CNX Resources Corp (CNX) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to earnings results conference. At this time all participant lines are in a listen-only mode. Later there will be an opportunity for questions, instructions will be given at that time. If you should require assistance from an operator during the call, please press zero, then star. As a reminder, the call is being recorded. I would now like to turn the conference over to Vice President, Investor and Public Relations, Mr. Tom Hoffman. Please go ahead sir.

Thank you operator. Good morning everyone. We'll be discussing third quarter results this morning, and with me is Bill Lyons, our Chief Financial Officer. A few housekeeping notes, we are Webcasting this conference call as we usually do, and we welcome anyone who's listening via the Web. To any reporters who are on the call today, you will remain in listen-only, but I will be available all day after the call to take any questions you might have.

As a reminder, we'll be discussing material this morning that in some cases is forward-looking, and these forecasts are of course subject to business risks. We have detailed those risks to some extent in the release we put out this morning, and we have additional detail on risks in our SEC filings, which we commend to your attention. With that, let me turn the call over to Bill Lyons.

Thank you Tom. As I usually do, I'd just like to start out with recitation of just some of the metrics for the quarter. CONSOL Energy reported a loss of $7 million or nine cents per diluted share for the quarter ending September 30th of 2002. This compares with a loss of 11.5 million, or 15 cents per diluted share for the same quarter a year ago. Net cash from operating activities was 103.4 million for the quarter, compared to 72.5 million a year earlier. EBITDA for the quarter just ended was 32.9 million, down from the 50.9 million of the year ago. The quarter had a pre-tax loss of 42 million, versus a pre-tax loss of 14 million in the year ago quarter.

For the quarter just ended, we recognized a tax benefit of $35 million. This is driven by the pre-tax loss, coupled with the benefit of percentage depletion generated by our profitable mines. The results for the September 2002 quarter were driven by lower sales and production volumes in our coal segment that could not be offset by improved performance in our gas segment. As we discussed in our previous calls, the mild winter of 2001, 2002 had a substantial negative impact on coal markets, particularly when coupled with the slowing economy. The rapid buildup of coal inventories at our mines, and at customer power plants compelled us to reduce planned production levels by seven to eight million tons, to a series of mine idlings, most of which took place in the third quarter.

Compared with last year, production in the September quarter dropped 3.4 million tons, or 20 percent, while sales of company-produced coal declined 1.1 million tons, or about six percent. However by idling our mines, we were able to draw down mine inventories during the quarter by about 2.6 million tons. This liquidation of inventories of course was a key component in the improvement in net cash from operating activities in the quarter-to-quarter comparison. Coal prices rose quarter to quarter by more than nine percent, reflecting higher prices on sales contracts that we negotiated in the fourth quarter of last year, when the market was still strong.

However cost increases exceeded unit price increases. Stopping and starting the mines creates a number of cost impacts. As Brett mentioned in the, in this morning's news release, unit cost will rise when you have temporary cutbacks in production, because your fixed costs in the short-run don't decline proportionally with temporary drops in coal output. In addition, the starting and stopping of mines creates short-term inefficiencies that lead to higher costs. Equipment that sits idle underground for six or seven weeks for example, may be prone to startup mechanical or electrical problems that would not occur when run on a normal schedule.

In general we are not satisfied with the current costs in our coal segment. Our analysis of costs, taking into account the effects of mine idlings, does not point to a particular company-wide cost issue. Rather it appears to be a host of small problems unique to particular mines. Quarter to quarter shut down mine costs were up over 200 percent, or $20 million. These specific costs are reflected in cost of goods sold, but not included in our unit cost data that we provided. These include costs of keeping the mine on standby, including staffing costs and power, as well as the straight-line depreciation charges on equipment.

Coal markets were generally lackluster during the quarter. Customers in the power generation sector were comfortable buying less and drawing down inventories. As we noted in the news release this morning, the relatively hot summer appears to have contributed to the draw down of inventories at coal-fired power plants. However we don't believe that inventories were drawn down as much as we might have expected, given the hot weather, because of the somewhat counterbalancing effect of a sluggish economy.

Additionally, preliminary numbers from the Energy Information Agency suggest that coal-fired power generation and hydro generation may have taken some market share from coal on a national basis. Longer-term, we believe that coal-fire electricity will retain market share, particularly with gas prices more than $3 per million MMBTU. We believe this year was anomaly, because of a number of new gas plants that were operated for warranty purposes, despite the relatively high prices for gas.

