CNX Resources Corp (CNX) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first-quarter earnings results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Vice President Investor and Public Relations, Mr. Tom Hoffman.

Good morning, everyone, and welcome to our first-quarter 2004 conference call results and outlook for the year we will be discussing today. In addition to those of you who are on the conference call, we are webcasting this call as well, and we welcome anyone listening in via the World Wide Web. As I mentioned, we will be not only talking about results from the quarter just ended, but we will be discussing our view on the outlook for the current quarter, as well as the current year. Our expectations with regard to business results are subject to business risk, and we have detailed some of those risks in the news release that we issued this morning before the open of the market. In addition, we have a much more expansive version that we have filed with our most recent 10-K, and we commend both of those documents to your reading.

With me this morning are Brett Harvey, our President and Chief Executive Officer, and Bill Lyons, Senior Vice President and Chief Financial Officer, who will review the first-quarter results. We're going to begin with Bill Lyons and then Brett, and then we will take questions.

Thank you, Tom. For the quarter ended March 31st, CONSOL Energy is reporting net income of 114.1 million or $1.26 per diluted share. This compares with 8.2 million or 10 cents per share for the same period a year earlier. As we noted in this morning's news release, the results from the first quarter include an $83 million benefit from a change in accounting related to workers' compensation, where we will now be reflecting the workers' compensation liability on a discounted basis. This change will make us consistent with that of the industry.

Much more importantly, CONSOL Energy is reporting earnings of 30.7 million or 34 cents per share, compared with 4 cents per share from the first quarter of last year, before the effects of the accounting changes. EBITDA for the quarter was 101.9 million. That is up 76 percent from year earlier. Net cash from operating activities was 95.5 million for the quarter, an improvement of 120 percent from the first quarter last year. Volumes and prices were up significantly in both the coal and gas segments, which translate into these financial results. We are pleased with our operational performance this quarter.

Coal production for the quarter was up 8.3 percent from the first quarter last year, and I can tell you that there is a litany of mines which significantly improved their performance from a year ago. This list would be like Mine 84 up 497,000 tons. Loveridge 412,000 tons, McElroy 379,000 tons, Robinson Run 241,000 tons. The Bailey Enlow complex was up 448,000 tons. Now the Bailey and Enlow mines are of special note. Each mine produced over 3 million tons during the quarter. That is 6 million tons from the complex. This shows the production power of the Bailey Enlow complex and gives testimony to the capital investment program at the complex. And speaking of capital investment, when we complete the final portion of the expansion project at the McElroy mine later this year, it will become a two (ph) longwall mine with the annual production capacity of a Bailey or an Enlow Fork. You can understand our excitement about the McElroy investment.

Average realized prices in the coal segment for the quarter were $28.85 per ton. That's up 6.6 percent versus a year ago. These price improvements reflect the favorable market conditions that have existed during the last two or three quarters. We have captured this improved pricing as contracts roll off. Our coal unit cost did increase from that of a year ago. The majority of this increase is related to employee benefit costs. We have not lost our focus in this area. I will note that we expect to record the benefit from the new Medicare bill later this year that will reduce our retiree medical liabilities and costs.

Turning to our gas segment, prices, volumes, and margins continue to be at record high levels for the company. Gross volumes were improved 10.8 percent in the quarter-to-quarter comparison. Gas prices were good. In the quarter just ended, the price received for gas was $5.31 per thousand cubic feet, and that's up 21.2 percent from the first quarter of last year. Price increases make up two-thirds of the revenue increase for gas in the first quarter, and increased volumes accounting for the remaining one-third.

In summary, the first-quarter numbers speak for themselves. Good execution and good markets translate into good results. In terms of the second quarter, we expect to replicate the first quarter's operating performance. Brett, your comments?

Thank you, Bill. It's good to be with all of you on this call. I want to echo Bill's assessment of the quarter. I think we have a good start to our year. Certainly, we are fortunate to have very favorable fundamentals in both our energy businesses, gas and coal. I would like to commend our operators for a fine job for the first quarter. Both groups worked hard on basic blocking and tackling to make sure that we execute the operating plan, and those efforts have paid off for us.

The other broad comments I would like to make are that the results from the first quarter demonstrates the power of additional coal volumes to cash and earnings to this company. As we complete the expansion of the McElroy mine and the expansion of the Bailey preparation plant on the heels of the opening of the Loveridge mine, we will see volumes in the fourth quarter as we add these two projects in that will look a lot like our optimal level that we will be at '05. The earnings will be very strong in the fourth quarter, and as I've talked to the shareholders in the past, as these things build up with volume, we will see much stronger earnings and cash flow as we go forward, based on the capital expenditures that we are doing this year to bring on this volume of expansion at 15 percent.

Let me talk about 4 topics before we take questions. First, I am going to talk about the coal market itself. Clearly, coal prices are up everywhere. Central (indiscernible) spot prices for May/June deliveries are between 47 and $52 a ton, depending on whether it is barge or rail transportation. Northern Atkas (ph) Frigate coals are $45 to $48 per ton, depending on sulfur content, while our highest sulfur product on the Pittsburgh 8 market is right around or at $30 per ton.

