CNX Resources Corp (CNX) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy fourth-quarter earnings conference call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to the Vice President of External Affairs, Mr. Tom Hoffman.

Good morning, everyone, welcome to a cold and snowy Pittsburgh where the forecast tonight is for single-digits. I didn't think we were going to be able to say that this winter season, but it's cold here. With me this morning are Brett Harvey, our Chief Executive Officer and Bill Lyons, the Chief Financial Officer and we will be discussing the fourth-quarter 2006 and full-year 2006 results, as well as discussing the outlook for the current year.

Our business is subject to risks that impair our ability to achieve forecasted results occasionally and we have discussed in limited detail those risks in our earnings release this morning at 7:30 and we have discussed those risks in detail in our SEC Form 10-Q filing, filed November 2.

With that, we're going to begin with formal remarks, starting with Bill Lyons.

Thank you, Tom. For the full calendar year, net income was $409 million, or $2.20 per diluted share, compared to $581 million, or $3.13 per share for 2005. Now 2005 was the year in which we recorded a gain of $323 million, or $1.74 per share for the sale of a portion of CNX Gas. In the annual comparisons, net cash from operating activities was $665 million, compared with $409 million, and EBITDA was $827 million, compared with $926 million in 2005. Now the EBITDA in 2005 also reflected the CNX Gas sales.

For the quarter ended December 31, 2006, CONSOL Energy reported net income of $128 million, or $0.69 per share compared with $88 million, or $0.47 per share in the same period a year earlier. Also in the quarter-to-quarter comparisons, net cash from operating activities was $225 million compared with $219 million and EBITDA was $198 million versus $191 million.

Financially, the fourth quarter reflected the strength of our asset base and the diversity of our revenue streams. In total, revenue and other income improved about 10% quarter-to-quarter if we apply the current accounting treatment for purchased gas to the 2005 quarter as we have in the 2006 quarter. This increase in revenues and other income for the quarter was driven by higher average realized coal and gas prices, higher gas volumes, increased revenue from our river transportation activities and increased sales of industrial supplies.

Produced coal revenues increased over 6%, or $2.42 per ton, resulting in a total average realization of $38.70 per ton. Produced gas revenues increased 19%, driven by a 16% increase in sales volumes. The river transportation operations revenue increased nearly 200% on the strength of both higher rates and increased tonnage moves. The industrial supply sales increased 10%, driven by higher sales volumes and prices. This overall growth in revenues helped maintain our quarterly earnings, despite the fact that coal production was down.

Well, the Coal segment results were mixed, both for the quarter and for the year. Now one of our key indicators, coal inventories, are low, about 1.5 million tons at year end. Buying inventories reflect the fact that customers have continued to take deliveries for coal under contract, despite the relatively mild weather in our key market areas. This also reflects our emphasis on term business, rather than on spot market business.

As we mentioned in the news release, we had three underground mines produce more than 10 million tons each. This is an extraordinary volume of coal at an underground operation and is a significant achievement from both a mining and a transportation standpoint. We also had an excellent year in safety, and Brett will elaborate on our safety program in a moment.

On the other hand, total coal production was down was 1.7 million tons in both the quarter and the year-to-date comparisons. This was largely because of our decision earlier in the year to idle the Shoemaker Mine in response to market demands and the long-term idling of our [met] mine, VP #8. However, coal production was down about 1.6 million tons, compared with the midpoint of our guidance range, which we provided in October primarily because of roof falls on the belt lines and sandstone intrusions. Quarter-to-quarter mining costs were up about 11.7%. This was a combination of lower production and higher supply costs related to adverse mining conditions, higher cost for key commodities and higher regulatory costs for safety and environmental requirements.

As a result, we missed our target for the year. Year-over-year total unit costs increased 8.2% versus the 5% increase we had forecast. Cost control will be one of the major challenges for us in 2007.

For the year, our production mix was 79% of Northern App steam coal, 11% Central App steam coal, 8% Central App met coal and 2% of Western steam coal.

I would like to take a moment to discuss our tax expense and our effective tax rate for the year. I have previously stated that I expected our effective tax to be around 28%. In actuality, it came in at 20%. It is not unusual to have differences in the actual tax rate once all the year-end procedures have been completed, but I want to review the main driver and the 8% effective tax rate change.

