CNX Resources Corp (CNX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings 2005 conference call.

[Operator Instructions]

I would now like to turn the conference over to Mr. Tom Hoffman, Vice President of Investor and Public Relations. Please go ahead sir.

Good morning everyone, and welcome to Consol Energy's first quarter earnings conference call. With me this morning are Brett Harvey, our President and Chief Executive Officer, and Bill Lyons, Chief Financial Officer for Consol Energy. This conference call is also being made available over the Internet, and we welcome any of you who are listening through the Internet. Our discussions today will not only be about the results for the quarter just ended, but we will be talking about forecasts and outlooks for the rest of the year and the years 2006 and seven. All of these forecasts are -- our ability to achieve the forecasts or projections are subject to certain business risks. We have summarized those business risks at the end of the earnings release that we have out today at 7:00. In addition, a more detailed discussion of business risks is available in our SEC form 10-K, filed February 28th 2005.

A couple of other things let me mentioned before we began, I want to remind people that in addition to the earnings release and financial statements we have attached to the release today, several supplemental pieces of information, a special income statement which will break out the income statement on the basis of coal, gas, and other, a production report based on Northern App, Central App, another production areas, similar to what we used to do on a monthly basis. This is done for the quarter. And then finally our historical numbers for the last five quarters.

One final thing, on May 13th, Consol Energy will be in New York. We are going to have a special presentation on the impact of recent clean air rules on coal markets. Leading that discussion is going to be our Senior Vice President of Strategic Planning, Nicolas Daheleus (ph), and we'll be at the Yale club on the 13th for that presentation at Midtown. We'll begin with breakfast at 7:30 and begin the program promptly at 8 o'clock and we'd encourage you to watch for additional information on that in the very near future.

With that, we're going to begin this morning with Bill Lyons, Chief Financial Officer. Bill?

Thanks Tom. For the quarter just ended, Consol Energy reported net income of $75 million or $0.82 per diluted share compared with $33 million or $0.36 per diluted share before the effect of an accounting change for the same quarter last year. In the quarter to quarter comparisons net cash from operating activities was 96 million, the same as the year earlier. EBITDA was 159 million for this quarter compared to 104 million in the 2004 quarter.

We are very excited by these results. As you recall, we reported earnings of $0.74 per diluted share in the fourth quarter of last year. Coupled with the results today, we have generated earnings of $143 million or $1.55 per diluted share in the last six months.

From a financial standpoint, the first quarter is a relatively easy period to analyze. Higher contract and spot prices for Eastern coal, coupled with higher sales volumes resulted in an increase in sales revenue of $167 million. This is an increase of almost 30 percent.

153 million of this increase was in our coal segment. The price increase of $6.23 per ton increased revenue by 114 million. The 1.3 million ton increase in production resulted in an additional $39 million of revenue.

We built the foundation for this financial performance with the completion of our capacity expansion in coal last year, and the continued investment in our gas segment. In addition, we produced additional tons at some of our mines. These are tons beyond our contractual obligations, and sold these tons at higher spot prices during the quarter just ended. We improved our margins on both coal and gas, both in the period to period quarterly comparison as well as the sequential quarterly comparison.

Let me mentioned a few things on costs. First, Buchanan. Brett will discuss the outlook for Buchanan later. From a cost standpoint, we recorded charges of about 14 million, net of expected insurance recovery. This would include costs of sealing the mine, the cost of drilling the 16 boreholes, costs related to inner gases and other materials pumped into certain places in the mine, as well as labor benefits and depreciation charges. These costs appear mainly in the cost of goods sold in the income statement, however because Buchanan is idle, the costs are not included in the unit costs of production numbers provided in the earnings release. We will continue to incur these types of charges until the mine resumes normal operations. We have property damage and business interruption insurance applicable to the Buchanan situation. The combined limit is $75 million, subject to certain sub limits.

Second, you noted in the news release that we have a buyout of a sales contract. Essentially, we were able to buyout of a contract from a power generator for about 320,000 tons of Northern Appalachia steam coal that has coking properties. The cost of that buyout was about $13 million, as it included in the cost of goods sold, but not included in the unit cost of production. That coal is being resold as a coking coal to domestic and international customers at current net coal prices. About a third of the tons were shipped to the new customer in the first quarter, and the resulting revenue booked in the first quarter. As a result, the net pretax impact of the transaction on the quarter was about $4 million of expense. The price of those tons is included in the average realized price for coal in the March 2005 quarter in the news release.

We expect to ship the remainder of the tons during the course of this year. The net result for the year from this transaction should be an increase in pretax income of $13 million.

Let me mentioned briefly that we completed our work and amending our existing credit facility. Among other things we were able to increase the capacity from 600 million to $750 million. In addition, the new facility has more favorable pricing. We expect the annual pretax savings to be around $7 million.

We have continued to strengthen our balance sheet. Since this time last year we have reduced short-term debt by $100 million and long-term debt by $45 million. At the end of March 2005, we had no short-term debt. In addition, we have increased shareholder equity by 38 percent.

Finally, let me make a few comments about the outlook. As you noted in the earnings release this morning, our production guidance is for the three-year period and is largely unchanged. We expect to get our production targets. We have adjusted the production forecast for the last three quarters of this year for both coal and gas. This reflects the impact of the Buchanan situation, as well as normal changes in coal and gas operations.

In gas the impact of Buchanan for the year will be to lower expected production by about 3 billion cubic feet. This is in addition to the production curtailment of 3 billion cubic feet to the pipeline transmission curtailments that we discussed in our January conference call.

