Massey Energy Q1 2009 Earnings Call Transcript

Apr.29.09 | About: Alpha Appalachia (MEE)

Massey Energy Co. (NYSE:MEE)

Q1 2009 Earnings Call

April 29, 2009 11:00 AM ET

Executives

Roger Hendriksen - Director, Investor Relations

Baxter F. Phillips Jr. - President

Eric B. Tolbert - Vice President and Chief Financial Officer

Don L. Blankenship - Chairman and Chief Executive Officer

Analysts

Shneur Gershuni - UBS

James Rollyson - Raymond James

Brian Singer - Goldman Sachs

Pearce Hammond - Simmons & Company

Michael Dudas - Jefferies & Company

Brett Levy - Jefferies & Company

Justine Fisher - Goldman Sachs

Wayne Cooperman - Cobalt Capital

David Lichens - CLSA

Paul Forward - Stifel Nicolaus

John Bridges - J. P Morgan

Jeff Creamer - UBS Securities

Meredith Bandy - BMO Capital Markets

David Gagliano - Credit Suisse

Mark Caruso - Millenium Partners

Operator

Good morning and welcome to Massey Energy Company's First Quarter 2009 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 Rob, and good morning everybody. We appreciate you once again taking time to join us for our conference call and we also appreciate your continuing interest in Massey Energy.

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

The members of our management team, who will be speaking with you today are, our Chairman and Chief Executive Officer Don Blankenship; our President, Baxter Phillips; and Eric Tolbert, who is 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 factors is available on the company's 2008 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.

So, with those typical formalities out of the way, I'll turn this call over to Baxter.

Baxter F. Phillips Jr.

Good morning and thank you for joining us. We're pleased to be able to report to you on another very successful quarter for Massey Energy Company. In the first quarter of 2009, we have many notable accomplishments, including tying our all time records for tons produced in the quarter, tying our second highest mark of all time for tons sold in the quarter and setting a first quarter record for produced coal revenue.

From these results, it is clear that our expansion in efforts in 2008, accomplished what we had intended. That is to put us in a position to increase our production significantly, and we'd anticipated high sales demand and fulfill our existing sales contracts.

While our operations have been strong, the conditions in the global coal markets have remained weak. We have seen the impact of the weak economy in terms of lower total coal consumptions, decline in electric power generation, decline in coal prices and building the coal inventories.

In spite of the market conditions during the first quarter, our utility customers had for the most part been taking their shipments on schedule. There have been some cases in which we have agreed to defer some 2009 tons into 2010. We consider these cases individually and agree to the deferrals, where it makes sense for us and the customer.

The impact of the weak economy has been greater in the metallurgical coal markets. Global steel production is down significantly and U.S. steel producers are operating at about 40% of total production capacity.

As a result, our shipments in metallurgical coal were lower than we had originally planned in the quarter. We continue to work with our metallurgical customers in order to plan effectively for the remainder of the year.

In fact, I've spend last week meeting with our customers in India. Based on the overall discussions, we have held with our metallurgical customers since the end of last year, we now expect our net coal volume to be in the 7 to 7.5 million ton range versus 9.9 million tons in 2008.

The guidance we provided in our press release reflects our best estimates of what you should expect. But as you know, metallurgical coal shipment volumes can have a dramatic impact on our total average price and margin per ton.

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

Eric B. Tolbert

Thank you, Baxter. For the first quarter of 2009, we reported net income of $43.4 million or $0.51 per diluted share compared to net income of $41.9 million or $0.52 per diluted share in the first quarter of 2008.

Produced ton sold totaled 10.8 million in the first quarter, an increase of 12% over the first quarter of 2008. 11.4 million tons produced in the first quarter was an increase of 14% over the first quarter of 2008.

Our average produced coal sale realization of $63.03 per ton in the first quarter was $6.67 per ton higher than in the first quarter 2008. Average prices were significantly higher in all product categories with the most notable being in metallurgical coal with the price increase of $22.36 per ton or 28% over the first quarter 2008 net pricing.

Average cash cost per ton for the first quarter in 2009 was $52.55 per ton compared to $45.62 per ton reported in the first quarter of 2008. Increased sales related cost on the higher average sales realization and higher labor cost accounted for approximately half of the $6.93 per ton increase.

As a result of our expansion activities lining down, cash capital spending declined to $103.7 million in the first quarter compared to 123.5 in the first quarter of 2008. For the remainder of the year, we will continue our efforts to limit capital spending.

Full-year CapEx is now anticipated to be $300 million or less. Depreciation, depletion and amortization were $72.6 million for the first quarter of 2009 compared to 60.2 million in the first quarter of 2008. This increase was attributable to the capital spent in 2008 and higher depletion and amortization on the strong production.

D&A is expected to be approximately 280 to $290 million for the full-year 2009. We ended the quarter with $591.6 million in unrestricted cash, cash equivalents and short-term investments. This compared to $646.4 million of December 31, 2008. The decrease in cash in the first quarter largely is a result of changes in working capital particularly, accounts receivable and accounts payable.

Of the March 31 total of $591.6 million, 566.7 is in cash or cash equivalent and $24.9 million is invested in the reserved primary fund, money market fund, which is cross side as a short-term investment.

We also had $99.5 million available under our asset-based revolving credit facility. Our total debt in March 31, 2009 is $1.316 million as compared to $1,312 million at December 31, 2009.

These totals have been adjusted in compliance with the accounting guidance implemented effect of January 1, 2009, which affects our 3.25 convertible notes and also interest expense calculation as I will discuss in a moment.

Our total debt-to-book capitalization ratio declined to 52.9% in March 31, 2009 compared to 53.8% at December 31, 2008. Our total net debt-to-book capitalization was 36.7% in March 31, 2009 compared to 35.5% at December 31, 2008.

Included in interest expense in the first quarter was non-cash interest of $4.5 million as a result of accounting changes as set forth in APB 14-1 affecting the treatment of convertible debt.

This interest impacted earnings per share negatively by about $0.03 per share in the quarter. Total interest related to these accounting changes estimated $99 for the full year 2009. It's important to note that this increase is a non-cash expense.

