CNX Resources Corp (CNX) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the CONSOL Energy first quarter earnings conference call. [OPERATOR INSTRUCTIONS]. As a reminder, today’s call is being recorded. I’d now like to turn the call over to our host, Vice President of External Affairs, Tom Hoffman. Please go ahead.

Good morning, everyone, and welcome to our first quarter earnings conference call. With me this morning are Brett Harvey, President and Chief Executive Officer of CONSOL Energy, and Bill Lyons, Executive Vice President and Chief Financial Officer. In addition to those of you who are on the conference call, we are also broadcasting this call on the internet, and we welcome those of you who are listening in through the web. We will be discussing not only the results from the quarter just ended, but we will be discussing forward-looking business outlook, and we would advise you to take a look this morning at the enumerated business risks that we’ve listed in the earnings release that we put out this morning at 7:30. These discuss the risks we have in meeting the outlook for the year and beyond. In addition, we would recommend that you look at our discussion of business risks in our 10-K that was filed on March 6.

With that, let me turn the microphone over to Bill Lyons, who will discuss the results from the first quarter.

Thank you, Tom. As everyone saw in our news release earlier this morning, CONSOL Energy reported outstanding results for the first quarter. Net income was $124 million compared to $75 million in the first quarter of last year, a 65% improvement period to period. That equates to earnings per share of $1.33 compared with $0.82 in the first quarter of last year. Net cash from operating activities was $153 million compared with $96 million in the same period last year, an improvement of 59% period to period. EBITDA for the first quarter totaled $259 million compared with $159 million in the first quarter of last year, an improvement of 63% period to period.

From a financial perspective, the first quarter is straight forward. Coal production was at the upper end of our forecast range. Coal prices exceeded expectations. Coal unit costs came in at forecast. And our gas subsidiary contributed more than $37 million to CONSOL Energy’s net income. In addition to the continued substantial growth in net income, cash and EBITDA, we were particularly pleased with the margins on Company-produced coal. Operating or cash margins were nearly $16 a ton, while financial margins were more than $8.50 per ton. We place great importance on margin expansion and stress this constantly to both our sales force and to our mine managers. These first quarter margins again reflect execution by our sales and production teams, as well as reflecting the strength of our asset base and strong industry fundamentals. We see industry fundamentals remaining strong for a number of years. We expect to continue to expand profits by investing in both efficiency and capacity expansion projects that are within our powerful asset base and by acquisitions if such opportunities present themselves.

As we disclosed in January, our capital spending program for coal will allow us to do important maintenance work, to invest in efficiency projects that will enable us to offset inflationary cost pressures while at the same time improving productivity, and to invest in brown field expansion projects that expand our productive capacity in a measured, disciplined way. In addition, the capital plan for our CNX Gas subsidiary will allow for a more rapid development of their substantial gas reserve base.

CONSOL Energy is in excellent financial condition. Cash and untapped borrowing capacity remains at nearly $800 million. We are proceeding with our planned capital spending program as well as our previously announced share repurchase program. During the quarter, we repurchased approximately 1.2 million shares of CONSOL Energy common stock at an average price of $64.43 per share. As you recall, last year the board of directors authorized the repurchase of up to $300 million of CONSOL Energy common stock during a two-year period beginning in January of 2006.

Let me now review some specific results for the quarter just ended. Average coal realization for the first quarter was $39.80 per ton, an increase of more than 13% period to period and an increase of nearly 10% compared with the trailing quarter. Average coal realizations for the first quarter were more than $2.50 per ton above the average realized price for all tons committed in price for the year as of the middle of January and are indicative of the overall strength of the market. Because we produced at the upper end of our guidance range, we were able to capture high prices on the spot market for the additional tons that we produced. It is this favorable pricing environment that has allowed us to achieve the margin expansion that I spoke of earlier.

On a period-to-period basis, total coal unit cost increased slightly, more than 9%, or $31.21 per ton; but that was $0.02 per ton lower than our forecast for the period. Our procurement and supply chain management group continually leverages our buying power, including that of our Fairmont Supply Company subsidiary, to negotiate attractive prices. We continue to promote throughout the mines standardization and process improvement programs that we believe will yield meaningful impacts on costs.

A final word on costs. There is an inherent lumpiness in our coal business quarter to quarter, and that’s in sales, in production, and in production costs. Despite the fact that the first quarter costs were up a significant amount on a period-to-period basis, we are still targeting total cost increase for the year of 2% or less. As I noted earlier, total unit costs for the first quarter were slightly below forecast, and I believe that we will achieve our targets for the year if the mines continue to run well and our planned efficiency projects remain on schedule.