Another adjustment to the guidance we previously provided was for capital expenditures required to meet production goals. You will note that the amount of capital proposed this year has increased by about 100 million compared with the previous guidance. This primarily reflects an acceleration of payments to Longwall Equipment Manufacturers from 2006 and 2007 into 2005. As demand for mining equipment grows worldwide, manufacturers are requiring more money up from to hold a place in the delivery queue.

Total capital for the three years is up about 20 million versus earlier guidance. Again, the principal change is the timing of the payments.

Finally, we provided a bit more parity with regard to our coal contract position. We provided total tons committed at a certain date as well as tons committed and priced as of the same date. This reflects the fact that at any given time we have tons for which we have reached agreement for sale, but for which final pricing has not been established. This might reflect, as one example, our reopen of contract.

The average realized price provided in the guidance is only for those tons where we have agreements with pricing included. In other words, we have made no assumptions in the guidance regarding prices not yet agreed to.

From a financial standpoint, this was an extremely strong quarter for the company. We have the cash and financial capacity to meet our current and near term needs. We are pleased with the overall strengthening of the balance sheet. And with that, let me tons over to Brett.

Thank you Bill. It's good to be with all of you and talk about Consol Energy for the first quarter, and give you some look for the rest of the year.

We had a very strong quarter. I think that strong quarter is really based on what we told everybody last year; the continued adding of capital and capacity to our mines, and as that capacity grew, we added volume and we added volume in a rising price marketplace, and those fundamentals really drove the coal business to where it showed the strength of our location and our ability to move forward.

The fundamentals for coal and gas continue to be very strong now marketplace. We made real -- we took advantage I guess would be the right thing, in spot opportunities that we had in the first quarter where our productivity at the mines exceeded our contractual obligations and we took advantage of the spot market. The results I believe, that Consol continues to grow the margins in a very powerful energy corridor or of the Northeast and we think that that really stresses the value of the location of our coal and where it sits in the market fundamentally.

The market fundamentals themselves show a very strong demand in both coal and gas.: inventories are at historically low levels. They continue to be there. Coal production across the nation continues to be flat overall, but if you look at it from east to west adjusted on a BTU basis, we see less BTUs being produced this year than we saw last year and a growing demand for fuel for electricity. This really puts gas and coal in a good situation, especially in the eastern U.S..

Electricity demand continues to grow with economic activity, as predicted. The market within a market that we talked about is being created even faster because of high allowance prices are encouraging the acceleration of scrubber development and high allowance prices enhance the competitive dispatch position of existing scrub plants using high BTU high sulfur coal versus un scrubbed plants burning low sulfur coal.

Overall we've seen a strengthening of contract price fundamentals for our coals across all of our products, not just net coal, but all of our products we see a price strengthening from the first of the year. With strong NYNEX pricing of gas, coupled with our open position in 2006, we see that business continue to grow in volume as we solve the Buchanan problem, as well as grow profitability associated with price.

We believe the three-year outlook is as positive as we've ever seen it. It continues to look more positive and we're very bullish on where we're headed for the next three years.

Let's talk now about Buchanan. Clearly, that's an event that happened in the quarter that was disappointing to Consol, but it's something that we reacted very quickly to. We sealed the mine quickly, we put the fire out of so to speak as quickly as we could. All the indications are that the mine is in the cooling, we are in the recovery mode, we are negotiating with Emshar, right now when to get in and when to get it started, we're looking at the risk profile for the asset as well as the safety issues associated with going back into that mine. I can tell you this: from an engineering and technical look, that we've looked at it, that things are positive that way. We will open this mine sooner rather than later and we are in the process right now of evaluating the proper methods to reopen that mine and get into it so we can get the production out of the mine safely.

With that, I would like to open it up for questions.

Operator, we're ready for questions here if you give instructions to our listeners please.

Ladies and gentlemen, if you have a question please press the star followed by the one on your touchtone phone. If you would like to decline from the polling process, press the star followed by the two. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. One moment pleased for our first question. Our first question comes from the line of Jim Rollyson, from Raymond James. Please go ahead.

Good morning gentlemen.

Good morning Jim.

Good morning.

Brett, could you talk about -- you guys kind of outlined in your press release the average price of your committed and priced funds, which is I guess low to mid 90 percent range of your total expected funds in the kind of 34/22 range, and obviously this quarter you were over $35 a ton. I resumed part of that was a result of, you know, moving out some contracts, what you mentioned, and selling some coal as net, and just the coal you produced over and above your commitments. As you look forward, excluding I guess what happens with Buchanan, do you think you have grown to continue to beat your current committed and priced average?

Well, a lot of that depends on productivity on a quarter by quarter basis, and I would say that with the capital that we've spent last year, we were very pleased that the mines are running well and that the performance especially Loveridge, at McElroy, and other places, are beyond expectations. Now, whether that holds all year or not I'm not sure, but I am optimistic that we will be able to hold the high end of the committed numbers that we have on our forecasts.

Right. Also, in your press release you mentioned you declared forced dejour on your mechanic contracts through the end of May. I guess should we assume that you're hopeful to get that back up and running by end of May or at least by the end of the quarter?

I would say that by the end of May is clearly a place where evaluation -- we'll be well on our way into the evaluation process for the mine. That's probably optimistic by the end of May, but through the quarter I would say yes, there's a good possibility we'll be operating.

Okay. And then lastly just looking at the gas side of the business, you're obviously pretty wide open as you go into next year and '07. As prices hopefully this summer strengthen, if we get some actual summer weather for a change, are you looking at locking up some gas at substantially higher prices where they are today versus what you've got kind of locked up for this year? What's your general thought on your strategy there?

