CNX Resources Corp (CNX) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the CONSOL Energy earnings conference call. At this time, all participants are in a listen-only mode. Later, we will have an opportunity for questions and answers with instructions given at that time. If you should require assistance at any time during this conference call, please press zero followed by star. As a reminder this call is being recorded.

I would like to turn the call over to your host for today's call, vice president of investor and public relations, Mr. Thomas Hoffman (ph). Please go ahead.

Morning, everyone. With me this morning are Brett Harvey, president and chief executive officer of CONSOL, and Bill Lyons, senior vice president and CFO for CONSOL.

We are going to be discussing fourth quarter 2002 results, as well as full year results. This -- in addition to this conference call, the conference call is being broadcast live on the web and we welcome anyone who is joining us through the internet. We will be talking in part about the outlook, those forward-looking statements are subject to certain business risks, which we have detailed in the press release we released this morning at 7:30. In addition, we talk about business risks for the company and our various SEC filings and we would urge you to review those at your convenience. If there are reporters on the call, as always, we will keep you in listen-only mode throughout the call, but I will be available offline throughout the day to answer any questions you might have.

With that, we are going to start with Bill Lyons to talk about the results from the quarter just ended and when Bill is done, we will turn it over to Brett who will talk about some of the broader issues and the outlook and then we will take questions -- Bill?

Thank you, Tom.

For the quarter ended December 31, 2002, CONSOL Energy reported net income of 4.1 million or 5 cents per share compared to 12.6 million or 16 cents per share for the same period in 2001. For the year, we reported net income of 11.7 million or 15 cents per share, compared to 151.2 million or $1.91 per share. The net income for the 2001 year included about 91 cents per share for the black lung excise tax claim that we had for the years 1991 through 1998. Revenues for the December quarter were 554.6 million versus 531.6 million for a year earlier. Net cash from operate willing activities for the quarter just ended were 150.8 million compared to 20.7 million in the compare rabble period in 2001. EBIDTA for this quarter were 72.9 million versus 67.6 million a year earlier. For the quarter just ended was 7.5 million, compared with 6.2 million in the compare rabble period in 2001. Comparison of the December quarter on the income statement is sometimes blurred because of income taxes. The December -- the fourth quarter comparison shows a $10 million greater income tax benefit in 2001.

We have discussed in the past a process of truing up our income tax versus earlier estimate. It is largely this process that has created the swing from the income tax line. The area of income taxes is complex in the energy companies due to the various tax conventions like percentage depletion, alternative minimum tax and alternative fuel credit. It is probably more illuminating to look at the pretax results on a business segment basis to understand the results for the quarter. Looking first at the coal segment, we had a pretax loss of 4 cents per share in the quarter just ended compared with a pretax profit of 2 cents per share in the December 2001 quarter. The quarter just ended, coal markets continue to flounder, despite a relatively hot summer. Poor economic conditions, particularly in the industrial sector, affected electricity demand in our key market areas. In addition, the liquidity problems of the electric power generation industry kept coal buyers on the sideline for much of the period. Power generators were content to run off inventory with a back stop of newly installed gas fire generation capacity.

Brett will talk more about this when I conclude, however, I believe we are seeing the gradual draw down of co-inventories. We forecast a return to supply/demand bounds in the second half of the year. Having said this, no one is more aware than those of you on the conference call of the significant economic uncertainty we face, particularly in the United States. Forecasting more than a quarter in advance is very difficult to do with the Specter of war in the Middle East along with the usual issues of economy, weather and geology that tend to drive our business. Fundamentally, the results for the quarter just ended turned on higher employee benefits costs, both for active employees and retirees. Although coal sales volumes were down about a million tons, average realization was up almost $1.80, resulting in a net increase in sales revenue for produced coal. Coal production declined in the quarter-to-quarter comparison by about 1.3 million tons. Most of the decrease was due to the closure of the AP mines in 2002 that operated in the fourth quarter of 2001.

Typically, a drop in production will result in a decrease in dollars spent. People are laid off, less money is spent on supplies. On the other hand, on a production basis, costs often go up because fixed costs are spread over fewer production units, in this case, tons of coal. In the quarter just ended, production income was up slightly compared with the same period a year earlier, however, given the higher realizations, production income would have been higher if it were not for the fact that cost related to employee benefits allocated to produce coal were up. When you then add to it the additional $10 million in idle and closed mine costs, which we do not include in the per ton cost numbers we report, you end up with a decrease of 13 cents per share in production income for coal for the fourth quarter of 2002, compared with the same period a year earlier. The cost increases on coal produced were in three main areas, health and retirement benefits, workers compensation and depreciation, depletion and amortization. Health care cost increase for active and retired employees have increased on an annual basis by slightly 10e6r 0%. Prescription drug costs in particular have risen substantially.

