CNX Resources Corp (CNX) 2005 Q4 法說會逐字稿

Good morning, everyone, this is Tom Hoffman I apologize for the delay. We had some sort of problem with the teleconferencing. We're here this morning to talk about CONSOL Energy fourth quarter 2005 and full year 2005 results. With me this morning are Brett Harvey, Chief Executive Officer; Bill Lyons, Chief Financial Officer. Also joining us this morning Pete Lilly, our Chief Operating Officer and Bart Hyita, Senior Vice President of Administration and Planning. You'll be in listen-only mode until we finish our remarks and we will take questions, I'll take questions from reporters offline throughout the day today. We are going to talk about actual results for the fourth quarter and for full year, but we will also be talking about the outlook for 2006 and in some respects for years beyond that. The Company's ability to achieve these results are based on the normal business operating risks and we have detailed those -- we have detailed those in our -- in our press release issued at 6:30 this morning. And you can also find a discussion of the risk factors related to our business in our SEC form 10-Q filed on October 26.2005. With that, I'm going quickly turn this over to Brett Harvey. Brett? I'm sorry to Bill Lyons I apologize.

Okay. Thank you, Tom. For quarter ended December 31, 2005, CONSOL Energy reported earnings of $88 million or $0.94 per diluted share. Compared with earnings of $68 million or $0.74 per diluted share for the same period a year earlier. For the year we reported earnings of $581 million or $6.26 per share compared with earnings of $199 million or $2.18 per diluted share in 2004. In the period-to-period comparisons, net cash from operating activities was 219 million versus 163 million for the quarter comparison, and 409 million versus 358 million for the full year. EBITDA , period-to-period, was 191 million versus 140 million for the quarter. And 926 million versus 389 million for the full year. As the numbers show, CONSOL Energy had an exceptional year. The market expected significant profits in 2005 and we delivered. We are reaping the benefits of strong industry fundamentals, the benefits of of our capacity and efficiency investments and the benefits of excellent execution. We believe that our shareholders have been well served. We also believe that these fundamentals are in place to fuel solid growth for a number of years to come. We will expand our profits by exploiting our competitive advantages through internal development and strategic accusations if and when those acquisitions present themselves. [technical difficulties]

Go ahead. This is Tom Hoffman, we're having technical problems here. Bill Lyons is going start and then Brett Harvey. I think from the beginning, I'm sorry. [technical difficulty]

For quarter ended December 31, 2005, CONSOL Energy reported earnings of $88 million or $0.94 per diluted share. Compared with earnings of $68 million or $0.74 per diluted share for the same period a year earlier. For the year we reported earnings of 581 million or $6.26 per share compared with earnings of 199 million or $2.18 per diluted share in 2004. In the period-to-period comparisons, net cash from operating activities was 219 million versus 163 million for the quarter comparison, and 409 million versus 358 million for the full year. [recording in background: Compared with earnings of $68 million or $0.74 per diluted share for the same period a year earlier. For the year] EBITDA , period-to-period, was 191 million versus 140 million for the quarter. And 926 million versus 380 million for the full year. As the numbers show, CONSOL Energy had an exceptional year. The market expected significant profits in 2005 and we delivered. We are reaping benefits of strong industry fundamentals, the benefits of our capacity and efficiency investments and the benefits of excellent execution. We believe that our shareholders have been well served. We also believe that these fundamentals are in place to fuel solid growth for a number of years to come. We will expand our profits by exploiting our competitive advantages through internal development and strategic acquisitions if and when those acquisitions present themselves.

One of our goals for 2005 was to improve our financial position and make it even more powerful. We expanded the capacity of our credit -- [technical difficulty] -- Thank you very much.

One our goals for 2005 was to improve our financial position and make it even more powerful. We expanded the capacity of our credit facility while at same time reducing the -- it's cost. We sold 18.5% of our gas business. This made this business completely transparent and return 420 million to CONSOL. The market cap of CNX gas is $3.7 billion. It should also be noted that CNX Gas has its own $200 million credit facility. The cash and untapped borrowing capacity of CONSOL Energy ex the gas company is now at $800 million.

