CNX Resources Corp (CNX) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to CONSOL Energy’s third quarter earnings 2005 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call please press star, then zero and an operator will assist you offline. As a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to our host, Vice President of External Affairs, Mr. Tom Hoffman. Please go ahead, sir.

Good morning, everyone. Welcome to our third quarter earnings conference call. With me this morning are Brett Harvey, Chief Executive Officer of CONSOL Energy, and Bill Lyons, Chief Financial Officer of CONSOL.

In addition to those of you who are on the telephone hookup, we welcome any of you listening to the call on the internet. And the conference call will be available for replay, and the operator for those of you who are on the call will give you the replay notes after the call is over.

Let me just quickly mention that in addition to discussing the results from the third quarter just ended, we will be talking about the outlook for the remainder of the year and for the next few years going forward.

Our ability to achieve the results that we discussed for the out years is dependent upon a number of business factors and business risks. We have detailed those in the earnings release this morning at 7:30, and you can also find a discussion of business risks in our most recent SEC 10-Q filing of August the 3rd of this year.

With that, let me turn the microphone over to Bill Lyons.

Thanks, Tom.

For the quarter ended September 30th, 2005 CONSOL Energy reported earnings of 377 million or $4.04 per diluted share compared with a loss of $12 million or $0.13 per diluted share for the same period a year earlier. In the period to period comparisons net cash from operating activities was 33 million compared to 8 million. EBITDA was 453 million compared to 50 million, and EBIT was 389 million compared with a loss of 14 million.

Our earnings of $377 million for the quarter are a record for the Company and are a result of improved operational performance compared with what we have seen typically in previous third quarters. Continued strength in pricing for both coal and gas. And, finally, the successful execution of our financial strategy for unlocking the value of our gas business.

At our earnings conference call this time last year we stated that coal and gas prices were increasing, and we expected that trend to continue. We expected our production levels to increase based on our prior capital investment. And we were committed to extracting the value from our gas business.

As we discuss our performance and the state of the business today we can say that. Coal and gas prices have increased, and we expect that trend to continue. Our production levels will be sustained because of our capital spending. And we have completed a major step in unlocking the value of our gas business through the sale of 18.5% of that business in a Rule 144(a) offering. The total market cap of the gas business has been established in a neighborhood of 2.5 to $3 billion.

The gas transaction is part of our ongoing strategy for our core business. A strategy that we have been discussing with investors for more than a year. The execution of the plan created real earnings and $420 million of cash in the door. As a result, we have fashioned tremendous financial flexibility for CONSOL Energy, while at the same time retaining our ability to participate in a meaningful way in the up side potential that exists in CNX Gas.

So, let me highlight some of the areas of coal operations for the quarter. Overall, pricing in the period to period comparison showed a 20% increase or an additional 100 million in coal sales revenue.

Coal production for the quarter improved nearly 11% versus the third quarter of last year. As you all know, the third quarter is often our weakest quarter because most of the impact from miners’ vacation falls in this period. In spite of the vacation period we had a number of mines, but most particularly the McElroy and Bailey mines that had strong quarters compared with last year. Bailey mine produced a record 1.1 million clean tons in the month of September. So in season with the loss of the [Canon] for the last half of September due to the skip hoist problem, Company production improved 1.6 million tons period to period.

We were equally pleased with our efforts at cost control during the quarter. Operating costs per ton of coal produced were $23.13 a ton, up only 3% period to period, and 2.3% versus the second quarter of this year. Our supply cost is tracking the producer price index which is what we had forecast.

Some specifics. We have seen cost escalation in rubber products. Conveyor belting is up about 23%. Rubber tires are still in short supply. However, due to the nature of our underground mining business our exposure is less than those relying on tires for heavy mobile mining equipment. Steel product availability has been satisfactory. Our cost for plate steel has been flat, while raw steel prices have continued to escalate though at a more modest pace than what we saw nine months ago. Finally, petroleum or petroleum based products have increased 57%. As we disclosed earlier in the year, our exposure to diesel fuel is limited, largely for the same reason as our exposure to rubber tires.

We think our operating costs in the east are among the best in the industry, but we are not satisfied. We will continue to focus on costs to ensure that we will maximize our margin expansion opportunities in a rising pricing environment.

As we mentioned in this morning’s news release, the contract pricing during the quarter just ended retained the strength that we have seen for most of this year for both Northern and Central App coals. In fact, Pittsburgh has seen prices for contract coal increase during the quarter for all products with the exception of the greater than [Six Pond Sulfur River] coal.

We believe that the river coal component of the Pittsburgh C market is likely to continue to lag the rest of the market. We believe this will last for several years until a substantial amount of the planned scrubbing of existing Eastern power plants is completed. This gap in pricing has consequences for the Shoemaker Mine, as we stated in this morning’s announcement, and as Brett will discuss in a moment.

