CNX Resources Corp (CNX) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter CONSOL Energy earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please depress zero, then star. As a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, VP of Investor and Public Relations Tom Hoffman. Please go ahead.

Good morning, everyone. This is Tom Hoffman. With me today are Bill Lyons, our Chief Financial Officer, and Brett Harvey, our CEO. We will be discussing our 1Q 2003 financial results and talking about the outlook for the current quarter and for the year. In addition to this conference call, we are broadcasting live via the Internet and we welcome people who are listening in on that medium.

We will be discussing forecasts and, as such, these forward-looking statements are subject to business risks. We have discussed those in a general way in our earnings release this morning and we would also recommend that you look at our most recent SEC filing for further discussion of risks associated with the businesses in which we are engaged. Reporters, if you are on the line, you will remain in listen-only mode throughout the call and I will be available all day offline to handle any questions that you have.

One quick comment on the release this morning. We did to a bit of a change in our presentation with regard to gas. We are now providing you information both on an MMB to you basis and on an MCF basis. We made this change after looking at a number of peer presentations in the EMP gas industry and we believe that to provide you with a better look at us versus peers in the gas business, that we need to make some adjustments in the way in which we present information. We're going to continue to look at that. And I think over the next few quarters, we'll probably have further changes that we'll want to make again to try and give you a clearer way of comparing us with other gas company peers.

What we're going to do this morning is ask Bill first to go over the financial results for the quarter just ended, March 31st. And then Brett has got some comments on the Colon Gas Markets and then we will stand for questions. With that, I'll turn it over to Bill Lyons, our Chief Financial Officer.

Thank you, Tom. For the quarter ended March 31st, 2003, CONSOL Energy reported net income of $8.2 million, or .10 cents per share, compared with $5.5 million, or .7 cents per share for the same period a year earlier. Revenues for March quarter were $560 million versus $550 million for the same quarter last year. Net cash from operating activities for the quarter just ended was $43 million versus $31 million in the period to period comparison.

EBITDA for the March quarter was $58 million versus $82 million a year earlier. EBIT for the quarter just ended, was a negative $3 million compared with a positive $15 million in the comparable period in 2002.

Net income was impacted again this quarter by an income tax benefit of more than $14 million. As I have discussed in previous conference calls, the area of income taxes in complex in the energy industry because of various past conventions, such as percentage depletion, alternative minimum tax, and alternative fuel credits. Once again, our large profitable lines, like Bailey and MO Fork, generated substantial depletion tax benefit that effected net income.

In addition, we also recorded net income of $5 million as a result of the cumulative effect change in accounting principal related to the adoption of FAS 143. As many of you are aware, this statement requires the fair value of an asset retirement obligation to be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs are capitalized as part of the carrying amount of a long life asset. Our asset retirement obligations primarily relate to the closure of mines, water treatment, and gas wells, as well as the reclamation of land upon the exhaustion of coal or gas reserves.

Under the previous standard, the obligations were recognized ratably of the life of the producing assets primarily on a units of production basis.

Let me make several overall comments before I discuss the detailed last quarters results. First, our gas segment performed remarkably well, with pretax income improved by more than 350 percent. We sold more gas and sold it at higher prices than a year ago. And we did this while holding costs in check. As we noted in this morning's press release, pre-tax earnings from the gas segment should double this year, versus 2002.

Second, largely as a result of the sale of our Canadian assets, we have reduced our short-term borrowing since the first of the year by 25 percent and have reduced total debt since the first of the year by seven percent.

We hope to make further progress in this area in the next two quarter as we get the bulk of the tax refund we are due as a result of the decision in the black lung excise tax.

Finally, our coal segment performed below our expectations. It also suffers in the period-to-period comparison for several reasons. One, we have considerably less production capacity now than we did a year ago. Less production means less times to sell.

Two, like many companies in the coal and other basic industries, we are grappling with the challenge of higher employee benefit costs, particularly the rapid escalation of medical costs.

And third, we had one-time events, in this case, two mine fires, that have affected costs and reduced production.

I didn't mention coal markets, because the markets, while not robust did show some pricing strength in March, primarily in the east suggesting a tightening of supplies; however in the short run, CONSOL has very little leverage to market. With our reduced production we are essentially sold out in most or our product line. Week-to-week swings in the market have little effect on our current financial performance.

