Arch Resources Inc (ARCH) 2006 Q2 法說會逐字稿

Good day, everyone. Welcome to this Arch Coal, Inc., second-quarter 2006 earnings release conference call. Today's call is being recorded. At this time I'd like to turn the conference over to Mr. Deck Slone, Vice President of Investor relations and Public Affairs. Please go ahead, sir.

Good morning from St. Louis, and thanks for joining us on today's call. Before we begin I need to remind you that the remarks and comments that follow will contain forward-looking statements within the Safe Harbor provision of the Private Securities and Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events, some or all of which may be incorrect. These expectations and assumptions include risks and uncertainties detailed from time to time in the Company's reports filed with the Securities and Exchange Commission.

On the call this morning we have Steve Leer, Arch's Chairman and Chief Executive Officer; Arch's John Eaves, President and Chief Operating Officer; and Bob Messey, our Senior Vice President and CFO. Steve, John, and Bob will begin the call with some formal remarks, and thereafter we'll be happy to take your questions. With that I'll turn the call over to Steve Leer. Steve?

Thank you, Deck, good morning. Welcome to the call. We're very pleased that you could join us this morning. I will spend the next few moments addressing highlights from the recent quarter and the first half of the year and provide some commentary on current market conditions. John Eaves will then discuss Arch's operating performance and Bob Messey will conclude by commenting on our recent financial performance and expectations for the balance of the year.

Earlier this morning, Arch Coal reported record financial results for the second quarter ended June 30. EPS increased to $0.48 per fully diluted share from $0.01 in the prior period. From the prior year period. These per share figures include the impact of Arch's two-for-one stock split in May of this year. Net income rose to $71 in the quarter just ended compared to $3.5 million in the second quarter of last year. Operating income increased more than four-fold and adjusted EBITDA more than doubled in the most recent quarter. Additionally, operating margin per ton expanded over 200% to $3.67 per ton while revenues were up modestly despite the disposition of select operations in Central Appalachia at the end of 2005.

For the first half of 2006, Arch reported fully diluted earnings per share of 0.90 compared with $0,05 in the prior year period. Operating income more than quadrupled, and adjusted EBITDA increased over 90% to $292 million in the first half of this year. In short, it was a very solid quarter and first half by almost every measure. We are halfway to what we expect to be a very profitable year. Despite near-term weakness in the market, we continue to expect a strong second half of 2006. Given the strategic direction of the Company -- that the Company has taken over the past few years including restructuring our Central Appalachian operations at the end of 2005, we believe we have entered into a sustained period of growth in margins, growth in earnings, and growth in EBITDA.

On an operations front we have successfully completed the restart of our Coal Creek Mine in the Powder River Basin. We view Coal Creek as a highly strategic addition to our operations and expect it to become a significant contributor to our financial performance in future periods. In addition, we've successfully ramped up the production at our Skyline long wall mine in Utah during the quarter. Our large modern long wall mines rank among the most productive operations in the western region of the United States and demonstrate Arch's leadership position in that region.

In Central Appalachia, we have experienced dramatic improvement in performance since the sale of select operations in the region at the end of 2005. This sale sharpened our focus and significantly reduced our legacy liabilities and ongoing costs in the region, as evidenced by our substantially improved operating margin per ton. John will provide additional details about the status of our operations for each -- for the quarter, and the expectations for the second half of the year in his prepared remarks.

In summary, we believe our large and diverse portfolio of mines increasingly enables Arch to overcome operational or marketplace challenges in a single region or in a single quarter. This is precisely what happened in the first half of the year when we overcame an extended outage at West Elk and continuing rail challenges.

On the marketing front, much of our sales activity during the quarter related to short-term deals for uncommitted tons in 2006. We still have a significant percentage of our future volume unpriced at present, and at this time we regard that market position as strategically advantageous. Based on current expected production over the next three years, Arch has unpriced volumes of 7 to 11 million tons in 2006, 55 to 65 million tons in 2007, and 85 to 95 million tons in 2008. As you can see, our unpriced position in 2007 and '8 remains virtually unchanged from the previous quarter.

It is also important to point out that most of the coal we shipped during the second quarter as well as the coal we expect to ship during the second half of this year was priced when coal markets were much less attractive than they are today. As a result, ongoing legacy contract expirations should have a positive impact on our bottom line in the future, despite the weaker near-term market conditions that we've seen.

Arch believes the long-term market dynamics remain strong despite the near-term pressures. Specifically, these pressures include unseasonably mild weather which has unfavorably impacted electric generation demand during the first half of the year, elevated natural gas storage levels, and increased coal production through the first half of 2006. However, we would point out that since coal consumption has outstripped production in each of the last three years, some degree of site supply response was certainly expected.

In contrast, Arch sees a number of positive influences that should support a sustained growth cycle for coal. For instance, a robust US economy and a return to more normal weather patterns should lead to an increased electric generation demand. The higher cost of competing fuels certainly creates an economic incentive for utilities to maximize coal-fired power utilization at existing power plants. The price of natural gas and the future of the market for delivery this winter remains above $9 per 1 million BTUs. Planned new coal-fired capacity is expected to come on line well before the end of this decade. Announcements have reached 93 gigawatts to date, equating to approximately 325 million tons of new annual coal demand. We expect at least 19 gigawatts representing approximately 67 million tons of incremental annual coal demand to be constructed by 2010.

