CNX Resources Corp (CNX) 2003 Q4 法說會逐字稿

Welcome to the CONSOL Energy fourth quarter earnings results conference call. (OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded. I would now like to turn the conference over to Vice President of Investor and Public Relations, Tom Hoffman. Please go ahead, sir.

Good morning everyone and welcome. With me this morning are Brett Harvey, President and Chief Executive Officer; Pete Lilly, Chief Operating Officer for Coal Operations; and Bill Lyons, Senior Vice President and Chief Financial Officer. We're going to talking today about our fourth quarter and calendar year 2003 results, and we will also be spending time talking about our views on the outlook for 2004.

In addition to those of you who are on the conference call, this call is being broadcast on the World Wide Web, and we welcome those of you who are listening in via the Web. There are reporters on the call. You will remain in listen only mode and I will be glad to handle your questions after the call off-line.

Finally, let me remind you all that in talking about our outlook for 2004 we're making forward-looking statements. Those statements and the results that we're talking about are subject to business risks. We summarized those in the news release that we issued this morning at 7.30. We hope you have read that, and in addition we would encourage you to look at our most recent SEC filings for further discussion of risks related to our various businesses.

We're going to begin with Bill Lyons this morning who has some remarks. Then Brett Harvey has some formal remarks that he will make. And then we will be prepared to answer questions. With that let me turn it over to Bill Lyons.

Thank you Tom.

For the quarter ended December 31, 2003 CONSOL Energy reported a loss of 24.6 million or 27 cents per diluted share, compared with a net income of 4.1 million or 5 cents per diluted share for the same period a year earlier. For the year we reported a loss of 11.8 million or 14 cents per diluted share, compared with net income of 11.7 million or 15 cents per diluted share for the calendar year 2002.

Net cash from operating activities for the December 2003 quarter were 64.2 million, compared to 150.3 million for the December 2002 quarter. The change in net cash from operating activities primarily reflects lower earnings in 2003 versus 2002 and the fact that we had the benefit in the 2002 period of 57 million tax refund that was not replicated in 2003. However, for the full year net cash from operating activities was 381.1 million, an improvement of 51.6 million compared with 2002.

EBITDA for the quarter was 45.3 million, down 38 percent from the same period a year earlier. EBIT was a -12.8 million, compared with a positive 7.5 million in December 2002 quarter. For 2003 EBITDA was 236.8 million, compared with 261.6 million for 2002. EBIT for the full year 2003 was -5.4 million, compared with a -1.2 million in 2002.

Now we provided a lot of detail on the quarter in the earnings release, so I will focus on the results for the full year. For the year just ended net income was a loss of 11.8 million, compared to a 11.7 million profit in 2002. In general the change was due to increased cost of goods sold and lower income tax benefit, offset in part by higher revenues and lower depreciation and related charges. Cost of goods sold increased 5.2 percent year-on-year. As we have talked about it before, higher retiree medical costs and salary pension costs are significant factors.

We've talked many times about the challenge of our benefit costs. While obligations are substantial, we believe they're manageable and we are attacking the cost at every opportunity. For instance, in 2003 we have made several changes to our salary medical benefit plans which will reduce our exposure to medical inflation. We also believe that the recent federal legislation related to drug benefits for Medicare recipients will help us as well. We have been actively working with our actuaries to develop an estimate of the expected savings. However, it is premature to give a number at this time because regulations that will implement this law have not yet been finalized.

In addition, the cost of the two fires we had in early 2003, higher gas costs related to an increase in drilling and increase in royalty payments also contributed to the increase in cost of goods sold.

The reduction in tax benefit of nearly 68 percent in the year-to-year comparison mainly was due to the sales of our Canadian assets and the reparation of that money to CONSOL Energy for the Canadian subsidiaries.

Our revenues increased 1.8 percent year-on-year. This was primarily due to a 60 million or a 41.5 percent increase in revenue, attributable to the increase in gas prices and sales volumes. The reduction and depreciation and related charges year-on-year reflects the closure of the Dilworth Complex in late 2002.

Let me mention just a few other items before I wrap up 2003. On January 20, 2004 the Special Committee of the Board of Directors completed their investigation on the allegations made in an anonymous letter received by CONSOL in October 2003. The investigation conducted by the nationally recognized law firm of Kirkpatrick & Lockhart found no fraud and no malfeasance with respect to any of the matters alleged. This investigation encompassed 3,200 outside professional hours over the span of 14 weeks. It included a review of over 170,000 pages of documents and interviews with 60 individuals. We elected to take the highroad on this and conduct a thorough and unbiased investigation. The investigation reaffirms the integrity of CONSOL Energy and its commitment to the best practices.

