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Alpha Natural Resources (NYSE:ANR)

Q2 2011 Earnings Call

August 04, 2011 10:00 am ET

Executives

Frank Wood - Chief Financial Officer, Executive Vice President and Chairman of Safety, Health, Environmental & Sustainability Committee

Paul Vining - Chief Commercial Officer

Kevin Crutchfield - Chief Executive Officer, Director and Member of Safety, Health, Environmental & Sustainability Committee

Todd Allen - Vice President of Investor Relations

Kurt Kost - President

Analysts

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Michael Goldenberg - Luminus Management

Lance Ettus - Mortar Rock Capital Management

Holly Stewart

Andre Benjamin - Goldman Sachs Group Inc.

Shneur Gershuni - UBS Investment Bank

Richard Garchitorena - Crédit Suisse AG

Brian Gamble - Simmons & Company International

Brian Yu - Citigroup Inc

Paul Forward - Stifel, Nicolaus & Co., Inc.

Meredith Bandy - BMO Capital Markets Canada

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Operator

Greetings, and welcome to the Alpha Natural Resources Second Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Allen, Vice President of Investor Relations for Alpha Natural Resources. Thank you. Mr. Allen, you may begin.

Todd Allen

Thank you, operator, and I'd like to thank all of our participants for joining us on Alpha's second quarter conference call. The format today will be somewhat different from our past calls in order to allow for further discussion of the Massey acquisition which we completed on June 1. We expect that this call will run longer than usual and we've provided a PowerPoint presentation to accompany our prepared remarks, which can be found on our Investor Relations website. Following the prepared remarks, we will open the call for your questions.

In terms of the structure of today's call, Kevin Crutchfield, Alpha's CEO, will lead off with a few introductory comments; and then, Frank Wood, our CFO, will discuss Alpha's second quarter financial results, combined company's guidance for 2011 and 2012, purchase accounting impacts and Alpha's current balance sheet and liquidity position. Following this financial discussion, Kevin will elaborate in detail on the synergies Alpha expects to realize from the Massey transaction as well as our ongoing optimization process.

Kurt Kost, President of Alpha Natural Resources, will then discuss the rollout of Alpha's Running Right program and the progress of our integration of Massey.

Paul Vining, our recently appointed Chief Commercial Officer will also be available to address sales and marketing questions during the Q&A section.

Please let me remind you that various remarks we will make on this call concerning future expectations for the company constitute forward-looking statements under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management's views and assumptions regarding future events and business performance as of the time the statements are made. Actual results may differ materially from those expressed or implied. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in our filings with the United States Securities and Exchange Commission, including our annual report on Form 10-K. This call is being recorded and it will be available for replay for a period of 2 weeks. The call can also be heard live on the Internet and both the replay and the downloadable podcast of the event will be archived on our website at www.alphanr.com for a period of 3 months.

With that, I'll turn it over to Kevin.

Kevin Crutchfield

Good morning, everyone, and thanks for joining. Since our last conference call, we completed the acquisition of Massey Energy Company, making Alpha a leading supplier of metallurgical coal brokering and we are now all by far, the largest supplier of metallurgical coal in the United States. We also control, by far, the most export capacity of any U.S. provider with nearly 30 million tons of core capacity. We substantially increased our reserve base and we're positioned to achieve significant synergies, which we now expect to reach $220 million to $260 million by 2013 without taking into consideration the impact of our optimization efforts. I'll address more on both of those topics later. Integration is proceeding according to plan and the rollout of Running Right is moving rapidly and has, if anything, been more successful than we originally anticipated. We're pleased with Alpha's industry-leading position following this acquisition. However, there's still a tremendous amount of work to do and we have been and will continue to remain rifle sharp focused on the successful integration of the Massey organization and optimizing performance of our combined company.

Today, we'll provide you with guidance for 2011 and 2012 and layout our plans to achieve optimum performance going forward. I view the discussion of the merger and our future expectations as the central theme of this call today. But before we get into that, I'll turn the call over to Frank, for a discussion of our second quarter results. Frank?

Frank Wood

Oh, thank you, Kevin, and good morning. In Slide 4, we will show some of the highlights for the second quarter. On Slide 5, we'll discuss our cost of coal sales per ton in more detail.

By closing the Massey transaction on June 1, Alpha's second quarter contains 1 month in the legacy Massey operations. On Slide 4, we show summary, financial and operating data for Alpha for the quarter at 6 months ended June 30. We also show a column for the legacy Massey for the 1 month, June, incorporated into our second quarter and 6-month results. The figures for legacy Massey should be reviewed -- should be viewed as indicative rather than precise and I've already integrated certain of the transactional accounting processes, and results by legacy company are beginning to blur somewhat.

Alpha reported GAAP loss of $56 million for the second quarter after recognizing $254 million of merger-related expenses, including a noncash charge of $108 million arising from shipment of Massey coal inventories that have been written up to value and acquisition accounting, which significantly affected the amounts reported for cost of coal sales in selling, general and administrative expenses.

We also incurred $6 million in pretax UBB charges, a pretax benefit of $10 million from amortization of acquired intangibles, a $5 million pretax loss and early extinguishment of debt, $54 million income tax effect of these various adjustments, and $6 million discrete income tax charge. Adjusting for these various items, our adjusted income from continuing operations in the second quarter of 2011 was $151 million.

Coal revenues during the quarter were $1.4 billion, up nearly 60% from $0.9 billion in the same period last year. Approximately $334 million of that is attributable to legacy Massey June coal revenues.

Total revenues also increased 60% from $1 billion to $1.6 billion. Two primary factors were driving revenue growth. First, Massey contributed about 57% of the top line growth in the quarter. Second, average per ton realizations on metallurgical coal rose 50% to $176.08 compared to the second quarter last year. Total costs and expenses for the second quarter were up 72% from the same period last year to $1.6 billion from $947 million while cost of coal sales increased 69% to $1.1 billion. We'll be discussing cost of coal sales drivers on the next slide with specific emphasis on Eastern cost per ton.

Compared to the same period last year, our adjusted EBITDA from continuing operations increased approximately 80% to $362 million from $202 million in the same period last year. On this slide, we discussed a topic that has been a frequent concern of many Appalachian operations. Overall, our adjusted cost of coal sales per ton in the East has increased by approximately $12 or 19% for the 6 months ending June 30, 2011, compared to the full year 2010. Here is the cost bridge indicating the key drivers of cost increases.

Since brokered coal is typically related to our met sales, it can be considered largely a met-driven cost increase. Taken together, met-driven items, including sales related, brokered coal and increased met volumes contributed nearly 60% of the increase or approximately $6.75 per ton. However, since we achieved much higher margins on this business, we benefit from these activities in spite of reporting higher adjusted cost of coal sales per ton for our Eastern operations.

One of the biggest operating challenges we [indiscernible] faced during the quarter was the week-long low volumes of Emerald due to geologic issues. This increased our Eastern adjusted cost of coal sales per ton by about $2.25 and contributed approximately 19% of the overall increase. Copper on the other hand had a solid quarter after its longwall move in the first quarter and the beginning of the second quarter.

Supplies for significant steel content such as roof support contributed about $1.25 per ton or 6% of the $12 overall increase. Despite our hedged position, more expensive diesel fuel also added about $1 to our adjusted cost of coal sales per ton in the East. While the $12 delta in our Eastern cost seems like a meaningful increase, and it is, the fact that majority of it is met driven, which enables us to achieve significantly greater margins gives us comfort that the cost increase is to a considerable extent, a conscious business decision, also the ability to extract sizable synergies from the Massey transaction means that Alpha will have a greater ability to control costs in 2012 and 2013 relative to the overall region.

Before I walk you through our combined company guidance, I want to discuss Massey's sales book, which in our view is suboptimally positioned for the near term and enforces our near-term shipment and average realization guidance, the reflects on the sales book can be found in the acquisition accounting, which I'll go to a couple of more slides.

