CNX Resources Corp (CNX) 2003 Q3 法說會逐字稿

Thank you. Ladies and gentlemen. (Operator Instructions). One moment, please, for your first question. We do have a question from the line of David Khani with Friedman Billings Ramsey.

Good morning, David.

Good morning. Could you give us a sense of how much coal you locked up in the third quarter for 2004 in volumes? And then maybe also if you locked up any additional coal for '05?

Dave, this is Tom. I have collected that information. Between our guidance for the second quarter and the third quarter guidance, we probably locked up another 6 million tons of business, for 2004. I'm not prepared to talk about 2005.

Could you give us a sense of rough pricing on the additional tons? Is it close to spot?

I won't be, I won't be specific but we would say the prices are up.

OK.

Excuse me to interrupt. We do plan to give more complete guidance in January for the '04 period.

OK. I guess last, on the coal side, what would you feel comfortable, percentage wise locking up your coal, heading in to next year?

This is Brett speaking. It's good to talk to you. We feel like going in to next year, with rising production as well as rising prices, that we can lock up most of what we call our Pittsburgh 8 seam coal, I would say 90% or more.

We think the markets there, the prices are right for us. The margins that we were expecting will be there at that level, so, having said that, that puts us in a position about 75% overall, and that's about where we're at right now. So that gives you a good flavor. The rest of it, we have to lock up as net coal and some of our coal to the south and central lap is on more of a spot basis and we'll leave that open as those things open up.

OK. And then just moving over to the gas side, is any of the capital at all going towards Triana or any of the JV in Tennessee?

There are some requirements for the capital in those two relationships, but in Triana, we have the option. It depends on whether that drilling is successful or not. In terms of the jv over in Tennessee, it's more related to our commitments that we have to have to hold the leases. We're going to keep those at minimum. It's still an exploration project, but we will continue to push our capital towards the sweet spot.

Great. OK. Thank you.

We do have a question from the line of John Bridges with JP Morgan. Please go ahead.

Good morning, John.

Good morning, Brett, everybody. I just wondered if where you were with your response to this anonymous letter, when can we expect some sort of announcement on that one?

I can tell you that the investigation is underway. The director of the board conducted an investigation, retained an outside law firm and the firm is now fully engaged in collection of documents related to that letter. But out of respect for the independence of the investigation process, I'm not in a position to speculate on the time it will take to complete, but I believe it will be timely and it will move as quickly as it can.

I understood that it was not something that required a huge sort of forensic accounting exercise and could be done quite quickly.

That's our impression as well.

OK. Exports, you're presumably benefiting from these much higher shipping rates. What sort of tonnage do you think you will be able to get on to water this year?

Well, the metallurgical coal certainly will move all of that, so that will be about 3 million tons Met coal, and I would say on the steam coal side, probably less than 2 million tons.

OK.

Domestic market is very strong, John.

Yes. And then you mentioned the ability of producers to flex production, though limited ability of producers to flex production. You were talking about raising your production 10% next year.

Yes.

You know, what sort of spare capacity is in there in your operations now in the form of extra shifts that can be worked and that sort of thing?

I would say what we have operating today, without adding capacity, we're pretty close to maxed out.

OK.

John, this is Tom, if I could add one other bit of color to this. Brett had mentioned the other, the projects, McElroy leverage and Bailey Bunker. When they're complete of course, we're not going to get a full year's benefit from those. Doing nothing else, you know, five, there would be another three million tons of production that we capture by having both McElroy and leverage online a full year rather than a partial year.

OK, excellent. Thanks a lot. I'll get out of the way.

All right.

We do have a question from the line of Dave Gagliano with Credit Suisse First Boston. Please go ahead.

Good morning.

Good morning. First, quick followup to John's question regarding the anonymous letter. Could you just give us a sense as to what the impact is on the effort to register the RWE shares?

This is Bill Lyons. What it does, is that it was suspended because we have to wait for the completion of the investigation for us to get the pwc sign off.

OK. And how many shares again was that for RWE, the registration, roughly?

Total shares they have is 58, for registration, I think, takes all of the RWE shares, almost 58, plus 11 million of ours, new primary shares.

So 69 million pending?

Yes.