Turning now to our gas segment, we had another good quarter. Quarter to quarter prices for gas were up 27 percent, and were up 12 percent since the beginning of 2002. Sales volumes were up 26 percent quarter to quarter, and have increased seven percent since the beginning of the year. Lifting and gathering costs on a unit cost basis declined quarter to quarter, reflecting higher volumes. For the quarter gas segment EBIT was 10.4 million, and EBITDA 19.1 million. The volume improvement is the result of the acquisition of production assets in Virginia late in August of last year, as well as additional drilling of wells in Virginia. Prices seem to reflect the market's belief that the reduction in drill rig activity nationally will result in a reduction in gas storage to normal or below normal range as we go through the winter heating season. As we noted in the news release, gas storage currently is about eight to nine percent above the five-year average for this time of year, down 18 percent from June.

Let me now turn to the outlook for the current quarter, and for next year. For the current quarter, based on what I see today, I do not envision results better than breakeven. Upside potential for the quarter depends primarily on the progress we make in unit cost reductions. We expect 2003 to be an improvement over 2002. Gas prices and sales volumes both should increase more than ten percent year to year. We expect some improvement in average realized sales price for coal year over year, and sales volume should increase by at least one million tons. More importantly, we expect to go into 2002 with most the domestic steam coal under contract. As you saw in the news release, we currently have about 78 percent of expected volumes committed, I expect that number to increase by year-end.

Regarding future sales volumes, we are giving you the aggregate of tons under contract, and tons we have agreed on volume or volume and price, but we're in the final, but where final signed contracts have not yet taken place. We think this is a realistic way to disclose sales activity. However we take a more conservative approach in our SEC filings in that we report only coal sales where we have an executed contract in hand. In 2002 we begin the year with a significant numbers of tons unsold, a conscious decision on our part to take advantage of what we thought would be a robust spot market. I expect our unsold position on domestic steam coal will be much less going into 2003.

I'm not yet prepared to provide guidance regarding earnings for several reasons. First, there is still a lot of uncertainties and factors over which we have no control, this is the weather, potential war, and the economy. Each of these factors can have a significant impact on energy markets. Second, our coal segment will be under new leadership beginning next Monday. We are all very pleased to have a man of Pete Lilly's experience and ability joining the CONSOL management team. We should have a better feel for some aspects of the coal segment performance once Pete has had an opportunity to weigh in on key issues.

With that, I'd be glad to take some questions.

Operator, if you could give us instructions on the queuing process. Operator, if you can give the call in participants instructions please.

Thank you. Ladies and gentlemen, if you wish to ask a question please press the number one on your touch-tone phone. If using a speakerphone, please pick up your handset before pressing the number. You may remove your line from queue at any time by pressing the pound key. One moment for the first question. One moment please. Our first question is from the line of John Burgess (ph), JP Morgan.

Morning John (ph).

Hi, morning Bill, Tom. Bill, you're talking about unsold tons and coming into 2003 with less exposure. Now we've been hearing from some other guys that they've been actually moving the other way, and I just wondered if you could give us some sort of indication as to what percentage you thought you'd come into 2003 with, unsold? And then maybe on the balance sheet the, or the cash flow sorry, the movements in your current assets during the, this quarter. I wonder if you could give us some guidance on that? I see there's some big numbers been moving around.

Well John (ph) in terms of our sales right now, we have, if you're asking the actual contracts in hand, we have about 60 percent. In terms of the, what we call committed tons, there's probably another, like I said, close to 20 percent there. Again all I can say is we expect that to move upward definitely. I would, I mean, I just can't venture to see a number there, but you know, right now we're close to 80 percent, and that's a pretty high number.

And we won't John (ph), this is Tom, we won't be sold out in terms of total tons, because some of those anticipated production from 2003 are the met (ph) mines, and as you know we won't actually begin discussion on, or try to finalize contracts on those until the first quarter of next year.

So that will be included in the total that you are planning for next year?

The number, the number we're giving you, the percentage we're giving you is total company production. If we were to only look at domestic steam coal, the percentage will undoubtedly be higher.

OK. That's interesting. Any sort of stab at the number of tons, thinks you, next year?

In terms of what John (ph), sales?

Total number of sales.

Yes that's in ...

Think we have. Think that's in the release John (ph).