As you can see on the slide, legacy Massey's production is fairly heavily contracted at prices that tend to be below market and in some instances, well below market. It will take us some time to satisfy existing contracts and clean up the sales book. But once that process is largely complete, we'll have a significant opportunity to increase our margins and generate substantial synergies.

Essentially, all coal from legacy Massey is fully committed and priced for the year 2011 due to combination of several factors: some recently booked business; some tons that were previously committed and unpriced, but has since been priced; a lower production forecast compared to Massey's previous guidance; and the need to apply some tons to thermal and industrial contracts that may otherwise be sold into the met market. In addition, a few customer disputes on some legacy Massey contracts are still in the process of being resolved, creating uncertainty about the future pricing of a couple million tons.

Typically, Massey has shipped about 7 million to 9 million tons per year on CSX OTC contracts with the standard 12,005 BTU per pound quality spec. As a result, some mines where the heat content may have been inconsistent were lower than is requirement, particularly surface operations tended to be dispatched inefficiently to hit the required OTC spec. Also in order to blend these coals up to the 12,500 BTU spec, higher quality coals that might otherwise go into met blends have been forced in the steam coal blends.

In addition to tons committed on OTC and utility contracts at below market prices, the Massey sales book brings with it a number of industrial contracts, which are often requirement contracts that consumes significant time and energy to service. Some of these contracts are long term in nature and below current market prices.

Going forward, we will migrate these legacy Massey tons onto contracts more typical of Alpha's book of business. Specifically, we will look for ways to dispatch lower BTU coals in more efficient ways among contracts that don't tie us to a quality standard that is misaligned with our actual production profile. This should improve the efficiency of thermal mines while at the same time freeing up some coal that ought to be shipped into the met market. Also we will be reviewing certain of Massey's commercial strategies, such as OTC sales, industrial stoker markets and requirements contracts to determine which make commercial sense in today's market environment. These issues will take time to work through.

In the short run, these issues will tend to constrain met coal shipment volumes and average realizations. And as a result, they will delay some blending and marketing synergies. However, in the intermediate term, the ability to clean up the sales book will provide an opportunity to increase met coal shipments, drive enhanced margins and realize substantial synergies. Importantly, there are very few legacy Massey obligations beyond 2012.

As Todd mentioned earlier, Paul is here with us and available to answer your questions about the contracted position in the Q&A following our prepared remarks.

Today, we are introducing combined company guidance for 2011 and 2012. For the year 2011, we have incorporated 7 months, June through December, of expected shipments committed and priced per ton sales realizations, adjusted cost of coal sales, East and West, SG&A expenses and capital expenditures from the legacy Massey operations into our combined company guidance.

At the midpoint, 4 to 7 months, we expect the legacy Massey operations to ship approximately 5.5 million tons of metallurgical coal and approximately 17 million tons of Eastern steam coal. In 2011, we expect to ship between 19 million and 20 million tons of met coal, 37 million and 41 million tons of Eastern steam coal, and between 48 million and 58 million tons of PRB coal, which is at the midpoint has been reduced by 1 million tons to reflect shipment constraints due to Midwest flooding, which impacted the second quarter by almost 1 million tons that continued during July.

Based on the midpoint of the shipment guidance, we have 86% of our 2011 met coal shipments committed and priced at approximately $158 per ton, leaving about 2.8 million tons get priced with a largely sold out thermal coal side of the business.

Our adjusted -- our Eastern adjusted cost of coal sales for the full year is expected to be similar to both the second quarter and the first half within the range of $69 to $73 per ton. The Western cost of coal sales is now expected to be between $9.60 and $10.

Moving to merger-related expenses. SG&A in 2011 is anticipated to range from $250 million to $270 million. Depreciation, depletion and amortization was expected to be in the range of $750 million to $780 million this year, reflects the increased of the legacy Massey DD&A due to write up in acquisition accounting of owned and leased mineral reserves, property and equipment, but excludes the net amortization of intangibles. $125 million to $140 million guidance for interest expense has been updated to reflect Alpha's post-Massey combination capital structure, which includes $1.5 billion of new senior notes, a net $375 million increase in our term loan A and Massey's 3 1/4% convertible notes. At the midpoint, our capital expenditure guidance of $575 million to $650 million includes approximately $220 million for legacy Massey for the 7 months.

In providing guidance for year 2012, we utilized the outlook for 2011 adjusted for expected improvements in synergies. We have not yet gone through a detailed planning process for 2012, which will occur this fall and will give us further insight to the expected performance next year. As a result, certain of the ranges are fairly broad at this early date.

This guidance includes a full year from the legacy Massey operations. Notably, measured at the midpoint of shipment range, Alpha has about 22 million tons of expected metallurgical coal shipments to price for 2012. Similarly measured, Alpha has about 26 million tons of Eastern steam coal and about 4.5 million tons of Western steam coal to price in 2012. Cost of coal sales per ton are expected to be approximately flat in these due to significant optimization efforts while PRB costs are expected to increase in the estimated inflationary range of low- to mid-single digits.

Now that we have had an opportunity to assess the operations and the sales commitments of all business units, we believe this guidance is realistic and attainable and we are committed to demonstrating consistent execution going forward.

Now I would like to briefly discuss the significant pro forma income statement impacts resulting from our preliminary acquisition accounting. The total acquisition accounting adjustments shown on the left-hand column are as of June 1, the transaction date. As you can see on Slide 8, most of the larger preliminary acquisition accounting adjustments result in additional expenses on the income statement in the second quarter and in the year 2011, because a number of assets such as coal inventory, PP&E, mineral reserve and development and transportation contracts have fair values in excess of their historical current values. These additional expenses are somewhat offset by a benefit to pretax earnings attributable to the increase of coal supply agreements as a result of fair valuing Massey's coal supply agreements, which, on average, were below market value at the time of closing.

The amortization of acquired intangibles referred to in our financials, includes such items as transportation contracts, coal supply agreements, permits and noncompete agreements and excludes such items as coal inventory and PPP adjustments. Taken collectively, the result of these preliminary acquisition accounting adjustments is a net additional expense of $98 million in the second quarter and an estimated net additional expense of $20 million for the full year 2011. However, because the largest additional expense item is the adjustment for coal inventory, which is largely expensed in the second quarter, the net impact of acquisition accounting for the Massey transaction is expected to flip to a net reduction of reported pretax expenses in future reporting periods.

As the largest adjustment, the one for coal supply agreements, is expected to become the driving influence among the various acquisition accounting adjustments. We will continue to break out the amortization accretion of coal supply agreements and adjust for this item in our adjusted income from continuing operations, which have the fair value of the liability of both large and accretive over a fairly short period of time. This treatment is consistent with the way we have reported our non-GAAP results since the merger with Foundation in 2009.

Finally, I would like to update you on our balance sheet and liquidity position. As of the end of the second quarter, Alpha had approximately $1.2 billion of cash, cash equivalents and marketable securities, and total potential liquidity of approximately $2.2 billion. At par value, total debt outstanding was approximately $3.4 billion, excluding the remainder of the Massey 6 7/8 notes, which were completely redeemed on July 1. We recently announced our intention to redeem the 7 1/4, 2014 notes in the month of August using a portion of the proceeds from our 6% and 6 1/4% bond issuances completed on June 3. After the redemption, both total debt outstanding and cash on hand should decrease by approximately $300 million.

On the equity side of the balance sheet, during the quarter, Alpha repurchased approximately 500,000 shares at an average price of $42.88. These were all the shares allocated under the 10b5-1 plan that we have put in place. These shares were brought back under the existing share repurchase authorization, bringing the total buybacks to $46 million since May of 2010. Alpha and its Board are looking into augmenting our share buyback program as we believe our strong expected free cash flows create an opportunity to enhance shareholder value through repurchase of our shares.

I would now like to hand the call back to Kevin for an update on synergies and optimization.

