Arch Resources Inc (ARCH) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal Inc. first quarter 2007 earnings release conference call.

Today's call is being recorded, and at this time I'd like to turn the call over to Mr. Deck Slone, Vice President of investor relations and public affairs. Please go ahead, sir.

Good morning from St. Louis. Thanks for joining us. As usual and before we begin, I want to remind you that certain statements made during this call, including statements relating to our expected future business and financial performance, may be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act. Forward-looking statements by their nature address matters that are to different degrees uncertain. These uncertainties, which are described in more detail in the annual and quarterly reports that we file with the Securities and Exchange Commission may cause our actual future results to be materially different than those expressed in our forward-looking statement. 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. On this call this morning, we have Steve Leer, Arch's Chairman and Chief Executive Officer, John Eaves, Arch's President and Chief Operating Officer, and Bob Messey, our Senior Vice President and CFO. Steve, John, and Bob will begin the call with some brief formal remarks, and thereafter we'll be happy to take your questions. Steve?

Thank you, Deck, and good morning, everyone, and welcome to Arch's first quarter 2007 earnings call. Arch reported fully-diluted earnings per share of $0.20 in the first quarter of 2007 compared with $0.42 in the prior-year period. While market conditions today are not as robust as we experienced in the first quarter of last year, we are pleased with our operating results. Arch's national scope of operations and diversity of assets has allowed the Company to achieve solid earnings in the quarter just ended. Turning to market dynamics, we are encouraged by many of the catalysts that we see shaping the market. As I discussed earlier this last -- this month at the Howard Weil Energy Conference, we believe an influxion point has been reached in the coal market. A return to more normal weather patterns has led to a nearly 5% increase in electric generation demand year-to-date. This compares to essentially flat electric output for the same period last year, when abnormally warm weather persisted throughout much of the winter season. In fact, we believe this year's elec -- increase in electric generation demand has been the strongest in regions that typically rely heavily on coal fuel generation for power needs. Additionally, hydrogeneration is down year to date while nuclear generation is flat, which may also contribute to strong coal consumption figures.

This pull on coal demand side has been coupled with a reduction in supply. While coal production is up 2.2% in the west, eastern coal production declines have more than offset this increase. Nationwide, coal production has declined 1.8% year to date. However, on a true energy equivalent basis, meaning that production is based on BTU content rather than tonnage, coal production would have been down even more in 2007 year to date or approximately 2.4%, according to our estimates. As a result of these supply demand factors, we are optimistic that a reduction in generator stock piles has begun and we expect that trend to continue throughout the year, assuming continued normal weather patterns and the current economic outlook.

Other factors that are likely to impact the market in 2007 and beyond are the continued supply pressures in Appalachia resulting from reserve degradation, accelerating or escalating mine costs and in particular renewed permitting issues in Central Appalachia. As a result, we believe that the new and existing surface mine development in the region will be significantly reduced, causing an accelerating reduction in supply over the next six to 24 months. Moreover, Arch estimates that import growth into the U.S. has slowed. Sea-borne markets are strengthening with China potentially becoming a net coal importer in 2007, causing a significant increase in global coal demand driven by Asia. That in turn has affected the price and availability of imports into the U.S. coastal plants. Furthermore, we have seen recent announcements of U.S. met coal being exported into global markets as well as steam coal moving offshore. In face, Arch is currently exploring options for moving some of our western coal into the export market this year.

Another interesting data point is the reported level of natural gas inventories, which currently stand at 217 billion cubic feet below the level reported in last -- in April of last year. What makes this statistic so surprising is that we started 2007 with 400 billion cubic feet of natural gas inventory higher than at the start of 2006. These various catalysts will almost certainly have an impact on the coal markets; the only question is when we see them occuring. Over the long-term, Arch continues to see several positive factors that support a long-term growth cycle for coal. Demand growth from new coal-fired plants represents a meaningful driver of coal fundamentals. Arch estimates that nearly 11 gigawatts of new coal-fueled capacity are under construction, equating to more than 40 million tons of annual coal demand, with 85% likely being sourced out of the Powder River Basin. Additionally another ten gigawatts are believed to be in advanced development. If these ten gigawatts get built, they would require another 34 million tons of annual coal demand, with 60% likely being sourced from regions where Arch has operating or reserve presence.

