Massey Energy Co. Q2 2008 Earnings Call

Aug. 1.08 | About: Alpha Appalachia (MEE)

Massey Energy Company (NYSE:MEE)

Q2 FY08 Earnings Call

August 1, 2008, 11:00 AM ET

Executives

Roger Hendriksen - Director of IR

Baxter F. Phillips Jr. - EVP and Chief Administrative Officer

Eric B. Tolbert - VP and CFO

Don L. Blankenship - Chairman, CEO and President

Analysts

Shneur Gershuni - UBS

Jim Rollyson - Raymond James

Michael Dudas - Jefferies & Co.

Brett Levy - Jefferies & Co.

Paul Forward - Stifel Nicolaus

Ann Kohler - Caris & Company

Pearce Hammond - Simmons & Co.

John Hill - Citigroup

David Gagliano - Credit Suisse

Luther Lu - FBR Capital Markets

Justine Fisher - Goldman Sachs

Leslie Rich - Columbia Management

Jeff Gildersleeve - Millennium Partners

Operator

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

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

Roger Hendriksen - Director of Investor Relations

Thanks, Latania. Good morning everybody. We appreciate you joining our call this morning, and we appreciate your continuing interest in Massey Energy.

As you know, we distributed our second quarter press release after market closed last night, and it is posted on our website and has been furnished to the SEC on Form 8-K. The members of our management team who will be speaking with you today are Don Blankenship; Chairman, President, and Chief Executive Officer; Baxter Phillips, Executive Vice President; and Eric Tolbert, Vice President and Chief Financial Officer.

Before we begin, I need to remind you that the statements made in this presentation, which are not historical in nature, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and are based on current factual information and certain assumptions which management currently believes to be reasonable.

Financial and other operational results for future periods may differ materially from current management projections as a result of factors outside of the company's control. Information concerning those factors is available in the company's 2007 annual report on Form 10-K and other periodic filings with the SEC. In providing projections and other forward-looking statements, the company does not make and specifically disclaims any undertaking or obligation to update them.

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

Baxter F. Phillips Jr. - Executive Vice President and Chief Administrative Officer

Good morning and thank you for joining us. As I'm sure, you saw from our press release last evening, we had a very strong second quarter and are very pleased with our operating results.

Revenue and revenue per ton reached all-time record highs and excluding the non-operating litigation charge, we achieved new records for operating cash margin for per ton, EBITDA and earnings per share. New mines developed during our expansion are all contributing to higher production as you can see from the quarter shift volume, and we can expect production to increase further as these mines continue to ramp up and as new mines are added.

We were able to leverage our high quality reserves during the quarter to take advantage of the high demand for exports of both steam and metallurgical coal. Our exports in total, increased by 83% and sales of metallurgical coal were up over 36%. All of these factors contributed to the record results of the quarter, and we believe it's just the beginning of what you can expect as we continue to roll out our expansion plans over the next several quarters.

Now, I'll turn the call over to Eric for a discussion on the financial details of the second quarter.

Eric B. Tolbert - Vice President and Chief Financial Officer

Thank you, Baxter. For the second quarter of 2008, including the Wheeling-Pitt litigation charge that was described in the press release, we reported a net loss of $93.3 million, or $1.16 per share. Excluding the litigation charge, we reported adjusted income of $92.2 million, or $1.15 per share compared to net income of $34.9 million or $0.43 per share in the second quarter of 2007.

Produced tons sold totaled 10.8 million tons in the second quarter, up 8% compared to the same period a year ago. Our average produced coal sales realization of $65.78 per ton in the second quarter was $14.38 per ton higher than in the second quarter of 2007. Average prices were higher in almost all product categories, but the increase is most significant from metallurgical coal, which was $37.42 per ton higher than a year ago. This is an increase of nearly 52%.

Average cash cost return for the second quarter of 2008 is $49.84 per ton compared to $42.68 per ton reported in the second quarter of 2007. Increased sales related cost on a higher average sales realization accounted for approximately $1.70 per ton increase. Additional cost drivers included increases in diesel fuel cost and higher labor costs. SG&A, a component of our cash cost per ton computation increased due to stock-based compensation accruals, reflecting the impressive increase in Massey Energy's stock price during the second quarter.

Second quarter other income of $26.9 million included a pre-tax non-cash gain of $15.3 million or $0.15 per basic share from a coal reserves exchange transaction completed during the quarter. This was similar to the pre-tax gain of $10.3 million from a reserve trade transaction in the second quarter of last year.

The income tax for the quarter was a benefit of approximately 26%. This rate was impacted by litigation charge, which was treated as a discrete item. For modeling purposes, we estimate the full year book tax rate should be approximately 20% to 23% and we expect that our cash tax rate will be 0% to 5% as we used NOL carry-forwards.

Cash capital spending was $178.2 million for the second quarter of 2008, compared to $76.8 million in the second quarter of 2007.

Capital expenditures for 2008 are now expected to total approximately $650 million and we have once again shows our accelerated our expansion projects puling forward some planned spending for 2009.

Depreciation, depletion and amortization was $62.3 million for the second quarter of 2008, compared to $60.2 million in the second quarter of 2007.

