CNX Resources Corp (CNX) 2005 Q2 法說會逐字稿

Welcome to the second quarter earnings 2005 conference call. (Operator instructions) I would now like to turn the conference over to our host, Vice President of Investor and Public Relations for Consol Energy, Mr. Thomas Hoffman. Please go ahead sir.

Good morning everyone, and welcome to our conference call. With me this morning are Bill Lyons, our Chief Financial Officer and Brett Harvey, our Chief Executive Officer who will be discussing results for the quarter. This conference call is also being made broadcast on the web, and we welcome listeners who are joining us through that medium.

As a reminder, we are going to be discussing not only results from the quarter just ended, but we will be discussing our outlook for the remainder of this year and several years forward as well as some results that we expect to occur as a result of these forecasts.

Our ability to achieve these results from these forward-looking forecasts are subject to business risks and we have detailed those business risks in the news release that was released this morning at 7:00. We would encourage you to read that. In addition, you can find a discussion of business risks and other factors affecting our results in our 10-Q filed on May 2nd of this year and on our 10-K for 2004 which was filed with the SEC on February 28th.

With that, let me turn the mic over to Bill Lyons who will discuss the second quarter results. Bill.

Thank you, Tom. For the quarter just ended, Consol Energy reported earnings of $41 million or $0.44 per diluted share. This compares with $26 million or $0.29 per diluted share for the second quarter of 2005. This represents an earnings improvement, period to period, of 57%. Now this includes $23 million of charges after fire insurance recovery that we incurred as a result of the fire at Buchanan Mine. As we noted in the news release this morning, we are in the process of preparing our claim for the Buchanan event on our business interruption insurance policy. There is no amount included in the second quarter results reflecting this claim, but we do expect the recovery to be significant.

We continue to strengthen our balance sheet. At the end of June, 2005 we had no short-term debt. We have reduced our accounts receivable securitization program by $110 million since the beginning of the year. There have been no increases in long-term borrowing. Shareholders equity has increased over 20%. Revenue and other income for the quarter just ended was $817 million compared with $675 million for the second quarter of last year, an increase of 21%. EBITDA for the quarter just ended was $124 million compared with $95 million in the second quarter of the previous year, representing an increase of 31%.

As we said in the earnings announcement this morning, results for the second quarter largely were driven by substantially higher prices received for company-produced coal. Average realized prices were improved by $5.72 a ton or more than 19% reflecting our continuing success in increasing average realizations on contract tons and reflecting higher spot prices on coal that is available for that market.

Sales of company-produced coal was up over 250,000 tons of the second quarter last year, and exceeded production for the quarter by over 0.5 million tons, which we covered from inventory. Coal production period to period was essentially flat, and fell in the middle of the guidance range we provided last quarter.

As we mentioned in the earnings release, production was impacted primarily by the outage at Buchanan. Compared with the second quarter of last year, Buchanan production was down nearly 900,000 tons. Our mines as a group performed within expectations and we would have produced within the guidance range that we provided at the beginning of the year were it not for the Buchanan Mine fire.

Unit costs for coal increased about 10% over second quarter of last year, reflecting an increase in labor and benefits, supplies – mainly in the areas of metals and petroleum-related product – and contract mining fees. However, these increases were anticipated. The year-to-date cost of $29.54 per ton is spot on our internal profit objective that was approved by our board of directors in late 2004.

Gas segment performance in the quarter just ended was impaired by $6 million, primarily because volumes were down by 800 million cubic feet. Again, Buchanan was the main issue. The fire impacted gob well production. Based on our most recent analysis, we believe that we lost about 2.2 billion cubic feet gross for the quarter, and year-to-date about 3.6 billion cubic feet gross of planned gas sales because the gob wells were shut in during the period that Buchanan was down.

Also curtailments on the Columbia KA20 Interstate Pipeline resulted in a loss of about 0.9 billion cubic feet gross of gas sales for the quarter and year to date. On the plus side, we are able to offset some of the losses by doing increased stimulation of our frac wells in Virginia, that were not affected by the Buchanan fire. Although as we noted in the news release, the enhance stimulation of the frac well increased our unit lifting cost for the quarter, we are able to increase previously expected production by about 3 billion cubic feet gross, which mitigated somewhat the loss sales from the gob well production shortfall.

As we noted in the news release, our unit lifting cost increased quarter to quarter, because of the expenditures related to the frac stimulation, but also because unit lifting costs from the gob gas are very low, and losing some of that gas impacts the overall unit lifting costs in a negative way.

Period-to-period gathering costs were up primarily because of the need to purchase firm transportation. Now this is not a new situation. We have disclosed this issue previously, but the period-to-period comparison suffers because we didn’t begin to incur this until May of 2004. We also accelerate some maintenance to allow it to be done during the curtailment periods, thus increasing the cost of the second quarter.

Now let me make a few comments about our recent decision regarding the gas segment. We have been saying for some time that we intended to take steps this year to clarify and enhance the value of this important business to our shareholders. We have done this first by establishing CNX Gas Corporation, which will own, operate and conduct Consol Energy’s gas business as a standalone company.

