CNX Resources Corp (CNX) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy Second Quarter Earnings Conference Call. As a reminder, today's call is being recorded. I'd now like to turn the conference call over to the Vice President of External Affairs, Tom Hoffman.

Thank you very much and good morning everyone. With me this morning are Brett Harvey, our Chief Executive Officer; and Bill Lyons, our Chief Financial Officer; and we will be discussing the second quarter of 2006 results and in addition talking this morning about the outlook for the remainder of the year.

As always, our ability to achieve our forecasted results are subject to a number of business risks and we have provided a detail of those business risks in the earnings announcement that we released earlier this morning, and I would also make note of the fact that detailed discussions of earning or business risks are discussed in our 1Q SEC filing that was filed on May the 8th.

With that we are going to begin this morning with Bill Lyons, and then Brett Harvey and we will then be open for questions. Bill.

Thanks Tom. For the quarter just ended, CONSOL Energy reported earnings of $106 million or $0.57 per diluted share, compared with $41 million or $0.22 per diluted share in the same period last year. Through the first six months of this year, our net income is $230 million or $1.24 per diluted share, compared with $116 million or $0.63 per diluted share for the first six months of last year.

In the quarter-to-quarter comparison, net cash from operating activities was $197 million, compared with $62 million last quarter, and EBITDA was $231 million compared with $124 million.

In the six-month comparison, net cash from operating activities was $349 million versus $157 million, and EBITDA was $490 million compared with $283 million. The numbers speak for themselves. We are very pleased with both the quarter and six-month results.

Compared to the second quarter of last year, total revenue and other income increased 14%. Coal production improved 9%, coal prices increased 8%, while coal cost remained flat. Of particular interest is the outstanding cost performance that reflects tremendous execution by our workforce, the advantageous geology of the Pittsburgh Seam, and the impact of our capital investments and targeted efficiency projects. But even more importantly, we continue to expand our margins on both produced coal and natural gas.

The driving force in our economic engine is margin per ton and margin per mcf. We believe that increasing these metrics over time will have the greatest and most sustainable impact on our economic growth. Quarter-to-quarter margins for coal improved $2.91 per ton, or 60%, and operating margins for gas were up $1.72 per mcf, or 80%.

There are several other items I would like to address. First is a reminder, the VP 8 mine is now on long-term idle, having exhausted its currently economic reserves. VP 8 is a low-vol met coal that produced about 285,000 tons from January 1 until its shutdown in early April.

Also I would remind you that we have idle production at the Shoemaker Mine, also in mid-April. Year-to-date Shoemaker produced about 870,000 tons, or 1.1 million tons less than the six months ended June 30 of 2005. Now during the idle period, work will continue on the installation of a new belt haulage system. Work on that project is scheduled to conclude in early 2009.

The second item I would like to report is on our share buyback program. Through June 30, 2006, we have purchased nearly 2.6 million shares at an average price of $32.78 per share. This equates to $83.6 million or 28% of our 300 million authorization.

The third noteworthy item is that on June 22, we received word that CONSOL Energy would be included in the S&P 500 Index, the leading index for stocks in the United States. We are very proud of being selected for inclusion in this prominent market index.

Finally, let me discuss the market outlook for coal. Market prices have weakened across all basins. We believe that there are several reasons for this. We had a generally mild weather in the first half of the year. Natural gas prices have fallen below $6 per mcf resulting in gas burning, particularly at night, by some utilities that also have coal-fired capacity.

Most basins had improved production during the first six months of the year aided by the mild weather that in turn allowed improvement in deliveries versus last year, and coal imports are up about 15% year-over-year. The result has been that inventories at coal-fired power plants are generally thought to be at normal or near normal levels. In addition, we believe that there is some inventory build at mining sites.

With that said, we believe this to be a manageable situation. To begin with, we foresee an 18-month market transition; in a large measure, this is due to our expectation that total scrub capacity will have increased significantly by the year 2008, creating a meaningful expansion and market opportunities for us.