Oh sorry, I must have missed that. And can, the movements in your inventory, is that sort of thing? It's inventory ...

Yes our inventories moved down John (ph) ...

About 2.6 million ...

... million tons.

... million tons.

Yes they came ...

And we had told you I think last quarter that our target was about 2.8, so I think we were, we tracked that pretty ...

We're pretty close.

... pretty close.

John (ph) our inventories do have a significant impact. If you recall we started our year about 1.6 million tons, and then at the end of June we were up to almost six million tons of inventory, and that's what precipitated a lot of the mine shutdowns. We are down to about 3.2 to 3.3 million tons, so we had a drop in the quarter of 2.6 million tons, but we still have an increase year to date of 2.6 million tons.

OK. And then there's a $69 million figure in those current, in the adjustments to your cash flows. What was that?

You're talking for the three months, or the year to date?

For the three months. Or maybe it was the year to date.

Yes, I mean I don't see it in at three months John (ph).

OK. I'll talk to you offline. Thanks.

OK.

Our next question is from the line of Dan Rolling (ph) with Merrill Lynch.

Morning Dan (ph).

Good morning gentlemen. To follow up on what John (ph) was asking, does this 60 and 20, almost 80 percent, I assume you mean that's of total anticipated sales met (ph) and steam?

Yes.

OK. The question I have does those anticipated sales number take into account any anticipated mine reopenings that are currently on idle or closed status?

I think we have, Loverage (ph) would be the only one where, and we're continuing to evaluate that. I think the answer is no.

How long has Loverage (ph) been down?

It's probably close to year and a half, two years now?

Yes, although I think it was a year ago that we mined the ...

The last part.

... the last part of the -- if you remember, it went down, it had a fire, it was sealed. We then reopened it, mined the, an already developed long wall panel, and got about million tons out, and then reidled the mine. So we've been in there of course to, and we've gone back in from time to time Dan (ph), since then, and have done some additional rehabilitation.

OK, now ...

... I can't remember just offhand how long it's been idle, but we have been back in doing some work since the last coal that we mined about a year ago.

OK. But Shoemaker, Robinson Run, Blacksville #2, Dilworth, Rend Lake, Humphrey, Mahoning, McElroy, Meigs #2, Meigs #31 and Muskeegan (ph), Muskingum are all anticipated to be closed for the entire year of 2003?

No. Shoot ...

No.

... no. If you ...

Shoemaker's up and operating now. That'll operate next year. McElroy is up and operating, that'll operate all next year.

So what's the significance of the paragraph in the press release that said these mines were closed in the quarter. But they're now ...

Well just ...

Just to try to -- we, I mean as we put out the production report each month Dan (ph), we tried to keep you abreast of when mines were idle and when they weren't. We were just indicated, we're trying to reinforce Bill's point in his remarks this morning that most of the idlings that we had planned to take during the year hit during the, during the third quarter. As it stands now, the four AEP mines, the two Meigs mines, Muskingum, and Windsor are all, are all closed. The only mines that we have on idle are Rend Lake and Mahoning Valley, and then if you want to throw Loverage (ph) into that mix, Loverage (ph) as well. But all of the other mines that took idle time during the quarter, or in previous quarters, are all back running. Now keep in mind again that Dilworth and Humphrey will also deplete sometime before the end of the year, and they will be closed as well.

OK, so Dilworth, Humphrey, Meigs #2, #31 and Muskingum ...

And Windsor.

... and Windsor, they are closed or will be by year end?

That's correct.

Yes.

OK. Thank you.

Yes.

And the next question is from the line of Steven Zeppelin (ph), Bear Stearns.

Yes hi, good morning guys.

Good morning Steve (ph).

Morning Steve (ph).

Hey, just wondering if you could share your thoughts on the credit position of the some of your major customers, and what kind of protections you might have in place for receivables, et cetera? And also second question, your longer-term commitments, are you tending to sign those for greater than two to three years, or is it still in the one to two year range? Thank you.

Steven (ph) in terms of our customer base, we still feel very, very comfortable with it. You know, you're talking about companies that always been the pillar of economic stability. And I think for the most part our customers still reflect that. Naturally there's been a lot of things that are going on in the power generation industry, but still the bottom line is, is that those power plants are going to run, they're going to need coal, and that we believe that the long-term fundamentals of the industry are very, very sound.

