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Alpha Natural Resources (NYSE:ANR)

Q4 2008 Earnings Call

February 5, 2009 11:00 am ET

Executives

Kevin Crutchfield - President

Michael Quillen - Chairman and CEO

Ted Pile - Director, Corporate Communications

Analysts

James M. Rollyson - Raymond James & Associates

Meredith Bandy - BMO Capital Markets

Pearce Hammond - Simmons & Co. International  

(Michael Dudis) - Jeffries

Brian Gamble - Simmons & CO

Luther Lu - FBR Capital Markets

Schneur Gershuni - UBS (US)

Jeremy Sussman - Natixis

Paul Forward - Stifel Nicolaus

(Mark Parr)

Bryan Lee - Citi

Operator

Good morning. My name is Trinity and I’ll be your conference operator today. At this time I would like to welcome everyone to the Alpha Natural Resources 4th quarter 2008 results conference call. (Operator instructions) Thank you, Mr. Pile, you may begin.

Ted Pile

We’re pleased to have everyone join us this morning for Alpha Natural Resources 4th quarter and full year 2008 earnings call.

Mike Quillen, our Chairman and CEO, and Kevin Crutchfield, our President, will deliver some prepared remarks as they customarily do and then we’ll open it up for your questions.

During this call and webcast Alpha management will make some forward-looking statements. Actual results may differ materially from these statements and these statements should be considered in the context of the risk factors contained in the press release we issued this morning and which is posted on our Web site and in our Form 10-K and other SEC filings which you can also access through the Investor Relations section of Alpha's web site.

As a reminder, a replay of this call will be available three ways, either by telephone, the number and access code are in this morning's earnings release, or by logging on to our web site at www.alphanr.com and also as a podcast available in the IR section of our web site as well.

I'll turn it over to Mike now.

Michael Quillen

Thank you, Ted, and good morning. As always, I want to start with safety and I want to say that the entire Alpha family, all 3,600 people should be exceptionally proud of the safety accomplishments in 2008, in particular in our underground mines, our lost time accident rate was almost 40% lower than (inaudible) national average for underground coal mines.

That's an accomplishment of the highest magnitude and the greatest importance, and underscores the record of continuous annual improvement through our running right safety initiatives.

For many measures, 2008 was as great year. In fact, it was a fabulous year right up until December. Still, even considering the fact that December met shipments dropped 37% year-over-year, we had a respectable fourth quarter with coal revenues up 18% and income from continuing operations before taxes of 27%.

Due to the net charges and income tax adjustment we outlined at our earnings release this morning, we reported a net loss in the fourth quarter of 4.2 million, or $0.06 per diluted share. The cumulative negative impact of these charges and the income tax charge equals about 34 million after tax, or $0.47 per diluted share using a normalized income tax rate of 23%.

For the full year 2008, we posted a new record high for coal revenues, operating cash flow, EBITDA, and net income. More importantly, we continued to generate free cash flow as we’ve done every year since our formation in 2003. I don't know that I've ever seen a coal company do that six straight years.

The significance of Alpha’s ability to produce free cash flow, about 320 million last year, including the (inaudible) break-up fee is certainly not to be overlooked in these difficult times where actually making money and creating value is once again a prize virtue.

We continue to compare favorably with our peers vise-a-vie cash and total liquidity. We finished January with more than $750 million in cash and cash equivalents, plus about 300 million available under our revolver for a total of about $1 billion of liquidity. This gives us considerable flexibility and options at a time when many companies and most industries are short on both, additionally; neither our revolver nor our debt matures in the near term.

The discipline doesn’t stop there. We have four overriding priorities, and those priorities evolve from our experience managing the co-business and down cycles before. First, is to be austere in both capital expenditures and SG&A. We will reign in our planned capital spending for 2009 and defer non-essential projects, such as mine openings or expansions that we continue to move forward on our main project in Virginia, Deep Mine 41, which is a long life asset and will be a low-cost producer.

While we haven't completely finalized our 2009 capital budget right now, we don't expect expenditures this year to exceed the 2008 level.

Our second priority is reduce our risk profile by constantly monitoring the credit worthiness of customers, suppliers, and contractors, and acting quickly if a potential credit risk arises. We continue to have excellent management of our receivables with day sales outstanding progressively declining each quarter last year to about 23 days in December. While we are pleased to be where we are in receivables, it bears continued close scrutiny.

Third, if we face unsolvable challenges in our asset portfolio like we had with our Kingwood Mine last year, or encounter an opportunity for the best non-core assets under favorable terms, like the sale of our interest in the Gallatin Lime Plant, in Kentucky May reserves last year, we will act swiftly and decisively.

Our fourth and perhaps most important objective, which I alluded to earlier, is to preserve and protect the fundamental underpinnings of our business, our ability to generate free cash flow after prudently maintaining our asset portfolio and keeping a sound and flexible balance sheet. Essentially in our 30 plus years in this business, we spent more time managing through a down cycle than an up cycle.

We’ve seen too many times in the coal industry where ignoring the fundamentals caused businesses to collapse. The theory of over producing a commodity in a weak market always drops revenue per unit and squeezes margins. We feel showing restraint is the best approach which we can do with our flexible mining plans and purchase coal.

We feel adhering to these priorities is how you run a business in an environment like this. We’ve been there and done that before and the results can be positive, plus your opportunities expand.

Kevin is going to make a few comments now detailing some of the specific actions we’re taking and plan to take that are keeping in line with our priorities, and also what's happening from a marketing standpoint.

Kevin Crutchfield

Thanks Mike. On the market side, specifically the thermal markets, we are anticipating a decline in coal consumption by utilities, which corresponds with projections of lower electricity demand in 2009. By exactly how much remains anyone’s best guess, but we've seen predictions of as much as 2%.

In addition, soft natural gas pricing and growing supply is creating the opportunity for some utilities to fuel switch. Coal stockpiles are pretty full on the national basis, although the (inaudible) data points to a decline last year of 11 million tons among generators in the mid-Atlantic and south Atlantic markets combined.

On the positive side, numerous production cuts have been announced and we think supply will continue to come off, and even faster if market conditions remain soft. As tends to be the case, there still seems to be a disconnect between the physical and paper markets. In fact, we’d be extremely reluctant to do contract business in today’s OTC prices.

As of mid-January, we had about 90% of our planned thermal coal production for 2009 committed and priced at a little over $70 a ton, or roughly $19 a ton more than we averaged last year.

On the bad side, fuel makers worldwide have shown considerable resolve in quickly responding to the grim economic decline. Obviously, their actions were driven by the near instantaneous, unprecedented headwinds, particularly in the depressed auto, durable goods, and housing industries.

In December, deep cuts in blast furnace production heavily impacted raw material needs. Scheduled loadings of export met coal were delayed, as we announced in early December.

