CNX Resources Corp (CNX) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the CONSOL Energy's fourth quarter earnings conference call. (Operator Instructions)

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

Morning, everyone. Welcome to our fourth quarter earnings conference call. With me this morning are Bill Lyons, our Chief Financial Officer and Brett Harvey, both of whom will offer remarks this morning before we take questions. To begin with, let me remind everyone that we will be discussing the outlook for 2008 and some forward-looking discussion of the years beyond 2008. Our ability to achieve any results forecast during those periods are subject to business risks. We have detailed those business risks at the end of the earnings release that we distributed at 7:30, and we would refer to you a more complete discussion of risks and in our most recent 10-K filing.

Now in addition, with regard to the proposed exchange offer to stock holders of CNX Gas Corporation, CONSOL expects to file a registration statement on form S-4 containing an exchange offer prospectus in related materials with the Securities and Exchange Commission. Investors and security holders of CNX Gas are urged to read the exchange offer prospectus and the other relevant materials when they become available because they will contain important information about the offer and about CONSOL Energy. Investors and security holders may obtain a free copy of the exchange offer prospectus and the other relevant materials when they're available, as well as other documents filed by CONSOL with the commission at the commission's website, www.sec.gov. And in addition, copies of the exchange offer prospectus and other relevant documents when they become available can be obtain from CONSOL Energy. You should send your request to me, Thomas F. Hoffman, Senior Vice President CONSOL Energy 1800 Washington Road, Pittsburgh, Pennsylvania 15241 or by email at tomhoffman@consolenergy.com. With that, again, welcome, everyone. And we'll turn the microphone over to Bill Lyons.

Thank you, Tom. For the quarter ended December 31, 2007, CONSOL Energy reported net income of $7 million or $0.4 per diluted share, compared with net income of $115 million or $0.62 per diluted share in the fourth quarter of 2006. Net cash from operating activities was $88 million compared with $225 million in the fourth quarter of last year. For the full year, CONSOL reported net income of $268 million or $1.45 per diluted share, versus $409 million or $2.20 per diluted share for the full year of 2006. From a financial perspective, the fourth quarter of 2007 was one of mixed results.

Now, we had good results from our active coal operations. Production of 15.8 million tons was down only 1% from the fourth quarter of 2006 as the 1.2 million tons of production, which was delayed at Buchanan was made up by the production of our Amvest acquisition. Financial margins were $5.54 per ton, up 34% from the fourth quarter of 2006 reflecting the improved market pricing. Gas operations, also, had a good quarter. Production of 14.6 bcf was up 2% over the fourth quarter of 2006, despite the 1.7 bcf delay in production due to mine-related problems principally at the Buchanan. Financial margins reached $3.46 per mcf, that's down $0.43 per mcf due to increased cost, again, primarily related to the Buchanan situation. Other expenses in the fourth quarter relating to mitigating in the roof fall Buchanan amount of $48 million. However, we did recognize $25 million of insurance reimbursements that our insurance carries have acknowledge and will be remitting to us shortly.

Another significant expense in the fourth quarter was $24 million relating to our claim for refund of Black Lung Excise Tax on export coal. These were taxes that were paid during the 1991-1993 period. Lower courts have ruled that our damage claim for these excised tax payments be repaid to us plus interest. However, in December of 2006, the U.S. supreme court agreed to hear the government's appeal of the lower court's decision. The accounting threshold for recognition of a gain contingency is very high. With the supreme court agreeing to hear this case, we no longer meet this high threshold for accounting recognition. Even though we reversed the benefits of the lower court's decisions, we intend to vigorously pursue this matter in the supreme court.

The financial results for the entire year of 2007 were like the fourth quarter, mixed. Production was 64.6 million tons, down 2.8 million tons from 2006. 2/3 of the shortfall was related to the Buchanan incident that idled the mine for the second half of 2007. The remaining 1/3 of the shortfall was related to geological conditions and belt problems in McElroy. Annual production records were set at Enlow Fork Mine, 11.2 million tons, Loveridge, 6.6 million tons, and Robinson Run, 6.5 million tons. Financial margins were $6.91 per ton, up 7% from 2006 reflecting improved market pricing.

Production at gas operations was 58.2 bcf, up nearly 4% from 2006. This increase was achieved despite the delay in production of 3.7 bcf due to the coal mine-related issue. Financial margins were $3.84 per mcf, that's down 8%, caused by mine-related issues at Buchanan and increased legal information systems and personnel costs. During 2007, we had $100 million in gains on property sales, showing our ability to strategically monetize our reserve asset base. In 2007, we incurred $119 million of costs related to the Buchanan roof fall. Offsetting now was $25 million from insurance proceeds that I previously discussed.

