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Executives

Janine Orf - Director, Investor Relations

Rick Whiting - CEO

Mark Schroeder - SVP and CFO

Analysts

Shneur Gershuni - UBS

David Khani - FBR Capital Markets

Mark Liinamaa - Morgan Stanley

Brian Gamble - Simmons & Company

Jeremy Sussman - Brean Murray

Paul Forward - Stifel Nicolaus

Bill Burns - Johnson Rice

Brian Singer -Goldman Sachs

Presentation

Patriot Coal Corporation (PCX) Q4 2009 Earnings Call February 2, 2010 11:00 AM ET

Operator

Welcome to the Patriot Coal fourth quarter 2009 earnings call. For the conference, all the participants are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions).

With that being said, I'll turn the conference now to Ms. Janine Orf. Please go ahead.

Janine Orf

Good morning and thank you for joining Patriot's fourth 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, our results for the 2009 fourth quarter and our expectations for 2010. 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 and Form 10-Q.

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?

Rick Whiting

Thanks Janine and good morning everyone and thank you for joining us this morning. As you are well aware 2009 was a difficult year for coal markets, and a challenging year for coal producers. While I did not like what we faced for most of 2009, I'm pleased with our rapid response to the market downturn. I'm also pleased with how well we've positioned our company for the market turnaround.

In many ways, 2009 represented a transition year for Patriot. First, we undertook a comprehensive review of our mining properties, and as a result idled higher cost mines and rationalized their operations to match committed sales.

Second, through better man planning and equipment upgrades, we achieve dramatic turnarounds at our Federal and Panther longwall mines with fourth quarter performance at both mines at their highest production for the year.

Third, as part of our planning effort by working closely with our customers to understand their needs, we continued development of several new mines including both, metallurgical mines and lower cost thermal mines to ensure our growth in future years. As a result, we ended the year with a stronger mine portfolio.

Next, we continued our constructive dialogue with the US EPA and Army Corp of Engineers that resulted in our successful receipt of the Hobet 45 permit in early January of this year.

And finally, with our stock offering in June, we significantly strengthened our balance sheet, and ended the year with a solid $200 million in available liquidity. Our management action plan which we talked to you about throughout the year served us well and provided us a roadmap to set up Patriot for future success. I feel confident that we are prepared to fully participate in the market rebound and we look forward to working with our customers to fulfill their coal requirements.

All in, we begin 2010 as a healthier, more tightly managed company. There are a number of positive developments worthy of highlighting as we look forward. Let me start with world steel production and resulting demand for raw materials which points to a very positive pricing trend for all grades of metallurgical coal. As a result Patriot should benefit from increased revenue on our traditional high grade products and by selling more of our crossover production into higher margin net markets.

Next, a combination of positive factors related to electricity generation, coal supply and natural gas pricing are all causing Thermal coal markets to improve more rapidly than most observers and market participants predicted only a few weeks ago.

Additionally Patriot has several mining projects in the pipeline which can bought online in future periods when warranted by the pricing and the length of commitments in improving market conditions.

Finally, capital markets have improved dramatically as well making funding available for worthy projects as well as M&A activity.

In summary all of these factors coupled with the fundamental commercial and operating strengths of Patriot’s team serve as reason for optimism and opportunity in the coming months and quarters.

Now let’s take a few minutes to review the progress of the coal market turn around. First of all we continue to see both metallurgical and thermal markets strengthen. In the met markets Asian economies are recovering more rapidly and are importing met coal at a robust pace. Idle steel mill capacity is being restarted around the globe.

European and Brazilian markets are poised to expand further. And US markets have stabilized. With these improving markets, Patriot has recently increased sales of crossover met coal for 2010 discovery primarily from the Panther mine. In fact we expect to increase Panther met sales from less than 400,000 tons in 2009 to at least 1.5 million tons this year. This by the way was a key strategy in our acquisition of Magnum.

As you may recall the Panther mine is contiguous to our Kanawha Eagle complex. Both Panther and Kanawha Eagle are in the Eagle scene which have solid met coal qualities. We have been selling Kanawha Eagle Co as met products for many years. With our expertise in these established markets the Panther mine allows us to market and sell a significant number of additional met coal tons.

I should add that we have the flexibility to shift the Panther product on either the CSX or the Norfolk Southern Railroad as well as the barge loading on the Kanawha River. This gives us excellent access to both domestic and international coal markets. This increase in Panther met sales in 2010 sets the stage for even higher met sales from this mine in 2011 and future years.

As a result of stronger international markets, we expect to sell increased volumes of met coal to customers outside of the US during 2010. For the natural markets for US exports will continue to be Europe and Brazil we believe that anticipated tightness in Asian markets will begin pulling more US coal to those Asian destinations.

In total Patriot shipped 5.4 million tons of met coal in 2009, two-thirds of which were shipped to customers outside of the US. Looking forward, we are targeting higher metallurgical coal volumes in 2010, as a result of the strengthening market with total shipments estimated to be at least 6.5 million tons. During the fourth quarter we were opportunistic in booking additional crossover, high volatile met coal for 2010 delivery.

More than half of the remaining un-priced met coal in 2010, consist of our highest grade products. Based on current global market conditions, we believe these tons will be sold at prices substantially above the average of business already booked.

The met market is extremely active with an upward trend in pricing. Given the circumstances we feel very comfortable with our position of un-priced met coal for 2010. Especially, since our unsold met coal consist primarily of tonnage in the second half of the calendar year.

