CNX Resources Corp (CNX) 2007 Q2 法說會逐字稿

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

Good morning, everyone. Thank you for joining us this morning. With me today are Brett Harvey, our President and Chief Executive Officer, and Bill Lyons, our Executive Vice President and Chief Financial Officer, and we will be discussing results from the second quarter just ended, as well as our outlook for the remainder of the year.

As a reminder, some of our discussion is forward looking in nature and we have enumerated for you in the earnings release this morning at 7:30 some of the risks associated with forward-looking forecasts, and in addition, we've discussed the risk factors for the Company in detail in our SEC Form 10-K filing from February 20th, 2007.

As is our usual practice, we'll begin with some formal remarks from Bill and then from Brett, and then we will take questions.

So I'll turn it over to Bill Lyons.

Thank you, Tom. I am pleased to report another outstanding quarter for CONSOL Energy. Net income for the second quarter was $153 million, or $0.83 per diluted share, compared to $110 million, or $0.59 per diluted share in the second quarter of 2006. This is an increase of 39%. Net cash from operating activities was $271 million, compared with $197 million in the second quarter last year, an increase of 37%.

Our financial position is powerful. We have improved our overall liquidity by generating cash, by paying down debt, by enhancing our various credit facilities, by prudently managing our active operations, and by monetizing assets that were not in our 10 to 20-year planning horizon.

Results from our coal business were very good, particularly in a challenging energy market. Total sales for produced coal were $705 million versus $661 million for the second quarter last year. This represents an increase of approximately 7%, primarily driven by increases in realizations on produced coal.

This improvement in average realized pricing for the quarter is also evident in what we consider two of the most pertinent metrics of our coal business -- operating and financial margins. One cannot over emphasize the value created when you can grow margins, even in periods of lackluster energy demand. Our operating margins increased period to period by -- to $16.18 per ton, an increase of 6%, and financial margins were $8.28 per ton, an improvement of about 2% versus the second quarter of last year. In addition to the nearly 9% improvement in realization, what's most impressive is that operating and financial margins grew while the denominator in the per ton equation -- production volumes -- declined 9%.

Production was down 1.6 million tons period to period primarily due to geological conditions in Mine 84 and McElroy, and the Amonate in earlier periods of Shoemaker Mine and some central Appalachia operations in response to market conditions.

On the cost side, total operating costs for the Company produced coal in the period-to-period comparison increased $2.34 per ton, primarily due to higher labor and supply costs, as well as health and retirement benefit costs. Total costs were up $3.17 per ton, or 10%. However, in actual dollars spent, total costs were only up $6 million, or 1%.

Yesterday, CNX Gas reported second quarter net income of $41.5 million, up 9% period to period. Results were driven by record production and expanded unit margins. From a strategic standpoint, the gas company expanded their acreage position by 1.1 million acres in two separate transactions. The most significant one involved the acquisition of certain coal assets from CONSOL Energy, for which CNX Gas paid CONSOL Energy approximately $50 million. CNX Gas subsequently exchanged those coal assets for Peabody Energy's coal bed methane and gas rights to approximately 1 million acres in several basins in the United States.

In addition to this sale, we also sold certain rights of assets in the Illinois Basins to Alliance Resource Partners for $53 million in a pure cash transaction. These assets consist of leased and feed coal reserves and resources, but in the aggregate, are estimated to contain 78 million tons of steam coal from three coal seams in Kentucky. Neither of these assets were core to CONSOL Energy's long-range strategic plan, and we will continue to evaluate our portfolio of assets or other such high-value opportunities.

The two asset sales are recognized in the other income line on our income statement and represent approximately $100 million. For comparison purposes, other income for the second quarter of 2006 reflected $25 million in insurance proceeds related to the Buchanan fire that occurred in March of 2005.

During the second quarter, we also announced the acquisition of the AMVEST Corporation and related coal and transportation assets, including AMVEST West Virginia coal and the Vaughan Railroad Company. This acquisition, when combined with our Birch and Canfield reserves to the north creates a continuous block of 300 million tons of coal reserves and establishes a platform in central Appalachia for future growth and profitability. It addition to the coal reserves that we are acquiring from AMVEST, we also are buying four preparation plants and a short line road that connects those prep plants to the dual rail interchange that is served by the CSX and the Norfolk Southern railroads.

From a financial perspective, EBITDA for the acquired portion of AMVEST for the 12 months ended April 30th of 2007 was $66 million. Although we do not provide financial guidance, I can say that AMVEST is on the lower side of the supply cost curve, and that we expect, as global demand for coal continues to grow, this acquisition will be an outstanding contributor to our long-term profitability. We believe that there is still a lot of money to be made in central Appalachia and we intend to be a major participant in the earnings generated from this basin. The AMVEST acquisition provides us with a sustainable competitive advantage in central Appalachia.

From a production standpoint, AMVEST Coal produced approximately 5 million tons of coal last year, with about 10% of that production being metallurgical coal.

Please note that although we have incorporated AMVEST into the third quarter '07 and the fourth quarter '07 guidance, we have not adjusted the production guidance table in the earnings for the 2008 to 2010 periods to reflect the AMVEST acquisition because we have not yet concluded the work on our 2008 profit objective or our 2009 to 2019 long-range plan. We anticipate completing this process and providing updated production guidance for the 2008/2010 period during a fourth quarter earnings release.