Also in 2006, we received $79 million in insurance proceeds relating to prior incidents at Buchanan. Our effective tax rate for 2007 was 31.7% which is a somewhat normal rate for us. In 2006, the rate was 20.4%, reflecting the release of certain reserves relating to state taxes and the states of Pennsylvania and West Virginia. Relating to Buchanan, especially trained mine rescue teams re-entered the mine yesterday. The first time we have been in the mine since July 9, 2007. The mine rescue teams will assess the damage to the mine's ventilation system and will development a plan to make the necessary repairs. As you noted in the guidance section of the news release this morning, we have used March 1 as an assumed resumption of small production at Buchanan.

With regard to guidance for the year, let me first review the Cap Ex guidance for 2008. Total capital expenditures are expected to be around $1 billion. This breaks down as follows. $512 million for cooperation, $450 million for gas operations, $48 million for land activities and $18 million related to other capital expenditures. Our coal operations further breaks down along the following categories: $255 million for maintenance production, $114 million for expansion projects, $119 million for efficiency projects and $24 million for environmental and safety projects. The primary expansion expenditures are for Shoemaker line and the expansion of the Buchanan preparation plan, while primary efficiency projects are the Bailey and Enlow slope and overline belt. New Portals at Robinson Run, Loveridge, Enlow Fork, and McElroy, as well as prep plan upgrades at Loveridge, McElroy, and Bailey. Keep in mind that our Cap Ex guidance does not include forecast for acquisition.

Production guidance for the four-year period is relatively straight forward. However, I would call your attention to the jump in forecaster production that occurs in 2010. This is when we currently forecast Shoemaker Mine to return to production. We continue to move ahead with our rehabilitation of Shoemaker's underground transportation system and should have that completed in late 2009 . As always, the exact timing for the restart of Shoemaker will be determined based on our assessment of market need.

Finally, with regards to the announcement this morning regarding the gas company. We recently completed our latest 10-year plan. We concluded as we looked ahead that we wanted to continue to have gas in our portfolio of energy assets. We liked the diversification. Coal and gas together account for 2/3 of all U.S. electrical generations. As a result, we made the decision to offer to acquire the remaining shares of CNX Gas. The offer is intended to be a tax-free, stock-for-stock deal and which we'll offer $33.70 per share of CNX Gas common stock, a premium of 12% over yesterday's closing price.

As we noted this morning, the number of things have changed since we sold the portion of the gas company to the public in the year 2006. First, the gas company's value has been independently established by the visibility and transparency gained through public ownership. You will recall that was a key goal we had in selling a portion of the gas company in the first place. Secondly, we believe that constraints on car emissions are in all likelihood, going to be one of the parameters of the environment in which we operate beginning sometime in the next 10 years. Increasing our ownership of gas and having the flexibility to synergistically manage the coal and gas portfolio to reflect changing emissions constraint seemed to us to be a prudent way to diversify the risk in our portfolio. Finally, we have seen the compliance cost of reporting and governance rules associated with being a public company continue to rise. We believe that there are significant savings that can be achieved by bringing the gas company back into the CONSOL Energy structure. Let me also reiterate what we said in the earnings release this morning. The world will not turn away from coal and neither will we. We remain fully committed to our coal business and to our philosophy of growing the margins on every ton of coal we sell.

In summary, we are well-positioned to continue to make strategic actions in our coal, gas, and transportation businesses to strengthen our competitive advantages. We have sufficient liquidity and borrowing capacity to increase production to meet the growing demand of coal or act decisively on acquisition opportunities should they present themselves. And with Brett, I will turn it to you for your comments on the quarter in

Okay. Thank you, Bill. It's good to be on the phone with you all and have an opportunity to talk about CONSOL Energy in total and all of it's assets. First, let's talk about safety. I would like to say that in 2007, we continue on a road to zero accidents in this company and we statistically, we have the best safety year that we've ever had. I am not satisfied that we're at zero yet but we're on the way there and I'm impressed with our efforts to get that done. Second of all, let me talk about, let me talk about the decision that the board made to acquire the outstanding shares of CNX Gas Company.

As we reviewed our strategy, it was clear to us that the value of the gas company was integral to CONSOL in the future. Our 10-year plan reflected that, the way we distributed our capital reflected that and it became clear that if we're not going to move off the 81% that we owned in that company, it was probably better to bring it in at 100% on an accretive acquisition and create value for our shareholders in the long-run with coal and gas as major contributors to our share price going forward. We didn't take this lightly. It was something we wanted to do. It's a bit of a shift in strategy for us but it was a strategy I think is very sound for the future the way we see the world of electricity generation using two fuels of coal and gas. Now, let's shift to the broader coal market and talk about them right now.

