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Executives

Janine Orf - Director, Investor Relations

Richard M. Whiting - Chief Executive Officer

Mark N. Schroeder - Senior Vice President and Chief Financial Officer

Analysts

Jeremy Sussman - Natixis Bleichroeder

David Khani - FBR Capital Markets

Paul Forward - Stifel Nicolaus & Company

Brian Gamble - Simmons & Company

Paul Cheng - Citigroup

Andreas Benjamin - Goldman Sachs

Meredith Bandy - BMO Capital Markets

Patriot Coal Corp. (PCX) Q1 2009 Earnings Call April 30, 2009 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Patriot Coal First Quarter 2009 Earnings Call. At this time, all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's call is being recorded.

At this time, I'd like to turn the conference over to Janine Orf. Please go ahead.

Janine Orf

Thank you, Kent. Good morning and thank you for joining Patriot's first quarter 2009 earnings call. I am Janine Orf, Director of Investor Relations for Patriot Coal. With me, are Rick Whiting, CEO of Patriot and Mark Schroeder, our Senior Vice President and CFO.

On this call, we will be discussing our operations, our outlook for coal markets and our results for the 2009 first quarter. As a reminder, forward-looking statements should be considered along with the risk factors that we note at the end of our press release as well as in our Form 10-K.

Finally, we will be referring to non-GAAP financial measures which are reconciled in our earnings release available at our website patriotcoal.com.

Now, I would like to turn the call over to Rick Whiting, Patriot's Chief Executive Officer. Rick?

Richard M. Whiting

Thank you, Janine. Good morning everyone, thank you for your interest in Patriot. My remarks will focus on how management is running the company in the face of the economic challenges that all businesses face right now. I assure you that our goal is to have Patriot emerge stronger and more competitive than when we entered the worldwide economic downturn.

The markets for coal are very depressed as discussed in Patriot's earnings release and numerous industry reports. We expect the coal markets to begin a slow recovery by the end of 2009, led by the U.S. electricity markets and more slowly by the steel markets. The long duration of the recovery necessitates hands on decisive management activity.

Last quarter, I talked about the management action plan we were executing in response to the weak coal markets. As you may recall, the plan included initiatives to idle high cost mines, cut capital expenditures, transfer equipment to more productive locations, reduce the prices we pay for materials and supplies and fill open positions with displaced miners from idled operations.

We move swiftly and with the help of many dedicated employees have achieved a great deal. We reduced output to better match market requirements by closing or suspending smaller higher cost operations.

Capital expenditures were $20 million less than budget for the quarter and some of our displaced workforce fill open positions at higher potential operations. Although our operating costs were somewhat impacted by cost of rationalizing our operations during the quarter, these actions helped strengthened our competitiveness and preserved assets for a better pricing environment in the future.

On the customer and revenue side, the management action plan included aggressively seeking customer reimbursement for regulatory related costs under applicable coal supply agreements, as well as working to restructure certain below market legacy coal supply agreements.

During the quarter, we made meaningful progress negotiating with customers in each of these areas, including modification of payment terms, receipt of payments for regulatory related costs and replacement of legacy terms with new business. We expect to see continued benefits from those actions as the year unfolds.

The management action plan is dynamic and is updated as new events and circumstances arise. Earlier this month, to further balance Patriot's production over shipments, we idled two contract mines, eliminated weekend work days at the Hobet Complex and deferred production start up at our newly developed Blue Creek Complex.

These actions removed an additional 2 million tons of production from our 2009 plans, bringing the total of reductions to-date to approximately 6 million tons versus our plans at the time of the Magnum acquisition last summer.

Management has updated the plan going forward to focus our team on major cost structure and productivity improvements commencing in the second quarter. This is an ambitious and essential goal to become more profitable during these soft markets. We're also revaluating all of our operations and we are prepared to make additional production cuts if market conditions want.

At the end of last quarter, Patriot had total unpriced production of up to 3 million tons including about 900,000 tons committed but unpriced. Given the poor market conditions during the first quarter we selectively booked only 800,000 tons of new 2009 business during that period. Considering the 2 million ton production cut I just mentioned, we are now fully committed for our planned 2009 output.

Regarding the roughly 900,000 tons committed but unpriced at December 31st which related to met coal under fiscal year contracts with certain European and Brazilian customers most of this pricing was finalized during the quarter with only about 200,000 tons yet to be priced.

Approximately 700,000 international met tons were priced during the quarter at pricing inline with the $129 international benchmark brought back to the mine for U.S. coal and adjusted for quality.

At this time market activity is virtually non-existing for new 2009 or 2010 sales. Further, some customers are requesting shipment deferrals due to low steel mill utilization, reduced electricity generation and high inventory levels.

Our management's approach is to work out mutually beneficial arrangements with the customers on their coal requirements where practical; while defending all of our contractual rights when arrangement does not occur. Our good customer relationships provide an excellent starting point to these potential discussions. These arrangements could result in further product cuts as we move through 2009.

Moving on to safety; maintaining safe operations continues to be a top priority at Patriot. During the quarter four of the company's facilities received Mountaineer Guardian Safety Awards from the West Virginia Coal Association. That was a Federal No. 2 mine, the Westridge surface mine, its part of Hobet; the Big Mountain preparation plant and the Harris preparation plant. Additionally, Patriot's Guyan and Colony Bay surface mines each received reclamation awards from the West Virginia Coal Association. We commend our employees on these safety achievements and on keeping safety at the forefront of everything they do.

As you are aware, surface mines in Appalachia have been and continue to be the subject of numerous environmental challenges. I will cover a few of the latest developments. We announced in March that Patriot entered into a consent decree with Ohio Valley Environment Coalition and West Virginia Highlands Conservancy to resolve pending claims under the Clean Water Act relating to the Apogee and Hobet mining complexes.

