CNX Resources Corp (CNX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the third quarter earnings results conference call. [Operator Instructions]. I would like to turn the conference over to your host, Tom Hoffman. Please go ahead.

Good morning, everyone. This is Tom. We're here this morning to talk about CONSOL Energy's third quarter results and to discuss with you our outlook for the remainder of the year. With me this morning are Bill Lyons, our Chief Financial Officer, Brett Harvey, our Chief Executive Officer, and both of them will be making some formal remarks this morning. Also with us is our Chief Operating Officer for our coal segment, Pete Lilly. Pete is in mourning because he is from St. Louis. Those of you on the call from Boston should not rub that in.

We would also like to welcome those of you who are listening to this conference call via the World Wide Web. For those of you on the call we will be taking questions after Bill and Brett finish their formal remarks. Reporters on the conference call will be in listen-only mode throughout the call and I will be glad to talk with you off line, I will be available all day.

We are going to be discussing not only the results from the quarter just ended, but we will be talking about our outlook for the fourth quarter. These outlook statements are subject to business risks in terms of our ability to achieve them. We have detailed for you in our earnings release this morning a number of business risks that we would encourage you to look at and in addition, we encourage you to review the risk factors that we detail in our latest SEC filings. With that we're going to begin with Bill Lyons and then Brett Harvey and then we will be open for questions. Bill?

Thank you, Tom. For the quarter ended September 30, 2004, CONSOL Energy reported a loss of 11.6 million or $0.13 per diluted share. This compared with a loss of $5.9 million or $0.07 per diluted share in the September 2003 quarter. After excluding the $83 million benefit from an accounting change relating to Workers' Compensation, which we did disclose in the first quarter, net income through the first nine months of this year is nearly six times that of the same period last year.

Net cash from operating activities for the quarter just ended was $7.7 million, compared with 77.9 million in the same period a year earlier. This is primarily due to activity related to the company's accounts receivable securitization program. For the first nine months of the quarter, net cash from operating activities was $195 million compared to $317 million for the same period in 2003.

EBITDA for the quarter just ended was $49.5 million, the same as a year earlier. Through the first nine months, EBITDA was $248.8 million, an improvement of 30% compared with the same period a year earlier. In the case of a nine-month number we have excluded the impact of the previously mentioned Workers' Compensation accounting change.

In the case of the third quarter comparison, our pre-tax income was nearly the same in both periods although the mix of contributors was different. Net income differences in the quarter-to-quarter comparison primarily are related to a smaller tax benefit in the quarter just ended. In terms of tax benefits, the difference in the effective tax rate is due primarily to permanent tax deduction items such as percentage depletion and the recognition of the tax benefit related to the Medicare prescription drug act.

Coal production improved 5.6% period to period. This reflects the reactivization of Loveridge earlier in the year and the addition of the second long wall in McElroy in August of this year. Although there were some upsets from problems at other mines, those notably mine 84, protection quarter to quarter was up more than 800,000 tons.

Coal pricing also improved substantially quarter to quarter. Average realized prices rose $1.53 per ton or 5.4% reflecting a continuation of the very positive market fundamentals that we have seen since the beginning of the year. Our problem is unit cost, which rose to $30.47 per ton in the quarter just ended. As we noted in the earnings release, the cost increase period to period was $3.10 per ton and reflected higher laboring supply cost and the impact of the special 12-month combined fund premium assessment that we announced last year.

The operating cost increases reflect both the mining problems we had in the earlier part of the quarter and the inflationary impact on supplies including steel surcharges, which we estimated to be 8-9%. We spent considerable time during our conference call in August describing the production problems, so I won't go into that. We were pleased to see our cooperations were able to improve costs in the later half of the quarter and we believe we can continue to realize cost savings in the fourth quarter.

Gas operations earnings were $30 million in the 2004 quarter versus 18 million in the 2003 quarter. Gas sales volumes net of the royalty owner's interest rose 9% period to period. We completed 32 new wells during the quarter as we continued to drill up the Virginia reserve. As we have explained, there's virtually no risk of the wells not producing because of the gassing nature of the coal seam into which we are drilling.