Between now and then, we have a number of things that we can do to actively manage this market transition. They include, managing inventories at our mines by controlling overtime and weekend production, utilizing the flexibility provided through our control of transportation assets, to maximize sales opportunities at the best possible prices.

We are seeking opportunities at accounts where our new transportation leverage could be the key market advantage. We are selling steam coal to Europe through our Baltimore Terminal, as necessary to maintain balanced inventories; and having the discipline to curtail production if necessary.

I've spoke often about our financial flexibility and strength. Just as that flexibility allows us to take advantage of opportunities such as acquisitions, it also gives us the ability to maintain discipline, if the market becomes more challenging. We will be rigorous in applying exacting standards, at all times and at all levels; safety, operations, marketing and finance.

We believe that the long-term outlook for CONSOL is very good. Demand for coal will continue to increase; non-traditional markets, such as, coal-to-liquids are likely to emerge; and the expansion of scrub capacity of the existing fleet of power plants in the Eastern United States will occur, all of which will benefit CONSOL. We offer a high-Btu product. Our mining costs are among the lowest in the industry in the basins in which we operate. We have substantial undeveloped reserves. Our mines and reserves are strategically located. We have access to economical transportation, and our people are well trained, well equipped, dedicated and hard working.

Brett, your observations on the quarter?

Okay, thanks. It's good to be with all of you, and let me say that I believe we had a very strong quarter, and I expect that we will have a very strong year as well.

Our long-term outlook remains strong, scrubber retrofits project to continue to be announced, all of which expand our market opportunities for us over the next three to seven years. And in conjunction with DOE, our R&D group is working on mercury removal technologies for plants that are not scrubbed, a technology that works best with bituminous coal.

The short term is definitely driven by weather, and I am going to talk about that a little bit. We see the spot market in ‘06 is soft, but we are 95 plus sold at -- in a marketplace of coal prices that we believe we would get for 2006. In ‘07, our pricing will adjust on volume or price depending on where the market is. We are disciplined; our production capacity is in place.

If you go back a few years, we've capitalized ourselves to be in a place to where we can respond to the market to get the margins we want to get. We have the capacity to expand, if the market signals and they will -- and they sign up for the capacity. We have the discipline to scale back on the soft spots and we will do that as well.

We are the low cost producer in gas and coal in our regions. That reflects higher margins in any market. So whatever the market is, we will have the highest margins. We are a safe producer. We are committed to our people, and we are committed to our stakeholders. To see that we produce this coal safely, we have plans in place that bring this company to zero accidents over time, and we are committed to that.

On the capital side, we're disciplined, we're focused, and we're flexible in the short term and the long term. So, we will respond with our capital dependent on what the market signals are.

I'd like to get to questions as soon as possible now. So let's go ahead and open it for questions. Tom?

Go ahead operator. Give us our instructions on queuing in.

Very good, thanks. [OPERATOR INSTRUCTIONS]. And our first question comes from the line of Jim Rollyson with Raymond James. Please go ahead.

Hey, good morning guys.

Hey, Jim.

Hi, Jim.

Just first off, you, I guess, beat your expectations on quarterly production this quarter yet your sales came in, just may be a little bit below kind of what we were looking for at least. Can you -- as you look forward next half of the year, your guidance on tons came down just a little bit still keeping your annual number basically where it was. What are your thoughts on sales for the second half of the year given that it would seem you've got a little bit of inventory from this quarter?

Well, there are two things on sales that I want everybody to be aware of. Clearly, on the production side, we did well. On the sales side, we saw two things happen. One is, we had our met coal down at Buchanan, we built some inventory there not based on coal that was unsold, but coal that was sold and that had not moved yet. And so we -- and with VP8 running for a couple of months, we clearly build a little inventory there. But over the year we will see that move. So, on the sales side, we are solidly in place there. The other thing we saw was -- on the river, we saw some big plants that came down for rebuilds and -- to get ready for the summer, and that created some inventory as well. Those are coming back, going to come back strong, they are base-loaded plants and we will see the adjustment throughout the rest of the year. So, those were two main things in the quarter that really put sales against production. And if you look at the end of the year, we were ahead for the first two quarters. The end of the year really reflects where we plan to be by the end of the year, production about 71.5 million in the mid-range and sales at 71.1 million. So, that is where we plan to be.

