CNX Resources Corp (CNX) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CONSOL Energy's third quarter earnings conference call. As a reminder, today's call is being recorded.

I would now like to turn the conference call over to the Senior Vice President of External Affairs, Mr. Tom Hoffman. Please go ahead.

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. We'll be discussing results from the third quarter just ended as well as our outlook for the business. As a reminder, some of our discussion is forward-looking in nature and we have enumerated for you in the earnings release this morning 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 unusual practice, we'll begin with some formal remarks and then devote the remainder of the time to questions and we'll begin with Bill Lyons.

Thank you, Tom. CONSOL Energy reported a net loss of $5 million or a $0.03 cent loss per diluted share compared with net income of $48 million or $0.26 cents per share earnings for the third quarter of 2006. The thir quarter net income was adversely impacted by the situation at our Buchanan mine which I will talk about in a moment. Net cash from operating activities was $142 million compared with $90 million in the third quarter of last year. This improvement primarily reflects proceeds of $113 million, received as part of our ongoing accounts receivable securitization facility offset by the reduction in net income from a year ago quarter. As most of you are aware, on July 9th, our Buchanan mine in Virginia, a low volatile metallurgical mine that produces about five million tons per year experienced several roof falls in previously-mined areas. These roof falls damaged some of the ventilation controls in the mine, requiring a general evacuation of the mine. No one was injured during this evacuation.

From a financial perspective, the Buchanan event represented, for the quarter, approximately $84 million of lost after-tax income, comprised of additional expenses and lost business income on both the coal and gas sides of the business. The additional expenses incurred by drilling bore holes, injecting nitrogen and the general management of the situation at Buchanan represented about 2/3 of that $84 million. Efforts to eliminate carbon monoxide in the mine have been narrowed to an underground area of about 400 feet in diameter into which the Company continues to pump inert gas through a number of bore holes. The underground area of the Buchanan mine encompasses about 20 square miles so you can see that we were dealing with a very small area. Now, based on the analysis of gases sampled from the area, our engineers believe that data continue to support the conclusion that no active combustion is occurring in the area. Of course, the main question we all have is the outlook for Buchanan. I'm going to let Brett address this broader issue.

For my part, let me point out that our fourth quarter production guidance is based on the assumption that we will have no production from Buchanan during the fourth quarter. We expect to make insurance recoveries from this event. Our insurance coverage has three tiers that are attributable to the situation at Buchanan. There are property damage, cost mitigation and business interruption recoveries after our deductibles have been reached. Business interruption insurance became effective on October 8th and is estimated to provide more than $640,000 per day for co-operations. There is a $75 million limit on the claim along with a $7.5 million deductible. Now, as is the case with most insurance claims, the recoveries may not occur until later and I'm not going to predict when we will actually have the cash in hand from a policy.

Absent the Buchanan event, results from our coal business were very, very good. Although Company-produced coal was down 1.5 million tons period to period, northern Appalachian and western production, period to period, were up and the period to period decline in central Appalachia production was mitigated by our acquisition of AMVEST which contributed about 735,000 tons of production during the last two months of the quarter. As we noted several weeks ago, McElroy mine and mine 84 experienced adverse geological conditions during the quarter that impacted their production versus our guidance. However, in the period to period comparisons, the combined impact of McElroy and mine 84 performance were less dramatic. Although McElroy's production and production income were lower than the same period last year, mine 84 was improved in the period to period comparison. McElroy has improved such that the mine is currently meeting our expected production rates.

With regards to mine 84, we issued a worker adjustment and retraining notification act or warn notice during the third quarter. This notices workers that a layoff at the mine may occur beginning November 7th of 2007. Up to 111 workers at mine 84 may be affected by the layoff. The Pittsburgh C mine in the area signed to mine 84 is characterized by numerous sandstone channels and intrusions that significantly impair the efficiency of longwall operations compared with any of our other Pittsburgh C mines. Steps have been taken to engineer around the situation have met with mixed results. Analysis of mine performance has led us to the conclusion that mine 84 is not meeting our internal rate of return target for capital deployed in mining operations and is not likely to do so unless there is a substantial increase in pricing for mine 84's coal. As a result, we plan to suspend longwall development in mine 84 in November and to longwall only the coal that's already been developed for the longwall system. Mining will continue until we mine out the developed panels. Current plans envision the depletion of developed panels in the second quarter of 2008. At that time, we expect to place the mine on long-term idle.