Unit costs of production, net of production taxes declined 11% period to period as we have continued to do a good job of controlling lifting costs. We did see an increase in transportation costs related to our purchase of firm transportation capacity in the Columbia system that increased our operating costs on the transportation side by about $0.11 per thousand cubic feet. We also realized the benefit of the robust gas market that resulted in an increase of 25% in natural gas pricing over last year.

Brett is going to talk about that more in a moment. But we continue to be very pleased with the growth of our gas business and also in the outlook for the future. Let me also mention we're making progress in our effort to improve our balance sheet. Since the first of the year, total long-term debt has been reduced 14%. Long-term liabilities have been reduced 6%, and shareholders' equity has improved 33%.We are steadfast in our commitment to actively manage our balance sheet, particularly on the liabilities side. This improves shareholder value.

Finally, let me review our outlook for the remainder of the year. As you probably noted in the earnings release we expect the fourth quarter to be our strongest quarter. We are forecasting coal production to be more than 18 million tons for the quarter and gas production on a gross basis to be more than 15 billion cubic feet.

We expect coal prices to continue to improve sequentially and we expect to capture high market prices on the unhedged portion of our gas production for the quarter. The increased coal production, along with changes in the mining plan for mine 84 and the coast control efforts being put forth at our mines should result in substantially improved unit costs.

As a result, we are forecasting earnings of $0.40 to $0.50 per diluted share for the quarter. Because of the unanticipated cost impacts from our mining problems in the quarter just ended, we will fall a little short of our original full-year net-income target of $2-2.20 per diluted share. In general, however, I think we will largely achieve the targets we have set out for ourselves.

The question you may be asking is why is this fourth quarter forecast so robust? There are a number of reasons. First, we expect the gas segment to continue its growth in production with higher realizations and operating in a cost-prudent manner.

Second, we have all 13 of our long wall mining systems running. As you recall these represent the main mining method we use particularly in the northern Appalachia region. The second long wall at Bailey Mine had been idle during the third quarter but was restarted in the latter half October. What this means is that the fourth quarter will be the first quarter where all of the existing mines and all of the expansion projects will be contributing to the bottom line.

In addition, we still expect to complete the expansion of the Bailey preparation plant before the end of November, which will give us additional capacity. And as we had noted in the earnings release, we have initiated production at our Miller Creek operation in southern West Virginia. This will contribute about 150,000 tons of low sulfur coal in the fourth quarter.

Our biggest challenge remains coal-segment operating costs. But we believe, as we routinely produce 17-18 million tons per quarter, unit cost will improve. Finally, the special combined fund premium assessment of $7 million per quarter ended with the third quarter payment. Going forward, these payments will drop to about half a million dollars per quarter. Brett, your observations.

Thank you, Bill. It's good to be with all of you and talk about CONSOL and where we're headed. Let's first review the coal markets. Power generation in coal-fired areas of the east where we produce is up 2.5% year-to-date. We see that as a positive. The utilities that are running hard on coal and we think that the economy is pushing that. Inventories are at these power plants are down about 10% year-on-year and 10 to 15% below normal levels. Going into the winter, I think that is critical for our customers.

CONSOL itself, a big player in northern App, we have a million tons of inventory. That's low for us. Virtually it tells our shareholder base and the market that every time we mine, quickly going into the market place and trying to build inventories and the utilities that we don't see the building coming on. The forecast is for a cold winter, so it's going to be a tough winter in terms of delivery and volume for what the customers going to need. We think the market will continue to be very tight.

The U.S. economy is maintained at a gross level that we believe is sustainable and that it's modest but still it's very deliberate in its use of electricity and we see that as valuable for the coal business. Global demand for coal on the met side as well as the steam side are robust. The prices are strong. There seems to be limitation out there on transportation and infrastructure that is holding the price up and the volumes down, which is demanding a very high price for steam and met coal.

Coal production in the east in our area is up 3% year-to-date. But let me emphasize, much of that is CONSOL's expansion that was planned and developed and capitalized with decisions made in 2001 and 2002. That coal is sold. That is not speculation. Fundamental support for pricing, robust pricing of coal continues to be in place. We're very positive about that and we see 2005 and 2006 as very solid years for coal pricing.

