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Massey Energy Co. (NYSE:MEE)

Q4 2008 Earnings Call

February 04, 2009 11:00 AM ET

Executives

Roger Hendriksen - Director of Investor Relations

Baxter F. Phillips Jr. - President

Eric B. Tolbert - Vice President and Chief Financial Officer

Don L. Blankenship - Chairman and Chief Executive Officer

M. Shane Harvey - Vice President and General Counsel

Analysts

James Rollyson - Raymond James

Michael Dudas - Jefferies & Company

Jack Kramer - UBS

Luther Lu - FBR Capital Markets

John Bridges - J.P. Morgan

Justine Fisher - Goldman Sachs

Pearce Hammond - Simmons & Company

Laurence Jollon - Barclays Capital

Paul Forward - Stifel Nicolaus & Co., Inc.

Dav Gagliano - Credit Suisse

Shneur Gershuni - UBS

Jeff Kramer - UBS

Operator

Good morning and welcome to the Massey Energy Company's Fourth Quarter 2008 Earnings Conference call. Today's call contains copyrighted material. It may not be recorded or rebroadcast without Massey Energy Company's expressed permission. Your participation in our call implies consent. Please disconnect if you do not agree with these terms.

Roger Hendriksen, Massey Energy's Director of Investor Relations will now provide opening remarks. Please go ahead, Mr. Hendriksen.

Roger Hendriksen

Thanks Mellissa. Good morning, everybody. Thanks for taking the time to participate in our call this morning. We appreciate your continuing interest in Massey Energy.

As you know, we distributed our fourth quarter press release after market closed last night and it is posted on our website and has been furnished to the SEC on Form 8-K.

I hope that you all had a chance to review that.

The members of our management team who will be speaking with you today, are Chairman, President and Chief Executive Officer Don Blankenship; our President, Baxter Phillips; and Eric Tolbert, Vice President and Chief Financial Officer.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on current factual information and certain assumptions which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control.

Information concerning those risk factors is available on the company's 2007 annual report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them.

With those formalities out of the way, I'll turn the call over to our President, Baxter Phillips

Baxter F. Phillips Jr.

Good morning and thank you for joining us. 2008 was a very exciting and successful year for Massey, by many measures, the most successful in our history. As you know, we undertook a very aggressive expansion plan in late 2007, and our members executed that plan almost to perfection in 2008.

We added more minds and more members than in any previous one year period. Though there were inevitable growing pains in the process, we were able to maintain strong operating performance throughout the year. We're especially pleased to have concluded the year with the all time record high $641 million in adjusted annual EBITDA.

Other key performance measures for the year included increasing total production by 4%, increasing produced total revenue by 25% and increasing operating cash margin by 69%.

There is no question that conditions in the global coal markets have changed significantly over the past three to six months. The ongoing concerns of the weakening global economy and uncertainty of the economic outlook impacted our fourth quarter results by causing average prices and volume shift to fall short of our plans.

Even so, our results in the quarter were strong and well above the prior year. Eric will give the details of the fourth quarter in just moment.

First, let me give you some background information on why we have reduced our 2009 guidance returns and pricing.

We adjusted our revenue forecast for 2009 to the flat commitments that we agreed upon in 2008 or earlier that we now do not expect to be fulfilled. These adjustments were made following many discussions with our customers over the past couple of months. The adjustments take in to the account, revised expectations for pricing on unrealized contracts as well as changes in customer operating capacity or financial conditions that have caused us to reevaluate our expectations on certain agreements.

Most of the adjustments were made in our outlook on metallurgical coal comps. In spite of the lower revenue forecast, we remain very enthusiastic about our opportunities for the coming year. We have a history of outperforming our peers and competitors in tough market conditions and we expect to once again deliver strong operating results in 2009.

Now let me turn the call over to Eric for a discussion on financial details of the fourth quarter.

Eric B. Tolbert

Thank you, Baxter. For the fourth quarter of 2008, we reported net income of $53.6 million or $0.63 per diluted share, compared to net income of $5.1 million or $0.06 per diluted share in the fourth quarter of 2007.

Produce unsold, totaled 10.2 million tons in the fourth quarter, an increase of 7% over the fourth quarter 2007.

Tons produced in the fourth quarter increased by 13% over the fourth quarter 2007. Our average produced coal sales realization of $62.69 per ton in the fourth quarter was $10.85 per ton higher than the fourth quarter of 2007.

Average prices were significantly higher in all product categories but the most notable thing in metallurgical coal with the price increase of $23.60 per ton a 32% over the fourth quarter net pricing.

Average cash cost per ton for the fourth quarter of 2008 was $49.66 per ton, compared to $44.14 per ton reported in the fourth quarter of '07. Increased sales related cost and the higher average sales realization accounted for approximately $2 of the $5.52 per ton increase. Additional cost drivers included increases in diesel fuel and other mining supply cost and high labor costs.

SG&A component of our cash cost per ton computation was again lower than SG&A cost in the fourth quarter 2007 due to stock-based compensation accruals that reflected the decline in Massey Energy stock price during the quarter.