During the latter part of 2006, the state of Pennsylvania change its statute regarding the use of net operating loss carryforwards, or NOLs. Before the change, there was an annual cap of $2 million on the utilization of NOLs. The new law extends the annual cap to the greater of $3 million, or 12.5% of Pennsylvania taxable income. This change removes a significant portion of CONSOL's NOL limitations. There are now some actions we can take from a tax standpoint that are both prudent and feasible that will allow us to realize the benefits of these NOL deductions. Because of the law change, we can now meet the FAS 109 test of recoverability in that it is now more likely than not that we will utilize these NOLs. We have removed the valuation allowance from these items in our deferred tax asset account, resulting in a tax benefit for the quarter.

Now there are some other items in that 8% reduction relating to other states' NOLs and various accrual to return adjustments, but the Pennsylvania law change was the most significant. Now we will exercise discipline in our capital spending, matching our expenditures with the demand for the market. We expect coal maintenance of production capital to be approximately $3 per ton, or $200 million, which is in line with our historical levels. Total cooperations CapEx will be around $360 million for the year 2007. On 2007, we also expect gas CapEx to increase from about $150 million to around $300 million -- this is double -- reflecting the large number of high rate of return drilling opportunities.

Let me tell you that we are in excellent financial condition. We have no short-term borrowings on our credit facility and nearly $900 million in capacity on total consolidated liquidity. We expect to have an additional $120 million of credit capacity freed up in the first quarter of 2007 due to the new UMWA contract that will reduce our financial security obligations related to the 1992 funds. Our financial strength allows us to maintain our production discipline during periods of soft energy demand and our borrowing capacity gives us the ability to act quickly on acquisition opportunities, should they arise.

With that, let me turn it over to you, Brett.

Thank you, Bill. Welcome all of you to our call. We appreciate our shareholders being on here with us, as well as our analysts and potential shareholders, I hope.

Let me say -- I will talk briefly about last year and then we will get into where we see the marketplace, and I would like to get to questions as soon as we can.

Let's talk about safety first. CONSOL is a leader in the safety side of especially the underground mining business. Last year was the best year in safety we have ever had, and the fourth quarter is the best quarter we've ever had. We are 50% statistically better than all underground mines in the United States in terms of averages, and our numbers are in those averages as well. So, clearly, we are a leader and we continue to be a leader. Safety is important to us to, our people are extremely important to us, and if they feel safe, they will be more productive as well.

Last year was a good year profitability-wise. The margins on the coal side grew again to $6.46 per ton, and that's the highest we have seen it in a decade. It continues to grow as our revenues grow and we see our margin grow as well, and that is a discipline that we're very focused on.

Last year was a year of accomplishments. We booked 230 million tons of new coal business with an initial value of more than $10 billion. We made strategic acquisitions in barge transportation. We were upgraded on the credit side by Moody's and S&P, we were added to the S&P 500 Index and we had a stock split last year.

Let's talk about the market. Short-term, we see Central App as a problem. The spot market there and the volume of coal that we see that is in the stockpiles of the utilities is a problem in terms of the spot market and our ability to sell coal at profitable rates down there. Our reaction to that will be, if we don't get the prices we need, we will continue to pull back in Central App on production.

In the short-term in Northern App, we see it just the opposite. We see it sold, stable, the prices are stable and the fundamentals are very sound. Scrubber projects are on track. We are now shipping coal to scrubbers that we started to three years ago, and that continues to be online.

Our guidance reflects short-term issues in terms of where we see the market on the coal side, clearly the gas side of the business. We can get quick rates of returns based on high-value drilling, so for 2007, we will accelerate our capital on the gas side and decelerate our capital on the coal side until the market sends a signal that it wants the coal at the rate of returns that is acceptable to our shareholders. In the long-term, we see everything intact. We see a demand issue on the coal side that we'll adjust over time.

Remember that we have always said that 2007 is a transforming year for us. As the scrubbers accelerate, we see real value in the fundamentals of where we want to go. So having said all of that, let's open this up for questions.

Operator, if you could give our listeners the instructions on getting into the question queue, please.

(OPERATOR INSTRUCTIONS). Michael Dudas, Bear Stearns.

Brett, in your prepared remarks and the press release, you talked about how procurement officers are assigning a higher value to I guess the coal that you're selling and the contracts that you're putting forth. Could you elaborate a little bit more on that? And certainly, I'm assuming you're talking about your Northern App product, and not so much in the Central App market.

Yes, Michael, we are -- there's two things that are going on. Northern App seems to be decoupled from Central App, in terms of value in the marketplace, driven by the scrubber additions that we see, but it's the high-Btu content of the coal and it's the relationship to the market as these scrubbers are built. It's also our ability to do long-term deals with these long-term plans. So I think you will see that CONSOL, from Northern App aspect, is big and we can do long-term deals that create real value. So you see decoupling between Central App and Northern App, especially on the term deals and the size of these deals. If you look at the numbers we signed up for last year, they're big volumes, long-term deals at the prices we believe the market should be as these scrubbers come on.

