CNX Resources Corp (CNX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to 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.

Thank you, operator, good morning, everyone, welcome to our third quarter earnings call. With me today are our Executive Vice President and Chief Financial Officer, Bill Lyons; and President and Chief Executive Officer, Brett Harvey. We will be talking about results for the quarter just ended as well as our outlook for the remainder of the year and for 2009. Some of our discussions will be forward-looking in nature, forward-looking statements are subject to business risks. We have enumerated those both in the earnings release that we distributed at 7:00 this morning, as well as in our most recent 10-K and 10-Q, and we would ask you to take a look at those at your convenience. With that, we'll begin this morning with Bill Lyons. Bill?

Thank you, Tom, and thank you to everyone for joining us this morning. CONSOL Energy reported earnings of $90 million or $0.49 per diluted share compared to with net loss of $5 million or a negative $0.03 per diluted share in the third quarter of 2007. From an earnings standpoint this is the best third quarter we have had in 15 years. CONSOL is financially strong and we believe that energy fundamentals will prove to be surprisingly resilient over the next several years. This view is further validated by the upgrade in our credit rating that we received on September 15, from Standard & Poor's. Our corporate credit raising was raised to BB-plus.

Net cash from operating activities was $213 million compared with $142 million in the third quarter of last year. This improvement primarily reflects higher net income that is attributable to higher average realized pricing for coal and gas and higher gas sales volumes partially offset by $104 million decrease in the period to period comparison from the proceeds from our accounts receivable securitization facility.

For our coal segment total sales for produce coal were $751 million versus $615 million for the third quarter of last year. This represents an increase of approximately 22% and was driven by increased prices. Average prices were $51.07 per ton for the third quarter, up $10.79 per ton or 27% quarter to quarter. Average pricing piercing the $50 per ton level, marks the beginning of the price mix momentum that Brett spoke about in the earnings release. What we mean by this is that we will see average realized prices continue to rise as older contracts in the mix are replaced with new higher-priced ones that were negotiated during this year's significant run-up in prices.

On the cost side of the ledger, operating costs for Company produced coal in the period to period comparison increased $7.42 per ton. Now, there were a number of drivers impacting costs including production shortfalls that in the short run increased unit costs because a high percentage of our costs are fixed. The excess escalation of costs of labor and materials. There are increased costs related to the execution of plans to address long wall development shortfalls and there was lower productivity and the need for a greater use of materials such as route control supplies to meet new safety regulations. We will have a thorough discussion of these issues in our 10-Q. So let me focus this morning specifically on supply and maintenance costs and labor, since they represent about three-fifths of the increase.

Supply and maintenance costs have increased about 40%. The increase in supply and maintenance costs is attributable to a number of items including the higher costs of items used in the mining process. Higher gas well plugging costs. Increased route control costs. Higher explosives and fuel costs. And higher equipment maintenance costs. For example, we are installing higher-strength seals at a greater number of -- and a greater of seals to isolate mine dot areas of our mines from the active areas thus adding to costs. This is basically a new federal requirement. The new seal requirements will result in the elimination of problems such as those we experienced at Buchanan last year, but it will take time and resources to fully implement this procedure throughout our underground mines. We are doing more development so that the long walls will not be idle following a move. That means more labor and more supplies, just as roof holds which add to the cost.

We are eliminating the use of combustible (inaudible) in the mines, such as Buchanan, but that means using more expensive non-combustible temporary roof support. These supports can be installed quickly but they add to costs. We have grown the business through the acquisition of AMVEST. But that means high fuel and explosive costs because AMVEST does a significant amount of surface mining which uses more of those materials than our underground mines. Now, labor and related costs have increased approximately 20%. The labor issue is straightforward. We have hired more people to address the development issue and wages and benefits for existing employees have gone up. Over time a number of these costs should decline to what I call a steady state level as we complete some of the catch-up work in things like development and sealing and we have become more efficient in integrating the new safety protocols into our planning and mining process.

As we noted several weeks ago, production for the quarter just ended was lower than expected due to a number of situations. And these included the roof balls along several mainline belts. The delays in long wall production following equipment moves at several mines because preparation of the new areas to be mined were not complete. And delays due to increased government safety inspections.

We continue to address the development issues and have made a number of important changes that should positively impact productivity and, hence, production, over the next six months. Thus far we have added crews and changed work schedules to increase long wall panel development which we anticipate will yield benefits quickly. We have also worked with equipment manufacturers to development better haulage systems for continuous mining machines. We've increased rates of advance in development sections of the mine. While we haven't yet found any game-changing technology, we intend to continue to explore technological advances with our equipment manufacturing partners. In addition, we've modified mine plans at several of our long wall equipped mines to increase the ratio of coal produced by long wall equipment compared to that produced by continuous miners.

Now, despite the challenges of production and cost, operating margins were up $3.37 per ton or 28% quarter to quarter, due to higher realized pricing per ton in the quarter just ended, as well as some lost sales of high-value metallurgical grade coal in last year's third quarter due to the Buchanan outage.