As a result of the negotiated settlement the deadline to implement solutions for selenium effluent limitations at outfalls subject to the litigation was extended from June 30 of '09 to April 5 of 2010. Patriot also agreed to implement a power project to evaluate selenium water treatment in coal mining setting.

Management believes this setting... this settlement is consistent with our mission to be good steward of the environment and our company philosophy to maintain a constructive dialog with the environmental community as well as federal and state regulatory authorities.

A significant Federal Court decision was overturned during the quarter allowing service mining permits to again be granted. However, the new EPA Director has indicated the agency's desire to participate more heavily on the permitting process.

The EPA has issued letters to the Army Corps of Engineers recommending denial of a number of pending industry permits. This action together with the proposed cap-and-trade system and the EPA's proposed endangerment binding on carbon dioxide and other gases could potentially mean hundreds of dollars in additional utility costs for every American each year. And these actions will reduce American competitiveness in the coal... in the global marketplace.

Coal is essential to the U.S. economy and American standard of living. Coal is America's most abundant fuel. It is impossible to separate coal from economic progress. When policymakers, legislators and even the administration senior staff look more closely at the energy sources that drive this country they will see that low cost electricity coming from coal is essential to our country's economic and social wellbeing.

We believe the new administration will ultimately find the right balance of environmental change and low cost reliable energy. And we believe the citizens of this country will insist that they do so.

In closing, I will repeat my pledge to have Patriot emerge from the global economic downturn a stronger, more competitive company. We look forward to reporting on our progress in the future.

Now let me turn the call over to our Chief Financial Office, Mark Schroeder to discuss the first quarter's results. Mark?

Mark N. Schroeder

Thanks Rick. Let me begin with an update on the performance of our Federal and Panther Longwalls. Those operations are obviously very important to our success.

Performance at the Federal Longwall mine improved each month during the quarter, with production for the full quarter near federalized... normalized run rate of 1 million tons. It has been several quarters since we were at this level.

Going forward, we expect to continue the most recent trend and get back to Federal's reliability exhibited during most of the past decade. That having been said, we do have a Longwall move scheduled for late May which will impact Federal's production in the second quarter.

And as a remainder, we have adjusted the layout of the next Longwall panel to minimize the impact of the adverse geology. The Panther Longwall also continued to show improvement as the quarter progressed with first quarter production more than 35% higher than the fourth quarter. But Panther is not yet performing at an acceptable level.

As we have discussed on prior calls, the Longwall equipment on the current phase is nearing the end of its useful life. We expect further improvement after we move to the next Longwall panel which is anticipated to be early in the third quarter. We expect a new and refurbished equipment competent to the next Longwall panel will yield higher production levels during the third quarter and beyond.

With that as a backdrop, let's discuss Patriot's improved financial results for the quarter starting with the supplemental financial data portion of our earnings release.

In the first quarter of 2009, Patriot sold 8.5 million tons and posted revenues of 529 million compared to sales of 5.1 million tons and revenues of 284 million for the first quarter of 2008. Sales volume increased 3.4 million tons compared to the year ago quarter, primarily as a result of Central App thermal coal sales from the acquired Magnum mines.

The 2009 first quarter sales include 1.4 million tons of metallurgical coal, the same level as the year-ago period. This amount was down more than 300,000 tons from our projections due to customer deferrals of deliveries. And as Rick mentioned, we are working with these customers to obtain the full value in these contracts.

Segment EBITDA per ton was $8.06 in the 2009 first quarter, more than double the $3.50 reported in the 2008 fourth quarter, primarily as a result of higher average selling prices. And as Rick mentioned, the first quarter results were impacted by certain costs to rationalize the operations. Segment EBITDA per ton was $8.39 in the 2008 first quarter which should not include the Magnum operations acquired in July.

Increased revenue per ton in the 2009 first quarter was offset by a higher per ton cost relative to the year-ago period. Segment EBITDA for Appalachia was $9.80 per ton for the 2009 first quarter, $5.88 higher than the 2008 fourth quarter, primarily as a result of higher average selling prices.

In the 2008 first quarter, segment EBITDA for Appalachia was $11.73 per ton, again excluding Magnum. Average selling price in this segment was up $1.39 in the 2009 first quarter compared to the year-ago period, but this improvement was more than offset by higher cost per ton.

Cost per ton increased year-over-year primarily as a result of lower production at the Panther mine and by certain cost of rationalizing the operations. Per ton costs were also negatively impacted in the 2009 first quarter as a result of higher material and supply costs.

Illinois Basin segment EBITDA was $1.67 per ton in the 2009 first quarter, a decline of $0.31 compared to the 2008 fourth quarter, primarily as a result of lower volumes caused by the winter ice storms during the 2009 quarter.

Segment EBITDA for the Illinois Basin in the 2008 first quarter was $2.80 per ton; the lower EBITDA year-over-year was primarily a result of lower volumes in both slightly higher labor costs in 2009.

Our capital expenditures totaled 19 million in 2009 first quarter or about half of our previously projected spend. During the quarter, we redeployed equipment and infrastructure from idled mines and our suppliers continue to provide support which together allowed us to limit our capital expenditures.

Total 2009 capital expenditures are expected to be less than 100 million for the full year, significantly lower than historical averages for our combined 35 to 40 million ton operation.

Turning to the income statement portion of the release; EBITDA improved to 21.9 million in the 2009 first quarter, compared to 17.1 million in the year-ago quarter. On a sequential basis, EBITDA improved 33.6 million, compared to the 2008 fourth quarter. As I mentioned earlier, production at the Federal mine improved significantly in the 2009 first quarter, compared to both the year-ago and the sequential quarter, contributing to the improved EBITDA. In both the 2008 first quarter and fourth quarter, the Federal Longwall mine yielded lower production due to difficult geologic conditions.

In accordance with U.S. GAAP, this quarter included approximately 77 million for purchase price accounting adjustments from shipments related to Magnum's below market sale and purchase contracts. This sales contract accretion is valued as of the acquisition date and is not mark-to-market in subsequent periods based on changes in coal pricing. We anticipate the accretion to increase net income by approximately 65 to 75 million each quarter for the remaining quarters of 2009.