Do you anticipate similar type numbers of multi long-term contracts as you inked in 2006? How are you positioning that relative to utilities, and are utilities being a little bit more aggressive in trying to get those types of deals done with your Company?

I would say that in '07, we'll continue to do those types of deals, because we're looking out into '09, '10 and '11 for a lot of these scrubber builds. In terms of aggressiveness, I would say it is about the same. We're talking to some multiple utilities right now about these kinds of things, but they are very focused on security of supply. Remember, they are planning running these plants another 30 years and the capitalization of the coal business matches, especially our coal business and our reserve base, matches that 30 years on some of these big plants. That's why they're coming to us for that kind of security.

Brett, in the fourth quarter, you had an operating rate or a production rate in Central App of about 12 million annual tons. You sound pretty negative on the Central App market near-term, which I think the market anticipates. How much wiggle room do you have relative to holding back production off the market, and how fragile do you think is that market as we move into the first half of 2007?

We think the market is very close or near the bottom. It's a demand issue. We think the stockpiles for those who use that coal are up, and we are concerned that these spot market prices, if they hold at the level they are today, we will pull back more production. We're not going to do this for practice. We'll leave it in the ground until the prices are right, and that could be as much as 2 or 3 million tons for us.

One final thought. It seems like your barge and transportation acquisitions were quite positive to the Company in '06. Could you just elaborate a little bit more how that positions CONSOL and what kind of revenue enhancements do you get relative to the position you have in the transportation and the river markets?

Remember, there are two components to the delivery of coal to the utility. One clearly is the cost of the coal, FOB the mine, and then the transportation associated with it. We see 18 million tons of new market for us down the river as scrubbers come online. We think the expansion of that market and having the transportation component in our hands gives us a piece of the action on the total delivered Btu piece; not only the margin that I talked about at the mine, but now we're looking at the margins on the transportation side. And it also gives us first move on the river in terms of moving our inventory, it also gives us intelligence about what the utilities are buying from everybody else. So it puts us in a very good position and it's a natural move for us. It's a core competency.

So you can ship coal further distances at a lower price?

Yes. Anything on the river is much less expensive for the utilities and ourselves. Well, for us, we make a profit to it, so it's our chance to, in a sense, own the railroad where we see expanding markets on the river.

Thank you, Brett.

Jim Rollyson, Raymond James.

Brett, you talked I guess in the prepared commentary here about cost on a unit cost for the coal side of the business over the last couple of quarters impacted by lower production volumes. Based on your outlook or expected volumes for production for '07, and I guess tagging into that the new UMWA contracts, what are you thinking costs are going to average on a per-ton basis in '07?

It will be less than this year, and I would say that you will see a lot of the efficiency projects that we've been working on over the last couple of years, like Robinson Run and others, come into line. So we see the -- and we also see the metals and the cost of materials stabilizing for '07. So, between those two, the efficiency gains and the cost leveling out, we see the inflation in our cost side to be less than this year, and I would say more around what we saw last year or what we predicted last year, 5%, I would say it would be more like that -- 5% to 6%.

One of the things you have to keep kin mind is, not all mines are equal in terms of their cost structure. And, again, our emphasis has always been on margin. So in some cases, particularly in Central Appalachia, our margins were very high when the market was going well, but the costs individually were high. Now, as the market deteriorates in Central App, as Brett mentioned, we may cut back on production in Central App, which in effect, is going to reduce our overall unit costs.

Just from the volume mix?

Right. We'll cut the high-cost mines out, and we'll expand the low-cost mines in each market and expand our margins in the process.

And then just one kind of looking out a little ways, your guidance for volumes as you go out to '08, '09 and '10, I think last quarter, we kind of had volumes going up into the mid '70s or so by '09, and now you have kind of trailed that back. Is that kind of just timing delays on some things, like Enlow Fork, or can you talk about what's going on there?

Yes. We have delayed some of this capital based on the market signals. We would rather hold back and expand our margins until the market says they're ready for this. So if you look at our capital spending for '07, it reflects that, that we've pulled back and we are at a maintenance capital level. We'll continue to get Enlow Fork expansion done and permitted, but we won't open that up until the market signals that it's the right rate of return.

David Khani, Friedman Billings Ramsey.

Enlow Fork, though, wasn't that 2010-11, is that right, when it would come on?