Let me turn now to the gas segment where we reported record results. Yesterday CNX gas in which CONSOL has an 81.7% ownership position, reported third quarter net income of $67.4 million or $0.45 per diluted share, more than double the net income from last year's third quarter. This is the highest quarterly net income in the gas Company's history. This was driven primarily by a 38% increase in sales volumes and a 42% increase in average sales price period to period. The gas Company also reported record production of 19.7 billion cubic feet which as I said, was at 38% higher than last year's third quarter and 5% higher than the second quarter of this year. Average operating margins at CNX gas were $5.89 per Mcf, an increase of 58% versus last year's third quarter.

We cannot be more pleased with our investment in CNX gas. They have provided steady growth in production and profit margins, while prudently but successfully expanding their footprint beyond Southwest Virginia which I will talk about in a moment.

Looking now at the business we concluded during the last three months, the Company's scheduled an additional 3.1 million tons of coal for 2009 delivery, including approximately 1.8 million tons of new sales at an average price of $116 per ton, bringing the the total tons committed in price to 58 million tons and average price of $57.63. In addition there are 2.5 million tons capped at a maximum average price of $43.66. At quarter-end CONSOL had between 9.5 million and 13.5 million tons of anticipated coal production unpriced for 2009 of which approximately 4.3 million tons is metallurgical grade coal. This is based on our production guidance range of 68 million to 72 million tons next year. For 2010 the coal business has 29.2 million tons committed and priced, and an average price of $48.27.

Now let's take a look at the gas Company's position for 2009. Yesterday CNX gas increased their production guidance for 2009 to 85 billion cubic feet. Approximately 42 billion cubic feet of next year's expected production is hedged at an average price of $9.74. And for 2010 CNX Gas has reiterated their production goal of 100 billion cubic feet.

Let me give you a quick overview of our coal and gas capital projects. To alleviate the development issues that we encountered this year we have plans for seven long wall face expansions that are scheduled to be completed between 2009 and January of 2011. During 2009 we expect to complete long wall face extensions at Bailey, Leverage and Robinson Run. Another three long wall face extensions will be completed throughout 2010 with the seventh expected to be completed in January of 2011. Our upgrade of the underground hauling system at Shoemaker is on schedule and is expected to be completed during the first quarter of 2010 with an annual anticipated production of 6 million tons.

And, finally, for coal, the new slope and overland belt at the Bailey Mine is expected to be completed in the fourth quarter of 2009. This will reduce the time and distance coal is transported underground thereby lessening mining delay, and increasing productivity.

Now during the quarter CNX Gas added to its acreage position. Currently the gas Company controls 3.6 million net acres. The bulk of these acres acquired were coalbed methane acres in Northern and Central Appalachia. CNX Gas continued to execute their drilling program which resulted in Virginia, Mountaineer and Nittany coalbed methane operations achieving their record productions in the quarter.

Now during the quarter CONSOL Energy's Board of Directors authorized a share repurchase program of up to $500 million of the Company's common stock over the next two years. The share repurchase plan will be used from time to time depending on a number of factors including current market conditions, the Company's financial outlook, business conditions including cash flows and internal capital requirements, as well as alternative investment options.

Now during the quarter just ended the Company repurchased approximately 1.2 million shares at an average price of $39.05. And also during the first three days of the fourth quarter we've purchased an additional 900,000 shares at an average price of $38.35, for a total of 2.1 million shares repurchased since we received the authorization. The share repurchase program may be used periodically as the Company monitor's general conditions in the equity and debt markets. In addition, CONSOL Energy's Board of Directors recently authorized a purchase of additional shares at CNX Gas Corporation up to an aggregate amount of $150 million. As everyone knows CONSOL Energy currently owns 81.7% of CNX Gas. As we said in a news release in March of this year and as we have mentioned many times on this call, we do not intend to sell or otherwise divest ourselves of our shares of CNX Gas that we currently own. We intend to continue buying shares of CNX Gas common stock from time to time in open market based on a number of considerations, including price.

From a financial management perspective I believe that both share purchase programs provide additional avenues for us to return value to our shareholders and should serve as a barometer of our competence in our future business prospects. In summary, this was a good quarter. The best third quarter, as I said, in 15 years. Coal and gas prices were high and gas segment produced record volumes and led to record earnings for them. Although it was a challenging quarter productionwise for our coal segment, we believe that we are addressing these issues with near-term and long-term solutions. We believe that we're going to benefit from the long-term demand for energy and as lower-priced legacy coal contracts open up to reflect that long-term global demand. And with that let me turn it over to you, Brett, for your remarks about our strategic direction and the state of energy markets today.

Thank you, Bill, and I appreciate the detail that you've given here. It's good to be with all of you again and in today's financial markets I feel like it's time for us to step back and take a deep breath about where we stand, versus other companies, and our ability to earn cash, as well as earning for our shareholders and create value like we have with our strategy over the last five to six years. 2009 is solid. 2010 looks good to us, but the outlook is less clear because of global issues. We'll talk about those in a minute.

