CNX Resources Corp (CNX) 2007 Q1 法說會逐字稿

Thank you for your patience. Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy first quarter earnings conference call. This call is being recorded.

I would like to turn the call over to vice-president of external affairs, Tom Hoffman.

Good morning, welcome to CONSOL Energy's first quarter conference call. This morning we will be discussing our first quarter results as well as our outlook for the remainder of this year and the outlook for the next several.

As you're all aware, our ability to achieve forecasted results is subject to business risks.

We enumerated those business risks in our earnings announcement this morning and we have a fuller discussion of business risks in our 10-K that was filed on February 19th of 2007.

With me this morning are Brett Harvey, our chief executive officer and president and Bill Lyons our executive vice-president and chief financial officer and we will begin with Bill's remarks.

Thank you, Tom. For the quarter just ended, CONSOL Energy reported net income of $113 million or $0.61 per diluted share compared to $135 million or $0.72 per diluted share in the first quarter of 2006.

Net cash from operating activities were $183 million compared to $153 million in the first quarter of last year, an improvement of 20%.

There are three items of accounting and financial significance in our press release that I would like to briefly review. In the first quarter we received word that the combined fund litigation was resolved.

As we noted in our 2006 10-K, this litigation revolved around our contention that the funds were overcharging us during the periods going back to 2003.

The litigation was resolved in our favor with a settlement of $33 million, which was recorded in the first quarter earnings. When half of this cash settlement was received in March and the other half was received in April.

In addition, income and earnings per share for the first quarter of 2006 have been restated in accordance with recent FASB guidance.

The FASB rescinded the accrue in advance method of accounting for planned maintenance activities during quarterly interim periods.

This adjustment resulted in a $10.3 million addition in net income or '06--$0.06 diluted share and 2006 first quarter statements. This adjustment only reallocates major maintenance expense in the quarters for 2006. It will not change the total earnings for the full year.

And, finally, the period to period net income comparison was impacted by a $21 million pretax or $13 million after-tax insurance settlement that we received in the first quarter of 2006, relating to the Buchanan mine.

From our financial perspective, this was another solid quarter despite the pricing weakness in gas and the weakness in demand for Central Appalachian coal. Our most important coal metrics, which is operating and financial margins, expanded period to period.

Operating margins increased to $17.23 per ton, an increase of 4.7%, and financial margins, which include what we call all in costs were $9.79 per ton, an increase of 4.3%, versus the first quarter of last year.

The margin improvements were driven primarily by the combined fund settlement and by lower contract mining fees that resulted from idling some of our contractor-based Central Appalachian production.

The combined fund reimbursement was something on which we had been working on very hard. The net impact on operating costs was about $1.26 per ton and will occur only in the first quarter.

More significantly, the settlement represents $33 million of cash in the door. Coal supply and maintenance cost and labor cost did not increase period to period, which were better than our internal expectations.

We're pleased with the cost performance for the quarter and we are well on our way to meeting our cost goals for the year.

As we mentioned in this morning's announcement we have elected to cut back planned Central Appalachian production for the year, to reflect our expectation that demand in pricing for this coal will remain soft throughout most of this year.

To review, we are cutting our forecasted production from Central Appalachia for the year by about 2.1 million tons. About 1.7 million tons will come from current operations.

The remaining 400,000 tons will come from production we had planned to bring on line later in the year in Southern West Virginia and which had been our guidance provided to you in January.

However, we still have a significant footprint in Central Appalachia. I expect our Central Appalachia production to be slightly more than 11 million tons split roughly 50-50 between met coal and steam coal.

We adjusted the quarterly production guidance for 2007 to reflect the cutbacks. As we have demonstrated many times, we are prepared to adjust plan production to reflect market circumstances.

We believe that taking action early will produce better results in both the short and long-term, particularly in protecting margins for coal.

In summary, we believe that this was another solid quarter for us, despite the softness in the energy market. We took the right steps from a sales and production standpoint in coal, and have continued to expand our gas well drilling program.

Despite lower gas prices period to period, the gas business still generates substantial income for us, and we remain extremely pleased with that investment. With that, let me turn it over to you, Brett.

Thanks, Bill. Good morning everybody, it is good to be with you to talk about our status.

First I'd like to talk about the first quarter and then I'll talk about the present market situation and then I'll talk about the long-term markets and some of the things we're doing to prepare ourselves for that.

Last quarter, first of all, let's talk about safety. We had another very excellent safety quarter, which we're happy with.

We had the best year we ever had in safety last year, and the first quarter was even 24% better than that in terms of our numbers. So for our people and the value that we see in our people and the safety around underground mining, we feel real good about where we're headed there.

The other thing is that we kept our costs in line, as we pulled back productions. I think that's important for people to understand.