Let me discuss some of the specifics of this past quarter results. In the GAAP segment, we had pre-tax earnings of 20 cents per share compared with four cents per share in the March 2002 quarter. Sales volumes increased nine percent. Gas prices prior to the adjustments for hedging increased this quarter, to quarter almost 78 percent, and costs excluding increases in royalty and severance tax payments were flat.

For the quarter, our average daily growth production rate increased to 132 million cubic feet a day, compared to 122 million cubic feet per day in the March 2002 quarter.

We will continue to grow our volumes through a sustained drilling program throughout the year.

Coal segment performance declines from pre-tax earnings of 18 cents per share in the March 2002 quarter to a pre-tax loss of 16 cents per share in the quarter just ended. As I mentioned earlier, a lot of the coal segment performance decline is related to lower volumes to sell. Sixty percent of the period-to-period production decline is attributable to the permanent closure of four mines caused by coal exhaustion and the sale of our Canadian production assets.

In addition, 22 percent of the volume decline is due to the long-term idling of a Rend Lake mine.

Keep in mind also that in the first quarter of 2002, that although we mined almost 20 million tons of coal, inventories during that period increased by more than three million tons. The increase in coal unit costs is attributable primarily to the decline in volumes, with the exceptions of costs for active and retiree medical benefits and salary pension benefits. These cost increases are not unique to CONSOL, and the issues of rising medical costs and the impact of stock market performance on pension plan assets have been widely discussed.

In addition to these unit cost impacts, we had nearly $15 million of cost related to the fires at Mine 84 and at Loveridge. These are estimated costs, net of expected insurance proceeds.

The fire at Mine 84 has been extinguished and normal production resumed in February. The Loveridge situation has not yet been completely resolved. As most of you know, we brought in technology from Australia to aid in putting out the fire. Essentially, this involved blowing the exhaust gas from a modified jet engine down into the mine, displacing any oxygen in the mine with inert exhaust gases. This process of making the mine atmosphere inert, thereby depriving the fire of oxygen, could have been achieved by simply - by keeping the mine sealed for six months or more.

The goal of introducing the jet exhaust was to greatly accelerate the process and our goal was achieved. We now have crews underground exploring the areas of the mine where the fire was suspected to have reached. The work is being done by mine rescue teams, sometimes working under self-contained breathing apparatus, sometimes with reestablished ventilation.

We have to contend with and there are still hot areas that require the atmosphere to remain inert until we can get water on the hotspots to cool them down. The main point is that we're back underground much sooner than could have been expected. This is an important and necessary step. I would characterize this as the exploratory phase in which we deal with any hotspots that remain and evaluate the fire damage. Once we have done that, we can prepare a repair plan that will allow us to resume development work at Loveridge.

At the moment, we are still forecasting Loveridge production to begin in early 2004. However, depending on the extent of the repair work and the speed at which we progress, we may be able to accelerate that timetable and get some production late this year.

There are some positives to take away from the coal segment report. Average realized prices on company-produced coal improved 78 cents per ton quarter to quarter. Over the last two years, our average realized price per ton of coal has increased more than 13 percent. As you saw in the outlook section of our release this morning, we expect to report higher average realized prices again this quarter. If coal markets tighten substantially in the second half of the year, we still have sufficient leverage to market with our 2004 production and our 2005 production to capture higher prices in contracts we negotiate this summer and fall.

Regarding our guidance for the current quarter, it is based on several factors - higher realizations per ton of company-produced coal, slightly higher production of sales volumes, improved coal unit costs as well the result of improved margins per ton of company-produced coal, higher gas volumes, lower gas prices based on contract sales and no change in operating costs, excluding royalty and severance costs. In addition, we forecast net cash from operating activities to be about 350 million for the year.

With that, I will turn it over to Brett for some additional comments on the quarter just ended and on the outlook.

Thank you, Bill. It's good to be with you. I'd like to give you some remarks on the overall general marketplace for gas and coal and then we'll get to the question phase. First, let me talk about gas and we're optimistic about gas. It's a very valuable part of our asset base, and is doing a very good job for us in terms of earnings.

At best, domestic gas production will be flat in 2003, but more likely will decline slightly. This is after a decline of maybe as much as 5 percent in 2002. Gas storage is now 49 percent below the five year average for this time of year and 59 percent below the five year average for storage here in the east. New storage numbers will be out today. We expect a build that storage should still be near or at historic lows for the year.

