CNX Resources Corp (CNX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Earnings 2004 for CONSOL Energy Incorporated. At this time, all participants are in a listen-only mode. Later, we will conduct question and answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to your host, Mr. Tom Hoffman, Vice President, Investor and Public Relations. Please go ahead, sir.

Good morning, everyone. With me this morning are Bill Lyons, our Chief Financial Officer and Brett Harvey, our President and Chief Executive Officer. We are going to go over our fourth quarter and calendar year 2004 results and talk about the outlook for the next several years for CONSOL. In addition to the conference call, the proceedings this morning are being carried over the Internet and we welcome anyone listening in way of the web. For reporters on the call, as is usually the case, we will ask you to remain in listen-only mode during call and I'll be glad to take your questions offline throughout the day today.

The outlook for '05, '06, and '07 that we will be discussing are forward-looking in nature and our ability to achieve those results are subject to certain business risks. We have detailed those risks in summary fashion at the end of the news release that we issued this morning at 6 o'clock. In addition, we've on file with the SEC on November 8 a list of risk factors for the Company and they are also available on our website at www.consolenergy.com and we would encourage you to take a look at any of those sources for the risk factors. With that, I will turn the call over to Bill Lyons, our Chief Financial Officer. Bill?

Very pleasant good morning to everyone. For the quarter just ended, CONSOL Energy reported net income of $67.7 million or 74 cents per diluted share compared with the loss of $20.6 million or a 23 cent loss per diluted share for the same quarter a year earlier. Included in the fourth quarter 2004 are charges of $32 million in accelerated depreciation and amortization for equipment and facilities at Rend Lake and other idle mines that I will talk about in a few minutes. On an after-tax basis, this accelerated depreciation and amortization charge equates to 21 cents per diluted share. For the year, net income was $198.6 million, or $2.18 per diluted share compared with the loss of $7.8 million or a 10 cent loss per diluted share in calendar year 2003.

Results for the year just ended included the after-tax impact of an accounting change in worker's compensation of $83 million that we disclosed to you in the first quarter of 2004. In a quarter-to-quarter comparison, net cash from operating activities was $163 million versus $64 million and EBITDA was $140 million versus $45 million. In the year-to-year comparison, net cash from operating activities was $358 million versus $381 million and EBITDA was $389 million versus $237 million. Net cash in 2003 was influenced by the settlement of the black lung excise tax case that contributed $67 million and by $108 million from the establishment of our accounts receivable securitization program.

Also in the year-to-year comparison, debt has been reduced 13 percent, long-term liabilities in the balance sheet have declined 6 percent, and shareholder's equity have improved 61 percent. Of particular note in 2004, we have reduced debt by $113 million. We have essentially no short-term borrowings at the end of the year and we have $320 million of borrowing capacity available under our credit facility. By virtually any measure, the 2004 fourth quarter was a superb one for us. The principal driver for the quarter was the outstanding performance of our coal unit. As we had forecast, both at the beginning of 2004 and again last October, we expected very strong performance from our coal segment. This expectation was based not on wishful thinking, but on the knowledge that our various mine plans are aligned in such a way that all 13 of our longwall mining systems would be in operation for virtually the entire quarter, the timing doesn't always work that way. Usually we are involved in equipment moves that several mines during any given quarter. But, when we are running at full capacity we can achieve very high volumes and low unit costs. This results in improved margins that drive increases in overall Company earnings.

We are also pleased to note that the strong fourth quarter allowed us to meet or exceed virtually all the goals we set at the beginning of 2004. As Brett and I have noted on a number of occasions, the Company manages its business over a long time horizon, measuring our success in annual or multi-year increments. People often tried to linearise the Company's long-term results based on short-term data points like a month or a quarter. While these results are meaningful in some ways, they may not always be a reliable gauge of the Company's potential over longer periods.

As I said a moment ago, fourth quarter results were driven by strong performance in our coal segment. We produced 19.2 million tons compared with 14.9 million tons in the fourth quarter of 2003. 3.7 million tons of that quarter-to-quarter improvement came from our major expansion projects Loveridge, McElroy, and the Bailey Preparation plant.

But while the expansion projects were key to the fourth quarter results, we are also very pleased with the fact that 11 of our 17 operating mines showed quarter-to-quarter production improvements. In addition to startup with the Miller Creek Complex in West Virginia, more than offset the loss of production at the Glennies Creek Mine in Australia, which we sold in the first quarter of 2004. Mine 84, which has had significant geologic problems that overcome showed quarter-to-quarter improvement of 335,000 tons.

As a result of a higher production volumes, unit operating cost for the quarter were $19.36 per ton and total cost were $25.96 per ton. This was in the face of considerable cost pressure from rising steel and other commodities prices in the period-to-period comparison. More importantly, the higher production levels coincided with a strong pricing environment. Period-to-period average realized prices for Company produced coal were up $3.77 per ton rising to $31.70 in the fourth quarter of 2004. The pricing in the fourth quarter reflects improvements in quality and spot business at high prices.

