Arch Resources Inc (ARCH) 2009 Q4 法說會逐字稿

Good day, everyone. Welcome to the Arch Coal Incorporated fourth quarter 2009 earnings release conference call. As a reminder, 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. Thanks for joining us. 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 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, we have Steve Leer, Arch's Chairman and Chief Executive Officer, and John Eaves, Arch's President and Chief Operating Officer, and John Drexler, our Senior VP and CFO. Steve, John, and John will begin the call with some brief formal remarks, and thereafter, we will be happy to take your questions. Steve?

Thank you, Deck. Good morning, and thank you for joining us this morning. In the fourth quarter of 2009, Arch generated $144 million of EBITDA and reported earnings per share of $0.11, excluding Jacobs Ranch acquisition charges and sales contract amortization. Results to some extent were impacted by inclement weather and electric outages that occurred in December, and for the full year of 2009, Arch generated $459 million of EBITDA and recorded adjusted EPS of $0.42.

Well, last year was unprecedented in the terms of negative economic developments, Arch was able to demonstrate profitability in 2009, even at the bottom of a market cycle. At the same time, we successfully executed on a long-term growth strategy that expanded our reserve base by one billion tons, added low cost productive capacity and further secured our competitive, strategic position within the US coal industry. These additions should serve us well for the next market upcycle.

2009 was very challenging for the coal markets. US power demand fell by a record 4% last year, and coal consumption demand declined precipitously. Anemic industrial activity, unseasonably cool summer weather, and low natural gas prices all played a role in dampening coal demand causing customer coal stockpiles to grow to historically high levels. Despite the continuing weakness, we were encouraged to see the first signs of stabilization in the fourth quarter and the first weeks of 2010 have brought further evidence that the market is beginning to move off the bottom. On the demand side, met coal markets continued to strengthen in the fourth quarter thanks to increased global steel production. Worldwide steel output in the fourth quarter grew more than 20%, versus a year ago quarter and grew modestly versus the third quarter of 2009. Domestic steel utilization also rebounded from the sharp dropoff of a year ago now standing at above 65% utilization rate through late January. Domestic steel capacity utilization appears to be continuing its upward trend. Looking ahead, we continue to believe that the strength in the met markets will drive growth in the industry during 2010, both domestically and internationally, and will likely have a spillover effect on to the steam coal markets as we progress throughout the year.

Steam coal markets appear poised for better days as well. Weekly generation trends turned positive in December, and likely driven by the cold weather across much of the US, and the slowly improving economy. For the first three weeks of January, electric generation is up 3.6%, a good start to the year. While US coal stockpiles hit a peak in November of 2009, we estimate that inventory draw down was 12 million tons in December, a meaningful amount for just one month, and we believe another 12 million ton draw down is likely to occur by the end of January given recent favorable power demand trends. It's also interesting to note that our projections appear conservative compared with other publicly reported stockpile reduction. Considering that utility stockpile overhangs were estimated at 40 to 50 million tons at the apex, cutting that overhang in half in the span of just two months is significant. Additionally, we believe that most generators entered the year with very conservative burn forecasts and could find themselves in an underbought position as 2010 progresses into the second half. We believe this could lead to a relatively active spot market during the second half of 2010.

Furthermore, the regional breakout of stockpiles is noteworthy. National stockpiles stood at an estimated 78 days at the end of December, admittedly well above normal. However, PRB stockpiles were at 69 days at December 31st, considerably below the national average. In fact, PRB stockpiles are dropping faster than other regions and represent the lowest in the country according to third party estimates. This trend would suggest that PRB markets could move much sooner than they have historically during market upcycles if the current pace of stockpile withdrawals continue.

Turning to supply, recently reported MSHA fourth quarter production figures for 2009 suggest that the industry ended 2009 with supply cuts totaling 96 million tons. This annual decline is 7 million tons below what EIA had forecast for the year. Nearly all regions produced less in 2009, with Central App leading the decline with a nearly 40 million ton reduction. Central App produced just 197 million tons last year. But even more striking is the fact that the fourth quarter run rate was roughly 180 million tons per year. Further supply has continued to decline during the first quarter -- or excuse me, first few weeks of 2010. Weekly production trends as estimated by EIA suggest that national coal inventory production is trending on an average below 20 million tons per week. Additional supply rationalization is underway and should help to further reduce inventory stockpiles throughout the year. Moreover, the rapid decline in supply in eastern basins should lead to a significant new demand for western coal over the course of the next 12 to 24 months, just as we have seen in the past market cycles.

Lastly, I wanted to briefly highlight the trends on the international front that can positively benefit domestic coal markets for 2010 and beyond. China swung to a significant coal importer in 2009, greatly tightening seaborne markets and has now begun trolling traditional Atlantic Basin coal suppliers for steam tons. India's coal imports also increased, expanding by more than 25% in a single year. In fact by 2012, China, India and Brazil's net coal imports could grow as much as 250 million short tons of coal by our estimates, which would represent approximately 25% of the total seaborne supply. Coal's fundamental growth story remains intact, and the US could increasingly be called upon to fill shortfalls in the seaborne coal supply markets in the coming years. The US ended 2009 with 59 million tons of coal exports, a decline versus 2008, but on par with 2007 levels. We anticipate significant growth in US exports in 2010, which as you will recall, was one of the key drivers in the bull market of 2008. On that note, I will turn the call over to our President and COO, John Eaves, for a discussion of Arch Coal's sales and operating performance and outlook for 2010. John?