Let's talk about gas. Gas supplies across the nation remain very tight. Production year-to-date with record number of drilling rigs is only up one-tenth of 1%. The natural gas association predicts that gas supply will be down slightly for the year. Weather will be the largest single factor in what gas pricing does for the winter. It's clear to us that, with full storage, that a warm winter would be a dampening on gas prices. But a cold winter would bring that story down rapidly with a supply situation that doesn't respond will keep the gas prices up. We see that as positive. We continue to drill.

Out ahead, we see the forward strip at very robust prices. Yesterday, we locked in some gas production for January and February of '05 at over $10 per million btu's. That's very positive for our shareholders and we believe that there are some more opportunities there as we go forward.

Let's talk a little about mine costs, and I think that it's something that needs to be addressed. The third quarter clearly showed some high mine costs. If you look at the quarter and dissect it, July was such a tough quarter for us for obvious reasons, and we talked about those in our warning that we did on our earnings. It was so far out of line that with the production and cost structure of August and September being in line with our budget, it is still put us out for the quarter, and we are continuing to look at those things and work with volume as well as cost controls at the mines to keep those costs down.

We see the fourth quarter in a very good position. All of our projects are online. If you look at us from 2003 to 2005, we have added almost 9 million tons of capacity into the company. The capacity was not speculation. It was sold capacity with long-term customers and that is solidly in place. These products have come online this year.

The Bailey prep plant will be totally finished in November but is running right now and the testing is being done. Pete's group has done a good job of getting that online and we see that as adding to the value of the fourth quarter as well.

We want to reiterate to our shareholder base as well as the market that we will not bring on new production with our large inventory of coal in terms of reserves. We will not bring new production back unless new long-term contractors are signed to go with those. I wanted to emphasize that in this call as well as where we're headed for 2005 and 2006.

We need to signal to the marketplace that the long-term contracts and the value of those has to come with capital and rates of return that are acceptable to our shareholders. With that, I think we would be glad to turn it open to questions. Operator, if you will give our listeners their instructions for getting into the queue we're ready for questions.

[Operator Instructions] Your first question comes from the line of Michael Dudas from Bear Stearns please go ahead.

Good morning, gentlemen.

Hi, Mike.

Fourth quarter, run rate of 18, 18.5 million tons is pretty solid with everything running. As we look into 2005 and model out of production and capacity, how do we worry about long wall moves, how much slack is built into -- maybe is there a little more out of the Bailey prep that we get more volume or not? Just give us a sense of, looking at the fourth quarter, you know to run-rate the fourth quarter, how comfortable should we look from a seasonal or mine planning basis how those results could translate, say, throughout '05?

That's a good question, Mike. And clearly the fourth quarter has a lot more working days in it than the other quarters so you will see more volume come out of those kinds of quarters. Every quarter varies on two things. One is how many working days you have and the one is how many long wall moves you have in any given quarter. We believe that you can't multiply the fourth quarter by 4 and come up with 2005. But what you can do is be assured that the projects, we brought online will be a benefit to the company in terms of capacity.

That capacity gives us the ability to spread our tonnage out over the four quarters and be at the -- we have predicted and said that will be just above 70 million tons for the year next year, in the low 70's, and that's where we're headed. We have the capacity to go beyond that. But with all of the things that play from quarter-to-quarter, that's about where we're going to end up for the year. So the flexibility as well as the flexibility in pricing we will see in 2005.

I can add to that, Brett, this is Pete. We probably had the benefit of less long wall moves on average in the fourth quarter than you would in a typical quarter, if you figure we do about 25, 26 long wall moves a year, it would be 6 to 7 per quarter on average and we will have a little less than that this quarter that work to our benefit.

Fair enough. Let me follow up with a market question, Brett. You know, looking out to 2006, 2007, I have to assume that even in everybody's wildest expectations, even internally in the company, are probably being exceeded. Can you give a sense of what customers are thinking about as they are looking into your stressing long-term contracts yet you still see the price of your products are at levels that, you know everybody has been surprised about.