Fast-growing economies such as China and India are fueling global coal demand. In addition, tight supply conditions driven by insufficient investment in development of a reserve, inadequate transportation infrastructure, and labor challenges continually -- and continue to positively impact deborn coal prices. Crude oil is currently trading at above $70 per barrel. Also the location of major world oil and natural gas reserves has continued to drive home the need for a domestic energy security. As a result, the outlook for the advancement of BTU conversion technologies such as coal to gas and coal to liquid remains favorable for the coal industry. Additionally, certain factors affecting Appalachian coal production are likely to benefit US coal industry and Arch in particular in the coming years. These factors include significant cost pressures, more difficult geology as each year progresses in the mining, permitting issues throughout the region, and a volatile pricing environment, all of which we believe place a strain on weaker competitors. We believe the ultimate question is when, not if, Central Appalachian production falls as a result of these factors.

In summary, we continue to be very optimistic about the future direction of the US coal markets, and we strongly believe that Arch is poised to capitalize. With that I will now turn the call over to John Eaves for further discussion of our operational performance during the quarter. John?

Thanks, Steve. I appreciate the opportunity to join this morning's call. As Steve pointed out, our mining operations turned in another strong performance in the second quarter. Among some of the highlights, income from operations which increased dramatically in the first quarter, strengthened still further to $99.8 million in the period just ended. Sales volumes at our mines increased 8%, excluding past returns when compared to the first quarter. We managed our costs very effectively, a solid follow-up to a very strong first quarter.

We complete our first shipments from the Coal Creek surface operation and the Skyline long wall mine, both which started up very efficiently and ahead of schedule. We've made excellent progress on initiatives that should boost productivity, lower costs, and further strengthen our competitive position over time. We also redoubled our efforts in the area of safety, moving swiftly ahead of a new safety regulations to ensure that Arch's mines set the tone and continue to lead the way in this crucial area of performance. In short it was a solid performance across the board and a strong foundation upon which we continue to build.

On an aggregate basis, we saw strengthening in some of our key metrics. As previously indicated, sales volumes increased 8% for 2.4 million tons when compared to the first quarter. Reflecting gradually improving rail service in the PRB, a full quarter of operation in the West Elk long wall mine, initial volumes from Coal Creek, and the Skyline mines. We expect volumes to increase still further in the year's second half as these mines ramp up to full production.

The one area we experienced some erosion relative to the first quarter was our consolidated average realization on a per-ton basis. Our consolidated average price for all tons during the second quarter declined to $16.78 per ton versus the $17.53 per ton we reported in first quarter. That decrease is attributable to several factors, most notably a greater percentage of PRB coal in our overall sales mix, a delayed net sales in Central App and lower SO2 premiums. The good news is on the operating side we were down even more, declining from $13.88 per ton during the first quarter to $13.11 per ton during the second quarter. Again, regional mix was a factor as was a very strong cost performance from our Western Bituminous operations during the second quarter. Consequently our operating margins across all returns improved slightly compared to the strong levels achieved in the first quarter. From $3.65 a ton up to $3.67 per ton.

Now let's take a look at our regional performance by basin and discuss the factors that affected our regional sales in the second quarter while looking ahead to the second half of the year. Our PRB operations had another solid performance during the current quarter with volume growth and roll off of the legacy contract more than offsetting lower SO2 premiums. Sales volumes increased nearly 2 million tons reflecting gradually improving rail service and the startup of the Coal Creek Mine. As noted earlier Coal Creek started up without a hitch. During the quarter just ended we shipped 600,000 tons from this operation. We are targeting shipments of approximately 5 million tons for the current year with the total being weighted toward the fourth quarter when the drag line is expected to begin operation. While costs have been favorable at Coal Creek based on the current status as a mobile equipment operation we expect significant improvement when the drag line comes on line later this year.

We expect further strengthening in PRB volumes during the year's second half driven by the increase in shipments from Coal Creek I mentioned earlier and our expectations that rail service will continue to improve. The railroads have announced plans to construct a total of 75 miles of additional third and fourth track lines on the joint line over the next two years. When complete that work should increase solidity and reduce congestion. We're particularly enthusiastic about the progress the railroads are making in adding a third track and supporting the infrastructure to a section of joint lines south of Reno Junction, the location of our Black Thunder mine. That project is slated for completion by the end of the third quarter and should prove very beneficial for our PRB operations.

In the Western Bituminous regions, volumes recovered nicely from the outage that West Elk experienced during the end of 2005 and the beginning of 2006. In total, volumes increased 11% versus the first quarter, climbing from 4.1 million tons to 4.5 million tons. Additionally the Skyline operation contributed approximately 200,000 tons to the production in the current quarter, and we are targeting more than 1 million tons for the second half of the year. On average, price realization in the region declined in the second quarter when compared to the first, slipping approximately 5% to $22.08 due principally to a less favorable contract mix.

