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Alpha Natural Resources, Inc. (NYSE:ANR)

Q4 2013 Earnings Conference Call

February 12, 2014 11:00 AM ET

Executives

Alex Rotonen – VP, IR

Kevin Crutchfield – Chairman and CEO

Frank Wood – EVP and CFO

Paul Vining – President

Brian Sullivan – EVP and Chief Commercial Officer

Analysts

Caleb Dorfman – Simmons & Company

Michael Dudas – Sterne Agee

Meredith Bandy – BMO Capital Markets

Jim Rollyson – Raymond James

David Gagliano – Barclays Capital

Curt Woodworth – Nomura Securities

David Katz – JP Morgan

Brandon Blossman – Tudor Pickering Holt

John Bridges – JP Morgan

Jeremy Sussman – Clarkson Capital Markets

Operator

Greetings and welcome to the Alpha Natural Resources Fourth Quarter and Year-End 2013 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Alex Rotonen, Vice President of Investor Relations. Thank you, sir. You may now begin.

Alex Rotonen

Thank you, Christine. Thank you for participating in today’s Alpha Natural Resources fourth quarter 2012 earnings conference call. Joining me on the call today are Kevin Crutchfield, Alpha Natural Resources’ Chairman and CEO, who will provide a brief market outlook and summarize our fourth quarter results; Frank Wood, our CFO, who will comment on Alpha’s financial results and updated guidance; and Paul Vining, Alpha’s President and Brian Sullivan Alpha’s Chief Commercial Officer who will be available to address operational and marketing questions following our prepared remarks.

Note that various remarks that we make on this call concerning future expectations for the company constitute forward-looking statements. These statements are made on the basis of management views and assumptions regarding future events and business performance as of the time the statements are made. Various factors including those identified in this morning’s press release and in our filings with the SEC may cause actual results to differ materially from those expressed or implied. Also, see our press release for reconciliations for certain non-GAAP measures to GAAP measures. This call will be recorded and will be available for replay for a period of two weeks. And replay of the event will be archived on our website at alphanr.com for a period of three months.

With that, I’ll turn it over to Kevin.

Kevin Crutchfield

Thanks, Alex and good morning everyone. Before I get started, let me share with you some highlights from last year which on balance was a pretty tough year. Having said that, we accomplished many important strategic objectives in 2013 including record setting safety performance, proactive balance sheet and liquidity management, life-sizing of our mine portfolio and aligning our cost structure, with the anticipated market environment. In short, we’ll continue to build a new platform for Alpha, enabling us to be more flexible and nimble, allowing us to quickly respond and decisively to changing market conditions. I want to thank all of Alpha’s employees for their hard work, dedication and commitment, without whom we couldn’t have accomplished these objectives. As is our tradition, we’ll start the discussion with our safety performance.

Alpha achieved an impressive 16% reduction in total reportable injury rate in 2013, resulting in the lowest rates in the history of our company. We also improved our violations per inspection day which were down a solid 11% over the same period. In addition to the meaningful improvement in 2013 safety statistics, we had 85 sites reporting no injuries last year, representing more than 4 million hours work without an injury. Camp Creek No.1 mine received the Eustace E. Frederick Milestone of Safety, signifying exemplary safety performance for an underground mine in West Virginia and an additional 17 of our operations earned the Mountaineer Guardian Safety Award. All these safety accomplishments affirm the effectiveness and value of our Running Right process, and for that, I want to recognize all of our employees. While these are great results, there is more work we can do and more improvements to be realized. So we’ll continue to work hard through our Running Right process to drive down injuries on the job in 2014. We’re championing the NMA’s CORESafety 055 program which has a goal of zero fatality and a 50% reduction in mining related injuries within five years. These goals will be increasingly challenging to achieve, but I have all the confidence in the world that our employees will continue their commitment to workplace safety improvements and will rise to this challenge. We plan to extensively utilize our new state-of-the art Running Right Leadership Academy to assist in the attainment of these ambitious safety targets.

We also achieved another one of our strategic goals in 2013, proactive balance sheet management as the company extended the maturity profile of our debt obligations. Through two offerings both of which had their $45 million over lot and fully exercised. We issued approximately $690 million of senior convertible notes, with 355 million due late in 2017 and 345 million due in 2020. By using a significant portion of these proceeds to repurchase existing convertible notes, Alpha reduced its outstanding convertible notes maturing in 2015 from 824 million to 194 million during 2013. In addition, Alpha termed out its bank debt which lowered our near term repayment obligations significantly. Majority of the new term loan B now matures in 2020. In addition to successful convertible note offerings, Alpha monetized the portion of its Marcellus gas acreage for a total consideration of 300 million, consisting of a 100 million in cash and 200 million in shares of Rice Energy at the IPO price or approximately 9.5 million shares. We achieved an outstanding return on our investment of approximately 30 million in cash and contribution of approximately 7,500 acres Alpha made to the Alpha Shale Joint Venture since its formation in 2010.

Also in the fourth quarter, we engaged in four transactions to dispose of some non-strategic idle assets. The cash proceeds from these dispositions were modest. However, the transactions allowed us to reduce liabilities, primarily asset retirement obligations, which will reduce future cash outflows from our idle properties. From a market perspective like for everyone else, 2013 was a challenging year. Pricing in the metallurgical coal markets declined throughout much of the year and thermal coal pricing remained constrained, despite increases in coal fired electrical generation from gas to coal reversion. Responding to the markets forced us to make some difficult decisions. As a follow on to the restructuring initiatives we announced in September 2012, which took out over 150 million annual overhead cost, we targeted further cost reductions with a goal of at least 200 million in additional savings to be realized in 2014. These actions, while not easy for our employees and business partners, were necessary to align our operations and spending levels with the current market environment and to continue to position Alpha for long-term success as markets improve.