Interestingly, despite tepid shipments in December when volumes were 350,000 tons lower than the prior December, we still managed to finish the fourth quarter with $104 million improvement in revenues from our met business, up 50% year-over-year. This reflects how much me coal prices have improved, even if they're not up to the peaks they reached in mid-2008.

Also, we’re seeing some positive signs that maybe, just maybe, conditions are beginning to turn, or are at least stabilizing. Steel service center inventories in the U.S. declined five consecutive months through December, and at year end stood at a 15 year low. This destocking is vitally important for the steel manufacturers to return to more normalized capacity utilization levels.

As of about two weeks ago, steel capacity utilization levels were mired in the 42 to 43% range. While that's not good, it’s better than late December or early January when capacity utilization bottomed in the mid-30’s.

Meanwhile, in January, momentum seemed to pick up on steel orders. Positive signals are coming out of China in terms of lower coal exports and higher steel prices, and in Brazil where steel sales began to recover in January.

There’s a chorus of voices that insist that with global steel production having plunged at its fasted pace perhaps in history, output is now well below apparent demand. And, if that's the case, it will begin to manifest itself in rising steel prices and capacity utilization.

Still, in the recent round of quarterly calls, steel industry executives are insisting they don't know exactly when things will turn around in a meaningful way, so it’s not surprising that they can't accurately project their raw material needs for the next 12 months.

As we stated in December, steel producers have gone back to their suppliers, including Alpha, seeking to reopen discussions or renegotiate agreements reached late last year. Our approach with our long-standing customers is to work with them to maintain mutually beneficial relationships, and that's exactly what we’ve been doing.

Typically, we’d be done with all of our domestic met business by now, and the view begins to take shape on the international front. This year is different. We haven't wrapped up our 2009 U.S. business completely, and we continue a dialogue with our international customers, so it’s premature to discuss what the pricing picture is going to end up looking like, or talk too transparently while they're still in these discussions. By the next time we report at the end of April, we hope to have a much clearer view to share with you, both on the domestic and on the international side.

On the supply side, although it took some time, the response has been the right one to match lower demand. We now believe about 30 to 35 million tons of met coal production has come offline around the world.

This figure is derived largely from cuts announced by public companies. Private producers don't tend to make an announcement when they find a mine, so we believe that it could be more, and it could happen very close to where we need to be given the demand that's occurred.

Finally, there are two instances from where future demand projections are looking positive. Here in the U.S., Alpha believes that as domestic steel makers reduce their dependency on importing coke, their need for (inaudible) coal will increase. Several projects are now underway.

On January 23rd, Sun Coke said it had started construction of a $340 million facility in Mill Town, Ohio. Those ovens could begin operating in early 2010 and are capable of taking about 900,000 tons of coke coal. Other projects are moving ahead at Granite City and Clairton.

The second thing I wanted to mention is that late last year, we were enormously successful in penetrating new markets in the CIS states of Eastern Europe. Although these economies are suffering a great deal as well, they will rebound at some point. We feel the in-roads we made in 2008 will help us expand business relationships in these long term growth markets.

Earlier, Mike mentioned that one of our main priorities was to manage our way through the cycle with the goal of protecting the fundamental financial underpinnings of our company. To this end, we’ve taken specific additional steps to optimize sales and operations portfolio to adapt to the current environment. In December, we rationalized mining plans at four facilities. This involved taking off continuous miner units at multi-unit mines and cutting back from seven to five day schedules.

Also, we’re implementing plans to cut back on non-Alpha produced coal. That's the coal we procure from contractors, mine level purchases, and also purchased broker coal. These sources tend to be higher cost tons yielding thinner margins than our own captive mines.

They also give us flexibility, so when economic conditions improve and the market rebounds, our business model will permit us to respond accordingly. All told, we expect to cut a total of about 4.5 million tons out of our sales forecast versus 2008 levels with virtually all of it coming from non-Alpha sources and the closing of Steamwood Mine.

Even with these adjustments to our operating plan, and in the face of one of the worse business environments any of us have ever witnessed, we still expect 2009 to hold up well in terms of our financial performance. A combination of factors makes this possible. First, favoring production from our lower cost and more efficient underground and surface mines; second, the $19 per ton improvement in pricing on 12 million tons of steam coal that we’ve committed for 2009; and, third, moderating supply costs.

Cost deflation is easy, in some cases, rapidly. One of the main cost drivers at our surface mines, diesel fuel, of which we consume about 32 million gallons annually, peaked last summer at $4.12 a gallon, and currently we are paying about $1.38 a gallon, which provides some much needed relief.

Surcharges on steel roof support products, our main underground cost, peaked as high as $670 a ton last summer. Since then, surcharges have been eliminated entirely through at least August. We accomplished this by entering into a physical hedge with our main steel supplier that sets prices on the most commonly used products.

There are several up-sides on the cost line. First is better labor availability as evidenced by a voluntary turnover rate that plunged to 3% in December. This helped improve our deep mine productivity as the fourth quarter came to a close, and should continue to benefit us over the course of 2009. Labor costs records will also subside in tandem with the increased availability.

Also, outside service providers such as maintenance services are more plentiful then they were last year, and as markets begin to stabilize, we expect to be able to be able to negotiate better pricing for outside coke purchases in this environment.

So it’s not at all unreasonable that cost inflation will moderate, and that cash costs should actually come down from the levels they reached in the second half of last year.

Now Mike’s going to make some concluding remarks, Mike.

Michael Quillen

As a final note this morning, we want to tell you that David Stuebe, our Chief Financial Officer and Treasurer who’s with us this morning will be retiring from the company. Eddie Nealy (ph) who’s been with Alpha or one of our predecessor companies for about 25 years, and who also joins us here this morning, is being promoted to the CFO position from his current role as VP Controller. Congratulations Eddie.

We’ll be issuing a press release on this later today, but I just wanted to publicly, on this call, extend my sincere wishes for a happy retirement to David and his wife Joy, and thank him for all he’s done to bring Alpha from (inaudible), raw state we were in, in 2003, to where we are today.

Along the way, David helped us through our IPO, a secondary equity offering, a recapitalization of the balance sheet, implementation of Sarbanes-Oxley, which is no easy feat, and integration of numerous acquisitions.

David was considering the possibility of retirement this past spring prior to our engagement with Cliffs Natural Resources, but we encouraged him to stay through that exercise. Now he’s got some catching up to do after giving us an extra year.

David, your experience, dedication, and accomplishments have been invaluable over the last few years as we’ve grown, and we want to thank you.

That concludes our call this morning, we’ll be happy to open up the line to questions now.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Jim M. Rollyson from Raymond James.

James M. Rollyson - Raymond James & Associates

Hi Mike, your balance sheet’s obviously in awfully good shape. Maybe spend a minute just thinking or talking about how you think about utilizing that over the next 12 months in the market we’re in, or is it more of kind of hoarding the cash for now? Or thinking about opportunities that present themselves under the situation we’re in? Or how do you think about that?

