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Arch Coal, Inc. (NYSE:ACI)

Q1 2014 Results Earnings Conference Call

April 22, 2014 10:00 AM ET

Executives

Jennifer Beatty - VP of Investor Relations

John Eaves - President and CEO

Paul Lang - Executive Vice President and COO

John Drexler - Senior Vice President and CFO

Analysts

Mitesh Thakkar - FBR Capital Markets

Brandon Blossman - Tudor, Pickering, Holt and Company

Lucas Pipes - Brean Capital

Michael Dudas - Sterne, Agee

Neil Mehta - Goldman Sachs

Curt Woodworth - Nomura

Meredith Bandy - BMO Capital Markets

David Gagliano - Barclays

Brian Yu - Citi

John Bridges - JPMorgan

Kuni Chen - UBS

Caleb Dorfman - Simmons & Company

Luke McFarlane - Macquarie

Paul Forward - Stifel

David Lipschitz - CLSA

Brett Levy - Jefferies

Justine Fisher - Goldman Sachs

Dave Katz - JP Morgan

Operator

Good day, everyone. And welcome to today’s Arch Coal Incorporated First Quarter 2014 Earnings Release Conference. Just as a reminder, today’s call is being recorded. At this time I would like to turn the conference over to your host for today, Ms. Jennifer Beatty, Vice President of Investor Relations. Please go ahead Ms. Beatty.

Jennifer Beatty

Good morning from St. Louis. Thanks for joining us today. Before we begin, let me remind you that certain statements made during this call, including statements relating to our expected future business and financial performance may be considered forward-looking statements according to the Private Securities Litigation Reform Act. Forward-looking statements, by their nature, address matters that are to different degrees, uncertain.

These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by law.

I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the Investors section of our website at archcoal.com.

On the call this morning, we have John Eaves, Arch’s President and CEO; Paul Lang, Arch’s Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO.

John, Paul and John will begin the call with some brief formal remarks, and thereafter, we’ll be happy to take your questions. John?

John Eaves

Good morning. Today Arch reported adjusted EBITDA of $28 million for the first quarter of 2014. As expected, our results were impacted by weak global metallurgical markets that had prevailed throughout much of the past year, as well as ongoing rail performance issues in the PRB. Paul will provide more detail on these issues in his prepared remarks.

As I believe nearly all of you would agree, current price levels are unsustainable for much of the 325 million tons of seaborne met production in operation today. Yet despite some of the supply corrections that have taken place, we expect metallurgical markets to remain soft throughout 2014. In order to successfully navigate these markets, we’ve elected to proactively scale back at metallurgical coal volumes to go further this year.

We’re not the only producer electing to cut back production as you know, in fact with the settlement of the second quarter met benchmark announcements of production rationalization and idlings have grown from Australia, Canada and the U.S. We expect more to follow.

Of course the seaborne market also needs to observe incremental production capacity coming on in 2014, which make for full recovery this year, but we’re optimistic that the seeds of the correction are being sown.

Despite a reduction in metallurgical sales volumes for 2014, we continue to make strides in lowering our cost in Appalachia. Given our solid first quarter cost performance in that region, we’re reducing our full year cost per ton outlook for Appalachia. Our ability to further drive down cost is a testament to our continued focus on strong cost control and operational efficiency at our mines.

Of course our long-term positive outlook on metallurgical markets remains intact, despite the softness in the near term. Several trends are driving this optimism. U.S. Steel utilization is trending above the 5 year average and auto sales are projected to reach nearly 16.5 million units in 2014, the highest level since 2006. So, our main market for metallurgical coal demand is healthy. Additionally, Europe has stabilized with crude steel production across the continent up more than 5% through February. China continues to grow at a slower pace, but on a bigger base and stainless spending should have materialized could accelerate this growth.

Moreover, growth in India and other emerging market economies is encouraging, helping to offset slower growth in China. All this suggests that world steel demand should be on track for 3% growth this year and as the world absorbs the current oversupply; we expect that met markets will recover.

One market where recovery is evident is the domestic thermal market. U.S. electric generation hit record levels in January and February, benefiting from a cold winter. In fact we may see power demand increase in 2014 after three years of decline. More importantly, we expect coal consumption for power generation to grow by 25 million tons or so this year compared to 2013 levels.

Supporting this growth are strong weather-related demand, a pick-up in the U.S. economy, higher prices for natural gas and muted contributions from other base load fuels such as nuclear and hydropower. We expect coal stockpiles [that] generators should decline throughout 2014. Based on our internal estimates, U.S. utility coal stockpiles could be below 110 million tons by the end of the summer burn season or nearly 30% below the 10 year average.

On a regional basis, PRB stocks are below normal at around 45 days of burn at the end of March and represent the lowest stockpile levels in the nation on a days-of-burn basis. By contrast, stockpiles in Central App and Western Bit remain higher than the national average, but had moved down appreciably during the winter of 2014.

Based on these observations, we would expect customers to reach into the market to rebuild our stockpiles as the year progresses, despite concerns about the availability of rail service for additional tons. Of course rail performance in the PRB has been problematic for already contracted tonnage and has likely forced even more rapid stockpile liquidation.

If you also consider the potential major rebuild natural gas storage in anticipation of the following winter burn season, it becomes clear that we have some interesting dynamics heading into the peak coal burn season this summer.

In fact our West Elk mine is benefiting from these positive domestic thermal market trends. Last quarter, we told you that we would likely scale back that mine to a 4 million ton a year annual run rate as the export market proved challenging. Despite continued weakness in international thermal prices, the outlook for the domestic thermal market has improved. This pick-up in the domestic demand should help offset weaker prices in the seaborne thermal market.

We are now running West Elk at a 5 million ton plus pace, still below its capacity, but it’s an improvement versus the fourth quarter. This positive development is driving force behind our $2 per ton cost guidance reduction for the region in 2014.