Well, clearly, the forward indicators show that if we go out two years we could lock up around in the high 7s, pushing $8 a million. That makes us think very hard about locking our -- that kind of value in going forward. We do believe that the weather's going to push it a little bit harder and we'll start layering in, I believe, where we think it's the proper places based on where we see the energy markets going forward. We'll capture some of that opportunity. It's a very robust market right now, and we believe we'll capture some of these higher prices, yes.

Great, thank you.

Our next question comes from the line of Mike Dudas of Bear Stearns. Please go ahead.

Could you talk about how much excess productivity, what kind of spot sales you made in the quarter volume-wise?

I would say -- this is Brett speaking. If we looked at the quarter itself, I would say we were probably up about 2 or 300,000 tons over what we thought we would be when we entered the quarter. The spot sales were across the board, Mike. We had spot sales virtually for every type of coal, whether it was very high sulfur, whether it was medium sulfur or even low sulfur. So it was a mix of those. I'd say a lot of productivity came out of the, what I call the Blacksville area, as well as the McElroy area on the river. So those were the two shining areas, I believe.

Second question is when I look at your guidance relative to your tons committed in price as of April 8th, I notice there are changes in the price and also the tonnage that was related in the fourth quarter. Could you explain that?

Mike, this is Tom. Just to be clear on the change in the guidance, we looked at the guidance we gave in the first -- in January. We felt it was a little inconsistent with our philosophy of letting analysts apply their own price sec to our un-hedged position in coal and gas. We had given you total tons committed with a price in January and that included some assumptions we made about that coal that was committed but not yet priced. So we thought about that and we thought really it's probably better to provide you with a little more detail. So what we have done is to say here's the total tons committed and of that, here's how much is priced and then you can apply your own price sec to the tons yet un-priced, even though they're committed, as well as applying it to the open tonnage.

Now, with regard to the quarterly estimates of tons, all we've really done there is to try to reflect both in coal and gas the impact of Buchanan, which, as you'll see, largely falls in the second quarter. I think in the case of coal the guidance for 3Q is the same as it was when we put it out in January. I'm not sure if that answered all of your questions.

That's very helpful, Tom. Thank you. Brett, when you -- we're seeing continued announcements by utilities of pollution control equipment being put in at their plants, and are you discussing with those folks about contract opportunities '08, '09, '10 relative to the timing of those switches coming on? And is there a lot of discussion and concern from the buyer side relative to locking up those types of coals?

Yes, literally across the board. With our reserve position, our capitalized production ability and its very high Btu environment related to the scrubbers being built, people are looking for long term relationships that tie up volume as well as security and supply. And that fits CONSOL like a glove. And we have some long-term discussions going on across the board. With 13,000 Btu coal in the region and scrubbers being built, it is creating a rapidly advancing market for us with tenure to it.

Sure. How did the rails perform this quarter, Brett?

The rails, I think we really can't point to where we were held back by the rails. Where we built any inventory, and that wasn't very much at all anywhere, we built inventory based on productivity of things that were beyond what we dispatched. So in the North, the rails have acted pretty well. If we had any complaints it would be in Central App, but still, we moved what we planned to move in Central App for the quarter.

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

Sure how's it going guys?

Alright Mike

Great. I was wondering if you can help me out a little since we had changed this format a little bit on the price, if you can just give a broad range? Like in '06, 47 million tons are committed. Out of the uncommitted, can you give us like some breakup of the coal at all in terms of what's going in App and how much is net coal, et cetera?

Mike, I can't at the moment. I'll go back and see if I can get that detail for you and call you, but I can't.

Okay.

Specifically, as you know, in '06, most of the met coal had been spoken for. I think we previously disclosed that. And I would think if you look at the remainder of our production, it's two-thirds Northern App, a third Central App, and I don't know, Brett, whether proportionately that's about where we'd be on our contracts. It might be a little more Central App open than Northern App in any given...

Yes, I would say it would lean towards more Central App coal being open than Northern App. But we can give you those numbers. We just don't have them right here in front of us, Mike.

Why is that? Are people -- why are people not more willing to put contracts on Central App or is it your guys are reticent to put contracts on Central App?

It's probably a combination. I think it's just where the market is right now. That market is not as -- I would say that market's not as stable yet as where I see the Northern App headed and I think there's some more opportunities there. There's still declining production in that area and the pricing is a lot more volatile than the North and I think both the customer and the suppliers are wondering where it's going to land. And so the longer-term deals aren't being done yet.

And in light of the gas curve and the valuations being given to gas companies, I didn't hear if you guys had spoken about this and forgive me if you did, what about monetization of the gas assets?

Well, as I've always said, we will do something in 2005 about the valuation in our share price associated with that gas business. I believe it's extremely undervalued. As we see these prices going forward, the value of this gas company continues to rise within our share price. It's unfortunate the market seems to be just running us as a coal business and ignoring that. The point I want to make is we've done a lot of work internally to separate these two; two separate balance sheets, our ability to manage these things as two separate businesses. And we're looking at our options beyond that of how to establish that value. I'm not ready to speak to that. The Buchanan has slowed our thought processes down on that a little bit, but we are -- continue to be very diligent about getting that value into our share price with a decision sometime in 2005.

It's interesting, just one observation point that you say you're valuing as a coal company. I don't know that there's anything wrong with that. If you look inventories down in coal and where the coal business compared to a gas business where, you look at the five year average, it's above there. I mean if there's one business I'd want to monetize, it's that. Maybe the market doesn't totally agree with me at this point, but I think at some point they will.