But the costs were the real story in Western Bituminous region. Operating costs declined 22% from the first to the second quarter, from $17.03 per ton to $13.23 per ton. This dramatic improvement reflected the benefit of a full quarter of operations by the West Elk long wall mine. As in the first quarter our regional cost performance benefited from a $10 million insurance recovery payment associated with the outage in the West Elk long wall in late 2005, early 2006. However, even without that payment which reduced our average unit cost by $2.22 a ton, we are very pleased with our cost performance in this region during the quarter.

In Central App we had reasonably solid performance although our results were well shy of the exceptionally strong results we achieved during the first quarter. Sales volumes declined modestly slipping 2% or 59,000 tons due principally to the lower and delayed net coal sales. More significantly our average price realization declined by 5% or $2.79. There were several reasons for the decline. First, we saw fewer net tons which tend to obtain a higher price in the marketplace. Second we received reduced pricing on our index agreements and spot sales during the quarter.

Operating costs on a per-ton basis increased 2% or $0.96 per ton compared to the first quarter principally due to the reduced volume levels in the current quarter. The operating margin in Central App was $3 per ton, which was substantially lower than the first quarter but well in line with our overall guidance of 3 to $5 per ton for expected Central App margins for 2006.

Looking ahead we continue to expect a very strong second half, having said that it's worth noting that we have a fewer long wall moves in the second quarter than previously anticipated. As you may recall during the last earnings call we indicated our first-quarter earnings release we may have four long wall moves in the three-month period ending June. In reality we had two. With the other two moves slipping in at July. Consequently we now anticipate three long wall moves during the third quarter. We also expect continuing rail construction and maintenance activity as well as timing of the miners' vacation and a high level of maintenance work scheduled for the vacation period to impact on operations over the next three months. As a result we expect the third quarter to be our weakest earning period in 2006. In contrast we expect the fourth quarter to be our strongest.

As I mentioned earlier we continue to work aggressively to enhance our competitiveness over our operations via initiatives designed to reduce costs, boost productivity, lower maintenance costs, and extend tire life. We are making very good progress on all these fronts and those efforts have proved a strong counterpoint to higher energy and other commodity costs. As one example, we've extended the average tire life for our equipment fleet by more than 30% in recent quarters. As a second example, we continue to expand on our predictive maintenance efforts, efforts that save the Company an estimated $5 million during 2005 and should contribute even greater savings this year. We are also moving quickly forward in implementing the new safety regulations that have been enacted at both the federal and the state level. As always our goal is to set the standard for the industry by operating the world's safest coal mines.

In closing on the operating front, Arch's mines are running very well, and we're focused on achieving further gains going forward. We have extremely talented and dedicated people working at our mines and they truly embrace the concept of continuous improvement. I believe that even better days lie ahead for our operating performance. On the marketing front we're committed to growing our revenues to further improve margins. We are pursuing market-based opportunities to further grow the returns on and the value of our exceptional and diverse asset portfolio. And we are being very careful, creative, and selective in committing to longer term sales. With that, I will now turn over the call to Bob Messey, who will provide additional color on our financial results, as well as offer some insight on our expectations for the full year. Bob?

Thanks, John. Good morning, everyone. As Steve and John discussed, we have just completed a very strong quarter. I'd like to recap a few of the highlights that Steve and John have already touched upon and then discuss in further detail other achievements completed in the quarter just ended. We are very pleased to report increased coal sales revenues, income from operations, net income, and diluted earnings per share compared to the second quarter of 2005. Despite a reduction in tons sold for the quarter due to the sale of select mine operations in Central Appalachia our revenues increased modestly $638 million. This increase is due to the ongoing roll off of coal sales contracts that were priced when coal markets were less attractive than they are today.

Income from operations increased more than four-fold to 100 million in the current quarter versus 22 million in the second quarter of 2005. We recorded net income of 70 million or $0.48 per diluted share for the quarter just ended compared to $3.5 million or $0.01 per diluted share in the second quarter of 2005. We had a record quarter in adjusted EBITDA, 152 million compared to 74 million in '05. This is up 105%. Adjusted EBITDA is a record for our company, and a direct reflection of the work we have done in positioning the Company in recent years.

Additionally during the second quarter of 2006, we've completed several financial initiatives. We completed a two-for-one stock split in May. Subsequent to the split we have approximately 143 million shares of common stock outstanding. Please note that all our per-share figures for all periods in our release reflect the impact of this split. We also increased our dividend by 50% on a post-split basis to $0.06 per share from $0.04 per share. The increase in our dividend is an acknowledgement of the strength of our expected future financial performance.

Furthermore, we renegotiated and amended our revolver commitment and asset securitization program. As a result of this transaction, we extended the revolver by 18 months to June 30, 2011, and reduced our borrowing rate. Specifically, we successfully converted our borrowing fees on the revolver, the matrix on the revolver from a ratings based grid to a leverage-based grid. This means we have more control over reducing our interest rates instead of being dependent upon a credit agency rating changes for interest rate reductions. Additionally we increased our revolver capacity to 800 million and increased our accounts receivable securitization program to 150 million.

