Arch Resources Inc (ARCH) 2014 Q4 法說會逐字稿

Good day and welcome to the Arch Coal Incorporated fourth quarter 2014 earnings release conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to Ms. Dawn Theel with Investor Relations. Please go ahead ma'am.

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

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

On the call this morning we have John Eaves, Arch's President and CEO; Paul Lang, Arch's Executive Vice President and COO; and John Drexler, our Senior Vice President and CFO. John, Paul and John will begin the call with some brief formal remarks and thereafter will be happy to take your questions. John?

Good morning. Today Arch reported it is fourth quarter financial results and recorded $116 million of adjusted EBITDA. That represents our highest level of adjusted EBITDA in over a year. In addition, we ended 2014 with more than $1.2 billion in total available liquidity. For the full year we shipped 134 million tons of coal, which was impacted by rail service shortfalls in the PRB over the course of last year.

We did see an improvement in performance by the rail carriers in the second half of year which, enabled us to catch up on a portion of our delayed shipments. Looking ahead, we believe the railroads will continue to make progress and service levels will return to normal in 2015.

Rail constraints weren't the only headwinds facing the US coal industry in 2014. Unfavorable weather patterns including a mild summer followed by a muted start to the current winter season has dampened domestic coal consumption. Against that background, Arch's results demonstrate that with our commitments to operational excellence and our diversified low-cost asset portfolio, we can manage our cost and drive improvement results in a challenging environment.

We successfully reduced our cash cost in the Powder River Basin Appalachia regions over the course of 2014 and further reduced our capital outlays. That success is reflected in the 2015 guidance we have provided. Additionally, we have built a solid book of business for the year with higher contracted prices in two of our segments that position Arch well for the coming year. In his prepared remarks, Paul will discuss the current outlook for our operations.

Now let's turn to current market outlooks. As the domestic thermal markets continue to evolve, we expect the US coal market fundamentals to be challenged in 2015.

So far, warm winter weather has decreased heating degree days by 5% and contributed to climbing natural glass storage levels and depressed pricing. As result, coal stockpiles at US generators ended 2014 around 145 million tons, which is essentially flat versus the prior year, but still one of the lowest year-end levels we've seen since 2006. That said, PRB coal remains competitive and we currently expect regional demand to grow modestly in 2015 as utilities receive their contracted shipments and stockpiles remain lower than the rest of the country.

As you know, the [Match] regulations are slated to take effect this year. We estimate that since 2012, the coal industry has retired approximate 20 gigawatts of coal generating capacity and we expect another 40 gigawatts or so will retire by 2018. In 2015, we expect roughly half of that capacity will be retired, meaning a reduction of up to 25 million tons of domestic demand on annualized basis.

In light of these market trends, we are taking a very conservative of approach to 2015. Currently, we expect total US coal consumption to be down between 50 million and 60 million from 2014 levels.

We also anticipate that there will be coal supply response during the year as demand declines. In particular, we expect the structural decline of central [App] to continue and output in the region to fall below an unprecedented 100 million tons.

On the international front, global thermal prices continue to be pressured by oversupply, causing US exports to fall below 100 million tons in 2014. We expect that trend to continue in 2015 as it remains uneconomic for most US suppliers to compete at these low prices, especially in light of the strengthening US dollar. However, the US isn't the only country expected to rationalize coal supply in 2015.

Recent announcements have indicated that Indonesia and China are calling for reduced domestic production targets and Australian producers are publicly reconsidering coal expansion projects. We don't see a near-term catalyst for the sea-borne market, but continue to believe in its long-term growth. Countries like India, Japan and even Europe have sustained import needs and are currently constructing new coal-based generating capacity to meet rising power demand.

With that in mind, the groundwork Arch continues to do through its international offices and export projects is helping to position the Company for when the market tightens and fundamentals improve.

Turning now to metallurgical markets, we expect to see continued weakness over the course of 2015. Global prices continue to bounce along what we believe is the bottom as the latest benchmark price settled down just $2 per metric ton versus the previous quarter.

We anticipate the bulk of the announced supply cuts will impact the market during 2015 and could spark additional supply rationalization, but with decelerating demand growth in some regions and incremental supply still available, it will take some time. Absent any market disruption, we do not expect supply and demand to be in balance until 2016. The US did see met exports in Europe reach near-record levels during 2014.

With projected growth in the European steel sector in 2015, we could see comparable US met volumes going into the Atlantic Basin, though with softer pricing. The North American steel sector's also projected to grow despite recent closures, as automotive demand remains healthy and the Canadian and Mexican demand remains high. At Arch, we shipped 1.9 million tons of met coal in the fourth quarter of 2014, representing the strongest met shipment level we've had in the past six quarters.

For full-year 2014, Arch sold 6.9 million metallurgical tons at prices averaging $81 per short ton. We hit the high end of our guidance range due to the outstanding operational performance in our Appalachian segment.