Well, you can single out these pieces, but when you add the two together, there's an undervalued company.

Alright thanks a lot guys.

Thanks Mike.

Our next question comes from the line of David Khani from Friedman, Billings, Ramsey. Please go ahead.

A couple of questions. What's the delta of what you actually contracted for in -- for '06 and '07 versus what you were at in fourth quarter?

I don't have the old -- fourth quarter would have been -- the guidance that we gave really hasn't changed in '06 and '07 in terms of the stuff that's priced. Yes, the '06 and '07 number really -- wait, I'm looking at an earlier draft of the same release. Let me check that, Dave.

Okay, I'll move on to another question if you can get back to me. Was there any rollover tons from last year that hit the first quarter?

Yes, there was, but it was minimal. My recollection was less than a million tons.

Less than a million tons. Do you have much left for the remainder of the year?

In terms of those tons?

Yes.

Oh, no. They're all gone.

They're all gone. So 2Q through 4Q shouldn't have any drag from last year's pricing?

No, there's no drag at all. In fact, I would say clearly we're rolling into '05 pricing based on '04's contract signing across the board.

Bill, legacy liability. Could you give us -- walk through kind of the '05 outlook versus '04 on accruals and cash outlays, you think?

Well, in terms of '05, David, pretty much what we have in the fourth quarter in terms -- or first quarter on provisions is probably what's going to play out for the year, primarily because they're actuarial calculations. So we had about 47 million of provision, like in OPEB, so I would expect somewhere around 190, 195 there. In terms of the payments, payments are about 32 million for the year -- for the first quarter in OPEB and that plays out to where we estimate, somewhere around 120, 125 million of cash expenditures. And I think that's very important there.

You can see that when you look at the P&L charge, that's about 70, $75 million higher than what the actual cash outlay is. And when you're looking at legacy liability, sometimes you have to take a look at what it costs to service those liabilities. And that 125 million is similar to what we had last year, not a big increase. In fact, when you take a look at it, probably for the next up to, say 8 to 10 years, it's probably going to move up to about 150 million a year to service that and it probably peaks out 20 years out somewhere around 175, 180 million.

That's the cash expenditure. So I think sometimes you get a -- I think you have to look at the cash expenditure to get a true perspective of the legacy liabilities.

In terms of CWP, our expenditures are probably going to be around 14 million for the year, I would say, 14, 15 million. Worker's comp is probably going to be about 56 million of payments. The charges there will be about the same, maybe about 60 million in worker's comp in terms of expense. Salary retirement, we expect an expense charge around 50 million and we're probably going to pay out around 65 to 70 million into the trust fund. So that's pretty much an overview of the legacy liabilities.

So when you put it all together, accruals could be up some but cash would -- what's the cash change? Is it going to be -- how much increase do you think?

I'd say cash is going to be somewhat flat when you put them all together.

Flat. Okay, good. First quarter, was there free cash flow generated, Bill?

You know we had that $96 million of operating cash flow, and about -- the capital expenditures was $57 million, so it would be the difference between the two. And we also have the $13 million of dividends. Is that how you define free cash flow, David?

You can either do dividends or without dividends, either way. I guess you didn't have free cash flow.

We did have free cash flow even if you put those in there.

Okay. And then last question also...

We're - I didn't tell you. I'm very pleased with our cash position. As I said in my remarks earlier, what a difference a year makes. We dropped our short-term debt by $100 million, and dropped the long-term debt by $45 million. So that, combined with our new credit facility, we're in very, very good shape financially. I'm pleased with our position.

Do you think you'll be free cash flow throughout the year?

Oh yes.

Okay, great. Last tax you paid 16% in the first quarter. What do you think -- what should the guidance be for tax rate for the full year and how much do you think -- out of what you're paying -- booking, what are you actually paying? Or what percentage will you defer, do you think?

Well, David, we've talked about how difficult it is to project the effective tax rate on taxes because of the impact of percentage depletion. Our estimate is what we have in the first quarter and that would be somewhere around 16 -- I'd say we have 16.1%, so I'd say anywhere between 15 and 20% should be the number on the taxes.

The effective tax rate goes up as we make more money and the reason why is that the mines that aren't profitable at 40% rate where when they become profitable, they come at a different rate because of percentage depletion. Don't know offhand exactly what our tax payments were for the year. I need to get that number for you. But the effective tax rate should be around, I would say 16% is what we're estimating and I would expect it to be around 15, 20% if you're asking for a range.

David, this is Tom. Just to follow up with you, the previous committed tonnage number for '06 that we gave you in January is 52.9; it is now 53.7 for '06. And previous committed number was 33.3 in '07; it is now 34.5.

Our next question comes from the line of John Bridges from J.P. Morgan. Please go ahead.

You touched on scrubbers in your text and your commentary. I wonder if you could fill us in on -- with prices sort of picking up $100 every quarter or so, things must be getting pretty critical. And I'm just wondering, from your side do you see the opportunity to accelerate bringing these things on -- do you see the pool running out? What do you see going on there?

Well, remember, the scrubber credits that are being used in a big way are the ones, the big scrub plants in the East that had a bank of scrubbers already -- or bank of credits already. And they're using those to continue to burn the local coal. And that local coal is very high demand. They're burning these plants at very high rates. And so they're using what they already had in their bank.