Our powerful financial position gives us a great deal of flexibility to build the Company and to build earnings. For example, our strong financial position allows us to embark on a capital spending plan that will enable us to do important maintenance work, to purchase equipment, to invest in efficiency projects that's drive down cost and improve productivity, to invest in [Brownfield] expansion projects that grow our coal production in a measured discipline fashion and to expand our gas business. We expect to do all of this with internally generated funds. We also have, in our arsenal of shareholder enhancing initiatives, the share buyback program that we announced last month This is a two year, 300 million share repurchase program. Management recommended this to the board, based in part on the encouragement we received from many of our shareholders. We listened carefully to what you said and recommended a plan to the board that balanced the short-term as well as the long-term interest of the Company and its shareholders.

Let me now review some specific results for the quarter just ended. Average coal realizations for the quarter were $36.28 per ton, an increase of 14% from the fourth quarter of 2004. The market for coal is robust, by that I mean strong demand and strong prices. And as I stated previously, we believe the fundamentals are in place to sustain this market for a number of years. Coal production, in the quarter-to-quarter comparison, was down 1.5 million tons. There are two reasons for this. First, the fourth quarter of 2004 was a huge quarter for us from a production standpoint. The mines ran well and the mine plans called for very few equipment moves during the 2004 period. If you can recall our discussions from last January, we said then that we did not expect to repeat that performance and any of the quarters in 2005. Although we expected 2005 production, overall, to be higher than production for 2004, which it was. The second reason that the period-to-period comparison suffers is, that in the fourth quarter of 2005, we lost about one million tons of production because of the skip hoist problem at the Buchanan. The decline in production volumes [impacted] unit costs in the period-to-period comparison because many of our costs tend to become fixed particularly in the short-term. As a result declines in volume usually result in higher unit costs. Operating costs on a unit basis increased 13% period-to-period. However, if you look at operating costs in terms of total dollars spent, operating costs period-to-period were up only 4%. This increase period-to-period reflected additional maintenance work, increased man counts at several mines, higher production type taxes that are influenced by increased pricing, and somewhat higher supply costs. Even with the lower production fourth quarter cash operating costs, we're below $22 a ton. Our goal is to expand margins. Margin expansion is a key driver in our decision-making process.

Let me now turn to the outlook for the year. As you have seen in the earnings report we released this morning, we're targeting 70 to 74 million tons of production in 2006. Over the four year period we currently expect to increase production to 74 to 78 million tons. This measured production increase reflects about 15 million annual tons of gross production additions that occur as a result of a capital project authorized in 2006 or in earlier periods. However, during the same four year period, we have production depletions, productions being idle and production being reduced. The aggregate gross reductions in annual production are nine million tons giving us a net growth of about six [billion] tons of production by 2009. If we hit somewhere in the middle of our guidance range for that year, we would be about 6 million tons higher and than our production in 2005. These numbers aren't exact because we've given ranges in the production guidance. Versus 2005 we -- we envisioned that about half of the increase in gross production will be in Central Appalachian, including the increase of production of Buchanan and the other half in Northern Appalachia. About half of the nine million tons of annual production is lost by 2009 is due to the long-term idling of the VP8 mine and the idling of the Shoemaker mine at some point in the five year period as we complete the [belt haulage] project.

Our capital spending budget for this year is approximately 740 million. That includes 490 million for coal, about 165 million for gas, and 85 million for land and other capital items. We have broken the coal spending down further into four categories of maintenance production, expansion, efficiency, and environmental and safety. It is the combination of expansion and efficiency projects that create the additional 15 million gross annual tons of production versus 2005. About two thirds of 120 million we're spending on expansion projects this year is for the completion of the Robinson Run overland belt in preparation plant project that we announced earlier. The bulk of the remaining spending is for the Shoemaker belt hauling system we recently announced and several smaller projects that will expand production and leverage in Mill Creek -- Miller Creek. Of the 45 million that we are targeting for efficiency projects, three quarters of that amount is associated with a new slope and overland conveyer belt for the Bailey mine. As we noted in the news release this morning, we expect the spending on efficiency and expansion projects will limit unit cost increases in 2006 to less than 3%. All the expansion and efficiency projects that we are undertaking in this year's budgets have internal rates of return of greater than 20%. Brett, your comments?

Okay, since we had a technical problem early on in this call, I would like to defer my comments and move right into the questions. We would like to get to the questions that you all have for us based on our earnings announcement. So having said that let's move into it.

I'm going open the -- open the lines now for questions. If you will identify yourself when your -- when you come up on the queue.