Also the strengthening outlook of the advancement of coal to liquids technologies -- coal to gas technologies remains a favorable long-term development for the coal industry. There is growing and bipartisan support for the emerging CTL industry in Congress, and we are encouraged to see a strong push for the inclusion of CTL incentives in the energy independence package being contemplated for this summer. In addition, we are seeing encouraging signs that technologies which promise to deliver near zero emission coal plants are moving forward. In March, AAP announced plans to demonstrate a post-combustion carbon capture using chilled ammonia at its Mountaineer plant in West Virginia, to be followed by the installation of a commercial scale system at its northeastern station in Oklahoma. While is there still much work to be done in terms of research, development, and deployment of these technologies, we are confident that the technology holds the key to addressing climate concerns over time.

While the long-term outlook is very favorable for coal, Arch has previously announced steps to rationalize production targets in the current soft market environment that we've encountered in the first quarter or the first half of this year. By following this market-driven strategy, we believe that we will optimize value for our shareholders. We have selectively signed sales commitments of approximately five million tons for delivery in 2008 at prices that significantly exceed current realized prices for the first quarter of 2007. Arch currently projects unpriced volumes of ten million to 15 million tons in 2007, 70 million to 80 million tons in 2008, and 110 million to 120 million tons in 2009. As you can see, we have elected to take a patient approach to sales contracting, preferring to maintain exposure to the up-side potential of the coal market. We believe this strategy provides great benefits to our shareholders and ensures that Arch obtains an appropriate return on its valuable reserves. We believe that the Company is well-positioned to capitalize on the expected rebound in the coal market.

With that, I will now turn the call over to our President and COO, John Eaves, for further discussion of our operational performance. John?

Thanks, Steve. Our mining operations delivered a solid performance during the first quarter of 2007 despite a continued weak macro environment for coal. Overall, average price realization per ton expanded in both our western, due to contract pricing in the PRB, as well as continued grow-off of lower-priced legacy sale contracts in Western Bit. In Central App, our per ton price realization declined due to weaker marketing pricing on index and open market tons, as well as a smaller amount of met sales during the quarter. In 2007, we continue to target increased met and industrial coal sales despite the depletion of our longwall in Mingo Logan, which has been our principal source of met coal. In 2008, we could see more significant increases in met sales, as the Mountain Laurel longwall ramps up.

On the cost side, we're focused on managing our controllable costs, both during strong and soft market conditions. We've been successful in removing our highest cost increment of production in regions where Arch Coal has proactively lowered volume targets. Although coal mining is a high-fixed cost business, we have worked very hard to increase the operational flexibility, thus allowing our mines to run efficiently and profitably at lower volumes. In the PRB, our costs were impacted by a 12-day belt outage at Black Thunder in January and higher diesel costs. Unfavorable weather in February and blizzard conditions at the end of March also caused disruptions to the rail service and resulted in mine shut downs at Black Thunder and Coal Creek for approximately three days in late March and early April.

In Western Bit, costs were affected by the start-up of a new state-of-the-art replacement longwall at Sufco. We were challenged by the typical start-up issues associated with a new longwall and have generally worked through those issues and expect the longwall to reach normal production levels in April. Late in the first quarter, we also began work on a scheduled longwall move at their Skyline operation, with completion of the move schedule for mid April, thus straddling the first quarter and second quarters. Going forward, we expect costs in Western Bit to remain in the high teens, as we continue to mine deeper panels, which is consistent with the overall trend in the region and also realize higher sales-sensitive cost.

In Central App, our operating costs were per ton declined as a result of strong performance from operations along with the benefit of brokerage activity optimization in a weak market environment. Looking ahead, we expect the longwall at Mingo Logan to deplete in the second quarter, with the longwall at Mountain Laurel complex to start in the fourth quarter of 2007. The timing of these longwall installations and depletions will have an impact on our cost in the region during 2007. However, as we replace our highest cost Mingo Logan mine with our lowest cost Mountain Laurel mine, we expect our operating costs in Central App to decline in 2008. I would guess that few operators in that region could make that claim.

We're also committed to lowering our capital cost in 2007, including eliminating any new discretionary capital spending in the current soft market. Arch will continue to maintain the appropriate level of maintenance capital necessary to run the business. This includes any required replacement capital, such as Sufco's longwall. We expect our annual maintenance capital to be in the range of $150 million to $200 million going forward.

Additionally, I'd like to take a moment to recognize some of our outstanding achievements in the areas such as safety, productivity, and environmental stewardship. Our Coal-Mac operation in Central App earned the Mountaineer Guardian Safety Award for completing 2006 without a single reportable accident as well as the Wildlife West Virginia Award for environmental stewardship. Also, our Sufco mine in Utah was ranked as the most productive underground mine in the U.S. in 2006. And the Colorado Division of Minerals and Geology recognized our West Elk mine for its land reclamation efforts and for operating more than seven years without an environmental violation. At Arch, we make employee safety, productivity, and environmental stewardship core values and these operations exemplify our long-standing commitments to these areas. Going forward, Arch will continue to proactively address the current soft market conditions. As such, we expect our second quarter results to be similar to our first quarter results.

