CNX Gas Corp. Q4 2008 Earnings Call Transcript

CNX Gas Corp. (CXG)

Q4 2008 Earnings Call

January 29, 2009 10:00 am ET

Executives

Tom Hoffman - SVP of External Affairs

Bill Lyons - EVP & CFO

Brett Harvey - Chairman and CEO

Analysts

Jim Rollyson - Raymond James

Shneur Gershuni - UBS

Brian Corales - SMH Capital

Michael Dudas - Jefferies

Luther Lu - FBR Capital Markets

Mark Finn - T. Rowe Price

John Bridges - JPMorgan

Chad Potter - RBC Capital Markets

Brian Gamble - Simmons

Jeremy Sussman - Natixis

Paul Forward - Stifel Nicolaus

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the CONSOL Energy and CNX Gas Fourth Quarter 2008 Earnings Release.

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, Tom Hoffman. Please go ahead, sir.

Tom Hoffman

Good morning, everyone, and welcome to our first joint earnings call with CONSOL Energy and CNX Gas. With me this morning are: Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas; and Bill Lyons, Executive Vice President and Chief Financial Officer for both companies.

This morning, we will be discussing fourth quarter and full year 2008 results for both companies. In addition, we will be discussing our views on the outlook for 2009.

Any forward-looking statements, we may express are our expectations for business results. Actual results, as you know, are subject to business risk, and we have enumerated those risks in both earnings releases issued this morning and in our SEC 10-K filings.

In addition, the United States Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation test to be economically and legally producible under existing economic and operating conditions.

We may use certain terms in this conference call such as unproven resources or reserves which SEC guidelines strictly prohibit from including in our filings. We also caution you that the SEC views such unproved resource or reserve estimate as inherently unreliable and that these estimates may be misleading to investors unless the investor is an expert in the gas industry.

With that, we will begin our remarks and then take questions. We'll begin with Bill Lyons. Bill?

Bill Lyons

Thank you, Tom. And let me also welcome everyone to the joint CONSOL Energy and CNX Gas Earnings Call. It is my pleasure this morning to announce record annual financial results for CONSOL Energy.

Net income of $442 million is a record, operating cash flow of $1.029 billion is a record and EBITDA of $1.075 billion is a record.

I cannot think of three better financial metrics in which to have record setting performance.

This past year illustrated the financial power of being a diversified energy company. Let me highlight some of our fourth quarter and 2008 financial results.

CONSOL Energy reported net income of $176 million or $0.97 per diluted share for the fourth quarter of 2008 compared with net income of $7 million or $0.04 per diluted share in the fourth quarter of 2007.

Net cash from operating activities was 346 million compared with 88 million in the fourth quarter of last year.

As I mentioned earlier, for the full year CONSOL reported net income of 442 million or $2.40 per diluted share versus 268 million or $1.45 per diluted share for the full year of 2007. This is an increase of 65%.

Net cash from operating activities was 1.029 billion for 2008 versus 684 million last year. This is an increase of 50%.

From a financial standpoint, the fourth quarter was outstanding for both coal and gas.

For our Coal segment, our total margins from the fourth quarter were $12.35 per ton, an increase of $6.81 per ton over the fourth quarter of 2007. This margin expansion is the key driver in our step change in profitability.

Average realized pricing for produced coal was approximately $52 a ton for the fourth quarter, and for 2009, the average realized price per ton committed, and we have just about all of our production committed, increases by almost $10 per ton reflecting the higher priced contracts we negotiated in 2008 for 2009 delivery. This bodes well for the coal segment in the New Year.

Our majority owned subsidiary CNX Gas Corporation had a record year in 2008, including record production of 76.6 billion cubic feet, which is 32% higher than 2007. Record net income of 239 million, which was 76% higher than last year, and record cash flow from operations of 447 million, which was 65% higher than 2007.

Of special note, CNX Gas achieved exploration success in the Marcellus Shale. The gas company's first vertical well came online in July with an initial production rate of 1.3 million cubic feet per day. The first horizontal well as noted in release, achieved peak production of 6.5 million cubic feet per day.

The year 2009 also bodes well for CNX Gas, as 41.9 Bcf or about one-half the expected 2009 production, is hedged at $9.74 per Mcf.

I do not need to tell this group that the deluge in the banking system has been of epic proportions. CONSOL's solid balance sheet and excellent liquidity has enabled us to navigate these choppy financial waters, without diminishing our earnings power.

At December 31, 2008, CONSOL Energy and now this is excluding CNX Gas had $381 million in total liquidity, which was comprised of $137 million of cash and $244 million available for immediate use at below-market interest rates. This credit facility does not expire until 2012.

Separately, as of December 31, 2008, CNX Gas Corporation had a $114 million in total liquidity, which was comprised of $2 million of cash and $112 million of capacity available for immediate use, also at below-market rates. This credit facility does not expire until the fourth quarter of 2010.

Until we have clarity in the financial markets in the world economy, we will continue to actively manage our liquidity, to ensure the earnings power of CONSOL.

Because of the uncertainties surrounding the US and global economies, we plan to adopt a cautious approach to capital expenditures; thus we are altering our usual practice of issuing annual capital expenditure and coal production projections.

However, we are providing production guidance for CNX Gas of 85 billion cubic feet for 2009. Our plan is to limit capital spending in the early part of the year to retain the ability to adjust the spending to the prevailing economic conditions. However, we expect to continue expenditures on maintaining production, efficiency project, such as, the overland belt systems and longwall face extensions, as well as safety items.

