Arch Resources Inc (ARCH) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to this Arch Coal, Inc. first quarter 2009 earnings release conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Deck Slone, Vice President of Government, Investor, and Public Affairs. Please go ahead, sir.

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 are, by their nature, and a 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 from those expressed in our forward-looking statements.

We do not undertake to update our forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by law. I would also like to remind you that you can find a reconciliation of the non-GAAP financial measures that we plan to discuss this morning at the end of our press release, a copy of which we have posted in the investor section of our website at archcoal.com.

On the call this morning, Steve Leer, Arch's Chairman and Chief Executive Officer, John Eaves, Arch's Creditor and Chief Operating Officer and John Drexler, our Senior Vice President and CFO. Steve, John and John 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.

Today, Arch reported earnings per share of $0.21 and earned $112 million of EBITDA in the first quarter of 2009. These results are largely in line with our expectations and highlight our ability to properly manage through the worst global economic contractions that we've ever experienced. We confronted several challenges in the quarter and have adapted our strategy to successfully meet and overcome them.

We also continue to focus on our industry-leading safety and environmental goals, and we announced that the proposed purchase of Jacobs Ranch in the Powder River Basin in March demonstrating our long-held strategy of positioning the company to grow through acquisitions in market troughs.

First, I would like to acknowledge the unprecedented trends we're seeing in the marketplace. U.S. power demand has declined by 3.4% so far in 2009, driven by weak industrial and commercial activities in the overall economy. The last time power demand declined 3% was in the recession of 1982. However, for the full year of 2009, we're currently forecasting generation to decline by 4%, representing the worst year for the power demand contraction since official records began in 1949. We are clearly approaching unchartered waters.

Demand for steel has been virtually nonexistent as well. Global steel utilization rates remain around 50% and met coal shipments around the world are being deferred or canceled.

Coal consumption is being hit hard by the recession. Based on just released EIA data, we're seeing real evidence that coal consumption could decline by more than 100 million tons in 2009, which would be a record contraction. Two-thirds of this demand reflects the weak industrial segment of power demand that affects coal disproportionally. We're also experiencing better performance year to date in other base load fuels, hydro and nuclear. And lower natural gas prices are causing fuel switching, although it is worth noting that natural gas burn is down as well.

Reduced demand from industrial customers and idled or scaled back Koch plants are contributing to the contraction in coal consumption as well. And the global economic slowdown is reducing demand for U.S. coal abroad, with exports forecast to fall by approximately 20 million tons in 2009. It is in some respect a perfect storm.

We believe our outlook provides a very sober view of just perfect storm and we are expecting to profitably navigate through it. Hopefully the economy will turn sooner and turn better than we forecast. But we are not planning on it at this time as we look out for 2009.

While global markets -- while global coal markets are reeling from the recession, there are some signs of life. U.S. exports will be down from the 80 million ton level achieved in 2008, but are still forecast to reach nearly 60 million tons in 2009, well off their depressed levels experienced earlier in the decade.

We also shipped our first vessel of PRB coal to China off the West Coast and continue to receive inquiries from new customers on the possibility of shipping more PRB into the Asia-Pacific rim. While we anticipate future agreements will be delayed given the current weak economic conditions, we continue to pursue conversations and build relationships necessary to move this long-term growth opportunity forward.

Additionally, while demand for met coal remains anemic, the steel industry may have begun to stabilize. The pace of destocking to date appears to be better than anticipated, suggesting steel inventories could hit bottom soon. And global steel production was up in March, off of January and February's lows, driven mainly by China. When the underlying demand begins to recover, steel prices and the commodities that follow them should rebound.

Lastly, new U.S. coal plant construction remains on track, as 16 gigawatts are scheduled to start up over the next four years. Nearly half of the estimated 55 million tons of demand from which these plants are likely to be supplied will come from the PRB. In the second half of 2009, five of those 16 gigawatts are expected to come online.

Turning to supply, rationalization is occurring in the energy space at an unprecedented pace. Natural gas rig counts are down 50% from peak levels. Announced domestic coal production cuts exceed 50 million tons so far, and are likely to climb by substantially more, marking the largest US coal supply contraction ever.

Central Appalachia production is down nearly 5 million tons year to day according to EIA estimates. In fact, we believe that the cash cost of more than one third of the current production in Central Appalachia are above the forward index price levels in the region and may result in further supply rationalization if the weak prices continue.

Also, recent ANCHA data suggests that PRB production is down over 4 million tons versus a year ago and down over 8 million tons from the fourth quarter run rate. Clearly, supply rationalization will lead to a better balance in domestic coal markets and will ultimately help set the stage for the next market up cycle, as economic conditions improve.

As a point of reference, the US coal industry has faced and persevered through many difficult times in the past, including massive strikes, game-changing environmental and government regulations, and the advent of nuclear power, to name just a few. While the industry is currently facing challenges, it is also important to point out that we've been here before in the '50s and the '70s and the '90s and the early 2000s and we've emerged successfully and stronger after each and every challenge and I firmly believe we will do so again.

Now I'd like to address what Arch is doing to confront these challenges. Clearly, 2009 will be a difficult year for Arch and the industry and indeed for all American businesses. But we also have the ability to respond to uncertainty in ways to preserve and build the long-term value for our shareholders and we are doing just that.

Due to the weak market fundamentals and growing coal stockpiles at generators, we're reducing volume levels this year and virtually eliminating any unsold tonnage rather than forcing those tons into an over supplied market. Given the depressed state of the steel markets, we also expect to sell 1.5 million to 2 million tons of coal into the met markets into 2009, well below our capabilities of supplying up to 6 million tons. As a result, we're shipping some coal into the steam market since we have the flexibility and low cost structure to profitably do so and we're slowing production or leaving tons in the ground where appropriate for future periods, when market conditions are expected to be substantially improved.

We're also executing on our long-term growth strategy, with the recently announced acquisition of Jacob's Ranch in the Powder River Basin. We are in the process of seeking the necessary approvals from governmental and other third parties and expect a transaction to close late in the second quarter of 2009. We continue to expect -- continue to expect to finance the combination -- the transaction with a combination of internal cash flows, borrowing on our credit facilities and other debt instruments. Looking ahead, with our low cost assets and reserves fully in place, we are poised to capitalize on the coal markets as they strengthen in the future.

I will now turn the call over to our President and COO, John Eaves. John?

Thanks, Steve.

I'd like to start by highlighting Arch's achievements and our key pillars. The Company's off to a great start in terms of safety and environmental performance. Our lost time safety incident rate in the first quarter of 2009 improved dramatically from the first quarter of last year, which is impressive, since 2008 marked Arch's best year on record for safety.

Also during the quarter, two-thirds of our individual operations achieved the goal of operating without a single reportable safety incident. Coal Mack and Mountain Laurel in West Virginia earned top awards for their strong safety performances within the past year.

We continue to improve upon our industry-leading environmental record in the quarter as well. More than 90% of our operations completed the quarter without a single environmental violation, as measured by Smacker. Several of our mines were recognized for their environmental stewardship and efforts as well.