Turning to the fourth quarter results, Alpha generated just under 1 billion in coal revenue and 71 million in adjusted EBITDA compared with coal revenue of 1 billion and adjusted EBITDA of 33 million in the third quarter of 2013. The improved EBITDA performance in the fourth quarter was largely driven by significantly lower adjusted cost of coal sales per ton in the East, notably due to normalized production at Cumberland and a slight improvement in met coal realizations, partly offset by lower shipment volume for met coal and Powder River Basin coal. At fourth quarter, adjusted cost for coal sales per ton was fairly indicative of what we expect for 2014. Most notably, our adjusted cost of coal sales in the East saw significant improvement in the fourth quarter, with cost dropping approximately $7.5 per ton from the preceding quarter, primarily due to strong performance of the Cumberland longwall. In the fourth quarter, Cumberland produced more than 1.8 million tons compared to less than 0.5 million tons in the third quarter. The performance was hampered with rough conditions over the headgate, miners’ vacation and a scheduled longwall move. Going forward, we’re optimistic about Cumberland’s outlook and its ability to generate meaningful.

Alpha’s other pit A[ph] longwall mine Emerald until the last several quarters, has been a relatively consistent performer of productivity and cost typical for Pit A longwall mines. In more recent quarters however, Emerald has increasingly experienced periodic, geologic issues which have lowered production and resulted in higher unit cost and diminished margins. In the second quarter of 2014, Emerald will move with the longwall for the final district with its life of mine plan. The time required to complete mining in the new district will depend on geologic conditions and the ability to mine under or rail surface obstacles. As we share with our employees, we anticipate reducing the number of continuous miner development as we progress through this longwall district. We’ll provide more color on this situation as it develops and we have more clarity. Next I want to discuss the status of current met and thermal coal markets, as well provide our insights on coal sales outlook for 2013.

After an increase in benchmark met prices for the fourth quarter, spot prices steadily declined throughout the quarter, which culminated in the first quarter benchmark of $143 per metric ton, which was $9 below the previous benchmark settlement. The trend of declining spot prices has continued into 2014 and is currently reported in the upper 20s. We believe that the weak Australian dollar, the unabated supply growth out of Australia in 2013, featuring commencement of shipments from new mines and producer’s initiatives to drive down unit cost and increase market share, coupled with the Chinese New Year and reasonably well stocked Chinese inventory positions, are the main factors causing the recent weakness in the met coal market. While near term pricing is clearly depressed, we’ve seen improved supply-demand balance on the mid-term horizon, as demand growth has expected to continue while supply growth should be much smaller in 2014, compared to 2013 and essentially flat after 2014. Let me give you some additional details behind this reasoning.

On the demand side, the world field association is forecasting a 3.3% increase in 2014 global steel demand, a slight improvement over 2013’s growth rate. More importantly for Alpha, the European Union steel demand is expected to ship from a contraction to growth, in 2014, with a forecasted growth rate of 2.1% versus an estimated decline of 3.8% in 2013. Even more impressively, Europe’s steel production was 11% higher in December of 2013 compared to December 2012. Furthermore, one of our other key markets, Central and South America is expected to see an accelerated growth in 2014, with the prospects for the Atlantic Basin and believe it bodes well for Alpha in the future.

On the supply side, we see limited growth in 2014 as only few mines are scheduled to come online. According to some estimates, the total exports in 2014 are estimated to increase by only about 10 million metric tons, of which 6 million tons are from Australia. As a reference, Australian exports alone grew an estimated 24 million metric tons in 2013. We see even less supply growth beyond 2014 due to a drastic retailment of capital investment in new mines starting in about 2012. In fact, if the current market conditions prevail, we’d expect a more definitive supply side response across most if not all major metallurgical coal basins. In summary, the seaborne met markets are still absorbing the supply additions brought on in 2013 and as just discussed, we expect limited incremental supply in 2014 and beyond to result in convergence of supply and demand and eventual market equilibrium.

Turning to domestic thermal coal market dynamics, we’re seeing some promising signs. The persistent coal spills we’ve experienced over the last several weeks has resulted in increased demands and interest in, coal fired electrical generation. This demand in turn is expected to accelerate the drawdown in utility stockpiles across the various regions. Overall, December 31, 2013 coal stockpiles were down 38 million tons from the prior year. Since coal usage has declined over the last several years, it’s more useful to view inventories on days of burn basis and that shows the year-end inventory at 64 days of burn compared to 84 days in December of ‘12. PRB and NAP[ph] inventories have improved the most and are now below their historical five year averages. Central App which has improved 118 days from 155 days at the end of 2012, is still meaningfully higher than its historical average burn rate. Furthermore, products of natural gas prices increased substantially to a high of over $5 per million BTUs recently from just over $3 in early 2013. These dynamics have resulted in near term price firmness in most regions, especially in Central App, where thermal prices as measured by NYMEX have risen approximately 10% from late November to late January.

There’s also been a recent speculation that the plant closing of some coal fire plants may be postponed due to concerns over grid reliability. These concerns are real, as some of the Midwestern and Eastern utilities have requested consumers to conserve energy during the past month. We don’t know what the ultimate outcome might be, nor the magnitude of potential delays, however, it’s encouraging that electrical generators and grid operators are focusing on the critical role of coal fire generation and maintaining a reliable energy supply. We also see that many utilities have not only been bringing coal generation back online, they are running it at full capacity. On the export front, during the second half of 2013, we contracted approximately 4 million tons of API 2 coal to relative demand strength in that market. We believe that European energy policies will begin to shift more towards balanced sources of energy, as they continue to debate the merits of carbon setting targets versus the real cost of rain energy.