Second, CNX gas is in the process of selling through a private transaction approximately 18.5% of its shares. We expect the net proceeds of that sale to be in excess of $350 million which CNX gas will dividend back to Consol Energy. We expect this transaction to establish a valuation for this business on a standalone basis.

At the same time, we will retain a majority ownership position in the Company. We expect the value of our retained ownership to grow as this new Company expands its production and proves up additional reserves. The process we have followed defers any tax on the gain from the sale of the 18.5% because CNX Gas remains in Consol Energy’s consolidated tax return. We are using a private transaction mechanism because it gives us control over the timing of the transaction.

We expect to reinvest the dividend we receive from CNX Gas back into the coal segment. Our intention is to focus primarily on accelerating a number of efficiency projects that we believe have very high rates of return and will improve margins. We expect to do most of this project in 2006 and 2007.

In addition, we will consider acquisitions if we believe they can be accretive to earnings. Having said that, I want to make it clear that we intend to maintain capital discipline. We will not add capacity unless the market clearly signals the need for additional coal through the willingness of customers to sign term contracts at prices that justify the capital expenditure. With either the efficiency projects or acquisitions, the goal will be to accelerate the expansion of margins and the growth of earnings.

Finally, we have not established a predetermined course of action with regard to any future disposition of our 80% ownership in CNX Gas. We believe that the new management team focused solely on gas will create additional value for CNX Gas shareholders very quickly, but we certainly want to give them the opportunity to sell into their new positions, and to execute the plan for growing that business.

Finally, let me briefly discuss the guidance we provided. The production and hedging guidance for gas is based on the plans that the new management team has developed and which they had previously disclosed in an 8K filing earlier this month. In both gas and coal, we have added an additional year of contract information which I am sure you will find useful in measuring the strength of both markets.

On the coal segment guidance, we have updated the forecast for 2005 to reflect six months of actuals. We have updated the hedge position through 2008 but we have not updated the forecast for the years beyond 2005 and we won’t do that until January.

From my perspective, we had a very good quarter. The challenges we had did not throw us off track. We are in a very strong position financially and both the near term and long term outlook is very positive. Brett, your observations.

Thank you, Bill and welcome to everybody on the call. I would like to echo Bill’s comments. We had a solid second quarter, despite the residual effect of the Buchanan Mine fire, I feel really good about the quarter. We showed quarter to quarter improvement and we also showed first half to first half improvements in revenues, earnings and EBITDA. We are ahead of where we expected to be and we expect to have a very strong second half of this year.

In fact, we are ahead of The Street estimate if you look at both quarters. Quarter 1 and Quarter 2 were at $1.21 a share, actual for CNX is $1.26. Prices for coal continue to be solid at very attractive prices. As we put out in January, our average price at $33.98 has risen 4% to $35.25 just in six months. We expect to produce more tons in the second half and expand our margins and also use that to control our costs as well. I expect our production to be up 1 million tons in 2006 versus 2005, despite the depletion of the VP 8 mine at the end of the year, that is about 1.5 million tons.

On the gas side, even with Buchanan’s problems, the new gas management team expects to be very aggressive in the second half of the year’s drilling program, and are forecasting a full year production of 50 Bcf, which is the top of the range that we provided in April.

Our view is that energy fundamentals in the United States favor energy producers, and will continue to do so for the foreseeable future. The new federal energy policy act makes it clear that the policy of this country is to rely on coal and nuclear power to generate most of our electricity going forward. Coal demand for the power industry in the U.S. will continue to grow because the power demand will grow as our economy strengthens.

As I have said repeatedly, within this market there is another market – a market that will be driven by scrubbers. Put simply, every scrubber that is built is a potential new market for Northern AP coals. By 2010, the scrubber capacity east of the Mississippi will more than double as power producers continue retrofitting their plants. We are synchronized in our production, pricing our coal and planning our coal contracts around these market dynamics.

The 2006-2007 market looks very strong to us. The steam coal contract pricing environment remains as strong as it was at the beginning of the year. Remember, our average realized price committed tons in 2005 has already improved 4% in just six months. The met market, although down from its peak three or four months ago, is still at prices much higher than it was 18 months ago; in fact, 2.5X higher than it was 18 months ago. Gas prices continue to be strong, and we will continue to grow that business.

Our hedge position on both gas and coal showed continued improvement in pricing through 2008. At a minimum, our average realized coal price in the next three years will increase 11%, but I believe strongly that our average price received for coal in the year 2007 will exceed $40 per ton.

I also want to remind you of what we have accomplished in the recent past is significant. We have closed inefficient mines. We have brought our inventory down to controllable levels. We replaced shutdown coal capacity and brought production back at the right time to meet the marketplace at higher margins, with contracts to match that production. We have continually compounded our expansion of the gas business. Recently, we decided to monetize a piece of that business to reinvest back into coal. We completed the sale of the shares of RWE and we have continued to drive our liquidity to a very positive place. We have handled our debt, we have put together bank facilities, we have increased value to our shareholders and we continue to allocate capital and expand our capacity as it meets the marketplace as the needs arise in our marketplace.