This conference is now in question and answer mode. [OPERATOR INSTRUCTIONS]

Yes, hi. This is Ian Synnott with Natexis Bleichroeder

Hello. Go ahead.

Just some more clarification on the CapEx. That wouldn't include -- the current guidance in '06 wouldn't include any spending on the Enlow Fork expansion?

That's correct.

Okay. And then can you give us any thoughts where maintenance CapEx might be moving forward and would it be on a similar ratio of kind of a dollar per ton?

Let me give you that guidance again. Typically what we tell everyone is CapEx for maintenance production will run about three and a quarter to 350 a ton. In the case of 2006 it's a little higher, but on a average, if you look at our ten year planning horizon, three and a quarter to 350 is the number we use, a little higher in '06 because we're moving into this scrubber era will we have the production, some expansion we want to do to meet these higher margins. So it's kind of an anomaly for '06 but on average three and a quarter to 350 is a good number.

Great, now thank you. And then just on -- on the scrubbers and on the contract that you signed with AP, are there any other things that you have kind of work that's you could give us more general comments on. I know you don't want to disclose anything before your ready.

We don't want to disclose any but I can guarantee you that there are a number of contracts in the works and even new market areas that we haven't been in before that look just like that so we're very excited about our future.

Great, well, thanks.

Next question please.

This is Jim Rollyson from Raymond James.

Hi, Jim.

Just one follow-up, Brett, on the -- on the long-term contracts. You know, one of the, I guess fears that people have generally as you go back in history in this business when it used to be long-term contracts, whether it was producer side or the utility side, but it was getting locked into long-term arrangements at fixed prices. Can you kind of just talk about how you approach setting up these contracts to make sure you get the best deal you can on the pricing side?

Well, clearly when we get into these longer terms, and we all have a good memory of what those old contracts look like, where there were -- were winners and losers based on the way they went inflation wise or market wise. We've tried to write these contracts, and I think we've done a good job of writing them to where they re-open about every three years at market. We're tying up the volume, we're tying up the ability to capitalize the mines and capitalize the power plants to match these kind of coals, but we're re-opening to make sure that the utility and the coal company are back to back taking money out of the marketplace rather than out of each other. And we think these new contracts are written really well to address that issue so we don't repeat history.

Okay and just one follow-up. Clearly your -- your plans on -- on putting a value on the gas business have worked out so far with CxG trading, you're -- you're over 350 or at least you were before today on a per Mcfe basis. Can you talk about just kind of now that that's registered and out what you're long-term plans are? How do you further capitalize on that?

Well, as I said in the past, that company is a very valuable company to us and valuable to our shareholders. It is a breakout company in a lot of senses and we think there's some maturing to do in that company. And we will evaluate it, at the board level, going forward, to see what the right place to go with that company is. But we'll do the right thing for our shareholders. We have not made, at the board level, a decision of what to do with the existing shares left, but we're excited about the future. We're excited about it's own ability to expand and create more value in the short-term.

Great, thanks.

Thanks, Jim.

Next question, please.

Yes, this is John Hill from -- from Citigroup. Good job persevering through technical glitches outside of your normal area, guys. Just a couple of quick ones, the other income line on the income state, 41.8 million is a bit higher than it normally runs can you give us some color on what is in there?

This is Bill Lyons. We have received some business inter -- interruption proceeds on the mine fire at Buchanan and it's about $18 million received in the quarter, and than was booked in other income.

Okay. That's great, and then I was just wondering if you could comment a little bit on -- on rail service, a recurring theme, sounds like things are getting little better in your region. Just wondered if you could share some thoughts with us.

I'll have Pete respond to that.

This is Pete Lilly, I think overall we continue to not -- not in a position where we lose any production as a result of rail service. Lately, it's actually been pretty good for us I think that primarily reflects good weather. So overall -- overall we're satisfied with the rail service by the two railroads that service us.

Okay, very good. And just last, any comments on where new deals are being priced relative to what we would see -- see market pricing in the trade, press, et cetera, just with regards of what's been -- what's been closed in the last couple of months?

Well, we see continuing very strong pricing as we look at contracts going forward. There's been a lot of chatter in the marketplace that there's been a drop in Northern App coal. We haven't seen that, we've see very strong pricing all the way through December coming into January. Now if that changes in the future, we'll take a look at it. But all of our pricing compare -- especially '04 and '05 we continue to see very strong pricing going. So we don't see any drop off. It looks good.