Market overview. Global events really is putting pressure on all coal across the globe, especially on eastern coals in the United States. Plus, the power shortages and major coal regions in the world. China is outconsuming their production, which is tidying their marketplace for coal. There is a big demand in India, Russia, and Brazil. Places like that were economies are growing. Tight supplies are driving up the world marketplace and it has a strong influence on U.S. coal, especially eastern coal.

World capacity of high-Btu coal, coal steam, and met down appear to be at its limits. A single event can create a situation that causes a major shift in the value and supply of coal. Despite that coal prices have not risen at this point where we seen significant capacities come online, or where they tried to come on line. There's been huge constraint in terms of infrastructure, as well as environmental issues that hold back permitting process.

Let's talk about the U.S. market itself. There are fewer imports coming in the U.S. this year as we saw slow down last year. Inventories at eastern power plants, especially in the northern upper regions are 20 to 25% below normal. Central mining permits slowed based on mountain top litigation and safety regulations. Northern half and central half have seen a very, very broad convergence of btu in terms of value. When I talked about price convergence, meaning the sulphur discount that we used to see in northern half is rapidly depleting at a more rapid rate than I thought would. I thought we would see that in 2009-2010, we're seeing in 2008.

Let's talk about the markets a little bit in terms of numbers. Let's talk about low volume met. Floods and world events have pushed the international price. Right now, low vol met would be at our Buchanan Mine of $135 million. Central ap prices themselves on the steam side. We have seen rising prices there. Those prices now in the mid- to high $60 rage for central ap coal. Northern ap on the spot side, a single train of daily type coal, we could sell at $80 to $90 a ton. Now, what does that mean for 2009? We're about 52% over for 2009. We are not in a hurry to sign the contracts until we see the market level out and give in negotiations stands to where consumers of coal see the value of coal the same way we're doing, we can concise some long-term contract.

On the met side of 2009, we have 4.5 million tons of low vol met open for pricing. Northern ap steam, we have 19 million central ap. We have 9.1 million and we have about 1.5 million out in Utah. In the mountainville area, we have about 3 million tons opens, which gives us about 52% open. So really, if you look at our core areas, there is about 32.5 million tons of coal open on the steam side. Now, where are these prices going to go? I would say to you that, as we see the demand continue to be strong, these prices are only reflecting what the options are for the utilities out in the marketplace.

Our very high-Btu coal and it's ability to move long distances is creating really value for us as we see a big demand for steam coal, as well as met coal outside of our traditional markets. When we look at longer-term contracts in Europe associated with 13,000 btu coal, we look back at the mine to see what prices in our natural markets are against those markets. We see those as pretty much even right now. And so, a longer-term contracts moving away from the traditional markets creating a lot of value for our shareholders and we will look at those depending on what the price instruction is going forward. The other event we have is our terminal where we move the coals to our own facilities. I'm happy to say that will be up around this Saturday and our capacity there is about 12 to 15 million tons a year, depending on the search they need to do.

These markets are very strong right now, I think it's a reflection of the signals that we got from the world about use of coal. We have third world countries excellerating the use of coal and Western countries trying to decelerate in terms of policy, which is restricted capital going into these markets. That is really driving the price of coal up in my opinion.

Now what can CONSOL do about that? We have the ability to expand on brownfield expansion within our existing -- with this great reserve base that we have. We can extend our annual basis on 4 to 5 of our longwalls producing another 300 to 500,000 tons per year, depending on what mine we're in. We can add additional Longwalls daily and at Robinson Run without total new infrastructures and we can bring shoemaker and Mill Creek back to full production. We can also bring the Birch Mine on it's associated with Amvest for another 3 million tons.

I would say over the next five years, we could give up another 25 million tons, not with green field expansion with expansion of existing reserves and the ability to do strategic capital investments. Now having said that, we not going to do that unless the utilities get to the table with us and decide they want to do a long-term deal based on this great reserve base we have. So, when they step up, we're ready to do these projects. In the meantime, we will respond to the market and continue to increase our market based on rising prices and control a cost structures going for based on productivity, efficiency projects and our ability to maintain the 70 million tons of capacity that we have [invested]. We'll recautions about [larn] and volumes at the right prices and we expect that to be a benefit to our shareholders. With that, I would like to open up for discussion.

Operator, if you could instruct our listeners on how to dial into the cue.

All right. (Operator Instructions) We do have a question from the line of John Bridges with J.P. Morgan. Please go ahead.

Good morning, this is [Anchus Aderwala] on behalf of John Bridges. I have two questions. In the release, you mentioned that you owned 100% of the Baltimore now. As far as we remember, this used to be 2/3 on sale. Could you please remind us when you increase this interest and secondly, could you also detail a bit on the Longwall extension, which mines you're looking at and where do you stand regarding the extensions now.