How do you best balance the needs of your long-term customers relative to taking advantage of the excess capital, cash flow has been generating from the business? Also to the gas market as well. Maybe your views on how the company is going to hedge or lock in gas volumes going forward.

Let's address coal first. Clearly long-term contracts are important to especially our situation where you have big long wall machines that need volume to do well. Clearly we're locking in prices on these longer-term contracts that are at the new pricing levels that we saw being developed in 2005. We have the opportunity to reprice about 50% of our coal in 2005 and we have done that. And that's a very positive step for us.

But remember we have another 50% that's going to come along in 2006 and 2007. We think that that is a minimum of where we're at in 2005 and probably even better pricing going forward. There are cost pressures on all of our tons as we look at these things, but we see good cash flow coming out of the coal business and we will reinvest with our customers at big volumes, if there's a commitment there to do it.

Clearly the generation is in place and also as we see scrubbers being built in the east, we see market opportunities where we can invest in our reserve base to match the demand that will come on with these new scrubbers and we think there's a real lions at reasonable high rate of returns that are acceptable to our shareholders in the long-term with these customers.

Now let's talk about gas. Who would have guessed gas would have been this robust with this much storage in place? Locking in gas and hedging in gas is something that I think as the coal business gets stronger, you're going to see us be a little more articulate in terms of the way that we describe our hedging process.

It will be more open as we go forward, compared to where we just captured our capital base to expand in the last couple of years. You will see us take more advantage of these higher volatility prices and our strategy of layering in higher prices you will see that going on in 2005, 2006 and 2007.

One final question, Bill, have you put forth -- maybe I missed it in the guidance -- capital opportunities, you spend, about 400 or something this year, can you give directionally how it looks and are you seeing higher capital budgets because of equipment steel and other costs are moving higher?

Mike, we haven't released a number yet for 2005, but you know, I would think directionally, it would be very similar to what we have in 2004. Basically when you look at coal and gas, I guess our maintenance production budget will be around $250 million. The rest of the projects would be at value-added discretionary, go before the board and get approved, those types of projects.

In terms of capital expenditures we are seeing increases in capital expenditures caused by steel, rubber products and petroleum products and you realize that the things like when we put in airshafts or our conveyer systems, they utilize steel and petroleum products and rubber products heavily. So just like we're seeing about 8-9% increase in those commodity prices and their operating costs, we see the same thing in our capital expenditures, so year-on-year just on that inflationary trend that would increase somewhat by that.

Thanks, gentlemen.

Thank you.

Your next question comes from the line of David Khani of Friedman Billings Ramsey.

You didn't damage that too much.

Good morning, David.

I don't know. If you -- you didn't give a number. Could you give a sense of what you think unit costs could do in the fourth quarter, if you mentioned directionally they should be down and part of it looks like it will be the combined fund which should take it down $0.50 and some volume increase. What do you think you can do in the fourth quarter?

David, that's a very fair question. As we talked about, the unit costs were about $28 in September. I think we can drop that down to around 27 when we get into the higher volumes as well as our cost controls. Yes, when we take a look at that quarter, David, just as Brett mentioned, July really hurt us. And we just couldn't overcome that.

August and September unit costs really weren't that bad, that far out of line. It was the problem with July that caused the units costs to drive up to that $30.50. So again as I look at the fourth quarter, I would expect $27 a ton to be a fair number and that's pretty close to what we can in the -- we did in the latter half of the third quarter.

Labor -- obviously demand for labor is going up. And what is your turnover and then, what are you doing to stem the tide? And what is your average payment towards your employees now? On an hourly basis.

I will let Pete get into the average hourly cost. Let me talk to you about labor in general. This is Brett speaking. We see more pressure in central App than in northern App though long-term we will see pressure across the board because of the aging work force everywhere. In the short-term we're seeing the same kind of pressure other companies are seeing in central App.

We have taken moves to increase wages in central App versus where we were a couple of years ago and to hold things in place. We're getting quite a bit of turnover, especially with our contractors on the met side. Those things are affecting us. We're making the adjustments as we need to, and we will continue to do that. We're not going to let labor get in the way of production.