Gas demand in the U.S. is about 60 BCF per day. The fastest growing sector of that consumption is the electric power industry. At 15 BCF per day, it represents about 25 percent of all the natural gas consumption. Natural gas used by power generation, about half of which is used in the southeast and south-central U.S. will impact traditional storage build withdraw pattern that will have a tenancy to keep gas prices higher, particularly in the Winter until a supply response or enough demand curtailment in the price sensitive area industrial sector will reduce demand.

We see a real change there. The use of gas for production of power has changed the shape of the gas model. prices and most analysts suggest now that the prices are likely to remain above $5 at least for the rest of the year. We have accelerated from the budget that we supplied for the year. Our gas drilling in Virginia to take advantage of these higher prices to lock in prices in 2004 and even some in 2005, at very high margins for our gas business.

Now, let's talk about the coal segment. The coal segment, because of the problems we had in the first quarter, I would say is still in the recovery mode. But if you look at overall, the electricity demand is up 5.8 percent through mid April. Most of this increase in the eastern U.S. We agree with most observers, the stockpiles at power plants have come down. The total U.S. probably is in the 120 to 125 million ton range or 40 to 42 day supply across the nation. In terms of days burns, stocks over the northern Appalachia coal may be significantly lower than that, if we look at it plant by plant.

However, for this time of year, there is about, we are about where we were in 1999 and 2000. Only in 2001, were we at lower levels than this, and that was at about a 30 day supply for this time of year. Of course, 2002, it was a record high. And that has been brought down to where we're at today.

In general, expect to see buyer return to the market in the second half of the year. We don't see a frenzy buying spree unless we see some real hot weather early on. But we do expect prices to continue to strengthen in the second half, as we see supply and demand tighten.

We don't have much leverage in the '03 market. But we expect to capture as we just discussed in '04 and '05 business on an increasing price basis related to supply and demand. Talking about the operation side a little bit. The coal segment of our business, of course is the biggest part of our business. We have 17 long walls. We try to keep them running at very optimum levels, and we're seeing improvements in our Robinson Run mine, our McElroy Mine and the places where we've invested capital and solved some problems.

The Loveridge fire was a setback. I believe that the technology that talked about briefly has accelerated our process and our focus is to get that mine back online. That will be very helpful to us.

The mines that we shut down last year were shut down at a higher costs than depleted reserves. Those reserves and our growth cycle for the next few years will be driven by capital already invested in the McElroy Mine, the Loveridge Mine and areas where we can grow from 62 million tons a year, I believe up to about 77 million tons per year, about three years out.

That growth will be driven by a second-long roll McElroy, the Loveridge Mine, expansion at the Bailey Enlow Facility as well as expansion at Robinson Run, and some expansion in Blacksville.

These are key areas that's a core part of our operations and we see that the market, not only can sustain these new tons in the market, but they're incremental compared to the production we've had in the last few years.

It's important to understand that at a company like CONSOL that has such a strong reserve base, and a highly capitalized reserve base, in a significant area, like the Pittsburgh 18, that tying that to our long wall production with high volumes and long-term contracts is a focus of the company. The intent is to get with utilities in the new de-regulated market, to optimize their capacity in their plants against our capacity in our long walls, so both companies run at 100 percent production and that we go back to back and take the value out of the market.

It's different than the old type contracts that we've had in the past, but I think we are setting the mold for the new type contracts with long reserve positions, with extended cash flows that really strengthen the bottom line for companies like CONSOL. We're proud of that and we see some more of that coming.

With that, we'll open it up for questions.

: Operator, we're ready for questions here, if you would give our liseners their instructions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the one on your touch-tone phone. You will hear a tone indicating that you've been placed in queue. If you press one prior to this announcement, we ask that you please do so again at this time. You may remove yourself from queue at any time by pressing the pound key.

If you are using a speakerphone, please pick up the handset before pressing the n umbers. Once again, if you have a question, please press the one at this time.

One moment please for our first question.

And our first question comes from the line Wayne Atwell with Morgan Stanley. Please go ahead.

Thank you.

: Morning Wayne.

Two questions, can you give us any kind of an early reading on the third quarter volumes and pricing? I know you've given us the year and the second quarter. And can you bring us up to date on drilling in gas? I know you've said you've accelerated that a bit. I guess that's for the immediate future. Obviously this seems to be your highest return business right now. Are you thinking about seriously stepping this up and any new feedback on what you're finding in Tennessee?