We knew we were going into the year with production that was--it was going to be soft, soft marketplace.

We pulled back and showed the discipline we needed to do and that commitment of 2.1 million tons for the present market for the rest of the year in Central App. is really a commitment to pull back and keep ourselves in that position.

Coal prices were up slightly. That reflects our abilities to look at the pricing going forward and still lock into the margins where we think the production matches the margins we would like to have. More importantly we protected our margins in this soft market and I think that's important.

When you look at our earnings overall, we expanded our margins based on the refund that we got, but still if you take that refund out, our margins are very, very solid against in a soft market.

Let's talk a little bit about the gas business. The gas business did well. They expanded out of their Virginia area. That expansion is doing well.

We accelerated their capital for the year. They're working their way through those issues. We announced a deal with Massey, where we'll be drilling on some of their properties and sharing value with them.

So that proves beyond CONSOL's umbrella, that our gas company can move out and deal with other coal companies and create value for both parties. That's a good thing. Let's talk about the market situation as it sits right today.

As we went in to the quarter, we were concerned at how soft it really was, and by mid-January we were really concerned about the quarter. That cold weather helped us. It helped us on the gas side and the coal side.

But we still see in Central App. we're plagued by excessive inventories and that is why we announced today we're going to keep that 2.1 million tons off the marketplace until we get the kind of returns and margins we expect to get for that area.

We believe with a normal weather pattern through the summer and continued drop in volume has been announced in Central App. that this should materialize in the third and fourth quarter to where we think it will be stabilize and be at average five-year level in terms of inventory in Central App., which I think will strengthen prices.

We already see Central App prices as being--has been at the bottom, and moving up slightly depending on quality, and we think that will continue for the next couple of quarters. Let's talk about the long-term markets.

We are confident that demand will grow especially for our type of coal, high Btu and where they're located as it relates to the marketplace and the scrubbers that are being built for us to access.

We think that is well on line. We think the scrubber announcements continue to grow, and it's very significant in what we consider our core area.

It continues to grow through 2012 and it is up to 200 equivalent of Northern App type coal, 220 million tons of high Btu coal of what has been announced by the end of 2012 now. Also, we are now spending money to look for the change in the marketplace.

And if you look back to what we did in 2002 and 2003, we did some expansion projects to be prepared for the next wave of value that is created as demand for coal comes online. If you look at those investments, that includes the Robinson Run.

We're finishing up that project to get more tons out of Robinson Run. Bailey Belt. Slow project.

Announcement of our partnership with Chevron, on Youngs Creek project, valuable asset we have out west. And the announcement of partnership looking at value with Head Waters. Head Waters is a high-tech company that is looking at coal to liquids for beneficiation of coal, different products to add more value to what we have.

We also have the ability to come back at Miller Creek and Central App. We can bring Shoemaker back on line as that works out and we find the right margin for that.

There is real potential for us to bounce back as we see these markets strengthen, and strengthen based on scrubbers well as demand for coal overall for the entire industry. These are all good investments.

We have a great base of value in gas and coal. We have the expertise and the--and we're in very good position in terms of a fee situation, as well.

Most of our coal is owned in fee and we have the ability to make very high margins on this coal going forward as well as the gas.

So having said that, I would like to open it up for questions and let's go ahead and do that, Tom.

Operator, if you would instruct our listeners to get into the question queue, please.

(OPERATOR INSTRUCTIONS) We'll take our first question from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, guys.

Would you give us more details about the recent announcement in the PRV, I know you talked about the reserves sides of 315 and ultimate production capacity of 15 million, but can you talk about some preliminary things like what percentage of this partnership do you own?

Perhaps a timing and ultimate CapEx if you actually get the contract commitments to get north of 50% like you want them. Can you kind of spell that out for us?

Right.

Well, when you look at this entire partnership, we put two very powerful P properties together.

CONSOL had more coal than Chevron had, but we put a joint venture 50-50 partnership based on what it would take to construct it and then we would share the profits based on ownership going after that.

The key here is--this is very high Btu coal. It's in fee, not owned by the Federal government. We combined with a partner that has the same kind of financial strength that we have.

We're looking at the long-term marketplace in terms of selling 50% or more before we open the mine, it is low sulfur structure, high Btu, it is in the northern part of the Powder River basin, so the transportation issues there are good.

We have had conversations with some of our big customers in the northern tier of that marketplace, stripping ratio is very low, and we're confident that that project is due to come online and to be very competitive coming out of the Powder River Basin.

It is one of those projects we held a long time that is due to come now.

Is that something I presume that comes probably early part of next decade?

I would say it might even be before that depending on how these markets unfold.

Clearly, you have to permit it, you have to put it together but we want to let the market know that we think that valuable asset is ready to start moving forward.

Okay.

