CNX Resources Corp (CNX) 2008 Q1 法說會逐字稿

ladies and gentlemen, thank you for standing by, and welcome to the CONSOL Energy first-quarter earnings release call. As a reminder, today's call is being recorded.

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

Good morning, everyone. Welcome to our conference call on the first-quarter results for CONSOL Energy. With me this morning are Bill Lyons, the Executive Vice President and Chief Financial Officer of the Company, and Brett Harvey, President and Chief Executive Officer.

We will be discussing the results for the quarter just ended, and we will be discussing the outlook for the remainder of the year. Much of our discussion will be forward looking in nature. Our ability to achieve forecasted results are dependent on certain business risks, which we have detailed for you in our earnings release, released this morning at 7.30. There's a greater detail on the discussion of business risks in our Form 10-K filed earlier this year.

With that, again, we welcome you, and I will turn the microphone over to Bill Lyons. Bill?

Thank you, Tom. For the quarter just ended, CONSOL Energy reported net income of $75 million or $0.41 per diluted share compared with $113 million or $0.61 per diluted share in the first quarter of 2007. Net cash from operating activities was $146 million compared with $183 million for the first quarter of last year. Overall, these financial results were mixed compared with our internal expectations.

CNX Gas, which we own 81.7%, had a record-breaking quarter in terms of production and earnings. Overall, CNX Gas contributed over 50% of our net income for the period. In coal operations, average realizations increased over 9%. However, lower production and higher costs resulted in a 37% reduction in margins.

Let me discuss some of the details of the quarter. Our share of CNX Gas' earnings was $41 million in the first quarter of 2008. CNX Gas' record production of 15.9 billion cubic feet of natural gas for the first quarter was over 10% higher than the 14.3 billion cubic feet for the first quarter of 2007. Of special note is that this record production was achieved with the Buchanan Mine longwall being down until mid-March, which meant we experienced a deferral of mine-related methane gas of approximately 1.2 billion cubic feet.

Average margins at CNX Gas were $4.52 per Mcf, an increase of 24% over the $3.65 margins in the first quarter of 2007. CNX Gas is estimating 2008 methane production to be 72 billion cubic feet, a 24% increase over 2007 production. CNX Gas maintains its strategic vision of producing 100 billion cubic feet of natural gas annually by the year 2010.

On the coal side, average realization per ton was $43.57, an increase of $3.73 per ton or 9.4%. This increase in per-ton realization added $60 million our revenue line. The other major metrics in the coal side, production and costs, did not meet our expectations. Production was 16.2 million tons, down 1.6 million tons from the first quarter of 2007. The Buchanan Mine being down for most of the first quarter of 2008 caused 1.1 million tons of this impairment. We also lost a light amount of production due to deficits in longwall development at several mines, which resulted in equipment being idle while the necessary development was completed. These production shortfalls were offset somewhat by the production at AMVEST, which we acquired in July of 2007.

Average cost per ton was $37.39, an increase of $7.34 or 24% over the first quarter of 2007. There were many items causing this cost increase, including lower production levels; higher-cost mines in the mix, like AMVEST; higher prices paid for supplies and services; higher labor costs; and the $33 million combined fund settlement benefit reflected in the 2007 quarter.

There were several nonrecurring items of accounting and financial significance in our press release that I would like to briefly review. These items are highlighted in a table on page 2 of the earnings release. They were, first, is that we received notice from our insurance carriers that we will collect the final $50 million of business interruption insurance relating to the Buchanan Mine roof fall event. This will bring our total recoveries provided by insurance to $75 million. We incurred costs of $25 million attributable to the suspension of production and related startup expenses at Buchanan during the first quarter.

We also bought out several contracts with customers for $16 million to release coal committed to them. We will sell this coal to other customers at higher prices. The additional profits generated by these transactions will be reflected in future quarters when the coal is ultimately sold.

