Peabody Energy Corp (BTU) CEO James Grech on Q2 2022 Results - Earnings Call Transcript

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Peabody Energy Corp (NYSE:BTU) Q2 2022 Earnings Conference Call July 28, 2022 10:00 AM ET

Company Participants

Alice Tharenos - VP, IR & Communications

James Grech - President, CEO & Director

Mark Spurbeck - EVP & CFO

Conference Call Participants

Lucas Pipes - B. Riley Securities

Nathan Martin - The Benchmark Company

David Gagliano - BMO Capital Markets

Operator

Welcome to the Peabody Second Quarter Earnings Call. [Operator Instructions]. And at this time, I would now like to turn the conference over to Alice Tharenos, Vice President of Investor Relations. Please go ahead.

Alice Tharenos

Good morning, and thank you for joining Peabody's earnings call for the second quarter of 2022. With me today are President and CEO, Jim Grech; and CFO, Mark Spurbeck. Within the earnings release, you'll find our statement on forward-looking information as well as a reconciliation of non-GAAP financial measures. We encourage you to consider the risk factors referenced there, along with our public filings with the SEC.

I'll now turn the call over to Jim.

James Grech

Thanks, Alice, and good morning, everyone. In the second quarter, our diversified assets delivered strong results, generating free cash flow of over $340 million and adjusted EBITDA of $578 million, our highest in more than a decade despite ongoing weather and logistical challenges. We continue to expect a strong second half with higher projected volumes compared to the first half of the year in all our segments and markets, although volatile supporting continued high prices. During the quarter, we delivered increased sales volumes in every segment except the PRB, capturing strong market prices, which resulted in higher margins.

With cash generated, we continue to strengthen our balance sheet by advancing our debt reduction strategy with voluntary repurchases, bringing us closer to eliminating all senior secured debt, which will allow us greater financial flexibility in the future. Before I expand on the quarter, I would like to sincerely thank our global employees for their continued focus on working safely and efficiently, which has been truly remarkable given the adverse weather and logistics challenges we have been facing. Without the dedication of our talented workforce, we would not have had the outstanding second quarter results we are reporting today.

Now turning to global coal markets; across the globe, all coal price indices remain at elevated levels, representing a dynamic demand that continues to test the ability of supply in most of our market segments. The outlook for all our operating segments continue to be favorable with the constrained base serving a market that is reallocating the scarce availability of coal. Seaborne coal markets are currently facing disruption resulting from the Russia-Ukraine conflict. Our coal supply in Australia continues to be challenged by weather and staff absenteeism primarily as a result of continued COVID impacts.

And in the U.S., coal exports continue to be challenged by Eastern rail logistics issues. Seaborne thermal prices remain near record levels as around the globe, coal fuel generation is called upon for energy security and reliability. High natural gas prices are providing strong economic incentives for generators to maximize coal generation. Evidence of this is the restart of available coal fuel generation in Europe. The Russia-Ukraine conflict is also impacting markets. The cessation of coal imports from Russia by European countries is creating a need to source from alternative locations, including Australia and the U.S.

Furthermore, reduced Russian gas pipeline closed into Europe and an LNG terminal outage in the U.S. are further challenging international gas supply. Actions to ration gas supply in preparation for the European winter, including the recent 15% reduction of use EU agreement further support coal fuel generation. Compounding these issues, Australian supply continues to be challenged by historically high levels of rainfall with most recent supply interruptions associated with heavy July range and in the U.S. rail performance is limiting export volumes to further constraining near-term supply.

Overall, global thermal coal markets remain robust, with pricing at historical record levels that is incentivizing high energy coal to markets where it provides the most value. Within the seaborne metallurgical market, anticipated steel output for July to September has been trimmed in North Asia and Europe as a result of falling steel prices and high distributor inventories. There are signs of weakening end user demand due to falling economic confidence in the face of increasing inflationary pressures globally.

As steelmakers introduce output production cuts, we have seen a weakening of incremental metallurgical coal demand. Moving forward and offset to some of this impact, our steelmakers in the Atlantic market, switching away from Russian coal imports and seeking supply from other regions such as Australia, U.S. and Canada, particularly for PCI coals. Robust thermal coal prices are above met coal prices which is creating switching opportunities for European buyers who can overcome technical barriers.