The successful ramp-up of the Leer mine was a major achievement for us in 2014. By bringing Leer online, we have taken an impressive step down on the cost curve and improved our coking coal qualities. No denying that the current market conditions aren't fun, but we are extremely pleased with the performance of Leer so far and are excited to demonstrate what it can do for Arch in the future.

Finally, I'd like to mention a few other major achievements for Arch this past year. We delivered another strong safety and environmental performance in 2014, turning in our best safety and environmental records since 2010.

In addition, several of our operations, Coal Creek and West Elk, reached new safety and environmental milestones during the year. I want to congratulate our employees on the continued progress towards our ultimate goal of a perfect zero.

In closing, I want to reiterate Arch's commitment to managing through these challenging market conditions. By being market responsive and relentlessly focusing on controlling the variables we can: our cost, our capital outlays and our liquidity, we are successfully managing the business and positioning the Company to emerge from this market cycle as a strong industry player.

With that, I will now turn the call over to Paul Lang, Arch's COO, for a discussion of our recent operating performance and outlook for 2015. Paul?

Thanks, John. This morning I'm going to discuss our operating performance in 2014 and set the stage for our plans and expectations for 2015. During the fourth quarter, our Powder River Basin cash costs continued to improve and shipment levels stabilized. For the full-year 2014, our cash cost in this segment increased slightly as rail service impeded our shipment levels, especially during the first half of the year.

We expect the improvements we've seen from the rail carriers to continue into 2015. With that improvement in rail service together with reduced cost expectation, stemming from our ongoing cost containment efforts, and lower diesel prices should more than offset the impact of higher sale-sensitive and inflationary cost pressures in the region. As such, we expect our cash cost to be lower in 2015 than 2014 and in the range of $10.50 to $11 per ton with slightly higher costs occurring in the first quarter.

Given the supply and demand fundamentals that we currently see, we anticipate our mines in the region will operate at levels similar to 2014. Relative to diesel, let me expand briefly on our exposure to falling oil prices and its impact to our operations. In 2015 we are forecasting diesel consumption across our operating platform of approximately 60 million to 65 million gallons, of which 80% is used in the Powder River Basin.

Our strategy has been to acquire out-of-the money call options that protect us from spikes in diesel prices but leave us open to participate in price reductions when they occur. As such, we expect to benefit from lower diesel prices in 2015, which has been contemplated in our cash cost guidance. This anticipated benefit is based on a year-over-year reduction in diesel prices of approximately $0.80 per gallon.

At this time, we've elected not to lock in our full prices for the balance of the year and have no restriction on our ability to participate in further savings if oil prices continue to decline. As we move through the year, we will continue to evaluate our exposure and act accordingly.

In Appalachia we achieved an 11% reduction in our cash cost in the fourth quarter, driven by an outstanding performance at our Leer mine and continuing improvements at Mountain Laurel. As a result, we are able to increase our cash margins per ton over four fold when compared to the previous quarter.

For full-year 2014, our cash cost performance in the region improved by 5% as compared to 2013. Our volume levels remain flat year-over-year and pricing fell slightly as pressure in the metallurgical and thermal markets continued to build. Despite these market challenges, we saw a cash margin improvement in the region as we re-aligned our platform towards lower-cost mines.

Looking ahead, we anticipate comparable production levels in the region in 2015 with a similar percentage of metallurgical and thermal productions last year. At the same time, we are forecasting cash cost to decline versus 2014 and range from $57.75 to $61.75 per ton.

With the smooth ramp-up of the Leer mine in 2014, we expect its positive influence on our cost structure to continue this year. Over the past 12 months, we've made tangible progress shifting our production in Appalachia towards low-cost, high margin metallurgical production. Using the longwalls at Leer and Mountain Laurel to anchor production and scaling the other operations as required, we expect we can continue to generate strong positive cash flow from this segment even in these challenging market conditions.

We are also moving forward with the permitting and engineering on the other high-quality metallurgical reserves in the Tygart Valley area. These reserves, which are similar to Leer in quality can support several new operations, including another longwall mine.

This reserve offers a unique, organic growth opportunity for us when the markets start to turn. While now is not the time to invest capital into developing them, they are a valuable piece of our future metallurgical platform.

In our bituminous thermal segment we saw cash cost rise as expected in the fourth quarter due to an increase of development cost and planned maintenance activity in the region. For full-year 2014, we saw cash costs decrease about 4% when compared to the prior year, in part from higher shipment levels in the region.

Both mines in this segment had an exceptional year and we were able to run West Elk close to capacity and capture various domestic and niche international market opportunities. In 2015, we expect cash cost in the segment to be slightly above our fourth quarter performance as development costs should remain steady during the year and volumes are expected to be slightly below our 2014 run rates.

Lastly, I want to touch on our sales commitments. On the thermal side we are over 90% committed, based on the midpoint of our guidance range for 2015 with higher contracted prices in our thermal focused region versus the prior year. In the Powder River Basin we have rolled roughly 5 million tons from 2014 to 2015 due to rail performance issues and have maintained the value of those contracts through repricing and additional sales.