Finally, let me turn to the outlook for the remainder of the year. VP 8 was put on long term idle at the beginning of April. This metallurgical mine in Virginia has mined all its economical reserves. This was part of our plan for this year and was reflected in our earlier production guidance. Second, we re-evaluated our plans with regard to Shoemaker mine and have concluded that the most favorable economic option is to idle production at Shoemaker now rather than in early 2007. We announced in January that we had secured a long term coal supply agreement with American Electric Power that would allow us to modernize Shoemaker’s haulage system. That project is moving ahead and is expected to be completed by the first quarter of 2009, at which point Shoemaker will be placed back in production. However, we are willing to run Shoemaker using the old haulage system while continuing to install the new system, if market prices in 2007 or 2008 were to increase to the point where Shoemaker would be economic. Because of the change in plan for Shoemaker, we have adjusted our quarterly production guidance for the remainder of the year. There are no changes to the ’07 production guidance because we believe that improvements in other operations will offset any production lost from Shoemaker.

You will also notice that we have continued to layer in contracts for coal over the four-year forecast period. Nevertheless, we still have as much as 39% and 66% and 82% of our potential coal production open to pricing in 2006, 2008 and 2009. This reflects two things. First, we remain very bullish regarding the long term pricing environment for coal. Second, as we have emphasized repeatedly, we are managing our portfolio of committed and uncommitted tons in a way that parallels the rise in this scrub capacity at coal-burning power plants. As scrub capacity east of the Mississippi grows, we expect high BTU, high sulfur prices to rise, converging with higher prices for low-sulfur eastern coals as scrubbers eliminate the sulfur penalty.

There’s one point in the pricing guidance that I wish to draw your attention. In 2007, the average realized price for currently committed tons is $0.04 per ton lower than the average price for committed tons in 2006. This is a timing issue related to commitments for metallurgical coal, much of which sells on an April to March fiscal year. We expect average realized prices for Company-produced coal to show year-over-year improvement throughout the four-year forecast period.

Let me again say that we had excellent results this quarter. We are executing in the near term, and our long term strategies are unfolding as expected. In sum, I remain very optimistic regarding CONSOL Energy’s ability to continue to increase value for shareholders over the next several years. With that, let me turn it over to Brett.

Thank you, Bill. As Bill said, we had a very strong quarter. It’s good to be with all of you to talk about this, and I’m looking forward to your questions. We are on track, on target financially, for ’06.

Let me say a little bit about the gas company. We’re very excited about what they’re doing and accomplishing and what their future is. We’re glad they had a good quarter. On all aspects of that company, they are on track, and we’re excited about that.

Let me talk about the coal business now. I want to make four points. We continue to see strong demand for Northern App coal as a long term, secure source of supply for energy. The scrubber market is expanding as fast or faster than we forecasted when we began talking about this a year ago. Transportation systems are working well for us, and in all regions we’re satisfied with our service there. The emergence of the coal-to-liquids market appears to be real, and we will be a part of that.

First, let’s talk about the Northern App markets. We have a number of contracted discussions underway with various customers in which they are looking for significant volumes for terms in excess of five years. Customers are looking past the short term inventory situation caused by the mild first four months of the year. Even though some customers have normal stockpiles, at a few of their plants, these same customers nevertheless are talking to us about long term deals at very attractive prices. We believe these discussions are taking place because the major coal-burning power companies have an appreciation of the long term coal supply fundamentals as they look out going forward. They want to lock up coal supplies to fuel the newly scrubbed plants on which they’ve spent billions of dollars in investment, and they are coming to CONSOL specifically because they believe that the breadth of our reserves in our mines in Northern App allow them to contract for fuel to 2010 and way beyond.

Second, the amount of scrub coal fire capacity east of the Mississippi continues to increase at or faster than the pace we originally forecast. We estimate that about 69 gigawatts of new scrub capacity will be installed by 2010 and rise to 75 gigawatts by 2012. By 2012, total scrub capacity east of the Mississippi will be 125 gigawatts, or approximately 50% to 55% of all installed coal fire capacity. As I noted in the release this morning, the mix of plant scrubber project is subject to some change with the new plans being announced and some previous plans being accelerated and some being pushed back a year or so, but in the net, scrub capacity will increase at a rapid pace in the next four years. More importantly, the plants that represent our best market opportunities are all on track or somewhat ahead of schedule.