On the first questions, this is Bill Lyons. On your first question, we all owned 100% of Baltimore. So, I don't know where that piece of misinformation got out there.

Okay.

We constructed that back in 1981 and we've always owned 100%.

Okay, sorry about that. That must have been -- I mean, misinterpreted that. On the second one.

Yes, let's talk about Longwall extensions. This is Brett Harvey. Longwall extensions really is making the panel wider so your ratio of development to Longwall mining is much more productive and lowers your cost over time and you get more volume because you have less Longwalls over time. We think that we can do Longwall extensions at Bailey, McElroy, Loveridge, and Robinson Run. And those extensions would create because of avoiding the Longwall moves and wider faces, it could create probably 300 to 500,000 tons as I said earlier, per year in each one of the mines. If you add it up, it's 2.5 million tons of capacity just based on capital added to your Longwall. Now, it takes a little bit of time to do that because you have to widen your development out and so you probably developed about a year ahead on your Longwall panels and your step would be to match your capitol to widen those spaces out about a year, 18 months out in front of you. We could easily do that. Our budgets that we put out show that we're doing that. That is our expansion that we're looking at in our mines right now and that is the lowest-cost incremental tons to CONSOL can put out into the marketplace at the highest margin for shareholders.

Okay. Thanks.

And your next question is from the line of John Hill of Citi. lease go ahead.

Great and thanks for a very detail presentation as always. I was wondering if you could just provide some additional commentary on the European multi-year contract opportunity. That's something we've all been waiting to see, it appears to be taking shape. There is talk about the ability to go out 7 to 10 years. What type of terms and mechanics are being offered and would this also suggest a pricing basket today as you suggested on met kind of consistent with the U.S. mix?

Well, I would say right now, specifically, we have about five deals in front of us that we're in discussion with on the steam side. Those are anywhere from 2 to 5 years. We have had one preliminary discussion on a 10-year deal but that seem to be shrinking in time a little bit. On the met side, I think the market is changing so rapidly. Remember, a couple of years ago, we went when the prices jumped from probably moved by about 100% and in terms of value there were five-year deals were put out there and we signed some of those up because of our reserve base and our capacity. We think there will be more five-year deals without there but they're going to be another step function in price in terms of value and we being the lowest cost operator in the central ap area with the big Longwall mine, clearly we have to run that mine. And that is an issue that we've had this year. But just last year, we see some real opportunity on the net side and with long-term partners as well.

Great, thanks for that and just a quick followup. Some of the commentary early in the call about recognizing $25 million of insurance in the fourth quarter and then I gather $24 million essentially expense or a change from that refund issue. Is that correct? These two items basically offset each other in the quarter?

They very -- you can say they're offset because they're the same amount but they different transactions and you're right. The $25 million insurance proceeds is a recognition we received from the insurance company. As we said it before, the limits of the policy on the Buchanan incident is $75 million. So, we're going to continue to perfect our claim and obviously it will rendered up to that amount. Again, we would expect more things to unfold on that in the year 2008. In terms of the Black Lung Excise Tax, this is a something that we have reported for various years. Again, various courts have supported our position. All of a sudden, December, this issue arose and again, it's an accounting issue and that we no longer meet the high threshold for the gain continuancy but as I said, we still have a case before the U.S. supreme court and we intend to present our case vigorously just like we did in the lower court.

Very good. Thank you.

The next question is from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, gentlemen.

Good morning, Jim.

Brett, you talked about the lower cost incremental tons from some of the Brown Field projects that you guys have the ability to bring on over the next few years. Can you maybe kind of compare and contrast the kind of typical cost per ton of that type of project versus a green field project? If I'm not mistaken, we've talked in the past, you've talked about green field new projects coming in the northern ap $60 or $70 a ton capital cost rage. Trying to get your sense of where that might be today and how this Brown field projects compare.

Well, there is a range pending on to your geological circumstance, but I'll give you an example. When we had the second Longwall to the McElroy Mine, when that came out, it was about -- we picked up another 6.5 million tons per year by adding the second Longwall at McElroy. We expanded the prep plant and if you add those two together, your costs, your incremental costs coming out of the mine was about 60% of green field. So you can say you save 40% right there and then if you picked up productivity after that, you are in good shape. Now, I would say when you have Brown Field expansions of Longwall, that is probably more like a 30% cost f capital against 100% on green. So, those are ball park numbers, every situation is different. But you can see those are the first moves you make. You increase your productivity based on the existing some capital. But the key to this whole thing, is we have the reserves to do this and it's not like we're set up with limited reserves with the Longwall mine. We can add a second Longwall throughout [so on] and go on for 25 or 30 years and that is because our reserves are that big. So, we have a unique ability to do that, very few has reached out.