Now let me turn to the outlook for the remainder of the year. As you know, I am going to now reconfirm our annual guidance. EPS range, $1.87 to $2.12. EBITDA, a range of 570 million to 610 million. Ton volume, 135 million to 140 million. This excludes the pass-through tons associated with the legacy Magnum contracts which we estimate to be about 5 to 10 million. Our CapEx guidance also remains at 420 million -- or 550 million if you can include the relative additions. Major expansion projects are expected to total 185 million as we've previously discussed. Coal Creek capital costs are 50 million. Skyline capital costs are 15 million. And the Mountain Laurel complex will be 120 million this year.

As expected, we experienced accelerated capital expenditures the first half of the year, totaling 391 million. This 391 million includes the second annual federal lease payment of 122 million associated with our Little Thunder Creek LBA. This reserve payment did not occur in the first half of 2005. In summary we are very proud of the results for the first half of the year and continue to expect a strong second half of 2006. With this, Steve, John, and I, are ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to David Lipschitz with Merrill Lynch.

Yes. Thank you. Quick question on the metallurgical ton. And I was just wondering what the issue was. Was it a rail issue? Was it a mining issue?

No, David. I think mostly it was more of a scheduling issue. I mean, we -- our scheduling was down. We expect to get some of those tons later in the year. So I mean, it could be between now and the end of the year, and some of it could move into first quarter. But, certainly wasn't any operational problems. It was more of a scheduling situation with some of our customers.

Oh, okay. And secondly, in terms of the pricing environment, do you sort of -- are you still glad that you're bringing Coal Creek on line?

Yes, I think we are. We certainly see PRB demand continuing to grow in the outer years. We think it's a low-cost operation. We think it will play very well in the market with all the new generation coming on in Texas. We think it's the right thing to do. It's one of the lower cost operations in the basin. And we think we'll do very well.

Okay. Thank you.

We'll go next to Jim Rollyson with Raymond James.

Good morning, everyone.

Good morning.

Can you I guess going -- looking through the PRB, you talked about going into next quarter and beyond. I guess Coal Creek will bring your average realized price down a little bit, but also bring your costs down a little bit. You think the net effect of that is that margins are flat to up with the new mix?

All other things being equal, yes.

Okay. And then it's just as a follow-up, obviously your view appears to be based on your contracting or lack of going into '07, '08 is you feel comfortable with the long-term nature of the market and that generally things will strengthen. I know your crystal ball probably isn't any better than anybody else's. But how do you generally see the market playing out over the rest of the year just in terms of spot pricing in general?

Well, again, it's always tough to make the predictions. Particularly when short-term events like something going on in the Middle East which, psychologically has enormous impact, but in direct physical markets perhaps has no impact. But it does depend on whether -- I mean, I've often said in the short term we can be positive or negatively impacted by a hotter than normal summer a colder than normal winter, or vice-versa. And looking beyond just the quarter to quarter variations, we see energy demand continuing to increase. We see the forward curve of natural gas very expensive, vis-a-vis coal. You look at world coal demand growing really in every nation. But China and India growing at 9, 10% on an annualized basis. I mean, enormous demand issues out there.

And as we look forward over the three to five-year period, it's very hard for us to come up with an answer that isn't extraordinarily positive towards coal. I guess the only issue is if we drew the world economy and the US economy into a recession. Even then presumably in a year's time, you work out of that. So we're feeling good about the intermediate and longer term. the short term, we don't think there's a lot of downside, But there certainly could be some significant upside.

Great. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] We'll go next to Paul Forward with Stifle Nicholas.

Good morning. Just wanted to follow-up maybe on that last question. Both yourselves and Peabody yesterday talked about a really strong fourth quarter driven really by volumes. Are you concerned that all that volume coming into the market, we saw what big volumes have done in the first half. As weather's been kind of mild. Have pulled down spot markets in both the eastern and western US. Are you concerned that a lot of volume hitting in the fourth quarter is going to have a further negative impact on pricing not so much for '06, but really for '07 when you've got a lot of exposure?

Well, again, Paul, the volume -- when you think about a sale and the way sales occur in the coal business with utility base, that volume's already in the market. I mean, we -- it's out there, we're talking to customers today, and I can't speak for anybody else. So we would say that that is being built into people's thinking. Now if electric generation would increase because the heat wave that we're currently having pretty much across the entire nation gets extended or we get another blow like this, there's probably upside to that. If we end up having a mild winter, then obviously there's a downside. But, I would make the point that as utilities are making their plans and as certainly Arch makes its plans for the future, I mean we're thinking six months, a year, five years into the future because of the nature of the business, then the variability which is much more dramatic than it used to be of spot pricing month to month really can't be what drives those decisions.

All right. And I guess switching gears a little bit, the three long wall moves you're talking about or I guess first of all the two long wall moves that slipped from June to July, where were those -- which long walls were those? If you -- if you can--?

Hi, Paul. Yes, when I indicated in the first earnings call that, we could have as many as four, I mean obviously we're not absolutely precise on those moves. And they moved days, not weeks, really, from the second to third quarter. We had the dugout in the Mingo Logan moves in the second quarter. Third quarter we'll have Sufco which actually we just completed a few days ago. We just started a move at our dugout operation in Utah, as well. Then later in the quarter we'll have a move at Mingo Logan.