We currently believe there will be a modest demand growth in the Powder River Basin during the year, but that could be further tempered by week utility burn this winter. In our Appalachian and bituminous thermal segments, the industrial sector appears to be steady, which is offsetting some of the supply demand imbalance and low natural gas prices in the traditional utility markets in the region.

Looking ahead, we have a solid start to our 2016 commitments with almost half of our volume booked based on 2015 expected production levels at attractive prices. We will continue to be active in the market in the coming months so as to position our business for the outer years.

On the metallurgical side, given where the markets currently stand, we are targeting similar sales volumes in 2015 as 2014 and guiding to a range of 6.3 million to 7 million tons. To date, we've booked sales of 4 billion tons, of which 3.9 million is priced, an average of $77.45 per ton and another 100,000 are committed, but unpriced.

We currently have more than 60% of our expected metallurgical sales committed for 2015 based on the midpoint of our guidance with a majority of those placed to the domestic market. During the fourth quarter we extended some agreements with a major customer that impacted our previously contracted volumes and prices.

Overall, we lowered our 2015 pricing, but in return increased our committed tons in 2015 and added new sales to 2016. By doing this transaction, we are able to maintain our overall value and reduce some of the volume risk associated with our plan. Although global metallurgical prices remain low, we now have a cost structure that allows us to continue to participate in the market.

We believe the current prices are unsustainable for the long-term and that additional supply cuts could be announced by the industry during the year, given that investment in this space has all but stopped. In all, we feel good about how the mines performed in 2014 and think we are well-positioned for 2015.

With that, I'll turn the call over to John Drexler, Arch's CFO to update us on our consolidated financial results, liquidity and guidance. John?

Thanks, Paul. As John and Paul have described, despite the challenges, Arch continues to successfully manage the business in this difficult market environment by streamlining our platform, reducing our costs, managing our capital spend and controlling our cash flow and liquidity. As we look to 2015, it is apparent that headwinds remain, but we are confident we are taking the right steps to continue to successfully navigate this portion of the market cycle.

First, let's discuss cash flow and liquidity management. We ended 2014 with nearly $1 billion in cash and a total liquidity position of more than $1.2 billion, taking into account the undrawn portion of our credit facilities.

We entered 2014 with $1.16 billion in cash and short-term investments. Through a combination of strong cost control, prudent capital management, monetization of several non-core assets and multiple other cash management efforts, we were able to contain cash outflows to $177 million for 2014.

Looking ahead to 2015, with a thermal portfolio that is heavily committed at prices above what we achieved in the prior year in our PRB and bituminous thermal segments, a met portfolio that is 60% committed and an expectation of lower cash costs, we anticipate expanding cash margins in our two most significant regions. With the expectation of improved results in 2015, we anticipate our cash flow will be comparable to 2014.

As part of our ongoing financial strategy, we have decided to suspend our current dividend at this time. In light of the continued weakness in coal markets, we believe it is a prudent step toward preserving our liquidity.

As a reminder, we have no major financial maintenance covenants until June of 2015. At that time a relaxed senior secured leverage ratio covenant of 5 times steps back in on the $250 million revolver. Today we have only a minimum liquidity covenant of $550 million in place, tied only to any borrowings under that revolver and we have no meaningful debt maturities until mid 2018.

Based on our current projections, we expect to remain in compliance with our covenants in 2015. Factoring all of this together, we continue to believe that Arch is well-positioned to weather the market downturn with ample liquidity and extended maturity runway, modest and manageable cash outflows and a solid book of business for 2015. In addition to the cost containment that Paul discussed, we continue to make significant progress in aligning capital spending with the realities of current market dynamics without underinvesting in our equipment portfolio.

During the fourth quarter capital spending totaled $29 million. After adjusting for the LBA payment made in the second quarter, our full-year CapEx spending totaled $88 million, which represents a meaningful reduction from the prior year. In fact, since 2012 we have reduced capital expenditures by nearly $250 million. Looking ahead to 2015, as reflected in our CapEx guidance, we expect to maintain these reduce levels and will do so for as long as these challenging market conditions persist.

Turning to our fourth-quarter results, I would like to expand on two significant items that were mentioned in the release. First is part of our continuing focus on cost containments. The Company made the decision to freeze its employee pension plan. While never an easy decision, this resulted in a pension curtailment gain of $27 million during the quarter or $0.08 per share and reduces our ongoing expense by approximately $20 million annually.

It should be noted that the majority of the fourth quarter benefit is recognized as a reduction in cost of sales, but is not included in our reported per ton results. Second, our review of the recoverability of deferred tax assets during the quarter resulted in a charge of $169 million or $0.80 per share to increase the valuation allowance and was recorded as an adjustment in the tax provision.