Kevin Crutchfield

Thanks, Frank. As I'm moving to Slide 10, we remain confident that total synergies from P&L perspective will exceed $150 million by midyear 2012. And today, we're increasing our final synergy target to a range of $220 million to $260 million from which we believe we're on a glide path to achieve by midyear 2013. Specifically, we look for marketing synergies of $90 million to $110 million, operation synergies of $80 million to $90 million, and SG&A and sourcing synergies of $50 million to $60 million, all of which are net of these synergies.

In addition to income statement-related synergies, we continue to expect the capital allocation efficiencies should be more than $50 million annually. Let's look at some specific synergy opportunities.

Our greatest synergy opportunities lie in sales and marketing. We now have a broader portfolio of coals that yield multiple options to meet the needs of our customers. Given Alpha's expertise in blending and coal optimization, the increased sourcing options are expected to improve the economics of Alpha's products, increasing customer value, our margins and cash flow. The sourcing optionality will, we believe, eventually allow Alpha to move all of its production to its most natural and optimal markets. By way of example, we've identified blending opportunities with just one of our metallurgical coal mines that should provide a recurring synergy of approximately $33 million annually by 2013. In fact, of the $90 million to $110 million in sale synergies we're showing, we believe an excess of $60 million will come from blending opportunities.

We also point to migrate thermal coal from the Pax mine into the metallurgical coal market by utilizing the nearby Massey prep plant to reduce the ash content. This single example should drive approximately $11 million in annual synergies in 2012 but we're already starting to migrate the coal into this met market.

The ability to better match actual production qualities with customer needs will permit us to reprice OTC coal to current market prices and result in a synergy expected to ramp up to approximately $20 million by 2013.

Because of the scale of the combined entity, legacy Massey coal that was historically marketed through the OTC and third-party brokers, which for the record was about 10 million tons, can now be marketed directly to end customers, which has always been our approach, and integrated with Alpha's blended products resulting in a synergy of approximately $10 million by 2013.

After sales and marketing, our next largest bucket of synergies consist of operational savings. Among our expected operational synergies, the single largest opportunity is to reduce the turnover rate at legacy Massey operations. Over time as we are able to achieve similar turnover rates as legacy Alpha, we should experience a 3% increase in productivity, resulting in more than $40 million in annual recurring synergies. The next largest productivity enhancement impacts are expected to come from sharing of best practices followed by increased productivity from reduced enforcement activity.

Overall, we expect total synergies from enhanced productivity to be approximately $85 million. Another obvious area for improvement that can yield significant synergies is our ability to increase the organic efficiency or the coal recovery rate at our acquired fleet of preparation plants. The goal here, simply stated, is to get the acquired preparation plant fleet operating at the same efficiencies as the existing fleet. By 2013, this will result in annual recurring synergies of approximately $32 million with only a minimal capital investment required.

Offsetting these positive synergies, the operations category of $80 million to $90 million includes a number of dis-synergies, which are primarily personnel related. For example, we've already implemented an hourly wage increase at many Massey surface mines and prep plants in order to align compensation across the company and within the regions where they operate, which will result in a net recurring dis-synergy of $10 million. In addition the alignment of benefit, retirement and paid time-off packages across the company is anticipated to cost approximately $20 million annually. We believe both of these actions will lead to a more stable and engaged workforce.

The remaining category of expected synergies consist of SG&A and sourcing items. On the SG&A side, the elimination of duplicate corporate functions, the elimination of duplicate accounts receivable, securitization, facility expenses and the elimination of collateral requirements for the legacy Massey surety program, along with an expected reduction in regulatory citations and various other initiatives, should provide approximately $24 million in annual recurring synergies by 2013.

Of the sourcing front, reduced unit costs driven by higher producing volumes and a consolidated purchasing platform is expected to generate recurring synergies of another $33 million annually by 2013, which we also think is conservative. But frankly, we'll need a little more time to assess more fully.

On balance, we're very pleased with the size and scope of the synergies that Alpha can garner from the Massey transaction notwithstanding the delay in some sales and marketing synergies arising from the sales book we inherited. We've achieved excellent clarity and granularity in our synergy review and we're confident that our target of $220 million to $260 million in income statement synergies can be achieved by mid-year 2013. From a cash perspective, the opportunity is even larger as we expect to save more than $50 million of capital on a recurring annual basis, which leads me into my discussion of optimization.

Our optimization process is unique because it starts with a comprehensive portfolio review of the company. Approximately 150 mines, 40

prep plants and our 14,000 people, and it looks to deploy people, equipment and capital dollars to the highest and best use, and our metric here is free cash flow at the mine level.

We started this process by analyzing mine contributions of free cash flow both historically and projected. While past results are not indicative of future performance and while market conditions were different historically, our analysis revealed several mines that realized an aggregate annual free cash flow loss of $150 million on average over the past 4 years. Note that these mines were in full steady state production and not in startup or development mode. Also, while the negative cash flow impact was nearly $150 million per year in the aggregate, the EBITDA loss was only $5 million per year. In our eyes, cash is king and the appropriate metric for this exercise as we endeavor to maximize our generation of free cash flow.

With that motivation, we sought to develop an internal process to look at capturing the significant value we see and holistically optimizing the combined company's assets. And the process is now fully owned and supported by Alpha team members, who sit on a steering committee with representation from each of the regional business units. The process is designed to be repeatable, ongoing and iterative as we continue to examine the portfolio after each change.

We want to feed the highest cash flow to margin operations, cutback on those that are not generating or reflect poor prospects of generating appropriate levels of cash flow, and turn the middle-of-the-road operations into sustainable winners. This is not just another budget process but part of a culture aimed at maximizing accretive cash flow.

Generally speaking, this means taking people and equipment away from our cost thermal production in Central Appalachia and putting those resources to work in a more productive manner, positioning to win in other words. It does not necessarily mean a substantial reduction in overall production but it does likely mean that higher margin metallurgical production will be emphasized and enhanced while low-margin or unprofitable thermal production will be deemphasized or even eliminated. And this process will reduce labor pressures by running fewer facilities, increase our productivity at our best facilities and optimize our financial performance as a result. And important to note that this is only the initial phase of our optimization process, which we'll continually monitor, manage, improve and expand upon.

Only 2 months into the acquisition, we've identified a number of facilities representing several million tons of production that may be candidates for optimization. Our ability to exploit these opportunities will be constrained somewhat by existing supply agreements and other logistical limitations. This is why it would be gradual and iterative implementation. I also like to state as much for the benefit of our employees as anyone, this is not a headcount exercise. We still have openings for great coal miners, so this exercise is about repositioning our asset base for the long term. We've already begun with the idling in July of our Laurel Creek mine, which was a high cost producer of thermal coal. We deployed these folks elsewhere, generated an estimated savings of approximately $9 million. Not a large dollar amount but it's the first tangible step on this journey, which has the potential to drive a multiple of that on an annual basis over the next 5 years, again over and above our expected synergies that I described earlier.

With that, I'll hand the call over to Kurt, to discuss the progress of our Running Right rollout and our integration effort. Kurt?

Kurt Kost

Thanks, Kevin. We believe the key to a successful integration is the establishment of our common culture that lies in the instinctive level of commitment to do the right things at all levels of the organization at all times. Ultimately, the commitment to what we call Running Right sets Alpha apart from other companies and is the key to our success. Success in our safety performance, success in our environmentalist stewardship, success in our operations and success in our relationships with our customers and our other stakeholders. To that end, the rollout of our Running Right platform throughout the legacy Massey operations is nothing short of a full court press.

So far, we have conducted 190 training sessions with focus on Running Right and supervisory safety skills. We have also trained approximately 6,000 employees investing in 54,000 man hours. Approximately 1,500 employees remain to be trained in Running Right, this will be completed by the end of August. Based on our observations and survey results, the program has been very well received. It's safe to say that the employee by then has significantly exceeded our expectations.

Another component of our integration strategy is focused on leadership. This month, we will begin Leading Right training, which is a program designed for management-level employees. We expect that the additional leadership and safety skills training will be completed by December of this year. Of course, training is just the first step. The ongoing task will be to continuously improve our performance in all categories by all our employees operating and behaving in accordance with Alpha's Running Right culture.