Thanks for the details and just as a followup, obviously you talked about the pretty lofty spot prices to get for coal right now today and you're obviously pretty wide open for '09. Can you maybe talk about the kind of differences between where the spot market is today say the contracts market for '09.

I'll be glad to do that. Let me give you an example. The spot market today, like you said, we could move train loads of different type of coal if we had it available, it's $80 or $90 of ton. I can tell you for '09, we are doing fields right now for the Bailey and low type coal. I have substantial volume of 300 to 500,000 tons in the high 60s.

Very good. Thanks.

The next question is from the line of Michael Molnar with Goldman Sachs. Please go ahead.

Good morning, everyone.

Hi, Michael.

Hi, how are you? Just two questions. The first is on inventories. As the overall national inventory number is above historical means but the market obviously seems tight for met coal. Two things could be happening, I guess. One, normal inventories is actually higher, given what happened in 2005. Utilities want to hold more of it and two, prb inventories might be really is high but [nap] is low. When you look at it, one of these things, most of these things or something else?

I would say that the closest circle that you can draw around northern aps, you can see it tight. The natural markets are very tight because of supply. The supply response just have been what you see, how the pattern [river basin]. If you draw a circle around and move towards Chicago, you can see that the volume coming out of the [river basin] has bill up to stockpile. I think in response to the utilities, they want bigger stockpiles because some of the issues they had on transportation a couple of years ago. But that is only speculation on my part. I know in the northern ap in our traditional marketings, it's a function of demand and the capitalization of the industry right now is not picking up the demand that the utilities want and in the short-term and I think in the long-term. The new mines haven't come on. We see a shrinking supply in central aps and northern aps is basically stabilized and I think that is driving the price up and putting pressure on demand.

A followup to that. Given the talk of a recession or either we're in one or we could be in one shortly, do you see a risk to demand being flat to down and given where spot pricing is maybe tonnage has not come on but a lot of people will be incented to bring tonnage and many other perfect storm of tonnage coming on. Just as demand kind a flattens out. What kind of risks on that do you see?

Well, I would tell you this. We have seen this cycle a couple of times about last five years. The demand seems to be higher every time the economy grows and when it flattens out, it tends to be not affixed. The supplier that much because the base load of electricity is coal and it runs in any economy first and so there will be a slight on the margin. I think it will effect gas prices a little bit more. The natural gas prices a little more but on the coal side, I would say, we can't just sell enough to cover ourselves on those issues but I don't see any magic bullet here, even if it's slow in economy where it's going to global demand is probably driving just more than the economy and right here in the Northeastern United States. From our Northern ap perspective, I'll give you an example. What if you sold out of the natural markets here in Northern ap? 3 to 4 million tons of coal, which is a good -- it's almost a Longwall mine in the Northern ap and it moves on long-term contracts to Europe, that could easily be the difference between the whole economy and a not so robust economy by itself. So, global demand is probably a bigger driver than the economy.

Okay. Thanks, guys.

Yeah.

Your next question comes from the line of Michael Dudas with Bear Stearns. Please go ahead.

Good morning, gentlemen.

Hi, Mike.

Brett, over the last few years CONSOL has tied up quite a few long-term, 15- 20-year contracts with customers. How is CONSOL looking at that trend differently given the new price deck and the lack of capitalization we're seeing in the marketplace. Are they going to be shortening the contracts? Different price reopeners, certainly you would think a producer of your side in your capitalization has the ability to extract some better value. How are those discussions changing versus what you did 2-3 years ago?

Michael, keep in mind those contracts we signed 2 or 3 years ago were not fixed prices.

That's correct.

And they have reopeners that to market and that market are shareholders with caps and value when you reopen that margin of that given time. Now, they don't all open at once but they open it in places that look at risk on both sides of the equation. Remember, we designed those contracts for the utilities 100% and so when we open back to market, both sides will realize what the market is and be in a good position. It also allows us to invest like Longwall's basic extension, the kind of things we talked about. We're creating the capital to do that. So, if someone came to us today and said I want to do a long-term deal, we'd be open. We'd be open until because we have the reserves, they would have the power plant and we would write the contract to fit where we think the market's going forward and where we're not open on to is putting green field expansion in our reserve base to speculate that the market might go up and stay up. i think that -- you will never see at volume in a rising market.

So, you made an interesting comment in the prepared remarks about the developing world demand for energy and the expansive use of coal. Even in traditional export-driven markets out of the developing country, yet in the developing countries, regulations pertaining capitalization investment and usage. Could you maybe give some color on some of the cross currents going on in the U.S. relative to safety legislation to the permitting and environmental issues we see in the east and how that might, even at these types of prices for central and northern ap coal, may still limit the investment to meet the demands on market?