Perfect. So, it sounds like your sales should outpace your production probably if your forecast is right for the second half.

That is our intention, we -- and intend our inventory to be about where we started for the year.

And second question is, your neighbors there at Foundation yesterday, talked about quality adjustment premiums and they highlighted that Northern App has been one of their most significantly affected areas. Can you kind of comment on what you guys have seen for that as prices for SO2, for example, have kind of moved down and how that might have impacted you, if at all?

Jim, this is Bill Lyons. These allowances really don't drive our business that much. Our observation on the allowances, there is some, what I call short-term speculation out there, the allowance prices dropped significantly. We didn't understand why they went up so much and maybe we don't understand why they went down so much. There is some impact to us on our realization we get, but quite frankly in the longer term, that all levels itself out. So, again, to answer your question, we just don't track it that closely because we don't think that significantly influences our profitability.

Got you.

In the longer term, the scrubber story is very real and there will be a decrease in the number of allowances available and that in turn will make these allowances somewhat irrelevant.

Sure. And then lastly just you guys talked about the outlook for coal-to-liquids and coal-to-gas plant possibilities and obviously your reserve position in a couple of regions are sitting there untapped, any thoughts to when you might expect to see some announcements just out of the industry or even with yourselves?

Well, the political environment, I think, throughout the world has drawn real focus to the value of Btus in the ground in the United States. I think, we expect to have relationships with big players in this business, probably announced within the next 12 months. We are looking at options as big as we are with the big pool of energy that we have on the ground, especially privately held, like we have in the east, clearly [where] a logical place to build one of these plants. We are not ready to announce anything, but we are in discussions with major players in this business and major players who want to build the plants to convert coal-to-liquids. So, you are going to see us as a player going forward, we’re not ready to announce anything right now though.

Great. Thanks guys.

Thank you. And our next question comes from the line of Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen.

Hello Michael.

Hey, Mike.

First question, can you compare a little bit on the markets versus Central App versus Northern App and where you stand? Certainly in Northern App you are certainly very low cost, but in Central App can you characterize what might be happening with some of the competition, especially regarding some of the synfuel credit is going away and with Central App prices in their mid to upper 40's, would you expect to see some production pressures as they move into 2007?

Well, Mike, if you compare the two basins clearly we're dominant in Northern App, and we have -- we're so highly mechanized, the longwall mines are very productive. Our geology cost structure doesn't change that much, which is a real advantage for us. If we go to Central App, we still have some very good properties, but Central App is a tougher place to mine as you know. The geologic conditions there make a requisite for a higher cost structure. Now as that market drops down you see a real margin squeeze, and we think that a lot of players have entered temporarily in that Central App area chasing the spot market prices that we saw in the last couple of years. They have come in with very high cost structures. We've seen -- the weather has been against them, we've seen a bit of a surge in production in Central App to level it out, it stopped the decline. And we think there is going to be pressure for those high cost producers to shut back down. We predicted that, we thought it was going to happen. Our own mines have the cost structure of the geology we saw four or five years ago. But we are not going to run mines for practice. If we don't get the margins though, we'll even pull ourselves back in that area. But I think that we think mines that were receiving synfuel contracts kept them in business and as those contracts roll off, we are going to see them shut down. So, that's just the way we see it right now.

Mike, this is Bill Lyons. Also on that just one comment on what we talked about earlier about margins. We emphasize margins as opposed to looking in particularly at revenues or looking at costs, and that could be very [clearly] shown like in Central App. It's not unusual for our Central Appalachia mines to have a cost structure quite frankly it could be 50% higher than our Northern App mines. But depending on the market at any given time, we might drive higher margins on those mines. So, sometimes if we focus just on cost increases or the rest, we miss the real focus that what I say drives our economic engine, which is margins.