We think that -- when there's a tight market we need to be responsive and we're responsive in trying to stay ahead of it. In Northern App, clearly we have, with our union contracts, we have a contract in place with our nonunion arm, and we certainly are watching that close as well. So in the big long wall mines we don't see as much as we see in central AP where it's more labor intensive.

Right.

Pete?

Just to add a couple of things. You know, at our big union free mines, we pay typically a premium to the union wage rate, plus we have some other special benefits like 401-K plans that are not in the WABA agreement. Brett is right. We have been squeezed in central App, particularly in eastern Kentucky and we have made adjustments in the wage rate and also in what we pay our contractors so they can keep their labor.

The other issue is somewhat ongoing for everybody in the coal industry now and that is, you know, the baby boomers came into the coal industry in the 70's and many of them are starting to reach retirement age. So we have initiated a substantial program of training and development for new people that we're bringing in. Trying to get a little bit ahead of the power curve so that we've got a pipeline of replacement, both hourly and salaried as these people retire here in the next three to five years.

Is mid 30's, is that sort of kind of the average between union and nonunion? Is that sort of ballpark per hour?

You talking about wage rate?

Yeah.

Well, the straight wage rate is probably in the low 20's.

OK.

I think when you add the cost of all the benefits and overtime, it's clearly in the mid to upper 30's.

OK. Bill, on the use of steel and all of that, how do you deal with it? Are you hedged? And what kind of -- how do you protect yourself really for these 8-9% increases for '05?

David, I wish I had a real good answer for that. What we're trying to do is we're signing some contracts in advance for steel and the rest and the other advantage we have is that we have our Fairmont supply industrial supply subsidiary and they're excellent in terms of being able to help us hedge this because they're able to buy in larger volumes, as well as they have a lot of market intelligence than the rest and they're able to foresee some things that other companies don't have this special arm can do.

So that's basically what we're doing is we're out there trying to anticipate this ahead of time, using the assets that we have, but again, David, it's something that at best you can mitigate. You can't overcome.

Let me add to that, Bill, that -- you know, we are the largest underground producer of coal in the U.S. And with that comes some advantage at least in terms of assuring availability of supply at the best possible price. We work very closely with suppliers of steel products like roof bolts and those and conveyer equipment. And because of our volume they are able to work out arrangements with the steel suppliers to ensure that we get supply.

It's -- and steel is -- because there's so much underground, that's your biggest increased commodity? Fair?

It's sure is, Dave, when you consider all the roof control materials which are all steel related and all of the conveyer belt structure demands you know extend when you keep adding conveyer belt, all the equipment that we operate is full of steel. All the components that gets replaced and repaired utilize steel. Now we also utilize a lot of rubber. You know we're typically conveyer belt haulage of our coal out of the mines and so that's another large expense for the company.

And how much on a may be on a per-ton basis, Bill, does this rubber affect your cost structure? Ballpark? Is that $0.20, $0.50 cents a ton?

David, I don't know that offhand. But $0.50 a ton doesn't seem out of line for me.

So it's somewhere in that ballpark? OK. Last question and I will let other people -- with Horizon you know splitting off what is the potential impact on the combined fund to CONSOL for those costs that come to you?

Well, clearly, any situation where the orphans get dumped into the orphan funds is an impact to the BCOA members and CONSOL is a big player in the BCOA members. We think the impact is from what we have seen so far is right around $5 to $10 million a year. But there are major efforts being done at the legislative level to handle these issues in association with the orphan funds and how the government has used other moneys to fund the orphans. CONSOL is clearly in a position where it will take care of its own retirees and take care of those but the orphan funds continues to be a national problem that will have to be addressed by Congress and others because we are not going to be in a position where we are going to take care of all of these ourselves.

Thanks. One more, I am sorry, one more question, Bill. It looks like the long end of the treasury rates have obviously come up since the beginning of the year. Do you think its fair assumption to think that the discount rates for -- on the legacy liabilities is going to go up?

I believe it will, David. If I had to estimate it right now, anywhere between a quarter to half a percent, I would say.