Great. A follow-up question totally unrelated, but looking at your committed tons, what you added during the quarter, seems like the incremental pricing will certainly for '07 and '08 and even 2010 we're at strong prices.

Can you talk about just, you know, '07 I would guess maybe some of that might be metallurgical coal but it seems like it is early to be contracting met coal for '08 and '10 -- can you talk about just kind of what's driving those high prices?

Well, yes, that is a pretty broad question but I'll give you the specifics the way I see it. Clearly '07 we added met coal into the equation.

'08 we added met coal in there as well. And that really of course met coal gives us a great average out as we add those tons in.

If you look going forward, though, we haven't signed a lot of steam coal outgoing '09 and '10, because we decoupled the short-term marketplace from the long-term market and haven't been in a position where we're willing to sign up big steam coal projects for '09 and '10 without getting the margins that we want to get. So we're decoupled right now on that issue.

I think that like in '08 we put 315,000 tons of met in, and in '09 and '10, there was a couple of things on internal adjustments of moving contracts around as it relates to Shoemaker, and showed a little bit down in '09. But in '10 we're fine.

We added some met in there as well. So if you look at it across the board, we haven't put much steam in and we've added some met in, in those years.

Thank you. Very good quarter.

Thank you.

Thank you.

The next question is from Michael Dudas with Bear, Stearns?

Good morning gentlemen, very good job on the safety numbers. First question, when I look at 2008 guidance of 62 to 72 million tons produced, how does that reflect relative to the central app production you have taken off the market?

Is that an assumption you possibly would bring that back on if pricing does turns out the way you anticipate in 2008.

And is the difference productivity or some of these capital projects going to come on to help meet those numbers?

Actually we've only updated '07 in terms of what our production is as it relates to that 2.1 million.

'08 and '09 and '10 is what we put out in the first of the year, and we'll give you guidance as we get closer to those years. Okay?

Terrific.

Second question is, export markets, global coal markets seem to be very strong.

Could you share a little color on your thoughts on the negotiations with some of your coal exportwise, and do you think the Europe markets will be a bit more of a longer-term market for you until the near-term markets in the U.S. get to the price levels where you anticipate?

Well, the European market is very strong, and it probably getting towards some of that's peek peaks in terms of delivered Btu. Well, the European market is very strong, and it probably getting towards some of its peaks in terms of delivered Btu. Unfortunately, a lot of that is on the transportation side. Real pressure on the transportation side.

In terms of it being a long-term market with long-term contracts, we tend to be more of a swing supplier even though we increased from last year to this year about a million tons. So we have gone from three to four this year. We see that market.

The other thing we're seeing, Mike, is a drop in coal coming into the ports of the United States. So the import coal is dropping based on that hot market.

And that's really helping to tighten up Central App, accelerate it a little bit as well as the big surge in China is pulling transportation and coal away from the Atlantic markets and we'll be--we'll use optionality of whether they want to go to these higher prices in the short term in the Atlantic or turn back into the domestic market.

And so it is good to have that option, especially when we own Baltimore facilities. It has given us good optionality.

We see the market heating out world wide and we think it will flow back into the United States as they stockpiles in Central App start to drop off.

Great. You and Keith really have spent a lot of your career out in the west. This announcement this past week.

Could you add a little bit more color? What has changed in the viewpoint.

Is this opportunistic investment for CONSOL, or do you see that there is a change that this market out west certainly is going to be much more of a higher return market for a company like CONSOL with such an asset base in the east to put additional growth capital out there?

It is one of the best asset bases to be opened up that region, to start with. And it is right next to a partner that has similar assets. It has a good partnership. We see some real strength in that market, going forward and all the coal markets.

You've heard me always say, no matter whether scrubbers, high Btu, whatever, all coal will be sold. Demand for coal is going to be strong because of infrastructure.

We just think it is time to open that up, it is high Btu, its low stripping ratio, it is cost structure, its very competitive. And a strong economy is going to drive that kind of need.

The other thing that we're not--and I don't want to get too far out on this, but that's the lowest-cost feed stock in the world for things like coal to liquids, coal to gas. Those kind of things.

So this isn't just a play to move into the old steam market. This is a play to move into new products with very low-cost feed stocks and keep in mind, we have 40,000 acre ranch right next to it that has water rights as well.

So this is a long-term strategy where we think we can add some huge value.

Good answers to that.

Thanks, Brett.

Thank you.

Our next question in the queue will come from Ian Synnott with Natexis Bleichroeder.

I wanted to follow up more on the cost side, definitely a nice trend in terms of cost improvement and the margin improvement.

And a big piece of that was from contract miners, kind of when you exclude out the combined fund stuff.

One thing you guys have talked about a bit recently is other productivity improvements like the work you did at Robinson Run.

