Jul 23, 2013
Executives
Vic Svec – Senior Vice President, Investor Relations and Corporate Communications Gregory H. Boyce – Chairman and Chief Executive Officer Michael C.
Crews – Executive Vice President and Chief Financial Officer
Analysts
Mitesh Thakkar – Friedman Billings Ramsey & Co. Michael Dudas – Sterne, Agee & Leach Inc.
James Rollyson – Raymond James & Associates Paul Forward – Stifel, Nicolaus & Co. Inc.
Meredith Bandy – BMO Capital Markets Brian Singer – Goldman Sachs John Bridges – JPMorgan Securities Inc. Brandon Blossman – Tudor, Pickering, Holt & Co.
Lucas Pipes – Brean Capital Brett Levy – Jefferies & Company David Lipschitz – CLFA Caleb Dorfman – Simmons & Company International Jeremy Sussman – Clarkson Capital Markets David Gagliano – Barclays Capital Inc.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Peabody Energy Second Quarter 2013 Earnings Call. For the conference, all the participants are in a listen-only mode.
There will be an opportunity for your questions. Instructions will be given at that time.
(Operator Instructions) As a reminder, today’s call is being recorded. And I’ll turn the conference over to Mr.
Vic Svec, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.
Vic Svec
Well, thanks, John and good morning everyone. Thanks very much for taking part in the conference call today for BTU.
And with us are Chairman and Chief Executive Officer, Greg Boyce; as well as Executive Vice President and Chief Financial Officer, Mike Crews. We do have some forward-looking statements and we would invite you to consider these along with the risk factors that we note at the end of our release, as well as the MD&A section of our filed documents.
And we also refer you to peabodyenergy.com for additional information on the Investor Relations page. And with that, I’ll now turn the call over to Mike.
Michael C. Crews
Thanks, Vic and good morning, everyone. Peabody’s second quarter results reflect ongoing cost containment actions that are yielding significant benefits, lower capital spending and additional debt reduction in line with our previous expectations.
We were executing well on these focused areas as we continue to navigate the current coal markets. So let’s review the quarterly results in more detail beginning with the income statement.
Second quarter revenues totaled $1.7 billion on sales of 61 million tons. Adjusted EBITDA totaled $254 million and includes a $21 million charge from an adverse quarter court ruling, dating back to a 2006 issue and a $12 million impact related to a voluntary employee separation program in the U.S.
Adjusted EBITDA from U.S. mining operations was largely in line with last year, as lower revenues were offset by cost reductions.
Year-over-year Australia contributions continued to be affected by sharply lower prices, the affect of which was partially mitigated by lower operating expenses. Moving down to the income statement, you’ll note that we took a $21.5 million impairment charge to write-down a minority equity investment in Asia to its current trading value.
You’ll recall that we exclude impairments from our adjusted EBITDA definition. We also had $7 million of higher interest expense associated with the court judgment, as well as our early debt extinguishment and we recorded a $148 million income tax benefit related to our revised annual earnings outlook.
Diluted per earnings per share totaled $0.39 with adjusted diluted earnings per share of $0.33. Now let’s turn to additional detail within our supplement schedules.
In the U.S., volumes were in line with the prior year with a modest mix shift toward more western tons. Revenues per ton declined 5% from prior year level, reflecting the roll off of legacy contract in line with our expectations.
U.S. unit costs were down 6% on average with improvements in both regions, where we continue to focus on maximizing margin through cost reductions and shipping volumes to the most productive operation.
We continue to target full year cost 2% to 3% lower than the prior year. Turning to Australia, volumes rose 5% over the prior year on increased output from several mines, including the PCI operation.
This was offset by more than $200 million in effects from lower settlements for both seaborne met and thermal pricing. During the quarter, we shipped 4.1 million tons of met coal at an average price of $123 per short ton and we sold 2.6 million tons of seaborne thermal coal at an average price of $77 per short ton.
Our Australia team continues to advance our cost containment initiative, reducing cost by 6% from 2012 levels to $73 per ton. The team also [worker] impacts from geologic issues at two operations during the quarter.
Cost benefited from improved productivity at the remediated PCI mines and the recent owner operator conversions. And for the first time in a number of years, we would note that the Australian dollar is also providing some relief to our cost position.
Based on the progress of first half cost cutting, we are again reducing our Australia cost targets to the mid $70 per ton range for the full-year. Now Trading and Brokerage, half of the quarter’s results were driven by the court judgment I discussed.
The remaining $20 million loss was largely associated with $14 million in unfavorable mark-to-market movements on economic hedges that will reverse at delivery of the related fiscal shipments in the third quarter. Trading results also continue to be affected by lower market volatility and reduced structure transaction.
Resource management turned in a very strong quarter that includes the sale of undeveloped reserves in the Midwest for prices in excess of book value. We will continue to seek opportunities to monetize surplus properties in the portfolio.
So that’s the review of our income statement and key earnings drivers. You’ll note that operating cash flows totaled $60 million during the quarter, which include semiannual interest payments and a payment in Australia to reserve our tax position during an ongoing audit.
During the quarter, we reduced debt by more than $100 million while still retaining $518 million of cash at quarter end. Capital expenditures totaled $93 million, less than half prior year levels.
And we are lowering our capital targets for the full-year by approximately 20% to $350 million to $450 million by continuing to term our sustaining capital needs and reduce project spend. Looking ahead of the third quarter, we’re targeting adjusted EBITDA of $210 million to $270 million and adjusted diluted loss per share of $0.16 to earnings per share of $0.09.
These ranges reflect to expectations for increased U.S. volumes, lower pricing and carryover impacts from geologic challenges as we work to improve production at the North Goonyella and Burton Mines.
I also refer you to our Reg G schedule in the release for additional details regarding DD&A, taxes, and other line items. So that’s a brief review of our second quarter performance and outlook.
For a discussion of the coal markets and other updates, I’ll now turn the call over to Greg.