So they're going pretty well so far?

Yes. They're going very well. Pleased with the progress.

Good. Thank you.

We'll move now to John Bridges with JP Morgan.

Good morning, Steve, everybody.

Good morning.

It must be frustrating after you spent all this time putting capacity in that we don't like it now.

Well, the great thing about being an analyst is you can be on whatever side of those questions you want to be.

You mentioned the low sulfur prices now that soft grades have come off. What sort of percentage of your PRB production should we apply that soft credit to?

Really all of it. I mean, Arch is a low sulfur compliant, coal supercompliance producer. And in our Powder River Basin I think there may be the odd contract out there without it, but really 100% is obtaining the sulfur credit. And, the sulfur credits while they're off the high of say right at the beginning of this year, they're still in the six to -- 6 to 6.50 range. We're still receiving around $1 give or take a bit premium due to sulfur. And if that increases that's a great thing. If it stays -- it looks like it seems to have kind of some support around 600, it's just another advantageous position of being a sulfur producer.

There was some sense when soft credits became an issue that there were older contracts that didn't have this. Have those all run out?

I don't think that we gave that sense, but if we did we were mistaken.

We've warded off most of those contracts. As Steve said we're virtually 100% adjusted on all of our PRB.

Okay. Congratulations on the results.

Thank you.

Thank you. We'll move next to John Hill with Citigroup.

Thank you and good morning everyone. Hate to beat a -- beat the horse continually on this PRB pricing, but I mean obviously last quarter you signed up some new contract volume, 150% better pricing. This quarter there's no volume so there's not much to talk about. But I would -- I'm just curious, it seems like the utilities and the miners are just sort of talking past each other right now and don't really need to agree on their opposing views of the market for another couple months. I mean, where are your customers on this, and do you basically see new contract volumes into '07-'08 going at $15-plus or should we be thinking more about 10 to 12, ex-sulfur?

Your first question on the customer side. Certainly we've got continuous conversations going on with all our customers, and we take every deal on a case-by-case basis, and we're being very selective. There is some interest in buying some long-term, obviously, because I think probably some customers feel like maybe we're getting near the bottom of the market range. But as I said, we're being careful and evaluating every opportunity. And we'll continue to do that. But if you look at the published prices in all the regions we participate in, certainly our weighted average price is below all those right now. So as we have low-price contracts roll off, we're replacing those with much higher business.

Or even if they're sold in the spot business.

Yes.

One of the great strengths of Arch and frankly the major producers is that, you have the financial strength that if you want to go a quarter and be in the spot market more than the contract market, you can do it. And frankly, you can manage that any negative impact and often it doesn't even show up as a negative impact.

Understood. Great answer. And then very briefly, with the production response we're seeing on the steel side, there seems to be some varying perceptions out there as to whether the metallurgical market is in fact tightening or not. Do you see the metallurgical coal market tightening in response to the uptick in steel production?

Well, certainly we've seen some pretty good steel production numbers. And we're kind of watching that closely. We feel like the second quarter was pretty light. But we could expect some improvements second half. We're about 2 million tons of metallurgical coal per year right now. But we have quite a bit of production that can swing both in and out of the steam market. So we will evaluate the metallurgical market and look at each opportunity. And if it makes sense for us, we have that flexibility.

Great. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go next to Michael Dudas with -- excuse me, Bear Stearns.

Good morning, gentlemen.

Hi, Mike.

John, you guys had pretty good cost controls here in the second quarter. As them operations get normalized on long wall moves and up to speed and your volume inputs, are we going to see a moderation or even a decline, say, as we look out into 2007 and the overall Arch Coal cost curve, mix adjusted, as well? Are we seeing maybe that we're getting close to the peak in costs relative to all the input issues that we've had to deal with over the last two to three years?

Michael, let's look at it by region. First in Central App, certainly we've had tremendous cost pressures. And you can see our cost range there in about the 45 range. We continue to try to do everything we can in terms of process improvement. Various initiatives to manage our costs. We think we've got a pretty good handle on those, but as we move into Mount Laurel and we're kind of in the CM development stage right now, but as we get the long wall running we expect to average those costs down a little bit. So I think we can do a pretty good job in managing the cost structure of where we are in Central App.

Moving to PRB, we actually had a very good second quarter on the cost side at Black Thunder. Obviously with the startup costs at Coal Creek that averaged that number up a little bit. We expect as Coal Creek gets up to steady state those costs will go down. Especially when the drag line comes on fourth quarter. At the same time you'll see a little bit drop in the realization, as well. We expect to maintain those costs going forward. I mean, obviously we're going to have cost pressures like everybody else. But the fact that we're extending tire life. We're looking at predictive maintenance. We're doing a lot of positive things that we think will manage our costs. We had an excellent quarter on the Western bit side. It did have the $2.22 in it from the insurance. Excluding that, the costs were in the 15, $16 range. And we're going to continue to have pressures there. But we think we can manage those costs pretty well going forward, too. We're managing four big long walls out west. So there's always going to be some long wall move going on in a quarter. And it's just up to us to manage those. But I feel pretty good about the way our operations are running, and really the way we've been able to manage our costs in a very tough environment.