I think everyone is well aware of our constant admonition that spot prices will not be the prices we get for term business, and that most of our business -- and as a matter-of-fact for the whole industry -- is done on a term basis. Term prices are up significantly, and term lengths are not getting any shorter. They're getting longer. That means that supply is a concern of the utilities. And we're seeing one-year contracts turn to two, three, even up the five-year contracts.

Despite the fact that we have sustained high prices for the now for last seven months, the Energy Information Agency estimates for the first quarter production is down 1.5 percent compared with the same period last year. And eastern coal production is down 3.3 percent. Even in West Virginia, where we see applications for mining permits, we see that as down or level from year-to-year, so we don't see a big response back on the supply side. Some inventories that we see in our marketplace are down 23 million tons lower than last year, and 26 million tons below what we believe are normal levels for our marketplace. That would put inventories at probably about 105 million to 110 million ton range on the ground.

Transportation is an issue in the coal business right now. CONSOL has not been affected that much on the transportation side. We do see tightening, though, and there are some issues around the ability of the railroads to move the coal -- not the volume so much, but the change in the marketplace. The met business has changed the patterns for the railroads, especially in the East, and has created different logistical problems for the railroads. From our perspective, these things are being worked out and we have had no impact in the first quarter, but we do see some tightening in the second quarter.

Now, let's talk about the international market a little bit. The international market has clearly two components. One is the metallurgical coal market, which is very strong and still there is high demand and high pricing for those metallurgical products for '04, '05, '06 and beyond. We see that continue. We think that there is a worldwide demand for met coal, and the growing need for steel in places like China and India are pulling these resources to new markets that have not been as aggressively developed in the last 10 years.

In terms of our own capabilities, we are working to stay flat in terms of what we can do in the met business going forward. We will be shutting down our V-8 mine next year because of lack of reserves, but we are looking to expand our Amonate and our Buchanan mine to replace the VP-8 tonnage over time. That's the situation that we're in. We do have some metallurgical coals that are marginal in the Pittsburgh 8 seam, but they would not have the same kind of pricing that we see in our Virginia coals.

Our performance on the financial side -- I want to stress to the entire base that we are talking to that the performance associated with that, this is a very capital intensive industry. And the capital spend that we're doing to not only produce the coal but to expand 15 percent this year on the coal side certainly is going to give us value for '05, '06, '07 and beyond. But remember, we have to spend $170 million to $190 million to maintain where we are in the gas business, as well as we are in the coal business, at about 70 plus million tons at year, to maintain that position. So we are a capital intensive business and we will continue to put the capital back into the mines. And if we grow beyond that, it will take extra capital to so that.

I think at this point, I would like to open it up for questions, and why don't we just go ahead and do that.

(OPERATOR INSTRUCTIONS) Michael Dudas with Bear Stearns.

Good morning, gentleman. Brett, you talked about contract links. You've been one of the few companies that have been willing to go into very long-term, 15-, 17-year contracts. Could you give a bit of color on what the major utilities in your markets that you serve are thinking about? Would you be willing to continue to enter in those long-term contracts and what is an optimal term (ph) -- 10, 15 year term, versus two- to four-year type business for your coal sub (ph)?

The first thing you have to look at, do you have the reserves to do these long-term contracts, and CONSOL is unique in that sense. We have the reserve base and the capitalized structure to do that. Most of our longwall mines do have 15, 20, 25 year life left in them, so we have the capability of doing that, Mike.

In terms of each given utility is a little bit different, so I will give you a general answer to that question. Some utilities wants to tie up this volume and run their plants at 100 percent capacity, or as close to 100 percent as they can get. So they need the volume; they want to run it, so they are willing to sign the long-term contracts and have reopeners on price and so forth, so both companies stay in the marketplace. That is one model we use.

Others just want a sure price and sure volumes for three to five years, depending on what their strategy is. So it is variable, but we are willing to work with any power plants or strategy, and as long as we have the reserves, that is the key to it. So we're more willing to go with the term. What we're seeing from the utilities, though, are their need for supply and surety supply seem to be dominant over price. In the last 12 months we have seen that.

One follow-up on that, Brett. In the contracts -- in the past we've seen these min-max contracts, and some of the industry got hurt a couple years ago when we had the high inventories, warm weather, and utilities pushed back on the shipments to you, which impacted your working capital and it impacted the results. In these new round of negotiations, is that a contract that is still in vogue or how is CONSOL looking to manage its variability relative to production schemes?

Mike, we see those as economic decisions, clearly, and when it's on the buyer's side, those things tend to be pushed. When the supply side has the strength, we move those out of our contracts. Options like that have value to them, and we're pushing them out of all of our contracts, because that is like a two-edged sword when the market's dropping. We just don't want to be in that position. Of course, our customers would like to have them. But since that time in 2002, we have not written any -- I take that back. I think we wrote one, but the economics were built into it. So we have pushed way away from doing that.

One final question. As you ramp up to your year-end target of 70-ish, 71 million tons in your coal business and your gas side, the 170 to 190 run rate for CAPEX, would you expect, given where the market is and getting through this great growth period, further organic opportunities internally and what kind of capital allocation do you think you'll be looking at -- on a general basis? I know you can't be too specific.