Turning briefly to supply. Our production forecast for Central App region is now below 115 million tons for 2014, a decline of nearly 35 million tons over the past two years. Even with some low cost met coal likely migrating back into the thermal markets, we believe other coal regions namely the PRB and Illinois Basin will be called upon to replace Eastern thermal coal. Interestingly the domestic thermal market, which was meaningfully oversupplied just two years ago has swung back to an undersupply situation.

In summary, Arch continues to execute on its plan. We are managing our cost and our capital, monetizing non-core assets and preserving liquidity. We had strategically positioned the company to withstand the current market condition and to capitalize on recovery in both thermal and met markets.

On that note, I will turn the call over to our COO; Paul Lang for a discussion of Arch’s operating performance in the first quarter and an updated outlook. Paul?

Paul Lang

Thanks John. Starting off with the operational results, I’d like to spend a few minutes discussing both the challenges and opportunities we see in our business going forward. In the Powder River Basin, we continue to sell into an improving market and customers are actively replenishing their depleted stockpiles, at least to the extent that delivery is available. As a result, in the first quarter, we’ve sold some incremental tonnage for 2014 deliveries making us to around 90% committed for the year. We also selectively place tons at attractive prices throughout the year we have about half of our 2015 sales volume priced.

Furthermore, as prices continue to tick-up we should still have more opportunity to capture upside over the course of the year. Prompt year index prices for Powder River Basin coal are up nearly 20% for this time a year ago and are up 30% from the volume that prevailed during 2012.

Our first quarter results reflect an underlying improvement in PRB prices. At the same time, our quarterly realizations were impacted by lower prices for export volumes, which should taper off as we progress through the year. Also offsetting the improvement in pricing to some degree was our elevated cost per ton relative to the first quarter of last year. Our costs were roughly in line with the fourth quarter of 2013 and reflect the ongoing impact of rail performance issues noticed in our last call.

Based on our expectation that shipments will improve in the back half of the year, we’re still forecasting the ability to achieve the cost guidance provided in February. In particular, our Black Thunder operation has been disproportionately affected by rail disruptions as the mines customer base depends heavily on the Burlington Northern Santa Fe railroad.

Looking ahead, we expect train performance to improve in the basin during the back half of the year and we’re prepared to make-up the lost volume. Customers clearly need the coal and we expect our volumes to increase as we catch up on our contracted shipments.

In our Bituminous Thermal segment, we had a solid operating performance at West Elk in the first quarter despite running at below capacity levels. As John mentioned, with improving outlook for the domestic thermal market, we’ve increased our production target in Colorado to match demand and lowered our 2014 cost guidance for the segment by $2 per ton.

On the pricing front, our first quarter realizations in the region were weighed down by lower netbacks on export shipments. However, for the balance of the year, we are forecasting a larger percentage of domestic business relative to exports, which should help improve pricing in the future. Longer term, we expect this region to benefit as international prices move up overtime, given the steady European demand that we see.

In Appalachia, we shipped 1.6 billion tons of metallurgical coal in the first quarter at an average netback of around $84 per ton. Those volumes were modestly lower than expected due to shipping delays for our Canadian customers related to ice on the Great Lakes. In addition, we elected not to force incremental tons into an oversupplied coking coal market.

At the same time, we successfully drove down our first quarter cash cost in Appalachia by nearly $2 per ton when compared to the fourth quarter. This strong performance was primarily driven by the smooth startup at Leer longwall. The mine’s ramp has progressed since planned and I’m pleased with our team’s efforts to manage this successful launch.

Also during the first quarter, Mountain Laurel’s longwall progressed to better geologic conditions in its current panel and we’d expect the mine to transition to a new panel in the third quarter. Combined, these operational improvements have allowed us to reduce our full year cost per ton guidance in Appalachia.

Looking ahead, as we noted in the release, we’ve elected to reduce our metallurgical volume target for 2014. To-date, we have 5 million tons of coking and PCI type coal committed at an average price of $83.50 per ton. We have another 500,000 tons committed, but unpriced.

Based upon the midpoint of our revised guidance range, we have roughly 80% of our targeted metallurgical volume committed. Even with our revised volume range, we’ve maintained a proportion of higher quality coking coal at around 50%.

Lastly, I’d like to briefly highlight Arch’s safety and environmental achievements this past quarter. We’re off to a strong start in delivering on our core values with five operations in our facilities in the last three months operating without a single incident or environmental violation.

Our Coal-Mac operations recently completed 2 million employee hours without a lost time incident at the end of March. And our Leer mine has earned West Virginia’s top honor, the Greenlands Award for its best in class environmental design and construction. I’m proud of our employees’ dedication in maintaining a strong commitment to safety and environmental excellence.

Looking ahead, we’ll continue to manage the things under our control and proactively respond to opportunities as they arrive.

With that, I’ll turn the call over to John Drexler, Arch’s CFO to update us on revised guidance and liquidity position. John?

John Drexler

Thanks Paul and good morning everyone. Arch continues to make strides on executing its plan to mange through the downturn. John and Paul have already discussed our operational achievements and continued progress in reducing cost. I would like to spend some time discussing our management of both liquidity and capital expenditures. First, on liquidity, we ended the quarter with $1.4 billion of liquidity with over $1.1 billion of that in cash for highly liquid investments.

With the successful refinancing actions we completed during 2013, we have no meaningful debt maturities until 2018 and we have no major financial maintenance covenants until June of 2015. At that time, a relaxed senior secured leverage ratio of covenants steps back in on the undrawn $250 million revolver. During the interim, we have only a minimum liquidity covenant of $550 million in place that is tied to in-borrowings under the revolver. We believe our strong liquidity provides the ample flexibility necessary to execute our strategy over the next several years.