Purchase accounting related to the Magnum acquisition, although preliminary, has been substantially completed, and I expect to finalize this exercise during the second quarter.

Regarding our diesel hedging program, we've locked in approximately 75% of our remaining 2009 expected usage and 40% of 2010 expected usage. This was accomplished at an average spot price per barrel of around $65 for 2009 and $57 for 2010.

We have idled and/or reduced production at several facilities focusing on the high cost operations but also impacting the lower cost Blue Creek facility. Additionally, we have incurred cost to idle these facilities and we will continue to incur certain costs to keep the mines in a near-ready state.

As a result of these mine changes, we are projecting cost per ton for the full year in the range of $56 to $59 for the Appalachia segment, and $35 to $38 for the Illinois Basin segment.

In response to the reduced production volumes starting immediately, we are performing a comprehensive review of our cost structure at each of our mines and support facilities. The objective is to identify further areas for absolute cost reductions. We continue to believe that operations is a key component of our management action plan. This area will be getting our highest attention as we execute for the balance of 2009 and develop operating plans for 2010.

Our depreciation, depletion and amortization of 55 million in the 2009 first quarter includes the preliminary purchase accounting impact of the Magnum transaction. Interest expense increased 6.3 million this quarter, compared to the prior year amount, primarily related to interest and amortized debt fee related to our convertible debt, borrowings under the revolver and cost related to existing letters of credit.

We recognized no income taxes in the 2009 first quarter as a result of our net taxable position. As you are all aware, sales contract accretion has no tax impact.

Turning to the balance sheet. We had 246 million of total debt as of March 31, consisting mainly of our 3.75 coupon convertible debt due in 2013. During the quarter, we adopted FASB Staff Position APB 14-1 which resulted in a reduction in our debt balance of approximately 43 million. This accounting rule required us to record the convertible debt at its fair value excluding the conversion feature with the difference between fair value and face value recorded in equity.

These $200 million par value notes are recorded on our books at 162 million at March 31st. As of March 31st, we had 65 million in borrowings and 343 million in letters of credit against our $500 million credit facility. As a result we ended the quarter with remaining borrowing capacity of 92 million, near the high-end of the range we had expected.

Taking into account our reduce capital plan and the idling of additional Central Appalachia mines during the quarter, looking forward for 2009, we currently anticipate sales volumes in the range of 34 to 36 million tons. This is lower than our projections from last quarter, as we have eliminated almost all of our uncommitted tons through production decreases, both in thermal and met coal.

In today's press release, we have provided the average price per ton for contracted business for the remainder of 2009 and for 2010 by segment and by thermal versus metallurgical coal.

As of March 31st, based on our expected total 2009 production, minimal thermal and metallurgical coal is currently uncommitted and approximately 200,000 tons of international met tons remained unprice. Of expected 2010 volumes up to 5 million tons of met and up to 8 million tons of thermal remain unpriced at March 31st. And we will continue to evaluate 2010 production levels as this year progresses.

In closing management will continue to execute its management action plan as we move forward through 2009. Our Federal mine is producing at more normalized levels and we expect improvement at our Panther mine as we further upgrade the Longwall equipment.

At all levels of our company, the near-term priority is to improve our cost structure and tightly manage our capital expenditures to further enhance further cash flows. Longer term as markets rebound, we intend to again resume our gross strategy. Over the long-term, our financial goals are to consistently grow revenue and expand profits in a manner that achieves superior shareholder value.

This concludes our prepared remarks Rick and I will be happy to take your questions at this time. So I will now turn the call back over to our operator Kent.

Question-and-Answer Session

Operator

Okay. Thank you very much sir. (Operator Instructions). Our first question today comes from the line of Jeremy Sussman with Natixis. Please go ahead.

Jeremy Sussman - Natixis Bleichroeder

Hi, good morning guys.

Richard Whiting

Greetings.

Mark Schroeder

Good morning.

Jeremy Sussman - Natixis Bleichroeder

Good morning nice job this quarter I thought those were excellent comments on the practicality of coal in this country Rick. Now that said, you talked about some major cost cutting initiatives in Q2, that you are kind of going through right now. I can guess can you may be elaborate a little more on this, and what could this mean for your costs, say in 2010? I know you gave us guidance for '09 but hope to get your thoughts on that?

Richard Whiting

I don't know if I am ready to quantify it yet maybe Mark will charm in a little bit. I think primarily, we're just going to.... now that we've kind of shaken down and got into a lower operating level. Lot of our support activities will be different, requirements will be different and now that other changes are being made around the industry on compensation level, other ways to cut cost.

We are really going to go looking at every component of the cost structure, once again look at our, what equipment we have assigned, how we're handling our maintenance programs, our inventories, our work schedules, every element of the cost structure deserves a fresh look now that we're in a different environment and operating at a different level across the whole company.

So I'll call it a bottom up; I'll call it like an early special budget style review to examine all elements of the, of what we do every piece of the spend and we're going to commence that, frankly we've already commenced it we will be doing that in earnest over the next four to six weeks to run out even more cost to make sure that we're competitive and have the ability to continue to compete even if the market stay soft for longer than we would like.

Mark Schroeder

Jeremy I'll just add one point, I guess may be as an example. M&S cost in our surface operations is the higher percentage of our total cost than M&S in our underground. That's an area that we have spent some time focusing on. And I guess just as an example it's an area we're going to continue drill down on and try to get to each of the different pieces.

We have done what we think are good moves and the hedging of fuel, we continue to look at the explosive costs, we've had made some strides with tire costs and we're continuing to focus on all the different pieces would be my example of M&S. But it's a sort of thing that as we look at the individual operations we're trying to continue to drill down as far as we can every dollar that we're spending.