OK. All right. And then just quickly on the cost per ton number, I just want to make sure, does the reported cost per ton figure, that does not include the expense, the incremental expense from leverage, is that correct?

That's correct.

OK. Do you happen to have a number if we were to include that number, what would the cost per ton figure be?

Leverage right now, we have in there is about $20 million dollars.

Just add 20 to the number, OK and then I will put the last -

That's total for the year. You know, let's go through that. We have accrued for a lawful lot based on this change in our thinking on the ventilation. In the third quarter we accrued $12.4 million in leverage and if I give you a rough calculation on that, about $3 1/2 million is the third quarter expense for work we did there.

We're going to accrue another, about the same 3 1/2 to $4 million for the fourth quarter, and our accrual maybe another million, million and a half for the month of January. And then we're also going to accrue about $4 million for a fan move. So again, we made substantial accruals in the third quarter based on the new information, revised outlook we have for completing the rehabilitation and also changing the ventilation.

One point I want to make here, just so everybody under it, is the ventilation changes that we decided to leverage, work that has to be done in the next few months but they're positive moves for the next 20 years, life of the mine. So it was really a restructuring move, shutting down a fan, doing things that really benefit the mine for the life, the 20-year life of the mine.

OK. And then just, Brett, quick followup to the comment made earlier on the export market. You mentioned I believe you mentioned this is a first time had you the opportunity or first time you were in a position to decide whether you were going to sell, I think, sell in to the domestic versus export market. I was wondering if you could expand on that a little bit more and why is this different than previous or did I misunderstand what you said?

No, No, you were right on there. What we're seeing in the marketplace is the ability to expand high BTU coal in the domestic market is growing faster than we have seen in the past. And that solid market growth that we see with these long-term contracts as well as our opportunities for these BTUs to travel farther is restricting our ability to go in to the spot market, into the international market because the first thing you're always going to do is sell the coal closest to home.

That export market, even though our BTUs travel very well at export market has to at least be at the price we can sell it for in the domestic market, otherwise we're pulling back pretty rapidly. Is that clear to you?

It is. I'm wondering, how is that any different than previously?

Well, previously what, if you looked at especially CONSOL in the northern ap (ph) area, at least my experience since 1998, there's always been somewhat of a overhang of coal. You've seen we have shut down a lot of it. We bought the AEP (ph) mines shut them down, RMP(ph) mines and shut them down, we shut down some of our own mines, (inaudible) worth and Humphrey and others and that just created more balance in the marketplace and we're seeing that balance on both sides of the sword, so to speak now.

Great. Thanks very much.

We do have a question from the line of Nick Lobacaro (ph) with Hunter Global Investments. Please go ahead.

I would like to get an idea where the board is in considering, you know, type of MLP structure, what kind of sequence of events we might expect on the subject.

OK. It's good to talk to you. The board itself has authorized the company to look at different structures like the MLP structure itself. And we are certainly looking in to it very rapidly with our strategic planning group. We had done some work prior to this and we're bringing it back to the light at this point in time. It is a high priority for us, we're looking at it, we think in our strategic meeting with the board in January, it will be one of the hot topics.

So it would be able to be voted on by January? Or is that like the first discussion?

No, there will be more discussions before that. But it will be I think will be, have some things for the board to really decide on that. But I'm not saying that's today we're going to vote. It will be in that time frame, though.

OK. And as far as what earnings streams that you could potentially put in and that will be -- over the total earnings stream that you have, I mean how much could conceivably be put in the stream?

Well, I think there are a lot of different pieces there, but I'll give you some examples. Our pipeline system certainly could be a good candidate for that. Some of our prep plant capacity could be a candidate for that. Baltimore terminal could be a good spot for that that.

So we have a large stable of different pieces that could go in there, depending on what their capital structure is and how it fits going in, so we're looking, we're listing top priority candidates right now, part of the study that we're doing.

Great. Thank you very much.

You bet, thanks.

We do have a question from the line of Michael Dudas with Bear Stearns, please go ahead.

Good morning.

Hi.

Is it better opportunity for your type of coal because of the production and capital issues in central, do you think?