Michael Quillen

Well yeah, well our philosophy hasn’t changed, even as our balance sheet has continued to improve. We don’t look to hoard cash, what we look for is that in this year, there’s going to be some opportunities, and our philosophy is still that Alpha needs to grow.

We think there needs to be consolidation in the coke industry, and we think that those opportunities, particularly in the second half of this year are going to be more attractive from a purchaser standpoint then they were a year ago, because obviously the pricing is going to come down.

We also think that both on the private and public sector, that you know, this is a cash flow business, you’ve got to have cash to operate, and there will be some good miners that will get in a situation—a cash situation that they can’t avoid going forward.

So again, our first priority is to grow the company, to do that prudently, and with the right multiples. The other options are out there, but for example, stock buy backs right now, there are some limits with our bank loan covenants, but we haven’t really seen that that’s been that positive to anybody’s shareholders. When they’ve done that in the past, it really hasn’t returned that much value to shareholders per se, and that’s a broad term. It’s certainly something that we would continue to look at.

Debt pay down right now, you know, we report accounting-wise an interest rate that’s somewhat higher, but our affected interest rate is pretty low on the amount of debt we had out there today.

We like where we are, we’re going to be somewhat conservative. We’re obviously waiting for the capital markets to do something going forward. We’ve seen some signals that there’s opportunities out there in the capital market side, so right now we’re still looking for growth opportunities as our first priority, and other then that, we’ll probably stay somewhat conservative for the next few months in terms of either share buy-back or dividends, or any other options we have for that cash.

James M. Rollyson - Raymond James & Associates

Great, thanks for that. And there’s a follow up; you’ve talked about the steam-coal position you’re in with most of that being contracted around $70. Last quarter, if I recall, you had noted in your press release in the details that you had about 5.4 million tons priced in the high $100’s close to $200.

Any update on kind of where that stands? Because I know you had some of your competitors that have kind of given up some of those previously priced contracts, kind of in discussions with customers. Just where do you guys stand on your previous contracts since you don’t know where the new ones might go.

Michael Quillen

We were kind of hoping that question wouldn’t come up today. We’re in the same situation as everyone else is, in that we’re not going to give guidance on those tons right now, particularly in terms of price, and every customer is a different situation. But those numbers, we can’t in all good confidence think that they’re out there anymore.

We have some contracts that run from April of last year, through March of this year, and some contracts that run through July and June, and they were extremely high numbers. We shipped some tonnage on those, but those customers have backed off and taken those really high priced tons.

We’ve had other situations where we would have considered it to be a committed contract, and under the UCC code in the United States, it would have been a committed contract, but we’re in a new area right now of contract law, and what is a contract may not be a contract now, and the new metric that’s out there.

In this current economic situation globally, does that impact what technically might be considered maybe a non-financial (inaudible), which could be excluded in the contract, but are the (inaudible) such that it opens it up.

So we have a broad spectrum of, we’ve got a portion of that tonnage, we’re still very comfortable what the pricing’s going to be. A portion of that tonnage we’re very comfortable that we’re going to sell to that customer, but we’re going to be renegotiating the price based on what the steel companies are projecting. We are probably going to see a reduction in total met tons.

And then we’ve got some customers that we will ship under provincial pricing, and may end up in court with them. Obviously on the international side, that’s different then the domestic as you look at the effort and the resources and the time and even the venue that you may be in court, you’ve got to judge that against that time, so we’re going to run the business. We’re going to ship the tons that we think is appropriate to ship with the right margins, and then we’ll let our legal department work through some of these other things. We’re not going to stop shipping and go to court with everybody.

That being said, where we are on the met side is, when we look at the total global reduction in met demand based on what all the steel producers and coke producers have said, we have a fairly detailed spreadsheet of every coke producer in the world, where they get their tons, how we participate in that market, and how we participate in that market and how other U.S. producers do.

When we hash all of that out, we think that the U.S. is probably going to get impacted as much as around 8 million tons of less met opportunity as the steel industry sees it today. We are 25% a little bit over 25% of that, so as we look at it today, we could see that we could be down a couple of million, 2 - 2.3 million tons of met opportunities on what the steel industry is projecting today.

That being said, that could dramatically change. We’re in a very balanced environment between supply and production. There will be some additional tons come off line for either regulatory reasons or for market reasons. So that is an advantage that we have, and we’ve had the last couple of years.

If there’s an event, one way or another, that causes the supply side to start to move back up, it’s still a—excuse me the demand side, the supply is still constrained, and we, as we did in 2008 will move quickly on that. But we’re going to be backing our tonnage off some, and the ranges we’re seeing on—and I’m taking a long time because I know everyone has this same question on this answer, but as we see the reports around the world that everyone else sees, we see certain international customers going to certain countries, and with a 175 FOBT number, we’ve seen 150, and that’s the range that this is not an Alpha guidance projection, this is just giving you some market insight, which I’m sure many of you want to see.

We see FOBT numbers in the range of 130 to 175, and it’s that broad, and that’s basically were we see this thing shaking out for all U.S. producers for 2009. We wish we would have been able to hold that number, and we still have contracts that can lead you back to a lot of that number, but in reality, if the international customer doesn’t send you a boat, you can’t dump it in the ocean, so we’re kind of stuck in what environment we’re in today, and we’ll have to live with that.

The other issue we’ve got is there’s some of those customers that we had high prices with that basically have said that if they have to pay that price, they’ll go bankrupt, which then does away with the contract.

So a lot going on in that arena, a lot of negotiations yet to be dealt with. We’re all kind of back where we were for post five years ago for the 15 years prior to that, where everybody’s waiting to see how the Australians settled out with the Japanese, and then people will use that number as a metric.

A lot to be decided in the next couple of months, but we’re off of that tonnage now, and we look at say, a reduction of about two million tons, as we see it today, in met product and pricing in the range that I gave out there. I don’t think Alpha will be that dramatically different from other people, except as you adjust for qualities of coal.

James M. Rollyson - Raymond James & Associates

Well thanks Mike for all the detail, very helpful.

Operator

Your next question comes from the line of Meredith Bandy from BMO Capital Markets.

Meredith Bandy - BMO Capital Markets

Thank you so much for the market information, that’s very helpful. When you’re talking about the range you’re see, the 130 to 175 on the international side, and as you say, if you don’t have a boat, you have to keep it internally in the US. What would be the difference that you’re seeing then in the domestic market?

Michael Quillen

Well, I mean really your options are to keep it in the US, because the domestic market is off proportionately about the same volume as the international market, maybe not quite that much because of the coke situation, there’s not much coke being bought and brought into the United States now, so they’re going to produce it themselves.