Very good. My follow-up is with regard to the Central App region. Published prices have come in. Can you give your indications on what some of the smaller mines or the higher cost mines might be in that region, and -- because you've had extensive experience operating and of course you've sold some assets recently. Do you think that we'll see some sort of response if we see mid to lower quality Central App prices stay below $50?

Certainly, Michael, I mean, we don't know the particulars of our competition, but we do know that with the current market environment that the cost structures of some of the smaller to mid-sized guys, they're probably pretty challenged right now. And you could very well see some production come off the market in my opinion over the next few quarters.

Thank you, John.

Yes.

[OPERATOR INSTRUCTIONS] We'll go next to David Gagliano with Credit Suisse.

Hi. Just first quick a question on the 2007 volumes. Of the -- I apologize if this has already been answered. Of the unpriced volumes for 2007, can you just remind me again what is your uncommitted position in 2007 at this point.

I believe it was 55 to 65 million tons that were unpriced for 2007.

Right. Of that, what is the uncommitted position? The question.

David, I'm not sure we've ever given that number. We always have focused on the price. Obviously it's less than that.

Okay, okay. And just as a follow-up, obviously stock's taken a bit of a hit here. Clearly you believe industry fundamentals still very strong. I am just wondering if you could share with us your thoughts with regards to a share buy-back program.

Well, that's something we always think about. And , with the sell-off of the energy sector and the coal sectors, I think that if there's a buying opportunity, and it will be -- always as a discussion point with the Board and something that I don't think that any time soon will go off the agenda.

Fair enough. Thanks.

We'll move next to Justine Fisher with Goldman Sachs.

Hi. The first question that I had was regarding the contract mining mix in the west. Can you explain what that issue was a little bit more. I'm sure it has something to do with the mix between Utah and Colorado. You said that there was a contract mining mix issue that resulted in a lower average realized price per ton for Western Bit.

Yes. What happened was the first quarter we had some of our lower priced legacy agreements that did not ship. We had the opportunity to take those tons and put them in a higher price spot market. We expect second quarter to be pretty indicative for the balance of the year, how those shipments will shake out. So obviously we try to ship our volumes on a ratable basis and sometimes customers have changes that they make in the shipping schedule. But we would expect second quarter to be somewhat indicative of the second half of the year for contract mix.

Okay. And then as you mentioned previously regarding the Western Bit costs, a bit difficult to extrapolate what the run rate is because of the insurance compensation from West Elk. But my question about the cost is regarding the third quarter and what you think the long wall moves will do to cost per ton in the third quarter?

Well, really wouldn't want to forecast where we'd be costwise third quarter. I will say that we've got two large long wall moves third quarter that will affect our costs. But we're going to do everything we can to manage those effectively. And as I said, I think we've done a great job, and we'll continue to do a good job. But when you have a couple big long wall moves in the quarter, it's certainly going to put cost pressures on us in Western Bit.

And then just lastly, any reason why you increased the revolver available, or was it just because you had the ability to do so when you were able to renegotiate terms as well as you could and said why not?

Well, at the time it was good for us to, the interest rates were low so we felt we should take advantage of that. One of the things that we need flexibility on and liquidity for is our surety market, and we need sufficient letter of credit capacity even though we're not using nearly all of it, but to cover any potential problems in the surety market by using LCs for the reclamation bonds. So we moved our capacity up 100 million on the revolver side and 100 million on the LC side.

Okay. Thanks a lot.

[OPERATOR INSTRUCTIONS] We'll go now to Leslie Rich with Columbia Management.

Hi. As you look at your unpriced volumes for '07 and '08, do you have in your mind a time by sort of by December 31, we'd like to be X percent hedged or is it really just sort of opportunistic and you're working the market all the time?

You're working the market all the time. And the customers are in and out. And it used to be there was a more established -- if we go back several years, a more established kind of buying period. And it would be late summer and really the world has changed and it's become such a national market we find that the utilities generally are always in the market. And certainly Arch is always in the market.

But would you be comfortable if -- let's say pricing remains soft, would you be comfortable heading into '07 with a large unhedged position? Or it just really depends on your view of the market vis-a-vis spot prices?

Well, if new information becomes available, you always have to include that in your decision making. But yes, I mean, as we look forward over the next several years, we feel very good about the marketplace. And think the propensity for improved market conditions is much higher than any downside short-term issues that might crop up out out there. So again given the size and diversity of Arch we're very comfortable in being selective of when and how we enter the marketplace. And I think perhaps the best lesson is we are living and a majority of our coal continues for this year and on into 2007 and a bit in '08 to be priced on old legacy contracts that are rolling off, and they're rolling off if you use today's spot pricing to much, much higher numbers. And we're seeing the positive impacts of that. So I guess we don't want to repeat history particularly.

Right. And then just one quick clarification. That $550 million of CapEx including reserve additions, that includes the Black Thunder lease payments?

Yes.