In general, CONSOL's experience in health care costs is the same as the experience of companies in most sectors of the economy. It is a national problem, for which individual companies can provide only limited mitigation. Workers compensation is a state problem. Worker's comp laws vary state to state. However, West Virginia, where CONSOL has a number of coal operations generally has far higher workers comp awards it is a flawed system in need of significant change. The business community West Virginia is pressing for reform in the current session of legislation. Depletion and amortization decreased 4 million primarily to the return of production status of mine 84 and additional efforts placed in service. This was due to lower production. Operations continue to make a strong contribution. Our gas segment earned 22 cents per share on a pretax basis in the December 2002 quarter versus 3 cents per share a year earlier. Quarter-to-quarter gas sales automatics were up 13% and volumes up 5%. - (inaudible) we estimate it will take about 10 year Foss drill up the current fruit reserves in Virginia at current drilling levels. Gas price increases reflect impact of colder weather in guest and the continued lag in the drill rig activity for conventional gas production.

We will talk more about current gas prices a little later. Total pretax income for December 2002 quarter was a loss of 6 cents per year versus a loss of 8 cents per share in 2001. These are not strong results for the quarter but there are a number of things that I think are positive. Our decision to significantly expand our gas business continues to be the right one. We are capturing substantial shareholder value from a product that is often treated as a waste product. We have held costs in check, expanded our production at reasonable cap exlevel and managed the risk associated with price. While our coal production costs are too high, our operation managers have kept labor, supplies and power costs in check. We will continue to focus considerable management effort in reducing these operating costs. We will continue to be proactive in finding more economical ways to provide quality health care to our active and retired employees and we will be unceasing in our efforts to bring about a fair solution to the crisis in workers compensation, particularly in the state of West Virginia.

We have invested in a number of projects that I will believe will make positive contributions to the bottom line this year. We have completed the construction of the new preparation planet (inaudible) Roy and upgrade of the plant at Robinson run. The quality improvements at these coal processing plants will yield higher prices for the product. We have complete the Glen east creek project and Peter project in Virginia. Finally made substantial progress in getting volume prescription for coal thatly will allow our mines to fully run in 2003. These term commitments are important for the large, highly capitalized mines we operate. As you saw in the news release, we currently have 88% of our 2003 production committed. Of the 12% remaining about half scheduled for sale in the export met hraourpblg Cal market. As most of you know, negotiations on export met coal are beginning for the shipping year that begins in April. Explaining this export business, which we are now confident that we will place, we have about 94% of our production for domestic markets committed as we begin the year.

On the gas side, we have 44.8 billion cubic feet or more than 80% of our expected production under contract for the year at an average price of $4.01 per MMBTU. In the first quarter, as you saw in the release, we have 10.7 billion cubic feet sold, an average price of $4.20 per MMBTU. Let me mention a few other developments of significance. As we previously announced, we have agreed to contribute our Canadian coal and transportation assets into a coal trust, jointly proposed by Sharret and Fording (ph) in return for 3.2 million units of trust and a seat on the board. If the transaction goes through, we believe this will be a positive development for our shareholders. First, we will enhance the competitiveness of our Canadian assets by linking with a larger coal production and marketing entity. Second, we will have enhanced the liquidity of our asset buys converting our holdings into units that can be sold. And finally, we have in place a put option for those units, exercisable at closing that gives us an acceptable minimum price for our assets should the market -- of the overall value of the met coal trust prove to be less than expected. In early January, we had a fire in the belt entry of the long wall section of mine 84. The fire is essentially out, although we continue to monitor for carbon monoxide as we do repair work.

Last Monday, we began limited coal production in the development sections of the mine. We were well under way in repairing the damage from the fire. The fire caused the roof support system to fail along 1600 feet of entry, resulting in several roof falls. We are in the process of cleaning those up. Work is slow, primarily because the water used in fighting the fire has made the bottom conditions soft. We are re-establishing roof control as we proceed. Once the falls have been cleared and the roof support re-established, we will have to replace several hundred feet of belt and belt structure. We currently anticipate that we can be back into production by mid-February. We will lose about 700,000 tons of production. Some of that can possibly be made up at our other mines. We have fire insurance that will -- that has a $5 million deductible.