Initially, that is what we did, but we pushed it out probably 18 months to two years.

Great. Could you give us a little sense from a big picture, how does the UMWA contract, you talked about some of the costs, but could you go into a little bit more specifics on the benefits and how you see it play out?

Well, the UMWA contract we believe was a very good contract. In matches highly-mechanized long-wall mining capabilities with long-term reserves, and it also matches a work force that we think overall as the tons per hour per person puts us in a very good position to expand our Northern App markets into these scrub markets at higher margins. So what you saw in that contract was the ability for us to take advantage of our heavy capitalized long-wall mines.

David, just one other point on that. When you look at the UMWA contract, as I mentioned, we are going to pick up $120 million of credit capacity because of reduced requirements of financial security. That's significant to us. And also, on the UMWA contract, in terms of the long-term liabilities, what it did is really put a cap on what we're responsible for. Brett has always said very clearly that we have no problem with paying for our employees. We accept that responsibility. The issue that we always had and the worry we always is that we could be held liable for the entire industry, and basically this new agreement takes that away. So that is very big for us.

So does that essentially at the end of the day make your legacy liability risk at least more predictable?

Yes, very much so. The other thing this contract did was, on the pension side, we made sure the pensions stayed healthy and didn't get into any issues with that, and we also gave our active employees what we think is a fair raise, and we also negotiated our ability to use our big long-wall machines more hours in a week, and on scheduling, it created real value for us. So you see a rise in cost per employee, but you also see a rise in productivity that goes with that.

Moving over just to sort of the state of the affairs on emissions, could you give us a sense of how you see mercury playing out? And then also, how do you think carbon is going to be played out, greenhouse gas emissions?

If you look at mercury, clearly, the best thing for mercury is for scrubbers to be built because you're going to pick up, depending on the coal, anywhere from 75% to 90% picked up just by scrubbers being built and [man] -- and in a sense, putting the muffler on all the engines, so to speak, and get as much as we can out on the mercury side, as well as NOX and SO2.

Carbon is a different issue. Carbon is an issue where it's not just a coal issue. We capture methane to offset carbon within our Company. We are actively involved in initiatives to look at carbon, and if the world decides that carbon is a real issue, it's on motor vehicles, it's on stationary things like power plants, but if you start to pick fuels like we did in the '90s where we picked gas and tried to displace coal, it's going to really upset the economy and we think this has to be really well thought through. It is a political issue right now. There's a lot of momentum, but I think reason will sustain. And if CO2 needs to be captured, we think technology going forward using clean coal technology will be the answer.

John Hill, Citigroup.

And I guess I would say just a quick question on overall production cutbacks, and certainly CONSOL has been a leader both in talking this issue early in the downturn, and also in taking action, and that's really great to see. There is a lot of kind of high-level discussion, 20 million, 30 million tons of production at risk across the industry. When do you think that really starts to be felt and seen on the ground? We see it a little bit in the statistics, but what do you see on the ground, and what is your feel as to when these begin to be felt and recognized by the customer base?

I think, if you look at it the way it is today, I think it's a second-quarter issue. I think, coming out of '06, a lot of the contracts that were signed in '04 and '05 had the margins in it where people could sustain themselves. I think renegotiation, especially in central App, is creating a problem to where it's a cash problem, not just operating without income, but operating negative cash positions. I think what we'll see part of that 30-million ton shakedown happen rapidly in the second quarter and accelerate through the third and fourth quarters.

There is another thing too. If you look at the increased production coming from Powder River Basin, it looks to me like there's a move to capture market share against Central App, which creates a real pricing problem, which, from our perspective, both sides dropped prices based on fighting over market share. As the utility demand dropped, volume increased. We don't think that's a good idea.

Great answer, thank you for that. And then on a more detail-oriented question, there was obviously some kind of income tax benefit in the quarter. There was, [for example], some underlying ongoing payments, but was there a discrete item that drove us to that $11.2 million tax benefit, just so we can back that out to get a clearer view of kind of the operating EPS number?

Yes. That was benefit we had by being able to recognize been the NOL carryforwards, primarily in the state of Pennsylvania, in my remarks (MULTIPLE SPEAKERS).

Is there a number there?

But that's ongoing, that's not onetime. We're going to see more benefit that way.

We're never going to be capped. The way it works out is that by putting a $2 million cap on Pennsylvania NOLs, in effect, we can never utilize them at all. Now we will be able to utilize them going forward, so in effect, it drops our effective tax rate in Pennsylvania. Also, we'll be able to do some different tax strategies. And I don't mean to make that simple, meaning like we have to change some things from a tax standpoint, but we're going to put those in place this year, and that will ensure we'll be able to take advantage of that cap extension going forward. So it's a big think for us.