And this dynamic can be viewed as a positive for the met coal market balance in the coming months. While energy shortages and inflationary concerns in some markets present a lift to near-term industrial activity, the underlying market fundamentals remain constructive as metallurgical coal supply remains static. In the United States, the coal markets continue to be tight as supply remains constrained. Transportation issues linger in the PRB and demand for coal has increased to meet summer electricity demand.

Overall, the electricity demand increased more than 4% year-over-year, positively impacted by weather and economic activity. Year-to-date, electricity generation from thermal coal has declined year-over-year due to coal conservation by utilities to build coal stocks given concerns with rail performance. U.S. natural gas prices remain elevated at levels not seen since 2008 with weather driving market tightness, and this is occurring even with a higher supply as a result of increased production and an LNG terminal outage keeping more gas in the domestic market.

Across the U.S., we are seeing growing caution regarding the pace of the energy transition, value of dispatchable capacity. Evidence of this are announcements of coal plant retirements being delayed with most utility citing grid reliability concerns or delayed renewable projects. This speaks to continued strong coal demand for U.S. coals. Overall, we anticipate continued near-term market volatility as coal demand fluctuates and supply remains constrained across the globe. Our diversified platform is positioned to participate in each of these markets, optimizing results by managing the needs of our diversified customer base.

Now turning to the second quarter; our second quarter results were strong despite several external factors at our operations that are delaying plans to deliver increased production volumes across our platform. We have included the impact of these factors and other adjustments in our updated second half guidance, which indicates lower results for the third quarter with improvements in the fourth quarter. In our Seaborne Thermal segment, the impact of heavy rain and COVID-related staffing shortages continue to hinder our recovery plans to recapture full year projection, production volumes at Wilpinjong and Wambo. In early July, La Nina record flooding event with more than 7 inches of rain, intensified productivity challenges.

This event resulted in interruptions to our Wambo operations and rail services, further reducing production expectations as the mines recover from flooding. We drew down inventory to deliver second quarter sales in line with guidance. However, we've had to update second half guidance to reflect lower sales volumes, additional royalties and other costs in the third quarter as the mines recover from these events. Our Seaborne Met segment is on track to deliver higher volumes and deliver on guidance as the year progresses.

The CMJV delivered higher volumes and had its first shipments from Moorvale South. At Metropolitan, we completed the longwall move and are positioned for higher volumes in the second half. At Shoal Creek, we transitioned to the J2 longwall panel following production challenges in the J1 panel, and we project the mine to deliver higher volumes in the second half. Outside of our operating segments, our 50% ownership share of Middlemount benefited from strong metallurgical market dynamics, delivering nearly 400,000 attributable tons in the second quarter.

Production here was also impacted by severe rains and COVID absenteeism during the quarter, which is also expected to impact third quarter production. In the PRB, further degradation of rail performance resulted in 2 million tons shipped less denominated by customers in the first quarter and 4 million tons less in the second quarter. This has unfavorably impacted our costs as we continue to remove overburden at a higher production rate, which will benefit those operations in the future. For 2022, although we have 90 million tons under customer commitments, sales volumes will be dependent on rail performance.

Our other U.S. thermal mines continued to deliver strong results with increasing volumes expected in the second half. Demand for our U.S. thermal products remain strong, and we continue to place new business with both existing and new customers. We continue to explore sales strategies that position Peabody to be the long-term producer of choice, providing our customers long-term supply, security and capturing strong prices. In the PRB, for 2023, we have approximately 6 million to 8 million tons priced at $13.28 a ton, with an average BTU of 8,600 and our remaining uncommitted volumes of the higher-quality 8,800 BTU coal while our other U.S. thermal segment has 16.6 million tons priced at $46.80 a ton for 2023 delivery.

In the quarter, we also issued our ESG report, which lays out the steps we have taken to strengthen our commitments and to reposition ourselves to better support the ESG targets of our stakeholders. This includes a commitment to setting targets and developing programs to enhance our position as a champion of ESG practices. Finally, we continue to advance R3 Renewables efforts to pursue the development of utility scale solar and battery storage on six tracks of previous coal mining land in Illinois and Indiana.

