us to deliver an additional 1.5 million tons of metallurgical coal production in 2021. We believe our met coal business is a key part of our diversified portfolio, and we'll continue to evaluate our mine plans to enhance our overall business over time.

I'll leave you with one additional positive note from our team's lively actions in the quarter. The company has now completed our postemergence tax planning, and we can report more than $4 billion in net operating loss carryforwards available in the U.S. These NOLs, combined with our already sizable Australian NOL position, significantly improved our expected cash tax position moving forward as we expect modest annual cash tax outlays related to taxes for quite some time.

That's a quick review of a number of initiatives, the combined effect of which is to make a very good company even stronger for our shareholders.

Now to review our performance in more detail, let me hand the call over to Amy Schwetz.

Thanks, Glenn. So let's turn now to Slide 4, where we've highlighted key performance metrics for the second quarter.

In some ways, it's hard to believe that we only emerged at the beginning of last quarter, and that means Peabody adopted fresh start reporting as of April 1, 2017. Consistent with fresh start rules, Peabody revalued its balance sheet in line with its plan values determined during the Chapter 11 process. As a result, certain financial statement items are not comparable to prior periods. As our operations were largely unaffected by the Chapter 11 process, segment revenues and operating results are generally comparable to prior periods.

From a format perspective, when looking at our financials, operational results for the quarter are recorded on the successor financial statements, with the impact of emergence recorded in the predecessor results, which includes a loss on the reorganization and related tax impacts.

While we're covering procedural items, our preferred shares as well as previously reported common stock, were registered in July. As a result, we now have 101.2 million common shares outstanding and 18.4 million preference shares, which, on an as-converted basis, together with our common share outstanding, total 137.3 million common shares. This excludes approximately 3.5 million shares associated with the management and employee incentive plan, which vests over 3 years.

Turning to the quarterly results. Revenues came in strong at $1.26 billion, reflecting an increase of $218 million over the second quarter of 2016. Income from continuing operations, net of income taxes, totaled $101 million for the quarter and included positive contributions from equity affiliates of $16 million, primarily related to the Middlemount met coal mine joint venture in Queensland. As you may recall, sales volumes and operational results for Middlemount are not included in Australia's operational results but represent more than 2 million tons of additional met coal exposure to Peabody.

Regarding the difference in net income and net loss attributable to common shareholders, approximately 39% of preferred stockholders converted their shares to common during the quarter, accelerating the noncash dividends that otherwise would have been payable over a 3-year period. As a result, preferred dividends during the quarter totaled $115 million. I'll note that until preferred shares are fully converted, you can expect to see some periodic impacts to EPS on any future conversions that are difficult to model.

Moving on. Adjusted EBITDA for the quarter totaled $318 million, reflecting an increase of $245 million over the second quarter of last year. While the company realized $28 million in break fees received from contemplated transactions not completed, these fees are excluded from adjusted EBITDA.

Moving on to Slide 5. Let's look at additional detail at the segment level. On the pie chart to the left, you'll see that Australia surpassed U.S. mining contributions with adjusted EBITDA of $178 million. While the Australian metallurgical coal segment represents the greatest improvement in adjusted EBITDA compared to 2016, I'd like to note that our Australian thermal segment was the largest overall adjusted EBITDA this quarter.

We've sometimes characterized our Australian thermal platform as more of a singles or doubles portion of our business, given the proven track record of making money in all pricing environments. That said, with gross margins of 44% in the second quarter, I think we can consider this segment to be a home run.

Overall, Australian adjusted EBITDA rose $182 million from the prior year on significant improvements in seaborne pricing despite the impacts associated with Cyclone Debbie.

Diving a bit deeper. As expected, Australian sales volumes were down 25% over the prior year, primarily as a result of rail disruptions caused by Cyclone Debbie in late March, impacting adjusted EBITDA by approximately $40 million to $50 million. This was not surprising, given the rails weren't running at all throughout April and only ran limited trains through May.

Realized revenues per ton were 41% and 114% for the thermal and met coal operations, respectively, from the prior year. Australian revenues benefited from stronger seaborne prices and reflect approximately 86% of metallurgical volumes sold under quarterly contracts as the team prioritized delivery on contracted volumes over spot sales. Of the contracted volumes, about 20% were higher-priced carryover tons from the first quarter.

Thermal coal operating costs of $28.67 per ton remain in line with the second quarter of 2016, incurred by our low-cost premier Wilpinjong Mine.