We also recognized an unrealized loss of $9 million on mark-to-market adjustments related to several coal sales options. We sold options for 525,000 tons of Pittsburgh seam coal at an average price of over $70 a ton. We received cash of $1.7 million for these options. This is very profitable business for us, and the transaction is in accordance with our risk management practices. The accounting rules that govern this type of transaction requires us to mark the options to the current market while the options are open. These unrealized losses will reverse as the coal is sold or as the options expire.

Now, looking forward, we have identified several brownfield expansion projects that we believe meet or exceed our after-tax internal rate-of-return hurdles. Currently, we're committing capital for nine longwall face extensions at six of our existing Northern Appalachian mines. Seven of the nine face extensions will be completed in the next 12 to 18 months, and we will increase production from a particular mine by 300,000 to 500,000 tons per year. The Company is also on schedule to have the underground haulage system at Shoemaker completed in early 2010. Shoemaker is expected to produce approximately 6 million tons per year.

CONSOL also expects to expand capacity at the Buchanan Mine in Virginia to 6 million tons per year by early 2011. The capacity expansion involves upgrades to the existing preparation plant, the construction of a new raw coal silo, upgrades to the water delivery and treatment system, the installation of a new vertical coal belt to augment the existing skip hoist, and upgrades to the underground haulage system.

In addition, the Company has begun the permitting process to add a third longwall mining system at Bailey Mine. This additional longwall will increase annual production by 5 million to 6.5 million tons per year and is expected to be completed by 2013.

As I mentioned earlier, CNX Gas has a large inventory of high-rate-of-return projects that will enable it to drive its 100 billion cubic foot annual production target by the year 2010.

Now if I could sum it up, I would say that we come out of this first quarter well positioned to take advantage of the great market opportunities that are available to us. With that, Brett, can we have your comments?

Thank you, Bill. It is good to be with all of you, and it is good to talk about the position of CONSOL Energy in this, I think, very robust and exciting energy market that we're in today.

First of all, let's talk about safety. The first quarter of 2008 was the best safety record that we have ever had in the history of the Company. I want to commend our people for their attitude about safety and their ability to look after each other and get the job done. That is paramount to this Company, paramount to management, as well as it should be to our shareholders, because a safe operation is also a very productive operation.

Let's talk about the gas company first. Gas had an outstanding quarter, as Bill just described -- higher production by 10%; higher prices by 16%, almost 17%; 50% higher profit; strong revenue growth; and the ability to grow that Company at a 15% or higher compound rate going forward. The 100 billion cubic feet per year for 2010 is very achievable, and it is part of what we call our double-edged sword in the energy business and a very valuable piece to our shareholders.

Now let's talk about the coal business. The coal market in the first quarter changed, I think, dramatically and has legs, in the met side as well as the seam side. I think we've seen a step-change in the coal market. I think the world is building coal-fired capacity all around us, driven by China, it's driven by India, Indonesia, even Europe now burning higher rates at the existing plants they have, as well as committing to build new plants based on their energy needs going forward.

Coal is the low-cost energy for the world, and the conflict between environmental issues and coal continue to go, but when it comes down to basic economics, coal is winning out in terms of growing the base worldwide, which creates opportunities for CONSOL Energy. Even Western Europe, with their green sensitivities and their attitudes towards CO2, has now decided that coal has to be a bigger part of their base. We think that is very interesting based on where the U.S. is under the same dynamic going forward.

Major world producers for coal have constraints. There are environmental issues about opening new mines, or permitting issues. There's availability, and there's ability to move this coal around the world. So capitalized mines with long-term lives of production become more valuable in the marketplace. And I think CONSUL is a very good example of that.

Long-term contracts are being looked at for world markets as well as Atlantic markets with CONSOL. And we have seen a big bump in long-term markets associated with utilities just around CONSOL's major mines. We're looking at brownfield expansion of some of our mines as it relates to these markets. And let me assure you that the brownfield expansions match the rate of return that we need to have for our shareholders to invest capital to expand anything. Otherwise, we would not do it.