With our big asset base and as much resources as we have in this Company, we have the opportunity to expand other volumes of coal. Clearly, it takes capital -- if you saw what we did to expand the McElroy mine, where we committed $180 million to expand it to the second longwall. We have the capability of doing those kind of things. But we won't do them unless the contracts are in place, we have signed contracts, and we have a return on capital that is acceptable to us before we bring those volumes back into the marketplace. That's the way we look at it.

Thank you, Brett.

David Khani with Friedman Billings.

A couple questions here. Excluding the fact that -- I guess you don't have fires in this quarter, the impact of that -- it seems like your operations are running very well in many of the different mines. What's the difference between this year and last year? What are you doing differently?

Well, I would say that we are really focused on execution. I think we were doing the same things last year. We went into 2003 with the same kind of mindset, and we got distracted very quickly when we had those fires. And we spent the rest of last year readjusting, doing what we had to do, spending the right capital to prepare for this year. And I think that the operations people, both on the gas side and the coal side, were very focused on the high-level execution that we needed to do, not only to perform financially, but to get our credibility back in terms of what we can do. Because this Company has a long history of being very steady that way, and we think we're back on track doing that. So I think it's just a matter of focus, spending the right capital, increase some of our maintenance dollars and so forth, and we're starting to show success from last year's spending.

Great. If you could maybe quantify what you think the rail impact is on your second quarter on CONSOL?

We're not seeing disruptions that are actually hurting us financially. We are seeing some places where we're putting some coal on the ground in the short-term that, in an ideal world, would move it right out, because the market is certainly there for it. But we have very slight build of inventory -- I think in the second quarter that we show maybe it's 400,000 tons or less.

Okay. And then on the met market, could you give us a sense what is your strategy for capitalizing on this run-up in price? Are you going for in general mostly long-term contracts or are you going to do a blend of short- and long-term?

It will be a blend. There's different qualities, as you know -- the high, medium and low vol. We tend to where we have the highest volumes on our low vol side. We are probably going to go out with term on as much of that as we can, because that keeps a longwall machine running at very optimum levels. And these higher prices, we have excellent margins at that level. And we don't think that -- if you look at net coal prices, it's $80, $100, whatever price you want to put per ton on any of these given products -- we don't think they are real sustainable for the long time. so if we can get high-volume with multiple years at a big jump, say, from the mid 30s up into the mid 50s or the 60s, we will tie those up for a long time.

And on the cost side, we heard some of your competitors talk about steel cost and belt costs and stuff like that hitting into your numbers. How does if affect CONSOL and how are you positioned to deal with these rising prices?

Clearly, we consume a lot of things to get the job done, and one of our issues is use of steel. We use a lot of steel in our roof building processes and holding the roof up and trussing and so forth. That is a cost that will be rising, but I don't think it is as big a worry to us in terms of what that cost versus what we are getting on the met coal side in terms of margin. So I think they offset each other a little bit.

That is a rising pressure on our costs. And also, as the utilities burn higher-priced coal, we are going to see a higher prices in electricity from them. There will be pressure there, but I think our gain in price and margin will outrun the cost pressures, I think for the next three or four years for sure.

Lastly, I guess a question for Bill Lyons. Have you put any of the OPEB costs into any of your EPS guidance?

No. And again, we're dealing with Mercer actuaries. We put some ranges in our 10-K. The savings per year is probably -- we put in 13 to $26 million; in terms of the liability, it's like 80 through 160 million. However, I'm going to tell you is that what I'm seeing right now is that we're definitely to be at the upper end of those ranges.

That's great. Good getting answers from you. Thanks.

John Bridges with JP Morgan.

Given the strong production performance, I just wondered could you give us some idea as to what extent that allowed you in the first quarter to put coal into the spot market?

Well, we had some opportunities. If you remember, we started Loveridge two weeks early. We sold 200,000 tons of Loveridge coal almost within two days at prices were at least $8 a ton higher than they would have been sold the year before. So you can see that was a big jump right there. There were other opportunities on the margin where we had a little more productivity. Bailey-Enlow, we picked up a couple trains here and there. Some were as high as $60 a ton on the trains that we moved. But remember, John, those aren't big volumes, but they are market opportunities that enhance the quarter's performance. They certainly do.

That's why the incremental ton is so important to us in terms of extra profitability.

I was just trying to get a sense as to what extent that incremental ton went to existing contracts and to what it extent it was available for spot sales. Your comments on low inventories and expected logistical issues next quarter sound quite scary, if we have anything other than a frigid summer. Could you give us a bit more detail on these logistics you're scared of?

I wouldn't couch that as being afraid of logistics. I have really wanted to get across on the call in my comments there that there are pressure on the railroads. We're seeing it east and west, and we're seeing it in the East. We're not seeing it as much in Northern App as we are in Central Approximately. And I think it really is a logistics issue of the switch from met to steam coal from the local power plants to the export market. I think that will be adjusted. But I do believe it is more to the south, John. It does give you concern. When the demand is there, the railroads struggle a little bit, that is all part of the food chain. We want to make sure it runs right. But I am not sending out a warning that I am that worried. I'm just saying that we are seeing some signs of that, and I wouldn't be naive enough to think that it won't affect CONSOL a little bit.

Are you indicating that you think it's going to get worse next quarter?