We would take it out of the market. I mean as we see it right now, we obviously have some flex tons that went into the met market last year in a dynamic met situation. We don’t really see bringing very much of that back in the steam business, a little bit of it, you know, we’ll put to our steam business that will lower cost with a higher ash and a little bit better mining conditions.

But mostly what our advice is, and what we state in our philosophy is, is don’t produce it right now. I mean it doesn’t make a lot of senses to us, as fragile and as delicate as the balance is between good met coal supply and consumption, we’d rather hold those tons back for what we saw in 2008. I mean that is going to occur, the economy is going to turn around, China’s going to come back out; we’re already seeing signs of that.

Things will stabilize, and then when people start producing met coal with the reduction of, as we’ve said, 30+, 40 million tons coming out of the marketplace, there’s going to be an opportunity for flexible companies with good facilities to participate in that market.

So we don’t want to sell a ton at a loss, and won’t sell a ton at a loss, or a reduced margin today, we’ll save that met ton for 2010, or 2011 and take advantage of it at that time. It’s not a matter of taking it back into the domestic market because we can’t sell it international, we’re going to hold that ton.

Meredith Bandy - BMO Capital Markets

Okay, so what does that do for you then on the cost side, because some of your competitors are saying that yes, they have commodity prices coming down, which you also discussed, but then they also perhaps haven’t set optimal production levels, so they’re expecting a unit cost increase next year. Would you expect Alpha to have a similar situation?

Michael Quillen

There’s three buckets that our costs go into, and that’s our company and captive minds going through our preparation plants, and then our purchase coal that is close to our facility, that it’s really not captive, but we buy that and there are contractors. Then we have our "broker purchase coal."

Our cutback is primarily, with the exception of Kingwood, which was about 1.4 million tons, and that broke down about half and half of met and steam, but you take to the side, and we don’t see any reason to replace that in 2009, the majority of the rest of it is going to come out purchased coal and contractors, which is—and I think we break that down even in our press release—a high cost production, so net, you know, because of mix we’re going to see a reduction.

The other thing that’s going to happen on cost, is that we will have a full year in 2009 of some of the labor adjustments that we made mid-year last year, so that’s going to obviously increase cost a little bit.

We also are going to have higher revenue impact on our fixed cost for severance tax and royalties. Offsetting that are what Kevin mentioned on diesel fuel and steel costs, and we’re very hopeful that we’re going to see some turnaround in productivity.

Again, we had an extraordinarily good, low turn over in December of three perecent, that’s probably not a realistic number. December’s going to be your lowest year, because of the holiday, vacation pay and bonus’s, but we see that stabilizing around single digits, which is where it used to be for several years, and there should be an impact on productivity.

It’s not unreasonable, as we look at this, to think that our cost is going to be either from negative to mid single digits is kind of the way we’re looking at it right now going forward, and of course buying is going to have something to do with that. We’re really not affecting our company volume very much. So overhead and all those things will still be well controlled.

For example, on SG & A we show a slight reduction in SG&A for next year from 2009, but again, I caution everybody that someone reflective on some of the stock grants and programs that are out there, that directly tie to stock price, so that number could swing a little bit, but right now we don’t see any increase in SG&A for 2009.

Meredith Bandy - BMO Capital Markets

Okay, great, thank you very much.

Operator

Your next question comes from the line of Brian Gamble from Simmons & Co.

Brian Gamble - Simmons & Co. International  

Good morning guys. Just a follow up, you made some extensive comments on the mat, just if I could, how were the shipments in January compared to on a year-over-year basis?

Michael Quillen

They’re a little down, our January tons, I think we’ve got one boat that I think ended up getting loaded at like 2:00 am on February 1, and that’s always frustrates us as we look at these, more so on a quarter then a month. A little bit down, but as we look throughout the quarter, we think that number that I was throwing out there is still going to—it may not be—and that’s not that unusual to not be ratable in the first quarter, we’ll see how our volume is in the second and third quarter, and then fourth quarter depends a lot on where we are in negotiating the market again. But it’s a little bit down, not materially I think, it’s a couple of hundred thousand tons.

Brian Gamble - Simmons & Co. International  

And then if I could, I wanted to try to clarify your statement from before. If you do $4.5 million less on the sales side next year, and as you mentioned, Kingwood really being the only organic production that you’re taking off, you’re talking about total volumes of 24 with 22 of it being produced internally, and then doing roughly $2 million from the outside?

Michael Quillen

That’s very good math. I mean that’s the way we’re looking at it today. The one thing I would state, and we went back and looked at what we said in January of 2006, and 2007, and that purchased coal is a very variable number.

A couple of years we said we would probably buy 2 million tons, and ended up buying 5 million tons and doing some things with purchased coal and flex tons and RS coal going met and buying steam tons, so as we see it today, the numbers you gave are where we see it; at 22 and 2 matches us up with where we think that the market is from today’s viewpoint, and we think that’s going to turn out with some pretty positive financial results for 2009.

Brian Gamble - Simmons & Co. International  

And then, if I may, I wanted to touch quickly on 404. I know that the chambers ruling hasn’t come out, and everyone says, well, it could come out any day, but it could be a couple months. It just kind of depends on what the court wants to do.

But as you see that, I know you’ve mentioned in the past that your permits are in place probably for this year, and might be an impact for next year, but how do you see an adverse ruling affecting your overall planned production for 2009, and then as we roll into 2010?

Michael Quillen

It will not impact 2009. As we look forward, the thing with this delay, we thought that ruling was going to be out last fall, and now we’re into January/February, so if permits continue to back up so there’s going to be a bigger delay, it’s probably going to take through most of 2010 to work that backlog out once the ruling comes out on a tonnage impact based (inaudible) impact our total tons produced off our surface mines significantly would be in the low single digits.

The two things that it does, it will increase our cost per ton, because we’re going to have to haul the overburden further then we’d planned to. However, we think—and I’m going to make up a number now—let’s just say it raised our surface mine cost by $2.00 a ton.

If that's a negative ruling, there's going to be so many mountain top removal tons come off and valley fill tons come out of the market. We think the market's going to go up more than that $2.00 a ton and it may not be $2.00. But, we think that once that settles out, there could be as many as 30 million tons come out of the marketplace on a real negative ruling. Not very many of those would come for us. So, we think whatever our costs go up, it could actually end up being a positive on margin.

The negative we see is we will probably lose—as everyone—lose some reserve because we will have to balance out our spoil bouts between what can go into valley fill, what can go against old, abandoned mine works and what can be stacked back up on the new operation. And just again, using some numbers, we may not be able to do a 25, 27 to one ratio. We may be pulled back down to a 22 or 23.

So, from a reserve standpoint, that is the most negative thing we see on an Alpha case by case on the side service mines we have, if there is a negative ruling.

Brian Gamble - Simmons & CO

Thank you very much.

Operator

Your next question comes from the line of Luther Lu from FBR Capital Markets.

Luther Lu - FBR Capital Markets

Morning.