Regarding thermal coal, last quarter we say we believed markets were at an inflection point and that thermal markets were poised to turn as demand expanded and inventory levels dropped. As a result of higher natural gas prices coupled with the extremely cold temperature experienced in December and January demand for thermal coal has increased and inventory levels have begun to decline.

Coal inventories held by eastern utilities in fact declined by 18 million tons in the last six weeks. This was the largest inventory decline in any six weeks period in the last five years. Moreover the colder temperatures have also drawn down natural gas inventories from almost 16% above the five year average in early December to less than 4% above the five year average in late January.

Because of surface mine permitting issues, and more extensive safety regulations and inspections as well as more difficult geology. We believe that Central Appalachian will be the first coal base into come into balance as thermal markets continue to strengthen.

As a reminder, overall Central Appalachian coal production declined more than 13% in 2009, the largest decrease of any coal basin. Thermal customers took deliveries as scheduled in the fourth quarter and the inbound customer calls have again increased with no discussions of a need for deferrals at this time.

Since many utilities contracted more coal than they needed in 2009, we believe that most of contracted coal on the low end of their expected needs for 2010. If electricity demand is higher than expected as a result of harsher temperatures, higher natural gas prices or more robust industrial power demand, utility customers will likely need to purchase additional coals during 2010 in a further tightening market.

As a reminder at Patriot, we have very manageable levels of remaining un-priced thermal coal for 2010 with less than 1.5 million total tons available tons in Appalachian. The majority of which is in Central Appalachian, and approximately 500,000 tons available in the Illinois basin. Now let me drill down a bit deeper and give some overall thoughts on our solid fourth quarter results.

Patriot achieved EBITDA of $32.5 million this quarter, a 28% improvement over the third quarter. The higher EBITDA for the quarter was primarily a result of increased production at our Federal and Panther complexes. Additionally, most of our other mining operations also turned in consistent performance for the quarter, and we achieved this higher production even with the disruptions to rail and highway travel caused by heavy snow in Appalachian in December as well as additional days off for the holiday.

To add further strength to our improving longwall operations back on December 1 Jim Magro joined Patriot to the newly appointed position of Senior Vice President of under ground mining. Jim brings 35 years of experience primarily with longwalls to our management team and will oversee our important longwall operations as well as other Appalachian under ground operations.

Looking forward, we believe we are through the most difficult geology at our two longwall operations and anticipate more consistent performance in coming quarters. Having said that both longwalls will move to new panels in the first quarter, in fact Federal began in the new panel, completing its move late last week. And we expect to move the Panther longwall late this quarter.

And as a reminder, around mid year 2010 both longwalls will experience longer than normal move to new areas in the respective months. Another key factor that impacts our production and operation is permitting, as we announced last month and I mentioned earlier this morning, we are very pleased that the U.S. Army Corps of Engineers issued the new permit for out Hobet surface mine.

Production at this mine is important to Patriot our employees there and the surrounding community. We appreciate the work done by the EPA and the Corp to achieve this result.

Now let me turn to safety and the environment.

Maintaining a safe work place and being a steward of the environment are important drivers of Patriot success. Patriot achieved a record safety instance rate of 3.52 for 200,000 hours worked in 2009. This compares favorably with the national industry average for all coal mines of 4.00 per 200,000 hours worked and with the company’s incidence rate of 3.75 in 2008.

During the quarter Patriot received the US Department of Interior, Office of Surface Mining’s 2009 Silver Good Neighbor Award for excellence in surface mining. We were awarded this honor for exemplary stewardship in restoring surface mining land located in Henderson county in Western Kentucky.

Our employees embody safety in every thing they do. I want to take this opportunity to thank our employees for maintaining their sharp focus on safety in what was a transitional and challenging year, a year in which we made many changes to our mine portfolio.

Now let me turn the call over or our Chief Financial Officer, Mark Schroeder to further discuss our fourth quarter results. Following Mark I will then add a few more remarks before we turn the call over for questions. Mark?

Mark Schroeder

Thanks, Rick. Let me begin by sharing with you some financial highlights of the quarter. First as Rick mentioned, we earned EBITDA of $32.5 million for the quarter. This brings our annual EBITDA to $110.7 million, a 150% improvement over 2008.

Our EBITDA per ton of $8.91 this quarter was our highest of the year with EBITDA per ton in the Appalachia segment in excess of $10 for two consecutive quarters. Our costs per ton improved $3.84 for this quarter compared with the third quarter and this was a primary driver of the higher EBITDA per ton and was our lowest quarterly cost per ton in 2009.

Now let me provide a bit more color on this quarter and I will start with the supplemental financial data portion of our earnings release. In the fourth quarter, Patriot sold 8.3 million tons compared with sales of 7.8 million tons for the 2009 third quarter. Metallurgical coal sales of 1.6 million tons were comparable with 1.5 million tons of met sold in the third quarter.

More than 75% of our fourth quarter met sales were exported, compared to a more typical average of 60% to 65%. This attest to the recent strength of the international market as well as the debts of Patriot's established relationships with steel companies outside the US. Revenues per ton were $59.77 in the 2009 fourth quarter compared with $62.95 in the third quarter.