I would say next quarter will be a little bit tougher than the first quarter. We didn't even see it in the first quarter. But we are hearing some chatter from the railroads that they have to work some issues out. And they will get it done. We have confidence in that. And we're spending time on it. In fact, we are ahead of the curve on the solutions. But it is a concern, I think, from all the suppliers.

Thanks a lot. Well done.

Brett Levy (ph) with Royal Bank.

I think most of my questions have been asked already. Two remaining ones. First off, the recent pension ruling and the bill that President Bush signed, does that have any impact on the funding requirements in any of your out years? And then the second one is, obviously moved out of investment-grade land and your fortunes have changed and your stock price has improved. Have you heard anything from the rating agencies vis-a-vis when they next want to see you and what they're thinking?

You have a lot of questions here. In terms of the new pension funding, that reflects moneys you put in the pension plan and they're really minimum requirements. We've never been a real fan of just putting the minimum amount into the pension plan. We usually put an amount that we consider to be prudent, reasonable in the middle, and recommended by our actuaries. I don't foresee that change in the pension funding requirements, these minimum requirements, are going to affect us, as our intent is still to fund our pension plan in what we consider to be a prudent manner.

Second, the OPEB liability, there is no funding there, so that does not affect it. In terms of the Medicare bill, like I said, it will have a significant impact on us, and as I mentioned when David Khani asked the question is that it's somewhere -- affect our liability in the upwards of $160 million range. That's the actuarial liability. So obviously, that's very significant. We are working with our actuaries, which is Mercer. But really until the final regulations are written, no one can come out with an exact number.

In terms of rating agencies, I was up there talking to them last week. I can't tell you how they think. They don't really share that with us in terms of what they determine investment-grade or noninvestment grade. We have an internal concern that they may not feel that the coal industry warrants investment-grade. We do not agree with that, but that is a concern that we have that is out there. All I can tell you is that we think that our performance and our financial statements warrant an upgrade in our credit rating, and we're pursuing that very diligently.

Thanks.

Dave Gagliano with CSFB.

I just wanted to make sure -- clarify the guidance for '04. On the earnings of $2 to $2.20, that includes the 92 cent accounting change and the 13 cent gain from the assets held this quarter, is that right?

That's correct.

So you ship (ph) that out, it's about 95 to $1.15 for the year. Then in the second quarter of '04, the 15 to 20 cent guidance -- does that include anything for asset sales or things like that?

We always have some asset sales. When you say that excludes all asset sales, that wouldn't be right. I know of nothing significant like an Australian sale that we have envisaged in the second quarter. But again, we are always looking at our properties and we always find that buying and selling coal lands is always part of the activities we are engaged in.

But if you look at it in terms of the way we gave the guidance, there was no specific sale of any onetime deal in the thing. It's more based on the performance of the mines, the performance of the gas company, and its ability to reproduce the first quarter.

So the 15 to 20 cents does not include any pennies for asset sales?

No, that's correct.

We don't see anything there.

Last question on the guidance. The effective tax rate assumption that's going into the $2 to $2.20 number for the year -- or I guess that would be a gain.

It's around 11, 12 percent, I believe, David.

Of an effective tax rate?

Yes.

And then just on the operations, now that leverage is back up and running, can remind me, do you have any idled capacity that could come back near term, other than obviously the incremental capacity at the existing operations?

The only capacity we're going to bring back is what we mentioned is the second longwall at McElroy and the expansion of Bailey-Enlow. And that capacity on Bailey-Enlow really comes in '05, because this project ends at the end of the year. We do have one property in the Midwest that's shut down, a longwall mine, but we have no intention of bringing it back. It's called Rend Lake.

Thanks.

Wayne Atwell with Morgan Stanley.

Thank you and congratulations on a great quarter. In the Medicare pension area, I'm a little confused. You mentioned 160 million. I thought that was Medicare, but --

That is the Medicare bill. I tried to differentiate the two. I'm sorry if I didn't do that clearly. 160 million is purely in the Medicare bill.

So your annual costs, you think -- how much do you think your annual Medicare costs might be down?

We put in the 10-K 13 to 26 million per year.

Okay. And that is annual? And the chances are 100 percent you will get something -- you're just not sure what you'll get?

Yes.

And in pensions, presumably the calculation would be revised. I guess that would, in fact, affect funding and not earnings.

That's correct.

Any update on your MLP thinking?

Yes, let's talk about that a little bit. In our last call, I said we would have some by the end of the quarter to talk about. We have talked about it at the Board level twice. We do have some ideas that are ongoing. But I don't think it is prudent for the Company to talk much about that until we're ready to announce something or not announce something. I feel like we have a lot of options; we're still looking hard at them. And it's taking a little bit longer, but -- I guess that is as much as I want to say about it right now.

So you're still in the investigation process?

Yes, we are.

And from your comments in your release, it sounds like you will probably not need to have a capital transaction this year to fund your spending.

That's right.

Any change in your gas drilling reserves?

On the gas side, we will probably do like we did last year -- accelerate some of the drilling in the Virginia side, but we would have to approve a little more capital to do that, and we're still looking at that. Right now, we still plan to spend $90 million there.

But you haven't stepped up your reserves at all?

Oh, on the reserve side, I think we increased by 5 percent.

During the quarter?