Understood, but wouldn't that take you to tax neutral, rather than an $11.2 million benefit in this quarter?

There's no doubt that there's a big change, because we're talking about NOLs from prior years that we couldn't pick up. When you look at the tax calculation on CONSOL, it's very complex, and there is a lot of volatility, primarily by things like percentage depletion. Generally going forward, I would expect our effective tax rate to be somewhere between 28% and 30%, and this is going to be the 35% who will say federal statutory rate, and probably about an 8% to 10% reduction due to the benefits of percentage depletion. And we'll add on to that the state tax effect of roughly 3% to 4%. But, again, I can tell you, we cannot project that that effective tax rate, within 1 or 2 percentage points. But, again, on terms of the range, going forward, based on our levels of profitability, I would expect that effective tax rate to range between 28% and 32%.

Alright, thank you very much.

Mark Reichman, A.G. Edwards.

Thank you and good morning. Just real quickly, could you just kind of go through for the year kind of what your cash costs per ton, how that breaks out on a percentage basis to fuel and materials and things like that, and how you might expect that to change or whether, going forward, those percentages of your costs should stay relatively stable or fall?

When you look at '06, total costs were $24.79, labor was $5.18, supplies were $4.80, project accrual were $1.78, prep charges were $3.12. What we are seeing there is, we think those are stable and we will probably -- you know, the fourth quarter is an anomaly. If we would have produced that 1.2 million tons in the fourth quarter, we probably would have come out for the year right between 5.5 and 6% on total cost increases. So when you see a drop in productivity based on a couple of problems that lined up just to the fourth quarter, it hurt our cost for the year. But that's not a continuing issue. We have already moved through those and you will see a more stable cost structure I think rising 5% to 6% overall through 2007. Tax and royalties last year were $3.75 a ton, and they were up about 10%, but that was a function of higher prices.

Okay, great. Thank you.

(technical difficulty). Mark Levin, Davenport & Company.

Great, hi guys, a couple of quick questions. Can you maybe talk about where you see the term market for cap coal today, sort of a benchmark cap products today, where you would come in on a two- to three-year deal today, versus six months ago; and then maybe, contrast or compare that to what would be the case for a Northern App sort of benchmark product, two- to three-year term, what you would get today versus what you would have gotten six months ago?

On a two to three-year deal, I would say, if you looked at the market when it was at the top of the market last year, I would say, that was a signal to the marketplace from the coal business that it would take that kind of money to reinvest in Central App in a big way. They were no term deals done there, so it dropped back by demand back to the spot market. We think today, it would be -- a short-term deal would be $46 to $48, based on average Central App (indiscernible). And in '06, it would have been $52 to $56. So that's the difference that we see in that marketplace. If you look at Northern App, we don't see that much change from where were last year. In fact, if you look at our projections going forward, you see continuously climbing average price for the whole company going up, and most of that is driven by Northern App.

So for a two- to three-year deal, you would say for -- in [App] today, Brett?

47 to 50.

47 to 50. So actually, you're in excess of what the cap number is?

Oh, yes. There are two things going on. You have shorter haul and much higher Btu.

Second question. How much coal did you export to Europe this year, and then what would your plans be for 2007?

Let me look that up. About 2.2 million tons for '06, and '07, it looks like it is going to be right around 3 million tons.

And do you have any flexibility if the inventory situation remains bloated to ship additional tons to Europe this year?

Yes, we do, if the price is right. We'll either lock in production, we'll pull back, or we will sell it into Europe at acceptable margins.

And then my last is question is, over the last three months, have you given any further thought to potentially spinning the nat gas business or doing something strategically with the gas business and your 81.5% interest?

We're always looking at the natural gas business in terms of its value to our shareholders. It's doing exactly what we ask it to do. We're going to accelerate it for '07. But in terms of spinning it, there has been no decisions on that.

And then, finally, you had been relatively public about M&A, about the desire to be in the M&A marketplace. Can you maybe comment about what your thoughts are today, if you're still as interested given market conditions, and what regions appeal to you the most?

Well, we think there's going to be an opportunity for M&A this year. We think this is a shakedown year of marginal players and we're looking for assets to enhance our portfolio and our risk profile. So we would be interested in some Central App and we would also be interested in Northern App and we would even consider some Illinois Basin things, depending on what they are and where it fits our strategy. We're pretty open to that.

Great, thanks very much.

Justine Fisher, Goldman Sachs.