Gregory H. Boyce
Thanks, Mike and good morning everyone. I’m proud of the work of the Peabody team in removing some $130 million from the cost structure in the first half.
We view these cost reductions as sustainable and believe more improvements are coming. And as Mike noted, in addition to cost controls, we continue to reduce capital and pay down debt.
Now, I’ll first review the markets indicators and outlook and then discuss Peabody’s actions as we continue to take the necessary steps for these market conditions. Now within global markets, both elements of the supply and demand equation have been at play during this period of market softness.
Demand growth has been lower than originally expected, reflecting economic conditions both in Asia and Europe. While at the same time the overhang in seaborne supply represents follow through from projects that were initiated in recent years, when prices were higher and projections of demand greater.
Still, we’ve seen favorable changes to both the supply and demand picture globally, and we do not believe that current prices are sustainable in the long-term. Now within the global coal demand both China and India imports have risen year-to-date and are on a pace to increase 15% this year, to a new record levels.
As the trends to urbanize, industrialize and electrify continue. Japanese coal use is climbing and in Germany coal market share is back over 50% as nuclear use declined and natural gas prices remain high.
We expect seaborne thermal coal demand to increase from 50 million tons in 2013, the fuel existing plants as well as the approximately 75 gigawatts of new generation that started up during the year. Metallurgical coal demand is also increasing with Chinese and Indian met coal imports expected to raise 10% this year.
Now in regards to global coal supplies, output reductions are occurring in the two largest coal producing nations, China and the United States. Industry reports note that some 45% of the Shanxi producers are unprofitable at current prices.
U.S. coal exports declined 30% in June as contracts continue to roll off.
The Indonesian government is again discussing steps to limit coal exports and increase domestic use. Mongolian export to China, remain below prior year levels.
In longer-term the lag effect of reduced project capital may setup our sharp rebound when demand accelerates, that is the historic trend that often follows periods of significant under investment. Now within the U.S.
coal markets, we continue to see improvement in both supply and demand fundamentals as we move through 2013. Natural gas generation is down 15% year-to-date as natural gas prices are up 50% over year ago levels.
Meanwhile, U.S. coal generation is up 11% with industry shipments down 5% this year.
These trends come despite a summer that has started in earnest only in July with cooling degree days down almost 10% versus normal so far this season. What does that mean?
It leaves customer inventories for Powder River Basin coal more than 25% below last year at a bit over 60 days of supply. We think this should move into the 50 days, 50s on days use later this summer.
Longer-term, we continue to see significant growth in Powder River Basin and Illinois Basin coal demand during the next five year period. This occurs as some plants retire primarily in the Eastern U.S.
At the same time, recovery continues from low gas prices, some new coal plants are coming online; basin switching is occurring and most coal plants can run at higher average operating levels. We believe these factors will combine to continue to boost U.S.
coal demand from the Southern Powder River Basin and Illinois Basin the two regions on which Peabody leads in both sales and reserves. Now looking to the second half, we continue to expect U.S.
markets to improve as stockpiles normalize and uncompetitive production is removed from the system. So that’s a summary of market drivers affecting both metallurgical and thermal coal fundamentals.
Now against this market context, we believe that Peabody is well positioned to succeed. At the beginning of the year, we said that we were focused on operational performance, cost improvement, capital savings and debt reduction.
And I’m pleased to say that we’ve had major successes in each of these areas. The team has continued to meet production targets and the results of both our PCI remediation actions and our conversion owner-operator status had been highly successful.
At our PCI operations, we reduced cost by more than 20% after major work to boost productivity, increase overburden removal, widen benches, improvement in equipment availability and implement multiple process enhancements. While we clearly are not pleased with the changes in coal prices since our acquisition, the operations are running very well and the asset base is better than expected.
And our owner-operator conversions are also exceeding our expectations with cost now down more than 20% at the mines we converted. So overall on Australia, our productivity and cost initiatives allowed the team to reduce the contractor and employee workforce are more than 20% since the beginning of the year without affecting our production target ranges.
And I would note that we are targeting improved U.S. costs despite lower volumes this year.
Now the major benefits to our capital program and our owner operator conversions in recent years is a modern equipment fleet and significant base of installed capacity. These allow us to increase our productivity and maintain our production even with lower sustaining capital spending levels going forward.
As a result, our sustaining capital level should be below the low end of our traditional range of $1.20 to $1.75 per ton for the next several years. And as to our level of project or growth capital, we will have market conditions dictate future project development timing and ultimate spending levels.
Finally, we continue to have what I believe to be the best reserve portfolio on project pipeline in the business and our production base is aimed at the best growth markets served from the U.S. and Australia.
Within the seaborne markets, Australia is looking increasingly competitive again, giving its improving cost structure proximity to the best end markets at recent favorable currency movements. Peabody has worked through challenging market cycles before, and we find as such conditions allow us to emerge even stronger during the up cycles.
We appreciate your continued support and with that review of the global markets in Peabody’s positions, operator, we will be happy to take questions at this time.
Operator
Certainly (Operator Instructions) First with the line of Mitesh Thakkar with FBR. Please go ahead.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Good morning everybody and congratulations on the cost improvements.
Gregory H. Boyce
Good morning, Mitesh. Thank you.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Just can you explain us a little bit about the cost to begin with, how much of this is driven by the improvement in all the dollar, my understanding was you have a fair amount of all the dollar hedged?
Gregory H. Boyce
Yes we do as we’ve talked about on previous call, we have a sliding scale in terms of how much we hedge over given one, first, second, third, twelve-months period. So we word about 75% hedged for the rest of this year, but having said that that rate has been about 91.
So for the hedges that we put in place they’ve been very competitive for us relative to where the market had just now come down to those ranges, but on a year-over-year basis the benefit of foreign exchange was little over dollar a ton, in the quarter.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Great, so can we assume that the remaining $4 on a full-year basis is more of productivity gains and just across the board merge tightening. How much of that is manpower related and how much of that is supplies related?