CONSOL will be strong through 2009 because, we have a very strong hedge position in coal and gas is in a good position as well. Low volume met coal and high BTU steam coal will command premium prices in the energy market whether it is a demand energy market or a slower economy, these two are bas valuable commodities. Cash and liquidity allows us to be disciplined in both sales and production, puts us in a great position for 2009. We'll have the flexibility to defer of slow CapEx without undercutting fundamental growth strategies that we have in our strategic plan. Global supply constraints is likely to offset any softening in demand resulting from a slow economy.

Those with cash and strong balance sheets will have the flexibility to manage in any environment, and that is CONSOL. We expect in the fourth quarter to expand our margins in coal, based on price and return to productivity based on long wall development ratio between long wall coal and development. Having said that, I think we're in the position right now to open this up for questions, and I'll be glad to take those right now.

Hey, operator, if you would instruct our listeners on the queueing process.

Certainly. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Jim Rollyson from Raymond James.

Morning, Jim.

Brett, could you maybe spend a minute just talking, obviously there has been a lot of different numbers but as it relates to pricing and what you're seeing, maybe spend a minute on what you're seeing in terms of eastern steam coal prices and how recently you may have booked some coal just to kind of give us a sense for where the real market is right now?

Sure, I'll be glad to do that. In the last three weeks we've done deals on eastern steam coal at everything plus $110 a ton. On the low vol met side we've done deals at 1.2 million tons for 2009 between $285 and $310 a ton. On the eastern steam side, I might want to reiterate, we have signed up almost 3 million tons of eastern steam coal at plus 110. So we see the market stable and strong and '09 looks very good for pricing. We still see in any economy the base energy demand of which our coals are related to in steel, as well as steam coal, is in demand and very strong -- very strong pricing.

And on the met side, presumably that is with domestic US steel-makers?

Yes, it is.

Any thoughts as to how that pricing might hold up as you go further, in time to the international negotiations? Do you expect that to generally hold up when you get to the international settlements?

Well, we expect met pricing to roll into the international environment because we believe they're linked. The other piece that we really believe, and I'm really satisfied with, is that our high premium low vol coal is going to demand higher prices and will move into that market as well, just like it did here in the eastern United States. What we're seeing is these premium high -- high low vol pricing create value towards the steel guys as their coke plants become more efficient in a different marketplace for themselves.

Understood. The last question may be for Bill. You spent some time talking about the different things you're doing to try to alleviate maybe some of the issues that cropped up this quarter, trying to help offset some of the rising costs situations. Can you give us a sense as you get into these long-wall face extensions, and some of the other projects you're doing, the magnitude of which you're hoping costs -- unit costs will kind of come back down?

Jim, that is an excellent question. Our average costs are somewhere around $41, I think $41.64 for nine months. I would hope that it would stabilize there maybe a little bit lower based on production increases in the fourth quarter, and then I think that would be a good base number, and from there I would hope that it would only be inflation that would cause the cost increases for 2009.

Very good. Thanks, guys.

Thank you.

Okay. Thank you. And the next question comes from the line of Michael Dudas of Jefferies. Please go ahead.

Hi, Mike.

Good morning, gentlemen.

Hi, Michael.

Two questions, first, Brett, could you maybe share your views on how sustainable the tightness in the Atlantic basin may be for high quality, high BTU thermal coals and what you're seeing in what you've contracted over the past nine months and what you anticipate? Is term business still being looked upon there, and is that a sustainable-type level especially given maybe the change that we've seen in the dollar and freight rates over the past two or three months?

Okay. That's a good question. It is broad but we'll get right to the point. The turns business that we're seeing right now, we're negotiating is anywhere from one to seven years we're seeing right now. So we still see term deals in the Atlantic market very strong, and most of that domestic right now. And a little bit of softness on the European side. But domestic is solid and good and steady right now.

I think there is some real issues that is pushing the Atlantic market, and I think labor, shortage of labor, especially in Central App, geology issues, probably across the board everybody is hitting tougher geology. The old saying about every generation gets the best of what's left, the mining business is really true, and then we've got these new safety rules that are putting pressure on productivity, and on top of that we have the (inaudible) and surface mining in West Virginia. And even in a declining heavy demand for energy, based on the economy, this is such a strong base commodity, even in a declining situation. These things are probably going to decline supply faster than demand for energy. So we see some real strength there.

Which kind of leads to the second question, and it's along these lines, Brett. Would you anticipate that even if demand were not to fall off or the market was continued to be quite strong, do you think over the last six months given what you've experienced at your Company and what you're seeing with your competitors, that growth in Appalachian, northern and Central Appalachian production into 2009 and possibly into 2010 may not even occur at even much higher coal prices than we are? And if coal prices were for some reason to fall dramatically, would you see discretionary impact to mines coming off stream especially in Central Appalachia?