Total sales for produced coal were $615 million versus $592 million for the third quarter last year. This represents an increase of approximately 4% and was driven primarily by the 3% improvement in realizations on produced coal. As we noted in the release, the period to period pricing improvement reflects business we negotiated last year at favorable prices as well as some opportunistic sales of some steam coal into the metallurgical market. On the cost side, operating costs for Company-produced coal in the third quarter to third quarter comparison increased $1.77 per ton primarily due to higher labor and supply costs as well as health and retirement benefit costs. The higher health and retirement benefit costs are attributable to the new five-year labor agreement with the UMWA that commenced on January 1st of 2007.

Our operating margins were $12.17 per ton and down about 5% period to period. Financial margins were $3.34 per ton, a decline of approximately 3% versus the third quarter of last year. Both operating and financial margins declined for the quarter-to-quarter comparison due to lower production from Buchanan which is a very high margin mine in the mix, lower production overall which amplifies the impact of fixed costs in the per ton calculation and higher costs offset by the 3% improvement in realizations that I previously mentioned. However, if you look at the year-to-date, the operating and financial margins of our coal group are up. Now this morning, CNX Gas reported third quarter net income of $33.3 million. Our share of that income is $25.5 million. Results were driven by a 4% increase in average realized pricing. Sales volumes for the gas company were up about 100 million cubic feet as additional wells came on-line from our ongoing drilling program and were offset by reduced active and sealed (inaudible) production due to the Buchanan mine being idle for most of the quarter.

Now, during the third quarter, we completed the finishing touches on our Robinson Run capital project. Over the last two years, we built a new preparation plant that enables the Company to process more raw coal with increased efficiency and higher recovery rates. We installed a new overland belt to replace more than seven miles of underground belt, allowing us to lower our maintenance costs and we built a new portal that should reduce the underground travel time of our miners by at least 50%. This is an example of a capital project that is both an expansion and an efficiency project. This project eliminated a bottleneck at the prep plant which allows us to expand the amount of clean coal we can sell. It will also enable us to reduce costs through maintenance and labor costs.

Let me switch from the management of our organic business to acquisitions. Subsequent to the third quarter, we announced the acquisition of Tri-River. This acquisition of a small bolt-on towboat company to our existing river operations enhances our ability to ship coal and limestone to existing and potential customers on the upper Ohio river system. We also announced today the sale of our Mill Creek assets including the associated surface facilities and reserves in eastern Kentucky. The reserves controlled by CONSOL are limited and the complex was on idle status. Any coal that we mine from other operations in the eastern Kentucky area in future periods will be processed through our Jones Fork preparation plant. We expect this transaction to close by year end.

Also during the quarter, we announced a dividend policy change. The board of directors of CONSOL amended the company's dividend policy, allowing the company to increase its dividend from $0.28 cents per share to $0.40 cents per share. This represents an increase of 43%. From a financial management perspective, I believe that both of the dividend program and the share repurchase program provide additional avenues for us to return value to our shareholders and should serve as a barometer of our confidence in our future business prospects.

The last item I will discuss is our review of alternative organizational structures, specifically master limited partnerships or MLPs. During the last quarter, we met with several major investment banking firms to gather information on the attractiveness of forming an MLP with the intent of increasing the long-term value of CONSOL Energy. Now, MLPs have the inherent advantage of avoiding the double taxation placed on corporations. Also, there is some empirical evidence that MLPs receive a higher multiple in the market place. However, we have decided that based on our particular circumstances, the MLP route is not a compelling alternative to us at this time. Among the reasons for our decision include the up-front tax leakage that we would incur as we transfer assets into the MLP, the requirement of the costly market transaction to establish the MLP, the requirement of significant agency or administrative cost of maintaining the MLP entity, the additional complexity it would add to the CONSOL Energy story, and the fact that forming an MLP could preclude us from participating in other strategic alternatives while the MLP was being created and established.

Our strategy is working. We believe that a Company with a history of strong earnings, strong cash flows and excellent dividends is a compelling long-term investment thesis. We believe that if we clearly articulate and execute our strategy, we will attract and retain shareholders who understand and support CONSOL Energy over the long-term. Both Management and the Board of Directors are committed to developing sustainable long-term value for CONSOL Energy shareholders. With that, let me turn it over to Brett.

Thank you, Bill. It is good to have time to talk to you and explain the third quarter and the issues that we dealt with in the third quarter as well as look at the future on production as well as the markets. First, let's talk about safety. Over the last three years, we've improved our safety statistics by about 38% on our road to zero which we do plan to get to. I would be remiss if I didn't mention that we did have a fatality at our Bronzite mine that had an excellent safety record before that on Labor Day. The fellow's name was Brett Reynolds. We're committed to zero accidents. We see that as an exception to who we are and we will move forward with the value of our employees as it comes to safety. Production for the third quarter is typically down for us. Typically a higher cost because we do a lot of maintenance work and with the addition of the problems at Buchanan and McElroy, you see the results of the third quarter.