Third, the transportation system has been very reliable for us during this past quarter. As we noted in the release, our mines did a great job this past quarter, and our production came in at the upper end of our range. From a transportation standpoint, that meant that we had an additional 600,000 tons of coal to ship that was not schedule in our plan for the quarter. Nevertheless, we shipped all the planned sales for that quarter and about a third of the additional tonnage as well. We expect to ship the remainder during the course of the year. Having dual rail service at many of our mines has been helpful in this regard. In addition, the additional barge capacity that we added in January has allowed us to keep coal moving to our customers as we’ve taken advantage of the weather and our ability to move it. The end result is that, although we produced the same amount of coal in a period-to-period comparison, we shipped an additional 400,000 tons in the first quarter this year compared to the last. That translates into considerably more revenue on a quarter-to-quarter basis. We continue to develop and create the economic rent of location in these transportation pieces because we don’t move our coal as far as other people do.

Finally, we believe that the emerging market for liquid production from coal is starting to mature. On Tuesday, President Bush announced that he would suspend purchases of crude oil for the strategic petroleum reserve and would again ask congress to allow oil drilling in Alaska. He’s also pushing various energy initiatives for other alternative energies. All this activity is in response to the high price of crude oil and refined products. We believe that within the next 12 months we will see an emerging public partnership in which the government will provide loan guaranties for the construction of coal-to-liquid plants and will in many instances also provide a guarantied market for the output of those plants. For example, Pennsylvania has already provided offtake guaranties for liquids from a waste coal-to-liquids plant in eastern Pennsylvania. On the federal level, congress has already appropriated several billion dollars in loan guaranties for construction of up to ten plants to be looked at by the DOE. And the Department of Defense is expressing considerable interest in purchasing diesel fuel derived from coal-to-liquid plants. All of these developments continue long term interest in Northern App coals. Growth in the use of technologies such as scrubbers to clean emissions up and the emerging coal-to-liquids markets should position CONSOL very well to sustain revenues and income growth over the next several years. Our large, strategically located, high-Btu eastern reserves make us the ideal company to serve the expanding conventional steam coal market as well as providing large blocks of energy reserves to serve as a feedstock for conversion to gases or liquids.

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

Operator, if you could instruct our listeners on the procedure, we’ll proceed.

[OPERATOR INSTRUCTIONS]. Our first question will come from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, gentlemen. Brett, going back-- Obviously, you brought your guidance for production down a little bit because of the Shoemaker decision. This quarter, you definitely got the benefit of having the higher end of production and getting some spot sales, which brought your averaged realized price up. You’re committed and priced tons for the rest of the year or for the year on average are a bit below. Can we presume that your average pricing for the rest of ’06 may be coming in a little bit lighter than this quarter, since your tons will probably be down a bit?

No. I believe our average pricing is going to continue to rise for the year. We have-- We’ve locked up most of our tonnage for ’06. So I would expect the average pricing as an average to continue to rise, and by the end of the year, you’ll see better than the first quarter.

Okay. And, on the flip side, one of the issues with Shoemaker was-- obviously, it wasn’t the most optimal transportation set up. The cost side of that-- what do you expect closing that down in mid April to do to your overall costs as you go forward?

Well, clearly, when you shut a mine down, you have to pick up the cost of the depreciation on it, but that’s baked into our financial discussions. We’ll be on target financially, even with it down. So, we see some real advantage to shutting that down and not creating those tons under the river as well. I feel like financially on the cost structure we’ll be fine because that was a high cost mine anyway, Jim. With that high cost mine, you’re taking an average high cost mine down. So, it will help our cost structure for the year.

Excellent. Last question, just a kind of housekeeping-- tax rate was up a little bit this quarter, I think, from what you had suggested guidance wise before, presumably because you made more money. What’s the expectation for the rest of the year?

Jim, the tax rate was pretty much where we expected it to be. You’re always going to get 1% or 2% going back and forth. Where we told you, around 30%, that’s right now where I see it.

Okay. Great. Nice work.

We’ll next go to the line of David Khani with FBR. Please go ahead.

Hi, gentlemen. Could you--? Maybe I missed this. What was the amount of spot tons you actually sold in the quarter? Was that 0.2 million tons, or was there some more than one-third of that 0.6?