For the full year, Massey generated produced coal revenue of $2.6 billion and net income of $56.2 million or $0.60 to $0.68 per diluted share. These results included the pre-tax charge of $250.1 million related to the Wheeling-Pitt litigation. Net income excluding this charge, was $239.2 million which was approximately 2.5 times during 2007 net income of $94.1 million.

As a result of our expansion activities, cash capital spending increased to $204.5 million in the fourth quarter and $736.5 million for the full year 2008. Capital expenditures for the full year of 2009 are expected to approximate $375 million as our expansion projects wrap up in the first half of the year.

Capital expenditures on expansion projects in 2009 will be largely limited to those projects that were already initiated in 2008 and require additional investment to complete.

Depreciation, depletion and amortization was $69.5 million for the fourth quarter of 2008 compared to 62.8 million in the fourth quarter of 2007. DD&A is expected to range approximately from 270 to $280 million for the full year of 2009.

We ended the year with $646.4 million in unrestricted cash, cash equivalents and short-term investments. This compared to 877.7 million at the end of September 2008 and 365.2 million at December 31, 2007. The decrease in cash in the fourth quarter is largely the result of the cash payment in December to Wheeling-Pitt in satisfaction of the legal judgment.

Of the year end 2008 total of $646 million, 607 million is in cash and cash equivalents and 39.4 million is invested in the reserved primary money market fund which is classified as a short-term investment. We also had 99.5 available under our asset based revolving credit facility.

Our total debt at year-end was $1.466 billion as compared $1.485 billion at the end of September. And during the quarter, we repurchased $19 million of our three and a quarter convertible notes. Our total debt-to-book capitalization ratio is essentially unchanged at 58.6% at December 31, 2008, compared to 58.5 at December '07.

Total net debt-to-book capitalization declined to 42.7% at December 31, from 45.1 at December 31, 2007. The decline was largely the result of the equity that we had issued in August.

Our tax rate for the full year was low as a result of percentage depletion deduction, the Wheeling-Pitt litigation charge and utilization is to minimum tax credit. The tax rate of about 21% in the fourth quarter is probably more representative of what is expected going forward in 2009.

Now, let me turn the call over to Don.

Don L. Blankenship

Thank you, Eric. Before we take your questions, let me take a few minutes to share my thoughts on the fourth quarter results and our outlook for 2009.

We were pleased to cap off the year another strong quarter with improved production and shipment volumes and what turned out to be an increasingly difficult marketplace. Our fourth quarter results were impacted by the global economic slowdown and the result, delay of some metallurgical and industrial coal shipment. We also observed $23 million of derivative accounting adjustments that hurt the bottom-line.

With the rapidly changing economic and political environment it becomes increasingly more difficult to predict what conditions will exist in the coal markets going forward.

That's why we are providing guidance. We need to emphasize that our customer's successes and failures will perhaps be the most important element of our 2009 actual results.

Our 2009 contractor position is strong with approximately 95% of our expected production under contract with confirmed or caller pricing. We now expect average price realization per ton in the range of $65 to $67 for 2009. This price combined with an expected shipment volume of 44 to 46 million tons and cost 5% or so above 2008, should yield another strong if not record year of earnings.

We will of course be working very hard for making difficult decisions in an effort to reduce cost and increase productivity.

2010 the market picture is less clear. Coal companies and coal consumers are searching for the right market and operating assumptions. For planning purposes, we are now estimating total production in 2010 of 45 to 47 million tons of the estimated total approximately 45 to 50% is under contract with confirmed or covered pricing.

Another 15 to 20% has been committed and sold but without a confirmed price, 30 to 40% of our estimated 2010 production has not yet been passed or committed.

Again, although very difficult to predict, our best estimate for average price realization per ton in 2010 is currently in the range of 66 to $72. While we expect the coal market prices to be weak versus 2008, we do expect the price to be supported by a significant reduction of competitor production particularly at high cost mines.

While our 2010 pricing outlook is considerably softer than it was at the end of the third quarter, it is important to remember that it is still much stronger than when we were anticipating when we lost our low cost, high quality mine expansion plans in the third quarter of 2007.

You may recall that we had anticipated weak coal markets in 2008 and 2009, and a rebound in 2010. I do believe we and the industry face more significant challenges ahead, as we cope with the negative impact the economy is having on coal demand, domestically and internationally.

We are simultaneously working hard to comply with a large number of new environmental and safety regulations. In times like these it is important to keep in mind that the long term best interest of all our stake holders is our primary focus. Now is the time to invest in reserves, properties and infrastructure so as to further two decade successful effort, to increase our market share and our operating capability.

We have a history of outperforming our competition and we continue to enjoy multiple competitive advantages over our peer companies including production cost advantages, a superior products and product diversity, superior reserves and advantageous (ph) logistics for loading and transport.