Also in the fourth quarter, we had just begun the process of reducing administrative overhead and could not estimate the costs related to the severance until we were able to determine which employees would be laid off and when that separation would occur. The charges for this restructuring action resulted in a $4 million charge.

In the final analysis our gas segment had a very good year where our coal segment encountered various operating problems. As we noted in the earnings release this morning, energy fundamentals for coal and gas were favorable in 2003 and we expect that trend to continue in 2004. We believe that the guidance we provided this morning is conservative and achievable.

You will note that we're targeting higher production of sales volumes for both coal and gas. The increase in production in coal largely reflects the impacts of leverage in McElroy coming on line. The increase in gas production reflects the planned 301 well drilling program with 200 coal bed frac wells, 60 gob wells, 39 conventional wells, and 2 horizontal wells. The increased sales volumes reflect our view of the overall robustness of the energy markets, which Fred will talk about in a moment.

As you probably noted in the earnings announcement, we're largely sold out in coal for 2004 and have sold about three quarters of our anticipated 2004 gas production. For the year we're targeting a significant improvement in profitability, but probably more conservative than some of the Street estimates. We expect that the earnings will build sequentially and gain momentum throughout the year. This reflects the leverage in McElroy contributions, with leverage coming on line in the first quarter and McElroy in the third quarter. We expect coal unit costs to be slightly lower in 2004 than in 2003. We expect total costs to be below $27 per ton all year, and we're targeting costs to be lower in the second half of the year than in the first, again reflecting our various projects coming on line.

As Brett said in the news release this morning, the completion of the McElroy at Loveridge projects, as well as the Bailey expansion, causes our capital spending to be weighted towards the first half of the year. In addition, we have 301 well drilling program and an overland conveyor belt at Robinson Run proposed for this year. Coal maintenance and production for the year will run about 143 million of the total capital budget of 364 million. Because of the level of spending required, particularly in the first half of the year, we will need to evaluate various financing alternatives, and I expect we will access the capital markets during the year to help fund this program.

Brett, your comments?

That you Bill. Good morning everyone. I will start by reviewing the energy markets in general.

It's clear that coal and gas are both in very positive positions for CONSOL going forward. The important thing is that we see the opportunity with our growth strategy, as well as our ability to produce the energy products.

On the gas side I will be very brief. It's clear that there is a shortage of gas in the nation, I think mostly driven by increased demand on the power generation side, which has kept surplus volumes coming on. That, combined with the cold weather, has really driven that popular fuel to a point to where the price is staying up.

We've taken advantage of that. We've laid in our prices. Our average price is over $5.00 for the year. We're at about 78 percent locked in. And we believe that that will be very powerful earnings piece for us this year.

On the coal side it's unique at this point in time. I believe that CONSOL is in a very good position to capture value going forward, not only in 2004, but beyond, based on bringing on 10 million tons of annual production; not just to bring tons on, but to bring high margin tons back to CONSOL from where we were in the long-term contracts in the past. These high margin tons that we're bringing on are lower-cost than what we've put away in the past, meaning shutdown mines were higher cost with thinner margins. We're bringing on high margin coal that is already sold. This is not coal that we're speculating on. And for the first time in my career I see where we're adding this much volume and the price continues to climb. That's an ideal position for us on the coal side.

The international markets -- there is very high demand for coal as well. But what we're focused on is expanding our domestic markets. If you look at us from year-to-year, a lot of the production that we saw in Canada, Australia and other places, our volume mix is now strengthened with our domestic markets at higher margins.

Now, our philosophy is to grow the coal side into these high margins, not only for 2004, but through 2005, 2006, 2007. We have the opportunity of locking these volumes in with escalating prices. We will continue to do that.

To do that we have to spend capital. If you look at our capital budget for the year, it's clear we have to finish the projects that we started. But these projects will give us the growth and the stability for this company to capture high margins from this point going forward.

We do not just add tons to grow; we add tons for consistent revenue -- revenue at higher margins than we've seen in the last couple years -- and give us the ability to capture that cash flow with margins that are $6.00 to $7.00 a ton.

It's important to emphasize the projects that we're spending on -- for instance, bringing back the Loveridge Mine and the second longwall of McElroy -- these are coal mines with longwalls that have the coal sold for the long-term. We captured new scrub plants on the river, and we're setting up the base for this company to move forward in a very solid position.

With capital clearly we have to financing vehicles. We have looked at the MLPs as a possible vehicles to raise capital. That's been talked about with the Board. That is still in evaluation. I promised you on other calls that we would announce something in the first quarter of what we plan to do that way. We will do that in the first quarter. We will make an announcement. But it is being evaluated at this point in time.

