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Arch Coal Inc (NYSE:ACI)

Q1 2012 Earnings Call

May 1, 2012 11:00 am ET

Executives

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

Steven F. Leer – Executive Chairman

John W. Eaves – President and Chief Executive Officer

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

Paul A. Lang – Executive Vice President and Chief Operating Officer

Analysts

Shneur Z. Gershuni – UBS Securities LLC

Mitesh Thakkar – FBR Capital Markets

Kuni M. Chen – CRT Capital Group LLC

Brian Gamble – Simmons & Company

Andre Benjamin – Goldman Sachs

Meredith Bandy – BMO Capital Markets

Michael S. Dudas – Sterne, Agee & Leach, Inc.

Justine Fisher – Goldman Sachs & Co.

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

Brian Yu – Citigroup Global Markets

David Katz – JPMorgan

David Gagliano – Barclays Capital

Lucas Pipes – Brean Murray, Carret & Company

Chris Haberlin – Davenport & Company

Lawrence Paltrowitz – Shenkman Capital Management

Lance Ettus – Tuohy Brothers

Michael Goldenberg – Luminus Management, LLC

Wes Sconce – Morgan Stanley

Richard Garchitorena – Credit Suisse

Brandon Blossman – Tudor, Pickering

David Lipschitz – CLSA Financial

David S. Martin – Deutsche Bank Securities

Operator

Good day, everyone, and welcome to the Arch Coal Incorporated First Quarter 2012 Earnings Release Conference 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 filed with the Securities and Exchange Commission may cause our actual and 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 Investor’s Section of our website at archcoal.com.

On the call this morning, we have Steve Leer, Arch’s Chairman; John Eaves, Arch’s President and Chief Executive Officer; John Drexler, our Senior Vice President and CFO; and Paul Lang, our Executive Vice President and Chief Operating Officer.

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. I plan to keep my comments very brief. As you know I retired as CEO of Arch last week on the date of our Annual Shareholders meeting. It has been true honor serving as Arch’s CEO over the past two decades, and I am proud of what we have accomplished over that time frame. I am particularly proud of Arch’s exceptionally talented workforce and the fact that they have consistently ranked at the top of the industry and safety performance and environmental stewardship.

During the past 20 years, I’ve seen numerous market cycles and during each cycle Arch has kept its focus on creating long-term shareholder value and exited the market trough as a leaner, stronger, more aggressive competitor. I expected to be no different this cycle and while the current thermal market is exceptionally difficult and the stock prices as source of pain for all of us, I am confident that Arch is exceptionally well positioned for the future success, growth and value creation.

We have aggregated some of the best assets in the U.S. coal industry and one of the lowest cost profiles when operating at optimum production level. The leveraging impact of the metallurgical coal franchise will leap forward with a startup of the Leer mine next year and continue to grow in the coming years as more high-quality met reserves are brought into production.

Let me emphasize I couldn’t be passing the baton to a more capable, talented leader. John Eaves is a ideal person to lead Arch forward in this rapidly evolving market place, which poses challenges that offers even greater opportunities. John and his team have put together an excellent plan for addressing the current market downturn and ensuring that Arch emerges from this period of market weakness as an even stronger global competitor.

I want to personally thank each of you on the call for your interest and investments in Arch Coal; for your questions, your comments, and advice; you have helped us sharpen our communications and focus with investors and shareholders over the years. Let me close by again saying that it has been a privilege and a deep honor to serve as CEO. And I look forward to continuing to work with John and his team and the Board in my role as Chairman.

With that, I will turn the call over to John Eaves, Arch’s new CEO.

John W. Eaves

Thanks, Steve. Before I turn to discussion of the industry and our views, I would like to say a few words about Steve. On behalf of Arch’s Board, management team and employees, I’d like to thank Steve for his contributions to the coal industry and Arch Coal over the past two decades. He has been a tireless leader and in the months and years ahead we plan to take advantage of Steve’s counsel as he continues on in his role as Chairman of the Board. Thank you, Steve.

Turning now to coal markets, we can all agree this has been one of the worst downturns we have seen since at least 2003. While disappointing, it’s also important to remember that we’ve managed through these tough times before. History shows that coal equities languished in 2003 and 2004, but gained momentum in 2005.

Coal equities hit highs as it became evident domestic markets were undersupplied and following the downturn of ’06, coal equities rose again driven by growth in global coal demand. Of course, each cycle has different drivers, but they all eventually played out in the same way. A demand downturn reversed itself over time and ensuing supply correction overshot itself igniting the next upswing. This scenario is likely to play out again over the course of 2012 and 2013 and there are five drivers that should combine to restore coal markets to help over the next two years.

The first is coal exports, we project that export capacity for U.S. coal should reach 270 million tons by 2016. This significant capacity increase includes port expansion along the East Coast and the Gulf region particularly as the Panama Canal is expanded, as well as multiple projects moving forward on the West Coast.

The second driver is strong met markets. There is a positive momentum building for met demand. Global steel production rates ticked up higher in March and supply constraints out of Australia began setting a price forward. Over the next five years, we believe the met markets will remain under undersupplied with normal cyclical volatile. We also believe that U.S. companies like Arch can play even greater role in overseas met markets because costs are rising to bring on new met production in Australia, Mongolia and Mozambique.

The third driver that will help fix coal markets is rationalization of supply. We believe that we are in the midst of a dramatic restructuring of domestic thermal supply, whereby some players will exit the market and others like Arch will pair back operations until market conditions improve. As suppliers shut in or more diverted into the met and export markets, the domestic market will again become undersupplied and that undersupply condition will become apparent as power demand reasserts itself.

Fourth is a correction in natural gas base. We don’t believe sub $2 gas prices are sustainable, but like the coal industry, the natural gas industry needs time to self-correct. Declining productivity in shale plays reduced gas directed drilling and more rational players in this space seem likely to emerge over time.

And lastly, we expect U.S. power demand to grow. Weather does revert to the main and U.S. economy is starting to recover with manufacturing, chemicals and fertilizer sectors leading the way, all these factors will be good for the power demand, our industry and our company.

Turning now to Arch Coal, I’d like to review our comprehensive strategy geared towards improving our execution, optimizing our portfolio and enhancing our liquidity. First, with focus on operational excellence; we are matching production targets to current demand by cutting our annual volumes by 25 million tons for 2012.

In the PRB, we’ve idled one dragline and railroad at Black Thunder and swung a second dragline into reclamation. In the second quarter, we expect to have a total of three draglines down. While these volume reductions will have predictable consequences on our cost structure, we believe it’s critical to reduce coal generator stockpile overhang in the PRB served regions.

However, as coal demand begins to normalize and more favorable weather patterns and even smaller increases in natural gas prices, we believe that the unused capacity at Black Thunder can be brought back easily with virtually no capital and no major time delays. Our underused capacity clearly represents some of the lowest cost productions in the basin and in the country.