As for our previously announced expansion plans, most are now complete. We will complete the construction of the new processing plant at our Coalgood resource group this quarter and also add two highwall miners. Several other expansion projects are being deferred until the market picture improves.

This concludes our prepared comments. We'd be happy now to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Thank you. Our first question is from Mr. Jim Rollyson with Raymond James. Please state your question.

James Rollyson - Raymond James

Good morning, everyone.

Baxter Phillips

Good morning, Jim.

James Rollyson - Raymond James

Hey, Don, obviously with the updated guidance on pricing and some of your commentary, obviously some of the customers not honoring their contracts, I was going to joke to you about getting soft but won't do that. Can you maybe just spend a minute on what you think, you have obviously signed contracts to pretty good prices and it sounds like some of those are gone up, but kind of what you are thinking and your current guidance is for steam in net pricing? Kind of what's embedded there?

Don Blankenship

Well, as far as any on the sole terms we have very little, but we would probably still be 125, 150 on different types of metco if we were passing. But what we've done in our current numbers is tried to take the feedback from the customers as far as blast furnaces that were down, as far as their expectations on their business and even some judgments as to their viability and so forth and reflect as best we could what we think the results will be.

James Rollyson - Raymond James

Do you expect down the road that assuming those guys survive when things get better somehow they will work on making this is up to you or are there is just pretty much lost opportunity?

Don Blankenship

There will be some opportunity to make it up but there will be some customers that will, if you will mitigate the damage there will be others that won't. It's the hot spot. We've got everything from customers just saying nothing we can do to customers saying we want to work with you, take it over a longer period of time, customers who're desiring discounts. So it's a hard spot and quite frankly each one of them are unique in one way or some way. So it's hard to describe them with a general statement.

James Rollyson - Raymond James

Got you. And then just lastly maybe you could give us the kind of net versus steam breakdown in the new guided tons for '09 and '010 as you see it now?

Don Blankenship

Yeah. I think we've got about 10 out of 45 or so, that's may and the other 35 is industrial steam and it's probably three or four industrial and the rest of it steam.

James Rollyson - Raymond James

Great, thanks guys.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Michael Dudas with Jefferies & Company. Please state your question.

Michael Dudas - Jefferies & Company

Good morning, gentlemen.

Don Blankenship

Hey, Mike.

Eric Tolbert

Good morning, Mike.

Michael Dudas - Jefferies & Company

Don, could you characterize how wealth is ... or how you believe Massey is positioned in the current marketplace different than the last couple of down cycles that we've seen in the U.S. and international coal markets? And you talked about gaining market share and using your competitive advantage. Given the valuations and the struggles ... expect some struggles from competitors, is this leaning towards investing more outside your company as opposed to inside the company, or a blend of both? Could you maybe characterize how Massey maybe different 12 months down than it is today?

Don Blankenship

I think the situation today of course is exactly opposite 12 months ago where we felt like internal expansions would give us the highest rate of returns and we still feel very good about those internal expansions, because they're low cost tactic advantage operations.

So we feel good about they're providing long-term value to the shareholders. And you're exactly right. I mean at this in point, we will look at the opposite, the development of Greenfield internal expansions on that property would probably get trumped in that external opportunity. But we don't know that for sure yet, but we will expect that to be the case and particularly if the credit markets don't free up.

So, we'll be continuingly watching for that as far as our position in the market, we're essentially so, we'll still have issues. We are having to watch, the credit committee has now become a performance committee. So we're having the look at all of the financial statements. So ledgers, track cash flows and not only try to protect our receivables but try to judge the capability of the customers to fulfill their commitments.

Michael Dudas - Jefferies & Company

And my follow-up question Don, is how fragile do you look at the your competitors in Central App relative to all the myriad of challenges that you provided in your prepared remarks and the credit situation in the marketplace? How significant of a pull back would you might expect if prices come under where they are, in the first part of 2009?

Don Blankenship

I think the tonnage pull back will be very significant at today's OTC in our mix and even fiscal trade process because there's lots of tons out there that can't stay in the money at those processes. Now having said that, some others have done a better job and we did to get some higher processing in '09 make early '010.

So you will see some high cost we won't be able to stay on because they've got high process, tremendous disparity, broken off of that relation and it's across the board and in the process that will be angelic.

We have been around a long time and we're sort of a company that must be stable in long-term. So we feel very advantaged in the things that matter over two or three years because we will have what we believe is the low cost product and the high quality product. So, I do expect our competitors to struggle because of all the rates, the cost of credit, because of the operations maybe we're broad on expecting high process but other than that I mean I couldn't put a number on it.

Michael Dudas - Jefferies & Company

Well said Don, thank you.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Jack Kramer with UBS. Please state your question.

Jack Kramer - UBS

Hi, good morning guys. Just wonder if you could I guess give any guidance around recent contracts that have been signed? I know you've drawn your contract of this year but just in last few months?

Don Blankenship

Yes it's always difficult because we signed multiple-year contracts, one year contracts, contracts with ranges and qualities to throw out general numbers. But we've signed some contracts, and 125 to $150 range since the economic downturn became visible.

