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James River Coal Company Q2 2008 Earnings Call Transcript

September 21, 2008 | about: JRCC

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James River Coal Company (JRCC)

Q2 2008 Earnings Call

August 5, 2008 11:00 am ET

Executives

Peter Socha - Chairman of the Board, President and Chief Executive Officer

C.K. Lane - Chief Operating Officer and Senior Vice President

Sam Hopkins II - Vice President and Chief Accounting Officer

Jim Ketron - Vice President and General Counsel

Beth Cook - Director of Investor Relations

Analyst

Jim Rollyson - Raymond James

Michael Dudas - Jefferies

Brett Levy - Jefferies & Company

Shneur Gershuni - UBS

Jeremy Sussman - Natixis

Justin Fisher - Goldman Sachs

Luther Lu - Friedman, Billings, Ramsey

Garrett Nelson - Davenport and Company

Laurence Jollon - Lehman Brothers

Presentation

Operator

Welcome to the James River Coal Company second quarter 2008 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Ms. Beth Cook.

Beth Cook

Thank you and good morning. Welcome to James River Coal Company second quarter earnings call. We released our earnings today and our current release is posted on our website and was furnished to the SEC on the Form 8-K.

As we noted in our press release, we will be using an updated slide presentation during our prepared remarks. The slides have been posted to the company website and furnished to the SEC on an 8-K. With me today on the call are Peter Socha, Chairman and Chief Executive Officer; C.K. Lane, Senior Vice President and Chief Operating Officer; Sam Hopkins, Vice President and Chief Accounting Officer; and Jim Ketron, Vice President and General Counsel.

Before we begin this morning, I need to remind you that this call will contain forward-looking statements. These forward-looking statements should be considered along with the Risk Factors that we note at the end of our press release as well as in our annual report on Form 10-K and other SEC filings. Now I will turn the call over to Peter.

Peter Socha

Good morning. Thank you, Beth. As Beth mentioned we are going through slides this morning. It occurred to us a couple of weeks ago as we were starting on the press release, that we really have not given our shareholders an update since last December, since Mike did his conference in December up in New York.

A lot has changed in the market, a lot has changed in the company and we just thought this would be an opportune time for to go ahead through slides. So what we are going to do is we are going to sort of our view of the market as well as some statistics from other sources. We’ll cover what we’ve done in contracting; obviously we’ve been busy in the last several weeks on the contracting front so, we’ll talk about that. C.K. will update us on some things going on in the operations area and then we’ll go to Q-and-A.

On the market I’m going to cover supply demand, the same things as normal supply demand inventories, the trains, exports and then how we are looking at it from 50,000 feet. On the supply front we just went positive last week on the EIA data; we just went positive by 197,000 tons. That’s over $100 million tons that has come into the south Atlantic market or come out Central APP despite prices that have been above $70, really since February. I can remember we were talking contracts with utilities in the $70 range in mid February. So supply really has had a minimal response.

I did add a box to the slide and that is the barge to rail effect. We”ve heard some people say during the flooding that has occurred in the Midwest and during the flooding that has closed down the rivers that some coal may have come from barges through the rail.

We’ve seen a little bit of that, we are not really connected to the river market, so we don’t see as much as some other companies, so we’ve seen a little bit of that and that maybe distorting the numbers and it maybe why we’ve seen such a uptick in CAPP production over the last several weeks, out of EIA. Again they use a fixed ratio between the rail and the barge and when you have dislocations like we’ve had in the last few weeks that will skew their numbers.

CAPP demand, we have seen it turn positive, turn strongly positive here in the last month or so. Year-over-year you can see where it went down in the April, May, June timeframe. What’s interesting about that and I’ll get to an inventory slide in just a moment is that we had demand go down and we had very little built on the inventory, so I would ask you to take note of that negative position.

The next slide just covers coal by wire. I’ve heard one or two other companies mention this; what’s struck it with me or what brought this to my attention was I was reading the AEP first quarter report and their wholesale generation was up almost 33% year-over-year. That indicated to us that they are having a lot of off-system sales and so that in fact we probably are seeing some coal by wire.