Thanks, Steve. Let me first start by congratulating our Operations for achieving another record year in safety and environmental performance. We surpassed our previous Company records set in 2008, and again, ranked first among our major coal industry peers on both measures. We remain committed to upholding our three key pillars, safety, environmental stewardship, and financial performance, which we believe are critical in driving our future success. I would also like to summarize the successful integration of the Jacobs Ranch into Black Thunder operation this past quarter. We are well on our way to realizing the $45 million to $55 million in expected annual synergies from the transaction. Post-closing on October 1st, we executed an aggressive integration plan to combine two independent operations into one single mining complex. Within the first 48 hours, we had successfully eliminated redundancies in the operations, consolidated duplicate facilities, and right-sized the workforce. We also migrated the former Jacobs Ranch [truckhaul] fleet to our MindStar GPS system in just a few days. Over the course of the fourth quarter, we redeployed one drag line to the former Jacobs Ranch property, idling higher cost truck shovel spreads in the process. We also achieved better coal recovery rates due to the integration of the mines. And we have begun to see savings with certain vendors as we have consolidated our contracts and been able to capitalize on scale. As we progress in 2010, we believe that we can further build on these successes in other key areas such as capital expenditures, revenue optimization, and reclamation cost reductions.

Turning now to our sales and marking efforts, we're definitely seeing escalated demand for met coal, both domestically and abroad, as Steve mentioned. We shipped two million tons into the met and PCI markets in 2009 and plan to more than double this level for 2010. Our current forecast suggests that we can ship between four and five million tons into the met and PCI markets this year. As you know, our capabilities in producing met quality coal are greater than the five million tons. In a robust met market, we are capable of selling between seven and eight million tons of met and PCI coal.

We're also starting to see some positive signs in the domestic steam markets that suggest an inflection point is near. We set our 2010 production targets at 145 million tons to 155 million tons, which includes a full year contribution from Jacobs Ranch. This past quarter, we committed nearly five million tons of PRB coal for 2010 delivery at double digit pricing on average and another five million tons for 2011 delivery at attractive pricing levels relative to the forward curves. We have also committed three million tons of coal in Central App into the met PCI industrial accounts for 2010 delivery at very attractive price levels when compared to that region's fourth quarter 2009 average realized price. Arch now has between five million and eight million tons uncommitted in 2010, with 13 million tons committed but not yet priced. We also have between 70 million tons and 80 million tons uncommitted in 2011 and between 100 million tons and 110 million tons uncommitted in 2012. Additionally, we have roughly 20 million tons committed but not yet priced in these outer years. We'll continue to focus on a market-driven strategy, patiently and selectively committing our coal in the short term without giving the leverage our future uncommitted position affords. We've also continued to assess our future production targets to ensure a good fit with our expectations and market demand.

On the cost front, our mines achieved solid operating performances in the fourth quarter where we improved cash costs per ton in each of our operating regions when compared with the third quarter. We experienced the most dramatic cost reduction in the PRB as synergies from the integration of Jacobs Ranch began to take hold. We reduced our cash cost per ton by more than 6% in the fourth quarter versus the third and expect to build upon this performance in 2010.

In Central App, we maintained our cash costs at $49 per ton in the fourth quarter, representing one of the lowest cost structures of any operator in Central App. Maintaining this strong cost performance will be our focus in 2010. In Western Bit, our fourth quarter all-in costs improved versus the third quarter, primarily reflecting better mining conditions at West Elk, as the longwall advanced into more favorable geology. Cost in the second half of 2009 in this region also benefited from the absence of any longwall moves. In 2010, we will look to improve upon the full 2009 average cost structure. With that, I will now turn the call over to John Drexler, Arch's CFO to provide an update on our consolidated financial results and guidance for 2010. John?

Thank you, John, and good morning, everyone. I would like to highlight some key financial metrics, address our quarter-end liquidity position, and discuss the impacts of our accounting for the acquisition of Jacobs Ranch. From a cash flow perspective, excluding the impact of the Jacobs Ranch acquisition payment, the fourth quarter was Arch's strongest of 2009 with the highest operating cash flow and the lowest capital expenditures. This resulted in a reduction of borrowings under short-term debt facilities of more than $90 million, despite making the first bonus payment for the lease of the Otter Creek tracts. For the full year, capital expenditures were $323 million, which included reserve acquisitions of more than $145 million. This was Arch's lowest annual capital spending since 2004. More importantly, we were able to fund all of the spending from operating cash flows. We expect to maintain this disciplined approach to capital in 2010. In fact, we -- having completed the final LBA payment on the Little Thunder coal lease in 2009, we are anticipating another significant step-down in capital spending this year.