Okay, great. Thank you.

We'll move now to Zack Schreiber with Dequesne Capital.

Hi, yes, just a quick question just on the state of the market and it seems like there's a little bit of some comments that you folks made today and comments that Peabody made yesterday. Is it a game of chicken that's going on between the producers and the customers and on a historical basis are we normally more contracted up for the next 12 months, next 24 months? And does this game have to end in the next two months, or does it not have to end at all and you just take it to market on a spot basis? And as you said, your financial strength gives you the ability to have a strong hand here as well as the solid, strong, very long-term fundamentals?

I think it's always a negotiation between customers and suppliers and at any point in time the dynamics can favor one position or another. But I can't speak to anybody but Arch, but as we look at it, we enter every negotiation, we have -- and there's a lot that go into a negotiation, price obviously being an enormous one. But it's where we see the future, it's where we think about the positioning of a particular mine or a quality or a rail service. And in terms of the contract. So it's an individual, private negotiation. We're comfortable where we are and where we see the future. I don't think that our utilities suffer particularly.

While we may differ a bit on the timing of some of the market conditions out there, they're seeing the same thing. And you see it in -- if nothing else through the announcements of new coal-fired power plants that coal is going to be the most competitive fuel vis-a-vis the other fuels for a long, long, long time. And on a BTU basis, PRB is in rough numbers a buck per million BTUs and depending what gas price you want to use it's 6 to $9 at the well head. And for natural gas. And God knows what it is for oil anymore. But--.

Right.

So there's always tension. And I think what we have seen and what's developed over the last really longer term -- stronger markets and weaker markets from our producers' perspective is that there still is a tendency in the marketplace for shorter term contracts. One, three, maybe a five-year deal with a reopener. And more price volatility out there in the marketplace, where you go back to the '90's, pole was a flat line in terms of price changes. Today relative to gas it's still pretty stable, but it's a lot more volatile than it used to be.

Got it. So as far as your strategy is, there's no urgency here. You're just going to take it to market and you have the financial flexibility to warehouse the risk for a quarter or so?

Or longer. I mean, it's -- again, come back to the point that in today's marketplace and our legacy contracts, the legacy contracts roll off and if they move into a spot market, that's still a much improved pricing point than what the latest average--. [AUDIO DIFFICULTIES]

Hello.

Everyone, please stand by. The moderator has disconnected -- so we can get them on line. Again, everyone, please stand by.

I didn't do it this time.

We have rejoined the conference.

Hello, ladies and gentlemen. This is Steve Leer again. We just had a blip in electricity, it must be one of those other guys' power plants and coal supplier. Anyway, we're back on. Operator, we could continue with questions.

Okay.

Hello?

Yes -- are you still -- are you still with Zack? I guess so. Okay. I think my questions have been asked and answered. Thank you so much.

All right. Thanks.

We'll go now to Paul Forward with Stifel Nicolaus.

Hi. Thanks. Glad to hear you're back.

Yes.

Just we've seen the sector come down quite a bit the last -- the last few days and weeks. How actively are you now looking at acquisitions, now that it's looking more like a buyer's market, and any regions in particular that you think would flesh out the portfolio at Arch, maybe better than others?

Well, Paul, we're always looking. Stronger markets and pricing environments that we might have seen at the beginning of the year, harder to make the numbers work perhaps on some of the things that we looked at. But we continue to look. You're right, there are probably -- there are some more attractive buys. But I think as we talk to particularly in what I would call the private sector coal in this side of the marketplace, a lot of people still love their properties a lot. And have some pretty high views of their value. But we continue to look. I can't say we have anything pressing today. But we do see that as a continued round of consolidation probably not so much from an Arch perspective, but it just seems like the east looks like it's gearing up for that. We'll usually go to each party and see if it makes any sense.

Okay. Thanks.

We'll go now to Mark Liinamaa with Morgan Stanley.

Good morning.

Good morning.

You've commented previously on the ability to potentially swap some Coal Creek coal for Black Thunder to free up some of that product for repricing at higher levels. Is there still potential to do that?

We structure most of our new coal supply agreements when we do have that flexibility to move back between Black Thunder and Coal Creek, so yes, we do have that ability.

Okay. And just to go back to the pricing environment again, if you had been willing to do PRB contracts in the $13, which would be slightly above the OTC quote right now, would you have been able to place substantial volumes at those levels?

You don't know if you'd reach an agreement. But there certainly have been utility customers out there buying coal in the marketplace throughout all this year. And at all different price points presumably.

So can we read into the lack of volume that you're just unwilling to do deals where the OTC is?

You have to read into that, that we haven't done any.

Okay. Thank you.

We'll go now to Scott Hanold with RBC Capital Markets.

Good morning. Could you guys help me a little bit on the production? You guys I guess talked about 135 to 140 is your range excluding any kind of pass-through volumes. And it looks like in the first half of the year your total production was around 61 to 62. Now you did comment that you thought the third quarter with long wall moves and things happening could be a weaker quarter relative to the other quarters. And just in terms of where production is going in the second half of the year, are we going to see a really sort of flattish in the third quarter with the really big ramp coming in the fourth quarter?