That's part of it. I think that the capitalization of the entire industry is now in balance, I think, with demand. And whoever has capacity right now seems to be gaining market share and I think it's just related to the barrier is much higher for reentry in to the business and what we're seeing, remember back in 2001, when they had the three-months of prosperity in the coal business, it all ended, an and there was a lot of capacity. Now we're seeing that shrinking capacity against the market, imbalance and a much softer economy, so anybody has capacity right now I think has strength and price and volume.

Second question, Brett, can you give us an update, share thoughts relative to regulatory issues out of Washington?

You mean in a broad sense?

Yes, in a broad sense relative to energy bill this year, clear skies, what's the NMA doing to move things along?

Those things are all moving very well. I think we will have an energy bill, I think we're getting close to that, there's positive things in there for us. I also believe that clear skies and some of the settlements about new source review are putting the customers in a position where they can go and capitalize and doing things they have to do with some assurity.

It's not all there yet but heading the right direction. The NMA is working hard and has been giving them some guidance. At the end of the day, I think our customers are in a much better stance than they were a couple years ago.

Final question, Brett, how is the culture, the structure of the management or what the board plans to do with the company, going the change now that RWE is out of the picture? How will that benefit, do you think, the assets that you have for shareholders?

I believe that CONSOL has very strong assets and they are really driven towards the marketplace. I think we have been through some rough spots in the marketplace, the whole coal industry has. I think it's in line right now and that's opportunity with the changes that we're going through and some of the financial structuring we can do. We can unlock the value of the company a little quicker than we could before. I think that would be a way of putting it.

Thanks, Brett.

Thanks.

We do have a question from the line of Justin Davey with CitiGroup. Please go ahead.

Hi. Could you please, given the capital costs that you guys are going to be incurring going this year and next year with the expansion, has there been any talk about changing or looking at the dividend policy going forward?

Our dividend policy remains the same. It's outlined in our 10-Q is that on a quarter by quarter basis the board reviews various items that go in to decision making the dividend. In terms of earnings and cash flow as well as projections and capital needs. I can tell you that there has been no change in that policy. However, you have to realize that there will be a change in the board and new people will come on and there will be new thinking and really we can't comment on what's going in to the minds of people that we don't even know who they are going to be.

OK.

There will be, it will be continue to be reviewed.

OK. The other question I had was with the gas lifting cost increase year to year and royalties, is that something we should be looking at as an ongoing sort of cost on a sort of cubic feet basis?

This is Brett speaking. On a lifting cost, I would say that's probably more related to just this year. But on the royalty issue, we don't mind paying higher royalties, that just means the prices are higher. I think that's directly related to the higher prices.

OK. Thank you.

We do have a question from the line of Wayne Atwell at Morgan Stanley. Please go ahead.

Thank you.

Good morning, Wayne.

Hi, Wayne.

Couple quick questions. The tax for next year, what should we assume in the model for your tax rate or tax credit?

Generally what I assume is that I look somewhere around 25%, but again, you're aware that is very sensitive to percentage depletion.

So we should assume a tax expense of 25%?

That's generally what I assume whenever I'm going forward in projections, yes.

Right. But history I guess has been a tax credit recently, right?

Depends on what you define history, Wayne. If you go back and look at our effective tax rate, it has been all over the board. Again, it's because it's very volatile based on the relationship to pre-tax earnings because the percentage depletion really does not relate to pre-tax earnings.

Right, OK. Can you give us an estimate of the head count reduction this year versus last year in the coal division?

I think last year we were, we dropped almost 1800 people off. This year it's been pretty stable. We have been running the mines pretty hard.

OK. And I guess it's early to tell about next year's drilling activity in gas. You obviously put another $18 million in to the fourth quarter. Any thoughts even directionally about next year in your gas drilling budget?

Well, we will continue to grow right at about the 15% level. Remember, that's on a bigger equation every year.

Right.

That's the best number to use.

OK. And I see in your release you had the gas sold forward for '04. Can you give us any thoughts on owe 05 or haven't you sold any forward there?

Wayne, I don't have that number right in front of me. Let me see if we can get it before the call is over.

Wayne, the number that I have is about 40% and that's just off the top of my head. I remember looking at the number. It's about 40% for '05.

Yes, top of the head is pretty good, Wayne.

Do you have a price?

Well, yes. '05 we've got 28.5 BCF hedged at 459 MCF, I'm sorry, 459 and MMBTU, you have to do the conversion.