Met coal operating costs increased 34%, primarily due to expected lower sales volumes of 2 million tons for the quarter. Even though met coal sales volumes were impacted by rail issues related to the cyclone, production volumes remained solid at 2.8 million tons, leading to an inventory build. As a result, we saw an improvement in production costs compared to the first quarter. This improvement, together with higher production volume and elevated inventory levels, have paved the way for increased sales and lower cost per ton in the second half of the year.

Operationally, the second quarter marked the best 6 months of production over the past 5 years at the North Goonyella Mine, and the Metropolitan Mine is now through its extended long-haul move that resulted in limited production last quarter.

So let's now turn to the Americas, where the word reliability applies as much to the business unit contributions as it does to the coal it provides for affordable electricity. U.S. adjusted EBITDA increased approximately $14 million from the prior year to $176.2 million. U.S. revenues rose 13%, driven by increased volumes on higher natural gas prices.

Powder River Basin volumes rose 6.1 million tons as we shift to serve contracts largely signed in prior years, along with requirements' agreements and customer optionality, given a sharply higher coal burn. U.S. cost per ton remained relatively stable with the prior period, leading to an average gross margin of 26% for the U.S. operations.

I might pause there for emphasis, that we've noted some -- for some time now that the new Peabody isn't about volumes but about margins and return. Based on early analysis, Peabody's Powder River Basin margins of 23% once again topped the competition, and that's the kind of leadership we look to continue in order to create superior shareholder value.

Turning now to our cash profile on Slide 6. Peabody ended the quarter with a strong cash position of $1.1 billion, reflecting an increase of $28 million from March 31. Operating cash flow totaled $91 million for the quarter related to successor results. While the operations generated strong adjusted EBITDA during the quarter, cash flow was impacted by the working capital build and a heavy dose of Chapter 11 exit costs, both of which were flagged last quarter.

Metallurgical sale volumes were predictively back-end loaded, with 1.3 million tons sold in June, driving accounts receivable higher. Together, inventory and accounts receivable balances increased approximately $150 million. We believe we are well positioned to convert the coal on the ground into realized cash in coming months.

As expected, Peabody paid approximately $180 million in Chapter 11 exit costs, settlements related to the company's emergence during the quarter and financing fees associated with the company's exit financing. In the back half of the year, Peabody expects to use approximately $175 million of cash for the remainder of these payments.

Partially offsetting this, I'm pleased to note that we have made progress on freeing up cash collateral with $113 million of cash returned during the quarter, which contributed to an increase to operating cash flow and brings the total restricted cash balance down 17% to approximately $562 million as of June 30. Peabody continues to focus on reducing cash collateral in support of its reclamation obligations, and we've begun work with brokers to identify surety solutions in Australia.

Turning to Slide 7. Last quarter, we told you we would be outlining our financial priorities, and I'm pleased to walk you through the components of this approach. These priorities are focused on liquidity, deleveraging and shareholder returns, and they take into account broad discussions with investors, bondholders and advisers over a number of months.

First, we are targeting a liquidity level of approximately $800 million, which takes into consideration the variability of coal pricing and cash flows and our ability to sustain cyclical downdrafts. While our U.S. portfolio has revenue visibility that extends up to several years and can accommodate reasonable debt levels, our Australian platform has a higher inherent volatility of earnings. Australia represents very good returns over time but can reduce our preferred level of debt relative to those cash flows.

Each of these factors has led us to conclude that $800 million is currently an appropriate liquidity level for the business. We also recognize the fact that cash is currently our primary source of liquidity. We intend to pursue the addition of a revolving credit facility to reduce cash requirements, but we realize this may take some time to come together.

Secondly, we have outlined debt targets that reflect our overall commitment to ensuring a more sustainable capital structure across all cycles. For a company of our size and scale, we believe that some debt on our balance sheet makes sense, and we will continue to utilize the cheapest form of capital available to us within our financial guidelines. As a result, we have evolved towards an aggregate debt target. Based on our expected cash generation, we are now targeting gross debt of $1.2 billion to $1.4 billion.

And that leads us to our debt-reduction targets. By year-end 2017, we are targeting $300 million in deleveraging. And within 18 months, we plan to reduce our debt levels by a total of $500 million. As Glenn noted, we have already made progress towards our deleveraging goals by voluntarily repaying $150 million of our term loan in July.