In Appalachia, we curtailed production at our thermal operations and reduce the work force by roughly 500 people since the downturn began. At Mount Laurel, we’ve elected to leave the longwall down after transitioning to the Cedar Grove seam. In total, the longwall was down about 55 days in the quarter with 20 of those days on idle. While Mount Laurel’s cost structure can play in any tight met market we chose not to force those valuable tons into south met market. The mine’s longwall began operating again on April 9. In the Western bit region, we are ratcheting back to supply from higher cost operation while continuing to service our customers

Other steps we are taking include addressing cost escalations at the mines and on the admin side. The largest thing that will impact on our cost structure is a significant volume reduction, but we look at everything from rationalizing high cost supply, right sizing operations, eliminating overhead, reducing headcount and working with our suppliers to generate savings.

The second part of our strategy focuses on optimizing our assets, since our last update we’ve eliminated another $45 million in capital spending and we’ll continue to evaluate options to delay future capital needs. At the same time, we will continue to spend time and money on port development and met coal expansion projects. We are focused on higher return projects that will create the most long-term value for our shareholders.

In February, Millennium Bulk Terminal our port investment on the West Coast submitted a permit application for the total export terminal that could handle up to 25 million metric tons initially and up 44 million tons at full capacity.

We are also progressing on the development of the Leer met mine named in honor of our former CEO. The slope construction at the mine is on schedule and is on call. And the construction of the coal handling facility is 70% complete. With two-thirds of the Leer mines capital already spent are committed for 2012, we close it bringing it on line. With an expected cost structure that will allow us to maintain our cost advantage in that region and with the anticipated high-vol A pricing in triple digits, we believe the return potential with Leer mine is compelling.

Furthermore, we’ve finalized a strategic review of our mine portfolio and are considering potentially divesting non-core assets or reserves. Given the uncertainty over timing of any action, we are refraining from discussing specifics related to the potential value creation driver. The third area of our plan includes enhancing financial flexibility. The recently undertaken financing initiatives provide us with the liquidity needed to executing on our strategy. John Drexler will discuss the specifics in his remarks.

Our Board has also determined to reduce the dividend rate on Arch Coal stock at this point in the market cycle. Although, it’s not an easy decision ensuring that our dividend expenditures are aligned with our reduced expectation is the best long-term decision for the company and our stakeholders.

Lastly, I wanted to briefly address our expectations as we progress through a challenging 2012. Our new thermal guidance range eliminates nearly all and sold tonnage. To-date, we’ve received some requests to deferrals on our committed sales 5% or so on overall volumes that have affected our commitment tables in the release.

We are working with customers to ensure that Arch retains the full value of those commitments. At the same time, we are offsetting lower domestic sales with increased exports. While pricing is not where we’d like, we are seeing solid demand for export tons. In total, we would expect to ship 12 million tons for export in 2012.

Lastly on the met expectations, we’ve placed lower quality met sales in the global market at net back prices of $85 to $90 per ton and are in negotiations to place our remaining tons with the customers. First quarter met prices averaged $122 per ton on shipments of 1.6 million tons. While, we expect met markets to improve as we progress to 2012, we have reduced our expectations to between 8 million and 8.5 million tons of met sales for 2012.

We’ve put an aggressive plan in place to manage through the downturn and still execute on our long-term plan. We believe the steps we are taking now will allow Arch to emerge as a stronger player in the global coal markets.

With that, I will now turn the call over to John Drexler, Arch’s CFO to provide an update on our first quarter results and the recent financing achievements. John?

John T. Drexler

Thank you, John. Arch reported GAAP net income of $0.01 per share in the first quarter, excluding sales contract accretion on an acquired coal supply agreements, the adjusted net loss was $0.04 per share. Revenues were up 19% versus a year ago, but cost grew up as well due to the challenge of absorbing fixed cost at lower than expected shipment levels.

Quarterly EBITDA totaled $180 million generated by our operations, profits from trading, higher income levels on equity investments and the sale of non-core reserves as outlined in our comprehensive strategy.

Looking ahead, we are focused on reducing costs and capital spending needs for 2012 and for future years. At the same time, we are proceeding with investments where we are highly confident that we can earn a return above our cost of capital. We believe this is the right course of action to create shareholder value over the long-term.

Turning briefly to our regional results, we saw higher pricing per ton in the PRB, but our first quarter margins fell due to lower shipments and higher cash costs. In Appalachia, we continue to execute on our cost reduction initiatives though the positive impact of these initiatives were offset by the temporary idling of Mount Laurel as well as severance and closure costs of $7 million.

In the Western Bituminous region, we reported strong cash margins though domestic shipments were below expectations. We were able to offset lower domestic sales with increased exports. Looking ahead, we expect to average two longwall moves per quarter for the remainder of 2012 in the region, which should cause our costs to trend higher there.

Turning now to our balance sheet, we are executing an aggressive strategy to enhance our financial flexibility. We believe our plan will position Arch to refinance near-term debt maturities, increase liquidity to succeed in a tough operating environment, and continue to execute on key long-term growth initiatives, particularly our met coal portfolio, which will help us to generate incremental EBITDA beginning in 2013.

As part of the overall financing package, our bank group has agreed to amend our senior secured revolving credit facility to suspend the total debt-to-EBITDA ratio and other financial metrics over the next 24 months in exchange for achieving minimum performance targets that both parties believe are achievable in light of the current market environment.

In addition, we will reduce the revolving credit facility by $1 billion, but will replace the reduced fortune with a funded term loan. The term of the credit facility will remain 2016. We have commitments to fully underwrite the $1 billion term loan subject to customary conditions pending the close. Given the ongoing nature of the process, we are limited as to how much we can discuss regarding the specific terms.

It is important to note that we will – that we believe that the term loan will have no financial maintenance covenants and is pre-payable. We plan to use the term loan proceeds to further improve our liquidity position by repurchasing or redeeming the Arch Western finance notes of $450 million, which mature in June 2013. This buyback simplifies our capital and reporting structure. In addition, Arch will use other proceeds from the term loan to pay down outstanding short-term borrowings.

Together this financing package represents the lowest-cost alternative while providing us with the most financial flexibility to manage through these challenging market conditions while still focusing on capturing long-term opportunities. Upon completion, Arch will have no significant debt maturities until 2016. As a reminder, none of our unsecured bonds due 2016 and beyond have financial maintenance covenant.

Lastly, I want to review our updated guidance. As you can see, we’ve reduced our open sales positions to address current market conditions and the unseasonable build in customer coal stockpiles. Our new range is effectively removed nearly all open thermal tonnage while leaving a 25% open position in met volumes.

While we hope that coal markets improve as we progress through 2012, we don’t plan to push tones into an already over supplied market. We now expect thermal sales volumes in the range of 128 million to 134 million tons with met sales between 8 million and 8.5 million tons.

Cash costs in the range of $11.50 to $12.50 per ton in the PRB, $24 to $27 per ton in Western bit, $68 to $73 per ton in Appalachia, and $32 to $35 per ton in the Illinois Basin. DD&A in the range of $520 million to $550 million; SG&A in the range of $125 million to $135 million excluding one-time financing cost associated with the amended revolver in term loan; interest expense in the range of $290 million to $300 million, which contemplates the change in our financing; and capital expenditures of $410 million to $440 million. Given our current outlook and the impact of percentage of depletion, we expect to record a tax benefit in the range of 40% to 60% of our pretax loss for the full year.

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

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to the side of Shneur Gershuni. Please go ahead your line is open.

Shneur Z. Gershuni – UBS Securities LLC

Hi, good morning, guys.

John W. Eaves

Good morning, Shneur.