Jack Kramer - UBS

And they're largely one year or so there is a mix but one or three year contracts?

Don Blankenship

In some cases they are but in some case they are they go open the market or quarter end and in some cases there were circumstances that existed that required adjustments and process to avoid if you will, a less pleasant resolution of issues.

Jack Kramer - UBS

I understand. And just on the follow-up, some of the adjustments that have made on the end-users side, how much of that would you say was not for North American customers versus international?

Don Blankenship

Well, I think again as far as absolute tons, if not go through, but as far as percent of the pass certainly there'll be a bigger thought in export terms and domestic terms because of the strength of the dollar on the freight rates and the general economies impacting that business and not so much impacting domestic business. But, we believe that we will see a lot of pressure on the utilities, volumes that hasn't been felt yet.

And that was the inventories. I don't believe although we don't have data to support this I don't believe the inventories have been burning off this winter like the weather would suggest and I guess process as you all know have been low probably be in a little bit of impact as well as the economies.

So, we're watching for the shorter what they call the shorter months of the spring to see just what the utility inventory situation is and what happens there. And it's a long answer to that fact that it's just tangible what's happening to the export market and on freight rates, economy and the dollar, but it's less tangible and less visible so far on the domestic utilities side.

Jack Kramer - UBS

Okay, thank you Don.

Don Blankenship

Thank you.

Operator

Thank you our next question is from Mr. Brett Levy with Jeffries & Company. Please state your question.

Unidentified Analyst

Good morning guys, this is actually Satya Kumar (ph) calling in for Brett. Just a couple of quick questions; can you provide the bridge between costs in '08 until '09 given the increase?

Don Blankenship

Well, I think Eric might have some idea about that. It's ... go ahead Eric if you want to?

Eric Tolbert

Straight up it's about $1 per ton on the higher sales related cost on the higher sales price. There's two other components that we identified, one was our pension expense, will be significantly higher than what we projected that will be about $0.50 per ton. And also, we got some lease. We did a fair amount of equipment leasing this past year and our lease equipment rate will go up about $0.35 a ton.

Other than that we've seen both increases and decreases in our suppliers cost given the current economic situation and we're benefited to a certain extent by diesel fuel pricing. However, we've locked in I think about 80% of our, hedged by about 80% of our diesel fuel use already for 2009. We're projecting somewhat of a live range in our cash cost at this point in time, but that's what we've got on the bridge.

Unidentified Analyst

Okay, thank you. For the hedge diesel can you give the price of what that is, the average, that 80%?

Eric Tolbert

It's first of all let me say that it's probably more like 75% -- 70-75% but we're probably in the 2.90 range. So we're pretty far above the market but roll off in the first two or three quarters. That's what sort of on a rolling situation, fourth quarter will be much better. But we missed it probably when we went down through the $85 a barrel range.

Unidentified Analyst

Okay, thanks. And then I guess my last follow-up question is, I apologize if I missed this. Can you provide the uncommitted tonnage of metco that you're planning on producing in '09?

Don Blankenship

No, we don't have any uncommitted metco in '09, if I thereby took what they bought but here we got a structure we feel that we're not need to sell a bit more because we're sure what the customers will take. But you could say there's that we would like to sell another 1 or 2 million. But we have lot of customers that have blast furnaces down and coco (ph) went down, so we don't really know how to answer that question at the moment.

We hope that it clears up some in next month or two.

Unidentified Analyst

Okay. Thanks a lot guys.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Luther Lu. Please state your question.

Luther Lu - FBR Capital Markets

Good morning.

Don Blankenship

Good morning, how are you?

Luther Lu - FBR Capital Markets

Good. A question on the cost issue; you hired 1300 more miners for the 50 million ton production level and now that 2010 guidance you could be produce as much as 10% below that level. I am just wondering what will that the impact on the cost for 2010 because of the high headcount? And if you have any plans to close some of those mines you want one or two lower cost?

Don Blankenship

I think the answer would be that we will be able to reduce the workforce with attrition fairly markedly. We hope to avoid lay-offs due to attrition and the fact that we've sold 45 million tons or whatever it is and we can deal with any excess production that reduced overtime. But we again, we don't know exactly what will happen when we're trying to position ourselves for some flexibility.

But we didn't finish overhang and we also will cut back on salaries and if maybe we will add some amounts but we are attempting to avoid that.

Luther Lu - FBR Capital Markets

Okay. And Just curious about the inventory at the end of fourth quarter, do you have a number for that?

Don Blankenship

I think Eric has one, we had a fairly sizable inventory but I don't know exactly what it was.

Eric Tolbert

One second there.

Don Blankenship

I let Eric look at up and respond to you in general, do you have another follow-up or we answer that to the whole group.

Luther Lu - FBR Capital Markets

Sure, also for the 2010 contracts, could you instead of giving the percentage, could you give me like a number like how may steam tons sold or how met ton were committed, I'd like there just to a better modeling purpose?