In these strong markets, we're going to see acceleration of revenue growth like we have never seen in CONSOL over the last 30 years. We're going to see rapid expansion in margins and we're going to see costs stabilize with the volumes as we expand into these lower costs, with brownfield expansions and wider longwalls. So we will see stabilized costs, as well as acceleration in revenue, which will expand our margins very rapidly.

Let's talk about coal costs for a minute. First quarter, we were affected in costs year to year based on a couple of things. We added a higher cost structure when we brought in the AMVEST mine, and then some of our lower-cost mines for the first two months of the year, we had a drop in productivity related to those mines, which, when you put that mix of costs into the first quarter, it shows a higher cost than we expect for the entire year.

I think for the second quarter, the third quarter and fourth quarter, you will see our average costs for the year decline to levels that are more reasonable and more in tune with the guidance we have given in the past.

The other thing I would like to look at year on year is coal that we were selling in 2007 for 2008, on the steam side and the met side, I would say in the spot market, are at least 100% higher than what they were from 2008 to 2009. Let's talk about some of those prices.

Let's talk about mid-sulfur. Northern App coal is selling right now -- we're signing contracts between $105 and $110 a ton; high-sulfur coal, Northern App, $100 to $105; Central App coal, depending on whether we're on the CSX Railroad or the Norfolk Southern Railroad, anywhere from $92 to $105 a ton.

Now, met coal at the spot market right now in 2008, coal that we have open today, we think we can sell that coal for about $240 per ton at the mine at Buchanan. In terms of what we have opened to reprice for 2008, we have 900,000 tons of met coal, high-vol 400,000, low-vol 500,000. Northern App, we have 1 million tons of reprice. Central App, we have about 800,000 tons of price. And Emery Mine out in Utah, we have 400,000 tons of price. So that totals about 3.1 million tons of price yet for 2008. Open for 2009, we have 25.4 million tons of coal to sell and price.

So I think it is important that we understand that there's been a dramatic step-change in the value of both these coals, and these coals are going to expand our margins very rapidly. But remember, this is a business where we contract. And as we contract and move into these different types of coal, you will see these jumps. The market tends to try to multiply all these numbers and ignore the existing contracts. We have to make sure that the market sinks them in when we actually deliver the coal under these new contracts.

So having said that, I would like to open it up for discussion.

(OPERATOR INSTRUCTIONS). Jim Rollyson, Raymond James.

Brett, you talked a little bit about the contracting market and maybe what you are seeing. Can you maybe spend a minute in detail? You signed up, looks like about 10.5 million of price to incremental tons and almost 15 million just in total commitments for '09. Can you maybe just detail how much of that is for export versus with domestic utilities, and is this business -- you were talking last quarter about signing multiyear deals -- kind of what you are seeing in that sense?

I would say, for export, I would say we're going to be up about 100,000 tons for 2008 versus last year. And the reason we are there, even though our Baltimore shipments are higher, say it's gone up from 6.9 million to 9.8 million tons through Baltimore, our export tons on the steam side are not moving because the domestic market is rising faster than the Atlantic market.

And what is happening with our utilities, our immediate utilities around us, they are very interested in term, volume, and in this rising price structure the availability of coal is more important to them than the price at this point in time. So we are doing long-term deals with legs, with major utilities in the area, and essentially we're tying up volume with them that don't have transportation components, which is a real value to our shareholders.

Very good. And as a follow-up here, you guys have talked for the last couple quarters about the ability to ramp up production over a period of time with brownfield projects, and you kind of listed some of those. Two questions on that. One, is that someone captured in the volume growth we see in your production ranges as we go out to 2011? And secondly, any thoughts to the overall capital required to complete the projects you're kind of looking at and talking about now?

This is Tom Hoffman. Just before Brett answers that, I remind everybody, as we indicated in the release this morning, the production guidance that we give for 2009, 2010 and 2011 is only updated at the first of the year. So that is a reiteration of what we gave in January and does not reflect anything necessarily that we are talking about that is new that was not in the initial guidance.