The inventory slide is based on GenScape. There are two or three other folks to provide similar data. They happen to be the one that we use and there are a couple of things that are interesting here; one is the shoulder season build. Last September, October the build was only 700,000 tons, this year in the spring season it was only 1.7 million.

The notes on the right hand side are the ones that we really find interesting, particularly the top one where inventories have dropped by 12 million tons in 12 months; so roughly a million tons a month. If you were to extrapolate that out through the end of this year we would end up at 12/31/08 at roughly 12.5 million to 13 million ton. That’s about 25 days of burn for the South Atlantic; that’s an incredibly low number.

We have not seen anything in the way of increased shipments to the southeast that leads us to believe that that trend will be broken. The only other item I would note is for those of you who listened to the Southern Company call last week, Paul Bowers mentioned that they’re target inventory was 40 days and they’re currently at 36; so roughly 10% below their target. That would equate to roughly what we see in the overall number right now, so that’s 17.8; normal would probably be in the 20 million to 21 million tons range. This is an interesting slide.

Then next slide is on train. This we pulled data from CSX and Norfolk Southern and looked at where they have been shipping their train and you can see that over last six quarters going back January of ’07, they shipped about 14.1 million tons less through the domestic utilities and about 21.7 million tons more to the export terminals and you can see the notation there; in fact in the second quarter we’re almost 22 million tons in six quarters but the change in the second quarters were 6.6 million tons. They went from 8 million tons last year to 14.6 million tons this year.

That is a dramatic change we saw that earlier with the Kinder Morgan press release were they shipped 1.1 million tons through Pier IX in June. We had thought that the functional capacity of Pier IX was about 10 million tons of year, but obviously they are shipping above what they thought was functional capacity.

We have gotten a couple of questions recently on how the trains are running for us. Quite frankly they’re running fine; we have not really seen much in the way of change other than normal hiccups here and there, but from our standpoint and from the standpoint of our utility customers the trains seem to be running pretty well.

Turning to the export market, I’m not going to read all of these various headlines, but there are a couple of key takeaways and that is internationally the people who have supplied coal to the world market in the past are now keeping more of that coal at home. They have demand internally and this is true in South Africa, its true Poland, its true in Vietnam, its true in Russia; they are keeping more of that coal at home and so that is one key takeaway and then the second is that the rest of the world is growing coal demand.

We tend to hear a lot about China, we hear a lot about India but as you travel around and as you talk to people around the world its unbelievable how much coal fired power generation is being built even in palace like the Middle East. It was very surprising to me to speak to some people over there recently about the amount of new generation that is being built in the Middle East.

Just turning to what our conclusions are, looking at the domestic market, very little supply response. The exports are continuing to go up; they are not holding at a higher level, they are continuing to increase from an already higher level and that’s an important distinction.

The inventories in the southeast which is our neighborhood, are failing extremely rapidly. I had a long conversation with someone yesterday on utility inventories and the mix of coal within utility stockpiles is not at the optimal levels. So, while they might be showing X amount of tons what’s actually usable in that X is not that. So that’s an interesting phenomenon.

The fall shoulder seasons; we’ve seen two shoulder seasons that were less than replenishing. If we see a third season this fall I think the utilities in the southeast anyway will be in for a very, very difficult winter.

On the international market as I mention we see a lot from China, we see a lot from India, but its happening around the world. Alstom, I didn’t talk about it, but on the last slide on the international market Alstom is one of the largest builders of coal fire generation and their backlog continues to go up and up and up and they discussed it on their calls and they discussed in their press release; its coming from around the world, it’s not just a China and India issue.

As some of you know, I was in Europe in May for a couple of weeks. What I would startled by was how many plants are currently under construction and I sat down with somebody from India had dinner with them one night and they laid out for me all of the numbers on the plants that are being built today, that will come online in 2011 and 2012 and it really is stunning when you look at the numbers and you realize just how much coal it’s going to take to fuel those power plants.