The bank that's accessible to the rest of the marketplace is a shrinking bank, but that's going to accelerate the building of these scrubbers, we believe. A lot of the people have announced, especially on the river here, the Ohio River we see the construction right now of things that we thought we wouldn't see till next year. So I think it's being accelerated. I think those high prices are driving it and it plays -- and these big scrub plants are running harder and harder. So in a sense, they're after the Btu's, so the scrubbers are just really playing the best economic Btu in the region.

Okay, that's helpful. Now, Brett, two years ago you came into a company with a lot of challenges, issues, whatever. There's been a phenomenal turnaround. Where do you see this baby going next?

Well, I tell you, this company is the most asset-rich company in the coal and natural gas business and region that I think you can find anywhere in the country. If you picked any region or looked for a reservoir of energy, you couldn't find it. So I would say that we have the ability to expand in the gas business internally or with an acquisition and I'd say the same thing with the coal business. I would say both those legs have the ability to grow and become a stronger company overall, within the region or without the region. I see this company with a balance sheet to grow and I think that's where we're headed.

So is the next trigger point the willingness of the utilities to sign longer-term contracts?

You know that's what's going to happen. The longer-term contracts are going to come and they're going to be base-loaded on these big longwall mines that have the productive capacity to go for 20 more years. The utilities have decided to move these big plants into another 25 years of life. There's not many coal companies that can match that. And CONSOL is certainly in that position.

Okay great.

John this is Bill Lyons speaking. Just to expand a little bit what Brett said about how excited we are. Now if you take a look at that quarter to quarter comparison on the price we're out $6.23 per ton. That's in one year. We believe it's step change in the industry. We think that pricing is real and we think it's a state. On the back end is that we believe the scrubber story and we think that the scrubbers are going to be there in 2008/2009 and particularly when you see the environmental regulations that came out in March of 2005.

I also encourage you to attend our session up in New York on May 13th that Tom talked about that will expand on our scrubber story. But we're also finding in between some pretty interesting things is that as the scrubber trend continues and these SN2 allowances are drying up. This is favoring scrub units and the scrub units we think in the interim period are going to be running full out. So strange as it may see is there's going to be a great demand for high sulfur coal during this interim period. So really I think the battle grounds so to speak are going to be for lower sulfur coals and that's our central APCO and even something like a Mine 84 coal and we're very happy to compete on that basis with those mines that we have right there so we're extremely excited about what we see in the future both near term and longer term.

Yes, I was just trying to get a sense of what could possibly happen with this small pool of remaining credits because we are seeing sharp increases and less VRP(ph) coal prices which suggests that maybe some of these guys are running away from your high sell for short term to get around that problem.

Quite to the contrary John. I think that's what we've been arguing is that the high sulfur coal is already going to the scrubbed units and because of the price of sulfur allowances those scrubbed units will run a higher capacity factor which will mean slightly more demand for high sulfur coal.

So in the short term - to help you understand it. In the short term the high sulfur scrub plants are running at maximum capacity which creates a quick short term market for us and then when the scrubbers get built the market expands even beyond that. So I would say everybody who has coal in this country that capitalizes is going to find a market. The real issue here is who's going to find the market with the highest margins?

Okay thanks for that guys. Well done.

Our next question comes from the line of David Lipschitz from Merrill Lynch. Please go ahead.

Good morning guys.

Hi Dave.

A question. What are the startup costs when you will get back into the cannon in terms of bringing it back up to a normal inventory level compared to the boost you got in selling inventory in the first quarter?

I would say that the startup costs are going to be directly related to what we have to deal with in the miners sell. We don't think there's a lot of damage there so once we can re-enter the mine we believe that the startup costs are just going to be the matter of doing some root control, some restructuring and then we should be back to full production once the long wall start probably within two or three days and then of course that will start the shipment process immediately because the customers need that coal pretty bad.

You also said that you had shipped - let's say about half of it in the first quarter. Has the other half been shipped in the second quarter and was that just a shipment that you had existing contracts on?

David as of yesterday - this is Tom. As of yesterday I think we had one train load of coal left on the ground to be shipped and that should be shipped anyway especially we completed the inventory that we had on the ground at the time of the event.

And that we due to existing contracts right?

Yes.

Okay thank you.

Our next question comes from the line of David Gagliano from CSFB.

Great thanks. Hi. Most of my questions have been answered. Just a couple of quick questions. First of all in the first quarter on the spot sales of 200-300,000 tons roughly. Can you just give us a sense as to an average price associated with those sales?

That's hard to do because they're all over the map. I tried to talk the different qualities. I would say if you looked during that time both the forward pricing was at the forward look I would say we're very close to those prices on all spot sales.

So say somewhere between 50-60-

There were a lot of sales done with the pricing problems. High 40s. There's a lot of demand for this coal right now.

And just to clarify one thing. In the January 13th press release, it does say tons committed and priced for 2006 at 52.9, and then in the current press release it says tons committed and price 47.1. There's a similar belted in 2007, and I know you spoke to that a bit. I just want to make sure I'm thinking about this correctly. The tons committed in price as of January 13th. Should that have actually just said tons committed?

David again what we did in January was kind of lump together - so far our total commitments and our commitments that have been priced and there is a difference and we made in our guidance in effect some assumptions about those untraced committed tons would come in at. Again as we thought about it from the standpoint of the way we wanted to approach guidance we thought we should really be giving just the pricing on those tons that we have priced. If we have them committed but they're not priced we'll let you apply your price deck to it. Let me say it again this way.