Our company's commitment to the three key pillars of performance, safety, stewardship, and shareholder return, is evident in these achievements and drives the way we run our business every day.

Next, I would like to provide a brief update on the progress we're making at West Elk. We encountered difficult geologic conditions in transitioning to the E-seam. These transition challenges were mainly quality issues due to sandstone intrusions and part of the long wall pound, unrelated to the transition issues, our first quarter results also were impacted by a roof fall that temporarily halted production at the mine for 10 days during January, as noted in our February call.

As we progressed further in the current panel, we expect the impact of the sandstone intrusions to diminish and the geological conditions to improve as the coal thickness increases, all of which should benefit productivity and coal quality. Going forward, given the variability of the sandstone intrusions in the E-seam, we are exploring a long-term solution, including the possibility of building a small preparation plant at the mine. We've had great success with a prep plant we built in Utah several years ago and would expect similar results for West Elk.

As Steve mentioned in his remarks, we are further reducing volume levels in 2009 due to weak market demand and growing generator stockpiles. Despite the obvious implications for short-term earnings, we firmly believe that reducing volume targets and capital spending levels are in the best interest of the company and our shareholders, so that we can preserve the value of our low cost reserve base until the markets are more attractive.

Our volume reduction spread roughly prorata by region. In particular, we're idling another drag line and a shovel at Black Thunder. We're also taking other equipment out of service, delaying the replacement of equipment, and reducing work schedules by cutting out contract work, reducing overtime, and trimming weekend hours across all our operations.

At Mountain Laurel, we're slowing the rate of advance of the long haul better match production and sales and preserve the future value of these low cost reserves. We plan to adjust our volume levels to match existing sales commitments in 2009 and assume that no new sales will be made. We plan to ride through this very difficult economic period with the expectation that our steel and generation customers will realize significant declines in the respective businesses, reducing demand for inputs of production.

As a result, Arch now has virtually all of its volumes committed with 5% remaining unpriced. We also have 75% of our expected production committed in 2010 and roughly one third of our expected production committed in 2011.

On the cost side, we will continue to focus on the rigorous cost control and mitigation efforts to offset the impact of lower volumes. However, spreading highly fixed costs over lower volume levels is bound to affect unit cost, as can be seen in our first quarter results.

In the PRB, costs are being particularly hit bit impact of reduced production levels and higher hedge diesel cost, which account for roughly two-thirds of the increase. For full year 2009, we currently estimate that the cost in the PRB should trend up between 12% and 15% excluding sales sensitive. In Central App, costs are being impacted by reduced volume levels offset by a larger percentage of production from Mountain Laurel, as we slow production at this complex, however, costs will go up. As a result, we estimate that Central App costs should trend up between 10% and 15% for the full year 2009, excluding sales sensitive costs.

Also during the first quarter, Central App volumes and pricing declined versus fourth quarter 2008 due primarily to met shipments and lower pricing on those tons. Met volumes were off more than 50% during the quarter, while average per-ton met prices dropped nearly 20%. While we lost some of our expected met shipments in the quarter, we anticipate that these tons will be rolled over into new agreements in the current contract year, or in future periods when steel markets recover.

In Western Bit, our costs reflect the current challenges at West Elk, but we anticipate the costs will trend down in the second half of 2009 and expect the full year range to be between $24 and $27 per ton all in. Looking ahead, we currently expect to have four long haul moves during the second quarter, as well as some remaining product quality issues at West Elk.

However, our focus remains on profitably managing through this weak part of the market cycle, while taking steps to prepare for the inevitable turnaround in energy markets. We have some of the most cost competitive strategically positioned assets under roof and we'll manage the company to ensure that we earn appropriate return on our valuable assets. I will now turn the call over to John Drexler, Arch's CFO, to provide an update on our consolidated financial results.

John?

Thank you, John, and good morning, everyone.

Before discussing our outlook for full year 2009, I would like to address our capital spending, debt, and liquidity position. For the first quarter, capital spending totaled $192 million, including the final payment of $122 million for the Little Thunder Federal Lease in the Powder River Basin. Traditionally, our first quarter spend is the largest of the year and, as you can see from our guidance range, we anticipate significantly lower capital expenditures during the remaining quarters of 2009. In this challenging economy, we believe it is prudent to exercise tight fiscal discipline and match our capital spending levels with our planned reduce in volume levels and our expectations for current weak market demands.

Looking ahead, we now estimate our maintenance capital needs to be between $195 million and $215 million in 2009. We also expect our land reserve additions to total $140 million to $160 million, which includes the final LBA payment made in March. As you can see, we've eliminated over $80 million in our annual capital budget from previous guidance in response to the market downturn and to preserve our liquidity.

Generally speaking, we continue to be comfortable with our debt levels and liquidity. We finished the quarter with a debt balance of $1.4 billion and a debt to capital ratio of 45%, up slightly from the beginning of the year. Available liquidity at March 31 was nearly $500 million.

We also amended our revolving credit facility in the quarter and renewed our accounts receivable securitization program for an additional 12 months. This amendment gives us greater flexibility in determining the best approach to finance the pending Jacob's Ranch transaction and enhances our overall liquidity position.

With that, let me now discuss our outlook for 2009. We expect the following. Volumes from Company controlled operations to be in the range of 116 to 120 million tons; EBITDA in the range of $395 million to $470 million; earnings of $0.20 cents to $0.60 cents per share. CapEx of $195 million to $215 million; reserve additions of $140 million to $160 million, including our final LBA payment in the PRB; and DD&A in the range of $295 million to $305 million.

With respect to income taxes, we expect a small tax benefit for the year, primarily due to our lower pretax income levels and the impact of percentage depletion. While the challenging economic conditions are having a significant impact on our expectations for 2009, we are responding aggressively and effectively. We will continue to focus on controlling costs, reducing capital expenditures, and tightly managing our liquidity as the year progresses. With that, we are ready to take your questions.

Operator, I will turn the call back over to you.

Thank you very much. (Operator Instructions) We will go first to Jim Rollyson of Raymond James.

Good morning, everyone.

Good morning, Jim.

Steve, you guys noted obviously that the guidance excludes any benefit from Jacob's Ranch. Can you maybe talk about, maybe you can't, but let me know if you can, kind of what you're thinking on the timing on when that might close and if you suspect would be accretive to '09 if that closes in '09?

Well, we're very limit on what we can say. I can say that we've filed for the HSR information and that right now we have expectations that it would close late in the second quarter of this year and as we looked at it on the proforma basis based on 12-31, I think we did announce that we expected an additional EBITDA, looking forward on those assumptions of $135 million to $145 million. And that's probably all I could really say.

Fair enough. And then maybe, John, you gave pretty good detail on your thoughts for costs for the rest of the year. Can you give us a little color on how you see the pricing realization side coming in, given some of the mix changes and I guess we don't know exactly what you might get on what the 1.5 million to 2 million tons of net, just kind of how you guys see average pricing trending relative to 1Q?