I don't think , aswe've seen past year. We've seen rapidly rising coal prices, again flat and declining demand especially in Northern App. And Northern App is more a function of when we want to bring it on and when we want to bring the capital into the business. I clearly will bring Shoemaker back at the right time to match our contracts. But ironically the supply constraints in the US and other parts of the world may prove to keep supply and demand in balance at a time and a slowdown of global economic growth would suggest a decline in energy demand. So I really think that even if we were to take mine 84 out over time and bringing it just to a met product. I don't see prices as demanding this. I think it is a function of bringing them on against the constraints we see with labor issues, productivity issues and the things -- 404 permitting in West Virginia. That is what is holding us

Thank you, Brett.

Okay. Thank you. And the next question comes from the line of Shneur Gershuni of UBS. Go ahead.

Good morning, guys. Just a couple of questions. One is actually just a follow-up to the last question or line of questioning was, can you remind us how much you actually committed to ship into the European markets for 2009 and for 2010 or sort of I guess put a -- give us an idea of tons that will still be leaving the continent at the end of the day?

Okay. From CONSOL directly we plan to ship 2.7 million tons into the -- in '09, into those markets on the steam side. And for '010 it's probably about 1.5 million. That's where we are today. That could go up depending upon pricing. If we see rapidly-rising prices in Europe, again, we'll probably increase that, but right now that's what we see for '09 and '010.

Two other questions I guess one relates to your share repurchase program, can we assume that you may slowdown some of the long wall moves or some of the CapEx you intend to do over the next year or so to execute on the -- on the share buy-back program? Obviously the prices -- the X right now is lot below where you were purchasing earlier and obviously would prove to be I guess, more favorable to where you were purchasing historically. Would you consider actually slowing down capital project to actually purchase more shares?

We -- okay, we're not going to change long wall moves or anything like that, but in terms of slowing down capital, it could very well be. I mean, it's certainly a fluid -- we'll say situation out there and CONSOL Energy we're very fortunate is that we have many opportunities and that includes internal investments. You know, we pay out very good dividend and we intend to be a leader in dividends. We can do acquisitions, because of our financial situation, and as well as share buy-backs and that could be either in CONSOL Energy or CNX Gas. Being in a fluid situation, we're going to have to -- we're going to judge this at any given time. One opportunity may be to look better than the other. But, again, the big thing for CONSOL Energy is that our strong strong financial position allows us to take advantage of different opportunities.

One final question. With respect to the [EMCHA] situation and so forth. We've kind of been hearing about EMCHA ramping up for probably the last three quarters or so, fines are definitely up and they're just writing everything up under the sun at this point. Where you do you get the sense it will peak. At some point they are going to run out of things to write up all the mines on. I'm not just talking about CONSOL, I'm talking about all of the underground miners in the East. There has to be a point where they basically run out of things that they can write up and you hit this peak and the negative hit on the productivity side. Or do you think it is not going to get any better but it is not going to get any worse?

Well, what we see, when we see changes in Intel like this, like we saw a with the law originally. When you see a change in the way they do business, we have to adjust to it and we have to adjust the way we do business. We think that it will level off at some point as we adjust and create a response to that environment. We'll do it with two things. We'll do it with technology and we'll also do it with trained manpower to adapt to what they're doing. Now, when we'll level off I think we're probably moving into that mode right now. But it is not clear as they continue to change we'll continue to change with them. But the reaction time, at least for us tends to be six to 12 months from a real change in the way EMCHA approaches a problem.

I guess just as a follow-up to that, you modestly took down your production guidance for the fourth quarter. Is that because you kind of expect the EMCHA issue to play through to the fourth quarter?

I think we're getting a better handle on what it it is costing us to do this in the short term as we adjust for change in technology in the long term. So if you -- if you go back to what I said last quarter, as optimistic as I am, I thought we would have this all solved in the third quarter. We've adjusted the fourth quarter just a little bit because we see a jump in productivity but maybe not as high as I would expect it. So and we're looking at what they expect as well. I think we're seeing a changed environment at the EMCHA level as well. So it's hard to give you a clear answer other than we're getting our hands around it and we'll address it for the value of our shareholders.

That's great. Thank you very much.

Okay . Thank you. The next question comes from the line of Brett Levy of Jefferies & Company. Please go

Hey, guys, Big Sandy Barge has got a southern handle on it. I wanted to get a sense from you, obviously, that kind of flies in the face of everything we're kind of seeing out there. What kind of volume is moving there? Is that just tiny, tiny amounts? And if you had to cut a contract today, could you cut it with a seven handle or would it be over 100 again.

Talking about the Big Sandy movement, right? Big Sandy River?

Yes.

I think you tend to see lower quality, low volumes moving on the Big Sandy. Let me reiterate what we've done in terms of bigger volumes, 2.9 million tons in the last three weeks and over $110 a ton and that kind of covers mostly Northern App stuff and very little Central App stuff that would be competitive with the Big Sandy. But Big Sandy, those are very low volumes and I think it's plus -- I believe it is plus $100 from the mines that we would ship out of that area.

So if you had to cut a contract today, it would still be above $100 in your view?

Oh, yes.

Okay. And then as -- as some of the weakness kind of rolls through, is there a particular geography where you guys would be targeting to opportunistic on the acquisition front?