Revenues per ton were higher in the third quarter, primarily as a result of the higher met tons as percent of total tons sold. Cost per ton were $50.86 in the 2009 fourth quarter, an almost $4 improvement over the third quarter. Consistent with the comments I made, our last quarter's earnings call, the significant decline in cost per ton related largely to the higher production at our two longwall mines.

Federal produced 1.2 million tons during that quarter, its best this year and finished the year with production of 3.8 million tons. Panther produced around 700,000 tons in the quarter, its best quarter since it became part of our portfolio. We are seeing the benefits of the equipment upgrades put in place last summer

Segment EBITDA per ton was $8.91 in the 2009 fourth quarter, our highest recorded in 2009. This was accomplished even with the lower revenue per ton I just mentioned. Additional sales crossover met tons contributed to the higher EBITDA per ton for the quarter. Segment EBITDA for Appalachia was $10.96 per ton for the 2009 fourth quarter, as I mentioned before our second consecutive quarter in double digits.

For the full year Appalachia segment EBITDA was just under the target we discussed early in the year of $10 per ton. Illinois Basin segment EBITDA was $0.94 per ton in the 2009 fourth quarter as cost per ton improved to approximately $37. For the full 2009 year, Patriot sold 32.8 million tons, a 4.3 million increase from 2008.

Metallurgical coal sales were 5.4 million tons in 2009 compared with 6 million tons in 2008. Lower met sales in 2009 were a result of decreased steel production. In 2009, as a result of stronger international markets, we increased our met exports to 67% of our met volume compared with 47% in 2008.

Cost per ton for Appalachia of $57.13 for 2009 was in the lower half of the $56 to $59 guidance range we provided a year ago. We were able to keep cost per ton at the low end of the range despite mine rationalization starting to gear which include the closure of the large Samples surface mine at our Paint Creek Complex.

Cost per ton for Illinois Basin of $37.30 for 2009 was just above the high end of the $35 to $37 guidance range we provided a year ago. Higher cost there were primarily a result of extreme weather events and unplanned major equipment repairs during the year.

Overall segment EBITDA was $7.86 per ton in 2009, a 36% improvement compared with 2008. Segment EBITDA per ton for Appalachia was $9.66 in 2009 compared with just over $7 in 2008. The 32% improvement in Appalachia segment EBITDA per ton resulted from a combination of higher contractive pricing and lower cost per ton driven by improved longwall performance and this higher EBITDA was achieved even though we sold 600,000 few tons of met coal in 2009.

Segment EBITDA per ton for the Illinois Basin was a $1.22 in 2009 compared with a $1.67 in 2008. Our capital expenditures totaled $24 million in the 2009 fourth quarter with CapEx for the 2009 full year of $78 million. The spending level is considerably less than the $100 million we have been forecasting and the more typical CapEx of $4 to $5 per ton of production as we continue to tightly manage our capital spending.

Now let me turn to the income statement portion of the release. Our depreciation, depletion and amortization was $49.6 million in the 2009 fourth quarter in line with that reported in the third quarter. DD&A for 2009 totaled $205 million, higher than 2008 due to DD&A related to the acquisition of Magnum.

Accretion related to shipments on below market sales and purchase contracts obtained in the Magnum coal acquisition totaled $66 million in the fourth quarter of ‘09 compared with $94 million in the third quarter. If you recall, the higher amount in the third quarter related primarily to the restructuring of thermal coal contracts and the associated reduction in future period shipments.

Accretion for full year 2009 was $299 million compared with $279 million recognized in 2008. During the fourth quarter, Patriot recorded a $20.2 million restructuring and impairment charge. The charge includes a $12.9 million, non-cash impairment related to certain infrastructure and thermal coal reserves near our Rocklick complex that were deemed uneconomical to mine at this time.

Additionally $7.3 million of the restructuring charge related to the discontinued use of a beltline into the Rocklick prep plant during the quarter. The restructuring charge represents the future lease payments for the beltline and contract termination costs that will be made without future economic benefit to Patriot.

Interest expense was $9.7 million in the fourth quarter compared with $10.7 million in the 2003 quarter and year-to-date, interest expense of $38.1 million was $14.5 million higher than in 2008. Higher interest in ‘09 resulted from a full year to the convertible debt outstanding. If you recall we issued the convert in May of 2008.

Turning to the balance sheet, again we had no borrowings under our credit facility at year end and a cash balance of $27 million. If you add that to the letters of credit of $352 million, we had available liquidity of just under $200 million at December 31. Our current credit facility has remaining life of approximately 21 months with October 2011 maturity.

We continue to carry very low debt on our balance sheet, at December 31, our debt totaled $206 million and consisted primarily of our three and a quarter percent convertible debt that's due in 2013.

In today's release, we have provided the average price per ton for contracted business for 2010 and '11 by basin and by product type. As Rick noted a few minutes ago, we were opportunistic this quarter in booking additional crossover metallurgical coal for 2010 delivery.

The table in the press release reflects these additional met coal tons booked. You will note that the selling price per ton for 2010 deliveries did not change from the prior quarter average of $86. But a good portion of the new business was crossover coal that would have otherwise been sold as a steam product. Additionally, I'll remind that priced thermal business for 2011 includes 8.4 million tons related to legacy contracts priced significantly below the current market.

If you would assume similar volumes in 2011 as our current 2010 estimates, this would leave approximately six million tons of met coal and 13 million tons of thermal coal unpriced with leverage to the market pricing.