But to that point, like the expansion of the longwall faces and so forth, these are very highly productive things. It lowers our overall costs, it increases our productivity and it also replaces the wind-down of Mine 84 and things like that in the marketplace.

So what we are seeing here is a much better cost mixture going forward, which expands our margins, as well as we will not bring on any of this brownfield expansion unless we have the tons sold and it does not affect the rest of our marketplace. The last thing we want to do is bring tons on and depress the rest of the marketplace in Northern App, or in Central App, for that matter.

So we are really focused on that. But I would say there is a market. We're going to bring Shoemaker back on in 2010. We see a very strong market for that coal. And what we are seeing on these expansions clearly have very high internal rate-of-return models that we have, and we're going to see the value there as we expand some of this.

Any thoughts on the CapEx, just from what you are targeting now? I'm just trying to get a sense of how much free cash flow you will still have left over.

I think on the CapEx side, we're going to be about -- brownfield expansion, I would say on a brownfield expansion, you expect about one-third to 50% capital that you would spend on a new mine. And so if you work that out, we're probably going to spend -- I'm trying to put that in terms of cost per ton.

I think you guys were saying a new one's in the 60 range?

Yes.

So 20 to 30 kind of numbers?

I would say so, yes. I figure that's a good way to look at it.

Thank you.

Michael Dudas, Bear Stearns.

Brett, in the step-change function in the coal market, how much do you think the global market is going to be dictating supply/demand fundamentals in the U.S. relative to, say, U.S. economic or energy policy going forward?

Well, I think they're coupled together, I think, permanently for at least the next five years. I think this global market is so powerful in terms of the -- keep in mind, we're building a much bigger base for coal worldwide, and that base is directly related to all the marketplaces.

So if you look at what is not coming into the U.S. in terms of the imports this year, and if you look at what is going out of the U.S. in terms of exports, that is a real effect, let alone the effect of what we call on-the-bubble metallurgical coal that could be steam or could be met, depending on how the met goes.

So these world markets in met and steam directly affect the domestic markets, especially in the Eastern United States. We are seeing the ability to move this coal either way. And I think that's why we're seeing the domestic utilities try to lock in volumes and the surety of supply rather than worry about price or try to drive price down.

Regarding Central Appalachia, do you think the issues relative to Chambers, relative to Geology and what you are witnessing in your own business, is that going to continue to limit the ability of that region to fully meet the demands for the marketplace? And how much do you think out West are we going to see penetrate because of such -- the tightness in the East and in the coal leaving our shores?

I think we are going to continue to see it to be very difficult. The markets will tighten based on the ability to permit coal in the Eastern United States, the safety issues that were written under the new law. All those things affect the cost and ability to get to -- you see a productivity drop based on these two issues.

So the capitalized, very valuable mines that are already in place are becoming more valuable. And as the international market takes some of that coal away from the natural markets, we're going to see some coal move from West to East. But that is a very expensive haul, and I think utilities will encourage more development around power plants than they will to take that long haul for long periods of time.

Final question, Brett, is you had a pretty impressive speech back in the fall about zero accidents at your Company that you've put forth in the market. And it seems like in your press release, you had some pretty good success. How is that going to -- relative to your Company and maybe the industry, given that there's going to be a big pressure to bring coal to the market and expand and hire and train in this bull market that we're seeing, could that be an issue for the industry, given the scrutiny that we are seeing from regulators over the last couple of years?

Well, I think if you look back to when we changed generations in the coal business last time, we saw a problem associated with safety, and that is what we're trying to avoid. We're looking at bringing new people into the business as an opportunity to train them to zero accidents and the mentality of zero accidents. But it takes a lot more training, as you know.