CNX Gas also had a very good quarter. Gas volumes were up period to period 1.6% to 12.5 billion cubic feet net. Prices were up 22% reflecting a robust spot market for natural gas during the quarter. As a result, margins on gas quarter to quarter improved 38%.

Let me take just a minute to talk about the Buchanan skip hoist accident which occurred on September 16th. Production at the mine has been suspended since then. During the quarter just ended we incurred about $1 million of expense related to the accident. Most of the costs related to the problem will be incurred in the fourth quarter. I expect that a portion of that cost will be capitalized because some of the replacement components will extend the life of the hoist. We do have insurance coverage that includes both property damage and business interruption; however, it is too early to tell the extent of the claim.

We have not made major changes in our previously reported guidance. We will do a new update in January once we have completed work on our long range plans. We have updated our hedge position for both coal and gas. As you can see, we still have some leverage to coal markets in 2006 and substantial leverage to coal markets in 2007 and 2008.

As I mentioned earlier, I believe that the contract markets for Northern and Central Appalachian coals remain strong and the outlook is positive based on the factors we mentioned in the earnings release. As a result, we expect substantial top line growth for the next several years. And with the progress we are making in cost control we should be able to continue to expand our margins, as well.

We continue to strengthen our balance sheet. We have $350 million of cash on hand. In addition, we have 525 million of untapped borrowing capacity under our credit facility and accounts receivable securitization program. We have established a market currency with CNX Gas who, by the way, have their own separate credit facility of $200 million.

We believe we are well positioned to take advantage of future growth opportunities. We are both confident and optimistic about the areas of the business that we can control and influence. We believe that CONSOL Energy’s unique composition of financial strength, product leadership, and regional presence truly positions us as a Company that is built to lead into the next decade.

With that, let me turn it over to Brett.

Okay. Thank you, Bill. It’s good to be with all of you again.

Let me first talk about the gas business. We’ve been discussing for a long time our determination to capture the value of the gas business and reflect it in our share price. We worked more than eight months to get this done, and this quarter announcement is a reflection on a cash basis of what the value of that Company is. And it goes into our shareholder base as real value. We can count the cash, it is there.

It is not a sale of non-core assets, although we do have an ongoing asset sale program that contributes to the bottom line to one degree or another, quarter by quarter; this was a strategic financial action to establish the value of that company.

We said we’d capture the full value of gas business, and we have. We said we would expand the coal capacity without negatively impacting markets, and we have done that. We said we’d strengthen our balance sheet, and we’ve done that, as well. We have delivered value to our shareholders today, and we’ll deliver value tomorrow.

Let me talk a little bit about Shoemaker. Shoemaker is an interesting mine. It’s a capitalized mine in the Pittsburgh 8 Seam on the river that has the highest sulfur of all of our coals. Therefore, it’s the last coal to move based on the old paradigm of chasing every scrubber versus new scrubbers being built. In this marketplace a high sulfur mine has to make the bridge between the old paradigm to the new scrubbers being built.

Shoemaker is a mine that never had the beltline put in it and is still on [car holleys]. Therefore, it can’t compete with modern mines in the Pittsburgh 8 Seam without capital infusion. We intend to infuse the capital into the Shoemaker mine as the market meets the demand and the return on investment based on that infusion. We do not intend to be marginal with that mine while the market adjusts to the new paradigm with the scrubbers. Therefore, we’ve decided to harvest that mine in a sense until the market reacts to the need for it.

It is unique in that sense. We’re not going to mine those reserves unless we can meet the margins we need, and we’re not going to spend the capital in that mine until the customers are willing to pay us a rate of return appropriately for the investment in that capital.

So, to that end we’ve announced that Shoemaker will be on a different production schedule. It is different than the other mines because of its capital structure, and it will be recapitalized and ready to go when the customers react to its need on the River as they build their scrubbers.

Let’s talk about the outlook. Coal fundamentals remain very strong. Coal use is up. Coal production is up about .7%, electricity is up about 4%, natural gas prices as we all know are very high at this point in time. Nuclear plants are running at maximum capacity factors. We see continued reserve depletion in Central App, and that makes Northern App coal even more attractive to the south of us.

The met market has softened somewhat but still are much stronger than they were 18 months ago, with China and India being key drivers there. We are continuing to write contracts at pricing that is higher than today’s price based on the OTC and on a quality adjusted basis. Making good progress and penetrating markets in the Southeast because of the building of the scrubbers is something that we’re doing very well.

Coal fire generation still has room to grow. Last year’s capacity factors for the total U.S. was 73%. We think there’s about another 8% it can grow assuming they spend the capital to run these plants at those levels on the customer base.