We have finalized our management team and commenced site evaluations with our project developer, Treaty Oak. Our vision for the future is simple. We want to continue to strengthen our position as a coal producer of choice. We will do this by maintaining financial strength, reliably delivering a diversity of products to support our customers' needs, practicing operational excellence and champion ESG practices.

This will allow us to be resilient in all cycles and to grow with our stakeholders. We are progressing this vision through multiple strategic initiatives. In our met platform, in addition to completing development of Moorvale South to improve quality and extend life at the CMJV, we continue to assess development of 70 million tons of southern reserves at North Goonyella. And in our Seaborne Thermal platform, we are extending the life of Wambo underground with further longwall development.

In the U.S., we continued to implement sales strategies and plans to capture incremental volumes and to give a flexibility in our mine plans to meet changing customer demand. Some examples of these activities are expansion into new areas at our Wild Boar complex in the Midwest and additional mining units at Francisco and Gateway. And most importantly, we remain focused on the financial strength of the balance sheet with further debt repayments.

I'll now turn things over to Mark to cover the financial details.

Mark Spurbeck

Thanks, Jim, and good morning, everyone. In the second quarter, we recorded net income attributable to common shareholders of $410 million or $2.54 per diluted share and adjusted EBITDA of $578 million, nearly 5x the prior year results. We generated free cash flow of $342 million, ending the quarter with more cash than debt for the first time as a public company. Second quarter revenue was $1.3 billion, an 83% increase from the prior year as our diversified products continue to realize substantially higher prices with premium Australian thermal coal doing particularly well, recently achieving prices more than double premium hard coking coal.

These terrific prices result in higher sales price sensitive costs and together with fuel costs and other inflationary pressures, higher overburden removal in the PRB and the Shoal Creek transition to the J2 longwall panel, costs were higher than the prior year. Turning now to the second quarter segment results; Seaborne Thermal generated $177 million of EBITDA, nearly double first quarter results due to higher realized prices and additional export sales, resulting in 50% EBITDA margins. The segment exported 2.2 million tons, $400,000 higher than the first quarter.

The $143 per ton average realized export price was $24 higher than the first quarter as index-linked prices were partially offset by fixed price sales and hedged tons. Second quarter costs were impacted by higher sales price sensitive costs and fuel prices. Included in the Seaborne Thermal segment is the Wilpinjong Mine, which shipped 3.3 million tons, including 1.5 million export tons. Wilpinjong realized an average sales price of $85 per ton, 70% higher than the prior quarter due to stronger international prices and a higher mix of export tons.

Wilpinjong recorded $170 million of adjusted EBITDA for the quarter and had over $200 million of cash at June 30. The Seaborne Met segment generated $300 million of EBITDA, more than $100 million higher than the first quarter as average realized prices of $331 per ton compared favorably to cost of $145, resulting in 56% EBITDA margins. The segment sold 1.6 million tons, about 33% more than the prior quarter as higher volume from the CMJV offset lower-than-expected production at Shoal Creek. Cost per ton increased as a result of additional sales price-sensitive costs, Shoal Creek transition costs and higher fuel and other commodity prices.

In the U.S., our thermal mines delivered $60 million of EBITDA. The PRB shipped 18.5 million tons, about 2 million tons less than the first quarter as rail service continued to hamper shipments to customers with only 82% of customer nominations met in the quarter. Costs increased compared to the first quarter attributable to additional overburden removal in the absence of available rail as well as higher fuel prices, partially offset by lower contractor costs. The higher overburden removal relative to tons shipped has driven up first half costs and will start to benefit from that as we shift some of the uncovered coal to customers in the second half of this year.

The other U.S. thermal mines shipped 4.4 million tons as the Midwest mines increased sales 400,000 tons compared to the first quarter, and the segment reported higher EBITDA margins of 28%. Costs increased due to higher fuel and other commodity costs, partially offset by onetime first quarter costs. Now a quick look at financing items; at June 30, we had $1.1 billion of cash and cash equivalents, $74 million more than total debt. During the second quarter, we retired another $51 million of secured debt.