We do not expect to commit the entire authorized capital budget for coal until we have a clear understanding of the state of the economy and the demand for coal. All other coal capital expenditures will be treated as discretionary and will be evaluated over the course of the year.

Regarding CNX Gas's capital, I expect spending to be limited to the cash we generate in this segment, but again, as will be tempered by any significant changes we see in the market. Regardless of the absolute level of capital we ultimately spend this year, our policy will be to allocate capital to the projects generating the highest returns.

The 2009 coal production target is 65 million tons and is lower than we previously provided. This reflects several changes in operating plans, which includes the company anticipates that 2009 Central Appalachian production capacity to be impaired due to delays in receiving permits for surface mining.

In addition, the company anticipates 2009 capacity reductions from its underground mines related to impacts on productivity from the new federal safety inspection and enforcement procedures.

In the aggregate, the company estimates that the permitting and safety issues could reduce 2009 capacity by 1 to 2 million tons.

In early 2009, the company revised the operating schedule for the Buchanan Mine, running a longwall mining system two shifts per day rather than the normal three, to reduce output commensurate with the general slowdown in the global production of steel. The change in the operating schedule was estimated to reduce normal coal production at the Buchanan mine, which typically ranges from 400,000 to 450,000 tons per month or approximately 110,000 tons per month.

The Buchanan mine produces a high-quality metallurgical grade of coal. In addition, mine production will be idle for two full weeks in February. Until there is additional clarity from the metallurgical coal customers regarding 2009 shipment schedules, the mine will continue to limit normal coal production and may further reduce production levels.

Gas production will be impacted by this lower plan coal production of Buchanan in 2009 by approximately 2 to 3 million cubic feet per day.

Because of the current lack of clarity regarding high-volatile metallurgical coal demand, we have also announced a plan to place Mine 84, a long term idle, at the end of the first quarter of 2009 paying-off most of the workforce. The mine was scheduled to transition from production of coal with a longwall mining system, to production using only continuous mining machines. That change would have resulted in an annual production rate of approximately 650,000 tons. The coal was intended to be sold as a high-volatile metallurgical coal for blending.

Let me briefly talk about the recent managerial changes affecting CONSOL Energy and CNX Gas that we announced last week. Brett Harvey, President and Chief Executive Officer of CONSOL Energy, has been appointed to the additional positions of Chairman and Chief Executive Officer of CNX Gas Corporation. Nick DeIuliis has been appointed Executive Vice President and Chief Operating Officer for CONSOL Energy. Nick, will have overall responsibility for energy production of both coal and gas, focusing particularly on production efficiency and production coordination, between these two [duals]. Terry will have overall responsibility for sales of coal and gas, and transportation services as well as the management of CO2 credit generated by these two companies.

The goal of the management consolidation is to improve performance and profitability of both companies, as well as to increase efficiency and reduce costs across all business areas. We expect this will create a more unified organizational structure, and we'll have functional, operational and financial responsibility for all coal, gas and related assets, while still recognizing the separate status of CNX Gas as a public company.

We believe that CONSOL Energy is in an excellent position to deal with the credit in the economic crisis. We are a low cost producer of energy. We have an excellent contracted position for coal in 2009 and 2010. We have a substantial market advantage; hedge position for gas in 2009.

A major portion of our coal contracts are with US utilities, whose plants are base-loaded. These utilities have excellent credit ratings.

CONSOL Energy has a strong balance sheet with low debt and substantial liquidity. We believe that companies like us – we have low debt and generate substantial cash flows from operations – produce growth capital, and will not only survive, but will drive in the coming years.

Like most companies we did not escape the sharp stock price decline in 2008. However, we believe that 2009 and 2010 will be years in which the equity markets will discriminate significantly between strong and weak companies. Those companies producing basic products, products having a dependable demand and those companies that execute well, will be recognized.

We believe CONSOL Energy will be one of those companies; a company returning premium value to the shareholders.

With that, Brett, let us have your comments on the market as well as our performance for 2008.

Brett Harvey

Thank you, Bill. Again, let me reiterate; welcome to our CNX Gas shareholders, as well as the CONSOL Energy shareholders. I think Bill did a good job of describing our position, but let me give some of the broader strokes the way I see them.

Coal and gas are both in a very strong hedge position in 2009. The gas volumes continue to surge with a 32% growth from 2007 to 2008 and the ability to go to 85 billion cubic feet in 2009.

Coal volumes that we announced are risk-adjusted; where we see the market at this point in time. We are on a very low cost position in both coal and gas, and we think that 65 million tons that we predicted are doable; that is at the contract level. And we believe our customers will take this amount of coal for 2009.

Our capacity for coal is greater; and as the market turns, depending on what it is, we will respond to that. It is probably greater in the short-term on the metallurgical side coming out of Buchanan, as we see the steel companies turn to a better position in terms of steel production. We are ready to take care of their needs.

We will build cash throughout the year and grow the gas volumes as we see the gas price going forward. We'll finish the projects with no new coal projects on the coal side.

We have brought production back based on where we see the market, not because of lack of capital, but lack of market. No reason to push coal into a market; those are lacking in value from our shareholder perspective.

Coal markets overview in general; we see weak economic activity. It is directly related to the production of steel and the production of electricity. As we see this move throughout the year, we will adjust, but we do believe the 65 million tons that we have now is very solid and have the right margins.

If you look at our history on the coal side and the gas side, every year since 2007, we've increased our margins.