Appreciate that, my follow-up is relative to your comments about you have been shipping some coal out of Baltimore into the European market. Any sense, I assume your exports might be better than it was a year ago at this time and are you sensing some sort of strength in demand for your types of coals there, or is in it a sense trying to keep the market as tighter as possible with another outlook that you guys have to [inaudible] [typical].

Mike, two things have gone on. One is, we were more productive in the first two quarters than our plan showed, and we had some volume we wanted to move. It's a very -- it was a cold winter and now it's a very warm summer in Europe and we're seeing the kind of pricing that creates value for us. If you see a softening domestic market, clearly we are always the biggest exporter into Europe, and when we see our ability to move that through our own port facilities gives some real value to this company, as we see it strengthening in there clearly we are going to pick our margins and we will move it to where we get the highest margin. Now, if you look at the first two quarters that extra productivity, especially in the second quarter where we saw the price drop a little bit on the spot market, it's better to move it into that area clearly and get the highest margins than either to cut back on production or lower the price. So, we are not about to do that. Okay?

Yes. And one final question, could you just characterize a little bit on your views versus the first six months of this year on how CXG Gas -- CNX Gas has been performing in the outlook, and what your expectations for the outlook relative to where maybe gas pricing is in their strategy?

Well, I think their strategy is solid. They are very low cost producer, they are expanding, I think, at the proper rate. They are moving into Northern App, I think, in a big way and understanding that business very well. We are spending a lot of money on the sweet spot and we are building that pipeline. So, everything that we plan to do with that gas company is happening and going in place, the management team is focused. And we think that the glut of storage is a temporary thing. We think it’s weather driven. And you can see it in the price forecast going forward. Look at the script for '07, clearly very solid pricing and we plan to continue to expand in that business, especially with gas, that's right in the middle of the marketplace.

Appreciate your comments.

[All right].

Thanks. And we now have a question from the line of John Hill with Citigroup. Please go ahead.

Good morning, everyone.

Hi John.

Just a quick observation. It's very refreshing to hear a company talking about its productivity accomplishments as opposed to blaming those on external forces, and then also willing to take some leadership and step up to, even talk about the subject of capacity cutback should that be necessary, and setting an example for some others. So I think that's very refreshing to see.

Thank you.

Many of the -- most topical questions have been asked; but just curious, it seems like the utilities and the miners are sort of looking at the same market and seeing different things, almost talking past each other and not really having to agree right now. What are you seeing in terms of customer behavior and how do you think the contracting situation will resolve itself when we look out a couple of months, will be a softest spot or do you see some promise?

Well, clearly the weather has been in favor of the utilities in terms of the way they buy coal. Their stockpiles, we believe are about where they want them to be, in the average place. We also believe that they will come out and try to take advantage of the marketplace like any buyer would. I think but that's a short-term function, and if you broaden this thing and look at it, the utility capacity hasn't changed; the capacity to supply those utilities hasn't changed, so the fundamentals haven't changed. The weather has been in their favor in the short term. We see that as an anomaly, but as part of a cycle that we always see. We will not sell long-term coal contracts on spot prices. We will show the discipline to step back. Now in the short term, we have better productivity, or we want to move something, we will clearly move it to the Atlantic or we will do it on the short-term here, but we will not be in a long-term situation based on, because the fundamentals haven't changed.

Great answer, great answer. And then very briefly, are you seeing any signs of the met coal markets tightening up in response to the uptick in steel production that related obviously to very strong steel prices?

Well, we think that lags a little bit. We haven't seen the signs on the price of met coal yet, but we think that the coke will start to tighten up and then right behind it the met prices will. If you look at the domestic, it's 80 to $85 on our low-vol type coal. The export market has sustained itself at about 80, and we think, we expect prices to be good for the fiscal year 2007. So, we don't see any uptick, but we don't see any downtick. I think in the long run, we'll see some uptick, the steel companies are doing very well.