Well, I would say it to you that the hurdle to get into this business in the last five years is probably doubled and that hurdle really is around two things. One, the safety issues and regulations are a cost underground mining which affects Northern ap and Central ap. The other one is the hurdle on top mining and the ability to get into the business and get permits even on a schedule to match the marketplace. It doe not mean a lot if you can -- if you have rising prices if you can't access your reserves and that is what we're seeing. That's why we're seeing the Northern ap right now, $80 to $90 train because there is no capacity and that capacity is not accessible within two to three months like we used to be, now it's two to three years. So, the restriction we see on the West world based on its own base, which coal and electricity is opposite on what you're seeing in the third world were their building power plant and building coal mines in six months without permits. You're seeing in Indonesia, you're seeing it in China and it's a reversal -- it's just an attitude that the western civilization has about it's own base and it's restricting and driving artificially. I think, driving prices up which our shareholders do benefit from that.

And one final question, Brett. Relative to the gas purchase. Do you foresee changing the way that business is run relative to hedging investment, growing the gas business through acquisition. Are you sending a signal to the market that you feel that the gas market given what you're seeing in energy is quite undervalued and that's a major reason why you're taking it in and going to be aggressive and growing that business as 100% on by CONSOL?

Actually, it was a strategic decision to bring it back in based on the efficiencies from the value that we see that being together. I wouldn't go out and say it's undervalued and so forth. I would say, that the market established the value and we offered a fair value package.

Thanks, Brett.

Our next question comes from the line of Shneur Gershuni with UBS. Please go ahead.

Good morning, guys.

Shneur, good morning.

Just a couple of quick questions. I guess it's a followup to the last question with respect to the purchase of [txg]. In your prepared comments, you sort of said that originally [ipo] to get out the markets recognized the value. That all said, are you at all concerned if it's consolidated back into CNX that the fact that they've got exposure to the non--evaluated takeriage, the [marsaleis shell] which is an interesting play at this point right now will sort of getting lost, being part of the larger CNX. And then secondly, if you can comment about whether it limits your financial flexilibity to make other acquisitions and so forth because that was basically source of capitol if you choose to sell seldom your [staking] so forth.

Let me take a shot. One is it, obviously, it will be a challenge before us to make sure that we don't lose the momentum that we've establish on the gas company. The gas team has done an excellent job of getting out the various conferences and various investors and telling the gas story and I think we established a lot of clarity and transparency. We intend to continue to have a high degree of effort in getting information on the gas company and think if we do that, we won't lose a lot of the benefit we've gain by having this transparency. In terms of the rest - in terms of value and the like -- this is not a coerced deal. This is something wed look at it and we're going to give up to the shareholders for their opinion and see what they want to do. Whenever you evaluate a company, evaluation is neither easy nor exact. There's different ways of estimating value and some people uses earnings estimate, EBITDA, sometimes people use just kind of cash flow, sometimes people look at the under value of the assets and certainly, everyone has different views for the future. And also, I'm going to tell you that different assets have different values based on different people and all these things have to be put into play in order to establish what the value is. So, again, we think that we'll be able to maintain that transparency. We're not going to lose it because we can continue the effort. In terms of doing future deals, that's one of the benefits of doing it as a stock transaction. We feel it will not limit us at all. In fact, we are -- our pot remains dry and we'll be actively looking for other acquisitions and that includes on the gas side.

If I could just ask one more question -- just with respect to 2010, 2011, you put out there quite a bit of production growth and so forth and looks pretty exciting. I was wondering if you could give us some color with respect to what the Cap Ex is going to be to get all of that production online and so forth. Is it something we can extrapolate from your 2008 or is it going to be a more aggressive or higher number and so forth?

We don't give out Cap Ex beyond the existing year, but I think I will talk about this year. Clearly gas is a part of our Cap Ex for this year. And so,you see the expansion there, you talked about our ability to explore some of the other properties we have. So, we accelerated that as a big way for 2008. On the coal side, you see our maintenance production is $255 million and that is 365 a ton. Our expansion capacity of which you have seen were doing to get to those numbers in '05 and '010 is about $115 million and our efficiency, which I would say is the Longwall expansion is about $120 million. So, you could say about $250 million of that capital you're seeing in coal really capital expenditures to get to this bigger numbers because we believe the market is there. If the market doesn't look materialized, we'llprobably back up on some of that. But that's what we're seeing for '08 .

Okay, great. Thank you very much.

Our next question comes from the line of [Mark Lillyma] with Morgan Stanley. Please go ahead.

Hi, all. Given the discussion of the importance of the various global effects that are effecting coal markets, would it be fair to say that you would be fairly aggressive in trying to drive a convergence to those markets and contract places. Can you discuss how you would think about that in line of term deals and traditional customers?