Turning now to financial management of the Company, I'm pleased to say that we strengthened our financial position during the quarter through two borrowing arrangements. In June, we completed a $1 billion credit facility. With this credit facility, we increased our capacity by 250 million and improved our pricing. And in April, we amended our trade accounts receivables facility to allow for the receipt of up to $150 million, an increase in capacity of $25 million from the previous facility. As part of the amendment, we are now permitted to issue letters of credit against the entire $150 million facility, freeing up capacity on our bank facility.

Through these two arrangements, the Company increased its financial flexibility, expanded its borrowing capacity and has improved pricing structuring for borrowing. These facilities also attest to the confidence that the financial banking community has in CONSOL Energy.

Finally, I'd like to briefly bring everyone up to date on the situation at Buchanan Mine and the potential financial and production impacts. Production at the Buchanan Mine was suspended on Monday, July 9th of 2007 after several roof falls in previously mined areas damaged some of the ventilation controls inside the mine, requiring a general evacuation of the mine by employees. No one was injured during this evacuation. Air monitoring continues to show an overall improvement in the underground mine atmosphere. The mine continues to be ventilated and engineers believe that carbon monoxide in the mine is progressively being swept from the mine by the active ventilation flow. Once all monitoring stations show acceptable levels of gases being monitored, the agency approval is secured, teams can re-enter the mine to repair areas where the ventilation controls have been disrupted.

For guidance purposes, our third quarter production guidance to you assumes that production will resume on September 1st of 2007. The mine continues to ship coal from aboveground inventories, although total shipments per week are lower than normal. We will probably ship our remaining inventory over the next 10 days.

Customers who purchase coal from the mine have been notified that a force majeure condition exists at the mine that may result in a reduction in deliveries under their sales agreements with that mine. Our current business interruption insurance has a 90-day waiting period. Business interruption proceeds are applied to each day of mining interruption starting on the 91st day -- 91st successive day and each day thereafter.

In summary, we believe that this was another outstanding quarter for us. We have made major tactical and strategic moves, both from a financial and operational standpoint and we believe that we are better positioned today than at any other time in the history of this company.

With that, let me turn it over to Brett for his comments.

Thank you, Bill, and it's good to be with all of you again to report what I think is a very good quarter, as well.

First of all, let's talk about safety. We continue with our safety program to emphasize the value of our employees and the numbers as we track them to continue to improve over our history, as well as our goal towards zero accidents. We're very proud of that and we continue to work towards that.

On the safety front, too, I really want to note that the systems we have in place at the Buchanan Mine allowed our employees to exit that mine with no incidents at all. It's clearly more important to us to recover assets, as we're doing right now at Buchanan, than try to have a problem with our employees or be in a position where we have a problem with our employees, so from that perspective, we're very thankful that those people are out of the mine and we're just monitoring the asset.

We continue to look at very important things on the economic side. We're focused on margin expansion in our coal business as well as our gas business. Our gas business announced yesterday expansion of margins, and also we announced today expansion of margins on our coal side. We have rise in average prices on the coal side. We continue to focus on that and we're mining the volumes that give us acceptable returns as it relates to our capital investment in these mining operations. That is our focus, not only for the quarter, but for the long term and we continue to be very focused on that.

We had solid operating results. Coal margins improved from period to period, as we talked in our release. In a business like ours with high fixed costs, that's a tremendous achievement. We are posting operating margins 40% higher than some of the PRB prices that I've seen reported recently. Coal prices improved $3.30 a ton. We have a quality product and the discipline to ask for a fair price for it. Clearly, reported inventory levels are not impacting our pricing.

Mine inventories fell and are expected to fall even more by the end of the year. We are shipping every ton under a contract and we're not seeing any delivery pushbacks at this point in time. We're focused on our high-BTU, low-cost leadership in all the basins that we operate in. For the first half of the year, operating costs are up only 3% compared to the total from last year.

We have in Northern App the right BTUs, the right geology and the right location to get these margins. We have in Central App, and with the acquisition of AMVEST, very good investments, low-cost producers. There is money to be made in Central App over the long run and we're the company that will make it.

We also have that with our Youngs Creek expansion that we just announced this last quarter with Chevron, so in every basin, we have a very low-cost position with the ability to have very high margins going forward.

Financially, as our CFO just announced, we're very solid. We have 1.1 billion in total liquidity, we have very low debt levels, and we have showed great skill in monetizing non-core assets at very attractive prices. We're not running for cash. We're running for the capture of real value for our shareholders.

Our core market fundamentals are better than the macro fundamentals in the U.S. for the next 18 months. Excluding AMVEST, about 20% of our unpriced tonnage for 2008 is low-vol met coal. We feel good with that, as we see rising prices on the low-vol side especially. We will update the guidance for 2008 in the next quarter, but I think you'll see we're in the right balance going into 2008.

Scrubbers continue to be built, which strengthens our bottom line. It expands the market for our type of coal, and our high-BTU coal in a very strong position in the scrubber market. You saw that we also announced in the Carolinas another contract that shows that our BTUs travel a very long ways once the scrubbers are built. The proximity to our customers gives us the opportunity to sustain very high-margins as these scrubbers are built and we are not in a position to where transportation is a big problem for us.

We continue to have a third of our coal move on the river, of which we control a lot of that transportation, as well as dual railroads or where we do have transportation.

With that, let me talk a little bit about more about Buchanan. Buchanan, we see no active combustion in the mine. We've drilled nine new boreholes. We've put cameras down those boreholes and we see no signs of fire or smoke or anything like that. It's all clear. Keep in mind we're ventilating that mine. It's different than 2005 when we had a problem. We are monitoring, making sure it's safe, working with the government to re-enter and recover that very valuable asset, and we will do that. No other company has the technology that we have and we are using it to recover that asset for our shareholders, as well as for our contracted tonnages for that mine.