Jeremy Sussman - Natixis Bleichroeder

That' great. And then this is a follow-up, you seem to indicate that utility is willing to work with you in terms of contract terms, payments et cetera. Can you elaborate on this i.e. how much tonnage each may be are we talking about, what type of improvement are you seeing on some of these terms? And lastly is the 1.4 million tons that you saw in 2010, it will looks like to be pretty prices associated with this?

Richard Whiting

Yeah. A couple of things may be I'll address first the working with the utilities. We indicated or I indicated that we're at 34 to 36 million tons for sales in 2009, the reason that is this is the range is there's up to a couple of million tons of both met and thermal customers out there that are at least talking to us about what we can do in that area.

And the reason we have a range and our willingness to work with some of these customers, says that there is some dialog going on, there is some things that we have talked with customers about like early pay or quick pay on some of their amounts. And at the same time they have some needs as to their inventory levels and when they schedule trains to come to our facilities.

So we're willing to work with them to try to help them through their struggles and at the same time maintain the value that we have in those committed contracts.

Richard Whiting

Our mission is to preserve the, I guess in order of priority to cash impact and certainly if we can the P&L impact of any commitments we have for this year and there are various ways we can do that. That's why we are putting a range of the tons, even though we say we are fully committed.

So, we're more about dollars than we are at tons. In fact I would have no problem with leaving more of turns in the ground for a better day and engaging more third-party purchase coal and brokerage activity to fulfill some of our obligations which most of our thermal coal obligations have the flexibility to put third-party coal on them. So that may enter into the equation as well as we go through the year.

Jeremy Sussman - Natixis Bleichroeder

And if I hear correctly, essentially as long as the customers are willing to pay earlier, quick pay, you've no problem shipping at a later point in the year may be when they need the inventory as opposed to now?

Richard Whiting

I wouldn't say no problem, I would just say we have to look at keeping ourselves at logical operating levels at each of our complexes. So it's not really open season but there are ways we can perhaps move to different sources, isolate tonnages that they don't want to take at another operation where it's more compatible with our schedules such as the kind of things we're doing without the Saturdays.

Again that gives us a flexibility to dial back up those Saturdays if certain business is needed. So we've build a lot of flexibility into what we are now running. The ability to dial-up or dial-down further without too much negative impact on the costs side. And then it's just more about preserving the revenue in form of cash and our ability also to try to preserve the profits.

But we are of a mind that we will preserve hopefully on a cooperative basis, the full value of our agreements. And so far we have seen a willingness and appreciation of that need from our customers.

Jeremy Sussman - Natixis Bleichroeder

That sounds great. Thanks guys.

Mark Schroeder

Okay. Thanks Jeremy.

Richard Whiting

Thanks Jeremy.

Operator

Thanks. And we have a question now from the line of David Khani with FBR Capital Markets. Please go ahead.

David Khani - FBR Capital Markets

Hello, gentlemen.

Richard Whiting

Good morning.

Mark Schroeder

Hey, David.

David Khani - FBR Capital Markets

Can you just a little bit follow-on on that with some... and you kind of hinted on this with some of the below market contracts and now with pricing as low as it is right now and where demand is low as it is, how much opportunity you have to go back and sort of redo some of these lower price contracts with some of the utilities, because obviously they're good at pushing back on the high price contracts or at least the delivery of it, how about on the flip side your ability just kind of redo some of these low price contracts?

Richard Whiting

Well, the fact that the market seem content though whenever there is a future's market out there with higher prices in out years, that's kind of compatible with people wanting to not only defer business but also lock in additional business in the out years.

That gives us some latitude to perhaps even make some additional sales about your business in conjunction with given people may be some tonnage relief now. And there is always the cash element and ways we can bridge to satisfy our need and desire for solid cash flows in between now and when they really want the coal. This takes a lot of different forms, it depends on where they are and therefore with repurchases it depends on another regulatory arrangement, in some cases they have multiple owners of power plants with different drivers.

It's hard to pinpoint any one approach but somehow given the make-up of our team with a lot of years selling coal and some members of our team having bought coal we seem to find ways to reach mutual approaches to this David.

David Khani - FBR Capital Markets

That's great. And how much flexibility do you have in going out and buying third-party coal and sort of moderating some of your existing production?

Richard Whiting

I think its give where prices are and peers willingness to the marketplace at least on some volumes to accept prices that make no sense for us from an operating standpoint. I think that's that could a lively area for us. It's always been a big part of our component, Magnum had a very solid brokerage group. And we have the connections, we have the docks on the river and we have the throughput arrangements. We have the knowledge of the barge movements and the customer requirements and the ability to blend coals with our own. It's just natural for us to arbitrage and optimize that possibility. And we're well positioned to do it in terms of staff and facilities.

David Khani - FBR Capital Markets

So it is that, so it could be a few million tons or it be really meaningful to your bottom-line?

Richard Whiting

I would say it could be more than hundreds of thousands that could get into the probably one to two million ton range.

David Khani - FBR Capital Markets

Got you. Okay. That's great. And then more on the operation side, can you gives us a sense of kind of the -- you think the annualized run rate of Panther sort of pre and post equipment in the new panel count, what do you think is sort of the uplift in production you would get from the Panther mines?

Richard Whiting

Well, we're out of the hard cutting areas the sandstone areas that were so hard on the equipment in previous months. And now we're leaving with some of the aftermath of that. So I would say we'll be more of 2 to 2.5 million ton a year run-rate until we get to the next panel and the new and refurbish components.

At that time we should be more at a 3 to 3.5 million ton run rate. And as I think we've previously disclosed, we're going to basically move around the highest concentration to sandstone area in the next panel. We've learned our lesson on trying to mine those areas.

So I'll say it will be a major step up after we move in July to more about 3 million plus annualized rate which is what I consider modest potential in some cases with new equipment we may see that as well say 3 to 3.5 level. But right now we are more 2 to 2.5 level potential for the next couple of three months.

David Khani - FBR Capital Markets

So you're talking about another sort of million-ish tons or more?