West Virginia just announced, one of our key production States that has an initiative to build coal to liquids plants. We think that’s a very interesting development. We have the financial, physical, and human resources to play a role in that. We do plan to participate there, as well as in Pennsylvania.

In the most recent 12-month period consolidated income has been $560 million, more than any other company with whom we are compared to. We are delivering today, we plan to deliver with these new prices. With this strong asset base that we have we intend to continue to use this asset base to lead the coal industry, as well as develop this gas business in the Appalachian region into a very powerful company.

With that, let’s open this up for questions.

Operator, if you would give our listeners instructions on how to queue into the question and answer period.

[OPERATOR INSTRUCTIONS.]

We’ll go to the line of David Khani from Friedman Billings Ramsey. Please go ahead.

Hello, gentlemen.

Hi, David.

You obviously raised CapEx but you didn’t make any real adjustment to your guidance. When do you plan on doing that?

The guidance, we plan to do the guidance sometime in January after we complete our profit objective and long range plans for the year, David.

David, let me say something about that CapEx. This is Brett. We clearly have projects in our asset base that we can spend that CapEx on and create some real value for our shareholders in terms of rate of return. The issue here is if the customers don’t respond we’re not going to expand that CapEx at the rate that we show if the response is not there and we’ll deploy that cash another way. We have the flexibility to do that, okay.

But I was just – I guess you raised the CapEx but you didn’t really raise your guidance. Why did you feel compelled to do it now without sort of going through your full budget plan?

Well, David, just to reflect the fact that when – this is Tom. When we announced the $420 million cash closing on the gas transaction, you will recall that Brett stated at that time that we intended to take that cash and use at least some of it for accelerating capital projects. So, we were trying to reflect what that acceleration might look like in those first couple of years because of the additional cash infusion.

Okay, good. I guess, secondarily, you put some more contracts in place on gas and coal. And did I hear you right that you’re signing contracts above the OTC market? Is that what you just said?

That’s right, we are.

Okay, great. And then on the gas side, Bill, are you using swaps or collars, or both? On the additional hedging?

We’re using both on those.

Okay. Could you give us a sense of what kind of pricing you got on that?

That’s a little sensitive right now, Dave, because of the registration that we’re going through, so we’d like to defer on that. And we’ll talk a lot about that when the registration is final.

Okay, understood. And then could you give us a better, sort of an update on Buchanan on timing? Of when you think it’ll come back on?

Well, I think we said it would be done in November. And then when we announced that we were clearly trying to get squared away with what we had to deal with there. Right now, our schedule is set to be around November 15th, and we plan to meet that schedule.

Okay. And the parts and everything are sort of ordered and on the way?

Yes, it’s a matter of putting everything together and getting it running. And we’re also in the process of doing some safety features upgrades. Remember, that’s about a 20-year-old project, upgrades to make sure that it has a fail safe system in it going forward.

Okay, great. And then last, just talking a little bit about Shoemaker, what do you think either how much does price have to improve and I guess or and secondary how much do you think it will cost to sort of update Shoemaker to make it to the point where you feel it’s competitive transportation wise?

Well, we think that to make that fully competitive compared to – I would compare it to McElroy before we added the second [long haul], it was running about 6 to 6.5 million tons a year. We would think to bring that mine up-to-date and have a 15 to a 20-year life, maybe even a 25-year life it would probably take 100 to $150 million depending on how we capitalize the underground development side. So, that’s what we’re looking at. And we think it would take about 2.5 to 3 years to do that.

Okay. And the last question before I pass on. Bill, do you have a sense of what you think the costs for Buchanan will be in the fourth quarter? Because you didn’t give a number.

David, the reason why we didn’t give a number is that, one, it depends on how long it takes to get it fixed. Two, we’re going to have to analyze the work that’s done because a portion of that will be capitalized. Really that hoist, as Brett mentioned, was in terms of its financial life was just about done. And as a result there’s not a lot of book value on there. So, as we go back in and replace that infrastructure, a lot of that will be capitalized because it extends the use of life and in some ways increases the efficiency of the hoist. That’s why I didn’t give you an estimate.

In terms of the fourth quarter, expense in the third quarter was around $1 million and maybe you could use that as a benchmark because it would cost us $1 million for half a month, so it could be 2 to $3 million per month I would say net of capitalization. But, again, they are estimates depending on the work we do and how long it takes to get done, David.

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

Hi, David.

Hi. How are you doing?

Good.

Can you talk about the barge situation? Are you seeing any problem with the barge with the Hurricane Katrina and getting barges. I know you have your own barge interest, but what are you seeing on that front in terms of the barges?

I think that’s mostly, this is towards the south, the lower parts of the Ohio and the Mississippi. We’re not seeing much problems here to the north. We’re getting the barges we need. It is tight but we’re getting what we need, David.

Okay. Thank you.