Subsequent to June 30, we retired an additional $116 million, including $94 million of Wilpinjong senior notes pursuant to an offer that was upsized from the original $50 million offer, bringing year-to-date debt repayments to $290 million. Immediately upon closing the Wilpinjong senior notes offer, we launched a reciprocal offer to the Wilpinjong term loan holders for an additional $44 million, which we expect to close in a little less than a month.

Now, let's turn to our full year outlook. As Jim mentioned, we have updated second half guidance to account for weather impacts on our Australian mine plans, higher sales price sensitive costs and higher fuel and other commodity prices. In the Seaborne Thermal segment, to account for the lost productivity from severe rains, we lowered full year expectations by 1 million to 1.3 million tons. We increased expected cost by $8 per ton to reflect higher sales price-sensitive costs, fuel prices and lower production.

We expect strong second half results from the segment based on 2.3 million export tons priced on average at $140 and about 2.4 million unpriced tons, including 800,000 tons, which are expected to price at Newcastle benchmark levels and 1.6 million tons expected to price in line with API 5 coal due to current coal quality and market conditions. Seaborne metallurgical volume is expected to be a bit higher than previous guidance, and we narrowed the range by increasing the lower end by 300,000 tons. Higher second half volumes are anticipated due to higher production at the Metropolitan, Moorvale South and Shoal Creek mines.

With essentially all second half tons unpriced, the current product mix is expected to achieve 75% to 80% of the premium hard coking coal benchmark. Cost per ton for the full year have increased $15 primarily as a result of the recently announced highly progressive Queensland royalty regime, which took effect July 1 and higher fuel prices. In the PRB, we have experienced increasingly poor rail service. We shipped 89% of customer nominations in the first quarter, only 82% in the second quarter and July month-to-date is down to 77%.

Based on current rail performance, we've lowered full year sales volumes by 5 million to 8 million tons. PRB costs for the full year have been raised about $1.25 as a result of the lower expected volume, higher fuel costs and general inflationary pressures. Other U.S. thermal volume was raised 500,000 tons to 18.5 million tons or 19.5 million tons, while costs were increased $4 to reflect higher fuel, maintenance and other costs to achieve higher volumes. Essentially, all remaining U.S. thermal tons are priced and committed, but sales continue to be dependent on rail availability.

With these updates, we expect a second half with strong margins and cash flows. Lastly, we will maintain our disciplined approach to capital allocation using free cash flow to continue repaying secured debt and cash collateralized reclamation obligations.

I'd now like to turn the call over for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And we'll take our first question from Lucas Pipes, B. Riley Securities.

Lucas Pipes

I wanted to first ask a bit about North Goonyella and specifically, there was the new royalty regime announced here a month ago or so for Queensland. And if I kind of think back to prior quarters and questions around capital returns, North Goonyella, it sounds like it factored into this. So with the changes on the royalty side, is this organic project may be moving further down the priority list and speedier and greater capital returns are maybe even more attractive than they already were?

James Grech

Yes. So North Goonyella, you talked about the new royalty regime in Queensland. And just a couple of quick comments on that. First, Lucas is the -- our Metropolitan Mine is not affected by that because it's not in Queensland, it affects CMJV and Middlemount and of course, North Goonyella when brought back online. So North Goonyella is still a attractive option for organic growth, probably our best organic growth opportunity that we have in the company. And we're still doing work on the surface and a lot of engineering studies and evaluation with that project, which we have been doing throughout the year. So it's still a very high priority for us in the list of all of our projects that we're looking at as being financially attractive.

Lucas Pipes

I'll switch topics for now. So 2023 is obviously not far away anymore, and this is an understatement. Lots of movement on the pricing internationally but also domestic, you pointed to increase 2023 commitments. But can you give us an update where -- kind of how much and what price your various products are committed and priced for 2023? What's left to sell, and that would really allow us to properly calibrate your earnings power, not just -- obviously, we have the coming quarters here, but into next year, given the very significant pricing.