Turning now to our updated expectations for 2015. In the PRB we expect cash costs in the range of $10.50 to $11 per ton, a meaningful reduction from 2014 levels. In Appalachia, we will continue to drive improvements into the cost structure and expect costs to be in the range of $57.75 to $61.75 per ton. In the bituminous thermal segment we expect cash costs in the range of $22 to $26 per ton.

In other financial guidance, we expect our CapEx for 2015 to be between $145 million and $160 million. Included in that range is the fourth of five annual $60 million LBA payments for the South Hilight reserve.

DD&A to be the range of $410 million to $440 million, total interest expense to be between $385 million and $395 million. Our cash interest expense will be between $360 million and $370 million for 2015.

During 2014 we successfully reduced our SG&A expenses by $20 million, a reduction of 15%. As we turn to 2015, we expect SG&A expenses to be between $115 million and $121 million, however we will continue to look for ways to reduce this cost. We also expect a tax benefit for the year in the range of 0% to 10%.

With challenging market conditions likely to continue in 2015, we expect to build on the successful actions we have taken over the last several quarters, including managing costs, controlling CapEx and limiting cash outflows while preserving liquidity. Our reconfigured platform of low cost, large scale complexes that generate positive cash flow in soft market environments will allow us to manage through the difficulties, but more importantly, will position Arch to create substantial value as coal markets rebound.

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

(Operator Instructions)

We will take our first question from Mitesh Thakkar, your line is open.

Thank you. Good morning, gentlemen.

Good morning, Mitesh.

Paul, to start with you, congratulations on all the things you are doing on the cost side. It definitely shows up. On the fuel side, you gave excellent color with respect to how should we think about the expectations and what you are doing to mitigate any changes in fuel prices.

Can you give a little bit more color with respect to how should we think about protection against any increase in diesel prices? I know you mentioned that you are buying out of the money call options. Anything else and how should we think about sensitivities to any change in diesel prices versus your cost guidance?

Mitesh this is John Drexler. As we go back over the last several years, we've implemented a policy, as Paul described, where we're buying out of the money call options to protect against price increases in diesel, essentially viewing the premium is an insurance policy and it is a fairly modest premium, at least in the approach that we've taken.

It has allowed us to benefit in the volatile movement we've seen downward. As Paul described, we are participating significantly in the downward pricing in diesel. As we sit here today, we are going to continue to look at the markets and continue to evaluate opportunities to protect and potentially lock in the types of benefits that we've seen develop in that portion of our cost portfolio.

Okay. Let me rephrase that a little bit. Does the cost guidance reflect current diesel price or does it reflect your hedging as well?

No, Mitesh, I think the way you should view that number of $0.80 per gallon based on diesel prices effectively today.

Okay. On the bituminous thermal side, under what scenario can your cost in bituminous thermal go up to your high end of the range? Because if you look at versus your 2014 level, the higher end of the range is almost 25% higher.

Mitesh, I think what we are trying to do on the guidance in bituminous thermal is leave open the fact that as we've headed into this year we have a little bit larger open position. We are not expecting anything at the mines to change materially. We are simply cautioning on the fact that gases down and demand is down a little bit and we probably won't have the pickup from the PRB that we saw in Western bit so we are cautious on the volume side, which is really driving our guidance.

Okay. Perfect. Just one question on the financing side, if I may. John, how should we think about any opportunistic buybacks of [bond], if that is in your near-term focus or is it something which you would want the market to recover a little bit before start thinking about deleveraging?

Mitesh, this is John Drexler. Obviously we worked real hard to put ourselves in position to have meaningful liquidity, a long runway from a maturity perspective. Obviously, as we described over the course of the prepared remarks, there continue to be a lot of headwinds in the markets themselves as well, so I think liquidity continues to be a focus.

We will look closely at that, as we've demonstrated through the course of the market cycle here. If we feel there's opportunity to take advantage and to create value we will do so and that includes capital structure. But right now, with where markets are at, I think our focus is going to continue to be on liquidity.

Mitesh, this is John. I think John Drexler and his team have done a great job on liquidity and we don't feel like we have to do anything, but we're always exploring how we can create value. That's something we continually do. I think we've done a good job thus far and we'll continue to look for ways to do that, but clearly feel like we are in a position we don't have to do anything unless it is in the best interest of our investors.

Brandon Blossman.

Good morning, guys.

Good morning, Brandon.

Just for fun I will follow up on Mitesh's question on the bond buyback, just larger in scope. Liquidity is obviously excellent right now, cost structure improving fairly dramatically over the last year or so, markets have at least stabilized. What needs to change out there as far the macro for you to get more comfortable with not having to hold quite such a big liquidity position?

Brandon, this is John. I think more comfort in the markets. We are seeing certainly oversupply in the global markets, gas prices have gone sub-three, inventories ended the year at about 145 million. We just need to see some stabilization in met pricing, some directional changes in the thermal prices. We think we will see that. There was about 25 million to 30 million tons of supply cutbacks announced last year.