As we have discussed in the past, we had a very well-defined integration execution plan in place by the closing on June 1 and we are on schedule to achieve our established milestones.

As Slide 16 shows, the initial integration work began shortly after we announced the acquisition in late January. We're proud of the hard work put in by various functional and cross-functional teams, which has enabled us to be ready for execution of our integration plan on June 1. We have 18 teams among the 3 legacy companies, Alpha, Massey and Cumberland Resources working on approximately 80 identified projects that will last anywhere from several weeks into more than 1.5 years. In total, approximately 750 man-hours per day is dedicated to short-, medium- and long-term projects.

Here are some of the examples of projects by timeframe. In the short-term, our primary focus has been on Running Right as discussed in the previous slide. Over the next 6 months, we have some financial projects such as acquisition accounting and tax provisioning, finalizations which are progressing on schedule. Over the long term, we will begin on the integration of all employee benefits. The unification of our enterprise resource planning systems is also expected to be completed by the end of 2012.

In summary, we are pleased with our second quarter results and excited about our future opportunities. Our EBITDA for the quarter was a record $362 million. Our integration efforts are on track and we're very excited about Running Right training success, which so far has exceeded our expectations with overwhelming positive employee feedback environment. We have filed additional synergy opportunities that allow us to increase the expected range to $220 million to $260 million by midyear 2013, which we are confident we can achieve.

In addition to synergies, our optimization program can achieve significant incremental free cash flows over the next several years. Our strong market position in met and thermal coal allows us to take advantage of global opportunities throughout a few of our leading export capacity. And we are truly excited about the many opportunities we have in front of us. Now that we have completed this transformational acquisition that has propelled Alpha into a global leadership position and metallurgical coal, our goal is to keep our eye on the ball and to continue to focus on solid, execution every day, as well as strong cash flow generation, enhancing shareholder value. With that, I'll open up the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Shneur Gershuni with UBS.

Shneur Gershuni - UBS Investment Bank

Just sort of want to talk a little bit big picture first here. It seems the way you've presented your guidance and how you've run through your slides that 2012 seems to be a continuation of a transition you're closing, negative free cash flow mines, and seems you're shrinking parts of the operation. What does the company look like 2013, 2014? Massey had -- once upon a time talked about getting to 20 million tons of met coal, if you scrap some of their planned growth projects. Kind of where do you see the company beyond in terms of ability to deliver met and steam coal a couple years down the road, once you've shrunk and then can go -- regrow again?

Kevin Crutchfield

Well, it's a good question, Shneur. It is a -- it's going to take a Herculean effort on a the part of a lot of people to integrate this company rapidly. Well, look, we'll get a lot done by the end of this year. I mean I've been really touched, Frank was very impressed by what's been done so far, but we still have a tremendous amount of work to do. And I think also 2012 will continue to be a transition year as we work off some of these sales positions that we inherited. It's part of the book and -- look, at the end of day, our strategies is just a little different. We're not trying to say that their strategy was the wrong one, ours is just different. It's going to take a while to work through that. But I would expect that as we begin to put runs on the board in terms of continuing to report to the Street as regards to synergies the efforts of our optimization process, we're just going to continue to find more and more opportunities. And I think, we have 2013 guidance today, I believe we feel very good when we began to look through the portfolio, pass out opportunities with respect to met, what we think we can do with the way of crossover coals as we work through this book, as we work through the optimization process. It's clearly a focus on the metallurgical side. We feel very confident in the kind of numbers we talked about before, and we were pretty open about talking 28 million to 30 million tons of met. And I think in the 2013 ZIP code, we don't see anything so far that causes us to pull back from met at all. But again, today is not the 2013 call, if we're screwed up, we're in hand-to-hand combat mode right now and trying to work through. What is -- you like the big, it's been a large transaction. It's got a lot of moving parts but just, frankly, an extraordinary amount of opportunity.

Shneur Gershuni - UBS Investment Bank

Yes, I said, do you still believe that 30 million tons is achievable longer term?

Kevin Crutchfield

Yes.

Shneur Gershuni - UBS Investment Bank

Next question. You mentioned that you've repurchased some shares during the quarter and that the Board is looking to -- at some alternatives and so forth. Do you have an authorization on hand or is that something that is part of what your discussing with the Board at this point in time now?

Kevin Crutchfield

We do have an authorization on hand that I think I'm not sure how much we discussed that publically, but there is more on hand, and that obviously given what's going on in the markets, whatnot, we plan to have ongoing dialog with our Board about that very issue.

Shneur Gershuni - UBS Investment Bank

And do you feel that the cash flow that's going to be generated over the next couple of quarters will be enough to pursue both the CapEx that's necessary to run everything right and also potentially look at buybacks as well?

Kevin Crutchfield

Yes, it's based on what we see so far. Even with a fair amount of noise in the quarter and settling out a lot of fees and whatnot, we still generate what, Frank?

Frank Wood

$116 million of operating -- there was probably $100 million in that of -- kind of merger-related payments that went out. So if you kind of mentally adjust for that it's probably a little bit over $200 million of cash generated by operation in this past quarter on a more normalized basis, compared to about $116 million of capital, and we had our one -- once a year LBA payment also in the second...

Kevin Crutchfield

Yes, $36 million. I think that, that coupled with the kind of cash balance we're sitting on, the prospects of what the next few quarters look like, there's nothing that scares us about the notion of potentially buying back some additional shares. But again, that discussion has got to occur at the Board level and will occur in the next few weeks.

Operator

Our next question is from the line of Jeremy Sussman with Brean Murray.

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Just following up on the buyback. I mean can you give us any broad strokes in terms of what type of number we could be seeing should you decide to proceed along that route?

Kevin Crutchfield

No, I wouldn't dare get out ahead of the -- of our board on that question. Jeremy, just suffice it to say that we get the message, it's coming through loud and clear, and that discussion would occur -- will be occurring with the board soon enough.

Jeremy Sussman - Brean Murray, Carret & Co., LLC

I appreciate it. And on the production reaction utilization front, are we likely that -- appreciate the 2012 numbers that you threw out there. But are we likely, as you kind of work through things to see any additional thermal production potentially come down to, say, redeploy some of these folks to other higher margin met coal mines? Or are we kind of -- is this -- what you gave is where we should think about things?

Kevin Crutchfield

Well, it's a little bit of an open question because the lead generation of this, there's a ripple effect and you have to evaluate that ripple effect on the organization before you take the next step and you also have some constraints here, too. Because again, this is not in any way, shape or form designed to be a headcount exercise. This is about positioning your better assets for the long term. And as we mentioned earlier, we've got some sales issue that we've got to work off. We also have to look at logistics with respect to our employees. Some of these mines have very desirable quality, there is need for blending purposes or whatever. So that's why we're taking our time as we go through this. But I think it's pretty safe to say that the optimization opportunities are by and large oriented at the thermal operations. But what you end up seeing sometimes, too, is when we're running under staffed across the organization as the Massey organization was historically, getting operations appropriately staffed, your production may not fall all that much, because you're loading higher productivity mines and that sort of thing. But it's one of the situation where I don't think there are a lot -- have a lot of general rules. We just think there's a huge opportunity bucket here. It's too big to ignore, too big to pass up and we've got some of the best brains in the company. This is really their exclusive job for the next few years, so because the opportunity bucket is so great. So it's hard to say what it'll look like in the end. I think a lot of that, too, is a function of what we see on and continue to see on the regulatory front as well. And our ability to move coal into the export markets and those sorts of things. And to some extent, all that still will -- fairly -- it's fairly uncertain, hanging it out there over us -- we're focused on it. We think there's a tremendous amount of value here to be created for our shareholders and all of our stakeholders.

Operator

Our next question is from the line of Brett Levy with Jefferies and Company.