The temperature probes that we put down in there show ambient temperatures for the mine. We continue to ventilate and the CO is declining very fast. We have very high hopes to get in there as quickly as we can and as safely as we can.

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

Thank you, Brett and Bill. Operator, if you would instruct our listeners on how to get into the question queue, please.

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

Good morning, guys. Brett, you talked about, in your prepared remarks -- or least in the press release -- being an asset-rich company, and obviously you've made some moves on that here recently. Maybe don't have to be specific, but any plans on capitalizing on that anytime soon? More asset sales?

Well, we clearly have a lot of assets, like we talked about, and we're strategic about that. When these assets come up and the market's looking for them, we negotiate the top price that we can. We do have a suite of assets that we would move, but it's more opportunistic when the customer or a competitor or whatever needs them and we can make a deal with them, so there's nothing that's really scheduled other than when it comes up, we're ready to negotiate.

Gotcha. And then you've had some of your peers announce kind of some cutbacks -- minor cutbacks in production or production growth trying to bring that inventory picture around sooner rather than later. Can you kind of share -- you guys have obviously done this in the past, but your thoughts on that and maybe update us on where you stand in terms of exporting coal?

Well, the export situation really gives us the opportunity to cut back soft domestic markets and take advantage of the international markets. What's interesting right now is we see a very rapidly rising price on the steam coal as well as the met coal side for international markets, and we see ourselves at about 4.5 million tons moving out of the United States on the steam side this year and as high as 4 million, maybe higher than 4 million next year if these prices continue to rise. So rather than cut back production on these big long [walls], if these prices are right, we'll move it out of the traditional markets into the international market.

Great. Thank you.

Thank you. The next question in queue comes from the line of Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen.

Hi, Mike.

Brett, can you maybe characterize a little further in your discussion about your markets versus the U.S. fundamentals and maybe how the market has changed since the end of last year. Do you think it's working in the proper direction relative to getting the supply-demand in balance in the U.S.? And is maybe your regions where you are much more active -- about to show up some lower production and maybe some inventory drop?

Well, first of all, let me say that the core markets of ours -- Northern App -- I would consider in balance right now, and they've been in balance for probably the last nine months or so. I would say the average supply level at the utilities in the Northern App marketplace is 30 to 35 days. We see that as stable. We're not getting pushbacks anywhere. I do think that Central App continues to be somewhat oversupplied. That's probably 40 the 50 days supply in those areas. The restraint that has been talked about -- if you look at what I said back into the first quarter, we didn't think that would turn until the fourth quarter. I think that's probably right. I think there's a lot of pressure on coal going into the synfuel system out of Central App. I think the safety regulations are going to put pressure on Central App and we'll see that slowly decline. But remember, people want to run their mines and they'll run them as hard as they can for as long as they can until this market pushes back. That's why we always said that it would be the fourth quarter before we saw turn there.

As far as Powder River Basin, we tend to see a lot of coal moving out of the Powder River basin. It seems to be disrupted once in a while by transportation, but I think more discipline needs to happen there, and we're not a player there, so I'll let them figure that out.

Relative to your balanced view of Northern App, do you think prices reflect that balance view or there's still room to go?

I think we'll see continued increase in pricing, as we've talked. As we see these scrubbers being built in our core markets, I would call the bull's-eye of where our BTUs go, we'll continue to see rising prices. Now, when you have a turndown in the coal business like we've seen in the last 12 months and probably some into next year, you're going to see this push a bubble of coals through the system, but the production capability of this country really hasn't increased that much. And when the demand really lines up again, you're going to see continued pressure on pricing.

The rail's in good shape. the river -- our river transportation is good, so we'll continue to see ability of our mines be able to move into the margins that we think our shareholders deserve.

Relative to your uncommitted metallurgical tons that you pointed out for '08 and '09, given where indications are in the Asian markets of pricing, is there much of a delta relative to the coal that you're shipping metallurgic ally relative to what you could get the next couple of years?

Yes, there is. In fact, if you look back in our history, when it jumped up on met prices the first time, we signed some pretty long-term deals that were very good for us because Buchanan is such a low-cost structure, but we see -- we signed those up in the $55 to $65 level. Right now, we see export low-vol at $75 to $78, high-vol at $68 to $70, and domestic we even see more pressure because of our location. That's probably $80 to $82. And these are dollars after mine is what I'm talking about. So yes, I think -- and we have 3 million tons open for repricing for next year, so we see some real value there.

One final question. You've had Youngs Creek announced for about a quarter. Any early indications of how that looks?

We're working on the mine plan. We're doing the permitting. We're putting the capital structure together. We're having discussions with customers and we think it will be on schedule. We think that's a good solid low-cost mine and there seems to be a lot of interest, especially on that northern tier of customers for that kind of coal.

Thank you, Brett.

Thank you. The next question in queue comes from John Hill with Citi Investment Research. Please go ahead.

Yes, good morning, everyone. Just a quick follow-up on Mike's question. Where do you see thermal export markets for the Northern App material into the European markets?

Well, right now it's at a record high in terms of delivery into there. We see $40 to $42 FOB the mine right now, and we think that might continue to rise. We're negotiating right now on some of those tons for '08 and we're in a good position to have optionality between the domestic markets, of which we're negotiating for some tons -- some open tons for '08 and the rising prices on the international market. It's nice to have optionality with that and it continues. It looks like it's going to be about 4 million tons for next year, leaving our area, but it could be higher if the price continues to rise.