We do this because we have a tremendous asset base that has been gathered up in this company for 140 years. I believe this asset base will be a point of differentiation for Consol for the remainder of the decade and beyond. We expect to have a good year and improve on the results of this year in 2006. We have achieved the goals that we had told you that we would do, we are harvesting the value of that capital investment, especially in the last two years, and we are excited about 2006-2007, in coal prices as well as gas prices and our ability to add value to our shareholders.

We are equally excited as we look farther out at the opportunity we believe exists for both coal and gas, because we have a substantial base of high quality assets on both sides with which to build value for our shareholders. With that, Bill and I would like to take questions from you.

Operator, before you give our listeners instructions on queuing in for questions, let me say that some of you may have questions regarding the private transaction on CNX Gas Company and I would tell you that there are a number of questions that we will not be able to answer in this call, until the private transaction has concluded. A number of the questions specifically relating to the gas company and the valuations and the nature of the transaction will be things that we can’t talk about.

I would remind you that there are disclosures out there about that transaction that were filed with the SEC on July 7th and if you have not seen those you ought to refer to them and Bill has talked about those aspects of that transaction that affect the parent company, CEI and those are the issues to which we will limit our conversation during this call.

With that, operator, if you would let our listeners know how to queue in.

(Operator instructions) Our first question comes from the line of Eric Pellimar; Wachovia Securities. Please go ahead.

Good morning.

Good morning.

Can you comment specifically as to when you expect insurance proceeds to come back to you? How that process works?

Bill, you handle that.

Eric, we were just talking about that before the conference call. As you know, whenever you have insurance policies, particularly in something as big as a mining complex, it requires an awful lot of detail to be accumulated and submitted to the insurance company before you get your money.

I would like to think by the end of the year, however being realistic on that, I wouldn’t be surprised if it stretched into the first half of next year. But again, I think the situation is pretty clear. We are well on the way of getting all of the information ready for filing a claim. The operations are just about back to normal, so I can assure you we will file the claim quickly. We do have the help of outside consultants with us to help file the claim and as I said, we are going to try to get in as fast we can.

Can you indicate how large the claim will be that is filed?

Well what I can tell you is that the overall policy – and that is everything – is $75 million, and that includes property damage and that includes business interruption. There are a lot of sublevels in between that. That is about all I am prepared to say on that.

I guess additionally I understand the comments around the gas business, tell me if I am going too far, but can you at least say whether or not this is an external party and it is not a party related to Consol vis-à-vis the [Essop] program?

Eric, no, we can’t tell you that.

Okay. Additionally, related to the potential for the cash to be used in additional capital expenditures internally, can you kind of expand on what kind of programs you are thinking about putting into place, as well as you mentioned acquisitions, what that might look like either size, timing and/or location?

You are being pretty specific here, but we do have – when it comes to capital, we do have many specific projects that we want to spend, efficiency projects that really expand our margins rather than expand production. I will give you an example, the board approved last year the expansion of the Robinson Run prep plant, underground belt project that actually eliminates about five miles of underground belt. Those are the kind of things that give us very quickly, lower costs to these mines and gets right to the bottom line. We will do those kind of projects at different mines.

Another one is the Shoemaker Mine, changing it from track haulage to belt haulage which really jumps the productivity in a mine. Those are the kind of things that we want to accelerate the value of existing capital and just enhance its value. If you look at a sump mine and you put a belt line in it versus track haulage, you very quickly add tremendous value to it. This is the last one that we have to do.

In terms of acquisitions, I am not in a position to develop or hand you our strategy on a conference call, but you need to understand what mines and what companies that we would like to take a look at and spend some time with. We have a very strong strategic plan and we plan to use our balance sheet to enhance the bottom line and shareholder value for this Company. That is as much as I want to say.

Okay, thank you.

Thank you. The next question is from Michael Dudas; Bear Stearns. Please go ahead.

Hi, Michael.

Good morning, gentlemen. Brett, given the fairly robust market and everything kind of pointing in the right direction here for energy use, are there any changes in your overall contracting strategy relative to hedge versus not hedge your coal position, and whether you want to put out the lower prices up first or wait and keep the higher prices up for later.

Also, how are the utilities who are retrofitting their plants synchronizing with you guys and actually getting these contracts in? Because I would think they would want to have that locked in before they go ahead with these plans. So just give a little sense about how you are looking at your role of putting away your contracts.

Well let me answer your last question first. Clearly, a utilities – and there are many of them, especially on the Isle River – that are adding scrubbers very rapidly and they are assessing their need for BTUs wherever they can get them from, to match those scrubbers. A lot of it comes from Northern AP. They want to match their scrubber capacity and their plant capacity with the highest BTU, closest coal, to their plants. That naturally fits us.