Yes. I think that's exactly right. If you look in the east, obviously we're starting develop coal at Mountain Laurel, and that should ramp up over time where it's hitting in stride. Fourth quarter Coal Creek certainly has mobile equipment operating there now. But the drag line is expected to start up in the early part of the fourth quarter. You also have a full ramp-up of the Skyline operation, as well. And you will have some of the long wall moves behind you in Western Bit. So yes, I would expect the fourth quarter to be pretty strong volume wise.

Are we talking in terms around 40 million tons during the quarter? Is that ballparkish of what you're looking at?

No. I don't know that we've broken it out. But it certainly is within the ballpark.

That range, yes.

I think the other thing to note, too, is the joint line and the PRB, the railroads continue to perform maintenance and complete the last or at least the third rail literally right in front of the Black Thunder mine. And while the rail itself has been constructed, the crossover work and the infrastructure continued to go on, and that's supposed to end on the third quarter, by the end of the third quarter. So there would be an expectation that rail service in the fourth quarter would be improved over third quarter and second quarter and first quarter for that matter as a result of that.

Okay. Thank you. And my follow-up question is just sort of a general industry commentary. I know you guys are -- you have indicated which I think we all have seen that there's a lot of coal-fired power plants that are being proposed right now. When you talk to utilities and any other any players what do you get for a sense of how potential CO2 regulation and maybe if you can give your commentary, how is CO2 regulation going to play into whether or not those actually get built.

I think there is certainly -- I'd call it a concern or recognition that CO2 restrictions could occur. They may occur. Different utilities have different views on that on whether it's likely or voluntary or mandatory. But I think the overarching question really is on the presumption that the American people want electricity when you are willing to sit there and ask that question and say what can fuel that electricity and the demand growth in electricity that's forecast by either the government or the utility private sector or coal company or the gas companies, you'd comment that we have massive need for increased generating stock over the next 25 years. The basic expectation worldwide is generation will -- I forget the exact number, but it's darn near double. And I think the EIA says energy needs in the next 25 years will grow by 27 quadrillion BTUs, similar to what happened in the last 30 years, between 70 and 2000. But the difference is that that increased energy needs in the 70s to 2000 time period was met 2/3 by an increase in reported oil and they are simply not -- one person I've run into anywhere and anywhere in the government or more importantly in the energy sector that believes we can increase our energy needs by 27 quadrillion BTUs by increasing our imported oil requirements by another 27 -- or 2/3.

So it just keeps falling back on the coal shoulder. And you're seeing the utility sector respond to that. And they're announcing that I think many of the plants will get built. Some will get delayed. Some won't get built, but -- and the different utilities are looking at, IGCC-type plants and others are looking at pulverized, supercritical-type coal plants. And I think we'll see both of them built.

We'll move now to Pearce Hammond with Simmons and Company International.

Good morning. Just curious where you're seeing prices right now for compliance coal in Central App as well as for high vol metallurgical prices and low vol.

I mean, I think if you look at the published indices they're low to mid 50's for a 12,000 compliance coal. Met coal, we really haven't done anything recently. But I'd suspect that -- the recent settlements were in the 100 to $110 range depending on the rank of the coal. But that's probably all the color we can give you on our pricing perspective.

Sure. And then do you have any instances, have you seen anything or heard anything in Central App of some miners running fewer shifts or sort of backing it off on the weekends? Trying to bring in less tons to the market?

I'm sure that's going on. I'm sure some of the small or mid-sized guys are pulling their production back. I don't know of any particular incidence where I've heard that in the last week or two. But given the current environment we're in and the cost structure for some of these guys, I would suspect that's going on.

It's a little hard to get your arms around because July traditionally is the big miners vacation and maintenance period as well for the industry. A lot of it we'll have to see how people come out of that, the July shutdowns. We just lost power again on the other side of the building here. So what we might do is maybe -- I know Pearce, you had a question. And maybe we might do one or two more questions and then let Pearce -- because I'm afraid we're going to lose power again. We've got one heck of a storm rolling through St. Louis as we did yesterday in fact. Not that I want to cut off anything. But I'm afraid we're going to be unforcibly cut off.

Operator, is there one more question?

No, that will conclude today's question-and-answer session. Mr. Leer, I'll turn it back over to you for any additional or closing remarks.

All right. Thank you. I think as you can tell we're feeling pretty good about the business. We had a solid quarter. We felt -- a couple of questions hit right to the point. I mean, we are focusing on costs. We're focusing on productivity. We're seeing some meaningful gains in all of those areas.

Today it's a very hot, muggy day here in the Midwest. I think we're going to see some pretty good generation numbers when they become available here in the next several weeks, over the last say five, six, seven days. And it looks like maybe some summer heat is really rolling across the nation. As we look beyond the next six months or the rest of this year and look into 2007, '8, '9, again, we see the dynamics for a very strong coal industry, very strong energy demand environment. And feeling good about the business. Thank you for joining us. Thank you for your support of Arch. And we look forward to these discussions on our third-quarter call here in a couple months. So thank you.

That does conclude today's teleconference. Thank you all for your participation. And have a great day.