Could we see some more of that flow through the rest of the year?

I think you will see some improvements based on--remember the UNWA contract, that we did, put us in a position where the scheduling change will use our machines at a more efficient level and at a cost structure that is a little bit different.

So you'll see a schedule that actually gives us more productivity, which will run right back into our labor costs.

If you look at our labor costs, in '07, first quarter, versus '06 first quarter, they're actually flat, and that really shows some of that.

But we've also done well in supplies and all the way through the cost structure, so we've seen it jump in productivity and that spreads over our cost structure and that's a good thing and you'll probably see some more of that coming.

Some of these efficient project I talked about, the Bailey slope, the Robinson run prep plant will be the first one to come on line. The Shoemaker expansion.

These are lower-cost structures we've seen in the past and they are lower cost because they are in Northern App as well. I think that is a positive too.

Changing subjects, when we think about the scrubber outlook you mentioned 30 gig ga watts coming on in the next years. Plants doing retrofits and bringing them back on.

Great, excellent no, thanks for that. And changing subjects, when we think about the scrubber outlook you mentioned 30 giga watts coming on over the next two years. Like we are seeing utilities taking down their plants doing the retrofits and bringing them back on. How much of that market do you think you guys feel comfortable taking and how much of that would also already be kind of committed on contracts.

Well, clearly they're not doing scrubbers just for CONSOL. They're building them for the entire market.

That gives them optionality on the Btus that they bring into the plants. Which puts them in a very good position.

They can actually burn anybody's coal once the scrubber is built. What we do though, we take advantage of our location and transportation.

If these scrubbers are built within our marketplace we can serve more than 50% of that market prop with our high Btu and so we're picking the scrubbers as they're built with the margins that we think fit, versus their choices, stack by stack, and so we're reorganizing our production to fit these new scrub markets to take advantage of location, delivered Btu and all of the things that go into what the customer needs.

The other thing that the customer is really looking at is to serve for a long term after they have made these huge investments. Those investments are so big and so long term, that CONSOL is one of the few companies that can match that for 15 or 20 years, and that is a real plus for us.

Great. Excellent.

Thank you very much.

Next question will come from the line of David Khani with FBR. Please go ahead.

Hi Brett, in the past I think you have talked about possible acquisitions, with this PRB project out there, are you sending a little bit of statement that maybe you have more organic than--and maybe you're backing off on the possibility of acquisitions?

Actually we see that some of the acquisitions that we are looking David, we continue to look at region by region. That's a regional move we made there but we're not backing off from our--you can look at our balance sheet.

It's poised to make some acquisitions, and we plan to do that at the right time, region by region.

So I wouldn't take that as a signal that what we're moving away from what we're doing here into another region, by strategy. I think we're looking at every region's capabilities and seeing what we could add to it.

We're not backing away from acquisitions at all.

Okay. I guess second question here is how much export tons did you export in the quarter?

In the quarter I would say, and I was just going to give you a round number, I would say it is about a million tons.

What do you think you'll do for the year, ballpark?

We'll be at 4 million tons.

4 million tons.

That is a nice step-up.

Yes, we're stepping up a million tons over last year.

Great.

And last--

That is 4 million tons steam. Let me make that correction.

That is four million tons of steam coal. Met is beyond that.

Met is beyond that.

Yes.

How much met?

I would say 4 million tons of met.

And 4 million tons of met?

Right.

Okay.

Last question, how much authorization do you still have on your stock buy-back?

I think we're about half-way through it, aren't we? Yes, go ahead.

Yes, we have in our press release basically we have a little bit more than half still authorized and we look at our share buy-back based on our financial situation and also other opportunities, and, again, I think it is pretty much we're executing the program as we--as we had announced.

Great. I'll let other people ask questions.

Good quarter.

Thanks, Dave.

Thank you.

The next question will come from the line of Brett Levy with Jeffries & Company.

Most of my questions have been answered and you guys are obviously talking to be acquisitive.

It seems like you got something close to 40% of Appalachia's coal production in private hands right now.

These guys are not the most disciplined in terms of what to let coal go for and if there was an opportunity probably to roll these companies up. And yet, when you look at some of the other smaller guys, it looks like their stock prices are starting to move.

Was this a missed opportunity? Is this something you continue to look at? Does it feel like the price tags for some of the private properties are moving up as well here? If you can give a little color of what you see going on in the M&A market.

I don't look at it as lost opportunities.

We look at all of these--we look at the marketplace, at the term of the marketplace and back it into what we think the value of these companies are.

If you are seeing rising prices, clearly these things become more valuable in the short-term. A lot is based on their location in the marketplace and their advantage to any given power plant .

We look at it more from that than we do just trying to buy it at the bottom of the market. So I wouldn't say there is a lost opportunity there.

I do believe that there will be more roll-off in central app, but the pain in central app, I don't think is totally there yet.

There is a lot of financially companies that are--that are suffering right now, that are living off contracts written two or three years ago.

We think there is a cliff toward the end of the year where there will be some more opportunities to do some consolidation there.

Consolidation that matches

You see these contracts as actually getting worse after this year?

Oh, yes, yes.

Got it.

Thanks very much, guys.

Thank you, the next question in the queue will come from Pearce Hammond with Simmons & Company International. Go ahead.

Good morning. Brett, on the Valley Fill ruling from the Justice Chambers, just curious what your thoughts are on that and the impact to the industry.

I think it slows down, it doesn't affect us very much, I think it slows down mountaintop mining. It makes it harder to get permits.

The pipeline going through that process has been delayed. And so it's really a permitting issue.

If you take the mountaintop mining equation in Central App and you are just going to slow it down, what it's really going to do in the short term is tighten up the market and in the long term it will be harder to get permits to slow down the pipeline.

The response from mountaintop mining won't be as great as it was the last time around.

My second question would be if you're still considering or any update on maybe an alternative financial structure for some of your assets like an MLP?

Yes, I can tell you this: We see a change in the MLP marketplace. We see some possibilities there based on our asset base.

Our financial people, and in fact our CFO is reviewing that right now, and we will be talking about--see if it makes sense for our assets to be in those kind of vehicles. But it has to make sense for our shareholders. We've seen this cycle before.

It didn't make a lot of sense to us last time because the size and breadth of the market, but we're seeing a big change there, and if it has longevity, you'll probably see us take a real hard look at that.

Thank you very much.

Thank you, the next question in queue will come from the line of Paul Forward with Stifel Nicolaus.

Go ahead.

Thanks, good morning. Couple of things. How are you seeing lead times and pricing changing for underground mining equipment? Is that any change over the last six or 12 months?

We think they're backlog is way down. We think their price is stabilized. I can tell you how we're responding.

We're basically saying the price is the price, we're not accepting much inflation because we're looking at more rebuilding against new products. We think our suppliers pushed it as far as they can push it in this marketplace.

All right. And the other income line is 25 million in the first quarter. Is 25 million a good run rate for the year?

I'll turn it over to our CFO on that one.

Yes, in that other income line there are many things that could enter into it, like property sales and the rest, so based on right now, I would say, yes, that is a good number. But, again, it is an item that is lumpy.

It is based on specific transactions that occur during the various quarters.

All right.

And the Youngs Creek property out in Wyoming, I was just wondering, high Btu content, good rail access. Why do you think it hasn't been developed before now, and I mean are there any issues? I know there are some mines in that area that have issues with higher sodium content.

Are there any issues like that, that have kept the property undeveloped before now?

Well, if you go back in history, and I won't spend a lot of time on this, but the oil companies capitalized a lot of that back to the '80's, and CONSOL chose not to do that. And they all started at stripping ratios 20 years ago, they were very close to what their stripping ratio is today.

With the high Btu in our stripping ratios, we think it is time and very competitive, based on we've been patient with it and we think it will create some very interesting value to us going forward because it is very competitive.

High Btu as well as lower stripping ratio, and the sodium issue, the market has figured out how to burn sodium.

It is the Btu-delivered issue. If you look at all those northern coals, they have the same issue.

They have been running 20 or 25 years now. So I don't think that's--our sodium tend to be a little bit lower than what we see in the north, anyway.

Okay.

Thanks a lot.

Okay. Thank you.

The next question in queue is the question from John Hill with Citigroup. Go ahead.

Great, thank you, and it is good to see the company continuing to exercise leadership on production cuts ever since you were the first to really start talking about that last summer.

Thanks.

First, a little bit more of a detail question. Just curious about the logic of including that $28 million credit against cogs. I mean, you talked about it and given us all the impacts, but it just appears a little odd. Why are we treating it that way?

Well, that is where it was charged originally, so we just took the credit back to where it was charged. You know, where do you put it?

The bottom line is that it is the people talk about quality of earnings and usually the test of quality of earnings is that it comes in, in cash, and it's real cash that came in the door.

We have it in the bank and that's why we put it there. That is where it was charged.

Understood.

And then shifting gears more to the coal markets again, a lot of insightful commentary already on the call, but it seems you've mentioned a number of times high inventories in the Central Apps, stockpiles need to come down for prices to catch an inflection, etc. and you sound perhaps a little bit less bullish than some other voices, although more considered, I'm sure.

How much do we think that stockpiles really need to come down before we can see a response in the market?

Okay. I would say we have said, and we said last time, we thought it would come down to about 30 million by the end of the year in terms of real production.