DD&A is expected to total between $255 million and $270 million in 2008. Available liquidity at the end of the second quarter of 2008 was $445.6 million compared to $489.6 million at March 31st, 2007. The decline was largely the result of cash payments for interest and the $20 million EPA settlement that we made during the quarter.

As of June 30, 2008, available liquidity included $351.9 million in cash and $93.7 million available under our asset-based revolving credit facility. Our total debt was essentially unchanged during the second quarter and our total debt to book capitalization ratio increased 59.2% to 59.5% at June 30th compared to 58.5% at December 31st, 2007.

Now, let me turn the call over to Don

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you, Eric. Before I take your questions, let me take a few minutes to share my thoughts self on the second quarter results and our outlook for the rest of the year. Baxter has already mentioned the records we set in the quarter in terms of sales, average prices and EBITDA. We are pleased with our results in that regard, but I believe that even more important is what we are capable of achieving going forward and what you should expect over the next couple of years.

The biggest factors in our better than expected earnings for the quarter were the increased volume and pricing power of our metallurgic coal or metco. As we expanded production with a focus on metco, we were able to achieve a significant impact on earnings. Metco was almost 28% of our total ton shipped in the quarter, compared to 22% in the second quarter of 2007, and it accounted for over 46% of our produced coal revenue.

We believe the size, quality and potential value of our metco reserves are sometimes overlooked or underestimated. Remember that, out of our 2.3 billion tons of reserves, approximately one-third is of metallurgical quality. The combination of our large metallurgical reserve base, our high quality steam coal and the diversity of our markets both geographically and from a coal quality and use perspective, what we believe makes us a unique player in the U.S. and international markets. This combined with our market position and diversity of mining efforts affords us opportunities to enhance shareholder value.

As we continue our expansion and bring on additional metco tons, the potential earnings impact is very significant, if prices remain at or near today's levels. And we have several reasons to believe that prices will remain strong.

During the second quarter, we traveled extensively through some of world's most rapidly developing nations and regions. We saw several new coal using plants under construction, we visited over 22 current and potential customers.

We were pleased to come to agreements to supply coal to some new Asian customers during the quarter as a result of our trip. We believe this is an indication of their confidence in our ability to provide them some of the highest quality coal in the world. We believe it is also an indication of their concerns about the global supply outlook particularly in the Pacific Rim region.

Domestically, we have seen inventory levels of Southeastern utilities fall below the five-year average for the first time since January of 2006. The stockpile of the plant in June was significant and several analysts expect the situation to get much worse in the next two months due to thick summer burn.

Supply for 2009 continues to be a major concern of customers throughout the world as production growth is still not enough to fill the world's demand for coal. In our view, the market conditions are ripe for continuing strong prices for both thermal and metco for the foreseeable future.

There has been some recent confusion over market prices for thermal coal. Although there has been a lot of volatility in the paper market, whereas in the physical market where extra delivery has remained strong with very little change. Prompt delivery co-passes for12,500. But thermal coal continue to be about a $150 a ton in July and metco prices were steady at very high levels.

Eric pointed out that we have again increased our planned CapEx spending this year. This is because we continue to believe that these market conditions have created and still represent an extraordinary opportunity to invest in our business. We believe our shareholders will be best served if we accelerate our expansion plan particularly at locations were permit are rather in hand or are expected shortly.

Recently, we also made significant progress on two mining developments outside of Central Appalachia. First, we received the DG permits to develop a property we have on the lease in West Kentucky and we are now starting its financial feasibility for development. Second, we acquired properties that will allow us to develop our loss rated reserves in Pennsylvania, both of these projects appear to have various advantage in terms of quality and proximity to the market that could make them very attractive ventures.

Our previously announced expansion continues on track. We said in our press release that we are planning to build 3 to 6 new preparation plants within the next two years. One is currently under construction at Inman Coal Company at Boone County, West Virginia. Construction work is scheduled to being this quarter on the new plant at Coalgood Energy in Harlan, Kentucky. Locations for the others are still being finalized.

The new preparation plants will provide us with more flexibility in shipping points, create additional opportunities to increase production and sales volumes, reduce our operating costs and lower shipping costs for our customers. Labor availability remains a factor of concern in our availability to execute our expansion plans. We've been pretty successful at adding skilled miners this year, but the labor market continues to be very tight. Our annualized turnover year-to-date is now about 16% compared to 14% last year. However, turnover for our underground labor is 10% less than it was at this time last year. Although the labor challenge is substantial, we remain confident liability to expand our operations.

In summary, our expansion work is on track, and is yielding positive results. Domestic and international coal markets are strong and appear to be sustainable, and we had record-setting results in the second quarter.

We do expect that third quarter will be challenging with the startup of several additional mines, so hiring with yet more inexperienced miners, we have our service issues and the stress of other expansion efforts. However, all of these efforts is focused on producing enhanced shareholder value in the quarters and years to follow.

This concludes our prepared comments. We'll be happy now to answer your questions.

Question And Answer

Operator

Thank you. In order to allow every one an opportunity to ask a question, we request that you limit your initial inquiry to one question and a follow up. If you would like to ask another question, please feel free to reenter the queue. [Operator Instructions]. Our first question comes from Shneur Gershuni from UBS. Please proceed with your question.

