Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Arch Coal Inc (NYSE:ACI)

Q2 2011 Earnings Call

July 29, 2011 11:00 am ET

Executives

Deck S. Slone – Vice President, Government, Investor and Public Affairs

Steven F. Leer – Chairman and Chief Executive Officer

John W. Eaves – President and Chief Operating Officer

John T. Drexler – Senior Vice President and Chief Financial Officer

Analysts

Paul Forward – Stifel Nicolaus & Company, Inc.

Shneur Gershuni – UBS

Jeremy Sussman – Brean Murray, Carret & Co.

Brian Yu – Citi

Brian Gamble – Simmons & Company

Mitesh Thakkar – FBR Capital Markets

Mark Levin – BB&T Capital Markets

James Rollyson – Raymond James

David Beard – IBERIA Capital Partners

Brandon Blossman – Tudor, Pickering, Holt & Co., LLC

David Martin – Deutsche Bank Securities

Richard Garchitorena – Credit Suisse

Andre Benjamin – Goldman Sachs

Brett Levy – Jefferies & Co.

Lance Ettus – Tuohy Brothers Investment Research Inc.

Justine Fisher – Goldman Sachs

David Lipschitz – CLSA

Operator

Good day, everyone, and welcome to this Arch Coal Incorporated Second Quarter 2011 Earnings Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Deck Slone, Vice President of Government, Investor and Public Affairs. Please go ahead, sir.

Deck S. Slone

Good morning. 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 pursuant 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 Securities and Exchange Commission 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'd 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 Steve Leer, Arch's Chairman and Chief Executive Officer; John Eaves, Arch's President and Chief Operating Officer; and John Drexler, our Senior VP and CFO. Steve, John and John will begin the call with some brief formal remarks, and thereafter we'll be happy to take your questions. Steve?

Steven F. Leer

Thank you, Deck, and good morning everyone. It has been a fast paced and exciting second quarter for Arch Coal. As you know we announced the acquisition of International Coal Group on May 2nd and close the largest transaction in our history 45 days later. During that time span we also raised over $3 billion to finance the transaction and put in place a $2 billion credit facility that gives us access to low cost borrowing capacity through June of 2016.

Since closing the transaction on June 15 we made great strides in integrating ICG. Here at the end of July the integration is materially completed. Over the last six weeks we work diligently on managing an orderly quick and relatively seamless integration process including reanalyzing, updating and identifying new synergies. As a result we’ve raised the bar on our estimate and we now believe that realize synergies in the neighborhood of $100 to $120 million starting in 2012 will be accrued to the transaction.

In his prepared remarks John Eaves will highlight our achievements in this area, but I would like to personally thank all of the 7400 employees for their efforts over the last 90 days and formally welcome the former ICG employees into Arch Coal.

Turning to our financial performance this past quarter Arch set new record for revenues and EBITDA for the three months ended June 30th. Revenues and earnings were up on higher per ton sales prices across all operating regions even as sales volumes were down 3.5% from a year ago.

In particular our Appalachian segment made a strong contribution to our results this past quarter. Volumes, pricing and operating margins per ton all increased meaningfully versus last year a function of improved market conditions and the inclusion of the ICG volumes beginning on June 15.

Our Western Bit Region also turned in another great quarterly performance with per ton margins tripling versus the year ago. Strong results from these regions help to offset a smaller contribution from our PRB operations in the second quarter where our shipments were below expectations in June given disruptions from flooding on the Mississippi and Missouri rivers.

These disruptions are also spilling into the third quarter with our PRB shipment effective through July and with our expectation that they will continue to effect into August and perhaps beyond.

As a result of the Midwest flooding we lost 1.5 million tons of shipments or roughly $15 million of EBITDA during the second quarter and estimate that we could lose as much as 4.5 million tons for the full calendar year equating to about $45 million of EBITDA. Of course these disruptions appear to be having an impact on the marketplace as well. Industry wide PRB shipments fell below the 100 million ton mark during the second quarter.

The loss quarterly level since the depth of the recession in 2009. As a result stockpile that PRB generators are being liquidated had accelerated rates falling by three times a normal rate in June. This is meaningful because stockpiles in the region were fairly close to normal even before the floods. Third-party estimates indicate that PRB stockpiles were roughly one day below normal at June 30 and rail disruptions actually intensified in July as I have discussed.

We are also seeing the forward PRB price could move up nicely with indices for 8800 Btu currently marked in the range of 1565 per ton for 2012 delivery and in the range of 1670 plus per ton for 2013 delivery. In fact the overall domestic home market appears to be heating up both literally and figuratively. On the demand side Power generation is running essentially even with last year while coal consumption through May the latest data available was down. The hot weather in June and July is likely boosting coal burns meaningfully and cooling degree days today are tracking 3% better than the hot 2010 and are currently 25% up higher than normal. On the supply side US coal production nation wide is flat so far in 2011 according to (Inaudible) helping to bring the domestic coal market into balance.

Furthermore strengthen the global mix and thermal markets has prompted us to raise our forecast to 106 million tons of US coal exports this year. You could ask why we are so bullish the first steps through May already put us on path to achieve these exports and exports tend to accelerate in the second half.

Second steel utilization remains high enough to support increased met exports, global crude steel utilization reached 83% in June on par with levels achieved during 2008 and the US steel utilization now stands at 75% of total capacity.

About two thirds of US coal exports will serve the met market, but one third or roughly 35 million tons will move into the global thermal trade which we believe is growing as well.

Stocks at ARA and that generators in the U.K. have been depleting well coal burn in Europe has returned all of which should support continued movement in US steam coal offshore. Couple that with another decline in the imported coal into the US as Columbian coal is being bid away into other markets and you start to see that coal markets could tighten even further over the next several months.

That is why we are projecting another domestic stockpile liquidation in 2011. National wide stockpile should be apt or below normal by the end of the summer which could set up a very dynamic 2012.

So how is Arch preparing to capitalize on these trends first with the ICG acquisition we have improved our value proposition and growth prospects for our shareholders. We have diversified our asset base even more and as low cost, high quality met coal production have much cheaper valuations that we obtained in places like Australia or elsewhere in the world and brought under roof some of the best met coal development projects out there.

Our goal is 15 by 15 that is to grow our met coal volume by at least 15 million tons by 2015 and we are working towards that goal with the ongoing development of the Tygart 1 mine we have also began the engineering and permitting of additional met reserves, second we have also thought we have started to focus on and then realizing the full potential of our thermal volumes.

It is about finding ways to deliberate our steam tons in Appalachia through Arch’s dedicated export terminals and throughput arrangement it’s about building out our platform in the Illinois Basin where we have already added active operations from ICG to complement our equity investment and significant reserve position there all in an effort to target the low coal chlorine segments. It’s about delivering value with our vast western thermal portfolio including delivering high quality Western Bit tons in to new markets and advancing our core development project on the west coast to place PRB tons directly into Asia.

And finally it’s why we’ve opened our Singapore business office to help advance these goals. In summary these are just some of the reasons why we are on track to deliver the best year yet for earnings at Arch Coal and we believe it’s a very bullish future.

With that I will now turn the call over to John Eaves, Arch Coal’s President and COO. John?

John W. Eaves

Thanks Steve. First I would like to briefly touch on the metallurgical markets. High quality low-vol coal such as our (Inaudible) coal remains scarce in the marketplace while lower quality high-vol coal prices have drifted down slightly from the record levels set in the first quarter.