Jim, this is Steve again, I'm sorry, let me jump in on the last question, your first question, it was$145 million to $165 million. I was not thinking here. Thank you.

Jim, it's John. To talk about the various pricing regions, I mean clearly we've had our challenges in the Western Bituminous region, primarily driven by the West Elk issues with the sand stone and the roof fall. But, I would suspect in Western Bit that you'll see prices increase throughout the balance of the year.

Certainly second quarter's going to be a challenge from an operational standpoint. We've got four long wall moves throughout the company. Three of those are in Western Bit, in Utah, which is very unusual. So given the quality issues at West Elk, the long wall moves, we may be a little bit impacted on the realization second quarter, but I do think as you get into third and fourth quarter, you're going to see a step up in those realizations.

In the PRB, you saw a step up quarter-over-quarter in the PRB prices. Clearly with our reductions in production, we've taken most of the uncommitted volumes out. We do have some volume that's priced off index and it will be kind of what those indexes are.

In Central App, kind of the same thing. The realizations are down quarter-over-quarter. We still have a little bit of met coal that we need to price. We indicated it will ship somewhere between 1.5 million to 2 million tons of met coal in 2009, with about 60% to 70% of that being priced thus far. So given that we're in negotiations with some of these customers right now, really not -- I would prefer not to comment any further on the pricing.

Okay, thank you.

Thank you.

Our next question comes from Michael Dudas of Jefferies.

Good morning, gentlemen.

Good morning, Mike.

Steve, given your expansion or your proposed expansion at PRB, maybe you can share with us how your medium, long-term views may or may not have changed given the changes we're seeing in the marketplace. And maybe even combine with that some of the discussion and talk out of Washington relative to coal plant moratoriums, carbon issues, how the PRB region, given the fact we've had some over supply issues looks to provide value longer term and how that's going to impact when you combine these operations.

First, on the operations, we're obviously -- there are tremendous synergies that we think will create real value with the -- you just have to look at the map and see the 6 miles of property line and I think it's easy to envision where you can see some of the operating synergies that would occur. And additionally, really to Real's credit, they are substantially sold out in the near term.

Looking intermediate and longer term, when you get into orders of magnitude of what's going on both in Washington and in the energy space, we see the west as just being a -- continuing to be I guess our premier energy reserve in the, really the United States. As you go through what's happening in Central Appalachia, the combination of reserve degradation, which is just inevitable in the mine there, certainly the challenges and the regulatory arena there and in this economic environment, we would expect to see substantial declines in overall production there, and with really the lowest cost energy in perhaps the world, certainly the United States stepping in to get a meaningful amount of that fill-in, if you will, and that's going to be the Powder River Basin coal. We feel very good about it.

I don't think the business cycle has ended by any stretch of the imagination. This recession is going to be deeper and perhaps longer than any we've experienced in the last 20 or 30 years, but, if you look at electric demand over the last 50 years or 60 years and look in recessionary periods, inevitably when we come out of that business cycle, we see a surge in growth in electricity and it's really -- we wouldn't expect any difference. In fact, I'm always highly skeptical when someone says it's different this time, whatever you're talking about, because, on the margin, the trend lines are very, very clear and, it's the old Willy Sutton comment. You go where the money is and go where the coal is, and that's the Powder River Basin.

Ultimately, we'll see developments in the Illinois basin as well. I think this economic environment's going to delay those. We have said that for a long period of time, not just due to the economic environment, but due to chlorine in the coal and ultimately getting all the scrubbers built. I think as we move through legislation in Washington, I mean -- no one can answer the question today. In some respects, the uncertainty is a greater problem than knowing is certain because it's very hard for our customer base to plan what is the future given the complete uncertainty and really no details of what any carbon legislation might ultimately look like.

So under the right format, we can be supportive. Again, I've said it in many, many forums, if you're serious about stabilizing CO2 in the atmosphere, we absolutely believe you have to develop carbon capture and sequestration, because you can eliminate carbon in the US which has all the implications to our economy and our society, none of which are positive, and you don't solve the problem if you don't really get the rest of the world, notably developing Asia, to have those same technologies.

So we're feeling good about it. I think there's,-- we're taking a very sober look at this near-term. We expect when we come out the back side that the value and the positions of Arch are going to be even stronger. I think there will be a lot of fallout and certainly many companies are going to struggle through this as they make it out the other side and really that was why we've put such a sober outlook out here, is we tried to say, "All right, we can't predict when the economic downturn starts reversing," but clearly we have tried to position this company to manage and do -- be profitable in the downturn and to excel in the upturn and over the last three cycles, frankly, I think we've gotten better and better at that. That's where we are.

Steve, I appreciate your candor. That's one quick follow-up for maybe you or John. Just a rough thought over the next 12 months, how much Central App tonnage do you think will eventually come off the marketplace? You highlight that into your prepared remarks on costs. And how much more quickly will we see that, or is it still going to be delayed until some of these contacts roll off?

You know, Michael, if you look at 2008, it was about 235 million tons produced in Central App. Our forecast right now show about a 30 million ton decline, which could be conservative, given what we're seeing in the marketplace right now. So, I personally wouldn't be surprised to see it go below 200 million an annualized basis.

And I would support that. You know, that's kind of a number we're working with, but the hard part to get your arms around, Michael, is what happens on the permitting issue, because frankly the permitting system has not been functioning well and with very few permits in Central App, surface mining being an issue since March of 2007. It is stacking up on itself and the needs for those permits, and obviously there's been conflicting court rulings here in the last three or four months. You had the appellate court overturning the chamber's ruling, but then you had the Goodwin decision and now you have EPA reviewing permits. We find it difficult to predict where that's really going to come out, but our general assumption is that it's not going to be fixed any time soon.

Thank you, gentlemen.

Thank you.

Our next question comes from Luther Lu, FBR Capital Market.

Good morning.

Hey, Luther, how are you?

Good, good. I was wondering if you guys can talk about, a little bit about 2010 diesel hedge and how you think about the lower costs in 2010.

Hey, Luther this, is John Drexler. I think as we look out into 2010, as we've indicated on previous calls, we have an active hedging program. We're out actively hedging now into 2010. We're roughly 40% hedged of our diesel fuel needs at this point for '10, at around $2.10 a gallon.

That compares to what we're at currently in 2009, where we're 70% hedged at essentially $3.70 a gallon. We have our hedging program not to try to time the market, but rather be comfortable with how we're layering in our cost structure in upcoming years. And so we're comfortable as we move forward with our program.

Okay, great. And then on the bigger picture, obviously we're seeing, natural gas competing with coal. And are you seeing real railroads doing something to have lower transportation costs so that the coal can be more competitive?

Well, you know, we don't really negotiate many contracts with the railroad. Export coals, we do. We have seen the railroads be responsive from where they were last year for movements for export to where they are today.

The individual contracts with the various utilities really have to go to the railroads, but, I think the railroads are recognizing the economic conditions as well and they -- coal is a significant piece of their business, so I would fully expect them to take that into evaluation as they negotiate new contracts moving forward also.