Obviously we're disappointed that the Buchanan mine is not back on-line. At the time it happened, it seemed like the solution was simple, that we could get right back in the mine. We kept ventilating the mine and working the mine and we chose not to seal the mine. We chose to use new technology. I think we'll find by the end of this use of new technology that we got in the mine faster than we would have if we would have sealed it. Now, it has drug out longer than we think it should have. But we're working hard with EMSHAW and with management and with engineers to make sure the mine is safely re-entered and that we've designed the mine to avoid these problems going forward. This has taken more time than I had thought it would take. But it is important that we address the safety issues around that mine. We are very close to re-entering that mine. But I can't tell you exactly when. And with that, we decided to announce that our production would start January 1st, just to be conservative.

For the third quarter, both coal and gas were affected by the Buchanan mine. It was clear that both balance sheets were affected, one in the amount of gas, the other in the amount of coal. The good news as we reopen the Buchanan mine, it will be reopened into a very robust market for metallurgical coal. We're happy about that part of it. So, let's talk about the market at this point in time. Because of the drop in the U.S. dollar, coal mined and sold in the United States is looking very cheap to the international markets. The global demand is rising. Prices are rising everywhere globally. The imports into the United States are down and the exports are rising. If we talk about why -- there are other effects with rising prices as well. If you look at Central App, if you look at the new safety regulations, the core of engineer permits, the end of the syn fuel credits, the rising exports, and some Central App steam coal actually moving into Northern App based on lack of Northern App capacity, based on the new scrubbers, show that even Central App is going to tighten and move forward in the next year.

We can take advantage in the short term of repricing and adding value to our Company with open tonnage. We have potentially nine million tons available for repricing for next year. A third of that is met, a third of it is Central App and a third is Northern App. We see real value being created for our shareholders as we negotiated that nine million tons, assuming we get the prices we want. The prices for these different products are up substantially. If you look at Northern App for mid sulfur, we see the price range from $54 to $56. On the export side of that for that same product, $53 to $55 and you add internally another $3 based on movement through our facilities. High sulfur coal, we see $49 to $52 dollars and export $49 to $53 plus an addition of $3 moving through our facilities. Central App, we see at about 12,500 BTU, $52 to $54, in export $50 to $53.

On the met side, it is very interesting. We see domestic, $95 to $97 and export, $95 to $102 on the low ball side. On the high ball side, we see $74 to $80 domestic and export, we see $74 to $80, as well. So, with all of that, we see a very robust market. The infrastructure is in place. We see some shortages in the market place. The demand is high. And with Buchanan coming back on-line, we see a good year for 2008. With that, let's go ahead and answer questions.

Operator, if you could instruct our listeners on how to get into the question queue.

(OPERATOR INSTRUCTIONS) We do have a question from the line of Jim Rollyson, Raymond James. Please go ahead.

Good morning, gentlemen.

Hi, Jim.

Brett, it looks like Buchanan is going to be out, I guess you're kind of assuming for all of the fourth quarter, which means presumably, you'll still have the volume reduction, its impact on unit cost and obviously average pricing just because of the loss of the higher priced stuff. Do you still have the same amount of costs associated with re-entering the mine and pumping nitrogen and stuff? You had a big number this quarter which brought your numbers, obviously your earnings down. Is the magnitude of that impact going to be similar in the fourth quarter or do you think it will come down a little bit?

We see a declining number, if you look at -- like any of these kind of projects, when you have a problem, most of the money is on the front end, setting up, getting the nitrogen in place, getting all of that done and I think we're about 95% there. It is like Bill said, we're in a 400 foot radius. We're just attacking the remnants of CO in that area. So, I would say the peak was in the third quarter and we're running about $12 million a month to button it up. And hopefully we'll get in before the end of the year. But I didn't want to make any commitments beyond that just because we've been surprised at where we're at so I gave ourselves a little more room.

Got you. If you look ahead and I know you haven't given -- you've kind of left that blank for guidance for next year. But just kind of looking here, you've got mine 84 that is going to run off, once the longwall panel you're in now is done sometime in the second quarter which is somewhere, if I recall, north of 3 million tons a year or at least it was last year. You're selling off Mill Creek which is -- you noted 1.8 million tons. So you add those couple together and it seems like AMVEST is the offset in volume for next year. Does that mean, aside from Buchanan coming back for hopefully all of next year, that your production will be more or less kind of flattish in '08?