Yeah we continue to be pleased with the levels we are signing business and believe met markets will remain tight as we enter negotiations this fall for the upcoming calendar in Japanese fiscal year.

To date we have committed nearly eight million tons of coking in PCI coal for 2011 delivery and on our pace to sell approximately nine million tons for the full year which includes roughly a half year contribution from ICG. This past quarter we shipped 1.8 million tons of met coal which included a very modest level of ICG volumes shipped in the last half of June. Pricing on our met shipments overall were strong up nearly 15% from the first quarter to reach an average of $121 per ton across our blended met products.

For the back half of the year we would expect our met realizations per tons to grow and our met shipments to raise as we incorporate high quality tons from Beckley, Vindex, and since knowing our volume mix and look to create premium blends of coal with our remaining open market tons.

Turning to steam coal markets we price some steam tons in the PRB for 2011 and layered in some 2012 sales one third which were 8400 Btu all at attractive prices. In the second quarter we also shipped PRB coal via the Gulf to Europe and have lined up shipments to Asia to Italy in the second half of the year. Further underscoring that the US is becoming a strategic supplier in the seaborne market, in Western Bit we continue to move coal offshore to customers in South America, Europe and Asia. We expect to move a 1.5 million tons for export from the region in 2011 and are targeting at least two million tons for export in 2012. Lastly our Appalachian segment reflects a combination of Arch and ICG commitments and does not include Illinois whose contribution was immaterial for the latter part of June.

Now let’s briefly review our operating performance by region before providing an update on the integration of ICG. In the PRB operating margins per ton declined as cost rose on lower than expected volumes, higher maintenance cost and higher sales sensitive cost. I will note Black Thunder had a major plant repair to its largest dragline during the quarter, which took the in and out of service for one month.

In Western Bit, let me take a moment to point out a change in our presentation mythology for the region. Beginning with today’s press release, we’re representing sales prices and cost per ton at an f.o.b. point for all domestic customers. Naturally this is chain has no impact whatsoever on the margins, but we do think it provides a more accurate (inaudible) of market conditions in the region.

In reviewing our operating performance in Western Bit cost improve versus a good first quarter its higher volumes help to spread fix cost over a larger number of tons. Coupled with improved pricing, we earned record margins in the region.

In Appalachia, margins grew to $25 per ton up 40% from the first quarter. Realizations rose on higher met shipments and pricing offset by lower price team sales. Cost also improved due to the return of Mount Laurel's longwall on April 17, offset slightly by higher DD&A expense due to the acquisition.

Now with the integration of ICG. We are essentially complete as Steve mentioned in his remarks. We had already put in place our operational management including several former ICG executives prior to the close and have retained a few other people from the ICG management team on a short-term basis to facilitate a smooth transition.

At close, we’re seeing full control with each functional area of ICG with Arch personal onsite at all locations to assist with the changeover. As you know, we took a very conservative view of potential synergies initially projecting $70 million to $80 million annually broken into operating, administrative and marketing buckets.

Since closing, we’ve raised our estimates to between a $100 million and $120 million as a result of the strategic acquisition, with the majority of the increase attributed to the operations bucket.

For example, by spending minimal capital we can upgrade processes at Beckley (inaudible) central preparation plan to improve met coal recovery by several hundred thousand tons.

We also changed the design of the Tygart Valleys spread plan based on what we learnt at Mount Laurel, which will help upgrade the quality of (inaudible) and increase the recovery when the longwall starts in 2014.

In addition, we had merged our Lone Mountain and ICG, Powell Mountain’s operation into a single complex idling one prep plan in the process. While we have a taken conservative view and not included any benefit from this integration there in their initial model we are now confident that these contiguous operations will have a better overall cost structure and higher PCI sales as a result of the consolidations.

Furthermore we are seeing that our combined purchasing power grants us additional savings on equipment, mine consumable such as tires and (inaudible) and service contracts with vendors.

We will also secure lower rates on the insurance and bonding due to our larger size, the ability to self insure in a strong credit profile that was maintained post the acquisition.

Another bucket of estimated synergies consist of overhead and administrative cost reductions almost all of which have been implemented or soon will be. These savings include elimination of duplicate functions, reductions in professional fees and costs associated with maintaining dual systems and the consolidation of offices in West Virginia.

Taken with the operational bucket, these categories represent roughly 65% of the total synergies identified. The remaining synergies are marketing related.

One example was our ability to push ICG’s met coal through Arch’s dedicated export facilities, eliminating fees in the process to achieve benchmark pricing for those quality coal. We will also liberate some of the ICG met coal, but substituting steam coal from our operations to satisfy contract obligations.

In addition based on customer needs, we can now obtain high vol B coal as low vol coal some are nearly acquired operations to create a synthetic midwall as well as produce an incremental high vol A met coal. All of which should result in meaningful revenue enhancement for the combined company.

Beyond those synergies already identified, we acquired highly valuable unassigned reserves in ICG. From undeveloped net tons in Virginia to high quality steam reserves in Ohio and Illinois, we’ve then boosted Arch’s future organic growth options immensely with this acquisition.

In closing, I want to reiterate that we’ve continued to focus on our core values this past quarter; we turned in strong safety and environmental performances with six facilities achieving a perfect zero for the last three months.

In addition, eight of our Appalachian complex has took some awards from the state of West Virginia which honored them for outstanding safety performances 2010.

Across our operating platform we are deeply committed to achieving our goal of operating the worlds safest and most environmentally responsible mine in bringing the best-in-class practices to all of our complexes. I’d like to thank all of our employees for the hard work and outstanding efforts.

With that, I will now turn the call over to John Drexler our CFO. John?

John T. Drexler

Thank you, John. I am happy to report that from a finance and accounting perspective the integration continues to go remarkably well to. Since June 15, we have successfully migrated nearly all backbone systems on to Arch’s platform and reassigned all customer contracts with any remaining transition work on track to be completed by the end of the fourth quarter.

As Steve mentioned, excluding the impact of transaction cost, Arch set records on several important financial metrics this past quarter namely, revenues, EBITDA and free cash flow. With ICG now in the fold, we would expect to eclipse these and other financial metrics in the quarters to come.

Let me remind everyone that the financial results for the second quarter include 16 days of ICG results from June 15 to June 30. The second quarter also included transaction costs associated with the acquisition such as direct transaction cost, risk financing and arrangement fees, consulting and professional fees, integration related expenses and severance cost.

We’ve excluded these cost from our adjusted EBITDA and adjusted EPS figures to provide you with a more representative view of our continuing operations.

In addition, in accordance with the accounting rules that govern acquisitions, we are in the midst of allocating the value of the purchase price to ICG assets and liabilities. While we have applied our best estimate to these assets and liabilities at June 30, there are likely to be additional changes prior to September 30. These changes could affect non-cash charges such as depreciation, depletion and amortization, which should not affect EBITDA.

Turning to the balance sheet of June 30, I want to highlight the following. First, we have assigned a net sales contract liability of $77 million, $4 million of which was amortized in the income for the period ended June 30. We also expect to amortize roughly $40 million to $50 million for the remainder of the year, another $10 million to $15 million in 2012 and smaller amounts thereafter. Since these net sales contracts are a liability they will be accretive to income as we move forward. To be consistent with our prior treatment of sales contract to amortization, we will exclude these add backs from recurring adjusted EPS.