The first question I have is just going to pick-back off of the previous question as far as M&A is concerns, and it's not necessarily with respect to CONSOL particularly, but also with respect to CONSOL and then potential other buyers of Central App assets. First of all, do you think that there are other buyers out there that are kind of as excited to take advantage of the shakedown as CONSOL would be? And then also, do you think buyers would wait for those assets to liquidate or become bankrupt, or do you think they would try and pick them out before-hand when they were still solvent, but just cheaper?

I think it all depends on opportunity and price, but I would tell you this. The stronger companies that have the balance sheet to do it will move ahead of liquidation just because they will get probably a better private deal than trying to do it through the courts and judges and so forth.

And then just a question on the CapEx. Because CONSOL still consolidates CSG in the results, the CapEx spend on the gas business is still going to run through CONSOL's cash flow statement, right? So there is $360 million for coal, but overall, capital expenditures for CONSOL Energy is going to be around $700 million next year?

That's correct.

And then on the cost aside, I appreciate the clarity that you guys have given already on the 5% to 6% increase, but I just wanted to double-check that that is under the assumption that, A, commodities cost stay relatively flat, versus those extra things like diesel fuel and metals; B, that includes the $0.60 to $0.65 for the labor agreement. And then, also, how much does that includes for safety measures?

All of it's in there. I would say -- and on the safety measures side, there are short-term costs that we have been instrumental in helping even write those laws in the states, as well as working with the Federals on that. We think over time, that will be passed through in the contracts that we have. But in the short-term, that is baked into the numbers that we're giving you.

Okay. And how much was it in the fourth quarter?

In terms of safety?

Yes, on a [cents] basis, or something like that?

I don't think we've separated that out. Not very much money. A lot of that's all being developed right now.

And then the last question I have is just a clarification regarding the revolver. I know that you guys are getting another $120 million of availability in the first quarter when the new labor contract comes into effect, but how much was outstanding at the end of the fourth quarter, and what do you anticipate your availability will be in the first quarter when you get the $120 million?

We have nothing drawn on the revolver in terms of any short-term debt. We probably have about $350 million available on the revolver right now. And, obviously, we will pick up another $120 million on that.

Okay, super, thanks a lot.

Pearce Hammond, Simmons & Company.

If you do that eastern utility bituminous coal inventories, how would you describe high-sulfur coal versus low-sulfur Coal? Are they at about the same level? And then as a follow-on to that, are you seeing any utilities wanting to defer shipments of coal because their inventory situation is flush?

We see deferred inventory pushbacks is what we call it in central App only in a couple of places for us, but we are seeing that. We're seeing nothing like that in Northern App. I think Northern App, I would say the stockpiles are 20 to 30 days on high-sulfur coal, and in central App, it's more 45 to 60 days. And I don't split Central App into high-sulfur/low-sulfur. I think that's just a matter of the indigenous fuels down there, depending on what's closest to the plants. But like I said, there is a real battle between demand versus oversupply coming from two different basins.

And with the lower-priced SO2 credits currently, when you talk to any utilities, have any of the utilities indicated any delays on scrubbers, or just do they not commit that capital right away, or any commentaries there?

We target the scrubbers that we want to match up with our resource base. We see absolutely no delays on the ones we target. And there are certain scrubbers that are being predicted out there and being built that we're not even targeting that is part of the battle between Central App and Illinois Basin coals that we are not targeting. Seems to be moving around, but the net total that we see announced is still at 70 gigawatts.

My final question is, where do you see leading-edge metallurgical coal pricing for sort of a Buchanan type product?

Where do we see the price?

Yes.

I would say $68 to $75 a ton, depending on quality.

Thank you very much, Brett.

David Gagliano, Credit Suisse.

Thanks for taking the questions. Just on the cost, I just want to -- and not to beat a dead horse, but I just want to clarify. On the 5% to 6% increase for '07, is that on the operating cost per ton line, the $24.79, or is that on the total cost per ton line, the $32.53 for the year?

It's on total cost, but the bulk of that will be in the operating cost.

Okay, fair enough. And then in terms of the commitments you made during the quarter, was there any met mixed in there for '07, '08 and '09, or can you give us a breakdown in terms of the volumes -- how much was met and how much was thermal for each year?

There was no met, and I think the rest was -- well, it was all thermal.

That makes sense, so no met for any of them. Okay. And then lastly, it looks to me like you still have obviously 3 to 7 million tons left to go for 2007. With regards to the mix there, can you give me a breakdown on how much of that is met versus thermal? That's the first part the question. The second part is, if you could share with us any thoughts in terms of timing.