Gregory H. Boyce
Yes, so if you look at that our revised guidance to a mid 70s per ton on cost is obviously referring to them?
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Yeah.
Gregory H. Boyce
Yeah, so when you look at that there is three primary components, there is the productivity improvements in the cost reductions.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Yes.
Gregory H. Boyce
We’re also seen in lower royalties with the lower pricing environment. We will get some benefits from FX which we estimated about a $1 a ton for the full-year on a full year-over-year basis.
And then some of that is partially offset by increasing level of met coal in the mix.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
Great. And just one follow-up, there is a comment in the release which says about 40% of the met coal is going to be priced on a shorter term basis?
Can you explain this how – why is that a departure from your historical normal just layering in contracts on a quarterly basis, and also is it fair to assume that for the back half of the year, it’s only about 20% or so exposed?
Gregory H. Boyce
Well, this is Greg, Mitesh. I think that is higher than historically we’ve been, it’s higher than we normally would like to run.
We had a number of expansion projects if you’ll recall, Millennium, we had the Burton widening project that were in place this year, and so we did not contract up to our normal levels to give ourselves a bit of flexibility. Now, what’s happened is the operations had been performing very well.
So we have a higher than normal level of short-term sales. We’ve got some of that through the back half of the year.
So I don’t think it goes down to a 20% level, but we would expect next year to begin to return to our normal levels.
Mitesh Thakkar – Friedman Billings Ramsey & Co.
That’s great, thank you very much. I appreciate guys.
Operator
Our next question is from Michael Dudas with Sterne, Agee. Please go ahead.
Michael Dudas – Sterne, Agee & Leach Inc.
Good morning, everyone.
Gregory H. Boyce
Good morning, Michael.
Michael Dudas – Sterne, Agee & Leach Inc.
Greg, your prepared remarks about demand increase for global thermal 50 million tons and you talk about the excess of higher cost coal in China. Can you maybe share with us, how long or where the dynamics you may see relative to production cutbacks not only in the global thermal side, but also on the global met side?
And because of the Australian dollar and some of the cost initiatives that you portrait in others in the Australian region, is it going to take longer for some of the higher cost production to come off the market in Australia and key prices kind of bouncing along the bottom here in the next couple of quarters?
Gregory H. Boyce
Well, I think the phase of supply rationalization has been a bit of conundrum here over the last six months. I guess as you know as we look at what’s happening we’re starting to see announcements taking place, people beginning to rationalize their production and I think more and more that is going to accelerate.
We’ve got the thermal coal pricing settlements now for a year. We’ve got met coal both in terms of a quarterly basis as well as what’s happening in terms of the short-term market that are all at levels that I think are going to drive people.
People that were waiting to see where pricing were going to go, now have it in problem or now going to have to make some real decision as to what they’re going to do relative to their operations. One of the benefits of our platform which we’ve always talked about is given the investments that we’ve made in our operations over the last four years and most recently with our owner-operator conversions, we had unique opportunities to move down the cost curve.
And when you can do you that obviously then you’re going to be able to survive in these markets and you move other people over to the upper end of the cost curve on the other side of it that are going to have to make those decisions. We think those decisions are going to increase through the back half of the year and we’ll have see.
Michael Dudas – Sterne, Agee & Leach Inc.
But the dynamics in China, where costs are for the quality of coals, do you anticipate a quicker resolution out of higher cost Chinese production or will there will be kind of for more social other reasons that keep it going in a much greater rate and potentially reduce imports of coking coal to say in the next six to 12 months?
Gregory H. Boyce
No, I think our own view, China has still got a very aggressive policy to try and consolidate, rationalize, close mine that have significant safety issues and a like. So I think what we’re going to see is while there is a fair bit of that production that’s currently out of money, a lot of that’s coming from the operations that the Chinese government has targeted to close and consolidate.
And in effect when you look at some of that production and you determine what’s the cost to get that production to the Southeast part and coastal part of China, you’re still going to have seaborne coal more competitive. And so we expect to see some of that production consolidated and shut-in.
Michael Dudas – Sterne, Agee & Leach Inc.
Thank you, Greg.
Operator
Our next question is from Jim Rollyson with Raymond James. Please go ahead.
James Rollyson – Raymond James & Associates
Good morning, guys.
Gregory H. Boyce
Good morning, Jim.
James Rollyson – Raymond James & Associates
Greg, maybe following up on Michael’s comments or questions, just when you look at the market rate now, all this seems to be taken, take place slower than in terms of responding on production cuts slower than everybody was hoping for maybe that’s because we had a quarter up and then back down. What do you think right now, it’s from your intelligence, how much is the market oversupplied on the met side, roughly?
Gregory H. Boyce
Yeah, I think it’s closer than people think in terms of where the balance is. Having said that, what was really difficult is to figure out where Europe, and U.S.
and South America would go in terms of their met coal demand. China has been growing, but China does have some domestic met coal supply.
When you look at Europe, when you look at South America, and even when you look at the U.S. steel demand, it is down; the only place it’s been up is in China.
So I think that’s impacting a bit. Obviously, we’ve got Queensland, which was not affected by any flooding this year and operations beginning to perform very well, not only ours, but of few others.
Mongolia is down in terms of their production levels, Mozambique is way behind in terms of any projections as to where people thought they were going to be. So I think, yeah, we’re going to need a little bit more rationalization in order to get it to balance, but I think it is closer than we think it is, and closer than it looks right now.
James Rollyson – Raymond James & Associates
Okay, that’s helpful. As a follow-up, you mentioned the – based on this year’s production levels carrying into next year for the U.S.
you’re in the 70% to 80% range for what’s priced. Can you give us just some sense; I know you guys don’t for competitive reasons give us the exact numbers like most of your competitors actually do.
But maybe some sense of what’s priced in for the various regions in relation to maybe what you’ve realized in 2Q, just kind of up, down, similar that kind of things, just we have an idea what tomorrow?