Second, we have recorded $351 million of restricted cash including $260 million for the retirement of ICGs senior notes. $75 million as cash collateral for ICGs outstanding letters of credit, and $16 million for certain ICG obligations that were assumed in the purchase price and remain unpaid at June 30. The ICG notes were redeemed on July 14 and we expect the remaining restricted cash to either be paid or freed up as ICGs letters of credit are terminated or replaced.

To recap the financing of the transaction, we used a combination of new debt and equity offerings in early June along with borrowings under our amended senior secured credit facility. The equity offering of $1.3 billion was sized at this level to preserve our existing corporate credit rating of BB minus. Given the equity market conditions that existed at the time of the offering, we ended up issuing more shares than original we hope in order to preserve that rating.

Incurring with the transaction, we also have issued $2 billion in senior notes and entered into a $2 billion revolving credit facility due in June of 2016, this was up sized from our previous $860 million revolver.

At June 30, our debt-to-capital ratio net of all cash stood at 52% and our total liquidity including cash and borrowing capacity was $1.2 billion. Now that we have closed on the transaction, our immediate focus is to generate free cash flow to pay down short-terms borrowings in fact, we structured the transaction with meaningful short-term borrowings to allow us to bring down that leverage in relatively short order.

With that, let me now discuss our revised outlook for 2001. We expect the following. Total sales volumes including brokerage tons to be in the range of 160 million to 165 million tons, EBITDA in the range of $1.80 billion to $1.2 billion, adjusted earnings of $1.75 to $2.15 per share, the adjusted EPS range excludes an expected $35 million pre-tax or $.10 per share after-tax of non-cash intangible asset income related to sales contract amortization.

As a reminder, adjustments to purchase accounting that we expect in the third quarter will affect earnings per share, but will not affect that EBITDA. DD&A excluding sales contract, the amortization in the range of $452 million to $470 million. Our DD&A guidance increased from the last quarter by $80 million, this is all attributable to the DD&A of the allocation of purchase accounting to the ICG assets.

Capital expenditures, including reserve additions of $480 million to $520 million with $75 million to $80 million attributed to the ongoing development of the Tygart Valley No. 1, and an effective tax rate between 14% and 18%. Going forward, we would expect to pay rate similar to an AMP tax there. With the major milestone of completing the acquisition and integrating the assets substantially behind us, we now turn our focus to unleashing the earnings potential of the Arch Coal.

With that, we are ready to take questions. Operator, I will turn the call back over to you.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator Instructions) We’ll go first to Paul Forward from Stifel Nicolaus.

Paul Forward – Stifel Nicolaus & Company, Inc.

Thanks, good morning.

Unidentified Company Representative

Good morning, Bob.

Paul Forward – Stifel Nicolaus & Company, Inc.

Well, now that we’ve got the merger done and you’re saying material completely you’ve got a pretty, pretty good outlook on the cost side in the Appalachian business for the second half of the year and going into 2012. I was just wondering if you could give us a little bit of a information just directionally compared to the $66 posted on Appalachian cost in the second quarter. What do you think that goes directionally in the second half of the year and do you think that's the number when you think about maybe higher pricing on average in 2012, can you hold that costs under 70 for 2012 when you consider al the synergy potential?

John W. Eaves

Paul, this is John. Yeah, it’s – we’re certainly excited to get these assets put together. And as we've talked about in Central App, we clearly think we’re going to be the leader in terms of cost control in that region. The $66 for second quarter I think that was probably going to be a little bit of pressure on that as we move forward, as we put the operations together, I mean our goal is certainly to hold it below 70 and hopefully well below 70, I would hope to more than offset it on the revenue side with margin expansion, but with all the cost pressures that we’re seeing in Central App, I would say there’d be a little bit of pressure on those costs. But the guys are focused on and clearly we're going to be a leader from a cost standpoint in Central App.

Paul Forward – Stifel Nicolaus & Company, Inc.

Okay. And you had mentioned one point on the Tygart that kind of design for the Prep Plant. just wondering if you could talk about as you think about modifications and if you think about say a similar market that we're in today when Tygart comes on line, what share of the output of that mine would you anticipate it goes to the met markets?

John W. Eaves

Well, I mean certainly in our models we were pretty conservative as we continue to look at it, make modifications to the plant, we think are very high percentage of that product is going to go in to met market. It is a high-vol A product very well received in the domestic market as well as the international market and I would tell you that 75%, 80% number would be certainly something very achievable and we would hope to well exceed that, but I think ICG was looking at when they were modeling it about 50% and we’ve got well half of that and hope to continue to build virtually all that coals into met market, but I think it’s just a little bit early to tell, but early signs are that we can continue to move that percentage up.

Paul Forward – Stifel Nicolaus & Company, Inc.

Great, thanks.

John W. Eaves

Thank you.

Operator

The next question comes from Shneur Gershuni with UBS.

Shneur Gershuni – UBS

Hi, good morning everyone.

John W. Eaves

Good morning Shneur.

Shneur Gershuni – UBS

First question just kind of wanted to talk about contracts in the east and sort of your strategy going forward. you’ve posted some contracts this quarter. Did that include some IOB tons even though you didn’t include it in the operations? And as you look at the market going forward, are you going to try and be conservative similar to the way ICO was there, will it be a little bit more aggressive in trying to price the market on a go-forward basis?

John W. Eaves

Well, I mean certainly we hadn't been that thrilled with what we’ve in the eastern thermal market, inventories are still above the five-year average, we think with the extreme level we’re having that has certainly drawn those inventories down and we’re starting to see more in close in terms of the domestic thermal market. We have been very pleased with what we’re seeing in the International market on the thermal side. We can’t continue to believe that that market is going to evolve at the back half of this year and well into the next year. But we are going to be exporting quite a bit of thermal coal of the East Coast. I wouldn’t say we’re going to be aggressive on our thermal pricing, I mean we’re going to be patient as we’ve said many times before, we're market-driven, we’re going to pick our spots, we’re looking to get the appropriate return, we think we’re going to have a good cost structure relative to our competition.

But right now, I would tell you that we’re focused on the international thermal market, the domestic met market and the international met market. And we don’t see anything on the met side that we’re discouraged as we start thinking about negotiations for 2012, we’re very positive especially in light of the products that we can take to the markets. So feel pretty good about our Eastern position, good costs, good quality coals, not only in the met side but on the thermal sides. So I think we can be very selective the way we market our coal. I don’t think that changes at all. And I think it is important to point out that in earnings release where we get some price coal that is reflecting some of the below market contracts that ICG has in place that’s certainly we will honor which ultimately is reflected in amortization that John mentioned earlier in financial part of the discussion where those get mark to up the market, but so – it’s not a big piece of the tonnage, but it will be an important piece of the tonnage.

Shneur Gershuni – UBS

Okay. And I guess as a follow-up, Paul just mentioned cost per ton and so forth. Quarter-over-quarter from the first quarter to second quarter, your cash costs actually declined by more than I guess the total operating cost. Can we assume that there is a depreciation step up that’s kind of driving that as well too as well as in fixed cost absorption reversal is that kind of the way to be thinking about it?

John W. Eaves

Yeah. Shneur it is part of the acquisition clearly, we’re allocating purchase price and a significant amount of value into the Property Plant equipment and that results in the higher DD&A. I think you can see the step-up in the guidance for the back half of the year that we expect as a result of that preliminary allocation is about $80 million.

Shneur Gershuni – UBS

So it’s fair to say you are not experiencing the same kind of cost pressure that some other players have experienced recently?