Okay, and quickly, obviously with this acquisition and the lower EBITDA guidance, how are you thinking about perhaps, given your policy, to trim the dividends a little bit and boost your free cash flow a little bit?

Well, again, we always evaluate on our financial structure every quarter and our outlook and you may have seen yesterday the board approved the $0.09 cent dividend for the June payouts and obviously we had this forecast sitting in front of them as well, so it gets evaluated every quarter and I guess based on yesterday's decision, we are still comfortable with our dividend and we will move forward as necessary.

Okay, great. Thank you.

Our next question comes from John Bridges, JPMorgan.

Hi, Steve, everybody.

Hi, John.

Could you give us a little bit more color on what went on in West Elk? In particular, were you forced to sell that coal at a discount, or was it a much lower yield? What sort of tonnage came out of West Elk?

Well, John, if you look at first quarter, the volume really quarter-over-quarter wasn't really off that much. It was more of a quality issue. We hit the sandstone intrusion, really couldn't get our shields low enough to go under. So we had to take that sandstone, create a much higher ash.

So we were segregating the coal. We were blending the coal. We actually took some coal off site and washed it as well. So, it was really more of a yield overall quality issue during first quarter. Now, we're going to have some of that second quarter. It's intermittent, but I think one of the solutions to solve this over the next year or two is to build a small preparation plant, as I indicated in my comments, and that's something that we're currently evaluating, the design work, the permitting, and just how long it would take to get one of those built. But until then, we've got to continue to do a good job in segregating and blending that coal and possibly washing some off site. So we've been able to get our customers to agree to a lower quality coal in the interim and hopefully we can work through this problem.

Were you taking a discount on that price?

We were, yes.

And when you wash it, will that get you back to where you were, or does that get you a premium quality?

It gets us back to where we were to slight premium.

Okay. And roughly what tonnage did you sell from West Elk during the quarter?

It was about 9--

900 -- about 900,000.

Okay. That's helpful. And how much is coming from Coal Creek nowadays on PRB?

I mean, you know, on an annualized basis, we're roughly about 800,000 to 1 million tons per month, which is about 10.5 million to 11 million tons on an annual basis.

And you were pretty much in line with that this quarter?

I think, yes, yes, we were.

Okay, that's great color. Thanks, guys good luck.

We'll go next to Shneur Gershuni of UBS.

Good morning, guys.

Good morning.

Just had a question, sort of an overall macro question with respect to the PRB and sort of your approach to production cuts and so forth. You know, I was wondering if you can sort of talk to -- there's been some timing issues for when you've been idling in the past to when we actually see it up. I was wondering if you can sort of give us some color as to what quarter today's announced idling will show up from a production perspective and then also if you can sort of talk about, your thought process of returning the idle drag lines back to full production, and I guess I'm asking this question in the context of, the facts, what if we have a false start on generation and it comes back down and then you end up bringing them back online too fast and so forth and kind of the end temptation that it's a high fixed cost business and more tons will help your margins and so forth. I just sort of wanted your general thoughts on when you'd be thinking about bringing them back?

Our first dragline we idled in about mid December, I think, and the second one right now I would forecast would be idled sometime in the first two weeks of May.

In terms of bringing those machines back, I mean the way we sequence these pits, I mean we can't flip a switch and bring them back on. We can do it over a matter of weeks or a matter of months, so I think we've got to be convinced that there's sustained demand out there in the marketplace before we make that business decision.

That's something that we'll be continually evaluating, but it's not something we're going to take very lightly, so if we see the demand start to develop and we think it's going to be there for sustained period of time, then we would start to process and restarting those drag lines as well as the shovels.

On the PRB subject just for one minute longer, with respect to, some eastern customers that had done test burns in the past and blending and so forth, has there been any pushback, just given the collapse in eastern pricing, as to say why haul it all the way across the country and so forth?

I mean we continue to believe that coal's going to move further and further east and it's going to be tested and has been tested at plants in the eastern United States. Now, obviously with generation down, inventories high, we're not seeing the interest right now that we have in the past, but we clearly think that that coal will move to the east as you continue to be challenged by Central App and Northern App production.

During past cycles, I think what you see is a slowdown in hedging the entire market goes down. But really except for maybe one or two customers over the years, once they start PRB and get the full test program implemented and the blend going, we have rarely seen anybody abandon the PRB because inevitably it is the lowest cost energy in America.

Okay, and just on the cleanup side, I was just wondering if you can sort of review your liquidity spot again. I sort of missed what you had said. And also if you can talk in terms of do you have any leverage target that you're targeting, would you consider converts. And in addition to debt and/or possibly equity, and also if you can talk about the interesting tax benefit that you've had during 2009, if that will also be a benefit in 2010 as well, too.

This is John Drexler, just to kind of cover our liquidity. As of March 31, we have about $500 million of available liquidity. That includes cash, our revolver and our AR securitization program capacity under those programs. As we look at the leverage position that we're in right now, we're comfortable with that leverage position as we look at the opportunity to close on the Jacob's Ranch transaction. Given our liquidity, our expected cash flows and our ability to use debt instruments, I think we remain comfortable that we've got a variety of options as we look forward to being able to finance and close on the transaction.

From the tax perspective, what we're seeing here is given our pretax income levels and the benefit we get in the mining industry from percentage depletion, we end up with the small tax benefit given our current guidance range. We're not projecting out into 2010, so it's a little premature to be able to give direct guidance into what the expectation for those rates will be.

Our next question comes from Paul Forward, Stifel Nicolaus.

Yes, good morning. You've been very good about discussing the issues at West Elk, but just wondered the other mines in Utah, how are they performing and why do you have three long wall moves I guess all happening at the same time in the second quarter? Was it after -- it's not as if the first quarter was, you know, was stellar. I guess why, why have them all show up at once?

Well, Paul, I wish they did. That's kind of the way the timing works, but I will say that the mines in Utah perform pretty well and we would expect them to do that for the balance of the year. But if you look at the moves we had second quarter, we go into third quarter and we don't have any long wall moves. By the time we get to fourth quarter, depending on the timing of those machines, we've got between 1 and 3 moves fourth quarter. So it's a very unusual event.

It worked out that way and we'll manage through it. I mean what we try to do prior to these moves is build up some inventory, but the real costly thing is the lost production in long wall move. So, that's what we'll encounter during the second quarter.

Okay, and you did say still $24 to $27 per ton cost expectations out of the full year Western Bituminous. How do you get to the low end of that range? I guess is it because you had a tough first quarter and three long wall moves second quarter. Are you -- would you expect that a normalized cost in the Western Bituminous would be something under $25?

You know, obviously we're going to strive to dot best we can on our costs. I mean second quarter will be challenging. You're going to see that benefit in the third and fourth quarter. What I will do for you at the next call, I'll narrow that range for you if I can, but we really are forecasting once we get through these moves, the sandstone issue in the second quarter, that things should improve pretty significantly third and fourth quarter.

Okay, great. Thank you.

Thank you.

And we will go next to Brian Singer, Goldman Sachs.

Thank you, good morning.

Good morning, Brian.