So we are talking to them about long-term deals that put us in a position to where both companies are in a solid position going forward, meaning they want to run their plants at 100%, we want to run our longwalls at 100% and both of us make a lot of money in the energy marketplace, not from each other. So those kind of contracts are being reviewed right now.

I can tell you there is a lot of interest in turn deals but those deals have to look like what I just described. We can’t get to where one has got the other, so to speak. What we are interested in is high volume, high rate of return projects that give huge cash flows going forward, and I think that is where we are headed.

Now in terms of how we break that down, clearly we are going to want to sell first the toughest thing to sell, the coal that doesn’t have the highest quality or the least attractive in the marketplace. Those ones will be sold first, they will create our base and then as the more attractive coals like the Bailey type coal, we will get the highest value because it has the highest reach in terms of marketability beyond the region. That is our strategy. I think it is a solid strategy. We are not changing it, Mike. I think we have had a lot of success doing what we are doing and if you watch what we have done in the last couple of years, we have kept our nose to the grindstone and stuck with that philosophy and it is working very well for us.

Fair enough. Bill, given that it looks like we are going to have, over the next couple of years with this dividend that you are expected to get if the transaction goes through, and free cash flow opportunities, any changes in covenants or restrictions or use of cash relative to – whether it is for bonding or restricted cash on the balance sheet that could maybe free up some more capital for interesting things?

I think we are pretty well positioned right there. We don’t have a capital expenditure covenant in our credit facility now. In terms of bonding, we are looking at that and I would say that situation has stabilized. I wouldn’t say it has gotten better, but it has stabilized.

In terms of our debt, we only have $400 million of long-term debt; $250 million of that comes due in 2012; $100 million of that is 2010 and 2011 at Baltimore Terminal and our next payment is $45 million in 2007. So I don’t think we are going to be doing anything with long-term debt. I am going to tell you, we are positioning ourselves to take advantage of opportunities that arise. So we are pretty excited about what we see in the future.

Thank you, Bill. My final thought back to you, Brett. Maybe you can comment a little bit on your labor pool, how turnover rates have been? Concerns about attracting miners and such, given the opportunities you are seeing elsewhere around the region and the renewed interest in coal. Maybe it is a little early for December 31, 2006 but your initial thoughts on possibly how the UMWA may react towards that contract running out next year?

Sure. Well let’s talk about the labor pool. Everybody knows the average age of miners across the country is pretty high, some as high as in the 50’s, depending on what company you are looking at. That is an issue, that is an issue that we have addressed. We are working with the states as well as the federal government on training new employees. We see that – we have changed some of our retirement programs for our supervisors to keep them here longer rather than getting them to leave like we have for the last 20 years. So things are changing that way and we are reassessing where we are at.

Now what I want you to keep in mind though, where we are so heavily mechanized, especially with longwall mining in the last 20 years – I will give you an example. In the 70s, we mined 65 million tons of coal with 23,000 people. This year we will mine 70 million tons of coal, or 70 million tons – around there – with about 7,800 people.

So the need to replace these people is not as great, but technically we need more technical people. So we are working with the colleges, working with the small colleges, the trade techs, to bring these people.

Having said that, not many people leave Consol. We attract people from other mining areas because of our long life reserve base, our long-term mines. They see 20, 30-year careers here. These young people are looking for places to come and stay. The other thing is these small communities in the last 20 years, where the people grew up in the West Virginia towns that had to leave because there weren’t jobs, we believe will come back just like they do with every generation. Just like I did when I got into the coal business.

So these are attractive jobs. They pay well and we think that will be solved over time, but Consol has a strong position of getting people to work for them.

The other piece that you talked about is the union contract, and let me say something about the union contract that I think people need to understand. These are our people, and when things get good, they are going to get a piece of the pie just like everybody else. There are some issues on the table, but because we are so mechanized, labor is not as big a piece of the pie as it used to be. So you can give them what I consider a fair wage and a fair negotiation that goes along with the value that is created for the shareholders. So I think the negotiations are going to have some very generation-changing type projects in it, but nothing that will be a hindrance to our ability to mine and produce coal.

Thank you, Brett.

Yes.

Thank you. The next question is from Mark Ragman; AG Edwards.

Good morning.

Good morning, Mark.

I was wondering if you could just comment on the interest that you might be getting from utilities towards the expansion of – the proposed expansion of Enlow Fork, are you finding that they are receptive to maybe making commitments there that would give you confidence that you can go forward with that project?

Well there is a lot of interest in that because it is the kind of coal that meets – is very extensive in the marketplace, it is the Enlow-Bailey type of coal. Yes, there is a lot of interest in it, I couldn’t see at this point in time that we have signed anything up.

But the reason we announced it and moved on that deal to get a permit was that there was enough interest that we saw the market expanding in sync with the time that it would take us to get it up and running.

Now that syncs directly with where we see the maximum load of scrubbers being built, and the demand will continue to strengthen as each of these scrubbers gets built, so we think it syncs right in. Nothing has been inked.