Brett Levy

Around the time of the merger you guys had seen, I think on the Massey side, about a 30% outflow of employees, was that stemmed and did you guys continue to see any more of that? And have you started to replace any of those people or in some cases, obviously, like Laurel Creek, you're looking to continue to rationalize. Just talk a little bit about what's going on in terms of a little bit with the employees are doing.

Kurt Kost

Sure. The turnover rate, which we've been tracking quite closely over the last 2 months, so it's definitely trending in the right direction. Our voluntary turnovers, one of the metrics that we've been looking at and in pre-merger, that turnover rate was in the high teens. And over the last 60 days, we've been able to knock that down into the low teens, to about 5%, 6% reduction. Our goal is to continue to work on that and cut that in half. And I think with some of the -- with the training programs, the rolling out of our value-based principle system and the rolling out of our desire to have fairer wage compensation packages across the enterprise, I think is an excellent opportunity for us to get that voluntary turnover running very similar to where Alpha has been in the single-digit range. So we're very optimistic that things are headed in our direction, and we will get our arms around the turnover.

Brett Levy

And then, it's odd to sort of come out of the transaction with this much cash on your balance sheet, obviously, you got your hands full in terms of putting these 2 companies together. Is there any ideas in terms of what to do with $1.2 billion of cash here?

Kevin Crutchfield

Well, again, we are -- trust me, we are so focused on this. And the amount of the sacrifice on work and the numbers of hours everybody's worked over the last 60 days has been really been nothing short of Herculean. But I do want to tell everybody again for the record that our focus on this transaction couldn't be any more laser-like than it is. As we continue to bleed cash -- build cash, and we believe we will, we'll begin to think about where to go from here. But having that discussion today was -- and I would characterize that as way premature. So what I'd ask for is a little bit of patience that let us get this under our belt and running as advertised. It's doing reasonably well now, but we still have a tremendous amount of work to do to bring complex transactions, has a lot of moving parts, and you're talking about 150 coal mines across, just a -- up and down through Appalachia. It's going to take still an extraordinary amount of work and effort by all of our folks. And what we're focused on right now is the rollout of the Running Right methodology, the system, the way we operate the company. And we couldn't be more pleased with how that's been received from all of our new employees on the Massey side, and frankly, we think we just kind of scratched the surface on what the potential of that is over the long term. So we appreciate your question, but I appreciate a little patience as we work through the transaction, get it integrated and we're able to kind of come up for air sometime in the future.

Operator

Our next question is from the line of Andre Benjamin with Goldman Sachs.

Andre Benjamin - Goldman Sachs Group Inc.

First question, I was wondering if you could please talk a little bit about the costs and what has changed such as you no longer expect them to fall very much in '12 versus '11. I think before, you talked a little bit about improve production rates and maybe a little stickier, et cetera. I appreciate that you've now had to pay a little bit more for the labor and there's been some fuel pressures. But a little bit more color on why it is that we should no longer expect the cost to come down and maybe what your spending on -- in the Massey assets that they were that has kind of brought that cost structure up from where it used to be.

Kevin Crutchfield

Well, I'll respond and meanwhile, Frank would address this as well. I mean certainly, the hope there is that we can surprise on the downside. But I know you could see, as we try to be transparent, with what's happening from period to period with respect to our costs and try to explore this as definitively as possible. What makes up the $12 to give everybody a sense of what is a conscious business decision, and frankly, the cost of being on the met side of the business, which we're happy to wear. But then as we try to manage through the Emerald situation, which you know as a heads up, that set of geologic circumstances is going to continue probably at least through the third quarter, Kurt could talk a little bit more about that. So I think we want to be clear that we probably won't expect a lot of relief there in the near term, although we'd expect some improvement now that we've got to set them all available for production for the balance of the year. But look here, we're -- a lot of this we're just dealing with what's going on at Central Appalachia with respect to some of the reserves. But we would expect through the optimization process and the synergy to put downward pressure on it. We just felt like it'd be premature to start guiding down too much right now. We need to get a little further into this thing and hopefully, again, we can guide down our surprise to the positive side in the future but we felt like that was a little premature at this stage. We -- I think, Frank or Kurt...

Frank Wood

No. I don't have anything substantive to add. I mean, I do believe, that as you said is there's a lot of opportunity here on the cost side through all of the synergies and the optimization to hopefully surprise. But on the other hand, we know, as we become more focused on the met markets and obviously, trying to push more and more coal into the met markets, is a conscious decision. That tends to put an upward bias on the cost. So I think we're trying to balance those 2 forces and really at this early stage decided to guiding them out on a flat base, was probably the most sensible thing to do.

Andre Benjamin - Goldman Sachs Group Inc.

I'm just trying to understand the opportunity with repositioning the sales portfolio. Should we just assume that you're going to continue working with the same customers and they just understand that Massey was pricing those volumes too low and they'll just be accepting of the fact that you're -- they do some better contracting here or are we expecting coal to now be shifted to markets where people are more willing to pay market rates?

Paul Vining

Yes. This is Paul. I'm saying that we're going to take a hard look at the strategies that Massey employed and quite likely shift -- and they have 10 million tons a year, more or less. That went into traded markets and third parties and brokers, and typically, you give up some value. When you give up, you jump into that value chain, so we're pretty optimistic we can get an uptick from that, that was on the synergy case. Additionally, just sort of a, there's a window in 2012 to meet obligations and qualities. We got about 2 million tons or so of met coal on the Massey side, that's going to have to move into the steam book to meet obligations. And post-2012, that coal will be moving to the met market. So it's an ongoing, continuing discussion with customers, trying to renegotiate deals, redirecting efforts and certainly, repositioning the company so we can maximize the metallurgical shipments.

Operator

Our next question is from the line of Brian Gamble with Simmons and Company.

Brian Gamble - Simmons & Company International

So to follow on something that Paul just touched on there, the 23 million to 26 million tons of met next year. Longer term, 28 million to 30 million tons. Paul, you just mentioned 2 million tons that you'll get back eventually when met actually becomes met. Walk us through the rest of that ramp up as far as what the plans are between what you see right now being new projects versus, I guess, further efficiencies at existing mines and I guess, just get us to 28 million to 30 million tons or possibly above it if that's really where you think it'll be after all the contracts roll your direction and some of your efficiency projects get further implemented.

Paul Vining

Yes, that's fine. Let's -- using the guidance, let's use the midpoint. You get 20 million tons this year as a midpoint.

Kevin Crutchfield

24.5 million tons...

Paul Vining

No, this year, 2011, 20 million. Fairly conservative outlook, you get 5 months of Massey, next year, we didn't have this year, it takes you to midpoint, probably about 24.5 million tons for '12. In '12 we've got about 2 million to 2.5 million tons that are in the steam market to meet obligations, that is a priority with us, number one priority is to Running Right and meet our obligations. Post-'12, moving to '13, trying to move towards the sort of a base case for '13. We've got those 2 million to 2.5 million tons that can roll into the book, probably another 1 million tons of Pittsburgh steam sales that we're looking to redirect into the export market, takes you to a base case in '13 of 28 million. And we've got about 3 million additional tons on to top of that to bring us to somewhere between 30 million to 31 million tons. About half of that is shifting production and increasing production at existing met mines, and the other half is some new projects. So I'm confident and believe we've got a fairly realistic, if not even somewhat conservative view. In '12, if we can redirect some of that steam coal back into the met side, renegotiating some contracts with some of our end users. It's possible we can get up above that midpoint but that's one of the reasons for the wide range there.

Brian Gamble - Simmons & Company International

Are there tons out there on the open market that you think you might be able to purchase at this point? Or is it still kind of to be determined based on the productivity of individual basins that'll allow you that optionality?

Paul Vining

We're active buyers of brokered met coal, as we speak. I mean we've continued to buy here in the last 60 days with fairly healthy margins. So it's more opportunistic and it's also where you have sort of fundamental underpinning of our met business.

Brian Gamble - Simmons & Company International

Great. And then maybe for you, Frank. On the cost side, not wanting you to change the guidance. I -- we appreciate you being conservative on the front end, but what sort of met pricing, backing into the royalties and taxes, are you including in that flat guidance year-on-year? I just want to get a sense of based on all assumptions whether we should be at the high end or the low end of that range?