Inch Thank you very much.

Thanks John.

Gentlemen, Mike Dudas, Bear Stearns, Good morning. Brett, when you talk about 15 million gross tons of expansion going forward, you said 50% Central App, 50% Northern App, is that correct?

That's right.

I guess maybe the market maybe a little surprised, why not more Northern App given the opportunity for scrubber retrofits and the value of that coal? And why Central App given the cost issues and the issues we've been reading about obviously in the press over the last month or so?

Well, on the Northern App side we're just talking about the next few years, so if we announced Enlow Fork expansion that would jump Northern App in a much stronger position. But if you remember our philosophy, as the customers step up and sign long-term contracts, we will expand to mass that scrubbers business. The Central App deals, those contracts and those expansions are very low cost compared to Central App opportunities or Miller creek our southwest Virginia piece. These are very high margin mines that we feel like we'll take advantage of that market in the short-term. And in the long-term we will expand. And a good example is what we just did with Shoemaker. That Shoemaker will go up to a 6 million-ton mine with a capital investment, but it will show up in '09 rather than '07 and '08. So, yes, we plan to expand in all of these places. We're taking advantage of the highest valued ones first.

Brett could you talk a little bit more about your barge acquisition and what type of value and how that all fits into your market position?

Well, in this sulfur market, as we see all of these scrubbers being built along the river, we see rapid expanding value on the river, based on scrubbers. If you look at the river market itself, 64% of it, right now, is Central App. As these scrubbers get built, these river mines are going to have the ability to move the coal to these scrubbers at the very high BTU level and create value for us very quickly. We have a core of competence in the barge market itself. So an acquisition from the -- with the Guttman barge it just gave us more capacity to optimize value on the river and move our coal farther down to where these scubers are and create a lot of value for us.

Thank you, gentlemen.

Thanks, Mike, we'll take the next question.

Hi, this is Justine Fisher from Goldman Sachs.

Hi, Justine.

Just to clarify a couple of questions, as far as the tonnage guidance goes, the price -- pricing significantly increased in '06 and then down again in '07. That's because of the way the timing of the mine expansions and the depletions in the idling occur, is that right?

Yes, and also reflects where we think today that the Shoemaker mine will be -- will be idle in its reconstruction. So it drops off in '07, but the markets will determine that. Right now, it looks like it's in '07.

Okay. And then the second question is, how much of the committed tonnage -- I know you have a significant amount of it priced already, but I guess talking about '07 and '08. How much, if any of that committed tonnage is [met] coal.

In -- in '07 and '08, I don't have the exact figures but probably percentages are relatively similar to -- to our overall position. So.

Percentage of price coal that is met coal or unpriced?

No, I would say what we're showing is 40 million tons priced in '07 out of let's say 70 so we have about 30 that are unpriced. So that ratio would be software on the met side. We produce about 600 million tons a year of premium low vol and mid vol met coal, so it would probably be similar percentage.

Okay. And then just clarify the CapEx guidance. Listed in the press release there's a little asterisk by gas, and it says does not include investments in equity affiliates. The press release for CNX Gas yesterday said that '06 CapEx would be 190 million. So is any -- is any of the other CNX Gas CapEx coming out of -- I mean it's still consolidated, so would that come out of CONSOL's cash balance in addition to this 740 total, or --?

No, the gas -- gas is totally on their own. The difference between what gas disclosed yesterday and what we did is primarily a land related to gas.

Okay. And then final, the last question is just on cost in '07 versus '06. I know there's no set cost guidance, but the press release says that cash cost per ton should in -- should increase 2.5% in '06 versus '05. Do expect costs to be higher or lower in '07 versus '06?

Well, you can generally expect certain amount of inflation year-to-year. It's -- it's hard to predict '07 at this point in terms of the balance of supply and demand as it relates to the key commodities that we purchase like steel, belting, that sort of thing. But keep in mind our geologic cost structure is very sound going forward. Pittsburgh [inaudible] and our position there gives us a lot of strength in terms of managing of our cost over time as we spend this efficiency capital in these mines. And the other thing to note is that -- that the mines that we are spending the efficiency and expansion capital on and even the [mop] capital now are are pretty much long lived mines as we go forward. So we're setting these mines up to be very productive and efficient for the long haul.

All right, thanks.

Thank you. We'll have the next question, please.