We didn't really see much of an impact from that. We think as we move through 2015 we will see more of an impact from that. I think where benchmark pricing is right now at $117, you may see some additional cuts, but we just need to see a little more clarity on the market. What we have done, Brandon, is we've positioned ourselves very well on the cost curve.

If you look where we are on the thermal cost curve, where we are on the met cost curve, I think we are well-positioned not only to generate cash margins in this tough environment, but really positioned well to capitalize when we see the market correction. And that's really the way we are managing our business. To answer your question, I think we just need to see a little bit more clarity and improved direction on pricing, whether it is thermal.

Okay, all fair comments and we will look to see what happens through 2015. Follow-up question, this is also a forward-looking question as we talk about or contemplate at least permitting activity on an incremental Leer-like mine. What has been the market acceptance of the Leer product and what do you think the future holds for that, particularly in the US market?

Brandon, this is Paul. We've been pleasantly surprised. Leer has got a very good cost structure and it is one of those weird things where the quality out of the mine was actually a little bit better than we forecasted. We've seen great acceptance of that mine, not only on the domestic side but the international side. I think we shipped about 2 million tons of Leer last year on the export basis. Frankly, heading into this year, Leer is I think in very good shape and I don't think we will have any trouble placing those tons.

Okay, thank you very much, Paul.

Michael Dudas, Sterne Agee.

Good morning, gentlemen, Dawn.

Michael.

You'd enjoy the weather here in New York today, by the way. It is really what you guys need.

(laughter). I saw the snow.

We have plenty, we would love to ship some out. First question for John or Paul. I think it is appropriate to take a cautious tone towards the US thermal markets this year. Of how you are looking at the market, is natural gas more of a threat, is the retirements more of a threat, lack of an economy more of a threat? If you could talk a little bit about that because gas is coming to a level where we are getting more interested in folks thinking about any displacement from coal from gas. If you can share some of your thoughts on that, I would appreciate it.

Michael, this is John. You've got a lot of headwinds coming into 2015 and with those headwinds, we think we've positioned ourself very well with a large percentage of commitments. In fact, if you look at our thermal commitments, I'm not sure I remember when we've been in better shape. So we feel good about where we are, but when you look at natural gas prices trading where they are, we haven't seen any impact on our PRB demand because of natural gas prices. We are seeing it in other areas.

I think Illinois would be seeing it, Western bit would be seeing it and certainly Central App is seeing it so that provides a little challenge there. We finished the year with 145 million tons of inventory. That's, quite frankly, a little bit higher than we anticipated. We had a slow start the winter, consumption was off in fourth quarter. We will see how the winter plays out, if we have an extended period of winter weather, we have a good summer, I think PRB should be fine.

But there's no arguing the fact that MATS takes effect this year. It's going to impact about 25 million tons of coal demand and then if you look at natural gas and some of the other headwinds, we think all in it is probably 50 million, 60 million tons of lost coal demand in 2015. Again, we've strategically put yourself in a good position with our thermal commitments and on the met side having 60% of that coal under contract makes us feel pretty good.

We are being cautious. Paul and his team have done a great job in making sure that we are on the extreme low end of the cost curve. We feel like the fact that we are generating good cash margins at all of our operations right now positions us very well when this market starts to improve.

John, those are very fair comments and I agree. My follow-up would be for John Drexler. Remind us what kind of asset sale proceeds that you generated in 2014 and is there opportunities to generate like amounts in your assets in 2015?

Michael, really the sales that were focused and highlighted by us occurred earlier in the year, generated asset cash proceeds of about $46 million. If you look on the cash flow there's some additional proceeds from some other smaller sales that occurred over the course of year that you total up.

As we've indicated on previous discussions and we've been very consistent with, we'll continue to look at opportunities. If there's value to be generated for non-core pieces of our business, then our approach, it's resulted in some of these transactions that we've occurred. I don't think we can speculate as we move forward what type and level that will be at as we go forward.

Michael, this is John to follow-up on that. You know we've been pretty pro-active over the last 24 months starting in 2013 with the monetization of Canyon Fuels and as John said, ADDCAR, Hazard. We position ourself very well. We put that cash on our balance sheet, but given where we are liquidity-wise, we just don't feel like we have to do anything that would be a bad deal. So as John indicated, to the extent somebody would come in, place value on our non-strategic assets, more value than we could create ourself as a management team, we would certainly be compelled to look at transaction, but don't feel like we have to do anything.

Caleb Dorfman, Simmons & Company.

Thanks for taking the question.

Good morning, Caleb.

First, looking at the PRB, obviously you do have a good committed position for 2015, but 2016 there's a lot of tonnage left to sell. Can you discuss how you are thinking about rolling in that tonnage? Are the prices that we are looking at in the financial market for 2016 down in mid-11 actually accurate or is there some sort of disconnect between the financial and physical market you are seeing right now?

This is Paul. For 2016, I think we're off to a pretty good start. We currently have about 54 million tons committed in the PRB, of which 38 and change are priced and the price of those is at $14.58, which is 8% above this year, which is 4% above last year. It is a pretty good step up and it's a pretty good commitment to start the year. As you know, the contract season really starts off in earnest here in the next month or two.