Sure we, if you take a look at our audited financial statements, we do have 15 percent of our sales and receivables with AEP, and another 15 percent probably with Allegheny Energy. Allegheny Energy is the one that came in the news most recently. We have been in contact with them, I can tell you we have contracts with them, just like we have contracts for many, many years. They are not delinquent in any account. We've had open discussion with them and they assured us that they plan to live up to the terms of the agreements that they have signed with us, and that there should be no problem with us getting payment.

OK, great. And on the long-term commitment for the contracts. Are those being signed out longer or still basically the same?

Steve (ph), this is Tom. Frankly the, I mean right at the moment there's not much activity other than discussions that we started maybe ten, 12 weeks ago. So I don't have any actual contract news to report. But I would say that we do have discussions underway where the length of the contract would exceed the two to three years that you mentioned.

OK, great. And just one follow-up. Can you just go over the power plant with Allegheny -- I didn't really see it in the press release. Was there any, I'm sorry, any mention of it?

No, it ...

As far as revenues or ...

No it's, again that was the first time it started up and basically it, the results were not significant for the quarter.

OK, thank you.

Wayne Atwell (ph), Morgan Stanley.

Good morning Wayne (ph).

Hi Wayne (ph).

Yes, good morning. How you doing? Thank you. Just a couple of housekeeping items. Your tax category, you had, you had a big tax credit. Could you explain that?

Well what it is the provision for taxes Wayne (ph). What we do on taxes, as you're aware, that in the coal industry we get the benefit of percentage depletion, and that is computed on a mine by mine basis. And mines that are profitable end up with this percentage depletion allowance. It is what's called a permanent difference, meaning that it's just on the tax return, it doesn't have a basis in the, in the, in the financial statements in terms of where the deduction came from, like normal depreciation does. If you take a look at us for really probably for nine months is the best way to look at it, we had a pre-tax loss of about $36 million. You would normally expect about a 40 percent benefit, and that's about 14 million.

We expect to have a percentage depletion benefit about 26 million, and then we had some other things, accrual to return adjustments and the rest, and that was about four million. So that makes up the 44 million of tax benefit. The taxes are computed according to the statement of financial accounting standards 109, APB 28 in our reporting, as well as financial interpretation number 18 on interim reporting. And basically it tells you project out what you're going to have is your tax status for the end of the year, and you apply that back to the quarterly financial statements. And the difference between the year to date number and what you booked previously is what's in the quarter. And that's a long drawn out answer, but that's how it's computed.

OK, well may I, I don't know whether you're able to help us figure out on a quarterly basis what you're going to do, but your pre-tax loss according to page six of your release was 42 million, which pre-tax loss you had a $35 million tax credit essentially, and then a $7 million net loss, so ...

Correct.

... and you're saying a lot of that was depletion?

Yes.

Seems to fall heavily in the third quarter.

Well again, it has to do with your, what your projections are, where you're at the year. Obviously we were projecting higher income and had a different tax impact earlier in the year. As you get better information you're required to update your estimates. The quarter taxes are by difference, you compute it on a year to date basis and deduct out what you had in the prior year, prior year to date.

Right. So you're saying you don't calculate quarterly, you calculate like nine months and six months and whatever?

That's right. You'd take the nine months ...

And at the quarter just ...

... calculation and subtract out the six months calculation.

Right.

So really differences in estimates fall out in that calculation.

OK. Well, and is there any way we could puzzle out what the quarter's going to look like? Or even the nine months? I mean it seems like based on this you had maybe a $9 million credit through the half, and then you had a 34 million to a $35 million credit in the third quarter, which is quite a meaningful difference.

I don't expect to have, I think the 26 million percentage depletion is going to be the maximum we'll get for the year. So if you're asking me on the fourth quarter, I would probably take, you add up, I think it's going to be zero. OK? I think the pre, if the pre-tax is around zero the tax on that probably would be about zero.

Oh, OK.

I don't expect a significant change in taxes for the quarter.

And do you have a thought about taxes for '03?

And our next ...

That depends on, the answer yes, I have a lot of thoughts on them, but it's hard because it depends on what, it's based on what your pre-tax income is. Normally if we're out in a year where we're making numbers like we did previously, our effective tax rate probably ranges around 20, 25 percent. But again percentage depletion can play havoc to that calculation, and there were some years where we had four and five percent effective tax rate. It's really hard to get a gauge on that number without doing the specific calculations, because it's based on what goes on mine by mine, not what happens in the mining income in total.