Don Blankenship

Eric would also look to that and give answers.

Luther Lu - FBR Capital Markets

Okay.

Eric Tolbert

Let me answer your first question. We had about 2.8 million tons of coal in inventory. About 600,000 of that was on consignment at customers or at the peers and about 1.5 million in clean coal, essentially ready to be shipped. So it was about 180,000 tons greater than what we had at the end of 2007.

Luther Lu - FBR Capital Markets

Okay. So 2.8 with 1.5 clean ton and 600 at the customer side, that's only 2.1 though.

(Multiple Speakers)

Luther Lu - FBR Capital Markets

Okay.

Eric Tolbert

And your other question was on, can you repeat your second question just to make sure it is right.

Luther Lu - FBR Capital Markets

Yeah. The question is on the 2010 contracts, can you instead of giving us the percentage terms, give us the absolute ... like how many ... how much metco is contracted, the tonnage number.

Eric Tolbert

Okay.

Luther Lu - FBR Capital Markets

Like how many tons of steam is contracted, how many tons of met is contracted?

Eric Tolbert

According to my report here in terms of total sold, on the steam side it's about 18.8 million tons. On the met side, which is most of the met has not been priced for 2010, but overall tonnage amount is about just over 6 million tons. Again, most of that's un-priced but it's essentially committed. And of course we have another about 3 million tons of industrial which has been, about half of which is un-priced.

Luther Lu - FBR Capital Markets

Okay. Got it. Thank you.

Operator

Thank you. Our next question is from Mr. John Bridges with JPMorgan. Please take your question.

John Bridges - J.P. Morgan

Hi Don, everybody. At first let me then just follow one from your response to Mike but, just wanted the color behind the equity issue that you announced this morning?

Don Blankenship

Yeah, I'll let Baxter relate that since he has been handling the details. He knows more about it than I do.

Baxter Phillips

John, I met with many investors in December and I told them we were taking all measures to preserve liquidity including slashing capital and of course our financing back in the summer. And this is just another measure if you will, another tool in the war chest to preserve liquidity or to have available liquidity in the event of an opportunity or a challenge that faces us.

Frankly, we feel very good about the company going forward but we look around and see what's going on in the world economy and with some of our customers and we just want to make sure that we are as best positioned as we can to, to ride out the economic situation and to be able to take advantage of any opportunities or ward off our challenges in rights of very small amounts that out there puts us on a position to have some additional measure of liquidity should we need it.

John Bridges - J.P. Morgan

Would you face more opportunity or a challenge?

Baxter Phillips

Opportunity. It's clearly put in place for opportunity. We have ... Don and I have both been very conservative as is the rest of our Board. And frankly it was discussion issue in our last Board Meeting and we elected to go forth with putting this in place. And we intentionally posted it last evening so that we could receive questions on it during the course of the call today.

John Bridges - J.P. Morgan

Okay. And then as a follow-up, rather talk now about service mining and that sort of things. What sort of attrition would you see on your surface component if you are no longer getting surface furnace for the (inaudible).

Don Blankenship

I think we've said in 2009 we wouldn't expect much and of course we are having trouble sorting out what all the possibilities are of the chambers or that case. But I would suspect that, we not lose 20% of our 2010 surface mine volume if we had worse result possible on the chambers. We'll point out that, as I do each time that this case is not a moratorium on surface mining, it sets new standards for surface mining and there have been two or three Highwall (ph) permits issued even since that ruling that fulfilled more of the commitments that the environmental group was asking for.

John Bridges - J.P. Morgan

Okay...

Don Blankenship

What it does is complicate and extend the permitting process considerably and that's hopefully we will mitigate that as we go forward in the event.

John Bridges - J.P. Morgan

Okay, Don. Thanks a lot, best of luck.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Pearce Hammond, with Simmons. Please state your question.

Don Blankenship

Are you there Pearce.

Operator

It seems to be lost him the queue. Our next question is from Justine Fisher with Goldman Sachs. Please take your question.

Justine Fisher - Goldman Sachs

Good morning.

Don Blankenship

Good morning.

Justine Fisher - Goldman Sachs

The first question I had is just on the tonnage guidance. I know that you said that you have about 10 million tons of metco that you expect to sell in 2009 and if I take, I think the highest quarter of steam coal production since '06 is 7.2 million tons a quarter, so if I just annualize that, is that 28 ton of met of math and four of industrial that still gets us below your tonnage your total tonnage guidance.

So is the difference made up by met coal that would have been met coal that you will announce our steam cost so that's 7.2 could be higher or is it the additional tonnage coming from expansion projects?

Don Blankenship

Its additional tonnage on the utility side coming from expansion projects that would be more like 32 staying ton and 4 or something like that.

Justine Fisher - Goldman Sachs

Okay, okay, got you just wanted to check on that. And then the other question that I had was on the domestic and the foreign steel as I know someone already asked about it, but to clarify if you were to say which of your mills are making or which steel mills are coming back more to renegotiate contracts? Is it domestic guys or the foreign guys?