Looking forward, we now expect 2009 average price realization per ton in the range of 60 to $63 and shipment volumes of 38 to 41 million tons in 2009. We expect our cash cost to be in the previous guidance range of 50 to $53 per ton for the full-year. We will be making adjustments to reduce cost but the lower volumes, after-mine cost and extended paying benefits will limit achievable cost per ton reduction in 2009.

Finally, you should extract our tax rates for the year to be about 22%, which is what it was in the first quarter.

Now, let me turn the call over to Don.

Don L. Blankenship

Thanks, Eric. Before we take your questions, I'll take a few minutes to share my thoughts on our outlook for the rest of 2009. Our expansions were fairly successful in increasing production capacities as evidenced by a strong production in the quarter.

However, the markets are not proactively to reduce ship volumes for the next few quarters. Nonetheless these new modern facilities will provide sustainable shareholder value for years to come.

Additionally, our expansion has been as it was in the first quarter substantially funded by free cash flow. We want to be prepared to operate successfully whether the market improves or remains weak, and we believe that we are. It is difficult however, to predict when the market might change directions.

The current turbulence in the global economy and resulting financial crisis in this country are historic in nature and indebt, and has an impact on total energy demand leading to growing inventories of coal and natural gas and the pressing prices of both.

The industry reaction to the weak demand has been significant as producers have scaled back production plans. We believe further cut backs will be required and they will happen either by voluntary programs or as marginal producers are forced to close due to lack of capital. The speed and the extent of production cut backs will be a critical factor and when the balance between supply and demand is restored.

The political and regulatory environment is another volatility factor. Increasingly stringent and has got a safety and environmental regulations that require significant capital investment just to maintain the operational existing mines. Opening new mines is even more of a challenge and more of an investment. In this economy, the credit crisis looms large over under capital last companies and is resulting in the failure of some coal producers.

Recent actions by the EPA related to the permitting process that raised additional questions as to the rules going forward. Likewise statements by the new administration regarding not only coal but also achieving energy independence have been in consistent and sometimes conflicting. Uncertainties regarding cap and trade or other carbon limiting policies and legislation would also weigh on any future investments in the industry.

While all these sound very challenging, there is a very positive side. Central Appalachia produces 23% of coals BTUs in this country. Therefore, it is critical to providing a nation's long-term energy needs. All other issues, I have mentioned will create barriers to entry or limits on productivities that will help to bring the coal markets back in the balance.

Further, as the demand returns to more normal levels, the response in production will be slow and we believe this will eventually create dramatic positive pressure on pricing.

Perhaps even more important to Massey and Central Appalachian coal producers, the rest of the world will use coal as their preferred energy source.

Our export customers compare the position in the world will be improved as the U.S. limits as domestic energy production unused.

Massey is very well positioned to further increase shareholder value and to emerge with greater advantages and opportunities. We continue to enjoy notable competitive advantages over a period of companies, including production cost advantages, readily available productions and processing capacities, superior product and product diversity, superior reserves and advantaged loading and transport facilities.

We also have sufficient cash and other liquidity to fully fund our existing operations and to exploit growth and acquisition opportunities as they arise. Our plan going forward is to preserve liquidity, control capital spending and cut operating costs as much as we can or adjust in production to meet customer demand.

As we said in our press release, we are scaling back our production targets. We've already reduced over-time hours by eliminating Saturday production at most of our operations. In addition as of May 1, we are implanting a meaningful reduction in base pay and benefits for all our members including our senior management team.

Capital spending will be dramatic to reduce for at least the next several quarters. As a result, we are reducing our full year estimates for CapEx to $300 million from our previous guidance of $375 million and we will continue to work to reduce this forecast further.

As I said in our last call, the successes and failures of our customers will be an important element of our 2009 actual results. While we have a strong contract to position to extend to which our customers fulfill their commitments, we'll ultimately determine our shipment volumes and our average gross per ton.

Eric gave you guidance on 2009, even at the low end of the ranges he provided, we believe we will generate positive free cash flow for the full year and position ourselves for lower cost and an improved competitive position in 2010.

For 2010, the market picture is very uncertain. Still we want to give you as much insight on our thoughts and position as we can. We presently have press contracts for approximately 22 million tons, another 8 million tons on under contract but not pressed.

Based on our current market views, we expect produced coal shipments for 2010 to be in the range of 35 to 40 million tons with average sales prices in the range of 60 to $65 per ton. Cash cost per ton is anticipated to be in the range of 48 to $52 per ton.

Additionally, we anticipate significantly reducing capital expenditures to a range of 100 to 200 million for the full year 2010. With results in these ranges, we would expect to again generate positive free cash flow for the full year 2010. This concludes our prepared comments.

We'll 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 the line of Shneur Gershuni with UBS. Please go ahead with your questions.

Shneur Gershuni - UBS

My first question is just with respect to the process and how you are achieving the production cuts you had mentioned that you were taking Saturday shift so forth. I was wondering, if you could give some color on some complexes whether they're going to be idled and your flexibility to be able to adjust if the market was to return the other way how fast you can bring the production back on line. And, possibly also comment on some of the small and micro producers, whether you've seen some bankruptcies or some closings as well here?

Don Blankenship

Yeah, we have in mine, as far as been able to come back et cetera, exactly what you said as we've made the reductions. That's the reason we've taken some mines to 4-10 hour days and therefore kept the mines hot and the workforce in place. So, that we could very easily come back to a more normal schedule and of course when you've cut out Saturdays, it's easy to bring them back.

We have added a few mines partially, so that we can reorganize and then do some work on ventilation and to meet some of the new EMSHA (East Midlands Strategic Health Autho) requirements more freely without having to do it in a sporadic manner in order to keep the full mine ventilated. So, by adding a couple of mines and getting the production down, it gives us an opportunity to more efficiently and cost effectively do some of the EMSHA required work.

So, we've got a combination of things going on, but we haven't taken anything offline at this stage that couldn't be put back on very quickly and by that I would mean within 2 to 4 weeks.

As far as bankruptcy is nearing, now we see evidences struggling and shutdowns and what's in the press pretty much, we do know that there have been several hundred more layoffs this week. So, we can expect that continue to happen as we see the high inventories and the decreased electricity generation and steel production.