Yes, Pearce Hammond from from Simmons. Just a quick question. Are you contemplating any ways to [defees] legacy liabilities and if so, or, just in general, what steps could you potentially take to reduce liabilities?

Pearce that's a good question and something we've done a lot of study on in the last few months. Obviously legacy liabilities are large but you also have to remember their long-term. There's something we've always had and it's something we've dialed into our prices. So it's something we feel, definitely, we handle. When we take a look at the fees and those liabilities, they can be done, but the rates of return do not compare to what the rates of return are when we invest like in Robinson Run, or Shoemaker or Enlow Fork. So as a result, unless we see better rates of return on [season as] liabilities we're probably not going to do anything on that on short-term. However, saying that, that we are -- we have made changes to our pension plan, and we continue to look at that and there maybe some acceleration of some funding there. But overall, I would say that we don't see major work done on defeesing legacy liabilities in the short-term because of rates of return.

Great, thank you and then given that the unfortunate two tragedies recently in -- in -- in Appalachia. What -- what do you think all anticipate might come out of the this? Is there going to be real expensive new safety measures or just more marginal safety measures or what is your outlook?

When we look at what came out of the West Virginia by itself, three things came out of West Virginia, the Central communications center of which CONSOL already has, the additional '02 store -- excuse me oxygen stored underground, which we already do, we probably plead the industry in that , and then providing communication and tracking devices to miners was the third one. We have some mine that's already have that, but have had difficulty finding the right technology so we could track all of the miners all the time, but we think that's the right step to go forward for all mining operations. This 15 minute of notification that was required in West Virginia also goes right back to our Central communication center, so, from CONSOL's perspective, we are already there. The only piece that we want to see, and we think is a good idea, is the tracking for miners and we -- we support that. And we have a technical team working with [M Shaw] right now, CONSOL advising M Shaw in where we might go in the next steps. So we think these are good steps for the value of -- of mining and our miners.

Thank you very much.

Thanks.

Hi, this is David Gagliano from Credit Suisse. Just a quick question on the 2006 target for production versus tons committed. I see that you still have about, I don't know, four to -- four to eight million tons left to -- to -- to commit for '06. I'm wondering what type of coal is that?

That's a little bit of, I'd say, virtually every mine has a -- has some coal that's uncommitted and unpriced. And we tend to do that as a -- as a matter of course, we want to make sure that we're that we're not overcommitted going into the year. We want to have -- but we want to make sure we have enough to carry the weight and run the mines efficiently early on in the year. So it's a balancing act and it depends a lot on what happens with the weather and the economy as to the exact time that -- that we'll move that coal. But I can tell you that there's some coal at every mine, based on what our projected production is, that still remains to be produced and priced and we'll see how that plays out as the year goes on.

Okay. And as a follow-up, just Brett, you eluded in the press release you referred to sulfur dioxide allowance prices being high and potentially impeding -- restricting the market for the high sulfur products such as those from Shoemaker. I'm wondering of -- of the -- of the difference between the tons that are committed and priced and those tons that are not. Are you at all concerned about those incremental volumes not being committed and priced by the end the year because of the high sulfur credits?

No, I'm not concerned about that. If you looked at the high sulfur markets, we've seen it coming like this, especially the squeeze on high sulfur versus low sulfur coal, we've seen that coming for a long time. We've actually dialed that into the way we've layered in our coal and sold our coal for the last two or three years. And that's why we've insulated ourselves in the a big way, especially in '06, to bridge ourselves into this scrubber market. A good example of that is probably the Shoemaker, the reason I mention it, because it would be the toughest one to sell in this market. But we've also written contracts with our customers over the last couple of years that even give us, if we can beat the sulfur requirements we wrote into our contracts, we'd get a sulfur advantage even on delivery. So for '05 and even '06, we see where we're going to even gain with a -- with high sulfur and mid sulfur type tonnages going to the utilizes. If we beat that sulfur based on production, that we'll get an advantage that way. So we pretty much dialed all this into our equations and I'm not concerned about anything but the highest sulfur and we addressed that when we talked about Shoemaker last quarter.

Okay, fair enough and then just a really quick last question. What -- what's -- what's a reasonable tax -- effective tax assumption for '06? I know it's not the pinpoint, but if you could give us just a sense.

As we continue to increase our -- our earnings, that tax rate, effective tax rate is going to move up to 25 to 30%.