We see it as an opportunity, but I think there will be an influx of new people into the business, and that is going to be a challenge for the industry. But I think it is something we can do. And we're spending money and investing in our people to the point where we think we can be at zero going forward, which gives us, I think, the advantage. People want to come to mines that have good safety records. And that will give us the edge, because a safe person is also a productive person, and we think they go hand in hand. So I think that is the watchwords that we need to look at going forward, and that is a motto of CONSOL now.

Thank you, Brett.

Luther Lu, FBR Capital Markets.

Brett, I have a question. Given that API prices are going back to $150, are you seeing the European utility buyers coming back and perhaps wanting to sign a long-term contract this time around?

I am pretty sure that they will. I think any time you see a dip in the market, and on the shoulder months that we are seeing in Europe and other places, that puts us in discussions for longer-term prices that probably don't have spot market economics to them. But we're okay with that, as long as it fits within the step-change of the marketplace that we have seen. So we are in discussion right now, in fact, with major utilities in the Atlantic, looking at longer-term deals that are five years and beyond.

Okay, great. And given that, do you have any plans to expand the Baltimore port?

Well, we have a study going on right now, and we've determined that with the capital expenditures of about $20 million, we think we could, on a yearly basis, get up to $18 million and stay there. We have another piece of that study that we're looking at. We have a big footprint there, and we think maybe with some more capital we could bring it up to who knows? Maybe 20 million to 25 million tons of capacity. But we won't do that unless we have the contracts to match it.

Right. And the railroad has to, I guess, cooperate as well?

Well, the railroad -- keep in mind, our port facilities have dual railroads going into it, with access to our major mines on direct hauls. I think they see that as very lucrative business, and it would be a great partner, an expansion of our Baltimore facilities.

A question for Bill. Bill, what is your cost projection for second quarter -- for balance of the year?

Luther, we don't give those cost projections out. As Brett said, we expect them to come down, but we don't give guidance on that.

And for your DD&A projection, given out earlier this year, it's still at a little over $400 million?

Yes, that should be okay.

Okay, thank you.

Brian Gamble, Simmons & Company.

Brett, when you mentioned your 6.5 million tons that you've committed, but not priced, based on your expectation that as the year progresses those prices will continue to improve, is that due to the customers not wanting to commit to prices that are reflective of current market dynamics, and you just wanting to realize your fair deal on that? Or do you actually think that you're going to increase the prices that we're seeing today over the next six to nine months and you can just be further profitable on those tons as we head towards the back half of the year?

Yes, I think the latter part of that. In any given move in market where we see a step-change like this, it is probably not very prudent for the supplier -- and we understand the demand very well -- for the supplier to lock in prices on the early end of the move. And so we decided there was such a need for the utilities to want to have the volume and they wanted to have it for term, we were willing to negotiate those prices later in the year.

I will give you a good example. When Bailey coal was moving at $65 a ton, and this was early on in the move in the first quarter, clearly we could have signed it up and it would have been $15 a ton higher than we kind of expected as it started to move. That spot market for Bailey coal today is $110. So it would have been very imprudent of us to sign that up that early.

So I think it was just a function of us understanding where the market is. We also spend a lot of time looking at forward electricity prices and seeing what their availability to pay as well is. So if you add those together, we did sign contracts with them. Both of us have handcuffs on them. But at market, we're okay, because we're a low-cost producer anyway. So I think we understand the market very well.

Then moving on to the cost side, when you look at what the cost increases were for the quarter, obviously they were above your expectations. But were they above your expectations on AMVEST and what you guys could do with those lines and how that cost shaped out, or was it solely due to the lower production out of some of those longwalls in Northern App? How did that break down on a percentage basis?

That breaks down -- there's a lot of things there in that cost number. You've got to realize, when you have all the complexes we have, they're not all the same, and we tend to linearize all of this stuff.

There is no doubt the reduced production hurt us in terms of the calculation of unit cost. Also, AMVEST we think is going to do better than what it did in the first quarter. So we also think that is also going to help us in terms of the unit cost.