On the cost side on coal, I expect us to be basically flat from 2008 and 2009. On the gas side, I expect that to be the same. So, we see rapid expanding margins. If you look into 2007 on the coal side, we're about $6.91 per ton. In 2008 we are 769 and in 2009 we could be over $20 per ton.

On the gas side, we've gone from 354 in 2007 and in 2008, 488. In 2009, we expect that margin to flatten up or expand based on our hedge position. The spot market for gas really is the reflector of what we're going to do between our hedge position and where gas goes, but we do intend to increase the volume on the gas side through the year to 85Bs.

With that, I'd like to just summarize again; we are a low cost producers in both coal and gas. So in any market, we're going to have the highest margins in both of those products.

We have no need to raise equity. In fact we will build cash in 2009. We will be very prudent with our production and our CapEx, especially on the coal side, and on the gas side we'll continue to grow depending on where we see the spot market for gas.

Gas flows will give us optionality going forward. If we see opportunities in the marketplace for acquisition on either gas or coal, we will step forward and look at those and make moves because our balance sheet is in good shape to do that. If not, we will just continue to build cash, as we see the market change. I see this as more of a tactical year, based on where we see the macro economy of the world and the United States, and we will respond accordingly with a very strong balance sheet.

With that, let us open up for questions.

Tom Hoffman

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question will come from the line of Jim Rollyson with Raymond James. And your line is open.

Jim Rollyson - Raymond James

Good morning, gentlemen.

Brett Harvey

Hi, Jim.

Jim Rollyson - Raymond James

Brett, first of all, great quarter. A couple years back, you guys spun-out or sold-off a piece and took publicly the gas business, and I think the methodology then was trying to enhance the valuation recognized by the market for the business because it wasn't getting it kind of under the CONSOL umbrella at the time. And it seems, because you've gone through the last 12 months or so, the moves you've made, it seem to indicate that maybe you're obviously trying to bring back in or retain that value under the CONSOL umbrella.

Could you maybe walkthrough the logic of what's changed over the last year or two since the initial move kind of getting it out there to maybe looking towards bringing it back in? And how you see that or how you think the market interprets the value of these two businesses from a combined basis versus a stand-alone basis?

Brett Harvey

Well, that's a good question. And let's go back to when we did do it. So, when we spun it out, we did it with the intention of recognizing the value of that company. And it quickly went from what we thought in our share price was about $1 billion and now it's got its own market capital of over $4 billion. So that was a success. Now, the real issue is we are an energy company, and we sell BTUs, and they're combined with coal, and they're combined with gas. But we needed to establish that value.

About a year ago, the Board on my recommendation, decided not to ever go underneath the 80%, and continue to grow the gas company within the umbrella of CONSOL Energy.

So when the Board announced that a year ago, we made a move to make a deal with the outside shareholders, that didn't work; we were at disport values, and we decided we would go ahead and run the company with partners so to speak. Well, we've done that, and we continue to do that. We have brought some shares back based on value since then, and we've done some consolidation moves to make us more efficient on the managerial side and the overhead side. And we will continue to grow that gas company at a very rapid pace, because we are a BTU energy delivery company.

I would say that if you look, and I'll give some color here. If you look at 2007, a very high percentage of our earnings came from the gas company. And if you look at where we're headed for 2009, if you run through the numbers, you'll see a surge in the percentage of value coming from the coal side.

If you look at the two years over the 24 months, even over 36 months, you'll see that the two combinations really give our shareholders surging values in two different market cycles, one coal and one gas.

But if you look at our share price and our performance on earnings, it's pretty much covered, and it really eliminates risk and it also gives us constant value year-to-year for our share holders. So, that’s basically the flaws.

Jim Rollyson - Raymond James

Okay. And it kind of seems like if today at this moment in time if you back out the current value of the gas company, it suggests your co-operations and the rest of the CONSOL umbrella are trading in a pretty big discount to what they, maybe should be?

Brett Harvey

I could argue the other side of that, that they are just the opposite. But the point here is, we believe that the value of these companies are de-coupled from the earnings capabilities. As the market has declined and people have sold shares, across the board there is a de-coupling of value between cash multiples and the earnings capabilities, and I think, over time that will realign, and it will look like it did before we saw the crisis on the financial side.

So, having said that, I do agree that it's disconnected, but I think it's not just us, but the entire market disconnected right now.

Jim Rollyson - Raymond James

Sure. And then just one follow-up here. Some of your competitors have obviously, you've, I'm sure heard the reports that had issues on the met coal side with customers either not taking some deliveries or, in the case, I guess, this morning's news, trying to renegotiate prices on contracts that were out there and signed previously. Can you maybe share what you guys have seen in the market in the last 60-90 days? And how you'll handle these situations?

Brett Harvey

Well, in the fourth quarter, we saw a pushback, not only of contractual sense but a real pushback even on pricing. We didn't deliver as much coal as we thought we would in fourth on the met side. The fuel company really went into a freeze position. We expect to extract the value of the contracts that we had with those companies, and we expect to be at market with them on the future values and as they determine where they're at in the steel business.

That's a tough negotiation, because like any other deal, we expect contracts to go to the end of their value, and that's all part of the negotiation. But if you compare the fourth quarter to this quarter, we've actually seen the coal start to move and it's moving in a positive way and the discussions are there. It looked very bleak in the fourth quarter, and I think negotiations are ongoing, but we'll hold all of our contractual value, and we'll negotiate to future values with them. The ideal thing is, we're a low cost producer in any market, and our margins will be good.