For 2010, we currently anticipate sales volume in the range of 33 million ton to 35 million tons. This includes metallurgical coal sales of at least 6.5 million tons, representing a meaningful increase over the 5.4 million tons sold in 2009.

Additionally, this guidance incorporates the impact of moves that both longwalls in the first quarter of 2010, and extended moves mid-year as both longwalls relocate to new areas within the mines. We anticipate moving federal to a new area in the second quarter, and expect the longwall move to take about 20 days compared to a normal 14 days.

And for Panther, we expect the move to the new area will be in the third quarter and anticipate the move taking approximately four weeks. We expect improved productivity will offset the negative impact of these extended longwall moves. Based on the expected volume, we anticipate cost per ton to be in the range of $53 to $57 for the Appalachian segment and $36 to $38 for the Illinois Basin segment.

This Appalachian segment estimated cost per ton represents a significant improvement over the $57.13 figure reported in 2009. Regarding our legacy liabilities, past mining obligations are estimated based on actuarial valuations discounted to present value. The annual expenses impacted by underlying employee and retiree population, the assumed interest rate and medical trend and there were some other actuarial assumptions.

In 2010, we anticipated that our past mining obligation expense will be $25 million to $30 million higher than in 2009, largely due to the discount rate assumption and some actuarial losses. Most of this increases is expected to be non cash with our anticipated cash outlay for past mining obligation in the range of $35 to $38 per quarter.

We expect our 2010 CapEx to be in the range of 100 million to 125 million, this CapEx figure would increase if we make a decision to expand production through the opening of one of our previously developed met mines.

So looking back, I am pleased with the progress Patriot has made on a number of fronts, operationally and improving production at our mines on the safety front as our employees continue to work towards zero reportable accidents and financially as our results have improved significantly in 2009.

So this concludes my comments. Now let me turn the call back to Rick for a few closing remarks. Rick.

Rick Whiting

Thank you Mark. I am pretty sure all of us on this call today recognize 2009 as the most volatile and challenging year in our memory in every respect. It was especially difficult for the coal industry and those important industries that use our products.

Frankly I am glad that 2009 is now in the rear view mirror. But as I look forward I see opportunities for a stronger more effective Patriot coal corporation to resume our growth plans and create value for our shareholders.

Markets are improving, we have solid growth projects in the pipeline and we have experienced and committed employees deliver strong results. We all look forward to reporting back to you in the coming quarters.

This concludes our prepared remarks for this morning, but Mark and I will be glad to take your questions at this time.

I'll turn the call back over to our operator. John.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). and first from the line of Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni - UBS

I just wanted to ask just a couple of quick questions I wonder if we can start with met-coal to start I was wondering if you can sort of give us kind of your view where you think high (inaudible) met coal is currently what you can achieve at the mine and if you can remind us of what is your grade A and Grade B met coal potential when we look out to 2011 and beyond if the market continues to remain strong.

Rick Whiting

Well, first let me talk about the potential, certainly with Panther expected in the future to do something right between 2.5 million to 3 million tons pretty consistently. We've assumed probably I think at least 1.5 million in 2010 of that going as met and that Eagle seam coal could in theory basically all go as met.

We have other sources for steam, coal and most contracts have rolled off that previously existed there so we've got that, we’ve got the Kanawha Eagle production which the Eagle seen there somewhere between probably 700,000 and million tons there so I would consider all that, I don’t necessarily like to call it Grade B by global standards I think its probably in the A group but I haven’t previously just for some differentiation referred to it as a crossover of Grade B coal but both those coals have access as I mentioned to really both railroads between the two of them and also part shipments and with what’s going on at the east coast a little more business going through there. Things going up a bit, we have the option to go down the river for exports or up the river for domestic steel business.

So there is a lot of potential there, of course our wells complex does well in excess of 3 million tons. So that’s substantial we still have the Harris operation running this year to be replaced in the future years by Black Oak and or the two gas not necessarily in that order.

So when you add all of those up moving some meaningful amounts probably not even a total amount of Panther over to met that's how we have previously gone up in that 9 million, 9.5 million ton category. And we've also talked about not a heck of a lot of capital to do that, I think we’ve stayed at about $50 million to $60 million of capital. We will bring on [Two Gas] and Black Oak.

So by per ton mine and a high value feedstock that type of products will be which by the way both, [Two Gas] and Black Oak would be solid grade A coals, more akin to Harris and Wells that bodes well as we see the real truth in the prices. So, I have given you a long answer on that part, because I am not going to give you an answer on the price part.

I just feel like there are too many variables right now what's going on with transportation companies, what's going on with competitors, what's going on with customers both internationally and domestically, mostly internationally I just think it’s in that funny time of the year where we are probably best to say that we are observing the markets, we are dispatching our well seasoned one of the better met coal sales teams in the world frankly with the team we have got, we have all done it for 15 to 40 years and guys who have worked on both sides of the fence both in steel companies.

On the coal side and we are going to do our thing and we are going to report back, and when we have it all booked and I don’t mean to be aloof about it, but its just very awkward to talk about prices and I think that'll probably be a mistake for us or any other producer to do it at this time.

Shneur Gershuni - UBS

If I can just ask one follow-up, if you can sort of talk about past a little bit. We've clearly seen an improvement in cost in the third and the fourth quarter, do you expect further improvements from your longwall operations? This is kind of where we expect it to be, your guidance kind of implies that cost should continue to trend down, is that just likely through the operational benefits or is there more to come effectively?