Again, as we talked about in the beginning, that first quarter of 2007 was an extremely good quarter for us, and it was aided by that $33 million combined fund settlement. That was a nonrecurring event, so naturally when you do the comparisons to 2008, it is going to pale by comparison.

We have experienced increase in labor costs and the increase in supply costs, and that will show an upward trend as we continue out. But you've got to realize, when we take a look at these met prices for coal we are talking about, that is a key ingredient in steel manufacturing. And we use a lot of steel in the mining process, both to roof control as well as in equipment. So I think you're going to see increases in cost. But as we talked about before, I think the focus needs to be not so much on cost, but the focus on margins. And you're going to see that margins are going to outstrip increases in cost.

And then one last question based on that margin comment. When I am trying to back into the 2010 committed and price volumes quarter over quarter, I get to kind of a 3.8 million incremental ton side for 2010 kind of in the low 50s. I was wondering if you guys could explain where those tons came from and why those prices don't seem as high as the realizations that you're getting on the 2009 tonnage side during the quarter?

I think that is a function of the mix that we see out there. I wouldn't dwell too much on what you saw signed up for that timeframe. I think it had to do with the mix that we are putting in, and these are deals that were signed in mid-2007. If you look at mid-2007 versus the market we're seeing, say, mid-2008 is dramatically different. So I think that was more of cleanup contracts we were looking at than anything that you could compare to the new marketplace.

I want to go back on your other question, too, about AMVEST. I don't want you to get the impression, because the costs were a little bit high in AMVEST for the first quarter, that we are discouraged about that. We think AMVEST is going to be a real winner for this Company for many, many years, and it is going to be one of the biggest workhorses in Central App I think out for the next 20 years. So you're going to see some real value come out of AMVEST.

I appreciate the color there, Brett.

Paul Forward, Stifel Nicolaus.

Looking at the just overall Northern App coal markets, when you talk about adding new volumes to that market, you've got to have a stance on what the whole Northern App coal market is able to do over the next, say, two or three years and what demand is going to look like. When you look at the entire Northern App market from today through, say, three years out, how much incremental production do you think can come in to that market, and how much incremental demanded do you see to be able to absorb that production?

I would say incremental demand is very limited. It would be probably 10 million to 14 million tons. That would be max. And most of it's us, and I think you're going to find that we're not going to bring it out unless the price is right.

So you said incremental demand is limited. Did I hear that right?

No, production.

Okay.

Production is probably 10 million to 14 million. Incremental demand, I would say demandwise, it could be as high as 20 million, 25 million tons. I think there is real pressure on demand here, that that is why the prices are running where they are at in the spot market.

And just also the Northern App markets, if we are at 35 days of inventory right now, which is a number that a competitor gave, you put a line in here in your press release that said we believe this tightness in the market will intensify as we get further into the year. Where do you see that inventory possibly going to, meaning the utilities that use Northern App coal? How low can this get by, say the end of the summer?

Well, if it is a hot summer, I would say that the utility is going to be in a very panicked position, because -- and here is why, because the inventories I think are stable to low right now if it gets real hot. And the Northern App supply will be weighed down as a response. So they can't respond that quickly with volumes.

We had a lot of people calling us today wanting coal for the summer, and we don't have the coal. And there's a lot of issues around where are they going to get it, and if they burn up this 20-day supply, how are they going to resupply for the winter? I think that is the concern. So the supply response is very weak. That is why the prices are the way they are.

And just lastly, you mentioned this 5 million tons of imported coal, that it will be lower this year than that last year. Are you seeing former coal import customers calling you looking for new tonnage, or is that not really coming -- are they not really looking to you guys for that?

We've always been the swing supply for a lot of the people along the coast because of our high BTU travel. We have been a swing supplier for the coast guys who bring them in and play Pittsburgh and Northern App coal off of the Atlantic market. We're seeing them come to us, and we don't have the tons they want. So it is tight. It is tight right now for them as well.