Well, when you look at convergence on those markets, you have to put yourself in a position of the buyer. The buyer has -- he's looking at one thing. Deliver in terms of btus. So, every deal has transportation and the cost of buying the fuel in the mine. Our value is -- we can do a long-term deal, very high btus and you let the customer play the transportation part. So, if the customer is willing to pay out at the mine, the same price that a domestic customer has without transportation and he wants to do a long-term contract, we're in the unique position that we can do long-term deals with anyone based on what our capitalization is at the mine. If the market demands is more coal, we're willing to Brown field expand the first into those market and then if they want to do longer-term deals because our reserve position, we would do a long-term deal or a green field project. But those tend to be 10 years or longer and we're not quite there yet, but I think that could development into if Asia continues to be growing at the pace they are, I really see Colombian coal and south African coal being somewhat diverted away from the Atlantic markets and I think there will be some long-term deals based on the high btu content and Brazil as well. The high btu content of our coal and the extends of reserves that we have.

So, just when you do a simple back of the envelope math, you can get some impressive prices that in theory, you could sell your stuff in. Could you be aggressive going after margins like that?

Certainly would. Yes. In fact, you can see us doing right now on the met business.

Thank you.

Our next question comes from the line of David Gagliano with Credit Suisse.

Hi, first of all, thanks for the good details in the prepared [marks] and Company. Just a quick question on the pricing commentary and the unpriced positions, you gave us good information on '09. I was wondering if you could give us the similar metrics for the $58 million on price roughly in 2010, the $68 million in price in 2011in terms of the regional breakdown between that -- things like that.

We gave you what the open position is but we don't have it broken down by met teams, I don't think right here. I mean, we can get back to on you that.

Dave, this is Tom. We probably have about -- just think about overall capacity about 5 million tons of net capacity and most of that would be open at least at the moment. For 2010 and then we have 55 million tons or so of northern ap capacity and 10 million tons of central ap. Is that sound that right, Brett?

Yes, that's right. We can give you more numbers if you want. I just want to get back to Tom later.

No, I mean, that is helpful and I will go back to you, Tom. Just a followup on the contract that you did sign during the quarter, I was wondering if you could give us more detail on the details of the specs associated with, I think it was roughly 4 million tons committed for '09 and a million ton in 2010. Would that sold into the U.S.? And Europe was a thermal met that kind of thing?

I would think it would be about half and half.

Half and half?

Yes. I think half of it was sold externally. Out of the 4.5 million tons, it was steam coal and most of it was about 4.5 pounds. That would be Blacksville loveridge type cole and that is where we were doing most of our dealing. That's the coal that is actually leaving the country.

Okay. And then for the small, I think it was a million tons of 20 tons, was that steam or met?

I think that might be legacy contracts. Carry over. I think that is what that was.

Okay. Okay. Perfect. Thank you very much.

Our next question comes from the line of Justine Fisher with Goldman Sachs. Please go ahead.

Good morning. The first question I have is just about the contract negotiations with your U.S. customers. I think that, if you guys are getting offers from long-term contract from European customers, obviously they seem to be pretty desperate to get coal. But are you noticing any changes in the negotiating habits of your U.S. customers whether in Northern ap or otherwise that they are looking for longer contracts, shorter contracts, how do you think they're approaching negotiations now?

Well, first of all, right now, we're not selling very much because on purpose because we think the markets are fluctuating in such that we're having a hard time seeing where the prices are going to land for beyond '09. And the customers, remember, in '07, the first half of '07, we were actually in the downcycle. We were pulling production back because the customers believed there was a glut of coal out there. It reversed itself very quickly in the last two quarters of '07 and now we're seeing upward movement in price that we haven't seen in two or three years. So, we're just not at the table right now on head-to-head whether it's long or shorter-term. The domestic market really seems to be in flux. People are very, very focused on getting the coal they need for '08 . They're not talking about '09

I mean, are they calling you guys up saying, hey, we know that you're going try to Central coal to Europe. We have to get some, too. Or do they not seem that desperate yet?

They understand it and they started to see it last fall. But I would say yes. They see the pressure of coal leaving the U.S. They just are very focused right now on '08 , it looks like and not a lot of discussion on '09, which surprising us

Okay. And then the second I have is about throughput as the terminal facility. So, I guess, total capacity is $12.9 million, you said, and you guys did about 6 in change during 2007. You guys plan to, I guess most of your '08 coal is committed. Do you plan to export more coal in '08 or do you plan to fill up the rest of the capacity and who is going to CONSOL coal l if it's not CONSOL coal?

Clearly we'll put CONSOL coal first.

Do you guys plan to export $13 million?