With that, I will now turn the call over to our CFO, Bob Messey. Bob?

Thank you, John, and good morning, everyone. I would like to take just a few minutes to expand upon some of the major financial developments for Arch during the first quarter of 2007. First, I'd like to address our capital spending program and debt and liquidity position. As expected, our capital spending program is traditionally weighted to the first quarter. We invested approximately $80 million in equipment, infrastructure and capitalized development in this quarter. Specifically, we spent $20 million on the new state-of-the-art replacement longwall for our Sufco operation. In addition, we incurred $32 million for the ongoing development of the Mountain Laurel complex. The remaining spending in this area relates to maintenance capital.

Additionally, we spent approximately $175 million on reserve acquisitions in the first quarter. We made the third of five annual Little Fund or federal lease payments of $122 million. We also acquired additional land and reserves in each of our operating regions during this quarter. As part of our ongoing operations, Arch continues to invest in opportunities and to further expand and upgrade our reserve base. As a result of these expenditures, our debt increased approximately $195 million. We ended the quarter with total debt of $1.4 billion and a debt to total capital ratio of 50%. At March 31st -- as of March 31st, our borrowing capacity under our revolver totalled $460 million. During the remainder of the year, we expect to make meaningful reductions to our outstanding debt ,barring any future events.

As a result of significant financing needs during the quarter, we elected to forego stock repurchases. Going forward, we will continue to evaluate opportunities under our existing authorization to purchase shares, and we'll do so when we feel that our purchases create the most value for our shareholders. Additionally, we will continue to evaluate the returns offered from organic growth projects,acquisitions and dividends as we make capital allocation decisions.

Now, I would like to reiterate our 2007 guidance. Earnings per share of between $1.25 and $2 per share. Adjusted EBITDA in the range of $530 million to $650 million. Sales volume of 130 million to 135 million tons, excluding approximately two million pass-through tons associated with the legacy Magnum contracts that we are currently servicing. As discussed, our ultimate production level will be dictated largely by market conditions, and will have an impact on where we are likely to fall within our EPS guidance range. CapEx of between $240 million and $280 million, excluding reserve additions. Included in this total of approximately $110 million related to the completion of the Mountain Laurel underground mine in Central App. We will continue to be very judicious in our approach to capital spending. We continue to be bullish on the long-term prospects for the coal markets. We're making significant strides and adjusting to the current soft market, while positioning the Company to benefit from our long-term view. As such, we currently expect the second half of 2007 to be stronger than the first half.

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

Thank you. (OPERATOR INSTRUCTIONS) And we will take our first question from Jim Rollyson with Raymond James. Please go ahead.

Morning, guys.

Morning, Jim.

Steve, you've talked about the fact that you're holding off on booking a lot of new coal right now, given your view of where pricing probably heads as you look out. Can you give us a sense of your thoughts on timing of when things start to pick up? How long can you wait to start booking some coal for '08?

We can wait quite a while before we have to really commit anything long-term, in fact indefinitely long-term. You can always go into the near-term market or the short-term market. And one of the things that we've done is we've evaluated the marketplaces and we've really gone back to the last two price spikes and looked at the different demand scenarios and supply scenarios that really occurred and the conditions that occurred back in 2000 and 2001 and 2004 or '05. We see many of the same issues out there, many of the same catalysts, if you will. And we're fully prepared to be patient here. And as we graded ourselves back in those two earlier price spikes, our biggest mistakes really were committing too much coal too early or too low of price. That overwhelmed any opportunities or costs that we saw of not moving, if you will, or missing a -- some movement upward and a movement downward. We just think that the propensity for pricing to decline is so much less than the propensity for it to increase over the next six, 12, 24 months. I can't predict the exact timing.

That's the other thing we didn't figure out. We're not real good at predicting the tops and bottoms of markets. We feel very good about the issues out there. And if you kind of look at it -- and it's a long-winded answer -- but if you think about world coal markets increasing where we are, we had the same condition -- or similar conditions back in the two previous spikes. The things that are the same are the markets are increasing worldwide. We're seeing increased U;S; electric generation. We have a high oil and natural gas pricing. We see a strong met coal market that's starting to draw off some of the high quality steam coal domestically. Bulk carrier rates are high and seem to be climbing higher.