I think it was-- It was about that-- We expected to do the 18. We did 18.2. It was about 200,000 tons. We’re seeing-- When we look at the average price in the first quarter, you’re also seeing some benefit of-- we were actually getting premiums on some of our sulfur contracts. If we delivered better sulfur under those contracts, we actually got some premiums. So, that’s in the pricing as well. But, in terms of volume, I would say the 200,000 tons was the only spot that wasn’t contracted for.

Yes, Brett, as you mentioned, one of the key points for our increased realization was the increase in quality. As we said previously, David, we really have probably about 95% of our coal sold for this year; but, again, as we go through we have about 40% open next year, about two-thirds open in the following year and about four-fifths open in the subsequent year.

Which leads me to my next question. Contracting-- I know it’s hard for you to talk about actual prices, but when you’re looking out now with this scrubber market coming and the demand that’s going to come from it and you’re looking to sign multi-year contracts, how do you think about pricing your contracts to try to maximize this upward pricing trend?

Well, what we’ve done is-- We know these scrubbers are going to get built, Dave, and we’ve layered in our contracts to match when the scrubbers come online. So, when you look at the long term deals we’ve done with the utilities, they tend to roll off at certain periods to where we open back up to market where we think it’s going to be a very strong market. So, we’re tying up the volumes and we’re tying up the long term relationships with these customers, but we’re also rolling the prices open to match the scrubber market. So, when you look at it going forward, you’ll see us pick up the economics of the value as those scrubbers come on.

So, basically, you’re going to try to have your re-openers match. Is that--? On the current contracts, some of the contracts-- obviously, you haven’t given us any pricing in the near term. Is pricing for some of these contracts higher and materially higher, like the [Duke] contract or the [Apune] contract for some of the ’07 volumes?

Well, they’re priced to show the strength of where we believe the market’s going to be when we start to deliver those. So, when those scrubbers come online, we have a prediction where we think the market should be, and these contracts are fitting right into where we think the market should be. So, yes; it’s growth in price based on where we see it two or three years out.

Some of your competitors have given sort of a percentage increase, and I know some of the contracts are future pricing that hasn’t been determined. But, on the ones that you have signed, can you give us a sense of how much you think of an increase that you’re getting maybe for ’07 versus ’06?

Well, we haven’t-- I think we made it clear on our comments this morning that we’d be at least 20% higher than the average for what we’re going to pick up for ’07. I would say that’s a good number to use.

Okay. 20%. Okay. Great. All right. Thank you.

We’ll next go to the line of Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen. Could you go over CapEx allocations this year and what maybe has changed in the last few months relative to some of the longer term capital opportunities you may have and how that could overlay the production guidance that you’ve given us this quarter for the next four years?

Okay. The capital that we spent for the first quarter is basically what we plan to do, so we’re on track with what we wanted to do and what our plan was for ’06. If you look at it throughout the year-- For the next couple of years-- A lot of the CapEx we’re spending right now has to do with efficiency of the mines, meaning we’re going to hold our cost structure down by spending this capital. In the last couple years of a four-year schedule, you’re going to see us start to grow volume based on what we’re spending this year and next year. Some of these take a couple of years to build. If you look at it, the first couple of years is efficiency. You’re going to see the hits on that, and then you’re going to see growth and volume with expanding margins. We’re really driven towards what’s the good long term margin expansion versus capital versus expense. The capital we’re spending today are going to give us better numbers in the next couple of years on the expense side, and then you’re going to see real growth and volume in the third and fourth year of our plan.

And is the capital being allocated proportionate to your production breakdown - Northern App/Central App?

Yes. It’s being allocated according to our expansion. So, if you look at the projects we’re doing, we’ve got the Bailey expansion, the Shoemaker will come back online; of course, Buchanan’s back now and Miller Creek. It’s basically split between Central App and Northern App based on the rates of returns we can get. It’s about a 50/50 split between the two regions right now.

I see. And, following up on your comments on CTL opportunities and tying that into new coal fire plant opportunities, it seems like there’s going to be enormous capital that’s going to need to be spent to serve the energy crisis that we’re in in the U.S. How comfortable do you and the board of-- and people you understand and respect in the industry feel that--? Is that really something that’s going to happen in a reasonable time frame, or can it get done as quickly as maybe the market needs it relative to what we’re seeing in pricing in energy?