Our gas segment continued to improve period-to-period. For the quarter, net gas production improved nine-tenths of the Bcf or to 12.5 Bcf. Average prices received rose 66 cents per 1000 cubic feet to $4.85 per Mcf. Unit production costs were higher in the quarter-to-quarter comparison. Lifting costs were up 7 cents per Mcf reflecting higher water disposal cost and the timing of well maintenance service. Water produced by the wells is trucked to deep well disposal sites. Higher fuel costs for the trucks affected our costs. I would note however that for the year, unit listing costs were down compared to 2003.

DD&A in the fourth quarter was higher versus the year earlier reflecting an 8 percent increase in volumes of gas produced and changes in quantity estimates used in the calculation of amortization rates. On the transportation side of the business, operating cost quarter-to-quarter, increased 15 cents per Mcf largely reflecting the cost of purchase firm transportation contracts, for the movement of our gas through the Columbia system. This is a problem we experienced for the first time last year where transportation capacity becomes limited during periods of low demand, or when storage capacity is full. We expect this problem to persist on and off this year and into next year until we are able to access alternative pipeline transportation for the south of our Virginia operations.

DD&A for transportation was up 5 cents per Mcf quarter-to-quarter reflecting new investment. Volumes for the gas segment while improved in the quarter just ended versus the year earlier were somewhat short for the quarter and for the year compared with what we had planned. This is primarily due to delays and connecting completed wells to the gathering system. The Columbia Pipeline bottleneck that I just mentioned, and reduced gob gas production from our VP 8 Mine. Nevertheless, the gas business continues to show sustained growth in production in the period of rising prices while keeping their controllable operating costs essentially flat. Let me discuss briefly, the charges for accelerated depreciation and amortization that also impacted fourth quarter 2004. About half of the writedown is for plant and equipment at the Rend Lake Mine in Illinois, which is on long-term idle status. The rest is primarily at 2 properties in Northern West Virginia, the [Adonal and mines. In our year-end review of the condition of assets at these idled locations we have concluded that the facilities can no longer be economically used resolving in a suspension of maintenance and subsequent abandonment. However, let me stress that these properties have existing coal reserves that can be accessed from other locations or from new facilities. The Northern West Virginia reserves are Pittsburgh Seam coal that will grow in market acceptance as scrubbers or retrofitted to existing power plants.

Let me now turn to the outlook for this year and beyond. As you have noticed as you walked your way through this mornings release we have changed our approach to guidance. We will no longer provide specific earnings, cash or EBITDA guidance. We will not provide an estimate of average realized prices, but will instead provide current information as to the coal and gas volumes we have committed and the average price at which those volumes are committed. We will no longer provide monthly production reports although we will continue to provide supplemental quarterly production reports, which -- with each quarters earnings announcement. We will begin providing guidance in 3-year increments to allow investors to focus on the longer term of the Company rather than quarter-to-quarter variations. We've had a spirited internal debate on this issue of guidance and what is appropriate to provide to investors. We have listened to investors and analysts, who have shared their views on this matter. The advice has been wide ranging and no clear consensus emerged.

Our decision on guidance has been driven by several factors. First, we believe that our long-term outlook is very strong and will create enormous growth in shareholder value. Therefore, we choose to focus your attention on the longer term. Second, we believe that both sell and buy side analysts are now much better equipped to create reasonable company forecasts, that would had been impossible 3 or 4 years ago. We will not endorse or comment on individual estimates of earnings nor will we comment on street consensus numbers. However, I want to assure all investors that we remain committed to providing detail transparent disclosure in our reporting of actual results and that we will be as transparent as we can, consistent with fair disclosure requirements in our discussions with you during the year.

We remain committed to our policy of promptly notifying investors when we believe material events have occurred, and we remain committed to our practice of providing access to our management team and our facilities within the limits of time and circumstances. We expect the next 3 years to be excellent ones for the Company. We expect our production volumes for both coal and gas to rise, and we expect the pricing environment for energy to continue to be favorable. As you can see through the guidance that we provided, we have hedged our coal position at higher prices each year but we still have leverage to the markets in 2006 and 2007. Most of this leverage is in the steam coal side of the business as we have very little uncommitted metallurgical coal during this period.