Great. Thank you very much.

Yeah.

Thanks. And we are now going to a question from the line of John Bridges with JP Morgan. Please go ahead.

Hello John.

Hi John.

Good morning, Brett, everybody. On the earnings, how much of insurance receipt got through to the bottom line?

Bottom line, we picked up about 25 million in total for the three months. And bottom line on that, that's probably 60% of that, John.

Okay, fine. Thanks for your commentary -- congratulations on getting into the S&P.

Yeah.

Thanks for your commentary on the market. I am just wondering, people look at the Btu's delivered prices and point to PRB being fantastically cheap etc, etc. And I am just wondering, particularly if the rails get their act together, to what extent PRB coal is substitutable for your coal? I suspect by the blending that is not all that substitutable. Could you comment on that?

Sure, I'd be glad to talk about that. We've given in our presentations before, John, to where we pick a plant on the Ohio River and show the effect of quality versus transportation to a plant from PRB versus a Pittsburgh 8 Seam, and we see the Powder River Basin at $15 pricing with transportation shows the value of a Shoemaker product into the same plant in the high 40s, pushing $50. So, we think the Btu arbitrage between the two is just a function of the transportation and the Btu adjustment. We think that there is some room to even have Btu convergence to where a high sulfur coal like Shoemaker can actually give a much higher value than it has in the last 15 years.

Yeah, I am just wondering given the need to blend actually how much physically can get into these things on any sort of short term basis without putting a lot of capital into the plants?

Well, they can't. I think there is a traditional market for each basin and it's not a matter of who is going to -- you know, one coal company is going to beat up the other coal company based on where it is coming from. I think all the coal is going to be sold into these plants because the capitalized infrastructure is in place. The question is who is going to have the highest margins based on location. These long hauls I think could play more to the railroad.

Okay, thanks a lot. Good luck guys.

Okay.

Thank you. And our next question then comes from the line of David Lipschitz with Merrill Lynch. Please go ahead.

Yes.

Hi David.

Hi David.

Question, now that the spot pricing has [technical difficulty] are you looking at maybe being a consolidator in Central App, [going to] that region rather than doing some organic growth?

David, that broke up, could you repeat that question please?

Sorry. I was just wondering with the spot prices coming down especially in Central App, would you look at yourselves to be maybe a consolidator in Central App, and expanding in that way rather than organically?

That's all a function of price. We see some opportunities. We said earlier in the year we thought there would be some opportunities for expansions. So at the right price, clearly, brownfield expansion, where you can pick up other people's productive capacities cheaper than green expansion, new money, and we will at the right price look at some of those opportunities. So, we are not ready to announce anything, but we are always looking at those kind of things.

David, we are going to -- we will review that very carefully, we are not going to just acquire to get bigger, you know, it's going to have to make sense to us, and it's going to have to be profitable to us.

Okay, and then a follow up on that. Where do you stand on the Enlow Fork expansion, in terms of, are we almost done with the permitting or how are we on the contract situation [with there].

We've done well on the land acquisitions, the permitting is in place, and the conversations with the customers are ongoing for long-term deals. And so, we are not ready to announce anything yet but that is in motion.

Are we still looking for like a 2010-2011 type of timeframe or -

Yes, we are.

Okay, thank you.

Thanks. And our next then comes from the line of David Gagliano with Credit Suisse. Please go ahead.

Great, thanks.

Hi David.

Hi. Just on the incremental commitments in the second quarter for the volumes for 2008, it looks to me based - just back into the numbers, it looks like you priced that [inaudible] around, 10 million tons around $36 a ton. And I am just wondering first of all, does that number sound right to you? Did I do my math correctly? And secondly, that sounds a little low to me, I am just wondering if there is any quality issues or any issues associated with the coal you committed or was that sort of just middle of the road thermal coal for you?