On the thermal coal side, any signs of renegotiations or deferrals among what you had contracted and can you provide any additional color on how that's being structured, if so?

Bryan, we really hadn't seen it yet in the first quarter. I mean, I think as you see generation continuing to decline, inventories continue to build, we may see some of that. But so far, we really haven't had a lot of pushback from our steam customers. Now, the spot activity's pretty much disappeared. But as of now, we're getting most of our contract steam shipments made.

That's great.

Bryan, I think it's important to note that during all the market cycles, Arch certainly has a reputation and performance that we deliver whatever we've contracted for, and whether the price is over the market, under the market, or at market, and, we fully expect our customers to recognize that as well during this down cycle. And it doesn't mean that at times you don't work with the customer because of certain problems they have and they have worked with us when we have problems. But the key is always to preserve our long-term and our present value of those sales contracts. And we would fully expect to achieve them.

That's great. And to follow up on a totally different topic, you touched a little bit on this earlier. When you think about the tons you are keeping in the ground this year relative to your initial thoughts last year, how easy is it from a timing and capital spending perspective to bring that back online, if markets do improve? You mentioned a few weeks or so for what was associated with the drag lines. I guess can you talk to the portfolio overall?

A lot of the stuff that we're doing lease or parking equipment, cutting out weekend work, shortening the normal work schedule, getting rid of contractors. I think again, when we evaluate that, we've got to be comfortable that there's sustained demand there, whether it's on the steam side or the met side, before we bring production back, we're going to be very, very careful in evaluating that. But it's not something that we can do overnight once we've made those decisions.

And should we assume that the capital spending reductions in your guidance this year would have to then come back in order to bring that production back, or are there any kind of secular decreases reflected in your guidance?

I think there's a combination, to be honest with you.

I mean what we did was, you know, there were some expansion projects. When we did the original budgeting process back really in the summer of 2008, we had some expansion projects. We had some additional mines that we were starting to work on and that were included in the capital spending. Those were the first cuts, and they may come back in some future year, but it may take a long time really to get implemented about what we are doing and continuing would be the permitting process and some of the other longer lead-time items. If you think about it to bring a truck back on, assuming that it's been maintained while it's parked, basically you have to hire the driver. So it is a combination of that short-term to, really, multi-year term.

And, again, we tried to sit here and take a very hard look at supply/demand and what we see in '09 and made the assumption that this is just going to be an ugly, ugly year and we're going to take a sober view of it and I hope that we start seeing signs of a turn in June, but I don't think that's very likely.

You know, Bryan, we took a look at our capital. I mean basically we put everything on the table except safety expenses, environmental expenses and training, and we looked at really every item and, you know, beyond some of the things Steve mentioned, we had some replacement equipment that we delayed and put off, but I think the one thing that the operating team has done a great job over the last couple of years is developing a very good and sound maintenance program, where they are doing much more planning on their maintenance, preventive maintenance, so they can manage through times like this and their manage costs, or their maintenance costs. And I think that will come through during the second half of this year. We have a planning engineer in virtually every operation doing nothing but planned maintenance and I think it will pay dividends.

Thank you.

Thank you.

Our next question comes from Jeremy Sussman, Natixis.

Hi, good morning.

Hi, Jeremy, good morning.

I was wondering, obviously you have some higher diesel hedges this year that will roll off next year. You brough tonnage down so to include that effects your per ton cost. I'm kind of wondering can you get to a point where we see some meaningful deflation in 2010, or how should we approach that?

Certainly possible, Jeremy. Obviously I think there are two things driving. If you take, say, a PRB mine, which is perhaps clearer and simpler. The diesel costs are clearly impacting the overall cost per ton, as are the volumes. And diesel by itself would not offset the volume reductions, but if we start climbing out and adding some of our production back sometime in '10 or, certainly, say, by '11, I think you'll see some meaningful reductions in perhaps our cost structure.

But, you know, one of my long-term concerns, and it's really why we're playing perhaps such a sober look here is with stepping back and looking at the overall economy, and I do think we have maybe a deflationary time for a short period of time here, but with pumping what I consider to be over $3 trillion into the economy and the odds of the fed being able to get it exactly right of when they should start increasing interest rates, I think we have to go through a round of inflation sometime in the future.

And whether it's in '11 or '12, those would be my two primary years and that reflects on how we position the company, why we're keeping, another reason why we're keeping our lowest cost production, in place, or low cost production in place as opposed to just pumping it out here.

And historically, commodities and energy tend to do very well in those kind of environments if you're not locked into positions that don't allow you to pass through cost increases. So, that's one of our balancing items as we think out three and four years into the future. So could we have a deflationary environment for a year or two? I think so. And then could it reverse on us rather suddenly? I think so as well.

That's helpful. And speaking of sort of low cost operations, you, you gave us an update in terms of how much met coal you expect to ship this year, but, since Mount. Laurel is probably one of the lowest cost met mines out there, at least on a high vol side, it does give you a lot of flexibility. Do you have a sense of how much -- how many tons you expect to ship there, whether it be in the met or into the thermal markets?

I mean clearly we slowed the rate of advance on the long wall, Jeremy, and we'll continue to evaluate the market. But, if you look at that 1.5 million to 2 million ton range from that what we see on the steam side it's somewhere in that 4 million ton rage plus or minus.

Okay, great. Thanks very much for the color.

Thank you.

Thank you.

We'll go next to Meredith Bandy of BMO Capital Markets.

Hi, everyone. Just another quick question on your CapEx. The 195 and 215 includes that Q1 spending on the West Elk project, right?

That's correct. Yes, it does.

That brings you to a maintenance I would say maybe around $1.50 a ton, is that about right?

I mean we don't think of it that way particularly, Meredith.

Okay.

But that's probably about right, and, because one of the reasons we don't think of it that way, there is such a different requirement on a per-ton maintenance expenditure between long wall deep mines, continuous miner deep mines and large surface mines that when you average them together in a rule of thumb, they can be very -- it can guide you along -- the wrong way just giving a way to have to be replacing a meaningful amount of trucks that year, Black Thunder versus, a new pan line and Shearer at one of those deep mines.

Right, and so -- would you go back to the total number, the 155 to the 175, would you consider that to be sort of sustainable ongoing number, or is that sort of the low and ongoing number? And what have you caught or deferred to get down to that number?

Well, you know, we've looked at replacement capital at all operations and that would probably be more heavily weighted towards the PRB, given, the reductions on a prorata basis. But, I think once we would get into normal market conditions, we've indicated a 200 to 250 maintenance capital range and I think that's something we could stay within under normal circumstances.

I mean one way to think about it, Meredith, if you park the drag line, you're not breaking stuff. You still maintain it in terms of keeping electricity on it and keeping it powered and warmed. But you're not replacing drag rolls in all of those kinds of things.

Okay.

So you get a reduction through the parking of the equipment, but it does come back once the equipment starts up again.

Right. And then just to sort of back up to what Brian was asking about on the thermal side, I think you said that for the most part, the geothermal contracts are coming too firm, but are you starting to see some working with customers on the thermal side? Or has that changed at all in the last couple months?