The stockpiles, unfortunately were built--were built by that production, so it takes a while to come down. We made a pretty strong statement by telling you right now that we're continuing to cut down 2.1 million. We think it needs to be accelerated.

We think the market on the Atlantic side is going to help. We think the cutting back in Central App is going to help. And we think the use of electricity to going up.

So they are dropping, but not dropping at the speed we would like and we're not going to sell our coal for practice. That spot market is still too soft.

Great. Great perspective.

And, again, great leadership on issue.

We'll take our next question from the line of Justine Fisher with Goldman-Sachs.

Good morning.

Good morning, Justine.

First question I have was to double-check on the cost line. If you add back the $1.26 for the combined fund settlement to the 22.61of operating cost. Can you give us some more color on what led to the fourth quarter, the first quarter decline on average cost per ton, because produced ton sold were lower, sequentially, so

could you give us some color on sequential basis?

Well, the--we have the ability to move from higher cost operating costs from one region to another and to lower cost in another region based on the market.

So you see a jump of productivity of long walls to the north, against the higher cost structures in Central App, and you see--so if you look at what we did, we accelerated the northern, because the market was better in the north, into the northeast. We accelerated that and decelerated Central App., which gave us a better cost structure in the short term, which investors should understand that is great flexibility.

If you look at that flexibility on top of our flexibility of shifting capital from gas to coal, this is a very, we have great optionality and we have better --we have had normal geology in the north, too. So we had a good quarter.

That is kind of a in the that in a nutshell. I can give you a lot more than that.

That's okay. So going forward, if the last couple of quarters of '06 where we saw obviously cost inflation for things like equipment and labor, etc., those were a touch above 25 bucks a ton if the ship to north app from Central App brought one Q cost down, can we expect to see average cost per ton stay below $25 as you guys shot down more higher cost central production.

I think you'll see our prediction of inflation be pulled back based on productivity and in shifting from one region to the other.

Whether it stays below that number or not, lot of it depends on how many tons we mine at any given quarter, as well as--but I think that our--on a productivity basis, yes, we'll--you'll see lower costs pressure based shifting from one region to another.

We don't expect the cost increases to be as great as they have been in the last four or five quarters, so we think there is some stabilization of the rate of increase there in costs.

And how much more of your Central App production would you say could be on the cusp for further cutting after you already take out this 2.1 million tons. Is there more that is kind of iffy as far as margins go?

Everything else is sold.

It is already committed.

So we pulled back everything but we refused to sell that hadn't been sold, so we just pulled it back and shut it down.

Okay.

One of your competitors commented on another call this morning that they believe the industry in Appalachia will be more disciplined in bringing supply back on line, after we go through this period of pain, as people have been calling it. I was wondering if you guys can comment on that in the light of the fact that

you have mentioned you can bring on some of your supply back if market conditions were amenable to doing so.

Do you think the industry will be more disciplined or do you think we will see some people that when margins turn positive they will just start bringing back on production they took out earlier?

I think a big part of what is being shut down today has forced discipline.

Their cost structure is so high, that they only do good at the top of the marketplace so they can't take the swings and they're also in worse geology and the competition is pretty fierce down there.

So I would say that companies like CONSOL who just pull back based on margins are probably on the rare side of it. The others are being forced out. So, yes, I think the discipline is probably going to be a little more than it was last time.

But, you know, everybody was capitalizing for $60 coal and that didn't last very long, did it?

Okay, then just one last clarification. I notice that the produced tons sold were I think you know 700,000 less than the produced tons.

So you guys built inventory at Central App. So did you build an inventory during the quarter?

What was the discrepancy between that number?

It was a build in inventory but that is fairly normal for us in that period of time. Inventories are not at abnormal levels.

Again, there is not an inventory problem.

I think we said by the end of the year we would be back to normal inventory and maybe even sooner.

Those inventories in Northern App or Central App.

Inventories are spread out.

Both.

They're--and there is not in one particular concentration. So, again, it goes back and says--there is not an inventory issue.

We're more worried about the inventory of our customers than ourselves.

I hear you. Thank you.

Next question will come from the line of Adam [Sanmartini] from Cobalt Capital. Please go ahead.

Hi guys, good morning. Just wanted a bit more color on the European market and the opportunity that you have here.

It is an interesting tactic and as David pointed out, continuing to get more attention from you as you're up 33% in tonnage year-over-year. Can you talk about how you view the supply demand dynamics for Europe. You mentioned China pulling transport and volumes away from the Atlantic base.

Can you talk about what you're seeing on the supply demand and what the opportunity in the future is. You mentioned being a swing producer but maybe you could quantify that a little bit more in terms of tonnage opportunity for you to send to Europe.

Well, it is interesting. The U.S. has always been a swing producer for Europe.