But let me talk to you a little bit about discipline. We are not going to open that mine on the schedule we said we would do unless these contracts are in place and the economics are good for Consol and Consol shareholders.

A good example of that is we opened a mine this year that we have a permit in southern West Virginia that has been on the shelf for almost 10 years. So we have the discipline and the reserves to open them when it matches the capital and the markets that we think are right for it.

So even though it takes a long time to do some of these permits, we will get them ready. We have the financial ability to hold them in place until the market is ready to take them to match our reserve base. So there is a lot of interest but I wouldn’t say that we are ready to announce contracts yet, right now.

And the proceeds that are expected from the private transaction, can you provide just maybe a little more specifics with regard to how that capital will be deployed in the coal business?

Well I talked about that earlier, I talked about like the Robinson Run project, the Shoemaker project, other expansion things like some development of some mines in Central AP that are very good reserves. It breaks down in probably, I would say $50-150 million projects, depending on what we are looking at. So there is capacity, I believe, even to go beyond that.

All that capital does is accelerate our 10-year plan. The way you look at it is we are probably going to spend $275 a ton to stay where we are at, and the expansion is going to be on top of that. So if you look at our 10-year plan, we are just using that money to accelerate what we have seen with the acceleration of the scrubbers. So we are trying to synchronize our capital spending to match the market that we see in front of us.

We have internal projects all the way across the board that can use this money, as well as strengthen our balance sheet to make acquisitions.

Great. Thank you very much.

Thanks, Mark.

Thank you. The next question is from John Bridges; JP Morgan. Please go ahead.

Hi, John.

Good morning, Brett, everybody. I just wanted to dig a bit deeper into the 9.9% cost increase. I was hoping that these cost rises would have eased by now, and I wondered if you could sort of detail what is going on and maybe give us an indication as to what the cost rise would have been if you hadn’t had the Buchanan problems, Bailey-Enlow problems, those things.

Well, we spent a lot of money solving the Bailey-Enlow thing. We also, if you look at the mix of the tons that came out in the quarter, it was a mix of some of our higher cost mines. I think if you look in total, it is more of a volume issue. If we would have had that 900,000 tons coming out of Buchanan and spread those, the profit would have doubled on the Company for the quarter. Also, you would have had lower cost that would have affected that profit based on spreading these costs over more tons.

I think it is a volume-driven thing at this point in time. But if you look at it mine by mine, people were pretty much on their budgets but you have a higher mix of higher cost mines in terms of the mix for the quarter. Now I don’t want to dwell much on the quarter. If you look at both quarters, I would say we are on track for the year and where we should be, where we expected to be.

So I wouldn’t be too focused on the quarter, I would look more to the combination of the two quarters.

Okay. And you have looked out in terms of likely revenues for the next couple of years. Any idea what mine costs increases we could put forward?

John, we are in the process of doing our annual profit objectives and long-range plan. I know that we have some concerns about increasing costs for equipment, and it is centered around steel prices again. The numbers that we are seeing right now is that steel could cause prices to go up between 7-9% so –

But that is just steel. I wouldn’t dwell that on all of our projects. I think the inflation that we saw last year is not going to be as dramatic as it was from last year to this year, going in from this year to next year. I think we are going to – if you look at what we did, we are shutting one mine down like VP 8, we are adding – and we have got other mines that are open. I would say you will see a different mix a little bit from central AP to northern AP, but the big northern AP mines are going to have pretty good cost controls based on the capital we spend.

Well you don’t have the diesel exposure that the big open pit miners have.

No, not at all.

Or tires.

Right, right. So would a mid-single digit number be what we should be aiming for?

I couldn’t give you any other guidance until I see the budget, but I would say it would be anywhere from 5-9%.

Okay. When you say term contracts, are you talking 10 years that you want the utilities to sign for, or?

Well, it all depends on what their needs are. I would say the utilities are starting to stretch it out towards a 10-year deal because they want the volume, they want to justify the investment in scrubber to match the coal to go with the scrubbers. So we would do a 10-year deal, but I think we would do the kind of deals that have solid rates of return on our capital investment that goes beyond, with the compounds affected, that really justify the investment.

We would not be in a position where we did big deals at prices that we think might go up. So we would have to be very careful about that.

Okay, great. And then finally, I seem to remember when you entertained the analysts down at Buchanan a couple of years ago that you said that something like two-thirds of the gas production at Buchanan was coming from the gob wells but then somebody suggested it had come down from that. What sort of percentage is it now?

It is down below 30%.

Really?

Yes.

Okay.

Below 30% coming out of the gob wells and that is because we have done extensive drilling beyond the mine properties and we are out into future mining areas or even the areas that we don’t plan to mine, and we are fraccing those and gathering that up.

Now remember, we have only developed like 30% of the entire property down there, and that is what is so valuable about that gas company. As it develops out and we add capital to it with the very solid balance sheets that it has, it will do excellent going forward. That is very low-risk gas, right at the throat of the marketplace. We see it as a real valuable asset.