Frank Wood

Well, obviously, Brian, that's one of the things that can move a number around in a range, you correctly identified. I would say, in general, we're assuming -- about I get more specific about what we're assuming, but generally, what we're assuming is price is relatively consistent with what we've seen this year, no great movements.

Brian Gamble - Simmons & Company International

Relatively consistent with the with the average, thus far, for this year?

Frank Wood

What the average is. And the average is incorporated, obviously, a variety of qualities and prices.

Brian Gamble - Simmons & Company International

And then one housekeeping question, best guess on tax rate for next year, Frank?

Frank Wood

Well if you look at the quarter, I think excluding that discrete item that we identified, I think we're around 22% for the quarter and we did a fair amount of work around taxes. It looks to us like we're going to be probably be in that 22% to 24% range on a book-tax basis, which is a little more normalized than it has been for a while for Alpha, so we feel pretty good about that particular range.

Operator

Our next question is from the line of Michael Goldberg with Luminus Management.

Michael Goldenberg - Luminus Management

I just wanted to find out more on the buyback I understand you can't provide more insight on the amount. But as far as timing, the stock seems to be approaching its 52-week low. Is there a particular procedural hold back or anything that is giving you pause as to why not speed up the process?

Kevin Crutchfield

Frank, do you want to talk about the redemption by which it had paused the coal. Try to [indiscernible]...

Frank Wood

Oh, the peer, I'll talk about that. I mean, yes, one of the things, Michael, is we do have a redemption notice out there on the 2014 bonds right now, which all cost $300 million to exit the company, I think, on August 18. That's one consideration. But it also leads your question about how the execution of the buyback, and we did make reference to it in the script, it's a way that we typically access that is during open window. We put in place what are called 10b5-1 plans, which basically designate shares to be repurchased at given price points. And we had one of those in place, full of prior open window that we basically exhausted. So as open windows occur, which usually is around earnings calls as you're aware, we would typically put other -- put new plans in place to accomplish buybacks.

Michael Goldenberg - Luminus Management

So once again, maybe I'm not understanding what the exact dates -- I understand the August 18 date, and what's the window date then?

Frank Wood

Window dates for us starts next week.

Michael Goldenberg - Luminus Management

Okay, so really, August 18 is the last date that procedurally is holding you back?

Frank Wood

And there's another factor that we've been fairly cognizant on that we won't have to be as cognizant on after August 18. And that fact is the fact that the bonds that we're going to be redeeming on August 18 are the most restrictive that we have relative to restricted payments, where share buybacks fall within. So we've always been a little bit cognizant of the timing of things to stay within the covenants on those particular bonds, which won't be as -- which won't be an issue after August 18.

Michael Goldenberg - Luminus Management

Okay, so after that, should you choose to buy back shares there's nothing holding you back?

Frank Wood

Other than just being able to put plans in during the open window periods as I described.

Operator

Our next question is from the line of Holly Stewart with Howard Weil Incorporated.

Holly Stewart

Question, I guess bigger picture, we've seen a lot of time on the East, Kevin in the PRB. I know you historically have liked the diversity but given that you've become the largest U.S. met player here, does the PRB is taking capital or manpower, any changes in kind of your bigger picture thoughts on remaining a player there?

Kevin Crutchfield

No. I think bigger picture, no. And I think, we like our position out there. We think the prospects for Western coal to find its way in the international markets is actually probably never looked any more promising than it has or that does right now. We've moved, I don't know, pushing 1 million tons kind of the East and some PRB out of the country for next year. So -- but at the end of the day, I mean, well -- the bill did generate outsized returns probably, and the PRB continues to be somewhat constrained in the near term, but to the extent that we can tap into these international markets either off the West Coast or bringing it back to the interior, gives us some hope that we can grow margins out, and that in the Powder River Basin. I think we're in the infancy of that discussion frankly. There's a lot of jockey proposition going on right now with respect to workspace and who can do what and all of that sort of thing. But at the end of the day, we've got circa 30 million tons of floor capacity, and it's plenty to serve us for the foreseeable future, and certainly a lot of chatter about increasing core capacity both in terms of new terminals as well as incremental expansion of existing terminals, there's been a lot of chatter about that of late. But look out -- I like our position in the Powder River Basin for those reasons, and, as a matter of fact, in that regard, really hasn't changed.

Holly Stewart

Okay. And then just, my follow-up would be on the cost side there. Is there anything to point out? I mean your costs in the quarter were obviously impacted, I mean, I'm assuming that's somewhat impacted by tonnage but it did seem to be declining if you use your guidance for the rest of the year and then looking into next year.

Frank Wood

Sorry, Holly, I was -- my mind did wander for a second. Can you repeat that?

Holly Stewart

No problem. I was just kind of thinking about the second quarter costs versus what your average for the rest of the year would assume, it looks like the cost should be declining is that just a function of tonnage in the quarter? And then looking out to '12.

Frank Wood

You were talking specifically about PRB or about...

Holly Stewart

Yes.

Frank Wood

PRB? Yes, PRB was definitely impacted here in the second quarter. I really like 3 factors. One was the overall tonnage. We shipped less tonnage obviously than we did in the first quarter, but we moved, overburdened it at normal rates. Secondly, I believe the way the tonnage shook out the second quarter were really bit more tonnage-centered at Belle Ayr versus Eagle Butte, which is a little bit higher cost. And then diesel fuel prices, if you recall, we're on the rise through the second quarter and the unhedged portion there increased cost somewhat at that point. But looking out over the rest of the year where we expect volumes to pick up once we get beyond these flooding impacts that we've seen recently, yes, we would expect cost to come down over the rest of year to bring us back within that range.

Operator

Our next question is from the line of Meredith Bandy with BMO Capital Markets.

Meredith Bandy - BMO Capital Markets Canada

Okay. So on the brokered tons because I think looking at your cost guidance going forward that's probably going to be a big factor. How should we think about that with a bigger company?

Kevin Crutchfield

Yes, it's a good question. I mean you got the scale if you wanted to take that either way. You can grow or you can shrink it. I mean I think historically we've been kind of as low as 2 million tons, and as high as maybe 6.5 million tons. That's a pretty wide gap but I would expect to see our activity continue to follow in that neck of the woods, maybe to 3 million, 4 million, 5 million ton range. Because we think -- from a brokerage perspective, there's obviously a financial incentive, but there's also a great blending opportunities for us to fully -- when we have access to the brokered coal. As we've mentioned before, unfortunately, all these folks that try to move brokered coal with the daily ranks just like we get to do, so the level of transparency there has shrunk. The margin opportunities from, put me off from what it used to be, but I think you can expect us to stay engaged in the market. And then there might be an opportunity also in the future to the extent that we continue to see some softness on thermal side to do some arbitrage around thermal, pick up some thermal coal for the nonexisting business to free up met coal and we really haven't planned on any of that. Something that we watched pretty visually and something that we've done a lot of in the past. So -- but I think it's safe to say that you can expect our brokerage activity to remain reasonably cost and if not grow a little bit as we move ahead. Do you want to add on that, Mr. Vining?

Paul Vining

No.

Meredith Bandy - BMO Capital Markets Canada

And then shifting gears to PRB, I think that you've recently nominated I guess an LBA at Belle Ayr to and set with the Peabody. Are there any in plans for more LBAs out there?

Kurt Kost

Meredith, this is Kurt. We're exploring several options. We have surface holdings and unleased coal really in all directions surrounding Belle Ayr, out to the North of -- out to the West and South. So on one hand, yes, we're disappointed. And we didn't -- yes, we were not successful with the bid, but we are exploring where we're going in the future. And we still have 6 years of leased coal that's permitted. So future still looks pretty good for us, and we will take a look at those options and go in different directions.

Operator

Our next question is from Paul Forward with Stifel, Nicolaus.