Don Blankenship

I guess if I had to choose between the two it would be the foreign guys.

Justine Fisher - Goldman Sachs

Okay. And then also if you were to characterize Matthew's lenience (ph) regarding met coal contract renegotiation or deferrals, would you say, you are being as lenient as other major met coal producers more or less?

Don Blankenship

Well I don't know how lenient they are being, so it makes it hard to make that judgment. But, we look at these things as sometimes we might trade short term for a long term I don't know how the competitors look at lot of probably the private companies may be less likely to do that than the larger public companies.

But, if we can get something in return we tend to be more agreeable than if we don't.

Justine Fisher - Goldman Sachs

So there is no way to tell at this point whether they are coming back to you to negotiate because another supplier may have set their way or whether they are getting easier tonnage from other guys there is no way to tell it at this point?

Don Blankenship

I don't think there is. I mean they will say things to you in negotiation of course so.

Justine Fisher - Goldman Sachs

Definitely, I'm talking to a book, right?

Don Blankenship

Yeah. I don't know what the other guys will tell me now we didn't see the foundation suit, and I'll see that I think it'll again starts towards middle but this is the only external losses I've seen.

Justine Fisher - Goldman Sachs

Okay. And then the last question is; are you seeing utilities come back and trying to negotiate some of the higher price contracts that they may have signed last year or is it really other renegotiation of prices of deferral of tonnages on that side?

Don Blankenship

I would say practically speaking, it's all on the met side. We've got some utility prices that someone might try to comeback on. But what we will see in addition that we try to account for if history holds true is and obviously complaints about quality trained offshore people want to say that they're accounting more.

So we'll see all of the historical arguments and it's hard to and embedded into our forecast but we'll try to do that.

Justine Fisher - Goldman Sachs

Okay. Thanks, so much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Pearce Hammond with Simmons. Please state your question.

Pearce Hammond - Simmons & Company

Yes, good morning, Don.

Don Blankenship

Good morning.

Pearce Hammond - Simmons & Company

Just curious since we are partially through Q1, how's Q1 trending right now for Massey Energy?

Don Blankenship

Well, our production is up about considerably January-over-January. It's probably up 400,000 tons. Shipments were are up a little bit less than that and we don't know what's the cost are yet as the accountants haven't got through, we're working on January yet.

But, we are running slightly better than we did say in the second half of '08 but we are not running nearly as well as we should but the expansion products, projects are producing tons.

Pearce Hammond - Simmons & Company

Great. And then if you can also provide a litigation update.

Don Blankenship

Lot of litigation, question. The ... I think March, is Shane on the call, can you speak to.

M. Shane Harvey

Yeah. I am on the call, Don.

Don Blankenship

Yeah. You want to respond to that?

M. Shane Harvey

I think the probably the two biggest items that people are following are the Chambers decision which as been mentioned earlier we're waiting our rolling from a circuit on that. It's been fully briefed and argued and we expect a decision any day and certainly I would think in the first half of '09.

The other case everybody is following of course is the Harman case, that will be argued on March the 3rd and we would expect the decision by June. Those are probably the two bigger ones, I don't know how much detail to go into but I think those are the ones that probably create the most interest.

Pearce Hammond - Simmons & Company

Thank you. And then Don just one final question, given your vantage point and the Southeastern Utilities and we heard about Southeastern Utilities dispatching a little more gas in front of coal. What is your expectation for gas, steel and share from coal this year from a tonnage standpoint a competitor is thrown out of figure another producer, like 10 to 15 million tons impacted the market this year, do you see something similar?

Don Blankenship

No, I have not seen that big of an impact when the market for coal is 150, but I wouldn't see that big impact now. I don't know what that person is studying but I will put it at four or five, before hearing any other number.

Pearce Hammond - Simmons & Company

Thank you, Don.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Mr. Laurence Jollon with Barclays Capital. Please state your question.

Laurence Jollon - Barclays Capital

Hi, good morning. I was hoping if you could provide us with an operating cash flow number for the fourth quarter?

Eric Tolbert

I have got one for the year. I don't have one for the quarter at the moment but it's about $401 million for the year.

Laurence Jollon - Barclays Capital

Okay.

Eric Tolbert

That's what some of my draft cash was at this point.

Laurence Jollon - Barclays Capital

Okay. Thank you.

Operator

Thank you. Our next question is from Mr. Paul Forward with Stifel Nicolaus. Please say your question.

Paul Forward - Stifel Nicolaus & Co., Inc.

Hey, good morning. On the ... I think you had mentioned going back to Chambers, on the worst case of a 20% cut from your surface mines, I mean assuming that its obviously worst case scenario, somewhere around 4 to 5 million tons in 2010 impact. How much worst does that get beyond 2010, if you do get a really difficult ruling coming out of Chambers?

Don Blankenship

I guess we would have to do a lot more steam we then to figure it out but I don't picture it as being a huge impact on the production. But picture has been a significant impact on cost and perhaps some on investments. So I think we would what would happen to prosper drives and we would be pulling further and compacting more and having to put more lead time in our permitting and doing more sampling and all of that.