OK, great. Thank you guys. Good quarter.

Thank you.

Thanks, David.

Your next question comes from the line of David Lipschitz from Merrill Lynch.

Hi, guys. Quick question. The $27 including the DDNA?

Yeah.

Yes.

OK. The joint venture for the gas, how is that going and where do we stand on that?

Oh, the joint venture is doing very well. In fact, the holes that we drilled with Triana last year were all economic holes. We think the ones that we're developing through the first three quarters of this year have been the same. I am pretty positive that conventional drilling, is going to especially on the trends that we are on, are going to be profitable to the gas business. And the nice part is that we have the option to go in or out depending on -- it's more exploration but we are surprised at how much success we are having on the front end of this.

When do you expect to realize anything from those wells?

Well, you have to put the gathering system together with them and so forth but I would say '05, '06 we will see somebenefit from those well.

OK. Also did you give a DDNA for the full year, a forecast for DDNA for 2004 for the fourth quarter or full year?

Basically you can take the nine months and divide by 475 you have come pretty close.

OK. Thank you.

And your next question comes from the line of David Gagliano, from Credit Suisse First Boston. Please go ahead.

Great. Thanks I will try to keep my question short, stick to the protocol keep in sure here.

Hi Dave.

Hi, I was wondering if you just remind me again of the 63 million tons of committed volume for 2005 how much of that is actually priced?

We have at this point committed and priced everything that we say is committed. So we are on the order of magnitude of 64, 65.

Forgotten Dave, this is Tom. The guidance in the release I think is for 65 point something million.

That's what is actually priced as well.

Yeah.

Yes. That's priced.

OK. And then sorry if you could just remind me, what is the average price for those committed volume?

We don't disclose that, David.

OK. Great, thanks.

But we will, of course, when we give guidance for the full year in '05, in January, we will give you an average realized price that we expect for the company.

OK. Fair enough. Thanks.

The next question comes from the line of Michael Lucas from Appaloosa (ph). Please go ahead.

Hi, it's Michael Lucas.

Hi.

I can't understand what were you saying the cost would be, all-in cash cost for '05, for coal?

We didn't say that.

We didn't.

OK. What will they be?

We don't disclose that

Can you give me guidance? Is it relative to the quarter or is it relative to the year. In terms of what you guys did in the last quarter which was obviously much higher than the previous.

I -- we don't anticipate the cost of this quarter to be replicated next year. This quarter was an anomaly so it will be lower than that number.

So basically you guys had geological problems as opposed to some of your competitors having rail problems. You guys were having any rail problems?

I thin kthat would be a good synopsis of it. Our geologic problems in July is what held us back for the quarter. The railroad issues, we have not lost production because of railroads.

Why is that? Can I ask you why are they seeing it and why are you not?

Well I think if you look at the volumes where our volumes come from, we're clearly one-third of our business is on the water, on the Ohio river of which we have our own barge company and contracts with others. The rest of it is very large mines with dual access to two rail roads in the north and that give's a lot of leverage and we're are a big mover in the north. We're seeing tightness is in central App where others are having problems but we have not actually lost production because of railroad problems.

The other benefit that CONSOL has is that we can ship typically multiple customers from multiple mines, so we if need to shift or divert a train from mine A to mine B, we can do that and may be put some mine B coal on the ground and pick it back up and we have done some of that. So we have been able to manage with the railroads. I think the railroads are improving. I think they have -- I think they made some changes as a result of the last recession that - and they have implemented a plan and we're working very closely with the railroads. You know what Brett said our issues, if we are flooding on the Ohio river, which we had some in September which caused some delays for us.

In terms of -- did you guys enter into any contacts -- new contracts in the third quarter this year for next year?

Mike, this is Tom. I think the -- if you look at the guidance quarter to quarter I think there is an additional roughly 4 million-ton change in the committed tonnage for '05.

And what do you guys hear, I know we have gone back and forth on prices. What I think it might be and what you said - wheer are prices? Northern App on a contractural basis, central App, you guys into some contracts in a third quarter what kind of prices are you seeing?