Obviously we are going to be very active in the market. As far as the disconnect between the indexes and the physical, it is really widened out. The fact is if you wanted to go out and place any volume at those financial prices, it doesn't exist. So I feel pretty good about heading into contracts for next year. Like always, we wish the prices would be a little bit higher, but in general we are not in a bad spot.

Great, that was helpful. And then, John, you mentioned that you expect cash burn this year to be fairly similar to last year. Do you see any possibility that looking at all the elements in your guidance ranges, the cash burned could actually be less in 2015 than 2014?

Caleb, obviously the guidance range is on a lot of the fronts here as we step at the beginning of 2015 are fairly wide to anticipate a lot of fluctuation in a lot of different things. If things are towards the better end of the guidance ranges, I think your statement is potentially an accurate one.

John Bridges, JPMorgan.

Thanks, congratulations. The mines in Appalachia that you've taken off-line, would you be seeing any reclamation costs coming through from those things this year?

John, this is Paul. Obviously there's idle holding cost and I think as I mentioned when we idled Cumberland River, that we are leaving it on what I'd call hot idle. We are keeping the mines ventilated and pumped. They were on the higher end of our cost curve on the met side so we took them off line.

They are still good mines and they are still a good product, but they are out of the money right now. As you look at our guidance, beyond that we really don't have a lot of ongoing idle holding cost. The fact is is that we've been able to do some of these transactions and have separated ourselves from some of those. I think our guidance for 2015 includes the idle holding cost for the Eastern operations, John.

Okay, that cost is in your forecast cost?

Yes, sir.

With respect to your comments about the likely 50 million to 60 million tons of lost usage of coal this year, you're very well contracted, but the last time there was a crisis with very low gas prices there was some pushback even on contracted tons. Where do you see the big pressure coming? Is it all Appalachia or do you see some of it coming into PRB this year?

John, this is John Eaves. We really haven't seen anything on the PRB yet. Shipments are going extremely well for through the first few days of February year to date. I would same most of that challenge will be in central App and maybe even in Illinois with current gas prices where they are. Paul indicated that we are a little bit cautious on Colorado right now given where gas prices are. We do have a pretty good contracted base in Colorado, but that's something that we continue to watch pretty closely.

And if we don't get the balance of that volume put in the marketplace, we could be on higher end of our cost curve. But I would say that the PRB currently really isn't seeing any headwinds in terms of what we are seeing on potential loss generation. Really, if we have a normalized winter for the rest of the season, a normalized summer, we actually could see a pickup in PRB demand as we move through the year because we do expect the railroads to improve their performance throughout the year as well.

Evan Kurtz, Morgan Stanley.

Good morning guys.

Morning, Evan.

You did a great job on working capital this year. I calculate that you had a release of about 70 million or so. I just wanted to get a sense from you what you are thinking on working capital going into 2015. Is that cash you can keep out of the business or do you think some of that might creep back in? How should we think about that?

Evan, that's something that we're always going to be focused on and you look at certain areas of the balance sheet and our ability to continue to evaluate and see if there's opportunities. It will be a focus for us, whether it's in areas as material in the supply parts that we have at the mines, coal inventory levels, et cetera. It is an ongoing focus for us.

Quarter to quarter there is variability, especially with the timing of some of our interest payments, which are semiannually on our unsecured bonds. So you see that flowing through, but overall over the course of year we will be very focused on seeing if there's opportunity for improvement in working capital.

Thanks and one follow-up on domestic met coal contracts. I know you have a bunch of mix shift going on this year with the ramp of Leer, but I was hoping you could give us a sense on a like-for-like basis, quality wise where did contracts end up in 2015 versus 2014 for some of the key grades?

I will take my shot at it and see what John thinks. If you look at the domestic met coal market right now we are seeing low-vol in the $85 to $95 range and high-vol, $75 to $85. Frankly, if you look year-over-year, we were able to extend our volumes into the domestic market and frankly, that's why we are in such a good position. Prices are obviously a couple bucks off last year, but we are entering 2015 pretty strong on the metallurgical sales side.

The other thing, Caleb, we did in terms of domestic sales is Paul and his team has moved up from about 35% in 2014 to about 45% plus of domestic commitments and that's volume and price that are committed for this calendar year. So as Paul said, we are in very good shape as we enter discussions for the international market and quite frankly, we've been pleased with the demand that we've seen in Europe. We don't like the pricing much, but the demand has been relatively strong.

Lucas Pipes, Brean Capital.

Hello, everyone.

Hello, Lucas.

To hone in a little more on that 50 million to 60 million ton reduction year over year, do you have a sense for a basin breakdown of that number?

I don't know that we have a good feeling. I think the biggest impact we think will obviously be Central App. There will be some Northern App and Illinois in that and there could be a small bit of that volume that would hit PRB, particularly on the MATS regulation, but I don't know that we have a good breakdown of it. Logic would tell you the biggest impact would be Central App followed by Northern App and Illinois.