Gas is quite a different story. Our hedged gas production is about 74 percent in 2005, is negligible in 2006, and is entirely open in 2007. This reflects an evolution in our philosophy that we have discussed before. As the coal segment performance begins to accelerate, we will be much more opportunistic with the pricing of our natural gas production. Obviously, as the year unfolds we may take advantage to sell some of 2006 and 2007 gas if an outstanding opportunity presents itself. For example, last year we sold some first quarter 2005 gas at prices above $10 per thousand cubic feet. If we have opportunities like this in the future, I expect we will take advantage of it. We have provided quarterly production guidance to help those of you who want to do quarterly estimates. They are 2 things to note. First, our mining plans for coal call for production levels with far less fluctuation, quarter-to-quarter, than we have seen in the past few years. The third quarter, is still likely to be the weakest because of the summer vacation period, but it will be still be within a relatively narrow band of expected results. Second, gas production volumes have anticipated as much as 3 bcf volume curtailment spanning the second and third quarters because of availability of the interstate pipeline capacity. As we mentioned in the news release, we are involved with the development of an alternative transportation project that should be ready by mid-2006 and will elevate the current situation.

Finally, let me mention some of the challenges that are included in the 2005 outlook. First longwall development will continue to be a challenge, particularly at our large mines. Modern longwall equipment is powerful and efficient and can easily outstrip the ability of continuous mining equipment the keep of head of panel development. In particular, we expect McElroy to have some challenges this year largely because of the recent state requirement, that they bolt not only the routes but also the risk of all entries. Second, cost pressure is likely to continue, our coal costs were low in the fourth quarter because we had higher than the normal production volumes. As you can see from the guidance, we do not have a 19 million ton quarter forecast in the plan. Internally, we have assumed overall cost inflation of 8 to 9 percent. However there is considerable uncertainty regarding commodity prices throughout the year. It is possible that material cost will level, but we are not prepared to predict this at that time. Current investors are reminded that our VP 8 mine (was as economically mineable reserves by the end of the second quarter. We expect to produce about 900,000 tons from VP 8 before they shut down. As a resort, our year-end net production capacity would be about 5 million tons per year. Fourth, Mine 84 is still operating in an area of sandstone channels as we manage through this area of geological difficulty. The mine plan is still suboptimal, while we expect Mine 84 to improve in 2005 versus 2004 it will not be until 2006, that real progress can be made.

And last, the capacity curtailment in the Columbia interstate system will impact gas segment results. We have estimated a curtailment of production of 3 billion cubic feet, as I mentioned earlier, but if we had a very mild summer there is some exposure to additional curtailment. In addition, we will again experience additional cost related to the purchase of some firm transportation on the Columbia line as we attempt to offset some of the curtailment potential. That said I want to go back to comments I made at the beginning of this discussion. I believe we are poised to produce very strong results over the next 3 years. Earnings should be much improved compared to the last several years reflecting our greater coal production capacity. Our growing gas production and the expectation of a continuation of a favorable pricing environment that we have seen in the last year. At this point, let me turn over to Brett for other comments.

Thank you Bill. And it's good to be with all of you on this phone call. I echo what Bill's comments were. We had a great quarter, we had a good year. More importantly, I think we have taken the Company to the new level of profitability, that I believe we could sustain and grow in the next several years. I am pleased with the response from our coal segment. Our people were focused on delivering the strong quarter, which they did. And on getting the mines to the point were we can produce at or near capacity on a sustained basis. I also believe that our gas business continue to demonstrate it's value to shareholders. They have continued to grow their production volumes and have done a very fine job in controlling their costs. In the next several years, we expect to have a major and then disciplined approach to the growth of production from our coal segment and a more aggressive growth strategy for gas production itself.

As you noted in the guidance this morning, we expect to grow the coal production between 3 and 8 percent in the next 3 years depending on the market, while we expect to grow the gas volumes 30 to 40 percent in the same time frame. Our coal growth is consistent with our philosophy that we do not intend to make large investments and significant capacity increases unless our sales force can conclude long-term sales agreements for a substantial portion of that capacity. Our gas business, on the other hand, Canton should continue to drill up the proved reserves of Virginia as quickly as they can, and our growth plan for the next 3-year reflects that investment.

The first 4 reason why I believe our earnings outlook for the next several years is so strong, is that we have a substantial roll off of coal contracts between 2006 and 2007 that have prices for the Pittsburgh Coal seam in the low $20 ton range. Given the outlook for the pricing in the next several years, we expect to see substantial improvement in revenue and margins as we reprise these tons in '06 and '07. Customers continue to indicate interest in signing long-term contracts at prices to which -- what we have seen on the last year. We have even had customers approach us with proposals of long-term contracts at today's prices, which suggest that customers continue to be concerned about securing adequate supplies of coal going forward. That they still value the high BTU Eastern bituminous products that we offer and they recognize a new platform for pricing that has been established in the last 12 months.