Then this last bullet, Resource Nationalism; this really came from an interview with a Minister of the government of Vietnam and he did an interview back in February or March and what he said in essence was they were cutting their exports to China and when the interviewer asked him why, he said that’s our coal. We need our coal and China can get their coal somewhere else.

I don’t know if there was something that was lost in the translation or what, but it was incredibly stark with the message that he was sending that they are building coal fire generation in Vietnam and the China will no longer be able to rely on Vietnam for as much coal as they had in the past. So, as I was reading that the term that came to mind for me anyway was Resource Nationalism and as I’ve traveled around and talked to people around the world, that theme keeps coming back again, again, again.

So, with that as a predicate, we have looked at our contracting activity. I said on the last call that we would be booking more tons in the second quarter than we have booked in the first or really that we had booked previously and in fact that’s what we did. What we try to do was to balance what we looked at as a very, very tight market both in the U.S. and around the world with the need to lock in margin for our shareholders.

The whole concept of becoming free cash flow positive as quickly as we can is very important to us and that’s what we were doing in locking in these margins. So, what we did in the second quarter and really we include July in this because we did book some last week. We did reach agreements to Ship 7.35 million tons of coal; that only includes 100,000 tons of stock.

Someone asked me this morning, how much of an impact on the 125 ton was there at stoker, and it’s actually minimal. Primarily they were multi-year agreements. I can’t think of a single steam coal order that we did, that was just in 2009. We have really been intense and have been focused on doing multi-year agreement so that’s what we’ve done.

You can see that we did, the average spec was 12/5 1.7, we are saving our OTC quality coal. These are specs that work well with our customers and so that’s what we chose to do there. The leverage numbers at the bottom; these are not new guidance numbers. I should point out we have never issued guidance on production for 2010 or for 2011; for 2009 it’s probably closer to through, but for 2010, 2011 it would probably not.

Cheyenne is not included in any of our guidance numbers that we put out yet and C.K. will talk about it in a few minutes; right now today Cheyenne’s replacement tons for another mine. As we move the equipment and men back to the mine where those men came from, Cheyenne will become all incremental. So, in 2010 sometime in 2009 that will become all incremental tonnage that is not included anywhere.

We think that we had a pretty good period here contracting. We had good discussions with our utilities. Some of them were more recent since the market broke, since API2 over in Europe, the European prices broke off, we continued our discussions and we did not see much in the way of impact. The financially traded market has clearly dislocated from the physical market and our conversations with the utilities I think reflect the fact that the physical market is still strong and we’ve been very happy with how that is taking shape.

And with that I will turn it over to C.K. to cover some things in operation.

C.K. Lane

Thanks Peter. I will cover a few things that we are focusing on and trying to spend a lot of our efforts on. We continue to work on safety with the new regulatory environment that we are all facing right now; that’s a key component to deal with. We tried to use and involve our workforce; one example of that is we had a superintendent and his workforce came up with a violation reduction program to help focus on reducing violations working with the inspectors.

People, you’ve heard it from almost every call; employees and recruiting and training and keeping people are huge issue. We are working with that, continuing to work with that on the mine level. We recently put in $100 a month gas card, gas bonus that we tied to attendance, but we are focused on that and working on that.

Also in the quarter we finished the development of the Abner Branch underground mine. Production began in the second week of July. This is in the four rider seam located at our Bledsoe complex. So far the conditions have been very good and it replaces the BL-4 which was one of our higher coals mines that was about nine miles deep when we pulled out of it.

We also completed the connection between Mine 81 and Mine 74 of May. We eliminated that 23 mile truck haul; that’s been running way away after we got all the belts installed and some initial start up issues on that. We started a new surface mine which was the Hog Trough surface mine in May that replaces one of our existing mines, but we did move a high wall miner there on that property from Barrett Branch, one of our existing surface mines. So, that was the new surface mine that started.

Moving on over to Cheyenne; Cheyenne was an acquisition that of course we completed. It fits very well with our current properties. If you look at the attached map that we put in the slide it’s about seven miles from our Leeco operation where the coal will be trucked to and loaded there.