Thanks a lot, congratulations.

Thank you.

Thank you. The next question is from Dave Gagliano; CSFB. Please go ahead, sir.

Good morning, Dave.

Hi, first of all, thanks for the additional info on the realized price line. It is always helpful to get that clarity and that visibility, especially out to 2008. Just coming back to the cost issue, I just want to make sure I have the comments correct in terms of the last question. Are you saying that we should be factoring in a 5-9% increase in overall costs? That is a reasonable expectation for ’06 versus ’05?

Let me make the caveat, the same one I did with John, is that we are putting the budget together right now and I don’t have the final number. I don’t feel and I don’t see the price pressure that we saw last year in terms of steel. It was a bit of a relief gasket for my suppliers last year as things changed. I see that is leveling out a little bit and I think we have more leverage in terms of getting the deal that we want to get. I gave him the number of 5-9% just based on what I feel right now. I don’t think it will be less than 5% and I know it won’t be up around 9% so I am just giving you a range. I don’t have the answer right now, I guess.

No worries. I guess the issue on my side is that seems to me to be a fairly substantial switch, considering how much capital you have invested over the last couple of years and considering where your costs already are, I would have expected perhaps that you would expect costs to come down, particularly versus the just-ended –

Well I am talking more material costs. Let’s correct that. That is a part of our commodities and so forth that we are buying. When I look at overall cost increases on a per ton basis, I would expect it to be close to level or less than 5% for sure.

Okay.

Okay. I am glad you asked that question, I didn’t want that to be misinterpreted.

But still up 5% year over year on the overall –

That would be max. You don’t need to nail me on that, because –

No, I am sorry, I don’t mean to be nailing. I just want to be sure I have it right.

I don’t see the budget yet, so we will be announcing that in the future.

Okay, and just on a somewhat related topic, I guess – I know you don’t have much rail exposure, but we have heard from – but you do have some. We have heard obviously from your competitors about rail issues, both in the east and the west. I am just wondering if you can comment on your rail situation.

Well first, let me make a comment and then I am going to turn some statistics over to you that Bill has developed here. We don’t feel the pressure on the rail that we are hearing in the marketplace, because we are concentrating on where we are at, and multiple rail systems to our mine; and as much barge work as we do, we are not feeling it. We do know the railroads are working hard and we are working with them.

Let us give you Company statistics and get a better feel for us in total. Go ahead, Bill.

Brett and I were discussing this right before the conference call, and really, our transportation group is what we consider to be a core competency. They do an outstanding job and that also reflects our railroad division that clearly is able to ship up and down the rivers for us.

If you take a look at overall in terms of our transportation, about 70% of our coal is shipped by rail. And if you break that 70% down, probably about two-thirds is NSX and about one-third of that is CSX. We do about 20% of our shipments by barge, we are looking to increase that barge traffic, and the remaining 10% half is truck and half is belt.

Overall, in terms of our mines, we are fortunate, some of our bigger complexes are serviced by two railroads, and that would be Bailey-Enlow, Blacksville and Loveridge. They both get the NSX and CSX. McElroy and Shoemaker are the mines that primarily handle traffic by barge.

So again, we haven’t had a problem with transportation and I think that is reflected in the fact that not only have we shipped all we have produced this quarter, we shipped an additional 500,000 tons. So transportation has not been a problem for us. In fact, it has been a plus.

Thanks very much.

If it is tight anywhere, it is in Central AP but we have not been pushed back there to big degrees.

Okay.

Thank you. The next question is from Pierre Salmon; Simmons and Company International. Please go ahead.

Good morning. There have been several recent announcements regarding increasing import coal capacity at domestic terminals, and I was just curious, what do you see as the impact to Consol and the industry in general with the increasing import tonnage in the years ahead? When would you expect that tonnage to be felt in the U.S. market?

Well I would expect and end to rising coal prices for utilities to try to encourage people to bring in coal at deep port level. We see along the coast areas some potential to bring coal in. We don’t see that as a negative, it also gives more potential to send coal out in the right marketplaces.

In terms of affecting Consol, I think our BTUs travel well. We are right here in the throat of the market. We have very high BTU coal. Our market is more related to those who build scrubbers within [inaudible] of our ability to get to them. Because of our location, we have the transportation advantage with very high BTU content, average of 12,500 to 13,000. With the scrubbers being built, we think competition will come but we don’t think it is going to be disruptive to the overall margins that we can acquire from our position.

And from a timing standpoint, do you think this would be potentially more of an impact in ’07, ’08?

I would say it would be at least ’08.

Okay.

And I would never expect it to be big tonnages, because remember, that is a world market and there is demand for the entire world. The market prices on a delivered BTU are going to spread, even though it is on the water there is not a lot of over-capitalization in the coal business, especially in the Atlantic market, coming out of South Africa or Columbia. So to gear that up would take years, just like it is on the domestic supply.