We will continue to focus on the domestic steam business primarily in the electricity generation sector as a primary driver for our coal business. While we will not retreat entirely from long-term relationships with certain oversea customers. We do not expect to be very aggressive in the international steam-coal business in the next several years. Of course, unless if the domestic market softens. We will continue to be a player in the metallurgical coal markets. As Bill noted in his remarks, VP 8 will be exhausted and it's economically mineable reserves this year. Absent any expansion of the Buchanan mine, our 1-year met capacity will be above 5 million tons a year. We are looking at the possibility of expanding Buchanan to replace some of the VP 8 production, but that hasn't been decided yet. We will continue in our effort to make our gas business more transparent to investors in our financial statements.

As you know, I don't believe the value of this business is fully reflected in our share price and we will continue to evaluate ideas for highlighting it's value to investors. We expect to have challenges this year as we have every year. We will discuss costs, field, and our other commodity prices continue to be a challenge but we must actively manage them. I expect that we will still expand margins on coal and gas despite these cost pressures. Transportation services continue to create logistics challenges for us. On the coal side, the recent flooding along the Ohio River and the shut down of the Belleville Lock & Dam have caused us to take some idle time at Shoemaker and McElroy mines, both of which flow directly on to the Ohio River and have limited ground storage, they handle these kinds of delays.

We have shuffled deliveries to our customers and have issued force-majeure letters to some of the disrupted shipments that has been caused by these problems. Based on what we know at this moment, we believe that we will be able to make up most of this later in the quarter, and for sure by the end of the year there. But I would have that return to normal. Shipping on river has been slow because of the change in weather and the flooding that we had. Rail service in the east had been affected by the wet weather and cold weather cycles that we've seen in January slowing the velocity and delivery cycle, especially with coal cars coming back from the customers. I don't expect this will be a long-term problem but it has added to the challenge of getting cold customers in January.

On the GAAP side, the Columbian transmission line congestion during this shoulder months or during mild periods during the year are expected to curtail our production in 2005, and that will reflect -- and that is reflected in our guidance. We have a plan, however, to deal with that situation. We are working very closely with Duke Energy on the construction of the Jewell Ridge Pipeline, which will connect to our Virginia gas field to Duke's East Tennessee line in the south. Not only will it give us transportation service flexibility, which should provide us with access to markets in the southeast that we have not had. We expect this to be -- this line to be finished and build by the third quarter of 2006. In the mean time, we will continue to purchase as much from transportation as we can from Columbia and direct some of the gas to our peaker plant where it makes sense when we make high margins.

To sum up our outlook for the next several years, this is the strongest we've seen since we went public, which I believe is a reflection of the capital investment that we've made in the last 2 or 3 years in this Company. The response will be good. We are well capitalized and ready to move from both coal and gas. And with the pricing of coal and gas rising, and rising volumes that we have on both sides, we expect very strong performance.

With that, Tom, I'd like to open things up for questions.

Operator, if you will give our listeners their instructions on getting into the queue, we'll take questions and answers.

[OPERATOR INSTRUCTIONS]. Wayne Atwell, Morgan Stanley.

Good morning, a good quarter. Say, can you give us any update on your gas reserves?

Wayne, the answer is no, but we expect to do that soon, but we don't have it today.

Can you give us any adjectives?

We are -- I think they will be positive.

Can you give us guidance on taxes?

In terms of the future, Wayne?

Yes, the first quarter in the year.

We put in the guidance for the year Wayne, 16 percent for '05 and, I think, 25 and 26 or somewhere in there. We leave that to you.

Wayne, the quarters are really hard to do because as you are aware we have to project at the end of each quarter where we think there are changes in the estimates. Problem with that is we tried to present this to everyone, all I can tell you is that we are in for a lot of volatility in the tax calculation. But as we get into higher profitable levels, then all of a sudden you start to see the impact of percentage depletion is on a positive number and you start to get to see more, what I call normal relationships between relationship of pretax income and like percentage depletion. It's very difficult when you have a -- you could have a tax loss with positive percentage depletion.

Now, and you're going to cut back on guidance a bit and I certainly understand it's hard to do that. But, you did mention you're going to talk about the current market conditions. Can you tell us what the conditions are like for steam coal now for what you might be signing in '05, '06, and '07?

Yes. I will give them that way, and this is Brett. We see real strong pricing across the board and we are still in a position where the utilities are talking about volume first and price second. I think across, especially in the Northern App region where we have most of our coal, the customers are very focused on term deals. I think in real life there is a new floor on pricing from where we were a safer 2003 and how it's gone up dramatically. '05, '06, and '07 seemed to be tied together, we are even getting contracts from the customers adding years on rather than typically where they go out for a spot dealer, they would come with us for 2, 3, 4-year deals.

Can you give us any kind of a feel for what the price level might be for contracts for 1, 2, or 3 years?

Well, I think our average price level -- of course we've different products. But, I would say everything that we've done for '05 and off of '04 has been at least $8 a ton higher from year-to-year and then we see even more growth in '06 and '07 beyond that. So, it's hard for me to give you an average, but if you went from year-to-year, we had about 50 percent of our coal open and that would have been on every ton with that $8 jump, we're up at least 4 to $5 a ton.