More recently, the domestic market has strengthened. We expect to get our share of any additional domestic demand in the markets we serve. We’ll also continue to focus on the thermal exports, recognizing the price sensitivity in these markets and the need to be opportunistic with the ability to clearly respond to opportunities as they present themselves. In order to be close to direct customers, we’re opening a small office in London and have hired an experienced executive to spearhead this effort. This move enables us to provide timely response to customers’ needs and demands, and is an integral part of the export platform we commenced a couple of years ago. With respect to the outlook of 2014, changing our guidance to reduce the midpoint of the range for metallurgical coal shipments by 2 million tons; to recognize the increased likelihood of selling the portion of our lowest quality metallurgical coals at better sales realizations in the thermal coal markets; we’re correspondingly increased the midpoints of the range of Eastern steam coal shipments by 1 million tons. We’ve also refined our estimates of couple of other guidance items which Frank will address in his remarks.

With that, I’ll turn it over to Frank for a discussion of our financial results and 2014 guidance. Frank?

Frank Wood

Thank you, Kevin and good morning everyone. I’ll start with revenues. Coal revenues during the fourth quarter 2013 were 1 billion versus 1.4 billion in the fourth quarter of 2012. The year-over-year decrease was primarily due to lower shipment volumes across all of our coal products and lower average per ton realizations, primarily for metallurgical coal. During the quarter, shipments for metallurgical coal was 4.4 million tons, down 10% year-over-year, Eastern steam coal shipments were 6.8 million tons, a decrease of 28% and PRB shipments were 9.3 million tons, a drop of 19%. The average realization per ton for met coal were $96.53, down from $121.27 in the fourth quarter of 2012, but up from $94.73 from the third quarter of 2013. Eastern steam coal realizations were $61.66 compared to $64.55 last year and $63.21 in the third quarter of 2013.

Total cost expenses were approximately 1.3 billion in the fourth quarter, a decrease of 20% from 1.6 billion last year. Excluding impairment and restructuring charges, total costs and expenses were 1.3 billion in the current quarter, compared to 1.4 billion in the fourth quarter of 2012. Fourth quarter cost of coal sales was 0.9 billion compared with 0.9 billion in the fourth quarter last year. Excluding the impact of approximately 19 million for merger related expenses and a provision for regulatory costs of approximately 2 million, Alpha’s adjusted cost of coal sales in the East was $66.97 per ton compared to $68.55 in the year ago quarter, $74.53 in the third quarter. As Kevin mentioned, Cumberland’s normalized volume was the single largest contributor to improved costs in the fourth quarter of 2013. The adjusted cost of coal sales in the Powder River Basin during the fourth quarter was $10.29 per ton, compared to $9.43 in the year ago period, and $9.29 in the third quarter of 2013. Approximately 50% of the year-over-year increased adjusted cost of coal sales in the PRB was driven by increased royalties as we completed mining sea coal on which we pay no production royalties. Reduced shipment volumes also contributed to higher per ton cost in the fourth quarter 2013.

As you’ve seen in our release, Alpha reported a fourth quarter 2013 net loss of $359 million or $1.62 per diluted share, compared to the net loss of $128 million or $0.58 per diluted share in the fourth quarter of 2012. The net loss for the fourth quarter of 2013 includes a discrete non-cash income tax charge of 205 million to increase the valuation allowance related to deferred tax assets. Excluding the items detailed in the reconciliations of adjusted net loss through net loss, Alpha’s fourth quarter 2013 adjusted net loss was $115 million or $0.52 per diluted share. Adjusted EBITDA, which excludes many of the same items and which is detailed the reconciliation of EBITDA and adjusted EBITDA at the net loss was 71 million compared to 217 million in the fourth quarter last year. During the fourth quarter, cash flows provided by operating activities was a use of cash of 70 million compared with the source of cash for approximately 213 million in the year ago period. The current year quarter included a cash outflow of approximately 38 million, major contributions to the industry’s safety initiative trust fund established by a non-prosecution agreement, larger laws, higher interest payments and more unfavorable working capital movements. Capital expenditures including lease by application installment payments were approximately 95 million, down 17 million or 112 million in the year ago period.

As Kevin mentioned, we’re refining our guidance for 2014. Alpha now expects to ship between 77 million and 90 million tons of coal, including between 16 million and 20 million tons of metallurgical coal and between 24 million and 30 million of Eastern steam coal. Powder River Basin guidance remains at 37 million to 40 million tons. As of January 31st, based on the midpoint expected shipment ranges, Alpha has 56% of its met coal committed price at an expected average per ton realization of $94.66 and another 20% committed and [inaudible]. We have 76% of our Eastern steam coal to and expected average per ton realization of $58.88 and 16% committed. And in the west we have 98% of our Powder River Basin coal committed price expected price realization of $12.12 per ton. Alpha’s guidance for Eastern and Western adjusted cost of coal sales remain in the ranges of $64 to $70 per ton and $9.50 and $10.50 per ton respectively. Our selling, general and administrative expenses are expected to be within a range of 110 million to 140 million. We expect DD&A to be between 650 million and 750 million and interest expenses are projected to be between 240 million to 255 million, of which 200 million to 210 million represents cash interest.

Capital expenditures we lowered the high end of our guidance to 300 million from 350 million and capital low end to 250 million which compares to 258 million in 2013, representing a substantial reduction from 2012 when Alpha’s capital expenditures and LBA installment payments totaled 498 million. Our capital expenditure guidance includes a $42 million LBA payment in 2014. Our final annual LBA installment payment of 42 million is due in the fourth quarter of 2015. Alpha’s total liquidity at the end of the fourth quarter stood at approximately 1.9 billion, consisting of cash and cash equivalence and marketable securities of approximately 957 million and approximately 966 million available under the company’s secured credit facility.