Shneur Gershuni - UBS

Okay. And if I can shortly follow-up a question with respect to the coming side and may be Eric, I was wondering if you can just give us a little bit color on the mark-to-market gain on the derivatives, just understand how it's been designated that way and also if you can talk about the non-cash interest expense as well to that creep in there sort of thing to be declassifying some of the debt integrities so far if you can just give us color, that'd be great.

Eric Tolbert

Sure. On the derivatives gain, that was driven by the extreme volatility in the coal markets during the quarter. We have certain coal contracts both purchase and sole coal contracts that were identified for accounting purposes as mark-to-market essentially that we believe that they will eventually be financially settled. And, essentially, the majority of what was in that line of the $9 million gain on the income statement was related to the swing in the volatility to coal markets during the quarter.

Going forward for the remainder of 2009, I would project that a dollar decline in coal prices would result in about a million dollar derivative gain and vice versa. And that's going to decrease over the course of the year as those contracts will allow.

And on the non-cash charge for the convertible debt, essentially the new accounting rules require that we break out on our $671 million of convertible debt, if required that we go back and restate how much of that had we issued it at a market rate and straight debt. How much of that would be attributable to equity and about $160 million of that debt was in re-class to equity and would be amortized essentially over a seven year period through that interest loan.

So, and that impact again as I mentioned in my comments was about $4.5 million in the quarter and it will be about $19 million for the full-year increasing over the course of that seven year period until the full amount is discounted is amortized.

Shneur Gershuni - UBS

Okay. So, just to clarify both of those points with respect to the contract, when you actually deliver on those tons or settle that contract, you will be recording the necessary full revenue because it will be reversal of the mark-to-market potentially.

And then basically disinterest expense is kind of theoretical in nature, it's not something that you actually ever going to pay out?

Eric Tolbert

Yeah, the interest expense is purely non-cash and from an accounting standpoint. On the derivatives charge, yes, those will be resolved effectively either financially or physically but will resolve themselves over time.

Shneur Gershuni - UBS

Perfect. Thank you very much.

Eric Tolbert

Okay.

Operator

Thank you. Our next question is coming from the line of Jim Rollyson of Raymond James. Please go ahead with your question, sir.

James Rollyson - Raymond James

Good morning Don, everyone.

Don Blankenship

Good morning.

James Rollyson - Raymond James

Don, you talked about the wage and benefit reductions. Can you maybe give us some idea of scale and are you among the first people to implement such a thing? I haven't heard much about that so far, so is this kind of a new trend given the circumstances or?

Don Blankenship

I think we're the first one to make meaningful cuts, wages and benefits. The others have made substantial lay-offs. We've been able to avoid significant lay-offs or at least significant permanent lay-offs and prefer to reduce the pay and increase the productive if we can and maintain it.

So, the reduction across the board is probably about 6%, and that if we $800 million in total wage and benefit package, it will probably be 50 or 60 million on annualized basis. So, about $1.30 a ton and we're still looking at different elements of it to see what further things we may opt to.

James Rollyson - Raymond James

Great. That's really helpful. And may be as my follow-up, thoughts on how you run your business given the potential risks with the new administration at least the tax, they've seem to takes so far in the first 100 days here, especially with respect to amount in top mining. Is this some kind of fear, could be a retroactive thing, if it goes through it as its heading in terms of impacting your existing production or is this more of a future production and just how you guys avoid those pitfalls?

Don Blankenship

It's sort of in between, I guess I would try to quantify for you that we're trying to produce 21, 22, 23 million tons of surface mine coal and we had 3 or 4 permits tied up in the Chambers decision ready to come out, they should come out anyway at some point, when the four circuit on the missionary consider. So, if that happens and those permits get released at some point, we would have no permit impact for sometime.

On the other hand, if we believe that permitting is going to be restricted, we'll not choose to in this depressed market, out of the surface mines and buying coal and preserve permitted reserve areas for a time, when the price might be stronger because one of the other will happen will either have better pricing or we will get permits.

So, we are trying to balance and make sure that we somewhat conserve a large permitted surface mines for better pricing if it goes that direction.

James Rollyson - Raymond James

Great. Thank you.

Don Blankenship

Thank you.

Operator

Our next question is coming from the line of Brian Singer of Goldman Sachs. Please go ahead with your question, sir.

Brian Singer - Goldman Sachs

Thank you. Good morning.

Don Blankenship

Thank you.

Brian Singer - Goldman Sachs

Question with regards to your 2010 guidance, can you talk about the split between met and thermal coal in your expectations for 2010 production and how much of that difference overall versus your previous thoughts is due to curtailments further Saturday reductions and some of the items you mentioned earlier versus any mine closures or delay in bringing new mines online?

Don Blankenship

Okay. So, its compound questions, I'll see if I can get most of it, may have to take a second shot at it but we shipped around 9.9 million tons of metco in '08 we are expecting to be kind of cut 7.5 million in '09, which is less than cut across industry as a percent somewhere in the 24-25% range. We are real uncomfortable with projections and detail and '10 but I would hope that we would be able to hold that same volume or improve it but we basically got about that same volume in our midpoint of our forecast range.

I don't know if I followed the question on the Saturday and so forth, but I'll say that our production adjustments are made commensurate with the types of coals and the qualities of coals we need to have.

And therefore, the deep mines have been curtailed perhaps a little more than the surface mines with the 40-hour weeks and some of the shutdowns that we have done as we mentioned earlier to do safety work or ventilation work but we bring the production down from the source that's going to the customers as we recognized the customer deferrals or cancellations. So, it's all matched up on an optimum basis.

Brian Singer - Goldman Sachs

Thanks. That's helpful. And then if you look at your capital expenditures plans, is there a cost deflation built into that or is it just simply lower maintenance in the expansion activity?

Don Blankenship

Now, as to a wide range we put on it is partially because we have not put in deflation but we would expect it, we will also have as we reported throughout '08 when we were spending large amounts of capital there as the market turn down; we would have a lot equipment sitting idle that we would use to displace ongoing capital in '10 or beyond.