Wayne, this is Tom. I'll comment on the third quarter, only to say that you're right, we haven't given you guidance for that. And I think with some of the uncertainty that still remains in the market, we - we'll decline to give you specifics. However, I would remind you that, in the last number of years, the third quarter has tended to be a somewhat weaker quarter for us, in part because - in the coal segment - in part because that's the period when a lot of the mines go down for vacation. I think, other than that, we're not prepared to provide any further elaboration on 3Q.

OK. This is Brett talking, Wayne. Let's talk about gas. The acceleration I talked about - we had budgeted about 75 million capital for the year to expand. I think we planned on 10 to 15 percent expansion for the year. That capital expenditure, because of the rise in gas prices, we've accelerated the speed of which we drill the holes and the number of holes we're drilling early on to capture what we believe higher price is at the end of the year and early next year.

That is accelerated. We will take a look at it in the summertime with the board to decide if we want to add more capital to keep that accelerated mode going on, to move capital from 2004 into 2003, to continue that accelerated mode. What I can say is that's probably going to get us 15 percent or a little higher for the year in terms of expansion in the gas business. And we see, if some prices stay this way, we'll probably be doing the same for 2004. Of course, that's all related to how much capital we have and the performance of the company. But this is the sweet spot right now and we're accelerating that to get the job done.

In terms of - the last part of the question was Tennessee. We're still in the exploratory phase there. We have hooked up the wells ...

And there's no well drilling this quarter.

There's no well drilling this quarter, but we've hooked up the wells that we drilled last year. So we're focusing on what I call the sweet spot expansion in Virginia, in terms of where we're at right now in gas.

OK. If we could get back to the third quarter, is there anything you can tell us about vacations? Is it the typical pattern where there's a lot of vacations in the coal area in the third quarter?

: Yes. It's a typical pattern.

Great. Thank you very much.

: Thanks, Wayne.

Thank you. Our next question is coming from the line of Dan Roling with Merrill Lynch. Please go ahead.

Thank you. A couple things, Brett or Tom. On capital expenditures, you spent about 70 million in '01 and 46.7 in '02. Could you give us the outlook for '03, four and five, especially since you said that the outlook for coal should be behind you, given that your expansion will come from capital already spent? And then, could you break that down between coal and gas?

You wanted the - Dan, this is Tom. Just to be clear, you wanted the outlook for 3Q?

No, '03 here, next year and the next year.

OK.

Thank you. Our next question is coming from the line of with Legg Mason. Please go ...

No, no, no. Wait ...

Oh, I'm sorry.

Hold it, , we're not ready. We haven't answered Dan's question yet.

Yes. We're projecting somewhere around 250 million in capital for the year. The change in capital in terms of this quarter compared to last quarter primarily relates to macro expansion. You know, expansion went on in the first quarter, mainly in the area. You wouldn't consider that to be maintenance or production. That would be extraordinary for us, and that was not replicated in the first quarter of 2003. We also had some reduction in gas spending. We had just some higher dollar amounts spend in the first quarter of 2002.

All I can tell you is that our gas drilling program for this year is on course, and as Brett said, in fact, we're going to look to accelerate that if prices continue to be as high as they are. We're not prepared at this time to give guidance on 2004, 2005.

Let me say something, that question was an insightful one. You talked about capital already spent. If look at the capital we spend last year and this year associated with , you're going to see where that 6 million ton jump there from the base that we're at today will be added in 2004 of capital we've already spent. And that was, I think, the point you were trying to make. And then certainly the ongoing opening of Loveridge, when it comes back online, that will be the other capital that's already in the system.

So those two big increments is going to bring us from 62 million up to over 70 million, by itself.

Right. That's what I was after, Brett.

Sure.

We look for cap ex on the coal side, unless you tell us otherwise, to basically be down for the next couple of years because the capital's already been spent.

I would say you're going to look more at a maintenance of production position, other than I did mention some expansion at Robinson run that I've talked about, but they're not big numbers like I've talked with the and Loveridge.

OK, so 250 million was the estimate for this year in total. Seventy-five, if I heard that right, is gas.

That's right.

So the full -- the balance is coal. What would be the maintenance level in both coal and gas?

Coal -- $2.00 -- I would say like $2.00 an annual ton is generally our real rough rule of thumb, which relates to about 150.

Gas, Dan, I think right now is because you don't have a lot of infrastructure that you're maintaining, it's probably 10 to 20 million.

Thank you.

The gas side is very good in terms of what you look at gas vaults and these holes are lasting a lot longer than we originally thought when we started in this gas business.