The next question is from the line of David Connie (ph), Freedman Billings.

Morning David (ph).

Hi David (ph).

Good morning. Couple of questions. On the cost, the $20 million that you gave as sort of the idling start and stop costs, should we expect a lot of that to be gone for the fourth quarter?

Well McElroy will be gone, Shoemaker will gone, so that'd be there. Rend Lake will remain idle, I would expect that to be about, maybe about seven million for that quarter. Loverage (ph) will continue to be idle, and that's probably about three or four million.

So maybe we get about a half of that come back as ...

Yes.

... benefit. OK. And, OK. The $3.87 cents that you have locked up for '03 on the gas price, is that net back to the well head, or is that a henry hub price? In other words, is that what you're going to realize on the, on this ...

Back ...

Yes, that's what ...

Yes, that's what we're going to realize.

OK. Great. And then looking at your customer base, sort of following up on the 15 percent for AEP and Allegheny, are you doing anything to ask them for sort of letters of credit or any kind of, you know, some of your competitors on their conference calls have talked about pay as you go or some other metrics to protect yourself?

We are in daily dialog with each customer based on the information we receive. Certainly these things have been discussed, but it'll be on a case by case basis.

OK. But are you doing some of the things, some of these things to protect yourself? You know, asking for them to put a letter of credit or something like that?

David (ph) I know of no cases where we've received letters of credit yet, but it's certainly one of the options that we have discussed.

OK. OK, and what do you, on your tax for the fourth quarter, how much would you think that you're going to get in depletion? Would you estimate, so that we can sort of try to model that in our, in our numbers?

The way we did the projections, we recognized all the benefits of depletion in the nine month number ...

OK.

... so there wouldn't be any further depletion.

OK, great. All right, thank you.

And there is a question from the line of Dan Rolling (ph), Merrill Lynch.

Follow-up on the prior question and mine earlier, the $20 million idling cost, that was just for the third quarter, correct?

Yes, yes.

What was it year to date?

I don't know if I have it. Do you have it here?

Yes ...

And while you're looking for that, when you gave ...

It's about 52 million year to date.

52, OK. And when you were listing the seven for Rend and the three to four for Loverage (ph), you left out Mahoning Valley, which you said would remain idle. What was that?

Dan (ph) that's probably around, it's probably about one, two, it's not much.

It's not too ...

It's a surface mine and ...

Yes.

... the costs of idling are not quite as high.

So basically around 12 million a quarter for those three, so that'd be another 48 million for next year?

I just don't have the next year numbers here.

Fine. But well there's no reason while the idling costs should change, are there?

No.

And where, and the earlier ...

But in some cases though that depends on what status we put the mines on.

Yes, but earlier you said basically you weren't going to change their status.

Well, let him finish that.

OK.

We use the term hot idle, cold idle, OK? If we're, for instance when we idled McElroy Dan (ph), we knew we were going to bring that up probably in a month or two, so we continued to have all the salary workforce, they continued to do, you know, all the work on the mains and the rest. If we're going to idle a mine for a longer period of time, then we would redeploy that salary workforce, have less people. And actually it would take longer to bring the mine back. So we have the ability to cut down on labor and supplies. We do continue to depreciate the mine, anything we do on a straight-line basis. Any time we idle a mine, if we do it on a short-term idle, and again it's mine specific Dan (ph), but it's not unusual for a 30 day idle to cost us four to five million. And but if we went into the longer term, it probably would drop two to three million ...

Right.

... and out of that two to three, at least half of that would be depreciation.

Right, I understand. So I'm, what I'm trying to find out is the three mines that I asked you about earlier, are they currently on longer term status, or hot idle, and are they, if they're on hot idle then obviously you're anticipating to bring them back some time next year?

OK, what are the three mines again?

Rend Lake.

Mahoning ...

Rend ...

... Loverage (ph).

OK, Rend Lake we evaluate really on a day to day basis. And I'm going to tell you, it depends on what the market does. If the market does not turn around we probably, we will take action to reduce the shutdown mine costs there. OK. Second one was ...

Mahoning Valley.

Mahoning Valley is minimal.

Loverage (ph).

Loverage (ph), as of right now we would foresee bringing that mine back, so the idle mine costs would probably cease next year when we do bring the mine back.

OK, so then that goes back to my original question, is Loverage (ph) and Rend Lake in your 80 percent number for contracted sales already, or not?