Well, I mean we're always having conversations with our customers and as I indicated earlier, I think as you continue to see inventories build, generation decline, and that we will evaluate it on a case by case basis and if we need to work with a customer in terms of pushing some volumes out, we may do that.

But we fully intend on getting our value out of our contracts and, that will be our plan. And as Steve indicated, we've always honored our agreements in good markets when we had under market shipments and we made on them and we would expect our customers to do the same. Is that saying we won't work with them? No, it isn't. We will take it case by case and look at it that way. If somebody needs some help and it makes sense and we can develop a win-win, we are absolutely willing to look at that.

Okay.

I think what we're trying to say here is that we really haven't seen much in the first quarter, but we won't be surprised and our thinking is and forecasting includes that there is going to be some, but we don't have a defined number or, we somewhat we just assumed there will be some over the next six to nine months.

Our next question comes from Brian Yu of Citigroup.

Okay great thank you. My question somewhat relates to the contracts too. I'd imagine by now you've had some opportunity to study with JP Spangenberg, can you provide us with sensitivities or ways to think about the potential impact on the EBITDA which you've given, should we see contracts get deferred on those operations too?

We really are restricted on what we can say about Jacobs. The HSR has been filed, again we do know that they were substantially sold out for '09, and 75% sold out for '10 and then you could take that number now for '11, but a meaningful number for '11. And I think all U.S. suppliers, the large public companies or larger producing operations fully expect that they will work with customers if they have to, but they will preserve their present value and long-term value for the shareholders. And history over the last 30 years that I've been in the business would indicate that. And certainly over the last 3 cycles in the late 1990's, we would say that again, our practical experience has always been that we end up preserving value but sometimes we do work with the customer.

All right and a followup question on a different topic, just housekeeping. How many metallurgical coal tons did you ship in the first quarter?

We shipped between 350,000 and 400,000 tons first quarter and that compares to about 850,000 or so fourth quarter 2008, so it was about 50% of it.

Okay, thank you.

Thank you.

Thank you.

Mark Liinamaa, Morgan Stanley.

Hi, guys.

Hi, Mark.

Two questions, the first is if you could comment on where you see Highland Quarry's utility stockpiles cracking through this year and if you see enough action starting to unfold in addition to what you've done to keep those in check. And second, Steve, you comment, and I would agree, that carbon sequestration is the ultimate den game for the coal industry environmental stuff got a lot of talk in the political campaign, but maybe a little bit less so as far as coal goes since. Are you seeing a timeline emerge from as far as getting carbon sequestration done ahead of some of these carbon concentrate policies that sound pretty onerous. So if you could comment on both of those I'd appreciate it.

I'll take the second one first, it's clearly a subject within the stimulus package and other money available in the past and here in the last several months, there was several billion dollars aimed at carbon capture and sequestration technologies and other clean coal technologies and other energy technologies. We think that's a start.

There's private money going into some of the university research and when you get into what the utilities are doing, you have test programs up and running, within AP and there's some stuff in Europe. There's the operation up in Canada, so we're starting the process, but it will be a long process.

I don't think anybody's under the illusion that it will occur quickly. In fact, if you slug through, which I will admit I haven't, if you slug through the 600-plus pages of the Waxman bill in the house that's currently being debated, one of the erroneous assumptions is that carbon capture and sequestration is available in 2015. And I think that's pretty optimistic.

Hopefully we can advance the ball that quickly, but I don't think that's going to happen. If you add another 5 or 10 years for that I think you can have it commercial.

It all comes down to the details and the speed of implementation of hitting certain targets. And I can't stress that you must overlay, the economy and the cost to the economy because, one of the interesting arguments that are out there is there's going to be more jobs. And just being a somewhat simple engineer, raising energy costs across corporate America, industrial America, residential America, commercial America, to me doesn't make us more competitive, nor does it create jobs on the net basis.

Maybe I'm looking at it wrong, but I don't think so. So I think as we deal with those issues, the process likely slows down and congress will hopefully really get some fundamental money going into carbon capture and sequestration technology because that is the key and it's the enabling technology.

And I think the president gets it. I know Secretary True through my conversations with him gets that point, as does people like Tony Blair and others. So, there's a lot to come on that. There's going to be a lot of noise and sound and furry to quote Faulkner, but we think that nothing is likely to happen this year in terms of ultimately getting legislation because there's just too many issues. Next year, the debate will pick up again and we'll see where it goes.

And so, you know, we're watching it. We're participating in it. I guess I'll add the last point is our budgeting is assuming that we are more actively engaged financially in communicating our issues and our concerns for our shareholders and our industry in Washington, so we will be part of the debate.

Now, the first part of the question was what? I'm sorry.

It was about stock piles. My big concern is that, that the cuts maybe are not quite enough as an industry, not pointing any fingers at any specific players, but just aren't enough to avoid a 200 million ton or so number by the end of the year.

We don't forecast them going that high certainly, but, we are making, again, kind of a sober outlook saying that the marketplace, the reserve, the regulatory environment, are going to create additional cuts out there. The credit environment, perhaps for some players, and that those cuts currently announced are around 50 million tons. They will grow. Where they grow to, I think is difficult.

Our assumption is that, they do grow from the 50, but that there will still be a stockpile overhang as we -- after the 2010 -- excuse me, 2009 into '10 and that that's part of our view has to be worked off as well.

I think in the second half, you'll see stabilization of those stock piles on the pre-assumption that things don't get appreciably worse in the economic environment. And obviously quarter to quarter, weather is perhaps a bigger indicator or problem or opportunity than fundamental economics and, normal summer is a lot better than a mild summer and a hot summer would have bigger impacts on stockpile levels than either of the previous two.

So nothing we can control there other than our view is that's an issue that's contained within our view of the guidance and that we have to work through that on top of just the 100 million tons reduction in overall demand that we're seeing for 2009.

Thanks, guys. Good luck.

All right, thank you.

And we'll go next to Brett Levy, Jefferies & Company.

Hi, guys. Most of my questions have been asked. Just wanted to check in. Is there anything on the bank covenant side here that we should sort of look at in the next couple of quarters and go, you know, I wonder if they are going to come close to needing a waiver there?

Hi, Brett. This is John Drexler. I think as we look out, we're comfortable with what we see during the first quarter. We did amend our credit facility. One of the things we did do, was we have a higher leverage ratio there as well. So we continue to be comfortable as we look forward.

Okay. Even with revised things. As you look out several quarters, you go, you know our advice is appropriate and no more revisions necessary, right?

We continue to be comfortable.

Thanks much.

And we'll go next to Brian Gamble of Simmons & Company.

Yes, good morning, guys.

Good morning, Brian.

John, I just wanted to clarify something you said earlier. You mentioned possibly building a prep plant to wash coal, essentially to kind of get you through this sandstone issue. Just wondering kind of what the thinking is there, if you think the sandstone is getting better in the second half and that's not going to be as big a deal, why you would even fathom putting the capital to use to build a plant to solve an issue that's getting better?