Thank you. We’ll now go to the line of Mark Reichman from AG Edwards. Please go ahead.

Hi, Mark.

Good morning. On the careful expenditures, could you just kind of briefly walk through exactly what the incremental allocations are for? And maybe comment on how the commitments are coming on the Enlow Fork expansion?

And then I guess, lastly, could you just talk a little bit about the dynamics of the market, you know, the negotiations with the utilities? And taking deliveries from the Northern App versus the Powder River Basin? Just kind of give us a feel for the market right now?

Sure, I can do that. Let me talk to the market first, and then I’ll talk about capital. The market, itself, the utilities tend, as they announce their scrubbers they’re tending to look for the source of fuel with more options than they had before when they didn’t have scrubbers. So that, and a lot of cases to the south that involves Northern App coal as an option for them. And so with our higher Btu coal moving to the south it creates more leverage for us to go to the south out of our natural markets, it creates another option for the scrubbers being built in the south.

What were looking at there is utilities are looking to get fuel online for when their scrubbers are built, and so that’s creating the dynamic that’s out there, ’07, ’08 and ’09. So, we’ll see a lot of strength there at that point in time.

Clearly, there’s a market for Powder River Basin coal, Northern App coal, and what’s being created in Illinois and Central App. It’s not a function of whether there’s going to be a place for the coal, it’s a question of who is going to get the economic run of the location, and that’s what’s being readjusted. And the scrubbers are actually readjusting that, especially in the east, so that’s the way the market is unfolding right now.

On the capital side, as this market responds to us, remember this capital that we’re putting in, we’re putting in accelerated capital on the gas side to expand that business. We’re also putting in efficiency projects like the Shoemaker mine and overland belt conveyors on Bailey mine to enhance the cost structure of those mines, as well as enhance some tonnage coming out of those mines. So, we would accelerate those brownfield expansions first. And then the next step we would take would be the Enlow Fork expansion of which looks very promising. We have customers that are very interested in large blocks of that. We think, I still believe within 12 months we’ll have that signed up.

Great. Thanks.

Okay.

Thank you. Our next question comes from Douglas Clifford with Omega Advisors. Please go ahead.

Good morning. I realize you’re not going to give the full update on guidance until January, but I’d like to see if you can give some sort of indication, even general, on what your expectations are and what the production might be? That’s the first question.

The second question is I know it’s not under your control on timing of the registration statement for the gas company, but can you give some indication as to how you expect the processes and the steps between getting it listed and getting a registration statement approved?

Okay, I’ll address the timing side first. We fully expect within the next 30 days to have that registration done on the gas business. We filed immediately after the sale, and we’ve gone through two iterations with the SEC and feel like that process is moving along very well. And so that’s, I feel real confident about that at this point in time.

In terms of guidance, why don’t you address that, Bill?

All right. In terms, we expect the fourth quarter to be a very good quarter for us, and that is the way, that has been historically. October has to be the lynch pin month because of just a lot of things, in terms of how the holidays follow, and number of workdays and the like. And we’re having a good October, so we would expect our production to be between 17 million and 18 million tons, and our expectation is for a very good fourth quarter.

Were you asking about the out years, as well?

Yes, I wanted to start getting some flavor for ’06 and even ’07?

Well, this is Tom. ’06 does not have in it any major expansion projects, so – and as you saw from the guidance that we gave today, for the full year we could be close to 70 million tons at the high end of that guidance. So, I would not expect the 68 to 72 to move a lot. It may move-up a little, but there’s no major project in the ’06 plan that would cause that 68 to 72 range to change dramatically.

Thank you.

Okay.

thank you. Our next question comes from Brett Levy with Jefferies and Company. Please go ahead.

Hey, guys. It is a little bit of logistical, actually two logistical questions. First off, can you talk about kind of where things are with respect to transportation? Are things closer to back to normal for you guys in terms of getting coal from point A to point B?

And then, secondly, in terms of the natural gas harvesting priorities versus the coal harvesting priorities, is there any sort of governance that sort of sets forth sort of who gets to go first? Or if there’s any conflict between the harvesting of the two resources, how that will be determined?

Okay, let me address that. The natural gas process is one that is well coordinated between the two companies. Clearly, we want to get the gas out of the way before the mining process for safety reasons. But we’re drilling as far out as 10 to 15 years ahead of the mining process, where we’re doing the fracing with the long [walls].

So, when it comes to the safety issue around the long wall, clearly the coal side has to call that shot. But beyond that extraction of the gas ahead of the mining process is clearly the priority and the rights there. So, that’s well coordinated between the two, and we have a long history of doing that. I think the issue there is the Buchanan Mine, we have to keep that long wall running. They get more gas while it’s running. And once it’s back up they’ll see that gas flow.