Turning now to CapEx, as you know an important component of preserving our liquidity is prudently managing our capital expenditures, and we are doing just that. During the first quarter, our CapEx spending was $14 million. That was the lowest level of quarterly CapEx in more than a decade for our company, but we expect higher levels of CapEx for the remainder of the year. One of the drivers of this anticipated increase in capital spending is the third of five annual LBA payments in the South Hilight reserve in the PRB to be made in the second quarter.

As a result of the LBA payments and our regularly scheduled semiannual interest payments on our unsecured bonds, we expect the second quarter to have the highest cash outflow of the year. That said, in the second half of 2014, we anticipate lower levels of cash flow use.

We will continue to make necessary investments in our business, but we remain as focused as ever on capital discipline. That’s why we are modestly reducing our CapEx guidance for the full year and we will continue to look for ways to prudently manage our liquidity as we progress in 2014.

Turning to our quarterly results, I wanted to briefly touch on a couple of items that had offsetting impacts on our results. Consistent with our strategy to realign our asset portfolio, we divested non-strategic assets in Appalachia during the first quarter including the hazard thermal mining complex in Kentucky and the ADDCAR equipment subsidiary for total consideration of $46 million.

We received $27 million of those proceeds in cash in the first quarter with the remainder to be paid by the end of the year. From a book perspective we recorded net gains on those two asset disposals of $13.8 million reflected in the other operating income line. Largely offsetting those gains we incurred a charge of $12.5 million in the first quarter related to minimum obligations on various port and rail commitments.

Given the prevailing weak prices in the seaborne market for both thermal and metallurgical coal we believe it is appropriate to incur these costs rather than move coal into over supplied markets. Absent improvement in those markets, we would expect to incur comparable charges for the remainder of 2014. However over the long-term we believe that we will create substantial value for shareholders through increased participation in the seaborne coal trend.

Turning now to our current expectations for full year 2014, most of which was outlined in our earnings release issued earlier today. We continue to expect cash cost in the range of $10.70 to $11 per ton in the PRB, this range contemplates gradual improvement in shipment over the course of the year as well as the impact of rail issues.

In Appalachia supported by the smooth ramp up of our Leer operation and improving geology at Mountain Laurel we now expect cash costs of $63 to $66 per ton a reduction of $0.50 per ton from our previous range.

In our Bituminous Thermal segment supported by higher shipments than previously anticipated due to a strengthening of the domestic thermal market we now expect cash cost in the range of $23 to $26 per ton representing a reduction of $2 per ton at the midpoint.

In other financial guidance, we expect our 2014 CapEx range to be between $180 million and $190 million which includes the $60 million LBA payment for the South Hilight reserve as discussed. This range is a modest reduction from our previous expectation. DD&A in the range of $420 million to $450 million. Total interest expense between $382 million and $392 million. We note that our cash interest expense will be between $360 million and $370 million for 2014.

SG&A between $122 million and $128 million representing, a reduction from our previous guidance as we continue to drive down our overhead cost. In addition, we expect to record a tax benefit for the year in the range of 20% to 40%, representing a reduction from last quarter due to an increase in our valuation allowance. The valuation allowance is a non-cash charge that will reduce our expected tax benefit over the course of the year for a portion of our deferred tax assets.

In summary, we’re well positioned to manage through the current market and create substantial value as markets improve. We have strong liquidity fortifying the balance sheet and the right assets in place to capture meaningful upside as markets turn.

With that we’re ready to take questions. Operator, I’ll turn the call back over to you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Up first from FBR Capital Markets we’ll go to Mitesh Thakkar.

Mitesh Thakkar - FBR Capital Markets

Good morning gentlemen.

Paul Lang

Good morning Mitesh.

Mitesh Thakkar - FBR Capital Markets

My first question is just on this PRB logistics issue, what kind of feedback are you getting from utilities on this whole rail issue and when do I think it gets resolved, what kind of gives you comfort that you will be able to catch up the volumes in the second half?

John Eaves

Hey this is John. Paul and I met with the railroads on a number of occasions and anything got behind on their crews, their power, they had a lot of congestion in the middle part of the country particularly in Chicago and then the weather hit, it’s really put them behind and we expect it certainly better performance first quarter than we saw. I would tell you that we should see progressively better performance as we move through the year, but it’s going to be back end loaded.

So probably see some in the second quarter, but really third and fourth quarters when we see the performance picking up. And I think, if you read what some of the utilities are saying in the press, I mean they have complaint pretty loudly and I think some of the customers they have got themselves in a pretty bad fight in terms of their inventories down in some cases to probably single-digits in terms of days burn.

So we do expect it to improve, it’s something that it’s not going to happen overnight, it’s had a tremendous impact on Arch Coal, if you look back over the last two quarters, we’ve been impacted between 4 million and 5 million tons between the fourth quarter and first quarter. So certainly been impactful we're looking forward to better performance and would expect to see that particularly in the back half of the year.

Paul, you got anything to add to that?

Paul Lang

Yes, Mitesh I think if you give a little more color on the subject, if you look at Q1, BN ran about 76% of their scheduled shipments and UP ran about 89% of our shipments. If you look at that volume, it was pretty intactful in Q1 and the reason why our (inaudible) try hit us worse than others is for the quarter we were 65% BN served customers and 35% UP.

Going forward, the reason why I think we should not have any issue of making it up is if you look at the mine, the capacity of the load outs and the infrastructure, we've run much higher volumes in this. So, I don't think it's going to be an issue for the mine to make up the volume, I think it's all going to go back to the railroads and as John said, I think it's more of a back half story.

Mitesh Thakkar - FBR Capital Markets

Okay. And is this kind of a temporary fix or we should continue to see improvement and kind of stick for the time, because the next question comes as utilities kind of replenished as inventories there will be a bigger call on the PRB versus what the current rates are?