John Bridges, J.P. Morgan.

Just wondered this decision on Buchanan, it seems like a no brainer to increase met coal production and gas. I wondered whether the -- could you walk us through this decision, is it primarily technical or marketing?

Well, it's probably little bit of both and the decision is really based on -- we want to bring it up of another vertical shaft and bring the excess tonnage offset of that longwall across the vertical shaft, but it takes a lot of money to change the shaft around as you know, and we need some term deals that would help take care of that. We think that that will come together. I -- we are just not ready to announce it yet. We are negotiating those things.

So, just from -- this is Tom. Keep in mind that Buchanan is a much deeper mine than our typical mines in Northern Appalachian. Northern Appalachian we might be at 800 feet, we are almost at 2000 feet in Virginia and so we can't bring the coal up with a slop belt as we do in Northern Appalachian. It's a vertical lift of 2000 feet and that's -- so the technical on capital challenges are a little bit different.

Tom, I can introduce you to some South Africans, you put just on 2 miles.

Well, I know.

Just a bit of housekeeping. Based on that 21 cents tax effected DD&A change. Does that give us sort of clean earnings for the quarter about 82 cents?

Yes.

David Khani, Friedman, Billings, Ramsey.

Just want to focus on maybe the cost side. I know you talked a little bit about 8 to 9 percent in your expectations of inflation of cost, but what are you basing it on. Is it $45 oil to get you to that 8 to 9 percent and what sort of inflation on steel and you have any of these cost hedge so that we understand when these things move around how to adjust to it?

David, in terms of the costs and how we do our projections, it's -- we have a -- there is a whole lot of list of things to go into it and different pricing mechanisms and then we end up trying to put it into our planning system. In some places we have 12 percent inflation, some places we have 2 to 3 percent inflation. When we came up with the average of 8 to 9 percent, that's just the aggregation in the average of all the things that go into the planning process. I don't know specifically in terms of what we had in terms of petroleum products prices, but I know that we had them probably in the range of a 12 percent increase on that one.

Okay. And is there any of that stuff fixed so that, if we look around at the moving of price for oil or gas, that you guys are not going to get as impacted?

Well David, we are not as impacted as the oil is if you see other coal companies. It's because of the mining method we are more electricity driven, and so some of that growth cost well be in increased electricity as they start to pick up the cost of our fuel, but you know that's the cycle we have to go through. Some of the cost issues are more related to -- I think the biggest hit we are going to have is on steel, our conveyor systems or rubber. Lot of those kind of things that we do a lot of useable items, the steel cost concerns quite a bit. But we also hit some of that buying forward because we are such a big buyer of roof bolt and so forth. So, I think we have the best position there but we are worried about the cost increases there.

How about the accruals for the legacy liabilities which -- is it moving up, flat? Give us a sort of sense.

Can't remember all that because it's moving in the different accruals but overall I would say it's a fairly flat in terms of next year I could see OPEB around 190 million. I could see workers comp probably around 70 to 75 million. And the pension is probably between 50 to 55 million, that's where I am looking at right now. But again we are in the process of completing our actuarial studies and they are still from tweaking that needs to be done on it.

But bring out, I guess is the first glance or so you are relatively flat year over year?

Yes that's where we are.

Yes, I would relative.

That's great. And then lack in the payment side--

We are -- when you look at payments -- OPEB payments were about -- around 125 to 130 million in 2004, and I expect it to be only slightly up from that this year 2005.

Some of the cash versus--?

Cash, the actual cash.

Yes, I know the cash is kind of in relatively flat it's up a little bit. It's been the accruals that have been moving around it and I guess driving everybody crazy on the earnings number. Last, I guess inventories you have about 1.5 million -- 1 million tons of rough inventory.

That's correct.

Would that -- is that a comfortable number and will that -- could you be potentially selling a little bit more coal in '05 assuming you can deliver it versus your production estimates?

Well, in terms of being comfortable David, it depends on who you talk to. Like -- I think the marker here is generally we would like to have more coal because it gives us more flexibility in terms of selling to customers. From our financial side, I think I like to have it to zero since we have no investment in that. 1 million 5, tricky if we take a look at historical allowances not a high level of coal inventory. And when you take a look at the actual make up with the inventory, it's pretty well spread out between our mines. I don't see any major concentration that would cause an issue there. So in terms of the level, I think it's -- to me I think it's a little bit lower than historical levels.

Yes, I don't think you see a drop in any more to pick up some more sales. That's very good operating level for us.

One last question, more strategic I guess. Given that you have written off Rend Lake. Are you making a base with your statement here that you have announced potential excess reserve base in Northern App to be able to deliver on the scrubber market versus maybe going after -- producing out of the Illinois basin?