Michael J. Quillen

Morning.

Kevin S. Crutchfield - President

Hi, Luther.

Luther Lu - FBR Capital Markets

Congratulations to Eddie.

Kevin S. Crutchfield - President

Thank you.

Luther Lu - FBR Capital Markets

Sure. Mike, could you give a little flavor on the 2010 thermal coal commitment and pricing?

Michael J. Quillen

Again, on pricing, again on the met side, as you well know, there really isn't any real insight on pricing. There's not any for 2009, but under normal circumstances there wouldn't be any for 2010. We think, again, that the volume of our met—if the world economy has started to turn around, will come back up.

Luther Lu - FBR Capital Markets

Sorry, I (inaudible) thermal coal.

Michael J. Quillen

We had a record year this year, but on steam 2010, we've got—I'm trying to look at that right now—around five and half million tons committed at around $77.00, $78.00.

Luther Lu - FBR Capital Markets

Five and half at 77. Okay.

Michael J. Quillen

Yeah, about 77, 78.

Luther Lu - FBR Capital Markets

Okay and for your 2008 NADCO export, can you give us some color? Did you (inaudible) distribution?

Michael J. Quillen

Try that again, Luther. I'm not sure I'm following —

Kevin S. Crutchfield

He wanted to know the bracket distribution of (interposing). It's literally all over the place.

Michael J. Quillen

Yeah, we'll probably have a slide on our next investor—maybe not our next investor presentation because I think that's next week, but we can do that. But really, it didn't dramatically change. We shipped to, I think, somewhere around almost 20 different countries, spread around the world.

There's no really one geographic area that dominates. As we said last year, obviously, our most natural customers are the Atlantic Basin and that's Western Europe and South America. We did find new customers and we think that's going to continue in Eastern Europe and we're not doing any business with Japan or Korea right now, but we are seeing some business in India.

That customer base was pretty much what you've seen in our presentations in the past without any really region totally dominating that. It's pretty well spread out with India being the lowest percentage, but the other three are—Western Europe's going to be the biggest and Brazil, South America and then Eastern Europe and then India.

Luther Lu - FBR Capital Markets

And then finally, on the cost issue, when labor becomes more available, is there a scenario where you can take away some of those gas card programs and actually lower labor costs?

Michael J. Quillen

Well, our gas card program was based on an indice that actually has ended as the prices dropped. That was to assist our employees. We were looking at $3.50 a gallon gas. Now we're looking at $1.50. That has already ended. Most of the other programs, though, will stay in place.

We gave, obviously, wage increases. We made some changes in their participation in insurance premiums and we have some programs for retention and those will all stay in place. What we are not going to do is we just spent two hard years of trying to stabilize our labor force—as all the other producers did—and that's why when you look at an adjustment in tonnage and this kind of a depressed global economy, we're not taking that to our minds and we'll resist that as long as we can. So, the majority of that is not going to happen now.

We've been in tough times back in the eighties where you actually had to start doing some things like cutting wages and stuff, but I don't see that in foreseeable future. It's not something that we do and wouldn't take that lightly. So, I wouldn't expect that that labor situation is going to change as far as what our commitment is.

What we do hope and do expect is that we're not going to have the vacancies that we had over the last couple of years. We're going to have, again, more experienced people filling the slots and we hope we can override that with some improvements in productivity and also we'll be mining some of our more desirable reserves. As we said, for the last two years, in the markets we've seen, we've mined several million tons that weren't even counted as reserves under an SEC standard.

Another way that we can control cost is we'll back away from things a little quicker at $150 a ton than we will at $300 a ton. So, we'll make up whatever—our employees deserve absolutely everything they get, so that's not an area we're looking to cut. We want to work with them on productivity, but we're not in a take-back mode and won't be.

Luther Lu - FBR Capital Markets

Okay. Thank you very much.

Operator

Your next question comes from the line of Michael Dudis (ph) from Jeffries.

Michael Dudis - Jeffries

Morning, gentlemen. Mike, to follow-up your talk on the labor side—and you gave a very good presentation last week down in Florida about this—the volatility in the market has really impacted, obviously, turn over rates and people wanting to be in the mining business.

And after this big, sharp decline and possible recovery in the next two years, how do you see the level of opportunity to keep your better, productive miners and is it going to be the larger companies that are going to be able to offer more attractive opportunities for labor and that's going to consolidate the good quality labor productive labor amongst the fewer names?

Michael J. Quillen

I think that's exactly what's going to happen. I think the larger companies and the better-capitalized companies will be able to maintain their programs. As I mentioned down there and we talked about it, it's a very dangerous position to reset everything we've worked hard, as an industry, to promote is that this is an industry you can get in.

You can make excellent wages and benefits and it's a long-life industry and it's going to be. We have to continue to do a good public relations job explaining to the perspective miners that they can come into this industry and stay there.

The bigger companies, I think, will be able to do that. The volatility, I think, will come about in your smaller producers more than anything else and they're under the most stress, not only on the labor side, but certainly the environmental regulatory side and the safety side.

But, what we don't want to do is start seeing layoffs and mine closures and things that send out the signal that this is not an industry to go into, whether it's mining engineers or whether it's people underground or on the surface mines. We want to be able to say we're here for the long-term and this is an occupation that will reward you if you choose to join us.

Kevin S. Crutchfield

Mike, this Kevin. Another we saw last year when everybody was running and gunning, people changing around because some new start-up could offer another couple of bucks an hour or something like that—and with the volatility that you pointed out—a lot of that has now passed. And the employees are very smart and they look at reliability of their employer a lot like we looked at our customers and that sort of thing.

So, that is a real choice, in a way, that we think we can continue to differentiate ourselves long-term is the stability of it and not vacillate with what's going on in the market.

As Mike said, we've worked too hard to create this employee base and the last thing we want to do is prostitute that process just because the market's new.

Michael J. Quillen

The other advantage that we have and it was part of our business model is we've concentrated on the smaller, continuous miner room and pillars, like mining underground and the smaller surface mines without the big valley fill, mountain top exposure.

So, when you're caught in with a long wall or a dragline, you have to adjust to what that dragline and that long wall will do and sometimes you just can't run it. You can't do like we can do with a continuous miner unit moving into different direction, take it to a different mine or work it five days of week instead of seven. That's a lot harder to do with a long wall.

So, we have a little bit of advantage with our labor with flexibility of the type mining we do that can keep our employees working four weeks.

Michael Dudis - Jeffries

Very well said. Just one follow-up along those lines again. However, 2009 —and you hear across the board—that there will be, or most likely be, a cutback in production in underground and surface mining in Central Appalachia.

You're certainly laying off contractors and not buying coal from other mines and probably not even allowing some of your coal to be washed through your prep plants. Given what you know and what you see in the marketplace, can you give a sense of if prices were to stay in the current NYMEX level, what kind of reaction you would see from the marketplace?