The recent explosion at an air shaft construction site has temporarily interrupted the sinking of the shaft while an investigation into the cause of the explosion is conducted. The workers who were involved in the accident were employees of the central Cambria (ph) drilling company, one of several contractors we use to construct air shafts for us. This new air shaft will serve the Micel Roy (ph) mine. As you may have seen in our news release last week, the shaft had not yet reached the level of the coal scene and the mine had not yet progressed to the shaft site. As a result, the mine was unaffected by the explosion and is continuing normal production schedules. Allegheny energy, one of our largest coal customers, has had widely reported liquidity problems. I can report that Allegheny has continued to pay us for the coal purchases on schedule and they have been keeping us informed of their progress with regard to their bank lines of credit.

We believe that Allegheny powers generation business is fundamentally sound and that they will continue to be a valued customer. Finely, you play is noticed that S & P adjusted the rating of our long-term debt from triple B plus to triple B with a stable outlook. They reaffirmed their A 2 corporate short-term credit rating for us, which applies to all our commercial paper programs. S and P's principal concern related to production costs in our coal segment. As I mentioned previously, cost reduction in the coal segment is a high priority for manage N 2003 and we expect to make progress in the cost area. I would emphasize to you, however, that our rating remains investment grade and our commercial paper program is unaffected.

Let me turn it over to Brett to talk about the outlook for the year and to discuss some of the strategic issues for the company.

Good morning.

First of all, I would like to talk briefly about 2002. It was a very tough year for energy producers across the country. And it was tough because of reasons that were beyond our control, but yet affected us dramatically. The warm weather of last winter was devastating in terms of inventories and plans about stockpiles. The war on terrorism changed the economy. The rapid deterioration in the U.S. economy. The collapse of the energy trading on the electricity side did affect the coal market. Financial problems with our generation customers that we hadn't ever seen before plagued us with their ability to pay and their ability to take the coal. Yet the fundamental of the coal and gas business remains largely in place. Coal is still the primary fuel used for generating power in the United States. Coal supply constriction will continue to be restricted, because permitting issues, capital investment, reserve deterioration, especially in central AP. Gas demand continues to grow, with the housing boom that we have seen and gas continues to be outstripped by demand.

Electricity will continue to grow at slower growth as the economy moves forward. On the coal side, our biggest problem is the liquidity problems of our customer. I'm not worried about their ability to pay the bill, but I am worried about their ability to stockpile and manage their stock Niles traditional ways. -- piles in traditional ways. We have seen real movement towards smaller, fewer days of stockpiles as they run down the major big stockpiles that they had coming off to the warm winter last year. On the gas side, outlook for production looks very good the demand is there. In terms of our gas, the risks are low. And our ability to produce is on schedule and at the right price. CONSOL looks at 2003 as really a recovered year from the major problems we saw in 2002. We looked to the strength of the coal segment. The coal segment pays for itself, generate cash to pay our dividends and creates enough cash to invest on an expanding gas business.

One of our goals is to get this coal segment with long-term contracts, that will help the customer as well as help us keep our mines at optimal operating condition. As we saw last year when we reduced our tonnage from 74 million tons a year to 6, that was a dramatic push back on our ability to produce coal, 'cause the market just wasn't taking. In the Appalachian region, the Kentucky area, we are nearly sold out. We see that area rebounding in terms of demand and we believe that will be robust through the rest of the year. We have leveraged our Canadian assets into this new coal trust and we believe that is very positive for our stockholders. These things are very positive for the coal side, but we see our coal business as one of steady. We saw sold our coal forward and believe we need a steady production throughout the year to show the performance of the company on the coal side is back on track and we are where we need to be to grow as we believe the market will rebound towards the end of the year. Our gas segment will continue to expand, as I said.

We will increase our drilling in Virginia. One of the -- let's talk about debt. The other thing we plan to go this year, by locking in our gas and our coal looking forward we plan to pay down debt. Up to about $100 million of debt reduction by the end of the year. Our intention there is to get us in a better economic position to go into 2004. We have worked real hard this year and last year on our planning and time our long-term capital structures, we have looked at the building of prep plants and the big investments at the Micel Roy mine with the major customers along the river.

We just announced yesterday the first energy contract. That contract is very valuable to first energy and very valuable to CONSOL Energy. It is written so both sides would operate 100% of capabilities and share in the marketplace, whether it is in electricity or in coal. Both sides maximize their capital investment in the given markets they are in. I think the 2003 will be a year of steady performance. We have to address issues like increasing health care and those kind of things that plague all industry in the United States, but I believe CONSOL continues to be on good footing and we are looking forward to having a good year.

Operator, we are ready for questions at this point, if you could instruct our listeners on the procedure.