You have asked a lot of questions here David. Brett and I will go back and forth to answer that. First, we did not write-off Rend Lake. What we've done is the equipment that is there. The preparation plan and some of the buildings and stuff like that. We just changed the economic useful life because we just -- we want them to spend the money in the main payer. We need to free our resources from being committed to maintain what's no longer contributing to what I call accrual current performance. That's what we did there. The reserves are still there at Rend Lake, they are very viable reserves, and quite frankly in the longer terms are very important reserves to us. So Rend Lake itself was not written off, it was just the equipment that in the preparation plant that was there. And it's our decision that we are not going spend a lot of money to maintain it over the short term.

But on the marketing side, region versus region, Dave, the indigenous coal in these regions as we build these scrubbers and we see these scrubbers being built. You are going to see the indigenous coals with no transportation come to be the supply for these scrub plants. So we are not given up on the Midwest at all in fact, it's just probably behind the curve versus our well capitalized Northern App area as scrubbers are built are here will probably move quicker as scrubbers are built there you will probably see it capitalize and not negotiate our good positions that we have in the Midwest. But I think once in front of the other.

Michael Dudas, Bear Stearns.

I noticed in your guidance you plan to spend, over the next 2 years, about $300 million more in capital investments than your depreciation levels. Can you go through a little about what that added investment's going to be? What type of mix of quality coal and is it going to be able to moderate or even help costs to the bottom line?

Well, that capital is approved capital which is to take care of maintenance of operations to keep us at the high level of production. It also covers our expansion in gas business that we're committed to. So, those are very higher rates of return. I do believe that everybody needs to understand this capital that we project is really capital that we have approved and ready to put in the ground. They are all efficiency projects and they are all expansion in the gas business, very little capacity expansion on the coal side.

And my second question is, Brett, getting close to March we are going to hear some insight from the regulations relative to your quality. Could you give a little sense of what you are hearing or seeing in the market, and maybe how this mercury situation is going to shake up?

Well, it's hard for me to predict that but clearly there needs to be a little playing field for mercury across the entire country. And one big attack on mercury is to have scrubbed plants, and so I think we will see an acceleration in the scrubbed plant for mercury as well as sulfur and everything else. I am not sure how the EPA is going to come out on coal versus sub-bituminous versus bituminous versus lignite. But I can tell you there is a real effort going on to make sure that it's evenly spread out. So no -- any given basin has an advantage over another, and the indigenous coals continue to be valuable regional asset.

David , Merrill Lynch.

A question for you. One of these bulletins came out a couple of weeks ago, Basin said that they thought contract pricing had peaked. Do you have any response to that or is that what you are seeing or--?

Well, we have seen some of that. I think that if you look at the marketplace we still see it very robust and we see it very robust in terms of the volumes that we mind. In terms of price peaking, I think it's what price might be right up there in this peak. But I think when you look at these term deals there is a whole new level of pricing that we didn't see in 2003, that we saw grow in 2004, and I think there is still some strength in 2005. But I don't think we will see the same kind of growth that we saw in 2004. But there is still a lot of pressure on supply. So, I don't think it's over, if I was utility I'd be telling you that too.

Michael , Appaloosa Management Limited Partners.

Can't understand whether the pricing mix -- I just want to start like maybe for 2007 at similar deals. As of today at $10m comp lockup. How many of those comps was met coal?

I would say for 2007, where all our met coals locked up all the way through this.

All your met coal?

Yes.

I am just trying to back into the price and trying to understand where you are signing contracts. It is -- that market seems to me in the Northern App. It seems to be somewhere in the mid 40's on a basis, and so these contracts would apply something little bit less, if you are saying that your old met coal contracts were at 50. I'm trying to understand where you are signing deals, where you are seeing -- I guess 5-year term deals you said for this met coal?

For which coal?

Northern App.

On Northern App, we are signing deals that are substantially -- let's see how well I put this. We are signing deals that are up in high volumes at $8 to $10 higher than where they were last year. And so if you look at some of the qualities of lower sulfur coal that we have that come out of Mine 84 and places like that, you will see that in the high 40's on big volumes. And some of the higher sulfur coal, like how Shoemaker and places like that, it's going to be in the mid to higher 30's. So, it's a combination of where it's coming from.

Mike, this is Tom. If you are looking at the pricing that we gave for the committed tons. Let me at least iterate again what Brett said in his comments. In '06 for example, there are tons in that mix that are priced to $20. That represent contracts we did in 2002.

I understand but that's a lot more but the easy year for you to focus on here is '07. If this 5 million tons in met coal that you guys are doing in total you said it all locked up, is that price and volumetrically for '07?

Pretty much.

So, it's easier to focus on that year. You want at least 5 million or other tons contracted at that time of the low 20s and something in the 50s, probably for the net. So, I am trying to figure out does that mean you signed Northern App fields in the lower 30s or higher 40s?

