Ladies and gentlemen, thank you for standing by, and welcome to the Peabody Call. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Vic Svec, Senior Vice President, Global Investor and Corporate Relations. Please go ahead.
Okay. Thank you, and good morning, everyone. Thanks for joining us today on the call to discuss Peabody and Arch coming together to combine our PRB and Colorado platforms. On the call today is Peabody President and Chief Executive Officer, Glenn Kellow and Executive Vice President and Chief Financial Officer, Amy Schwetz. During our formal remarks, we'll reference a supplemental presentation and that's available on peabodyenergy.com.
On Slide 2 of this deck, you'll find a statement on forward looking information. We encourage you to consider the risk factors that we reference here and that's along with our public filings with the SEC. So today's call is intended to be a discussion of the joint venture and the multiple benefits it gives to all stakeholders. We do appreciate you limiting your questions to the joint venture and of course we are routinely available to discuss the industry and the company through our active IR engagement program. One last thing, I'll also note that Arch will be hosting a related conference call on the transaction That's at 9:30 Central Time this morning.
We would encourage participants to take part in both calls today. And with that, I'll turn things over to Glenn.
Thanks, Vic, and good morning, everyone. I am thrilled to underscore what we believe is a combination aimed at unlocking extraordinary synergies and creating exceptional value for customers and shareholders. I'll start with the key takeaways on Slide 3. First of all, this transaction offers unparalleled synergies that are designed to strengthen our competitiveness against natural gas and subsidized renewables within the U. S.
Electricity generation mix. Not often do you find 2 highly productive operations that literally share a property line. So you can imagine the opportunity for synergies simply given the proximity is tremendous. As a result and our second point, we believe this can and will provide extraordinary value and benefits for a number of stakeholders. The transaction allows us to offer enhanced products and security of supply for our customers, greater efficiencies for railroads, long term opportunities for employees and strength for the communities most closely tied to our operations, all of which creates value for our shareholders.
The JV expects to unlock synergies with a pre tax NPV of $820,000,000 We expect the average synergies on 100% basis to be approximately $120,000,000 per year over an initial 10 years. We believe these step function improvements to create value are possible by uniting 2 of the most proficient operators in the U. S. Coal industry. We share not only property lines, but a skilled culturally aligned workforce with a commitment to core values including safety and sustainability.
I'd like to take a quick minute and discuss the overall structure on Slide 4. Ownership will be split 66.5 percent Peabody and 33.5 percent Arch with Peabody serving as the operator. Each company's economic share was ultimately negotiated based on the net present value of life of mine plans for the PRB and Colorado assets based on common third party assumptions. Governance of the joint venture will be overseen by a Board of Managers including 3 appointments by Peabody and 2 appointments by Arch. Voting rights as well as profits, capital requirements and cash distributions of the joint venture will be in proportion to ownership percentages.
Both companies are expected to proportionally consolidate the joint venture within their respective financial statements. The assets will operate independently until closing, which is subject to regulatory approval and other usual conditions. On Slide 5, we provided a visual of the assets that will be included in the joint venture. The centerpiece of this transaction is the combination of Peabody's North End Loper Shell Mine, otherwise known as Naarm and Archer's Black Thunder Mine. Also in the PRB, assets will include Peabody's Caballo and Rawhide mines as well as Archer's Coal Creek mine.
These are among the best ratio mines in the basin. Combined, these PRB assets comprise 5 of the top 10 most productive coal mines in the United States. The joint venture also incorporates 2 longwall operations in Colorado Peabody's 20 Mile Mine and Archer's West Delft Mine. The inclusion of the Colorado assets offers the ability to better serve domestic customers while preserving seaborne coal optionality. Overall, we think the transaction brings together unique strengths of the 2 companies.
Peabody has the lowest cost position amongst major PRB producers, while Arch offers high quality PRB products. Arch is contributing its low cost, higher margin West Elk mine that enhances Peabody's 20 mile mine. Turning to Slide 6, let's look at the types of combinations that come together to create these extraordinary synergy opportunities. We expect these to be accomplished by optimization of mine planning and sequencing and accessing otherwise isolated reserves. We believe we'll be better to deploy our fleets and ensure efficient procurement and warehousing.
Through the transaction, we were able to enhance our blending capabilities to more closely meet the requirements of our customers. We also expect to improve utilization of the combined rail loadout system among other rail efficiencies. With more efficient mine planning and deployment, we also expect to reduce long term capital requirements. At Peabody, we pride ourselves with having a scalable shared services model, which we expect to benefit the joint venture. The JV will look to extract the greatest synergies by operating Naam and Black Thunder as a single complex.
These two adjacent operations are well capitalized and share a common border that stretches more than 7 miles along with 4 loadout facilities and numerous mining pits with multiple products and cost profiles. So why are these synergies so important? In the U. S, coal is not going away, but the structural decline that has occurred over time compels us to make structural improvements to our cost position. These improvements can be best achieved through significant synergies that strengthen our ability to compete against natural gas and subsidized renewables.