All right. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You can remove yourself from queue at any time by pressing the pound key. Once again, if you do have a question, please press 1 at this time. And one moment please for the first question.

And our first question today comes from the line of Wayne Atwell (ph) from Morgan Stanley. Please go ahead.

Morning. A couple of quick questions, how much of your coal is booked for '04?

We don't report that Wayne.

I thought you have in the past?

No. Other than in the K, we do. But we don't update that except on an annual basis.

Oh, okay. Can you give us some numbers in terms of your health care assumptions, impact on costs and such?

Well, Wayne, no doubt that things like retiree benefits are very, very difficult. We had to change our discount rate from 7.25% down to 6.75%. When you get into the complexity of the calculation what it does is when you lower the discount rate, you increase the liability balance and that is going to be reflected in our balance sheet. When you take a look at the numbers, you know, our costs for the year were about 151 million, our cash expenditures were about 111 million. For next year, because of the changes in discount rate as well as increasing health care costs it is probably going to rise to about 187 million. I don't expect that the payments to increase significantly, but 111 million it depends on what health care costs go up.

As you are aware we make promises to provide in kind health care benefits and it is very, very difficult to project what that is going to be. As Brett mentioned this is a global issue. If you take a look at medical inflation throughout the country in 2000, it was 8.1%, 2001, 11.2% and hearing in 2002 it went up 14.7%. Obviously, that cannot continue there is going to have to be some global solution to this and I say global, I mean political and going to have to affect the country as a whole. We really think this will probably be addressed in the next presidential election because this issue is so serious.

What are you assuming in terms of your inflation cost for health care?

We got -- for 2003 it is 8% and trails down to 4.75% through the year 2008.

Thank you.

We have a question from the line of CSFB.

Thanks, good morning. Just a quick related followup to Wayne's question. Given the outlook for the rise in health care costs, what --if you could give us a sense of what your production, overall unit cost production targets are for first quarter of '03 and for full year of '03?

I think that was in the press release. But the first quarter coal production is 14. -- I'm sorry 15 to 16 million.

I was actually curious about the cost, unit cost figures, targeted.

For coal? We don't forecast the unit costs.

Most of the -- is attributable to the coal segment.

Okay, so I if I just for example, do a quick back of the envelope, you mentioned about $36 million in, I think, you know, incremental owe pedestrian costs in '03. Assuming about 67 to 69 million tons -- 67 -- 68 per tons -

Yeah, the map is right.

Thank you.

Go to the line of John Bridges (ph) with J.P. Morgan. Your line is now open.

Morning, Brett, morning, everybody. Maybe something that will help you on the cost side. You have been cutting back, well, closing down those AP mines and tidying up your portfolio this year. Is that going to come through in the form of lower idling costs in 2003 and/or lower overall operating costs?

Yes. What you are going to see is a steady -- if you look from year to year, we are down almost 1500 people. We are going to mine about the same amount of coal. You can see we got a lot of --dramatic productivity rise. We have closed down the dell worth mine, going to open the leverage mine mid-year. We are looking at the idle mines and deciding what to do with them. You can see we have a jump of productivity against stagnant sales, but that kept the price there. So that is -- does that answer your question?

I would imagine that those AP mines were relatively high cost operations and by consolidating at smaller number of higher capacity mines then your unit costs should be trending down?

Yes that does help the cost structure. We will be able to run the minutes we are running full out all year.

Also, where we had to take idle time in the first half of the year primarily, second and third quarters, Macel Roy went down, Robinson run went down, Schumacher went down. We don't envision that next year.

So, what idle costs are you going to be running with in this first quarter.

Don't have the first quarter with me here on idle costs, John.

You were talking about 10 million, your preamble, talking about 10 million a quarter?

I think that is a little high, okay? Probably be 25 to 30 million I would say for the year.

That should be trending down?

What I call closed and shut down operations that includes the workers comp that we assigned to closed operations.

Okay, thanks a lot, Brett and Bill.

We will go to the line of Dan Rolling (ph) with Merrill Lynch. Your line is open.

Thank you. A couple of things. ( inaudible)

It is 151 million this year in terms of revision. And this is a tentative number, probably about -- between 187, I would say 188 right now.

So 151 for '02 --( inaudible )

Yes.

Okay.

Dan, remember, that is the provision, not the cash, that is the provision.

In the cash, you had 11. How much did you think it was going to go up?

Dan it would depend on what you think medical inflation is going to be, you know, 8%, it could be 120 million.

Okay. On this 17-year contract with first energy is that a take or pay contract? ( inaudible ) is this base load for them, they are ( inaudible ) first, foremost and any plus or minus volume commitment with it?