The supply -- there's supply issues as a result of some of the port congestions in the Pacific Rim, permitting issues have now raised their head in Central Appalachia. Some of the things that might be different that's positive, though, would be the weak dollar again, makes imports more likely to move to other countries along -- you see that stockpiles are probably higher today than they were in the other two periods at the utilities, which would be an offsetting slight negative. But the big unknown out there, as well, is China potentially being a net importer instead of an 80 million ton exporter. So we look at this marketplace and say, everything almost is really on an upward trend and we feel very good about it.

Thanks for that detailed answer. As a follow-up, just switching gears to the PRB, you noted that the average price realization, which was up sequentially, was also impacted by a greater mix of Coal Creek tonnage, which is lower price, can you talk about how you see that mix going forward? More or less favorable, similar or just how you see that? Thanks.

Well, Jim, we're in at pretty good shape at Coal Creek right now have. We were fortunate to go out early and book a lot of those tons, so I think, at least in the near term, the volume's going to be kind of what you're seeing right now. As we see the market increase, hopefully the Black Thunder volume will increase with it. We'll see some improvement in our cost as we move forward, hopefully in the back half of this year.

Sure. Thanks.

Our next question will come from David Khani with Friedman, Billings, Ramsey.

Yes, hi, gentlemen.

Hey, David.

How much coal did you buy in the weak Central App market to help your cap margins the first quarter?

Dave, we typically are probably in about one million 1.2 million range per quarter. That's throughout the Company with a big part of that being in Central App.

is the environment still ripe to be able to make money by going a little bit harder into the Central App market to do that?

We see opportunities, and we've got -- our mines are pretty strategically located where we can bring truck coal into those operations. We've got a dock facility on the Big Sandy River which we buy and sell coal. Yes, we see opportunities continuing in that regard.

Great. That's great. How much costs would you say you've rung out of your system here, given your improvement plans that you've stressed over the last year or two, John?

In terms on the cost side, Dave?

Yes, on the cost side, yes.

We worked real hard on our process improvement programs. We've worked real hard on our maintenance program. As we've structured our mines to create flexibility, we've looked at our contract labor, we've eliminated some of that. We've looked at our work schedules. And quite frankly, I don't want to go into a lot detail about our process improvement, but the guys have done a great job on tire life extension, some of our shift transitions, some of the things like that that have really paid off. And we've still got a lot of work to do, but I'm pretty pleased on the results we've seen thus far.

Dave, this is Steve. I'll jump in here and just compliment John and his team because they have done a fine job where we have adjusted volumes, and if you look at it and you sit there and say, usually that really hurts the cost of a mine when you take the volumes down and really they've managed that well. It's one of our goals is to increase the flexibility of the operational performance so that, as the market demands, we can meet the market requirements and not be under it or not be over it and maintain control of our costs, and we're getting better and better at it. And as I looked back three or four years ago, the difference is dramatic, so very pleased with what the operating guys have been able to achieve.

Well, you beat me to it. I was going to congratulate John, and I think it also gives you the flexibility to be able to ratchet back on your volumes to be able to -- to be aggressive in when you want to sell your coal.

You hit the nail on the head.

Yes. Bob, your working capital turned from negative -- I think it was fourth quarter to a very positive this quarter. Was there anything going on?

Well, at the end of the first quarter in '06, we had a lot of acquisition liabilities at Magnum, which basically made that working capital negative.

Okay, okay. Great, thanks. I'll let others ask questions.

We'll take our next question from Ian Synnott with Natexis Bleichroeder. Please go ahead, sir.

Yes, hi. Good morning. I guess the first question I was going to ask, a little bit of follow-up on the belt outage at Black Thunder. With that fix and assuming that there's not a similar issue in the second quarter, what kind of impact would that have had on the costs for the first quarter? And then what could we see made up then for the second quarter and moving forward?

Well, certainly, we don't anticipate a belt outage in the second quarter. I don't know that we want to get into specifics of the impact of the belt outage, but we hope things will improve as we move forward, but that was an isolated event. The weather was an isolated event hopefully, and hopefully we won't have those type of events during the second quarter.

It was caused by ice, so it's unlikely that it'll be -- Although in Wyoming, who knows?

-- warming up here. Right, right. Well, you never know, right? No, that's helpful. And then, I guess as we think about in general pricing assumptions for 2007, you guys have a pretty good idea of what the book looks like now minus that ten million to 15 million tons or so that's open right now. How are you guys seeing for the rest to have the year versus what we saw in the first quarter, relatively smooth or do we see a little bit more pickup as we move through the rest of the year?