That was at year-end, Wayne. I don't think we have anything to report this quarter or next in the way of reserve change.

Just lastly, can you give us an estimate of how much coal you signed during the first quarter, what your open contracts were the last time we talked and what they are now and what the difference is?

Let's see. I think the last time we talked, we were 60 percent open for next year.

Wayne, in the January guidance for '05, we had 40.6 million tons committed or under contract, and I think our guidance that we had out today was 47.3 million tons. So for '05, that would suggest we did a little less than 7 million tons of additional business.

How about '06?

We don't have a report on '06.

Okay, thank you.

David Lipschitz (ph) with Merrill Lynch.

Anything new with Triana and what's going on with the joint venture?

That continues to be successful. We are drilling the holes that we had the agreement with them for this year. We are finding quite a bit of success in those deeper holes, and I think what we announced or what we talked about is what we have done so far has been economic. So we feel like -- we are reviewing to see if we can expand that on a more rapid pace. Of course, that takes capital and would have to be worked out between the partnership.

Okay, thank you.

Michael Lutetz (ph) with Appaloosa.

I just wanted to touch again on the your met coal contracts, what you look like for '05/'06. I'm not sure if you're aware, today Extrada (ph) basically said their under contract for '05 at $80, which is obviously incredible numbers. They said they had some 135s (indiscernible) and just if we could touch on yours again.

That's $80 Australian?

$80 U.S.

$80 U.S.?

Yes.

And coming out of the Australian mines?

Yes. (multiple speakers) you could touch on what you look like '04, '05 in met coal again -- the total tonnage, etc.

We still have a lot of open tons for the annual cycle starting April of '05 and beyond -- we have a lot of open tons. And we don't disagree with those kind of numbers in the short-term. It all depends on how much volume you can get with those numbers. And that market is very hot, so I don't disagree that those kind of numbers could be had in the short-term. I think '06 -- I think we believe it's going to come down a little bit, but not a whole lot. So we are locking in as high a price as we can get at the longer terms with escalation in some cases. So yes, $80 numbers are real.

The other thing I wanted to ask about is in thermal market, some of the comments you made seem counterintuitive to some of the other calls I was on, saying that the utilities and everybody is looking for longer contracts. It's my understanding that the utilities are actually backing away from entering into contracts right now, and they have not been aggressively entering into it. I'm just trying to parse what you said to what you said to what I've been hearing from other people -- and utilities likewise are saying that they are not jumping to enter into contracts, etc., right now.

I can't speak for the utilities. All I can speak for what we're doing with the customers we have, and we're signing longer-term deals than we have in the last five years. And if you look -- what we did last year, we signed the longer-term contract with First Energy and others. And what we would consider one-year deals now, I think more than 50 percent of the time they are turning into 2, 3, 4 year deals. So in our marketplace, we do believe longer contracts are unfolding and will be unfolded in '05.

Okay. I just want to understand your view, then, in terms of thermal (ph) markets. Like if you are entering into these longer-term contracts, where is that relative to spot that we see now? You had referenced some of these markets are 48 to 52 and 45 to 47. Where would utilities be interested in entering into two- to three-year contracts at this point?

I would put it this way. Pricing from '03 to '04 -- say you set a price from '03 to '04. What I would accept (ph) from '04 to '05, I would say across the board, $8 dollars higher a ton return.

And those would be on two to three, four-year contracts?

In some cases. In some cases just a year. It all depends. Remember, spot prices, you can't get volume with those kind of spot prices. Spot prices are there because there's no coal. And when you get down to start talking big volumes, there's a big jump in price, but it's not at those spot prices. That's the point I'm trying to make.

I'm just trying to understand -- investing in all these equities and owning equity, it seems that the pricing power should be in your hands as opposed the utilities. And I realize that spot prices might not be real, but at some point it would seem like you have a lot more pricing power than maybe $8. Maybe the price would be 45 to 50.

I guess I can put it this way. If we have the pricing power, we will get it. That's one thing we know. We know where the supply is, we know what the alternatives are. And the other thing too is you've got to keep in mind, if you try to move a billion tons in this country that fast on price, that's not healthy. But we will get the price we can and we will negotiate right down to the best deal we can. And if we can lengthen that out over time and lock in higher margins for extended periods of time, that's a good, solid play for us.

Could you just reiterate -- because it's a little bit confusing -- the '04/'05 total contracted that you have, break that out between met and thermal?

This is Tom Kauffman speaking. As of today, we are reporting for '05 that we have 47.3 million tons of coal committed for the '05 period. And while we have not given '05 production guidance yet, I think it's probably 70 million, maybe 71 million would be a fair assumption for our '05 production. Because that's about the annualized rate we will end up at the end of this year. And our met coals are probably 10 percent of that, I'm going to guess.

And look at our met coals of about 7 million tons a year. Typically, we have been half domestic and half international with that. We will probably be more domestic next year -- probably more like 4 domestic, 3 export. And those pricings -- essentially that pricing will start for '05 and I would say we are probably about 20 percent of that tied up for '05 and '06.

I'm confused on that. You said 10 percent of 47.3 was met coal, which would be (multiple speakers).

No, I'm sorry. 10 percent of our total production of 70 million tons is metallurgical grade. I don't have in front of me, unfortunately, of the tons that we have committed how much of that is met versus steam.