Well, clearly we're seeing -- as tight as the market is, the spot price continues to be high. But when you go out after volumes and like I said in the past, on the steam side, at least $8 a ton across the board on every type of coal we have -- on the met side we're seeing some contracts being signed for '05 as high as $80 to $90 a ton with volume.

OK, can you give me a reference price on the 80 bucks? I just want to make sure we're on the same page.

A reference price?

Yes, in other words, what is the actual price.

Coal that would have been sold in 04 for say $24 bucks a ton is now sellin,g had sold under contract with volume for in the low 30's. And coal that was 32 certainly would be in the 40 or plus.

OK, I guess it's the 32, you know some of the comparison in signing contracts the mid 50's. I'm not sure of the exact shipments --

Well, there are some very small volumes that are moving in the 50s and 60s even. But those are spot purchases because of a very tight market. They're not limited to -- they're not tied into long-term volumes or big volumes either.

OK. Thanks, but I want to make sure we stick it to the utilities.

OK, all right.

Let him know you said that Mike.

[Operator Instructions] We have a question from the line of Brandon Elliott (ph) from (inaudible), please go ahead.

Good morning gentlemen.

Hi Brandon.

I got in line before the last question was asked, it sounded like it is still comfortable with that, up 8 to 10 on the '05, that the '05 you got priced this year which puts the blended average up three to four, are we still talking those numbers for '05?

Yes, yes.

On the gas - I had to hop off for a minute. Your gas hedges for Q4 and '05.

Well in '05 we're hedged at a --

37B Brandon at 460.

And we just like I said on my announcement we locked in some more for January and February at over $10. So we're layering in where we see the big spikes. That's going to help our average going into 05.

Anymore discussion on the gas assets and is there a good way to monitor those assets at all?

I can tell you this, it's a hot topic at the board level. The board is looking at a lot of different options with the gas business, how do we extract the value out of that business. But I'm not in a position where I want to divulge our strategy over the conference call.

Thanks.

Your next question comes from the line of Dick Price from Westminster Securities. Go ahead.

Good morning, gentlemen.

Good morning.

Could you clarify some of the differences in the numbers between your income statement and your supplementary statement? Looks like I'm seeing 660 total revenue on the supplementary statements, 650 on the income statement. I'm seeing 487 in produced coal sales on the income statement and 469 including freight revenue on the supplementary statement.

Dick, this is Tom, if you don't mind, we can do that off line with you?

OK, that's great. Thanks again. Good quarter.

Your next question comes from the line of Andrew Shirley (ph) from Ivory Capital. Go ahead.

Hi, I just want a little clarification. You given some comments on costs and there's implied cost guidance in your fourth quarter guidance. Do the costs that you're going to be seeing in the fourth quarter essentially reflect market prices for labor, raw materials, etc, or based on whether it's hedges or what you're playing in place for the fourth quarter do you expect increased spots going into 2005?

This is Brett speaking. Clearly there's pressure on every ton that we mine on costs. We're repricing 50% of our tons in 2005 at these higher prices. We have pressure on every ton. Now, fourth quarter reflects two things. One is, all of these projects that we capitalize are online in the fourth quarter, which gives us good volume, which helps pricing, but we still have pressure on all of the tons. If you look at the mix, clearly we're going into 2005 with pressure on costs of materials and inflation associated with these steel and so forth. So that will be reflected in our budget as we announce it.

OK, great. Thanks.

[Operator Instructions] We have a follow-up question from the line of Michael Lucas from Appaloosa. Go ahead.

One thing, how much coal have we contracted, committed in price for 2006?

We don't disclose 2006, Mike.

Just in reference to what Brad said, we're looking up contracts, that's 50% of 2005 in higher prices. Isn't 2005 completely committed? Maybe I misunderstood that last comment.

2005 is I think

92%

92% committed. I would say 2006, well we have told everybody a long typically our contract roll off about a third every year.

OK, is it pretty much the same thing, we're talking 6 million tons of met coal a year?

You mean at Buchanan?

Yes, yes.

Buchanan it's probably going to be a little different because we're signing some longer term deals at much higher prices with the steel companies. They tend to be coming after high volumes with longer terms but depression is way up. We will announce that.