John Eaves

Well, I would tell you they are adding crews and they are adding thousands of new crew members and they are bringing on lot of power. So, I would tell you they are gearing up for the long-term Mitesh. And they are committed to fixing this business. BN has been pretty aggressive in the Basin last couple of years. And I don’t think they have any regrets in terms of what they have done market share wise. But this caught them off guard with what's happened in the Bakken, the weather, the congestion and in the Chicago area of all kind of compound [and under] issues, I truly believe they are committed to fixing this problem.

Mitesh Thakkar - FBR Capital Markets

Okay, great. Thank you very much guys.

John Eaves

Thank you.

Paul Lang

Thank you Mitesh.

Operator

Up next we will hear from Brandon Blossman of Tudor, Pickering, Holt and Company.

Brandon Blossman - Tudor, Pickering, Holt and Company

Good morning guys.

John Eaves

Good morning.

Paul Lang

Good morning.

Brandon Blossman - Tudor, Pickering, Holt and Company

Paul, just looked at a answer that Leer like it did three pretty incredibly this quarter. Can you comment on what this quarter look like at Leer versus what you think it will do for the rest of the year and kind of how that seems good up with your plans for met production this year?

Paul Lang

I will tell you Brandon that [Lone Mountain] you don’t want to get too after this, but Leer I got to say pretty well hit the marks, pretty well for last year, the guys have continued to execute on the plan and it’s come along pretty well where we thought would be. I think we are still in the ramp up phase, we are still believing that as you look down the road this is a great asset the great quality, as earning we have seen since a show that it’s right on line with where we thought it would be.

John Eaves

Brandon this is John, it’s a real credit to Paul and his operating team on how well [that we have gone] at Leer and the performance not only on the volume and cost but the quality, their receptivity we are seeing from a customer base and the same time making the improvements that we made at Mountain Laurel. So I think if you look at those two operations, I mean they are really going to be the foundations of our met supply moving forward. So we are feeling pretty good about where we are with both of those operations right now.

Brandon Blossman - Tudor, Pickering, Holt and Company

And John, you touched on customer acceptance, marketing I assume is going well for that call?

Paul Lang

Well, I think we have been pleasantly surprised, we thought there would be a Laurel bit longer at a reduction period, but overall I am very pleased with where the marketing team has positioned the mine.

Brandon Blossman - Tudor, Pickering, Holt and Company

Okay, good, good news. Thank you guys.

John Eaves

Thank you.

Operator

Hearing next from Brean Capital, Lucas Pipes.

Paul Lang

Good morning, Lucas.

Lucas Pipes - Brean Capital

Good morning everybody.

John Eaves

Good morning.

Lucas Pipes - Brean Capital

My first question is on the met coal production cuts, how should we think about those? Are those kind of running to a light of schedule? Are you closing some high cost mines? Is it shifting to thermal? If you could just maybe provide us some color around what exactly is going on there?

Paul Lang

Yes Luke, this is Paul. I’ll start it off and see John has anything to add. Yes, we reduced our metallurgical volume guidance to 6.3 million to 7.3 million tons, which leaves us about 1.3 million tons to hit our midpoint. Sitting here today we are about 80% committed.

If you look at the reductions that we made somewhere around 1 million or 1.2 million, it relates roughly to taking back production out of Cumberland River, Sentinel and Beckley that’s predominantly by just cutting back on shifts scheduled overtime and that sort of thing. While the rest of it, the other half probably rolled into -- went out of the metallurgical market and went into the industrial and thermal accounts.

I think the bottom-line is, our portfolio has a pretty broad range of cost and qualities. And as John said, they are anchored by the two longwall mines. And our plan is real complicated. We are going to run the two low cost high quality longwall mines throughout and we are going to use our other mines up and down to kind of scalable fashion or as a flywheel to lead the market as it comes up.

I think on the flip side when the market does come back, we will have the opportunity to ramp these mines back up rather quickly. And as you think about it, you never say you’ve backed all the downside in, but I think clear to the point where we are hoping there is more upside than downside by this change in our guidance.

Lucas Pipes - Brean Capital

That is very helpful. Thank you for all that information. And then in terms of the cost guidance [about] our East, as a follow-up, you sold some what I believe to be mostly thermal coal assets. Is that part of the reason why the cost guidance came down or maybe if you could then give just met coal guidance? And also if you could maybe provide parameters around kind of maybe a step function in terms of the Eastern cost guidance?

John Drexler

Yes. I’ll jump in and let Paul follow on. I mean it really has been coming for the last year or two when we closed about 8 coal mines last year and lot of those were higher cost mines, we didn’t think to work long-term with our plans. We continue to refine our cost structure in the East. I think a lot of it has been driven by the mines we’ve taken off, but we also benefited from bringing later on. It had a positive impact on our cost. We would expect to continue to see that as we move out.

But clearly what we’ve done in the East is transition more to focus on met supply with not only a wide variety of qualities, but a good cost structure. At the same time, we’ve moved it [away] from our higher cost thermal operations. And we’re really left with Coal-Mac, which is kind of the flagship in the East with good quality, good cost and then any other thermal we’re doing in East is more byproducts that we have under contract.

So, we do think we’re well positioned. We think we’re one of the low cost producers in Eastern United States and it’s something that we think we can maintain going forward. And as Paul alluded to earlier, we’ve done a lot of this with the ability once we see the market improve to bring those operations back fairly quickly with very little capital. And we think that’s a pretty unique position to be in particularly in the East. Paul, you got anything to add?

Paul Lang

Yes. I think the only thing I’d add is as we entered into our guidance last quarter, we knew about the sale of Hazard, so it was baked in.

Lucas Pipes - Brean Capital

Okay.

Paul Lang

And as you look at the other mines that pretty well run as anticipated, a little bit better. Fact is we did cut some production on the met side, which is on the higher end of the cost curve and all of those things baked into our guidance number.