As you can see from the chart on Slide 7, while total electricity demand has edged up over the past 15 years in the United States, coal demand has given way to natural gas and subsidized renewable generation. Drilling down on those past 15 years a bit more, the average natural gas price over the past 5 years is less than half what it was in the 2004 to 2,008 timeframe. This transaction is expected to improve competitiveness against natural gas and renewables. We believe in the value coal provides our customers, employees and the communities in which we operate. And we intend to continue providing that benefit for decades to come with the formation of this joint venture.
I'd like to conclude my formal remarks by emphasizing the unique value proposition this joint venture presents for Peabody. We believe this is an extraordinary example of industrial logic with a lot to like about this transaction. First, the joint venture is a clear demonstration of our stated investment filters, starting with clear alignment with our U. S. Thermal strategy to optimize our lowest cost, highest margin operations in a low capital fashion to maximize cash generation.
2nd, the transaction makes the best use of one of our core strength as an efficient low cost PRB operator. We look forward to doing this on an even larger scale to improve productivity, drive down costs and capture synergies, all without increasing our portfolio exposure. The transaction structure fully preserves our financial strength and enhances our position as we strengthen our competitiveness. Given the cashless nature of the transaction, of course, returns are above our weighted cost of capital and the expected payback period is rapid. For Peabody, this also represents a great opportunity to accelerate monetization of our reserves.
As noted, this is highly synergistic joint venture and we would expect to create substantial shareholder value. Finally, this transaction in no way changes our firm commitment to execute on our shareholder return program. As you would imagine, the lead up to the transaction limited our ability to be in the market buying back stock. That said, we look forward to continuing an active program of shareholder returns with share repurchases as a centerpiece. I want to reiterate our commitment to returning an amount greater than our free cash flow to our shareholders in 2019.
We look forward to continuing to update you on our progress. Bottom line, this joint venture makes us more competitive, which in turn drives more value. With that, we're happy to take any questions. As a reminder, please limit your questions to the joint venture.
Thank you, sir. Now take our first question from John Bridges from JPMorgan. Please go ahead. Your line is open.
Thanks. Good morning, Glenn, everybody. I just wondered, historically, there's been pressure, antitrust from the utilities against consolidation in the Powder River Basin. I just wondered what hoops you have to jump through to get this to a conclusion? And what's your thinking on this topic?
Yes. Thanks, John, and good morning. Look, the transaction will require clearance under the U. S. Antitrust laws and certain jurisdictions outside of the United States.
However, we believe the case for customers is compelling. The landscape of U. S. Energy production has changed even if the fundamental nature of coal production is not. Coal is not just competing against coal, it's competing against natural gas and renewables.
The announcement of the joint venture transaction occurs as a U. S. Thermal coal industry conditions have been challenged by increased competition in the face of inexpensive natural gas from shale production, growing build out of subsidized renewable generation capacity, coal plant retirements, strict regulations and limited power demand growth. Synergies to the benefits to the customers will arise, we believe, through customers being able to have a convenient and reliable source for a suite of products that can be tailored to fit their needs to better match their burn and plant efficiency. It allows the JV to provide enhanced products and security of supply, whilst also as we mentioned before the greater efficiencies for railroads.
So the aggregate synergies are expected to significantly reduce costs, enabling us to compete against natural gas and renewables.
Yes. I know the circumstances it makes a lot of sense. And this of course was something that was spoken about a lot at the time of the reorganization. What's the timeline been of this? Was this an active discussion at the time of you coming out of reorganization?
What's the timeline been on this?
John, I'll just say that the stars have aligned at this point in time. And we think that the extraordinary nature of these particular set of assets, the synergies that have been identified, the time is right now to move this transaction forward.
Okay. Congratulations. It makes a lot of sense. I hope it works. Thanks.
Thank
you. Thank you, John.
Our next question comes from Chris Terry from Deutsche Bank. Please go ahead. Your line is open.
Hi, Glenn and team. A couple of questions for me. The first one is just around the 120 $1,000,000 per year in synergies for the JV. Are you able to give a little bit more color on splitting up some of the pieces between maybe logistics, mining, coal qualities, things in that order? Just some broad comments on that please.
Probably the comments I said the synergies we think are substantial. When you look at the optimization of the mine plans, the sequencing being on isolated reserves, the way in which we move overburden and being able to do a joint mine plan particularly at Black Thunder and North Antelope Rochelle to really optimize those ratios and also look to structure the mine plan so that we have shorter coal haul distances. I think you can look to that to be a substantial portion of the component. Having said that, we think there's efficiencies across the combination of assets in terms of the deployment of the fleet, more efficient procurement, warehousing, stores and spares. I mentioned the customers benefits, but being able to enhance our blending to meet those customer requirements we think is significant.