Between January and April the total number of tons committed has gone up by a million or tons in '06 and whatever the number was later so in '07. So we're obviously making progress toward commitments but what we've done is to give you the lower number which is only the part of the committed tons he has priced and you'll see that resulted in a somewhat different pricing level - a lower level because we had previously made some assumptions on your behalf about the pricing of the committed tons that hadn't been priced yet and so we think we're giving you a better opportunity to do what you do best which is to analyze this stuff.

Okay. I just want to clarify it. And again in the January 13th press release it says eight tons committed and priced which is the exact wording-

We were not as careful on that as we probably should have been and plus more importantly I don't think it was consistent with the way in which we chose to approach the guidance. So we're hoping that this is a little bit clearer for you.

And it's also helpful - you know my understanding now is we can - I could probably just back into what price assumptions you were using for the incremental six million tons given that you also giving a difference in price.

Everybody knows you're a clever guy.

No I'm just say that will help us - okay. Thanks very much. That's all I had.

Thank you.

Our next question comes from the line of John Hill from Smith Barney. Please go ahead.

Good morning everyone and congrats again on a strong result in a difficult environment. Just curious. We've heard a fair bit of commentary from other operators not so much about operating costs which are pretty much across the board but actual availability of inputs be it everything from contractors to equipment. I was wondering if you could comment on that particularly on the contractor front?

Well where we use contractors is mostly down in southern West Virginia. There is a real tight market for contractors for people who will come in and mine small blocks of coal and stay with you because there's a bidding process between companies and they tend to hop around. There is a tight market there. Fortunately that's not a big percentage of our business and it does affect us but it doesn't affect us materially at this point in time. That is a tight - now when you talk about mining equipment that's why you saw a change in our capital. Our capital were actually putting more capital into the mines - not actually into the minds into the equipment earlier to keep our place in line to make sure on our three year plan that this capital shows up on the day we need it because we're running these lines pretty hard and that capital has to be replaced. So yes we're putting cash up front to keep our place in line because we're buying new long walls to keep this hydro electivity up and that is a problem but we're addressing it with our balance sheet.

Very good. I think in a way that also is a measure of some of the sustaining capital under spend that occurred over many years.

Yes, yes.

Secondarily, I was just wondering now. We've talked through the cannon situation and thank you for your forthright approach to. I was just wondering. Do you have any reasons specific data points for us? I mean you talked in the past about gas concentrations and light readings and thermocouples and things of that nature. Do you have any specific data points to share with us?

Well we have - there is a - and I forgot the name of it. It's called the Linton ratio and it gives you the ratio of the gases in the minds as it relates to a fire. The Linton ratio has been very healthy in terms of absolutely no fires since late in March. So now it's risk file - how do you re-enter a mine and do it right? Are you doing it too early? Are you doing it not too early? Is it safe? Those things are being worked out with the government but there all positive things. We're figuring out how to get this thing going as fast as we can versus fighting fires. So that's the good news.

Yes it sounds like it and then taking a forward view. Is it safe to say that there'll be a fair bit of redesign of ventilation there?

Not so much ventilation. I think color, size and probably roof support. Those two things will - they'll be some changes going forward there. That's where we're seeing - we can avoid this problem with some changes there we believe. So that's yet too be seen.

Very good. Thanks a lot.

Our next question comes from the line of Paul Forward from Legg Mason. Please go ahead.

Hi. Good morning.

Hi Paul.

Hi there. Thanks for all the detail in your release and in the conference call. Just a couple of questions. Can you explain what the acceleration of the Capex that that was due to the desire to get the equipment sooner rather than later. Why don't we see more of a bump up in the production guidance for '06? You still have that 68 number in there at the low end. Why not take out the low end given that you're accelerating capital spending?

Paul you misunderstood a little bit. The acceleration that's happening is advanced payments being required by the manufacturers.

Paul in terms of that you have to take a look at the capital expenditure guidance we gave you is - yeah it's up 100 million compared to what we previously disclosed but this is offset by a 20 million decline in 2006 and a 60 million decline in 2007. So really the true increase is only about $20 million. You know we came to the conclusion that it's a sellers market and as Brad has mentioned we just weren't going to risk production due to equipment delays.

Paul this is Tom. I think what you were asking is are we accelerating at getting equipment in place and why isn't production reflecting that. Equipment will be delivered in the same timing as before and the only timing exchange is the payment schedules to the manufacturers.

And even when you take a look at that if you do a present value calculation it's really not that significant. The trick is that we were able to lock in some prices so we'll get the benefit of that and second I'm going to tell you is because our financial position is that we do have the option to lease those long walls into time that come due. So even though it may not show up in the capital expenditures I'm going to tell you that we do have the option to handle it the best way financially. So that was nothing more than a change in the payments not a change in delivering schedules.

Okay thanks and just think about the scrubber installations by many of the utilities in your area local in the northeast. How much - when you look across the region in northern Appalachia how much new volume can really come on by the end of the decade given the permit limitations and equipment limitations and whatever other limitations there are for new mines development?

Well let me say this. We believe that the stock prices and the continued spot prices associated with any kind of volume in Central App is a clear indicator that money's going to come back into Central App. They're going to be new capital come into there. The slide off - or the roll off I guess the volume in Central App will slow down as these prices stay up.

In terms of when it's going to come back, I would say you're going to be - it will accelerate somewhat based on demand but I think you're looking at five years to get any major volume back into Central App and for instance the mine we opened up Miller Creek last year that permit was on the shelf for almost twelve years before we pulled the trigger. There's not many of those out there and we still have a couple more ourselves but we're - as we see the market unfold we'll bring them out. There's just not a lot on the shelf and anything that's capitalized in Central App is going to demand some pretty high prices especially if it's a high BTU.