Now let's talk a little bit about the special investigation. I can't speak to details of it. It was an onerous investigation. It put management in a position where we had to focus on that, as well as other things. And it is behind us now, and I believe that 2004 is going to be a very good year for CONSOL.

I want to emphasize, like Bill Lyons did, though, that our forward guidance is conservative and it's doable, and CONSOL is well positioned to get that done. If you look at it over time, remember we're bringing on volume in March as Loveridge comes back. We're bringing on a second longwall in July as that longwall comes in McElroy. Those are two unique events that bring us margin, cash flow and ability to grow our earnings. So what you will see is us gradually but steadily grow our earnings first quarter to second quarter to third quarter to fourth quarter and then on into 2005 and 2006 as we capture the strength of the market to move this capital spending that we've done in the last couple of years.

That concludes my comments for now and we will open up it for questions.

Operator, if you will instruct our listeners along the process, we're ready to take questions.

(OPERATOR INSTRUCTIONS) Michael Dudas, Bear Stearns.

Good morning gentlemen. Brett, with all the money and time and 170,000 pages of investigation on this anonymous letter, did the investigation turn up who actually wrote the letter?

No it didn't, and that has not been a focus of what we've been doing. The focus was to see that there were no allegations and that once that was completed we need to get the Company back on track, get our auditors back on track with us and move forward. The Board will decide going forward what to do about the letter and who might have written it.

Fair enough. Second question, this capital spend on the coal side, what is the targeted return on invested capital that you're putting forth?

We have various rates of return on these projects and they range with a ride range above our cost of capital. So again it's varies by project.

Can you give us some sense of a range, Bill? You don't have to give me lows and highs, but somewhere?

It would be over 12 percent.

Thank you. Third, Brett, current Pittsburgh steam prices are significantly above what you contracted in 2004 and probably what you set up for 2005. How backward is the market to go out long-term and how much of that difference do you think your company will be able to capture in your negotiations over the next six to nine months?

Well, we're in a very interesting position right now. We're now talking about 2005 prices, I think, four to five months ahead of what we would have any other given year. We also have some longer-term contracts that we signed in the past couple of years that will be rolling off in 2004, 2005. We will be able to capture a good portion of this growth. A good example is we will be bringing on some tonnages that we're selling in the low 20s. They will be moved forward, we believe, above 30 going forward with escalation on them. So there's some real opportunity for us.

And on the gas side, remind us what your Board's hedging strategy is. Is this something like we want 75 percent locked in forward 12 months? How much is available for '05? And how do you look at the gas segment relative to what you guys talked about in the past, especially given the robust pricing (indiscernible) your success in the drilling that you've seen?

Well, we lock in to see that we have return on capital investment plus cover our capital going forward for a 15 percent growth every year. That is what we've been doing. As well as if you look to where locking in at over $5.00 a million. If you look at the history of the gas business, that's a very solid position. If you look at our cost structure, full costs loaded is around 265 to 270. So you see that is very high margin for us, and that's growing at 15 percent a year. We will continue to do that. Our philosophy is to lock it in to do that. But as you see the coal side become more robust on its earnings based on these longer-term contracts and the new volume and higher margin coming on, you will probably see us a little bit more risk in keeping the gas price open. But in the short term we will continue to do what we are doing.

Thank you, gentlemen.

John Bridges, J.P. Morgan.

A couple of questions. I am a bit perplexed as to why you didn't give some sort of indication as to the planned restructuring costs that you obviously knew were coming at the time of the previous guidance. And then just a follow-on from Mike, really. Based upon the growth in your planned production then, it sounds as if you should be in a much stronger financial position in 2005. So I'm just surprised that you're still sort of selling forward gas in that period.

Let me answer the gas piece and then I will have Mr. Lyons talk to your first question.

The gas piece itself, we're sold forward about 40 percent for 2005. Remember, these are still very high numbers compared to history and compared to what we believe the cost and gas is that would replace that in the market like LNG and so forth. That is always being evaluated and we look at that, but we're layering it in according to where we see the drilling cycle, how many rigs are out there, what the growth in storage is. And so there are many variables that go into that. But we think that's a good solid place to be, and we have some people on the Board that have been in the gas business that advise us on that as well. So we're in a strong position there.

Isn't the gas market deep enough to sort of perhaps buy puts rather than just sell everything -- you know, sell on (ph) the upside?