To summarize, 2013 was a challenging year for Alpha, a year in which we accomplished several important goals. First, we accessed receptive capital and bank markets to extend the maturity profile of our debt obligations. Second, we set in motion the process that resulted in monetization of a portion of our Marcellus shale acreage. Third, we further reduced our operating and overhead cost structure which is anticipated in result annual savings of at least 200 million. And finally and most importantly, we met our safety improvement goals which resulted in a record low rate of reported injuries.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Caleb Dorfman with Simmons & Company. Please proceed with your question.

Caleb Dorfman – Simmons & Company

Good morning gentlemen.

Kevin Crutchfield

Good morning, Caleb.

Caleb Dorfman – Simmons & Company

I guess Kevin it seems like you’re getting a little bit more positive on the met market, yet you still think a lot of coal on economic its current prices, what do you think really will cause Alpha or the industry in general, to start cutting production? It seems like we’ve been talking a lot about production being uneconomic for sometime.

Kevin Crutchfield

That’s a double edged sword question. I mean I think a couple of quarters prevailing notional spot prices would probably hasten supply side reduction pretty quickly I would imagine, I think coupled with thoughts we have around new production we see coming online being stemmed. And triple that with what we see from a GDP perspective across some of our markets you can see, equilibrium at some points not in the near term for sure, but you can see a rising towards equilibrium over next few quarters hopefully we’ll see few things start to move back up. Paul, Brian anything you’d like to add to that?

Paul Vining

No.

Caleb Dorfman – Simmons & Company

I guess you had a real strong performance on the cost side in the East. Can you sort of help us walk through – we’re at $67 that’s essentially in midpoint of 2014’s cost guidance, yet you have the $200 million as savings rowing in 2014. What is offsetting that so we couldn’t actually see lower cost going forward in 2014?

Frank Wood

This is Frank. We had a few items that are normal course type items, but a little bit lumpy in the fourth quarter which did benefit our cost including a few modest gains or asset disposals. Those will be there periodically, but I don’t know if they will be there quarter by quarter, hopefully on an annual basis they will be. So, we would continue to expect strong cost performance as the 200 million of cost savings are taken more fully.

Kevin Crutchfield

I would also add on these $200 million bucket of cost savings, these are things that you got to hope and pray to hope your math’s right in the game. I mean there are things that are structural that we feel highly confident that we’ll be – I think the chance of us succeeding that’s actually pretty good that we’re all willing to talk about and commit to publicly is 200, but we feel very confident that we will start baking those in on a radical basis throughout the rest of the year.

Caleb Dorfman – Simmons & Company

That’s helpful. So will that have to happen if we were to get to the high end of the cost guidance or would it be just for poor longwall performance?

Frank Wood

Yeah that’s probably the single biggest thing in some sort of exogenous as opposed to –

Caleb Dorfman – Simmons & Company

Thank you.

Operator

Our next question comes from the line of Michael Dudas with Sterne Agee. Please proceed with your question.

Michael Dudas – Sterne Agee

Good morning, gentlemen.

Kevin Crutchfield

Hi, Mike.

Michael Dudas – Sterne Agee

Hi Kevin. Again the safety numbers are quite positive and we should congratulate, how does that help productivity within the different mining complexes that you’re controlling? Has it – anticipate some of that help range of the cost guidance for 2014 and beyond that others could continue? Now, I know geology is difficult but can you see productivity enhancement to help cost reductions?

Kevin Crutchfield

Yeah I mean look, it’s hard to pinpoint exactly the effect of the low TR/IR has on productivity per se. But, I think sufficed to say that when you have people doing the jobs that they’re trying to do and not off does make a difference because you’re not backfilling with somebody less experienced or backfilling with somebody else on overtime nor are you experiencing this kind of the work which comes expenses that you might when you have people off. So, I think it factors in, but it’s not a something that we point out in particular. Anything you have to add Paul?

Paul Vining

Yeah, I’d say that 2013 was a transitional year. We had several thousand people that we sent home and probably equally as many that moved around the different seats or different mines or different parts of the organization. There was a lot of fluid movement, whenever you have that it’s even a bigger challenge to keep people focused on their job and operating safely and productively. Not to say, I haven’t ever seen a particularly low cost productive profitable mine with a terrible safety rate. They go hand in hand and it reflects typically the training of the workforce, the attention to detail and ultimately the attitude and the drive of the workforce that all come together to produce positive results on safety as well as productivity and cost.

Michael Dudas – Sterne Agee

That was a good point especially [inaudible] different labor. My follow up question, I guess for Kevin or Paul, as you look at what’s happened over the last 30 days 45 days over weather wise with the weather, and looking at different end markets that you serve Northern App Central App, West or even Europe, which of those four markets might surprise to the upside on the tightening supply fundamental for your thermal coal in 2014?

Paul Vining

Yeah I guess I’ll start with the PRB we typically have not been particularly bullish compared to some of our competitors. But I would say at this point in time, we believe we might be approaching a bit of an inflexion point and its two or three things. One, anecdotally if you go back and listen to some of the other calls and as well as the PRB shipments were off in the fourth quarter including ourselves probably 1 million plus tons that we missed because of the lack of rail service and not lack of demand or the lack of sales. And when you couple that with the dislocation that’s taken place here in the first quarter because of weather and the upside on the burn of demand side, we see inventories dropping pretty significantly on the PRB. There is some lead time to ramping production, people have iron sitting on the ground. But quite frankly, if you’re not doing the pre-stripping you’re going to have a six month full year lead time to actually bring any kind of meaningful production on it.