Michael J. Quillen

If it stays in the current NYMEX, that would be drastic and anything less than that would really be an impact. I think when you've got almost two-thirds of the industry's public companies now that is certainly much more disciplined in terms of the return they provide their shareholders, that is the biggest impact. But, everyone else is conscious of the fact that the two decades that we, as an industry, operated on a cash basis didn't work very well.

We've already seen a couple of bankruptcies in the industry even when the market was very good. The potential for that is out there in 2009. We're going to see a drop off. We're going to see some companies of a certain size that have been frustrated with the regulatory environment and the capital required to meet the safety requirements that might have hung on. They would have hung on in a $100 steam market.

They're not as apt to hang on in a—and I haven't looked at NYMEX in the last day or two because we don't play in it—probably $60 market or maybe even 50. They're not going to hang around in that market and put new capital.

One, you can't possibly get capital or can't get loans to buy capital. So, that's going to go away. As we said, when you look at Central App, we've said all along that we see that going from 220, 230 million down to 180 million. Last year we said that date had extended itself out, maybe to 2012 or beyond.

Now, that number's coming back at us on when we think that. But, we think the natural attrition because of geology and reserves is going to pull that number down around 180 and we think the only basin, really, that can pick up a significant part of that in the future is probably the Elnoid (ph) Basin. Everybody else has certain restrictions.

Kevin S. Crutchfield

Michael, you saw the Appalachian Basin, as a whole, last year expand by about 2.4% in probably the best gold market in the history of the planet. I think at today's prices—in that respect, it's kind of inelastic.

But, when you think about the current price stack where this recession continues to go sideways, I think you will see more elasticity on the downside and I think, in fact, we've already seen a lot of it. And there's, perhaps, some more to come.

Michael Dudis - Jeffries

Agreed. Thank you, gentlemen, for your thoughts. I appreciate it.

Operator

Your next question comes from the line of Schneur Gershuni from UBS.

Schneur Gershuni - UBS (US)  

Hi, good morning, guys.

Kevin S. Crutchfield

Good morning, sir.

Schneur Gershuni - UBS (US)  

Most of my questions have actually been asked and mostly answered. Not to beat the whole MetCoal negotiations thing, I just kind of wanted to understand one key point. When you get that call that you hate to get, is there a chance that there's a differentiation between the types of products that people are asking for negotiation or asking for a little bit of leeway on?

High vol versus low vol? Is low vol hanging in better than the high vol and so forth? I was just wondering if you can give us a little color about that and at the same time, if you can sort of talk to this whole contract versus spot market, whether it makes sense to even bother with contracts anymore if nobody honors them and just move towards more of a spot market type of approach?

Michael J. Quillen

Well, let me take that last one first because we certainly have had that debate is what is contract and I assure you that we have expressed, externally as well as internally, our frustrations. In '07 and '08, we shipped some $65, some $75 met tons when the market was three times that. And we expect our customers to recognize that and certainly, some will. Some may not, but that's a very frustrating thing that if you're a producer, it's a contractor. If you're a customer, it's not. So, there's a lot of frustration on that level and it, again, will play itself out over time.

But, it is a fact of life that you got certain tons you want to keep moving and there will be some preventional pricing. In other words, both customer and supplier understand that to keep your volumes moving that preventional pricing may be what we put out there at some number and then we either, through court or arbitration or whatever, resolve what that settlement may be and we'll just deal with that as it comes.

When you talk about the pressure—without question because of the very limited supply of good low vol coal around the world, that's going to be under less duress, in any market, than the high vol. The first tons that are going to be under pressure are the flex tons or a lot of tons that weren't traditional met.

They're going to come out of the marketplace, particularly through highly priced first and get pushed back on. But, specifically, to answer your question, high vol is going to get more pressure, certainly, than low vol.

There just isn't a lot of mid vol out there. So, we kind of characterize that about in the same arena as low vol. But, high vol, without question, is going to be under the most pressure.

Schneur Gershuni - UBS (US)  

Kevin gave some great color with respect to inventories and so forth coming down. Are there any other key leading indicators that you look at in the steel market that you sort of keep an eye on that we should be focused on as well, too for how we should be thinking about the direction for pricing and so forth?

Michael J. Quillen

We monitor probably half a dozen different ones, whether it's roll ban, (ph) flat production, production out of different steel mills. We have some people that monitor very closely coal production and all of the steel products in the various arenas. We also monitor a number of automobiles that are being put into the marketplace.

I guess the question we haven't gotten yet is is the infrastructure thing really going to anything? Certainly, if they'd build some roads and buildings, it would impact the steel industry. I'm not sure that some of the stuff that we've heard the last few days in that bill are going to be that dramatic on the steel side. But, Kevin, you got anything else on the steel we might be missing to monitor?

Kevin S. Crutchfield

Yeah, I think short-term, I think Mike hit all the ones that we like to watch. Obviously, long-term is what makes the most sense. It's watching just basic GDP growth because steel's obviously a very part of any economic growth package and trying to keep an eye on where you see emerging trends across the world to try to figure out where there's a fundamental dislocation that you could take advantage of like we did in 2008.

Michael J. Quillen

One other thing that we monitor closely on almost a daily basis on currency exchange rates with our competing suppliers around the world and then we also watch ocean freight rates very closely around the world. So, that kind of all goes into the mix on how we evaluate how the international coals are going to move in the Atlantic and Pacific Basins.

Schneur Gershuni - UBS (US)  

Great. Great color. Just switching to the steam side for a second, we kind of see where natural gas prices are and it is a competing fuel at times, especially during the shoulder months. Do you perceive that the thermal market getting worse before it gets better just given what we've got going on and once we get the shoulder season, there's some more capacity that can actually fuel switch and so forth?

Michael J. Quillen

Yeah, and as we said in the past—and it really hasn't dramatically changed—when gas prices are above $5, there's virtually no pressure on coal. Setting aside some of the environmental issues, we're probably going to see going into the future. But when we see prices below $4, like we are right now, there's certainly utility. By utility, there's dispatch issues. We have seen some impact on that in the last couple of months that we have seen gas displacing some coal.

We do the same thing on the utility side we do on the met. We monitor every perspective utility customer and what their fuel is and there's a lot more clarity on that because in the United States, a lot of that is a little bit lagging— about 90 days. But under FERC, almost all that data is reported on where they get their sources of fuel. So, it is something we can keep up pretty closely.

But, there's some pressure now—and another interesting statistic that we monitor closely is inventory level of utilities—when you look at the macro number last year, there's an increase, but when you break that down into segments of the country and the Southeast and the Mid-Atlantic, there actually was a reduction, I think, in steam coal inventories at the end of the year.

It's kind of interesting to us as we watch some of the dialogue that goes on that people say, well there's a four million ton impact or 5 million ton or 15 million ton, whatever number you want to look at on the utility industry from natural gas and we're saying that's a big and ton industry. It was four degrees here this morning.