It’s about 13.8 million tons of proven and probable reserves; we are in the process of adding another 2 million tons of reserves that we control the mineral on and we will add those to the permit in the future to increase that reserve a little over 15 million tons. It’s great quality reserve 12.6, less than 1% sulfur and 11 ash; almost all of this product will be shipped raw not have to washed.

We were able to acquire this property; all the roads and infrastructure are in place. We moved equipment in over about a four day period and began production in July 24. We are expecting a 500,000 tons a year run rate. We are currently looking at additional equipment to bring in to the property to increase the production hopefully in the fourth quarter, but early in to next year. So, we were very pleased with the work going on Cheyenne. The coal will be shipped through our existing rail facility at Leeco and the total purchase price was approximately $40 million.

We are going to start a new project at our McCoy operation. We will start three small underground mines hopefully in November. We have about 1.5 million tons of reserves with an additional 4.5 million tons in the area. We are looking at a fourth mine to start after we get the first three up and running.

This will be a high wall Alma Seam metallurgical product. So, it will be our first met coal that we have shipped and we hope to begin to production in November looking at 500,000 tons a year annual run rate. Now, the total cap was about 3.3 million. We will move the equipment and people from one of our existing McCoy mines that is getting ready to mine out and instead of going back into a steam coal mine we’ve decided to start the three small met coal mines.

We will use some spare equipment that we have in the company so that’s why we are able to keep the capital expenditures down to about 3.3 million. Now, the coal will be processed and shipped through our Burke facility. Burke is an idle prep plant that we have at the McCoy operation currently; it’s located on the CSX.

Another project that we hope to get started very soon is the Slurry Recovery Project. It’s located at our Blue Diamond operation. This is recovery fine coal from three existing impoundments. These are old impoundments that were processed long before the fine coal circuit was installed in preparation plants. So the fine coal was basically thrown away and put in these impoundments.

We estimate about 1.4 million recoverable tons. With this project we will give additional recovery through our prep plant due to the circuitry that we’ll adding, so we’ll get a plus also from our existing production. It’s a 11/3, less than 1 sulfur product, 7 ash; so we will be able to blend that off on our wash product coming out of prep plant.

Production rate should be around 135,000 tons per year. We hope to get started sometime late in the second quarter of ’09. Estimated capital is about $6 million and we’re looking at an operating cost of about $35 a ton on this project.

Last project; I’ll take a little bit about the Log Creek Underground Mine located in Indiana at our Triad operation. This is on the reserves that we acquired last year. We hope to begin development in mid 2010. We may point out that surface production will start on the property in 2009, one of our existing surface mines will mine out and we’ll move the equipment in May and down to start surface production earlier.

We can accelerate the underground development depending on the availability of capital. We have approximately $17 million recoverable tons, similar quality to what we are shipping now 11,200 Btu, 3% sulfur, 8% ash product. We would expect full production of about 1.35 million tons by mid 2011. We’ll start out with one continuous miner unit and increase that to four as the mine develops.

Estimated capital will be about $35 million. The uniqueness of this product is, if there is a rail load out facility, we will upgrade that facility, but that real load out will allow us to ship coal into the Southeast and to other markets in Indiana. So with that as the main projects we’re working on right now and I’ll turn it back over to Peter.

Peter Socha

Thanks C.K. A couple of items kind of miscellaneous investor questions that we’ve gotten over the last couple of weeks. One is on NOLs; as of June 30, we have on the federal tax NOLs about $200 million, AMT NOLs about $100 million and Kentucky state NOLs of about $100 million. When we give guidance later this year, we’ll be updating on what the tax rate would be in 2009. Obviously, these coming to play of 2009 and 2010 and we’ll be updating at that time sort of how they will work and how we anticipate utilizing them.

Free cash flow, we’ve got a lot of questions on free cash flow again, ‘09 and ‘10 questions. The board had a preliminary conversation about it in June. We have since signed some of those contracts that I mentioned. We will have a more fulsome conversation in November. As of right now, other than what C.K. as talked about, we have no major other development project planned. We will probably upgrade the equipment fleet, which will takes some and we will strengthen the balance sheet, which will takes some, but other than that we have no major projects planned.