Okay, thanks a lot, Brett.

Justine Fisher, Goldman Sachs.

We have already seen the step-change function in Eastern prices for both Northern and Central App, but the PRB producers are arguing that we have yet to see it for PRB coal and that PRB coal will backfill some of the holes left by Eastern coal that is exported. Are you guys looking at all at developing more in the PRB to get into that market more from a production standpoint before that potential step-change, or do you guys not see a step-change there because of different sulfur content in transportation, etc.?

In that marketplace, we have Youngs Creek that can come on in 2012, but we won't bring it on unless we have the coal sold. We're not going to use our shareholders' money to speculate, although I do think there is a possibility of the high BTU coal that we have coming out of Youngs Creek and our value as a fee product versus royalty product that the competitors have there, that we can have a niche there with our Chevron partner to get some things done.

I think the Powder River Basin has a different marketplace than the Eastern coals. And if you draw a circle around its transportation nationwide, the inventory is high at the utilities that they feed. I think that drives the price. As long as utilities in that marketplace feel comfortable, we're not going to see the push for higher prices yet. Now, if it turns out those inventories drop or the production of the PRB is limited somewhat in the future, I think you will see prices rise there pretty fast. But right now, we are not going to speculate by bringing on a lot of volume in the PRB.

And I guess there's no timeframe as to when you would try and commit those new brownfield expansions in the East, right? Is there any way we can gauge how long you would wait to commit that coal? I mean, I know we can't tell what price you would commit it at, but--?

A good single is, and I'm trying to send this signal on this call, is the utilities around us are tying up very large volumes on our base capitalized mines. That tells you the next brownfield expansion mine, like the fifth longwall at Bailey [inlow], could happen earlier than later, but I can't give you a date on that.

It seems like you guys are trying to sell more to the domestic utilities, just because they're willing to accept higher prices as well. You said that domestic prices are rising faster than Atlantic prices. Is it part of CONSOL's goal to go back to these domestic utilities first to maintain those relationships as opposed to exporting it, and then potentially angering or disappointing utilities that may have bought substantial amounts previously?

Well, there is a real advantage to -- I mean, if you look at these power plants, they are built right on top of us, and there is no transportation between us. So the economic [rent] of being their supplier comes to our shareholders. And if we can sign long-term supplies with them that are very powerful, in the billions of dollars, we will do that first. And we are naturally capitalized for each other. So that makes a lot of sense if our shareholders get their piece of pie, yes.

And then one more question. I asked a competitor about SO2 prices and what the potential reason for the recent lag in SO2 prices was. And I was wondering if you guys have an opinion on that, whether it's scrubbers, or how you would explain the recent dip in SO2 prices?

Well, I think there's two things going on. One is the scrubber build depresses SO2 prices because there's a lot more scrubber capacity being built out there, which is a natural market for us. The other thing is utilities buy heat, and they're short on heat. So the demand for heat for power, meaning the BTUs that come out of coal, that has become the priority over sulfur or anything else.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). David Gagliano, Credit Suisse.

I just wanted to ask a couple of quick questions. First of all, we have seen a recent spike in Eastern U.S. prices, and we have seen a pullback in international prices. And it looks to me like some of the steam export prices are now at or below Eastern U.S. prices on a netback basis. And so I'm just wondering, are you revisiting your thinking with regards to the volumes that you want to move into the export steam market versus totally into the domestic steam market at this point?

David, we think that that softening in the market you are seeing is based on the shoulder months and the demand has backed off a little bit. But if you look, we still have major problems in South Africa. The supply side, when the demand comes back, it's just not going to be there. So we think the Atlantic market is going to continue to be strong.

In the short term, I think the domestic market's a little stronger, based on the inventory, and they are trying to build their inventory. So if you look at the balance between the two, I think it switches back and forth, but this is the first time I've seen since I've been at CONSOL where it's switching back and forth on a two- or three-month basis instead of a two- or three-year basis.