Turning to our balance sheet and liquidity position, debt totaled $1.8 billion at December 31st, and the debt-to-capital ratio was 46%, down from more than 47% at the end of Q3. Liquidity remains strong at $691 million.

Next, I would like to touch on the Jacobs Ranch acquisition. On October 1st, we closed on the transaction with a final purchase price after all working capital adjustments of $769 million. During the quarter, we finalized the purchase allocation for the acquisition. As you might expect, the majority of the value was allocated to the plant equipment and coal reserves that were acquired. Additionally, the acquisition accounting rules required us to report acquired sales contracts at fair value as of the acquisition closing date. Contract values were determined based on forward pricing at that point in time, which as you recall was near the lowest of the 2009. The acquired portfolio included both above- and below-market contracts with a net asset of approximately $58 million assigned to the sales contracts. We recognized approximately $20 million of sales contract amortization during the fourth quarter, with the remaining value to be amortized as the shipments are made under the contracts. We expect a majority of the remaining amortization will be recognized by the end of 2010. Finally, the acquisition accounting resulted in goodwill of $62 million. As I'm sure you are all aware, the goodwill is not amortized.

With that, let me now discuss our outlook for 2010. We expect the following; volumes from Company-controlled operations to be in the range of 145 million tons to 155 million tons, EBITDA in the range of $590 million to $710 million, adjusted earnings of $0.50 to $1.00 per share. The adjusted earnings per share estimates exclude an expected $35 million, or $0.14 per share of noncash intangible asset charges related to sales contract amortization as previously discussed. CapEx, including reserve additions of $200 million to $220 million and DD&A, excluding sales contract amortization, in the range of $370 million to $380 million.

Obviously, 2009 was a challenging year. Despite the headwinds, we executed on our market-driven plan and set Company records for safety and environmental compliance. The capital market transactions that we executed earlier in the year to finance the Jacobs Ranch transaction have left our balance sheet strong and our liquidity high. The extension of the credit facility has also left the maturity schedule of all of our debt on a very comfortable track. In short, we are well positioned for what we believe to be an inevitable recovery in coal markets. With that, we are ready to take questions. Operator, I will turn the call back over to you.

Thank you. (Operator Instructions) Our first call comes from David Khani with FBR Capital Markets.

Hello, can you hear me?

Yes, David, how are you?

I'm good. You talked on a couple of things that were interesting. With the MSHA data showing about seven million tons at differential on the EIA. Is all of that in Central App, or could you give us some regional breakout of that?

You know, I don't have it right in front of me. We can get that for you. It is split, you know. Some regions are up a little bit and some are down, but Central App is dominant.

The majority of that, David, would be Central App.

It would be, okay. Because it looked -- the EIA data looked like it could be wrong in Central App the most.

The majority of that would be Central App.

The EIA, I think, has something within their translation. They get the railcars, but as they calculate trucks and barges, that's where usually they have more trouble.

Right. The second thing that was interesting, and we've heard this before -- is the utilities using very conservative burn forecasts. With the colder weather and the stockpiles coming down, what kind of sentiment are you hearing -- are you seeing out of the utilities and from your vantage point?

You know, David, certainly we are having more conversations, I think, you know with the drawdown of 12 million tons in December. It caused some of our bigger customers to start looking at their burn forecast for 2010. Could I say that we have seen a real significant pickup in demand, no. Certainly, our shipments are progressing in 2010. We are not getting any pushback. But I would say, I think, some of the customers are relooking at their burn forecast for the year. If you have a cold February, it really could start to change things a little bit. But clearly if we get another 12 million ton drawdown in January, and then another one in February. I think the customers probably will react a little bit differently than what we are seeing.

Right. All right. And then, if you could talk a little bit about the met side. You mentioned you could do more than what you were giving us here. What do you think is your total met capacity if everything lined up perfectly?

Dave, certainly we are looking at the market here, and we are cautiously optimistic. Certainly on what we are seeing thus far. We've committed a lot of our PCI coal, some of our domestic met, really haven't placed any of our international met. Those are in discussions now. We guided to four million tons to five million tons for 2010. I think in a good market, if things continue to materialize, we could be somewhere in that seven million tons to eight million ton range as a Company moving forward.

That's great. And what -- you mentioned the trying to keep the cost down, maybe potentially going down in 2010? What kind of things are still left to do, do you think, on your front to squeeze costs down?

Well, certainly we continue to look at our operations in this tough period, and I think we started really getting the synergies, say at PRB, fourth quarter. We expect to continue to get those, and I think you will see some improvement in the cost there. But it's really just managing very tightly, Dave. Obviously, in the Western Bit region, we had some challenges the front half of '09. We improved some in the back half of 2009. As we go into 2010, we are going to continue to work on our costs there. We've got a number of longwall moves in Western Bit that we are going to be working through. We also have got the new prep plant coming on at West Elk during the third quarter. So we've got some challenges, but really our focus out west is to continue to work on our costs and try to improve upon those. In Central App, $49 cash costs -- we think that stacks up pretty well versus our competition. We are going to continue to work on those, and we think we can. We think we can hold the costs in that range for 2010. So, right now until we see a material pickup in the steam market, our focus is going to be to really concentrate on these costs and keep them tight. I'm pleased with what I'm seeing thus far.