Shneur Z. Gershuni – UBS Securities LLC

Just a clarification before I start my questions. John, just can you clarify with the financial package everything is actually in place or you just got cross and t’s and dots and i’s with respect to proceeding with everything?

John T. Drexler

Yeah, Shneur, essentially everything is in place. There are some ongoing things to kind of close transactions on the credit amendment. We’ve received signed agreement commitments from over the majority of the banks that participate on that facility. That process will continue, but at 50%, that’s a successful execution. So that has been completed. The term loan is fully underwritten and we have signed commitment papers for the underwriting of that, given that process, I am limited on what I can say there, but we have described in my comments and in the press release everything we can discuss there.

So, yes, everything is in place. As we saw the market continuing to evolve, it was important to us to be proactive and work with the banks and address some of the issues and concerns we saw developing with the markets and as we move forward and we think we’ve been successful in doing that here at this point.

Shneur Gershuni – UBS

Okay, my question, the first is on coal production, second on met coal. You've definitely done a sizeable production cut. Obviously, it was definitely needed. I doubt that your crystal ball is probably a little murky at this stage right now, but are there any ongoing discussions that still have to be settled or is this guidance cut kind of your best guess of all the information that you have available or kind of – are we going to go through another round of this later on in the year?

And then secondly on met coal, I was wondering if you could talk about the ICO met coal assets, about how they're performing? Are any of them idled or is it primarily the pullback just on legacy Arch, just given the fact you have the opportunity with the longwall already done at Mountain Laurel?

John W. Eaves

Yeah, Shneur, on the cuts, I mean these decisions are not easy and we’ve gone through every operation we have and taken a pretty thorough look. We think we hopefully made the last cut. The last call we indicated, we’ve cut about 5 million tons, now we have cut another 20 million tons. A big part of those would be in the PRB. Given the soft demand that we see in that market right now, we just don't think it makes sense, so therefore we're idling the three draglines during the second quarter.

The Eastern thermal market continues to be soft, so we've made some further cuts there. No further cuts in Western Bit. We wouldn’t anticipate any additional cuts there. Continue to be encouraged by what we’re seeing in the international market, particularly out of our Western Bit.

On the met, if you remember our midpoint last call was about 9.5 million tons, we pulled that back to 8.25, given the softness we saw first quarter, the fact that the longwall in Mountain Laurel was down. We thought that was prudent. If something materializes, the back half of the year on the met side we probably try to take advantage of that.

We are seeing capacity factors continue to improve, it’s about 81% right now in the U.S., globally it's about 81%, 82%. We’re forecasting about 5%, 6% growth in steel production for the year. So we are cautiously encouraged by what we are seeing on the met market.

In terms of your question on the ICG assets, I would tell you if you look at the top four to five properties in terms of cash margins and EBITDA contribution, certainly the met mines that we got from ICG are in there. I will talk about Beckley, Sentinel clearly making major contributions to our EBITDA and cash margin. Some of the mines that we have closed in Central App on the thermal side were some of the ICG mines that we just didn’t think made sense in this marketplace. But we’re very pleased with the met assets that we’ve gotten from ICG. The build out that we’ve got on the Leer mine starting in ‘13. We’re very excited about it from a cost standpoint, from a quality standpoint, from the ability to access the global markets, as well as the U.S. market.

So that’s why as we pull back capital, we continue to spend capital on these projects that create real margins. And we think that Leer mine is one of those, and it’s going to be a big part of our future.

Shneur Gershuni – UBS

Great. Thank you very much, guys.

John W. Eaves

Thank you.

Operator

We’ll move next to the side of Mitesh Thakkar. Please go ahead, your line is open.

Mitesh Thakkar – FBR Capital Markets

Yeah, hello guys

John W. Eaves

Good morning.

John T. Drexler

Good morning.

Mitesh B. Thakkar – FBR Capital Markets

Good morning. Can you talk a little bit about you just mentioned about managing the portfolio and divesting some non-core assets. Can you just talk a little bit about what areas you are looking at, more thermal, metal and Illinois based, and Western Bit. How do you think about that?

John W. Eaves

There has been a lot of rumors out in the press. And we just don’t comment on the M&A rumors that end up in the racks. What I will tell you is that, over the last 20 plus years, Arch has always looked at their portfolio. We're buyers, we're sellers of assets, we'll continue to do that. So, if we have a non-strategic asset that somebody else can come in and provide more value, we’re willing to potentially monetize that. But it's always an ongoing process at Arch, if we don’t get appropriate values we keep those assets. So you know, other than that, we just really wouldn't care to comment any further on that.

Mitesh B. Thakkar – FBR Capital Markets

Okay, fair enough. And just looking at your CapEx spend, it looks like you are pulling out some more CapEx and postponing some discretionary spending. How should we think about its impact on some of the growth projects, I think as you mentioned in the press release probably Tygart Valley Phase I, looks like it's still a goal. How should we think about the other projects and where does that CapEx start coming out of?

John W. Eaves

I would tell you right now. We took another $45 million of capital out and the focus is, as you said, the Leer mine and growing that met supply. We pulled back a little bit on some potential continuous minor production in that area but can bring that on fairly quickly. The balance of our capital would be maintenance capital. I mean really no meaningful growth capital beyond the Leer mine right now.

We would expect to kind of monitor that as we move into 2013, but wouldn't expect to see major step ups in capital as we go into 2013, given what we see right now. But the real focus being on getting the Leer mine production in the market in '13, get it developed with U.S. and international customers and as you see that happen you are going to see a major step up in our margin expansion as an organization.

Mitesh B. Thakkar – FBR Capital Markets

Great, thank you very much guys.

Operator

We'll move next to the side of Kuni Chen. Please go ahead, your line is open.

Kuni M. Chen – CRT Capital Group LLC

Hi, good morning, folks.

John W. Eaves

Good morning.

Kuni M. Chen – CRT Capital Group LLC

First off, obviously, the state of the coal markets one year from now is certainly anyone's guess, but certainly it's feasible that, that more production across the industry will need to come out even headed into next year. Can you perhaps give us some sensitivities around, let's say a 1% production cut would mean for your costs in eastern thermal and PRB?

John W. Eaves

Well, if you look at these cuts that we’ve made, we built all those costs increases into our forecast. And if you look at our cash cost, the PRB reflects a much reduced production schedule as does the thermal markets, the met, et cetera.

So, I think that's built in there. We really eliminated our exposure to the thermal markets right now. We've got a little over 2 million tons, we need to still put in the met markets. Given what we see, we think we can easily do that, and as I indicated earlier, if we see some opportunities, hopefully we can do a little bit better than that.

But if you look at our cost guidance right now, it's all built in there as we think about moving forward. If you look at the industry as a whole, industry data had production down first quarter about 14 million tons, so if you annualize that, it's about 56 million tons. That's kind of what we’re seeing right now.

Coal consumption, we’re calling about 75 million tons off this year versus last. So we would agree with you, there is probably some additional cuts coming, but we position Arch very well to come out the other side as a much stronger company.

Kuni M. Chen – CRT Capital Group LLC

Okay, great. And just as a quick follow-on. I guess can you, obviously it's going to be rough going for Arch in the industry for the next couple of quarters. How do you think the company may approach, how it goes to market differently once the industry stabilizes, maybe you can talk about some lessons learned here and just overall thought process on risk management and strategy longer-term, if there is any shift there?