If it had been 34, that would have had maybe as much impact, so it's kind of hard for us to say that we're smart enough to say that natural gas impacts a big and ton a year industry; four millions tons.

It does have an impact. It certainly has an impact psychologically as your negotiating, but right now, the steam business is normal. It's more stable than the met business. The met business has huge rewards when it's good, but it is much more volatile.And steam businesses is a little bit more predictable and you don’t have these kind of contract to base normally in the steam arena that you do with the met customers.

Kevin Crutchfield

As you seen in the past with the natural gas, its obviously much more transparent, instantaneous type market versus what out's there for oil when there is a migration to switch it typically cost the gas price to react, pretty quickly compared what Mike recalled. So that thing cause some things to stand still long enough to be able make projection on what’s going to happen this year, is pretty tough, and I think a lot of it going to be depended as Mike what the economic outlook is to.

Schneur Gershuni - UBS (US)  

That makes great sense. I just had one last housekeeping question, for both '09 and for 2010 you kind of outlined to committed but unpriced tons, do you have data for your committed but unpriced tons, how many they are for '09 and '10 and if possible the color around it.

Michael Quillen

I don’t really want to expand a lot of, I mean again the, and you all understand very well is where we are at this stage, we don’t want to give subject for save to be guidance that we have to correct when we get new information because banks are so volatile and going to be that way for the next 6 to 10 week. So there is not a lot more than, you can say than what we already bracketed, I think we kind of laid out to tonnages, we see today with our partners go forward and we can adjust that a couple of million ton, we are thinking we will be down a couple of million tons on met coals we see it today, we could put that back in the marketplace if it moves. So there is such a broad range right now, again on the met side that 130 to 175 I would say pretty much, but that’s a huge range of $45 a ton there to try to bracket right now.

So there I don’t know if there is lot more I could say to break it down for you other than we think '10 will this tonnage we will pull them back as we see in February of '09 we see that tonnage coming back because of the global economy in '10 and maybe even some upside to go beyond that.

Schneur Gershuni - UBS (US)  

Right, I would actually was (inaudible) forgot, but I was actually referring more to the thermal side, just with you said that was 90% contract.

Michael Quillen

In thermal, I think we gave you an '10 numbers we have about 5.5 million tons committed at $77 to $78. So if you went back our normal steam production to say around 14 million tons you heard about another 9, 10 million tons of steam that is not priced in '10. If that was your question.

Schneur Gershuni - UBS (US)  

I was just trying to figure out of the 9 to 10 how much was committed but unpriced. If you prefer I can go for it with that offline.

Michael Quillen

I don’t think very much of that, I think, we have that in the met side, we don’t have very much of that in the steam side, but casing go over that but I think it's never going to be close to zero.

Schneur Gershuni - UBS (US)  

Al right, perfect. Well, thank you very much guys.

Operator

Your next question comes from line of Jeremy Sussman with Natixis.

Jeremy Sussman - Natixis

You mentioned preserving margins, as one of your goals for 2009, obviously this quarter, they were bit above $12 per ton, but for the full-year they were I believe little over $17 per tons for the full-year '08. So which of those numbers should we be looking at in terms of what you talked about in your release?

Michael Quillen

Somewhere between those two, no I mean actually on our honest answer is that we are looking to move towards that higher number. We think if we manage our sales rights we use our flexibility and can get what we are looking for in terms of productivity on the tile side that it should trend maybe towards that higher number rather than that lower number.

Again when you look at the big factor is that in '08 we were 42% metallurgical coal, we are probably going to be just under say 40 in '09 and therefore, and that’s on a lower number. So, that makes met sustain impacts of little bit of that, I think if we can maintain something in the high 30s to 40% of met coal that well trend towards that higher margin.

Jeremy Sussman - Natixis

Great, that what we should be looking for on the met side against high 30s to 40%. And just lastly housekeeping, in the third quarter I believe we were 94% hedged for your thermal coal, but now you are 90% hedged was this just a case of basically some met coal switching into the steam market that’s maybe now unhedged or I assume it wasn’t contracts, that were broken on the utility side.

Michael Quillen

Biggest thing that was again when we shut, came were down we lost 800,000, 900,000 tons of steam coal that obviously we because the geologic reason that were in the market reason. But that’s the kind of force measured ton. And we lost those tons. So that primarily was just having being forced to close that came with mine because of geology.

Jeremy Sussman - Natixis

Great. Thanks for all your color on this call.

Operator

Your next question comes from the line of Paul Forward with Stifel Nicolaus.

Paul Forward - Stifel Nicolaus

Hi there. Just one or two more questions here. How willing if the rails been to cut rates on the export shipments to keep U.S.exports competitive. And if you could throw a number out there, what’s roughly the rate for moving Central Appalachian tons to the ports these days?

Michael Quillen

Paul I liked that bird cut, but we haven’t really heard that some of these one of the rail- roads for 2009. Actually as you follow them and we do too. They were talking about very significant rail increases on the export going into '09, that is somewhat lowered right now. So that expectations would be, I think we would be probably satisfied if we can see any other freight rate stayed the same from '08 to '09.

And again they are monitoring that the same we are, what the volumes going to do. And of course their fixed cost is higher than say maybe ours are in terms of the per ton basis. But there is discussions going on, that’s kind of a unique process. Again we pay that number and get reimbursed with it. But there is a lot of that negotiation goes on between your international customers particularly western Europe and railroads themselves. So its not something that we are even party to from time to time.

That number, there is a little bit I think we were using around $25 a ton. Its probably going to be somewhere, few dollars north of that it could be or close to that. We heard numbers that were as high as $10 a ton. I think that’s probably not in my prediction as that’s not going to happen the same as the mid prices are.

The mid prices are in $300 for them to pick $10 a ton on it would probably been something rational. But I think right now you are looking at, I don’t look for a cut necessarily but I do don’t look for a significant increase either. And that’s what are pushing that they don’t know. Outline of where we are in the market price.

Paul Forward - Stifel Nicolaus

Okay, thanks. And the on the purchase coal you went down from 4.8 in 2008 to somewhere in the range of 2 million tons in 2009. Just wondering what happens to that supply is it just dried up. And is that the, when you talk about 2 million to 2.3 million tons of met possibly down in 2009.

Is that all, is that primarily met coal in that number and that in purchase coal being down by 2.8 or so million tons. Is that the majority or all of your met shipments that you plan on having to pull back in 2009. Is that all from purchased coal?

Michael Quillen

Let me take both that’s really two question. First off all of that won’t go away. We debate internally, how much of that will go away. How much it will be picked up maybe by somebody else or particularly a broker, if I pick that ton up and so at a different margin. So some of that will survive obviously we are somewhat of the preferred parts through that coal because when we pay very timely and we cant buy. So it won’t all go away.