Paul this is Tom. We've previously said that with regard to Northern App and scrubbers even though every scrubber increases our market opportunity we have a committed to commensurately expand volumes with that market opportunity and I think perhaps your position has always been we're going to first optimize the margins on the capacity we have.

That's right and then we'll look - if there's customers willing to do long term deals with us we'll ultimate capacity to match them. That's going to take some time.

But don't they - if I'm out there building a scrubber now and I'm planning on using northern App coal and it's all going to be incremental tonnage because everything else out there is already committed why wouldn't I be out there pretty nervous about where the coal's going to come from right now?

I think - you've described in the market.

Yeah from that color observation.

You're describing the market as we see it right now.

Okay well thanks.

Our next question comes from the line of Brett Levy from Jeffries & Company. Please go ahead.

Hey guys. Three questions. First off you guys talk a lot about steam and coal. Given the real pull back that we've seen in a lot of the steel stocks and steel prices have you guys seen any pull back in the long term demands for met coal? I know you guys are fairly far out already but I mean my sense is that perhaps the outlook there is a little bit less rosy. Second one was can you talk about plans to be investment grade at some point and then the last one is given that the outlook is so strong here can you talk a little bit about the risks that labor costs are to get a little bit expensive here?

Okay. Let me first address the met coal issue. We have a long experience with met coal and it does cycle with the steel business and when it came up this time for the first time we saw the opportunity to sign longer term contracts associated with met coal. We're satisfied with those. We have some long term deals. We think that price is good and it was price fairly between the two parties and coming out of long wall mines like we have for met coal we see some real good margins. So that market has softened a little bit but the fact of bacan is down did strengthen the market. When it comes back I don't know what we'll see but we feel like we're better off being contracted for longer terms at high margins than we are trying to chase that spot market.

On the labor side clearly when you having rising value in the mining business you're going to share it on the labor side. We think there'll be some pressure there. Because of our techniques in long wall mining the labor issue doesn't give us as much pressure as we would have with continuous miner mines. It's higher productivity. It uses a lot less labor to get a ton of coal out of the ground. They'll get their piece of pie and that will be negotiated but we don't - that's bake into our forward-looking plans so we don't see any big issues there.

In terms of investment grade - discussed that a little bit in terms of our plans. Obviously we plan to be investment grade. Unfortunately it's not unilateral on our part. It's that we have to go before the credit rating agencies. All I can tell you is our story is this is that we have a company here that's generating substantial cash flow. A company that has a history of strong cash flows. We have long term debt of $400 million. In terms of the service of that debt $45 million comes due in 2007; $100 million is in 2010 and 11 and $250 million is 2012. So you can see the service on that is far out. We just did a $750 million credit facility that was substantially oversubscribed. We're able to borrow using our account receivable facility at rates very similar to commercial paper. In terms of our stock price you've seen the equity markets have seen an increase of say 50% in the last year. Our market cap is approaching $4.0 billion. It seems to me I described an investment grade company and that's what we present to the credit rating agencies.

Got you and then with respect to contracts and unionized labor and defense escalation?

Well when we look at the labor situation in total - the United Mine Worker contract comes up at the end of '06. That will be in negotiation that happens about every five years. They'll get their piece of pie. We'll negotiate a fair deal. We plan for these things on a long term basis anyway. I think there's more an issue out there are there enough miners to do what we need to do. Across the entire industry, I think it affects us less than others but - if you look at the cost breakdown labor's probably about 25% to 30% of our total costs. I think it will continue to be there going forward. That's a good number to use.

Okay thanks very much guys.

Operator it's 11:00. Do we have any other calls in queue?

Yes we actually have three more in queue.

We're willing to stay

Okay, do you want to take another question?

Yes.

Alright. Our next question comes from the line of Michael Lucas from Appaloosa Management. Please go ahead.

Hey guys. I just wanted two things I want to clear. Is your met coal spoken for for '07 as well?

Some of it. I think we do have some open in '07.

But '06 was spoken for but '07 I thought you were maybe increasing from five to seven million tons?

Mike this is Tom. The statement that we've made at conferences is that there is a project that we've reviewed that could increase met production as Buchanan but going forward with that project would be dependent on securing additional sales for that incremental volume.

Okay so that's out of the way, how about (inaudible) much of that for '07 was spoken for?

I think pretty much all of it. I don't think there's a whole lot of met coal open in '07. Keep in mind - excuse me for interrupting. Keep in mind that sometime during this year the VP8 mine which is a met mine near Buchanan depletes all of this long wall mine-able coal. So we have some decline in absolute met capacity sometime this year.

But just to understand. When you say committed that's the advice for '07? You have no open mines you can sell on a stop basis?

I would say that there is some but it's being negotiated at this point in time.

Can you give us a percentage of it?

At this point I don't think it would be a good idea.

I just wondered if you could make a few comments. I don't mean to put you on the spot like this buy I'm gonna. You've spoken a few times about you know you're very excited about the coal and the gas business and I hear you as an exciting coal story and that's to me where the fundamentals are the best by far compared to the fundamentals in gas, what do you have in the going forward business of coal, gas and which are you more excited about because I'm a little confused this morning.

What am I more excited about?

Yeah, which do you guys view yourselves as and what business do you like better?

Well I would say you need to view us an energy company that sits right underneath - you know our gas business is directly tied to the coal business and those - and it sits right there with a premium to the northeast markets. If we can continue to make these kind of margins and grow this business associated with our coal business it just make a lot of sense. It's a powerful company. So I'm excited about both of them.