James Grech

Yes. Lucas, as far as we have sold as I've said in my comments, in the PRB, we've got the 68 million tons sold at $13.28 and that's in the 8,600 Btu. We still have all of our unsold PRB in 2023 is the 8,800 quality coal. And on other thermal coal in the U.S., we've got 16.6 million tons sold at $46.80 a ton. And so we haven't given guidance yet as to our tonnages for next year. So we're not prepared to do that at this time, but that's what we have sold there.

I will say that in the metallurgical markets as far as interest for next year, we are getting interest from our customers for commitments now to sell metallurgical coal next year in greater quantities than we have sold to them this year. So of course, those will probably come at index prices in doing those sales, but it is an interesting dynamic since you're asking about 2023 that in the metallurgical markets, we're getting customer interest to make commitments now for significantly increased tonnage amount of what we sold to them this year.

Lucas Pipes

And I'll ask one final question before turning it over. The international Seaborne Thermal coal markets, extremely robust, rare premium over met coal. Are you selling into that thermal coal market already? And would that also factor into what you just mentioned on 2023 met coal commitments?

James Grech

Lucas, when you talk about selling into those markets, are you talking about metallurgical coal being sold into the market?

Lucas Pipes

Correct, correct, correct. Yes.

James Grech

Okay. I understand your question.

Lucas Pipes

Yes. No, yes, it's about switching met coal volumes into the seaborne thermal coal market.

James Grech

Yes. We've started looking at having that occurring into the third quarter and some of those sales mainly from our Shoal Creek mine so as far as this year. What I referred to for next year was strictly metallurgical coal and interest for metallurgical coal buyers to be locking down tons for next year.

Operator

Next, we'll move on to Nathan Martin, Benchmark Company.

Nathan Martin

I guess I'll start. There was a headline this week. I think that the Japanese annual contract settling around $375 a metric ton. It would be great to get your thoughts around that. And then are you incorporating that value in any of your updated Seaborne Thermal segment price guidance?

James Grech

Obviously, that's not the traditional -- we haven't had a traditional JRP settlement occurring this year. So what we've been doing is bilateral settlement negotiations are what we're undertaking. And so the results of anything that we have settled Nate is in the guidance already. There is a sensitivity to talking about prices on our side since the JRP isn't settled because we do have ongoing negotiations right now in these bilateral agreements. So I guess I'd like to leave it as the prices that we have settled are in the guidance going forward, and we're still in active negotiations on other tons. So I prefer not to comment on prices while we're in active negotiations.

Nathan Martin

Maybe moving on to kind of Lucas' question, again, talk about crossover met into the thermal markets, you're giving kind of the unprecedented premium thermal prices are displaying over met in today's market. What -- said differently, what kind of opportunity do you think there could be there maybe not only for Peabody, but even globally, what kind of barriers to entry do you guys see to making that happen?

James Grech

Well, Nate, I'll come to answer that and please, if I don't answer your question, just follow-up, so I make sure I do. When you say barriers to entry, the number one thing I think you look at is just technical is the quality of the metallurgical coal, the volatile matter, the BTUs, the ash and the sulfur, what type of thermal markets can it go to so not all metallurgical coal move into thermal markets. So I'd say that's the number one thing, if you look at the cost, obviously, but then you [indiscernible] coal actually be consumed in boilers.

And so that's the issue. I think you mentioned something in barriers to entry. And whether it's thermal coal or metallurgical coal, the barriers to entry for incremental production or new production, I should say, is pretty high. And so there isn't any big more metallurgical coal projects coming online. And so as that coal goes into the thermal markets, what the tons that can, it automatically makes the supply side less in the metallurgical markets, which at some time we'd hope would result in a quicker price rebound into those markets. So high barriers to entry for new supply and the switching is very, very much dependent on the quality of the coal.

Mark Spurbeck

Maybe one more thing I'd add. Yeah, just wanted to add, we're talking about switching from that into thermal. And as Jim mentioned, there's a lot of technical barriers for that to happen. So on the margin, there are some tons that can go in there. But I don't want to lost in the discussion. It's a great time for Peabody's diversified portfolio and the 8 million to 9 million tons of Seaborne Thermal that we are selling at these grade prices of north of $400 per ton on a Newcastle level.