I'm just thinking about it big picture, considering how much has come out of Cap, how much there is left to cut. I would think that after the onslaught of regulations and gas prices that the mines that are left are relatively efficient.

If you think about Central App and we finished the year, call it 117 million, 118 million in 2014, we've got another call it 17 million, 18 million, maybe 20 million tons coming off in 2015. So we think that you are probably going to dip below that 100 million ton mark in 2015 in Central App. So you've got some real structural changes going on there. There is still some higher cost production that probably needs to come out.

There's probably some guys hanging on that may throw in the towel given the current pricing environment. I think we are unique in the fact that if you look at our base operation for thermal in Central App, it is [cold-mac] and we have an extremely low cost structure there that actually, believe it or not, allows us to create cash margins even in this current market condition.

That's helpful. To shift over to the met coal side for a second here. You're watching the Australian dollar as well and I'm wondering, do you see an impact already on your European sales efforts because of this weaker dollar or are the Australians pushing harder into that market? And then, if you can give us an update on the average [net-back] met coal price, to your minds, in the current environment?

Certainly we watch the currencies and the weakness in the A dollar gives them a cost advantage, no doubt about that. We really haven't seen any material volumes coming into the Atlantic market. We think most of that is staying in the Asian market and they may even be putting some of that met coal in the PCI and thermal markets. As I indicated earlier, we continue to be pleased with the demand that we see in Europe. Pricing is under some pressure, but given the logistical advantages that we have from the US, we continue to believe that Europe will be a good market for us.

The transportation differentials that the Australians have coming into that market is fairly significant. Although it has come up recently, we really haven't seen much of that. When you look at our more traditional markets for our met coal: US, Europe, South America and Canada, there's about 115 million plus tons of demand there with a lot of that demand being high-vol.

So if you look at how Arch is positioned today with the startup of the Leer longwall, that combined with the Mountain Laurel longwall, we think we are pretty uniquely positioned not only from a quality standpoint but from a cost standpoint. We think we can compete in the US and the global markets pretty consistently.

Jeremy Sussman, Clarkson.

Good morning and thank you for all the color you guys have given on the call.

Good morning, Jeremy.

I want to clarify that the domestic prices, the $75 to $85, that was for high-vol A and I think you said that was just a couple bucks lower year-over-year and if that's right, can you give us the same metrics on high-vol B?

High-vol B I would throw about another $5 to $8 discount on top of high-vol A. As I did say, the average price we have booked so far this year is about $77.45 and to give you a little more color on that, it is about 55% low-vol and high-vol A. In the balance is high-vol B and PCI. What we are looking at is a similar product mix to last year.

Got you, that's helpful. A quick follow-up, I think in the press release liquidated damages of $50 to $60 million for 2015. Can you elaborate on what this pertains to and how long these go on for?

Jeremy, this is John. We've been talking about those over the last couple years and those are a combination of barge agreements, rail agreements, port agreements that they go on for varying lengths. So we really haven't gotten into more detail on that. We are guiding to a midpoint of about $55 million this year. We finished 2014 at about $37 million, so the guys have done a great job in mitigating that exposure.

But given the softness we see in the international markets right now, we still think it is prudent to participate more in the domestic markets and we'll continue to try to minimize that liquidated damages for 2015. Right now our best outlook would be a midpoint of about $55 million and we will do everything we can to reduce that number as we move through the year.

David Gagliano, BMO

Great, thanks for taking my question.

Welcome back.

Thanks. There is one clarification question first of all. On the PRB, if you do the basic math on again, backing into what was contracted Q3 to Q4, during Q4 it implies 12 million tons were contracted about $12 per ton for 2015 delivery. But I know that in the prepared remarks there was commentary about tons being pushed out into 2015. Can you clarify how much was actually contracted in the PRB and at what price for 2015 delivery?

David, Q4 the comparison is kind of messy for quite a few reasons. As I mentioned earlier, we were proactive or conservative, however you think about it. As the rail situation looked bad, we got in (inaudible) with our customers and wanted to preserve our value, so we rolled tons starting in the second half of 2014 and 2015 and 2016. The other thing that makes the tonnage a little bit messy is that we actually transferred one contract to the Illinois Basin and converted it to a 2015, 2016 contract.

All told, the actual sales were actually below $10 million or right at $10 million. The other thing that's messy about that if you're looking just for price direction is about two-thirds of those were 8800 and about one third were 8400 coal so you had a pretty big mix and kind of a messy quarter over quarter comparison.

Okay. To follow-up on that, of the two-thirds of $10 million that was 8800 BTU coal, what was the price on that coal that was sold for 2015 delivery?

We layered it in over the quarter and it was a pretty broad range, but I'd tell you it was anywhere from $12.50 to $14.25.

Okay. For the 2016 number, how much 2016 coal did you actually sell in the fourth quarter and what was the price on that coal?