At these levels, we view deleveraging as a benefit to shareholders and an essential part of our approach to accomplish several goals. First, deleveraging moderates our risk profile. It also lowers our interest expense and transfers enterprise value from debt to equity. In addition, and importantly, an improved balance sheet provides the potential to free up restricted cash that is currently used for collateral.

The final piece of our financial approach is our return of capital to shareholders. Our Board of Directors has authorized a $500 million share repurchase program, effective immediately, as we believe share repurchases provide a good long-term value for our shareholders. And while we currently have some restrictions in the amount of cash available for shareholder returns imposed by certain debt and equity instruments, there are means in which we can return cash to shareholders as early as this year, and we intend to do just that. We will continue to assess additional ways to increase our flexibility for shareholder returns.

We acknowledge that in certain scenarios, we may have more capital to deploy, which could be the basis for a regular dividend as another avenue to provide tangible returns to shareholders and as a means to broaden our shareholder base. Our Board of Directors will regularly evaluate a sustainable dividend program, which we are targeting to begin in the first quarter of 2018.

Before turning the call back to Glenn, I'd like to highlight a few items with regard to our 2017 guidance. By and large, we have reiterated our 2017 targets in all material respects. We tightened up our U.S. sales volume range and would expect to be at the upper end of our PRB volume guidance. While we are maintaining our Australia export volumes for both met and thermal, we would expect to be at the lower end of our range for met volumes if there is any further slippage in rail performance.

We are also now expecting slightly lower Australian domestic thermal coal sales. Many of you will recall that domestic thermal volumes in Australia are lower margin, so the decline may free up volume for export. We have reduced both our U.S. cost per ton and revenue per ton guidance ranges, driven by a mix of higher PRB volumes.

I'd like to note -- I'd like to point out that while we have reiterated our Australia cost per ton guidance, we would expect to be at the higher end of that range on met costs. We anticipate higher met coal sales volumes in the second half of 2017, which will drive lower cost per ton across the platform.

I'll also highlight that this quarter, we have included our full year 2017 seaborne thermal price position with approximately 10 million tons sold at an average price of $67.20, leaving an incremental 3 million to 4 million tons to be priced in a currently favorable environment. We are also lowering our quarterly interest expense range to $39 million to $41 million based on our voluntary term loan payment made in July.

One other item I'd like to note is that we now expect 2018 U.S. sales volumes to be in line with 2017 in light of current industry conditions and natural gas prices.

Glenn will now cover current industry fundamentals and our near-term priorities, beginning on Slide 8.

Thanks, Amy. Turning to industry highlights now, starting with the U.S. We continued to see the strong interplay between coal and natural gas through June, with coal generation increasing some 6% over the prior year as natural gas declined 14% due to higher pricing levels. Coal has now overtaken gas, regaining its place as the #1 fuel source for the U.S. electricity generation.

The Powder River Basin strongly competes in a $3.00 gas environment and was the greatest beneficiary during this period, with demand increasing nearly 25 million tons through the first 6 months of the year compared to the prior year. While we typically do not see stockpile draws during the shoulder season, PRB utility inventories declined 12 days from 2016 levels to approximately 57 days of maximum burn during the quarter. While we project approximately 15 million tons of reduced demand due to coal plant retirements during 2017, you can see that this has been more than offset by high capacity utilization at the remaining coal fuel-generating plants.

For full year 2017, we continue to expect U.S. coal demand for electricity generation to rise some 30 million to 40 million tons compared to 2016 levels. In regard to policy, we continue to see positive actions from the new administration and Congress in support of coal mining and coal fuel generation, including the steps that could prevent premature retirements of the baseload generating fleet.

In the case of the Navajo Generating Station in Arizona, the lease has been amended to ensure the plant will run through 2019. We're encouraged by efforts to keep the plant online and continue working with stakeholders towards a transition to allow for operations well beyond this time frame.

On Slide 9, within the global front, we continue to see strong seaborne metallurgical and thermal coal demand in the second quarter, largely driven by China. Overall, China has exceeded our expectations for the year in terms of economic growth, steel consumption and electricity generation thus far, the latter 2 reaching record levels. As a result, through June, seaborne metallurgical coal and thermal coal imports were up 33% and 20%, respectively, over the prior year.

Recently, we have seen the Chinese government announce import restrictions and tightening of customs clearance into second-tier ports, which has primarily impacted lower-quality Indonesian coals. This follows other actions intended to boost the Chinese domestic coal industry and support pricing, including initiatives to improve mine safety, rationalize excess capacity and target pricing bans for both metallurgical and thermal coal.