Nathan Martin

Yes. Mark, I agree, absolutely. That was kind of the genesis of my initial question around the $375 number that was floated out there this week. Obviously, a record result since that comes to fruition. Jim, yeah, I appreciate those thoughts. I mean, I guess I was also kind of thinking tonnage-wise, maybe what's out there or are we going to see restrictions in the near term, given maybe some tonnage is already contracted on the met side, so it could not participate in the thermal market or things like that.

James Grech

Yes. I'll just speak for our company. With -- if we have commitments under contract, we're going to honor those commitments. So we just can't take all of our metallurgical coal and then switch it over to the thermal market. So really, you're talking about uncommitted tons or incremental tons that we can bring to market. And right now, again, that's mainly our Shoal Creek Mine. We are looking some at our Australian mines and Metropolitan mine as one of them for some other sources of that ton. So I don't have a hard number for you at the moment Nate as to how many tons we're looking at because we're still evaluating that. Again, if we could just flip the coal into thermal market, that would be great, but we got to find specific markets that can handle our coal quality. And so it takes a little bit of time to do that.

Nathan Martin

Totally understand. Very helpful, Jim, and then maybe just one final thing. I think you guys mentioned about 264,000 tons of your hedged thermal coal, $84 sold during the quarter. Looks like you mentioned maybe still around for 3Q anticipated. Can we just get an update on how many tons are left there and when you expect those to roll off? Appreciate it.

James Grech

Yes, Nate. We now have less than 1 million metric tons after the roll-off of those Q2 hedges. They will roll off over the next 12 months, finishing in the first half of next year. I would like to roll off a little bit heavier in the second half of that, so maybe 425,000 tons over the next half or in the second half of '22 and about 500,000 tons to 550,000 tons in the first half of '23.

Nathan Martin

Okay. So 425,000 tons over the second half and 500,000 tons?

James Grech

550,000 in the second -- first half of next year, that's right.

Operator

And next we move on to David Gagliano with BMO Capital Markets.

David Gagliano

Great. I have a series of questions that are related, actually, so most of the questions have already been asked. But just a little more detail on some of the topics that you've covered. First bucket, capital allocation. I was wondering if you could speak a little bit to -- if Peabody has a total debt reduction target specifically, if you could quantify that? That's my first question.

James Grech

Yes, good morning, David. On capital allocation, as we said, everything we do is with a keen eye to increase shareholder value. And we've said for a while now that the repayment of the senior secured debt is the pathway to do, and that's the first step. Since the start of 2021, we've repaid more than $625 million of debt. We expect to continue that course and so we've eliminated the secured debt. We have about $600 million of that remaining. And once that's repaid, we'll then look to address the unfunded $320 million LC facility that matures in 2024. That facility is used right now for noncash collateral for the reclamation liabilities. That needs to be replaced as we continue to fund long-term reclamation liabilities.

David Gagliano

Okay. And then on the North Goonyella restart, I know it's still being evaluated. Is there a range? Historically, there was a range and it was fairly wide. Is there a range that you can give us in terms of potential capital expenditures associated with the options you're looking at in North Goonyella?

James Grech

Yes, Dave, we haven't settled on those numbers yet internally. It's still part of our evaluation. We're looking at the mine plan. So when we're ready to give that to you, Dave, we will, but it would be premature for me to do that at this moment.

David Gagliano

Okay. And then on the shareholder return side, any update on negotiations with surety bond holders regarding restrictions on buybacks and dividends?

James Grech

Yes. Just as a reminder, both our debt documents and the surety agreement prohibit shareholder returns at this point. We need to address the secured debt in the LC facility, which I spoke about earlier. That will position us to have further discussions with the surety providers. And we're looking really to reach a long-term plan to fully fund our final reclamation obligations.

David Gagliano

Okay. Now switching gears over to the market commentary and Peabody's position here. First of all, on the thermal, domestic thermal, thank you very much for the price for 2023. It's helpful for the PRB volumes that are committed and priced. Of that 68 million, I think 7 million were priced in the second quarter. And obviously, those -- the overall price is an average of all the prices that we've seen as the contracts were layered in. My question is what was the price for the 7 million tons of PRB coal that was committed in the second quarter for 2023 delivery?