It looks like right now, we may have as much as 50 to $80 million of relatively new equipment on idle if you will and therefore, it makes it real practical and easy for us to achieve the targeted 2010 CapEx numbers. And as far as discounts in the equipment process, I would expect it to be very significant but we haven't been in the market right now.

Brian Singer - Goldman Sachs

Thank you.

Don Blankenship

Thank you

Operator

Our next question will be coming from the line of Pearce Hammond of Simmons & Company. Please go ahead with your question.

Pearce Hammond - Simmons & Company

Good morning, Don.

Don Blankenship

Good morning.

Pearce Hammond - Simmons & Company

I just would like if you'd elaborate on a comment that's in the press release, whereby you say that you anticipate some opportunities to possibly expand your exposures in other regions or in non-core businesses. I'm just curious kind of what's you're thinking from a non-core business standpoint?

Don Blankenship

Well, as far as what I'm thinking is that everybody from natural gas producers to transporters of coal, which is not exactly non-core but we don't deal in barges and things of that nature currently and things that are -- that we have knowledge we're context with which can be anything from timber to material handling. So, it would be somewhat related geographically or if it were outside the area, it would be related to transferable skills like Illinois production or something.

Pearce Hammond - Simmons & Company

Great. And where do you see the greatest opportunities right now for potential acquisitions, would it be on the coal reserve side or more struggling smaller miners that might have some decent reserves?

Don Blankenship

Well, I think there would obviously be opportunities to pick up co-investments for fractions of the dollars that were spent on them in '07, '08 by investors. So, that will be one thing we'll be interested and even though it may be acquisitions that we'd have to sit on for a while, wait for the markets come back, I think the processing of that might be attractive and again obviously, I think that with natural gas process where they are, there could be some opportunity and we're hearing rumblings, which I don't want to repeat, rumors and so forth that some of companies maybe struggling and may not either be able to pick up as such or through the court processes be able to pickup properties.

Pearce Hammond - Simmons & Company

Great. And then one final question, based on your guidance, your shipment guidance for this year, if I took the low end of that range, the 38 million tons, and then I back-out what you ship for Q1, the 10.8 million tons that would imply about 9 million tons a quarter for Q2, Q3 and Q4. How should we think about that progression for the rest of the year, is it short downward move in Q2 or is it short downward move come in Q3 and Q4?

Right now, I would tell you that we will probably be in the say 9.5 in the quarter but we don't know that in this quarter. And of course, because of that we are looking at the third and the fourth quarter and saying lot more might be coming at us. So, we've moved it to what we consider to be a very low number although I think I just came from National Mining Association Meeting, the most common comment among the CFOs and the CEOs is how many budgets we've done this year because every morning we will get another call and another problem. So, we've allowed for that in the 38 million ton number.

Pearce Hammond - Simmons & Company

Great. Thank you Don.

Don Blankenship

Thank you.

Operator

Thank you. Our next question is from the line of Michael Dudas from Jefferies & Company. Please go ahead with your question.

Michael Dudas - Jefferies & Company

Good morning gentlemen.

Don Blankenship

Good morning. How are you, Mike?

Michael Dudas - Jefferies & Company

Well, thank you. Don, looking at the contracts that you have in your backlog, how -- what percentage of success will Massey entail relative to capture the full value of the contracts that you've signed with your domestic steam and your international met customers?

Don Blankenship

I would say it's quite different as between utilities and met accounts. We will capture eventually nearly all or more of the utility value contracts because in some cases where we're deferring is been done on behalf of utilities request et cetera.

On the metallurgical side, its no secret that some of our negative cash and they're having issues and they don't have any bit coal and I would think that we're going to surrender some of that value. We don't want to get too specific about that but it's some of our internationally and we can't book losses for 4 or 5 years and we need customers, so its -- everyone of them is a one-off tough negotiation trying to find both the balance between the shareholders interest and reality and what would be involved in trying to enforce them. So, we're working with each one of them but there will be considerable value loss on the international met side.

Michael Dudas - Jefferies & Company

And for your uncommitted met tonnage for 2009, is there a range, or are you still in negotiations what kind of pricing relative what you booked in the first quarter and how should we think about that, how that goes through?

Don Blankenship

Well, it's difficult because you're trading off these values and extending contracts and you got everything in the world going on in those negotiations. And at times, you get them sold you can seem to get them written before the market changes again. So, we still expect -- you are seeing probably the 129 FOBT Australian closings, which come back about 86 or $90 that FOB short-term demand depending on what the relative freight rates are in tumbling fees.

We think that that's close to the market right now and for both '09 and '10 and we're working along those lines and then trying to build in the value of commitments that are being fulfilled.

Michael Dudas - Jefferies & Company

And my follow-up is though this is an unprecedented economic and energy environment that we're in right now, maybe can you characterize in your 20 plus years or 25 years in the company, how this is similar to maybe some of the more difficult times that the industry and Massey's had in the past and when things normalize, could things be -- could the market be a lot shorter than people anticipate because of the lack of investment and the push back orders from transportation standpoint, from the difficulties in the capital front and at the same time when the world's want to have our coal again, could that lead towards a pretty strong recovery on the other end?

Don Blankenship

I think that fundamentally on the second part first, the thirst of the world for energy will come back if the economy comes back and I think everybody thinks it will whether it's this year, next year, two years and when it does, obviously whether it's natural gas or coal or all of the number of rigs, the amount of investments so forth is far less than it has been in not only in last year but in last several years.

So, the investments will be behind and there won't be enough volume in place to meet the recovery in demand essentially, I'd say in a simple way, the market will recover faster than the production can recover and therefore, the pressure should be extremely strong. As compared to what it's been like in the past, I think '08 and '09 have been the two most volatile years I've dealt with,'08 on the up side, '09 on a down side, press is tripling and part of '08 over '07 and in following high for less in '09, I think all that has to shake out and stabilize because I believe that it will have to be more stable for producers to stay in the market and of course it also couldn't have been much more volatile on the regulatory side, whether it's miner act one, or whether it's been the EMSHA strict enforcement of the laws and violations or EPA or the new administration, it's been as wild as I've seen it.

Even though I had a little bit of contact was 74 and 77 when they first put into surface miner laws, and it was a bad then, but it will shake out the weak players and make the stronger players stronger in my opinion.