John W. Eaves

Yeah I think that’s fair, yeah, we feel pretty good about where our costs are, I mean we’re really just starting the budgeting process for ’12. But where we came in second quarter what would be the balance of the year, we do think will be in our leadership role in terms of costs in Central App.

Unidentified Company Representative

I think if you look back at the last several quarters, our eastern operations typically were among the lowest cost in the eastern or the public sector companies and ICG was kind of second. So in combination, we would expect that to continue to occupy that position.

Shneur Gershuni – UBS

Okay. And finally I realize it’s too early for 2012 guidance. But do you guys expect to see 2012, if everything kind of stays where it is right now to be meaningfully higher than we are right now or too much we’re expecting for this year?

John T. Drexler

Yeah. Once we had caveat, everything kind of stays where it is there from the market projections.

Shneur Gershuni – UBS

All right, great. Thank you very much guys.

Operator

The next question will come from Jeremy Sussman from Brean Murray.

Jeremy Sussman – Brean Murray, Carret & Co.

Hi, good morning.

Unidentified Company Representative

Good morning.

Jeremy Sussman – Brean Murray, Carret & Co.

Could you give us a sense of – for next year in terms of your quality breakdown out of your met coal, I mean how much – how much high-vol A, high-vol B, and low-vol, do you think we’re looking at this we’re thinking about it more on a blended basis?

John W. Eaves

No Jeremy, we are going to be doing a lot of blending. So I’d hate it allocated what I will tell you is that we got a strong position in low-vol with our Beckley and Vindex mines, some of the best goal in the world if you actually look at those two coals, they compare very favorable to the Peak Downs coal in Australia. So we’d expect on those type coals to get the benchmark type pricing. By blending some of our low coal – low-vol coals and our high-vol coals we create a mid-vol coal, which really there is not a lot of that here in the US. So we feel like that’s unique, we have the high-vol B, the high-vol A and then the PCI. So when we talk in to that customer, we literally have any product they can envision in terms of putting into their blend.

So I think it’s hard right now until we get to the budget process to really allocate what products go where, but I think it’s safe to say that we’ve got a portfolio of products that’s almost matched in the US and should be well received not only here in the US, but around the world.

Jeremy Sussman – Brean Murray, Carret & Co.

Right I appreciate that And just as a follow-up Steve, you mentioned 15/15 where you – I guess plan on increasing your met coal output by another 15 million tons, if I heard you correctly. Maybe from a bigger picture standpoint, can you kind of walk us through how we get there obviously the ICG properties are a big part of that, but love to hear your thoughts on that?

Steven F. Leer

Sure. I did say 15/15 and I – what we’re looking at is 15 million total tons of production of met coal by 2015 round numbers that in kind of 1 million tons a year moving forward here. I think if you look at Tygart 1 coming online in very early 2014 with this drag or excuse me with the long-vol would be a big chunk of that as John indicated my expectations are that will almost all go into the high-vol A market, there is really no reason that it doesn’t the coal done there is all high-vol A closing that is just the logical development of the mine and as customer develops. So that would be the largest piece of it, some of the Prep Plant modifications that we will be implementing over the next six months and then on into couple other plans on into 012, we’ll add another several 100,000 tons of very high quality low-vol and some of the high quality A, high-vol A coals to the mix. And then we are starting the permitting of really the other metallurgical reserves and the engineering really on Day one of closing the transaction and it’s always difficult to predict the permitting the construction time to those mines, but our goal is to have I will call it Tygart 1, 2 and 3 up simultaneously in the second half of this decade, not in series, which was the original tons that ICG had and there is really no reason that can’t occur.

Jeremy Sussman – Brean Murray, Carret & Co.

That’s great to hear. Thanks, Steve.

Steven F. Leer

All right, thank you.

Operator

We’ll move next to Brian Yu from Citi.

Brian Yu – Citi

Hi, great, thank you. My question is on the synergy estimate with the revised guidance that $100 million to $120 million. Is that a run rate that you hope to achieve in 2012 or is that the full year number that you’re expecting?

Steven F. Leer

Yeah. I mean we’ve got about 10% of that numbers for back half of this year and then, as we move into 2012, we would expect to get $110 million range for the 2012 year.

Brian Yu – Citi

Okay.

Steven F. Leer

Or the bottom line next year?

Brian Yu – Citi

Yeah. And so the change is incrementally around $30 million to $40 million and is that something we should expect to come through on the cash cost line holding of the equal amount, asking to make a prediction on where our cost will be, holding all (inaudible) cash costs come down by roughly $1 on the mining side.

Steven F. Leer

I think it’s fair to say again, kind of a third to third to third if you think about administrative buckets, marketing buckets and operating buckets, ultimately I think there is going to be additional line, we hold at least in my goal personally is that the marketing and blending bucket will grow further, but so, about a third of that should show up in the operating side and the other two, I mean the administrative side is an easy one to look at. Obviously there is redundancy when you bring two companies together in the corporate overhead on day one, everybody in the company knew what their future was with Arch Coal and there were some terminations with severance on day one, which are – have been reflected in the second quarter. But we also kept a Group on that would help to close the books in the second quarter and work through the third quarter there will be – they already know their departure date and then there is few folks who would stay onto end of the year. But you know so you get the full synergy effect by 2000 or through 2012. But it’s kind of layered in here in the initial six months of the rest of this year.

John T. Drexler

And Brian as you look at the income statement that’s going to come through those synergies on the revenue lines, that’s going to come through on the cost line, that’s going to come through on SG&A as well.

Brian Yu – Citi

All right. And my second question is early you mentioned out shipping some of Arch’s thermal to free up ICG's net. How many tons roughly are we talking about?

John T. Drexler

It’s minimal for the back half of the year. As we move forward, we think we can increase that but I would hate to throw out a number, but I wouldn’t say it’s a significant amount to back half of this year, but as we move forward, we’re looking at doing more and more of that as we get familiar with contracts and get the appropriate concerns from customers.

Brian Yu – Citi

Okay. Thank you.

John T. Drexler

Thank you.

Operator

We’ll move next to Brian Gamble from Simmons & Company.

Brian Gamble – Simmons & Company

Good morning guys.

John T. Drexler

Good morning

Steven F. Leer

Good morning, Brian.

Brian Gamble – Simmons & Company

The prognostication on the exports was a pretty strong numbers, Steve wondering if you want to put your prognostication head on and guess what’s the next couple of met signings are going to be in the international market, you guys obviously have a bigger footprint now and have more of your horse in that rate. Do you want to light that?

Steven F. Leer

We probably have better luck in forecasting when that deal is done as ever in Washington, but you know right now, I think we have spent a lot of time looking more in the next five years kind of look out at 2015 on global thermal and met coal demand in supply sourcing and on the assumption that there is not a global recession of any source, but really taking projections that are commonly available out there on GDP growth from very centric around the world, we continue to see a shortage of – in the supply demand balance with seamless of shortage of thermal and met exceeding 300 million tons approaching 340 million tons with about two thirds of that met, and one third steam. So where the settlements end up here in the third and fourth quarter and on into next year, obviously the folks in Australia will probably make those settlements but I – we think there is strong pressure for the high quality coals and maintain their value in that $300 range plus or minus and then everybody else pricing half of that. For the B quality coals, we’ve seen a little softness out there, but from the first quarter, but nothing hugely negative or disruptive and again we are feeling pretty positive about it.