It's not.

Not, yes it's ...

So the 80 percent ...

Rend Lake would not, Rend Lake would not be. Dan (ph) when you're talking about Loverage (ph), we really look at it, Pittsburgh seam coal and we look at more of that as an area as opposed to a mine by mine basis there, so ...

In other words we could, we could add a contract where a number of mines including Loverage (ph) would be qualified to ship to a customer.

Right, OK. But that 80 percent then might be a little bit overstated if in fact those mines come back on?

No ...

Well in the case of Rend Lake, I don't think it would come back on unless we actually had contracts.

Yes.

OK, thank you.

From the line of Mark Rogensinger (ph), Merrill Lynch.

Good morning gentlemen.

Hi Mark (ph).

Hi Mark (ph).

I just wanted to follow-up on the cost issue, maybe on this sort of more general sort of a company-wide issue. How much of the cost increase on a unit basis was due straight to a lot of volume, and how much would be the rest due to sort of other operational issues on the mine by mine basis? Have you got a feel for that?

You're talking about the quarter?

No. Well maybe in general sort of, you know, I think in the industry we've been seeing unit costs go up on the back of, sort of, production coming down, which is understandable, but I'm just trying to figure out how much of that increase is actually really straight directly due to the volume, and how much could be due to other issues. And maybe for CONSOL in particular on the sort of, you know, sort of ongoing basis for what's you've been seeing in the last six months then?

Well if you take a look at production for the quarter, you know, we had 13.7 million tons of production, compared to 17.1 in the, in the quarter in '01. We're down 3.4 million tons. Obviously that has a big impact on our unit costs. The unit costs for the quarter were 26.52, we had 24.10 in the, in the prior year quarter. So we were impaired $2.42 on that. It's really hard to go through that because you get, with mines, when you have that big a change in volume, it does affect us on a, on a per unit basis. For instance, like depreciation, we're impaired like I said, $2.42 a ton quarter to quarter. Depreciation is impaired 57 cents a ton, but it's a fixed charge.

In fact we had 360,000 less depreciation in the '02 quarter than the '01 quarter, but on a per ton basis when you linearize it, it's 57 cents. It's really hard to go back and tell you how much is in there on a volume basis, but definitely we're very, very volume sensitive. Things of how we do our costing for instance, OPEP (ph), retiree medical, that's really a fixed charge. We calculate per the actuarial study, we allocate it out to the mines. That's going to be a fixed amount whether they mine one ton or 70 million tons. So you do have some problems when you try to linearize this stuff because many of the costs just aren't linear.

OK, thanks a lot. And maybe you could just follow-up on another subject. With these sort of offer for shareholders made for fording (ph), will you have any comments on what your position might be in terms of sort of expanding the company into other areas? And sort of, yes in general what's your view on what that could do from a market globally if another player, global player was to get involved then in terms of pricing on cooking coal longer-term?

Well, you know, we're really an observer on this. We've been partners with, we'll say Sherrit (ph) over 30 years at our Cardinal River mine. Now of course Sherrit (ph) just bought in on Loscar (ph), and we are partners with Sherrit (ph) on our Line Creek mine. Both of these are in western Canada, we've been happy with our dealings with Sherrit (ph). If the Sherrit (ph) deal is completed it may present some opportunities for CONSOL Energy down the road, because our relationship with Sherrit (ph), but as of right now we just don't have anything to say. We don't, that's what it is. You know, we're involved in that transaction.

OK, thanks a lot.

Next question, John Bridges (ph), JP Morgan.

Hi, sorry. I found the thing in the, in your cash flow as well -- at long last. 69 million point one, other operating liabilities in the cash flow statement for the, for this quarter. Was that related to the mine idling and that sort of thing? It's just a big number.

That was just some ...

John (ph) whenever you get into these cash flows, you know, according to when you have to do, according to the financial FAS-95, I think the best thing to do, is that a lot of those things are just offsets here or there in the balance sheet. For instance, here's how I analyze it when I look at, like the nine month number. You know, our cash flow from operations were about 179 million, we had net income of eight, I add back the depreciation and then I look to see the difference, and that difference is 27. And in fact it's 27 negative, and that's the case is because the inventories moved, you know, that's a prime mover on the cash flow. You know, we started the year at 1.5 and we're up to 3.0. So again there wasn't, there's nothing really in that cash flow to read in as. They're what I call swings and roundabouts.