Jim Rollyson - Raymond James

Great. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Shneur Gershuni with UBS, and your line is open.

Shneur Gershuni - UBS

Hi, good morning, guys.

Brett Harvey

Hi.

Shneur Gershuni - UBS

I guess, I'll start, my first question is on the coal side. I was just wondering, if you can sort of comment on the market in general, whether you're seeing some of the private producers cutting back production?

Also if you can comment, how many tons you expect to ship overseas or specifically steam tons overseas through the port facilities and how much you've got contracted to go overseas as well, too?

Brett Harvey

Well, we do see production coming out of the market, especially in Central App, where there are high cost producers are having financial difficulties. And the ability to generate cash, they're living off some of the old prices; but when they get into the new marketplace, the banks are not carrying them. So we're going to see that shutdown pretty fast.

On CONSOL basis for export, we're going to be at 2.9 million tons export versus 3.6 last year. We contracted at 2.9, that's what we'll move but what we're seeing in Baltimore in general, through our port is about one-third reduction in volume, going out of Baltimore into the steam markets in Europe. And I think that's reflective of the price over there.

We signed up a lot of our tons of domestic supplies when the price was high in Europe and the domestic suppliers are under contract with us and we'd rather sell them at this point in time because they're right close to us, and we take the advantage of the freight. So it looks pretty good right now from that perspective. If that market heats up in the future maybe and the prices start to rise, we'll see if we can gather up some time to go after that market. But right now, we don't see much movement beyond the 2.9 million tons that we are contracted for that we will ship.

Shneur Gershuni - UBS

Okay. Just one follow-up question on the CapEx side. Definitely, applaud your decision to holdback a little bit. I was just wondering if you could sort of give us numbers or remind us what you're planning to spend on the overland belt and the longwall face extensions?

Brett Harvey

The longwall face extensions was a multi-year, and I think, four or five longwalls. I don't remember the total cap number on that, but those have been pushed out even on some of the development cycles to slow down capital spending. The number that comes to me is right around for all the extensions were about 400 million, but I think, if you call us offline, we can give you those numbers, I don't have those [right of six month time].

Shneur Gershuni - UBS

Okay. No problem. If I can just switch to gas side for a second? I was wondering if you guys had available your reserve to production ratio and kind of where approved reserves ended up for this year?

Bill Lyons

We don't have that number right now.

Brett Harvey

When we have it, we'll announce it.

Shneur Gershuni - UBS

Okay. And then, I guess, one last final question. You were giving where net gas prices are currently and where they're headed, and then you sort of mentioned in the press release today that you had an intention of living within cash flow and so forth. Can you sort of give us a priority of the targets of where you'd like to go? Are you going to still be looking in the shales and so forth are you pulling back to some of your lower cost areas where you've had a lot of success in the past?

Brett Harvey

I think like any other marketplace, if the price drops, you always go to your high margin spots. So, we'll probably spend capital to develop our CBM plays, because there are really no dry holes, and it's 100%. We'd probably go Virginia first, Northern App, and then to Tennessee would be our last move. So, in that order, that's the way we would spend our capital, and as the price drops, we might even slow down in Virginia, depending on where we see the demand for energy on the gas side. At this point we think expanding volumes at very low cost, moving forward, we capture the higher prices when they move with higher volumes. That's been successful for us in the past, so we continue to look at it that way.

Shneur Gershuni - UBS

And how about the Marcellus Shale? Do you plan to still attack that play or--?

Brett Harvey

If it continues to be very successful, yes, we'll weigh that capital against spending capital in the coal-bed methane areas. The nice part is we have the optionality to look at the two and whichever...

Shneur Gershuni - UBS

Sure.

Brett Harvey

Abide us we'll do that.

Shneur Gershuni - UBS

Okay, great. Thank you very much.

Operator

Thank you. And our next question in queue that will come from the line of Brian Corales with SMH Capital. Please go ahead.

Brian Corales - SMH Capital

Hi, guys. I have a couple of specific questions to the gas company and this is kind of bigger picture. A strong quarter with production, can you maybe give some -- what area out-performed?

Brett Harvey

I think, well, my evaluation ever when I looked into numbers. Every area met or exceeded the targets that we had for the fourth quarter, as well as the year. And I would say Virginia, Northern App and down to Tennessee.

Bill Lyons

Yes. We set records just about in every play that we had for us.

Brian Corales - SMH Capital

Okay. And how much takeaway capacity do you have, up in the Marcellus, right now?

Brett Harvey

I think we have the ability to take away almost everything that's there. We have contracts for about three years of what we think, we can produce.

Brian Corales - SMH Capital

Okay.

Brett Harvey

I'm not sure exactly what the total volume is.

Brian Corales - SMH Capital

And then finally, kind of follow-up on the first question asked on the call. Where do you see the both companies, in the next 12 months to 24 months? I mean, is there something that ultimately you see just being one company. What is your thought process there?

Brett Harvey

Well, our intent right now is to run them as both public companies, efficiently as we can, and that gives us optionality for the future. But I believe, at this point in time, we're going to stay fixed to exactly where we're at. We bought shares recently on the gas side, because we saw a lot of value, but right now, we intend to run them as efficiently as we can as two public companies.

Brian Corales - SMH Capital

And do you plan to continue to buy shares, or …?

Brett Harvey

If we see value, we will. But we're doing the same with our own shares at CONSOL Energy, so it depends on where they are in the marketplace against the peers.

Brian Corales - SMH Capital

Okay. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Michael Dudas with Jefferies, and your line is open.