Well, it’s like any other energy crisis; a lot of things get into motion, Mike. But, the reality of it is-- and if you look at these big coal companies like ourselves and Peabody on these big reserves, the Btu content of these are so big in terms of oil and other reserves-- even natural gas reserves in the United States-- that the conversion for security and supply-- the conversion of these Btus to liquids takes a lot of pressure off the government in terms of chasing this oil all over the world. So, I think you’re going to see some real push. Somebody’s got to build the first plant, and I think those first plants-- Once one’s built like we saw down in South Africa, and the technology is certainly there, but these higher prices at $70 oil or $60 oil, these are economic plants. But, you’ve got to build the first one, and you’ve got to prove it’s going to work in the United States, and it has to be capitalized. Now, the real issue is who’s got the fuel? Is it located in the right place, and is it the right quality and the high Btu fuel like we have? It gives us an advantage. And, we’re in the eastern side. I think there will be an eastern plant built and a western plant built. I think we’ve got a leg up on the eastern side.

Terrific. Thanks for your thoughts, Brett.

The next questions will come from the line of John Bridges with JP Morgan. Please go ahead.

Hi, Brett and everybody. Just following on from Mike, do you see yourselves as participants in coal-to-liquid plants or suppliers of coal to them?

Well, clearly we’re in the coal business, John. But, I think if there was a good investment there, we would consider it. But, these are huge investments, as you know. But, it’s nice to be in a position where you own the fuel, and that gives us leverage. So, if you can leverage the value of that fuel into some ownership, we certainly would look at that. We haven’t involved into that, first. Clearly we’ll be a supplier, but I don’t know if we’ll get into the ownership point, unless we can lever our fuel into that. That’s undecided yet, John.

Okay. Have you been down to [Sassleberg]?

We have people that understand it very well. Remember, CONSOL has one of the best R&D departments in the coal business, and our people are watching it very close. We understand the processes. We know what’s being pushed here in the United States. The oil companies are involved in this, so we’re having discussions on multiple fronts right now.

Okay. Can I just jump over to the scrubber thing? I’m just trying to square the circle here; the utilities are spending a lot of money on putting these scrubbers in and whether they expect to get a rate of return on that investment. If there’s no longer a sulfur premium discount, then it implies that they’re not going to get a rate of return on that. Could you try and explain that?

Well, I think you need to step back to the utilities and look how they’re structured and how they make their money. The regulated utilities clearly make money by spending capital and investing in their company. One of the first places they’re going to get a return on investment is on mandated environmental issues. So, they’ll get their return from their commissions on a state-by-state basis. That would be the regulator wants to-- The unregulated generators, I think, will probably be the last ones to scrub and will likely play the difference between low-sulfur coal and the credits as long as they can to avoid that capital spending until they’re mandated to do it just to meet the law.

Okay, Brett. Great results. Thanks a lot.

We’ll next go to the line of Ian Synnott with Natexis. Please go ahead.

Yes. Hi. Good morning. I was just wondering if you could give some more thoughts on the strategic direction with the remaining stake of the gas business and what you’re kind of looking at at this point.

Okay. I’ve stated publicly a lot of times that the gas business is very valuable to us. We’ve done a good job of establishing the value of that company in its own right, and I think the management team has continued to show that they can get things done what they said they would do. At the board level of CONSOL, we’ve had discussions about this. I think the more successful that company is the more pressure it is on us to do something with it. But, right now, we see it as a very valuable asset that we own 81% of, and we’re not ready to announce what we want to do with it going forward, other than we’re behind it, we want it to grow, we are solidly behind their plans. I think that’s as much as I want to say about it at this point.

Appreciate that. Thank you. And just one housekeeping item. Thinking about the maintenance CapEx-- it’s a little bit of a follow-up-- are you guys still comfortable with the [$2.50 to kind of $3.25] a ton? [Inaudible]?

Yes. I would say it’s probably pushing between [$3.00 and $3.25 now; $2.50] is going to be a low number. The way we see inflation and the capital side of it, mining equipment and so forth and the steel associated with those, it’s going to be [$3.00 to $3.25].

Okay; great. Thanks very much.

Thank you. We’ll next go to the line of Lee Cooperman with Omega Advisors. Please go ahead.