And hopefully, we don't want to see that happen hopefully we will do that better than others and past would more than mitigate the cost increase. But Shane can you shed more light on that and...that's not as far as the volumes but the impact so the permit process as you understand.

M. Shane Harvey

Yeah again, there is nothing in the Chambers decision that would prevent the value fields. They would just require more study in the permitting process and while that question is open that case in been reviewed. There has been a slowdown in the permitting process. I think perhaps some backlog in permitting that would impact 2010, but as the Chambers case is decided in the Court and others know what the rules are, I think that would be alleviated and permits would begin to be issued again.

The process might take longer but everyone, whether the result from Chambers is good, bad or in the middle, we'd know what the rules are and permits could be processed and issued again. So, I think 2010 would be the biggest impact and beyond that it would alleviated.

Paul Forward - Stifel Nicolaus & Co., Inc.

Great. And on the fourth quarter buybacks, the convertible debt do you see more opportunities for that in 2009 happening?

Don Blankenship

Of course there has been whether Baxter can speak to that but they were at $0.57 on the dollar and now they are 60 or something.

Baxter Phillips

Basically we were looking at how deeply they are discounting. If there is opportunity there we are comfortable with giving up the liquidity to do so, yes we would do that. But it all depends on the relative discount.

Paul Forward - Stifel Nicolaus & Co., Inc.

All right, and lastly going back to the potential share issuance, I mean if this market stays very weak for coal, met coal, thermal coal, as you look out a few quarters down the road, are there any covenants that stand out to you as ones you bunk into first in a tough market?

Don Blankenship

No, we don't believe, we don't have covenant issues going forward.

Paul Forward - Stifel Nicolaus & Co., Inc.

Okay, thanks.

Operator

Thank you. Our next question is from Mr. Dav Gagliano with Credit Suisse. Please state your question.

Dav Gagliano - Credit Suisse

Hi, good morning. Thanks for taking the question. I wanted to ask a little more detail on your 2010 pricing targets. Specifically what are the underlying prices for the 18.8 million tons of steam and the 1.5 million tons of industrial that's already been priced?

Don Blankenship

Okay Eric, I guess you provide some of that. We want to be careful about how specific we are on some of the stuff because we have to make some assumptions that are conservative I think we are all out with that information going ahead.

Eric Tolbert

Dav, for the steam as I mentioned 18 million both ... I'd say about 17 of that is sold priced on the steam side and that's in the higher 50s, closer to about $58, the metco sold price and sold collared together, that amounts to about little over 2 million tons and that's just over a $100 a ton, not to be too specific but just over $100 a ton and majority of that's on the collar so.

Dav Gagliano - Credit Suisse

Okay. And just to round out the industrial as well have 1.5 million tons, it's probably around that $60 numbers is that right?

Eric Tolbert

Yeah it's a little bit higher than $60, may about 62 or so.

Dav Gagliano - Credit Suisse

Okay. And then just as a follow up, what's the breakdown on the assumptions that you are using for the un-priced volumes between met and steam to get to the overall 2010 price guidance.

Eric Tolbert

Yeah I think we probably rather not get that specific.

Dav Gagliano - Credit Suisse

Okay. And then as the -- other follow up if you can just provide more detail on the contracts that were actually renegotiated, exactly what were the agreed price changes and what were the volumes type for these pricing?

Don Blankenship

We can't go through all of that because...

Eric Tolbert

It is still negotiation.

Don Blankenship

Below from volumes and numbers which ones we were speaking to and that wouldn't serve us well.

Dav Gagliano - Credit Suisse

Okay, all right. Okay, alright thanks very much.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from Shneur Gershuni with UBS. Please state your question.

Shneur Gershuni - UBS

Hi good morning Don and Baxter. How are you?

Don Blankenship

Fine, good morning.

Baxter Phillips

Good morning.

Shneur Gershuni - UBS

A couple of quick questions, I guess a follow-up too to the previous question. You clearly, you can't give us any clarity on the negotiation so far. I was wondering if there is a preference towards low wall high wall coal if there seems to be more renegotiation of one versus the other. And is the percentage discounts different between the two or it's kind of even across the board? And as part of that discussion, there steel companies have been very litigious in the past, what are you options to enforce them to on to the contracts that they signed? Is that something that you're pursuing as well?

Don Blankenship

Well I think it's something that is still on the table on some cases. Some say international business that's of course difficult, time consuming and expensive but it is certainly on the table, if it's needed. As far as which others if I divided the market on the met side into three categories; high quality highwall and low quality highwall and low volumes so for mid volumes, I'd say that the one that's most impacted would be the ... whatever coal in our quality, have our met coal because is it this one that that's more available if you will than the specialty coals, the coals that moved from steam to met last couple of years.