Michael Dudas - Jefferies

Good morning, gentlemen.

Brett Harvey

Hi, Michael.

Michael Dudas - Jefferies

Brett, could you maybe provide your perspective overall on U.S. or even global coal markets? How oversupply do we think we are? And do you anticipate a quicker and aggressive response from some of your competitors in the marketplace, as some have indicated with regard to holding the line on production? And is that going to be enough to get the market back a little bit better balance as we move through 2009?

Brett Harvey

Well, we see about a 35 and 40 million ton oversupply on the steam side. And I think the responses have been announced like anything else. It will lag a little bit, but I think I've been pleased with seeing the response on the steam side that we've seen so far on the announcement side.

And I think that the ability to finance operations going forward is going to accelerate the response. So, yes, I think there will be a quicker response based on discipline, as well as financial disciplines as forced through the banks. And that will equalize the market and we'll see some

Bill Lyons

Probably in '010 some stabilized pricing.

Michael Dudas - Jefferies

Brett, what you'd instructing Bob when he was discussing with you your utility customers outlooks for term contracts in the marketplace right now? Is everybody just in a holding [back] you're going to see how the economy turns or is there a certain price tick that you can really start to negotiate with going forward as utilities get more comfortable with how the year is turning out?

Brett Harvey

Well, we're negotiating right now a price tick that we're comfortable with for the long term, similar to like we were last year. We have some deals on the table that we're negotiating for long term. That's being evaluated by both companies, and that will unfold based on where we negotiate to. But, yes, we are looking at long-term deals based on, if you look at any given marketplace, depending on where the economy is, there is fluctuations but in the long term, remember this business was short in terms of energy and supply. And on a low-cost production side, we're looking at margins as well. So if you combine the cycles we see on the economy with the margins, we'll find a place to enhance our shareholders position in any given market. Who knows where that demand for energy is going to go? But we'll adjust ourselves to go forward.

Michael Dudas - Jefferies

Thanks, Brett. Appreciate your thoughts.

Operator

Thank you. Our next question in queue that will come from the line of David Khani with FBR Capital Markets, and your line is open.

Brett Harvey

Hi, David.

Luther Lu - FBR Capital Markets

Hi. This is Luther for David.

Brett Harvey

Hi, Luther.

Luther Lu - FBR Capital Markets

First of all, any predictions for Sunday's game?

Brett Harvey

Steelers, of course.

Luther Lu - FBR Capital Markets

Of course. Brett, I want to ask you, how should we think about the 65 number? Is that a midpoint, or is the lower bound of your production for this year?

Brett Harvey

Well, as we described in the thing, that 65 is absolutely locked in contracts, and is risk adjusted. Meaning, we saw some push-back on Central App, we closed down some Central App production on the steam side, and the 65 moved away from the spot market totally, and it's contracted tons that are locked in with customers that we believe they will take on the steam side as well as the met side. And so that's the breakdown that we have. So, I would say that's at the bottom, and if there is anything more than that, the market will have to open up for.

Luther Lu - FBR Capital Markets

How should we be thinking about the 2010 production levels? Is this the 65 plus the Shoemaker expansion, or…?

Brett Harvey

Yes. I think 2010 that has to unfold. I think flat from now, we've been 65 million tons for this, this should be the third year at 65 million tons, '10 would be similar to that. What I need to reiterate here again is, even though we're flat on these tons, we continue to expand our margins in a big way. And so we're more focused on the margins than we are on the tons.

Right now it looks like it's flat for '10, and we've got a pretty good hedge position for '10 as well. So we won't increase the market supply into the market unless we have -- we won't increase coal into a bad market. And if we see contracts come, and we sign the contracts, we're happy with the margins we'll go ahead and increase what we're doing.

Luther Lu - FBR Capital Markets

Production cost this year flat. I just want to verify that?

Brett Harvey

Yes. I see the production cost flat between '08 and '09.

Luther Lu - FBR Capital Markets

Okay. And what was the margin expectation again for '09?

Brett Harvey

Well, if we keep it flat, we think the margins to be over $20 a ton.

Luther Lu - FBR Capital Markets

Okay, got you. And one last question on the export side, have you guys seen or started talk with the railroad and perhaps to get a bit more favorable term to better enable the export ability?

Brett Harvey

Yes. We're talking to them all the time. And right now, we're holding the rates at where they were, and of course, we would like to see them go down, but we're holding it for now.

Luther Lu - FBR Capital Markets

Thank you.

Brett Harvey

And there was a push to get increases, that's pretty much normal.

Luther Lu - FBR Capital Markets

Okay, got it. Thank you.

Brett Harvey

Okay. Thank you.

Operator

Your next question in queue that will come from the line of Mark Finn with T. Rowe Price and your line is open.

Mark Finn - T. Rowe Price

Thanks you. Hi, guys.

Brett Harvey

Hi, Mark.

Mark Finn - T. Rowe Price

I had a couple of things I wanted to go over. The first is I know you're bringing Nick into address some of the operational issues in the coal business; at least, I'm perceiving if that that's the case. How long do you think it will take before the coal business is sort of back to running at optimal levels and you feel like all of the development issues are resolved and you have the personnel in place that you feel you really want? I guess, I'm just curious about the timetable for that.

Brett Harvey

Well, first of all, the consolidation was for efficiency, not just the coal piece, but Nick will add a lot to what we can do on the coal side in terms of energy and organization. And that's for sure, because he did a great job within the gas company. Keep in mind, he still has both of them, so he'll be focused on both of them. I would say, on the operational side, we addressed a lot of things last year.