Firm volumes of 4.5 million tons, Dan. They will take it on a schedule that we have agreed to. Any incremental tons above that we certainly can go to the mark wet them on those. That will 4 1/2 is very solid.

So ( inaudible )

Yes.

Okay. And then, Bill, coming back to you, as we look at the balance sheet, basically investments and affiliates went up 74% or $57 million. Could you enlighten us on what that was?

The beeker (ph) project was probably half of that probably 28 million. Increase in Glennnies creek and little bit lime creek, the three big players there.

Okay. And then short-term notes payable went up 163%, 127 million. What was that for, the same project?

Yeah, you have to be a little careful about that, Dan. We -- really commercial paper balances went down during the year but what we had to do accounting wise, because we are in the process of doing the 250 million medium term note offering, we had to reclassify that into -- as a reduction of current liabilities I, but overall, the increase was caused by a requirement for the year, the inventories went up that caused some working capital requirements.

$100 million reduction ( inaudible ) talking about then, is that on the long-term side or all in?

Commercial paper. Back to reduce our commercial paper balances.

So net would drop 100 million this year or not?

That is our goal, yes.

Okay. Okay.

There is really no mature hits in 2003 for our -- any of our longer term debt.

Okay. Thank you.

Our next question from the line of David Connie (ph) with Friedman Billings Ramsey. Go ahead, please.

Yeah. Bill, question for you, could you give us sort of the quarterly breakout for the hedges, so we can model this? Just the volumes and then maybe the prices.

Yeah. David, ask another question while we get that paper in front of us.

Okay and then just -- the price that you give, just to make sure we are consistent is that the realized price or is that an eye next price?

That is our price.

That is your price. Great. While you are looking, is there any other cost initiative that you have out there that could potentially be meaningful to unit costs, that maybe we are not aware of, that is brewing in there?

I tell you, we have been so focused on cost, to say is there something new out there?

Yeah. And the reason why -- I'm sorry, the reason why I bring it up, I know you have a new COO and he has had a little time to be there and thought maybe he is bringing -- maybe bringing something new to the equation here.

At this point in time, David, I would say that our costs are pretty well transparent.

Okay.

David, I -- I'm not putting my hands on the paper I want, but I can tell you that 20% of the contracted gas is gas that we have in a series of contracts that are -- that have got price collars and we are typically bumping up against the upper end of that and so there -- the rest of it are layers of fixed price contracts that we put in over the course of the -- say last half of last year.

Okay. And so -- so the 401 is a blend of maybe swabs and collars, full year?

Yes it is.

Okay. And is that -- so, and is that assuming there is no more upside to the collar?

Well, in the first quarter, there is probably a few cents of upside potential and then as you go out into the latter quarters, at the moment, there would not be any more upside. Right.

Okay. Okay. All right. Maybe I will circle around back offline and see if you can get the volumes to me. Thank you.

David, here is what we had. We told you we had 44.8 billion cubic feet of gas hedged. And that is pretty much about 11 million per quarter.

Is it flat pretty much like that?

Yes.

Okay. And the reason is -

Pardon me?

Because I was going to say we have our own price forecast and we want to make sure that we have our earnings outlook right.

I will give you the numbers. I told you we had 401. Price for the 44.8 billion cubic feet. Like I said it works out about 11 billion cubic feet per quarter, pretty steady. We are hedgeing a little over 80% of our production each quarter and the price we have in our models are 420 for the first quarter, 388 for the second, 389 for the third, 407 for the fourth. And the math should work out to 401.

That would be the blended price that we are getting based on what we have sold.

Okay. Thank you very much.

Move next to the line of Evan Smith (ph) with Santo Morris Harris. Good morning, please.

Sorry if I missed this, but can you talk about the cap ex plans for '03 specifically between coal and gas and also, the first quarter guidance, how much of that countries of income tax benefits?

Well, in terms of cap ex, we are probably somewhere around 275 million for the year. We have a good part of that going to gas, but as well as our -- maintaining our mines and the rest. 275 million is probably a pretty standard number for us. The -- and that includes our investments and the equity affiliates, so, that is not just consolidated companies. Second question was on income taxes. Our income tax for the year, we do have -- yeah, but it will be -- we are going to show a benefit. Right now, we are projecting a benefit of about 34% and under APB 28, interpretation 18, how you do the income taxes, you project for the year and apply each quarter out that would apply for each quarter as of right now as we get better and different information as the year unfolds, we will be adjusting that tax rate benefit.

Okay. Thanks a lot.

Our next question is from the line of Alex Buchanan (ph) with ABM AMRO. Go ahead, please.