Richard Whiting

I think on an annualized basis that's kind of step function we should see with the different base configuration in terms to face with the new modern better equipment and the areas we're going to plan to mine.

David Khani - FBR Capital Markets

And then may be for Mark, what is the impact does that going to be on your unit cost; I don't know whether I don't know whether you want to say that the mine or really more on the overall cost structure?

Mark Schroeder

I guess I may be just talk to the mine without getting to the specifics of Panther. But we talked with you and others about how important the divisor is. So if you just think the Panther if its cost structure is X and it's producing 2 million tons and beginning more like third quarter or SO it's producing 3 million tons. Its cost structure just improves by may be not 50% but a pretty good size component. So Panther's only one piece of our total equation, but it's a pretty important piece of our equation.

Panther and Federal certainly are our low cost producing mines when they're running well. And there is a real benefit cost side of Panther running and getting its devisor up just like what we saw with Federal getting its devisor up in the first quarter.

David Khani - FBR Capital Markets

Right. And then can you talk a little bit of about the... how much extra costs did you actually incur in the first quarter from actually shutting down because you kind of hinted at you have these extra costs as well as that hurt the unit costs as well as the mines not running as ideally as fully functional. Is the extra cost meaningful? And if you look into the next other quarters, what's the kind of the unit cost impact?

Mark Schroeder

Its single-digits and it's a 5 million number-ish, give or take a little bit. It's kind of hard to quantify exactly, but I'd say it's five or less or it's single-digits. I think I don't want to hang our head on that. We did incur some costs; we'll continue to incur some costs to keep these mines in a ready state.

There is potentially more production shut in so what we'll do is we'll go through the rest of the year. So I think we'll continue to have some of those dollars, but I think, as a company we feel those are smart dollars to spend. Again, I don't want to hang our head on it but I think it's a single-digit number, not 5 million but somewhere in that range.

David Khani - FBR Capital Markets

Okay, and then Mark, income tax in the first quarter is zero. How about for the rest of the year, is it going to be zero as well?

Mark Schroeder

My expectation at this point is yes, we'll have a zero tax provision as we go through the year.

David Khani - FBR Capital Markets

Okay. And then just last one and I'll let it open up for others, do you expect to... with the lower CapEx and the mines running better and proven overtime, your liquidity of 92 million, how do you think that's going to look at sort of year-end '09?

Mark Schroeder

I guess, tough question David, good question but tough question. I think as we go through the year, we continue to do the things to limit our capital. So as I look forward depends on how much capital we can limit if we keep it to a number that is very manageable like in the first quarter. I would say by the end of the year the number should look very similar to where it is now, may be slightly less liquidity but not a whole lot.

David Khani - FBR Capital Markets

Great. Thanks, good job.

Mark Schroeder

Thank you.

Richard Whiting

Thank you.

Operator

Thanks. And our next question comes from the line Paul Forward with Stifel Nicolaus. Please go ahead.

Paul Forward - Stifel Nicolaus & Company

Yes, good morning. Just a couple of things, on the reported committed terms of 27 million, I guess at the start to the year you had 35, so is there a difference... I know that the remaining eight is essentially committed but not yet priced, can you give us a little sense on that committed but may be not reported as a priced business, what that is or is this... okay, sorry, I've been looking at really just the remainder of 2009 so?

Richard Whiting

Yeah, we did something a little different there and just did the three quarters, so hopefully that kind of goes...

Paul Forward - Stifel Nicolaus & Company

Okay. Never mind.

Richard Whiting

You're okay. We... I had a similar question a couple of days ago Paul.

Paul Forward - Stifel Nicolaus & Company

Okay.

Mark Schroeder

Well just to add, Paul, that would be easier to... that what people can't just follow where the first quarter actually was and we'll show you what the rest of the year looks likes so.

Paul Forward - Stifel Nicolaus & Company

Got you, never mind. On the $100 million capital spending rate, how long could you last if those levels of spending without looking at 2010, 2011 and seeing a significant, I guess, impairment of the company's ability to keep producing coal at the current... at your current expected full year rate?

Mark Schroeder

Not forever and forever, I guess, is probably something you want to quantify a little bit. What helped us very in the first quarter here is moving some of the equipment from an idled mine into the current producing mine. So redeploying equipment was very key to keep that number down.

So as we go through this year, we think where we're at now of a 19 million run rate is a reasonable run rate; I said less than a 100 million, you can do the math at 19 times four. That's somewhere in the range of where we expect the year to be. I feel very comfortable at that level as we go through the rest of this year.

As we get into 2010, I think it's somewhat dependent on what the production volumes are going to be, and if in fact production is at a higher number in 2010 relative to 2009. There will be some need for additional capital if it's at a similar level. I think we can probably get by for a portion of the year or may be the whole year at that similar level. But that's probably yes by the time we get to 2011, I think we have some capital increase above that level again.

Richard Whiting

We have got a mixed issue too, some of the spending for the initial rules that the MINER Act will be tapering off. And we have some pretty heavy spending this year for a couple of major airshafts at the long haul mines.

So what that would mean even if we would hold the number at 100 million or less again for a whole another year, we probably would have more higher percentage we could move to what I call replacement capital of rolling stock and actual mining machinery.

So that's helpful to with the surge of some of these governmental regulatory compliance spending will diminish in terms of the capital piece of that at least. So that will be helpful, to couple with what Mark said I think we could go certainly nine and probably 10 if we needed to at what lightening up on these capital costs.

Paul Forward - Stifel Nicolaus & Company

Okay, great. And you talked about the tax rate for the full year being around zero, what do you see is a normalized tax rate going forward post 2009?

Mark Schroeder

I think will be more of an AMT tax there for a while, so we do have some credits interval credits and AMT credits are built up. So I think we're more in a 20% range or so once we get further down more of an AMT tax there as we get down the road.

Paul Forward - Stifel Nicolaus & Company

Okay. That's all I got thanks.