Michael Dudas - Jefferies & Company

Thank you, Don.

Don Blankenship

Thank you.

Operator

Thank you. Our next questions is comes from the line of Brett Levy of Jefferies & Company. Please go ahead with your question.

Brett Levy - Jefferies & Company

Yes. Can you talk about the non-expenses as moved over to natural gas, how much of that is actually in the North American market able to move from coal and natural gas kind of use to be on a BTU basis, the coal was twice the value of natural gas, obviously, we're placing it right now that may not be as true. But can you talk a little bit about the math at this point and a little bit about how much capacity you really swing back and forth in terms of the amount of demand destruction it creates.

Don Blankenship

Well, it's a hard thing to do because there is so much exchange of electricity between utilities and the disparity and the drop of different utilities were some of them lost major industrial counts and others perhaps haven't done and some of them high priced coal that maybe they can differ in some of the wrong markets, so but my guess is that there's been more than 5 million tons displaced that is super player in the central App market. In the country, I don't know I mean some of the guys that deal more in the West and throughout the country would have a better idea. But I wouldn't be surprised if it's not 10 to 15 million tons annual.

Brett Levy - Jefferies & Company

All right. Then the second question is do your bank covenants allow you to repurchase bonds at a discount and is that something that if below would be an all of interest for you at this point?

Don Blankenship

The answer to both would be yes, although we're not too concerned about the bonds at this time. We're more focused on dealing with the volatility in the market in getting our operations adjusted in the right size and so forth but yes, the bonds are selling at considerable discount.

Brett Levy - Jefferies & Company

All right. Thanks very much, guys. Good job navigating through tough times.

Don Blankenship

Thank you very much.

Operator

Thank you. Our next question is coming from the line of Justine Fisher of Goldman Sachs. Please go ahead with your question.

Justine Fisher - Goldman Sachs

Good morning.

Don Blankenship

Good morning

Justine Fisher - Goldman Sachs

The first question I have is just regarding your met coal tonnage. So, first of all what is your total met production capacity because I'm trying to figure out what percentage of your capacity you'd operate at? Because if the steel mills are operating at 40 to 50% of capacity, it sounded like you expect to ship 75% of year met coal tonnage capacity this year some, so I'm trying to reconcile those numbers because I would have found in that coal shipments would have declined even further beyond the first quarter of 20 million ton.

Don Blankenship

When we saw capacity, capacity of equipment mines and infrastructure in place be probably between 12 and 13 million tons. I think we had got it that we thought we would do more like 10 maybe at one point 10 to 12. But so if you look at it as a percentage, we are probably doing say 60, 65% of our capacity but we would have to put those mines back to work.

Justine Fisher - Goldman Sachs

So, it's -- so you're looking from metco shipments to the rest of the year to be on par with the first quarter, you don't expect additional deferrals that would take numbers down way below the first quarter's 1.8?

Don Blankenship

Well, we expect additional deferrals but we will be in the late season. So, our forecast allows for the fact that we should have some customers taking coal Lake Shore opened it and have not been taking coal whether closeness or it bounces after the to the guided number.

Justine Fisher - Goldman Sachs

Okay. And then for the 2010's production guidance, the fact that 2010 is even lower than '09, is this you guys being conservative or is this you're assuming that electricity demand will decline even further and that met coal demand will decline even further beyond what I guess some people think as the drop '09 already.

Don Blankenship

I think it's more a function of the beginning of the year inventory level. Steel mills would have had fairly normal coal and coke inventories as well as slab inventories and so forth. At January 1, '09, we think that given the situation the inventories through out the systems would be high at January 1, '10.

So, their take volume from us even if they are making more steel will still be impacted and the same thing would be true on the electric side. We don't necessarily think electric use of coal in '10 will be less than '09 but we think they will enter the year with higher inventories.

Justine Fisher - Goldman Sachs

Okay. And then the last question is just on the wage and benefit cuts, I guess with the current job market there is probably not too much more and then the shutdown in Appalachia of the mine is probably not too much competitions for labor but is there a concern that after you have may have offered or stream some benefit packages in '08 in order '07 and '08 in order to drive labor that reducing these benefits may drive some labor, where it may allow other companies to take some of the workers that you worked hard to get over the last couple of years?

Don Blankenship

No, we don't worry too much about going elsewhere. We worry about there being disenchanted or turning to other sources for assistance inappropriately. So, we are managing that very well. I'm trying to personally meet with hundreds of our coal miners. We have prepared films to communicate our messages. We were careful as we ramped ways and benefits of the last couple of years to make it clear that we would adjust to the market when we had to and most of our people are understanding of the ups and downs of the coal market.

So, we are doing the best we can, although we always have a concern as to how the workforce will accept these changes.

Justine Fisher - Goldman Sachs

Great. Thanks so much. I appreciate it

Don Blankenship

Thank you.

Operator

: Thank you. The next question will be coming from Wayne Cooperman of Cobalt Capital. Please go ahead with your question, sir.

Don Blankenship

Hey, Wayne.

Wayne Cooperman - Cobalt Capital

Hey, sorry I just stepped out for a second. Just -- you might have touched on this but I mean the whole, it looks like the cost structure of the industry is above the spot prices of coal. It doesn't really make a lot of sense. Just kind of where you think the industry is going to go as far as total volumes and some of these contract guys, you got to pay royalties on top of everything seems to be SOL, so to speak, just curious about your feel on the industry?

Don Blankenship

Well, I think that as we talked earlier, the volatility has made it almost impossible to plan your business and of course the safety rigs and environmental rigs, which we don't usually get into the level of detail that we have to deal with the headline stuff about the permit or safety rule or shelters attracting the vessels is one thing, but what its doing to the cost structure of the industry and the tale is quite significant.

And therefore, there does exist a situation, where the average costs are exceeding the top market, and obviously that can't continue for very long. Having said that lot of the companies, including us are somewhat subsidized by process that were agreed to last year for shipment this year in that, so the end time, though the cost has to come down and the price has to come up, the cost will come down some just because of the psychology of the labor market and the supply market and so forth and the price will recover somewhat as the inventories return to normal levels and there will be a margin there otherwise none of the companies could survive.