And other than that we will go to Q-and-A; operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Rollyson at Raymond James.

Jim Rollyson - Raymond James

Peter, if you kind of go through all those projects that C.K. just highlighted and laid out and then some of them started in ’09, the one doesn’t start till ’11, but how much of those are incremental projects for incremental tons over the next couple of years versus some replaces and I guess I was surprised to see Cheyenne being replaced this year, but you mentioned that that turns into incremental next year. So, can you talk about that a little bit?

Peter Socha

Yes sure. Cheyenne, you should assume that will be all replacement next year as I mentioned. On the Met Coal, C.K. how much would you say is going to be replacement and how would be incremental?

C.K. Lane

Cheyenne will be all incremental tons next year. I think you said that …

Peter Socha

Yes, but on the McCoy project.

C.K. Lane

Yes, on the McCoy project that will replace about 250,000 of the existing tons that are steam production with 500,000 tons of metallurgical production.

Jim Rollyson - Raymond James

Okay. The costs on the met project?

Peter Socha

We are not going public with those yet.

Jim Rollyson - Raymond James

Okay, I presume margins are improved over the previous steam migration?

Peter Socha

Margins will be very strong.

Jim Rollyson - Raymond James

Your new contract additions look obviously very strong and you mentioned only 100,000 tons of stoker. Do you suppose, is this indicative of what you are looking at signing the rest of your coal for. I think you mentioned the specs on what’s been signed versus having roughly OTC spec left?

Peter Socha

Right now in CAPP, actually in both regions, we’ve got some contract price reviews ongoing. They don’t have callers, let me say that; there are no callers, but what I would expect between now and say the next time we’ll report, November the sixth or eighth whatever it is, we’ll probably have another half a million tons of ‘09 and ‘10 under contract. I don’t know yet, what the pricing is going to be on that.

We’ve been so focused on the ones we did that we didn’t fill the pipeline up and honestly we’re in a summer time, we’re in vacation season and I want to wait and see what happens sort end of September; are we replenishing the utility inventories; is it going to be another weak shoulder season, but we do have the tons that are under price review right now.

Jim Rollyson - Raymond James

Switching over to the Midwest, not a whole lot of margin this quarter? Talk about maybe your new cost guidance is pointing on to $31; I think your booked pricing is in around $32 bucks, you have some diesel pass-through, just kind of thoughts on how that proceeds going forward and when you might be able to book some volumes?

Peter Socha

We didn’t have the Big Wet this quarter, but we had sort of Big Wet. In that it just hit hard. I mean we had several storms that hit very, very hard and obviously the ones that made the news and caused the flooding on the big rivers and things like that.

In this case, we had roads washed out, we had railroads that were almost washed out, we had railroad that were parking fully loaded trains on bridge trestles to try to keep the bridge from washing out. I mean that’s sort of all in the area type stuff. On the mining operations themselves, it was very muddy. It was just very, very muddy and the machinery doesn’t run as well as you want it to around, it doesn’t run as fast as you want it to run and your repairs and maintenance go up, so you costs go up.

Now the Midwest, we want to bring incremental production on in the Midwest as quickly as we can, so we can bring some margins out there and get them some financial release, but hopefully knock on wood, we’ve seen relatively dry weather out there in the last several weeks, but they have really struggled with weather this year and I feel bad for them because it’s no fun doing the kind of work that they do in that level of mud, but we will do what we can to boost their margins up, but the remainder for the year as well as next year.

Jim Rollyson - Raymond James

You’ve got a little bit of room next year and certainly a lot more room in 2010 to add pricing.

Peter Socha

Yes, as I said we do have one price review going on out there right now. Prices out there have moved up dramatically. We have those tons available under the price review, but we also have several other parties who are interested in those tons and so I’m hopeful that will work something out with the existing customer, but if we don’t we have plan B.

Jim Rollyson - Raymond James

So that news should get better going forward?