Shneur Gershuni - UBS

Hi, good morning everyone. I just had two questions. The first one just pertains to say, CapEx or maintenance CapEx and to growth CapEx. When the project was first proposed back in October, you had mentioned that it'd be about $440 million of growth CapEx spread over the past two years? Can we get a sense how that's changed based on the original project not including the new projects that have been added and if you can also tell us what maintenance CapEx is kind of the run rate added at this point right now?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. With the caveat that we are right now in the midst trying to figure out our 2009 through '13 budget and of course we are being flooded with project updates from various managers and groups and others and aren't sure exactly were we want to go with the expansion in '09 and '010. I would say that the ongoing CapEx is probably in the 280 to 300 range, may be even though higher lot of inflation and equipment and so forth. So this year, we're probably look at $300 million to $400 million kind of in expansion and I would expect it will be similar next year although it varies greatly on the proposal we are getting on what the economic analysis show and out permitting in the ongoing expansion that we are trying to do now continues and how well we are doing it, what we are doing as far as how much more we will do.

Shneur Gershuni - UBS

Just to clarify then, is some of the capital increase or the CapEx increase that we are experiencing this year, is that some of the '09 CapEx moving into the '08 calendar year or is that just rate inflation?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No, it's mostly all full and forward expansion CapEx, the plan that we mentioned being under construction and it is probably $30 million of that number. And we've also brought on plan several spreads of surface mine equipments that was not in the number even last quarter.

Shneur Gershuni - UBS

Okay. And just one follow-up question, and just with respect to your guidance, with respect to your pricing and so forth, you clearly took it up quite a bit. Was this based on just your kind of assessing where the spot market is and where the forward strip is or does it also include some commitments that you entered into and if you can give us color on what you think because is the market is right now for both steam and for met coal?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, that's a difficult answer, sound bite let me say that you know a lot of these contract has price escalators, I know much have been significantly impacted by coal and other prices. We are going back and challenge things that are in the contract perhaps the indexes that we didn't feel were matching the intent of the contract or the language allowed for that challenge. We saw call away prices higher than we have projected that we would sell them for. We... both coal and it allows in order to sell that same coal at a higher price into a better market. For example, maybe switching steam to pulverize coal injection met and I could go on and on, but it has been such as hotchpotch of changes that I don't know really I've got the sound bite give you.

Shneur Gershuni - UBS

I was looking for a sound bit, as much as just to understand your thought process about 2010 and specifically that part.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, its been a lot of different things... and I think some of that, I don't know have to handicap how much of this being want, but we certainly when we recognized of course with our self board on the steam side was in trouble and sold them at market changing reformed, if you will and we looked at all the possibilities of coal switching and market diversity and bringing on steam coal surface mines to free up met coal that was in the steam market that could then be sold in the met market, so it's been a really intention and the effort to enhance revenue, sort of an enhanced revenue initiative.

Shneur Gershuni - UBS

Okay, great. Thank you very much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Jim Rollyson from Raymond James and Associates. Please proceed with your question.

Jim Rollyson - Raymond James

Hey, good morning guys.

Baxter F. Phillips Jr. - Executive Vice President and Chief Administrative Officer

Good morning

Jim Rollyson - Raymond James

Don, you just sort of touched on the pricing side, can you may be talk a little bit about the cost side your... I guess you kind of gave guidance for next year in a range for the first time. Can you may be talk about the difference between the low end of that range of $52 a ton for cash cost and the $60, maybe kind of what's spreading between there, what gets you up to the higher end versus the lower?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Probably about $0.080 or $0.90 so as the sales price... so if we take the higher sales price in the $0.80, $0.90 or $1 run and the rest of it is primarily productivity and inflation not knowing where diesel fuel is going to be. I know we were here this year at $2.90 a gallon in the equipment on about 60% next year, we are not as hedged, so we do not know whether to put in $3.90 or $4.50 on diesel fuel and I hope that alone can be $1. And then that same thing holds true for explosives and a lot of other things that were not hedge on in 2009. So I will say that $0.80 to 1$ that runs were the sales related and productivity being in the 10% range up or down can make $2 or $3 difference and the rest of it is our inability to predict where steel, explosive and diesel fuel prices will be.

Jim Rollyson - Raymond James

Understood. Where do you peg the marginal cost of production in Central App today?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, the first thing I would say about that is that there is just a tremendous gap between the low cost and the high cost in Central App in the different maps, there has been a lot of maps that were put on, solely because they got $240 piece of business, so that may have $140 cost, maybe mining of coal or reduce stripping distance down to the same water equipment they could throw together. So I don't know how to express the gap between the production, and then we've got mines in the30s and we've got mines in the near 100 ourselves. So, but if you are talking about an incremental production of some of these mans coming on in those kind of conditions, the incremental production we'd like to think about is the next turn that we get out of productivity is probably a $20 turn. That's what we are focused on is getting productivity out of the mines that we are running as well as the expansion.

Jim Rollyson - Raymond James

Thank you. Excellent quarter.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Michael Dudas with Jefferies & Co. Please proceed with your question.

Michael Dudas - Jefferies & Co.

Good morning, everybody.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning, Mike.

Michael Dudas - Jefferies & Co.