Mark Schroeder

Thanks Paul.

Richard Whiting

Thank you.

Operator

Okay. Thank you. And our next question comes from the line of Brian Gamble with Simmons. Please go ahead.

Brian Gamble - Simmons & Company

Yes good morning guys.

Richard Whiting

Yeah.

Brian Gamble - Simmons & Company

I just wanted to check on clarification for one thing. Rick I think you mentioned in your prepared remarks your restructuring legacy contracts and then you talked about deferrals and you kind of quantify that as potential 2 million tons for the rest of the year. When you talk legacy restructuring, does that include the contract that you still have on the books Peabody days... or those....

Richard Whiting

When I'd say legacy contracts, I would include anything that we came across from anything prior including what we brought across from the Peabody days and then what Magnum brought in. And they had some that was heritage from their companies that made up Magnum when they formed that company, going all the way back to their predecessor company.

Brian Gamble - Simmons & Company

Okay. Great and then on Federal, when you talked about -- I know about it in the past in changing the way the next panel is weighed out. Does that change at all the, I know talked about the Panther change and the run rate there. Does that change the Federal run rate any from what you talked about as being roughly a million tons a quarter?

Mark Schroeder

I'd say it still gets us in the million tons. I am naturally hopeful that when we get into that we'll see some better improvements. And hopefully as a group here, we're trying to be a little conservative when we give you these numbers. But Federal should run better we're going to miss the bad geologic areas as is Panther we threw out a number of about $1 million a quarter.... tons a quarter. Panther has done much better than that in past years. So I think the potential is there but we're going to stick with the million tons or so. So right now is where we think a normalized run-rate would be.

Richard Whiting

The main differences we're not going to mine at the beginning of we're cutting off the early part of some all the panels in the so called north area where the sandstone existed. So we're eliminating that completely.

We will have part of the panel that has the parting or the boundary in the middle that not so much affects our mining, but more our yield at prep plant the recovery given some higher binder component of the scene. So but as far as the hard cutting part that did slowed us down the most and did the most damage to our equipment on the previous two panels, that is what we will be eliminating in the same fashion as we're eliminating hard cutting areas at Panther, although it's in the middle of the Panther panel, is the beginning of the panel.

And we'll just -- we won't even deal with it at Federal. So I think that gives us the confidence that we'll be more and what I'll call normalize run rates of 400,000 ton a month plus and as much when you are running at the Federal. And we're already starting to see that in recent months.

Brian Gamble - Simmons & Company

All right. And then the 6 million ton number that you mentioned as the reduction since the Magnum acquisition, anywhere to put $1 dollar per ton or for cost on the tonnage that's come Appalachia?

Mark Schroeder

I don't have a number right off hand Brian. And there are some low cost mines, Blue Creek one of them that was a mine that we were developing. There's certainly some high cost mines in there as well that made sense when the market was a little bit north of where it is now.

Richard Whiting

I'd said range anywhere from probably everything we've taken Appalachia range, range from somewhere from 70 to $100.

Brian Gamble - Simmons & Company

All right. And then finally Mark.....

Richard Whiting

That would end, so I am seeing its a math, so the math would be on higher end of that range.

Brian Gamble - Simmons & Company

Okay. That's okay. And then finally Mark, any pushback from any of the banks on how you treating the covenants in the back that Magnum purchase by the accounts in the EBITDA calculations; have you had any updates there at all?

Mark Schroeder

The definition in the revolver is very clear. So we're just following what's in the revolver definition that's all.

Brian Gamble - Simmons & Company

Yeah.

Mark Schroeder

It's very clear.

Brian Gamble - Simmons & Company

Okay. That sounds great, I appreciate you guys.

Mark Schroeder

Thanks Brian.

Richard Whiting

Thank you.

Operator

Thank you. And our next question comes from the line of Brian Yu with Citigroup. Please go ahead.

Paul Cheng - Citigroup

Good morning. This is Paul Cheng for Brian Yu, how you guys doing?

Mark Schroeder

Good morning Paul.

Paul Cheng - Citigroup

Great. At least one of your competitors has talked about wages and benefits concessions roughly like in 5, 6% range, do you guys envision to kind of cutting that one of your time (ph) but not asking for concessions in wages and benefits?

Mark Schroeder

I guess I would say we're not really focusing on what our competitors are necessarily on how they are cutting it. We are looking at our cost structure itself, on the mines that we do have out there. We have had different things that we've put in place when labor was very tight, performance bonuses.

What we try to do is have that as a separate line item, separate item to the individuals not part of the overall... the individual wage but part of the overall pay check. And those are areas that we continue to look at and we have done some things already in those areas through 2009.

I guess I won't say we go out and publish it necessarily when we do those things. But I will say that we continue to look at the different pieces of the wage structure and make adjustments to it as we see importance there.

Paul Cheng - Citigroup

Got it. And just a couple more for 2010, I mean what you expected in the cost, I mean is it safe to assume that in the cost which trend down even if production is flat relative to 2009 as hedges roll off. I mean is that relatively safe assumption and also if any guidance or kind of like quantification from what that would be?

Mark Schroeder

I don't... I want to duck that question I guess I don't feel comfortable again talking about 2010 costs. We'll get there as we get closer to the end of the year. The hedge comments that you made or the diesel fuel hedge comments you made we are in better position for 2010 on diesel hedge on about 40% of the business. But we are in better position on that than we are in 2009 otherwise I like a lot where we are in 2009.

That is one area that should see some decrease 2010 relative to '09. But in general I guess, I'd say it's a little too early yet to talk about where costs are going to come out where we expect those costs to come out in 2010.

Richard Whiting

I will tell you this, I will speak for Paul Vining and myself, we're in a mission to make tens of millions of dollars out of the cost structure dealing what we already have.