No, I would say if you look year to year, we'll be up and as I said, we would have 9 million tons to reprice if we opened everything up. So, I would say we would be in the low 70s but that budget has to be approved by the Board and so I would -- versus this year, I would say we're going to be up 4 million tons.

Ok. Then this last question for me, exports, you talked about I think in the prepared comments were, expecting to ship 40% more export this year, another 25% growth in '08 and it sounds like pricing in the international markets are somewhere along the lines of what you're seeing here. Is there upside to the export target? Or what's your philosophy right now on whether to ship domestic versus export given that prices seem to be in pretty close ties right now?

I would say we're negotiating in both cases. Clearly, we'll ship tonnage that has been sold domestically. We'll ship that tonnage first and the tonnage that has not been sold, we will move to the export market assuming that price is acceptable. Clearly, we're not going to expand into a rising market because that just dampens prices. But what we will do is capture the capacity at the highest value whether it is sold domestically or in the export market.

Thank you.

You bet.

You have a question from the line of Michael Dudas, Bear Stearns. Please go ahead.

Good morning, gentlemen.

Hi, Michael.

Question for you, Brett. CONSOL has done a very good job at repurchasing its shares over the past year and a half. And I commend the Board for raising the dividend. Can you talk a little broadly about where you -- and I understand the issues relative to MLP, can you talk a little broadly about how you and the Board looks at allocating capital for CONSOL going forward, given the opportunities you're seeing in the gas business, the quote-unquote consolidation that's yet to come in the eastern part or even just the whole U.S. coal market? And is this something that's more of a 2008-2009 story for CONSOL? Do you anticipate even though the budgets are not in yet, major increases in capital expenditures over the next 12 months? Just you could give us a little color on those thoughts, Brett?

Well, the good news is we have a lot of options, Mike, as you know. And clearly, this year is what we did when we saw dampening markets in '06 moving into '07, we decelerated capital spending in coal and we went to a maintenance mode basically in coal and then we accelerated the expansion of the gas business. I think with some longer term contracts, I think we're going to come out of this increasing coal markets, you'll see us accelerate our capital and match the long-term contracts. But we will not speculate in open mines based on a rising market because what we -- what you end up with at that point is dampening the market based on volume. So, I would say we'll see a lot of great value, internal projects like Bailey Slope project, Shoemaker will had open up at the appropriate time late '09, early '10. And so we will bring high value projects on to the market that we've already seen that we're funding at this point in time. But new capital beyond where we're at, I don't see it unless the contracts come with it. But I can tell you this, if someone contracted, we'll build a new mine and we have the reserves to do that. In fact, we have the reserves in fee which is a good thing.

That's certainly correct. Brett, maybe you can touch a little bit on the long-term contracts you highlighted in the third quarter. You know, how has the customer reaction been to the ability to ship the coal as far away from Pennsylvania as you have and on these long-term contracts, can we maybe get a sense of the structures, is it reopen every couple years that will protect each party on the pricing front? Is there quality issues that are involved? And do you get a sense of the availability or attractiveness of the transportation characteristics relative to these and other types of long-term contracts that you're negotiating right now?

Those are all good points. And I would say these reopeners, yes, we do reopen for price. They want to tie up the volume and we want to tie up the volume as well. We don't have a problem, being a low cost producer, going back to market any time with our people. So price is the negotiable part. The volume is the non-negotiable part. We're tying up for them to run their plants at maximum capacity with our mines at maximum capacity, and the nice part about it is we have the long-term capability to do this. We can go five, 10, 15, 20 years, depending on the needs of the customer. We're unique in that way and I think that gives us a great advantage as a stable, dependable supplier. One thing that we might see though, Mike, and a question that you ask is if the U.S. dollar continues to be depressed, we might see some of these big utilities in the Atlantic market looking for longer term deals. And the issues there will be price shift between domestic and international and fortunately, we're able to move a lot of our coals through our own port facilities that create a lot of value for our shareholders. So you might see a signing longer term contracts based on the decline in the U.S. dollar which is good for our shareholders.

And a final question kind of on top of that comment you just made, Brett. We're seeing a lot of activity out of the export market from your company. Can you go a little history of how exports out of the U.S. for the steam market from Central Appalachia have been in the last five or ten years and how sustainable and how much capacity you think that there is available into taking some of these swing coals into the export market, it if it is not just a six-month issue given where pricing is, but maybe we get to more of these longer term contracts, how meaningful can Central App contribute to the world's need for coal, on a steam basis?