Well, there are assets that we would like to have, all around the country. These are key low-cost assets that match our low-cost structure. There are pieces in the West and there are pieces -- some in Northern App and Central App that we would like to see. But specifically I think it is more based on price and opportunity, and where we see strong synergies, that's where we'll move. Where we can take our low-cost techniques into the marketplace.

So something that is adjacent to you might be attractive as well?

Sure.

Thanks very much, guys.

That's always attractive.

Okay. Thank you. The next question comes from the line of Luther Lu, FBR Capital Markets, please go ahead.

Good morning, guys.

Hi, Luther.

Just a couple of things, first. Notice that in the press release you mentioned 550,000 pounds of crossover pounds will be switched back to the Northern App's steam market? I was wondering if you could give me your best assessment of how much of this cross-over ton was in place in the met market for the US, overall? This year.

I think it was about 25 million tons.

25 million tons of cross-over tons.

That's cross-over tons in total in the east that we would see that has potential to cross over between met and steam.

Okay. Great.

Does that answer your question?

Yes, yes.

Fine.

And then I also noticed that third quarter '08 and third quarter '07 had similar shipping volumes. But the freight expense I know is a pass-over -- pass-through expense, but still freight expense jumped 35%. So could you give us a little bit of sense of what is the shipment rates from mines to ports in Northern App, and Central App?

Well, Luther, in terms of that, you're right, that is a total pass-through to us, and shipping rates are up, and lot of that is based on the value of the coal. So, again, we don't look at that to be a major issue for us. For the most part, as I said, these -- we sell our coal FOB mine, and this is really an issue that customers have with the railroad or who ever is doing the shipping for them. But if you want to ask off-line with Tom Hoffman or somebody, they can probably give you more specifics.

Okay.

After the call.

Okay. Great. And can you give us a sense of this international met coal negotiation. When do you expect the settlement with the Europeans to take place?

We expect that it will happen in the first quarter for delivery in April. Probably around February.

Okay. And the -- on the steam coal -- steam coal contracts that you mentioned that you signed with the European customers, the 2.7 million tons, when were those contracts signed?

Those contracts, the 2.9 million tons were for eastern steam coal and they were with domestic utilities, that we -- the 2.7 million tons for '09, those were signed probably six months ago.

Okay. Six months ago.

Yes.

Okay. That's all my questions. Thank you.

Thank you.

Okay. Thank you. The next question comes from the line of John Bridges, JPMorgan, please go ahead.

Hi, John.

Hi, Brett, Bill, everybody. Yes, I was just wondering there is some commentary about layoffs in mine 84, I just went into the directory of the transition there to this better quality material?

That is the natural progression from moving from a steam coal mine to a met coal mine. We're going with continuous mining methods for the met coal. We're pulling away from long wall production so your development cycle changes and you're losing less people. The nice part about that is that we're taking those people and repositioning all of the supervisors and anybody that wants a job into our other mines that are expanding. So we're taking advantage of that labor pool. But you have to announce it if you ship more miles. So that will happen in the fourth quarter.

This is Tom. It's only 40 to 50 people who are affected, and those layoffs, were they -- were they to occur, will occur in the last couple weeks of December.

Okay. Okay. Great. And then I wonder if you can give us a bit more guidance, I know there has been questions already, on what sort of cost escalation we should put in going forward. I know the current situation with the changes is not a great guide to the future, but, what sort of cost escalation should we put in for, say, next year?

That is an excellent question. Quite frankly it is a question we usually ask you. So I don't know, I mean, when you take a look at all of the dynamics that are going on right now in the drastic drop in commodity prices, we naturally expect that we won't see double-digit increases in commodity prices like we saw, know, probably in the last 12 to 15 months. But, the fact we saw copper as an all time low and we had issues of copper. In fact that was a major issue we had, people were stealing copper everywhere because it was worth so much. I don't know, I would think that maybe 2, 3% might be a number to use. But, again, with the economy being such -- being in such shape, and until we get some more clarity, I don't know if I would hazard a guess.

There is two components there. And one is the commodities themselves, and I think Bill addressed that pretty well. The other one is we're going to see as productivity rises, on our ratio between long wall tons and development tons, you are going to see the costs naturally go on productivity to the favor of the cost structure. And I mentioned that earlier because I really see the fourth quarter we'll have expanding margins on every ton, which will give a good preview for next year on price, as well as productivity, and that's a good way to see it, because in the second and third quarter, we really lost some productivity issues, expanding margins based on the productivity problems we had with long wall development. So we're going to see that reimbursed along with commodities. So I don't see as much pressure in '09, and we'll give you those details when they come out in January.

Okay. And then a follow-on. Some of these issues seem to have come from catch-up capital, the slow (inaudible) and so on. What's a good ongoing capital number we should use going forward? Because it sounds as if the cost of seals, the cost of extending long walls and so on, is going to raise the capital number we should be using just for maintaining capital going forward.

I would say the expansion -- the expansion of the long walls give us a productivity bump which helps our cost structure, and so that capital returns very quickly. I would say (inaudible) capital you could figure on an ongoing basis, 3.25 to 3.50 a ton.

John, we'll give you further clarity on our capital expenditures in January.

Thanks a lot, Bill. Thanks, guys. Good luck.

Our next question will come from the line of Brian Gamble with Simmons & Company. Please go ahead.

Good morning, guys. Bill, just wanted to touch real quickly on a follow-up. I understand '09 is tough to gauge what the costs are going to be. You did mention in your opening comments that you might be able to come in a little bit below the nine-month average in 4Q?

That's correct.

Is that -- what are -- what assumptions are making into that? Are you baking in the increased productivity?

Yes, increased tonnage.

Increased tonnage as well. How much lower could those numbers possibly be? We talking just modestly or we talking a decent chunk?

Well, I don't know what a decent chunk is, okay? I would expect it to be under our $41.64.

Okay. That's fair enough. When -- and then when, Brett, when you talk about the 25 million met tons that were crossed over this year, obviously you guys had the minor position rolling back into the steam rolling. Would you expect if we did continue to see weakness on the net side for all of those tons to potentially roll back? Are there certain metrics that you look at that say maybe half of them go back next year? What is the feeling on that?

If you look at the met business worldwide, the 25 million tons is a response I think to a strong met market. I would say half of those tons are in a structure that could never come back to the steam market just based on cost to operate. But if you look at the costs of new coal covenants worldwide or the build-out of those, we think it's going to be pretty strong all the way through, so that coal that has good met characteristics is probably going to stay there. I would be surprised if out of 25 million, 10 million would come back, and out of that 10 million that would come back I would say half of that would just go out of business because it can't compete with the steam market.

Great. And then just want to follow-up on a previous question on M&A. Obviously you guys are looking for the best uses of your capital going forward. But specifically on the M&A side, what kind of attitudes have you seen recently with the pull-backs and all the multiples. Are people saying hey, these things are too cheap? I don't want to sell down here. Or are they of the opinion, hey, the run-up might have been too far, but there are opportunities out there for buyers to come in and maybe we can get a deal done sooner rather than later. Walk us through people's thought process and how that market is in today's environment.

I think a lot of this reflects the current credit situation. There is no doubt that credit is tighter and quite frankly it is just too early to tell the full impact of what all of this might be. Obviously, we're seeing some slow-down in global economic growth. When you start taking a look at that, there is no doubt that smaller producers and those with substantial debt will be the most affected and they're going to have trouble coming up with money for equipment purchases, for new capital capacity additions. I think tight credit will be a major impact on acquisition opportunities. Larger deals that were financed with debt, will be very, very difficult to do. But smaller acquisition of assets that, we can see I think are very doable. And I think this may -- the emphasis may shift from acquisition to merger in some cases. So, again, when we look at it, I think that it is going to be hard to do acquisitions based on the credit, the smaller acquisitions, I think, can be done in companies like CONSOL that have -- have liquidity and are going to generate what we feel are very robust cash flows in the next quarters, are going to be in excellent position to be able to take advantage of some great opportunities out there.

And you need to keep in mind that we're looking at coal and gas, because we see opportunities on both sides of the fence. Okay?

Thank you very much.

Yes.

Okay. Thank you. And the next question comes from the line of David Lipschitz of Merrill Lynch. Please go ahead.

Thank you. Hi, everybody I just have a quick question. Bill, in your remarks, you said something about 68 to 72 for 2009 estimates? But in the press release it says 70 to 74. I just want to do confirm which what it is.

70 to 74 is the right number.

So that is the right number.

Dave, this is Tom. Let me remind everyone listening, though, that with regard to the out year production guidance that we only update that once. We update that in January. So while I'm not intending here to suggest that it will change, you should -- everybody should be aware that it is subject to change and that the final guidance for '09 won't be given until we announce earnings in January.

That's the last one we put out.

No, because Bill said in his opening remarks 68 to 72. I was wondering whether is that a new--?

No, no.

Because based on production guidance 68 to 72.

So it is 70 to 74.

Okay. Thank you. That's all.

All right. Thank you. The next question comes from the line of Jeremy Sussman of Natexis, please go ahead.

Just to clarify, you said you signed 1.2 million tons of met coal at those prices. Is that correct?

Yes we did, 1.2 million tons of met, domestically between 285 and $310 a pound.

Great. At the mine, sure. And you also mentioned potential you're negotiating anywhere from a one to 7-year deal. Can you give us a sense of how a seven-year deal would be structured, any price caps, any backwardation, or fuel escalation clauses and that?

Well, in today's -- in today's market we would probably stay away from price cap, because the price cap basis that we did got us to these higher markets. I would say they would have some reopeners in it and there would be some indices between the reopeners that was addressed to costs. But the real deal would be the utilities trying to tie up capitalized volume to assure themselves supply of coal, and it would be I think on the side of the supplier how these things opened up and what price they were opened up at. So we feel pretty comfortable with those kind of contracts going forward.