John W. Eaves

I would say that we’ve been a market driven company, we'll continue to be that way. We're focused on when we are seeing improving markets to layer in sales. And we’ve said many times, I am sure you've heard, Steve say that, we're not smart enough to catch the top, but we want to always be layering in business.

We came into this year with about 85% of our thermal coal committed. Obviously we weren't counting on the market to come back to us like it has. Natural gas prices continue to erode, coal inventories built through the winter months and the economy was pretty sluggish.

But as we think about 2013, we look at putting a higher percentage to bed as we move into 2013, absolutely we would. I think it depends on the opportunities we see in the U.S. and the international markets. But our portfolio and our sales approach is something we're always looking at and we're always tweaking to try to maximize value and we’ll continue to do that.

Kuni M. Chen – CRT Capital Group LLC

Great, thanks.

Operator

We’ll move next to the side Brian Gamble. Please go ahead, your line is open.

Brian Gamble – Simmons & Company

Good morning, guys. Why don’t you talk about Central App a little bit. You noted the thermal operations that are closed and as well as the metal ore operation, it’s back on and running. Maybe you could juxtapose a couple of things and talk about – are those operations on the thermal side gone permanently. Are any of those temporarily idled, and then maybe talk about the mix between met and thermal, the amount we’re coming back on line while idling some of thermal assets, how that impacts just your overall profile in Central App as we go into the back half of the year and into '13?

John W. Eaves

Well, first on the thermal closures, nothing we have closed, it’s something we can't bring back with some time and people. If we saw sustained market in the thermal cloud, whether it’s in U.S. or internationally, we would certainly consider bringing those assets back.

On the Mountain Laurel side, it’s some of the some best cost coal in the Eastern United States. One of the reasons that we completed the Longwall move from the Alma to the lower Cedar Grove, we left the additional 20 days, just because we didn't want to force low cost tons into a relatively soft met market. But as we’re back up and running now, we have started the wall on the 9, April. It’s running well, the fringe continues to get better.

I would tell you that as said in previous calls, the seam is a little bit thinner about 10 to 12 inches but we think the coal quality is a little bit better than the Alma that we were mining. So we hope to more than offset that in the marketplace. We really don't expect any of the volumes out of Mountain Laurel to go into the thermal market. Right now we are focused on pretty much met, and maybe a little PCI, and think we’ll go replace that volume between now and the end of the year.

Brian Gamble – Simmons & Company

Great. And then you noted some deferral requests not unlike everyone else in the business right now, but kind of talk about, I guess the magnitude, the 5%, is that about what you had expected and kind of what is the general attitude that utilities have had towards that reduction? Are they asking to push years, are they asking to push quarters and if so what is their preference, your customer’s preference for how to go about maintaining the integrity of the contracts?

John W. Eaves

Well, I'd say it's a little bit less than what we saw maybe in 2009 environment, we are probably pushing 10 million tons in 2009. Right now we are saying its net 5% range, so call it about 7 million tons. And really it’s a whole variety of things, we are pushing tons from the first half of the year at the back. We are pushing tons into '13 to '14, and then, we've had discussions on just pure monetization of some of the contracts.

So I would say it's all those, what I will tell you is that we’re preserving value on all those we do not intend to give up any value in actually trying to build value through the restructuring. So hopefully we’ve got all that in there for the year, it depends on summer weather and what we see at the back half of the year. We think we can manage through pretty efficiently.

Brian Gamble – Simmons & Company

Thank you, John.

John W. Eaves

Thank you.

Operator

We’ll move next to the side of Andre Benjamin. Please go ahead, your line is open.

Andre Benjamin – Goldman Sachs

Good morning.

John W. Eaves

Good morning, Andre.

John T. Drexler

Hey, Andre.

Andre Benjamin – Goldman Sachs

First question on Mountain Laurel being idled, should we take your decision in bringing back the Longwall as indicative that customer interest is actually starting to pick up or are you mainly just bringing it back in anticipation of a stronger market given some of the supply constrains out of Australia? And then, I guess, given that it’s low cost asset could you discuss why you chose to leave that Longwall down versus kind of bring that back as quickly as possible, and maybe shut in some of your higher cost operations?

John W. Eaves

Yeah, I mean really the reason we did – we want to preserve those tons for better market and we have seen an improvement in the market, I mean we are not ready to claim victory yet, but I would tell you what we’re seeing towards the back half of the year, we had deep packets in the U.S. and globally.

We’re seeing good demand for our product, and if you look back over the last two or three weeks there has been a step up of about $5 to $7 a ton in the met markets on the spot, and we’re starting to see that and we just thought it was prudent to bring that back in early April, and really feel pretty good about the outlook for the balance of the year.

Andre Benjamin – Goldman Sachs

Thanks, and one other question, I know you made a number of significant changes in announcements this morning. Are there any other major strategic or operating topics that we should expect to get updated color on at your Analyst Day later this month?

John W. Eaves

I think, clearly, the operating guys have done a great job in managing their costs when we brought down significant volume. I think we have provided pretty good ranges on our cost as we move out. Our Analyst Day is going to be where we’re going to showcase our Beckley mine. I think it's one of the more impressive mines in the country, good quality coal, good cost structure, trial is very well in the U.S. as well as internationally.

So, no, I think it's a mine I think you’re going to be very impressed with. We have right-sized our business. We think we've got it to a very manageable level right now with these cut backs. We plan to manage through this tough period. We've done it before. We think we've got a very diverse asset base, whether it's thermal coal, met coal. We've been very proactive in terms of going out and seeking port capacity and we’ll be one of the largest, if not the largest exporter over the next three to five years of thermal and met coal in the seaborne market where we see most of the growth.

So now, I mean we are managing through a tough environment right now, but when we think over the next three to five years, we feel very, very good about where the Company is headed and how we are positioned in that space to take advantage of what we see in improving marketplace globally.

Andre Benjamin – Goldman Sachs

Thank you.

John W. Eaves

Thank you.

Operator

We’ll move next to the side of Meredith Bandy with BMO Capital Markets. Please go ahead, your line is open.

Meredith Bandy – BMO Capital Markets

Hey, good morning.

John W. Eaves

Hi, Meredith.

John T. Drexler

Hi, Mary.

Meredith Bandy – BMO Capital Markets

Well, my first question is on the CapEx, I guess, just a pivotal final point. Last time I think you said 50% of the previous guidance was for the met coal project, so that amount is unchanged, right?

John T. Drexler

That’s correct. The build out we’ve spent about $85 million last year on the Leer mine and the plans are to spend about $180 million, $190 million this year, that's correct.

Meredith Bandy – BMO Capital Markets

Okay. And then the rest, the cuts will be coming out of maintenance and should we just consider that maintenance across the board or was there a particular region that's taking more of that than others?

John T. Drexler

I think you can consider across-the-board, if you look at where we made our cuts in the PRB and we've idled a lot of equipment. So we don't have those normal maintenance expenses that we would have in a normal marketplace. Some of those were in Central App as well. But I’d say the biggest part of those, were probably in the Powder River Basin.