Well, in the last five years, I would say for Central App, it has been almost zero. Now we're starting to see, even with our AMVEST deal, we just did a deal and kind of broke the ice there and moved the AMVEST coal into the international market. I would say there is going to be more of that. I would say the numbers look very good to move some of that. It's BTU play. The world looking for heat and Central App certainly has characteristics to get burned in the international market. Long-term contracts, I would say we're looking at interest in our Jones Fork mine and I think that's going to be robust. I think it's going to tighten that market. Based on all the other things I said with safety issues, the Core of Engineer permits, the syn fuels issues and -- some of the Central App steam coal is moving to Northern App just to fill the heat need. I see that market tightening up.

Thank you, Brett.

Thanks.

We have a question from the line of David Gagliano from Credit Suisse. Please go ahead.

Hi, good morning, everybody.

Hi, David.

Just a question. Thank you very much, first of all for the pricing indications. That's very helpful. I'm just trying to get the price indications to foot with the numbers between Q2 and Q3 in terms of the volumes committed. If you can help me. My math is probably wrong here, but it looks like it was about 22 million tons committed from '08 to 2010, I think 12 million of which was in '08. And if my math is right, it looks like an average price of about $44 a ton which sounds like a lot lower than what, obviously, you just mentioned is. Is my math right or is there something wrong with what I'm doing there?

No, I don't think your math is right. I think what you're seeing is that's committed before the movement in prices. Also, I would call it legacy contracts we've rolled into some of those years based on production's behind a little bit. So, you get a lower number there. It averages down a little bit. So, I would say all new contracts, new sales are certainly going to be from $40 to $44 for that year based on that average. So, I think the part that's missing is when we roll in some of the legacy contracts. And we could probably talk to you about that off-line.

Ok. Ok. Fair enough. Somewhat related question, the $52 to $55 dollar range in the press release and the opportunity there, what sort of volumes are you shipping over to Europe?

Well, right now, I think we're at about 4 million tons for '07.

What do you see --

That's on the steam side. And I think we're almost two and a half on the met side. And we see an increase net of about 25% next year if the market rises.

Ok, thanks.

I think '08 would be 4.7 and I think in -- on the met side, it should be about the same.

Perfect. And then just one last question, on the unit costs, obviously volumes make a difference here as well. But my understanding is the $72 million hit for Buchanan was not in the reported operating costs number, operating costs per ton figure.

That's correct.

And that number was up 11% sequentially. How much of that 11% sequential increase was due to just volume being lower?

Well, total operating costs were up about 6.7%, quarter to quarter. Our numbers so far this year on labor -- on materials is about 4.5% increase so a lot of it had to do with volume and construction costs that we do in the third quarter as well as fixing the problem at McElroy. So, if you add those three together, we were up for the third quarter but we're not -- I would say for the year, we're going to meet what I said we would do for the year at about 6% increase overall.

David, if you take out Buchanan and even some of the start-up at AMVEST, part of the mines are doing very well. All I have to do is mention and I don't want to miss any but Buchanan's -- or Bailey's doing well, [Enlou's] doing well, Blacksville's doing well, Loveridge is doing well, Robinson's is doing well, just to name a few. So we're very pleased with what we see in terms of our costs at the majority of our other mines.

I wouldn't try to project these costs on to normal quarters.

We should see that cost coming back down to sort of that $33 number.

Yes, yes.

Ok, great. Thanks a lot.

Ok, thanks.

We have a question from the line of John Hill, Citigroup. Please go ahead.

Good morning, everyone. Thanks for a very detailed and informative call as usual. A lot of good subjects have been plowed over here. I guess I'll just ask for your customary recitation of views an how the market is supplied. You often provide some perspectives on your interpretation of stockpiles in different regions and domestic utility behavior.

Sure, I would be glad to do that. Our analysis showed that Northern App is declining and below average going into the winter. Central App is declining and above average and I would say it continues to be somewhat oversupplied but declining. If we look at the Illinois basin, I would say it is about average. At this point, it was a very hot summer there and coal coming from the Powder River basin is above average. I would expect those stockpiles where they're all Powder River Basin coal to be above average. There's just over supply there that has been for a long time.

Great color. Great color. Then circling back to touch on a previous question that had to do essentially with whether exports would resuscitate marginal capacity in the Southern Apps, many in the industry were looking for the 30, 40 million ton a year capacity cuts previously. Is this a matter where we can take an additional 10 to exports and get away with the smaller shutdowns or how do you think that's going to play out?

I think you'll still see some shutdowns. Those would be the very high cost marginal mines. But if these prices continue to rise, I don't think you're going to see the 30 million pullback, but I would say you'll see at least 10 million tons go to the ex. So there is going to be a switch-off there. It is a little fuzzy there to see who's going to do what. But from a domestic market perspective, anything that leaves the country is a shutdown, right? So, I would say that will drive price.