What is average life, Brett?

Well, we have some 10 years old we thought would be gone now, so we're still working out the average life of some of these holes, but it looks like we're seeing right now, after about seven years, about a seven percent decline after about seven years. And originally when we started doing these, we thought it would be a lot faster than that.

So that's good news.

Also, Dan, you're aware, there's more flexibility in our capital expenditure program in gas than there is in coal. I think the average cost of a well we have right now is around $350,000, and obviously you can bring wells in and out a lot quicker than you can on major projects and coal. I would think that on the average we probably have between four and six months by the time we start before we bring a well online. So gas is a nice component we have in our portfolio mix.

OK, I'll be back with other questions.

OK, thank you.

Thank you.

Our next question comes from the line of Paul Forward with Legg Mason.

Good morning, Paul.

Good morning. Just a couple questions on the coal side, I was wondering, I saw that the guidance on pricing for the year went up, which is good. I was just wondering on the 2706 number for the first quarter, why was that well below the guided range of 2760 to 2810 for the quarter.

That was just a mix issue, Paul. We're going to get the numbers through the year. As we said, we have over 90 percent of the coal sold. Any time you, it's timing, you know, we shift to some lower price customers, some lower price contracts than we had anticipated when we did the original guidance.

But for the year, we'll get that realization. So it's just a timing issue.

OK. Good, and also as looking at yesterday's Norfolk Southern and their conference call, one of the bright spots they mentioned for coal was an improvement in export pricing and volumes, which is a bit of a surprise I think for them, and they really cited a tightening world metallurgical coal market. Are you seeing any opportunities there? Are you seeing any chances to take advantage of some higher pricing or some volume that just wasn't there six months ago let's say?

Well this is Brett speaking. For 2003 I would say that it's about what we expected it would be and we talked about that before, it's in our budget and the pricing's about where we budgeted. That is such a volatile market. It almost runs on a six months cycle, instead of a year cycle, but what we're seeing there, it is tightening out there. We have very high quality metallurgical coal supplies, most of that comes out of Buchanan and VP 8.

In terms of capturing any thing extraordinary, we're not that optimistic at this point in time, but the volumes seem to be holding and might be up for 2004. The jury's still out, from our opinion. I think Norfolk Southern is a little more optimistic than we are on that.

OK, thanks, I'll get back in the queue.

Paul, this is Tom. In that guidance that we did give for 2004, it does not include I think the majority of our export metallurgical sales, so that work is yet to be done for '04. So, in that amount that's committed for 2004 and the guidance, there's very little of the export business in that.

So potentially there's upside there.

Oh, yes due to priced, yes, so we see at budget or up, but not real optimistic it's going to go way up.

OK. Thanks. I'll get back in the queue.

Thank you. Our next question comes from the line of Peter Ward of Lehman Brothers. Please go ahead.

Good morning. You mentioned you got 70 percent committed for '04, what's, can you give us some guidance on the realized price you expect for that tonnage?

No.

OK, and.

And the reason is Peter, that we do have you know, work that we're doing, selling and I think from a competitive standpoint, we're not prepared yet to tell you where we are on price.

OK, secondly you mentioned you have the capital sunk at McElroy, can you give us any guidance in terms of where your incremental marginal cost is going to be there?

You mean, do we expect costs to be lower, is that what you're talking about?

I mean, clearly, I mean, give us an idea of what the fixed cost leverage is going to be there, as you ramp up the volumes?

We usually don't give that on a mine-by-mine basis for a lot of different reasons, mainly competitive.

But let me give you some philosophy there Peter, just so you feel, we've shut down major mines that had high costs and replaced it with this second long wall in an infrastructure that's very productive. So there's a substantial change between our costs of producing that ton against the other, but it's rather competitive. We don't want to run that out, but it is a substantial. That's why we spent the capital.

OK. And finally what proportion of '05 is committed at this point?

Peter, I don't recall the number. It's in our 10-K and that was as of, I think, February 28. It's 10 or 15 million tons. But it - I don't remember the number off the top of my head. But do just - we did just disclose it in the K.

OK. Thanks.

Thank you. Our next question from the line of Steven Zepplin with Bear Stearns. Please go ahead.

Yes. Good morning, everybody.

Good morning, Steve.

Of the 72 million that you received from the Canadian coal trust, has all of that been earmarked towards gas and/or debt reduction?

It's mainly debt reduction.

OK.