Meredith Bandy – BMO Capital Markets

Okay. And then if we think about your 12 million tons of export. How does that split between the basins? And if you can give us any sense of just taking a snapshot of the freight rates and the rail rates you’re seeing, what sort of international prices do you need to be in the money in the basins?

John W. Eaves

Well, if you look at the 12 million tons, overall it's going to be about 70% of that would be on the thermal side, and the balance would be on the met. I would say that the railroads have stepped up to the plate and continue to help us move met coal as well as thermal coal into the global market.

We continue to move volume out of the PRB to the West Coast. I don't know what the latest volume forecast is there, but call it between 1 million to 2 million tons. The Western Bit region continues to grow in the global marketplace. I had indicated last call that, that was somewhere between 2.5 million and 3 million tons. I still think that's a reasonably good number, and then out of Central App on the thermal side, we are actually looking at several million tons in the international market there.

And then the balance of that would be our met volumes. And if you think about last call we had about 4.9 million tons of met committed, virtually all of that was in the U.S. market. So the balance, if you get to that 8.25 midpoint, the balance of that would go in the international market. So that's kind of the makeup of the 12 million tons.

In terms of what prices it requires to get a good return, I mean we don't like the prices we are seeing right now in the international thermal markets. API has been moving around pretty hard recently to the down side. But what we’ve been trying to do as a company because we see how important a global market place is over the next three to five years.

We’ve been trying to develop a customer base off the West Coast, off the East Coast and through the Gulf. And the net backs aren't something that we are real proud of, but we think it's important given our growth strategy over the next couple of years to develop those customers, and that's what we have been doing.

As we all know, the API prices can move pretty hard either way and we want to make sure that we have established these customer contacts and have a seat at the table when we see the market improve.

Meredith Bandy – BMO Capital Markets

All right. Thank you very much.

John W. Eaves

Thank you.

Operator

We will move next to the side of Michael Dudas with Sterne, Agee. Please go ahead. Your line is open.

Michael S. Dudas – Sterne, Agee & Leach, Inc.

Good morning, everybody and congratulations Deck and John on the promotions.

John W. Eaves

Thanks, Michael.

Michael S. Dudas – Sterne, Agee & Leach, Inc.

First question is John, how long ago did the organization and the board move in conjunction…

John W. Eaves

Michael? Hello.

Operator

It looks like we lost Micheal…

John W. Eaves

Okay, okay.

Operator

We will move next to the side of Justine Fisher with Goldman Sachs. Please go ahead.

Justine Fisher – Goldman Sachs & Co.

Good morning.

John W. Eaves

Good morning.

John T. Drexler

Good morning Justine.

Justine Fisher – Goldman Sachs & Co.

So the first question that I have is on the strategy for 2013 and given, I mean obviously you haven't given production guidance for 2013, but given that the cost guidance for PRB for ‘12 is $11.50 to $12.50. My question about selling in ‘13 is maybe you can, but to me it seems like it would be difficult to just not sell what’s uncommitted for ‘13 like you’ve done with 2012. So when you are making commitments for ‘13, do you look at your average PRB price versus the cost i.e. including your already committed tons and/or your spot PRB price versus your cost? So would you sell spot tons at $11.50 if your cost is above that as long as the average price gives you a margin or would you not sell any spot tons if they are below your cost regardless?

John W. Eaves

We might sell some spot tons. It’s something that was close to our cash. We’ve done that in the past, we’ve done it in the last six to 12 months. And that’s something we evaluate on a case-by-case basis. But if it helps us optimally run the mine, we’d do that. We think longer-term we want better pricing and if we’re going to commit our coal for three years, we need a better realization something better than our cash cost. So that’s the way we look at the market and I think it’s really on a case-by-case basis and we make a determination based on what’s going on at the time.

Justine Fisher – Goldman Sachs & Co.

Okay and then as far as the comments on the credit facility. It seems like you will raise enough money to repay all the drawings under your secured credit facility with the new term loan? And then when the covenants kick back in 24 months, what are they at that time or what they would have been or are there new maintenance covenants that will kick in, I guess it’s the beginning of '14.

John T. Drexler

Hi, Justin, this is John Drexler. Right now, with the credit amendment not been completely finalized at this point, we can’t get into a lot of detail, but the covenants, actually the relief from the leverage ratio, debt to trailing 12 months of EBITDA actually goes through June of 2014. At that point, some of the covenants do come back in and reestablish themselves. We’ll have more color on that once all of the facility is finalized, but at this point we think, we’ve created a substantial window here through what arguably and as we’ve all discussed will be challenging market conditions for some time. This process and working with the banks we’ve got a supportive bank group. They understand where we are in the cycle.

We built a structure that we think will be putting us in a position to achieve a wide variety of market scenarios as we move forward, and that’s over some time where we clearly have uncommitted volumes in the outer years of 2013. But we’ll have to watch that continue to evolve. If there’s significantly negative developments for Arch in the industry, we feel confident at some point well into the future, we’d be able to hopefully go back to the banks if need be, but at this point, we think we’ve built a structure that allows us to work through what we think will be the market cycle here through the process.

Operator?

Operator

Okay. We’ll move next to the side of and it looks like we have Michael Dudas back on line.

Michael S. Dudas – Sterne, Agee & Leach, Inc.

Guys, can you hear me now.

John W. Eaves

Yeah. Looks like you disappeared.

John T. Drexler

We lost you.

Michael S. Dudas – Sterne, Agee & Leach, Inc.

Sounds like a mobile phone commercial right. Just two questions first, unless transferred. John, when did you and the board start thinking about this plan, was it a reaction to the difficult January, February, the marketplace, was this something that’s been thought about over the past few months. Give me a view on that front? And with regard to that, any thought about Coal Creek and where that stands relative to opportunity to monetize or to cut back production?

John W. Eaves

Michael, no, it’s not something we just started recently. Steve and I’ve been communicating with the board for quite some time and we started our budgeting process in October, November of a given year and we were starting to talk about seeing some softness as we were kind of putting the budgets together and it’s been kind of evolving process. We didn’t think that we would have no winter. We didn’t think natural gas prices will continue to decline like they have. So this thing is kind of building and we just got to the point that we thought it was the right business decision to pull back, manage our business, eliminate our exposure to the thermal markets and manage through this thing. I mean we’ve been through these before. We’ve managed through them well.

And our goal was really to come out the other side stronger than we went in and that’s why we continue to focus on the net build out, managing our capital and trying to manage the cost as best we can. So now I wouldn’t say it just happened, it was something that we’ve been talking about for a period of time that had just progressively got worst and we reacted to it.

Michael S. Dudas – Sterne, Agee & Leach, Inc.

And Coal Creek?

John W. Eaves

Coal Creek, it’s something that when we were looking at these business decisions, we’re always taking a look at Coal Creek and how it plays into Black Thunder. But I will tell you that we have a solid customer base at Coal Creek and it specifies that coal needs to be shipped on those contracts. And with our cost structure from that operation, we don’t have any immediate plans to do anything there. I mean it’s always something we are talking about, but given our customer base there and our commitments we are pretty comfortable continuing to run Coal Creek.

Operator

Next to the side of Paul Forward with Stifel, Nicolaus. Please go ahead.

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

Yeah, thanks. Good morning.

John W. Eaves

Good morning, Paul.

John T. Drexler

Good morning.