Great perspective. Then last, just a touch on David's cost question. You believe you can hold costs at a normalized level even if we benchmark diesel fuel to crude in the mid high 80s?

Definitely. Yeah, we'll -- because diesel is not a big cost to us other than our river transportation. We're doing some hedging on that. But in terms of production of coal, it's basically our source of power is electricity and so I would say we're going to be very stable on our cost structure, assuming the anomaly of Buchanan is out of the way and if you look at the other mines, cost structure is very solid.

Also, John, just keep in mind that we really emphasize margin as opposed to just cost of revenue. So, in some places, particularly like Central App that has a higher cost structure, if we're maintaining margins or increasing margins, we have no problem with bringing on mines that have -- I'm just throwing out a number that could have costs even at $50 a ton, if we're going to get $60 a ton for the coal. And sometimes just focusing on cost, you may get the wrong impression because you may see some increases in costs. I think the key thing is to look to see at the margins, are the margins increasing.

Great perspective. We'll hope to see those move back up through the $16 level that he with saw last quarter. Thanks, guys.

Thanks.

I have a question from the line of John Bridges, JPMorgan. Please go ahead.

Good morning, everybody.

Hi, John.

Like Mike and John, I too am fascinated by the -- how the export market is going to get satisfied. Obviously you're not going to want to build capacity for that. Do you think that we're going to see any export contracts developed? Is the export market going to become that tight? Alternatively, could we see something along what we saw in the met coal market where independent producers satisfied that demand in the short term and actually took skilled labor away from you guys.

Well, I would say the export market is a sustainable market. I would say the next three years for sure. Now, the real question in my mind is, is the dollar going to continue to stay weak, will that trigger long-term contracts between CONSOL and Atlantic market for the high BTUs that we have in our properties. If that's the case, I think you'll us actually make capital commitments for expansion to meet that market. But I can tell you the same thing with the domestic market. The only issue here is, John, is the Atlantic market, if the dollar continues to stay weak, they just might trigger long-term contracts meaning three to five year deals for the first time in 20 years. That will really change our market structure.

Right. Except not knowing where the dollar is going to go, you won't know whether those deals are smart or otherwise.

Yeah. I would say that domestic -- and I've always said this, that's a swing supply for us, but we will talk about long-term deals. The domestic market is our natural market. And if you look at the power plants right around us, I think that's the market that we should be focused on and in terms of labor and what we need to supply that, they should be long-term deals between us and the plants that are already built within the region. That's the way I see it.

Okay. On Buchanan, how do you prevent this happening again? What changes are you going to make to prevent this happening again?

There are two things that we're doing. One is, first of all, understanding what happened is the interesting part. And we've done a lot of work to see what really happened there. So, we're going into a whole new block of panels with the next block, we'll have all metal, no wood. They will also be not as large in terms of expansion. And they will be -- have different technology in terms of the pillar sizes between the longwall panels because we really don't want to break the sandstone above these longwall panels and create the friction that we've seen in these highly gassy mines. So, we're redeploying that and agreeing with EMSHAW on what we should do to extract that coal at even a safer level. We'll increase our CO capacity as we go rather than try to ventilate the (inaudible).

Interesting. And then the coal that you haven't been delivering, will you have commitments to deliver that under previous contracts or does force majeure protect you from that?

In this event, it is all force majeure.

Okay. Thank you very much.

Thank you.

We have a question from the line of Pearce Hammond, Simmons & Company International.

Good morning.

Hi, Pearce.

Brett, earlier in the call in response to a question or I may have written this down wrong, but I just wanted to get clarification, you had said 9 million tons to reprice in '08 if we opened everything up.

Yes.

When you say open everything up, does that mean mine 84 is not idle?

No, mine 84 will still be in an idle position. We have 9 million tons to reprice whether they're committed or whether we would open up other mines. That would be kind of an optimum number if we got the right pricing.

Okay.

It could be less than that depending on where the market is. Central App is probably the place we're not ready to commit yet based on price.

Okay.

We've got Miller Creek that's idle, remember. And some capacity as to what we call swerve.

And these are decisions you'll talk -- work through here in the next few weeks.

They're market driven. I just thought the market or the call -- people would want to know what our capabilities were. It is really one-third Northern App, one-third met and one-third Central App. It breaks down like that.

Great. If you could give a little bit of a preview on '08, not so much on a guidance standpoint, but as you see the 404 permit playing out in Central Appalachia, what do you think the cost structure does there? Are you looking at maybe Central App production for some of the major producers there really coming off, how do you see this whole 404 issue being resolved?