Brian Gamble – Simmons & Company

To that end Steve is there any additional color you want to give on potential development pass Tygart 1 and then you talked about your potential there that there is the Tygart 2 and Tygart 3 kind of in your pocket is there any thought – has there been any more definitive thought with regard to the timing there. Could you bring that forward and really the 15 and 15 be north of that if one of those projects were to kind of be justified by the economics?

Steven F. Leer

Would be north of that. And right now the economics are overwhelmingly in favor of that. It’s really a question of the – getting the engineering done, which are pretty straightforward and then the permitting and construction and a realistic view of that would be a two year process for engineering, permitting and three year construction time frame and I think that’s a workable number now. If you run into issues on permitting obviously and do it if they would go amazingly smoothly you could cut that by half a year or so, but I think that’s a bad assumption in today’s world on thinking that permitting will be amazingly smooth.

Brian Gamble – Simmons & Company

Yeah. Those two things don’t go hand in hand (Inaudible).

Steven F. Leer

Not recently.

Brian Gamble – Simmons & Company

Thanks guys. I appreciate it.

Steven F. Leer

Thank you.

Operator

And our next question comes from Mitesh Thakkar from FBR & Company.

Mitesh Thakkar – FBR Capital Markets

Good morning guys.

Unidentified Company Representative

Good morning.

Mitesh Thakkar – FBR Capital Markets

A real quick follow up question on the Tygart project, can you provide us kind of an update on how does capital expenditure balance is playing out. I know you mentioned our longwall would be in 2014 for Phase I, how do we think about Phase 2 and Phase 3 is there anyway you can give us like some production numbers around it, I know timing is uncertain, but just in terms of production numbers.

Unidentified Company Representative

Well I mean we will start some development production later this year in the next year, but I mean really Mitesh until we see the longwall come on and we are expecting that in the first quarter of 2014, we are not going to see any meaningful production come from that operation. We should build or ramp that up pretty quickly and get to a 3.5 million ton run rate in pretty short order. In terms of what has been spent and will be spent on the project ICG has spent about $40 million this year, we are going to spend another 70 to 80 million between now and the end of the year, we are looking at longwall equipment or looking at prep plant designs, the total project right now is about $375 million this is the way we are pegging in.

Unidentified Company Representative

And each of the other model would probably have a similar type of expenditure, you know Mitesh, that is in prospective of the total reserve base there is $130 million, $135 million tons of recoverable high vol A coal. So, it is a significant reserve base and as I mentioned earlier, when you look at the global supply demand balance as we see it, it’s going to be, we think its going to be a major contributor to not only global supply, but certainly to Arch’s future earnings down the road.

Mitesh Thakkar – FBR Capital Markets

Okay. And just touching up on that reserve base, just from a capacity of a mine, if we forget about all the phases 1, 2, 3 whatever it is, what do you think is an optimal capacity of that kind of reserve base on an annualized production run rate kind of thing?

John T. Drexler

Each phase is probably $3.5 million to $4 million tons.

Mitesh Thakkar – FBR Capital Markets

Okay. Perfect.

John W. Eaves

Each $9 million to $10 million total if you’re running all three of them at the same time.

Mitesh Thakkar – FBR Capital Markets

Okay. Now, this is helpful. Thank you very much. Appreciate it.

Operator

We’ll move next to Mark Levin from BB&T Capital Markets.

Mark Levin – BB&T Capital Markets

Hi, gentlemen. Most of my questions have been answered, but I want to focus a little bit on the free cash flow situation and on the balance sheet. With regard to the balance sheet kind of where debt to sort of LTM EBITDA is today just in for the acquisition, sort of what’s the max level and then, maybe where do you hope to be a year from now?

Steven F. Leer

Mark, as we entered into this transaction, our debt to capital is in the low 40 percentile area, and that EBITDA was around two times. Clearly, in order to execute on the transaction we’ve taken that leverage up. As indicated, we are at 52% we’re pushing for times on debt to EBITDA. The immediate goal post in the transaction with the significant free cash flows that we will have is to bring that down and as indicated in my remarks, we’ve structured the transaction with meaningful pre-payable debt, a lot of revolver borrowings. That’s our intent, that’s our goal.

As far as a comfort level of where we like to be and how quickly we like to be there, I would say from where we were in that low 40s was a fairly comfortable level that we like to be in that range. However, clearly, if there is opportunities to enhance value, we are willing to take that leverage up. But right now, that will be the primary focus of bringing that leverage down.

Mark Levin – BB&T Capital Markets – Analyst

And then, I believe there, I could be wrong, but some meaningful LBA opportunities in the PRB that could be presenting themselves in short time. Is that viewed as a potential use of free cash flow as well?

Unidentified Company Representative

Yeah, no, clearly, as we look at how we operate our last under operation in order to move that forward, we are in the business of having acquired those reserves through LBAs and yes you are correct. There are LBAs that are coming due in the future, first one we expect to come due in 2012, so we will be evaluating that and clearly that would be a use of free cash flow as we move forward.

Mark Levin – BB&T Capital Markets

And then just on the CapEx subject and more specific I know you guys don’t want to get in to business of giving your 2012 CapEx budget yet but it’s obviously has a meaningful impact on what free cash flow looks like next year, can you may be give us some guide post or a good way of thinking about what CapEx could conceivably look like for 2012?

John T. Drexler

I think it’s a little early, I mean the guys are meeting over the next two, or three weeks for their first budget meeting and I would just take to put a number out there right now, that’s something that we are going be working on over the next couple of months and should have a reasonable number here over the next three months that we can maybe share the progress on that.

Mark Levin – BB&T Capital Markets

Okay, great. And then last question just specific to Mountain Laurel quality with the met coal that you shipped from Mountain Laurel, can you may be talk about sort of where that would price today in the met market and may be where it was for the last quarter?

John T. Drexler

I think if you look from first quarter to second quarter and some of the sales that were made a lot of that was high-vol B, which would have been our Mountain Laurel product and that was in the $143, $144 range. I would say we are seeing a little softening off that number over the last couple of weeks. We will see where that goes, but as we look to the balance of the year, most of our uncommitted volumes would be that high-vol B type product, so we are watching that market pretty closely right now.

Operator

The next question comes from Jim Rollyson from Raymond James.

James Rollyson – Raymond James

Good morning guys. A quite afternoon yet.

Unidentified Company Representative

Good morning, Jim.

James Rollyson – Raymond James

A couple of higher level questions may be for you. Just as it relates to guidance for this year coming down from your original guidance as far as thoughts on distribution of that between may be some of the early drag from the ICG acquisition before you get everything integrated and get into the benefits of the synergies we talked about earlier versus just some of the things I mean going on like the flooding issues et cetera. Any kind of color on the distribution or kind of what’s driving the delta?

John T. Drexler

Jim, this is John Drexler. I think had you look at that question and there is several major items and you hit on a few of them that are impacting that. First one of the major impact is just the additional shares that we issued in order to allow this transaction to happen and if you take the mid point of our previous guidance and just layer in those additional shares, you can see the impact that share count is having on that EPS. If you then look at the increase in EBITDA midpoint to midpoint, you’ve got a $150 million increase, now layered in that increase is a significant impact of what’s flowing through in PRB, you do get the benefit clearly of ICG, but there's a lot of things coming through there. You also have not affecting EBITDA, the additional interest expense; midpoint to midpoint for the remainder of the year is $87 million. On the DD&A front non-cash charges, but primarily all related to the increase in allocation of the value to the property plan and equipment $80 million. So with the increase in EBITDA offset by the additional interest in DD&A, you then can kind of reconcile and step forward where we’re looking on an EPS standpoint, which our midpoint now is a $1.95.