Yes, it's great to see those opportunities play out. Next, I was just curious about the asset sales -- roughly $103 million in the quarter. On the cash flow statement, we see a gain of 103 but proceeds of only 57. Is the difference -- in other words, the cash that's not there, is that timing or does that represent the property swaps or what's that about?

Yes, this is Bill Lyons. The Alliance deal was a pure cash deal. $53 million came in. The gas swap deal was not a cash deal per se; it was a trade of property so as a result, there's no cash flow. There was an exchange of cash between the gas company and the coal company, but on a consolidated basis, it's zero there.

Got it. And then do any of these asset sales or other items factor into the operating margin calculations that you provide?

No. They're all totally separate. Our margins really capture all of our costs, as well as our liabilities, and you can see we have very strong margins after we've covered all of those issues.

Yes, absolutely. Just asking because we had that combined fund settlement, which was created treated as a credit against COGS in those calculations last quarter, but we don't have that this time around?

No. No. That's where it came from. It will be averaged in all year. If you look at our cost structure and what I said about the cost structure the first quarter, I said that we've probably be -- our costs would rise about 5 to 6% over the year. And if you saw what we did operating cost wise, we're actually -- our costs are down from all of last year to half of this year. We're down 3.3%. That includes that one-time adjustment, but I think -- remember the third quarter is a heavy rebuild quarter for us as vacations are on, and you'll probably see us at about a 5% rise year to year -- 5 to 6% rise year to year in total costs by the end of this year.

Okay.

But if you look at operating margins, we're up almost 17% year to year.

Got it. Great answer. Thank you.

Thank you. The next question in queue comes from the line of John Bridges with JPMorgan. Please go ahead.

Hi, John.

Hi. Congratulations. Great results.

Thank you.

Just wondered could you sort of open up a little bit more on your expectations for the coal exporting out of the U.S. in general? It seems like a very interesting market as the other exporters aren't able to deliver. The U.S. has got plenty of capacity. I just wonder how much you think can be put on water.

Well, we know what our capacity is. Our Baltimore terminal will probably move 12 to 14 million tons at maximum capacity. We see 4 to 5 million of our tons. We are shipping other people's tons through that port. Keep in mind that we don't pay excise tax -- Black Lung Excise Tax on those shipments so that's an adder for us. And we also pay ourselves to run through that port, and that's another dollar and a half or so. So in a sense, you're paying ourselves to leave town, which is a good thing, I think, to keep our market stable.

But yes, I think there's capacity there. I think as that market continues to be -- it tends to be more of a spot market, as you know, John, and the commitments are really quarter to quarter and no long-term looks. South Africa is moving coal to Asia, and Australia port congestion is really creating U.S. steam to move into Europe at pretty good prices.

Exactly, so this fall, things could really quite interesting.

Oh, yes, I think it can. And the utilities do see a lot of coal, especially to the south, but that could evaporate pretty fast if you see a switch as it relates to the marginal met coal, like we saw in the last run up, and as well as the ports start to ship steam coal way from utilities. The capacity is just not there for them to build inventory if we get the right weather.

There's some comments about shipping out of the West over to Japan. Any even vague thoughts about that for your Youngs project?

Well, clearly in the long run, the Youngs Creek would have the advantage there on a BTU basis, but in the short term, we don't see anything for Youngs Creek because it wouldn't be up and going. We do see a lot of pressure on Canadian met coal, though. We think that's going to jump and a lot of that's going to move into Japan. Steam coal -- that's always a tough story because the steam coal in the West tends to be so far from the ports, it's really marginal and only runs in hot markets.

Right. Right. You mentioned the idea of an extra 10 million tons of met going out into this very strong market, but when I look at what happened to the met market when the price doubled a few years ago, it was only something like a 5, 6 million ton increase. Could you just elaborate a bit on that?

Well, it all depends on how big the demand is. I would say very good met coal right now is demanding good prices. If it gets real tight and you see India come in in big volumes, you're going to see the marginal met coals like you see in Indiana, PA, even some of our Pittsburg 8 coal is marginal on the met side. It used to be U.S. Steel's properties. I would say that that coal could end of moving at larger tonnages as a blend with low-vol coal just to keep the steel mills running. So you can see a crunch there and it could be as high as 10 million tons.

Interesting. Okay, great. Well done. Thanks, guys.

Thank you. The next question in queue comes from the line of Pearce Hammond with Simmons and Company International. Please go ahead.

Good morning and good results. Brett, can you give some elaboration on the mine seal issue that's impacting the underground miners and how that may be impacting the industry at large and CONSOL specifically?

Well, the mine seal issue is related to the Sago incident, where the explosion came from behind the seal. And MSHA has decided to re-evaluate all the sealing and the procedures of sealing across the entire industry. What that's created was there are a lot of different kinds of seals built over time in the coal mines. Some are better than others, and what they're trying to do is set a standard of an explosive range behind a seal where methane's behind the seals that could hold any kind of an explosion associated with oxygen and methane behind the seals.

Right now, we're trying to design and build, going forward, 120-psi seals that would hold 120 psi for any kind of explosion. And the Omega seals that were at the mine at Sago were about 20 psi, so you can see there's a big difference. And the industry is trying to get their hands around what MSHA wants them to do versus what was built, what we have to build in the future, what the costs are, and so there's a lot of controversy over that.