You're not providing the locked up coal volume for '05 yet?

No.

OK, good. Thank you.

(Operator Instructions). We do have a question from the line of Evan Smith with Sanders Morris Harris.

Good morning.

Hey, Evan.

As I stand here at the end of October, can you give us an update on liquidity as far as cash, availability of AR securitization and your credit facilities?

Our credit facility is up to $125 million, we draw on that as we need it. Again, there's an issue in terms of the cash, your question is do we have liquidity, are we going to be yes for the next quarter? The answer is yes.

No I was just trying to get what are balances as of the end of the month here?

I don't have that information right now, but the accounts receivable securitization was not fully drawn at the end of September.

OK, and the credit facility? That was fully available?

Yes, there was --like I said, the credit facility we had some reservations, I call it, for letters of credit but the facility was more than ample for what we need.

What is the, I guess through the end of '04, if you guys have looked at it this way, what are the incremental cash needs for the self-insurance and the bonding, that sort of thing?

OK, we'll give more guidance on that in January when we give you the forecast for the year.

OK. One last quick question: I guess as we're coming up on year end, do you expect any, I guess charge for pension liability?

For this year?

Yes.

No, there shouldn't be a charge for pension liability for this year. What happens, actuarial studies done at the end of the year, and then the expense number that you have is calculated for the coming year. So generally you know what your expense charges for any type of actuarial study by January 1 of any given year.

OK, So the number that was charged in the fourth quarter last year, I think ran about $55 million that we won't see that this year.

OK, run that by.

For the minimum pension liability.

The minimum pension liability, again, on that one with we have to wait to the end of the year. I thought you were talking to about the charge to the P&L.

No, No, No.

The minimum pension liability, we have to wait for the end of the year to get evaluation of the fund assets before we do the calculation.

Understood, understood. I wonder if you have an idea what that might come in at.

Not at this time, we have a meeting schedule with Mercer to its upward in the midst of those calculations, we'll have that later.

Thank you very much.

You bet.

We do have a question from the line of Keith Chan with Dryfuss, please go ahead.

Hello. With expected 10% growth in production, can you give us a feel of the incremental earning leverage, is it basically higher production volume, lower he can cost or actually the cost structure of the production would be lower or higher?

Well, there's two pieces to this and first of all, when you bring a mine like leverage back, you're bringing a average mine back, meaning it's all the averages coming in to the fold. So that would be just spreading your fixed cost over more tons with an average mine coming in. And that's going to be on an annualized basis that will be about 5 million tons a year.

On McElroy, you're going to be coming in with about 4, 4 1/2 million tons of what we call incremental tons, higher margin tons, because that mine is already active so you're bringing on the second long wall into a mine and you're maximizing your capital that you've already put in to your prep plant.

So that has higher margin, but I don't think we announce what the margins are on those. But you can figure that 4 1/2 million tons is going to be much more profitable in terms of margins. The Bailey Bunker we talked about where that is true productivity jump, increase in our most valuable mining operations, that's even going to be a little higher margin coal, but we don't predict those. You can see they're very valuable projects to us.

Thank you.

We do have a question from the line of Paul Forward with Legg Mason. Please go ahead.

Good morning.

Hello Paul.

As of the end of September, what was your coal inventory?

It was about 1.6 million tons.

And I guess that's something you're comfortable with? Or is that something that may rise as you move through pretty strong production quarter in the fourth quarter?

I would say it's going to lower.

OK.

Yes, I would say the production inventory is going to go down. It will be below a million tons by the end of the year.

All right. And as of June 30th, just looking at your next 12 months, you would look at $306 million of expenses from other long-term liabilities and that was up from 254 as of December 2002. Just wondering if you could describe what was behind the rise and then also when does that begin to roll over ? When does the 12-month outlook on other long-term liabilities, expenses begin to rollover?

OK, as you're aware, these actuarial liabilities are very complicated and you probably have to separate what we call the charges, the P&L charge from the payments, OK? In terms of the P&L charge, they're very volatile based on things like discount rate, which again you have to reset each year based on current market conditions, as well as your outlook of medical inflation. And if had you to take, they were probably the two biggest items we had, where we increased our medical inflation rate and we also had to reduce our discount rate by 0.5%.