Wayne Cooperman - Cobalt Capital

Any sense of just how many tones Central App might spend at ship in this year and next year?

Don Blankenship

My guess is that the Central App is going to make a huge adjustment probably higher than other people perhaps 50 million tons. If you remember back 2 or 3 years ago, sort of took the breadth that this would happen last year and have last year happened this year. So -- but we need do adjust about 50 million tons temporarily at least and then hopefully come back a little bit.

Wayne Cooperman - Cobalt Capital

So, if the industry take that 50 million tons, I mean do you start getting better freight rates from the shippers and the rails and today have to kind of readjust also?

Don Blankenship

Yeah, I think everything adjusts, I think freight rates adjust cost to route boats adjust and cost to labor adjust, psychology adjust. There will be a lot of, if you will external pressure on cost to go down and the price will recover somewhat because it will have to for the higher coal producers to stay in the market.

Wayne Cooperman - Cobalt Capital

Let me ask you one other question. Do you have any sense of either of your customers or Central App customers in general, how much of their electricity production can be shifted between coal and natural gas, because clearly gas prices have pretty depressed right now too at least in the slot market?

Don Blankenship

You were asking a question a moment ago, and I guess it' not be 5 million in Central Approximately. Its so dependent on what region its occurring in and whether that particular region, whether its South Carolina and North Carolina area, whether it's the Ohio areas and or the Florida area as to availability of gas, and even that plant and trading off till what hours between utilities is hard to predict but its certainly at 320-360 gas as a fact.

Wayne Cooperman - Cobalt Capital

All right. Well, thanks. I'm proud of you guys for bringing the production down and the CapEx down for face reality.

Don Blankenship

Well, we appreciate that and the best we can to do with it changes so fast it's hard to keep with. But thank you.

Operator

: Thank you. The next question will be coming from David Lichens of CLSA. Please go ahead with your question, sir.

David Lichens - CLSA

Okay. Good morning guys.

Don Blankenship

Good morning.

David Lichens - CLSA

Question, what type of price would you need to see on the met or the steam side to bring that stuff you are idling or to bring the Saturdays back online?

Don Blankenship

Ironically, we've probably -- if Massey could bring the volume back online in today's press is just a matter of volume. You've got situation where both utilities and the steel companies have bought more coal and they can accept deliveries. So, there is no press really.

Most of the presses you see posted are process, where people are buying coal back or buying out of deals. So, at the process, we can get a reasonable margin on that the volume as a hold on the store.

David Lichens - CLSA

Thank you.

Don Blankenship

Thank you.

Operator

And next question is coming from the line of Paul Forward of Stifel Nicolaus. Please go ahead with your question.

Paul Forward - Stifel Nicolaus

Yes, good morning. On other income, can you talk about why guidance went up and where that should be next year?

Don Blankenship

On plant, it went up, Eric could speak to us specifically but he touched on it some with the mark-to-market stuff and so we've done a few transactions and so forth but I'll let him speak to it more in detail. But the mark-to-market was probably one of the bigger ones.

Eric Tolbert

As Don said, mark-to-market did play into that some in last year in the budget of projecting out 2009 of course we were looking at a different market and expecting more on the negative side for mark-to-market or purchase type coal transactions and now we are of course modeling a little bit more on positive side on that.

Also from time to time, we will have some transactions on sales and of assets in such that basically add into that range that we're providing for guidance for 2009.

Don Blankenship

To give you one example, we had a piece of property this time, that one of our competitors was up against it, he could man it, we can't get to its verticals and we've acquired a lot property that way over the years sort of as a back product of our other acquisitions, and we typically wait for someone to need that property and then we sell them.

So, it's hard to predict timing and it makes it awkward to put guidance in there, but historically, we've done quite well at there

Paul Forward - Stifel Nicolaus

All right. And thinking about, if you were to take 2010 I know it's too early and I appreciate the fact that you gave guidance, but if you take the midpoint of guidance almost say pricing volumes cost and capital spending, you probably get to somewhere around 3, $4 of share free cash, and I'm just wondering -- and some free cash this year as well probably lower because of the higher capital spending but I was just wondering if you can talk about what you plan to do with it this year, and next year and I think you talked you about buying some debt back but also compare buying back your own shares with buying distressed assets. How do you go about that decision making process?

Don Blankenship

As you know, it's like some of those stuff we talked about it, it's ever changing if you're convertible bonds are trading at $0.60, $100 and you deal a little bit of dilution and some of your interests expense in that EPS, its attractive.

However, if they've moved up and the capital markets have opened up, we might look at taking out some of the other debt. So, it's really hard for us to say what the circumstances are going to be say late this year or early next year, how many acquisition opportunities might be there, but certainly if the debt stays discounted and we get comfortable that there is not yet a steeper downturn in the future, which we don't believe at this point there is then, that's a possibility and acquisitions would probably be a strong possibility.

Paul Forward - Stifel Nicolaus

Okay. Thank you.

Don Blankenship

Thank you.

Operator

The next question will be coming from the line of John Bridges with J. P Morgan. Please go ahead with your question, sir.

John Bridges - J. P Morgan

Good morning Don, everybody.

Don Blankenship

Good morning.

John Bridges - J. P Morgan

Just wondered with this latest comment from the Department of the Interior talking about changing the rules with respect to mine waste closed to streams. If that were to be made it legal, then it might compromise the strong position you've put in place with your permitted projects. So, could you comment on that?

Don Blankenship

Yes, it's hard to comment on because it can be interpreted in so many different ways but essentially, what they are discussing their and the buffer zone is that placement of rock field within a 100 meters of intermediate or routine or XML streams, in other words streams that actually have water. So, it will impact few of our permits or change our mining a littlie bit.

I guess the way I would characterize it in the big picture is it's a frustration that drives some cost we think it's been mischaracterized because it was under review for 4 years, under the Bush Administration Act for some court ruling and so forth related to the patent decisions. So, it's been made to do different studies and environmentalist to going back and forth with industry on it and it should be behind us and here it's still a factor. But it won't greatly impact us in the other two to three-year period.

Again, we have idle deep mines and the more restrictions are put on any of this mine, the more it will impact supply and health press. So, we think we can deal with it better than most and we just wish it wasn't constantly changing.