We can do both, and I think our philosophy has been to sell it into the marketplace and layer it in according to where we see the value at. A good example is id this would have been a warm winter, we would have seen a much different gas price structure. And so it is not as deep as people believe in terms of demand yet.

Forgive me -- as an analyst we're always hindsight related.

That's all right.

I will answer your question, and I agree it's hindsight as you're looking at the pre-restructuring. We did announce restructuring in December, and we were in the very beginnings of that program. From an accounting standpoint, you have to have an awful lot of information available before you can really determine how much that charge is going to be. The fact that it ended up with around 4 million wasn't surprising to me when we announced that we were going to target a reduction of about $10 million in overhead a year. So the cost of the program is between 3 and 4 million in terms of severance cost, and we expect to start receiving the benefit of those reductions in 2004.

Thanks guys. Good luck.

Eric Eddondon (ph), York Capital.

Some of my questions have been answered, but I have two remaining questions. One is what do you expect your tons of productive capacity to be coming out of '04? You have given us an average for the year, but what do you expect it to be?

Our analysis has been at the -- through the fourth quarter, after the longwall, the McElroy and some of other increases in volume has come, it will be 70 million plus as an annual rate going forward. So I would say 70 to 71 million going forward with some upside to that. But that's a good solid place for us to be.

Shifting back to the investigation, now that it is complete, how does that relate to registration of shares and potential timing of maybe selling the remaining RWE shares?

We're going to head full bore on this. We have Price Waterhouse reviewing the special investigation to allow them to go through and complete the review of our third quarter 10-Q. And the Registration Statement also is in process. So I would expect that to move along very quickly.

Thanks.

Wayne Atwell, Morgan Stanley.

A couple of quick questions. Did you make any changes in your pension plan assumptions discount rate returns or anything?

Yes, Wayne. Our discount rates dropped down to six percent and we had it at 6.75 percent. And that was the big change in the pension plan for the for the year.

In terms of OPEB, we also dropped down the discount rate from 6.75 percent to 6 percent. And we also did some changes in the trend rate, which you are aware is very significant on the number. On the trend rates we had it -- like 8 percent, 7.5 percent. We move them up to 10 percent, 9.5 percent. And that's the year for 2004, 2005.

In terms of salary people, the salary people are capped at 6 percent in terms of the health-care trend rate because of the changes we made in the medical plan.

So yes, we did make rather substantial changes in the OPEB assumptions. And again, the discount rate, we are required based on current market conditions for what they call long-term investments, and also we're required to review the health-care trend rates and adjust them based on current information also. So the health-care trend rates went up and the discount rate went down.

What was the return on the fund and did you make any changes in the assumption?

Return on the fund is eight percent. Our assumption change last year was eight percent. So there wasn't a change in assumption from last year, but previously we did have nine percent.

So for '03 you assumed eight percent and in '09 you're going to assume eight percent?

'04 eight percent.

Okay. So in '03 you assumed eight; in '04 you're going to assume eight?

That's correct.

And what was the actual return?

Actual return on the pension plan was very good. I don't have that exact number, but it was definitely in double digits.

Okay. How about contributions to pension plan -- what do we looking forward -- what did you do in '03 and what about '04 and '05?

We contributed about 42 million in '03. We're anticipating a payment of between 55 and 60 million in '04.

Did you make any change in your estimated expense for pensions in '04 versus '03?

Pensions -- we're estimating somewhere between 45 and 50 million in '04. That's about the same in '03. That's in the range of '03.

Financing -- you talked about possibly an MLP. So presumably the financing area would require something in addition to the MLP, maybe debt, possibly equity. And what about the Registration Statement? When do you think that might be cleared?

We're working on the Registration Statement right now and I would hope it would be a matter of weeks, but that's up to things outside of our control. But we're working on it very diligently.

In terms of financing, if the MLP does work is that sufficient? Or do you think you might need something else in addition?

Probably need something else in addition.

I have other questions, but let me turn the mike back to someone else.

David Lipshitz, Merrill Lynch.

Bill, you mentioned something about costs for '04. Was that under 27 for the year?

Yes.

And is there any chance of eventually getting down to $25 level again? Or where do you see that in the future?

That is very difficult to answer. The issue with like benefits, OPEB combined fund. There are things that we need to attack, which we're doing. And if we get those in line and with increased volumes $25 a ton to me is not out of the range of possibility.

What is your depreciation outlook for '04?

It's about the same as what it was in '03.

Thank you.

Dave Gagliano, Credit Suisse First Boston.

Just a couple of quick questions. I am just curious what your tax rate assumption is in driving your 60 to 75 cent net income guidance.

Taxes should not be a significant item for 2004. There will be a slight benefit.