Great, and just a follow-up to the previous callers question regarding rail transport issues. If I heard you correct you were saying that you had a little more trouble in Central AP than Northern AP, but there wasn’t as much of an impact in Central AP? Is that correct?

No, there is nothing to complain about in Central AP. It is just that it has been slower, but we don’t feel distressed by it.

Do you think it is improving for the rest of the year, or is that too early to tell?

We believe it will, we believe it will. We believe Central AP will improve, and Northern AP hasn’t been a problem.

Thank you very much.

You bet.

Thank you. The next question is from John Hill, Citigroup. Please go ahead.

Yes, good morning everyone, and congratulations.

Hi John, thanks.

Congrats on the result. I am just curious on the contract side, this 2008, 22 million tons. When – obviously this is the first time you have come out with the numbers, but when were these laid on?

Well it is a basket of contracts, I would say most of them were laid in in the last 18 months so they are at the higher pricing levels, as you see the price there. And they typically are coals that are high volumes, probably the river coals. I would have to look at the breakdown, but the last 18 months, to answer your question.

Has there been any meaningful additions there within the last three months or so?

You know, I don’t have that in front of me, I would have to research that but I don’t think so.

Okay, and how does this tie to your discussion about locking in some of the less marketable volumes? In other words, should we look for even better pricing as a more representative cross-section of your coals are made available?

Well, I would expect – you heard what I said. We have a number here of $36.52 for ’07, if you look at that chart. Well I said earlier, I expect it to be over $40 for ’07. That ought to give you a reflection of what the CEO thinks about it.

Yes, of course. And also, I was interested in your commentary about the longer term deals behind capital projects, essentially a win-win type of dynamic. Does that suggest any various kinds of indexing, or are you investing in some more novel structures there?

Definitely, there would be indexing on any long-term deal that we would do and it would be – and even to the point like we did with some big utilities a couple of years ago where we actually reopened every three or four years just to make sure everybody is whole and make sure everybody is at market. I don’t think it is healthy for us to get into the 70s type contracts with these big utilities where one side or the other gets screwed. We need to make sure we get back to back and take the money out of the market.

Well said, well said. And then finally as a follow up, what is the situation on the ground at Buchanan as we sit here today?

In terms of where they are at in production or where they are at in inventory or--?

Yes, I mean how is the operation running, exactly right. Production rates, inventory –

I just spoke to Pete [Milley] right before the call. He is very pleased with how Buchanan is going.

I would say if you were to talk about Buchanan today, you would say that it is in exactly the same position it was before the fire.

I used the term to Pete, I said, can we say that Buchanan is back to normal, and he said yes.

Well that is great to hear, and thanks again for a very detailed call.

And that would be gas and coal.

Thank you.

And our next question comes from the line of Jim Rollyson from Raymond James. Please go ahead.

Good morning, guys.

Hi, Jim.

A quick on. On the stuff going on with the PRB rail situation everyone is scrambling to get coal. Is that starting to drive any interest, not just in short term but even maybe some of the utilities in your neck of the woods looking at their long-term options in terms of burning higher sulfur coal with scrubbers as opposed to using PRB for their emissions planning? Or have you noticed much of a change at all at this point?

I would tell you this, Jim and let me tell you about the coal market in general. I think there is going to be plenty of market going forward for all capitalized coal production in this country. In terms of this region, independent of coal moving from west to east to get to the markets that are natural for them, we have been talking to utilities for the last year about this issue. So that is not driving it as much as they are just building scrubbers and looking for resources in their back yard. It is more a move between Central App and Northern App in the Illinois Basin. The movement from west to east, those natural markets, they are going to have a market.

I think the real key here for all of you to look at is, who is going to have the highest margins once this all settles out? Who is going to get the value of the economic win of their position? I think that is coming out in spades in terms of the long transportation.

Sure. Lastly, in your press release you highlighted the hedges you have on the gas side. You didn’t really – at least I didn’t catch it – how much of your gas going forward do you have hedged and what is the plan for the rest of the gas that is unhedged?

Jim, we do have a hedge position in the earnings release. We have gas – we don’t have very much, but again, just to repeat what is in the table, we have in ’06 14.8 Bcf with an expected production of 56. These are net numbers. 7.4 hedged in ’07 and expected production of 66 Bcf net. 7.4 hedged in ’08 with a 76 Bcf expected production.

The pricing, as you saw, has moved up in ’06. We have a hedge at an average price of 6.88, but then we are into the 7.67 in ’07 and 7.20 in ’08. We still have a lot of leverage to the market, obviously. When you are talking about ’08, we only have about 10% of our expected production hedged.

Right. Any plans to layer in any other hedges now that U.K. strips north of $8?

Let me talk about that a little bit. I don’t want to talk about the gas company too much right now, but I can tell you the philosophy before we separated the gas company to its own management group. We use the gas as more of a modeling to model the earnings going forward. We took higher risk because coal was doing so well. I think maybe the management there in the gas company, they will certainly follow the philosophy that does good for that gas company. That is as much as I want to say about it right now.