On the met side it's about half and half between met, steam on that tonnage, again Kingwood plays into that, part of that drop in met is going to be about 700,000 tones of Kingwood coal that was more metallurgical that we are not looking to replace. And the rest of that will in purchase coal, purchased in a variety of ways either purchased at our freight plant, purchased in the rail cart, purchased at the fort, but you take out about 700,000 of that it will be coal company turns due to the Kingwood closure and the rest of that it will be purchased.

Paul Forward - Stifel Nicolaus

Okay, I appreciate the details.

Operator

At this time we have time for two more questions. And your next question is from Mark Parr (ph).

Mark Parr

Hi, good afternoon guys.

Michael Quillen

Good afternoon, Mark.

Mark Parr

It is afternoon. Hey one thing, Mike you had mentioned the new coke batteries coming on in Middletown and I guess U.S. steel has got a tremendous amount of upgrade work going on at Clairton which would probably means more coal opportunities in next several years. Does this have any potential impact on your mix of export versus domestic? I don’t know how much you share about profitability for the respective end markets but would that potentially change your profitability opportunities, if there was a change in the mix?

Michael Quillen

I don’t think it changed our mix very much, I think we have build in our marketing strategy of tons that we look for and we are monitoring these new opportunities in the U.S. We built, we will manage, its not they are going slide tons one way or another. And again for the volumes that we think that will be, those are tons that we can't come up with and we have some more opportunity to produce.

I mean we can put out more met tons next year with our margins where we wanted them to be. So, I don’t think it has any growth factor almost for say how we are going to market a coal. Well I forgot the last second part of that question was what?

Mark Parr

Profitability?

Michael Quillen

Profitability, '08 was such an unusual year. There were some very attractive profitability in export markets because of supply disruptions out of China and Australia for even, lesser quality coal so that was kind of a unique year.

Normally, if I go back for 15 years domestic coal has been a little more profitable then international coal that was totally reversed last year then international coal was much more profitable. As we look at the day it’s about the same and we just have to monitor how that moves in terms of pressure from a disruption in supply but, as I am looking at right now it's about the same.

Mark Parr

Do you think that some weakening of the dollar could enhance the profit opportunity for export tons?

Michael Quillen

So to say again we monitor it very closely and I didn’t look at this more and I think yesterday it was about $0.64 in Australia. So when you go back last year and that number was $0.97 to $0.98 that put tremendous pressure on the Australian producers to try to get an increased price to just basically stay even on the labor and services they are going to buy in country.

They have a huge advantage on that right now and that they can get the same purchasing power with a less U.S. dollar revenue price about 35% just because that exchange rate when you couple that with ocean freight reduction which is now I don't know it was 25% of 30% was a year ago.

So, that’s how we are going to have. Australia is really the big guerilla that we have to watch. Western Canada is certainly and maybe in the tougher situation than the U.S. and that they are on the high cost production side. They got to compete in the Pacific basin against the Australians, they are certainly some financial issue up there with the major producers that everyone will be watching.

But that being said the Japanese and the Koreans really I don’t think would want to see the Canadians get significantly reduced or go away and they just left with the Australian. So there is a lot of things, we monitor when we try to make those judgments and this is almost more variables then what we would like to put in an analysis.

Kevin Crutchfield

Mark, I think part of the strategy is, because this market kind of convert, it is having exposure to all of these markets is probably significant? No don’t be concentrated at anyone particular markets spread at around and then take advantage of dislocations as they become available.

Mark Parr

Okay, I really appreciate all the color, thanks again and congratulation on the great '08 year.

Michael Quillen

For the whole industry, it was year like we had never seen before and maybe there is another one after. The thing that I said down in part is that we all use adjectives about '09 like its going to be something terrible and it's probably going to be the second best year as an industry have ever seen.

It’s not as good as '08. Not as certainly as good as any of historic going to be back in June and July, but this is not a doom and gloom year. We been through doom and gloom years going back to '82 and '83 its besides what the anticipation was '09 is going to be an okay year.

Operator

Your last question comes from the line of Bryan Lee from Citi.

Bryan Lee - Citi

Great, thanks for letting me slip in here. I have a question relating to the thermal coal markets. And you are probably just did a math here 12 million tons contract representing 9% of shipments, and that would suggest thermal shipments of little bit over 13 million tons which is about 3 million tons on your decline. But also implies your thermal side is run the production cut back. I would have thought that market will be more resilient. Can you comment?

Michael Quillen

Well the Kingwood situation, that situation was the huge opportunity and I think something unique to Alpha, remember last year we had the opportunity to purchase thermal tons and take company tons and put those in the met market. So, I think when you balance that out. You see that dropping and purchase tons on the thermal side that's because, that opportunity is probably not going to be there. And it was not going to be there in '09 like was in '08.

And I think it’s a little bit of a mix situation there were again with our company tons still being the lowest cost production that we have. And sometimes we can do in the preparation plants and assigning our labor and our equipment around the steam production. We will produce more steam tons our sales next year then we did, excuse me, '09 than we did in '08 because we are not going to buy those from the purchase guy because we can’t take some of these flex tons to the met market.

Bryan Lee - Citi

Alright.

Michael Quillen

We just had a call in by the work do that with you in a little bit more detail because its certainly moving pieces around on the chess board.

Bryan Lee - Citi

Yeah, alright. And then my second question has to do with diesel I know you mentioned diesel price have dropped and you are going to start feeling the benefit of that, many of your competitors in hindsight had kind of hedged most of the diesel cost at much higher levels for 2009. Is it fair to say that you guys were much less hedged so we will feel the benefits sooner?

Michael Quillen

Well we weren't immune to that, we have a very sophisticated diesel hedging program that is ratably put into the marketplace. And our strategy is to as you go forward say for this current year the maximum we really love to be at about 50 actually a little bit less than 50%, but that’s not in this early great prices. However, by not having that other 50% we currently right now or certainly looking at and putting in place some physical hedges in this dollar, $30, $50, there is an upward curve as you go out there.

So, what we are going to be able to do is to go ahead and go beyond say our programmatic hedging and take advantage of this low diesel prices and because of our cash situation we can even fund that our sales like we did our steel prices.

And yes, we will have a benefit of going ahead and locking that in at a higher volume, and we probably wouldn’t go over 75% even in this market. But there is another 25% of our diesel fuel that we are putting in place right now to hedge and lower that exposure we had to the, $85 barrel hedging that we did last year for '09.

Bryan Lee - Citi

Alright, great, thank you.

Michael Quillen

We appreciate everyone. Again we want to say best wishes today, even we appreciate all of these efforts over the time and good luck to Eddie. We are weighing down and weighing in about six months and see a separate grouping of CFO will probably—company in this 2009 economy. Thank you very much.

Operator

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Source: Alpha Natural Resources Q4 2008 Earnings Call Transcript
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