Paul Forward - Stifel, Nicolaus & Co., Inc.

Obviously, we'd seen some pretty ugly macro data points that are spooking the markets over the past couple of weeks or so. I was just curious, you got your finger on the pulse of the met markets domestically. Has there been or -- and there's also, but I think part of the guidance range, when you give 23 million to 26 million tons of met coal for 2012, there's a certain amount of variability based on, I think, you're ability to place the traditional utility tons crossing over into the met markets. Can you give us some sense of whether that crossover market has softened up over the past few weeks? And any sort of quantification of where the markets are today versus where they were 3 months ago would be really helpful to us.

Paul Vining

Yes, Paul. This is Paul. Good question. I think that there's been a lot said and written about the met markets. And the -- certainly, the better products and hard coking coal side has come off just a tad here in the second, third quarter. The -- what I called the second tier met coals. I don't think the demand has come off at all. Certainly, the price seems to have come off a little bit more than the hard coking coal side. Specifically, the domestic side, we're shipping every ton we can get out the door to the domestic folks. We're not stacking coal up or getting a bit of pushback. In fact, we're scrambling to meet obligations, and we're about to head into some discussions with them in the next month or 2 relative to next year. I will say this, if you really take a look at our numbers that we're going to post this year in the guidance and 20 million tons. And 24.5 million is the midpoint for next year, we're really not talking about adding additional market share. We're really just taking the 4.5 million tons for Massey in the first 5 months and rolling it on top of what we've done this year. So we don't have a big growth piece built in there and some over realistic, over-the-top expectation. But certainly, we were all kind of focused on where things are headed in the next 6 months. And my crystal ball is as good as anybody's at this point.

Paul Forward - Stifel, Nicolaus & Co., Inc.

Okay. And just as a follow-up, I was just wondering. I mean, the Massey is a huge acquisition and a long time to digest. Can you confirm that you're not likely to do another acquisition anything close to that size over -- in the near term or is that still on the table?

Kevin Crutchfield

No, I absolutely can confirm that we're not going to do anything of that scale anytime in the near to even midterm. Again, I can't reemphasize enough how focused we are on making sure this is a success. And there are one of these things too where you can't be partially in. You got to be all in because it is all consuming and we're dealing with lots of things. I'm spending a lot of time and everyone, the executive leadership team spend a lot of time out in the field talking with customers, talking with our employees to -- because we understand that we've got to get this right. So I think it's a completely safe assumption that you're not going to see us in the market at this scale anytime in the near future. Is that clear enough?

Operator

Our next question is from the line of Lance Ettus from Tuohy Brothers.

Lance Ettus - Mortar Rock Capital Management

Just kind of want to follow up on the stock buyback. I know you've said that there is some debt covenants and things coming up that will allow you, I guess, post that to increase buybacks, weren't, actually, I guess, a new one. But have you considered with your stock dropping today, and I know that you kind of bought aggressively last quarter, potentially even raising debt to -- especially with the debt market so strong, relative to equity markets relative to your stock basically kind of levering up to buy back stock, and then that also I think have the side-benefit of a kind of a squashing these rumors that you guys are interested in a major deal, which you just said 2 seconds ago that you weren't.

Frank Wood

Certainly, as Kevin said earlier, we're going to have a continuing discussions with the board here in the relatively near future. And we're going to look at a number of different options. That maybe one of the options that we'd look at. Let me just clarify something from the previous question that I think Michael Goldenberg asked, just so everybody is clear. The bonds that we're going to take out in August were the ones that are most restrictive on our ability to do dividends, share buybacks and various other types of investments. That doesn't mean we've eliminated all of those restrictions going forward. We've just essentially made them less restrictive because our new credit facility and particularly, our new bonds are less restrictive in that regard. But any sort of buyback that we execute has to be done over a period of time because the restrictions that we have in our various instruments basically allow us to build up capacity to do that as we earn money. So I just want to make that clear because I think we got perhaps a little too focused on the mechanics of doing the buybacks there and maybe not enough on the overall considerations that we take into account as we look at that option.

Operator

Our next question is from the line of Richard Garchitorena with Credit Suisse.

Richard Garchitorena - Crédit Suisse AG

My first question, just touching on the growth question again. If you look past 2013 and into '14 and '15, where do you see potential growth for the company going forward? Massey did have grand plans in the past and I'm just wondering if the permits are in place there, you could expand elsewhere within the Central App or maybe looking in Northern App and what do you sort of envision for that?

Kevin Crutchfield

Well, I mean I think just taking it kind of a -- sort of domestic level initially. To some extent, we're real clear on what we got as part of that transaction in terms of resources assigned to adjusting business unit for those sorts of things. But there a lot of reserves that are beyond that, that we need to understand a little better. We designed the team that's pulling through that asset base so that we can look at that and understand what we need and what we may not need, and what's kind of in the bubble and what we want to do with that. But we think, and just in terms of internal growth opportunities, the existing reserve base in Central Appalachia is quite sufficient, maybe even overly sufficient for what we'll need for the mid- to even longer term. They're now certainly wouldn't want to rule out old dog kind of things, if that would make some sense and have a lot of synergies and those kinds of things. But we're not driven by that. We don't need to do that given the existing footprint. I think longer term, as we've said before, we're really looking at the international markets, we continue to be very constructive on metallurgical markets through the end of the decade, just give it kind of where the supply side is relative to what you can see on the demand side even with all of the sort of weak economic mess that's coming out of here, the world's still on pace to produce something like 1.5 billion metric tons of steel this year. Add to that the real high-quality sources of metallurgical coal continue to be constrained, clearly, a lot of talk about -- continues to be a lot to talk about Mongolia, and how they're going to step up, and Mozambique and with Eastern Russia and those kind of things. But at the end of the day, we're still very constructive on metallurgical fundamentals, steel fundamentals. And then even longer term for -- we continue to be very constructive on seaborne thermal markets. And part of our strategy is to try to figure out how we can take advantage of the existing asset base to participate in those markets, because they continue to move. Unfortunately, we're always away from where some of that activity is occurring. And thus, the -- we announced earlier in the year, I don't remember when that was actually last year -- I can't remember, but we started an office, a small office in both Australia and India, to better understand what's going on there and examine opportunity so that -- when we think about this, it's a long term. We're in this for the long term, and having assets that'll participate in all markets in a cost effective and productive manner is the name of the game in terms of market plan. We continue to believe, but this -- you got to take these things one step at a time, and this is a real big step, we just get the -- we continue to be really focused on making sure that it is a success. And I have every belief that it's going to be a resounding success, I mean we're going to have a world-class coal company by the time we get through this and continue to be very excited about that. So we're going to continue to -- I try to understand what's going on across the globe and how we can participate in that in a our own strategic way.

Richard Garchitorena - Crédit Suisse AG

Great. And then my other question is related to during the quarter, I think you've mentioned there were some issues, geologic issues at Emerald. Can you talk about what those were and are those behind you at this point?

Kurt Kost

Yes, Richard. This is Kurt. During the quarter, we were operating in our E panel. We started up in the latter part of May, early June. And we ran into some geologic issues that are -- with some unconsolidated roof conditions which caused a slowing down of the longwall. At the same time, we started up a new longwall in the sea district. And there were also running into some sandstone issues, intrusions into the face. Well, probably for the month of August and part of September, both walls will be in somewhat difficult challenging conditions, but we think towards the September and getting into the fourth quarter, the walls will be working out a little bit -- but for the balance of the year, Emerald we'll be probably somewhere in the 4.5 million-ton range, which is now upwards of -- probably close to 0.5 million to 1 million tons under what we'd like to have the mine to be producing. And then as we look into the future, as we're looking at the geology going forward, Emerald as we've mentioned before, must -- going to be problematic. There are sandstorm intrusions and several logistics, and it'll be a challenge for us going into the future. On the flipside, the good news is that Cumberland is performing extremely well. We had a great quarter, and in the second quarter producing just shy of 2 million tons and looking -- for the Cumberland come out of its vacation period and continue to produce some very high rates for the balance of the year.