And then based on what you know today, given that I think it's about 60 percent of your '05 production is already committed, what would expect in terms of your total average realized price -- above or below $30 a ton?

For '05 we don't have that number yet. Certainly on the business that we are negotiating presently for '05 and beyond, which is where we're focusing our effort on marketing, we're getting well above $30 for our Bailey-type product and for our higher sulfur Pittsburgh 8 on the rail market. Of course the river market is not quite that high. That's still a bit below $30. Certainly the met coal markets are very strong right now. And assuming that those fundamentals continue, it looks like we will be locking in some multi-year deals in the met market at strong prices as well.

And based on that, do you think -- so do you think you'll exceed that $30 threshold by '05?

I think clearly for the new business, I would say the average price will be pushing that. It may very well be there. I'm not sure at this point.

Okay. I think that's about it. Thanks.

Mark Plunkett (ph), Atlas Capital.

I was just curious -- I know you said your forward guidance is conservative in nature. I am just trying to get a better understanding when I look the high-end of your production guidance at 69 million tons, how does that translate into the higher end of your EPS estimates? I was wondering if there were some conservative assumptions laid into that higher volume number that there might be some upside there.

The guidance we gave is exactly what we're going to give. In terms of being conservative (multiple speakers)

I am just try the understand the philosophy I guess.

The philosophy is that we do have relatively high fixed cost, so incrementally if we bring on incremental tons that dramatically impacts our profitability. So if we increase our production from existing mines, you could see some significant changes in profitability.

The other quick question I had -- with regards to leveraging your other mines coming back on line, how do those stand? Are any of those -- is there a potential for any of those to be finished early? Or is everything tracking on plan?

If you go back to last year when we were talking about the recovery of Loveridge, our prediction originally was that Loveridge would come on in late April. We have already moved forward to early March. And I think that is very solid. We just talked to our McElroy superintendent this morning, and he said that they will be on line for July to bring that second longwall on as predicted with the capital spending there. So I feel real good about these volumes coming on as predicted with good high margin prices.

Excellent. I appreciate it very much.

Jonathan Efrig (ph), Third Point.

Can you walk us through management's incentives plans, specifically when new options will or have been issued and how the investigation may have impacted the timing of that?

The options -- the incentive plan, of course, has got two components -- a short-term incentive plan and a long-term incentive plan. The options are given out right around April when we have the annual shareholder meeting. And none of the option -- optionally has been delayed based on the investigation. But there will be something coming out from the Board at that point in time around April.

Thank you.

Dick Price, Westminster Securities.

Daniel Roling, Merrill Lynch.

Pete, earlier you made an allusion to or reference to the metallurgical coal market. Can you tell us what it looks like for you and where are you on your contract tonnage from that for '04?

We are clearly done with all of the domestic met business. That's typically a calendar year, and we've actually been talking about a little bit extra with certain customers. And we are pretty well along on finalizing the export met business. Normally that's a fiscal year that starts April 1st through the succeeding March 31st. And I would say that we are -- by mid-February we will have that pretty much completed. We've got the majority of it done now. And I have to say the pricing is very strong and in a number of cases we have been successful in locking in three-year deals at known prices.

So three-year deals at known prices not subject to renegotiation?

Yes.

Are these prices anywhere near what we're reading in the trade press of $66 at the port US?

66 per -- you're talking about FOBT in metric ton or short ton?

Metric.

In metric ton? Yes. I think there's some deals in that order of magnitude.

Brett, you had said earlier that your capacity at year-end '04 would be close to 70, 71 million tons. Given your capital expenditure program and what you're looking at, what do you think your capacity will be at year-end 05?

At year-end '05 I believe with the additions that we're putting on Bailey and long (ph) it will be more between 72 to 75. I'd say right around 74. If I had to give you a range, I'd say that's a good number.

And I may have missed this earlier because I got on the call just a little late -- what are you open tons yet on the thermal side for -- I assume '04 is sold out -- but '05 and '06?

I'm not sure what the number is for '06. (multiple speakers) For '05 I would estimate that we have about 30 million tons or so to finalize. Like I said, we're in the process of negotiating '05 and beyond business right now, which is months earlier than you would normally expect. In our market area in the north we now believe that utility coal stockpiles are below normal -- solidly below normal. The utilities seem to be running the coal plants very hard, partly because weather and partly because of the high price of natural gas. And therefore, it's creating openings for negotiating '05 business because '04, as you all well know, is pretty well spoken for.

Brett, a question for you. On the MLPs, since I obviously have missed something, could you elaborate? Are you talking about MLP just for gas? Are you talking about MLP for coal? Are you talking about MLP for the Company?