Well, obviously, we've given our annual guidance, which would incorporate some price thoughts and we're not going to get granular here and really can't. But I think it's interesting if you look at the indices, the spot indices, there has been a meaningful percentage movement, particularly in the east and a little bit in the PRB, as well, throughout the first quarter from the beginning of the quarter to today, admittedly off of some pretty ugly pricing. Directionally, it's going the right way and we see continued pressure dependent upon a normal kind of weather pattern. If we have a hot summer, that'll have positive implications on pricing. If it was 75 degrees across the nation, obviously, that would delay things. But the overall large picture we feel very good about and the exact timing, it's a little bit open, but we see the forces are forming. And you saw them have some impact even in the first quarter in the upward price move.

Certainly, yes, the east has definitely improved quite a lot. Have you been seeing more customers -- has the -- I guess these contacts from customers been increasing a little bit more? Are they looking for more coal at this point?

We have seen a lot more interest over the last couple of weeks. Inquiries from anything from short-term to one to three year type arrangements, certainly in the eastern United States.

Great. Thanks very much.

Thank you.

We'll take the next question from Michael Smith with Bear, Stearns. Please go ahead.

Good morning, gentlemen.

Morning, Michael.

Steve, talk a little bit about test burn activity amongst your customers, impact on improved investment in the real capacity out west, and how much -- you mentioned the other two cycles in '01 and '05, there was certainly a log effect from Central App into PRB. Would you anticipate given those indications on positive trends, i.e., capacity and lifting the embargos and higher test burns, leading to similar improvement in PRB relative to the lag we've seen in Central App in the last couple of cycles?

Again, all we can do is look at the past and there certainly has been a lag and we would anticipate one again. But one can't really define the exact timing of that, but I think lifting the embargo was an important step in that. And we have additional inquiries. Frankly, some of our tests have been more on the mercury reduction tests that we've been able to achieve by blending our Black Thunder and West Elk mines. But as things develop as we move into the summer, we would think that some of the issues that are developing in Central Appalachia, specifically the declining production and potentially the significant impact of not being able to obtain new permits, the buyers in the past have then started to reach west. And they usually reach into the Western Bit markets first, because it looks more like a Central App coal, nd then they reach into PRB and the exact timing will be driven by then. But we've seen it twice before, and I guess I would expect it a third time as we look out at all the catalysts.

Steve, you've made an investment last year into the Illinois Basin with Night Hawk. Seems to be some thoughts of some -- over investment in that region, maybe timing of the scrubber builds have been pushed out a little bit there. How's that dynamic impact possibly the potential of PRB replacing some tonnage or when they go -- or when Central App buyers go west, would Illinois be a stop that they may look at if there's some excess supply relative to that and even the sulfur (inaudible) prices?

Well, if they stop in Illinois and, you're right, we have a small investment in Night Hawk, but it's always been our contention that you needed to get the scrubbers built and we saw the resurgence of Illinois and we do expect that to occur. But it was in the end of this decade, into the next decade not today or in 2008, and that's still our contention. If they stop in Illinois Basin with the higher sulfur coals and the scrubbers are not on line, then you would expect to see some impact on sulfur emission credits. There's not enough coal that we would think the excess in Illinois right now that would stop them from eventually reaching the PRB. And again, PRB is, we think, the best energy buy in the world, perhaps too good. But history would tell you that's where they'll end up because that's where the coal's at.

Steve, thanks for your time.

Thank you.

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

Hi, good morning.

Hi, Paul.

On the -- on this exported coal from the western market, how are you going to get that to Asia?

Paul, we're looking at taking it through Roberts Bay at this point.

Okay, interesting. And then also, I guess when you look at the -- you're looking for a similar second quarter as you had in the first, and it sounds like you'll be without an operating longwall in Central App in the third quarter, can we expect a really strong fourth quarter once Mountain Laurel picks up? And also are there any tax realizations coming in the fourth quarter that you'd expect?

Well, we are excited about getting the Mountain Laurel longwall up and running. With any new longwall you have your start-up issues, so we'll start-up in the fourth quarter, but we don't expect it to hit its full stride until first quarter of 2008. We will encounter a gap there in the third quarter when the Mingo Logan longwall goes down, but certainly expecting big things from that operation in Mountain Laurel in 2008. Bob, I guess in terms of the tax --?

In terms of tax, we have said previously that our overall rate's going to be around the 8% to 10% and that there will be a lower rate in the thir -- in fourth quarter, excuse me, than the first three quarters. So yes, we expect to have some adjustment in the fourth quarter.

Okay. Appreciate it, thanks.

Thank you.

We'll now go to Fritz von Carp with Sage Asset Management.

My question's been asked and answered, thank you.