Mark Schroeder

[Shneur], this is Mark. We set a lower guidance number for 2010 below the average for all of 2009. What we did in the fourth quarter, good solidly within that range. On the fourth quarter, we've pretty good production at both Federal and Panther. Going forward, we feel very comfortable with the range that we set for 2010. I think there is some continued improvement in '10 over '09. For us, it really is a key to getting the tons out of the ground; we’ve talked about that in the past calls.

Would you see something like Federal and Panther running pretty well like they did in the fourth quarter, that cost number does come down significantly. If you look at the fourth quarter compared to the third quarter, big improvement there in Appalachia, so the range that we have in 2010, we feel very comfortable. I think there is some improvement that we will continue to see from where we finish the year, but you will see that that is a pretty good improvement over the full year of 2009, which was just over $57.

Operator

Our next question is from David Khani with FBR Capital Markets. Please go ahead.

David Khani - FBR Capital Markets

How much would you say is the total crossover tons that you think you can do in 2010?

Rick Whiting

Probably an increase year-on-year, probably at least $1 million to $1.5 million more than we’d have done from as you say in ’09 between Kanawha Eagle and Panther, if I put those in that category. We will probably have a step up of at least $1 million and probably more like a million and half tons from that level.

David Khani - FBR Capital Markets

If you take a step into the Illinois Basin a little bit, what you see for us this year is supply and demand given with some of the new production coming online and then how much Illinois Basin coal do you think could actually head into central App because there is been some questions in the last several conference calls about that and you guys are obviously in both basins a good group of people to talk about it.

Rick Whiting

Well, first we don’t have very much Illinois Basin coal unpriced, as we mentioned a fairly small amount and so for ‘10 it is not a big issue for us. In Illinois Basin we live for the day that the one large contract rolls off in early ’12, that’s been more breakeven type business and then we can move on to higher ground. That’s when that focus will certainly increase for us over the next year or so leading up to that and we’ll pay a lot more attention to alternative markets for that product and more distant markets and probably scrubber markets in the Southeast.

Probably like a broken record over time, but it will depend on the delivery cost per million and the cost of mining and the Illinois Basin coals I think do have a bright future into a broader fleet of scrubbed units. A lot of our future and the destiny there will lie in the hands of the transportation companies, but I do know there are a lot of billions of tons of good mineable reserves left in the Midwest and I think assuming our country gets our energy policies right, we will enjoy a good long-term future of a low cost fuel.

And at some point if Central App does drop in production as it’s expected to do and coal is still a meaningful part of the burn, 50% of the burn in this country, it’s logical to me that the Illinois basin, particularly to the southeast and particularly to river-borne destinations can enjoy a pretty bright future. All that said, we don’t have a whole lot to be concerned about in ‘10 because of our minimal amounts of unsold.

David Khani - FBR Capital Markets

Right, but do you have a sense of how much could actually go into Central Appalachia just physically down the river system.

Rick Whiting

The river system alone has multiple plants up and down the river. I think it could be a very meaningful number, going up river just to kind of a swag would be at least I would think 15 million to 30 million tons.

David Khani - FBR Capital Markets

Okay that’s great and you know on the total exports for the US have been surpassing the coal companies, what they think incremental met will be shipped out of the US this year? What do you think your view is on that?

Rick Whiting

I would say that it probably feels more like returning to the kind of 2008 levels where I think it was in the neighborhood of 39 million tons overseas met plus the Canadian met in that year of another three or so or four actually.

If this year is down in the low 30s, let’s say 31 to 33, it seems to me with all that we are hearing and with these crossover tons and this additional market has opened up for US coal into China, it seems to me it certainly could go well into the force, low 40s, 40 million tons to 45 million tons. It seems to me you can claw back everything it got in ’08 and go beyond that.

David Khani - FBR Capital Markets

Have you had any chance to ship any coal into Asia, either from your crossover tons or some of your other met?

Rick Whiting

We have had some business primarily through third parties that I mentioned in an earlier call I believe into several of the Asian markets including China. I wouldn’t call it a huge amount of tons, it’s probably in the number of a handful of vessels so far with more schedule.

David Khani - FBR Capital Markets

And when your peers is shipping in some of the Northern App over there, is it possible that you can ship some of your Federal as well?

Rick Whiting

It’s possible given the fact we are of rail origin and some of this coal will need to go down the Gulf, we are more likely to serve the domestic markets, but we certainly have the similar qualities and have the physical ability to do that. We are not as competitive to the river and that we have a rail moved to the river, but through the east coast we can move that coal if the prices are right.

Operator

The next question is from Mark Liinamaa with Morgan Stanley. Please go ahead.

Mark Liinamaa - Morgan Stanley

Just to be clear for my benefit, all of your references have been to at least 6.5 million tons of met coal. I just want to make sure I understand what the upside is on that? And whether it would all be crossover or if there is the chance that volumes in aggregate for the company will go up?

Mark Schroeder

Mark, this is also Mark at this end. I think the $6.5 million equity increase as we ship more tons out of the crossover you mentioned out of the Panther, or Kanawha Eagle, so the 6.5 could go incrementally up from that number by up to let's say another million tons or so.

Then I think additionally you have the opportunity of a Black Oak or a [Two Gas] increasing earlier than what we have projected right now. We don't have any of those tons in 2010, but to the extent we would open those facilities that are largely phased up already or developed already, that would add to that number.