James Grech

Dave, we'll have to -- I mean, we may have to catch that one up with you later. I don't have that type of number with me, the specific number that you're asking.

David Gagliano

Sure. It doesn't have to be specific. Is it -- I'm trying to get at what the current market is for 2023 contracts relative to that average, that $13.28. Can you give us a framework as to relatively speaking, how high it is relative to that $13.28? I'm guessing it's higher.

James Grech

Yes. Again, I'll use the same comment I used with some of the other calls. We're still in negotiations for other coals that we have there and some of the coal we sold was the 8,800 and the coal we have left to sell is the 8,800. So since we're still in negotiations, Dave, I'm just not going to comment on those prices right now.

David Gagliano

Okay. And then just in terms of the approach to the volumes out of the Powder River Basin for 2023, assuming rails fix themselves, what is a near-term maximum quarterly volume, if everything goes well out of the PRB for Peabody? It's my first part of that question. And secondly, is Peabody evaluating plans to increase volumes in the PRB in 2023? And would Peabody spend capital to expand capacity in the PRB? That's it for me on that piece.

James Grech

Yes, David. Listen, we had to take our guidance on the PRB given the rail service. We were -- our top end of our old guidance was 95 million tons. Certainly, the demand is there. Rail has been the confining factor to-date, assuming that rail is fixed and in regular conversations with rail providers and expect that to be fixed here as we go through the second half of this year and be back to full service levels next year. I would expect that we would be at those levels that we had in our original guidance. Certainly, demand continues to be strong with all the pressures on natural gas prices. Thermal is certainly attractive here. So strong demand, I would say that without giving any guidance for '23 is we're not prepared to do so, I would look at it as consistent with our original guidance for this year.

David Gagliano

Okay. And is there capital expenditures for incremental capacity additions in the PRB under evaluation? Are there capital expenditures under evaluation at this point?

James Grech

Yes. If you look, we did increase those tonnages or planned tonnages this year from the prior year, certainly did that in the Midwest as well. There's certainly always under consideration how we can increase tonnage around the margins. At this point, it's mostly equipment.

David Gagliano

Okay. And then -- sorry, I'm going on, this is my last one. If the world stays where it is, obviously, netback pricing is more attractive in the export market, I think even out of the PRB. I was wondering if you could just frame from a realistic perspective, the order of magnitude of Peabody's U.S. thermal that could shift into the global export markets in 2023.

James Grech

Sorry, Dave, I want to make sure I understood your question was the last part of it was how much of the U.S. met coal could shift into the thermal markets. Was that the question?

David Gagliano

Sorry. No, if I said, met, I apologize. What I was asking was how much realistically would Peabody export out of the U.S. on the thermal side, incremental in 2023 versus current given where netback prices are now?

James Grech

Yes. Well, in the U.S., there's a lot of assumptions there. You mentioned the rail. And our first commitment is to our existing contracts and our long-term customers. And to us at the moment, every ton that you shift to export is one you take away from a domestic customer that you're not shipping to. So we want to make sure that we are loyal and serving the needs of our base customers before we start shipping coal out of the country for commitments that we have already.

The second part of that becomes -- is their port capacity and is the rail capacity available. And right now, there is an incremental rail capacity available and the ports are almost in the same situation. So it's something that we take a look at, Dave, but I -- any substantial tons, I guess, is what you're getting at. I don't see that occurring for us even though we take a look at it, but I don't see that being something that we'd be doing with our PRB for next year.

Operator

Thank you. And there are no further questions. So I would like to turn the conference back over to Mr. Jim Grech for any additional or closing remarks.

James Grech

Yes. Thanks for everybody for joining us today. And again, as I said at the beginning, I'd especially like to thank our employees for remaining focused on safety and continuing to execute on our various initiatives and also thanking our customers, investors, insurance providers and our vendors for your continued support. Operator, that concludes our call.

Operator

Thank you. That does conclude today's teleconference. We do appreciate your participation. You may now disconnect.

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