James Rollyson – Raymond James

Good color, and then as far as going forward to next year, and then I'm not expecting to give guidance overall yet, but if we think about this now that your synergy number has moved up to $120 million range from $70 million to $80 million. Let's say from where you started this in your own models, where do you think the accretion overall comes out for Arch on a combined basis for the next year, with out and you don’t have to give the, where you started and where you were, but maybe just a delta, is it better or worse?

John W. Eaves

On the assumption you recovered from the flooding and you had looked at the overall numbers, so we're not going to give a percentage right now that we’d like to get the final purchase accounts, purchase price allocation and some other things, but we would still believe the standard project that we’re slightly accretive in the first full year of 2012 and then we’ll have an update really, the full update and guidance will be provided on the call in January.

James Rollyson – Raymond James

So it sounds like directionally, it’s getting a little bit better given the rise in the synergies?

John W. Eaves

Yes, I mean its getting a little better there and the disappointing thing this last quarter and really the third quarter is really the flooding which obviously we have no control over, but it had an impact on the company, and it will solve itself as the rivers go down:

James Rollyson – Raymond James

Absolutely, thank you.

Operator

We do have several more questions in the queue (Operator Instructions) And we will move next to David Beard from Iberia Bank.

David Beard – IBERIA Capital Partners

Hi, good morning guys.

Steven F. Leer

Good morning, David.

David Beard – IBERIA Capital Partners

Maybe just to follow along on your EBITDA guidance bridge, when I step back you originally have guided 990 and the midpoint, it went up to 1.140, and you add back the PRB and take out the synergies and the guidance seem to be above $185 million. As part of that ICO in that number, is my question. And what sort of accounts for the balance?

John W. Eaves

Yeah, Daniel, I mean, I think the significant step up that you just kind of referenced there, I think a large portion of that is the impact of ICG and their operations for the rest of the year, layered into our results.

David Beard – IBERIA Capital Partners

Okay. All right, thank you.

John W. Eaves

All right. Thank you.

Operator

We’ll move next to Brandon Blossman from Tudor, Pickering & Holt.

Brandon Blossman – Tudor, Pickering, Holt & Co., LLC

Good morning, guys.

Steven F. Leer

Good morning.

Brandon Blossman – Tudor, Pickering, Holt & Co., LLC

I guess, say on a PRB just for a second. A couple of things, one care to comment on the recent increase in the business around the LBA process at least the last call around. And then two, on the forward curve pricing looking pretty attractive right now. Are there actual opportunities to kind of lock in some of that ticked up that we’ve seen over the last couple of months.

Steven F. Leer

On the competitive bidding, it’s a competitive process out there always and the government always has the right to determine if bid is non market related or competitive, if they so choose, so or just been an competitive with multiple bid situations before and obviously there were the one that occurred recently were two other guys were in that process. So I think it’s the way this system is structured and it has worked well for the state and for the government on getting full value for the bids.

As we look at the current pricing, the answer is yes, I mean the pricing has moved in and really the last few weeks somewhat significantly in the Powder River Basin, we’re not going to give the details, but we have done some contracting at that pricing, we also did some earlier in the quarter that was lower than that or in the second quarter that was lower than that, but we have been riding that pricing upward and people are in the market. And with the disruption and shipments and the heat waves that’s embraced pretty much the entire nation, the stockpiles are getting I mean down to significantly or certainly have seen an increase in questions and activities in coal. Yeah and I think the other important aspect to notice well, the committed but unpriced coal particularly in the PRB have all sorts of calculations to ultimately get it, but a somewhat rule of thumb to think about it is the unpriced, the committed unpriced coal prices that whatever the average price was for the previous quarter. So we’re looking at third quarter pricing, it’s kind of picking up second – it will pick – end up picking up second quarter price, ultimately pricing. So as we move forward in assuming this pricing continues where it’s at it will have the positive impact next quarter as we roll through the system committed but unpractical.

Brandon Blossman – Tudor, Pickering, Holt & Co., LLC

Great, thanks, useful color. And then just switching topics real quickly on integration, it sounds like it’s gone exceptionally well today, so congratulations on that. And the question is between signing and today, it sounds like you have some positive surprises, has there been any negative surprises against which you kind of pro forma prior to the deal being signed?

Steven F. Leer

Great question, and actually, no, we literally had a Board meeting yesterday and both John Eaves and I reported to the Board that in all the deals we’ve done, speaking from ourselves over 30 years, this one has gone smoother and faster than probably any one that I’ve seen given its size and really no negative surprises, knock on wood. But the usual bumps of coal mining that you have, but really, then more on the positive side, the negative side and it’s really a credit to the men and women of the former ICG to Ben Hatfield and his team and to the men and women of Arch Coal, I mean people rolled up their sleeves and decided to get this done. I’ve never seen an operation ever where we converted the computer systems on the first day of acquisition. I mean that’s just unheard of and they got it done, which is incredible.

Operator

And we’ll move to the next question from Dave Martin from Deutsche Bank. And Mr. Martin, please check your mute function.

David Martin – Deutsche Bank Securities

Sorry about that. Thank you. Why don’t you come back to your comments about – first your comment about second half exports if you would, given all the macro concerns, I’m just curious if you can give us any comments or color on what you’re seeing that gives you confidence to make that statement? and then secondly on the met markets, do you anticipate that some of the open tons that you have available for the second half, will it be sold domestically or is that all export? And then lastly, just curious on the weakness you noted in some of the lower grade mets? Where do you think – what do you weight as more important? Is it a demand driven weakness in the price or do you think it’s more of a supply driven issue with more blending going on in the industry?

Steven F. Leer

I think of kind of going in a reverse order, it’s probably just uncertainty of some of the steel companies as they look forward in just their market book, where we’ve seen, as John mentioned a slight decrease in the Grade B be type quality coal. I mean that’s in that $5 or $10 range, it’s not a big jump down if you will. We expect to really sell that coal, we’re in negotiations. We have sold that coal over the last 30 days we’ve committed and some of the coal and continued to have a pretty good visibility in the market we think. So it’s more I think (inaudible) what the future holds when you look at our – lunacy that’s going on in Washington that’s not giving confidence to people out there. So you’d see that sort of thing occurring.

So from the total export number, we’ve actually pulled back a little bit. We had raised our number internally above 110 million tons for total exports. The flooding on the river system have pulled back some of that that we’ve seen here and we’ve tried to build that into our thinking. But it is a robust market out there. Most of the sales are committed already and obviously boats can move around or something could slip from fourth quarter and the first quarter for somebody, but the demand is clearly there and for the most part, the commitments are already tied up.

Operator

And we’ll move next to Richard Garchitorena from Credit Suisse.

Richard Garchitorena – Credit Suisse

Great, thanks for taking the call. First question just you do say that you see inventories tightening to below normal by the end of this year. I'm just curious do you still see given the strength in the export markets and eastern tons coming out of the US, do you still see PRB demand increasing through backfill to the east? Have you had any interest from utility in that sense, what's your view going into 2012?

John W. Eaves

Richard, this is John. I mean we continue to believe and see interest from Midwestern and Eastern utilities as they look at inventories continuing to be drawing down. The continued challenges I see out of Central App we're very bullish on PRB coal coming to the Midwest and Eastern United States and secondarily going off the West Coast to the Asian markets as we develop more port capacity. So, yes, we’re seeing that happen right now. As Steve indicated we’re encouraged by the pricing we're seeing, certainly over the last couple of weeks. If you just look from June 10 on the step up in pricing has been pretty significant. So as we come into the third quarter, we continue to layer in business at very attractive prices and would expect that to continue throughout the back half of the year.