Okay, well, you -- the operations look like they are running well. Last question, and then I will hand it off. How much met tons do you think the US in total incremental will be shipped out in 2010 versus 2009? And do you think from your vantage point -- do you think you will see any steam being shipped out of the US in 2010?

Well, we are -- we saw exports for 2009 at about 58 million tons, 59 million tons, of which a little over 60% of that in our forecast are coming up met. We clearly see an uptick in the exports in 2010. We are showing at least ten million tons for this year, and I think a big percentage of that will be met. Six million tons, seven million tons very well could be of that ten million met coal exported in 2010.

Okay. And any -- and you think maybe you will see some steam -- incremental steam come out?

I think it's possible. I don't think we are there yet, David. If you look at the APIs, the numbers don't work. It's something we continue to watch. As you know, the Europeans are having a pretty extreme winter as well, and you could see that thing turn pretty quick. But thus far, we don't see any activity. But it's something that we're certainly watching.

And our next question comes from Jim Rollyson with Raymond James.

Good morning, everyone.

Good morning, Jim.

Just going back to one of David's questions on the met, you said you -- of the three million you have priced so far, I guess that's out of the four to five, is most of that PCI?

A big percentage of it, Jim. Well over 50% of that is PCI. The balance would be some industrial business, and then our domestic met.

And I guess in the prepared commentary in the press release that kind of implied price there is somewhere in the low 70s, low to mid-70s?

I don't really want to comment on our pricing. We kind of stepped it up as we moved forward. We started looking at markets, and we clearly think that things are improving. I would just be a little bit hesitant until we get our international stuff concluded to talk about price.

Got you. And then as a follow-up, just on the volume, 145 to 155. Obviously, up in part with Jacobs Ranch, but, it implies you are going to be down somewhat apples and apples. Any thoughts on what markets you are targeting to be down in production overall?

Again, we typically don't jump in and describe which one of our basins, but, pro rata is probably reasonable. As we look forward, we clearly believe there is some upside in overall demand, and we will match our production to meet that demand. So, I really think the leverage to the upside could be significant. But my personal view of the US domestic steam coal demand is we are seeing fairly significant burns develop in December and now as we move through January. And the weather forecast looks pretty favorable for February. Today's GDP number surprised us on the high side. Our projections are a 2% GDP growth for 2010. If it's more than that, that has a favorable aspect and should create electric demand out there. So, we are sitting here with what we hope is a fairly conservative view of that future demand and the ability to respond to higher demand, if necessary. And I think it's important to note, and Dave was kind of circulating around it was even at the low end of our forecasted range, given our capital spending, the fact that we basically made our investments to have our capacity in place. You do the modeling, and I think it would show positive free cash flow for 2010, even at the low end. And obviously, at the upper ends it becomes, again, a leveraging impact. So we are feeling good about the overall market demand. Certainly good about our cost structure and the ability to respond to that demand. But the utilities, until they get their stockpiles burned down, I think are -- will more than likely sit on the sideline, and we're off to a great start to have that occur in stockpile burns. But, our view of it is that things have really moved to a second half turnaround here for 2010.

Makes sense. Thanks.

Thanks.

Next, we'll go to Michael Dudas with Jefferies.

Good morning, gentlemen.

Hello, Michael.

Steve, when you are -- how has been the interaction with the customers of the Jacobs Ranch coal relative to what Arch is providing? And when you are looking out to 2011 of that uncommitted tonnage, do you expect that to be garnered with new customers, further penetration east, or just improved utilization from the major customer base that you have?

Well, a lot of it is just exploration of existing contracts that often go to the same customer. The fact that we are supplying customer X, Y, and Z, currently from Black Thunder and those contracts expire. Obviously, the -- presuming the economy and demand is there, they go back into the marketplace, and we compete for those. But we would anticipate relatively the same customer base. That always changes a little bit, just given the nature and the competitiveness of the business. But as far as reception, the customers have been great with the expanded Black Thunder mine and integrating Jacobs. You now how three loadouts. A few customers want a specific quality that one loadout or the other can provide given where we are mining, and we can certainly meet that demand. And sometimes, we get a premium for that too, because we -- the ability and one of the synergies of Jacobs is Black Thunder basically upgraded the overall recoveries and quality of Jacobs. And that was one of the synergies that we are starting to realize and will continue to realize.

My follow-up question is for John. John, when you are looking at the international market for your PCI high vol coal, how far do you expect it to travel? Certainly, we have been hearing a lot of indications of the Asian Pacific Basin taking even lower quality met coals into their markets. Do you anticipate you being able to compete there? Or are you going to be backfilling into some of the traditional Brazilian or European markets as you price and contract on coal? Not just for this year, but as you move through '11 and '12.

Really, Michael, we are looking at all of those markets. Clearly, we are having some conversations right now about the Asian market. We have some people working pretty hard on some potential shipments into China, Japan. But, I will tell you as we stand here today, the economics currently favor our more traditional customers in Europe and South America. But it's something we continue to evaluate and look for opportunities. I think right now at least our negotiations are primarily with our traditional customers with some ongoing dialogue in China and Japan.