On the same time, the rail roads have to have the equipment available instead of hauling oil out of the Bakken. So the PRB we think is perpetually getting set up for a little bit run here over the next two or three years and the – As you move into Northern App, we’ve all been challenged a bit with ice and hot water up on the rivers for the Northern App Pittsburg sea mines. In fact, it’s affected us a little bit and taken a little bit of idle time just for the simple fact that much like rail cars. The velocity slows down, they get tied up and empties get a little tighter and the barge traffic slows down, the locks limit the size of the and ultimately it gums up the pipeline. And that’s caused some dislocations on the demand side. I think the rail roads have to scramble to provide coal into plants that had not anticipated much of any burn during this first quarter plants that typically are around the Mac closure list of 2015 have ended up running pretty substantial year in the first quarter. And that’s one of the flags that Kevin hit in his comments that we’re going to be watching here in the coming months. So Pittsburg market is fairly firm the cap market we have definitely seen a deluge of enquiries from a lot of our Southeast customers and the fact that contract didn’t end move some of our typically low end metallurgical crossover coals we call it into the thermal marketed prices that are a lot better than what we’ve seen in the lower end met or the PCI pipes. So, really all the basins have benefitted short term, I’d say PRB’s got some potential long term benefits that might come to fruition.

Michael Dudas – Sterne Agee

That was excellent. Thank you.

Operator

Our next question comes from the line of Meredith Bandy with BMO Capital Markets. Please proceed with your question.

Meredith Bandy – BMO Capital Markets

Hey good morning, everyone.

Kevin Crutchfield

Hey, Meredith.

Meredith Bandy – BMO Capital Markets

I wanted to ask to catch up a little bit given your current CapEx where do you think, your capacity would be in the PRB and met coal in particular as especially with some of the benefits that Paul just talked about in the PRB, how much more production could you get out there?

Paul Vining

In the PRB, we’ve got installed capacity equipment iron on the ground for what traditionally has been about 48 million tons to 50 million tons. And if you look at this year, I think our midpoint is right around 38 million or so. So there is about 10 million or 12 million tons, but at the end it’s a matter of bringing on some additional employees which would take a little bit of time and probably pre-stripping and mine planning. So, it’s not something you bring on into a matter of two or three months. You could bring an increment of 2 million tons or 3 million tons of production without a whole lot of effort, but you don’t want to take that 10 million ton jump back to 100% of our sort of rated capacity would take a good six to 12 months.

Meredith Bandy – BMO Capital Markets

And what would you want to see before you would do that?

Paul Vining

Like suited demand I mean if you look at our margins last year, we actually we have pretty healthy margins in the PRB. But we’re not in a hurry to drag coal out of the ground and move into higher ratio coal. But like I said before it’s a valuable resource. We only have two LBA payments left this year and next year and starting in 2016 for good many years we’ll have no LBA payments and the PRB will generate a fair amount of cash. So, bringing extra incremental tons on for an incremental dollar got to be wait against the long term sustained value that those assets have.

Kevin Crutchfield

There’s been a lot talk Meredith about laden capacity in the Powder River Basin how hard it is to get it back online. I agree with all of that, but it’s still relative to all the other basins, it’s still pretty elastic. And I think Paul makes very important there that you want to see a sustainable price deck that make sense to dispatches as opposed to incremental ton game which we tried for 20 years from 1980 to 2000 and pretty well a really bad strategy and we don’t want to go back to that.

Meredith Bandy – BMO Capital Markets

Okay, that make sense. And then similarly on the met coal side, given I guess Kevin from your comments about where we are on the current met coal market? What qualifies as thermal versus crossover met? How should we think about your long term met capacity today?

Kevin Crutchfield

Well it’s somewhat less well certainly not the likes of the Powder River Basin. I mean I think our high was 24 million so we guided today to something less than 6 million tons less than that. Look the reserves are still there the people are still here, the equipment is still here we can certainly move back to that rate, if necessary. But again, just like Paul said on the PRB with the market conditions wanted that’s a dangerous game to play, especially kind of given the quality change dynamic that we’ve seen over the last couple of years. But we could ramp that back up because all of the components are still here, but it would take some time. We couldn’t do that overnight, but what we want to try to do is kind of sit back and assist the environment and dispatch it up at a level that make sense for us as opposed to playing the incremental ton game across that basin as well. I think the other thing you got to think about two is when you look at kind of where notional spot prices are today. We always think of it as in the process of high price cost mines are the ones that are in jeopardy and I think that’s absolutely true, but when you begin to think about it from a mining jurisdiction point of view, Australia versus Canada versus Southern Appalachia versus Central App, these kind of numbers for any sustained period, I mean you’ve got a whole basin that can’t dispatch with these numbers over the long term. So, I think that curtains some stabilization and some inflexion point in the reasonably near future as well.

Meredith Bandy – BMO Capital Markets

Thanks very much.

Operator

Our next question comes from the line of Jim Rollyson of Raymond James. Please proceed with your question.

Jim Rollyson – Raymond James

Good morning guys.

Kevin Crutchfield

Hi, Jim.

Jim Rollyson – Raymond James

Kevin, great job on building up and monetizing part of your Marcellus acreage within the JV. Couple of questions around that, one, you’ve got – partly you’ve got in cash and partly you’ve got in Rice Energy shares, how are you thinking about ownership in these shares in terms of what point are you just trying to ride this for a while, to continue to benefit from what Rice is doing? Is there a price point you have in mind or is it driven more by the need for cash at some point for other things? Just may be one how you think about how long do you own that stock and two, your thoughts and plans for the remaining acreage you’ve guys have in the Marcellus.

Kevin Crutchfield

Jim given unbalance we offered you with the transaction and we are tied up customary lock up of six months so we’ve got plenty of time to think about it. But I’d also say that we really believe in the Rice story and Rice management team and what they are doing. So, I guess the bottom line is we’ll make that decision when the time comes, but we’re actually pretty pleased with the investment as it stands now as it relates to the remaining acreage. I’m happy to report that we have entered into another joint venture on the majority of our remaining acres. Unfortunately, the terms of the joint venture don’t permit me to disclose the party’s name, but sufficed to say that we really liked the Rice model worked and adopting a very similar strategy around those remaining acres and given the proximity of those remaining acres to the original joint venture we did. I think it’s also safe to assume that they are – it’s potentially productive is what we saw out of the original acreage. So, one step at a time and we’ll continue to work ahead and the value all the options available to us, but like to create some additional value there as well.