OK. Just on a totally different subject on your visit, on our visit to Buchanan(ph) mid-year, there's a lot of talk about the exploration down in Tennessee. I just wonder if there's any news on that?

Some. We've got nine wells hooked up, most of the activity in this last quarter has been laying gathering line. We've got a total of 24 wells drilled. We are struggling a little bit with the amount of oil that's being produced with the gas. I guess the paraffin content is high, and so we're trying to work through -- I mean, this is, this is a little out of my league, but the, I guess it, in simple terms it kind of gums up the works a bit. When we get all those hooked up we're expecting that the joint venture production from those 24 wells would be somewhere between two and four million a day, of which we would get half. So we're making progress, most of the work that's been done since the Buchanan(ph) executive presentations has been laying gathering line.

So the next step is to wait until there's some capital ability, and then you can take it further. Is that the plan or?

Say again John (ph).

So is the next, so are you going to do anything now, or are you going to wait until you've got some more capital available to develop the project further?

Do you -- I don't know what the, what the plan is next year. I think there'll probably be some more wells drilled but I don't, I don't know what he's got in the budget. Not sure John (ph), I don't, I don't think we know the -- we're just not aware of the answer.

OK, no problem. Thanks a lot.

OK. Operator, are there any more questions?

Yes, from the line of Wayne Atwell (ph), Morgan Stanley.

Thank you. Just a couple of follow-ups. Do you, can you give us what your coal bookings might have been mid-year? You said essentially I guess you've booked and sold and priced 60 million tons as of the end of September. What would that have been mid-year?

We were at about 50 percent, so that would have been roughly 35 million.

OK. Now you're at 60, and you think you'll be pretty much done by the end of the year, which -- will you, will you price some of what you've sold but not priced in the next three months?

Well, it's two questions. By the end of the year we will still in the, in the aggregate have unsold coal and that, a lot of that will be the metallurgical grades of coal that are sold overseas ...

Right, I understand.

OK. Most we expect to have a very high percentage of our domestic steam coal business completed by the end of the year. I would think that by then we will have agreement on both volume and price but it, I mean that's, I'm not directly involved in individual negotiations, but our objective here is to, is to have a fairly strong contract base for '03.

So by the end of the year you will both book more and price some of what you've already booked but haven't priced?

More than what we reported today?

Right.

Yes, that's correct.

OK. And can we get the same numbers for '04 and '05, how much you've booked for '04 and '05 and what it might have been mid-year?

Wayne (ph) we don't report out that far.

Did you give us, you've certainly given us '04 in the past.

Well, we will do that when we, when we file a K, I think we do a contract look then, but I don't have any information to give you today on '04 and '05.

OK. And you seem to be departing from your peers, the other companies seem to have had much less progress, made much less success in the third quarter. Are you doing anything differently, or are you being more aggressive on pricing, or you just have better salesmen or ...

Better salesmen.

... they have better, they have better ball tickets? I mean what are your, what's your success?

Really good salesmen.

OK. And now you've, you're projecting forecast price of 26.60 for the fourth quarter, but your realized 27.16 for the third, is there a message there?

Well there's no inherent contradiction. We want to allow in terms of guidance some latitude in the event that prices were to decline some in this quarter. And clearly the, you know, the weather is going to play a factor in that as we saw last year and so we, and there's been some, because there's not much activity it looks as though prices have come down some, so we've tried not to be too aggressive in what we're, what we're leading you with regard to prices. And, but I don't think they're necessarily inconsistent. I mean the prices we have for what we've already booked are what we're reporting and, you know, we've still got deals to do and discussions underway, and we'll see where that price ends up.

OK, and for the fourth quarter you're essentially guiding us to breakeven results?

Yes.

And that would imply a fairly meaningful improvement in profitability, because your pre-tax was fairly red, it was ten million reduction in mine shutdown costs, so that's a pretty material improvement in results, I guess, due to higher volume and better gas results?

Yes.

And lastly any update ...

You got to realize, Wayne (ph) as I know you're aware of that the third quarter is always the worst quarter for us, miners vacation and the rest. And when you accentuate that by the amount of the mine idlings we had, that's why that quarter was as bad as it was. We don't expect to have the same situation in the fourth quarter.

OK. And an update on McElroy, I know your expanding that, that's a fairly important project. Is that ahead of schedule, behind schedule, on schedule?