Peter Socha

Yes; that will get better. They are going to struggle long for another six to 12 months. That price review will help, that higher price will help, but we also need to bring on probably a little more production sooner rather than later to try to boost their margins on.

Operator

Your next question comes from Michael Dudas at Jefferies.

Michael Dudas - Jefferies

Peter, from a strategic view point, given where the company is and the market is today, could you maybe assess, how you and the board are thinking about contracting strategy going forward?

Peter Socha

As I just talked about with Jim, we will probably do another half a million tons for ’09 and ’10, between now and to say November 8, when we will report again. If I can stretch that to an ’11, to 2009, 2010 and 2011 I think I will, but I don’t know yet, I don’t know with that will be.

We love to go into the year with 20% open. This year we may go out there with 25% or 27%, probably certainly less than we did last year and more than we would normally. Again, I really want to watch and see what happens with the Southeast market over the six to eight weeks.

We have the OTC coal available, so have multiple outlooks for that coal. We have overseas outlooks for that coal. Again because of the quality of it that can go overseas very easily and that’s one reason why we held it back, but I think for expectation purposes for you, if you look at it and say well they may do a half a million tons ’09 and ’10 between now and ’10 Q3 report, that’s a good assumption.

Michael Dudas - Jefferies

Both the days of seeing 80%, 90% open in one or two years out probably are behind you, Because a good of the utilities uncertainty are, I would think looking to lock in long-term as you guys just demonstrated with some of your numbers this quarter.

Peter Socha

Yes, I think that’s a fair comment. I mean we held an open book, we took a lot of grief for it, we took a lot of heat for it, but we believed in the market, we believed that it would tighten up. I went to Europe in December, there was no coal in Europe at all and ultimately I think that we got the direction, right. Certainly, the magnitude of the price changed. I’ll be the first to admit, we just got lucky on that, but the direction we did get right and I think the holding of 90% opened contract book is this type of a market, I just wouldn’t do that. That wouldn’t be prudent.

Michael Dudas - Jefferies

On the Cheyenne purchased, I think C.K. mentioned something about additional opportunities on the inferred or resource to the convert to reserves; is that in $50 million additional or is that going from 13.8 to 15?

Peter Socha

No, that was 13.8 to 15 plus. The drill patterns were not there and all of the things that you need under SEC guidelines to classify it as reserve were not there, but the coal was there.

Michael Dudas - Jefferies

Pete, can you talk about your company’s underground productivity over the first six months and what you’re expecting it through the end of the year to assess the impact on the state, federal regulations of your company and what you’re anecdotally you’re hearing or seeing through your competitors?

Peter Socha

Yes, I think we are all seeing the same thing. Certainly if you go to any meeting of industry people involved in the operations area, we’re all saying the same thing, which is just there is a much heavier presence of regulators and inspectors and people who are involved in your mine and that just impedes your production as impedes your productivity, but it is the new environment.

It’s not a new environment, just for James River’s, it’s a new environment for the entire industry and we are all adjusting and some conversations with C.K. that I have are very difficult, because I could tell he’s had a tough day, he’s been at a mine, he’s had eight inspectors at the mine and each one has a different opinion on how we ought to be doing things at that mine.

Michael Dudas - Jefferies

Kind of like investors?

Peter Socha

Well the interesting thing is C.K. is coming to one of the conferences in the fall and I think I’m going to let him do 20 slides on conversations that you lost with him.

Operator

Your next question comes from Brett Levy at Jefferies & Company.

Brett Levy - Jefferies & Company

I’m just trying to figure out; can you put a number on the weather impact for the second quarter and with that in mind, as you look to the third quarter, can you talk a little bit about where you expect to be on tons; where you expect to be kind of on average selling price, etc?

Peter Socha

In the Midwest, I think if you just take guidance numbers of three-four or three-five and divide it up in roughly equal portions and then you look at what the delta was in the Midwest between that number and the actual number, probably I’m going to say 85% of that is weather related in some form or fashion either because of the mud itself or because of increased repairs and maintenance or something of that nature. C.K. would you?