John Bridges - J. P Morgan

Okay. Don, thanks. Congratulations on the results.

Don Blankenship

Thank you.

Operator

Our next question is coming from the line of Jeff Creamer of UBS. Please go ahead with your question.

Jeff Creamer - UBS Securities

Hi, good morning guys.

Don Blankenship

Good morning.

Jeff Creamer - UBS Securities

You've talked a little bit about in that coal sales, did you mention what the carryover tons was from '08 and are there more times to come from 2008?

Don Blankenship

Well, there has been so many contracts renegotiated in so much issue, I don't know how to define carryover anymore, we've clearly been in a situation, we're at times that we are being carried over have now been deferred again simply because they don't have any word to put to go.

And so, I don't know how we define carryover times. We had probably close to a million tons of what would have been carry over times but now I'm not sure that they want those terms, so if they are all in separate negotiation.

Jeff Creamer - UBS Securities

So, I guess the 2008 pricing, we didn't see that in the first quarter and wont see that in '09.

Don Blankenship

In the first quarter, you saw some '08 pressing that was April 1-April 1, or even July-July1 pricing but -- and you saw a few extremely high press shipments that probably impacted the average sum. But at the first quarter average is not significantly different than in the next three quarters as far as I wish perhaps.

Jeff Creamer - UBS Securities

Okay. And just used about 60 million or so of working capital during the quarter, do you expect that to improve later on this year and that might be a source of cash?

Don Blankenship

A big part of that working capital was the payment of capital expenditure items that were accrued at year-end. So, we pulled down payables real hard in the first quarter and we probably will again in the second quarter, plus we've -- because we had a 10.8 million ton volume, the receivables were up between those. But we would expect maybe the cut in another 30 million out of payables just because of the downsizing and the run rate.

So, you will see some cash hit there but working capital won't be a factor over the rest of the year on cash flow like it was in the first quarter.

Jeff Creamer - UBS Securities

Okay.

Don Blankenship

So, it will be net zero or less probably for the rest of the year, we probably get cash out of working capital as opposed to putting 82 million in working capital on the first quarter.

Jeff Creamer - UBS Securities

Okay. So after the 82 stat, then it'll probably be flat for the balance of the year.

Don Blankenship

Right, although it might be a little negative in the second quarter, it'll be flat for the rest of the year.

Jeff Creamer - UBS Securities

Got it. And then just finally on liquidity position, you guys have healthy liquidity position at nearly $700 million, have you given any thought to possibly increasing the size of revolvers, kind of underscore your cash position and make it more flexible, I guess to pursue the opportunities to see there pursuing back funds or acquisitions?

Don Blankenship

Well, we've looked at it. Of course the cost of it was extraordinary last year, it's come down some but the cost is still higher than we think it will be. So, we haven't bothered to try to increase the ABL or to do other things because we think it's coming in our direction.

Jeff Creamer - UBS Securities

Okay, thank you.

Don Blankenship

Thank you.

Operator

Your next question is coming from Meredith Bandy of BMO Capital Markets.

Meredith Bandy - BMO Capital Markets

Good morning. Thanks for taking my question. I just wanted to go back again, sorry to beat the dead horse here, but on the production guidance, the 38 to 41 million tons, is the 7 to 7.5 million tons of met, will that be sort of at the midpoint of that range or would that represent the high-end, how do think about the split there?

Don Blankenship

I think 7.5 is a midpoint. If you use 39.5 and 7.5 and 28.5 steam and 3.5 industrial, you would probably be close to the midpoint in rounded 0.5 million.

Meredith Bandy - BMO Capital Markets

Okay. All right. That's very helpful. Obviously the met makes a big difference to the results, and then would you say the same then for the 2010, I know you don't want to get into too much specifics on that but the 7, the roughly 5 met would get you to the midpoint of the 35 to 40?

Don Blankenship

Yeah, most of people here are scared to give any guidance for '10.

Meredith Bandy - BMO Capital Markets

I don't blame them at all.

Don Blankenship

But we got you some guidance. I think that -- I personally think that the met market will be more favorable to us than the utility market relatively speaking because I think India and parts of Asia will provide a better customer for a met coal than Central App utilities will and I don't think we are going to have much luck on steam coal force. So, I think there is a better chance, we would improve the met than the steam in terms of volume '10 over '09.

Meredith Bandy - BMO Capital Markets

Okay And so can you remind me again how much of your met, is it generally like half of your met is exported and who are your major customers been on the met side, not the customers themselves, but the areas of the world I guess?

Don Blankenship

Generally, it's got to be non-definable term in this business but our biggest customers are Western Europe, India, Brazil and Asia.

Meredith Bandy - BMO Capital Markets

Okay. So, all over the map.

Don Blankenship

Yeah, India has been a big customer in last year and we have been pleased that we've been able to continue to move coal in the Asia; it's more or less that we're there I think to provide balance to Australia. But nonetheless its been good business for us.

]

Meredith Bandy - BMO Capital Markets

Okay. All right. Thank you very much.

Don Blankenship

Thank you.

Operator

And our next question is from David Gagliano with Credit Suisse.

David Gagliano - Credit Suisse

Great. Thanks very much and thanks for the duration of the call. First question relates to your 2010 pricing expectations. What is the average price for the 20 million tons that have been committed in price thus far? How much met coal has actually been priced for 2010 and what are you actually assuming for your un-priced positions for 2010 to get to the 60 to $65 weighted average? That's my first set of questions. Thanks.

Don Blankenship

20 million just under 60 practically none and pretty well constant with the non-met and OTC sales forward chart which is mid 50s on steam tons and the Australian 129, FOBT mid settlement.

David Gagliano - Credit Suisse

Okay. So the 2010 includes the 129 assumptions on the met?

Don Blankenship

Yes.

David Gagliano - Credit Suisse

47.5 million tons.

Don Blankenship

And forward market trigger pressing on the steam and almost all of the sold tons are steam. And so impressed tons and in the neighborhood of $60.

David Gagliano - Credit Suisse

Okay. My follow-up question. You mentioned you actually idled a couple of mines and I'm just wondering what's the volume associated with the idle mines and what is the average cash cost of the mines that you've idled.