Thank you very much.

Thanks, Dave.

Hi, it's Paul Forward with Stifel Nicolaus Bill, I think you said on the half of that nine million tons of expected depletion and lost volumes were VP8 and Shoemaker, if I heard correctly. Where does the other half the volume come from, approximately?

Do want me to answer that, Bill?

Yes, go ahead.

We have a small surface mine in Ohio, called Mahoning Valley, that's pretty much going to be depleted here after long. We also have a small surface mine in east Kentucky, named Wiley. In essence that's a part of the expansion of Miller Creek because we'll be moving the equipment from Wiley to Miller Creek. So, net-net we'll actually gain a little bit there. And then the last one is our Mill Creek operation, in east Kentucky, is -- is depleting it's reserve and will be winding down during the course of the next year or two.

All right, and with the -- with the declining volumes looking at '06 going into '07 and '08. Are your Northern App customers starting to get nervous about where they're going get volumes from in 2008, 2009 and beyond for their scrub power plants? And we're seeing a little bit of a market activity with your AEP deal and alliance side of deal with Allegheny. Is there -- is there starting to be a scramble for whatever tons are likely to be available for the scrubber market?

Well, I'm not sure I would use the word scramble. What I will say is that first of all, the AEP deal did validate our strategy and did validate what -- what we felt all along would occur in regard to the scrub market. I will tell you that very clearly that we are having discussions and negotiations. More than discussions with a number of customers for longer term deals because I think our sophisticated customers are clearly recognizing that the demand for higher sulfur coal, with all new scrubbers being built, will -- will likely exceed the supply.

All right, well, thanks.

Thanks, Paul.

Hi it's Mark Reichman from Morgan Stanley.

Hi, Mark.

Could you give a little bit a summary of what the 236 million in CapEx during the quarter was? It was a little higher than I was looking for.

The main thing is it was long [wall] payments made the most of that -- most of that increase.

When say long wall payments like purchasing shields, shearers, what?

Yes.

Okay, and can you give a bit of an idea of how much of your production is under these varied long-term contracts we've been seeing recently and a sense of what the volume optionality for the customer is, if any, and description of the price reset mechanisms?

Well, I will tell you. I think you can almost tell from the amount of committed tons in the guidance. Typically what is committed in that '08 -- '07, '08, '09, time frame does reflect long-term contract commitments. The second question was -- ?

Optionality.

No, we -- we -- if you're in a -- if you're in a sellers' market, you don't do that. Optional -- options have value. We've all learned that, and we -- we don't provide options typically to our customers, unless there's some sort of appropriate compensation for that.

That's good and the price part of it, is it just to the market at the time or how would you determine what the market was? It's fairly thin in Northern App at some times.

Well, okay, the traded market in Northern App is fairly thin, the market is not thin. We -- if you look at the pricing that we have obtained, increasing from '03 to '04 and '04 to '05 and even to '06, indicates that there has really been a suppliers shortage or at least a minimum balance. I don't look at the pricing as weak. As a matter of fact, if you look at traded prices, it still shows the premium, Pennsylvania and Northern West Virginia, Northern App coals still holding very good markets value. And we tend to -- we tend to price our -- our long-term agreements based on where we perceive the market is going to be. And we've -- we feel the market has been strong, will be stronger going forward, and that's how we do it.

Great, thanks.

Next question, please.

Wayne Atwell, Morgan Stanley. You mentioned, and we've been reading the press about scrubbers being delayed, could you put a little light on -- shed a little light on that?

Well actually, Wayne, this is Brett. In my remarks that I didn't give, I was talking about scrubbers and I talked about they are on schedule, if not ahead of schedule. This allowance pricing is pushing the utilities, they want to get those scrubbers in as fast as they can go. So what we're seeing, especially on the river market that -- that they're on schedule, and in fact, we think even some of the end of '06 that would have been '07 are going to be on. So we're seeing just the opposite. And I've read some of the things you have and we're not seeing that.

Am I mistaken or did someone make the comment that some of the scrubbers are delayed?

No, I don't think we did.

Not on this call.

Second, can you give us tow implications for your ownership in the gas business? If you were to decide to sell it or someone made an offer for your position, do I understand that if you -- if the business was spun up two years there would be no tax implication of the Company or what's the tax ramifications of a change in ownership?