You know, Brian, we do think it's going to get better and we do think the seam's going to continue to get thicker. But as we look out, we've got to move late this year, early into 2010 and we think we may encounter this sandstone a couple more times.

And really the way we approach the Utah preparation plant is we actually built it with the intent that it was an insurance policy, that we would have it there, we would use it if needed, we would buy coal into it. We might even consider running third party coal through it, but we just thought it made good business sense to have that there and at times when we needed it, to wash our own coal, fine, and it gave us another opportunity to buy lower quality coals in and wash those and sell those coals in the open markets. We found the Utah plant's given us tremendous flexibility and we're going to evaluate that same business model in Colorado.

Okay. So it is two-fold, though. The sandstone has the potential to creep itself back into the seam as you move to other panels as well?

It does, and we just want to make sure we're prepared to deal with it.

Okay, and then secondly, when you think about, slowing production prorata across the basins and you talk about slowing down Mountain Laurel, what's the thinking there as opposed to trying to maybe idle one of the smaller operations? Seems like if you're performing well at Mountain Laurel that you would want to kind of keep that going from a cost benefit type of perspective. What's, what's the thinking there as opposed to doing something else in the region?

You know, Brian, the way we've looked at it so far, we've looked at our highest production cost increments and kind of taken them off that way. We've looked at our work schedules and we're trying to maintain things as best as we can. But, you know, if things continue to deteriorate, we may evaluate those type decisions. But right now we've been able to manage it, with really altering our work schedules, cutting out contractors, shortening the work week, and doing those type things. But I will tell you, we're evaluating all options in terms of cutting production.

Okay, and then finally, on Western Bit, back to that one second, when you look at the sandstone continuing and the long wall moves during the quarter, I know you mentioned costs getting considerably better in the back half. But is there a potential for quarter-on-quarter Western Bit costs actually get worse?

I think we can manage our costs quarter-over-quarter, but, certainly with three long wall moves in Western Bit, I think we're going to be challenged. But I think they should be fairly flat quarter-over-quarter. And then you'll start to see that improvement as we move into third quarter and fourth quarter.

That's great. Appreciate the color.

Thank you.

And our next question comes from Justine Fisher, Goldman Sachs.

Good morning.

Good morning, Justine.

So, I feel for 2009, you guys have given guidance and you're mostly priced and I guess it's up to us to make the determination of what we think will be renegotiated or not. But my question is regarding 2010, because you guys are only 70% -- not only, but you are 75% price.

I'm wondering how you guys are thinking about how you're remaining on price tonnage and other coal companies on price tonnage may ultimately get signed because utilities aren't in the market right now for spot much less contract. I think that 2010 is kind of a period that people haven't started evaluating yet. Do you guys think that it will be predominantly spot sales in 2010? Are you being approached by utilities for 2010?

Justine, actually I think maybe some of the view there isn't quite right. It's interesting that many utilities are in the market for 2010, '11 and '12. They are not in the market at all for 2009.

I think that says two things. And a lot of unsold tonnage is for Arch and really I think any producer looking forward, certainly in this environment, is a result of contract roll off as opposed to new additions out there someplace in Central App or wherever.

So, to me the question on '10 is what stockpile level do we exit '09 with and is there an overhang and that could shape some of the thinking. But also the number of customers that are out there looking for tons today for that '10, '11, '12 contract period, is maybe sending a signal that at least some of our customers, or some customers think we're bouncing along the bottom. And that they are going to take advantage of that.

I would refer back to one of the earlier questions where one of my concerns there, if you looked at those forward markets, is there are some reasonable price increases, given those markets on the indices versus spot market today, mainly because there is very little spot market, but I'm also concerned when we see an inflationary impact.

I guess the last point that's pretty critical, though, is you do have the new generation coming online and it is front end load. That 15 gigawatts, a good chunk of it comes on in the second half of '09 and throughout '10. So you do have those, those customers entering the market as well. So, I think we all have to think about how '10, '11 and '12 shape up, but I certainly wouldn't want to leave the impression that there's not opportunity for contract settlements right now in those years because there is.

Okay. That's interesting. So basically utility -- you think the contract signing will follow the same rhythm sort of for lack of a better term this year as it has in previous years and it's really the fact that, if you guys -- if you were approached and other coal companies, if you do leave some tons in the ground this year in order to maintain a more appropriate stockpile level by the end of '09, that that's kind of taking one for the team in '09 such that you can continue more normally in 2010 and 2011.

Well, I don't know if I would say it's the team. It's the proper thing for Arch.

I'll go back to the previous question on Mountain Laurel and I look at Mountain Laurel as it's a great coal, great coal mine with a great cost structure and that coal can be sold into the metallurgical market, which almost in every market gets some premium. But the issue in the metallurgical market today is purely volume.

We would like the prices of '08, but even if you take the index prices that the Australians settled on, it becomes a good business for us, except for there's only a certain amount of tons that the customers are willing to take. And so slowing that down and preserving that for a future year when you do the cost benefit analysis of that is often the best decision.

So, we're sitting here saying what do we think's best for Arch, what do we think's best for our overall reserve and contract position, taking a three to five-year view as opposed to 2009. So we think that market approach really meets market requirements, has worked very well. We have fully implemented it over the last business cycle in the coal markets and we've had three of our best years in the history of the company with '08 being the best year. But we think it works, but it's not always easy on the downside of the market. It has a degree of pain with it.

And we'll go next to Mark Caruso of Millennium.

Good afternoon, guys. Just two quick questions. One, Justine touched on, the other one Brian touched on. Looking out, you mentioned earlier that you feel okay with the covenants looking out. But as you look out to 2010, given the PRB -- at least the financial prices are looking like '11. Do you feel there's adequate cushion if you end up doing this deal with all debt to the waiver you just got? And the second part is given the, further along that and given the comments made by S&P, do you have to be more creative on your debt options as something that has equity credit as you guys look at financing this deal?

Mark, John Drexler again. As we anticipated the Jacobs Ranch transaction and went out and got the credit amended, we obviously were looking long-term and under a wide variety of scenarios to make sure we felt comfortable with what we were amending. We were going to have an appropriate level of cushion as we looked at the various ratios as we went forward and given what we are looking at today into the future, I think we continue to be comfortable from that standpoint.

In regards to financing the transaction, a lot of different options that are out there on the table, we will evaluate all of those and be opportunistic in putting together what we believe is the best financing available for Arch Coal and we move forward and so we'll evaluate everything.

Great. And then as far as the last point goes in terms of being opportunistic, do you need to have approval before you can go ahead and sort of, look at your options and take advantage of windows while they are there?

Approval in what?

From the FTC?

No. I mean, we can -- obviously the issue then becomes, and we've evaluated it both ways, if the window opened up today, you could enter the marketplace and then if you're sitting there with that money borrowed at a higher rate than you could probably invest it short-term. What does that do, and again, we're comfortable that we can deal with that within all of our loan covenants, as well as if we were luckily got to close the deal tomorrow on top of that.