Don, you touched in your prepared remarks about the 700 million or 800 million tons of coke-able reserves that Massey controls. Can you maybe add a little bit more assessment to that or relative to what we have seen in the marketplace the last few months on integrated steel companies purchasing some reserves in Central Appalachia, some productive capacity. What gives Massey, your advantages whether it's diversity, quality, plant access, rail access or that could enhance some value out of the 800 million tons or so of metallurgical reserve?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think that the high vol coal that we have is extremely high quality and when combined with the low vol reserves that we have that are not fully developed as we haven't been in that market, it gives series [ph] op buying coal or whatever the opportunity to have a complete blend and to have that complete blend so some extend on either railroad or even on the railway. So there is, given that our reserves were spreading out from probably Kentucky all the way through West Virginia over a couple of 100 mile distance and that they go across railroads and barged delivery and all that I think it gives them a lot more value than they would otherwise have. And the quality of course is excellent.

Most of the coke they want to run it in full steam, because they want to get every ounce of coke out of it they can and the quality really many times is focused on how fast they can coke and it's a huge economic advantage to a steel mill. So we think we have tremendous value, we of course wish would have more the low vol reserves developed than we have, we do have gains up mining now developed then we have a couple of the more low vol mines in the permitting stage that aren't currently in our numbers, because they have not been fully permitted and so forth. But we are very focused on, if you will, monetizing the value of each reserves.

Michael Dudas - Jefferies & Co.

My follow-up Don is, you mentioned again in your prepared remarks about your visits to steel and utility companies around the world. Maybe you could share what does really surprise you about the opportunities and how best Massey or even the U.S. coal industry in general can find sustainable advantage in taking some share from other countries around the world?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think that we're running more and more the difficulty of mining in other parts of world. The European coal reserves have been mined over for years and years and when you go into places like Ukraine and so forth and learn about how the difficult the mining is even though they might have less expensive labor and less regulation, they have a much more difficult ore body to mine and of course the Russian situation where they are treating their resources as gold so to speak and not as willing to export it into those countries and then seeing the expansion in places like Korea and Turkey and so forth was quite eye opening.

We knew that the expansion was there, there is just the impact of getting little bit better handle on the quantification of it, and also realized in South America even in North America, where just a few years ago there was no plant still production in place that they are showing great relevance.

Michael Dudas - Jefferies & Co.

Alright. Just one quick follow-up before I leave. Is Wheeling-Pittsburgh Steel a customer of Massey on the coking coal side?.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. We are 100% supplier of their high vol portion of their blend, have been for a number of years.

Michael Dudas - Jefferies & Co.

And is there a negotiation -- is it a long-term contract, where negotiations coming up or --?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, the market... opens to market November 1st, I believe the negotiation on the new gross starts in September and I am not sure whether it has 2 or 3 years remaining on it, but something of that nature.

Michael Dudas - Jefferies & Co.

Terrific. Thank you, Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Brett Levy from Jefferies & Co. Please proceed with your question.

Brett Levy - Jefferies & Co.

Hey guys. I mean I know after off of natural and some of the transactions that escalated the valuation of met coal reserves may be a change of tune on this, but I think a couple of quarters back, you guys made a mention of wanting to triple your met coal reserves over relatively short period of time. Have you been sort of priced out of that strategy at this point?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I am not sure I remember a strategy of tripling our met coal reserve. But I will say that, we are continuing to pursue reserves, we are not normally a barrier of reserves. But one thing that can't be in the numbers is the amount of reserve that we have, if you will, I won't use the word, crack, but we have unique advantage any time you have the vastness of reserve that we have that our reserves contain with any of the reserves or maybe contiguous to them or best supported by your infrastructure that gives us the opportunity to acquire reserves that perhaps someone trying to do a Greenfield would not be able to do. And we are constantly looking for those situations.

As far as being able to acquire reserves, yes, the prices on reserves are of course very healthy right now and we are pleased to acquire 2 billion tons reserves in the last 15 or 20 years and when the opportunity is rightful, continue to do that.

Brett Levy - Jefferies & Co.

And it's very attractive to be acquiring stuff that is basically neighboring you, is what you say?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes. Many times you may have a 1200 ton on our plan that has permits and infrastructure that you can push to 1800 and then reach a little further over piece of property much quicker than some one could do a Greenfield or you may have something actually contained within your reserve that is adverse to you that's not in the numbers. But certainly a company with Massey's reserve base has a greater opportunity to acquire more reserves than someone that was starting from scratch.

Brett Levy - Jefferies & Co.

That was my question and follow up. Thanks guys.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Paul Forward from Stifel Nicolaus. Please proceed with your question.

Paul Forward - Stifel Nicolaus

Thanks. Good morning.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Good morning.

Baxter F. Phillips Jr. - Executive Vice President and Chief Administrative Officer

Good morning.