I'm talking about the MLP that would address the suite of assets that we could put in a natural resource type MLP. For instance, pipelines or coal reserves or a combination thereof. So it would be a (indiscernible) MLP, based on our assets suite.

Okay. Thank you.

Dick Price, Westminster Securities.

Brett, you had indicated strength in international markets and emphasis and focus on domestic. Pete followed up with some very strong comments about the met market. Could you give us a little more color on the balance of your export market, given that you had indicated in the last quarter that you saw expanding opportunity there with existing customers?

Yes. The export market is very strong, I would consider, on the spot market year-to-year on the steam side. And on the met side, which should typically -- spot market meaning year-to-year -- we're seeing multi-year deals at higher prices. That's good news.

What we have, though, is a conflict between available volumes for the steam market on the worldwide side against growing volumes on our domestic side. So we basically have been dictating to the international market a steam price FOB. the mine that would match the robust national market. And we tend to be leaning towards building our base right here at home. We're not putting a lot of volume into that international market. Our domestic business is growing.

Great. Thank you.

David Fondry, Heartland Funds.

I'm having some difficulty reconciling the comments on conservative guidance, and I guess the issue is -- at least for me -- that in your guidance you suggested at the high end you could be at 69 million tons. And yet, you're going to exit 2004 at 70 the 71 million tons of annual capacity. If you were to reach that -- I don't know how you get the 69 million tons as some of that capacity is not coming on until the first --second quarter and then the additional capacity coming on into the second or third quarter.

And then, secondly, if you could just help me understand, if you were to hit that 69 million tons for the calendar year 2004, are you saying that -- because your comment before was that you had heavy fixed costs. Are you saying that you may exceed the high end of your guidance of 75 cents?

I will speak to that. If we hit the 69 or beyond, we certainly have the capability of going beyond the guidance, depending upon how things work in terms of cost, what mines it comes from, where the margins come from. Clearly if we're much more successful in mines like Bailey and Low (ph) or the metallurgical minds for the year, there's potential there. In more the lower margin mines, gives you a different mix depending on where the coal comes from. But yes, that could happen. But I think our guidance is our guidance.

In terms of the volume for the years, let me explain to you again that you're bringing on 5 million tons of annual capacity in March, with adding Loveridge from where we are today, and then in July you're bringing on another 5 million tons of annual capacity, which is a total of 10 that you will be at that rate by the end of the year. So that's where we're getting to the 70, 71. So you can see it is a step function. And with that higher volume, not only in terms of the volume determine the fixed costs, but you're bringing on higher margin coal than what you wound down with the last couple of years. So it's coming back longer-term contracts, higher margins.

Thank you.

Paul Forward, Legg Mason.

Just curious on -- we've been talking a lot about exports. What is your exposure to the Ontario coal plants that I guess the Premier of Ontario is looking to shut that capacity down? And are you concerned that he will actually be able to go through with that plan?

It is interesting. I do have a meeting -- we do fairly significant business with Ontario Power. They have been a steady customer. The actual exact tonnage I don't have in front of me, but it's on the order of magnitude of 0.5 million or so tons a year.

So when you talk about your overall export business, that is a pretty small component of the total. What is your -- what do you think you're penciling in for 2004 total export tonnage if you, say, hit 68 million production range?

Total export tonnage, steam and met is on the order of magnitude of 6 to 6.5 million tons, not counting the exports from our Australian operation. With that we would probably be around 7 million.

Just on the -- going back to Wayne Atwell's question about the OPEB discount rates on the pension discount rates, can you give an earnings impact in 2004 for the changes that you have made in the discount rates and also the assumptions going forward on growth rates?

In terms of the assumptions, we have this built into our projection. I said before we expect OPEB somewhere in terms of say 210, 220 million to charge for the year for 2004. Last year in 2003 that charge was somewhere around 170, 175 million. So the increase in charge reflects the change in discount rate and the change in the medical trend rate assumptions. So that is filed (ph) in there.

Thanks very much.

(OPERATOR INSTRUCTIONS) Wayne Atwell, Morgan Stanley.

A couple of quick questions. Your volume projection for '04 seems to be at the high end of your -- your sales seem to be at the high end of your production. It almost seems like you're selling more than you're producing. You don't have that much inventory. Can you explain that?

Clearly we planned -- our guidance we gave in December was 68 million. We're giving you arrange going forward this year. There might be some adjustment in sales, depending on production, and we have some leverage on that. Clearly we want to sell -- mine and sell the 68 million that we showed there. And in terms of inventory, the inventory is going to be tight all year long. It's going to be -- as we get it out we're contracted to deliver this and get it out. But there is some flexibility there. That's why we gave you the ranges.