Lucas Pipes - Brean Capital

Thanks John. Thank you. And then maybe one last question on the Western side, in the PRB have you noticed a shift in terms of the contracting strategy from utilities. Are they willing to maybe sign-up a little bit more longer term deals or if your sense more maybe that they just try to plug the whole does see a lift in some spot shipment?

John Drexler

Yes. I think in general, we're still seeing a lot of caution on the part of utilities for taking out term. We have signed some multi-year deals and we're pleasantly surprised with the out year prices, but I can’t say it’s a real change of trend.

John Eaves

But we would expect to see some opportunities as we start to head into the summer season and then utilities think about not only their burn for the summer, but over the next couple of years. And as we see that demand increase, at the same time we're seeing price improvement as well. So, we think we're in a very good position to be able to capitalize on demand and price improvement over the coming quarters.

Operator

And next we’ll go to Michael Dudas of Sterne, Agee.

Michael Dudas - Sterne, Agee

Good morning gentlemen, Jennifer.

John Eaves

Good morning Michael.

Michael Dudas - Sterne, Agee

John in your comments regarding the (inaudible) rail charges, does that indicate that you think the global international dynamics are going to get worse before they get better, is it what we could read into it?

John Drexler

I think based on kind of what we recorded in the first quarter that 12.5 and then the discussion Michael did, absent, major changes in the market dynamics that we would expect to record something similar over the remaining quarters of the year, I think it’s an indication of kind of where we see the current markets as they stand today.

I think it's something that evolves over the course of the year. We're going to work real hard to mitigate that. If we do see improvement in international markets, we're able to get more coal into those markets; we can find ways to reduce that as we move forward. So, I think it's just kind of a view point of where the current state of those international markets are, I don't think long-term it changes our view of where we think those markets will go, but it's where it currently sits today.

John Eaves

Yes Michael, this is John. I think John is right. I mean we look at the long-term markets continuing the (inaudible). I mean we still see 200 gigawatts of new coal-fired generation being constructed over the next 36 to 48 months. I mean that’s coming online, going to need 500 million to 600 million tons of supply that's not there today with a portion of that coming on this calendar year.

So, as you know, we've been pretty proactive in the past in going out and getting port infrastructure, (inaudible) in place to be able to participate in that marketplace. And quite frankly over the last two years, we've exported about 25 million tons and generated about $2 billion in revenue that we probably couldn't done without these agreements.

But in the short-term, John is right, we don't see anything on the met side, really get materially better discount a year, the API prices are such right now that when you do the met fact they just don't work really well.

So, it's something we monitor, but I think given the opportunities we see in the domestic market this year, we're at least right now, we're probably off to capitalize on those and continue to pay the LDs given where we are today. That could change next week given one of that and one of these other producing regions.

Michael Dudas - Sterne, Agee

That makes sense, fair enough. My follow-up is inventory levels, how do your inventories look relative to what they specifically be this time of year? And with some of your larger customers, can you get a sense that they are above or below that 45 day average that you mentioned in your prepared remarks?

John Eaves

You know, I mean certainly that 45 days is lower than historical norms of 50 to 55 days. We finished the year with about a 148 million tons country wide. We think we’d continue to pull those numbers down and bring it about 132 at the end of January. And then if you just kind of run the forecast for February and March, we think they continue to pull inventories down and you could be in that 120 range or so.

So, as I indicated in my opening remarks, we think with a normalized weather pattern this summer, you could have utilities at 110 million tons by the end of the summer season, which is as low as we’ve seen in the long time, Michael. So, we think this summer as you look at natural gas inventories and the [bill] that’s going to be required between now and in the fall season where total inventories are and some utilities named pretty open that they are in pretty tough shape. We think we are setting ourselves up for a pretty dynamic season this summer.

Operator

And next from Goldman Sachs we will go to Neil Mehta.

Neil Mehta - Goldman Sachs

Good morning.

John Eaves

Good morning, Neil.

Neil Mehta - Goldman Sachs

What opportunities exist for non-core asset sales, we saw a number of transactions over the last couple of months that you guys were able to execute. Are there other opportunities in your portfolio?

John Eaves

Neil it’s something that we are always looking at. What we have said is that, we have assets that are not core to our long-term strategic plan and somebody would come in and provide more value on those particular assets and we see ourselves that we will consider monetizing those I think that’s occurred over the last 6 to 9 with Canyon Fuels and then Hazard and (inaudible).

Are there others? I think that’s possible, it’s something that we are always evaluating our portfolio, we’re buyers and sellers of assets. I think it just depends on where we are. We are fortunate that with our liquidity position that we don’t have to do anything. And unless we can get the appropriate values, I think we are pretty comfortable where we are. We do think that our focus on continued build out in the met market just serves the demand growth we see there, the maximizing our PRB position and in our position in the bituminous segment is pretty unique here in the U.S. And with our cost structure and our exposure to thermal met, we like the way we are positioned today.

But again if somebody comes in and has some interest in some of our assets that are really not required to execute that strategy and will pay us little value, we have to consider.

Neil Mehta - Goldman Sachs

Makes sense. And then, I know it’s always hard to put a finger on this number but in terms of the oversupply in the global met market right now, is 15 million to 20 million metric tons still a right number in your mind or has that number changed over last couple of quarters?

John Eaves

I think it depends on what forecast you look at. I mean I have said 15 million to 20 million in the past; I mean I would say today, it’s probably in that 15 to 20, 25 range plus or minus. We are encouraged over the last week or so about some of the rationalization that we are hearing about, not in Australia, U.S. and Canada, let’s call it 5 million to 10 million tons. We think that’s encouraging. We think the 3% growth in steel demand is encouraging and we think thing is going to balance itself out. And we think we are not forecasting any material improvement in the met market this year but what could potentially accelerate that is if you start seeing more and more people pulling production off. And we think at the second quarter benchmark of 120, the fact that the Australian dollars move back up to $0.93, $0.94, those guys are probably looking at where they might trend some of the production. So, on a 325 million ton market, it wouldn’t take a whole lot to balance this thing pretty quick.