Michael C. Crews
Well, I can tell you this for what we do sell we – I’ve always said, we’ve sell it better than what the daily spot OTC market curves would indicate at the time that we do it. Now we do say in terms of the coal that we’ve sold and the position that we’re trying to get to is, it’s a fine balance between selling at your operations too strong when you think the market is on a increased strengthening pace, versus making sure that you got a level of operating certainty for the subsequent year such that you can cost effectively manage these operations.
And so that’s really why you see us doing what we do during the quarter. Some of our sales were re-openers, some of our price times were re-openers that we priced, but some of it was multiyear sales over the next couple of years.
Just to make sure that we’ve got that operating base within our operations. But we’re not getting the specific about pricing average to say, the marketing team is always told that maybe it’s better than trading.
James Rollyson – Raymond James & Associates
Thanks, Greg.
Operator
Our next question is from Paul Forward with Stifel. Please go ahead.
Paul Forward – Stifel, Nicolaus & Co. Inc.
Good morning.
Gregory H. Boyce
Good morning, Paul.
Paul Forward – Stifel, Nicolaus & Co. Inc.
Wanted to go back to Australian and definitely congratulations on the 20% cuts in the PCI, cost cuts in the PCI mines and really elsewhere in Australia, but I did want to ask about across the Peabody Australia portfolio, when you consider how weak thermal and met coal prices have shown up for the third quarter? Are there mines that are not generating positive cash at the kind of pricing that we see at those third quarter levels and what’s the company’s process for deciding whether to ship coal at really thin margins and non-existent margins or shut-in production?
Gregory H. Boyce
Yeah, Paul, I would say that, we’ve got our operating platform structure such that given normalized operations and I’ll explain that in a minute, our operations are sustainable. Now every months in a while, we’ll have some geologic issues in North Goonyella, Burton, Metrop that are inherited in the business and in those particular quarters, we’ve got challenges at specific operations.
But on balance, our operating assumptions and plans would be that our operations when they’re running normalized or competitive, that is I mean margins are thin and certainly we look forward to today when prices get back to where they need to be. But also as you look at the question was asked earlier about it seems to be taking longer for folks to make decisions around high cost or out of the money production.
I think to a certain degree, we may be all of us underestimated the impact of couple of things, one the exit cost for instance in Australia do have to take into account, take or pay port and rail charges, which are not catastrophic, but they’re not insignificant. If you’re going to close an operation, so that probably had lowered the cost, the price of exit from what we would have thought it would have been if you were just looking at mine site cash cost.
And then in the U.S., I think the switch to shorter-term pricing perhaps gave folks to do that, if they could last another month, if they could last another couple of months, they might see some thing different at the end of the day, on in reality, there is just high cost production that’s got to make decisions based on the markets that we have in front of us. So we’ve come back and we’ve looked at our platform is seen the kind of cost reductions and capital reductions we’ve been able to make.
We believe there is sustainable. We announced overnight some additional reductions in Australia as our productivity numbers continue to improve.
So all of that’s designed to have as many of our Tier 1 assets at the low end of the cost curve as we possibly can and that’s always been the nature of how you succeed in the commodities business.
Paul Forward – Stifel, Nicolaus & Co. Inc.
Great, I appreciate that. Just to follow-up on this, looking across you’ve done lot of work in Australia in particular.
I was just looking across items like the SG&A expense, which I think was $64 million in the quarter and is tracking lower year-on-year, but may be low single-digits and the other operating costs on expenses line which was $57 million in the quarter. Just wondering if you could discuss, have you pulled a lot of levers on the controllable cost in those areas or are there potentially more reductions on the cost side that you could, or you could structure the company for lower-cost going forward in a slack value, if this slack market is going to persist for a while?
Michael C. Crews
Yeah, this is Mike. You know for all the conversations that we’ve had around productivity improvements and cost reductions at the operating level, no one is safe at the corporate level as well as, when Greg gives direction around what we’re trying to do for cost-reduction programs.
We’ve all take it onboard at the corporate level in terms of the discretionary spending and the levers that we can pull. You made a reference to the SG&A, but of that $12 million charge that we talked about for the voluntary separation program in the U.S., $5 million of that ran through the corporate pieces of the SG&A.
So in fact, we would have been even lower. And so I can tell you that it’s something that we continue to look at and it’s through all aspects of the business in terms of cost reduction.
And it’s something where we would expect to trend on the SG&A to continue going forward.
Paul Forward – Stifel, Nicolaus & Co. Inc.
Okay. Thanks.
Operator
Next we go to Meredith Bandy with BMO Capital Markets. Please go ahead.
Meredith Bandy – BMO Capital Markets
Hi good morning. So Greg I was wondering if you could talk a little bit about all the news we’ve read in the press about potential Chinese import restrictions, is that something you think is going to happen and what impact do you think it could happen, could have on the seaborne thermal market?
Gregory H. Boyce
Yeah. I mean, I guess my sense is there wouldn’t be this much discussion if there wasn’t going to be something at the end of the day that comes out of it.
I don’t think it’s going to be anywhere nearer the impact, as people were first thinking when the initial restrictions came out, but I think that Chinese are looking towards methodologies to improve the quality of the coal they import into China. And by that I mean, really reduce that very, very low quality high ash type of coals, they reduce the efficiency in the power plants and the higher ash causes more emissions, and so, I think the primary impact on that will be the lower quality Indonesian coals, they are really the only ones that will be affected.
Now it’s probably going to occur at the same time that Indonesia is out telling everybody that, they are going to be short coals and so for their power plants and their buildings, so that they were going to be restricting exports. So, time will tell us to how well those two balance out, but net-net we think the imports of the better quality coals, particularly out of Australia are going to remain strong into China.
Meredith Bandy – BMO Capital Markets
Okay and then switching gears to met. What is the met mix for the next couple of quarters is the North Goonyella and Burton geologic issues over and what about the stripping and everything at the PCI?