In terms of pricing, we saw volatile moves in seaborne metallurgical coal during the second quarter incited by Cyclone Debbie. Prices ranged from a high of more than $300 per ton to a low of approximately $139 per ton before recovering to an approximately $175 per ton level in recent weeks.

In addition, we saw a shift from traditional settlement negotiations for benchmark hard coking coal pricing to an index-based system, which was established on a 3-month average of $194 per ton. At this point, we're expecting this pricing mechanism to be in place going forward, at least in the short term. In the segment of the business that is very close to supply and demand balance, we believe this potentially brings greater volatility to both long and short-term pricing. However, PCI remains on the benchmark system. And during the second quarter, Peabody set the low-vol PCI benchmark at $135 per ton. And just recently, the third quarter benchmark price was established at $115 per ton, well above 2016 pricing levels. In seaborne thermal coal, the annual settlement beginning on the Japanese fiscal year was set at $85 per ton, a 37% improvement from the prior year's settlement.

I'll conclude today with our near-term focus areas on Slide 10. We expect to increase both Australian thermal and metallurgical coal shipments relative to the second quarter. While second quarter thermal volumes were not impacted by Cyclone Debbie, wet weather did result in lower shipments and logistics issues for a major domestic customer, which, for the exports, we expect to recover in the third quarter.

As we have continued to see rail performance improve following Cyclone Debbie, we expect metallurgical coal volumes to rebound in the third quarter and in turn, result in lower cost per ton for the segment, as Amy outlined, putting us within our guidance ranges, which we are focused on delivering. And as is to be expected, we will continue to evaluate and execute on our deleveraging shareholder return initiatives by generating cash, reducing debt, investing wisely and returning that cash to shareholders.

So that concludes our formal remarks regarding a very active and productive quarter. At this time, we'd be happy to take your questions.

(Operator Instructions) We will go to Mark Levin with Seaport Global.

A couple of quick questions. One, as it pertains to the buyback, I know there are some restrictions. My understanding is that you could buy back as much as $50 million of stock in 2017. And then in 2018, the builder basket starts to take effect, where you might be able to buy back more and certainly pay dividends. But my question is this, is there the ability with which -- or are you in the process of trying to secure an amendment, whereby some of these restrictions could be removed and free you up to buy back stock without some of these restrictions?

Yes, Mark. This is Amy. And I think that our plan is to start immediately within the confines of our credit agreement in delivering on the capital allocation program that we've outlined. That being said, we're not going to let our debt documents restrict us in terms of what we can do. So as we move forward, we will look at what the opportunities are to either amend or refinance if we feel that they're restricting our progress.

Got it. That makes sense. And then I think you referenced -- I want to make sure that I understood it correctly when you were talking about production in 2018 with regard to U.S. domestic utility production. I feel like I heard you guys mentioning that at this point, that production -- you wouldn't anticipate increase in U.S. on utility production in 2018. Did I hear that right or not hear that right?

You did hear that right. So at this point, we're indicating that we expect similar sales levels in 2018 versus 2017.

Got it. That's great. And then with regard to sort of the 8,400-8,800 split, you guys produce a lot more of the higher-quality, lower-cost North Antelope Rochelle product, but you do have a little bit of 8,400 coal. Can talk about like the price differentials that do exist there and how that might impact how you see the 8,400 market going forward?

I don't really want to talk about necessarily pricing differentials. But I will talk about our overall strategy in the PRB, which I think is a little bit different. As you know, we have 3 mines in the region, and we do really look at that region as a complex as a whole. So I know that some folks talk about -- with their activities, they talk about particular products at particular mines. We have certain flexibility across that complex with respect to a range of products. And we actually move people, equipment and sometimes even contracts to suit the particular blend and meet the customer requirements to achieve the best margin outcomes, as Amy had described, overall. So I don't really want to get into the 8,400 versus 8,800. I think our flexibility and optionality, I mean, we have over 12 active pits in the PRB, really does enable us to deliver and focus on meeting customer requirements, customer quality specifications, but at the same time, ensure that we are focused on delivering on margins through that strategy.

That makes perfect sense. And then one last question for me. When we think about modeling met coal realizations in Q3, I know there's been a lot of change in the market in terms of how met coal is being priced -- some quarterly, some not, some indexed, some not, how would you advise us to think about modeling Q3 met coal? Is it looking at the Platts benchmark or the premium low-vol and the low-vol PCI and taking an average and some discount? How would you approach that going forward?