If you think about the last 3 or 4 down cycles we’ve been through, one thing we know is we will correct and sometimes overcorrect and the market’s respond and the goal of this management team is to make sure this organization is ready when it turns to capitalize on this opportunity.

Neil Mehta - Goldman Sachs

Make sense. Last question, just one as a follow-up to previous question on PRB and the rail issues; is it your view that the second quarter, the rail conjunction, service issues could persist but as you get to 3Q, 4Q, so the second half for the year, those will largely resolve?

John Eaves

I think that’s absolutely correct. I we would hope to see some improvement in second quarter because it’s not a real high bar but certainly in the third and fourth quarter we would expect materially improved performance. And that’s what Paul and I’ve been told on more than one occasion from the railroad.

Operator

We’ll go next to Curt Woodworth of Nomura.

Curt Woodworth - Nomura

Yes, hi. Good morning.

John Eaves

Good morning Curt.

Curt Woodworth - Nomura

John, how do you think the coal plant retirements are affecting utility buying decisions today? I mean depending on different services like (inaudible) Wood Mackenzie, there is roughly maybe 20 million to 50 million tons of PRB exposed? Do you guys have a view on kind of what the net exposure is or what your net exposure is to those plants?

John Eaves

We looked at that pretty hard and we think we have a fairly good understanding. If you look at the forecast between now and 2018, we’ve got about 60 gigawatts closing. And to-date, we’ve seen about 17 to 18 of those closed, those are probably the smallest, most inefficient plants. So, as we continue to move through these closures over the next couple of years, it’s going to get more and more painful.

If you look at 2013 consumption rates based on that 60 gigawatts, it’s about 85 million tons. We think the PRB gets impacted but not greatly. If you look at in our mix, within that 85 million tons, we’re impacted about 8 million to 10 million tons. Good part of that in the PRB and that’s coal going to some of these plants that will close. I think what you got to focus on though is the surviving plants, there is about 260 gigawatts in plants that we feel like will survive in the regulatory environment we see today. And that’s -- those plants that last year been running in the low 60s. If you just assume those particular plants, go back to where we were in 2007 of about 70%, 72% that’s incrementally about 100 plus million tons of demand that we don’t see in the market today.

So in improving economy, we think that that generation could be some of the most economical generation that you see. And when you look at what we went through this past winter and you saw the extreme power prices, the grid or liability issues, two of our largest customers indicated they were running at about 90% of the coal plants that are forecasted to close over the next year or so. So, I think it calls into question some of these decisions that we see a changing -- some of the mass decisions probably not but what it will plan to hopefully is that consider additional regulations going forward, they will take some of that into account.

Curt Woodworth - Nomura

Okay. That’s helpful. And then as a follow-up, just in terms of when utilities are going to start to get more aggressive in terms of the interim business. So I mean, I think the last data set from EIA days of burn in the PRB is about 48 days and probably maybe goes a little bit lower the summer, but then the rails as they improve in the shoulder season of fall, probably corrects. I mean do you -- what level in terms of days of burn do you think that the utilities start to get more concerned about their stock levels and what do you think their targeted days of burn level is they like to be at by the end of the year?

John Eaves

Well, I’ll let in Paul jump in here. But I think they are concerned today. And I think the reluctance has been that they are concerned, they are not getting the tons they are contracted for, so why go out and compound the problem. But as we move through the shoulder season here and start thinking about summer burn and a typical draw summer from May to August, historically over the 5 years, we’ve drawn 22 million tons.

So, if you take another 22 million tons out of our inventory, you assume a small build over the next month or two, you get in dire straits. So, I think utilities are going to have to consider pretty shortly coming out for the summer season as well as multi-years in terms of buying coal, particularly our PRB coals.

Paul Lang

Yes, I think the only thing I’d add is, I think that average is a little bit proceeding on inventory. There is some real colder stories on certain stations that are just, they are not on the ground, but they are pretty nervous about being able to operate.

So, the service level is impacted pretty unevenly across some of these utilities. And I think they got to a comfort level last couple of years, because the rail service, I think few of them rethinking that strategy.

Operator

And next, we’ll go to Meredith Bandy of BMO Capital Markets.

Meredith Bandy - BMO Capital Markets

Hey, good morning everyone.

John Eaves

Good morning.

Meredith Bandy - BMO Capital Markets

Just wanted to follow up on Paul’s comments earlier about the ability to bring back met in a better market. What would you consider a better market, what sort of improvement would you look for before you consider that? And then what would be your needs in terms of capital and timing to bring back production?

John Eaves

Well Meredith, this is John. Certainly, something better than at 120 benchmark…

Meredith Bandy - BMO Capital Markets

Okay.

John Eaves

And I think that -- I am hasn’t to say anymore, I think we have bottomed out that and I think we have bottomed out. And I think given where people’s cost structure are and the fact that you’ve got a large percentage of suppliers in the world market that have a cost structure that don’t work, something’s got to change.

And I think you are starting to see the early part of that with some of these cut backs. I don’t know that we have a magic number out there, but clearly as Paul indicated, we’ve set our self up in a manner that allows us to respond pretty quickly. But I think, we would want to be comfortable that we see more of a sustained improvement in those market conditions and not just something short term, and that goes for met; that goes for thermal.

I mean, we are just -- we are not going to bring volume back on for a quarter or two improvement, we want to see something that is more multi-year. And right now we are starting to see some positive signs on thermal side, particularly for PRB. We want to be patient and make sure that that market is sustainable. Other than the production cutbacks on the met side, we are really not seeing a whole lot that would cause us to change our recent decisions. So it’s something that we will monitor and let the market kind of be the guy.