No, we are not doing anything in the low 30's.

Well, I am trying to reconcile your 35.15 price.

Well, that's not the forecast for all of the tons.

That's just what is locked up.

I mean at least I am hearing that price out there in Northern Appalachian set 45 and Central App is 6.

Mike, maybe I am misunderstanding you but just so your clear on the guidance. The price that we've listed there is the price we have for the 33 -- I am talking about '07 for the 33.3 million tons that are committed. Those are committed at a price of 35.15. So, that would mean that if we achieved -- if we did 73 million tons in '07, we have got roughly 40 million tons that will be priced in today's environment.

Where -- are you guys doing firm deals in Central App in the 60s. Where you going like that is like lower 60s, we hear term deals in the 60s. Are you guys hearing the same thing?

Depends on the quality of the coal but yes I've seen deals done in the 60's, that have 2 and 3 years on.

Okay, any long-term met coal deals?

As long as met coal deals we have 5 years.

Any new ones?

Any new ones? No, I haven’t' heard of any new ones.

David Gagliano, Credit Suisse First Boston.

Most of my questions have been answered, I just wanted to come back to the capital spending program for 2006 in particular and 2005 if you want to add some color there as well. I see that the big jump that Mike Dudas referred to earlier, and I am just wondering there is no increase in production expectations. Right, I don't see much of an equation. I am just wondering could you give us a little more details to where the incremental increase in capital spending is going, I think now from '01 to '02 you ran about 270 to 290, in '04 you were at 411 million, obviously that was a big increase I thought that was attributable to some incremental increase in output or targets and improvements. And then I am wondering if you give us a little bit more color where you are heading for in '05 through -- arguably through '07?

Well, I would say if you look at the total these -- you got your base market capital, which we think on the coal site is about 275 a ton, to stay in the position there. And then to stay in the at about 55 million cubic feet a year on the gas side, that's about $40 million a year. So, that leads us to the -- so these become efficiency projects that we are putting into the system like Prep -- Robinson Run Prep plant, that we were replacing that has another a million tons a year at Robinson Run, that would be in 2006. Those are the kind of things that we are seeing in this -- this is approved capital. It's been taken to the Board and anything beyond this would have to be special projects. But that's why you are seeing is that blip I think is expansion on -- in 2006, that would be the Robinson Run Prep Plant and probably the finish it's another acceleration on the gas side.

David, this is Tom. Just keep in mind that although the tons look like they don't increase, you have got essentially a loss of a million tons in '05. And then a loss of 2 million tons from the depletion of VP 8. So, in effect this to stay even we have got to increase some capacities somewhere else.

Mark Reichman, A.G. Edwards.

Congratulations on a good quarter. I just wanted to go back to the average realized price per ton, they're 35.30 and 35.15 in 2006 and 2007, those are only representative of what price that you--

Yes, correct.

Leveraged to improve pricing based on the open position. I guess really what -- you had earlier about some contracts rolling off in 2006 and 2007, some of which include coal price in the $20 range, can you kind of give us an indication in terms of the percentage of your sales or production that roll off year-to-year, say '05 from -- to '04 and '06 to '05 and is that number increasing as we go forward?

Well, if you just look at those numbers just over that 3-year period -- we were rolling off may be 15 million tons a year and typically are -- we may have a 90 percent or better of our coal contact and then about a third of it rolls off every year, I think that's going to -- that will start to change if customers are looking to extend the contract periods to the lengths greater than 3 years but in the last -- over the last couple of years, the average contract length for us was about 3 years, maybe a little bit more, and then it would appear that rolling off may be 15 million tons a year.

I suppose my other questions were already answered, on this Miller Creek mine, what are the reserves behind that, the mine that you activated in the -- I think it was in fourth ?

It was actually -- there's actually 2 different pieces of Miller Creek mine. One is the surface -- surface mine, which I think is about -- I am just giving you the stuff top of my head, I don't memorize all reserves. It seems like is about 20 to 25 million tons surface and then there is another 40 to 70 million tons underground.

Keith Chan, Dreyfus Corporation.

Can you shed some light on the lifting cost increases during the fourth quarter and for the natural gas and how it would look like for the '05 period?

Keith, the lifting costs in '04 was driven by 2 things, one was that fuel prices impacted the cost that we paid to truckers to haul the water away, we don't have big water disposal issues, for example, compared with Powder River Basin, call that methane extraction. But we do have water disposal and it has to be hauled from the drilling sites to 2 deep injection wells that we've got in Virginia and so probably two-thirds of cost in the fourth quarter was related to the cost of trucking that water and the rest of it just happened to be the timing of servicing of wells and it -- versus the fourth quarter of last year.

And how would they look like in '05, pretty much the same?