CONSOL tends to be at a much higher standard than these Omega seals and what we've done in the past. We are doing some repairs and doing some work. We just need finality on what we have to build and what we have to do. There will be a cost to it, but it will be over time, so we're building about 150-psi seals right now. And we might change some of our procedures going forward, but I don't think there's a dramatic impact for us, but I think across the industry, we could see some real impact that could slow down production on some of these smaller mines.

And so the cost guidance that you'd referred to earlier -- '07 over '06 by roughly 5 to 6%, that would be reflective of the seals?

Yes, it would be.

Okay. And then my other question is as Buchanan is down right now, have you noticed any shift? Has the low-vol met market gotten tighter? And if it were to be down for a little bit longer than your expectation, could that be the tipping point for met coal in the U.S. as far as pricing?

Well, it's a very tight market anyway and having a big, big low-cost mine like that down does create pressure on the market. I wouldn't say it swings on our mine, but it's already tight, so any disruptions in the market, whether it's transportation or a mining problem, really affects the price there. We're seeing a run-up in price. Because the market is tight, the demand's good. We're seeing the worldwide market really driving hard.

We know that the Japanese shipments for met coal are way behind. We think they're going to come out early for this coal. There's a lot of pressure on the met prices right now and the premium coals, like the Buchanan Mine, always demand premium prices, so there is a lot of pressure there.

When we get it back, like I said, we have 3 million tons to reprice next year. We'll certainly be wanting to reprice it at these higher pressure prices going forward.

Where do you see pricing right now, just roughly in a range, maybe at a short ton at the mine?

Short ton at the mine we see low-vol at $75 to $78. I'd say today -- that's for next year. I would say today it's probably $72 to $75.

And what about high-vol?

High volume is $65 to $68. Today.

Today.

Yeah.

And then for '08, you think it --

$68 to $70.

Okay. Thank you, Brett.

All right, thanks.

Thank you. The next question in queue comes from the line of Brett Levy with Jefferies and Company. Please go ahead.

Hey, guys. Most of my questions have been answered already. Can you guys talk a little bit about kind of the level of inventories you guys see at your utility customers, what you're seeing overall, a sense as to whether or not a normal summer from this point is going to take that out. And then kind of bidding activity as you've seen it, going into '08 and '09?

I would say 35 to 40 days in the Northern App core area that we have. I would say down south, we're seeing 45 to 50 days -- would be the Central App areas. A normal summer, I would think, would pull that down somewhat. So we would like to see a normal area of anywhere from 25 to 40 days across the utility spectrum because I think that's about where they would like to run their inventory, as well as manage their cash flows that way.

And then sort of what the level of activity for '08 and '09 is at this point. Or is basically you've got a situation where the coal guys are kind of sitting on their production for the next couple of years until they see better pricing.

I would say -- Well, if coal guys would sit on their production for a while, you'd see better prices right away. I think that if you look at the market for next year -- I'm going to talk about CONSOL specifically. We have about 15 million tons open of steam coal -- no, 15 million tons total open for next, of which 20% is met, and I would say we'll place that either domestically or internationally. And we see the markets for that at prices that are acceptable to us.

We continue to look at our Central App mines where we pulled the capacity, and we won't open that up until we get the right rate of return on those. But I think for '08, you're going to see pressure on two things. One is the synthetic fuel tax is going away, and we think that a lot of coal is being pushed into that this year so you're seeing volume go into that in Central App. And also the safety regulations, as they come into place in Central App for those who weren't at the same safety level in terms of capital as CONSOL was, there's going to be a real push and we'll see some mines shut down because of that, in my opinion. So we'll see some real pressure I think at the end of '08. Like I said though, I don't think any of this is going to turn until the fourth quarter.

Thanks very much, guys.

Thank you. The next question in queue comes from the line of David Gagliano with Credit Suisse. Please go head.

Hi, thanks. I just wanted to follow up on a comment you made earlier, Brett. I wanted to make sure I heard it right. Did you say that you thought the steam export market was around $40 to $42 a ton FOB mine at this point?

Yes.

And so you mentioned you thought it was at a 4 million ton opportunity. Do you think -- just taking it from the opposite side, do you think that's a reasonable price relative to what you think you could get in the U.S. at this point or am I misinterpreting that?

It's higher than some of the high sulfur stuff that we have. The high sulfur stuff, if you can get 40 to 42, I would say, yes, that's a better price. We'll move at that (inaudible).

Okay. And then --

If you talk about some of the low-sulfur stuff, yes, that's not a high enough price.

Okay, and then just on a somewhat related question, the 6 million tons that you committed for 2008, what was the quality of that? Was it a steam met mix? If you could just give us a little more detail on that 6 million tons that was committed.

Yes, it was probably -- I would say it was mostly steam and it was, I would say, midlevel steam coal. It would be like Blackville-type coal.

Okay. Was there any met in there?

And there was some AMVEST met in there. Figured in.

Okay. And then just briefly --

Hey Dave, this is Tom Hoffman. Just so I'm clear on that with you, the AMVEST tons were just added in all at once; when they did the actual sales is not known. In other words, we reflected AMVEST from a starting point so some of those 6 million tons of commitment just are a dump of all of the AMVEST tons that were committed for the third quarter. See what I'm saying?

Yes, I do. So roughly, could you give us a number in terms of how many tons you actually committed?

I would say -- okay, for '08, we committed -- CNX committed 2.2 million tons at an average price of $44.28.

$44.28. Okay, that's very helpful. Thanks. And then just on Buchanan, it looks like you expect it to be down obviously perhaps through August, but it looks to me like you've raised your full-year production range by about 1.6 million tons. I'm just wondering where you expect that incremental tonnage to come from, and that's just versus what was disclosed in last quarter's press release.