On the other side on the transportation, we see transportation, especially here in the East with Norfolk Southern and CSX, as improving over time. We’re getting the trains that are required to move our coal. In fact, by the end of the year our inventories are going to be as low as they’ve been over the last five years.

So, we feel good about that and, you know, there’s always room for improvement, I think there is on both sides. Our production is schedules against their schedules. But we’re doing well with both of them, and it’s even a little better in Central App than what it was a quarter ago.

Okay. Thanks very much, guys.

You bet.

Thank you. We’ll now go to the line of Pearce Hammond with Simmons and Company Incorporated. Please go ahead.

Good morning.

Good morning.

Hi, Pearce.

On the, you mentioned you’re signing contracts in ’06 and beyond higher than where you’re seeing the OTC market. Would you be willing to quantify the level, percentage level kind of above that you’re seeing things?

Well, I don’t think we want to comment on specific contracts. I wanted to make the general contract, though, is the market is very robust and we’re seeing real demand for this type, especially the high Btu coal; and not only in our natural market that we’ve had in the past 20 years but markets that are being created by building of the scrubbers. So, in terms of I think that’ll unfold in our guidance but I don’t want to talk about that right now.

Fair. Why do you think sort of eastern prices have been stagnant with the change in gas and obviously PRB prices have moved here recently, but – (multiple speakers) – prices and the high sulfur prices seem to be maybe even a bit more stagnant than the Central App. Any thoughts there?

Well, I think the higher sulfur pricing took a jump, and it took a jump ahead of everybody else. And now that’s why we’re doing well on the earnings side going forward. I think that’s an immediate earnings we’re seeing in that original jump. It’s going to jump again.

And we applaud the fact that the prices are going up in the Powder River Basin because we think because of location that’s just going to drive the prices up in our area, as well.

So, I think overall you’re just seeing pressure on all coal Btus across the country. And it moves in different patterns, but we’re going to see, I guess it would give an example if you had Powder River Basin prices at 15 to $20 I wouldn’t be surprised in the long run of seeing the Pittsburgh 8 with its Btu strength capturing 80 to $90. It just pushes it by region based on transportation.

One final question on low ball met, where are you seeing that pricing right now? Just a rough range?

Well, it’s stabilized around it; what we’re seeing right now in the spot it would be between 80 and $85, but in our case we captured a lot of that first jump in value in the mid 60’s and 70’s. For a long term. We would try to capture any excess production. But we feel like we've got real steady cash flows for the next four or five years at – remember, our mining method with long wall mining for that low vol coal gives us a very good cost structure and gives us great margins at 60 and $70.

Thank you.

thank you. Our next question comes from Ian Synnott from Natexis. Please go ahead.

Yes, hi. Good morning. I was wondering longer term as we look out at the kind of scrubber driven demand what portion of that new demand do you think you guys can meet in terms of blending that you’re going to see at some of the plants? I mean what’s your indication been from some of the utilities? Are you going to be able to kind of hit maybe 75% of their needs post scrubber, or are there still going to be some issues with sulfur and they’ll still need to blend in some lower sulfur products? That would be my first question.

It depends on what the State rules. I would say our natural markets, especially to the north, we’re going to be able to do probably everything that needs to be done with them, because they’re going to build their scrubbers to fit the products to the north.

I think the farther you get where those States have some limitations, you’re going to see blending just mandated on input, which I think is going to hurt the economics of some of these States, electricity. But overall I would say we’re going to capture what we want to capture in terms of the markets and the scrubbers we want to get to.

Keep in mind, the location of where we’re at and the strength of the Btus once those scrubbers are built really gives us a distinct advantage.

Excellent. Thank you.

Then, also, a separate question, just getting a little more into the operational efficiencies you’ve discussed. You were noting that you could see, in the release, noting about a $0.50 per ton decline in costs from operational efficiencies. And could you elaborate a little more on what some of those might be? I know you’ve talked about maybe replacing some conveyors and stuff like that?

Let me make one clarifying point before Brett talks about the specifics. It’s $0.50 all other things being equal. In other words, we just – if you froze all of our costs and then said, ‘what will these efficiency projects net in savings?’ It’d be $0.50 a ton. Now, there may be if there’s inflation of 6% or whatever then, you know, the actual number may turn out to be less than that. But freezing things at a start to do that calculation, that’s how we reference the $0.50.

Okay. No, appreciate it.

Okay, let’s talk about some of those projects. For instance, the Shoemaker mine, itself, if we put that beltline in and I’m sure we will at some point in time in the near future, that’s a 4 million ton a year mine on railcar haulage. You add the 100 to $150 million, you let the long wall loose in terms of productivity, so to speak, and so you see a real drop in cost for that mine. So, that’s where you see, that’s more than $0.50. In fact, it’s probably more like $1.50 or even more. So, you jump from 4 million tons a year to 6.5 million tons a year, for instance.