And that's part of our goal, also, is to reduce debt. Like I said, we had about 203 million of commercial paper at the beginning of the quarter and we were down to around 151 at the end of the quarter. So - and most of that reduction was due to the proceeds of the Canadian asset sale.

OK. Great. And just one follow-up question. The line item - the idled mine costs - I know that's not included in the unit cost, but I'm getting about 54 million this quarter. I know 15 million of that was due to the fires. What is the remaining 40? How is that split up between idled mine and worker comp or rising medical costs?

Well, in terms of workers comp, probably about - there's about five million in workers comp in the idled mine and shutdown costs.

OK. And can we expect a run rate of about 30 million in that, going forward or - for just the idled mine and the workers comp medical costs?

OK. In terms of the workers comp, that's probably a good assumption. And again, that's an assumption because when you're dealing on a state-by-state basis and particularly the state of West Virginia, there is some volatility in that number. In terms of the idled mine costs, we are pretty consistent on that - I should say closed mine costs, in terms of what we call shutdown. Again, that depends on the mines we have in the mix with shutdown. And - but that's probably going to be consistent throughout the year. The biggest player in the shutdown costs would be Rend Lake and we are projected to have that shut down through the rest of this year.

OK. Great. Thank you.

Operator, before we go on, looping back to Peter Ward's question. Peter, the volumes under contract in 2005, as of February 1, were 13.8 million. While we haven't established the tonnage production number for 2005, I would expect it will clearly be more than 70 million tons. All right, operator, we're ready for another question.

Thank you. Our next question comes from the line of David Khani with Friedman, Billings, Ramsey. Please go ahead.

Yes, guys. Hi.

Hi, David.

Hi, David.

Of the 98 percent of your coal committed this year, is all of it priced? Is that why you're having - giving us such a good 27.46 number?

Yes. It is all priced.

It is all priced.

Yes.

OK. Great. And then, just a little clarification on your gas cap ex. Was the number - the prior number I had was 60 million. Did you bump it up to 75 or was it 75?

Yes. I believe it was 75 and we're running at that - an accelerated rate on the 75 for the year. And what I was trying to explain earlier is that later in the year as we approach that number that we budgeted, we'll probably go to the board, depending on where the price is, and ask for more to keep that accelerated rate or we'll slow it down, depending on where we see the market.

OK. So, in other words, it's like front end load - more front end loading.

Yes. That's the point I was trying to make.

Great. Okay. And the other thing is Appellation gas wells can last 25 to 30 years. But, I guess you guys can cut off some of the productive life, I guess, depending on how you mine your coal?

Yeah, we cut some of them off in the mining cycle and we get a real accelerated production that lasts on the short term as the long well passes through, yeah.

Because it gets converted into gob gas?

Yeah, very quickly. In fact, we even break up other things above it, yeah.

Long wells are great fracking units anymore.

Expensive fracking units. They do a good job.

And then the last question is. You know, at some point we're all expecting maybe gas to have another run as we enter into Winter. What's your philosophy here if you were to lock up more gas for '04. What would you feel comfortable again percentage wise to lock up and would you do it on collars and, versus swaps?

Yes, we're doing, uh, we're looking at '04 much different than we looked at '03. We're seeing, we're locking mostly up at the higher levels on what we call the shoulder months. And we're leaving more gas open on what we see the peak times. And we're putting collars around those as well. So we're a lot more flexibility than we have in 2003.

Great. Okay, thank you.

In terms of ratios, that's a moving target and it depends on where we see the market.

Our next question's line of Evan Smith, of Sanders Morris. Please go ahead.

Hi, good morning.

Good morning.

Good morning, Evan.

Wanted to see if you guys are seeing any problems with rig availability now or later on in the year given the accelerated drilling program, and the capital, you know, growing capital allocation there into next year? Also, just wanted to, Brett, I just wanted to get your view of balance sheet goals over the next three to five years, mainly dept reduction, and how those goals will be achieved.

Well, let's talk about rigs first. We don't have rig problems. We're kind of in an isolated area there. And we've kept them busy. They know we're in the expansion mode and we have a great relationship with those who are already on the job with us. So that hasn't been a problem for us. And we don't see it as being a problem because of the depths we drill and so forth.

The other side of it, on the terms of the balance sheet, we want to get it in a position where we get our dept down as far as we can, keep ourselves in a position where we can stay in the investment grade position, and in a position where we can look for opportunities to expand the gas and coal business as we see some real changes coming in both. We want to expand what we own on gas. And we see there are some real values coming on the gas side. But more as individual acquisitions, rather than major acquisitions.