Paul Cheng - Citigroup

Okay. Fair enough. And lastly, you kind of gave us some color on contracts in met coal and yet you made a comment of sales being non-existed for '09 and '10. Do you see the difference between the domestic front and international front from met coal, think us from advantage point it seems like steel activity in China seeing a little bit of an uptake, so I wanted if there is, do you guys see any difference between the domestic and overseas front from that?

Richard Whiting

So far in terms of the take of the coal and interest in any future business and the pricing I don't see it will make any differences. I think if anything in deals like the U.S. steel industries getting hammered at least as much as everybody else and probably running at lower levels than any of the counterparts around the world, China and India aside. So I'd say it's I don't see a major difference right now, say if anybody struggling to do well right now it's probably the U.S. producers of steel.

Paul Cheng - Citigroup

Thanks.

Richard Whiting

Okay. Thank you for your question.

Operator

Thank you. And our next question then comes from the line of Andreas Benjamin with Goldman Sachs. Please go ahead.

Andreas Benjamin - Goldman Sachs

Hi, good morning gentlemen, how are you?

Mark Schroeder

Good morning.

Richard Whiting

Hi.

Andreas Benjamin - Goldman Sachs

I know you just said you were looking to probably not touch on cost too much in 2010. But just to ask a slightly different way, should the world become a better place in 2010 then what currently forecasting you need to produce some more tonnage, how much of that could you do without a major CapEx investment?

And second part of that would be how much could commodity existing lower cost mines that you still have opened versus would you need to go back to what you've already idled?

Richard Whiting

So you're talking about an environment where tonnage comes back on, opportunities arise and we can dial back up?

Andreas Benjamin - Goldman Sachs

Exactly.

Richard Whiting

I'll have to say, we're well positioned with extra equipment we have and face ups we've already done, permits we have in hand, additional shift work we can do, weekend schedules. We have a lot of ways that we can bring on tons. Certainly Blue Creek is standing there, ready to go. That's 1.5 million to 2 million tons of potential on annual basis, simply with the prior take to hire the workers which is probably 60, 90 day type cycle to get started.

So I think we're going to be probably as well positioned as anyone with some low cost, new mining opportunities and dialing back up at our mines that are still running because we got them pulled back to most cases no weekend work now in many places and so we have that there in front of us. So I'm feeling good about when it turns with very, probably very minimal capital.

Andreas Benjamin - Goldman Sachs

You're currently in 34 to 36 range should we say that you can get back to what 38, 39, 40 is that so optimistic without a major spend?

Mark Schroeder

I guess when we're back in July, I kind of hate to talk about this, we're back in July of '08 we talked about a number of 41 to 44. We see opportunities to get back there and now can we go from 34 to six up to 41 to 44 without spending any capital. I won't say that that's the case. But there certainly is some incremental to get cut that gap, I don't know if it's in half or a little bit more than in half without spending a whole lot of capital.

Andreas Benjamin - Goldman Sachs

And the majority of that, like you said would be out of your lower cost stuff that you still have open?

Richard Whiting

That's low cost in that, it could be incremental that the things are already running, which is always your cheapest tons given the half fix cost structure and you take Blue Creek, that's always been pegged as a low cost operation, tens of dollars less per ton than some... because it's a higher clean tons preferred advance reserves, it's a good solid reserve, tens of dollars per ton cheaper than some of the stuff we shut down such as Remington and Jupiter.

Andreas Benjamin - Goldman Sachs

So I guess I am just trying to figure out up until what point we should start ramping the cost back up because you've had to open up those higher cost mines again?

Mark Schroeder

I think we have several million tons above the 34 to 36 before you need to do that. As Rick said, it's hard for us... it was a hard decision for us to slow down Blue Creek to take these weekend teams off to cut back on the overtime because that typically is your cheaper tons. It makes a hell of a lot of sense in today's market to take those tons off the market. So turning on back on when the time is right should be very beneficial to the cost structure.

Andreas Benjamin - Goldman Sachs

Okay, thank you.

Richard Whiting

Okay.

Operator

: Thanks. And our next question comes from the line of Meredith Bandy with BMO Capital Markets. Please go ahead.

Meredith Bandy - BMO Capital Markets

I'm sorry, I wanted to talk about the renegotiation of your legacy contracts, but that's already been pretty well done. So thank you for the time and I'll let you guys continue.

Richard Whiting

Okay, thanks, Meredith. Thank you.

Mark Schroeder

Thanks Meredith.

Operator

: Thank you. And your next question then comes from the line of Brian Finklestein with Catapult. Please go ahead.

Unidentified Analyst

Yeah, hi, this is Sunil Jagwani (ph) actually. Guys, I just wanted to ask the question about the treatment of the legacy contracts in the EBITDA calculation with the vendors; it seems obviously with other people asking the question, it seems a little surprising... and I am sure this issue has been brought up with other companies around the country with such, I guess non-cash income line items, I mean is there a legal precedent or something like this or what did the lawyers tell you about stuff like this?

Richard Whiting

I guess, I don't know how to answer this. It's very clear in the revolving credit agreement, and that's filed out there, you can see it in the SEC documents. It was very clear as to how you calculate the covenants from the bank's perspective.

So there really isn't any legal opinion or any legal work that we need to do in that area. We just, as we know, as our banks know, we're just following the definition in the covenant calculation itself. Again, it's very specific in the document. And the banks have not raised an issue with this at all.

Mark Schroeder

Well, I won't say they haven't raised an issue but I would say they and we point to the definition and it's very clear in the definition as to how to calculate it.

Unidentified Analyst

And have they at all discussed about potentially challenging this?

Mark Schroeder

I'd say we've had some discussions about a number of things, but challenging is, I guess, a difficult word, I will say that the banks and us went through the definition and realized that the definition is very clear as to how to calculate the amount.

Unidentified Analyst

Okay. All right, thank you.

Mark Schroeder

Thank you, Brian.

Operator

: Thanks. We are showing a follow up question from the line of David Khani with FBR. Please go ahead.