The preparation plant part which would, which would be phase one, I think if you want to think about McElroy and three phases, the prep plant, the underground expansion and the harbor facilities. The prep plant is finished and running, and that has had the benefit of improving the quality of the product we're putting out by lowering the ash in the coal. The seam there had a lot of interlaced clay partings that the old plant simply wasn't able to handle. So the plant is running, I think Bill, I'm now aware that the underground expansion is probably now due to come online in early in 2004, as opposed to the end of 2003. And then there are some harbor expansions.

It's, it is, it's online. We slowed down probably for a couple months based on some market conditions as we were taking a look at our cash situation. But no, it's on what we call our internal schedule, and there's no issues with that in terms of bringing it online to serve the market whenever it needs to come.

The underground part Wayne (ph) as you recall, is to develop an additional part of the mine to allow a second long wall to be introduced into the, into the complex.

Right. And you've done some work on getting a better reading on your gas reserves. Is that progressing and do you have any kind of results to report, the progress you've made in terms of expanding your gas reserves? And if you don't have a number are you happy, disappointed, how would you characterize that?

Well I don't have anything to report. I think we're still -- still believe that when we are able to report that the number is going to be higher.

OK. And any kind of early reading on results that are coming in better than expected, worse than expected, not many results?

Can't give you, can't give you an answer to that one.

OK, thank you.

Steven Zeppelin (ph), Bear Stearns.

Yes, hi again guys. Just a follow-up on my last question on the power plant with Allegheny. Where, I guess when you start reporting that, will that be on the other income line, and also what should we expect from that going forward?

As of right now it would be in the other income line. Going forward, as of right now I don't see it being a significant contributor for the next, definitely not, next year or two.

OK. But your gas sales will be going into that plant, right?

Correct.

OK. Thank you.

David Connie (ph), Freedman Billings.

Yes, hi guys. Follow-up question on that power plant. How much gas did you burn of your own gas on this power plant in the quarter?

Dave (ph) I'll have to check and get back to you on that, but we've just, we burned only our gas.

Right. OK.

Now, I think we had to set aside, and the original idea was what, about 27 ...

I thought it was 22.

22 million a day.

Yes.

And I think it took less than that, but what happens is the partnership buys the gas from us and ...

No matter what.

... no matter what, and gas that's not used is immediately turned back into the market.

OK. What's the, what's the price that the partnership pays, is it ...

It's the, it's the market price.

It's just, it's an index price?

Yes.

OK, good. Looking at your contract, just give us just a little bit of philosophy, because we're all kind of flying in the dark here on what's going on. Are you guys, in the new contracts you're signing, are you still avoiding giving option tonnage?

Yes.

You are, great. Oh that's helpful. And then last on the gas, and I'm not sure if you can answer this question, do you think you're going to replace more than 100 percent of your production this year in the reserve side?

I don't know that I can answer that David (ph).

OK. OK. All right, good. Thanks.

Dan Rolling (ph), Merrill Lynch.

Hi gentlemen.

Hi.

The last question raised an interesting question when you said you were burning all the, all the gas being burned was your own. And earlier in the discussion you had said that a lot of the gas burn this year was due to warranty work and this is a new plant. Is this plant expected to be running 24/7, or was a lot of the burn at this plant due to warranty work, and it will now go down?

Well the warranty work really is on the, that we were referring to is more of the combined cycle plants. This is just a peeker, you know, a couple gas turbines ...

So this ran because there was a legitimate economic demand for it?

Yes.

Yes.

Not warranty.

Right. But again, that, yes, yes, yes. But we, this is not a plant that you'd expect to run 24/7.

OK. But at these gas prices that plant was economic, and it was a positive contributor to earnings, not a negative?

It was neutral to earnings.

Why was it run then? That's OK, you don't have to answer that. Going back to the other question he asked on option tonnage, so you're writing new contracts with plus or minus options in them still?

No, we're attempting to not do that.

OK. So the option tonnage that you refer to is on old contracts?

Where did we refer to those?

Just in the prior question, he asked if you were still giving option tonnage, and you said yes.

No, no. The answer was no.

No, he said no.

Oh, I misunderstood. I'm sorry.

Yes, well.

OK.

Yes that's right. He asked were we -- I think he said were we attempting to eliminate.

OK. My mistake, sorry. Thank you.

We have no further questions at this time, please continue.

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