Unidentified Company Representative

One of the interesting milepost out there too is, historically when these kind of market conditions occur, you’ll see Eastern Utilities start to approach the Colorado market and usually Colorado will starting selling into the east. This year Colorado coal is being exported in, speaking for itself, that’s pretty well all committed to the export market. So there is no opportunity to back that with Colorado. So you move faster to the PRB.

Richard Garchitorena – Credit Suisse

Great. Thanks. And on that note, in terms of the PRB strength, can you give us any idea in terms of what you have committed price for 2013? I know you didn’t give it, but maybe you can give us a sense of what you’ve got open?

Unidentified Company Representative

Our uncommitted part is in the press release, I think, but in terms of pricing, I think if you look at the industry numbers, those are pretty representative of where the market price is right now. And that’s in that high $16 range right now on the end.

Unidentified Company Representative

And as a company, I mean, we have plenty exposure to what we think is improving market in 2013, out of PRB and some of our other regions, but that’s by design and with what we see occurring right now, it should play out very nicely for Arch.

Operator

And our next question comes from Andre Benjamin from Goldman Sachs.

Andre Benjamin – Goldman Sachs

Hi, good morning or good afternoon. Couple of quick questions also on the PRB. I guess the first would be, how should we think about your contracting and production going forward? Have you noticed any difference in utility willingness to contract, is the strip has risen over the last few months and could you give a little color on say, how much of those price last quarter was, say, earlier in the quarter versus later when it was above 15?

John T. Drexler

Yeah, I mean certainly our customers continue to show interest with our PRB I would say. between that one to three year length in terms of the term of the contracts. As Steve indicated, we did commit some call earlier in the quarter. We’ve always said that (inaudible) especially when we see markets improve that we can always catch the top. And so as I previously mentioned, we saw the market start to really move around June 10 and move up pretty significantly after that. So we had committed some of our sales prior to that, but everything we’re seeing right now over the next one to three years indicates very attractive pricing over the next couple of years and should continue to improve.

Steven F. Leer

And John mentioned in his comments, but I think it’s important to reiterate it. Roughly a third of our commitments in this last quarter were in our 8400 product. So while it’s pulled down the average pricing out there without very attractive pricing for that market.

Andre Benjamin – Goldman Sachs

That’s definitely helpful. And I guess to follow-up on a question which I just previously asked on EPA regulations. I know you guys have had the belief that POB has a bigger opportunity to backfill not only impact of coal supply in Appalachia, but also benefit from pending EPA regulations particularly the software. Have you started to actually get to increase in utilities that give you the confidence that view is actually going to be boring out or do you think that that’s something you again have to wait a little bit until it does settles around the pending regulations?

Unidentified Company Representative

I think we’re getting inquired or correct way to phrase it was we’re getting inquiry, more people are thinking about that you’re starting to see some of the consulting groups come out with the view that there will likely be some switching to the lower sulfur, lower chlorine type coal that would be our lead. But the utilities quite rightfully you’re kind of look at it and say we have to start our thinking and planning, but until we see the final rulemaking. We’re certainly not going to make commitments.

Andre Benjamin – Goldman Sachs

All right, thank you.

Unidentified Company Representative

All right, thank you.

Operator

And we’ll move next to Brett Levy from Jefferies & Co.

Brett Levy – Jefferies & Co.

Hey, guys. Almost all my questions answered from you. In terms of like equipment movements are anything causing a disruption in 3Q or 4Q. How is that going to compare to the second quarter you guys just posted?

John T. Drexler

A couple of things, we did have a major repair on our largest dragline at Black Thunder that was down for over 30 days. That was in early part of the quarter. Back half of the year, we’ve got I think about four long-vol moves all in the Western Bit region. So other met is just normal course of business. we’re moving our long-vols all the time. So it’s – we don’t see that as unusual. So other met everything businesses.

Brett Levy – Jefferies & Co.

So in terms of EBITDA or EPS impact, similar impact from 2Q to 3Q to 4Q?

John T. Drexler

I think that’s a fair characterization.

Steven F. Leer

Yeah, yeah.

Brett Levy – Jefferies & Co.

Thanks very much guys. Good quarter.

John T. Drexler

Thank you.

Operator

Our next question comes from Lance Ettus from Tuohy Brothers.

Lance Ettus – Tuohy Brothers Investment Research Inc.

Just want to know with the West Coast ports, how the permitting process is going? And just you know if we could just go over the details how that works if it’s – I’m sure if not just hold one permit. I guess it is kind of layout for us, the various things you ask me to get and the time horizon it gets for each one of those and where they’re, which you have to get one before the other or I guess just the detail on how that works.

Unidentified Company Representative

Well the Millennium which Arch have 38% of again, we’re not responsible for running that, it is – but we are a large equity holder there. I think the easiest way to think about it is the port itself is in a fairly heavily industrialized area and it was a former aluminum facility, so much of the port issues are already there if you want to think about it that way. What was agreed to was that or I should say the port was permitted for $5 million tons per year of product and originally Millennium that they could just add coal to that.

Ultimately it was determined that maybe under all of the laws in Washington that you had to go through an EIS or what’s the maximum potential size even if you’re going to build it or construct it in a period of phases and Millennium agreed to do that so they are performing at EIS for kind of the maximum size that the port might be, and that number is still open to review and debate internally, but they’re progressing with the expectation that hopefully they will complete that (inaudible) and environmental impact information either by the end of this year or early next year. On the assumption that goes forward than it and submitted to the state then the actual review and ultimate permitting takes place. If we were extremely lucky that’s going to occur in 2012. I think realistically it will take longer than that and then you would have faced it where you would actually kind of start at 5 million tons and then whatever the final size ultimately agreed upon when you think about the railroad movement through the town and the port itself probably be built in two or three phase. So it’s a little early, but sometime between 2012 and ‘15 is about the best I could give you right now. I mean we are not including it in our numbers until later into that span of years.

Lance Ettus – Tuohy Brothers Investment Research Inc.

Okay, thank you.

Operator

And we’ll take the next question from Justine Fisher from Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

Steven F. Leer

Good morning, Justin.

Justine Fisher – Goldman Sachs

I have a question on the debt repayment. I know that you guys mentioned you had structured the deal around being able to prepaid debt in order to bring your leverage metrics down and when we look at it, there is a $360 million of revolver drawing that can be obviously be repaid with strong cash flow over the next 18 months, but beyond that it doesn’t seem that anything is pre-payable unless you count calling a bond and so the question is, if we assume that you repay the ICG bonds and the revolver to bring debt to $3.6 billion is that the goal that you’d look out or does that need to actually be lower than that and if so, how do you get there.

John W. Eaves

Justin. Yeah, I mean, part of the evaluating all of this and contemplating what the markets would be as we move forward and what the opportunity for free cash flow was to put meaningful pre-payable debt, which you’ve reference there as the drawing under revolver. But then in addition we do have debt maturity of the AWR notes which are coming to mid 2013. So we will continue to evaluate, depending on what market conditions are, what the free cash flow is, what our opportunities are with that as we move forward.

Justine Fisher – Goldman Sachs

And can you remind us of the tax implication taking some of those 13 debt early as their disadvantage from taking some of those out, in ’11 or ’12?