The other thing you see is like the Bailey beltline project, where you’re shutting down maybe 10 to 12 miles of underground belt, putting together a five-mile, five to seven-mile overland belt, and what that does is you eliminate some manpower because you’re holding all those entries open, you’re running those underground belts, you’re ventilating, you’re doing roof control, you’re eliminating all of that with a more consistent, higher efficiency beltline that’s above ground that has a higher availability and you actually get some more tons. So, that’s where you get your gain there. So, that gives you two good examples.

Excellent. No, appreciate that. And then in terms of saving on manpower there, would you see kind of reallocating some of those man hours to maybe miners who are retiring?

That’s what you would do, yes. You would just – you never lay anybody off, you just relocate them to places where you need the manpower.

No, that’s great. And then as a final question just in terms of the gain from the gas sales, should we be thinking about that as more of a taxable event or a nontaxable event?

You know, this is Bill Lyons. Right now, the way we have it recorded is a nontaxable event. And the reason why is that’s for Federal tax purposes it is nontaxable. And, two, according to the accounting principle rules in the FAS 109 it also precludes us from recording any tax.

And the reason why is that there’s methods out there that the remaining 80% could be handled in a tax-free manner. And as long as there are manners out there that we could utilize there would be no tax recorded. So, for both book and tax there’s no tax reflected on that transaction.

Okay. So, if we’re looking at no tax on it then, and if you’re kind of trying got come to a more normalized number for the quarter, kind of for an ongoing basis, then you’d be shaking out somewhere more like $0.57, $0.58 for the quarter in EPS?

That would be one way of viewing it, but again we feel that this is part of our normal operations. And so we think that’s real earnings. And the reason why we say that is that cash came in the door and it’s cash that we can spend.

Okay. Okay, no, appreciate it.

Thank you. Our next question comes from Lee Cooperman with Omega Advisors. Please go ahead.

Hi, Lee.

Thank you. I apologize profusely, because this is conference call was heaven this morning, and so I’ve missed a big chunk of the call.

But I don’t think there’s anything in your release or anything you’ve said that would account for a $5 price decline in your stock, okay?

And I’m just trying to understand the attitude towards the use of your free cash flow and how to capitalize, or the attitude towards capitalizing on the opportunity that Mr. Market presents periodically. And I’ve read reports that suggest your asset value including the gas company is substantially in excess of $100 per share, and I see the stock trading as we speak at $63.50 with a very optimistic outlook over the next few years for your production.

And, therefore, I would assume if you can keep your production costs under control, your profits and free cash flow. What’s the attitude towards basically capitalizing on the opportunity Mr. Market is presenting?

Well, I think what you’re seeing here is a very high potential company with a lot of assets that I think in terms of the way the guidance has gone for the year. We have a very soft third quarter every year. And when we don’t give financial guidance over the entire year you’re going to see that we’re going to hit our goals and objectives, just like the guidance was different – the Street missed the first quarter, they missed the third quarter, but overall I think they’re going to be right on or right close to us for the entire year. This asset base is extremely powerful. And those numbers you talked are real, so…

But I guess the question is very simple. If I’m running a business and I have a stock that’s $63 that I think, just to pick a number because it’s a round number, the assets are worth 100% over the price of stock, e.g. the assets are worth 125, my stock is 63, I’m generating free cash flow, it would seem to me in the real world that the rate of return associated with a significant stock repurchase program is extraordinarily appealing.

And so my question very simply is if I look at the sources and uses historically because of our historical performance we’ve not been in a position to buyback stock and we’ve issued stock every year for options and have never bought back stock. Are we now at a time in the cycle, given the underlying asset value, that we should be seriously at the Board level considering an important stock repurchase because it’s so accretive to the remaining shareholders that don’t sell? Or are we not thinking along those lines, that’s the question?

Well, we are thinking along those lines. And remember, with an asset base as strong as this you either create long-term real asset value by redeploying the capital at the market, and the customers don’t respond, then you clearly have the option to create value by doing it that way. And I think I’ve made it clear to the asset base and to the market if we build a lot of cash we’re going to use those kind of methods to get back to our shareholders. Clearly, we have – the nice part is we have those options.

Got you. Okay-doke. Thank you.

Thank you. Our next question comes from [Remy Troflet] from [Troflet and Company]. Please go ahead.

Hi, Remy.

Hi, guys. I want to continue with this issue of the increased CapEx outlook, and you did touch on, I guess, in the last couple of questions the benefit you’d get at Shoemaker going from 4 million tons a year to 6.5 million tons a year, but can you go through each of the different projects and the economic benefits you’re going to get from those? Because you guys have increased your CapEx estimate for them by over $500 million for the next two years without a commensurate, without any commensurate understanding or guidance from you guys of what the economic benefit of that is going to be. So, can we go through each of those so we can start understanding what the benefit of that $500 million spending is going to be?