Yes, I would think that again in '05 within costs we would expect to be relatively flat looking at for the year rather than the fourth quarter. For the full-year '04 costs were about 32 cents per 1000, and that's probably closer to what we will do.

Okay.

For the year -- for 2005, I am sorry.

Operator, we're going to be mindful of the 11 O'clock hour for our colleagues in St. Louis with Peabody and their earnings announcement, so we'll take a couple of more calls but we would like to track and conclude close to 11 as we can.

Paul Forward, Legg Mason.

Good morning, outstanding quarter. Just looking a little further down the line, I was wondering where do you think Northern App production is going to be by the end of the decade, and where does the incremental growth come from? And then given that we are going to have some scrubber installations and some incremental demand for that coal, where do you think that coal is going to be supplied from? And given the restrictions on new development, why aren't you showing a little bit more, let's say by 2007, a little bit more Northern App production potentially due to the road to serve that demand?

This is Tom, Paul. Just keep in mind that a lot of the scrubber installation doesn't really begin to hit till 2008. And I think that our internal long-range look will show us taking the opportunity to wrap up production again, consistent with our philosophy of having sales contracts to support that. But, ramping up production beyond 2007 as these scrubbers come on, we think it's clear that scrub capacity is coming on line. We think by 2008 it's something like 30, 31 gigawatts of additional scrubbing. It's going to allow Northern App coal to penetrate into the southeast with the scrubbing that we see going on down there. So, we think certainly CONSOL won't speak for other competitors in that part of the basin, but we certainly have the reserve base in Northern Appalachia to expand production. And again, that expansion is tied to the ability of our sales force to come back with contracts. I want Brett to go in.

Yes, Tom's right on the money there. We certainly have the reserves and the capability of expanding into that market. I think, the first thing you'll see us do to those is take our capitalized production base and take advantage of the delivery cost in a given power plant. So, we have power plants within a tight radius of us. But, we will go after those power plants first, because we will get the economic run of our location. The next thing we will do is go to the plants. As the market increases, we'll have mines or capacity based on what the market can bear. One thing that we are not going to give position where we a few years ago where -- we were way out ahead of the market in terms of volume. We are not going to be in that position.

So, looking at that 2007 CapEx number of 335, which is a big slowdown from the 469 in '06. In anticipation of some better volumes in 2008 and beyond that number could prove to be quite conservative, I would guess, is that true?

Keep in mind, that's only what's approved. If we put some together in '05 and '06, that number could go up.

The capital that we get, this is Tom, Paul, the capital that we provided in the guidance is the capital that is necessary to meet the production guidance that we've given. As Brett says if we like to increase production, capital will go up and we will subsequently change our guidance and capital for you.

Would you like to take an additional question, gentlemen, if you want to?

We will take one more question, operator.

Riza , Zimmer Lucas Partners.

Just wanted to clarify something for VP 8, the 10 million tons, so you will be able to produce maybe a million this year before it rolls off in summer?

900,000.

900,000. Okay, great. And also for your CapEx, what is the split between coal and gas for your guidance going forward?

I would say gas is probably about 110 million, I don't remember that right--

110 to 120 million on gas.

So basically annual, something like 110 to 120 over the next ?

Yes I would say that's a good number.

Operator we will take one more if we have got somebody on there. We have got a little -- we have got another couple of minutes here.

Frank Stanley, W M

Congratulations great quarter. I just want to add that and I want to ask I guess maybe Bill, on the liability side of the balance sheet. You made some great progress on overall debt reduction in 2004, and just wondering about 2005, if you will continue to pay down debt? I guess that's first question.

Well in terms of that debt, we have $250 million is due in 2012. There is a possibility of paying that early, but again it's due in 2012. We have 45 million is due in 2007, again there could be a possibility of paying that down based on economics and we have 100 and -- about 102 million of debt for our Baltimore Terminal facilities it's due in 2010-2011. So, we are sitting there with debt of around 400 million, not a big number. I am not really concerned about debt and definitely not the debt service.

Furthermore, I have to spend more time on the long-term liability reductions, yet there will be media cash flow issues.

And Bill, with that, I know there was a couple of questions, but when you look at the actual balance sheet numbers, do you expect that to be generally flat on the other liabilities in '05 or do you think that they will continue to work lower?

When we say relatively flat, I would say that's the correct term relatively flat. I don't see any major increases anywhere. They said the provisions for OPEB will probably be pretty 30 million -- 25 to 30 million higher in 2005, and ahead in 2004 other than that pretty well flat. We're going to take a very, very close look at our liabilities, that's going to be one of our goals for 2005, and I expect to have progress, but again we just going to being in studying that.

Operator, it's 11 O'clock or maybe a minute after and I do want to be fair to our colleagues in St. Louis. So we will rapid up, if you will our listeners there a replay information, if they care to re-listen to the call, and thank you all for joining us and we will be available all day to talk if you continue to have questions.

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