Paul Lang

Meredith, the only thing I’d add is, since we have a range of costs, we have a range of ability to bring back production on with price. Most of the changes or all of the changes we have made on the met side are pretty easily reversed and particularly in this market people and overtime everybody is cut back and I think it would be relatively easy to scale back up. So if you compare this to say what we did on the thermal side on some of the stuff over the last year this stuff -- our this production is out there and [it’s easy] to bring back on.

Meredith Bandy - BMO Capital Markets

Okay, thank you. And then just not to be the dead horse to that but the port and rail charges is that all from Ridley or is there something else?

John Drexler

That’s pretty much spread between port, rail and barge.

Paul Lang

Yes, and it’s pretty well spread East Coast, West Coast gulfs.

Meredith Bandy - BMO Capital Markets

Okay. All right. Thank you. That’s helpful.

Operator

We’ll go next to David Gagliano of Barclays.

David Gagliano - Barclays

Thanks for taking my questions. Back on to the met story just for a minute it looks to me like you still have an embedded increase in your volumes for Q2 to Q4 to hit the midpoint versus the Q1 number or roughly it’s [time]..?

Paul Lang

Yes, Q1 David was down predominantly because of the Lake season. Our first quarter particularly with Canadian customers tends to be our lowest.

David Gagliano - Barclays

Okay, that’s helpful. My question is you saw that $1.3 million last price uncommitted I think $1.3 million. If things stay the way they are, how much of that should we expect will actually be produced and sold?

John Eaves

I think we are very comfortable with it, we see a market given where we are with the cost structure we would expect that to be placed in the market primarily internationally, but we feel pretty confident at this juncture that we will get through to sell those tons.

David Gagliano - Barclays Capital

Okay, and then on the PRB side just one question. When did you sell the 10.8 million tons roughly, 10.8 million tons for 2014 delivery at around $12.25 per ton and was that all 8,800 BTU coal?

Paul Lang

Yes, David, that was through the quarter. I think what’s a little deceiving on the efforts on the pricing is that embedded in that in some export that clearly weighed that down. And then you can pick the number, but it’s prior weighed our average domestic down $0.30 to $0.50. So I think we continue to layer in sale and the prices continue to rise. So I think we’re feeling more and more optimistic about the PRB.

Operator

Due to time constraints the number of participants queued we do ask that you please limit yourself to one question. We’ll move next to Brian Yu of Citi.

Brian Yu - Citi

Hi, great, thanks. On the metallurgical coal markets and we’re seeing various prices, you’ve got the settlement, there is Atlantic and then there is specific. For the tons that are left to open, which particular market or price point you would be looking at that, free to place those tons in it?

Paul Lang

My sense is the vast majority will go into Europe although I think we will still see a percentage go into Asia.

Operator

Up next from JPMorgan we’ll go to John Bridges.

John Bridges - JPMorgan

Good morning everybody.

John Eaves

Good morning John.

John Bridges - JPMorgan

Just want to dig a bit more into the met coal. Presumably the tons which you’re dropping were not contributed to earnings. I am just wondering taking that out and I realized it’s a very complicated, mixed up calculation, but would this be a loss of positive cash flow or would those tons have been operating in negative cash flow recently as you were anticipating some better pricing to keeping them alive?

Paul Lang

I mean obviously John we took them out because we thought they were met negative.

John Bridges - JPMorgan

Met negative tons, so we should expect to see some overall improvement by taking those out?

John Eaves

Yes, that’s correct, John. I mean when you step down from the previous benchmark that where we were that certainly impacted our margins. And as we’ve been saying on previous calls that we would always be looking at refining our met volumes that’s what we did. And we don’t want to be out there losing cash on some of these met [mines].

Operator

We’ll go next to Kuni Chen of UBS.

Kuni Chen - UBS

Just a quick question on the overall M&A environment, obviously there is a good deal of assets out there for sale in the Central App region, so you’ve had a chance to take a look at them. Just wondered if you can give us some thoughts on the -- on how these assets look, were they on the cost curve and just your overall impressions?

John Drexler

I would say that there has been a little bit more traffic over the last couple of months -- properties on the market particularly on the met side. As I indicated earlier, we're always buyers and sellers of assets. Everything that we’ve seen thus far I think would tend to be on the higher cost side. We work very hard to put together what we think is a low cost portfolio of met products that will serve the U.S. and the global markets very well. And certainly, we’d be hesitant to add anything that would impair that. So, you are right, there are some assets on the market out there, but I don’t know that we’re seeing anything particularly or feeling at this point.

Operator

We’ll move to Simmons & Company’s Caleb Dorfman.

Caleb Dorfman - Simmons & Company

(Inaudible) taking the questions. I guess going back to the PRB contract you’ve got, how are you thinking about rolling in the contracting on the remaining 50% of tonnage that you have uncommitted for 2015. Are you comfortable entering 2015 partially uncommitted because you think prices are going to continue to rise throughout the year?

Paul Lang

Hey Caleb, it's Paul. I don't think we believe we're going to be able to hit the market perfect. We'll continue to layer them in, but heading into ‘15 where we're at, I'm very comfortable because we're clearly seeing a rising market.

Operator

Luke McFarlane of Macquarie. Your line is open, please go ahead.

Luke McFarlane - Macquarie

Yes, hey guys. My one question is really about; I mean we talk about non-core assets house in the East and what not. Have you ever thought about doing something in the PRB with those reserves or some of those auto drive (inaudible) you trying to sell off any of that?

Paul Lang

We've not looked to anything really in the PRB, but we've been approached on some creative things that we’ve talked about, starting that as far as equipment sales, longer term we still feel very comfortable where we're at with PRB. We have lot of unused capacity that we think ultimately will be brought back online when the market improves.

John Eaves

Yes. When we look at demand growth over the next 3 to 5 years, the impact that met is having on coal plant closures, we think the primary beneficiary will be PRB and we want to make sure that we have that ability to scale that operation up as we see those opportunities present themselves.

Operator

Up next from Stifel we'll hear from Paul Forward.