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

Thank you, and thank you very much for the presentation, everyone. Great summary of the various elements of the looming coal inflection as you describe it. Just curious, that's what we all see, I suppose as coal operators and investors. But what about the customers? Have you seen any meaningful change in behavior with regard to the utility customers?

I think as John alluded to, that you saw a flurry of customers enter the marketplace after the announcement of Judge Chamber's decision on the permitting issues with core. And I think those customers were looking at it that perhaps they see the market similar to where we were and -- or we do and there's an inflection point. Now we'll move on into the summer to see probably the next flurry, but whatever bids and offers they've received, I'm sure those customers are sorting through those today. But, yes, for whatever reason and we think that was the reason we saw a real flurry post that announcement about a week and a half later.

Great answer. Great answer. And then in terms of marketing Powder River Basin production, what percentage of RFPs do you estimate that you're winning?

We're not going to get into the specifics, but currently not many.

Yes, it just begs an interesting question because there was another major producer saying that they were winning perhaps 10% of the business, and it begs the question who's undercutting out there in the west. I suppose there's some ideas, but would just be curious, do you think that that's a meaningful theme to be concerned about? That there are producers willing to sell into very weak markets and therefore, forestall any recovering of pricing?

Well, producers have to do whatever makes the most sense to them, and I can only speak to Arch and our view of the world is that we're patient and others will do what they need to do.

And I suppose many will be glad to hear that it's not Arch doing the undercutting.

Well, again I'm not going to get specific on Arch's philosophies here, but let's just say that we have a lot of coal remaining to be unsold and we expect to realize good value for our shareholders for that coal.

Great, thank you.

(OPERATOR INSTRUCTIONS) And we'll now go to Sanil Daptardar with Sentinel Asset Management. Please go ahead.

Yes. My question is you talked about improving [fundamentals] in the coal market. In response to that, are you going to expand your production in that case or you're just going to remain static what you're producing currently?

Currently, we've given our production range and we haven't updated that, so our view is that the market isn't demanding additional coals yet and we will be in that range.

Market is not demanding additional coal or it is demanding?

Is not at this point in time beyond the range that we --

So do you expect that condition to change in the second half of '07? Because you talked about the second half to be better than the first half of '07 and the pricing should be better also in that case? Or it should be where it is currently?

Right now, we -- as I said earlier, we've been unable to forecast tops and bottoms of markets. We don't expect meaningful demand changes really this year outside of our ranges, but that can change dramatically with weather or with issues in Central Appalachia manifesting themselves sooner. Because as we look at people needing permits, no one really knows if someone needs a permit next month or at the end of the year. But over time, having lived through it twice before, we know that it impacts production, first gradually and then meaningfully. And it manifests itself in perverse ways you don't automatically think about.

And if you need a permit, say in July and you have a big shovel that breaks down right now, do you fix it? Or do you let it go until you receive the permit, so you see the production impact sooner as opposed to July. With a smaller mine it might be the engine to a D10. Do you start taking higher ratios to extend the mine life of the mine, raising your costs, lowering your production, lowering your productivity. That will manifest itself, we think over the next six to 24 months, at first slowly and then with acceleration. And that'll start impacting the other basins and the demand from those basins. And at that time, then, we'll sit back and reassess where we might be on production levels.

Okay. In case -- if the demand says that you had to increase your production, do you have the necessary equipment to do that? Are you seeing any kind of ratios on not getting the equipment? Are there any kind of supply issues here that might be worth looking at?

Again, we've cut back some of our anticipated production from say a year ago. So until that was -- that would be the first increment that we would restart, and then after that, we would have to add equipment and expand load outs, that sort of thing. We're really not focused on that point at the moment.

Okay. Just last question. You talked about signing some contracts, five million tons for next year delivery at significantly higher prices than the first quarter of '07. Is it possible to quantify how much significant is that? Is it a 30% increase, a 25% increase? I think in Peabody's conference call they talked about signing about 30% higher coal prices for 2008 deliveries on an [outage] of 2006 price, but is it possible for you to quantify how much increase it is?

I can't really speak for anybody else. We've decided that over time here through some hard lessons that we'd just as soon stay away from giving too much specifics there. I'm sorry about that.

And we'll now go to John Bridges with JPMorgan.

Hi, Steve, everybody.

Hi.

Congratulations on the cost control. That's very impressive.

Thank you.

The extra capacity that you're talking about, the 11 gigawatts, what's the time line on that? It seems to be pretty back-end loaded. It doesn't seem as if it's going to be quite meaningful for a few years.