C.K.Lane

I’ll trace that.

Brett Levy - Jefferies & Company

So, with that in mind, should we look for a number closer to like three-three or three-four for the third quarter?

Peter Socha

I mean we give annual guidance Brett and that’s pretty much it; we never give quarterly guidance, but I will say this; I mean the Midwest operations have pretty much returned to normal.

Brett Levy - Jefferies & Company

And then in terms of and again maybe there is some lumpiness; if you separate 3Q from 4Q, in terms of what you’ve locked in the Midwest and what you’ve locked in the Central Apps, are the proportions of contracts rather similar from 3Q to 4Q?

Peter Socha

No, the only difference in Q3 will be and we noted in the press release would be that one contract in Central App that we will be shipping. Actually, I think it goes out, it starts today and so that in average sales price for Q3, that will cause a good bump, but other than that just that issue goes.

Brett Levy - Jefferies & Company

And then in terms of like miner vacations in that kind of thing, any lumpiness between sort of the Christmas periods versus the summer period as far as you guys can tell?

Peter Socha

No difference than any other year.

Operator

Your next question comes from Shneur Gershuni at UBS

Shneur Gershuni – UBS

Just want to start up with just two housekeeping questions. First is with respect to tax benefit; obviously you didn’t report one this quarter. I guess you chose not to book at this point right now, but can we assume that you’re still booking the actual NOLs and the NOL balance will continue to grow with these tax benefits that although not appearing on the income statement today and can be leaked into earnings as an offset, in future years we have cash flow.

Peter Socha

That is correct. Yes, hopefully, the NOLS will stop building fairly soon, but you can assume that they are continuing to accumulate and that they will be available for use in the not too distant future.

Shneur Gershuni – UBS

The other housekeeping item and I’m not sure if that was asked already, is just with respect to how many the tons you’ve committed for the Midwest for 2008 relative to your total guidance for production. It seems to be a bit of a shortfall there. Can you give us some color on how you’re going to address that?

Peter Socha

Those will be customer conversations Shneur. Obviously the weather has impacted a lot of things and the sales group and the ops group have got to sit down with the customer and talk about that, but you’re right. I mean on an arithmetic basis, you’re correct, but those are conversations that we’ll have with the customers.

Shneur Gershuni – UBS

And just shifting to some bigger picture questions; maybe this is I guess more for C.K., but you guys had mentioned in the past about how the Central App labor problems are not as bad as what you’re experiencing and so forth. You noticed in your press release today that labor clearly is an issue. You also mentioned the gas card and so forth; I was wondering, are you starting to experience the same type of labor tightness that some of the other players are experiencing and what are you doing to mitigate your labor cost?

Peter Socha

Sure. I mean, we’re immune to the same things that the other public and private companies around us have been experiencing and I notice this has been talked about on other calls. Particularly, if a mine is closer to a particular miner’s home, so he doesn’t have to drive for 45 minutes or an hour, that’s quite a savings for him and gas.

If going from second shift to first shift, from evening shift to day shift is something that they want to do, that’s something that is difficult in a tight labor market. We took some steps earlier in the year for labor to increase retention. We are about to take some additional steps as we put in the slides, I think it was in the slides.

What we’ve done as we’ve got all of our ops guys, mine superintendents, general superintendent; they have all gotten together and they have said, this will work, this will not, this is what we’d like to see. So, we’re really doing a bottoms up from the people who are closest to the miners to tell us, these are the things that are important to me and we’re going to try to assimilate all of that and put that into a program that hopefully can be deployed company wide, without getting into too much differences between areas, but the important thing to us is that it’s coming from mine level up to C.K. and up to me.

Shneur Gershuni – UBS

Can you talk about things that you’re doing to control controllable costs. I understand, you cannot control the price of diesel and some of the other commodity prices and so forth, but is kind of like your program with mine ideas with respect to MSHA and how to handle them and so forth? How many other projects out there do you have that you can help keep down costs or at the very least to help offset some of the inflation?