We expect an increase -- if you take a look at, again, if you look at probably the nine months numbers, we had about $130 million in OPEB expense, you know I project the net to be about 175. In terms of payments, we had about $84 million of payments in OPEB, probably going to come out to maybe 115, $120 million. In terms of next year, I would expect the OPEB expense to go up because of increased medical inflation and also there could be another reduction in discount rate, although we are in the middle of the actuarial studies and I can't tell you for certain there. That's just my view at this point in time.

In terms of payments, if we're at 120, $125 million this year, it could go up 10%, so we could be around 130, $140 million, maybe $135 million mark in OPEB for next year in terms of payments. Again, what is going to happen is that, you know, payments are made when people retire. So you see payments made out over, you know, a different period than what you're occurring the expense for. Again, I think the long-term liabilities in terms of the manageability is based on our ability to provide cash, you know, cash payments, cash servicing those and we've always dialed that in to the equation and I don't see them being much give than they have been in the past.

OK, thanks.

We do have a question from the line of John Bridges with JP Morgan. Please go ahead.

Hello. I don't want to pick you on, Bill, but I would like to follow up on that previous question. I think I heard you say that the P&L effect of OPEB this year was $115 million.

OPEB for this year? No, probably going to be about $175 million for OPEB.

Sorry, and that's coming through --that's in the income statement.

Yes, it is.

Based on -- you know, just broad brush, based on what you think is going to happen to discount rates and medical inflation, you know, what sort of number would you be thinking about for next year?

Thinking about, John, if that number rose to $215 million for next year, I would not be surprised. But again, we don't know that yet until we complete the actuarial study.

I understand. Just get a sense. And the 16 cents of cost at leverage, what sort of tax rate would you put on that that? Would that to be 25%? I'm just trying to get to -

That wouldn't have a depletion impact. That would probably be around the 40%, that's 34 for federal and maybe 6 for local and state.

I was trying to ex-out that to get to a sort of earnings excluding that number for this quarter 3.

Yes.

And then finally, there was some comment there that the seam width at Enlow was going to be coming down over the next few years. Presumably that's going to mean a pullback in production from the mine. Any guidance on that?

Le me give you some guidance. This is Brett talking. Enlow is in the center part of the mine right now and we're experiencing that. We have even had a couple panel that's have gone, we have had to take a little more rock. I think the point was that these things do happen to us within panel to panel, but it's part of our process. It will affect us month to month maybe sometimes even quarter to quarter, but we deal with these kinds of things. That was the point he's trying to make. Long-term trends.

That's all I needed to know, thanks a lot.

We do have a question from the line of Wayne Atwell at Morgan Stanley. Please go ahead.

Thank you. Any chance with the revised ownership pattern? You might have a sale of some non-core assets?

Yes, I think that could happen that way. We're looking, our re-look and reconstitute our board with a different look at the asset base and different look at all of the things. Yes, yes, we could see that. That's a possibility. I'm not saying we're going to do that. That's a possibility, though.

And I would assume maybe the port might be something that would be considered. Anything else that might fall in that category?

That's something that has already fallen in to my category we will take a look at.

Freight rates very strong around the world. Is that having a negative or positive impact on you?

At this point in time, it hasn't been negative. It is driving the price of coal up in the international markets, but we don't get a piece of the freight anyway. I think it's just driving total delivered that's up to all foreign customers.

So, obviously coal coming in to Europe and elsewhere would be higher coming from Australia and South Africa. But presumably if you have to, or your customers have to charter boats, their costs would go up from here to Europe.

Right.

In a similar fashion, so you probably wouldn't benefit at all.

Well, it would get us a higher price back at the mine because if you're comparing the delivered but from Australia versus delivered but from Pittsburgh 8 seam, we have an advantage.

So, you are sure your haul would give you a advantage?

Yes, more back at the mine at the same price.

I realize this may relate to the anonymous letter, but any thoughts on when you might have yourself approved?

In terms of the shelf, we are, you know, just a little history of that, we filed the shelf on may 30th and got notification from the SEC about real equipment, probably June 4, they will review us, we got our first set of comments letters around July 2, which is about 105 comments.