Out of the 47.3, we don't know how much of that committed is met?

No, we don't right now. We know, but we don't have it in front of us.

We don't know -- we don't have it in front of us.

What about '06 and total commitments for all pricing?

We don't provide that for add-on guidance for coal tons.

I thought I'd give a shot. Lastly, could you split out that 47.3 in '05 between Northern App in that kind of detail?

No, but again typically for our total tons, our mix is about two-thirds/ one-third. Two-thirds Northern App, one-third Central.

So you could apply that to the 47.3? (multiple speakers)

That would be fair. That would be a good, round number.

Okay, thank you.

Adam Huritch (ph) with Ulysses Management.

I might have missed this, but did you discuss anything about your thoughts, given the Tom Brown acquisition?

In fact, we were talking about whether to put it in my comments or not. We think the Tom Brown acquisition, even if you took the premium that was paid for that and if you backed it into our gas reserve base, that's about $17 a share. I really believe -- this is Brett speaking -- that the market is either discounting coal or it's discounting gas, but we're not getting credit for both of them. This is an undervalued company in terms of its asset base. Those kind of movements in the market are real, and they are good benchmarks for what the value of our assets are.

If somebody didn't see that, by the way, the reported price for reserves in the ground was $1.97 per MCf -- or $1.95, and we've got one trillion cubic feet of proven reserves. And then the reported premium for that was 24 percent, so it gives us a range somewhere between $16 and $21 a share as the value for CONSOL's business, if you apply that same market metric.

So then the question is that there's a tremendous amount of speculation around what you do about that. And I'm sure I wouldn't be the first to put you on the spot, but is there anything more substantive we should be focused on in terms of your thoughts?

Well, we have been put on the spot about this before. You have to remember, this is a new business to us. We've grown it rapidly since '99. It is maturing rapidly in the thoughts of the analysts as well as the marketplace. It has been a great contributor to us. It has the potential to grow. It is only 30 percent developed. So there are a lot of issues -- and we have a fully newly reconstituted Board that are looking at these issues strategy wise and so forth going forward. So that's about as much as I can say about it, other than we realize that we are an energy company. We have two very strong growth potentials in coal as well as gas, and it is a really good position to be in right now.

And last thing and I will let you go. The problem that people are having when you speak to people about this is the ability to really separate between the two businesses if need be. Is it truly impossible to do so? You don't have to give me something specific. Or are there ways that you could imagine in which you could realize shareholder value, you could go about separating the businesses?

I think clearly there's always a possible way of doing anything.

We provide an awful lot of financial information. We do put gas as a segment separate from the coal segment. I said, I think that the information there, though, enabled people to do so.

But if your thought pattern is do you make it as separate company and get the value that way. Certainly the universe of all the options will be looked at by CONSOL to get full value for the shareholders.

Michael Dudas of Bear Stearns.

Just one final thought, Brett. Could you review for us what you think about in locking in forward gas business, and has that changed, given the markets that we have been seeing?

Clearly, $5 gas and $6 gas is very attractive to us. As you know, our operating costs for 1000 cubic feet is right around 2.50 full cost -- that's with royalties and everything -- our cash costs are around $1.85. So you can see that is very attractive to us to lock in at those higher numbers. Clearly, in an expansion mode, we want to lock in reserve to capital for that company so we can continue to expand it 15 to 20 percent a year. We will continue to do that.

Forward-looking, we think the market is going to continue to strong. And the fact that the coal business is now becoming so strong in terms of -- it is getting its legs, so to speak, in terms of pricing as well as production. We have a risk management group within the company that we meet once a week, actually, and we evaluate the risk profile on coal and gas and we spend a lot of time where we should hedge, where we should take the risk. And I think we will see that change a little bit. As coal gets stronger, we will probably take a stronger position in terms of risk and reward on the gas side. I think you'll see us naturally move that way as coal continues to strengthen itself.

Mike, this is Tom. Let me point out here, by the way, that we have added some additional disclosure on gas, in that we have broken out the DD&A for gathering versus production. So that you could look at the gas business as two component parts. The gathering part has got a cost of about 86 cents a 1000, and the production part, net of royalties and production taxes, which vary typically with price on the gas side, is $1.18 a 1000. You can at least now, I think, look at these two businesses and separate out the transportation component if you so choose.

I appreciate that, gentlemen. Thank you.

John Bridges with J.P. Morgan.

Just a quick follow-up. I see you're reporting your coal inventories as 1.25 million tons. Assuming the rail situation sorts itself out, how much more of that could practically be sold?

You said we were reporting what?

1.248 million tons of -- in inventory of coal.

And what is your question, John?

Well, you were saying that you're putting coal on the ground that should rightly be put onto rails. And I just wondered if there was -- how far you thought that inventory could go down, how much extra coal could be put into the market.

If you look at where we like to run, 1.2 million tons out of 70 million tons is a pretty good inventory level. I think that is at the optimum level. We would not want to get our coal much forward 2, 2.5 million tons on inventory before we would have to make some adjustments. So having less than 1.2 million probably gets us pretty tight (ph) onto some of the blending we have to do and so forth, John.

So there's nothing there?