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

On the PRB, you gave a pretty wide guidance range on cash costs of $11.50 to $12.50. I am just wondering – considering that you’ve eliminated the unpriced tons, I just wondered why there is such a big range on the cash costs? And then on the $11.50 on the low-end of that range, would we need to get one or more of the drag lines backup in operating in order to achieve that low-end of $11.50, I mean, I guess this quarter was $11.24. So was just curious if you could talk about that range and how you could achieve the low or high end of it?

John W. Eaves

Paul, since we’ve got our new COO in here, I’m probably going to avail myself of his benefit and let him field that one.

Paul A. Lang

Well, I think, Paul, as you look at the first quarter, things got pretty fast and I think we reacted to it as quick as we can and going forward you look at the cash cost structure, we think we’ve built in the fact that the three draglines would be idle and we wanted to give ourselves some margin particularly on where we ended up on our – or what process we would do and cutting back the cost to give ourselves a little bit of margin of error.

John W. Eaves

Paul, what we’ve tried to do is when we made these revisions, we’ve tried to put a plan in place that we can manage to and maybe – and we think that’s important given the tough environment we are in. Paul and his team did a great job in managing cost. And if you think about the volumes that we’ve taken out and what we are doing to some of these operations, it’s a real credit to him and his team the way they've managed through this.

John T. Drexler

Paul, another component that causes some uncertainty with that cost structure having putting us in a position to put a wider range out there is diesel fuel. As we’ve indicated previously, we’ve entered a hedging program where we are essentially protecting the company against increases – volatile increases in diesel pricing, but we benefit if the pricing declines. So that’s another area given some of the volatility that we see in the diesel pricing arena, that’s built into that range as well.

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

Great. And then on the one of the other source of uncertainty in the model is a couple of million tons of unpriced met coal this year. Just wondering if you could talk a little bit about the lower Cedar Grove, the Mount Laurel production these days and I guess that’s still pretty much a high-vol B coal, where are high-vol B markets today and how does that Cedar Grove quality match up with, kind of what the markets needs are today and what if you were to do back of the envelope kind of plug in what could we assume with some margin of error on the unpriced business is it, is it 80, is it 100 are we somewhere in that ballpark for that type of coal?

John W. Eaves

Paul, when you think about lower Cedar Grove, as I mentioned, it’s a little bit thinner seam but the characteristics are little bit better. I think the sulfur might be a little bit lower, the coke strengths are little bit better. What we are seeing in the markets for that type of quality coal, I mean, it’s a high-vol B, it’s fairly comparable to be the Alma Seam. We are seeing in that $85 to $90 range right now. I mean, that’s what we are seeing in the market, that’s kind of what we’re seeing, we are seeing good demand.

And if you think about our uncommitted volumes for the balance of the year, the majority of our uncommitted volumes are the high-vol B. We may have a little bit high-vol A in there, which is a step up in realization, but for the most part, I think that $85 to $90 price range, we’re seeing today is what we would expect.

Now hopefully, we see some improvement. We see some recent settlements in the spot market at $216, $216.50, which is encouraging given the most recent benchmark was $210. So, capacity factors continue to hinge up here and around the world. China was on a pretty torrid paced in March. We are cautiously optimistic that hopefully we can do better than that, but I think you are modeling this thing, that $85 to $90 range is probably a good price.

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

Okay. Thanks, John.

John W. Eaves

Thanks, Paul.

Operator

We’ll move next to the side of Brian Yu with Citi. Please go ahead.

Brian Yu – Citigroup Global Markets

Thanks and good morning. I’ve got a question on your 2012 contract portfolio. Could you comment on the core change in average pricing, because when we calculate the implied, it looks pretty low, right now there is more going on there within the context maybe, deferrals and contracts and exports that’s rolling in?

John W. Eaves

What region were you talking about…

Brian Yu – Citigroup Global Markets

All three. If you could PRB, we are getting a negative implied price, which I don’t think is right, Western Bit, $12, Central App thermal $41?

John W. Eaves

Yeah. All those have push back tons in them, and that's what drawing that price to the negative. There were some lower price export sales, but for the most part, if you look at that 7 million tons or so of push backs most of that’s in there, creating those negative numbers.

Brian Yu – Citigroup Global Markets

What would be the offset, just given your comments earlier about kind of preserve the NPV value of these?

John W. Eaves

Well, I mean obviously, for example, we had one large contract, if you look at 2013 on the table. We stepped down about 1.2 million tons. We've restructured a big contract out of our West Elk mine and actually took that volume to the PRB in 2014, 2015 at a real premium price to the market. So we created value there and helped the customer in the short-term. So we're looking at those types of things.

Brian Yu – Citigroup Global Markets

Okay. And then my second question is just on the changes you’ve made in the credit, could you disclose, what your liquidity position is now and then the previous adjustments that you made, if there is any difference?

John T. Drexler

Yeah, Brian. This is John Drexler. As we sit here today prior to the full execution and finalizing the plan. As of March 31, we have about $700 million of liquidity under our existing structure. Post, all the transactions with the refinancing activity that we are doing as we look forward, with cash that we'll have on the balance sheet, with full availability of the revolver we would project that we’re going to be approaching that $1 billion range of liquidity post all of this activity.

Brian Yu – Citigroup Global Markets

Okay. Thank you.

Operator

We’ll move next to the side of [Brian Atwell] (Operator Instructions).

Unidentified Analyst

Thank you. I think that’s weighing out well. And Steve, congratulations on your move. I had a question on the export capability you have, and you pretty much touched on this. But maybe could you give us just a quick review on what you have planned, and I would guess with the tone of the export market, you’re probably going to step up your export capability and may be what you might do in addition to what you’ve already done?

John W. Eaves

Yeah, let me talk just first about the general industry. We exported out of the U.S. last year about 108 million tons. We’re forecasting about 114 million, 115 million tons this year. Arch's internal forecast over the next couple of years is probably 10 million to 15 million tons per year of growth in the global markets.

As we look at the demand growth in, particularly Asia but all around the world, we've identified about 290 gigawatts of new coal-fired generation are going to come online over the next 36 to 48 months. And when you look at the supply projects around the world and those are going to need about 950 million tons of additional supply (inaudible), so you are talking about more than replicating this coal industry today.

If you look at all the supply projects all over the world, Mozambique, Mongolia, Australia, Canada and you assume that all those projects come on as scheduled on time, which can always be a challenge. You come up with a cumulative short fall of about 300 million tons over the next 36 months. So what we’ve tried to do as a company is positioned ourselves to be able to take advantage of that shortfall in supply. So if you look at the capacity today, call it 110, 115 and you look at the expansion projects going on whether its eastern seaboard, the western seaboard or Gulf, New Orleans or Houston, we think it's very feasible by 2016 to have 270 million tons of through-put capacity out of this country into the global market.

So what you are seeing is the U.S. going from more of a swing supplier to a long term strategic supplier in the global market. So how does Arch play in that? Well last year we shipped about 7 million tons of exports, this year as I indicated its in the 12 range and we would hope over the six to eight years it would be well above 30 million tons. So we’re trying to position ourselves through expansions of our own facility, throughput agreements, whether its East Coast Gulf or West Coast to build or position ourselves to take advantage of this growth we are seeing.