So if you look at our -- I think Platts is one of the 3 resources that is being used to establish that indexed average. And that indexed average applies to the hard coking coal products that are out there. It does not -- it does not correspond to PCI. So PCI is still on a benchmark system, and that standard pricing still is relevant to that. So overall, we view ourselves as about 50-50 contract and spot. And I would note that we've got probably 0.5 million tons of carryover from Q2 to Q3 on the pricing, although I'll tell you, in this quarter, it's not nearly as large a delta as what we saw between Q1 and Q2.

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

So you decided to go ahead with the Moorvale extension. And I guess, obviously, it doesn't affect this year, but your guidance this year is for 11 million to 12 million tons of met coal production. And I know you had previously planned on sort of having met coal fall into the upper single-digit range a few years out. So if we think about kind of the actions you've taken, can we safely assume sort of Peabody in that double-digit annual production range, at least for the foreseeable future on coking coal?

I think what we talked to you about, and I know this goes back over a year now when we were updating on the business planning process as part of the restructuring is that we did look at the Moorvale mine life finalizing over the end of that 5-year plan period. What we've been able to do as part of our annual mine planning process is take another look at -- taking at least one further cut based on our cost performance and our productivity performance. I think as we've talked about, we try and run that as a complex now with Coppabella. And I think that and a number of other initiatives have enabled us to be able to take that extra cut. That's going to give us probably up to 2 additional years of production out of Moorvale versus what we were previously contemplating. But I wouldn't want to commit or give further guidance above that at this point. Obviously, it's a regular process for us. It's an annual process in terms of our mine planning, but rest assured, the team will be ensuring that we try and do everything we can around that mine planning process.

No, that's super helpful. And then maybe just on another note, obviously a lot of moving parts from a cash standpoint this quarter. So maybe just try and get a sense of normalized cash generation. So if you kind of back out unusual items like inventory builds, exit financing fees, et cetera, can you kind of give us a normalized free cash flow bridge this quarter?

Yes. I think you've pointed out some of the big moving parts in terms of both the exit costs, which we certainly saw loaded towards this quarter, and we'll see the remainder of those costs come out on a little bit more of a ratable note. We certainly work to manage our working capital quite efficiently. So the type of working capital build that we saw in this quarter is a bit of an aberration and is one that we are very focused on converting those assets into cash in the upcoming months. A couple of other items that I'll just note that need to be factored into the third quarter in particular is we do make our interest payments in the third quarter of the year. So that will impact our third quarter cash flows. But overall, I think you've picked up on 2 of the key components that we've talked about. We're going to continue to report regularly with respect to our progress in terms of freeing up cash collateral. But this certainly was a big quarter in that respect as that restricted cash that we had in short-term assets on the balance sheet in March 31 has largely now converted to cash available for our use. So I would suspect that as we look at tackling that $560 million of cash that we have restricted on the balance sheet, that we've now drawn out on the balance sheet itself, that the return of that cash will be a little bit lumpier, to use a technical term, than what we might have seen this quarter with the return of that shorter-term cash collateral.

Just last but not least, with that $560 million or so of restricted cash that you still have after freeing up the $113 million or so, can you give us a rough time line of maybe the pace that you'd look to free it up? I know the answer is sooner rather than later, but just trying to get a general sense.

Well, I think the actions -- you're right about the actions occurring sooner rather than later. I'm hesitant to put an exact time line. But let me tell you a little bit what we're doing. First and foremost, we're working with sureties as it relates to our Australian platform to try and provide an alternative form of financial assurance for the cash study with the state governments. I do view that as somewhat of an interim step as we move forward. Secondly, we continue to highlight our improved financial position to the sureties that we work with in the U.S. to try and continually chip away at that collateral that's being provided in support of those -- of that bonding solution. And then last, we are looking and starting to have discussions with financial institutions around what needs to happen for a financial revolver to put in place. That has colored the way we think about our financial allocation as well in terms of trying to create a capital structure that will give us access to a different form or different area of the capital markets going forward. And that is something that we'll be working to execute over the course of the next 12 months.

And next, we will go to Lucas Pipes with FBR.

I have a quick follow-up question, Amy, on the restricted cash, specifically the $113 million that you were able to unrestrict during the second quarter. What exactly -- where was that? Was that in the U.S. or Australia? I think you may have mentioned it, but I wanted to double check.