Gregory H. Boyce
Yeah. Centrally, Meredith, we’ve got generally about call it 40% to 45% hard coking coal and then also about 40% to 45% per quarter of the low-vol PCI with the remainder in that semi-hard range.
That probably edges up a bit towards the hard coking coal side in the back half of the year, but that’s a fairly fine kind of metric to try to judge. But generally speaking if you go with that 40% to 45% per quarter on both the low-vol and the hard coking coal side with the remainder in the semis, you’ll be in good ship?
Meredith Bandy – BMO Capital Markets
Okay, so pretty much back to normal, sounds good. Thank you.
Operator
And next we’ll go to Brian Singer with Goldman Sachs. Please go ahead.
Brian Singer – Goldman Sachs
Thank you, good morning.
Gregory H. Boyce
Good morning, Brian.
Brian Singer – Goldman Sachs
Can you discuss your commitment to the 45 million to 53 million ton goal for Australia output in [2015 to 2017] I think you mentioned in your opening comments that market conditions would dictate CapEx and pace of growth I thought maybe you could discuss how things would change in that of your base case outlook for prices or if we stay in this 145 ton to 150 ton met price tag for a longer period of time?
Gregory H. Boyce
Well, obviously those targets were set in a much different market environment, as you look at the amount of project capital that we’ve taken out of our spend, those targets will be revised based on current market conditions and we haven’t reestablished those targets yet. But sufficed to say that those were said in the different market environment
Brian Singer – Goldman Sachs
And I guess that you’re already behind, are you already on track to be below that based on the capital spending retentions that you’re implementing today or would it be more forthcoming reductions in capital spending from here, that would accompany a lower target.
Gregory H. Boyce
Well, we were on a pretty good track with the completion of the expansions in Wilpinjong and Millennium. And of course we are still opening up the [throttle] on all of these owner-operator conversions and seeing what kind of productivity improvements we can drive, I guess I would say as you know as we come out of our budgetary process and our mine planning processes in the third quarter, we will be in a better position to really look in what the next couple of years are going to look like in particular one year to five year view.
Now that we’ve rescheduled the projects that we had, some of those projects were required to get up to that product range, which we have not spent any money in the last year.
Brian Singer – Goldman Sachs
Great, thanks. And my follow-up also focuses on cost reductions.
You mentioned in your comments that there are more cost reductions that are coming here, it looks like second quarter costs were already – in the Australia were already in your mid 70s range? Can you add more color on where the incremental drives of cost reductions are and will that take you below the mid-70s range in Australia or you’re referring to others?
Michael C. Crews
Yeah, I mean the mid-70s, you’re right. When you look at the year-to-date basis it’s at that mid-70s range, we’re saying that that’s going to continue for the rest of the year.
From a cost reduction initiatives standpoint, there is a rather broad ranging program going on from idea generation to personal that are being assigned to that’s really refining it as to what we think we can achieve setting timelines and then executing against those targets. So that’s why you’re seeing benefits in the first half of the year impacting that mid-70s cost range and then there is still a component that we think are going to continue to come through and perhaps accelerate in the back half of the year, which is one component as I mentioned with the other components around some lower sales related costs and lower exchange rates.
Brian Singer – Goldman Sachs
Great, thank you.
Operator
Our next question is from John Bridges with JPMorgan. Please go ahead.
John Bridges – JPMorgan Securities Inc.
Good morning everybody. Good morning, Greg.
Gregory H. Boyce
Good morning, John.
John Bridges – JPMorgan Securities Inc.
Just wanted to dig into the performance in the U.S. the cost-cutting on lower volumes.
How are you doing that? Where is that coming from?
Gregory H. Boyce
Well, again John, it’s our productivity improvements part of a VSP that you saw in the quarter charge was a reduction and a separation program that we ran, which continues to take costs and some of those costs were coming out during the course of the quarter at the operating level. But really it relates to what we’re doing in the context of our mine plants or operating plants.
In the Powder River Basin, we shifted more and more tonnage down to North Antelope Rochelle where we have a higher margin and as we continue to add volumes to the lower cost structure. We continue to look at shifting more tons from truck shovel and our overburden at our surface operations to either drag on and/or dozer operations which are inherently lower cost.
So John, it’s just that day-to-day looking at every dollar that’s spent in the operations. We’ve spent a lot of time at our maintenance programs to where we’re running condition based maintenance programs now rather than time based.
What does that mean, it means you don’t replace an engine or a drive axle or any other components of machinery until you’ve done the analysis on the oil, done the analysis on vibration and on demography to where you’re replacing when you need to not just based on time, and so all of that just continue to take cost out of the operating platform. And then we spent some money in the past on some technology in terms of our equipment monitoring, in terms of our dispatching of trucks and equipment in our surface operation and even underground with the operation of our long-walls and our miners.
So you add all of that up and the team just is now in a mode of everyday looking for ways to improve productivity to reduce cost.
John Bridges – JPMorgan Securities Inc.
Are you going to borrow from the self strip status of the mines anywhere?
Gregory H. Boyce
I’m sorry John, what was the question?
John Bridges – JPMorgan Securities Inc.
Are you able to sort of pull back a bit on stripping at any of the mines, borrow from?
Gregory H. Boyce
Well we’re maintaining the strip ratios that are required for the operations for the long-term. But what we’re watching very closely is to make sure that we don’t get too far ahead of any particular operation, if the average strip ratio say is four to one, we don’t want to run for a quarter, we will run in a five or six to one, we’ll make sure it’s very tight, so all of those things help to minimize the cost, because you are levelizing things.
You should remember at our very large surface operations here in the U.S. and Australia, the best thing that we can do, is to reduce variability in the operations, because that allows us to manage that cost structure and to get the best productivity and all by the way capital efficiency out of our equipment.
So those are the things that the team looks for.