So I would say we've got a balance there. We haven't changed our philosophy. We have the ability to either move it to the domestic and make high margins or move it to the Atlantic and make high margins because of the high BTUs and the port facilities that we have. So I think it is a matter of leverage.

In terms of your specific volume targets into the export market, that really hasn't changed in the last couple of months?

No, it hasn't, no. We would move it consistently there, and no, there has been no change in our philosophy there, no.

And then just the other question, just briefly, switching to your strategy as a company, Brett, obviously right now you are basically a pure Eastern U.S. coal producer. And just looking forward, I'm wondering, is your preference to remain primarily an Eastern U.S. coal producer, or would you prefer to be more geographically diverse in terms of other U.S. regions?

I think it's like anything else -- for the right deal, we would make a bigger footprint if we thought our shareholders would benefit. We're not bashful about going into any other region. Our move into AMVEST told us that -- into Central App, we decided that was a good place to move. The Southwest, more expansion in Utah, Wyoming, all of that looks attractive at the right price. And we would consider that, because there is an advantage to have diversity over time. And we always look at that.

Perfect. Thanks very much.

Wayne Atwell, Pontis Capital.

What is your leadtime on buying a longwall?

Right now, it is about 12 months.

And how long would it take to, if you decided this morning you wanted to build one and you had the 12-month leadtime, how long would it take to have one up and running?

If we wanted to develop for one, it would probably take as much as two years to develop for it, and probably 12 to 18 months to get it designed and purchased. But keep in mind, we run a lot of longwalls, up to 15 longwalls right now, and we are buying ahead because of our buying power. To replace some of the ones that we have, we're buying ahead two or three years. So we do have a pipeline of longwalls coming at us because of our buying power, which gives us better pricing.

So if you decided this morning, it might take you two years to get up and running at one of your different mines?

Yes. It depends on the demand for coal. If somebody signed up with us for delivery in 2011, we could probably get one going.

And what is your potential in terms of your gas reserves? How much might you build up your gas reserves to over the next two or three years?

Right now, we are at 1.3 trillion cubic feet. We are drilling right now on 3.8 million acres to prove that out. Our gas company will be at the level they have announced in 2010, at 100 billion cubic feet a year. And I think that will continue to grow at about a 15% compounded rate after that. I don't have any numbers to give you, but we have a lot of opportunity there, and that gas company continues to be more valuable to us.

If I'm not mistaken, a few years ago you were at about 1 trillion, and now you're at 1.3 trillion.

Right.

Is this a case where you could go to 2 trillion or 3 trillion, or is it sort of like 1.5 trillion or 1.7 trillion?

I think if you look at probable reserves, it could be as high as 3 trillion to 4 trillion.

Wow. And if I'm not mistaken, there is an area where you're really excited, that you're spending a lot of money and energy on?

A couple areas, actually. Right up here in the Pittsburgh area, in two places, the Nittany project that we're working on and the Pittsburgh seam area, we're enthused about as well. We also have a pretty strong acreage position in the Marcellus Shale, which is very popular right now in the gas business. So if you look at the combination of what we have in the 3.8 million acres, there's a lot of opportunity, yes. We're excited about it.

And the highest value of that asset is to keep it within the Corporation now instead of possibly selling it?

Yes. That has been determined by the Board, and I agree that the value there is if there is any pushback on coal based on C02, that extreme value comes on natural gas. And that is part of the double-edged sword that CONSOL has. So that is good.

Great. Well, I congratulate you. I remember a few years ago when you bought it, you did not pay much, and it turned out to be a great investment.

Yes, it certainly did, and it gets better every year. We're excited about it.

Super. Thank you.

At this time, we have no further questions, speakers. Please go ahead with any closing comments.

Thank you, operator. We thank everyone for joining us this morning. We will -- Chuck Mazur and I will be available all day to get back to you with any follow-up questions. And at this time, again, we thank you for joining us. Operator, if you would tell our listeners about the replay.

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