That is -- well, if we can sell $13 million. Remember, we have a lot of open tons in '09. We're 52% open. If it turns out that we, if we sell that much, we'll do that. If we don't, then we'll sell the excess capacity to whomever, but I think at this point in time, as long as we have that open position, there is not much for sale in terms of our throughput.

And for '08 , since you're mostly priced, are you getting calls from people asking this by that capacity

Justine, this is Tom. Just for reference in the release this morning, we did indicate that we expect about a 25% increase in CONSOL exports through the terminal in 2008, versus 2007.

So, the last numbers I saw were 6.3 to 6.8 -- 8.6. That would be the jump from '07 to '08.

Okay. And I then, I just wanted to clarify what the cash impact of the gas purchase will be because I know you guys obviously received cash for it. This is a stock-for-stock transaction but it seems to me that there is not going to be that much of a change in the cash flows as far as CONSOL Energy is concerned because you guys were still recording Cap Ex for the gas business and flowing that through your income statement. Anyway, so, is it correct that there is not going to be that much of a different in cash flow going forward because of the purchase?

That is correct.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Brian Gamble with Simmons and Company. Please go ahead.

Yes, good morning, guys. I wanted to go through a little bit about your production increases and potential brown field expansion. How much of is that is layered in the 2010-2011 production estimates and then, whatever part of that is layered in, how do you anticipate that impacting cost per ton and that metric as we look out over in 2009, 2010 time period?

I would say on the Longwall expansions, I would say by the end of 2011, we'll pick up 2.7 million tons there. On the other ones, Longwall extensions are going to help us control costs because your productivity jumps on the Longwall and your ratio between your development and Longwall tons drops. So, you will see a leveling effect on the cost structure on the Longwall side. Exact numbers, I don't think I can give you but we will have productivity to help us control costs. I would say on the Longwall edition, if you're going to pick up -- remember, we're going to bring Shoemake on 2010. Half of that is sold. We won't bring it back in 2010 unless we have at least another 2 million tons open there. So -- because we have the ability to supply it with all the mine. I would say if you look at the total production through 2011, it's pretty much built in because our hourize only these investments really are structured that the decisions for making in '08 will start to see the tonnage in late '09 and '010.

So, on the cost, the 4% increase in '07 over '06, you anticipate that being a good baseline for '08 over '07, I mean into '09 maybe seeing a little bit of a benefit as additional Longwall start to come up?

Yes, that's a pretty good baseline. There might be some benefit. Remember, if we so a big round of inflation, it will be offsetting but right now, the way we're looking at the world, the inflation on that material and supplies doesn't seem to be growing as much as we originally thought. So, I would say in today's world without big changes and inflation. I would say would be at that level and some upside based on productivity.

I mean, kind of had a coal fire question I wanted to throw at and get your outlook on it. I have been reading a little bit recently about nuclear plants and the potential for some of those utilities in the southeast have to shut down plants that we start temporarily based on the drought going on in that region. Does that impact the coal utilities in that region as well? Are they on a strict permitting guidelines as some of the nuclear plants are or does that not impact them as much based on the certainties surrounding some of the contracts and the nuclear and maybe on the coal side.

It's not a safety issue like with nuclear. It's more of an operational issue with coal plants. Coal plants need water to operate and nuc need them to cool and that create safety issue. But in both cases, they need a lot of water. If you look at the growth on the nuclear side, nuclear production is down about 5.5%. Coal production is p but we did see in the summer last year because of the drought coal plants that were being pulled back on dispatch, just based on lack of water. So, [both] last year but nucs tends to be more of a safety issue than operational issue.

I appreciate that, thanks.

Operator, we have time for one more quick question. At 11:00, the gas company is going to do their earnings call. So, we'll take one more question, please.

Our last question comes from the line of [Luther Lou] with Friedman, Billings, and Ramseys. Please go ahead.

Hi, Brett.

Hi, Luther.

Could you guys talk a little more about the synergy of the buying back of CXG, how much FG&A can you save and how much flexibility can you have in terms of allocating capitals, things like that.

Okay, I will let the CFO talk to that.

Luther, we think that the synergy are least $5 million a year administratively.

Okay.

And we think as we go forward, maybe in taking advantage of some computer system, we can increase that.

Okay.

In terms of operational, one of the things we did find out in Buchanan is it's certainly a lot easier when we work together but we think it will just enhance the synergies by having the 100% operational synergy.

Okay. And are you guys still going to close down mine 84?

That is our intention unless customers step up and pay the price give some margins they want. It is a high-cost mine, the markets above that high cost and there's margins will continue to operate but we tend to sell that coal as it hits daylight rather forward.

Okay, great. Thank you for the color.

Operator, we'll have to conclude our call now. I thank everyone for joining us. Charles Mazur and I will be available throughout the day for anyone who has followup questions. Operator, if you would give our listeners their information with regard to playback.

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