Well, it is an accelerating impact. I think the first plant's going on almost as we speak up at Council Bluffs. And then -- and I don't have all the numbers laid out, but it's a couple more plants in 2008 and a lot of plants in 2009 and '10. But I think the key components here is they're under construction, they're going up. And we look at plants coming out of the ground at very realistic, and it just adds to that capacity of the normal -- setting aside 2006, the normal 20 million to 30 million tons of annual demand in coal demand that we've seen every year going back almost a decade. It's kind of been a steady march forward, with 2006 being one of the few exceptions over the years. So we just see it as a little bit of -- I'll call it the whipped cream and cherry on top from the underlying huge base load demand that is ever marching forward and increasing.

Okay. And presumably that was helped by the increase in coal plant utilization over the years?

Yes.

And what's that statistic doing at the moment? Are you tracking it?

I don't have the most up to date, but over time it's basically been slowly climbing about one percentage point per year and obviously, bounces around. And we've spent time with some of our customers and asking, what can you get that number to? And depending on the age of the plant and the customer, we always come up with -- or they report to us numbers in the 80s and some in the 90s. We've certainly had recently -- and I can't tell due to confidentiality tell who it was -- but one customer said their objective is to get all of their plants above 90, which kind of stunned us, but more power to them.

Is that being influenced by limitations on capital expenditure? Is new source review still an issue out there or is that --?

Well, I think it's still an issue and the efficiency -- you have the conflicting issues of we want to have better efficiencies for carbon management, for just general price of electricity. And then to have an artificial constraint that you can't increase the efficiency due to new source review, there is a conflict there that at some point in time I think people will resolve. But ultimately, I found that common sense does win and that efficiencies and lower costs should prevail, and for the most part they do.

Okay. Your prices in the Western Bit, you were looking at repricing of most of that Utah material over the next year or two. There was a big pickup -- 20% pickup this quarter on last, but year on year, it doesn't seem to moved very much. Could you comment on that?

Well, yes, as we said earlier, we expected to end at '07 a lot of contract roll-off and replacement at significantly higher prices. We still expect that to occur. I think we had low prices one quarter this year, I think it was the third quarter that actually prices jumped up pretty significantly. But you should see those prices continually improve over the next year or two.

Okay. Is there any sort of -- so you say most of the reprice -- most will be repriced by --?

I would be hesitant to give you a percentage, but we are looking at some repricing on our contractual business over the next -- for the balance of this year and with shipments starting in '08.

There is a big change from '07 to '08.

Okay. Got it. Congratulations, guys.

Thank you.

Our next question will come from John Selser with Maple Leaf Partners.

Sorry, I withdraw that, thank you.

Thank you. We'll move on to Justine FIsher with Goldman Sachs.

The first question that I have is about the coal brokering operation. I was wondering if you guys could give us a little bit more detail as to what brokering optimization means? Does that just mean that you guys look more to the OGC market to purchase more coal during the quarter?

Well, we do that as well as buy from producers. We look at opportunities to buy coal which we feel is under the market and with the ability to sell it at a profit. With our loading docks on the river, our rail infrastructure at our mines, it affords us that opportunity.

And that was in both the PRB the eastern U.S. during the first quarter?

It's more in the eastern U.S. We do buy coal OCC for PRB from time to time, as well.

And you mentioned that you buy from other producers. Who are the major buyers -- I'm sorry, who are the major sellers that you guys buy from? Are there utilities that are selling coals, or is it mainly other producers?

It's mostly producers, and I'd rather not name any names.

It's at lot of small guys.

So it's not as if utilities are out there selling their own coal and you guys are buying from utilities. It's really from other producers.

Most our purchases are from competitors.

Okay. And then, in light of the costs that you reported, I guess the PRB cost in the first quarter is $8 and I know I would expect that to come down just because we know that there were weather issues and belt outages that affected cost in the first quarter. But if the -- if the price of coal is still -- has a seven handle, would you guys look to purchase coal instead of mine some of your coal in the second or the third quarter?

We will always look at the opportunities to maximize margin for the shareholders, and whatever's available to do that, we would consider it. I think one of the things -- and we haven't talked a lot about this, but John and his team have significantly upgraded our marketing efforts and our market research efforts, and really this last year have formed a trading and purchasing group that is making an impact and we continue to expect them to make an impact as we move forward. But we're walking, not running there, and it's just another arrow in the quiver to maximize shareholder value.

Okay. And then the next question I had was just on the share repurchase versus debt repayment. I know that you had mentioned it was a priority to repate that this year and I'm going to guess the answer you'll do either opportunistically. But I was wondering if you would put more of a shorter-term priority on repaying some of the debt that you had issued to lease payments above share repurchases?