Unidentified Company Representative

There is a springing tax liability associated with that, and as it get overly complex here. As we get closer to the take out period of those bonds, as when our partnership agreement essentially goes away and the tax liability to the company continues to get smaller and smaller, so we’ll continue to evaluate that as time goes by.

Justine Fisher – Goldman Sachs

Great. Thanks very much.

Unidentified Company Representative

…last year.

Unidentified Company Representative

Yeah, it gets very small as we get to the end.

Justine Fisher – Goldman Sachs

...end of 2012.

Unidentified Company Representative

Correct.

Justine Fisher – Goldman Sachs

Okay. Thank you very much.

Operator: And we’ll move next to Jack Franke from Point State Capital.

Unidentified Analyst

Yeah, hi its (inaudible) from Point State. Can you hear me?

Unidentified Company Representative

Yes. Jack go ahead.

Unidentified Analyst

Thanks Steve. Just quick question just in terms of what your thoughts where with these new environmental regulation, now EPA will be a (inaudible) and some of the implications of that for putting a price on SO2. Having had a price on SO2 for several years. Okay, then sort of remand and implosion of the old (inaudible).

Steven F. Leer

Right.

Unidentified Analyst

…you might start to get a price on SO2 again. Just curious how big a price on SO2 and what’s some of the implications were for PRB coal in general. And then in particular the CSAPR rule effectively now includes taxes and there has been a lot of discussion in Texas from the EPA and the power generators there. That’s that way they comply there is to shut down the self owned lignite mines, over the reclamation liabilities and start to do PRB blending. Are you getting a lot of interest from some of the large coal fired power generators in Texas and the request for pricing, on PRB coal, and looking into rail and so forth that would sort of (inaudible) and switching or is this all sort theoretical hypothetical effect this early stage.

Steven F. Leer

I mean, I’d love to be able to answer that question in full detail.

Unidentified Company Representative

So would I.

Steven F. Leer

But still it’s early, but I think the general direction is that people are starting to really look at the proposed rule and which should go final here in November. And the fact that they have a very short time frame as they get to keep the timeframe the same as by 2015 to [leap year] of the requirements of the rule. And that in general, the low sulfur, the low mercury, the low fluorine content of the PRB coals played very well against that rule. So I hear more that there are discussions and inquires are starting. Again, I don’t think people have made the commitments yet, but the increasing level of interest that people kind of work through the rule itself and every unit out there is a bit different, so we see that as one of the significant up size that could accrue to the PRB. We’re not projecting that yet, but at the moment, it’s trending that way. I do think the lower sulfur content is going to become an important piece of that total calculation.

Operator

We will take the next question from RJ Cruz from [TCW Asset Management].

Unidentified Analyst

Hi, thank you. Can you provide an update on the Allegheny Energy supply litigation and, if you have accrued anymore than the $40 million that (inaudible) has recorded in the first quarter?

Steven F. Leer

You know the ongoing litigation, I really can’t comment much on that, but we certainly recognize that and I’ll let John talk about the accruals, but we are a big customer of FirstEnergy, which is known as Allegheny. We’ve got to have a relationship at some point in time. I’m sure it just hasn’t performed yet, but we’ll sit down with them and see if there is a logical way to solve this problem.

John W. Eaves

Hey, RJ. In the 10-Q, we will be disclosing that we have accrued over a $100 million for that. If you remember the judgment was $104 million. I mean, as we were evaluating that potential in our economics as we’ve indicated, we contemplate a more severe impact there as well, so we feel comfortable in purchase accounting that we have it appropriately accrued in accordance with GAAP, and we’ll go forward from there is as Steve said, how this continues to play out.

Unidentified Analyst

So that would mean that you are less certain about your legal basis to win this litigation.

Steven F. Leer

Yeah, with me and then we’re being conservative and didn’t want any surprises to our board, our shareholders or the market.

Unidentified Analyst

And maybe just a follow-up on, what Justin was asking in earlier and beyond the revolver pay down that you’ve mentioned, are there other uses that you’re highly considering for the deployment of debt free cash?

Steven F. Leer

As we sit here today, and as we’ve stated several times I think I think the immediate focus post the acquisition is to bring down that leverage post the acquisition we will continue and expect to continue to have, really have the levels of continued cash flows as we’ve and I pointed out over the course of the discussion here there is plenty, there will be several opportunities for various things whether its organic development, we are continuously and constantly evaluating dividend policy. We have had share repurchase programs that we’ve had out there and utilized in the past. And so all of those will be out there and as we’ve consistently done in the past, we’ll look at where we create the most value for the company for the shareholder and we’ll execute when we think that it is fit and, but the primary focus here right out of the gates will be ongoing delevering of the balance sheet.

Operator

We’ll take today’s final question from David Lipschitz from CLSA.

David Lipschitz – CLSA

Thank you. Did you guys talked at all about the Illinois Basin going forward, I know it’s a small part, but in terms of what we’re doing in that region in terms of the Viper Mount and things like that.

Steven F. Leer

You know we will, it is a small part at the moment, David, but you know Viper is a nice contained operation and we do have some activity there of course, we have our equity investment in Knight Hawk coal and then, we are in the process of permitting a major mine there. So, periodically the discussion and the play on Illinois Basin will certainly be brought up and called and I think future releases, it’s just, Viper is a pretty small mine and 15 days it didn’t have much impact so on. I’m sure let’s see some works in the future.

David Lipschitz – CLSA

But going forward are we going to see that as a separate sort of you have the PRB Western Bit at Appalachia is that could be it’s only a little segment with like in the third quarter release.

John W. Eaves

Yeah. As it becomes more material you’ll see more detail on that.

David Lipschitz – CLSA

Okay, and then finally, I just want to go back. You said about being accretive next year, I know you haven’t given any guidance, but consensus of things when you did the deals about $3.80 somewhat of share two basin are saying still accretive from that point in time.

Steven F. Leer

Well you know its accretive from what we were projecting with internal numbers, we’re not going to give a number today of were our guidance go, but I just want to say we’re feeling very good about the way this has come together and in fairness, its come together better than anybody should have the rights to expect so you know stay tuned, I guess.

David Lipschitz – CLSA

Okay thank you.

Steven F. Leer

Thank you, David.

Operator

That concludes the question-and-answer session today. At this time, I will turn the conference back over to our presenters for any additional or closing remarks.

Steven F. Leer

All right. Thank you, Nancy. I would like to thank everybody for joining us today. I hope that you could tell that we are, and that we have communicated fully our enthusiasm for not only the ICG transaction itself, but really for the way the integration has progressed thus far where we stand when we’re looking into our complete suite of metallurgical coals from the most economic PCI coals to the most high value low vol coal. You know not many have really focused on that Arch become one of the major producer of the low vol coals in the United States moving forward, and will have significant back I think on that higher quality in particularly when you are at the highwall when Tygart comes on as well.

In the thermal markets, we’re seeing improvements in the west. We’ve talk a bit of that today domestically, the market is getting more and more interesting led by that perhaps the heats waves and the fact that the export markets for thermal coal continue to develop and remain strong and they are pulling off some of the highest quality thermal coal. So as the US domestic customers come back and if stockpiles end up like we are projecting where their below normal it really sets an interesting 2012. So, it’s going to be very dynamic.

We think Arch is extremely well positioned and we look forward to discussing not only the transactions, but really our views of the future in our next several call. So thank you and have a good day.

Operator

That does conclude today’s presentation. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Arch Coal CEO Discusses Q2 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts