CNX Resources Corp (CNX) 2006 Q3 法說會逐字稿

Welcome to the CONSOL Energy's third-quarter earnings conference call. As a reminder, today's call is being recorded. I would now like to turn the conference over to the Vice President of External Affairs, Tom Hoffman. Please go ahead, sir.

Good morning, everyone. With me this morning are Brett Harvey, our President and Chief Executive Officer, and Bill Lyons, Executive Vice President and Chief Financial Officer. We're going to be discussing our third quarter 2006 results, as well as looking ahead to -- through the remainder of the year and into next year.

Forward-looking statements in our discussion should be evaluated against the business risks that we have enumerated in the earnings release that we have out today at 7:30, and the business risks that we have included in our 10-Q filing of August 3, 2006.

We're going to begin this morning with Bill Lyons.

Thank you, Tom. For the quarter just ended, CONSOL Energy reported net income of $51 million, or $0.27 per diluted share, compared with 377 million, or $2.02 per diluted share. The substantial difference period-to-period is primarily due to the recognition last year of an after-tax gain of 323 million, or $1.75 per diluted share, from the sale of 18.5% of CNX Gas to the public.

Through the first nine months our net income was 281 million, or $1.51 per diluted share, compared with 493 million, or $2.67 per diluted share. Again, the convergence in the period-to-period comparison reflects the Gas sale in 2005.

Net cash from operating activities was 90 million, compared with 33 million for the third quarter of last year, and for the first nine months was $439 million, compared with $190 million for the same period in 2005.

EBITDA for the quarter was 139 million compared with 453 million for the third quarter of 2005. Again, the substantial disparity in results period-to-period reflects the impact in 2005 of the sale of a portion of our Gas business. For the first nine months, EBITDA was 629 million, compared with 736 million in 2005.

This quarter, while not meeting our expectations, had a number of positive factors. We continued to ratchet up our average realized prices for both coal and gas. Period-to-period, average coal prices were up nearly 10% and gas prices were up nearly 12%.

We were able to execute another long-term coal sales agreement with a major coal burn utility that is in the process of installing scrubbers on their plants. As a result of our expanded drilling program, our gas unit continues to grow both its volumes and earnings. Co-operating margins improved, being up over 4%.

On the financial side of the business, both S&P and Moody's raised our ratings. Our overall financial flexibility remains strong. With nearly $700 million of total liquidity, we are able to [remain] disciplined in soft market periods, while having -- still having the ability to take advantage of opportunities. And finally, we continue to raise returns to shareholders through our share repurchasing activity.

Excluding the benefit of the gas sale in 2005, earnings for the 2005 and 2006 third quarters were almost the same. Although prices were considerably higher in the third quarter of 2006, earnings remained flat period-to-period for several key reasons.

Coal production was down 9% period-to-period, resulting in less coal to sell, and hence, lower revenues, despite higher prices. Unit production costs were up. Part of the reason for the increase was that we had fewer tons over which to spread fixed costs. But also, contract mining fees, production taxes, subsidence costs and supply costs all increased in the period-to-period comparison.

And we recorded a $22 million pension settlement charge in the third quarter. This adjustment had no impact on cash, but increased our third-quarter per-ton costs by $1.25 per ton. This adjustment is a result of one of the many complex accounting rules related to pension accounting. It is formula-driven and basically requires that when lump sum distributions from pension plans exceed the total of the service cost and the interest cost for the plan year, a company must recognize an adjustment to pension costs equaling the unrecognized actuarial loss resulting from each individual who received a lump sum in that year. We did disclose the possibility of this charge in our risk factors delineated in our annual Form 10-K filing.

As we said in the earnings announcement this morning, we expect to hit our original production targets in the fourth quarter. In addition, based on our current shipping schedule, we expect to have a drawdown of inventories during the fourth quarter, which will result in a return to more normal levels of mine inventories by year end. We expect to have a good fourth quarter.

Finally, let me make a few comments about the market. As we noted last quarter, we are not uneasy about the current market conditions for coal.

First, we believe that as we move into the second half of 2007, we will begin to see the market impacts of the scrubber installations underway at many utilities. For CONSOL, this represents a considerable expansion of market opportunity.

Second, as you have noted from our guidance, we are sold out for the remainder of this year, and have about 5/6 of the anticipated production sold and priced for next year. Now, in addition to the 57.3 million tons, we show in our guidance as being priced and committed for 2007, we also have 3 million tons committed in price, but for which we are waiting for contracts to be signed. We estimate that the average realized price for those tons will be more than $41.50 per ton. And we have another 1.7 million tons committed that will be repriced under contracts with a price cap. We estimate that the average realized price for those 1.7 million tons will be more than $43 per ton. In total, that will give us 62 million tons sold for 2007, making 90% of our production committed for next year.

Third, we have the flexibility from a sales standpoint to balance domestic steam markets with sales to international markets through our terminal at Baltimore. Because we own the terminal, our transaction costs for shipping are lower, making such international transactions more attractive to us.

And finally, our financial flexibility will allow us to continue our production discipline. As Brett noted in the earnings release this morning, we have idled high-cost production, and we are not afraid to take advantage of or take additional action in this area, if that is what the market dictates.

We are encouraged by the strength of the term market. As we noted in the earnings announcement this morning, we believe coal buyers who are interested in longer-term deals will assign value to intangibles such as stability of supply, the flexibility of multiple sourcing, and the reliability of delivery.

As we have said many times, our reserves and mines have a strategic logistical advantage because of their location. And we are turning that advantage into better pricing and margins. However, we do recognize that energy markets are dynamic and can't be navigated on autopilot. They require active management.

We are well-positioned to continue our strong financial performance and take advantage of growth opportunities. We remain very optimistic regarding CONSOL Energy's ability to increase value for our shareholders over the coming year.

Brett, your observations of the quarter and industry conditions.

Thank you, Bill. It's good to be with the shareholders and analysts today on this call. Let me cover three things. I'd like to cover safety, production, and where I see the market at this point in time.

Clearly, safety is a driver, us being the largest underground mining operation in the United States. And safety has been in the press because of other incidents in the U.S. this year.

We have always led safety. We continue to lower our numbers. We see a 10% decrease in our incident rate this year and a 20% decrease last year. We lead the industry on underground mines by 40% as an average. And it is a key driver in terms of productivity as well. So, it's at the top of our thoughts all of the time, and it's very important to us that we continue on the road to zero accidents for our employees.

Second, let's talk about production. I'll start with the third quarter. Clearly, the costs were affected by the volume. This is a volume-sensitive business. And when the volume drops below our expectations, clearly, we have to spread our fixed costs over less tons, which drives the costs up.

Let me tell you that that cost -- this was an anomaly for the third quarter, and it was based on volume. We did have the adjustment on the pension plan. But if you look at the rest of it, it was volume-oriented. If we would have mined the tons that we expected, we would have been at the rate of cost increase that we expected for the entire year.

Having said that, we've solved these problems. We had three or four mines come out of vacation that had some problems, geologic, as well as some roof falls. We have cleaned those up, we've moved forward, and the fourth quarter looks pretty strong at this point in time.

The fundamentals of the industry are solid. Capacity matches the average load to the utilities. Demand is down for coal right now, so it really is a demand-driven market at this point in time. We think when demand rebounds, capacity will be tight, because the capitalization in the industry does not match the maximum load of the utilities at this point in time.

Let's talk about market. The buyers are spending capital on scrubbers. By 2012, three times CONSOL's current production will be in the marketplace for us to take our coal into that marketplace. The value assigned to reserves and long-term contracts are now starting to come together. Term and spot prices are decoupling, especially when it comes to our reserves and our high-BTU coal. Contracts are being signed by us at prices that we believe is the new market, based on the building of the scrubbers.

Now let's talk about discipline a little bit. Disciplined production really is how we handle our margins as we see the market going forward. Active mines that do not make margin -- make acceptable margins will be idled, and you've seen some examples of that in our announcements this year.

The market signals the need for volume, not the production capacity of CONSOL Energy. No new capacity will come online without contracts, even though we have a very strong reserve base. New capital for next year -- we will be below our $3 per ton maintenance production. We will watch the capital very close as we see this soft market, and we will only put projects in place that we have approved or that will improve our margins going forward. We'll give you more detail as we talk about that at the end of the year -- excuse me, the first of next year and January.

Let me drive one thing home to you. On the gas side as well as the coal side, we are the low-cost producer on a BTU basis in our region. We drive the highest margins in any marketplace, and both businesses are well set up to expand if the market demands so. I think in the short term, as we see softness in the energy markets, whether it's gas price or coal price, I think moving to CONSOL is a flight to quality. And we think in any marketplace we will have the highest margins.

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

(OPERATOR INSTRUCTIONS). Michael Dudas, Bear Stearns.

Brett, your folks should be commended on the safety record. First question. Brett, share with us a little bit about what you're seeing in the Central Appalachian market on the dynamics. We've all been pretty closely following about marginal costs, especially for continuous minor operations. Are you starting to see a little bit more stress in the fragile market there?

We are. Actually, the drop in the spot price -- which Central App tends to be more spot-oriented than Northern App -- the drop in the spot price, we see that as something where the marginal producers, the ones with the highest costs, are dropping off. They're running for cash and even losing cash in some cases. We see the spot price between 45 and $47, that's substantially down from last year, as we all know. That's not sustainable in the long run. We think the price has to rebound in Central App. The question is when. It's a demand-driven issue.

You talked in the press release about the term versus spot market in your Northern App market. How much has that changed over the past two, three years? Do you expect it to continue to widen? Will there be a much more steeper contango in the market that we're seeing in spot? And I guess that also -- if the spot prices in your markets were to firm, would that put, you think, more pressure on term pricing, again, given the lack of capitalization in the (inaudible)?

As I said earlier, we see a decoupling related to the spot market and the longer-term contracts. We sell about 5% into the spot market ever year of our total production. But what we're seeing, though, is -- in the old days, the utilities used to try to drive one or two or three-year contracts based on where the spot market was at your negotiation. What we're seeing is negotiations for five, 10, 15, 20-year contracts that are related to where both companies see the marketplace based on our ability to produce volumes of coal that match their capital investment on these scrubbers. So, that's the decoupling I'm talking about. And I see some real strength in that for those who have long-term reserves to match their capital investments.

Also, the fact that we're in much stronger financial shape right now, it allows us to put some more discipline in than we had before. So, as Brett mentioned, we are able to cut back on production if we need to, where quite frankly, three or four years ago, that just wasn't the case.

We won't allow spot price to drive our long-term deals.

Two quick follow-ups. First, you mentioned briefly the export market. How have those dynamics changed? Is the demand for some of those -- some of your qualities of coal better than you would have thought six, nine months ago? And because of your Baltimore exposure, are some of the deals at the margin more attractive than some of the customers you've been talking about trying to put away coal for the next year or so?

What we've actually seen this year is if you look at the last quarter, we moved about 650,000 tons of steam coal into the marketplace at higher prices than the spot market, especially when you look at the excise tax advantage, as well as the advantage we have of moving it through our port. So, if you look at those two things combined, that's probably 2 or $3 a ton higher than the market that we see today. We -- our export in North America on the met side is about 43%, 2.3 million tons, and North America it's probably 3 million tons on the met side.

My final question is, relative to -- if we start to see some drop-off in production in Central App, that should loosen up the labor market, I would think, and help productivity. How are -- could you give a comment about where we stand relative to your negotiations with UMWA coming into the end of the year?

I think it would be remiss of me to spend much time on the United Mine Worker contract. We are in negotiation, in continuing negotiation. We believe we can get a contract together, but that's as much as I would like to say about it right now.

David Khani, Friedman Billings Ramsey.

Could you -- it looks like the pace on which you're spending capital spending for the first nine months, and kind of the -- directionally you're talking that '07 will be down, could you give us a sense, maybe just at a minimum this year, what you think you'll spend in capital spending? It will help us for modeling purposes for next year.

If you look at where we were for the year, we do have some delays this year. And it's really based on we saw in the second quarter that things were going to start slowing down. So, we started slowing some of our projects to match our cash flows and so forth, to see that we would continue to be very healthy cash-wise. So, we've delayed some projects. I believe that we will probably be about 100 million tons less -- excuse me -- $100 million less this year on our capital spending than we predicted.

Also, keep in mind that in our capital expenditures, we do have our gas business there. And gas has an accelerated drilling program, which again, has been translated into increased earnings. But they're probably up at least $50 million year-over-year after nine months and, like I said, probably about 117, $120 million of our capital expenditures through nine months.

But as they reported yesterday, they're going to be $15 million less on their capital spending, and they're keeping their production flat. So, I think -- is -- of that $100 million less, is 15 million of that the gas and 85 million of coal, or is 100 million all coal?

The 100 million is the net number.

Great. Could you give us a sense -- I know you're not a big met producer in general, but could you give a sense of what you're seeing in the marketplace today on the met side?

I think if you look at where we're at, we see -- we have everything sold on the met side, except for about 1 million tons to be repriced. And we think the market is very good, and that it's going to hold at about 75 -- $75 a ton at the mine.

Okay. And then last, on the operational issues for the third quarter -- which you basically talked about that's pretty much behind you -- could you give us a sense of which mines, and when were these issues resolved? Was it literally September that they've started running, or is there going to be any lingering impact at all in fourth quarter?

You have to realize that we do have a mix of mines. So, when you take a look at the pluses and minus, remember we idled Shoemaker in the third quarter. And if you're comparing this quarter to the (multiple speakers) third quarter this year to third quarter last year, that's 600,000 tons.

Same thing with VP8. We ceased operations in April 2006; that's another 200,000 tons. So again, when you take a look sometimes at the mix of the mines, I don't know that there was so much operational issues specifically in certain mines that causes a problem -- it's just being overall down in tons. Offsetting that somewhat, as you're aware -- like Buchanan. Buchanan didn't operate a full three-month period in 2005 because of the incidents there, and we are improved almost 700,000 tons when you take a look at the 2006 quarter to the 2005 quarter. We believe the mines are operating well, and particularly in the month of October. And we expect to have normal operations in the fourth quarter.

But for the third quarter, I would say the ones that probably -- that weren't planned to be shutdown, clearly, we were showing some restraint. The ones where we wanted to mine is clear -- like Enlow Fork had a big roof fall; we cleaned that up; we lost a few hundred thousand tons there. Mine 84 went through one of their tougher geology areas, and slowed them down next to budget what we wanted to do there. But we've gone through both of those and we are on our way in October.

I just wanted to kind of put in perspective that this wasn't a big mine fire; this is sort of normal (multiple speakers)

There's no issues at all in terms of that are not normal. You always have swings and roundabouts, and that's what it was basically in this quarter, except for, like I said, the idling of Shoemaker and we did have the depletion of VP8.

One last question on sort of stock buyback. Could you give us a sense of -- I know you have almost 60% left on your buyback -- how you're thinking about buying back your stock, at what point? Is it just being opportunistic? Is it more of a program approach? Give us a sense of what you're thinking there.

It's -- actually we are in a position to where it's more opportunistic. We're trying to look at the market and when the right time to enter the marketplace is. And we're also trying to match it to what our strategic issues are internally. So, if you look at those issues, we are on the track where we think we should be.

In fact, when we announced $300 million share buyback over 24 months, if you straight-line that after nine months, we're almost exactly there on the straight-line basis. In the third quarter we bought back about 965,000 shares; average price was about $34 a share.

Jim Rollyson, Raymond James.

You signed an awful lot of coal up; I think, 230 million tons on term contracts throughout this year. And I guess if you read through the press release today and the last one, it's somewhere in the 9 to $10 billion range, which I guess gets you a kind of low $40 implied price for that on average. Can you talk to kind of what the average quality of the coal -- you've mentioned high-Btu -- but, in terms of sulfur content, number one? And then maybe also, as it relates to these things being longer-term contracts, and obviously at -- just kind of a pricing mechanism. So, if costs scale up over time, which I guess you expect in general, what kind of protection you have in terms of being able to pass that through?

Here's the kind of contracts we've been signing up. In terms of statistics, we're looking at 13,000 BTU at about 3.4% are sulfur, or 12,400 BTU at about 6% sulfur. That's the kind of contracts we've signed up. So, we consider that baseload very high-Btu coal. A lot of it on the river.

Now, in terms of how these contracts work, the contracts -- they're all different with any given utility. But our intention is for the utility to run at 100% and our mines to run at 100%, and have the kind of margins we expect to have in the mining business. We see rising costs, and so we have reopeners of about a third on some of the contracts about every year. So, it rolls over into whatever the marketplace is at that point in time. We think that mechanism creates a situation where we keep our margins and the utilities, and the coal company doesn't have a divergence of philosophy and end up being one loses to the other. We would rather get back to back and take it out of the marketplace. That's the way these contracts are being written now.

So, you're effectively locking in margin as opposed to price?

Basically, yes.

Just as a follow-up, your forward production guidance -- and the numbers going to '07, '08, '09 and so on -- all remain the same from last quarter. Yet you obviously shutdown a couple mines in the Central App. Should we assume that you're making up the difference elsewhere? And kind of added onto that, you also mentioned that the costs you're shutting down are higher-cost mines. Do you think that will also help your blended costs as well?

We do shutdown the higher-cost mines. Our blended costs should be helped by that. But in terms of update for '07, '08 and '09, we only adjust that at the end of the year one time. So, you'll see those adjustments as we come out with our end-of-the-year forecast.

David Gagliano, Credit Suisse.

First question is if we could just focus then on the met, the mix between met and thermal. Can you just break down the mix between met and thermal for the commitments you made in the third quarter, and also for the remaining volumes that are out there for 2007 through 2009?

For 2007, I think we have about 900,000 tons that are unpriced. All the coal is sold for 2007. And so, we will be repricing about 900,000 tons for '07.

You're asking about the mix of the incremental tons that we booked during the quarter just ended?

I was actually asking both. So, that was -- Brett's answer was part of it. And then I was asking about the mix for Q3. But also, if we could get some insight into '08 and '09 as well.

For instance, there is a mix -- at that 41.79 that we show for '08, there is a mix of met and steam. No, excuse me; there is no met in that. So, that's more a mix of all steam. And then in '09 what we show is really the scrubber market. There's no met at all in '09.

Great. Were there any met tons priced for the third quarter?

I think 650,000 tons (multiple speakers) were priced into that for the third quarter.

Okay. Was that for 2007?

Yes.

Perfect. The second question, just following up on the share repurchase program, you mentioned you bought back 3.5 million shares during the year and 965,000 shares during the last quarter. Yet when I look at actual shares outstanding, they only went down for the year by 1.6 million, and they were basically unchanged in the most recent quarter. Does that imply that a lot of the share buyback so far has gone towards options, or is there something else there? How should I think about that moving forward?

Unless you're talking about the difference between primary shares and fully diluted shares, David. Is that what you're talking about?

I'm actually just looking at the change in basic shares outstanding every quarter.

The only thing that we'd change there would be any type of restricted stock units issued, or any stock options that were exercised. That's the only transaction that's occurred there.

So, it looks the stock options that were exercised basically offset the buyback thus far. Is that --?

I need to check those numbers out, but that would be the only transactions that occurred there. There was no additional shares issued. And again, I'm talking about on the -- any open market transactions.

John Hill, Citigroup.

Thank you for a very detailed call, and also for the leadership in the marketplace. Just following up on a theme you discussed earlier having to do with a potential shakeout in the Central Apps as shorter-term deals roll over for private operators, how much tonnage do you think is potentially at risk between year-end and, let's, say April/May '07 in the Central App, or maybe if you have in the Northern App as well?

You're talking about tons of production?

Yes, for the industry.

I see. I'm just going to give you a number what I think. Now, this is basically -- I would say it's about 30 million tons that are really on the edge in Central App. If you look at Northern App, and up in the Indiana, PA area, I would say there's probably 5 to 6 million tons.

Great. Next question would be -- just looking at the fourth-quarter guidance that you've given, it looks certainly achievable, a little bit aggressive. That 17 to 18 million tons is just the production, and then you'd mentioned inventory drawdown on top of that.

That's right. We intend to drawdown inventory and produce that coal. We have it sold; it's a matter of getting it out the door. And right now, the railroads are doing very well for us.

Can you give us an estimate on what the magnitude of that draw might be? Is it a material number, or is it small?

I think it might draw down -- we plan to draw down about 1.1 million tons.

We expect to be under 2 million tons by the end of the year.

Last one. Just, I know, a question that you've fielded many, many times in recent weeks and in the last few years. But just on the scrubbers, obviously, there was talk on other earnings conference calls about some of the stretch -- scheduled stretchouts mostly into out years as opposed to in the near-term. I know you guys have your views. Any thoughts you'd care to share with us on that kind of commentary that's been out there?

I guess my response to that is we see the scrubbers being built. We're negotiating these huge contracts with the utilities that are building them. The scrubber build is far beyond the capacity of CONSOL Energy at this point in time. And we believe that the marketplaces will open up for new coal and new capital. And our reserve base is set up to match that.

I don't think there's any real winners or losers other than CONSOL in this case. We'll be able to get into marketplaces we haven't been before. The debate between who wins and who loses is really based on the low-cost delivered BTUs to any given plant. So, if you look at the announcements of Florida Energy's CEO, as well as Shaw Energy -- Shaw Group's CEO, they're building scrubbers; they are very bullish on the short term as well as the long term. So, I would say this is all in place. There are some swings in terms of timing, and -- but this is where the utilities are headed. And it's a very strong platform for us to expand our marketplace.

Great answer. Thank you.

John Bridges, J.P. Morgan.

A quick one for Bill. I see the accounts have changed in previous periods. Was there any major driver for that?

What do you mean the accounts have changed?

The adjustments, rearrangements.

You'd have to -- I don't know what --

I'll come back to you after that one. Brett, with respect to the pullback in tonnage at the mines. I'm just wondering to what extent this is related to protecting current margins, and to what extent it's a reflection of the need to improve margins to support new investment.

Well, clearly, we want to protect current margins. When you see a downturn in the marketplace, anything that is spot market, you want to protect those margins. And you don't want your average spot market price to drop and, therefore, chip away at your margins.

The other thing, too, is -- I think we're letting -- with the cost structures that we see in the entire coal industry, of which we have the best position, there is pressure on the cost side. And the prices have to support these margins, otherwise there will be no capital investment in this business, like there hasn't been for many years. Speculative capital investment, we think, at this point in time is really a mistake in the marketplace. I don't know if that answers your question, but we're not -- it is a fine line between whether we're protecting margins or trying to justify an expansion. And that's part of the strategy, is we have to hold our spot. This isn't like 2001, 2002, 2003, where we had to move this coal just for cash. Stay alive. This is a different marketplace than it was before.

I'm trying to get to the sort of right sort of margins to put into these things going forward. Because if you're able to contract the Enlow extension, then it sounds as if you would go ahead at these price levels.

The Enlow extension -- we do plan to open that up and make it go. We haven't been able to come together on what the market believes that they should be buying that coal versus what the margins we want for it. And we will actually delay that project if it does not come to where we want it to go. The permitting is underway, but we're not going to spend big capital until we have somebody signed up. But we are in negotiations still on those. So, it isn't like it's a dead issue; it's just if the market stays flat, we'll just push it out.

So, is the market looking for lower margins than you're getting at the moment, or are you looking for better ones?

I think the market -- when the market gets soft, the spot market, customers try to drive long-term deals off of that. And there is a decoupling, and we're making sure that they understand there is a decoupling, especially on new capital.

Pearce Hammond, Simmons & Company.

On the acquisition side, Brett, you've spoken, or made no secret in the past that you're potentially interested in doing something there. Has anything sort of piqued your interest, given what's going on in the marketplace right now? Do you see any opportunities or anything you want to refresh the investor base with?

We think the softening in the short-term market is going to create some opportunities, maybe not for acquisition of entire companies, but acquisition of pieces of companies. And we've tried to keep our balance sheet in a position where we can be opportunistic and surgical about what we want, to bring in the kind of margins we are used to with our Northern App production.

Would that be specific? Like, would you have more interest in met versus steam or, say, Appalachia or underground versus surface, or that level of detail?

I guess I would put it this way -- clearly, where we see the highest margins, that's where we'll drive. And met looks real good right now. We would be interested in some of that if it has the right reserve base.

Next question is related to CNX Gas. Any change or any updates on when you might make a move with the remainder of the Company?

Repeat that again.

On CNX Gas, any update on your position that you hold in CNX Gas, as far as what you might do with (multiple speakers) piece?

There's no change. We plan to grow that company, we are enthused about it, and we haven't changed our policy on that.

My last question is, if we do see a change in the power structure in Washington following this election, any sense of -- would there be any change to sort of coal regulations, or a little more business as usual? What's your expectation there at CONSOL?

I would say a change in administration would probably -- would probably be pretty benign. We'd probably see some new regs, but we believe that the electricity market certainly needs the fuel, and any given administration certainly needs to encourage technology, as well as the use of coal for energy security in this nation.

So, you don't see any significant changes if you see a change in power in Washington?

No. I think we'll lead the way, either in technology or safety. I think that's the way we look at it. Coal is a basic need for society, no matter who is in charge.

How do you see CO2?

CO2 is an issue that will be dealt with. But still, the fundamentals of what this country needs in terms of energy, I think that's going to be a technology-driven thing, of which there is no one answer to it. And I believe that the technology will drive it. And it will be driven by the people with the reserves, because coal will be used either way. So CO2, there is technologies out there to deal with it. The other thing is the gas company. We talked about the gas company. Clearly, if we're capturing 22-to-1 by weight with methane, the gas company becomes more valuable to us after the CO2 regulations.

[Ben Gambill], Trafelet Delta Funds.

Brett, could you talk about, just given your high-digit cost of equity capital and mid single-digit cost of debt capital, what steps you are taking to reduce that overall cost of capital?

What we're looking at -- and we've had discussions, I know, with you before in the past -- larger positions in share buybacks is one thing we're looking at; clearly, acquisitions, those kind of things that change our capital structure. We don't think we're at the optimum capital structure now, and over time that will change based on the direction we decide to go.

David Lipschitz, Merrill Lynch.

On the Enlow Fork expansion, is there any type of baseload that you'd want before you would start to bring it into construction?

Yes. We would want at least 3.5 to 4 million tons of baseload before we will bring it back. So, that's about 50 to 60%, at the kind of margins where we see, and that would probably take commitments of two major customers; maybe one, depending on where it goes.

Where in the permitting process -- how much longer do you have in the permitting process before it's totally permitted?

I would say -- as we announced when it opened up, I would say we are 1.5 -- excuse me -- one to one and a half years before we have the permit in hand. Keep in mind, once we get the permit in hand, we will not open that mine. We've had mines that we had permits on the shelf for 10 years. So, we'll open it when the customers step up and say they really want the coal.

So, it's a not one to one and a half years from today; it's from when you announce the agreement (multiple speakers)

It's from today.

From today? Okay. And then how long after -- let's say you decided to go forward with the construction. How long would it take you to bring up?

It would probably be three years.

Ian Synnott, Natexis Bleichroeder.

Just a follow-up question on the accelerated pension charge, and how we should be thinking about that kind of on an ongoing basis. I know you said it may be somewhat lumpy when we see that, but is that something we should be kind of considering when we're looking at your ongoing costs as we're modeling forward?

That's difficult question to answer. The reason why is that it depends on how many people retire. And if we see our normal retirements the way they are right now, I would anticipate it would be likely we'd see that charge again next year, maybe the year after. But again, it's a very discrete event. As I told you, it's formula-driven. It's a matter of like, when you hit the number, all of a sudden you have to record this charge. If you don't hit the number, you record zero. And again, it's a very technical, formula-driven calculation. Again, as we reduce our pension charges, you would think that that would hurt us somewhat in terms of the calculation, because we have a lower threshold to meet in order to trigger the pension settlement charge.

Great. Thanks for that. Kind of a follow-up to some of the previous questions, in terms of some of the new business that was signed looking out towards 2009. If I kind of run through the math on the new tonnage that you signed, it looks like you've broken through the $50 a ton mark, which would be -- I would look at as pretty positive. Would that be still kind of, like you were saying, tied to a set margin in terms of how that contract was structured? Or would that be more reflective of just some of the stronger pricing that we will see or the market should see as scrubbers come on?

I think stronger pricing definitely we see out there, but clearly we're writing contracts to protect the margins that we believe we should have in those marketplaces based on our alternatives for supplies of these -- the new scrubber market.

Great. Is there any comment you could make in terms of what kind of cost inflation might be baked into those kind of contracts?

Well, the reopener covers that. When we reopen a third ever year, that covers where the market is and what inflation issues there are between the two companies. Where there is indices on some of them, they're all different. But there's a basket of indices on some of them that dictate what inflation is in between reopeners.

Mark Reichman, A.G. Edwards.

Thank you, but my questions have been answered.

Eric Kalamaras, Wachovia Securities.

A question regarding under what conditions you might consider monetizing your additional ownership in CONSOL Gas.

Under what conditions was the question? Clearly, the more successful that company is, the more pressure it puts on us to do something in terms of that company. We're very enthused about it, and we're very enthused about its growth and its ability to do the projects we've asked it today. I think the conditions are just always based on price and value in the marketplace. We have not decided to do anything different at this point in time.

And additionally, could you elaborate, to the best you can, regarding the potential shakeout you might see in Central Appalachia that you alluded to previous, regarding the question on acquisitions? How do you think that might unfold going into '07?

We've always believed that there would be a shakeout when the market softened, because a lot of the high-cost producers that are out there today in the old marketplace in the early 2002 -- '01, '02 and '03, were companies that were the last of the marketplace that were really going out of business, and they became public companies in the new pricing structure that we saw going forward.

So, I would expect the high-cost producers to struggle in this market, depending on how long it lasts. Now, if we take 30 -- and I gave a number of 30 million tons. If you take that 30 million tons off the market, you'll see it go back up to the spot prices that we saw last year and the year before. And to me, those spot prices really are a signal to the marketplace, that's the kind of long-term contracts it's going to take to recapitalize Central App. So, this exercise of discipline that we're seeing across is going to change how long that lasts. I don't know. The high-cost producers are going to be in trouble, I think, as long as this market stays in place.

In that context, how do you think about the size of something that you might look at over time? Would it be -- would you consider it transforming for CONSOL, or would it just be kind of a tuck-in here and there?

I guess I'd look at it this way -- I would do both. I think we could do a transforming acquisition, and we have the balance sheet to do that, or we have the capacity to do either one. But there are some pieces coming up that we really like. An example is there are some things for sale right now that are right next to some of our better reserve bases in Central App. We're looking at making acquisitions just to accelerate the volume process in Central App.

Justine Fisher, Goldman Sachs.

The first question I have is just a clarification on where the pension charge was included in your cost per ton numbers. That was included in the overall cost per ton breakout of about $35, but that's not included in the operating cost per ton that was around 26. Is that right?

There was -- about $0.08 is in the operating, and $1.17 would be in the non-operating (inaudible)

Okay. And then you [sound like], obviously, you expect the cost to go down going forward, and that makes a lot of sense if the tonnage goes up. But do you expect it to go back down close to levels where it was before, or are we still going to see some upward pressure from things like equipment and taxes and kind of the usual suspects that everybody's talking about?

There are, clearly, two types of inflation that you see in the coal market, especially in the east. One is related to commodities, which we see a lot of pressure. That's eased off somewhat. But we expect to be on the same pace that we were in the first and second quarter in terms of those commodities. And the other one is geology. These mines that have tough geology. That's the other -- what I call it -- geologic inflation, [may mean] you're going to tougher and tougher coal seams. You add those two together, some people are under real pressure.

From our own mines, I would say the commodity pressure is the one that's driving us the most right now, because we have very consistent geology, especially in Northern App. And I would say we'll be back online to where we were first and second quarter, with some pressure. We have roof control costs that are going up because of steel. Replacement parts are up substantially. And we are seeing some pressure from the changes in the safety rules, of which I think about 80% of it can be passed through over time. But in the short-term, we might see some pressure there.

Also, you have to remember that things like production taxes and royalties are directly related to realization. So, our cost increase quarter on quarter, probably about $0.50 of that was directed -- directly related to production taxes and royalties that have a strong relationship to our increased realization.

And then, the other questions that I have -- and I certainly don't want to kick a dead horse here -- but are just some clarifications on the met coal percentage of price tonnage, etcetera. Just to clarify, correct me if I'm wrong, with the additional tonnage that you priced in the third quarter, 650,000 of that was met coal, that's included in that implied price. And then for '07, of the tonnage that's still open, there's about 900,000 tons to be priced.

Let me just make sure we're answering the right question. You want to know -- for 2006, we booked about an additional 1 million tons of business between July and October of this year. You want to know how much of that was met. And then, for 2007, we booked an additional 6 million, roughly 6 million tons during the quarter, and you want to know how much of that mix was met. Is that the question?

That is the question. And I was going to ask another question, but we'll just throw it out now. Of the tons that you said weren't included in the press release, at the beginning you said that you had additional tons for which you hadn't signed the contract, but that that was at 41.50, and then another set that was at 43. Are there significant amounts of met coal tons there? Because it's just a matter of whether or not you're getting significantly higher prices for steam coal, or whether or not even a few 100,000 tons of met coal is bumping up that average price.

There was no met coal in the numbers I gave you.

Okay. And then, 2.3 million tons of met coal total?

In 2007, we were trying to give you a sense of how much met coal we sell for export versus domestic, if you assume our capacity next year in met coal is somewhere between 5.3 and 5.6 million tons, roughly 43, 44% is going to be sold internationally; the remainder is North America. So, the 2.3 million tons was our expected export sales of met coal in 2007.

What are you guys seeing on pricing for that? Because there was just -- there was a couple pieces of recent news. First of all, for an international contract that was signed at pretty significantly low levels in the low 80s. And then [Fording] recently also reported some lower pricing expectations, I think, from met coal. And I know you said about $75 a ton for the U.S. met coal. What do you expect to see on the international side?

At our international business, we think that those contracts that were signed were not representative of where the market is, especially in the Atlantic market which is ours. We expect to be at least at rollover where we were last year.

Thanks a lot.

[Duval Patel], [Columbus Hill].

Could you just comment, how much of -- you commented how much your coal sales are in the spot -- represent the spot market. How much of the spot market do you represent?

How much of the spot market? I would say --

This is Tom. We said earlier that CONSOL typically might be -- our sales of spot coal will be about 5% of our total.

That's for yours. (multiple speakers)

I doubt that we're a very big player in the spot market.

That'd be about 3.5 million tons. I'm not sure what the total spot market is. That varies year-to-year.

Paul Forward, Stifel Nicolaus.

On other income, the other income line, that first three quarters of '06 averaged about $41 million a quarter. That's up from 26 million, roughly, in 2005. Where do you think that is on a quarterly basis going forward into 2007?

We have some insurance proceeds in there. In terms of the insurance proceeds in the third quarter, it was about 13 million. And in the second quarter we had 25 million. And that's on our fire insurance claim that we had at Buchanan. We're done with that. That claim is finished. There may be some more. We're still in negotiations on the insurance claim on the skip hoist, and what happens on that remains to be seen. It's in negotiations.

Is there a number that you would say is a typical run rate for that other income as those items go away?

I think the best thing to do is take a look at our 10-Ks for the past couple years; I think you could pick out the trends on that the best.

And also -- I know you don't want to mention this, the contract expiration and how things are going with that with the negotiations -- but can you give us a number just in terms of a percentage of your production that would be influenced by contract expirations at year end with the United Mine Workers?

I would say it would be about 42 to 45%

And that's percentage of volumes then, right?

That's right.

Can you give me a number, maybe roughly, just industry-wide east of the Mississippi, what the comparable volume percentage might be that has contract expirations at year-end?

You know, I don't really track that. I would have to do some research to give you that.

(OPERATOR INSTRUCTIONS).

Operator, this is Tom. We'll take this as the last question. I know our colleagues over at International Coal Group are starting their conference call at 11, so we'll take one more and then Chuck Mazur and I will be available for the remainder of the day to take further questions.

[Aaron Smith], TI Capital.

I was curious on what the export steam coal sales were for Q4 and then in '07.

For Q4, export sales I would guess would be about the same pace we've been on for the other quarters. I'd say about 600 to 800,000 tons on the steam side. And for '07, I don't think that's determined yet.

Thank you very much, everyone, for joining us this morning. As I said, Chuck Mazur and I will be available throughout the day. Operator, if you would give our listeners their playback information, we appreciate it. We'll talk to you again.

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