Well, remember, we're going to close AMVEST at the end of July, so we're picking up those tons and reducing the Buchanan tons.

Okay.

At Buchanan, we think -- you know, we could be in there quicker, we just -- conservatively, we thought it would be good to give guidance by the end of August.

Got it. So the 2007 production volumes now include AMVEST and then last quarter they didn't. Okay, understood. Last question, best guess on the EBITDA hit from Buchanan being down, assuming it's down, say, until September 1st?

We usually don't give that information by mine, David.

Okay. Thanks very much.

Thank you. The next question in queue comes from the line of Laurence Jollon with Lehman Brothers. Please go ahead.

Good morning. It's Laurence in High Yield Research. On EBITDA for the quarter, you reported 311 million. Can you help walk me through, you know, what was flowing through in terms of the asset sales? I know the Alliance one was cash, and I'm not trying to suggest you shouldn't have credit for that. I was just trying to get a sense for what your EBITDA would have looked like on a run rate excluding those asset sales.

As we said, if you take a look at the Alliance sale, it's about $50 million of earnings. The tax on that, which would be cash tax, would be about 40% of that. If you take a look at the gas transaction, the exchange, that also has a earnings impact of about $50 million. However, there's no cash exchanged there and it qualifies for like-for-like exchange on a tax basis so there will be no current tax on that amount.

Okay, but from the EBITDA line -- I mean, the other income line is roughly 100 million of other revenue, right?

Right.

So from an EBITDA perspective, you guys are truly benefiting from Alliance, but are you also benefiting from the gas exchange?

Yes.

Okay.

The earnings per share from the two transactions was about $0.32.

Yes, you can figure $0.32. What we announced was --

And that $0.32 is after tax.

Yes, that's the earnings per share impact on the two transactions.

And what's the EBITDA impact?

It would be 100 million.

Okay. Well, the only reason I ask is if you look at what you've broken out income statement by segment, you have on your coal other, you have other income, 100 million, which is flowing through revenue, so I would attribute that to the two transactions. And then you have cost of goods sold. What's confusing me is you have cost of goods sold of 46 million under that segment line, and I was just trying to -- I didn't know if it was a pure 100 million pass through or if there is some other stuff there.

This is Tom. We can give you some more granularity on that. Why don't you just call us after the call and we'll work you through it?

Okay. And then I'm a bit new to your company. You may have discussed this on prior calls. I apologize if you have. What's your goal in terms of getting to investment grade? In terms of I know you're rated investment grade on your bonds at S&P. Do you guys have a push to get to investment grade and eventually taking out your high-yield notes or can you kind of update me on your strategy there?

Well, it's very hard to say that we have a strategy to get to investment grade when you look at there's no investment grade coal companies right now. We feel that there could be some inherent bias by the rating agencies that the coal industry itself does not warrant investment grade rating. And if that's the case, obviously there's nothing we can do about it.

You take a company that generates substantial cash flow, has very little debt, no one is going to lose money here, it's hard to believe why this wouldn't to be an investment grade company, but again, this is in the hands of the investment rating agencies. We spend a lot of time with them. We are seeing some movement as they look at the coal industry and feel better about it, but quite frankly, it hasn't hurt us at all . You can take a look at our ability to raise capital, our ability to get very, very good rates in the market in terms of our debt. I don't think that being investment grade would have made much

Okay. And then related to that, given your significant cash position -- and I recognize that you're going to have a cash outflow when AMVEST closes and then given your additional liquidity with your new credit facility, would you consider taking out your higher cost bonds or opportunistically buying back bonds in the market in the coming quarter?

Not really. If you take a look at the debt, we have $250 million of bonds and that's slightly under 8% -- let's say 8% -- so one, that's not a big amount, and two, that rate is pretty good. Second is we have about $103 million in industrial development bonds related to the port at Baltimore. They come due in 2010/2011 and they're at 6.5%. You know, I'm really not -- don't feel any compelling reason to take out that debt right now.

Okay. Thanks very much.

Thank you. We'll take the next question from the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Hi, Paul.

Hello. Good morning. What is -- I guess a couple of questions. Any more detail on the geology issues at Mine 84 and McElroy and when you think those might be resolved?

Yes, I can talk about both of those. Mine 84 is in a tough spot of the Pittsburg 8 seam. It's probably the toughest geology that we have and we tend to move around anomalies and identify them. We do a lot of drilling, a lot of technical things. That kind of comes and goes based on what we think we can do with the present technology we have, so that's a little bit -- it's harder to track. In terms of McElroy, we hit some pretty heavy rock that we were losing in a split in the Pittsburg 8 seam. We think we're going to mine out of that. We're going to move out of that part of the mine. We're just about finished with that part, but through the second quarter, we ended up eating a lot of that and dropped our yield, which affects our cost.

Paul, this is Tom Hoffman. Just so the other listeners are clear, those conditions that Brett described were largely forecast, and you'll recall that our guidance for production in the second quarter was a lot lower than 1Q and it reflected, in part, the recognition that we're going to be in those conditions.

Also, on Mine 84, I mean, we've always felt that Mine 84's going to be, I call lumpy in terms of their production because of the geological conditions there, and quite frankly, their quarter was not a bad quarter. It's just that it paled in comparison to the extremely good quarter they had in the second quarter of 2006.

Okay. Excellent. And what's your view -- when can you restart share repurchases and what's your view on how active you'd like to be in the third quarter on that?