I know it's akin to say which one of your children do you like the best and they're both our children. They're both doing well and we love them both.

I guess it's akin to say if one of my children could be sold off in multi value in a big way well then I might pull that one off.

Well and I do understand your viewpoint there and that's a consideration that I think has to be made as things become more valuable on the other side. It wasn't that long ago we didn't have a gas business and look how valuable it is to us today. So there's a time and place for everything.

Okay thanks.

Our next question comes from the line of Jay Turner of BMO Nesbitt Burns. Please go ahead.

Thanks. Good morning everyone. Just had a couple of questions here. I think you mentioned that the limit on your insurance at Buchanan is $75 million subject to some sub limits? But I was just wondering - I mean you accrued $13 million or $14 million in the quarter. I was just wondering how long you can go with the situation the it is before you hit that $75 million limit? Is that sort of why you're giving the end of May guidance or how did that all play out?

It's going to unfold the way it unfolds. I mean obviously we're at the $14 million and edged up forward. Depends on how long the mines done and it depends on what we find down there in the rest.

Jay this is Tom. Just to be clear because someone else said-

I missed part of it. I may have missed it.

Someone else said a similar thing. To be clear what we said with regard to the force du-jour on Buchanan was that the current force dujour ran through the end of May but that the company might continue to extend that beyond the end of May if circumstances require it. So just to be clear we were not giving a forecast that at the end of May things will be back to normal. We were just trying to give you an accurate depiction of the contract situation and the current letters that customers have say through the end of May but that we may alter that as circumstances warrant.

Okay let me - maybe I'll reword it. You said that the $14 million was net of proceeds? What was the gross amount?

The gross amount was around $24 million.

Twenty-four million okay.

Again that is a very preliminary estimate of where we stand at this moment and there's a lot of very technical accounting rules that we have to comply with and its based on knowledge that we have at this point in time. Again that's the basis of the numbers.

I mean I guess what I'm trying to determine is you have a pool of recoverable insurance proceeds that are linked to this lost production.

That's right.

We know what the lost production is or we have a pretty good idea. We know what your inventory position was. On the assumption that you have a long term price of somewhere around $55 or $60.00 for this met coal and you have contracts that you have to honor if you have to go into the spot market and pay I don't know a hundred dollars a ton for replacement coal how long do you foresee that (inaudible)?

That's where we have the bust. On a force majeure we don't have to cover.

You don't have to cover?

No.

Well no but isn't the insurance proceeds of $75 million drawn down by that covering strip?

You're talking about business interruption insurance?

Yeah.

Yes. You're getting reimbursed for your business interruption but yeah if you go beyond that clearly you've lost the opportunity to sell that coal but that doesn't mean you've got to cover anybody.

If the coals not being produced and a customer needs say 100,000 tons of met coal that they were going to get from you but they can't because of force du-jour-

Right.

It's got to be supply from somewhere-

Yeah but that's their issue not ours.

Sorry that's up to the customer to cover that?

Yes.

And they don't get anything from the insurance above-

No they don't get anything from the insurance period.

Okay. That was one question and the second one I had - well actually it was a small question. The other income this quarter what was that driven by? The $24 million?

I don't have all the detail for you but what's in there is there's some purchased gas. That's mainly what's in there. But it's some purchase gas and the rest. There's not a lot of in there.

And keep in mind Jay that the purchase gas number is offset by a cost.

Right yeah I know. Okay and then lastly this is more-

We'll be disclosing that more in our 10-Q.

Thank you. I guess the last question is more of a philosophical one because I know that you don't want to provide a lot of details about the financial split of the gas business and the coal business. But when you did the AEP transaction I think it was in 2002 you took back a bunch of cash which was used to purchase your partner out of the gathering infrastructure and return for taking legacy liabilities on those AEP mines out of your balance sheet. Philosophically how do you see splitting up the legacy obligations between the potentially a new dividend of gas business and the existing coal business?

Well one description you're using is you're describing how we use cash in any given year. That's just a cash transaction. If you look at legacy associated with these businesses the legacy was created by the coal business and stays with the coal business. The gas business does have any legacy.

Alright thanks a lot.

On that detail you want to know another - the only thing that has some difference is that Harvard Trust Settlement that we talked about.

Alright thanks.

Operator if there are no other questions-

Actually we do have a question from the line of David Lipschitz.

We'll take that one.

Alright go ahead sir.

Thank you. One quick call. On the gas guidance that you gave you have 38.2 hedged at 478 and that was the same guidance you had at the end of the fourth quarter. So does that mean you had no spot sales in the first quarter or am I looking at this separate?

I'm sorry David. Say that again please.

The guidance for the first quarter has the full year 2005 estimate volumes tests for gas of 38.2 at $4.78. That's the same guidance you had at the end of the fourth quarter in your January conference call.

Yes.

My question is - does that mean you had no spot sales and no sales in the quarter or am I looking at that incorrectly in terms of what you have left to sell.

We had sales but we didn't forward sell any additional gas.

It was all on a daily sales basis.

So does that mean you still have from the 50 - let's say take this top end. You have 11.8 left to sell or is there less than that to sell this year?

Well of course the new guy - yeah you will have 11 and in fact it's being sold every day on a daily basis.

Okay thank you.

There are no further questions at this time. Please continue.

Ladies and gentlemen thank you again for joining us and we will be available throughout the day if you have follow-up questions. Thank you very much.

[Operator Instructions]

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.