I wonder if you could give me some kind of utility stockpiling or inventory days that you have seen over the last year and your projection going forward. And also your own inventory position.

Okay. If -- if you look at last year, they were extremely high, I would say overall we showed that most stockpilings on average were up to 50% by mid-year above where they planned to be typically. Now what we are seeing now is that it has gone back down to the normal stockpile levels going into the winter. They were a little bit high, we believe they are normal right now and they are digging into the stockpiles rapid, especially in our area bus of the cold weather, but what we are seeing is an adjustment of the customer level because of liquidity that tend to drive, trying to get another 20%, I think, out of their stockpiles, so that has taken longer for them to come back to the market place. Those are all general numbers, you have site specific across the board. Some are very high, some are very low. We have seen some customers down to ten days, but it goes all over the board.

And what does that mean for your own inventory levels?

Our own inventory levels -

3 million tons right now.

Right at 3 million.

We had about a million five starting the year so we did have an increase in inventory. But again it had a real peak to it because our inventories increased a million tons per month for the first five months. So we are up to 6.6 million tons, which precipitated the need to cut back on idle mines. Right now, being at the 3 million ton level, we are comfortable with that. When you think about it, when you have over 20 mining complexes, you are going to have probably almost 2 million tons in the pipeline just on that. So having 3 million tons is probably a comfortable number, we feel within the company and that is taking a look at the finance side, likes inventory to be as low as possible, but the marking side, likes to have the flexibility having the coal in inventory. So we are comfortable at the 3 million ton mark now.

We do blending as well. If you get too low, get restricted on blending, you end up with customer problems.

That is great. Just one other question. You mentioned a 5 million insurance cover for mine 84. What do you believe the total additional cost might be to you for this damage?

We are in the process of doing that right now. We really don't have an estimate we need to give out. That we are prepared to give out right now. Like I said, I would look at the -- the damage would be 5 million and we will probably -- well, we will be hurt by the loss of tons, you know, the 700,000 tons. And that could impact us by 5million dollars.

That is great. Thank you.

We have a question in queue from the line of David Labonte (ph) from the line of Salomon Smith Barney.

Good morning, guys.

I have a few remaining questions, in the change of other operating liabilities a timing difference or large number here?

A reclass of current portion of O'ped, the reason why it is so big, before, we were taking, making payments out of an owe ped trust we required with R & D and that was pretty well depleted. As a result, off rather large increase reclass that goes up there that is all that is.

Okay.

Nothing to down your models.

Ability to increase gas production is that something that you guys have looked at, is there an ability there to do that to capture some of these higher gas prices? Looks like production was a little bit higher than maybe even you anticipated in the fourth quarter. What are your thoughts with respect to that?

We are looking that the internally, looking at our capital structure for 2003 and seeing if we can't squeeze another 10 -- remember, one of the main goals is to pay down debt if we can see real value there, we would like to get a $10 or $1 5 million increase on the gas side. We are studying that right now.

Capital outlay -

What type of capital outlay would be required to increase gas production by that much?

You meant 10 or 15 million more capital?

I would say 10 to 15 million more dollars. That would increase --accelerate us I think about 10%.

10%?

Yeah.

Brett, you mentioned one of the concerns you had were utilities hedging their stockpiles. Did you essentially mean you would be worried there would come a time where central utilities would increase their demand at once and the ( inaudible )

I think that is very likely occurrence.

Okay. All right, guys, thanks a lot.

Thanks, David.

We will go to the line of Michael Dodds (ph) Bear Stearns. Go ahead.

Good morning, Mike.

Your line is open, could you please press your mute button?

Hello. Gentlemen?

Hi, Mike.

Okay. Can you talk a little bit more about your discussions with first energy and this contract, you know, how long have you guys been discussing this, why the 17 1/2 years why not shorter or longer? Are you looking to do things with other customers? What is first energy seeing in the markets that maybe some of the other utilities that you deal with are not?

I think this is more our market specific. If you look at northern AP, we certainly are the player here. If you look at the generators on the river, they are looking around see hog can take care of their needs the long run. I think 2001 run up was a wakeup call for some of them. And the intention was how do we -- remember our investment on Mcel Roy changed the values on the river. We set it to a higher BTU level, created a better marketplace and some of the utilities that go big on the river were looking to grab ahold of that as part of their portfolio going forward. That, of course, going to spend that kind of money, we need the terms to pay it back. So the intention between first energy and CONSOL was how do you get both capital investments, their plant and our mining operation expansion a line for the long-term? That was the intent for the contract and turned out to be a very good contract T doesn't look a lot like the old contracts but certainly driven towards volume and capital recovery on both sides.