Share repurchases -- again, there are certain limitations placed upon us -- the blackout periods and the rest. We will continue to execute our share repurchase program as we have announced. We have authorizations up to 300 million and I see no reason why we will not continue on to execute that program as we have announced.

Okay. And lastly, beyond the Youngs Creek expansion or the new mine there, do you have any interest in expanding your footprint in the Powder River Basin through acquisition?

We certainly would. Yes, I think at the right deals, the right price, we'd be interested in expanding our footprint in any basin.

Okay. Thanks.

Thank you. We'll take the next question in queue from the line of Wayne Atwell of North Street Capital. Please go ahead.

Thank you and good morning and congratulations on a strong quarter.

Thanks, Wayne.

There's been a number of coal plants which are in the proposed stage, which have been canceled, some in Texas, and Florida is becoming very difficult to get projects approved and that's true in other states, as well. Does this concern you? There's some spare coal burning capacity in place right now, but if you fast forward five, six, seven years, it's going to be an issue both for people who want to turn on the lights and for the coal industry. What are your thoughts on the difficulty on getting new plants permitted?

Well, I think like any other environmental constraint no any fuel, it's going to slow it down, there's no doubt about it, but that's not all negative. I think that's capitalized and we'll capitalize in the markets that we're in. There are some being built today. If you look at Minnesota, you look at Iowa, you look at Wisconsin -- excuse me, Wisconsin or Iowa, these are being built and they're going up right now. So I think when the demand is there very strong, they're built. The problem is it's to a much tighter constraint and at a higher cost based on these environmental regulations. It's really raising the base cost of electricity.

Santee Cooper and Carolinas are also building one, so they are being built but you know, everybody announces a lot of them because they're the lowest cost option and then there's a big push back politically and not as many of them get built. But if look at our market, we're looking for scrubbers to get built. We're expanding our market based on existing power plants as they retrofit scrubbers, so we're taking advantage of that market first.

Do you think there's enough capacity is going to be built to keep the coal industry on the track that you'd like to see it or is this going to be a problem a few years down the road?

I think it's going to be a problem. I think it'll get pushed into a crisis mode and then there will be a lot of them built, just like it was in the '70s, but they'll be built with very tight environmental controls, which that's what society's demanded and that's fine. No matter -- any way you look at it, it's the lowest cost alternative for energy structure.

Changing the subject, your insurance situation with Buchanan, is that -- you don't start getting paid for 91 days or you don't start getting paid anything until after 91 days? In other words, is there a grace period on which you don't have a claim for 91 days or is it the payment that's delayed?

We will not start getting paid until the mine is off for 91 days.

But you don't have this grace period where they don't pay anything for the cost of the first 90 down days?

Yes, that's correct. They will not pay anything for the cost of the first 91 days.

So in other words, if this thing is resolved in 91 days, you don't get anything.

That's pretty much the case.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question from the line of Justine Fisher with Goldman Sachs. Please go ahead.

Good morning. I just have a couple of other questions on the export market. The first is about the freight that you pay. I understood that you guys have the transportation advantage domestically because of the Baltimore terminal, but I was wondering what sorts of contracts you guys have for the ocean freight between the U.S. and Europe and whether those are spot or longer-term contracts and how you and -- I guess if you could comment -- other exporters deal with the record high ocean freight rates in today's environment.

Let me tell you, we do not pick up the freight beyond our facility at Baltimore.

So if you're exporting coal to Europe, you're saying that the buyers in Europe are paying your ocean freight?

Yes, they're paying the delivery costs. Yes.

Okay. And then the other question is just about the sulfur content of Northern App coal versus Central App and how that plays in the European market, because -- and please correct me if I'm wrong -- my understanding of API to coal is that it's a 1% sulfur product, and so the Northern App steam coal sales that you make to Europe, are those for blending or how do you compete with the Central App as far as export market is concerned?

It's anything less than 3%, and there's adjustments based on sulfur, but there's also a big scrub market over there and there's also adjustments based on BTU, of which we dominate.

Okay. And then of the met coal sales that you said you had unpriced for next year -- I think you said you had 3 million tons -- is that all going to be exported or what percentage of your unpriced met coal tons do you expect to export?

It's both. It's both domestic and export.

I guess it sounds like there's at least a $10 difference between the prices. Could you break it down for us what percentage you plan or you don't know yet?

No, I think what we announced was on the low-vol side, the difference between the domestic market and the export market is about five bucks.

Okay, and then the last question I have is about the '09 commitments. The tons committed between what you reported for the first quarter and the second quarter actually came down. Is there a reason for that? it went from 25 to 24.

We sold 800,000 tons for '09 at $45.20.

Yes, Justine, this is Tom Hoffman. There were -- I think there was a deferral of a few tons into 2010 that we listed in 2009 before. I think there was a coding error. It was just some minor things. And that's why this implied pricing and the tonnage that we booked sometimes can be a little misleading. What Brett was saying is if we look just at the actual tons of coal that we booked during the last three months for 2009, it was a little -- it was about 800,000 tons and we're seeing prices over $45.

Great. Thank you.

Thank you. We'll take our next question in queue from the line of Luther Liu with FBR. Please go ahead.

Morning.

Hi, Luther.

I wonder could you guys give me an update on the Robinson Run and how much cost saving can you achieve from that project?

Well, Robinson Run, just so everybody knows, we built a new prep plant there and the belt line associated with it to avoid underground haulage. It all starts up next week and I think our cost savings there are probably in the order of a buck a ton.

A buck of ton?

Yes.

Okay. And for -- on the capex front, will the [miner air compliance] have any impact to that -- to the capital expenditure for this year?

You said on capex?