Operator

We’ll move next to the side of Dave Katz with JPMorgan. Please go ahead.

David Katz – JPMorgan

Hi, just a follow-up on that last question, I recognize the need by the industry and the desire by the customer to have the coal flow offshore, but it seem that there is both low coal opposition, and more importantly EPA opposition to the happening. How does that enter into the ability to expand to that 270 number?

John W. Eaves

Well, I think the big challenge right now, if you look at that 270 million ton number, about 40 to 50 of that’s off the West Coast. And some of that capacity is in place right now, there’s a couple of projects that are in development out there, Arch is involved in one of those. We have submitted our permit, we’re going through the process now, we’re going to do a full blown environmental impact statement on that facility.

So yeah, it’s going to be a challenge, it could take us four or five years to get it done, but we are creating hundreds of jobs, we’re spending $600 million plus in Longview Washington to develop this facility. And we think, the world needs the coal, so it’s something we’re going to continue to pursue, I mean we’ll have challenges from time-to-time, but we think at the end of the day, we'll prevail.

Operator

And next to the side of David Gagliano with Barclays. Please go ahead?

David Gagliano – Barclays Capital

Hi, thanks for taking my questions. I have one quick question on the – in the press release, I compare Q1 versus Q4. I know there's something going on there, but for 2013, it looks like your PRB commitments went up 7 million tons during the quarter, and it actually looks like it came at a pretty good price. I was wondering if you could just talk to us about what happened there in Q1?

John W. Eaves

Yeah, I mean, we booked about 7 million tons during the first quarter for 2013 at pretty good prices, and we feel good about that. As I said earlier, that we are focused on trying to get value when we place each tons longer-term and more encouraged by what we are able to put today.

Operator

We’ll move next to the side of Lucas Pipes with Carret. Please go ahead.

Lucas Pipes – Brean Murray, Carret & Company

Good morning. Quick question on the met coal side. First, could you maybe give us breakdown of what you plan to ship domestically versus exports? And then in terms of – on the domestic side, do you think natural gas used in blast furnace is having an impact on your business? And then on the export side, how would you say, I know you've sold a lot of your higher quality met coal already, but how would you say this kind of Beckley product trends versus the recent benchmark?

John W. Eaves

Yeah. On the natural gas piece here domestically, we've heard a couple of steel companies talk about it in their calls. We've actually talked to some of our customers and really aren't getting any feeling that it's impactful at all. So I would tell you that we really don't see an impact here in the U.S.

We think about what we’re shipping domestically, I think you need to think about 4.5 million tons to 4.8 – 4.9 million tons is going to go to the U.S. markets and the balance of that will go in the international markets.

The other part of your question on the international piece, Beckley yeah, we think Beckley is some of the best quality in the world. And if you look at the low-vol, it compares comparably with maybe a slight discount to the Peak Downs, Saraji coals in Australia. But clearly it's a well-known coal in the U.S., and becoming a better-known coal around the world.

So when you combine that with the increased production at the Leer mine, and you think about our overall, today we’re 25% to 30% of low-vol and high-vol A, by the time we get to 2014, 2015, over 50% of our portfolio will be high-vol A and low-vol. So not only we'll play very well in the U.S. markets, but it will play well in the global markets as well.

Operator

We’ll move next to the side of Chris Haberlin with Davenport & Company. Please go ahead.

Chris Haberlin – Davenport & Company

Hi, good morning.

John W. Eaves

Good morning to Chris.

Chris Haberlin – Davenport & Company

Can you just expand; there was a question earlier about the 7 million tons of PRB. Was that new business or was that anything that was deferred from this year going forward or was that a long-term contract? And then as you look out to 2013, what's your appetite for booking incremental thermal volumes and what’s the customers’ appetite for taking additional thermal volumes given inventories in kind of the uncertain environment?

John W. Eaves

Chris, I think that 7 million probably had some tons in it. We’re restructuring it. It's a combination of new business and restructured agreements. As we think about 2013, as I said earlier, we’re not willing to sell coal on a sustained basis at even near our cash cost.

I think when we look out over the next one to three years; I mean we’re still seeing reasonably good prices. We’re seeing good demand as we think ‘13 and ‘14, and we hope to continue to layer that in, in those latter years. So if we have a normal summer, this summer, I think you’re going to see more and more customers come to the market, start thinking more about 2013 and 2014. We’ve identified a lot of demand out there particularly for ‘13 and ‘14 that we think offers real value for Arch Coal.

Operator

We’ll move next to the side of Matt Vittorioso. Please go ahead?

Unidentified Analyst

Yeah. Just a quick first question, does the tender for the Arch Western bonds trigger any kind of tax consequence and then secondarily on coal to gas switching, we’ve heard from some guys that infrastructure limitations are really limiting any further coal to gas switching, even if gas were to continue to go lower, do you share that sentiment? Thanks.

John W. Eaves

Matt, in relation to the tender other than what was put in the press release, I’m very limited on what I can say about that. However, in regards to Arch Western notes, we have had commentary in the past. Given the structure of those notes and BP’s 0.5% ownership that there is an issue that we continue to monitor related to the tax consequences that we have in a partnership agreement with BP growing to the other 1% and 0.5% of Arch Western resources. As we continue to evaluate that, we think that that’s a minute risk in the overall view, one that is not at all material to us, and in fact, we’ve begun discussions with BP as we look at that agreement, which comes to fruition in June of 2013.

And as you look at our SEC disclosure materials, our 10-Ks or 10-Qs, we disclosed what the potential tax implication of that is, and as we step through each quarter, it continues to ramp down, and as we look at it today, we think it’s very immaterial to any of our issues.

John T. Drexler

In natural gas question, if you look back over the last couple years on a cumulative basis, we think there’s probably been about 82 million tons of coal displaced. Could there be any more? We don't think it's real material, could be another 5 million tons in appropriate world, but we think most of what’s been displaced is about all that can be displaced. So, as we think out over the next year or two, that's kind of the numbers we’re looking at, and if we get back into that 250, 275 range on natural gas pricing, PRB starts to get back their market share in a pretty significant way.

Operator

We’ll move next to the side of Lawrence Paltrowitz with Shenkman Capital. Please go ahead.

Lawrence Paltrowitz – Shenkman Capital Management

Good morning. I was hoping you could elaborate on the $18 million of income flowing through the income statement under other operating income. Is there a non-cash gain on sale of reserves in there?

John T. Drexler

Yeah. as we described in the prepared remarks and as we’ve talked about our strategy moving forward, we’ll look at assets and our ability to monetize some of those assets, as they are non-strategic and non-core to our portfolio moving forward. So we had an asset sale during the quarter in alignment with that strategy. It resulted in a cash gain that we’ve recognized and that flows through other income there.

Operator

We’ll move next to the side of Lance Ettus with Tuohy Brothers. Please go ahead.

Lance Ettus – Tuohy Brothers

I just had a question about – you are looking at some of the strategic asset sales. First of all, would those potentially include some of PRB mine? And also what are you allowed to, and two, would you consider selling off royalty rates? I know that when you acquired International Coal, I believe you owned the royalties there, so with that maybe a good flexibility?