We improved in the fourth quarter. We're putting together plans to make sure that the development cycle is ahead of the longwalls going forward. And in terms of people and timing and so forth, the 65 million tons that we put into the thing, I think, has pretty much locked in all the way through. And I would say that's given. Anything beyond 65 will be our ability to get to development on longwalls, exactly, where we want them.

Remember that part of that longwall cycle was related to pictures by M. Shale and we're adjusting our numbers, and we did adjust our numbers for '09 to fit that as well, so, it's a combination of all those things.

So, I would say, by mid-year, we'll have a good solid plan to see where we're at for the next 24 to 36 months.

Mark Finn - T. Rowe Price

Okay. There has been plans to have a CNX Gas Analyst Day. Is that still --?

Brett Harvey

Yes. We're going to do that. And Nick will be there for that.

Mark Finn - T. Rowe Price

And is that when we'll probably hear about the reserves and things like that, or would we hear earlier?

Brett Harvey

It will be sometime in February, but definitely you'll hear about it then. And if we get it sooner, we'll announce it. But we'll talk a lot about it when we do the analyst thing.

Mark Finn - T. Rowe Price

Okay. And then, the last question I have is related to that first question that was asked by Jim Rollyson, and I guess, I'm curious whether or not you've gotten any indication from CXG shareholders that they're feeling a bit orphaned by the move that you guys made to consolidate and kind of bring you as CEO on both companies. I guess, there is one independent Director on CXG. But I'm kind of curious about your thoughts regarding that aspect.

Brett Harvey

Well, I would say that we intend to do what we need to do to run both companies as legal entities and be very efficient with them. I think to comfort the other shareholders. I think nothing has really changed. It's not the way we plan to expand that company and grow that company. I think we just tend more efficient, the way we're organized to do that, and organize the overheads to do that.

For me to be the CEO of both companies, I've already been there for years. I went back to that. And I think it gave Nick an opportunity to tie things together on both sides. So if it's a matter of changing CEOs, I think we're in good shape. I was the original CEO, the Founder of the company, and I think bringing that back and bringing it into line with everything we do between the two, at the present shareholder base that we have on both sides. I think it's an optimal way of doing it.

Mark Finn - T. Rowe Price

Right. And I guess, the reason I asked about coal first was because the implied value, as Jim sort of went through, if you take the market cap of the gas business and you back it out of the market cap of the entire entity, it's sort of like, elephant in the room, right? I mean, the implied EBITDA is so low that at some point, you know, it kind of begs a question that you have to unlock that, and I guess the way, I'm expecting that it will get unlocked is as coal runs much, more efficiently, that will help to do that. And I'm not expecting any answer. I just am curious. It's just an observation on my part, that's all.

Brett Harvey

Well, I think that's a good observation. But let me reiterate that when our share price was over $100 and the market seemed normal on the banking side. I think we saw the value both companies have on share price. And I can tell you again that there is a de-coupling between the two, between the market and the value of the company in terms of earnings capability, I mean, we earned $1 billion last year and they separated any way.

So, I would say that would come back into line and I don't think that the short term marketplace or the financing crises determines the value of the combination here. And again, if you look at what we said about 2009 versus 2008, the percentage of earnings between the two have shifted back and forth in terms of the total pie which creates real value for CONSOL Energy shareholders. And I think we'll continue to watch that very closely. But I understand the markets concern and understanding of that, but we think we're doing this for the right reasons, and we'll continue to grow CNX Gas as we always have as a very valuable company.

Mark Finn - T. Rowe Price

Thanks for taking my call.

Operator

Thank you. Our next question in queue that will come from the line of John Bridges with JPMorgan, and your line is open.

John Bridges - JPMorgan

Hi, Brett. Congratulations on the results from the strategy.

Brett Harvey

Thank you.

John Bridges - JPMorgan

You mentioned the contract situation was improving. Could you give us a little more color on that? It's a very critical issue.

Brett Harvey

Yes, what we're seeing. And it's on the met side, what I was referring to. The contract situation is on the steam side is it's been solid and continues to be solid. The met side with the pushback we saw in the fourth quarter, the boats weren't being scheduled. There was discussions. The steel companies were really kind of frozen in place financially, trying to figure out what they had to deal with. The boats are showing up, and in the first quarter and they're responding to bids as we talked about the future. So that's the color I was trying to give. It's not perfect; but it's not as dire as it was in the fourth quarter.

John Bridges - JPMorgan

And I've seen some commentary that there is sort of $150 gap between the consumers and the producers in terms of discussion ahead of contracts, could you comment on that?

Brett Harvey

Well, I would say this. The high prices of met coal last year set a mark that everybody would like to have on the coal side, but I think the benchmark price, there is still as the separation, but I think it's really unknown what met prices are going to be going forward, and so there is a lot of discussion between the two parties.

Coal companies they would like to hold the value as high as they can, and I think steel companies, because of their nervousness about how much steel they're going to produce would like more flexibility on that side. I think what's important is that we all extract the value of what we have done together and decide what the future looks like. The good news for us is we're a high margin in any market based on our low-cost production.

John Bridges - JPMorgan

Thanks. Just a housekeeping point. The 56 million of cash, of course, write-backs, where did that go in the accounts? And would there be any spillover into this year?

Bill Lyons

Talking about the 56 million that we did for share buyback on the gas side?

John Bridges - JPMorgan

No, 56 million, black lung write-back?