That has nothing to do with quality. What it had to do was contracts that we wrote, remember in ‘03 it was pretty tough and '04 we wrote some contracts that had bands on them, very high volume but they had bands on the contracting, well those bands were 15% on the upside so we picked up the 15% in '08. But it wasn't as high as where we see the market in '08, so we had to -- it averaged that price down. Those things that didn't have bands on were higher, actually we closed higher than where the market was. So that was just a big influence of [vintage] contract. But let me say about those, those contracts roll off at the end of ‘08 into a whole new market for '09. We set those contracts, you’ve heard us talk about layering in contracts; that was one that was layered into really jumped to the marketplace where these scrubbers get built in '09 and '10. So the good news is, we got a 15% increase in all that volume. The bad news is we could have got more, but it was -- they were [vintage] contracts that affected that price at that time.

This is Tom. About 75% of that '08, 10 million tons that you cited were in the [vintage] contracts, that rolled over at a price that was collared.

Right. And the -- that wasn't on the rollover piece was higher than expected. So the open market stuff is higher than what we had planned for '08.

Okay. Just a follow-on on that. Of the, I guess it's, I don't know 30 -- 30 million tons left to go for 2008, how much of that volume has the caps, basically the caps on the price on the upside?

About 7.5 million ton.

Okay. And are they capped at 15% up as well?

Yes. But they end in '08, I believe.

Okay. And - okay, and then just last follow-on question here is just wondering Q2 realized price, I am just wondering if you could break out the composition of the -- I think it was $1.47 sequential decline in the realized price. How much of that was due to mix versus sulfur credits versus spot sales versus anything else when compared to the first quarter?

That's a pretty - we'd have to go through and do an analysis, more thorough analysis on that, David. If I would guess, probably the biggest part of that was the allowances that had the impact there when you -

I think quarter-to-quarter, there is about $9 million just on the allowance piece, and the rest of it is mix. The met, we built some inventory on the met side. So, we'd have to give you some numbers if you want to call us Tom can give that to you later.

Okay, no problem. Thanks.

Thanks.

Thank you. And we have a question now from the line of Pearce Hammond with Simmons & Company. Please go ahead.

Good morning, Pearce.

Good morning. Can you give an update on the labor contract and how negotiations, if they have started, or how they are proceeding and kind of what your outlook is there?

Pearce, this is Brett speaking. I think that because of where we are at time-wise with that contract, it would be more prudent for us just not to make any comment on.

Okay. And I know in the quarter you’d had a problem with one of your customers, Allegheny plant, is that problem resolved or, you know, any outlook there?

We are not aware of a problem with Allegheny in the quarter. Can you give me any specifics?

Well, I can talk to you offline.

Okay.

And then the, the last area is as you look at CNX Gas, any updates on possibly spinning that off to shareholders or sort of the strategic holding on to CNX Gas?

Well, we are content to maintain our ownership position in gas while that company continues to mature, and follow the direction that we set out when they went public. So, I think that is where it's at, at the Board level as well as the management level.

All right, thank you very much, Brett.

Okay, thank you.

Thanks. And we have a question then from the line of Scott Hanold with RBC. Please go ahead.

Good morning.

Good morning, Scott.

Hey, guys, I am going to apologize first if this has been asked but my line got cut off, so I missed a fair amount of the question-and-answer, but I am going to ask it anyway. In Central Appalachia, you indicated that you have had some geological challenge, can you just sort of give some color on what you expect if prices remain soft in the second half of the year? Do you anticipate there will be some production that is curtailed, I guess, or stopped? And can you sort of quantify that from your perspective, how much it would impact your mines versus the general Central App market?

Okay, when I talked about Central App's higher geologic cost, I was talking about the entire basin versus Northern App. Now, when you get specific to CONSOL Energy, we clearly have a higher cost structure in Central App than we do in Northern App. But if you compare it to other cost structures in Central App, we have some of the better properties. But as spot prices decline, you are going to see a squeeze in Central App. So, margins will squeeze across all Central App coals. We have some of the better positions. But, if it squeezes far enough, I think, we are going to see people, high cost producers that came in lately, Johnny come latelys in that market with very high cost structures, they will get in financial trouble very quickly. If it gets too tight, we will even cut back ourselves, but I think we are farther down the food chain. You are going to see some real adjustments in the cycle of people with high costs. It is not sustainable at the prices they have dropped to. There is a whole new level, whole new plateau of cost structure in Central App and it is not sustainable at these dropping spot prices.