Basically Columbia and South Africa drive that. Straight rates is the issue between all of us. But what we're seeing, as you see Asia demand more coal, you're seeing transportation move out of the area first, drives up transportation costs. Does it deliver Btu into Europe, gets more expensive based on transportation.

And as you see, that becomes the driver. You see more coal being pulled away from the U.S. coast from South Africa into Europe, and so forth, which tightens up the market overall.

We believe that that's going to continue for a while, and that the European market is going to stay at these high levels for--but they tend to be a spot market with us year-to-year rather than long-term deals.

We don't see long-term deals, but we'll take advantage of that spot market, at the peak like we see right now. Especially when our market is a little bit soft.

So we'll play it one off to the other, and we have the advantage because of our big mines, dual rail systems as well as our Baltimore facilities, to quickly move millions of tons away from our market.

When you think, Brett, about the market, do you think four million tons given your outlook for your market and the tightness that you say, do you think four million tons is a reasonable estimate for the next couple of years, or do you think it could be meaningful more than that.

I think because of the scrubber market you'll see us pull towards higher margins and higher prices right in our back yard.

Okay. Thanks.

Thank you. The next question from the line of Jack Franke with Duquesne capital.

How you doing.

Hi guys, thanks for taking my call. I want to ask a little bit further on the MLP opportunity.

Sure.

Sort of what the size of a potential MLP could be for CONSOL's assets, what the assets are, and sort of a timing you guys would be thinking of.

Well, I think the size clearly, because of our asset base, we could do real big or real small.

I don't think I'm ready to talk about the numbers, but I think I'm convinced that the market is big enough to take a big MLP. The issue on timing I would say--I would say we'll have an evaluation this year, and announce one way or the other this year.

So, yes, we're looking at it and the type of assets we look at, are things that are capital intensive, obviously, and that would be things like barges, pipelines, prep plants. Things that coal fee structures, those kind of things, and that's what we're looking at.

It is a very broad look and that is why it is taking us a little time to evaluate it but we're looking.

Do you guys have a sense of the EBITDA range of CONSOL could be put into an MLP structure?

I don't think we would want to bring that out right now, but it could be a--depending upon what you choose, you can pick the ranges. Clearly you could pick a range for the transportation pieces, or you could pick a range for the prep plant pieces.

But if you add them all up, I don't think I'm prepared to talk about that right now.

Okay.

Secondarily, just on the M&A front, how are you guys looking at M&A opportunities versus share buy-backs and MLPs and the like?

We weigh them against each other on an economic model. Clearly you have short-term issues versus long-term issues on M&A.

But if we can do an M&A that has very high rates of returns for multiple years, that would take precedent over a quick hit on a share buy-back, if you could sustain long-term value for a shareholders to buy an acquisition. We're weighing those out.

We have models to do that and every project that comes up is weighted against

I assume those are risk adjusted returns.

Oh, yes they are.

Okay.

Thank you, guys.

The next question is from David Gagliano from Credit Suisse.

I wanted to drill down on the Youngs Creek again, just to come back to it.

Based on the initial feasibility study, I wondering if you could give a us a sense in terms of the capital cost associated with the asset. That is the first question.

Sure. Well, clearly feasibility studies and feasibility, but big surface mines are a bit easier to figure in terms of capital.

The total capital we think would be about $200 million.

200 million and that supports a 15 million ton pressure

That's right. That is what we're looking at.

You mentioned strip ratios a few times. What are the life of mine strip ratios?

Life of mine I think--I think the average life of mine is about 2.5.

Presumably lower in the beginning years?

Oh, yes.

And then lastly.

It is one to 1.5 early on.

And lastly you have--obviously you have a, you know, a tax advantage considering the ownership.

Yes.

I wonder what the early read is on unit costs factoring in that tax advantage.

I don't think we're ready to talk about that.

Not ready for that one? That is very helpful. Thanks very much.

Our next question we'll take from the line of John Bridges with J.P. Morgan.

Hi, John.

Hi, Brett.

Congratulations on the safety numbers.

Thank you.

Just a little bit more color on your comments on Central App if you could. You know, people are looking at this threat to surface operations as being a big positive for pricing down there, obviously that's mixed impact.

But, you know, from your comments it sounds as if you still anticipate an overhang of coal right through the end of the year. Is that what is driving your view?

I would say not through the end of the year, John. I think as long as you have big stockpiles on the ground, the mood isn't right now for customers coming out looking for higher prices.

I think they're looking to replace those stockpiles at the prices they build them up on, and if you look at the psychology of that, it takes a while to build up pricing back up.

You really have to be in a position where they don't have options, and I think the mountaintop scrubber issue isn't so immediate that it tightens the market within a quarter.

Now, I would say over three quarters, maybe it will. But that's just one piece of it.