Paul Forward - Stifel

Thanks.

John Eaves

Good morning, Paul.

Paul Forward - Stifel

On the -- you had mentioned that with the reduced guidance in met coal this year, it sounded like about 500,000 or 600,000 tons of that was formally met coal going back into the utility or industrial markets. Just wondering if you could talk about what the prospects of more -- is there more of that potentially to come and what kind of pricing improvement needs to happen in the utility market to allow you to consider rotating more of that met coal into a thermal coal market that seems need the tons right now?

Paul Lang

Yes. I’ll start it off and see if John wants to add. But it’s a little bit of a hard question to answer, Paul because we think about it some of these industrial accounts are kind of local, we have a mine like Lone Mountain, which fits very easily in the PCI market all it has a very good kind of local business around those industrial accounts.

So, you get caught up in the thin facts whether it’s PCI or industrial. So, at this point in time the industrial accounts because of logistics are paying a higher netback than the PCI market. So, I think you’re going to have to see a little bit of fair step up in price before we see it’s going back too hard into that.

Operator

We will go to David Lipschitz of CLSA.

David Lipschitz - CLSA

Good morning.

John Eaves

Good morning, David.

John Lang

Good morning, David.

David Lipschitz - CLSA

Just, I don’t know if you gave any numbers on what you expect exports this year in terms of compared to last year?

John Eaves

We haven’t David, we do think that exports will come off, last year they were at call it 115, year before about 125, we’ll have to see for the balance of the year, it held up reasonably well. But I guess at this point we think they could be in the low triple digits, but time will tell. Certainly at API prices right now, the numbers don’t work when you back them out to the mine. The prices that we see out the West Coast certainly don’t work very well right now. I mean we do think it’s important to continue to cultivate long-term customer relationships because we do see long-term demand being strong in the international markets. So we continue to do some of that. But I think time will tell but I wouldn’t be surprised to see exports build up plus 100 million for the year.

Operator

Brett Levy of Jefferies has our next question.

Brett Levy - Jefferies

Hey guys. In terms of like the new volume you put on and prices in the PRB, is it above that 13.76 average or are you still struggling? And then can you talk a little bit about 2016, have people started to talk to you a little bit about that and is that price yet again above kind of the average that you have been seeing for 2015?

Paul Lang

2015, prices have come in as I noted earlier, we have been relatively pleased with what’s coming in. As you look out, you are seeing a pretty good step up year-over-year and we are going to continue to layer in. But you are not seeing also a lot of utilities trying to hit after ‘16 yet. So I think we are being cautious but at the same time we will continue to layer in business.

Operator

Goldman Sachs’ Justine Fisher has our next question.

Justine Fisher - Goldman Sachs

Hi, good morning.

John Eaves

Good morning.

Justine Fisher - Goldman Sachs

A question from me is more of a longer term issue of cash burn. So if let’s say if we see prices rise but still not enough to turn the company cash flow positive, I have been really impressed by the CapEx cuts and the progress there is really good, but I am wondering if there anything else that Arch can do. I mean I know asset sales are on the table as you said earlier from time to time but is there anything else that the company is considering doing to help stem cash burn aside from just leveling it down if prices don’t increase enough to get the cash flow where it needs to be, let’s say a year from now if the company still bring cash in?

John Drexler

Justine, this is John Drexler. I think we look at what we’ve done over the last couple of years to protect the balance sheet. We’ve been very happy with what we’ve been able to achieve and we’re very happy with current liquidity that we have on the balance sheet. But frankly, it’s put us in a good position as we continue to weather the markets. We’ve acknowledged that we’re going to be cash flow negative this year. And I think we’re executing on all the plans that we’ve indicated we would execute on, to your point, continuing to roll down the thing that we can control managing and reducing our costs. We continue to be successful on that front. We will continue to look for ways to move that down to prudently managing our capital. I think we’ve done an outstanding job without under-investing in the company as well. We’ll continue to look at ways there and we’ve monetized non-core pieces of our business for appropriate values.

As John said earlier, there is nothing here at this point that gives us pause that puts us in a position that we think we need to do anything desperate. We don’t have to do anything from the standpoint of fire selling assets, doing things like that. So, as we look forward we think there is still plenty of tools and levers to be able to pull to manage our liquidity. It’s a very large focus for us as we move forward. And quite frankly, we do think we’re seeing significant improvement on the thermal side of the markets. And we think that met is the bottom of the markets. And given the asset portfolio that we put together, we’re going to do very well continuing to manage through this downturn, but create substantial value as the markets do turn.

Operator

Due to the time constraints and other company commitments, we will take our final question today from Dave Katz of JP Morgan.

Dave Katz - JP Morgan

Good morning. You brought Bituminous Thermal cost down in your guidance by I think it was $2 per ton because the extra tons you expect from Western Elk and then further you layered in the small amount of thermal as a result of lowering the met volumes, yet it appeared that your total thermal tonnage guidance remained the same. We were just curious what the extra Western Elk and Central App’s thermal tonnage has been [planted]?

Paul Lang

It’s spread across pretty well all the basins but there is a small chunk of it we think that’s going to be impacted in the PRB and the rest of it just spread predominantly in the east.

Operator

And at this time, I’d like to turn the call over to John Eaves for closing remarks.

John Eaves

Certainly want to thank you for your interest in Arch Coal. The management team continues to focus on the things that we can control, capital cost; sales commitments; and liquidity. We do feel like our asset base is diversified and unique, we think it’s got tremendous earning power once we see an improving markets; we’re starting to see that on the thermal side, we think we’ve hit the bottom on the met and should see stuff and improvements in the coming quarters.

So we think we’ve positioned the company very well. And we really appreciate your interest in our Arch Coal. And we look forward to updating you on our July call. Thank you.

Operator

And that does conclude today’s conference. Again, we thank you all for joining us.

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