So your sales are at the above the bottom end of your production range. Do you have the flexibility of declaring force majeure if you have a production problem you can't deliver on?

Absolutely.

Yes we do.

You took a charge for I guess severance, and that implies, did you say 10 million in cost-cutting this year?

Yes.

And how many people left the firm?

There's right around 100 people and those were high end people. Corporate office is mostly where it came from.

Did you have any updates to your gas reserves? I think you've done some drilling and you're looking at different areas. DO you have anything else you can tell us?

We're going to add slightly to the position, I think about 30, 35 Bs of reserves. So it will go up a little bit.

Keep in mind, we're not spending a lot of money on adding reserves; we're spending a lot of money on expanding proven reserves. So our production -- our capital is being focused on the increase in production in existing reserve base. In terms on -- remember, it's not going down as we expanding 15 percent a year, so that tells you that you're naturally expanding your reserve base as you increase. That tells you how powerful that is.

So the money is being spent for development, i.e. bringing in new volume?

Yes. You're bringing 15 percent a year on a larger volume every year. And that -- and we're only one-third developed in that proven reserve.

You had had some problems with production. Earlier in the year you had a fire and a few different things. Are those all resolved and you're happy with what's happening in your production then going forward?

The answer is yes. 84 has been back in operation for quite some time. And as Brett mentioned, the Loveridge longwall will start up in March for sure. We have implemented a number of organizational changes and adjustments to ensure that that doesn't happen again. And I will say that thus far in January we are right on our internal target.

One last question. In terms of what your booking going forward, the spot price that we see is extremely strong. I think it could go even stronger, even higher. What kind of contract pricing are you getting? It sounded like you're talking -- maybe hoping to get $30 versus the average of about 27, 28. I would have thought the contract price would have been more in the 32, 35 range.

It depends on which product you're talking about. For our typical Bailey product, there's no doubt. That's correct. Maybe even a little bit more. (multiple speakers) For the Loveridge, Blacksville, Robinson Run product it's a little bit lower because it's a higher sulfur product.

If we look at maybe the average across the board of what is sort of the -- and not to give away any confidences -- but what kind of ranges are people talking in terms of what you could lock in for '05? I would have thought 32, 35 was sort of where the discussions would be taking place right now for two, three, four-year contract.

I think that's a good assumption.

That not unreasonable. One thing about the spot market -- and I can't overemphasize this -- you have heard us say this before -- the spot market is mostly driven by lack of coal period that's available. You can't move these big volumes that fast with that high a price jump that you see in the spot market. It just doesn't work that way. You get it over time. And we're negotiating -- the numbers you spoke to just a minute ago are good solid numbers going forward.

In terms of business strategies, it's probably smartest to develop your domestic market because those are long-term people you have important relationships with. But I would think the export market people would almost be desperate because we hear prices are through the roof for Europe and elsewhere. I would have thought pricing would have been much higher for volumes you could put into the export market. Maybe that's for next year instead of this year, so maybe that's not doable.

Let me just make sure I'm clear on this. Historically, the export steam market has always been priced at a discount to the domestic steam market. And what Brett said is that the export steam business that we're doing going forward, we require it to be priced similar to the domestic steam market. So that's not really our growth market and there are some export steam customers where our coal fits very well and as long as they pay the price that we can get in the domestic market we will stick with them. But that's probably not a growing market for us because our internal or domestic market opportunities are growing. No other companies in the East are growing like we are, and every time a unit gets scrubbed in this region it increases the market opportunity for our coal.

In terms of the met market it is a little bit different story. And again, as Brett said, historically the international export met coal customers typically have not been willing to do multi-year deals and it's because they have had more choices -- coal from other countries, not just the US. However, in certain cases domestic consumers of met coal are more willing to do the multi-year deals. Typically the domestic steel buyers tend to, for us at least, establish the pattern of where we will allocate our low-vol and mid-vol (ph) coal.

Thank you.

Evan Smith, Sanders, Morris, Harris.

Good morning. A quick question on the natural gas forecast. It's like 16 percent increase in '04, yet the CapEx falls by about 12 percent. What's going to change there to help the production volume growth?

The issue there is higher concentration of what we call the sweet spot in terms of the expansion, less expended on capital on exploration. That changes the mix.

So you'd be working in a more concentrated area, is that what --?

We do have a very concentrated area where we're expanding our volume anyway, but when we looked at our capital and our opportunities for the year we cut back on some of the exploration pieces and emphasized the expansion of the gas business, especially to capture these big prices.