Very good. Thanks, guys.

Thank you. The next question is from Mark Cooper; Omega Advisors. Please go ahead.

This is Doug Clifford sitting in with Mark. This is the question on the operating side on the gas company. The lifting costs are up fairly significantly quarter to quarter. Can you break out how much of that increase is temporary, effective loss of gob wells and tracking? How much might we expect? If any of that increase is going to stay around with the Buchanan mine back in operation?

I would tell you from what Bill told you earlier that those costs related to the lifting costs weren’t directly related to the loss of the gob gas. Now that Buchanan is back to its normal process, I think you will see the cost go back to where they were.

The gob gas has virtually zero lifting costs. The reason why, that is part of the mining process we have in the coal costs. So whenever you shift from gob gas to other gas, obviously you are going to pick up lifting costs. I think it was around $0.07.

This is Tom. It is split really half and half, and both probably are one time in nature. We had about $0.08 on 1,000 related to, in effect, the loss of the active gob production and that $0.07 per 1,000 it was related to the enhancement effort that we did on the frac wells to try to offset what we expected to be loss on the gob side.

So we really didn’t have any just general lifting cost increases, they were sort of unique to the situation around Buchanan.

Thanks. A more general question on the gas companies, can you give a little detail on how the potential environmental issues relating to water disposal are going to be divided up between you and the gas company? Will there be any potential liability remaining at the parent company for that?

I think we are in a position where we don’t want to speak for the gas company at this point in time. We are just getting to far into their details and the position they are in, I think it would probably be inappropriate.

I would again remind you of the 8-K disclosure that we do have a number of operating agreements in place between Consol Energy and the gas company. I am sure that at some point in the future that the detail of that will be disclosed, but we don’t feel that we can do that right now.

Thank you very much. This is Mark again. One final question. On the CapEx, looking at the change in CapEx it looks like your CapEx is projected to be down $38 million from what it was at the end of the first quarter. Can you give any further clarification on that, please.

Taking a look at capital, we are a little bit behind in our capital spending, but we are going to be on line with what our projected totals are for this year. If you are taking a look at year-to-year comparisons, they would be down somewhat because in 2004 we had substantial amounts of capital put into expansion areas of McElroy and Loveridge and those projects are done, so obviously we won’t need to replicate that in 2005.

And let me – this is Tom – let me also remind our listeners that the CapEx number that we provide you in guidance is only the CapEx that is needed to achieve the production results that we have listed in the guidance as well. So if, for example, if Brett gets the board to approve a new efficiency project that we start this year, that number will obviously change.

Operator, do we have any more questions.

Yes, sir. The next question is from Paul Forward from Legg Mason. Please go ahead.

Hi, Paul.

Hi guys. Just a last little question here, just so we are all on the same page with that insurance recovery. Can we assume that $23.3 million, is that a pre-tax figure and if so, what would be the appropriate tax rate to assume when you calculate an EPS impact of that item?

Paul, we have been guiding you with 17% assumed tax rate for ’05, so if you throw that tax rate against the $23.2 million it works out, after tax, to about $0.21 per share.

Got you. And has Enlow Fork moved beyond some of the problem areas?

Yes it has.

Okay, I think that is it. Thank you.

Thank you. The next question is from Sven Defozzle; John S Harrow.

Hey, Sven.

Hi, good afternoon. I was just wondering, in reference to the most recent Schlumberger reserve disclosure, I am looking at 750 Bcf of probable and possible reserves. Can I have any kind of indication of how that might be split between the Virginia coal bed methane project and Northern Appalachian base, and then also your Triana joint ventures?

Good question, and can’t talk about it.

Okay. In addition, I am assuming that increase might be associated with undeveloped acreage that was accumulated during 2004? Can you talk about that at all, like where the acreage might have been accumulated during 2004?

No, we really can’t. Again, the disclosure on July 7th did have a breakout of acreage in various geographic regions and that is as much as we can say. Good question, Sven, just can’t do it.

Okay.

Operator, we are at the 11:00 hour, we will take one more call.

And our final question comes from the line of Daniel Rowland from Merrill Lynch. Please go ahead.

Hi, it is Dave Lipschitz.

Hi, Dave.

Hi. The VP 8 mine is extending through the rest of the year. Is that going to be sold into the spot market or replacement tonnage for the lost tonnage at Buchanan?

A little bit of both.

A little bit of both. And also it is listed at the end of the year. Is that just because it is totally depleted or because if prices go higher, you could still extend the life of the mine?

I would say total depletion. It is right – we are squeezing the last bit out of that mine.

Okay, thank you.

Thank you everyone for joining us. We appreciate your interest in the Company. Operator, if you would let our listeners know about the replay information for this call, and I will be available all day for anybody that has follow up questions.

Ladies and gentlemen, this conference will be available for replay after 1:30 p.m. today until August the 4th at midnight. You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 787744. International participants may dial 1-320-365-3844.