Mark Liinamaa - Morgan Stanley

And how much would that potentially be?

Mark Schroeder

There would be a startup with those mines, once they get going can do a million plus on an annual basis.

Mark Liinamaa - Morgan Stanley

One of the big concerns I'm hearing over and over again is just this risk of ash disposal, can you comment on the status of that and anything that the coal industry is doing to address that? That seems like it could be a very significant issue and almost just force people to burn gas?

Mark Schroeder

Certainly, it's a lot more in the hands of the utilities, and I think the most recent thing I've read or been informed of is EPA has held off at least for now, and is taking a slower course of action and in a mode of gathering more information instead of coming forth with some hardline at this time, but it's clearly a situation that the utilities have everything at stake to get it sorted out and for sure, we're pulling for them.

I can't say that, our company and I can't speak for the other coal companies, but I don't think we have much of a seat at the table as much as the utilities do, given the fact they control the combustion and the handling of that material and have all of the science and the chemistry and everything around it to make their case that it is not a hazardous substance.

Mark Liinamaa - Morgan Stanley

Do you believe is there any change at the margin of that, is it still being pushed as a hazardous substance or is there a little bit to give on that at the government?

Rick Whiting

I was probably trying to read between the lines in a positive fashion, but the last article I read or the last communication I had on it felt like there was at least some softening or belief that perhaps it needed further consideration before making the determination that it was.

So it’s great certainly and I will have a hard, solid answer for you, but it’s still in play and it is a huge important issue I agree with you but once again I think that wiser heads will prevail and we will come to whatever the logical scientific conclusion is hopefully and I believe that will demonstrate just as over the last 40 or 50 years, it has not being deemed as a hazard substance.

Operator

We will go to Brian Gamble with Simmons & Company.

Brian Gamble - Simmons & Company

A question on the cost. If the Federal and Panther longwall moves go smoothly midyear you seem to be walking into a Q4 2010 on the same position you were Q4 ‘09 with as far as rolling both of them through for the entire quarter at a good run rate. Do the new panels suggest that those prices would be lower or roughly the same if you got sort of the same quarter-on-quarter type of production figures?

Mark Schroeder

I think you probably meant cost, I would say the new panels, the geology feels like it is going to be as good as geology that we have been experiencing recently here. So we anticipate, I think I said something in my comments early on that we are going to have the moves, their extended moves what we think the production level that we are going to get out of those panels are going to offset the extended moves that we have. So we actually feel pretty good about the geology, time will tell but we feel pretty good about the geology as we head to those new areas.

Brian Gamble - Simmons & Company

Are the moves once you get to those new areas have about the same timing as they did in these areas? Are those going to be quicker moves?

Mark Schroeder

They will generally have about the same time. Once we get into those new areas, there are typically 12 to 14 day moves going forward, it will be the same.

Brian Gamble - Simmons & Company

The fourth quarter, specifically December obviously had some weather impact, did you guys try to quantify what sort of tonnage shipped impact the weather had on your Q4 shipments?

Mark Schroeder

No, there was some but I will just say that it was not material. It was a minor number. It certainly had an impact on some of the workers getting to our facilities. We had also power outages on the shipping side, it wasn’t as meaningful. It was a little bit more on actually just the production side getting the people to through mine and actually the mines being able to operate with the power being down for several days.

Rick Whiting

We had a very big month on met coal mainly on the CSX and they didn’t experience some of the problems that unfortunately Norfolk Southern side had, so we were kind of in the right lane, talking to the right teller this particular time, we had good movement. I think it was our best month in a long time, the biggest month of the year of met coal shipment.

So Mark’s right. It impacted our production to some degree and probably kept us from having a really robust blowout excellent quarter, but shipments-wise, we had a strong finish particularly on met coal.

Brian Gamble - Simmons & Company

The CapEx number that you mentioned obviously didn’t included one of those met project, if you did decide to move forward with one of those, what could the incremental CapEx be at the end of the year?

Mark Schroeder

Those are ballparked $25 million to $35 million per property. So, take your 100 to 125 and add either one or two of those as we go through the year. I don’t think we would do both of them, I think it’s more likely that one would happen sometime mid to late year.

Operator

We next go to the line of Curtis Woodworth with Macquarie Research.

Unidentified Analyst

Hi, good morning this is actually Warren [Shandline] for Curt. Can you comment on the mine pricing differential between what you are selling domestically versus what goes overseas, after accounting for all the netbacks right now?

Rick Whiting

I will just say that the prospects for the international business, given the global circumstance and the timing of those transactions that will take place over the next couple of months as opposed to the supply demand balance and the overall situation of the market as we move through the fourth quarter in anticipation of a calendar year deal, the prospects are substantially higher for the remaining coal to go to the export market, substantially in tens of dollars I would say.

Unidentified Analyst

Okay, that’s great and my follow-up question, for the 8.4 million tons of underwater contracts you have priced through '011. You previously said you had 6.5 million I believe through '010 and '011 and that doesn’t include some of the renegotiations you’ve done over the last two quarters. So, can you just reconcile the difference and remind us what the other schedule for those volumes? Are you still expecting to rolloff in '011?