Would you be willing to sort of give us an idea of the sort of the range on where your highest cost [cap mines] are?

You mean, CONSOL's mines themselves?

Yeah, that's right.

I don't think we split them out mine-by-mine, but I can tell you we have some of the better cost mines in the area. And if you look at it, Buchanan is probably the lowest cost mine in the entire region.

Definitely.

So, yeah -- we don't split them out mine-by-mine, but what I am saying is there is going to be a shakedown based on those spot prices, and we will show the discipline if it gets to our cost but we are down the food chain for many others.

And also, Pearce, is what we talked about before, we are driven by margins, so it depends on what the market is, and depend on, what I talked about before is demand for the product and if we can make great margins we can open up some higher cost mines. So, cost is important in terms of the long-term view of the market. But as we look to things on a short-term, we are driven totally by margins.

A good example of that is, is a mine that say has an average cost of 42 to $45 in Central App, if it has a $10 margin we are fine with it, versus the Northern App mine that has a cost structure in the low 30s or even in the 20s, if it has a $10 margin we are fine with that too. So it's just a matter of where the market is and what are our margins are. Okay.

Okay. Fair enough. And hopefully the market will improve itself then, we just saw [there a] withdrawal of 7 bcf in the start this week, so hopefully the coal market will improve here.

I think we'll see that. This hot weather certainly changes people's attitude, doesn't it?

It does. Thank you.

Okay.

Thank. And we have a question now from the line of Mark Reichman with A.G. Edwards. Please go ahead.

Well, thank you. My question has been asked and answered. Thanks.

Great. Thanks.

Thank you.

We have a question now from the line of David Khani with Friedman, Billings, Ramsey. Please go ahead.

Yeah. Hi guys.

Hi, David.

How much of volume did you ship into Europe in the second quarter?

I believe it was -- I think, 800,000 tons were sold and not all of it is shipped yet, but it was sold.

And what do you think you will end up doing for the year?

For the rest of the year, let me think about that, I'm thinking about next year, but for this year I think it will be about 3 million tons, 3 to 3.5 million tons.

3 to 3.5. And remind us all on what capacity you have on that Baltimore terminal?

That terminal can go up to 12 million tons. If we really pushed it, it would be 17 million tons. But right now its capacity capitalizes is 12, we would have to add people to go to 17.

But definitely capacity is not an issue there.

Yeah.

It's really more of the demand, right?

That's right. We are picking the margins between the European market and the domestic market. And we believe the margins will strengthen as the scrubbers get built on the domestic market over time.

Also could you remind us how much met you have available next year to be repriced?

How much met?

Yeah.

I'm trying to think in my mind between the long-term contracts and what's open. It's about 1.4 million tons.

1.4 million tons, okay, and great. And then could you also give us a sense, what do you think inventory levels are currently, or I guess, at the end of June? And then also what do you think this hot weather is doing to the level of inventories? Do you think, is inventories you think still building in the summer here in this weather or you think they are actually starting to decline?

What I believe is, in June it got to normal for what the utility wanted. And it's been declining in July, and we think it will decline through August and maybe into September. It all depends on how long this hot weather stays in. They are burning pretty heavy right now.

Okay, great. And then last, just could you give us a sense of what are you doing for this R&D effort on the mercury side and what kind of plans are you targeting at this [multiple speakers]?