Paul Forward - Stifel Nicolaus

On the... I think you had mentioned just a little while ago potential kind of challenges in the third quarter. I guess I'd just like to maybe true up the full guidance versus that idea of maybe a little bit tougher third quarter on volumes. When you look at... so you've got two things to play; you've got the expansions going on so your volumes ought to be going up. But at the same time you typically third and fourth quarter volumes are weaker than the first half. Can you go through in thinking about first quarter's 9.6 million tons, second quarter 10.8 million tons, where would you expect the quarterly run rate to be maybe by year-end or let's say fourth quarter in terms of shipped volumes and how do you third versus fourth quarter stacking up relative to maybe what you did in the second?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I mean we are hopeful that the third quarter will be at or near the third quarter and the fourth quarter unlike previous quarters will be equal because of the amount of development that's occurring or has occurred in the second quarter and will occur in the third quarter. So we wouldn't expect the typical drop-off in volume in the fourth quarter that or at least not at the level that we've had in the past. So if we are at 21 that 20.4 would need to be 21.1 to get to the low side of our margin versus with 10.5 we'd hope to be at 10.8 size, to 10.5 each quarter.

We are concerned essentially because it's much more difficult to predict the productivity and the volume coming out of the new mine or and versus a mature mine. And as you hear all of the coke companies saying, the regs are getting tougher and tougher. So we're just a little bit cautious about the third quarter and the rest of the year because of the new mines and the cost of tightening regs and railroad service in July quite frankly has been abysmal. But we are not changing our projection and we don't consider the quarter, but the quarter is tough to be the most important thing.

Paul Forward - Stifel Nicolaus

Alright. Just wanted to be able to sort out the short-term and if they still think that by year-end you are on track to have the equipment and the development in place to be at 46 plus million ton per year run rate by year end?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, we think that that will not be an issue. The equipment is not an issue, I know that a lot of the other companies have expressed concern about equipment. We are okay on that. We think we are okay on permits. And the only challenge that I see that holds us back is the people aspect, with the possibility of course to drags as they continue to be can be disruptive.

Paul Forward - Stifel Nicolaus

Okay, thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Ann Kohler with Caris & Company. Please proceed with your question.

Ann Kohler - Caris & Company

Yes, great. Could you provide us with any sort of update you have regarding the potential ventures with Essar?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I can't say too much, but except that we are continuing the talk on that trip I did with them in two, three locations. We have engineers and so forth visiting. As of now, we are tying to figure out what types of joint efforts make sense and of course we've been doing that now for a few months. So I think we are getting a little bit more focused but we don't have anything to report of significance at this stage.

Operator

Our next question comes from Pearce Hammond with Simmons & Co. Please proceed with your question.

Pearce Hammond - Simmons & Co.

Good morning Don, great quarter.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thanks.

Pearce Hammond - Simmons & Co.

Don, you alluded to this earlier, can you elaborate a little bit more on the rail service that you're experiencing right now?

Don L. Blankenship - Chairman, Chief Executive Officer and President

There has been... you know it was okay in the second quarter, but since the expectation, it's been tough and we of course we've told that we are trying to turnaround but it has been really slow and we're doing everything we can to self mitigate that and so forth. But it's not been good the last three weeks.

Pearce Hammond - Simmons & Co.

It is bad for both the CSX and the north of Southern [ph]?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes but it's probably worse on the CSX. Of course, we are a lot more dependant on the CSX, so we may just notice them more.

Pearce Hammond - Simmons & Co.

Do you think there is any particular reason for it or --?

Don L. Blankenship - Chairman, Chief Executive Officer and President

It appears to be cruise.

Pearce Hammond - Simmons & Co.

And then Don, on the labor issue you're obviously doing a much better job than in the past as far as keeping the turnover low in this upcycle. What would you attribute that to, just the new plans that you've implemented or is there something that, just started to move people away to some of these more marginal mines because of safety issues?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No I think it's... we've given two raises this year, we've given guaranteed wages for three years, we've set our schedule out of year in advance so that people know when they will be expected to work here in the NASSCAR race or whatever so there is... we found that it improve our communication and we've added some pay, we've increased our... we then provide gas cars with an $80 a month now to help with gasoline expense. But it's not over yet. That's going to be a continuing problem. Part of what you see with our Harlan County development and some of the other things that as we are trying to get some locations where we are completing over someone else's labor instead of ours, so let them go down the Harlan County or free open Martin County or do some of the other things we are doing or getting outside of our labor pool and getting into someone else's, so we think that will help us well.

Pearce Hammond - Simmons & Co.

And then finally an update... a quick update on Chambers?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, I mean it is just lying there waiting for the whole circuit I guess another month or two. It's... who knows what will happen but we are doing everything we can to mitigate the damage both in the field and trying to move our permitting program forward in compliance with anything that we think might be a bill. So we are working it from every angle and I'm just hopeful that pragmatism prevails.

Pearce Hammond - Simmons & Co.

Thank you.

Operator

Our next question comes from John Hill with Citigroup. Please proceed with your question.

John Hill - Citigroup

Yes. Thank you and congratulations on the strong results and the progress with the projects.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

John Hill - Citigroup

In the press release there is reference to steam coal, $150 to $160 a ton, it's not clear if that's a benchmark. Is Massey selling significant quantities at that price range?

Don L. Blankenship - Chairman, Chief Executive Officer and President

That was a prompt delivery number, and we've sold some coal in that range when we had the opportunity but not a lot, well I just... we do know from selling future aims that that market is real. And we are seeing strong '09 prices right now as well. But we have not had a lot of tons to sell into that market.