All of the met is sold, and about 3 million tons of Central App is either going to be priced where we want it to be to sell, or we'll back off. And Northern App has about 1.4 million tons open, and we think we have a home for that as well.

3 million, perfect, that's what I needed. Thanks.

Jeff Gildersleeve, Millennium Partners.

Hi, it's actually [Mark Russo], how are you guys? Just two quick questions. One is on CXG. Was there any sort of time horizon that was for the tax re-spin as far as when you can actually do something? Is there a holding period just where you could spin down the assets?

I will leave that to the CFO, in terms of taxes.

Your question -- there's a lot of complexities in terms of what we can do from a tax standpoint. Generally, I'm going to tell you based on average depreciation lives and amortization lives, I would say you have a seven-year period. After seven years, then there's probably very little tax consequence.

But that doesn't drive our strategy for the gas company.

Okay.

And it's somewhat linear, meaning like every year, it decreases.

And then, just going back to the question that Mark Levin asked, on the Northern App time prices, did I hear that right, it's 47 to 50 on a three-year deal?

That's right. On term deals, yes.

Great, thanks so much.

Paul Forward, Stifel Nicholas.

I guess first of all, on that 47 to 50 number, there were not a whole lot of new contracts signed for 2009 and it didn't seem like there was a whole lot of new commitments for volumes in '09. Is there a disagreement on whether that 47 to 50 is something that your customers are willing to pay, or is that just simply that you didn't have a whole lot of big contracts signed during the quarter, and that more are coming up, and you think that that's the right level?

I think there is a disagreement based on a very flat and leaded market in terms of spot prices. Customers tend to try to put those two together, the short-term versus the long-term. We said in our conference call last quarter that we see them as decoupled, and these long-term contracts that we're signing show that they are decoupled. Now short-term spot market prices tend to drive the debate, but we are not backing off from where we think the value is in those long-term markets. So we will be patient.

And with the 5 million-ton reduction in your planned volumes for 2009, is that a deferment of the restarted production at Shoemaker that you're building into the plan?

Yes it is.

And I guess, if the prices come back, how quickly can you decide to bring that plan back and actually bring that 5 million or so tons back into the market?

The longer the prices hold out, the farther it pushes out. So, basically, you are pushing the bubble because we're slowing down the capital spending on bringing that back. So you would have -- as soon as the prices come back, we will accelerate it.

Okay, thanks a lot.

John Bridges, J.P. Morgan.

With respect to these NOLs, thanks you for the guidance on the future tax rate. Are there any other sort of idled NOLs which could come back later, or does this adjustment here represent the whole thing?

John, an NOL is a very complex area. And what I'm saying, not only do you have federal areas, but you have also state areas and some do consolidated returns, some do separate returns. For the most, I think we are in a -- we've pretty well cleaned out the recapture to the NOLs. And, again, that law change is very important to us. We're also, because of our increased profitability, particularly in a state like West Virginia, we're able to recognize some NOLs there too, which means we'll be able to take advantage of them and that will be a cash inflow for us in the future. But for the most part, I think we have the NOLs wells pretty well where they're going to be. Of course, unless there's others -- some change in tax laws. But you also have to realize, John, that we have become profitable, and as a result of that profitability, there will be a reduction in NOL availability, which is a good thing.

Okay. My other questions have been answered, so thanks a lot guys.

David Khani, Friedman Billings Ramsey.

Could you give us a sense, you didn't do any stock buyback in the fourth quarter. Where's your mindset now? How aggressive do you want to be, given that you're more contracted now for '07?

David, I don't know if there has been any real change in our mindset, which you are aware on share purchase transactions, is that they are subject to various factors, including market conditions, alternative investments, business conditions, there's legal restrictions. And also, you have to realize that we have to be prudent in how we look to what we see in the future. We did have a UMWA contract that was being negotiated in the fourth quarter. That did not get resolved until really at the very end of December. And there was some concern I have to provide for in case there would be a protracted labor strike. Saying all of that is that we're authorized to have $300 million share buyback. We have done about $116 million of that. I can tell you that we have not changed in our thinking and that program will continue on over the next 12 months.

And the fact that the UMWA contract is past due, and also that your financial capacity is improving, would that lend to want to step in the market sooner than later?

That is one of the factors we consider, and obviously those things looked better in the year 2007 than they did in 2006.

That's all I had, thank you.

Ian Synnott, Natexis Bleichroeder.