John Bridges – JPMorgan Securities Inc.
Okay.
Michael C. Crews
And I think the other thing that is where we’re making concerted effort not to make short-term decisions on cost that could have long-term implication. So it’s really as Greg noted a day-in, day-out approach to fundamentally taking cost out of the business.
John Bridges – JPMorgan Securities Inc.
Yeah, that’s what I was hoping to hear, well done thanks guys.
Gregory H. Boyce
Thanks.
Operator
Our next question is from Brandon Blossman with Tudor, Pickering, Holt, please go ahead.
Brandon Blossman – Tudor, Pickering, Holt & Co.
Good morning everyone.
Gregory H. Boyce
Good morning.
Brandon Blossman – Tudor, Pickering, Holt & Co.
I think, actually I think you’ve answered most of the questions, but I’m going to take another stab at it. This is on met production product mix and actually total production.
So nice uptick quarter-over-quarter with 4.1 million tons shipped Q2. What was the mixed shift if any between Q1 and Q2 PCI versus low-vol?
Gregory H. Boyce
Yeah in the first quarter, we ran at nearly 50% PCI, little over 40% on hard coking coal. That was not all that difference in Q2.
We were very much inline Q1 and Q2 on mix shift there. And then as you get a little later in the year again, we might have a modest add drop on the hard coking coal side, but it shouldn’t be notable.
Brandon Blossman – Tudor, Pickering, Holt & Co.
Okay. And that’s reflected in the price.
It looks like no real change quarter-over-quarter there. And then the 4.1 million tons, is the current operations is that what it essentially sized for is that a good expectation on a run rate on a go forward basis or it’s a little bit more to come?
Gregory H. Boyce
Well, we mentioned in a couple of things, we mentioned that we did have some geologic issues in the quarter, and that was at our metallurgical coal operations, on the hard coking coal side. So we would certainly hope to recover from that as the third quarter progresses.
Then the other thing I would remind you is, that we’re shifting over to the top coal caving technology in the fourth quarter of the year, and that could bring us some additional volumes as time goes on at the North Goonyella mine.
Brandon Blossman – Tudor, Pickering, Holt & Co.
Are you willing to quantify what the top coal caving might do, which is very close to that?
Gregory H. Boyce
Well, I think at this point we’ll get it in place and running well and be in a better position to give a read on that as times goes by.
Brandon Blossman – Tudor, Pickering, Holt & Co.
Thank you very much, it’s helpful.
Operator
Next we go to Lucas Pipes with Brean Capital. Please go ahead.
Lucas Pipes – Brean Capital
Good. Good morning, gentlemen.
Gregory H. Boyce
Good morning.
Lucas Pipes – Brean Capital
My first question is for Mike. Mike, I’m trying to get my head around to third quarter EBITDA guidance, especially in comparison to second quarter results.
So when I look on the pricing side, of course we had a very short drop in met coal prices quarter-over-quarter at least on the benchmarking? And secondly, given that Australian costs were $73 in Q2 and that your full-year guidance of $75.
I would expect also a little bit of an uptick in costs generally at the second half of the year. So in light of that, why is the midpoint of your third quarter guidance only slightly below your second quarter results?
Michael C. Crews
Yeah, I mean you referenced the lower coal pricing, some of that will be tempered a bit in Australia around some carryover bonds that we will have from 2Q into the third quarter. When you look at mid 70s that’s just – some of that could be a timing between the third quarter and the fourth quarter as to where the ultimate second half cost is going to come out.
But then I think the other wild card here is the fact that we do expect on a seasonal basis some increase in our U.S. volumes.
So that’s going to be an upward benefit to the third quarter.
Lucas Pipes – Brean Capital
And in regard to the trading business, should that also reverse to more historical levels?
Michael C. Crews
Yeah, the trading business we would forecast, that we would have an expectation that would improve in the third quarter relative to the second quarter.
Lucas Pipes – Brean Capital
That’s helpful. Thank you.
And then Greg, more of kind of the big picture question, but it seems to be a tendency right now in the capital markets to essentially obtained a lot of the coal assets around the globe with the same rush in terms of valuation. I was just curious to hear your thoughts in terms of where do you think premium assets continue to be out there and where would you put your money?
Gregory H. Boyce
Well, I think when you look at seaborne market, go to assets have always been Australia and I think what we’re starting to see, I mean people had a view that the cost structure in Australia was going to stay where it was forever, we have to remember then when markets are very, very strong and pricing is very high, people will chase all incremental production and not be so sensitive as to what the cost structure is, number one and number two the Aussie dollar had a huge run. We’re seeing both of that come back, we’re starting to see Australia come back into the competitive range that it always held in terms of a global seaborne market.
So, I think Australia is still a place that you want to have quality assets, and that’s why we’re there. I think in the U.S.
obviously in the Powder River Basin, Southern Powder River Basin and Illinois Basin, we think that those are strong assets and those assets are going to be the ones that are going to continue to grow as the U.S. shifts its coal use, particularly as we go through the next five years of some of the utility changes that we’re already forecasting and have already been announced.
Now you look at, you look at places like Indonesia, lot of volume out of Indonesia, but it’s a huge number of players. Uncertainty as to, what’s going to happen both with their domestic demand, as well as what happens into the China imports.
So, at the end of the day, I still think western U.S., mid and western U.S. and Australia are still the places to be.
Lucas Pipes – Brean Capital
That’s very helpful. I appreciate it.
Thank you.
Operator
Our next question is from Brett Levy with Jefferies. Please go ahead.
Brett Levy – Jefferies & Company
Guys, can you talk about – I mean you did about $2.5 billion of legacy liabilities, as rates go up, is there any chance that sort of the cash funding starts to change for those or maybe you just – the total size of the legacy liability down. I guess the correlated question is, if rates backup are you likely to continue to pursue bond buybacks?