That between import coals and pull-back in production across the board, I'm going to give you my crystal ball. I think it is going to happen in the third and fourth quarter.

And early in the third I would be surprised. Late in the fourth quarter, I would be surprised. So it is somewhere in between there.

All right.

I don't know if that was helpful to you, but that's--it is hard to tell because the customers aren't just out there looking for coal.

In a big way. They are looking for certain qualities that they weren't a month ago.

Right.

You were talking about things being quite bad at year-end.

Well.

I wouldn't say bad. I would say we're committed not to mine that coal this year unless there is a big change in the market.

I think I was talking more about CONSOL. We won't bring that 2.1 million tons back until we get reasonable pricing on it. It is hard to speak for all of the others.

Okay. Good luck. Thanks.

Thanks.

Thank you. We'll take our next question from Zack Schreiber.

Jack has answered my questions thanks guys.

Wayne Atwell with North Street Capital.

Hi, Wayne.

Let me paint a scenario.

I don't mean to seem too positive on your environment. But let me sort of walk through what I see.

The mountaintop mining issue could conceivably knock out half of Central App volume which is maybe 220 million tons.

Let us say it takes down the surface volume of 110 million within three to four years. The scrubbers are coming on, which is going to increase the appeal of Northern App. coal so what you conceivably could see is a reduction in production capacity or production of 110 million tons versus existing capacity now.

Now the European and Asian markets picking up an appeal so the trade balance is improving. China is becoming a net importer.

So if you look down the road, an intelligent purchasing agent should be really paranoid about availability of coal in your geographic region.

Are you seeing that? Am I missing something? Or are they just implying to have a three to 12-month time rise and not be paranoid about the '08 to 2010 period?

Comfort on the short-term for utilities are based on how much they have in their piles right now.

If you look at what we did last year, we did see people concerned about the long term. That why we signed up $10 billion worth of business over a 20-year period.

The price is still the issue, I think. They like these low prices that they're seeing right now, and they're worried about the tons for the long-term, but it is not driving them right now, especially in the Central App area.

People are still trying --in my opinion, people are still trying to figure out what the mountaintop issue is and how deep it is. I can tell you this, it won't go to zero.

There is still a lot of good projects that are already permitted and in place and capitalized and those will work their way out. So I think it's--there is two things needed.

We need a rebound. We need a steady base. And we need discipline in that region, and I think we're going to see some of that in the next couple quarters. Like I said earlier, I think it will be forced discipline.

But I really doubt that we would see 110 million go to zero in the next three or four years in Central App.

So if you know when you have a mine, you need to constantly repermit it and you move from one area to another.

So you don't think we'll lose all the 110 million tons of surface capacity.

No, I think it will be permitted a different way, it will cost more. You will see a break between surface mines cost and productivity, versus underground mines and productivity.

So you will see companies like CONSOL and others, the permitting process will slow down and then you will choose quicker mining to avoid those permitting problems, you will see a shift there.

Certainly some of that 110 million tons will disappear. Some of it depletes, it won't be repermitted And some that needs to get permit two and three won't get them.

I agree with that.

You said 110 millions goes zero. I didn't think that. I think there is a good chance that 30% of it could go away in three years.

Even that is pretty significant. When you add in the scrubber issue, as more utilities have scrubbers, demand for your coal in your region could improve pretty materially.

Oh yes, but remember, that drop in permitting will not affect all permits and won't affect underground mining as much.

So there is a balance there and the question is, it is hard to see where it is going to go because there is so many players down there, but it will tighten up and I think you're thesis is good there.

The economics of certainly the underground mines will deteriorate as well. As some of that coal and

the ways to be put back underground I tend to think.

That is right. That will cost more too but not as dramatic as surface mining.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS)

And we will move along to the line of Pearce Hammond with Simmons & Company international.

Just a quick follow-up question, given the change of dynamics in China, with them becoming a net importer of steam coal, have you changed your outlook or is your outlook for met coal improved from where it may have been at the end of last year?

From met coal, did you say?

Met coal for pricing.

We think met coal is stable and if anything that will affect upward pricing we think '08 is very solid.

Where do you see pricing roughly, just a rough range?

Back at the mines here, if you go to a short-term back at the mines, we see low 70's for our type of coal.

And that's a Buchanan low vol.

Yes.

And the high vols are getting a little more.

I think a little bit more, but not dramatically more. They tend to use those international blends and play one off the other and keep it in that level.

And transport it to get to port.

The transportation piece, you know, I'm not sure. I have to get back to you on that.

They tend to pay for the transportation. That's stable getting to the port but I'm not sure what the total cost is.

Sure. Thank you, Brett.

Operator, if we have no other questions it is 11:00. And we would like to thank everyone for joining us this morning, and if you would, before people sign off, give them the replay information.

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