Well, I see -- anytime you have permitting in question, you slow down the feedstock to the market place. So, that bubble is moving through right now and is tightening the market. The result will be -- there will be some agreement to handle these fields and streams and all of that differently but it will cost more money. The market is going to shift to the lowest cost, especially after the scrubbers are built. So I would say some of the marginal players will go out and that will continue to keep the market tight.

And then finally, export port capacity in the U.S., do you think the U.S. has enough export capacity at the ports to move additional coal? There have been reports here recently that stockpiles are piling up at the ports and there is some difficulty in actually, moving the coal out of the U.S.

I would say for Northern App, the CSX terminal is tight right now. I would say that our terminal has the capacity of 11.5 million. I would say we're probably up to 7 of that now. So there is some room there. And if you go down into Central App, I would say Central App is a new phenomenon about moving steam coals through it. What's contracted there is going to get top priority and that's probably going to be tight.

Great. Thanks so much, Brett.

Thanks.

I have a question from the line of Paul Forward, Stifel Nicolaus.

Yes, thanks. One question that has kind of puzzled me here is you talked about Central App coal moving into Northern App, because of the tightness in that market. And you also can't get a decent return on mine 84, enough to keep developing the longwall panels there. Is the geology situation at mine 84 that bad that the costs are to the point that a utility in the region is going to prefer to bring in Central App coal rather than actually commit with you to a longer term contract that could earn a decent return at mine 84?

I would say we prefer to run that mine if the contract is right. We haven't seen utilities typically take that coal. It had a real advantage based on sulfur and as the scrubbers get built, its advantage gets taken away. So, it is one of the highest costs of the Pittsburgh HC mines and it is always going to be the one on the margin based on geology and I think in a hot market, you're going to see it probably -- it could be extended. But the customers have to step up, otherwise we're going to maximize our low cost position and keep our low cost mines at the highest margins. I guess that's up in the air would be the right -- would be the right response to you right now.

Okay. That's good. And you talked about 2.9 million tons of unpriced net coal for 2008. Can you give us any kind of ballpark about -- is Buchanan a substantial or majority of that on price coal and so we can think about that as being majority low ball or -- ?

The whole number is Buchanan.

Okay. Very good. Thanks a lot.

You bet.

You have a question from the line of Leslie Rich, Columbia Management. Please go ahead.

My questions have been answered. Thank you.

Hi, Leslie.

Thank you. We have a question from the line of Dave Conney, FBR. Please go ahead.

Hi, gentleman.

Hi, David.

Can you talk a little bit about the acquisition market and also kind of your perception of how aggressive you want to be right now?

Okay. I would put it like this. I think you saw what we did with AMVEST and I think you liked that. We talked about that.

It was great.

I think there are other opportunities out there and we are still aggressively looking for the right kind of situation that enhances shareholder value for us on the gas side as well as the coal side. For me to give you targets on the phone would probably be the wrong thing to do.

I don't want you to give us targets. Is the market heated up a little bit and did you sort of catch the bottom there with AMVEST?

I think the opportunities are still there.

They are still there.

I think they are based on people's reserve positions and how they can sell forward.

Okay, good. And is there any reason beyond price why you wouldn't run AMVEST full? On full production?

We are running AMVEST on full production now.

Okay. Okay. But I meant for next year because you're not giving the production targets. Is there anything beyond price?

No, no. AMVEST should run full out and it will have some met coal -- some high vol met coal as well.

Bill, can you give us a little bit of an outlook and also the numbers on how much legacy liabilities have tracked through the nine months so far? The cash payments?

I don't have those offhand but they're exactly where we expect them to be. When you're taking a look at overall, we're somewhere around the $275 million to $325 million both in expense and cash costs.

Great.

So, there's nothing unusual, nothing we're seeing out of the ordinary. So, we're on course to our projections.

Okay. Then the 11% cost number that you threw out there for -- how much of that -- how much was driven by the UMWA, if you stripped it out, how much was the real underlying inflation?

Well, I would say, like I said, the commodities running about 4.5%, labor is running about 4.8 for that quarter. I would say labor and maintenance are right on. What we're seeing is steel costs, we're getting pressure on those. Third quarter is not a good indicator of what the year is going to be like though, Dave.

Right. Because obviously you have the productivity issues.

Right. You have volume down, costs up. And you're doing a lot of maintenance in the third quarter because of vacation. So, that will be averaged over the whole year. If you look at the whole year numbers, we're on track. We're going to be total inflation across the board at about I would say about 6%.