David, we will have an announcement out later today about it is basically, a DOE funded project in which we are going target a number of smaller units, so less than 400 megawatts that might not scrub for sulfur, as you know S02 scrubbers are -- also remove mercury. There are about 317 of these units out there, and we will be trying to prove up a technology. It will in effect scrub for mercury, it will get sulfur removal as well from that technology. But it's basically a mercury removal technology that we're trying to prove up. And again the risk is that with mercury, some of these smaller units may shut down if they don't have a cost affective way to get mercury and we think that's what we are going to show is that, there is technology there that will allow those plants to run.

And what do you think the percentage of mercury removal and percentage of sulfur will be removed from this process, what's the goal, I guess?

Up to 90%.

Okay. That's --

I mean, it's a significant technology if it proves up.

When does this -- when would you know if this thing would work? How far out into the future?

Well, I suspect it will run several years, but I don't know. Again, it's kind of up to DOE to fund it.

Okay. So this is more of a, we will really know in maybe in 2008?

We are not the only player in there. We have a utility in there with us. So there will be some funding to get it there, Dave.

Okay. Great. Thanks.

Thank you. And our next question then comes from the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Thanks. I was just wondering, have these weaker coal markets had any change in your plans on the coal CapEx for the next one or two years. I didn't see any updates in the earnings release, but do you have any comments on that?

Well, I have always said, we will adjust our CapEx spending based on where we see the markets. If the coal prices stay soft and we have to tighten things up for '07, before the surge in scrubbers we will certainly do that. We are trying to balance that out with what we see the demand as the scrubbers come on. I can say to you right now, we are very flexible and we can turn that capital off and on based on where we see the expanding markets. I don't think we have anything to announce now, but I just wanted to stress the flexibility with you that if the markets stay flat for '07, we will change the way we are doing things for '07.

And I guess on a related note, have you seen any kind of easing of the delivery times for key pieces of underground mining equipment from some of your suppliers?

Yeah, we are seeing a bit of an advantage coming back to the buyer. It's down to about six months now, where it was a year before on some of these deliveries. The other thing that we are seeing, big players like CONSOL on the underground business, have a lot of leverage with other suppliers. We sent signals to them that the capital costs are rising too fast and we are moving into some longer rebuild modes to send the signal that we are not going to tolerate these rising prices as fast as they are going.

Well, just a follow-up maybe, those lead times were a year six moths ago and now they are..

They are cut in half, yeah.

It has been cut in half. Well, so six months from now is it going to be just no time at all for lead times, or -

I don't -- no, I don't think that will be the case. I think you are seeing the capacity of the people to build new machineries -- remember there is a lot of wearing pieces, especially the underground mining business. So, I think you are seeing a balance here. Six months is probably where we expect it to be and I think it will hold there with pretty high volumes for a while.

Okay, very good. Thanks.

Yeah.

[OPERATOR INSTRUCTIONS]. And we do have a follow-up from Dave Gagliano with Credit Suisse, please go ahead.

Hi, sorry, I just wanted to just come back to these price caps again. On 2007 volumes, I think you have 26 million tons left to price or thereabouts, how much of that is capped and what are the terms of those caps as well?

For '07?

Yeah.

Dave, I don't --

I don't think we have that right at the tip here.

We will have to check.

Okay. Okay.

Give us a call on that. We will let you know.

Okay, great. And on a somewhat related question, in terms of the current market dynamics, is there a level here where, obviously some prices have softened; is there a level here where you just walk away and just don't commit any incremental tons? That is a tough question to answer, I realize, but I am just trying to frame it a bit.

I don't think it is that tough, we are pretty focused on margins. We will walk away from business, because we are not doing this for practice, we have to attract capital for our shareholders and we are not going to let the short-term market dictate what we need to do in the long run.

Okay, fair enough.

You look at our history, we have taken mines completely out of the business just to reflect the market in the long run.

Okay, good. Thanks.

Thank you. [OPERATOR INSTRUCTIONS]. And at this time I am showing no further questions in queue.

Okay.

All right, operator. Well, thank you very much everyone for joining us this morning, and Chuck Mazur and I will be available throughout the day for additional follow-ups. And operator, if you would give our listeners the replay information.

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