Jim Rollyson – Raymond James

Yeah probably makes perfect sense. And then may be one for Frank, just couple of housekeeping items Frank. Both DD&A and SG&A guidance for the year, ranges if you take the midpoint obviously imply a pretty big step down from where you were in the fourth quarter I think you had 215 million in DD&A and your run rate for the year is about 175 and is 38 million going down about 31 million. Is that something we should see step down even in a fairly big way pretty quickly or just kind of gradually ramp down and may be a little discussion with what’s driving the declines there?

Frank Wood

I think with the DD&A you’ll see it happens fairly quickly. The fourth quarter actually did have a lumpiness in it on DD&A. As you noted, probably a little bit above the run rate of previous quarters because of some asset retirement obligation assets. But technically we’re accelerating deprecation in the fourth quarter. I think from the DD&A side you’re going to see it ramp down pretty quickly to a run rate that will pitch into that guidance range. With regard to SG&A I would say pretty much the same thing. I think we’ve disclosed on the last call, somewhere between 15% to 20% of our projected 200 million plus of cost savings will fall in the SG&A line. And basically that set off to happen and we entered 2014 so it may not be perfectly aligned across the year that maybe actually downward trend across the year. I think you will see some significant ramp downs in the run rate even starting of the first quarter.

Jim Rollyson – Raymond James

That’s perfect. Just what I needed. Thanks guys.

Frank Wood

Thank you.

Operator

Our next question comes from the line of David Gagliano of Barclays. Please proceed with your question.

David Gagliano – Barclays Capital

Hi. Thanks for taking my questions. I just wanted to come back to the Eastern U.S. cost commentary I just want to clarify. I thought I heard during the prepared remarks you think cost in 2014 unit cost, would be more or less in line with the fourth quarter number? I want to clarify that if that’s actually correct is that?

Kevin Crutchfield

Yeah that’s what it is. The fourth quarter is indicative of what we think we can do in 2014.

David Gagliano – Barclays Capital

So then is the 200 million incremental savings being offset by something else like the longwall move or things like that or are there other things?

Kevin Crutchfield

There is – I think there is one move in ‘14 one in – so there is a combination of an expectation that we’re not going to have as tight as it’s been this year like we did the last year. And then beginning to bake in the 200 million of savings some of which fall the cost of goods sold line and ready lines but they layer in throughout the course of the year. And on balance, as we continue there are additional things that we can do. We’re not prepared to talk about those yet today, but we have some additional leverage we can pull to generate some additional cost savings with the passage of time.

David Gagliano – Barclays Capital

Okay. And then so I guess is the $64 number the low end of the range still realistic or that’s more likely $67?

Kevin Crutchfield

Absolutely. That’s why we gave the range we did.

Frank Wood

Yeah it’s within reason and again I mean it can vary month to month, quarter to quarter we don’t see anything that says we can’t hit $64 from time to time even where we end up for the whole year. It’s hard to know right now because a lot of things are out of our control but we feel good about that range and feel reasonable about the low end of the range.

David Gagliano – Barclays Capital

Okay. And then just the other question I have is it’s regarding 2015. I was wondering if you could give us a sense of your 2015 committed and price positions for both the [inaudible] Eastern steam at this point.

Kevin Crutchfield

I don’t think we talked about that and probably don’t plan to in the next couple of calls David.

David Gagliano – Barclays Capital

Okay. All right. Thanks.

Kevin Crutchfield

Sorry.

David Gagliano – Barclays Capital

It’s okay.

Kevin Crutchfield

Good try though. Thank you.

Operator

Our next question comes from the line of Curt Woodworth with Nomura. Please proceed with your question.

Curt Woodworth – Nomura Securities

Hi good morning.

Kevin Crutchfield

Hey Curt.

Curt Woodworth – Nomura Securities

Kevin, when you look across your thermal portfolio how much exposure do you guys have to coal plants slated to retire in ‘15 or ‘16?

Kevin Crutchfield

In terms of tonnage base?

Curt Woodworth – Nomura Securities

Yeah ton.

Kevin Crutchfield

There is 7,700 megawatt to retire by 15 is a roughly the number you’re working with obviously that’s weighted to the East. We don’t do a takedown of the plants that we’re delivering to that will be slated to retire and assume that we won’t be able to do that elsewhere.

Paul Vining

Let me answer it this way. This is Paul Vining. I’ll give you an example we have a fairly large contract multi-year with First Energy some of those terms typically move from Cumberland across the river to the half field plant. First Energy has a multitude of plants. They have a huge portfolio of Pittsburg they purchase and consume every year. We’re not going to be disadvantaged by the fact that they finally shut down we still have the contract. We’re still going to move the volumes. So it’s more of the portfolio management on the part of our utility customers than are selling specific coal from a specific mine to a specific plant. So from a risk management standpoint, it’s really about the total supply and demand and a given base and on the effect on demand as it relates to the plant closures. The same thing would apply to somebody like we do a fair amount of business with them some planned closures in the next couple of year but doesn’t really have any effect on the contracts.

Kevin Crutchfield

And to your point we did I think it was three years ago doing assessment baller by baller across the United States and where our coals went to modify future marketing strategies as Paul said most of these employees were dealing with large fleet and ability to accommodate and move things around. And we did factor that into our thinking because there are some instances where it doesn’t make sense to try to sell coal to something that’s not going to make any sense in the cases of the smaller but we have tried to think about it. At some extent the steps come very fast and the utilities we find are trying to figure out as they go along as well. So we’re doing our best to work through it together.