Shneur Gershuni - UBS

Okay. And then just as a follow-up question. Given where gas prices are today, you can run the math and you start to see shocking prices and so forth. And given the possibility that this economic climate can continue much worse, how many tons do you think you have available to take offline if you start to see prices let's say dip in below 40s, for an extended period of time?

Don Blankenship

We don't have that lot of them so thermal coal in 2009. So I mean, in 2010 it all depends on what pasture come into. But we wouldn't have any hesitancy to bring tons offline in 2010 if they get to where they were providing a margin.

Shneur Gershuni - UBS

I mean would you even potentially consider this scenario of shutting in a mine and well being short of contract but just buying it in the open market and delivering on it because where the pricing is where it is?

Don Blankenship

Yes. We would do that. We'll do whatever provides us the biggest margin. Although we do want ... we do believe and we've done this in the past now it's the time to gather produced market. So, we do have to keep in mind when we back go in or keeping the other guys mine employee for the higher market as suppose to keep in your mine employee for the higher market. So it's ... but if that gap gets meaningful certainly we would do that.

Shneur Gershuni - UBS

That makes perfect sense. And if one last question if you can sort of give us some color on the nonpublic producers and how many tons do you think they've shut in and how many are in trouble for shutting in a lot more given the climate?

Don Blankenship

No, I don't ... those number are tough on the private sector, you don't them pretty much but I would guess that there has been 8 or 9 million tons shut in.

Shneur Gershuni - UBS

Okay. Great, thank you very much.

Don Blankenship

Thank you

Operator

Thank you. Our next question is from Justine Fisher with Goldman Sachs. Please state your question.

Justine Fisher - Goldman Sachs

Hi, thanks. Just one follow-up, what's the run rate SG&A do you expect for 2009 and maybe for 2010 but '09 more importantly because it fluctuated quite a bit in the third and the fourth quarter?

Eric Tolbert

Justine this is Eric. I would use a run rate of about $70 million for the full year. I think the top of my head, I don't know what it will. I think it will still remain, will fluctuate based upon good portion of our stock comp is in that number. And therefore, it'll follow the share price. But, I would say 72... 75 million is probably good run rate for '09.

Justine Fisher - Goldman Sachs

Okay, and then where will the Whitling settlement show up on the cash flow statement in the fourth quarter, just a bit model differ correct ensuring where the cash up out flow?

Don Blankenship

I believe it's up and Op-cash, operating cash flow.

Shneur Gershuni - UBS

So was that included in operating cash flow number that you gave out earlier?

Eric Tolbert

Yes, I believe so.

Shneur Gershuni - UBS

Okay, alright thank you.

Operator

Thank you. Our next question is from Mr. Pearce Hammond with Simmons. Please say your question.

Pearce Hammond - Simmons & Company

Yes, Don just one follow up on mining equipment. What do you seeing right now for pricing and delivery schedules for continuous miners, highwall systems, shovels, etcetera. And is that kind of what's the outlook you see from the equipment side?

Don Blankenship

I think obviously availability is a lot better than it was and we deferred some miners, I think about 14 or 16 miners that we deferred out of '09 in to '010 that are options. But generally speaking, the availability is improved although there are still a few things that are longer than lead times than we wish they were.

Pearce Hammond - Simmons & Company

What about pricing of equipment?

Don Blankenship

Well we haven't really tested that yet because we haven't bought equipment if you will, entered into a contract about equipment for future deliveries since the downturn. So, but I am sure it will down, but I don't know how much.

Pearce Hammond - Simmons & Company

Thank you.

Operator

Thank you. Our next question is from Mr. Jeff Kramer with UBS. Please state your question.

Jeff Kramer - UBS

Hi guys just a follow-up on uses of cash in 2009. What are your thoughts around priority between balancing liquidity, potential acquisitions and potentially buying back more marks?

Don Blankenship

I'll let Baxter speak to that. We like a lot of liquidity right now, but we are also willing to take some risk. So we will see what Baxter's response to that is.

Baxter Phillips

I think in this market Jeff, our first priority obviously would be acquisitions of distressed assets, if we, we're able to come upon those at the right price. As you know we have already build this company by taking advantage of those opportunities as I would say secondly with the discount that we've seen in the bond market we would perhaps continue to look at buying back in bonds that are extremely discounted.

But at the end of the day, cash is king. So, all of that would be moderated by, what we feel like a future cash flow would be and the liquidity position that we want to hold.

Jeff Kramer - UBS

Okay thanks. And I guess as far as acquisitions going with this primarily the remaining in central after (ph) which you guys look elsewhere?

Baxter Phillips

I think we would look elsewhere.

Jeff Kramer - UBS

Okay thank you.

Operator

Thank you. There are no more questions. Now I will turn the program back to Mr. Hendriksen.

Roger Hendriksen

Okay everybody thanks again for joining our call this morning. We appreciate your interest in Massey Energy. We look forward to speaking to you again in the future. And if you have further question, I am happy to follow up with you later in the day.

Thanks very much.

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Source: Massey Energy Q4 2008 Earnings Call Transcript
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