And access to port capacity to ship out of the US? Do you think there will be any concerns given the uptick we have seen in met coal? Actual shipments and expectations in 2010? Is there going to be a fight for getting space to a ship?

You know, I really don't. If you look at 2008, there was about 82 million tons exported. We thought we had plenty of spare capacity on the East Coast. That number dropped down to 59 in '09. We think it will go up ten plus in 2010. So we think there's plenty of capacity. We currently have an ownership piece of DTA, where we have ground space, the ability to manage inventory. So, we really, with the numbers we are seeing right now, don't see any capacity issues on the East Coast for met coal.

Thanks, gentlemen. I appreciate your thoughts.

Thank you.

Next we'll go to Brian Gamble with Simmons & Company.

Good morning.

Good morning, Brian.

With the discussion from the Asian PAC region, obviously taking off the East Coast, we talked about steam coal going that way as met. Have you had any increased level of conversations with the possibility of getting PRB off the West Coast and sending it over there, obviously as steam product? What sort of increased level of interest, if any, has happened over the last few months?

Clearly our people are spending a lot of time. We see that as a good long-term development market. We were able to ship two large boats to China in 2009. We continue to have those discussions, and we think long-term it makes sense. Do I see anything in the short-term? I really don't see anything over the next couple of quarters, but we clearly think long-term that the PRB coal will work in China as well as maybe India. So it's a market we continue to spend time on. I don't think you are going to see any near-term big volumes, but I think longer term, it's something that is going to be important to Arch Coal.

And then secondly, you mentioned some pretty quick timing on integration of Black Thunder and Jacobs Ranch as far as the efficiency projects were concerned -- doing things in two or three days. How much of Q4 was at what you would consider some sort of normal operating condition looking into 2010? Was it two months that you would say ran pretty close to 2010, or was it a shorter time period? Just trying to get a feel for that?

I would make the argument, Brian, that it continues to improve as we implement the synergies. We did, and we've gotten it down to pretty much of an art to move quickly and move hard and fast on making decisions and implementing everything from where people will be, what their future is, to on day one, to the MindStar system. But when you move the drag line over, you get it into the pit. You park a higher cost shovel truck spread. There's an immediate positive impact, but it actually improves as that drag line gets fully entrenched into the mining sequence. So, I would argue that the -- we got two months or at least a month and a half of full benefit of the integration process. But that it -- they will continue to improve as we move through this quarter and probably into the second quarter of next year.

Brian, this is John.

Of this year, I'm sorry.

This is John Drexler. In addition, another area where we have some opportunity for cost reductions that we will see as we move forward is in the area of diesel consumption. We talked about in the past, with Jacobs, we are now going to consume about 60 million gallons on an annual basis. And if you remember throughout 2009, we were on the wrong side of hedging. Currently for 2010, we're 60% hedged of our expected consumption at a price of about $2.20 a gallon. Current markets are at $2.50 a gallon range for 2010. So if you look at what our average consumption was per ton -- or per gallon in 2009, at about $3 a gallon, there is going to be additional cost improvement opportunities there as well.

So just to kind of roll that all into one, with all of those continued improvements, are we thinking about PRB total all-in operating costs being potentially in the single digits?

I would be hesitant to say that, Brian. I think clearly we expect an improvement from what you saw for 2009, but, we need to work through this and see how things go. But I think that would be a stretch at this point. Clearly, there will be an improvement. But I think at this point, we want to be a little by conservative. But I certainly wouldn't model anything in the single digit range at this point.

Okay. I appreciate it.

Thanks.

Next we'll go to John Bridges with JPMorgan.

Good morning, Steve, everybody.

Good morning, John.

I just wondered on the potential for PRB or Illinois to get into Central App. We've always been focused on PRB taking that market share, but Illinois is making some ground here. What do you see going on?

Well, I think both of them are going to benefit from -- if nothing more, the just continuing decline in Central App production. As more tons in Central App get moved to the export market, and then just all of the rigors and difficulties of permitting mines, and just the fact that everybody is operating in more difficult scenes as they move forward in Central App. PRB is likely to fill in in a large majority of the demand. Illinois Basin is going to have its opportunities as well. I would say during this decade, we will see significant eastern movements of both of those basins over time.

Okay. And on the contingency, you say about 50% will have been used up by the end of 2010. Is this going to have a long tail, or is -- what sort of number can we expect to put into the 2011 model?

The contingency, I misunderstood what you are asking there.

The legacy contracts from Jacobs Ranch?

Yes, John, this is John Drexler. The vast majority of the remaining value, as we look out will be realized in the 2010 time frame. So minimal impacts after 2010.

So 75%, 80% rather than 50%?

Yes. I would give -- for 2011, I would basically model no impact.

Okay.

All the remaining contract amortization as a practical sense occurs in 2010. There's a little carryover, but it's not enough to worry about.

No, not meaningful.

Okay. That's helpful. Thanks a lot.

All right.

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

Thanks. The five million tons of PRB coal that you sold for 2011, you make reference that it's attractive relative to the forward curve. Is that's today forward curve, or the curve at the time you did the deals? And if it's the latter, roughly when were those done? Thanks.