Great. And I guess just my last question. Can you take us through maybe a two or three, maybe of of some of the mines that have been running below the run rate that you would like to see this year kind of talk about some of the problems that you've seen, and basically how things have either improved or based on where they're running now or how you plan to kind of get things back -- back up and running little bit more smoothly?

I think leverage is one of the mines we struggled with. We've had Robinson Run, ve've added crews there to solve the problems. At the McElroy run, with two long walls running there we were behind on development. Those were the three main ones we had for the year and we solved that with technology, manpower, and scheduling of people. And there is a piece of it, though, that we're still addressing as related to the safety issues, and the drop in productivity based on the new safety laws that we've just about got that solved, but that's still something that we're working with. But those three mines, I would say are back on track and the development is where it should be.

Great. Thank you very much.

Thank you . The next question comes from the line [Danielle Jaguani] of Catapult, please go

Yes, hi. First, a quick housekeeping question. The 1.2 million met tons, is that included in the outdated contract position that is mentioned in the press release for 2009?

No, it's not.

No, it's not.

Okay.

Excuse me. Those numbers that we were talking about were deals that we've done essentially in October.

In the last three weeks.

So they are not included in the third quarter reports.

Right.

Okay.

We want to do give the updated numbers because of this turmoil in the market we wanted to make sure everybody understood that it was still very strong.

Got you. The met wasn't working and that is why I wanted to check. The other questions are more theoretical. If you look at, heat rates and gas prices today, it would be -- utility given, if they had the choice to justify purchasing Central App coal, given the risk surrounding delivery and, I guess, just basically price, so how much of the -- of the continued strength in price would you attribute to I guess the lack of switchability in the short-term and I guess also the view that maybe the fall in gas prices is also short-term, because just on the economics standpoint it is hard to see why, the thermal coal prices in the East would sustain themselves above $90. It is good that they are, but I'm just wondering why and how that makes sense from a guess, I guess, just from an economics calculation stand point.

Well, if you look at the total load of energy between coal and natural gas, especially on electricity, the margin between the two isn't a big margin. So gas could never replace coal. So if you look at the BTU equation, that is one thing. And then when you look at the margin between the two, you have to look at it region by region and some places can switch more and some can't. But we see it as about a 3% switch between the two in total, and then you would have to figure out utility by utility. What we're seeing, though, is $100 coal of our quality runs up against $7 gas on a regular basis, and they'll switch where they can. What we like about that is when they start switching to gas, it creates huge demand on the gas supply of the country, because we're using electricity for gas, and that busts the bubble within six months. And then we see rising gas prices. We've seen this cycle about four times since 2001. I think we're going to see it again. So I hope that answered your question. But what we're showing is that CNX Gas benefits from, we win both ways it can solve with coal and gas depending on what the utilities are choosing.

Sure. I understand. Okay. Thank you.

Okay. Thank you. The next question comes from the line of Paul Forward of Stifel Nicolaus.

Hello, Paul.

Couple of questions here, one is you have got, just looking at your production guidance you have got somewhere close to 4 million tons of coal that you'll be producing this quarter that you weren't producing in the third quarter with your -- thankfully, with the effect of the better productivity and all the investments you've made, but if you put this new production into the market this quarter, in a recession, with stronger dollar-limiting export growth, won't this undercut the kinds of pricing that your utility customers will be expecting for '09 as their inventories are able to build inventories and particularly when you have a lot of volumes on pricing for 2010.

That's a good question. All of this is already sold, was baked into the equation, the prices are on it, and it was already expected all year long. So if you look at the inventory level of these customers, they need that coal to get through the winter. If you look at our own inventory level, we're at an all-time low. So it is already sold and it is not new coal into the marketplace, it is coal that they're expecting.

And can you give us any sense of the breakdown right now if you're signing new deals? I know you talked about deals signed two and three weeks ago, that seems like an eternity. But the difference between North Appalachia, your high sulfur versus lower sulfur-types of coal today?

Yes, I can give you that. The higher -- excuse me, the lower sulfur coal is going to get a better price especially if it is around 13,000 BTUs. What you have to look at is sulfur and BTUs. The higher sulfur coal with lower BTU that we tend to see in Moundsville on the river, it will probably have a $15 hook on it in a negative way just based on lower BTU and higher sulfur. So the spread is going to be about $15 depending on those two issues, and the mix changes because the mines come in and out of sulfur and come in, BTUs stay pretty mine by mine. But the Moundsville coal will drag probably about $10 to $15 off that price. But that Moundsville coal is sold out for all of next year at very good prices.

All right. And maybe lastly -- I mean, I know you can't turn on a dime here with new projects, but your shares are down 75% from the top back a few months ago. The market is clearly fearful that in a recession, we'll have excess coal production relative to demand, maybe for a year, maybe a couple of years. Why not reconsider some of the investment in expansion projects that you had announced at a stronger coal price environment?

Well, here is what we do and as we start to see that volume doesn't sustain the returns that we want to have. We'll actually start shutting mines down or pulling projects back. What we'll do is pull back on the highest-cost mines, and we'll spend the capital where we get the highest rate of return. Some of these long wall extensions gives us a very high rate of return so we probably would finish those and shut down a mine to respond to that kind of marketplace. Are these returns better than say buying back your own shares at $0.28? I think we have the ability to do both.