Great, thank you.

Our next question comes from [Jeff Kraemer], UBS.

Hey, guys. Just following up on Mark's question, is there a certain liquidity amount that you guys are comfortable operating with? I guess more for John.

Yeah, no, I think as we look at projected cash flows with the variability that you potentially see from quarter-to-quarter in mining, and as we look at our liquidity levels throughout the rest of the year and beyond, I think we're comfortable with that. I don't think we have a specific target out there, I'm not going to share any specific target, but within a range management and the Board we're comfortable as we look forward.

Okay. Then just there was the $60 million working capital usage in first quarter. Do you expect that reversing later on in the year, seeing cash inflows from that?

You know, if we look at the timing and from quarter-to-quarter, we've got certain working capital issues that are significant such as our semi-annual payment on our AWR, interest on our AWR bonds, which is in the first quarter and the third quarter of each year. That's $30-plus million. So you do have some of that variability that flows through from quarter-to-quarter. So, yes, we expect that ultimately turns from quarter-to-quarter.

Okay, and just giving you $761 million purchase price, I'm guessing you probably wouldn't let liquidity go too much further down, so we expect the bond issue in either convert or straight bond and kind of in that neighborhood. Is that about right?

You know, we do have cash flows from the company and obviously we have cut CapEx as well. And I think it's important to recognize that a meaningful amount of EBITDA flows from the Jacob's Ranch mine itself. So it is a combination of all of them.

All right. We'll go next to [Stephen Lessons] of Luminous.

Good morning. This is actually Michael Goldenberg.

Hi, Michael.

Hi. Had two or three questions on Western Bituminous. Now, you said the revenue this quarter was lower because of issues with the quality of coal. If you-- if the quality of coal wasn't as expected, what would have been average revenue per ton?

I mean it would have been, probably a couple dollars higher.

Like 30, 31 range?

In that range.

And all the coal sold, or almost all, was under contract. That was probably signed in the '07-'08 timeframe, would that be fair?

That would be fair.

Would you say that whatever is contracted, if anything, in the level from Western Bit is also those levels.

Well, I mean if you look at the Western Bit market, we've seen it stay a little bit higher than the other regions. It really hasn't declined to the extent you've seen Central App, so but we have seen a little decline in demand. So, as that coal moves to the Midwest and their inventories are higher, we really haven't seen the demand there that we've seen. But we haven't done a lot of transactions, but ones we would do, I would expect higher prices than those average prices for sure.

No, I understand that standing today they should be higher, but the stuff that's already contracted that we stand today, if we take basically from today going back to whenever you signed the first contracts for '10 and '11, would that be in the 30, low 30s range?

Yes. In that range.

Understood. Okay. Thank you very much.

Our next question comes from [Brian Finklestein] of Catapult.

Yeah, hi. It's actually Sunil Jagwani, and I have a question that's very similar to the one that the previous gentleman asked. I'm just trying to reconcile the statements that were made pretty much every quarter through 2008 about contracts signed for Western Bituminous and Central App at significant premiums to those realized in those quarters and just doing the math we could get prices up into the 40s for Western Bit and, you know, 80s, 90s, and I guess for low quality met, above 100 for Central App. So are those prices ever going to flow through, or I guess are they just to be realized later in 2009, or have those all been renegotiated down?

Well, you know, I think if you look at -- we've said publicly that, it was a little bit less than pro rated those volumes out of Western Bit and that's certainly the case. It was the case in '08. It's the case in '09. It's a little bit more so in 2010. As we get into late '10, 2011, you see more roll off and we should average those prices up pretty significantly. But we did have a pretty good contract base in Western Bit and didn't really get to take advantage of those prices like we would like to.

I'm sorry. So you're saying that -- when you said pro rate, you mean you pushed those out, or the volumes --

it's pro rated with our volumes at the company. When we give you uncommitted volumes, those are pro rated, PRB, Western Bit, Central App.

Right, but my question was about tonnage that was contracted to be delivered in '09. I believe that's what the comments were made specific -- regarding, the 60%, 70% premiums for realized prices I believe were for '09. And my question is, are those actually ever going to be realized, or have those been -- are those part of the pro rated declines in volumes that you're referring to?

They are, and, as I said earlier, you will see a step up in pricing as we move out in the balance of the year as well.

Into the 40s for Western Bit, for example?

No, absolutely not.

Okay, all right. Well, thank you.

Thank you.

Our final question comes from Sanil Daptardar of Sentinel Investments.

Thanks. On the metallurgical side, have you seen any kind of signs that the system was linked to 2010 and sign some kind of contracts or just thinking that 2010 is too far off?

You know, right now everything's pretty short-term-based, given their capacity factors. As Steve alluded to earlier, globally they are running about 50%. If you look at the US, capacity factors are probably closer to low 40s. So, they are looking short-term. Our discussions are really, really focused on April 1 of this year and March 31 of next year, really nothing beyond that right now.

It's really the traditional buying pattern. But really restricted volumes.

Okay. You alluded in your commentary that you are seeing some inquiries from more Asian customers. Which of those countries might be in addition to China?

Well, we continue to talk to all the customers in China and India and we're very pleased with our first boat that just shipped recently and we expect a lot more opportunity there. Given the current economic situation, I think that's probably been pushed out a little bit, but it's certainly a market we continue to work hard on developing. Given what we see going on in Indonesia and some other areas, we think the PRB coal can be very competitive in both of those countries going forward.

And we had some inquiries from Korea as well.

I see, and in the U.S. market, of course there are considerable stock piles with the liquidity customers. You signed some contracts which are in the press release, a few contracts probably. I presume it might have been the domestic market. But again, the nature of the inquiries is again short-term in nature, short-term, or is it like people are -- the utilities are looking at 2010, 2011, 2012 kind of stuff?

Yeah, I mean I think we indicated we signed 12 to 24-month type agreements for small volumes and some of those would be industrial customers.

Okay. So they were industrial customers.

Yes.

Okay, I see. Great. Thanks.

Thank you.

Thank you.

And this concludes the question and answer session. I would now like to turn the conference back over to Steve Leer for any additional or closing remarks.

Well, thank you, today, for your time. We ran a little over because there were certainly several questions. And we would agree with that and hopefully we gave very clear and sober answers.

The economy and more specifically the coal markets are in unprecedented times. The electric generation decline looks like it will be greater than ever before. We're anticipating production cuts and responses to that being greater than ever before.

What we've tried to provide today was a very sober look at the business for 2009 and how we've tried to gear the company to profitably manage through what really is the worst view and emerge from the other side in a very strong position. We think that's what we're doing here. It certainly has a pain to the industry, but that's fine. We will come out the other side and I think it's going to be an interesting time when the markets turn.

But the process of the market correction is never easy. So we look forward to continuing to report to each and every one of you on our next call and the call after that. And obviously we wish every success for the economy to start seeing some turns at some point in 2009. But we're assuming a pretty slow growth, if no real recovery until sometime in '10. Thank you.

And Ladies and Gentlemen, this does conclude today's conference. Thank you for your participation.