Don Blankenship

I thought that before the call that somebody was going to ask that question.

David Gagliano - Credit Suisse

That's good.

Don Blankenship

But we idled about 2.8 underground, 1.4 surface. But we'll cut it back virtue of cutting that over time so forth for about 4.2 million tons so far and I would guess the average cost of those mines to be approaching $60, but I don't have the math to support that in front of me.

David Gagliano - Credit Suisse

Okay. That's perfect. Thanks very much. I appreciate it.

Don Blankenship

Thank you.

Operator

Gentlemen, our next question is from Zack Swaver (ph) of Ducan Capital. Please go ahead with your question sir.

Unidentified Analyst

Hey, Don. Thanks for your time. I was wondering if you sort of update us on the whole amount on top mining process which stands legally and with the charge with the EPA. Through ash jurisdiction can the EPA take it back. And of course it's... you're a not lawyer, it's confusing to follow. Thank you

Don Blankenship

And you're asking the question as rebate in order to turn over to a lawyer. I think I'll turn over to Shane and he is on the other line, but we hope to that we can get an understandable answer. It's influx that's for sure. Shane, are you there?

Yeah. He's not in the same room wherein for the audience purposes but he should going to able to answer.

Unidentified Company Speaker

I will try to make it simple as I can. Most of the debate has been over the process of permitting valley fields, and that's what chamber's case was about.

And the chamber's decision puts some limits on the ability to permit valley fields but that decision was overturned by the Force Circuit in February. The environmental groups have asked the Force Circuit to reconsider their overturning of the chamber's decision and that is currently before than we expect to get an answer on that some time mid May.

I would say I don't want to handicap too much but getting cases reconsidered by a circuit is very difficult. So we feel decent about our place there. The other more recent development has been some objections by the EPA. The EPA has the ability to review permits issued by the core of engineers and they have sent some letters questioning what standards the core should apply in issuing those permits and that's still a bit hazy at this point. We've had meetings with the EPA and core trying to determine what the rules are. I would say right now we have a fair amount of uncertainty but no permits that have been denied.

Unidentified Analyst

So basically the EPA is reviewing permits of (inaudible) core engineer has issued?

Unidentified Company Speaker

Issued or prepared to issue. They have that right. They've done that in the past and we have in the past changed permits somewhat to meet's EPA objections and gotten them through. This is not something that hasn't happened before but there still more focus recently by EPA on the objection process.

Unidentified Analyst

Is the EPA effectively trying to sort of reinstitute that the chamber's decision which the Force Circuit overturned and will likely uphold that position by likely declining to reconsider it. So, how much can the EPA sort of undermine that traditional decision. It's all I mean...

Unidentified Company Speaker

Well I wouldn't say that the EPA is trying to put the chamber's decision back in play. In fact I'd point out that the Department of Justice which also represents the government's interest is on our side before the Force Circuit in trying to get the chambers decision or keep that decision overturned.

The EPA's objections are different than the findings in the chamber's case. They have some concerns about water quality which we have to ultimately address. They are different issues.

Unidentified Analyst

Got it. Okay. All right. Thank you so much.

Unidentified Company Speaker

Sure.

Unidentified Analyst

Thank you.

Operator

Our next question will be coming from the line of Mark Caruso of Millenium Partners. Please go ahead with your question, Sir.

Mark Caruso - Millenium Partners

Hi, actually good Afternoon now at this point. Don just quick follow-up from the comments earlier. One is on your pricing assumptions for this year do you already have enough clarity on the met side. So, what you'll get first, your conversations that you're having now with met customers is the first question.

Don Blankenship

The answer would be yes although we've had to be fair, I mean we've had three or four final conclusions to allow each deals and then they simply can't make it happen because they loose their order book or something happens to them. You have a price and a volume and you negotiate a new price and a volume and an extension and then three weeks later you find yourself back in front of them again. So we don't know that we won't be back in front of them again but at least I think it's not as bad as it's going to get.

Mark Caruso - Millenium Partners

Okay. And then just going back on the comments earlier. Is the $60 per steam assumption for your, is that for priced tons or is that for un-priced tons?

Don Blankenship

What I said that we're near $60 average price on the steam tons that we have sold and most all of the 20 million sold and price tons are steam and that essentially we've used the forward market which is $55-$56 for steam coal and the Australian FOBT settlement of $129 sort of get a guideline for '10. Again having said that, it's sort of done in a macro manner as opposed to a detailed build up by customer that we might have as we do the budget and have future guidance.

Mark Caruso - Millenium Partners

Got you. Okay. Just understood or I have a bad connection. So its 60 is what you have locked up and then sort of what's un-priced due to seasonal strip.

Don Blankenship

That's basically right.

Mark Caruso - Millenium Partners

Okay. Thanks.

Don Blankenship

Thank you.

Operator

Our last question comes from the Erik Fill (ph) of Merrill Lynch. Please go ahead with your question.

Unidentified Analyst

Hi, thanks for taking the call. One of your competitors have talked about as much as of third central lab production being underwater so to speak given current prices. And I think they were referring to fuel prices as well and saw just a spot. And I don't know if could sort of give you color on that kind of a comment. I mean, how do you feel,... I mean now you gave a number, are you thinking 50 million tons needs to come off line. But with respect to the kind of costs curve if you will, and central ad versus say cotton prices, what's your perspective on how much of that maybe out of the money.

Don Blankenship

Yes, I would agree with whatever our competitor said that its probably a third. It's a big number, But I would say that historically the cost have come down with this kind of pressure. It essentially comes down automatic and as I said earlier you take off your hack off mans first and then you get a little bit different psychology in the work force. So I think the number will come down from there, but I wouldn't disagree that the third or more has a cost in the first quarter higher then'10 strip or market.

Unidentified Analyst

Got you. All right. Thank you.

Don Blankenship

Thank you.

Operator

Thank you. Now I'll turn the program back to Mr. Hendriksen.

Roger Hendriksen

Well, thank you everybody for your participation. We're happy to speak to you later. You can call me at my office if you have further questions and again we appreciate your interest in Massey Energy. Thanks.

Operator

Ladies and gentlemen, you may now disconnect your lines at this time.

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