Mark, it's pretty much versus the today's forward curve.

Okay. Thanks. And a little bit about the move east. I think, Steve, you said 12 to 24 months you would expect to see that going. Is that anything that you can really point to from a factual basis, or is that just because that's the way you see the future playing out? Thanks. It's the way we see the future. It's some discussions. It's looking at past market upcycles, and again, as we look at the Central App production constraints and issues, we haven't moved off of our expectations that 2010, Central App will be down around the 165 million tons of annual production. Some of you may recall in one of the earlier calls, we talked about that, and we talked about at the time we were projecting fourth quarter to be running at about 180 million tons or so of annualized Central App productions and runs. And in fact, that's what it has occurred. So we are still viewing that to be a reasonable expectation, and as the stockpiles come down, which obviously give all of the customers some buffer to make decisions. We would expect them to start expanding their various basins because we do know that several customers have concerns of where Central App production will ultimately bottom out at. And when would you expect to actually see them doing something related to that? Thanks.

I would expect to start seeing the more firm indications once the stockpiles hit toward normal levels. So, right now our projections are going to be that that's in the second half of 2010.

Okay. Thanks. Good luck.

All right. Thank you.

Our next question comes from Paul Forward with Stifel Nicolaus.

Good morning, Paul.

On this Otter Creek, project, can you talk about the opportunity that you've got there? And maybe in terms of potential size of the mine? Timing of when it could come online? Cost to develop? Can you use some of your existing equipment, or is that all going to be new equipment? And any sort of marketing advantages that coal would offer you?

It's early to get into all of that stuff. Right now, we are just starting the very preliminary mine permitting. All of those sorts of things. Obviously, which we can't really get into as well. There's potentially going to be a sale of additional reserves up there, and so our exact plans will be somewhat dependent on that as well. Because the reserves that we purchase can support its own individual mine. But at the same time, there would be an advantage if could you have a larger mine, but we'll wait and see. We really see this as a longer term project. It's certainly not in the next couple of years. The availability of equipment given mines throughout the United States is depleting in the East and elsewhere. It could be used equipment. It could be new equipment. But it would be large-scale mining. We are talking in the 20 million ton ranges, not in the two or three million ton ranges. But it will be driven by market demand and the capital spending would -- I really don't have a number for that yet.

Okay. Great. Just also on the 70 to 80 million tons uncommitted, unpriced for 2011. Have we seen enough of an improvement in price expectations among customers that we could see you over 2010 put to bed a lot of that business per quarter so that by year-end you are really not left with all that much unpriced? Is there a -- can we expect that you will take out 15 to 20 million tons a quarter over the course of 2010? Or is it really a situation that you are not seeing enough in the way of demand to say that you are really ready to put business to bed?

You know, Paul this is John. Clearly, we are going to continue our market-driven strategy. We think it makes sense long-term for our shareholders, and we're always evaluating the market. As we said, we laid off about five million tons for '11 in the PRB, and we have seen a step-up in price over the last month or so of a couple of dollars. We're encouraged by that. I would say, though, we are not seeing a lot of volume associated with that uptick. But, as we see the market evolve, and if you look at the inventories, you've got about an average of 78 days in the US. But we see PRB in that 68, 69 day level. So we think they very well could come to market before even maybe Central App or some of the other people. It's something we are watching pretty closely. We are encouraged by the uptick in the prices. I think as I said earlier, if you see a pretty cold February, you could see some buying behavior change. But clearly, we're looking at those opportunities, and we'll take advantage of them when they make sense.

We would be layering in sales, but it wouldn't be anything that's too attractive even though pricing has improved a couple of dollars since, say, mid-November. We would expect, and we think there's more upside out there that once we see some additional movements, it's more likely that we'd get more active. So, I guess that's a long-winded way of saying in the first quarter I wouldn't expect much. And if things continue to develop, we'll see.

All right. Thanks.

All right, thank you.

Moving next to Kuni Chen with Banc of America.

Hello. Good day, everybody.

Good day.

Good morning.

I guess just a follow-up question on the Otter Creek. Is the strategy there more tied to serving the domestic market? Or more Pacific Rim export opportunities? Over time? What gets you to really start moving on that project?

I think it's both. We see some opportunities with some of the northern tier utilities, and we certainly see an opportunity for exports. So I think we are looking at both markets when we evaluate the development of that operation.

So as far as your mindset goes, it's not more weighted one versus the other?

We are looking at both opportunities.

It has a definite competitive advantage to the PRB going to those northern tier utilities domestically. And then obviously, as the Pacific Rim develops, you have to look at port capacity, but that becomes very interesting if China, India, and the rest of Asia continue their curve. It becomes another one of the choices that we think could be very competitive into that market.

Great. And then as a follow-up, your outlook comments suggest the first quarter should be the weakest of the year. Operationally how do you compare that to the fourth quarter? Is that up or down versus the fourth quarter? Is this more seasonal, more market-driven, or more tied to some of the ongoing integration work? If you could just give us a little bit more color, that would be great.