Your answer is actually both. So we had a customer deposit in place in Australia that was returned shortly after emergence. And then we also had some cash deployed in support of our AR securitization facility as we emerged. So when we reconverted to a larger, different AR securitization facility, we were able to relieve about $70 million of collateral that was supporting that facility.

That's helpful. And then I noticed that the restricted cash bucket, so to say, and its total amount, high $500 million range, didn't change all that much. So can you walk me through what happened there during the quarter?

I think you're right in saying not a whole lot during the quarter. That is those long term -- a long-term collateral base that's in place, primarily for our sureties that support both workers' compensation and reclamation bonding in the U.S. as well as the government collateral that we have in place in Australia. So the movement that you would have seen in those buckets would be the result of any sort of minor modifications that we would have in collateral levels or change in insurers over that period of time. It is in long term because we expect it to be a bit more stable in terms of fluctuation back and forth, but that obviously doesn't change the, I guess I would say, the -- how hard that we're working to try and get that back. But we're going to need more of a long-term solution to get that back, as I outlined previously.

That's helpful. And then lastly, you're really great with giving color on these accounting items. And I wanted to touch base on the $67 million of coal inventory revaluation. Could you give me a flavor of how exactly that worked through -- that flowed through the income statement during the second quarter and what the impact was, if any, to the costs that you reported with the various segments?

Sure. No impact to the costs that we reported in the various segments. Fresh-start accounting is almost as if you're performing purchase accounting, which we all might be a little bit more familiar with than -- but you're performing purchase accounting on the entire balance sheet. So as we look at the inventory balances that were in place at March 31, those needed to be revalued to fair value. So essentially, there was -- if we had not made the adjustment that we made to EBITDA, we would have had 0 margins on those tons. So from a non-GAAP perspective, we did add back that component of fresh start to provide comparability between the periods. Now I will say, partially offsetting that inventory adjustment, which will be onetime only to our reconciliation, at least from the scale of which it was, is a deduct from EBITDA that will be with us for some time as well, which is the take-or-pay obligations that we have out of Australia that were established as a liability in purchase accounting. And that was about $10 million this quarter. We intend to exclude that from EBITDA going forward as we're still making cash payments on that. So those who use EBITDA as an indication of cash flow would want that excluded.

Got it. And -- but just on the inventory side, was that a write-down of inventory? Or did I misunderstand that?

It would have been a write-up of the inventory to fair value.

And next, we will go to John Bridges with JP Morgan.

I was just wondering, with the changes to the plan for the met coal, is that going to have an impact on CapEx at Moorvale? And possibly, what's the plan at Metropolitan as well?

No, the changes that we've indicated are just the extension of the mine through taking another operational cut in the mine plan, so using existing capital. So no, I wouldn't expect any significant changes. I think that we talked about the Metropolitan impact perhaps last quarter, and we saw that as being within the guidance range, in the range of perhaps $5 million to $10 million. But certainly, we'd be able to accommodate within the guidance targets that we've outlined.

Yes. I know when you've spoken before, there was a chance to sort of do some serious reinvestment in that place to get the costs down. I just wondered if the board had thought of that?

That's not included within our current mine plan. Obviously, the team -- as one of the options we'd consider, is whether or not we could essentially debottleneck through accessing the mine in alternative ways. That's not within the current mine plan nor within the capital requirements as a result.

Okay, great. And then, Amy, maybe you've given great clarity on these getting out to Chapter 11 payments, $175 million for the rest of the year. How's that split between the quarters? How can we -- how should we model that?

So most of that will be coming through in 3Q, so I'd see it as sort -- somewhat of a stair-step as we go throughout the year, with roughly 70% to 80% of the remainder occurring in the third quarter.

And next, we will go to Paul Forward with Stifel.

I wanted to go back on the question on met coal volumes. You had shipped 4.2 million in the first half of the year. And I think, Amy, you had said, I think about the low end of guidance for the full year out of Australia, that would imply second half volumes of around 6.8 million tons. I just wanted to ask, is that approximately -- like are you shipping at that rate right now? And -- or does the guidance imply some improvement from where we are now over the next few months to be able to reach that low end of guidance for the year on volumes?