Then other clients on the riff they're might be interested in doing certain type contracts like this?

I -- well, if you look at ADP, they started it with our 8-year deal the year before, we ended up with their mines in the process, but that really was the first long-term contract to lock up volume on the river. And we see more of that coming, especially when it relates to our reserve base.

And the second thoughts, Brett, talk about the competitive nature shall, say in the Pittsburgh scene, Appalachia, most people are talking about how we continue to see production fall off and real concern, when demand spikes up, will the industry be able to meet it at a reasonable and efficient level?

Well, my thoughts on that we are setting up for demand is going to quickly outstrip supply. We think it is going to start to rebound toward the end of the year that way. A lot of it is economy driven and weather gets in and out of it, as we saw last year, but the fundamentals are declining in terms of the ability to produce coal for power plants that are already constructed. And if those power plants get pushed hard, especially against high gas prices, I think there is going to be a real demand for coal and the coal is not going to be there. It really is driven, central APS is going to be really short, we believe. To the north, we are more driven towards higher volumes and think we will capture some markets to the south.

And finally over the next two, three years when you are thinking about capital allocation, as you stand right now, would you think you would be leaning more towards coal, gas or power?

It is nice to have the option. I would say in the short-term gas, but if you look at what we have done, we made a big commitment on Micel Roy and this year the mine will have a second long wall put in and so we are spreading it out where we see the highest rate of returns on those options.

Thank you, Brett.

We move now to the line of Wayne Atwell with Morgan Stanley. Your line is open.

Thank you. I didn't see a new gas reserve number on your -- in your release. Do you have a new number for that?

That will be reported in the -- when we file the K.

Okay. Can you give us any kind of a feel, was there much of an improvement or more or less flat?

Right now, we are in the process of compiling all of the data. As you are aware it is pretty comprehensive calculation that needs to be done by just a whole slew of engineers. I don't foresee any chances, but we don't have the final reporting now.

What does your success look like in Tennessee?

I know that was a pretty exciting area for you. How is that shaping up?

Continues to be, I think, a very hot prospect in terms of exploration for us. Going on beyond exploration talk, I wouldn't feel comfortable with at this point, but we have had some pretty good hits there. But remember we slowed that down dramatically because of the troubles on the calm side last year and we had to cut become on our exploration budgets. We still think that is a good place to be and we see some value there.

Thank you.

Our next question from the line of Frank Shandley (ph) of Dudley and Company. Go ahead, please.

Good morning, gentlemen.

Just, I guess more followup, a little bit more on the gas side. You mentioned, Brett, I think ten years of drilling, you know, activity ahead now Virginia and just talked about Tennessee. You know what do you think is a sustainable, reasonable, sustainable growth rate in units for gas production over the next three to five years?

Well, let me -- let me tell you, our ten-year plan shows we can expand that business in Virginia alone 10 to 15 parse year without missing a beat. We think that is sustainable. We think we could accelerate it. These gas prices hold where they are at, we will probably try to find a way to accelerate that, because we are looking at gas prices in 2004 and 2005 that are historically thing we have never seen and we are locking in some of that gas already.

Okay.

Frank, this is Tom. I think you saw that we were forecasting 50 -- 52 to 54 for this year and that would be up from 47 last year.

Right is that a reasonable -- can you, you know, sustain that -- you are saying -- ( inaudible )

Very. Yeah.

Okay. And guess the only other question at this point I have, you know, looking out ahead, any sense of when you might start creeping the dividend back up, is there any, you know, we are at a base level, I hope and wondering, you know is that -- is that something that is in the cards over the next, you know, year or so?

I'm not in a position to speak for the board on that our decision really was to be the leader in the industry in terms of dividends on both gas and coal, if you look at us. In terms of where we are going to go, I think that is directly related to earnings and what the board wants to do on a yearly look.

Okay, thank you.

We have with a question in queue, followup question from the line of Dan Rolling from Merrill Lynch. Go ahead.

Thank you. ( inaudible ) your comments intrigued me the ability to produce coal is harder and you basically say there is a very good likelihood ahead we will have a very tight market. How far in the future is that? And I ask it that way, because if that is the case and it is nearer term, I don't understand why you are so aggressive on signing these big contracts now, what I would assume to be lower prices.

These are base contracts that have good rates of return on us. They certainly have -- they have market characteristics in them to where the price can be renegotiated if either party is out of the market. But if you look at what we are signing up, we are signing up on our home court, so to speak and we are signing up volume and these contracts will be worked out, Dan, and the volumes higher and the contracts -- the volume goes up, the surprise going to go up with it.