John W. Eaves

We really don’t want to comment on what particular region is. As we said earlier, we’re always looking at our portfolio, looking at what makes sense in terms of possible monetization. It’s something we’ve done for a long time and will continue to do. In terms of the royalty monetization, I mean, that’s always a possibility that fits into our strategy as we look at our asset base, whether it’s operational reserves. Those are all things that we’ll take into account as we move forward to manage our business.

Operator

We’ll move next to the side of Michael Goldenberg with Luminus Management. Please go ahead.

Michael Goldenberg – Luminus Management, LLC

Good morning.

John W. Eaves

Good morning.

John T. Drexler

Good morning.

Michael Goldenberg – Luminus Management, LLC

Just wanted to get better understand this new term loan that you’ve agreed to. Is it going to be senior share outstanding bonds [if I pursue]?

John W. Eaves

With where we are in the process, I’m very limited from a legal perspective on what I can discuss. I think everything that we’ve described in our prepared remarks and in the earnings release is what we can discuss at this time.

Operator

We’ll move next to the side of Wes Sconce with Morgan Stanley. Please go ahead.

Wes Sconce – Morgan Stanley

Hi, thanks for taking my question. This one is for John, give the tremendous earnings volatility in your Appalachian met platform, do you expect to take a different approach to layering in your thermal coal business going forward and perhaps being less exposed to the spot market? And secondly, is it all an option to permanently mothball some of the idle PRB draglines, so as to eliminate the market’s notion that there’s 50 million tons of spare capacity in the region?

John W. Eaves

Yeah, Wes, I said I think on an earlier call, we came into this year with about 85% of our thermal committed. We thought that was a good position to be in at that given time. The market kept coming back to us with lower natural gas prices, milder weather and it just continued to snow ball on us where we really didn’t feel like it’s prudent to try to place those tons and therefore we cut production times back. As we think about 2013, I think we evaluate every opportunity on its own, but what I’d like to go into 2013 with something higher than 85%, I think it depends on the opportunities out there, but it’s a likely scenario, we had that opportunity.

In terms of the permanent idling of the draglines, there is no plans to do that. We’ve got second quarter three draglines that will be idle. You’re right; we do have 50 million tons of unused capacity. It’s low cost. It can serve the U.S. markets and the international markets and we’ll be looking for sustained demand, before we make a quick decision to bring that production back. But now, there is no plans whatsoever to idle those draglines on a permanent basis.

Operator

We’ll move next to the side of Richard Garchitorena with Credit Suisse. Please go ahead.

Richard Garchitorena – Credit Suisse

Okay, thanks for taking my question. Basically, I just wanted to ask about the ICG transaction. Can you give us an update on what you are expecting from synergies this year and also is this year’s cap guidance reflective of any benefits from that or should we expect further improvement in 2013 as you move forward?

John W. Eaves

Yeah, I think our midpoint was about $110 million of synergies, and it was really in three buckets. It was on the operating side, the administrative side and the marketing side. And I would tell you certainly on the operational side and the admin. side, we’re getting those synergies. It’s built into our forecast. The one area that we’ve been a little bit challenged because of the soft market has been on the blending synergies. I mean our met volumes are down a little bit. One of the real opportunities was to blend the various coals, eliminate the middle men and really export it out of our facilities and with the volumes down, little bit I would tell you, we hadn’t got all that that would materialize in a much bigger way as we move into 2013.

Operator

We’ll move next to the side of Brandon Blossman with Tudor, Pickering. Please go ahead.

Brandon Blossman – Tudor, Pickering

Good morning gentlemen.

John W. Eaves

Good morning.

John T. Drexler

Good morning.

Brandon Blossman – Tudor, Pickering

You touched on this a bit during the call, but just to put all the pieces together PRB ‘13 and beyond, recently it’s taken probably a disproportionate share of the domestic thermal hit. What do you think about the recovery there on ‘13 and beyond relative to the other basins, particularly the ultra-low sulfur Black Thunder coal?

John W. Eaves

We know we’re in a pretty good position when we got some unused capacity. We’ve got some of the highest quality coal. If you look at our higher BTU, our low sulfur, ability to move back between a 0.55 and 0.8, we think we’re well positioned from that standpoint. I would think a normal summer weather pattern would help clearly, a little movement in the natural gas prices would help.

As I mentioned earlier 250 to 275, the PRB starts getting back some real market share. So that would really helpful. I think the other thing that, if you look at the continued deterioration in Central App and our internal forecast having down from ‘11 to ‘12 about $30 million tons, we think that could be conservative given what we see in this market environment. So I think all those could really accelerate the PRB’s, pricing and volumes as we move out.

If you look around right now, as I mentioned on one of the earlier question, there has been about 14 million tons of decrease in production according to answer to your first quarter, if you annualize that that’s 50 million to 60 million tons, I think that’s probably light, I think you’re going to see a lot more volume come up as we move through the year, so that too helped the PRB situation.

Operator

We’ll move next to the side of Dave Lipschitz with CLSA. Please go ahead, your line is open.

David Lipschitz – CLSA Financial

Good afternoon. Quick question, how many tons of coking coal did you ship in the first quarter?

John W. Eaves

We shipped 1.6 million tons in the first quarter.

David Lipschitz – CLSA Financial

Do you think that’s going to be every quarter like pretty average or it could be better and bigger in the second half or what you think for second quarter?

John W. Eaves

Well, I mean, we think obviously it’s going to a step up as our midpoint is 8.25 million, but if you think back to fourth quarter when actually the market was starting to weaken pretty significantly, we shipped 2.2 million tons. So we know that we can ship those kind of volumes. So yeah, I would expect volumes to continue to step up, and as you get into third and fourth quarter, you’ll really see the step up and we are not concerned about meeting that mid-point of our range.

Operator

Due to time constraints, we’re going to take our last question from David Martin. Please go ahead.

David S. Martin – Deutsche Bank Securities

Yeah, thank you good afternoon. I had two questions for John Drexler. John, first working capital consumed, I think about $100 million in the first quarter. I’m just wondering if you expect working capital to be significantly positive contributor to cash in the second quarter. And then secondly, on the new financing package, John, I think you mentioned that there still were some minimal financial requirements under the new deal. Could you mention what those are? Are they EBITDA targets or what type of items?

John T. Drexler

David, from working capital perspective, yeah, that essentially tends to normalize over the course of the year. So we’ll see improvement in that as we move over the course of the year. From the standpoint of the covenant package of the credit facility, we’ve replaced the debt to trailing 12 month EBITDA with minimum EBITDA requirement. We’ll continue to have an interest coverage ratio, senior secured leverage ratio. To meet those requirements, those requirements have been adjusted as well to reflect our revised expectations as we move forward. So the rest of the package continues to stay in place essentially as it is, but adjusted to meet our revised expectations as we move forward.

Operator

There are no further questions in queue. I’d like to turn the program back over to our presenters for any closing remarks.

John W. Eaves

Yes, certainly we want to thank you guys for your interest in Arch Coal. We think we’ve got a sound plan in place. We think we can manage through this tough market. We think our diversified asset base, our port infrastructure, our low cost efficient, and our unused capacity in Black Thunder will bring Arch out to the other side much stronger than when we went in. We’ve been here before. We’ll manage through this well and we look forward to updating you on our plan on the next conference call. Thank you very much.

Operator

This concludes today’s conference. You may disconnect at this time.

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