John Hill - Citigroup

Understood. And on a similar subject with the benchmark met 300 per metric at the port, could you just provide a little bit of insight as to how that maps back to some of the benchmark products that Massey is more heavily weighted towards?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Generally, you know that metric tons take up 10% of your... to 10.21 if you want more difficult math and then great trade now probably if you put in everything, the surcharges, the freight rates to term and you are probably in your $30 range and that probably go close to $40 if the railroads have their way next year.

John Hill - Citigroup

I guess I was sort of interested in the quality spreads between high vol, low vol et cetera and then what you're seeing anything in that regard?

Don L. Blankenship - Chairman, Chief Executive Officer and President

You know, TC add coal in the 160 to 180 mcm, high quality coal met demand 240 to 250.

John Hill - Citigroup

Great. And then just as a quick follow-up, on the reserve swap, was there any cash that changed hands?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No.

John Hill - Citigroup

Okay. So that's a non-cash reserve swap as part of revenues and EBITDA?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, that's a new accounting rule's requirement that when you exchange properties there is a one, an exercise they go through to value the EBITDA should be booked and we are complying with that rule.

John Hill - Citigroup

Got it. Thank you.

Operator

Our next question comes from David Gagliano from Credit Suisse Please proceed with your question.

David Gagliano - Credit Suisse

Hi good morning. Just a couple of quick questions. On the 2010 open position, I was wondering if you could just expand a little bit on the current state of the market? It looks like you committed about 1 million tons and what I am wondering is that are you in the process of negotiating 2010 conference at this point or is it too earlier or... and if you can just give a little feel for what's going on for 2010 at this point?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I would say that we are negotiating some contracts, we are taking a little bit in the OTC market so forth and we are seeing prices better or above the numbers that are in after tax.

David Gagliano - Credit Suisse

Okay. And are you... in terms of the discussions with the customers, how far along are you with those discussions and if you could give us some flavor in terms of the gap if there is one in terms of your expectations with the customers expectations?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No, I don't want to get too specific because sometimes the customers are on here with us, we believe that we can negotiate prices that are within the ranges of our forecast in '09, '010 and we think that the customers are accepting the fact that the international market and the switch to steam coal to low quality [indiscernible]fast coal injection is going to require that the pay the prices that are generally available to us and other Central App producers.

David Gagliano - Credit Suisse

Okay. And then just a quick follow-up on the Chambers question. Can you remind us again if in a worst case scenario you've had more time to work through, obviously look at the mine plans et cetera. In a worst scenario, what you think... what does an adverse Chambers ruling if its upheld do to your targets for 2009-2010?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I don't think there is much of anything in 2009 and 2010. I mean there is several different ways that ruling could come down that could have different impacts on the speed at which we could comply with whatever new rules that come out. That is hard to forecast because we don't know what those new rules will be. We are also making sure that we have preparation capacity, which is just 3 to 6 plant time part of that is being able to process underground coal should we run into Chambers. And then we're also of course considering Chambers and the language of our contracts that we are currently negotiating.

So, there's... it's somewhat wild and we are trying to think through the different aspects of it and deal with it. I don't think that we are in a position to say how many terms in '010 it would impact. Right now, there's a next 90 days of our planning period, we will budget a number under one scenario with another and then we'll have that number for you probably at that time. Right now, given how much acreage been put into and how detail the technicalities are, I'd prefer not to serve with yet another number forecasting the impact.

David Gagliano - Credit Suisse

Okay, fair enough. Just a last question on the contracts again. If... looking into your crystal ball, when do you think we should expect to see decent chunk of that 30 million tons in 2010 pricing committed by the end of this year or what's your sort of... what's your preference in terms of holding that tonnage open?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Don't you know, my crystal ball is probably they are more worse than the industry, so I don't know if I'd depend on it. But given the sales of coal, pretty good right now if you want to just go out and start selling it. So it's a matter of whether you want to see it when you believe you will get the higher or the lower price and it's a day to day negotiation, month to month thing. So it's... I don't know how that will work out. But we expect our sold and unsold position to move along at about the same pace as it always does. By this time next year, we will probably be 90% or 87% so for '010 and between now and then, I'd say that we're 40% right now. It will go up like 10% a quarter. So you will know, 40 now we get to 80 after four quarters, it will be on about that same progression line if history holds true and we sort of deal with it as the customers want to buy it as opposed to pushing it out year.

David Gagliano - Credit Suisse

Okay, thanks very much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Luther Lu with FBR Capital Markets. Please proceed with your question.

Luther Lu - FBR Capital Markets

Good morning, Don.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Hi Lu.

Luther Lu - FBR Capital Markets

I have question for you, you mentioned in the color negotiation contracts you are adjusting the language in the event of Chambers ruling goes against the long-term mining practice. For the existing contracts though, how are you soft sourcing the coal, is at portfolio-wise or mine specific?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, with all the contracts we have they are all different, and even different contracts with the same customer. So most of our contracts both require and allow us to source the coal from nearly all of our facilities with only the small differences in the freight being the subject of negotiation, wherein some cases, the freight differential might PRB and the others the freight differential not be the customers, but we have a lot of contract of course in place for '09 and don't have Chambers language, as we've said already, we don't expect a lot of '09 impact from Chambers.