Operator

Our next question is from the line of Brandon Blossman with Tudor Pickering and Holt.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

I guess we did -- we covered the high-vol met market. How about the current state of the thermal export market? And probably related to that, what's your capacity utilization that your export supposed to look like? And how do you think about the Massey gulf coast option?

Paul Vining

This is Paul. Well, I mean, the -- we're pretty excited about the opportunity and the sort of the potential we got on the export side. We've recently been moving a little PRB through the Gulf into Europe, which is a movement really that's been on and off over the last 10 or 15 years from Marcellus and other PRB producers. Certainly, the API index being where it's at and the freight rates being where they are, there's going to be a fair amount of activity in the Atlantic market going forward into '12. This year, it'd probably be 30 million tons plus of thermal exports out of the U.S. and every bit of the possibility, you could see 35 million or 40 million tons next year. One of the questions that often comes up is what about capacity and does the capacity there in the United States to move more coal? This year were going to do about 100 to 105 potentially out of the U.S. in terms of exports. Because every bit of probably 20 million to 30 million tons of additional capacity available in the next year or 2. From a terminaling perspective, it require some commitment on the part of railroads and barge lines. So I don't see any logistical bottleneck certainly enough where we've got a good solid 30 million tons of capacity spread out through the export system.

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

That is helpful color. And then more detail, on the free cash flow negative mines, what drives the timing of closing those down? And can we assume that those are higher-cost mines on a dollar per ton basis or...

Kevin Crutchfield

I'm sorry, the -- I couldn't hear you or a part of the question. Would you mind repeating that?

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Sorry about that. On the free cash flow negative mines, what drives the timing of closing those down? And then also, is it fair to assume that they're higher-cost mines are not?

Kevin Crutchfield

Yes, they typically are higher costs. I mean, what to do as you -- you got to go through the whole portfolio and understand exactly what you got from a cost perspective, even what it's going to take, capital-wise, to keep it going, what the prospects of market for that kind of coal looks like in the future. And you begin to rank these things in order of priority leaving some sort of attention. And the Laurel Creek, what we did was real easy, because math was obvious, people could be very easily relocated very quickly without being invasive on their lives and those kinds of things. So as much as you'd like to get into this and deal with it in one fell swoop but I'm on -- unfortunately it has -- it's just not possible, because you have, as we talked about, you've got sales commitments that we need to live up to, it's part of the deal. People do deal with -- expecting you to live up to, and then we've got to think through those implications. We want to look at the implications of the coal quality, whether it needed another plans and those kinds of things. So I feel -- I would expect these coal, even though we can characterize it as a 2-, 5-year exercise, I think, it's really more like a couple of year exercise to be able to work our way through this, iteratively and it's stages, in a very thoughtful way. So I would think that by middle of '13, the vast majority of the major actions that we are going to take will have been taken or at least plans in place and very well communicated.

Operator

And our final question comes from the line of Brian Yu with Citigroup.

Brian Yu - Citigroup Inc

Kevin, I wanted to ask you a question about costs again. Because we haven't talked about absolute, if you could provide us with the framework of thinking about 2013. '12 is a transitional year. You've got synergies coming through in '13. You're going to lock up some low performing operations. How much of that reduce your costs by? And then as you take coal from thermal, turn it into met, how much incremental costs are we looking at? And then the expansions, what would be the marginal cost on the expansion met tons?

Kevin Crutchfield

That's a really, really tough question. The hope hear would be that, as I mentioned earlier, we can surprise to the downside on the costs. But we still don't feel like we know enough yet to be able to say that, because where -- when we put these numbers out, we're serious about doing our level best to hit them and then have a high confidence level that we can hit them. And the -- so you have that hope on one end and you have the reality of what we're dealing with because you -- I remember when you put the company together, our costs were $30. And here we are today we're talking about stuff and our average with a $7 handle on it. So it's the reality of the situation we're dealing with. So I can look at -- again, I believe, based on what we've seen and the way of opportunity, there is the real possibility that we can come in on the low end or even surprise a little bit below that. I just don't want to commit to it yet until we can weigh in with this a little further. When you think about some of these thermal mines that potentially may get idled for a period or even shutdown, when they're in the high 60s and 70s, assuring yourself that you could be pushing production and harder on metallurgical coal mines which is even a higher cost than that, which in the kind of markets we're talking about. It's probably -- and again, it's called a conscious business decision that you'd be okay with just given the margin expansion potential. So I think trying to get too granular on that right now would probably just, box me in to have to come up with something later to exploit, so I think, consciously, but we hear you and want to believe that, but we need a little more time to get into this. It's such a rich set of opportunities with lots of options that have to be very carefully evaluated and we clearly want to bring focus to -- about our employees, because this is not a headcount exercise. We still have probably 400 openings across the company for coal miners. And so we're still short in that regard.

Brian Yu - Citigroup Inc

Okay. And then switching topics a little bit. On the EPA side, there's been additional pronouncement. I know you guys done a lot of work here. How are you thinking about these pronouncements, especially in light of coal fire generation capacity and the latest auction I think they're down as you look out into 2014 and '15 in terms of gigawatts of power that's being nominated there?

Kevin Crutchfield

Yes, I mean the -- I guess the bottom line is the trend continues. It's obviously one of the reasons we're so focused on emerging international markets, forging relationships with international customers that we think can be sustainable over the long term. But I mean it's frankly kind of hard to synthesize everything that's coming out of the EPA these days, so -- they just continue to be stacked up and we're doing our best to process and thinking about them. I mean it has changed the way we're thinking about marketing strategy. Who we want to market to and why? And who's going to be around if he's on the bubble? And who's likely to pronounce plant closures and those sorts of things. I think probably one of the things that worries us the most, aside from these regular frequency of these pronouncements is the relatively short implementation times that are being laid out there. I mean, everybody is scrambling with this latest ruling that try to: a, understand what it means; but b, how do we reasonably implement this by January 1 2012? So we continue to be cognizant of what's coming at us. But again that's bolstering as much as anything our focus on these international thermal markets, because at the end of the day there are still growing economies in the world that want the carbon, and as I said before, were obliged to get it in into their hands to the extent that we can.

Brian Yu - Citigroup Inc

Okay. Can I get a last one in on goodwill? In the purchase price allocation, we understand that Massey has a lot of reserves, but goodwill isn't exactly something that's typically associated with the name. How do you guys think about the $2 billion that you have allocated? And I mean that -- you can just say trying to be as serious as possible, but I mean, how are you going to think about that going forward?

Frank Wood

Yes, well, it's a good question. I mean it's sort of an interesting play on words perhaps. But in terms of goodwill, a lot of what gives rise to the goodwill, which really is the residual part of the acquisition accounting, it is what you don't have a study or analysis that says can be assigned to a specific asset or group assets. A lot of it arise in these types of transactions where you do an equity-based or a purchase of a company. A lot of it arises from the fact that you're writing up your booked assets, your tax basis remains at historical tax basis, that therefore, gives rise to a large deferred tax liability that comes on your balance sheet and acquisition accounting. Typically, unless you just have -- unless you just got assets that are valued such that it's just an over, over supply of assets, you typically then have goodwill for that reason. That's the reason that the goodwill number that you see it roughly $2 billion in our preliminary acquisition accounting is the size that it is. Most of it is driven by that deferred tax liability essentially step up into the balance sheet.

Operator

We have no further questions at this time. I would like to turn the floor back over to management for closing comments.

Kevin Crutchfield

Once again thanks for everybody for participating today. I hope the way that we've laid of this today, you found helpful and instructive. And certainly, we'd be following up with everybody in the future as regards to our progress on the integration, and the synergies and the optimization efforts. I would also like to take this time too for those Massey folks and everyone -- the late Massey folks that I haven't run into, welcome them to the organization, but also, to thank all of our employees for the Herculean effort that they displayed over last several months. That's -- it's been fantastic to watch and really appreciate it. So we look forward to catching up with you soon. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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