Okay. Thanks.

But what I've told management, that we will stay within our budget and the projects that we've got online. We're not going to be inefficient with those projects. We'll finish them.

Thanks.

Okay. Thank you. The next question comes from the line of David Gagliano of Credit Suisse.

Hi, David.

Hi, good morning. I just have a couple of questions on the, first of all on the long wall extensions for 2009. Will they affect production while those are happening?

No, no. That is just part of the long wall moves. They'll just go into panels that are wider.

Okay. So those were part of the original plans for when you were putting together the guidance for 2009 in terms of production?

That's right. It's more towards the end of '09.

Okay. Okay. In term of the commentary earlier regarding the export market, I was wondering if you could round out that commentary a little bit. I think you mentioned 2.7 in terms of your expected exports in 2009. I think you mentioned 2.7 and actually I forget the other number in terms of the steam market. I was wondering if you could just tell us, one, what are your steam exports for 2008 and also, if you can give us the same numbers for met, i.e. 2008, 2009, 2010 for steam met?

2008 is 3.6 for steam 2007 -- excuse me, 2009 is 2.7 for steam, is what we're thinking right now. And on the met side it's going to be about half of our met production. So it should be -- let me look. Domestic will be about 1.9 million tons and international will be about 1.6 million tons of low-vol coal. That's our export side. And that's what we see for '09.

That is what you see for '09. '08 is 1.6?

Yes.

Okay. Thanks. And then just the -- I just want to make sure the price caps there was a very slight downward adjustment that seems to be the only change in price caps. It is not material but I just want to make sure there is not a material reset in those price caps tied to things like spot price et cetera. Should that be the only change we should expect to see?

Only related to quality adjustments. That's all. That's part of the contract.

Okay. Perfect. Thanks very much .

Thank you.

Okay. Thank you. And our final question comes from the line of Mark Caruso of Millennium Partners please go ahead.

Hello, Mark.

Good morning, guys. Just a quick clarification partially off of what (inaudible) was asking. The committed tons at a price, does that include -- does that not include the 1.2 million met tons or 3 million steam you were talking about in the release, or does it include it? I'm just confused. It seems like I heard it both ways today.

This is Tom, again. The stuff that we were talking about earlier, the 1.2 million met, those are deals that we've done in the last couple of weeks. In other words, subsequent to the end of the third quarter. So they are not included in (inaudible). As Brett said, we thought it was important to tell you we had done these, rather than wait until January, because I know everybody is concerned about where pricing may be going.

Okay. And then how about the steam tons? Are the steam tons on the table or are those in addition.

No, they're not.

They're just done in the last three weeks, so they would be -- they would be closed -- would be closed in the open tons you see in the third quarter report.

Instead of 64 we're talking about 67 million tons then?

That's about right.

Okay. And the second question is, I know we were talking earlier about costs and talking about, hopefully the fourth quarter will be below the nine-month average. But I know Pete in the press release is also talking about some costs improvement as productivity improves and other things you're doing. As we look forward I know you are going to give us an update. Is being below the 4164 a good run rate and could see better improvement as other things you guys are doing start to really come to fruition in 2009?

Well, higher volume clearly gives us better cost structure and because you've got a kind of in the short time you have a fixed cost between materials and manpower. If you get more tons per hour, it gives you much better deviser of your cost into more tons.

Let's be clear on this. What we look at, is not necessarily costs and not necessarily realization. Our decision is based on expanding margins. But it could very well be that we mine some very high-cost tons that we'll get extremely good margins on, and, again, our goal is to increase margins, and that's what we look at when we make our decisions.

Yes. But having said that, I want to reiterate to everybody, as these tons increase, in terms of volume, against this fixed manpower, we should see productivity pushing costs down and we'll stop seeing the rising costs that we saw in 2000 -- excuse me, in the second quarter and third quarter. Okay? .

Great, thanks, guys.

We would like to thank everybody for joining us this morning. Brett, I think you had a couple of thoughts you just wanted to add again.

Yes, I would just like to let everybody know that CONSOL is in a strong position for '09. '010 is good, but it is not as clear as it was maybe a couple months ago. We feel very strong about it. In '09 we have a very good hedge position in coal and gas. Our low-vol met call and our high BTU steam coal will command premium prices in any marketplace. Financially we're able to be disciplined in both sales and production and our ability to buy our own shares back. We can slow our CapEx down if we need to. Supply constraints will, overall will likely offset potential slow demand for coal if we see a drop in energy demand. Those with strong balance sheets like ours will have the ability to be very flexible and command real value going forward. I feel like a CEO standing on a strong financial rock in the middle of a swirling stream of financial uncertainty, and you just need to know from a CEO's perspective our plans and our strategies have been solid and we feel like we're in a good spot in any market going forward. Thank you.

Again, thanks everyone for joining us. Chuck Mazer and I will be available for the rest of the day off-line. Operator if you would instruct our listeners on playback information.

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