I mean we’re not going to go into detail to all of those projects on the conference call because, obviously, they’re numerous. What we have here, though, is in the mining industry you’ve got to realize that some of these investments we have have longer term paybacks. So, like an investment today might not come to fruition in terms of return until five years from now.

These are all things that we need to take into consideration when we weigh the alternatives, which includes the stock buyback. Do we invest in one of our major mining properties that will not have a payback to five to seven years, or do we use that money for immediate buyback of the stock?

Well, it just seems from what you’ve said in the release you’re going to be spending it in CapEx not in buying back stock.

Well, what we’re saying there – this is Brett speaking – what I’m trying to make clear to you is we have the option, if the market responds we think it's smart to develop these resources. But we always have the option on any of these given projects, whether to do them or not.

What we’re telling the market is we have the resource base to redeploy this capital and expand this Company in a very powerful way, in the long-term if the market unfolds that way. If not, then clearly we’re going to go with other forms of taking care of the shareholders.

Oh, absolutely. It clearly activates there. It’s just then you do have some projects we just would like to understand the economic benefits of this incremental $500 million you’re spending.

Yes, and we will unfold that as we give our guidance going forward. We just wanted to let you know how we were going to deploy – we plan to deploy the 400 million and a lot of it is expansion in gas and these other projects that I’m talking about. You know, the 100, $200 million projects that have very high rate of returns.

Oh, no. We think that’s great. It’s just that we’re getting half the story here. We’re getting the spending and we’re not getting the benefit.

I got what you’re saying.

And I think you guys need to come out and talk about it right away and not wait till January if we’re just going to hear none of the other numbers change except for the CapEx.

Got you, okay. I understand.

Thanks, guys.

All right.

Thank you. Our next question comes from Eric Kalamaras with Wachovia Securities. Please go ahead.

Hi, good morning. A question, a couple of questions here. Can you refresh me as to the related to Buchanan as to what the deductible is related to insurance?

The deductible, I believe, is around $5 million. The insurance, the total insurance is $75 million in terms of the total coverage and that includes both business interruption and property damage.

Okay. And to date you have not filed any claims, right?

There’s no claim filed on the skip hoist accident, that’s correct.

Okay, but you did file initial claims for the roof collapse?

Yes, we did.

Okay, and what’s the timing on collection from that incident?

Obviously, a claim like this is very complex. Like I said, we filed a claim. If the insurance company accepts it, we get the money right away. If they don’t, then you go through a period of audit and negotiations. I would expect, I would not expect to get any money on either one of those claims this year.

Can you indicate what the amount the claim was filed for?

No, we don’t want to disclose that at this time.

Okay, fair enough. Additionally, related to potential share repurchases, I mean looking, in looking at the basket in the indenture for the notes, can you give an indication as to what your ability is for a share repurchase there?

I believe we had that explained out in our 10-Q and 10-K in detail. We have the ability to go back and repurchase shares, I just don’t recall the exact amounts right now.

But that was disclosed in the 10-K?

Yes.

The aggregate amount?

I believe it was.

Okay. Thank you.

All right.

Thank you. We’ll now go to the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys. Brett, I just had one quick last question, and maybe you can’t talk on it. But given, you know, you had a wide open hedge position going into ’06, ’07, ’08 on the gas side, and obviously what you’ve got hedged so far is meaningfully higher than what you’ve realized so far this year, what’s your thought on hedging, you know, more gas now that we’re in the double-digit range on gas prices?

Well, philosophically. Clearly, double digits are a good place to hedge. And I think that’s as much as I want to say about it. We have a lot to do with that gas company, and they’ll be talking about their philosophy as they can talk, okay?

Sure.

All right.

Thanks.

Thank you. Our next question comes from Ross Collins, with Copia Capital. Please go ahead.

Hi, Ross.

Hi. Thanks, guys. I was, the first question is looking at kind of the supplemental tables in the press release it looks like under coal other, which I believe is mostly purchased coal, you…

It’s also closing out of mine costs.

Okay. But at the revenue and cost of goods sold level it’s mostly purchased coal, right?

Right.

You know, and it looks like historically where that was a breakeven business you’re now, you know, leaving on the order of about 30 to $50 million a quarter, losing 30 to 50 million in that business. Is that due to some contract situation? Or maybe you could give us a little guidance as to when that might runoff?

I don’t see that in the numbers. Maybe you could talk to Tom offline on that, and we could reconcile that number for you. But we don’t have anything that’s hidden in the purchased coal. There’s no significant change and no, you know, definitely no significant losses in purchased coal.