Okay, I don't think it's two years. My estimate is that that 18.5% that we -- we sold, if we kept it for a period of six to seven years it would mitigate most of the tax on that. But if we drop out of the consolidation after that time, or any time, then the rest becomes taxable. So, there will be tax leakage if we -- we sold the remainer of the gas business.

And the tax implications on the first 18.5%?

It has to be held for a period of time and if it -- if it does, then we probably will have no tax on it. And in the period of time, my understanding is somewhere like the seven years.

Right.

On average.

And then the 81.5 that still own, what's the tax on that?

That will be taxable.

So if you were to sell that, that would be taxable?

That's correct.

Okay, thank you.

It's [Sam at Cobalt].

Hi, Sam.

Just two very quick questions. First on the AEP contract, you said on the last call that the Shoemaker call was commanding low to mid-30s. I'm assuming that it's meaningful above that. Some of the trade rags have -- have speculated prices in the low 40s. Can you confirm or deny any of the levels of that contract?

Well, we don't specifically talk pricing on contracts, but we can tell you that we looked at the forward market for that kind of coal in '09 and came to an agreement with AEP that reflects all of the hurdles that we've talked about in terms of our financial constraints that we put on them. So yes, they're very good contracts. They're a lot of revenue associated with it and I think Pete had a comment on it.

Let me put it this way, the pricing is sufficient to ensure that -- that the investment that we're going to make on the Shoemaker belt and modernination -- modernization project exceeds a 20% internal rate of return.

That's $125 million?

Yes, on the capital on the belt side,.

No, I think we -- I think we said is 150 to 200, didn't we Tom?

150 to 200, okay. And you'll earn a greater than 20% IR on that capital?

Yes, after tax.

Okay. And secondly, with roughly to 20% of your production eligible for barge transport, what's a -- what's a reasonable estimate per ton in unit cost for transportation?

Well the -- first of all, you know of -- I think the way to describe it is, that it's a function of the length of the haul. So if we're hauling down the Ohio river all the way to the [Kanaw] or Big Sandy area, then it's going to be a lot more expensive. If it's just up the river to let's say Allegheny's Hatfield's Ferry's plant from our Alicia dock, then it's -- it's a very small number. I think categorically you could say barge hauling per ton mile is conservatively less than rail.

That -- that was sort of my question. I think I know that the longer the distance, the greater the cost, but can you compare it to -- to rail or -- ?

I would say -- I would say if you compared an average rail ton per mile against an average river ton per mile, you're going about 30% of the cost.

River ton is 30% of rail ton?

Yes. On average but then you have to look at the haul.

And how important was that with your -- do these -- obviously the barge acquisition seems like a neat little acquisition, but how strategic is it when you go to an AEP and sit down and hammer out an '09 contract, how important is that visibility and reliability vis-a-vis just the cost savings?

Well, first of all, having -- having to go and move your coal on the river and not build a lot of capital for storage for the inefficiencies that happen base on how your production cycles and so forth are is a real advantage to you. Plus you -- you have the ability to be responsive to your customer very quickly. And it's nice to be in position will you own part of the railroad.

More -- moreover let me add to what Brett said. That we're getting into a situation on river transportation where the, similar to coal itself, the demand is now out stip -- out stripping supply, and as you add these scrubbers on, you also add limestone that has to be moved other river system. So, we believe that just the fundamentals of positive supply and demand balance makes sense for us to be in the barge business strategically y coliseum and moreover from a standpoint from dealing with our customers, it is a reliability of supply, positive thing that we -- that we can market with our customers.

Is there any additional vertical integration we should expect over the next few years or -- or is -- or is this it?

Well, you need to -- you need to look at -- that was a core competency with CONSOL for 100 years. We've been in the barge business for a long time. We just looked at the ability to move coal and the way we see the scrubber market going decided that that core competency could add value to our shareholders and we did that in the short-term. So I don't see it as an integration rather than just an expansion of something we were already good at.

Thanks, guys.

Thanks Sam.

I don't know, given the start to this call whether there's an operator on the line who will explain the replay number. If there is and the operator can come on and do that. If not, if you have interest in the replay number call me afterward and we will be glad to give it to you. I'll try one more time to see if there are any other questions. Thank you very much, everyone for joining us. We apologize for the delay, but we appreciate your interest in CONSOL Energy. Operator are you on the line? If you have an interest in the replay, give us a call afterward and we'll have it for you.