Mark Schroeder

Sure, the $6.5 million was more the Peabody-inherited contracts on the Patriot side, the additional $1.5 million to $2 million relates to the arch inherited on the Magnum, so may be the 6.5 number will let it to a time period, I'm not sure exactly when we talked, but the time period prior to having the Magnum in it so if you combine all of what we have now inherited from Peabody inherited to Arch, it's more in the 8 million to 8.5 million range, I think I said 8.4 earlier. A good chunk of those obviously, there is some that roll-off in the first quarter of 2012 that is largely that the Illinois Basin tons and that's somewhere in the range of 3 million or so, there is additionally Central App tons. There were about 3.5 million that run off at the end of 2012, and then the remaining Magnum related that I talked about, that 1.5 million to 2 million or so goes on for an extended period, several years yet.

Operator

Our next question from Jeremy Sussman, with Brean Murray. Please go ahead.

Jeremy Sussman - Brean Murray

It's great to see the improved performance to Federal enhancer, kind of given the level of detail that you've gone through, what type of overall production do you expect at both of the use in 2010? Are we talking 3 million or so at Panther and 4 million at Federal sale?

Mark Schroeder

I'll still walk around with those numbers. I like the sound of those, once we get to those numbers, we'll probably increase them, but the sound of them are pretty good right now as we talked about Federal did more than that on a run-rate in the fourth quarter doing 1.2, Panther doing 700,000 was pretty close to that, but I'm going to walk around right now with 4 million Federal, 3 million Panther for 2010.

Jeremy Sussman - Brean Murray

You talked about more funding being available for M&A and obviously you can bring on something like Bracco if the market wants, so I guess with all that in mind, kind of what are your thoughts in terms of bringing your own mines, our mines versus what you are seeing available on the market place right now either on the met or the thermal side?

Rick Whiting

I think we are looking at both, its always nice to know we have the option to have some substantial growth without any acquisition and that’s within our control from (inaudible) and our funding standpoint and more just an expansion of what the brown field type of an arrangement, but at the same time I think they will continue to be opportunities and we continue to have our antenna out there and if we can identify some properties that vote in with what we have either from a location of mining perspective or from a market perspective we will continue to look at that I'd say relatively speaking we are pretty keen on metallurgical coal as you can tell we have a good heritage and we have the great market base and the customer base to expand that easily and we understand that, but at the same time we have equal heritage of long term relationships with the important utility customers in this country and dealing with long term contracts and all the provisions that relate to those we like to add as well its good stable, so I don’t know that its all about the financial analysis and return on investment but I'd say we are interested in both (inaudible) popular right now but over long periods of time both are important to a portfolio.

Operator

And we'll go to Paul Forward with Stifel Nicolaus. Please go ahead

Paul Forward - Stifel Nicolaus

Congratulations on the Hobet permit now that you have got that permit in hand was just wondering what's your view on the volume potential for that mine as you look at 2010 - '11 and '12 and how long do you think you going to go 4 million tons a year.

Rick Whiting

That’s particular permit had in access with 8 million tons, so I think based on the production we got planned out there we got at least 3 to 4 more years just on that part plus what they already had permitted there so that purchase a good stead for the next several years I'll say four to six years out in terms of holding up meaningful volumes out of there.

Paul Forward - Stifel Nicolaus

And Mark I think you had mentioned a $4 to $5 a ton maintenance CapEx number. Is that on all tons or is it just on Appalachian tons.

Mark Schroeder

That would be on all tons. The way I think about it is really on a total company basis so somewhere in the $4 to $5 dollar range on all the tons we have.

Paul Forward - Stifel Nicolaus

Okay and so it’s a little bit if you run that through on $34 million tons its going to be your CapEx guidance for 2010 is going to be below that, can you expect that it'll be rising, that the maintenance level just ignoring the growth CapEx but the maintenance level, will be rising in 2010.

Mark Schroeder

Yeah, in '10 I think a 125 is going to be a similar to last year number actually higher than last year number but similar and that we have done a good job of deploying capital and holding off on some of the capital that we otherwise would have spent and I’ve been saying for a little while I think we can continue that for 2010 but by the time we get to 2011 I think we probably need to get back into the normal mode or something like a $4 to $5 per ton run rate. So if you take its already couple of million tons at that level times (inaudible) $4 or $5 number, you are going to get a number closer to 150 to 175 million. So I think our 2010 CapEx number will again be lower, but I think as you go forward in 2011 and future years you are probably going to see the capital jump back up another $25 to $50 million.

Paul Forward - Stifel Nicolaus

Lastly you and many others have spoken of the crossover business, Oaks and this whole, this concept that there is a difference between export opportunity in the domestic market on the range of tens of dollars per ton. Are you domestic utility customers that are overwhelmed by this prospect or is their response more allowing to find we don’t need that coal anyway, we have got high stock piles?

Rick Whiting

I am sure that they are playing it more like the later comments you made but there are some various coal buyers with these major utilities and I am sure they are watching it very carefully. Because it is whatever that tonnage number is whether its 10 - 15 up to 20 million tons or more it is significant enough and what is now 220 million ton total central app market to make a huge difference in the supply demand balance. So, I'd say they are playing their cards pretty close to (inaudible) they are making very little noise about it, but I am sure they are figuring into their calculations and watching it carefully.

Operator

And we go to Bill Burns with Johnson Rice. Please go ahead.

Bill Burns - Johnson Rice

Mark, I just had a quick accounting question on your balance sheet. You got those below market sales contracts in both the current liabilities and the long term liabilities. Does that imply we are going to see this accretion in the P&L this year and next year?