And I know you don't want to sort of forecast too much into -- for next year but steel will be an issue for next year as well because obviously the hot met market and you're not as much susceptible to diesel but do you think that 6% trend is sort of a good trend for next year? Within the tolerance?

Yes.

Okay. Great. Thank you very much.

Thanks.

We have a question from the line of Justine Fisher, Goldman Sachs.

Good morning.

Good morning, Justine.

The first question I have is dovetailing on the one that was asked about U.S. port capacity for exports. Given that you guys are in the barge business, too, I was wondering if you could comment on the availability of capacity either rail, barge or both for inland transportation to the ports for coal that might be exported now that wouldn't have been exported previously.

We actually don't see any capacity problems on the rivers. I would say we have long-term contracts. We take care of those. But we're not moving our barges outside of the northern area and the railroad -- on the rail side, with our big mines with duel service, Norfolk Southern and CSX, we're not having any problems at all. There's plenty of capacity in both of those areas. I think if we're going to see a limited capacity, it will be at the ports in Central App.

So, that applies to smaller producers, too, that might want to try to gain access to rail capacity for export?

I would say yeah.

Okay.

I would say the rails feel like they have plenty of capacity right now.

Okay. And then also in terms of the export market, can you compare the export market for high sulfur steam coal versus low sulphur steam coal. I guess the benchmark coal in Europe at API too is a 1% sulfur product. Can you tell us what type of customers you guys are selling to and whether you're seeing different demand trends for high or low sulphur?

What we're seeing is -- of course we have two products, our mid sulfur coal which is 3.4 pounds of SO2 and our high sulphur is about 4.5 pounds of SO2. The export pricing at the mines, $53 to $55 on the mid and $49 to $53 on the high sulfur. In terms of what those plants can burn, I'm sure they're blending our high BTU into western Europe's scrub plants. Remember, Europe's 82% scrubbed already and that -- they're looking for heat and so they come to CONSOL for the very high heat and they'll blend it down to meet their scrub requirements.

Okay. And then the other -- oh, yeah. The last question I had, sorry. The last question I had was again, about expansion. And you may or may not be able to answer this. Would you guys consider bidding on some of the leases that are coming up in the PRBI this year or next year?

Sure.

All right. Thanks.

We're entering the PRB through our Young's Creek mine and our strategy for the PRB is developing as we go. It is new to us but we're watching it close.

Thank you.

We have a question from the line of Michael Molnar, Goldman Sachs. Please go ahead.

Good morning, everyone.

Hi, Michael.

Just a quick question on the syn fuel credit expiration. How much -- I know it is hard to say but do you have any additional color on how much tonnage could come off in 2008, especially in light of your view where the coal markets might be getting stronger in 2008, how much would you estimate might come off in terms of supply due to the syn fuel credit expiration?

We think where the market is today, 10 to 15 million tons. If the market continues to rise that, will shrink.

Got it. Thank you.

Yep.

We have a question from the line of Jeremy Sussman from Natixis Bleichroeder.

Good morning, gentlemen. Great color about the pricing. Can you just remind us about your -- from your prepared remarks earlier if those were current prices you were looking at or more for 2008?

Those are current prices for 2008 the way we see the market today for 2008.

Great. Then for Buchanan, when does that -- do you have a target -- I know you didn't say, but in terms of when it needs to be on-line to capture some of the upside for 2008?

Well, clearly we want to get on-line as quick as we can. But I'm not at the point to where I want to give a date other than we expect to be in full production January 1st.

Sure. And then just lastly, if I could, seems like we've been talking about exports mostly. But turning towards the domestic scrubber market, can you just sort of give us an update on the way you see the scrubber situation playing out? And also I mean -- I think personally, the contracts that you signed this quarter are a good sign that we're seeing the scrubbers come up on-line. So, maybe you could you briefly discuss that?

The scrubbers that are important to us are on target or a little bit ahead. There are very little delays. The delays we see are outside of our influence meaning a longer haul where they got more alternatives to fuel other than Northern App. But the scrub market is -- the increasing prices is based on the higher BTU coal deliveries and we're having discussions on longer term contracts as these scrubbers get built.

Great. Very helpful. Thank you.

Operator, I understand we have no other questions in queue and I am further understand that we've got another company in the coal sector starting at 11:00. If there are no other questions, we would like to thank everyone for joining us this morning. And operator, if you would give people the replay information when we sign off here, Chuck and I will be available during the day for any additional questions you may have. Thank you again for joining us.

Yes. Ladies and gentlemen, this conference will be available for replay after 1:30 PM today through November 1st. You may access the AT&T teleconference replay system any time by dialing 1-800-475-6701 and entering the access code 890070. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Conference Service. You may now disconnect.