You couldn't have said it better. We'll look at both priorities [LAUGHTER] and look at opportunities. So it's -- we have an ongoing authorization, which over time we expect to utilize, but we'll be looking at opportunities to repay debt and invest in other assets, as well. So it's -- we're not absolutely committed to one direction or other, but we are committed to the entire process.

And then just to double check, because the short-terms on the balance sheet went up significantly, but that's just because you have to classify revolver drawing as short term, that's not necessarily debt that you are obliged to repay over the next year?

That's correct.

Okay, great. Thanks a lot.

All right, Christine. Thank you.

[OPERATOR INSTRUCTIONS] And we'll now move to David Gagliano with Credit Suisse. Please go ahead.

Hi, just a quick question on the Powder River Basin costs. I may have missed it, but I know you touched on Central App and Western Bit in terms of the trends moving forward, and obviously there were some issues in the first quarter that shouldn't recur. Should we expect the cash costs in the PRB to get back down to that 750 level? Or if not, what are you thinking with regards to the trends of PRB? Thanks.

David, I'd be hesitant to give you a number right now, but I will tell you, no we don't expect those type of events to occur in the second quarter. And as volume improves, we do expect our cost to improve somewhat out in the PRB.

Okay. What was the --

It's really going to be volume related, basically. And as the market improves and our volume increases, you'll see our cost improve.

Fair enough. What was the cash cost impact in the quarter of the 12-day belt outage?

I'd be hesitant to give you that number at this point.

Okay. All right. Fair enough. Thanks.

Thanks, Dave.

We will now go to Pearce Hammond with Simmons & Company International.

Good morning.

Morning, Pearce.

Steve, you had talked about stockpiles earlier. Where do you see them right now and do you think we could see a bifurcation of bituminous and subbituminous stockpiles as the year progresses?

Well, it's interesting, because customers, of course, have gotten more secretive on their stockpile numbers, and for the most part they've raised them from a year ago or certainly two years ago, but they don't necessarily tell you what their new targets are. We have had specific customers tell us that they are -- have yet to reach their new stockpile target number. Our view is more or less that the stockpiles are at the five-year average, which we think is great. It's a bit like natural gas, where we started the year looking -- it looked awfully ugly. While it's perhaps not robust in terms of stockpiles, it's not nearly as bad as it might have been and now we'll see how the overall demand supply picture goes. But again, we see normal weather for the summer, expanding electric generation at almost 5% right now year over year, and supply issues occuring in the marketplace. So that's certainly would implies that the stockpile numbers will likely come down as oppose to climb, and it's very hard to have them climb in the summer time any way.

Great. And then just two housekeeping questions. One, how much met was shipped during the quarter and then how much do you expect for the full year '07? And then on longwall moves for Q2, you'd already mentioned Skyline, but is there any other we need to be aware of?

We shipped about 500,000 tons of met first quarter, which is a little bit less than we shipped fourth quarter of '06. In terms of longwall moves, we do have a couple in second quarter. I mentioned in my opening comments we straddled the first and second quarter with Skyline, so we had two weeks of that move in April. We've also got a couple more moves out west and then we've got the cessation of the Mingo Logan longwall late in the quarter. In terms of target for met coal, we continue to be cautiously optimistic about that market. We are in discussions right now about placing additional met coal. We had -- I think we've got about 1.6 million tons booked right now in that market and can increase that pretty significantly if the opportunity's right. We're also focused on increasing our industrial sector market as well, which we've been very successful year to date on, as well.

Great, well, thank you very much.

Thank you.

And our final question comes from Sanil Daptardar with Sentinel Asset Management.

Yes, sorry. On (inaudible), have you seen any kind of changes there? Has that created -- the price has picked up or any kind of color you can give to us?

I'm sorry, you got garbled coming across.

On the (inaudible), have you seen any kind of changes happening there? Any kind of pickup in prices? Can you give us any kind of color to us on that piece?

Yes, we have seen that improve over the last week or two. I think the latest price is about 480 in the open market.

Okay. Great. Thank you.

All right, thank you.

And I'd now like to turn the call over to Steve Leer for any additional or closing remarks.

Well, we appreciate all you taking your time to listen to the call and for your interest in Arch. I think you hopefully out of the call perceive that we feel very good about the way the business -- underlying business is running and our view of the marketplace that we think Arch is in a position to meaningfully capitalize on positive market movements as we go into the rest of 2007 and on into '08. With that, we'll talk again in about three months and thank you for your interest in Arch. Bye now.

Thank you very much. And that does conclude our conference for today.