We actually shipped a little bit above that level in the month of June. So as that rail performance picked up, we had the coal on the ground. We were able to load those trains quickly and see a great month in June. We don't have to duplicate that every month, but we need the rails to continue to perform sort of at capacity for that to happen. And one of the things that we've seen with respect to the repairs is that they can perform at capacity as they did in June, but there's just not a whole lot of flex that we might expect to see. So we think that we're ready to deliver. We've got coal on the ground. And we're going to try every day to load trains out of those mines in Queensland. I would also point out that we had very low shipments out of Metropolitan in the first half of the year. So we expect that to be additive and not dependent on the Goonyella coal chain going forward. So it's those drivers that are leading us to expect to see these higher volumes in the back half of the year. But we did felt -- feel it was appropriate to add that cautionary response with respect to infrastructure performance.

Okay, great. And just as a follow-up on that. There was a line in the -- as you're talking about Moorvale in the press release, and that's good to see that you're planning to extend that, the life of that mine, there's a line about -- that you're continuing to evaluate opportunities that could lead to stable metallurgical coal volumes over time. Just there's a big difference between like first half 2017 rate and second half 2017 rate. When you think about the potential to go to stable metallurgical coal volumes, would that be relative to the approximately 11 million to 12 million tons that you're planning for this year? Or would that be more stable on the second half run rate, which would be 13-plus million?

Well, the second half run rate, as Amy indicated, does have some buildup from production in the second quarter, which, due to Cyclone Debbie, didn't rail through. So I think it would be stable from the annual guidance ranges but also adjusting for the fact that we had talked about Millennium reaching the end of its mine life. I've spoken about Moorvale. And those -- it's also important noting that those rates, that those numbers don't include the 2 million tons of economic exposure that we have through our Middlemount joint venture as well, just for further clarification. So as we look at the year, and as we look at what a normal year would have been, it would have been -- it would be Metropolitan up and running, which you'll see through the third quarter and those stable shipments occurring, which we also expect in the third and fourth quarters but without the benefit of the additional volumes and catch-up from Q2.

We strive to have a little bit more balanced usage of working capital than what we saw in the second quarter.

And next, we will go to Brett Levy with Loop Capital.

Some bigger picture questions. I mean, in terms of just -- if you're going to keep your cash or you're trying to bet around $1.2 billion to $1.4 billion, it gives you a lot of latitude. Thoughts about locking in longer-term contracts in any of U.S. or Aussie or thermal or met? Or just kind of where you're thinking in terms of like locking in? And then the second question is, you guys could probably buy fairly levered U.S. coal assets, like Westmoreland or Cloud Peak, without actually putting -- if you look at their equity market cap, without actually putting a significant dent in your cash. What are you thinking about in terms of, again, jurisdiction and then thermal versus met in terms of acquisitions, if at all, going forward?

Well, maybe just answering the contract question before, I think it's probably more of a function of the market than necessarily specific actions from ourselves. Although we do look in the U.S. to have extended contract positions, but we have seen some tightening up. I'd say the average contracting that's going on in the U.S. at the moment would probably be in a 3-year duration. And that's probably evolved downward over the last sort of 3 years or 4 years. With respect to the M&A question, I think, as we previously stated, we are focused on a disciplined capital allocation framework, our key priorities, which we've sort of described as simple but powerful word -- cash flow -- from ongoing operations; achieving and maintaining our debt levels; and then, in the short term, repurchasing those shares opportunistically. Like any other capital reinvested back in the business, would be subject to a sharp focus on risk-adjusted returns and foreseeable payback periods. And you specifically asked about acquisitions. We would only -- well, firstly, as we've outlined, we have a strategy of being in what we regard as being the best markets, Powder River Basin, the Illinois Basin and Met -- and thermal production areas in Australia, which is able to access those higher-growth Asia Pacific markets. Any filter with respect to reinvestment would be -- have to be considered in the things that I talked about: balance sheet, high returns and being able to really extract tangible synergies in going forward. So I'd really like to try to outline a very disciplined approach in the way that we would consider any redeployment of capital back into the business. So I'm talking about creating value for shareholders, but they need to be our shareholders, not other people.

And next, we will go to Amer Tiwana with Cowen and Company.

The first question I have is around the thermal coal volumes in Australia. Is any export tonnage committed for '18? And directionally, if you can give us some idea of what demand or your volumes may be in '18.