Yes.

Well, I think we paid about $10 million for SCSRs and some things like that, but I think so far, cash wise what we've seen so far to date this year is about $0.25 a ton.

$0.25 a ton.

That's the expense. I'm just looking here real quick, I think Bill Lyons -- we're going to have a disclosure on the 10-Q. regarding that, but it's like 37, 40 million through 2009 for total expenditures. Keep in mind, Luther, that we will make every effort to recoup as much of that as we can from our customers.

Okay, great. And one last question. Brett, can you give us an update on the MLP?

Yes. The MLP is certainly something that we're looking at, along with other financial structures, as I've said. We are looking at alternatives and I said that by the end of the third quarter, we would discuss what we're going to do with MLPs. We see MLPs as something we can do any time and we're also looking at other financial structures that we can do.

And Luther, I assure you that the activities that we pursue will be the ones that will maximize long-term returns to the shareholders. What our problem is is we had many alternatives, of which MLPs are one, and some alternatives need time to play out, to see if they're viable, to see if they could be executed. Really, we believe patience and discipline is needed, although it's really hard not to be anxious when one looks at all the great alternatives we have on our plate here.

Okay, great.

Operator, it's 11:00 and we're still willing to continue, but do we have any other people in the queue at the moment?

We have three more remaining questions. We'll move along to our next question from Jeremy Sussman with Natexis Bleichroeder. Please go ahead.

Good morning.

Hi, Jeremy.

Hi. If I heard you right earlier, you mentioned a contract that you signed in the Carolinas in your earlier remarks. Would it be safe to say that this would be at a scrubs utility, and if so, could you maybe give us a little color as to some specifications of the contract? I mean, this certainly wouldn't be the first time you've made inroads in a traditional Central App market, so it would seem like a decent sign that scrubbers are having an impact.

Right. It's a brand new scrubber and I think the total tons are 6.5 million tons over five years. And it's very high BTU Bailey-type coal.

Okay. Thank you. And then just secondly, if I could, maybe switching gears a little bit, could you talk a little bit about your thoughts on carbon dioxide? I mean, do you think we will see legislation anytime soon? I believe that through CNX Gas, you've built up a number of offset credits that other coal producers might not necessarily have, and is that -- do you view this as a big asset to you?

Well, we don't think there will be legislation soon. We think it will be rational legislation when it comes, but the more CO2 becomes an issue in this country, the more the gas company becomes a valuable asset to CONSOL Energy. So I think if you put the two together, there will be a global solution eventually, but it's not going to be immediate, and in the long run, I think it's just going to make our assets more valuable.

Great. Thanks very much.

Thank you. We'll take the next question in queue. That's from the line of Michael Molnar with Goldman Sachs. Please go ahead.

Good morning, guys. Just given the time, I'll try to make it real quick. You talked a bit about the incremental demand from the scrubber market. Wondering what are your thoughts on the incremental supply coming on line that could service that demand? Can you give me thoughts on perhaps quantifying that?

Well, I think if you look at any given power plant, it already has a market and it already has a supplier. Once they build a scrubber, it has more options. And so if those options are high sulfur coal, that just opens the market for us to enter that marketplace. The competition is still going to be there and it's going to be based on two things. It won't be just on sulfur anymore; it'll be on transportation and cost to that utility.

We have a definite advantage, being the highest BTU coal moving that direction, so the closest high-BTU coal to any given power plant with the scrubbers is going to win. And that's the way we do our market and that's the way we lay it out. So long term, if you have the reserves, the high BTUs and the ability to move it into that marketplace, that's why Northern App's so valuable. It has all those things in place. A lot of concentrated generation around high-BTU coal, which are natural markets for us with scrubbers.

But are you seeing any others with high sulfur mines coming on line or anything that where [a slug] of high sulfur mine that could compete would be coming on line?

No, we don't see that because we see new capital is very hard to compete with what's already existing.

Okay.

There is some movement in the Illinois Basin, but that's going to be a tough battle between -- and in fact, we're thinking about moving Pittsburg 8 coal that direction.

Okay. And a second question would be with the synfuel, you talked a little bit about that. What would your estimate be if Central Appalachia is, say, $45 to $50 a ton, how much could come off? I know there's estimates that 100 million tons, approximately, are related to synfuel. Do you have an estimate on how much tonnage could come off related to that in 2008?

That's a tough one to get your handle on because the utilities are the ones that really push that. They burn synfuels as well as regular steam coal, but we think -- we're just giving you a shot. We think it's anywhere between 15 and 20 million tons.

Okay, appreciate it. Thanks, guys.

Thank you. We'll take our final question in queue from the line of David Lipschitz with Merrill Lynch. Please go ahead.

Hi, David.

Hey, guys. Just a quick couple of things. The tax rate -- what are you guys looking for for the year now?

Probably around 30%.

30%. And capex for the year?

Dave, this is Tom speaking. We'll stick with what we gave you for the January guidance.

Okay.

We don't update it quarterly.

Okay. Thank you.

Operator, I think that was the last question in the queue, and we would like to thank everyone for joining us this morning. If you would, give our listeners the replay information. We'll talk with you again next quarter and Chuck Mazur and I will be available for everybody all day today offline.

Thank you. And ladies and gentlemen, this conference call will be available for replay after 1:30 p.m. Eastern time today through August 2nd, 2007 at midnight. And you may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 879916. That telephone number again is 1-800-475-6701 with the access code of 879916.

And that does conclude our conference call for today. Thanks for your participation and for using AT&T Executive Teleconference. You may now disconnect.