Are there any opportunities for the non-core asset sales, kind of like what you did with the Canadian assets to help raise cash and pay down debt?

I think, yeah, we're looking at everything. We're looking at things that, I guess, would be, would have been sacred cows a few years ago, we're looking at what our options are to adjust the balance sheet and get more strength in the bottom.

Great. That's a lot.

Yeah.

We have a follow up question from the line of Dan Roling with Merrill Lynch. Please go ahead.

Thank you. Bill, could you give us a breakout on the gain on the sale for the Canadian assets and tell us if that's included in that .4 cents for this quarter, pretax, post-tax, and per share basis?

Yeah, the sale, there was, there's not much gain or loss. It was basically flat. There wasn't a gain on that sale. And we're finalizing the final issues with working capital rest, but basically as I said, it's a break-even penal impact.

OK, good, and coming back to the balance sheet question, Brett. When you say down as low as you can get it, I mean, are you talking debt to debt plus equity ratio of 20, 25 percent, or do you mean 30, 35 percent?

We're looking at, this is Bill Lyons talking. Dan we're looking at our commercial paper balances, you know, we want to have some presence in the commercial paper market, so getting that down to 80 to 100 million would be a goal for us, but we would like to have some offsetting assets, so it would have a net position, short-term of basically zero. That's our goal, and we hope to achieve that in the next year or two.

In terms of our other debt, you know, we have no debt due next year, you know, in terms of our medium term notes, and the debt we have right now in terms of longer term debt, we're pretty satisfied with, so, I'm not sure how that will all play in the ratios, but we're not looking at ratios. We're looking at absolute amounts here.

OK, maybe I can ask it a different way, because we look at sort of all the liabilities, not just the debt, and you're over 50 percent. How do the ratings agencies look at you and what is your rating and what, are you on a credit watch up or down and where would you like to be?

Well obviously, we'd like to be very high on the credit rate scale. We're in discussions with the credit rating agencies. In fact the rating agencies have told us that they're going to view the long-term liabilities differently than they have in the past. They have issued a press release probably about a week or two ago, listing 19 companies of which we were one, where they put us on credit watch negative, and they want to re-evaluate our credit rating based on what I said their new view of long-term liabilities.

Dan, I can't tell you what they're thinking is. You'd probably have to talk to them. But the financial statements are what they are.

Let me talk a little bit about that in terms of what we want to get done though Dan. This is Brett speaking. Clearly a lot of that is the liabilities associated with employment and union contracts and all those things that older companies have a history of. I think between healthcare and investments and all of those things that are involved in that negotiation process, I think the whole industry's going to be looking for ways to get those resolved in a way that doesn't have such a hangover on the balance sheet and I think it's important to some states like West Virginia as well as the government on how you control these healthcare costs and all these pensions issues. You see it in the steel business. Any old, old line industrial groups have the same issues, and they have to be resolved, not only on our balance sheet, but I think legislatively and at national level.

OK, well.

That's one place we're going to really focus, I mean I'm getting ...

I understand, I mean, as you know we look at the steel industry too, and we've seen 20 or 30 companies go through bankruptcy to address those issues, and I'm not suggesting that with you at all, but I don't think legislatively it's going to be addressed.

Well we might look like the steel industry in terms of having these things on our books, but remember, they're in a different marketplace. We are the future for electricity, and so there's ways of working this out. And we have the reserves and the assets to do that.

Thank you.

Thank you. Once again ladies and gentlemen, if you do wish to ask a question, please press the one on your touch-tone phone.

And our next question, a follow-up with Paul Forward with Legg Mason. Please go ahead.

Yes. Hi. Just comparing the Ks year to year, it looks like you've taken out about 1,300 union jobs since '01. I know that the contracts don't expire until 2006, but I was just wondering if you could discuss the impact that that might have had on labor relations at the company.

All right. We'll talk about that. In terms of labor relations in the short-term, there hasn't been a big issue. These are things that we've dealt with, we've notified, talked to the union. Even when we did the long-term contract with them, when we renegotiated last, I think these things were on the table - apparent deductions. I - what I see, though, anytime you have that many jobs leave any company, you're going to have some pressure to find new jobs or - and so where we are expanding and doing other things, we're trying to give them jobs ...

McElroy ...