Michael C. Crews
Yeah I mean when you – so you are – I assume you’re referring on the legacy side to more of the retiree healthcare and pension, on the retiree healthcare side even with the fluctuations that we’ve seen in interest rates that have impacted the liability to cash usage has been fairly consistent from period-to-period very manageable. On the pension side there were a couple of years ago we put about $45 million in, I think we’re at $3 million, zero million to $3 million for this year.
And we don’t expect a lot of funding going forward as we’re about 89% funded on the pension plan moving more toward a liability directed investment to match that out another debt cash flow. I guess what I’d say is and back to the prior comment around that what you are doing on the operations, what are you doing on the corporate side, this is another one of those things where we say we’re going to control what we can control, we’ve seen benefit in the increase in the equity markets, we’ve seen some interest rates come down to pull down some of those liabilities and we take those opportunities to structure ourselves to limit the cash outflow on the legacy side.
Brett Levy – Jefferies & Company
And then on the bond buyback question?
Michael C. Crews
Yeah, we’ve said in the excess cash flow we’re going to look at debt reduction as a priority, we have repurchased some bonds from time-to-time depending where the price levels were, but it’s a component of the opportunities for debt reduction as we will continue to evaluate.
Brett Levy – Jefferies & Company
All right. Thanks very much guys.
Michael C. Crews
You’re welcome.
Operator
Our next question is from David Lipschitz with CLFA. Please go ahead.
David Lipschitz – CLFA
Yes, good afternoon, or good morning I guess though.
Michael C. Crews
Good morning, Dave.
David Lipschitz – CLFA
Question, may be I missed it been jumping on the calls. Did you say what you saw in met and thermal for the second quarter, what the realized prices were?
Gregory H. Boyce
We did Dave, we had that in Mike’s prepared remarks. Let me we can really pull that forward, I think it was a $123 on the met side.
So yeah, we had $4.1 million tons of $123 of short ton, the seaborne thermal was $2.6 million tons, its $77 of short ton.
David Lipschitz – CLFA
Okay, thank you. Sorry, I missed that.
My second question is, with all the cost reductions that you guys and your competitors in terms of productivity costs ramping up production in certain places, does that mean that the benchmark price can stay at a lower level for a longer period of time, because if everybody is bringing cost down, if everybody thought it was a $180 to $200, we have talked to people in China that their costs are lot lower to now, that we can have a $150 to $170 type of price and everybody is okay?
Gregory H. Boyce
No, I guess my own view is what we’re seeing is, we’re seeing a steepening in the cost curve. By that I mean there are few of us that had the ability and part of our platform was the way that we had capitalized it over the last five years.
And the projects that we were just completing even in the first half of this year that we’re able to make some long planned significant shifts in our position in the cost curve. But there are still whole parts of the upper end of the cost curve that don’t have that opportunity.
They don’t have the geology. They don’t have the ability to put in the capital investments to modernize.
They’re not putting in new fleets in order to be able to get cost reductions and they’re not able to drive their productivities down or up to the same extent, some of the Tier 1 players are. And so I think what we’re seeing is a steepening of that cost curve and those folks are still going to have to make decisions in low markets, I don’t think it fundamentally drives down the cost curve to the point where we’re going to see long-term sustainably low prices.
I don’t think these prices are sustainable in the long-term. And particularly when you start to look at project capital there is no longer in play right now.
When this thing starts to turn there is just not new capacity coming into this market for three, four, five year period of time, because all these projects have been canceled.
Michael C. Crews
And you will see that even in a place Dave like Shanxi where again reports are that you’ve got close to half of the producers there that are in loss making mode these days, the other elements of this is it really reinforces the go to nature of Australian met coal, because it’s always been closer to the growth – always been closer to the growth end customer and now with some of those cost pressures easing on the $8 and some other elements it just widens that advantage over the more marginal producers.
David Lipschitz – CLFA
And just then, quick following up on that in terms of the growth, where do you see Chinese steel production over the next three to five years, in terms of what are you looking for?
Gregory H. Boyce
Well, we still see China as a major growth component for steel. If you look at and you model GDP, it’s somewhere between 7% on the low side and up in the 7% range over the next five years.
You’re still going to have good growth in the Chinese steel consumption, their urbanization and their infrastructure is going to continue to grow. So we still see that as the number one spot for steel demand, steel production globally.
Operator
Our next question is from Caleb Dorfman with Simmons & Company. Please go ahead.
Caleb Dorfman – Simmons & Company International
Great, thanks for taking my question. I guess I had a two part question.
First, obviously the Australian dollar shift in a lot of investment a nice benefit for you guys, but at the same time the Japanese yen has depreciated a lot? Do you see that over the longer term sort of impacting you and making it, so you won’t actually be able to get a higher benchmark price like you did in the past.
And I guess on the second part that for Michel, how do you I guess hedge against the change in mix relative evaluation of the currency though to your customers?
Michael C. Crews
I mean I’ll take the second part first, I mean we have a very active hedging portfolio, we hedge over an extended period time on the sliding scale with two basic approaches, one is the limited volatility and the second is not for ourselves in an uncompetitive position, it’s something that served us very well and when you look at what our hedge position is for this year, as I mentioned before is when you are in those low 90s, we’ve only seen recent market, $8 market movements come back down in to those low 90s. So that’s the approach that we take, again it helps impact and maximize the possibility that we can get out of the platform.
And its not just one that to foreign exchange, we look at fuel and then other opportunities to control our input cost.
Gregory H. Boyce
Yeah I think on the first part of your question, to the extent that Japanese steel industry becomes more competitive internationally because of what’s happening with the currencies even though they have to pay more in terms of comparative basis for the met coal the fact that they are growing and then they are increasing in terms of their demand, actually overall it’s very good as you remember earlier in the call I was talking about, we like it when countries that have no met coal supplies increase their demand. That’s a good net for the overall seaborne market.
And so I think the positives of a healthier Japanese steel sector, even with the currency change offsets any concern about whether that’s going to limit their ability to pay more money for met coal.