Mark Schroeder

Yes, it does. But the fair portion would be the amount that you would expect to see in 2010. There is some in the current asset side that you don’t see it, it's not spiked out as a separate line item. But yes, the current portion you should expect to see in 2010 the long term portion would extend past 2010. It continues to be a diminishing number as there are fewer and fewer of those contracts that have tons for delivery in 2011 in future years, but there will be some amount past 2010 and it relates to long-term amount shown on the balance sheet.

Operator

And we'll go to Brian Singer with Goldman Sachs. Please go ahead.

Brian Singer -Goldman Sachs

Following up on some of the other thermal question, you mentioned I think in your opening comments that you did have some spare capacity available if cap thermal prices rose from here, can you talk more specifically about how much higher price would need to go in the lead time if the market were to move there today?

Rick Whiting

The lead time would be a matter of probably some weeks to get started up. We can bring up Blue Creek slowly or more rapidly depending on where the market is. We have the ability to bring on another spread at Hill Fork which I would be bringing in equipment, some of that's probably already in the planning phase, so we have both of those. If you think longer term, we certainly have the ability to bring backup surface operations at our Paint Creek Complex, we formally operated the samples mine there and that's the one we closed, but we already have permitted coal in that area under a couple of different previously acquired permits that might be a little bit longer, actually eight months or a couple of quarters in bringing the equipment in.

I wouldn't necessarily want to pick a number, but certainly to bring meaningful volumes back up particularly something like Paint Creek. I'd be as much interested in not just the price, but also in some meaningful term for that business at least probably, I'll say let's say three year type commitment the one to add in that that’s when if the prices are right then we should have the leverage to get some multi year business as well.

So its combination of the two. I'd rather not throw out a specific benchmark but certainly its got to be a lot harder than the current traded market when you start seeing the traded market little bit of [indicate] you start seeing the traded prices at a couple of years if we can bring those numbers forward that will get more interesting.

Brian Singer -Goldman Sachs

Thanks that’s helpful and then on the met side can you provide any additional color on what you are hearing from your various regional customers what any differences in what the trends are for US customers versus European or South American customers?

Mark Schroeder

I think the US customers are probably mostly except for some top off tonnage on unanticipated business improvement they are pretty well tucked in there maybe some as far as we are concerned we are pretty well done on the domestic front, we are now turning our attention to the fiscal year in the international. But I don’t think much change you probably heard the various commentaries just like things are, pretty well hot in Asia and its going to drive a lot and lot of sellers including us and also lot of buyers in the Atlantic are waiting to see where some of these benchmark Asian prices settle out and who the participants are and the terms and conditions around those sales. So, it’s a little bit of a waiting game right now because I don’t think anybody wants to on the buyer or the seller side want to get too far out in front of the large international bench mark coming out of the hard (inaudible) in Australia it will drive virtually everything. And its feeling very good, we are hearing big numbers and I can repeat everything I hears some likely heard will have $200 bottom end on it.

Operator

And we will go to [David Kani, FBI Capital Markets]. Please go ahead.

Unidentified Analyst

Yeah hi couple of follow up questions. On the operations side it seems like the hire of Jim Magro is the important hire to help I guess for finding a team on the operations side. Can you talk a little bit about what you think some of the goals I guess from bringing Jim on will be for 2010 and has some of the write down of the infrastructure at Rocklick is that part of the decision making that Jim helped bring to bear when he came online?

Mark Schroeder

David I will cover the Rocklick part, we’ve been looking at Rocklick for a little while now. I would say to answer the question directly no Jim certainly had a input into what we were doing there but that was more decision that was already in the process before Jim came on board.

Rick Whiting

On the operating side its really just every aspect of taking a fresh look at bringing in his expertise to review the things we’ve been doing at our longwall mines and other underground mines everything from the exploration drilling, the drilling to identify the best mine plan the engineering of those plans, the equipment selection, the interaction with vendors, the decisions regarding wage rates and management structure what we have is not broken, but what we have has more room for upside. We feel like we have made good solid investments over the years in these operations. We feel like we have some good minable reserves and great markets and Jim just brings a broader expertise and long hauls having seen large numbers of them in different operating circumstances with different type of labor groups to just to bring his experience to bear and just help us as you said kind of dial up our gain.

We feel like he is going to be very, very helpful but it's really every aspect starting with the even which reserves we are going mine and mine layout. I don't think you'll see any radical changes I will say that when he came in he was very complementary of the actions which have been taken since we did the spin of a couple of years ago at Federal and also what has been accomplished over the last year and half or two years to move to where we are finally hitting our stride at Panther.

They were just some long term mine layout and equipment issues that took a while for us to flush those through and get back on track but he has agreed with virtually everything we have done up until now. And just making some additional suggestions or changes where he feels appropriate.

Unidentified Analyst

Good color. And then Mark, you mentioned on the legacy liability about the $25 million to $30 million increase year-over-year most of which is non cash, could you give us a sense of how much cash outlay you spent on legacy (inaudible) 2009 and the rough estimate what you think it will be for 2010?

Mark Schroeder

The ballpark is somewhere in the 150 range or so for 2010 and that's similar to where we were in 2009.

Operator

And we have no further questions in queue.

Janine Orf

We thank you for your interest in Patriot call and we look forward to speaking with you next quarter.

Rick Whiting

Thanks, everybody. Take care.

Operator

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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Source: Patriot Coal Corporation Q4 2009 Earnings Call Transcript
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