Okay. And then the second thing would be not to beat up on this CapEx thing too much, but the way you’ve given the guidance it’s labeled CapEx required to meet production forecasts. And correspondingly with no increase in the production forecast. The worry is in those increases is there any increase, cost inflation or anything associated with those ’06, ’07 production forecasts?

Yes, we do have cost inflation that’s in there. Obviously, because things like long wall, the components of long wall have a lot of steel in them. And, you know, you can track the, you know, anything, an increase in prices of steel are going to be passed through by the manufacturer.

But that increase we showed are real projects, and those projects have a high rate of return on them. So, we need to break all of that out for you and we'll – (multiple speakers).

Yes, the worry was that the cost of that current production forecast, that’s what that was. Okay.

No, and in fact, you’re going to see CONSOL has probably the strongest ability to maintain their cost structure over time.

Okay, great. Thanks.

[OPERATOR INSTRUCTIONS.]

We’ll now go to the line of Wayne Cooperman from Cobalt Capital. Please go ahead.

Hey, guys. Quite a fun day. Everybody is asking about the CapEx. I guess maybe I missed this, but how much of it is for coal and how much of it is for gas? And how much of it is future expansion of coal that’s not contemplated in your production guidance?

Here’s the intention of raising that CapEx. We wanted to show everyone where we were going to spend the $400 million that we got from the gas company sale. Those are all projects, I’d say it’s about one-third gas, two-thirds coal, and those projects are clearly optional to do depending on the response of the market. So, you could either look at it as free cash flow or you can look at it as projects that the Board accepts to do at very high rates of return.

You also gave production guidance for coal and gas, so I’m just curious if that assumes you spend the 400 or that’s not including what you would spend on the expansion?

I think on the gas side you would assume you spend it.

And on the coal side?

On the coal side I would say that built into the budgets are your MOP capitals. These are projects beyond that, to build into new capacity maybe one or two years out.

Right. You guys, you know, your press release is highly inconsistent and confusing then, because you’ve said you might spend all this money on expansion capital but you haven’t said how much extra production you may get from that spend? I – (multiple speakers).

Well, we realize that maybe we could have done this differently now. Our intent was not to confuse you. Our intent was to give you the information as it was available. And as we said earlier we are in the process of reviewing everything. And we’ve chose to give this out piecemeal instead of all at one time. And, obviously, we need to think about that as that's the best way of going about it.

I’m either extremely easily confused or you guys did a really bad job of explaining what you were trying to accomplish, or a combination thereof. Anyway, I would assume you – I would suggest you guys start buying back some stock, because if we back out the gas business, your coal business is trading at a low single-digit multiple of what you guys will be earning in a couple of years.

We will take that into consideration. Thank you.

Thank you. Our next question comes from Paul Forward with Legg Mason. Please go ahead.

Thanks. Just trying to get at the reason for this recent softening we’ve seen in Northern App coal prices, just according to various publications. Is the stockpile situation at the utilities for the higher sulfur coal, is it that comfortable that they just feel no pressure anymore to go out and try to bump supplies here, bump their stockpiles? Why are we seeing the softening?

Well, I think if you look at Northern App in general we expanded by 15%, 10 to 15% in our production capability with sold coal. One thing about it is we performed. We’ve done the job. We’ve got the coal to them.

And we think that that price pressure is just a matter of – we don’t think the production there is for them to rebuild their stockpiles at all, and I think it’s just a matter of a waiting game between the utilities and the Northern App producers at this point in time. You’re going to see some real pressure on that price going forward.

Clearly, you guys need to stop performing so well. But that’s it. Thanks very much.

Thank you. Ladies and gentlemen, in the interest of time our final question will come from [Josh Bonfeld] with [Kenyon]. Please go ahead with, sir.

Hey, guys. Sorry to keep harping on this CapEx issue. But is there any way you can give us updates on how to think about your maintenance CapEx, are those to keep production flat, from where it is right now? Both on the gas side and on the…

I think you’d look at maintenance CapEx, if you want to put about I’d say 275 to 325 a ton maintenance CapEx for ’06, ’07, and ’08 would be some good numbers to use.

Okay. So, then you could sort of back into any other CapEx above and beyond that as growth CapEx?

Yes, and then you could call those projects free cash flow or projects, yes.

What about on the gas side?

I think we’ve been saying 30 or $35 million. We don’t have it on a unit basis but their maintenance production was about 30, $35 million.

I’d say that’s about right.

So it's 35 million for a year?

Yes, I’m sorry, yes, for a year.

That’s right.

A year for like 50 Bcf production?

That’s right. (multiple speakers).

Okay, so your main CapEx there is like $0.80, $0.70?

Right.

Okay, so I think that’s good, that’s good help for us then. Thank you.

Okay. Thank you.

And with that, I’ll turn it back over to you for any closing comments.

We have none here, Operator, other than to ask you to give the replay information.

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