In McElroy, for instance, is an expansion project. So some mines shut down and if you look at the mines we shut down for AEP, we were the only ones in the area that could really resolve that situation. Where AEP sold their mines to us and we had ways of putting them into our other mines through attrition. So the labor issue has been, I think, a very solid, open relationship and I think will continue to be.

OK. Good. Thank you.

Thank you. And our last question is a follow-up with Dan - or with David Khani with Friedman, Billings, Ramsey. Please go ahead.

Yes. Just one question, Bill, on the . Some of your competitors have, I guess, taken more of a hit as opposed to a gain. Is it a function - and I'm trying to think philosophy-wise - that you have long life mines and you - because you've been accruing it for - over these years - the reclamation and all that - and that you're just - you were just ahead of the game because of the long life nature of your mines. And the - and when you do the present value, it pulled it behind. Is that sort of the philosophy or am I ...

It's really a mathematical calculation. Everybody's got to get to the same number at the end of the day. You know, you have a cash ops low. What we did before is that we estimated what that cash ops low was and accrued for it equally on a per ton basis. Under the new rules there's an element you do on a ton basis and there's another part of that that you carve out and do it on an interest accretion basis. And it's based on the mix of the mines. It's based on the age of the mines. It's based on many, many factors.

And mining methods as well.

Yes. So it's - to me it's more of a mathematical formula as opposed to a different style of how you do things. Just a mix of the assets that you have in your portfolio.

OK. All right. That's all I had. Thank you.

We do have a question from the line of Dan Roling with Merrill Lynch. Please go ahead.

Thank you. I just - I've got a lot of them today - a couple. Bill, what is the - what are we looking for - for depreciation for the year and what run rate do we look for at year-end? And then I have a question for Brett.

Depreciation is going to run somewhere in, I'd say, the 240, $250 million amount.

And the fourth quarter run rate?

OK. When you say the run rate, what are you talking about?

With change in your production maybe picking up if leverage comes back on, will it go up much or do you think it's going to be pretty flat?

No, it'll be flat. You know, what we do for our mining assets - they're depreciated on a straight-line basis and we continue to depreciate whether the mine runs or not. Where you do have some variability has to do with amortization of like air shaft development and coal . And that varies on a mine to mine basis. So, but for the most part depreciation on an active mine, on a mine that we have in our portfolio, we continue to depreciate. So you'd still see depreciation charges there.

You're not depreciating though, are you?

Yeah, there's some depreciation in .

Okay. Brett, looking at the mining industry and supply and demand may be pretty close to balance, if in fact the utilities start cranking up their burn of coal. How much idle capacity do you think you guys could bring back on in the short run, and what price would it take to encourage you to go look at building a new Greenfield mine, and what kind of lead time would it take to bring a new Greenfield mine on?

Well, let's talk about the long term. A new Greenfield mine that would look like Bailey , would probably be $350 million investment. And we could probably produce, we could probably reproduce that three or four times in our reserve base. Now we think it would take seven to eight years to get it up and going. And we do have some form of those kind of things going on on a permitting basis right now. But no accelerated spot. So it would take a long time to bring that kind of volume back on.

In terms of the short term, if you look at what we've done, and I think you've been watching us pretty close, we've trimmed a lot of things down and shoved them down. They're gone. So in terms of real capacity to come back, we're talking to you about what our capacity is. It's Loverage, it's McElroy, it's these, uh, incremental expansion of what we already own. The response in the whole industry, in my opinion, is not going to be even what we saw in 2001, it's going to be less. And that less response is going to, I think drive prices. It's tight. The capitalization of this business, remember in 2001, and you and I've talked about this, but in 2001, that was a hot economy where it ran up. Now we're seeing the crunch come even in a slower economy. So the fundamentals having changed. It's gotten tighter.

Okay. Thank you very much.

Okay. You bet. Operator, we have time for one more question here.

Thank you. Once again, ladies and gentlemen, if you do wish to ask a question, please press one. And I'm showing no questions at this time.

All right, operator. Ladies and gentleman, thank you very much for joining us. and I will be available throughout the day today to talk with you offline on any further questions you might have.

With that, we'll conclude the conference call for this morning. Thank you, operator.

Thank you. Ladies and gentleman, this conference will be available for replay after 1:30 p.m. today through May 1st. You may access the AT&T teleconference replay system at any time by dialing 320-365-3844, and enter the access code number of 680024. Once again, those numbers are 320-365-3844 and enter the access code of 680024.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executel conference. You may now disconnect.