Caleb Dorfman – Simmons & Company International
Great that’s helpful. And then I guess shifting to the U.S.
market, real quickly you obviously brought your U.S. increased current expectation down by essentially 10 million tons.
Is that solely because of the, I guess, milder than expected start to summer, or there other issues that you’re seeing so far?
Gregory H. Boyce
No that was solely a reflection of the mild summer, the lower than average summer burn that we’ve got up to this point in time.
Caleb Dorfman – Simmons & Company International
So when you’re looking into 2014, real quickly how much do you think we could actually gain back of what we have not gained back so far in 2013?
Gregory H. Boyce
Well, what we haven’t gained back a really is the Eastern production in terms of where gas prices are and how competitive say cap coals are, relative to the current gas price. And our focus in terms of Midwest and PRB coals, we’ve gained, our view is we’ve gained everything back essentially than we’ve lost.
So the only thing that’s really remaining would be the Eastern cap production and its competition with natural gas in the South East.
Michael C. Crews
But we continue to point out too, that the existing fleet can run at much higher rates, assuming we have the economic activity and the electricity draw to warrant that which we certainly expect to happen over time.
Operator
Our next question is from Jeremy Sussman with Clarkson. Please go ahead.
Jeremy Sussman – Clarkson Capital Markets
Yeah hi good morning.
Gregory H. Boyce
How are you Jeremy?
Jeremy Sussman – Clarkson Capital Markets
Doing well thank you Greg. The trading loss I guess this quarter was related to the unfavorable mark-to-market hedges which I believe will all reverse next quarter?
Michael C. Crews
It was $14 million of the $20 million.
Jeremy Sussman – Clarkson Capital Markets
Okay great. I appreciate that.
And then just secondly in your prepared – I guess in your press release you mentioned 40% of your met is now sold on a shorter-term basis, should we assume this is mostly, monthly and I guess similar question to your export thermal business, is that all quarterly or monthly how should we think of the mix there?
Gregory H. Boyce
No, I think the mix on the thermal export hasn’t changed from where it’s been in terms of how much we sell under the annual contracts versus quarterly. I think the question on the met coal, we talked a bit earlier about it, because we had our significant number of projects, the Millennium expansion and in particularly the Burton Widening, we did not attract as a higher level as we normally would to be able to absorb the start-up in the variability at the beginning of those project operations.
So the 40% level is not a level that we would use on a go forward basis. We would still prepared to have a higher percentage of framework contracted tons and less on the short-term market.
Operator
And our final question will come from line of David Gagliano with Barclays. Please go ahead.
Mr. Gagliano your line is open.
Possibly you take yourself off mute. And one last call to David Galiano.
David Gagliano – Barclays Capital Inc.
Could you hear me?
Operator
Please go ahead.
David Gagliano – Barclays Capital Inc.
Oh, good. Sorry about that.
I did I apologize. I just had a very quick question.
I’ve notice the ranges between the low and the high in the EBITDAs for the quarterly guidance. It’s gotten fairly wide, over the last three quarters, it has gone pretty wide, clearly this quarter and considering everything is pretty much priced including the benchmarks.
I’m wondering what is the main driver between the variability between the low and the high?
Michael C. Crews
Yeah, I think well, I mean typically what we’ve seen; we always hedge the potential for ships that are going to fall in or out of the quarter end, so that’s an impact there as well. You’re seeing some variability around our trading operations.
I mean I think those are two of the larger components.
Gregory H. Boyce
Well on the natural variability in terms of geologic issues at the operations. You add all of that add up and you can even see it in the current quarter.
There is a fair bit of variability that we have to plan for. So when we put that ranges together, we try and look at the low and the high end and come up with the best estimate that we can.
And I think we do see those variabilities as Mike said a couple of vessels, two or three vessels of met coal, even at lower pricing is a significant dollar value. And long haul or other geologic issues they’re going to have a major impact in terms of the operations EBITDA that’s generated.
I would say we’re comfortable with the range that we use even where we said within the beginning of the quarter.
Michael C. Crews
And if that range is expanded, it’s been right along the lines with what’s happened with the Australian pricing phenomenon, so that widens out that variability and drive that ultimate range.
David Gagliano – Barclays Capital Inc.
Okay. That’s helpful, thank you.
And then just one last quick question, can you give us a little more detail in terms of 2014 incremental tons that were sold forward in the second quarter, how much did you sell forward and at what prices or at least where you can just give us a range or something like that, specially in the Powder River Basin, if you have that?
Gregory H. Boyce
Yeah. We sold some additional tons forward during the quarter in the PRB, but as you know and we’ve reduced our unpriced by about 15% overall in our range.
But as you know Dave, we don’t disclose the prices that those were done at.
Michael C. Crews
Yeah, for 2014 we priced about 18 million tons and then we had another 9 million tons of re-opener.
David Gagliano – Barclays Capital Inc.
Okay, were they sort of in spot market down or above spot market?
Michael C. Crews
Well, I mean the new business that we do as we’ve typically said is as we hope a line in terms of what kind of price we’re going to give relative to OTC and we’ve been favorable first to the OTC market. And then when you look at the re-opener that’s going to be a little different because it varies by contract with industries and debt bans and so it’s not really trying to compare that OTC or currently alone the market pricing is probably not that helpful.
But and the reason we have it re-open or so there is potential for both the buyer and the seller and it limits some of that volatility.
Operator
And Mr. Boyce, I’ll turn it back to you for any closing comments.
Gregory H. Boyce
Well, thank you and thanks to everyone on the call. I think what you’ve heard is a strong message around our commitment to cost reductions, cost control, capital discipline, making sure that we’re responsive to the market in terms of project in growth capital and we’re beginning to see the signs of market rebalancing both in the international and particularly in the U.S.
market. So with that, I want to thank the Peabody team and we look forward to keeping you apprised of progress in the second half of the year.
Thank you.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation.
You may now disconnect.