Bill Lyons

Oh, the 56, I'm sorry. Where it was? That's another. It's 25 million of black lung excise tax and 31 million of the interest, that 31 million have partly sharpen the interest. But again, we're looking at the 56 million in total. And the reason why we [recorded] is that there was a law passed in October of 2008 that said that, we can get refunds for black lung excise taxes we paid in 1991, 1993. So the event already occurred to gave rise to the receivable, it's with the federal government. So, last time I looked, John, that's probably the best place you can have in terms of flexibility and the amount expected in determinable. It's not in the per-ton statement anywhere in the coal unit cost.

John Bridges - JPMorgan

Okay. And nothing coming through this year?

Brett Harvey

No.

Bill Lyons

No.

Bill Lyons

It's all a onetime thing.

Brett Harvey

It's all done.

John Bridges - JPMorgan

Thanks, guys. Well done.

Brett Harvey

Thank you.

Operator

Thank you. And the next question in queue that will come from the line of Chad Potter with RBC Capital Markets. And your line is open.

Chad Potter - RBC Capital Markets

Thank you. Good morning. A question on CXG on the production guidance of 85 Bcf of 2009. That implies or I guess that's works out at about 233 million a day, which is about 9 million cubic feet or less than the fourth quarter. And I just kind of wanted to get a handle on whether that is conservatism, or possibly it's a one-time production or something that benefited the fourth quarter, or if we do expect kind of a decline through the years?

Brett Harvey

Well, there will be an effect on the Buchanan Mine that will slowdown a little bit based on production. But in terms of the growth to 85Bs, it's directly related to the capital we have to spend to get there. If you look at the CapEx that we've done within our own cash flows from 76.6 to 85, it's a pretty good growth rate. So, I'm not sure, on your rates, exactly what the question was. But there is a backdrop on Buchanan, based on if the coal is mined at the same rate there will be 2 to 4 million a day of gas. But I'm not sure exactly what the number you were talking about?

Chad Potter - RBC Capital Markets

The fourth quarter production averaged 242 million cubic feet a day. If I take the 85 Bcf for the year in 2009, that would average 233 million a day. And so, yes, it is up year-over-year, but from the fourth quarter, it would imply about a 4% decline for the year.

Brett Harvey

Yes, I would just say the fourth quarter is a very strong quarter, and for it to be reproducible. Every quarter we have a lot of drilling to do to get back at that level. Okay?

Chad Potter - RBC Capital Markets

Okay. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Brian Gamble with Simmons, and your line is open.

Brian Gamble - Simmons

Yes. Good morning, guys. I wanted to go over the cost number if I may, for just a minute. I know you guys mentioned cost being flat and when you think about commodity prices coming down, that makes sense.

I just wanted to get your sense as to, just some details around that. I know that pulling production down, you're going to have to spread fixed costs over a shorter amount of tons, but at the same time you're probably pulling off some of the higher cost out. So just may be some details on why you think flat year-over-year is a good target?

Brett Harvey

Well, I think, partially you answered your own question. So, if you look at costs, we have high cost mines that are coming out of the mix. We got dropped in commodities, and then we have upward pressure on labor and the safety issues around M. Shale. A good example of the safety issues is the Buchanan itself. We've made it a less risked mine by putting more seals in, a year before we built a hundred seals, last year we built 200 seals, and we intend to continue to seal that off in a proper way so we lower our risk.

So if you have got upward pressure on labor and drop in commodities and the higher cost comes out, we expect to be about flat. And that's similar to '08 to '09. Okay?

Brian Gamble - Simmons

That's fair. The met numbers, if I run through the numbers on Buchanan, taking off mine 84 [is the amount of rate] you gave. If we're talking about a met number for the year of roughly 3.5 million tons, does that sound about right?

Brett Harvey

That sounds right, yes.

Brian Gamble - Simmons

And then maybe just a couple of housekeeping items. Tax rate for '09, Bill, what should we be looking at there?

Bill Lyons

I think our effective tax rate that we have this year probably be treated for an estimate of for 2009. And again, you're talking somewhere around 33%, 34%. And the reason why that tax rate is like that is that, as we get more of our income from the gas company, you don't have the impact of percentage depletion on the income.

Brian Gamble - Simmons

And then, finally just on the repurchases, I know you repurchased both CNX and CXG stock over the last six months. Brett, I think you mentioned that you are thinking there it was in relation to peers as to when you decided to do that. Because I know if you look at just an absolute value, this $26 per share on CXG is about, if I'm not mistaken, the levels that you had bought it back during the third and fourth quarter last year?

Brett Harvey

That's right.

Brian Gamble - Simmons

Okay. So you're looking at relative to the overall market and not focusing on an absolute dollar value that you think the gas is, as we work at long term?

Brett Harvey

Yes. That's right. I leave that strategy up to Bill, mostly. But we're moving between the two different stock based on where we see the value.

Brian Gamble - Simmons

Are there any more synergies that you can extrapolate from kind of recombination that's been going on recently without bringing it back fully in-house?

Brett Harvey

I think we're giving a big chunk of what you could as if you brought it back. On the financial side, we pulled about $2 million of cost out, when we originally did that, and this restructuring is probably going to give us another 1 to 2 million. So, yes, and that's every year. So that's pretty valuable to us.

Brian Gamble - Simmons

Thank you, guys very much.

Operator

Thank you. The next question in queue will come from the line of Jeremy Sussman with Natixis, and your line is open.

Jeremy Sussman - Natixis

Hi. Good morning.

Brett Harvey

Good morning, Jeremy.