I’d like to follow up on this last question on the gas company. I’m an owner of both the gas company and the coal company. When I originally participated in the gas company, I was led to believe that we would spin it out, so we’d have the security of a reasonably marketable company. From the standpoint of tax efficiency, your shareholders own the gas company. What is the disadvantage to the coal company if we spin it all out and basically have it freely trading? All your shareholders that own it by virtue of owning it through the coal company would just own it directly. Who’s disadvantaged? I don’t-- I’d like you to kind of maybe be a bit less guarded and a bit more specific as to what the issues are that will determine what will ultimately happen here. I was kind of led to believe when we participated in the initial placement that this was going to happen, and now I get a different impression.

Well, Lee, I don’t who led you to believe that. We never did announce--

Your underwriters.

-- we were going to do that. From our perspective, the board will act on what to do with that when we think it’s the right time to do it. In terms of ownership, clearly if you own CONSOL Energy or if you own the CXG outright, you own the shares and you’re going to participate in the growth of the company. I understand your arguments. I’ve talked to you before about those. I think when it’s time to do that, we’ll announce that. Whether it’s that route or some other form of currency that we use that company for, we’ll do that. We’ll look at all the tax issues; we’ll look at the deals we do at the time we decide to do it. Okay?

Thank you. We’ll move along to the next line, and that’s from Pearce Hammond with Simmons & Company. Please go ahead.

Good morning. The first question on labor - what’s the update on the labor contract, and what are you seeing developing on that front?

Well, as you know, the labor contract expires at the end of this year. It’s a five-year deal. We have had very good relationships with labor in the last five years or last ten years; actually, since 1993. That’s ongoing. Publicly I don’t want to say a lot about that, but I expect to have a contract in place by the end of the year that’s acceptable to both sides that fit the economics of the business. So, that’s as much as I want to say.

And, then, Brett, as you look at acquisition opportunities, if you could just outline your thought process and criteria if you’re looking at sort of high sulfur versus low sulfur or surface mining versus underground mining; or, even, does it make sense to maybe build it versus buy it? What are your thoughts there?

Well, clearly, we have the ability to build it. Of course, it takes more time. An acquisition certainly something you want to look at. We’ve tried to build our balance sheet to where we can make an acquisition quickly if we see one that fits our criteria. Our criteria really is driven towards high value, meaning if we could pick up something that has a lot of synergy with us, we’ll do that very quickly. If we could pick up something that diversifies us in other areas where we think we can grow, we’ll look at that too. So, I think it’s more opportunistic, but our balance sheet’s certainly there. I think the first thing we’re going to look at is what makes the most amount of money for us - for our shareholders. We think western markets is certainly a place we would consider. We’re expanding in the Central App area. We still have some good reserves to expand in Central App of our own, or we can see an acquisition there as well. I think we’re opportunistic right now. I think a lot-- There’s been a lot of money chasing the coal business, and some of it hasn’t been so smart, from our look. We think that’s going to rationalize itself out over this year.

And one last--

I didn’t give you anything specific, but we are interested in an acquisition.

It doesn’t sound like you’ve got money burning a hole in your pocket right now then.

No. No. We’re patient.

Then, the last question on scrubbers. If you look at utilities and sort of the spec on the scrubber - on the wet scrubber that they’re installing - the average wet scrubber - the chlorine levels in the coal between Illinois Basin and Northern App-- does that put any one region at a disadvantage relative to the other one as you look at sort of the average scrubber that’s installed at a utility?

No; it doesn’t. In fact, it’s-- the economics is driven on the delivered Btu. Once the scrubbers are built, the utilities are looking for the lowest cost Btu delivered to that plant. So, if you look at it region by region, there’s not going to be really any losers in the coal business. You’re going to draw a circle around the economic influence of that mine and where it relates to those power plants, and the advantage will go to that. Illinois also has a very level of chlorine that I think the utilities are concerned about and that they would have to overcome. That eats up the scrubbers pretty fast. So, you’re looking at Btus; you’re looking at the content and the ash content as well as the chemistry of what you’re doing. But, it’s all going to be based on the component of the delivery cost as well as the quality of the coal. So, I don’t see any advantage or disadvantage. It’s more related to geography and the relationship to the power plants that are already built.

But, based on your chlorine comment just now, it sounds like Northern App has an advantage over Illinois Basin, all things being equal.

Well, the advantage I see from Northern App is, clearly, Btus travel farther, and the quality in the sulfur is well represented, and it’s such a big volume right now. It will travel farther than Illinois Basin coal will. But, having said that, we’re a big reserve holder in the Illinois Basin. We think that local market as they build scrubbers is going to expand there as well.

Great. Thank you very much.

Next, we’ll go to the line of Justine Fisher with Goldman Sachs. Please go ahead.