No, there's nothing there. I think it is pretty optimum what we've got planned -- and my comments -- I don't want people to overread my comments, that we're building a little inventory into the second quarter. It's not that critical, but it's something that will have to move by the end of the year.

Our inventories are really low. When we start taking a look at 15 active complexes, thinning the inventories below really 1.5 million tons is getting pretty tight.

Dick Price (ph) with Westminster Securities.

Just a follow-up on that inventory question. I would presume from your comment about using for blending that most of this 1.5, 1.2 that you said is at your lower end is considered work in progress rather than salable.

Yes, that is the way we would look at it.

Compliments to Peter on the improvements in the operations I've seen over the past couple years -- very much improved.

Paul Forward with Legg Mason.

Good morning. I was just wondering what your sense is of the regional distribution of the utility coal stockpiles. Is there anything in the Northeast that stands out as tighter than the rest of the country?

I have to talk about certain customers. I would split it out this way. Utilities that are regulated still tend to have higher stockpiles. Those who are merchant oriented tend to be the ones that are on the margin, so you can kind of pick them out, and some are very tight. Some are very tight. The merchant types are the most tight.

So there's not much of a regional pattern that stands out this year?

No, I don't see a pattern that way. The only pattern we see is those who can pass it through and those who can't. And one thing that we are seeing that really excites us is all these scrubbers being announced in our cap (ph) start (ph). The utilities seem to be shifting toward scrubbers pretty rapidly.

All right. I guess on a different concern, how concerned are you that the restart of the Pinnacle mine could cut into this strength in the met markets?

Well, our indications are that certainly any volume that comes back into the met markets is volume, and it's at a fixed price. What we see right now and what we are being told by our customers is that the worldwide demand will soak that up pretty fast and won't change price very much.

Do you see any bottlenecks as far as the rail distribution to the export markets; anything at the port that you're concerned about?

We've got over 6 million tons going to our facility in Baltimore. That seems to be running pretty smooth. It's got a couple glitches in it, just because we're changing the patterns, but I don't see anything. I think there's more of an issue to the South where they're trying to come out of Norfolk.

All right, very good. Thank you.

Wayne Atwell of Morgan Stanley.

Can you explain the motivation and maybe the enthusiasm on the part of the utilities to sign up coal on a term basis out a couple of years? Are they getting nervous at all? Are they playing chicken here? Do they feel comfortable? What is sort of the tone of the utilities?

Wayne, my impression is right now that they're very frustrated. They are getting the consulting reports and hearing a lot of data that as they try to increase the burn on their coal plants, that the supply is not responding or is not capitalized enough to supply. It's certainly on the supplier side, and this is the first time it's been that way. We saw it briefly in 2001, and then the economy flattened out and we had the glut back. But now with a slower economy as it tries to rebound, the supply is just up there. There are too many players that have gone bankrupt and shut down and pulled out, and the typical way that the utilities hold from the coal companies, it's not lining up that way anymore, and that's showing that they are concerned about supply. The discussions around supplier are much greater than they were, say, a year ago, and that continues to be an issue with them.

When they all get together with us, we talk price, but when it gets right down to the individual supply, it is very concerning to them, especially the ones that burn a lot of coal, and they want to have the supply and they want to know where it's coming from.

We're quite surprised that the utilities aren't a little more motivated. Our take on the market, and maybe correct me if you have a different opinion, is that gas is obviously very expensive. Spot pricing for coal is up nicely, and anybody who could bring on more production presumably would have. Production year-to-date is more less flat. Inventories are down to bordering on all-time lows. We don't know what the weather this summer is going to be like, but what you have is high gas, low inventories, no supply response, and gas is certainly a lot more expensive than coal. So you would think that utilities would be quite nervous. If we had a hot summer, they could be in trouble. Do you have a different spin on this?

No, I don't have a different spin. I think customer by customer, we see the concern. I don't sue the concern across the marketplace yet, and it all depends on who's got want and what their access is and what their stockpile position is, but it's not -- it takes a while for the utilities in a discount market to move mentally, and I think they're trying to digest these new prices along with volume, and that is a big step for the utilities, because remember that is 60 to 70 percent of the cost of producing electricity. It has got to run its way all the way up through the ranks to the top guys and back down, so it's taking a while to be absorbed, I guess would be the right term.

Thank you.

Matt Breeder (ph) with Millennium Partners.

Quick question. I understand Section 29 tax credits are being reintroduced, attached to the job spill in Congress right now. Can you give us an idea how that might affect you guys if it does get introduced or it does get passed?

Section 29 was available before on the gas, but I'm not familiar with that right now. We would have to study that further.

Okay, thanks.

Peter Ward with Lehman Brothers.

Of the 47 million tons you've got committed for '05, how much of that is priced? And as you extend the duration of these contracts, are you locking in price or are there price reopeners in them?

Peter, thinking back now to February 10-K, and there was a number in there for the amount. I think it was something like 6.9 million tons. Bill is going to quickly check it. It was like on page 19 or 20. There were like 6 or 7 million tons that were committed but not priced.

9.7 in '05, as of February 25th. So of the number that we're reporting today, I don't know whether there's still some that it's committed but on price. I just don't know that detail.