Well, I'd tell you from an operational standpoint, we are in the middle of a longwall move at one of our western mines right now. We have another one in the east in the latter part of the quarter. In terms of our discussions with our international customer base, we don't really see those volumes and those prices kicking in until April 1st. So, it is going to be a little bit of a difference. Fourth quarter, we didn't really have any longwall moves. So that will be the biggest difference operationally.

Great. Thanks.

Thank you.

Our next question comes from Curt Woodworth with Macquarie.

Hello. Good morning. This is Warren Chang on line for Kurt. I was just curious, the seven to eight million tons of met PCI that you could do for next year potentially. How do you get from the four to five to the seven to eight? What's the coal quality? What CapEx do you need? And how fast can that come up?

Really, there's not a whole lot of CapEx associated with it. I think it's more market-driven. We have got three operations in the East that primarily serve the met-PCI market. And, it's a matter of configuring those mines to a different customer base. It's an evaluation of the market demand right now. So I wouldn't say there's a whole lot of capital associated with ramping up to that. It could take a little bit of time with work schedules, et cetera. But I think if the market demand is there, we'll transition to that market.

We may have to buy some steam coal to replace some production that's going in the steam market, but other than that, it's pretty straight forward. And pretty quick.

Okay. And how much met do you have priced for next year?

We've got roughly about half of what we guided in the four to five million tons. And as I said, a big percentage of that would be domestic PCI and the balance would be domestic met.

Okay. Great. And one more quick question. The weather and outages that you talked about in the press release. Where did that occur? And is there any way to quantify that in terms of either volume or earnings?

We didn't try to quantify it. It occurred really both in the Powder River Basin and in Central App. I think for those who followed Central App, the December snowstorms and the problems that occurred with both railroads. We had mines that were down two, three, four, five days without electricity. The mine was fine, but we didn't have any power to it. Obviously, in deep mines, you can't work in that scenario. And so, it's just a large hodgepodge that balled everything up. You'd had some impact, but we didn't try to -- we're not trying to offer it as an excuse or an issue. It's just -- one argument is that's part of winter mining. But the flip side of it, it clearly had an impact on some of the operations.

Okay. Thanks a lot.

All right. Thanks.

We'll take our next question from Andre Benjamin with Goldman Sachs.

Hello. Good morning. How are you?

Good.

One big picture question, as you -- as we take a look at the potential for coal plant retirement and scrubber announcements to accelerate as we go through the year, how are you thinking about the impact of those announcements and your customer, boiler constraints, et cetera, on demand for PRB coal?

It's interesting. No one talks about this very often. It remains -- first, if you just look at scrubbers. Over 50% of the western utilities all scrub PRB coal. And it remains -- it's lower cost to scrub PRB than it is a high sulfur coal, and that's just the nature of the way the system works. Mercury removal, a decade ago, was more difficult than PRB coal. Today, the technologies have advanced. So it's actually easier to remove PRB mercury, the mercury in PRB coal. The scrubber announcements we see as certainly opening some opportunity for higher sulfur coals into the traditional Central App market. They are going to get some of that share from the Central App producers. But if they go head-to-head with PRB -- at the end of the day, if PRB wants to, it always wins. It's a question of whether it makes economic sense for that particular PRB producer. You even saw this maybe in a microcosm last year. PRB did not get displaced by natural gas during 2009. Other coals did, but PRB didn't. Again, it's just the greatest energy resource that America has and probably the lowest cost energy resource America has.

As far as boiler and plan announcements and closures, you have to read them very closely. Clearly, some plants will close over the next four or five years. They tend to be smaller, very old plants. When you look at their capacity factors, they may be 100 or 200-megawatt plants, but they are running 25% of the time or 37% of the time. So there's a reduction. We don't want to misstate that, but it's not quite the same thing as some of the major plants. Some of the other plants that are announced for 2017 or '18 or 2020, we want to keep our eye on. It's a little early to make that call exactly how that all plays out. Again, as a look-see, we could look at some of the Canadian plants that were announced to close in 2000 -- early 2000, and then extended to 2005 and then 2012. And they are still running today and projected to now close in 2015 and '17. I think energy demand and overall structure and whatever regulatory environment finally settles out will make that determination, and we don't see that probably coming to resolution this year.

Sure. And I guess one short follow-up question on PRB realizations next year. I don't know if you were able to give any further color. i know you have generally said that Jacobs Ranch contracts should be pretty close to what you had signed as the stand-alone Company before. But any color you can give around what you think that would be sequentially as we move through 2010? Given there could be a little noise around that, it would be helpful.

Again, we would anticipate as 2010 develops and stockpiles come down, there would likely be upward pressure. We are not anxious to do anything right now in any of our basins, but the pressure is more positive than negative in terms of pricing from a producer's perspective. So we'll take that patient attitude, and sometimes you need to move some coal literally out of the way of the mining sequencing. So that typically is the type of thing you saw in the first quarter -- excuse me, in the fourth quarter, that we committed to. And you could see some of that again in the first quarter. But we'll be on the lower end of it.