David Khani - FBR Capital Markets

Yeah, hi gentlemen. I don't know if I missed this, but did you talk about how much met you actually exported other than 1.4 that you've shipped?

Mark Schroeder

We did not. It was 1.4 in total and I don't recall the number, give me just a second here. About almost all of that was, let's say, 850,000 roughly was exported in the first quarter.

David Khani - FBR Capital Markets

Okay, great.

Mark Schroeder

That bring it to 1.4.

David Khani - FBR Capital Markets

That's beautiful, thank you. And then with the new FASB ruling on implemented on the converts, you talked about the balance sheet impact; may be I missed this, but the interest expense impact in the quarter as well?

Mark Schroeder

The interest expense, we end up treating that 3.75 coupon as if it were just under 9%. So on an annualized basis, 200 million at 9% gets you an 18 million charge versus previously it was a 6.5 million charge. So on an annual basis, about 12 million higher, so in the quarter, 3 million higher.

David Khani - FBR Capital Markets

3 million higher. Perfect. Great and that's all on non-cash, right, obviously right?

Mark Schroeder

Non-cash, it is just an accounting rule or accounting implemented rule.

David Khani - FBR Capital Markets

Right. Okay. And then with four permits, I guess, in the back into the question here, what is the impact on Patriot if you look at over the next either '09, '10 or '11, some sort of view of what how much tonnage could you get clipped by not getting permits issued?

Richard Whiting

Well, I think the first and foremost piece is a permit to continue the drag line operation at Hobet. And that would hit us pretty hard by mid 2010. So that could be a big lag there, I don't know how to quantify it in tons but pretty quickly probably a million tons or more, big, big chunk of the App as whole mine.

Anything else pretty well gets up into mid 2011 and in some cases mid 2012, if you look around at Apogee or Hobet again there as we have got a couple more years at the other two big surface mines till we have to have a permit before we start impacting productions.

So these mines are 3 million, 3 to 4 million ton type of operations. So if you get a major permit for even one of the hits on the F2 or 3 and sometimes it looks as it's going to be a million to 2 million tons probably impact at that point. But the good news is the one at Hobet called Hobet 45 should be coming through any day, we believe, we maintain that we have complied to the letter of the law and we do expect to get that permit.

But if we don't, for whatever reason we start seeing meaningful impact in mid 2010 and we'll probably feel a little bit of affect of that on a monthly basis right now leading up to that from it.

David Khani - FBR Capital Markets

And have you have spent much time in trying to quantify kind of the industry impact, Rick?

Richard Whiting

Frankly we've been more focused on our own operations, but I think that most of the profile just the way these permits work and the way you line them up in the number of acres that you normally get. I would think that the industry profile is comparable to ours such that some meaningful turns will start dropping out in '10 and then it accelerates in '11 and'12.

So it can start being, based on my rule upon there about if it's half or third of the mine, you can start seeing within a couple of years probably a third to half of the tons going away. So you're talking to.... let's talk about there, you're talking 30 to 50 million tons within the next two to three years pretty easily drop out, that's just tip-shooting calculations on my part, but I think it's settled our magnitude.

David Khani - FBR Capital Markets

Okay, great. Thanks a lot.

Richard Whiting

Hey, David.

David Khani - FBR Capital Markets

Yeah.

Richard Whiting

I didn't know anybody can ask more questions than Luther but I think you did it today, buddy.

David Khani - FBR Capital Markets

And you understood them.

Richard Whiting

Take care.

Operator

: Thanks. And we have a question from the line of Jacob Muller (ph) with AM Capital. Please go ahead.

Unidentified Analyst

Good morning.

Mark Schroeder

Good morning, Jacob.

Unidentified Analyst

In the variance, the 2 million ton variance for '09, is it fair to assume that the tons in question of the highest sales gross tons in your book?

Mark Schroeder

No, not at all. You are talking about the range of 34 to 36 in that 2 million that we're talking about there.

Unidentified Analyst

Right.

Mark Schroeder

Yeah, no, I would not say they are the high, they certainly are not.

Unidentified Analyst

Can you quantify the cash flow impact of the losing those 2 million tons?

Mark Schroeder

Well, I guess, I'll go back to what Rick mentioned earlier. We expect to maintain full value on those, those are committed tons. So we expect to maintain full value from the customers in whatever way we can work it out and when we talk full value, we're talking cash and EBITDA.

If, in fact those 2 million tons don't get shipped for some reasons, we're not going to produce some either. So I would say whatever cash impact would be mitigated by not spending the money to get the tons out of the ground. So I don't know what that number would be but again I would fall back to saying, we intend to get full value from our customers, those are committed tons.

Unidentified Analyst

And when you look at your met book for 2010, are there any committed unpriced tons?

Mark Schroeder

A minor amount, yes, we do have some agreements with customers where they are committed and annually priced. We do not include that in the priced numbers that you see in the 2010 part of our release. But yes, we do have some tons that are committed with an annual price discussion.

Unidentified Analyst

I was just wondering, as a result of the cancellation of certain tons earlier in the year for '09 and '10 both extremely high priced tons, are you expecting to get anything back down the road from those companies or those are just lowest there?

Mark Schroeder

Sorry, it's different in different companies. I guess it depends on how we work out the arrangements on tons, committed tons that our customer does not take or wants to talk about us to a future delivery. It is depended on what kind of negotiations are worked out between the customer and us, and it will vary as to how you structure a deal.

Unidentified Analyst

Thank you very much.

Mark Schroeder

Thank you.

Operator

Thanks and at this time then we have no further questions in queue.

Janine Orf

All right. We thank you for your interest in Patriot Coal and we look forward to speaking with you again next quarter.

Mark Schroeder

Great. Everyone thank you. Have a great day.

Operator

Thank you very much. And ladies and gentlemen, this conference will be available for replay starting today, Thursday, April 30, at 11 AM Central Time and it will be available through Saturday, May 30th, at noon Central Time.

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Source: Patriot Coal Q1 2009 Call Transcript
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