Luther Lu - FBR Capital Markets

Okay. And since most of your '09 steam coal had been contracted, do you have a weighted average price for that portion of the business?

Don L. Blankenship - Chairman, Chief Executive Officer and President

We do but... we talked about that before the call, and decided we don't want to get too specific because we are still negotiating indexes and changes and trying to do some things with that. And we think that with the numbers that we've provided on total average and the fact that metco should be in the couple of hundred dollars range that they can be extrapolated. But I'll prefer not to give a specific number on the sourcing terms in '09.

Luther Lu - FBR Capital Markets

Okay that's fair. And on the Wheeling-Pittsburgh pays, the charge when do you expect start to paying cash on that?

Don L. Blankenship - Chairman, Chief Executive Officer and President

We don't know because we are going through the process of evaluating our possibilities in the U.S. spring coal and trying to figure out what the strategy for them should be and of course at some point, when [indiscernible] probably taking lot of time right now we'll let to both talk to them as well study and evaluate our possibilities at the next level.

Luther Lu - FBR Capital Markets

Okay great. Thanks.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Justine Fisher with Goldman Sachs. Please proceed with your question.

Justine Fisher - Goldman Sachs

Good morning.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Hi.

Justine Fisher - Goldman Sachs

So just so to again on Wheeling-Pitt, I know that you are still evaluating your options with the Supreme Court. But if you did have to pay that $245 million, would that just come out of cash on hand or is there another way that you might plan to finance that?

Don L. Blankenship - Chairman, Chief Executive Officer and President

50 million of it's already in the collateral with the bonds, not in their numbers. So call it, 200 if we... if we had to we could write a check for it. But we'll see how that goes.

Justine Fisher - Goldman Sachs

But if you had to, you'd rather check. There is no there alternative method of financing that payment?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, there are ways of financing options. But we don't know what we would do yet because we haven't reached that point, but we are not feeling anxious about it because we have the cash if we need to pay.

Justine Fisher - Goldman Sachs

Okay. And then can we talk a little bit about your contract I guess that the meaner in your contract negotiations with utilities now, another one of your competitors with a large presence in Northern App was commenting that there seem to be utilities trying to find long-term deals because they may be concerned that the coal might leave U.S. altogether. Are you seeing your customers trying to do that and when you approach that maybe proprietary openers, are they saying, okay final, pay you more but we want another year or two of extension of the contract?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Again these things are tough because every buyer is different. We are seeing a lot of that on the met side, probably more than we are seeing on the thermal side. But we see thermal customers with low end of planning inventories who are more focused on supply than they are $5 or $10 in the price. I mean they are always going to be conscious of the price taking bids and trying to grab the lowest number they can, to the structured way to do. But we do know that both because of low inventories the large amount of coal that has certainly gone to export that are concerned about long-term supply. Again perhaps more so on the met and the thermal side. If you know some of the statistics I think Central App production was down less than 1% but deliveries to utilities was down about 8%, so about 7% went outside of the country so.

Justine Fisher - Goldman Sachs

So in other words, you are hearing some of the desperation on the part of the metco buyers but not yet on the part of the utilities?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I don't know we want to use the word desperation, but I would say consciousness and focus and trying to make sure that have security of supply. Their objective would be to have security of supply without going along on today's prices. Our objective would be to go as long as we could and therefore make... we would know that our other expansion was on the act of our new business. So it's just a negotiation, and I would say that desperate would be the word, but conscious of the goings on in the coal business both in U.S. internationally and the regs and the Chamber's decision and all of the things that they have to concern themselves with to get supply.

Justine Fisher - Goldman Sachs

Okay. And then I know that this maybe a little bit early to comment on, but I know I guess Wheeling-Pit is still one of your big customers and there has been some consolidation on the steel side in the U.S. of the small mills by I guess one big owner maybe two. Are you either seeing them approach you to try and renegotiate some of those metco contracts or do you see any change in the negotiating between you and some operating your met coal buyers because of that consolidation on the steel side?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, I wouldn't see I've seen a change in the negotiation per se. I mean, I could say that this is a subject of conversation, I wouldn't... I don't know whether it's impacting their position to one degree or another. But it's not something that they aren't aware of and it is a subject of conversation that several of the major steel companies buying all the coal reserves should be awkward position for the remaining steel companies to be in. So I mean this being talked about, is being discussed, it's being strategized about, I don't know to what extent it's changing their exact negotiating position.

Justine Fisher - Goldman Sachs

Okay thanks very much.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Shneur Gershuni from UBS. Please proceed with your question.

Shneur Gershuni - UBS

Hi guys. Just a quick follow-up here. I just wanted to understand your position with respect to labor at this point right now. I noticed that labor did tick up from the last quarter. How many more miners you think you need to be able to satisfy your needs for the expansion program and your confidence and likelihood that you will be able to get all of them in time to meet your projections?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Generally speaking, we needed to be about plus 700, plus 700 or probably plus 400 this morning. And so we need to be plus about three more hundred. I don't know, we also are looking at the configuration of our staffing, trying to figure out where we could use automation or I think it would be hard for shareholders to relate to, but automatic testing [ph] and better power tools and everything else. So we are looking at every element of it as well as maybe looking at skilled levels that maybe we can make to job, so we are doing a lot of things, but generally speaking we are little over halfway there and still got halfway to go.