I think it's an interesting thing to point out, and maybe, we didn't clearly state it in Jacobs. At the time we closed the deal at Jacobs, their contracts were well above market. But they were below what Arch had traditionally been able to get for its Black Thunder coal. In many respects, that's why you saw fourth quarter average pricing drop from Black Thunder. It was a combination of rolling in Jacobs above then-current market contracts but below what Arch had committed its coal for. Then our unpriced, but committed coal, that basically is indexed. We did ride the indexes down, and so that combination lowered that pricing. And right now as we look even at today from fourth quarter, the indexes are up. So that's a positive. As we recommit, let's say, Black Thunder -- excuse me, Black Thunder or the old Jacobs coals into the marketplace, we'll have to see where the market is at the time. But certainly we're hopeful that the combination of the improved quality and the improved overall flexibility of the loadoff will give us an advantage.

Our next question comes from Brett Levy with Jefferies & Company.

Hello. Most of my questions have been answered. You said you were well along the way to getting the $45 million to $55 million of synergies from the Jacobs Ranch transaction. Can you just say what well along is in actual numbers? And what the timetable is to get the remainder?

Well, we would expect to achieve the remainder this year. And as Steve said, we probably got a month, month and a half of those in the fourth quarter. And we continue to refine things, but we basically integrated this into one coal mine now. It's kind of a hard to tell where the two mines were. Certainly saved on our capital expenditures. We are trucking coal to some of our loadouts that are much closer. We have optimized our quality. Really, we would expect an improvement in our cost structure in 2010 because of these synergies. So I would say we are well on our way and really haven't encountered any negative surprises in terms of what we forecasted. And hopefully, can improve on those. So I'm cautiously optimistic how quickly and what we found so far in terms of the synergies and being able to execute those and get them to the bottom line.

So fully in the bottom line by the start of 2011?

We would hope so. Yes.

Maybe sooner.

That's our plan.

And our next question will come from Jeremy Sussman with Brean Murray, Carret and Company.

Jeremy, how are you?

Good, thank you. How are you. I was just hoping you could elaborate a little bit on where you see things shaping up on the coal ash front? Clearly, there's been a lot of talk there, and I know you all spend a lot of time with your pulse on Washington. So can you give us a sense of what you are expecting there?

Well, it's -- predicting the government is a high-risk proposition. But, it would appear that the EPA is looking very hard at some modification of perhaps where you might have thought it would come out at the end of the year. Right now if I had to bet, we'll see rigorous new laws in terms of ash ponds. That you could see wet storage at a detriment to dry storage, whether it moves all the way to hazardous waste designation or not -- I don't think anybody knows at the moment. Again, it's one of these interesting little tidbits that not many folks have focused on on this. We think it would be very bad for electric costs to see something that is Draconian in an ash disposal determination. But when you look at scrubbers, and you look at the amount of scrubber output that comes from a high sulfur coal versus a low sulfur coal, there's a lot less that comes out of a scrubber on low sulfur coals. So, we see Arch as well positioned in it. We think the best would be more rigorous inspection of the ponds which was the real issue of what occurred with the spill. It's hard to call. And, people who live it every day continue to be surprised, I guess, as to things developing. But clearly there will be additional regulation, but we don't think it will be Draconian.

I appreciate the color. Thank you.

And our final question comes from Justine Fisher with Goldman Sachs.

Good morning.

Good morning, Justine.

So I just wanted to clarify, you said that the reduced production for 2010 is going to come pro rata across the board. But given that the margins in Western Bit and Central App are much higher than the PRB, are you still planning on taking down production in those regions despite the fact that they may be more lucrative to keep around than the PRB?

Again, Justine, we will always focus on what the market demands are, and different basins do have different demand profiles. But historically and for modeling purposes, pro rata will always likely get you into the ballpark, but we never specifically focus on one basin or another for competitive reasons. But if one basin has more attractive margins, it's probably less likely that they get impacted than another basin.

Okay. Great. That was my only question. Thank you.

Thank you.

And with that, there are no further questions. I would like to turn the call back over to you for any final and closing remarks, Mr. Slone.

All right, this is actually Steve. Thank you for joining us this morning. And let me close by noting that we have seen a dramatic improvement in the market conditions since our last call. And certainly over the course of the fourth quarter. Met markets continue to improve. The burns in the steam coal markets and the stockpile overhang is projecting maybe we'll be at least half of what we thought it would be at this point in time. So, there's a lot of positive developments going on.

Today's GDP number was stunning. Certainly well above what we have been projecting, but we'll have to see. I would argue that there is still a great deal of economic uncertainty out there. We are trying to be pretty conservative as we look forward, but the trend lines are moving in the right direction. Our costs are among the lowest in the industry. We have -- we think a pretty modest capital spending outlook. Again, the modeling would show free cash flow for even the bottom of the range, and I would argue that the leverage to an improving market for Arch is very strong and very dramatic. So we'll see as the market develops. We think we have the pieces all in place. I feel a lot better about the world today than I did four months ago. But those who know me know that I always have an optimistic view on the way things can turn out here. But we do feel good about it. We look forward to updating you next quarter. And with that, we'll sign off. Thank you for your time.

Again, this does conclude today's call. Thank you for your participation.