Actually, this is [Jerry Sussman]. Following up, if I'm looking at the new contracts you signed in the fourth quarter, my math shows that you signed at about $46 a ton in '08 and $41 in '09. Number one, am I looking at this correctly? And, secondly, what is the big difference between 2009 this quarter and last quarter, when I believe you signed about $50?

Jeremy, there were some adjustments in the base of 2009. The business that we signed in 2009 actually was between $43 and $44 a ton. It was only about 2.9 million tons. So it's a small number of tons that we did in the last three months in the out year 2009. But there were some other internal adjustments in what we had already had booked, and so you're being misled a little bit when you do that calculation. But you are correct that the implied pricing in '07 and '08 is in the upper $40 range.

Okay, so it's -- the main --.

There was a little bit of business that was done in '09, was at somewhat lower prices, but not as low as the calculation would imply.

Right, but certainly not close to -- it doesn't sound like it's close to 50 where you guys signed last quarter, right? Okay. And, secondly, you commented earlier about signing two- and three-year deals at around $47 to $50, which we definitely think is encouraging. And I believe you also mentioned 18 million incremental tons from the river from scrubbers. Can you give us a sense of how much bigger the scrubber market really is and how you play on that? And then just secondly, for your more longer-term deals, will you try to sort of lock into margins more going forward with utility customers, or do you look more at the pricing side? Thanks.

We are margin-driven, especially on what's already capitalized in place, and we see the scrubber market at 70 gigawatts. Not all of that's immediate to us, I would say half of that. But if you just CONSOL's equivalent tons, there's a new marketplace for our type of coal in the year '10 is 170 million tons of our type of coal. So, clearly, we're not going to chase all that. We're not going to try to expand to fit that. We're going to chase the highest margin scrubbers that match our capitalization, and then we'll either acquire somebody else to expand that, or we'll expand off of our massive base, but that takes a little bit longer to do.

And of those 170 million tons, is your sense that most of the scrubbers you're baking in, are they actually being built already, or are those planned scrubbers?

They are announced scrubbers, I would say, the ones that come on in '10. It accelerates over time and it's kind of an exponential curve. '07, there's a lot going on, '08 doubles, '09 comes up about 40%, then it jump to 70 gigawatts '10. So we see real growth there. And if you look at the way we layer in our contracts, it's based on which ones are coming on and which ones are we targeting to capture the market, like the Mitchell plant or AEP that was right next to our mine at McElroy.

Thanks very much. That is helpful.

David Gagliano, Credit Suisse.

My question was primarily answered a minute ago. It was regarding the 2009, the discrepancy there between the 47 to 50 range that you mentioned and what looks like then implied price of 41, which I think is now 44 based on what Tom just mentioned.

That's right.

But there is still a bit of a spread there. I'm just a little curious.

Well, you need to understand that we're layering in what we would call marginal coal, or maybe even not the highest Btu coal first, and then we keep the lower-sulfur/higher-market value coals to be layered in at the end. So you will see an escalation in margin and price from the bottom up.

Okay. So the coal you committed in the fourth quarter was lower quality coal, at 44?

That's exactly right. We'll move it first.

Mark Liinamaa, Morgan Stanley.

With the 3 million tons of Central App coal that you said would not be sold if you did not get the proper price, can you give an indication of what operating costs might be at those operations? And if you chose not the sell, would it require shutdowns, or just scaling back of operations that may not hit [news flow] particularly?

We don't announce costs mine-by-mine, but we do want to hold our margin so that should give you a pretty good clue about where that should be. We would probably cut back section by section, and we would idle units, rather than mines. So, say you have a mine that has five units in it, especially in Central App, you might cut two of them off if they were higher cost and stay with your most profitable. For 3 million tons, I don't see total mines being idle, but that could happen if the market doesn't -- we don't believe the market is going to get that soft, but we do believe 30 million tons will eventually get cut in Central App this year some time.

30 million tons this year?

Yes.

And you would guess that it's somewhere around 20 million that as been ratcheted back so far, is that fair?

I would say, there has been $20 million announced. I would say, you've probably only seen 10 of that.

Thank you.

Just for a reference point, Bill gave the mix as a percentage, but our Central App steam production last year was about 7.6 million tons. So we are not -- we don't have huge steam volumes in Central App to begin with.

But 30 million tons additional I think would be an important signal. It would be nice to get some sort of idea of what -- it sounds like contract pricing power in that part of the country is a little bit higher than the OTC market is indicating, but it would give us a good idea of where we might see additional reaction from the industry.

Remember, the average construct structure in Central App is way up versus three years ago.

Where would you put that at?

I would say it's probably up 15% to 20%.

Thanks very much.

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