Shneur Gershuni - UBS

In terms of thinking about the shift and so forth, are there any shifts that you're having a tougher time attracting workers towards the evening shifts, the late afternoon shift or is it for everything across the board that you're still short?

Don L. Blankenship - Chairman, Chief Executive Officer and President

It's not so much the shift because we use a rotating shift, I think sometimes where you work two on the day and two on the third shift, usually stays the third shift, it is maintenance skills. But we believe that gives the individual that have children playing ball at night have a chance to view those games, give them chance to stay home and be in their home situations, so we rotate at a lot of our coal mines and we have others who manage their straight day and second, but haven't seen a significant challenge as it relates between shifts. The biggest challenge is skilled personnel as opposed to experienced non-skilled personnel. As you define inexperienced non-skilled personnel with when it comes to mechanics, welders and electricians and large equipment operators has becomes problematic.

Shneur Gershuni - UBS

But overall given the fact that you're up COGS 350 at this point right now, likely that you being able to hit your targets in terms of how many men you need and how do you expect to these configuration changes and a couple more hires and we shouldn't be overly concerned about it or should we be watching it closely?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Well, you should be concerned about it, although we think that that concern is reflected in the projections. But it's all matter of the degree at demand containment through this class before and it's a real challenge when we try some innovative things this time and I told you Harlem County development was designed to get the need of underground miners about eight year or so using both surface mining and out of our labor pool area and also that even this morning, I had some discussions about additional mining and surface mining that would allow us to make out volumes and lessen our need for underground coal miners. So it's a challenge that we should all be aware of and concerned about and one that we're trying to deal with in a number of ways.

Shneur Gershuni - UBS

I guess when you said, it's reflected in the numbers, in other words if you get everybody that you need and you can make any configurations, possibly the numbers should be higher. Am I understanding that correctly?

Don L. Blankenship - Chairman, Chief Executive Officer and President

Yes, we've not given the street a number that reflect us being 100% successful in that.

Shneur Gershuni - UBS

Okay perfect. Thank you for the clarification.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question comes from Leslie Rich with Columbia Management. Please proceed with your question.

Leslie Rich - Columbia Management

My questions have been answered, thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you very much.

Operator

Our next question comes from Jeff Gildersleeve with Millennium Partners. Please proceed with your question.

Jeff Gildersleeve - Millennium Partners

Good morning, guys. I just had a two quick clarification questions. One was Don, I am not sure if I heard you correctly, but you guys were looking at ways of addressing some of the contracts you signed earlier in the year at lower prices?

Don L. Blankenship - Chairman, Chief Executive Officer and President

We have contracts that say, thanks to the effect that the index... those index is not following the actual inflation that we are absorbing, but it's a subject of negotiation. So it's ambiguous and it's not something that we have historically pressure on that. But we have done that in a few places and of course there is the debate about government positions and of course we've had a lot of government in positions, some of which aren't as simple as $0.10 a ton or a $1 a ton, they are in positions on requirements of extra labor and extra testing and so forth. So there is lot of negotiation about those numbers and about when they apply retroactively or going forward, so there is a lot of individual negotiation with almost every customer we have.

Jeff Gildersleeve - Millennium Partners

And the second question is lots happen as far as M&A in the industry. I just wanted to kind of get your thoughts as far as Massey as consolidators or too much competition, just kind to get your thoughts because you do have such a big reserve base, do you feel you need to do something or?

Don L. Blankenship - Chairman, Chief Executive Officer and President

I think that when you have a larger something [Technical Difficulty] has value that's not developed that your half return will come from developing that asset as opposed to buying that asset. You know, if you look at our 20 year history, acquired under my management probably 2 billion tons of reserves, during times when they could be acquired for nearly nothing. So we don't mind going out and buying reserves and paying an appropriate value, but we also have reserves that we develop for the very purpose and very situation that we're in. And we are frustrated a little bit about the labor and permitting and the delays, but I think we're... we did the right thing during the period time that reserve could be acquired for the next announcement and we are trying to do the right thing now that we're just putting them to play. Having said that, we are very aware of reserve transactions and the reserves next to us and making continual efforts to acquire more reserves.

Jeff Gildersleeve - Millennium Partners

Got you, great thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

Our next question is a follow-up question from Luther Lu with FBR Capital Market. Please proceed with your question.

Luther Lu - FBR Capital Markets

Thanks. Just a quick follow-up for the unpriced met coal. Is there any collar contracting there?

Don L. Blankenship - Chairman, Chief Executive Officer and President

No, we have... this is not 110% accurate but 99.9 we have got collars that's are low, we are treating as prostate in top of the collar. But price tons are totally on price or unsold are not collared at all.

Luther Lu - FBR Capital Markets

Okay great thank you.

Don L. Blankenship - Chairman, Chief Executive Officer and President

Thank you.

Operator

And there are no more questions. Now I will turn the program back to Mr. Hendriksen.

Roger Hendriksen - Director of Investor Relations

Once again, we like to thank you all for joining our call this morning and we look forward to speaking with you again soon. This will conclude our conference call for this quarter. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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