Curt Woodworth – Nomura Securities

Okay that’s helpful. And then just a quick question on pricing that tonnage can you give us a sense for how the quality or ASP profile that exposure which assumes lot of that as your export business compares to the current hedged position?

Kevin Crutchfield

I’m sorry I didn’t catch the last part of that Curt.

Curt Woodworth – Nomura Securities

Just for the unpriced net tons how does the quality of those or ASP potential compared to your what’s currently priced?

Kevin Crutchfield

It’s we’re about 50-50 in remains to be either sold or priced through the year between kind of low ball high ball and mid ball versus the 50% left to be either be sold and priced and remainder of the year and that will be semi-soft TCI. So it really is about half and half in terms of the ranks and pole of the sold for the rest of the year.

Curt Woodworth – Nomura Securities

Thanks.

Operator

Our next question comes from the line of Dave Katz with JP Morgan. Please proceed with your question.

David Katz – JP Morgan

Good morning. I was just curious. You talked about obviously some of the changes from the thermal coal demand dynamics. I was curious how you’ve seen that affect by base and utilities this to enter into longer term contracts?

Kevin Crutchfield

Yeah in the Western U.S. has been some near term buying for the year. There is indications as there will be some firm purchases here in the next three, four, five months but that quite frankly is not a whole lot different from most of the behavior we see out of the western customers. In the East it’s still really short term oriented that’s anywhere from three to nine month type purchases and very little into 2015 we do have some folks coming out looking at blocks of tons in 2015, of the Eastern thermal side but really nothing beyond ‘15 in the east.

David Katz – JP Morgan

What do you think it would take to change that back to a more historical buying pattern?

Kevin Crutchfield

Regulatory certainty.

Paul Vining

And then getting pounded by the PUC for buying spot gases for five and six bucks and the reverse of what happened when I got caught upside down on coal got accused of overpaying and gas was $2.50. And now they’re paying $5 or $6 and why aren’t they going back and buying more coal on return so the regulated environment its they have to manage the risk associated with cost recovery and the expectations and PUC and the reliability of the grid and the service for their rate payer and customer base they get to situation that’s going to continue to evolve because mostly tied to the and certainly to the gas price.

Kevin Crutchfield

I think there is another important part here that in this last polar vortex or whatever you want to call it and the PJN dispatch area they were calling on a lot of coal plants that are scheduled to close and we were one coal plant running at full capacity from rolling blackouts. So I think that has caused and everybody to pause and say we really hit it down the right path. Please don’t misinterpret my comments that there is going to be a rewrite of anything. But I think it has caused people stood up and looked are we doing the right thing here? So I think to your point, perhaps rolling set of blackouts might create a different environment as well.

David Katz – JP Morgan

Okay. And then with regard to the converts that are due in 2015 obviously you emphasized that there is not a lot left compared to their historical balance but what is your plan and timing for attacking the rest of those?

Kevin Crutchfield

I’m not going to get very specific about this I mean even if you go back into ‘13 before we did our issuances, we did opportunistically from time to time dabble in the market and buy converts. So we’ll continue to look at opportunities and just make the decisions based on what we say. We’re comfortable to wait until they mature if that’s the best course action but the likelihood is that there will be some bind probably from time to time.

David Katz – JP Morgan

Okay. Thank you.

Kevin Crutchfield

Thank you.

Operator

Our next question comes from the line of Brandon Blossman with Tudor Pickering & Holt. Please proceed with your question.

Brandon Blossman – Tudor Pickering Holt

Good morning guys.

Kevin Crutchfield

Hi.

Brandon Blossman – Tudor Pickering Holt

Kevin wishful thinking that you’ll bite on this one but have to ask the new JV in the Marcellus JV given what you know about the acreage, kind of order magnitude how is that compared to the Rice JV in terms of value?

Kevin Crutchfield

Yeah, your inclinations were correct, but let me just say that I think the acreage from the perspective basis is equal in perspective just based on this proximity to where we started. It’s a little bigger than what we started with on the right side so let me just lead it today until we develop more information that we can share of it. We feel very good about it and we feel like it can be everything that Rice JV was if not more.

Brandon Blossman – Tudor Pickering Holt

Okay. Well that’s actually more color than I expected. Thank you for that.

Kevin Crutchfield

Well I’m sorry then. My apologies didn’t mean to say that.

Brandon Blossman – Tudor Pickering Holt

And then digging into some details, obviously Cumberland had a better quarter kind of at the very top end of its historic range. Emerald kind of the opposite level there were some comments on Emerald some prepared comments. How should we think as we go through ‘14 and thinking about cost structure and kind of guessing as to or estimating where we end up for the full year cost structure? How should we think about relative production out of Cumberland versus Emerald?

Kevin Crutchfield

Yeah Cumberland, had a great month in January, operated again in that 7 million to 8 million annualized range and had every expectation that it will have an exceptional performance in this year. We’ve had a couple of hiccups this year and in the last couple of weeks mainly because of lack of barges and the fact that we have very limited storage capacity. We’re taking a very small amount of idle time things that can be made up and things that typically happen during the year anyway. Emerald’s another matter. We’ve given a great deal of energy and thought to study the Emerald circumstance and its production profile and predictability it has been erratic over for the last several quarters. And it’s no reflection of the workforce, it’s more a reflection of the reserve body and the resource that is left at Emerald’s and its signed reserve area. And we’ve got one canal that we’re in and what we call the deep district. We have one more district left block of coal where you set up to mine longwall canals and it’s called our deep district. The month of January for Emerald was modest because of geologic issues canal that we’re in we’ll be moving to the new district in the early part of the second quarter. And we have anywhere from two to four canals that we can potentially mine in that district and there are four canals left. And after that district, we anticipate we control around any additional mineable longwall canals in the Emerald reserve body. So the district we’re moving to looks more favorable. We would believe that we’re going to have fairly good catch out of Emerald certainly for the next couple of years as we move deeper into the D district, we’ll have to drill additional holes and take a hard look at the geology of the predictability and things like the market price and how the cost structure is laying up.