David, I don't have that right in front of me.

Okay. Great, thanks.

Paul Forward, Stifel.

Hey, Paul.

I want to follow up on that question on the liquidated damages. Is that 50 million to 60 million embedded in your cost guidance across the regions full-year or partially included in those cost guidance numbers?

This is John Drexler. It is not. That's in addition to the costs that we are reflecting in each of the regions. That's an add to the overall expenses that we expect for 2015.

Okay and when thinking about that range of 50 million to 60 million and I know you've been talking about how potentially, you don't like the price happening in the export market for met coal, but you like what you're seeing in terms of the demand for the product and the potential for volumes holding up. At what extent, if we see that continue and see that you're able to defend share in the export markets, how could that potentially affect those liquidated damages if, in fact, you're able to ship more than maybe the current market is suggesting?

Paul, it's really hard to speculate on what we could see in improvement in market price and then additional volume and how that could impact it. What we indicated earlier and what John Eaves said I think still applies as we look at 2015 and that is, as we came into this year, we started out at a higher number. We worked very hard over the course of your to mitigate that. As we sit here today, I think the guidance we are providing you is our best estimate of what we see with current market conditions and what we are going to incur. Rest assured, the team here is going to work very closely to find opportunities to mitigate that.

Brett Levy, Jefferies.

You talked about the June 2015 covenant. It sounds like you probably get a waiver, but can you talk about the covenant, where you think you will be around the time of that covenant in terms of the key metrics and where you are in negotiating with the banks?

Brett, this is John Drexler. As we indicated in our prepared remarks, as we sit here today and our current expectation and projections, we expect to be in compliance with the covenants, the senior secured leverage ratio that kicks back in in June of 2015 at a five times and then obviously the $550 million minimum liquidity provision. With that being said, if markets continue to be very challenging and significantly unfavorable, we've discussed this in the past, we have a supportive bank group, at least they have been historically.

If need be, we would be in a position where we would be having conversations with them. With all of that being said, the actual component of our liquidity that's made up of the revolving credit facility is quite small. So it's less of an impact on our overall liquidity so we feel very comfortable with where we stand today with our cash position representing the majority of our liquidity.

Then in terms of what you could potentially add in terms of senior secured liquidity, where do you feel like that basket sits at this point?

Brett, we've got a fairly complex debt structure, a lot of different components. We've talked about some of the significant items that exist. One is a 30% CNTA limitation on additional secured borrowing capacity that essentially is driving, at this point, our scared capacity. However, there are various baskets across the indenture where there's, we believe, some additional secured capacity as well.

So as we sit here today we continue to believe there's flexibility in how we approach those things. With that being said, as we indicated at the beginning of our prepared remarks, we're very comfortable with our liquidity, our runway and where we sit today. So we feel good about how we are positioned.

Matthew Korn, Barclays.

Hi, everyone.

Good morning, Matthew.

With the utilities that you are supplying with slide inventories --

Matthew, you've dropped off.

Mr. Corn? Have you hit your mute button?

We should move on if we've lost him.

Due to time constraints, our last question will come from Justine Fisher of Goldman Sachs.

Good morning, how are you doing?

Hi, Justine.

The first question that I have is a follow-up on Brett's question. I definitely understand that if I were you guys too, I don't know if I would use my liquidity to buy back bonds now. But on the revolver, are you guys considering replacing that revolver with some long-term permanent money to maybe eliminate the potential need to go back to the banks and renegotiate covenants in the first place? If you could replace that with a first-lien bond, for example, then you wouldn't have to worry about the covenants. Is that on the cards or is it a preference to maintain it in a revolver form?

Justine, as we sit here today and as we've indicated, we are very comfortable with the liquidity position, the cash component of the liquidity position that we have. As we continue to move through these markets, as we've shown throughout the cycle, we'll be proactive in how we approach opportunities. And at this point I don't think we can speculate on how we're going to approach the revolver here, which is well over a year away before it is at the end of its term.

Okay. My follow-up is on liquidated damages. Just to clarify, could you tell us how much they were in 2014? If you had said earlier, I didn't get it. Then to clarify, those are an offset to other income, right? That's where they're recorded, so they're not included in cost guidance, but they're in your other income number for 2014 and that's where they should be in the future. Is that right?

That's correct, Justin. This is John Eaves and the number for 2014 was $37 million.

Okay, fabulous. Thank you very much.

This does conclude the question-and-answer session. At this time I would like to turn the conference back over to Mr. John Eaves for closing remarks.

I would like to thank everyone for their interest in our call. I'd also like to thank the employees of Arch Coal for their focus on safety, environmental performance, cost, capital, liquidity. We'll continue focusing on those things in 2015. We think we've positioned the Company well with our diversity, access to thermal markets, met markets, domestic, international. We like how we're positioned and we will continue to manage the Company effectively. We look forward to updating you on our first-quarter results in April. Thank you very much.

This does conclude today's program. You may now disconnect and do have a wonderful day.