The price ( inaudible ) is the key?

They certainly are both parties didn't want to sign a long-term contract without the ability to go to market.

Okay.

Then going over to bill for a moment, I noticed on the balance sheet, under your liability, you have a huge increase, 1,000 p% this salary retire from 8.6, 91.5 million. Can you elaborate on that?

I didn't hear your question. Pension? You are talk become the pension cost, Dan? Dan, I didn't hear your question.

On the balance sheet there is a line item called salary retirement that increased from 8.6 million to 91.5 million. Could you elaborate on that?

Dan, again, that is an issue with the actual studies, we had to change the discount rate. That affected us. Also it hurt us in terms of return on a pension fund. The pension fund for the year reflected the market. It returned in negatives 9.6%. So, you have a situation where actually will continue to grow, just through the accretion of interest, as well as the earning of benefits, the service costs and the corresponding return on the plan assets just didn't take place. Assumption, long-term assumption and return on plan assets was 9% return. Like I said, for the year, we'd negative 9.6%, so, what happens is you have to report what they call a minimum pension liability, which means you go off of your normal actuarial calculation and you have to take the difference between what they call the accumulated benefit obligation, less the fair market of the plan assets, the liability went up normally and the pension fund got whacked because of what's happened in the market last year.

Okay. Thank you. Is this related to unionized work force -

Salary is totally nonunion. Okay, and Dan, when we are talking about these long-term liabilities I, we need to put them in perspective. They are long term. Okay? So even though you mentioned, you know the pension liability has increased so much, you know, the payout on the pension for next year is probably going to be between I would say 30 million, 25 to 35 million dollars and we are going to fund that we are going to make a payment and fund that we currently fund our pension obligation, you know it is not like all this comes due at one time.

Okay. ( inaudible ) could you give us the payout level for '02, is it in that range and then what -- has there been any major impact opt unionized side of the pension plan given all the things you have just described?

The pension payout for 2002, like I said, $30 million. I expect the same relative amount for 2003.

Okay.

Dan on the union side, clearly, BCOA manages that, the union pension fund. And I haven't seen a pile of numbers, but I don't expect them to be on the real positive side versus the projections we have but that is also a long-term deal and we will have to decide to make the adjustments, depending on where the market goes.

When will we know the impact own regarding that this year?

I don't think it relates directly to this year. But as soon as I -- as soon as I -- we are going to have our annual meeting with the BCOA sometime in March, I am sure that will be depressed.

I guess what I'm leading up to, will there be any -- you guys speculate if there will be an announcement a thank related back to the financials of CONSOL, because of the things we are seeing in all the pension plans, you don't know what the BCOA ( inaudible ) --

There is ( inaudible )

That is independent.

As a result, we like that on a pay as you go basis. That is what we show on the expense, income statement. No reason to think the pay as you go will change, based on what hours worked or tons produced?

Really based on what they need to pay out and they allocated out.

Right. Okay. So it is giving them out.

But like any other funds. The assumption for growth is adjusting itself on this poor economy, but it is a long-term deal, like everything else.

Right. Okay. Thanks.

We have a followup question from the line of David Connie with Friedman Billings. Go ahead please.

I just want to clarify, the return on plan assets 9%, you are not making any assumption change there is?

We are, we have to drop that to 8%. We are dropping it down to 8%.

Okay, great.

That will be reflected next year.

Okay. Great. That was it. Thank you.

We have a question in line from Alex Buchanan with ABN AMRO.

A quick question. Wondering what your export volumes look like year on year?

We believe the math side is going to hold if I recall of about 3 1/2 million, 3 1/2, 4 million there is about 400,000 that we are looking at right now. On the steam side, I think it is going to drop. I think we have decide the domestic mark let's strong enough, we can get a higher price domestically, probably drop from about 3 1/2 to maybe as low as a million.

Great. Thank you.

Okay.

We have no further questions in queue at this time. Please proceed.

Thank you very much, everyone, for joining us. Dan, bill and I will be available throughout the day if you have got any follow ups With that, operator, if you could give us the information regarding replay and it was nice to have all of you with us.

Thank you. Ladies and gentlemen, the conference is available for replay, beginning at 1:30 p.m. today, the 28th day of January, 2003, until February 4, 2003 at 11:59 p.m. To access the AT&T executive play back service during that time, please dial 1, area code 320, 365-3844, enter the access code when prompted, 669130. Those numbers again are 1, area code 320, 365-3844, the access code once again is 669130. That concludes your conference call for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.