Peter Socha

Yes, I mean the guys at the mines are just focused on cost every single day. It’s what they do, it’s their life and coming up with ways to work with MSHA and to try to smooth out the productivity impact there, as best they can is something that we have all as a group, we have gotten together and say, let’s try this and let’s try that.

Not everything is successful, but saying this is what we’re doing to control cost, I mean that’s a bit of a difficult question, because (a) it’s handled differently at each mine and (b) the men and the women are so focused on it that it’s just a difficult question to answer without taking another out.

Shneur Gershuni – UBS

Fair enough and just you’ve put out your un-levered slide which you told us not to impute as true guidance, but it kind of gives us a window to how you’re thinking with respect to production. I just wanted to confirm so all these new projects that C.K. was talking about are not with your thinking when you thought about that un-leveled possession?

Peter Socha

Cheyenne is not in any guidance. 500,000 tons from Cheyenne per year is not in any guidance. On the met coal mine the 250,000 of incremental, it’s all going to be met whereas in the past it was 250 of steam. That is not in any guidance.

So what we were really trying to do there is to just establish; this is the rough range of what we’re looking at as our unhedged position. Of course it’s a reasonable question, but we weren’t trying to go out there and update. This is what we believe our production guidance will be in 2011; that was not the intent.

Shneur Gershuni - UBS

The way for me to take a look at it is that there’s potential for incremental tons and you’re also upgrading the margin of tons, because you’re already met?

Peter Socha

Yes, I think that’s a good way to look at it.

Shneur Gershuni - UBS

Okay and then just one final comment. If you could sort of talk about where you think the stoker market is relative to the steam market?

Peter Socha

We have gotten some very, very nice prices on stoker. I’ve heard a couple of other comments or one other comment I guess on a call. It was we have gotten north of 150.

Operator

Your next question comes from Jeremy Sussman at Natixis.

Jeremy Sussman - Natixis

You mentioned that obviously we’ve seen tremendous volatility in the financial and futures market, but no real change in the physical area; how about this though, was gas prices falling; any discussion of coal versus gas at this point?

Peter Socha

We haven’t seen it. It’s a good question and with gas prices in the eights or whatever they are this morning, we just haven’t seen it honestly. Right now, we’re projecting 99 or 98 here in Virginia, today. I think 101 tomorrow. So I think everything is running, the gas and the coal unit, but the coal burn is up. Clearly in the southeast it’s up; I think certainly if you look at what AEP has been doing, I think their coal burn is up, but again with most utilities, they look at average costs, they don’t look at top costs.

Jeremy Sussman - Natixis.

How about costs for next year, too early to start looking at that?

Peter Socha

Yes, too early. As we always do we come out at the end of budget season, which is usually in the Thanksgiving period. This year we may slip into January, but we’ll see.

Jeremy Sussman - Natixis.

Okay and I guess just lastly obviously you made the Cheyenne acquisition this quarter, after keeping flattish production for a while. So I guess any plans to do something further and I guess now that we’re hearing you’re bringing on some met reserves as well maybe something you can do there?

Peter Socha

Yes, obviously the last couple of years it’s been all about survival and it has not been much in the way. This is what we’re going to due to grow here or this is what we’re going to due to grow over there. It’s been let’s just make sure and survive until the market turns in our favor, which it did. So now we have a little bit more of an opportunity to look at projects that make sense for us and that is something that we’re doing but we’re still trying to get into 2009. That’s very much on our mind.

Jeremy Sussman - Natixis.

Great, I actually just have one more. In terms of you mentioned that your OTC quality coal. that’s still opened; do you have a typical discount to the type of coal you signed this quarter, your premium coal?

Peter Socha

No, actually not. It just the OTC gives us more options on places to sell and certainly it opens up the export for us in the East. It opens up export avenues, a little easier than having a discussion on a 2% sulfur coal for instance or a 2.5% sulfur. It’s easy to say this is 12.5 minus one. So we’ve never given sort of this is what we discount for higher sulfur and like that because sometimes we do that and some times we don’t.

Operator

Your next question comes from Justin Fisher at Goldman Sachs.