Jeremy Sussman - Natixis

I want to get into pricing a little bit. You signed about 6 million tons over the past quarter for '09. Obviously, I assume some of that was the met coal that you signed early on in the quarter. But could you give us a breakdown of how much of that was met? How much of that was steam, and maybe where at ballpark, where are we for steam prices these days?

Brett Harvey

Well, on steam prices, let's address that first. Steam prices were not actually negotiated in any spot deals on the steam side. What we did on the steam side in that, was between $78 and $85 a ton, during that timeframe that you mentioned. Right now, on the steam side, you see the spot prices down around the mid 60s. Those are in places, where we are not selling any coal. So it's like at the top of the market it's very thin and at the bottom of the market it's very thin. So we're negotiating long-term and short-term deals going forward. If there are long-term deals, they're certainly not in the 60s, because we wouldn't sell high-Btu coal out of Northern AP, especially below the marginal cost of production at in Central AP. So that's kind of where we're at. So what we did sign, it was your question, between $78 and $85.

Jeremy Sussman - Natixis

And marginal cost to Central AP being at least $70?

Brett Harvey

Well at least $70, yes. And on the met side it's at least $80 that's it.

Jeremy Sussman - Natixis

Right and just a clarification. You're committed in price tons that you give, for example, in 2010, the 30.4 million tons at $49.22, does that price include the 8 million tons of your cap to coal?

Brett Harvey

Yes.

Jeremy Sussman - Natixis

So that includes the caps in there?

Brett Harvey

Right.

Jeremy Sussman - Natixis

Okay.

Brett Harvey

No, it doesn't. Now that I'm looking for numbers, it's really at if you add the [$8], it gives you $51.30.

Jeremy Sussman - Natixis

Right because in the past I know I think you've broken it out a little bit differently. Okay. That's helpful. Great. Thank you very much.

Brett Harvey

Thank you.

Tom Hoffman

Operator, we have time for about one more question.

Operator

Okay, sir. The question comes from the line of Paul Forward with Stifel Nicolaus. Please go ahead.

Tom Hoffman

Hi, Paul.

Brett Harvey

Hi, Paul.

Paul Forward - Stifel Nicolaus

Hi. Good morning. On the 2009 average pricing, you're at $61.56 per ton. When we look at 2010, you've got a few items, old contracts rolling off. You've got a price deck that you have in mind for the coal you haven't sold it yet? You've got a weak economy. At first glance, would your expectation be that in 2010 that average number would go flat, up or down from there?

Brett Harvey

Well, actually, right now the way I'm looking at it, it would go up somewhat. Because we have about 85% of what – let's assume we stay at 65 million and I would say 85% of that 65 million would already be sold, of which 17 million needs to be re-priced. If you look at that being re-priced against the spot market right now on the revenue side, I think we're going to be pretty much equal to '09. So if you look at us we're in a good hedge position on both years but we do need to re-price price at 17 million. And plus, there is 4 million tons of met coal to be re-priced in '10. So there's some upside that if you look at our position, there's not as much exposure to the downside as there is on the upside for '10.

Paul Forward - Stifel Nicolaus

Great. And thinking about downside again, on the $61.56 average price of 2009, to what extent could you evaluate the possible list to that number just if steel stays weak all year, and you do have some customers either deferring or they are attempting to re-negotiate? How able would they be to do that? And is there any kind of risk that you see to that already price position in '09?

Brett Harvey

Well, we've – I think it's been risk adjusted. We expect to retain the value we have in these contracts, but I think it's already been risk adjusted at the 65 million. On the met side, keep in mind we only look at about 3.1 million tons in '09 being produced. That's a pretty pessimistic look especially when you're looking at Buchanan, which is really the base of all met coals coming out of the United States. So to go below that I think the problem is a lot bigger. I wouldn't say there's a lot of risk below that and we're starting the see them both come in to kind of match that 3.1 level.

Paul Forward - Stifel Nicolaus

Okay. Lastly, on the acquisition side of things, how active are you at trying to take advantage of this downturn to try to pick up properties here or there, and are there any areas that you're particularly interested in?

Brett Harvey

Well, we're keeping our powder dry, and we're building those great balance sheet to take advantage of acquisitions. When we look at areas, we look at areas where we've already identified that are either close to operations that we have, where there's some real synergy between combining assets or low cost position in other regions. We would be interested in that. I don't want to be that specific, but we are looking around. We continue to look around. And I really want to emphasize we look in both coal and gas. We don't just look at coal. So we're looking for opportunities to go in both directions. We see in the short-term some growth in the gas business to be pretty dramatic, just based on the way the government pushes against the different commodities. And so the gas and coal side look very interesting to us. Both of them do.

Paul Forward - Stifel Nicolaus

Okay, thanks a lot.

Tom Hoffman

I'd like to thank you, everybody, for joining us today. Dan Zajdel with CNX Gas and Chuck Mazur with CONSOL Energy will be available to investors throughout the day. If you've got additional questions, and I will be available for reporters, who may have questions as follow-up for the conference call. With that, again, thank you for joining us, and operator, if you would instruct our listeners on the replay information.

Operator

Thank you, sir. Ladies and gentlemen, this conference will be available for replay after 12:00 PM Eastern Time today through February 5th, 2009, at midnight. You may access the AT&T Telecom's replay system at any time by dialing 1800-475-6701, using the access code of 982693. Again, that telephone number is 1800-475-6701, using the access code of 982693.

That does conclude our call for today. We thank you for your participation. You may now disconnect.

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