Brandon Blossman – Tudor Pickering Holt

Okay, that’s very helpful. Thank you.

Operator

Our next question comes from the line of John Bridges with JP Morgan. Please proceed with your question.

John Bridges – JP Morgan

Good morning, Kevin, everybody. Thanks for all the information. Just wondered on the cost side. What’s the mix of the different grades going to be in 2014 now?

Brian Sullivan

I think that traditionally we’ve had a higher mix of higher ranking coal and you’ve seen the softness of the market has been softer on the semi-soft TCI lower ranking coals. So, I would expect that we’re migrating towards a higher percentage of higher ranking coals away from what in 2013 beginning of the year was a greater winning towards the semi-soft TCI and high. So, we’re going probably from a 60-40 high rank to low rank mix upscale probably up to two-thirds one-third.

John Bridges – JP Morgan

Okay, that’s helpful. And then historically, to what extent have you been so trying your contracts benchmark and how much have you been selling on spot?

Kevin Crutchfield

Very small percentage of contracts have any tie to the agent quarterly benchmark setting. So most of our contracts are with the European and the South American customers who certainly are influenced by the assessments. We don’t have a high number, we have a direct tie. That being side, can’t ignore the influence of benchmark has on pricing even in the Atlantic basin for recovery. So we’re seeing obviously the spot assessments are measured sentiment and that obviously affects buyer behavior globally.

John Bridges – JP Morgan

Okay great. Best of luck in 2014.

Kevin Crutchfield

Thank you.

Operator

Our next question comes from the line of Jeremy Sussman with Clarkson Capital Markets. Please proceed with your question.

Jeremy Sussman – Clarkson Capital Markets

Hi good morning.

Kevin Crutchfield

Hey, Jeremy.

Jeremy Sussman – Clarkson Capital Markets

Kevin I may have missed this but did you say how much acreage you have in the new other Marcellus JV versus what you have in Rice currently?

Kevin Crutchfield

It’s about 10,000 net acres, Jeremy?

Jeremy Sussman – Clarkson Capital Markets

In the new one?

Kevin Crutchfield

Yes.

Jeremy Sussman – Clarkson Capital Markets

Great. And just follow up, my fence on rail seem to be making some decent money on the met export side of the business, may be not so much on thermal. Can you talk about the potential for lower rates on the net front this year and whether or not this may or may not be meaningful?

Kevin Crutchfield

Well we certainly heard the pronouncements but, the Eastern rail roads and their calls last week but as in the past, we expect that as one of the biggest shippers, export manage not the largest certainly in the east. We’ll get the same sort of cooperation that we’ve had historically from the rail roads on our met franchise. They have as much incentive to have their asset dispatch as do we. We’re kind of hand in the glove in that respect. There are a number of ways that we can add value to each other and we’ve done that in the past. And we expect that as this market condition either persists or worsens, that we will be in near constant dialogue with our railroad partners to help both of our sets of assets in the most challenging times.

Jeremy Sussman – Clarkson Capital Markets

Great. Thanks very much.

Operator

Thank you. Ladies and gentlemen, due to time constraints our final question will come from Vance from [inaudible]. Please proceed with your question.

Unidentified Analyst

Hi guys. Just got a question on obviously there’s been some concern about China, but there’s also been concerns as far as there supply of coal that a lot of those guys are in financial distress. Do you have any idea kind of what their marginal cost there is and what the I guess may be different breakpoints what their how much they can –may be their cutbacks will come back from there I guess? Any thoughts on that.

Brian Sullivan

Obviously there’s as many theories as there are people in China. We don’t have a lot of visibility, or transparency into prospects of growth of their met reserve or how they’re going to be financed. Obviously that’s one of the key issues but I don’t think that China has saw for itself between sufficient banking system and shadow banking system. So, that’s one of the things we’ll obviously be watching very closely as the year progresses and I think as they come out of the winter, we’ll start to see some development of that narrative. So we don’t have a good answer how much of their growth can be served by increasing their own met production or any real steps on the quality reserves they could bring on which is just as important as the volume.

Kevin Crutchfield

Brian brings up a good point. I do think it will be interesting to watch as they pronounce earnings couple of thousands mines and they’re obviously getting ain’t that larger more productive safer that sort of thing and as they permit these new facilities they’re going to need financings. And while shadow banking system the reports we read only represents high single digits as a percentage of the total credit market there given the uncertainty of late. The question then becomes are they going to have to pursue more traditional sources of financing which implies more transparency perhaps even more difficulty in getting things permitted and online and I think there is a correlation between that as well as the amount of imports I think it’s got 10% of their consumption and we had about 75 million tons this past year. So I think it will be interesting to watch and you’ve got so many products that are really coming due this year that we’re signed good time in the ‘11 and ‘12. So I mean it could slow down their ability to serve their own needs a little bit and little bit more positive pressure on the import side at least that’s how we see it.

Unidentified Analyst

Thank you.

Operator

Mr. Crutchfield, we have reached the end of the question and answer session. I would now like to turn the floor back over to you for closing comments.

Kevin Crutchfield

Thanks everybody for joining us today. We hope that you stay warm and safe in the next wave of the polar vortex better known as winter. Hope that you all recognize our many proactive steps and measures we’ve taken to deal with the ever changing dynamics of today’s coal markets and prepare our financial resources for future success. Last couple of years have been tough in the industry, but I think we’re up for the challenge and we plan on being a strong competitor well into the future. Thanks and we look forward to talking to you in the next quarter. Everybody have a good day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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