Again, when we look at these comments themselves and I tried to break them down, the majority of the comments are what I call sector or industry comments, you know, they tried to get an understanding of how we reported our coal reserves, gas reserves, they wanted to see mine maps, they wanted to see seismic information. A lot of, I don't want to say non-accounting stuff but a lot of thing to see the basis for the underlying values of assets.

They also focused in on another area that had to do with whether or not mining rights or tangible or intangible and I know no one wants to go through my lecture on (inaudible) 141 and 142 and why things should be what they are.

Again, they focused on an issue that was, again, segment, I'd say sector-related. And the last part they're looking at is some judgment issues on terms of like segment reporting. So again, not major issues, but they continued to ask for a lot of detailed information to learn about what I call the mining industry. We are down pretty close to being done with this and literally we're talking about one, two items which we are going to submit back to the SEC, which hopefully will get clearance through on that. So we're very, very close to getting that done.

OK, great. Now, is the letter holding you up? Or is that irrelevant?

Well, I can't speak for the SEC. Obviously there's an issue with, we need to get PWC sign off on this and if they don't get PWC sign off, I don't know how they're going to view that. I can't comment to SEC's thoughts.

Has that been an item, there's been a dialogue on that? Or has that not really come up?

There has been, the SEC reviewer has alluded to it and that's the word I'll use because they're not involved in the letter, but they just said we were aware there's a letter and it's just a comment.

OK. But other than that, it sounds like you're pretty much at the end of the program and with the exception of the resolution of that anonymous letter you should be pretty close to getting your sign off on the shelf.

Yes, Wayne, this is Brett speaking. These issues are even at the NMA level where the SEC and policy of how they handle these things. We kind of got caught in-between a SEC change and the NMA debate and it's not just on coal, but on gold, on silver, they're looking at the entire mining industry and it's just slowed the process down. But we're right at the end of our piece of it.

OK. Lastly, anything new in the insurance area for reclamation? Is that getting easier, harder? The insurance companies talking about less availability or more? What are we seeing in that area?

People are talking a lot about it. It's not getting more difficult. There is a lot of talk about finding alternative ways of providing security, so I think from that standpoint that's all positive. I just haven't seen a whole lot of movement in the last quarter, but I am encouraged that people are discussing these things and trying to find solutions to these very difficult problems.

Thank you.

We do have a question from the line of Tiffany Darling (ph) with JL Advisers, please go ahead.

Hello, could you just repeat one more time again your '03 expectations in terms of CAPEX?

CAPEX, is about $300 million.

300. And your expectations for '04?

We haven't given that guidance yet, still has to be reviewed by our board.

OK, so the '03 budget or expectations of 300 can it touch up against one of your bank covenants. Is that going to limit your ability to borrow in the future?

No, we won't exceed the bank covenants and we're going the watch it closely so we don't exceed it.

OK, thank you.

Operator, I think we have time here for one more question.

OK. We do have a question from the line of Jay Turner with BMO Nesbitt Burns.

Hello, good morning gentlemen. I wanted to clarify guidance you have given for the full-year 2003, the 37 cents. I understand break-even operating earnings, but does that include or exclude the expenses at leverage?

Includes.

Everything is in it.

We have been break-even pre-tax, probably around $25 million tax benefit and then we had the $5 million cumulative effect of the change in accounting to the (inaudible) 143 on mine closure costs.

Thank you.

Gentlemen you said that was your last question. Do you wish -

Operate, that was quick. We'll take one more.

We do have a question from the line of Brian Wall with North Point Capital. Please go ahead.

Could you just suggest, you mentioned several times about board changes. Could you mention kind of what timing you expect that to take place? And I guess the number of seats that will be changed, et cetera?

Well, OK. I'll give you the status as it is today. Right now we have had two of the RWE board members have resigned. The board now constitutes six. We plan to go back to nine. We have hired a professional firm to give us to, canvas and give us a matrix on what the board needs going forward and we are going to be filling it in with people who we think add to the strategy and values of the company going forward based on what our needs are. And we're going the do that as quick as we can.

So three new board members.

Yes, that's the intention at this point.

OK, thanks.

And do you have any closing comments, sir?

No, operator, thank you very much, everyone, for joining us this morning and operator, if you would be good enough to give people the replay information, we appreciate you joining us and we'll talk with you again next quarter.

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