I would say it's probably all priced at that level. The other thing too is we are -- what's interesting, Peter, is we're in very heavy negotiations on all of our tons for '05, which typically we would be doing in July and August. That has been going on all the way through March and April, so we're seeing a lot of these volumes come together quickly or earlier in the year, and that is indicative of the supply side, because they are concerned about it.

As you do these newer five-year contracts, are you locking in a price for five years, or is there flexibility in there typically today?

It varies. A five-year deal would, in some cases, would have one reopener in it, in some cases none. Some of them are just escalations through the five years, and the tons are locked. It's not variable, as we talked earlier.

Congrats on a good quarter.

Michael Lutetz with Appaloosa.

Yes, you guys had touched on scrubbers. I was wondering if you guys have a report where you could just touch on some of the plants that you know are bringing on scrubbers, or some of the utilities in that area that are bringing on scrubbers?

You saw what AEP did about a month ago. They announced 2500 megawatts of scrubbers right in our backyard. In fact, one of the big plants they decided to scrub, Mitchell, you could hit -- our McElroy expansion and Mitchell are matched. You could go right across the road with the beltline to hit that, and that's new market for us right there. What we're seeing and it has been announced about 15,000 megawatts of scrubbers in our market area that's either built or will be built, and they've been announced through two -- we actually have a chart through '05 through '08, show when they're going to be built, and that's about 35 million tons of our coal of capacity of new markets that we look at.

If you want, you can call me later today and I can run through the list of the specific plant names if you would like.

That would be great.

Operator, I know we're past the 11:00 hour. Are there more questions on the queue?

Yes. Actually, we have two more questions in queue. Jay Turner with BMO Nesbitt Burns.

Good morning, gentlemen. Just a follow-up on the scrubber question. A couple of summers ago when I visited your research center outside of Pittsburgh, there were discussions of using pulverized limestone as a means of stabilizing the acid in the scrubber chamber and then maybe stabilizing the mercury. I was wondering if you could give us an update on how that research is going and whether you have made any strides in mercury containment?

Well, we still think that is a possible solution. It's still on the R&D phase. It's like anything else, it costs money, and that compared to natural movement of mercury with scrubbers and so forth I think will be the first move we do. Those would be on the backside of the scrubbers, and we have made progress, but it's not to the point to where we are ready to announce anything or say that we have the answer.

Thank you.

David Khani with Friedman, Billings.

A couple of questions here. Obviously now, Triton looks like it may be back on the market, and then also secondary you do have some PRB coal. What are your thoughts about that market? Would you want to bring coal onto that market longer-term?

Well, we do have some good reserves there. I think the same issue that we've always had is those reserves are a long ways away from the marketplace. We still think that new capital in that market will have to be justified as long-term contracts. Somebody has got to justify bringing that up. We wouldn't bring new capital into that market unless we had some term deals that would have the rate of returns that we see on our eastern reserves.

Okay. Second, if we have a hot summer and we're not seeing coal supply response here, are you worried at all that we could go through the same thing we have had in the gas story, which is some demand destruction? Are you seeing any of that manifest itself now, given that where you're located you're in a lot of industrial areas in the Midwest?

Well, that's part of the reason. When we talk about spot prices, we don't think it's healthy for the demand for coal to get up in the 50, 60, especially on steam coal, because I think there is demand destruction as electricity rates go to those levels. I think a steady growth that give us the rate of return on investment that is solid with the resources of the place they're in is a much better place for us to be. But we don't see demand destruction yet, and we think there is a lot of roam between the cost of generation with coal and the cost of generation with gas. There's a lot of room for movement on the steam coal side before we see any destruction or effect on the power rates.

Great, thank you very much.

Operator, we're ready to sign off unless there's somebody with a pressing question.

We do have one in queue if you want to take that one.

We'll take that as the last question.

A follow-up from Michael Lutetz with Appaloosa.

I just wanted to ask again about your last comment. You said that utilities or I guess just generators in general have other alternatives. We're trying to figure out what that is. With gas above, if you kind of believe it's above a $4 range, what alternatives do they have?

The question you asked, they don't have a lot of alternatives, but if you let the cost of energy get too high, you have destruction on the utilities side. These people move away and they do their products, like the demand for steel or the demand for whatever moves to another country. That's what they're talking about. So your capacity in the power plants actually shrink back and your need for coal shrinks back because it's priced out of the world market, I think was his point. I think in terms of their choice immediately for fuel, there are no alternatives. There never was.

And furthermore to that point, you've got nuclear rates operating at 93 percent, which is higher than it's been in 15 years.

You're right.

It's pretty steady. You've got (indiscernible) which you could always have blips in the radar screen. So I just want to reiterate again. I mean, I said it you before, but we just hope that -- you guys have made a comment, of course we're going to be looking for the higher prices in utilities. We clearly do think we have pricing power and we'll take it where we can. I just wanted to make sure I came back in the queue, because in that last comment, it seemed that you were softening that position and saying, we don't want to kill these guys when, look, if they had you guys in this same position, they would take as low as they could possibly get you. They would lower your marginal (ph) if they could.

I understand your point, but we will get the price. We know where the supply comes from. We know what their alternatives are, and we will price it to meet what we need to do to take care of our shareholders.

Okay, fair enough.

Ladies and gentlemen, thank you for joining us this morning. The operator has some information about replay, and with that, we will sign off.

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