Does that assume rising or flat service costs or down service costs?

Actually, it shows our cost of production to be flat.

Thanks a lot.

Eric Sow (ph), Kazza Capital (ph).

Could you just remind us how many tons of met coal that you produce on an annual basis?

I believe it's about 7 million a year met.

That's about right.

Okay. Thanks.

Fadid Sadid (ph), Friedman, Billings, Ramsey.

I think most of the questions got answered, and I got dropped off the call -- sorry. I just wanted you, if you haven't answered it already, just expand a bit on the range of the production forecast of 65 to 69. Given the progress now, what has to happen for the low end of the range and the high end of the range? And also, if you do less than 68 where does the tons come from the 68 million tons of promised sales?

Brett talked about that earlier. In a nutshell, if we're on the low end of the range it's because we have probably had force majeure conditions that arise during the course of the year. If we're in the middle to upper end of the range, it's more it's more the expected case bringing on the Loveridge longwall and the second longwall at McElroy. We're contracted at approximately the 60 million ton range. We have some flexibility, and certainly the availability in all of our coal supply agreements to claim force majeure should such an event occur.

Okay. And maybe one more question. Going beyond '04, are there opportunities for even a couple more tons of capacity going out to '05?

We think so. We have some opportunities to maybe increase in the Central App area on our steam coal production and we certainly are in the process of a fairly substantial investment at the Bailey Preparation Plant that will allow the combined Enlow Fork and Bailey mines to increase production. There will be some ramp up to that production during '05 and '06, but ultimately I think we will add about 4 million tons of capacity by the '06-'07 timeframe at Bailey.

That's on top of 69, 70 range?

Yes.

Very well. Thank you.

Rebecca Followill, Howard Weil.

Just a quick follow up question on this last question. I want to clarify if you come in at the low end of your range at 65 million tons and you sold forward 68, and it's just a delay in getting these two mines on line you can declare force majeure with delays? Without fires or weather or anything like that, you can declare force majeure?

Not on a delay typically. (multiple speakers) unless there's an event -- some sort of an act of nature or whatever that causes that delay.

Let me just remind everybody that in the guidance we pointed out the guidance is for contracted and committed tons. And there are some tons in there for which the sales group feels essentially all of the discussions are completed and they've stopped shopping those tons, if you will. But there are tons in there for which there are not necessarily signed contracts. But we feel that in terms of our discussions with all of you that you need to know how much of the tons we're shopping and how much we look at internally as put to bed. But on a strictly legal basis, and the basis and the basis that we would file with the SEC, we would only report contract tons.

Now I don't have a breakout of that 68, how much is signed contracts and how much is committed, but not get signed. I would imagine of the vast majority of it is already under contract. But there may be some flex there as a result of the way we report that number.

So some of that 68 million commitment may be just sales that you bought from third parties and are reselling?

Yes. And you've got to realize, we're not taking a lot of risk between 65 and 68 in terms of sales. Otherwise we wouldn't have sold that much. And that's basically the position we're in. There is some flexibility with customers as well on where we have full requirements, what their burn is and so forth. So there are a lot of variables there.

Thank you.

We're mindful that our colleagues at Arch Coal are starting their conference call here I think any minute, and so we will take another question or two if there are any, and perhaps many of you need to drop off and take that call as well.

John Bridges, J.P. Morgan.

Very briefly, what is a good adjuster factor between your thermal coal price and your met coal prices, i.e. what's a good up-to-date price for getting the coal from the mine to the port to get to that FOB price?

For the low-vol and mid-vol product I think Dan Roling asked the question earlier and asked whether $66 per metric ton FOBT was reasonably accurate, and my answer is yes.

I'm thinking in terms of what discount -- what you're losing in terms of the difference between the ex-mine price and the FOB price in your revenues.

I think it's an order of magnitude of 14 or $15 at the terminal. (multiple speakers)

It depends on what mine you're taking it from and where you're taking it, but it can be anywhere from seven to fourteen.

Seven to fourteen is a range?

It depends on where you're coming from.

And then you have to wash the stuff harder to get it up to metallurgical quality?

Actually our met coal is washed as our spec (ph). If you look at Buchannan and VP8 it is washed met spec and that's a market we've always driven on value.

So is there a difference on the recovery for a thermal product and a met product?

Yes.

What would that difference be?

Typically -- well, it depends on the seam characteristic, but typically your met products need to be lower ash.

Probably two present difference in ash would be of a gauge you could use on (indiscernible) coal.

That's great. Really appreciate it. Thanks guys.

We have no further questions.

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