Good morning. My first question is just about what you guys are going to do with the contracts that covered the Shoemaker coal. I remember that when you first said you were going to idle it, you said that you’d only do it in ’07 because you were going to ship the rest of the coal under those contracts. I know you reduced your tonnage guidance. Does that mean that you can aggregate the contracts, or how are you going to make up for that tonnage?

We have other mines that can match those contracts, and that’s basically what we’ve done is negotiated to take it from another place. Actually, it improves our margins because--

Basically-- other mines that were going to sell their coal on spot will now take that coal to make up for Shoemaker’s contracts, and then that’s what leads to the reduced tonnage guidance overall?

That’s right. Yes. That’s right. A good example is the McElroy mine that we just expanded. It has the capacity to pick up that at a lower cost structure, which is good for us.

Okay. The next question I have is just about the distribution of spot sales. I know that higher production in the quarter meant that you were able to sell more coal on spot that increased the average price. Would you be able to tell us for the second, the third and the fourth quarters whether spot sales are weighted more towards the fourth quarter versus the second quarter; or would they be an even amount of total estimated production for each quarter?

I don’t think-- I think if you look over the year, it’s pretty much spread out based on how well the mines do on the spot sale side versus the spread that we give you on a quarter-by-quarter basis. But, if you look at spot sales, they’re pretty much spread over each quarter evenly. So, I would say that when you look at our total production quarter by quarter, that percentage of spots is going to stay about the same.

Okay. Then, you talked about the quality of the coal that you mined increasing your average realization as well. There’s no way we can predict that; is there?

No; there isn’t.

Okay; checking.

There’s no way I can--

It’s a good thing, but I just wanted to know if there was any way to sort of put that in the model, or it would just be an upside surprise each quarter.

One thing we do-- To make you understand that a little better-- When we write these contracts, we try to anticipate where we’re at and get-- where we’re at in the mines and what the quality is in that part of the mine. We write the contracts to where we don’t get penalties. So, we actually do a little bit better; we get the upside. We saw that in the first quarter. So, there is some planning in this; it just-- sometimes you get surprises in terms of what you see in a 2,000-foot area in a mine that you haven’t drilled out.

Okay. And then the last question I have is just quickly to clarify the cost guidance. The 2% increase is just your overall costs for produced coal tonnage increasing 2% in all of ’06 versus all of ’05?

That’s right.

That’s correct.

Okay; great. Thanks a lot.

Questions now from the line of Paul Forward with Stifel Nicholas. Please go ahead.

Thanks. Good morning. It looked like you had a really good quarter at Buchanan. Is there any--? If that continues, any potential for spot met sales as the year goes along that might boost average pricing, and what do you expect the annual run rate to be out of Buchanan going forward?

I would say it was a good quarter, and Buchanan’s doing very well. That helps us on both the gas side as well as the coal side. We should give about-- I’d say somewhere between 4.2 or 4.4 million tons at Buchanan. In terms of the met prices, naturally, if we get additional production we’ll be able to pick it up. We think the spot prices on met are probably going to have an 8 in front of them.

But, if you look back on total capacity there, with the change that we did on the hoist we might get a little bit more out of the met by the end of the year, maybe a couple hundred thousand tons. But, that will unfold, and we’ll sell those as they come out. We’re not likely to sell them forward until we get a real good feel for the average over a year’s period at that mine.

And, I guess, as you said, spot with an 8 in front of it. Is there any sense that we can get on what the [process] is to transport that coal from the mine to the port on the export side?

Paul, this is Tom. The price we’re quoting is FOB the mine.

Right, but I’m just curious about the--

[inaudible] the transportation.

I think if you call us back, we can probably give you a number or what that looks like, but we don’t have it right here.

Oh, okay.

Typically, the customer pays for that.

Yes. All right. Thanks very much.

Okay, and we’ll next go to the line of Mark Reichman with A.G. Edwards. Please go ahead.

Hello. Based on planned efficiency and mine expansion and development plans, I’m just curious; where does production-- productive capacity-- or maximum productive capacity top out, and in what year? Is there any potential to accelerating so we see maybe a little bit of a ramp up in production through 2009?