So with respect to our price position in 2018, we are not significantly repriced as it relates to that business. We have an amount of about 2 million tons that are priced on the JFY, which runs April through March 31 of next year. And that is primarily our price position as it relates to 2018. We talk a lot about our thermal business, about the stability, about the strong margins of that business and frankly, about the reserves that we have associated with that business going forward. So it is an area of the business where we expect to see relatively-stable volumes going forward as we look to kind of maintain what we believe is a premier position within that market.

So we have about 56% of that business that is priced for the second half of 2017. And derivable from the guidance we've given, you can -- that price is a bit above what we have priced the first half business for as well, just as a bit of additional color on that. And obviously, we're in a robust pricing environment currently there.

Got it. The second question I have is around met coal pricing dynamic. There's been a little bit of a supply squeeze, and demand has been perhaps a little bit stronger as well. Going forward, can you talk about the fundamental picture, what you expect over the course of the next 6 months? Is supply going to ramp? And what do you see on the demand side? And how do you see the pricing evolve?

So I think with respect to demand, it has been a little bit stronger, as we've indicated. China has outperformed on a couple of fronts versus what our expectations were. But have in part, as you've indicated also, has been a story about supply. The industry has gone through a relatively-benign period up until the fourth quarter of last year with respect to supply disruptions. But then we've seen a range of factors affecting the supply side response: Geological conditions; industrial action; there's some gas issues going on at a particular major producer; so we had Cyclone Debbie and the weather events occurring in Australia, which we've talked about that have affected us. And I think we probably are seeing industrial action as well, either occurring or being threatened, that has impacted supply factors over the last sort of 6 months to 9 months versus the last year. It's a little bit difficult, given all of those factors I've talked about, to be exactly calling how supply will respond. Although we have seen, as I'm sure you're aware, probably swing producers come into the markets to meet those needs. Although I'd say, in part, steel making -- steel makers were prepared to sit on the sidelines during that volatility and perhaps as we've seen in sort of recent weeks, have returned to the market. So it's a little bit difficult to balance that, but that gives you some of the factors that are in play. I would expect, over time, that supply factors would stabilize and supply would be able to respond back to the market. But the demand factors that we've indicated have been stronger than what we were looking at previously.

And we will go to Michael Dudas with Vertical Research.

The market has been very good especially on met coal supply demand there. Looking internally in your -- looking to expand some of your productivity initiatives in Australia, maybe you can elaborate on what you're thinking and trying to do there net of inflation. And also, in the U.S., how some of the productivity that you've seen, given the start of turnaround in the company over the last 12 months and how that can continue going forward.

Well, I think in Australia and perhaps, really, it's the same in the United States, given that we do try and share operating practices across the operations. And we call it the Peabody way, but we do try and outline best practices, monitor performance on a mine-by-mine level and really drive for those operational improvements. So I wouldn't necessarily say it was a U.S. versus Australia activity. What we've indicated, I think the basic strategy has been in terms of operating costs, you've seen us move from getting control of our operations and activities, so the move from miner operator -- from contract mine to owner-operator has been one trend. The use of probably, particularly in our surface fleet, tools around operator performance, condition-based monitoring, sort of automation of certain processes that have continued to drive productivity. Aggregation of complexes, I gave you quite a detailed outline of the way we think about the Powder River Basin. I also mentioned Moorvale and Coppabella. We'll continue to drive those sorts of opportunities wherever possible. We cut out a significant amount of overhead that I'm sure you're aware of. But we also, I think, there's something in our mining methodologies as well, and I'm particularly proud of the team and the way they undertake surface activities. We also highlighted that North Goonyella has been running at its best performance in 5 years over the last 6 months. So there's a range of initiatives across the platform. Thanks for noticing it and we're going to continue to try and drive that going forward.

And I would say, at the relatively-balanced portfolio that we presented in the second quarter, there's a good dose of healthy competition going on between our 2 platforms right now as it relates to the third quarter. And that can't be done without intense focus on improving productivity and cost performance.

And there are no further questions in queue. Mr. Glenn Kellow, CEO, please go ahead for any closing remarks. Sir?

Well, thanks for that discussion. I actually started my comments by saying there was a lot to like about the actions of a stronger Peabody and believe we have evidenced that here today. We look forward to continuing to deliver value for our shareholders. I would also like to extend my appreciation to all our employees both at the mines and in the office for their continued commitment to ensuring safe and productive environments. I thank all of our current shareholders, potential shareholders, bondholders, lenders and sell-side analysts, for your interest in Peabody. We look forward to speaking with you again soon. Operator, that concludes our call.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.