And having those improved utilization of a combined rail out system will enable benefits for both the customer and for the rail. As you'd expect bringing these fleets together and having a more optimized mine plan will deliver, we think it benefits from our long term capital requirements. And we boasted in the past I think around our scalable shared services model. And I think this is about us being able to put that in place for the overall benefit of the joint venture.
Okay. Thanks. Thanks, Gwen. And then in terms of how long you think it might take to ramp up to achieve that sort of 120 run rate? Will there be a period where you sort of have to go backwards to go forwards to make all the changes necessary?
What sort of time line should we think about on the ramp up?
Yes. We're not looking to go backwards very much there Chris, but I'll throw that one to Amy.
Sure. Chris, what we'd say is we think that immediately we start to recognize some of these benefits. There will be some transition costs, some transaction costs and some integration costs associated with it. But we expect to get pretty quickly up to that run rate of about $120,000,000 annually.
Okay. Thanks, Amy. And then the last one for me, just looking at the mine lives of BTU and Arch, somewhat different further out. Is this a transaction that's in place basically indefinitely? What size or is that value being reflected in the share ownerships with the longer asset loss that Peabody has across most of the basin?
Yes.
I think that's right. When you look at the life of the way the splits were calculated, there were the life of mine basis using those shared assumptions. I did mention monetization of reserves. So I think that's reflected in the split. So this is an indefinite transaction for the areas that we've outlined.
And we think one which is going to compete against natural gas and renewables for a long time to come.
Okay. Thanks. Just one final one. Are any other opportunities within your portfolio where this sort of thing might make sense somewhere else?
Look, we're focused on this transaction as I'm sure you understand. But we've outlined our investment filters and our strategy and I think we I hope you've seen from today's announcement and from the past Shoal Creek that we're not exactly prepared to sit on our hands in order to find ways to create shareholder value.
And I might just follow that up by indicating we are pretty experienced at working in joint ventures. This is our first of large scale in the U. S, but out of our Australian platform, we have joint ventures with the CMJV at our Coppabella and Moorvale mines with Wambo and also with our Middlemount joint venture. So it is a model that we're familiar with and experienced in a productive way.
Thanks, Eileen. Thanks, Glenn. Good luck.
Thank
you. Our next question comes from Lucas Pipes from B. Riley FBR. Please go ahead. Your line is open.
Hey, good morning, everyone, and congrats on the announcement. I wanted to ask a little bit about the potential tax implications of the JV structure. Obviously, you and your future joint venture partner have substantial NOLs. Any reason why those would not apply to income from this JV?
Lucas, it's Amy. No, we intend that we'll be able to utilize our NOL position as it relates to earnings. So despite the fact that we referenced sort of pretax synergies in the release, we would expect a high conversion rate of those pretax synergies to after tax.
That's very helpful. And then the synergies of $120,000,000 are at the JV level. Are there opportunities for additional savings at the corporate level that might be outside of the JV? Thank you.
Yes. So I think and you'd expect that from both parties. So I think this creates both those opportunities. For us I look to procurement type activities, but also I mentioned our shared service model, so the opportunity to provide that service across a larger base. So yes, we'll be also looking to get additional synergies outside of what we talked about within the JV.
Great. That's very helpful. And maybe following up on one of the earlier questions and to just narrow it down between synergies on the CapEx and the OpEx side, do you have a rough split between the 2?
Look I think the overwhelming component of synergies would be operating in nature.
Okay. All right. Well, I appreciate it and congrats again.
Thank you. Thanks, Lucas.
Our next question comes from Mark Levin from Seaport. Please go ahead. Your line is open.
Great. Appreciate it and congratulations on a terrific transaction, terrific idea. Just one question and you I can't recall if you answered it directly or not, but just around the timing. Is this something that you would expect would take 6 months, a year, longer than a year? Any conceptual idea as to how long the process would take to close the transaction?
I think it's fair to say it will be a multi month process, but we think once again that the logic of this transaction and the compelling case I think for a variety of stakeholders would support that case. In the meantime, the nature of this transaction doesn't impact on the flexibility of the respective corporate. So for Peabody, we'll have a team focused on the completion of this transaction that it really doesn't limit the corporate capability to continue buying back executing on our shareholder return strategy or doing anything else strategically whilst we work through the regulatory approval process. Ladies and gentlemen, that's all
the time we have for today. At this time, I would like to turn the call back over to Mr. Kellow.
Well, thank you for your questions and participating in today's call. We believe this transaction is a win for Peabody, a win for Arch and a win for our many stakeholders including our customers and investors. We appreciate your continued support and interest and we'll keep you apprised of any progress over the coming months. At this point, we'll give you time to switch over to John and the team at Arch and operator that concludes today's call.
Thank you, sir. Ladies and gentlemen,