I just want to understand, when you say you signed new deals, when do the contracts run out on this and how much is coming on, coming off?

Well, it varies. You got that 7 million tons and it breaks up into a lot of different parts. But it tended to be year-to-year negotiations from April to April. Some of them were one and two year deals. Some of them were only yearly deals and I would say the majority were yearly deals. We're seeing that stretch out into some cases about I would say a third of that volume is now stretching out into five to 10-year deals at the new pricing levels, up with volume. Not the spot pricing levels but the new pricing levels.

Do you guys follow the benchmark? Is that the same in 2005 next year you will have all of these tons open to re-price?

No, we won't be in that position.

Some of these were negotiated during the course of 2004.

That's great, year to year, you said wouldn't that be 05?

For 05.

I'm sorry. You negotiated the price for 04 for 05, so then 05 you will negotiate for 06, correct?

Some of the tons were negotiated in 04 and have been recently negotiated for 05. There will be some -- there will always be annual tons on the met coal side that get renegotiated each year. Typically speaking, the export negotiations, because that's on a fiscal year starting April 1. Those negotiations are typically starting right after the new year, although much of that has been occurring a little earlier this year than normal.

So for annual renegotiations, it will typically occur late in the year presiding the year of delivery for the parts that have multi-years to them, for the contracts that are negotiated under multi-year arrangements, some of that -- much of that has been negotiated during calendar year 2004 for delivery in 2005 and beyond.

OK. I just -- you know, if you guys could just help us out with the breakout of that, you're talking about 180 million or 200 million of EBITDA for the company. You have already focused on this.

Don't get caught up in the high volumes associated with spot prices.

No Brett, actually I'm referencing your $80 price.

OK will the $80 price is some tons that we have signed up on a year-to-year basis that are reflecting this spot market movement. But they're not long-term deals. It's kind of where the market stands right now. You may do a boatload or two at prices like that. And it's very pleasant to do those kinds of deals. Wish we could do all of our tons at that kind of pricing, but it doesn't -- it just doesn't work out that way. You tend to layer in business as the market is moving.

Guys I don't mean to deliver the point. How much in the long-term out of this out of all your met coal and how much is short?

I would say probably just an estimate half and half on the met, 50%.

OK. And of which 50% was just entered into this year in '04?

Yes, I would say that's reasonable. At least re-priced this year, yes. You must understand that next year our VP 8 mine comes depleted in reserves so we actually drop about a million tons of met coal production next year because of the depletion of VPA in mid-year.

OK, we'll move on to your next question. It comes from the line of David Khani of Friedman Billings Ramsey, please go ahead.

I will have to ask the third question, she will get it right. What is your export volumes in 04 and what do you think you will do in 05? Ballpark?

I don't have that. We export both steam coal and met coal. Probably a total of, on the order of magnitude of 5 million tons.

For '04?

For '04, yes. And it's probably going to be a little bit less on the steam coal for next year and probably similar amount for met coal. So I would guess we will be exporting on the order of magnitude of 4 to 5 million tons next year.

David, let me say something about that. The steam side is so robust on the domestic market that we're tying deals up with customers within the radius of where we get a lot of value out, not having a lot of transportation. The prices are so good these local customers are matching anything on the world market.

But I will say, know, that we do have some a few very selected loyal steam coal export customers and we will continue to do business with them probably not as quite as high a volume as we have in the past but we will keep them in the mix. And they will basically pay the equivalent of the domestic price.

I was trying to wonder if China does slow down, do you sell any coal to China?

No. Our steam coal export is virtually all to Western Europe.

And so met isn't

Met coal export for us is mostly to Western Europe with some going to Brazil.

Increasing to Brazil over time.

Yeah.

Increasing to Brazil. OK. Sorry about the St. Louis Cardinals but I'm a Red Sox fan.

Sorry for you mentioning it. Operator, are there any other questions?

At this time we have no further questions. Please continue.

all right we have no further comments, operator. Would you, at this point we will sign off and allow you to give the replay information to our listeners. Thank you all for joining us on this third quarter conference call.

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