Well, I think, clearly, we’ll ramp up as fast as we can based on what we’re doing. We’re trying to lay this capital out to see the ramp up. But, I would say if you see what happened in 2007 when we shut down Shoemaker and we still left our guidance the same, that tells you that we’re doing everything we can to get as many tons out in the short term. In terms of maximum production capacity, we tend not to forecast that because you always have some issues. We’re looking to be more in the middle of the bell curve when we give you guidance. So, if we can get that efficiency in there and our capital comes out just right, you’ll see the higher end in all these years.

We’re looking for margin, and we’re looking to see how much money we make.

I realize that, but I guess what I’m--

Take a look at Shoemaker. We’re going to cut our production, and we’re going to make more money.

Right. I realize that. And, I guess what I was trying to get at is-- I think the high end is 78 million tons in 2009. Basically, we’ve said that there’s 225 million tons of new domestic coal demand right now that could be produced. So, I guess, really, what I’m getting at is do you feel that CNX’s production profile is properly matched to the forecasted growth and demand, so balancing production versus so you don’t dilute price.

Okay. That’s a different question than what I was answering. You’re exactly right. We’re not going to cannibalize our existing markets with expansion. But as you see this expansion and see utilities like Duke and others that have come to us to make arrangements that weren’t typically our market, that actually makes it so we can-- the next line of customers that want this coal will come and make the kind of deals that don’t cannibalize where we’re at, so we can hold our margins going forward. That’s really what our strategy is, and you’ll see, even baked into 208 and 209, we won’t mine that much coal if the market’s not giving us the kind of margins we want.

Okay; great. Thank you very much.

And we’ll next go to the line of David-- Excuse me; Daniel Roling with Merrill Lynch. Please go ahead. Mr. Roling, do you have your mute feature on? We’ll move along to the next line. [OPERATOR INSTRUCTIONS]. And, we’ll go to the line of David Gagliano with Credit Suisse. Please go ahead.

Hi; this is actually Richard [Garstrena]. Just in terms of the contracts you signed during the quarter, I’m just curious; was that early in the quarter, later in the quarter, or was it spread evenly throughout the quarter?

I would say most of them were signed late February and early March.

Okay. Great. And, then, I guess a follow up. In terms of 2007 - the remaining unpriced volumes - are you looking at maybe signing those earlier in the year or putting that out to the end of the year in terms of--?

Well, a good portion of that’s met coal, so that will go with the met cycle that we always see. It will be more in the summertime here, I think. Then, in terms of how we lay them out, we’ve got Northern App about 15 million tons, Central App about 4.1. We’ll match the cycles when we negotiate those. We’re not in a hurry to do that. It’s a little bit-- We’re in the shoulder months right now. The utilities’ stockpiles have come up a little bit. So, we’re not in a hurry to sign that up right now. We’d rather sign them up when the summer’s real hot.

Great. And, my final question is just on the production quarterly. Any longwalls-- any moves planned during the year?

Well, let me tell you. We have 17 longwalls. We’re always moving longwalls. We tend not to get into specific longwall moves, but as big as we are with longwalls and underground mining, that’s just part of our planning process. As long as-- We’re getting very good efficiency in our moves as well. So, we tend not to make that a focus.

Great.

And, we’ll next go to a follow up from the line of Justine Fisher with Goldman Sachs. Please go ahead.

It’s been answered. Thanks.

Thank you. We’ll move on to the final question in queue, a follow up from the line of Pearce Hammond with Simmons & Company. Please go ahead.

Brett, with your acquisition of Mon River Towing and J.A.R. Barge Lines, is that meeting your strategic rationale, and could you see yourself making additional purchases there?

Well, it really does fit our strategic rationale; let me tell you why. On the river itself, there’s almost 10.3 gigawatts of capacity on scrubbers being built on plants that we don’t-- and that’s about 25 million tons a year that we don’t serve today. If you broke it up, it’s about-- we supply about 3.3 of that 25 today, and if you break it up, Central App’s about 16.9 of it, PRB is even 1.4 of it. We see that a real expanding market. So, we’ll make the acquisitions on the barge side to match how we grow on that piece. Right now, we have about 18 tow boats and 650 barges. If we need more barges, we’ll make another acquisition.

It looks like the cost on that based on looking at the cash flow statement is about $24.7 million.

That’s correct.

Yes; I think you figured that out. Yes.

Okay. Thank you.

Operator, our screen shows no more questions in queue. Is that correct?

That’s correct, sir.

Well, if there are no more questions, let me thank everyone for participating this morning. We’ll be available all day offline to continue to discuss the results. Operator, if you would tell our listeners about the replay information, we’ll sign off.

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