CNX Resources Corporation
Q1 2008 Earnings Call Transcript

Published: 30 Apr 2008

[Operator:]

Ladies and gentlemen, thank you for standing by. And welcome to the CONSOL Energy's First Quarter Earnings Release 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.

[Thomas F. Hoffman:]

Good morning, everyone. Welcome to our conference call on the first quarter results for CONSOL Energy. With me this morning are Bill Lyons the Executive Vice President and Chief Financial Officer of the company and Brett Harvey, President and Chief Executive Officer. We will be discussing the results for the quarter just ended and we will be discussing the outlook for the remainder of the year. Much of our discussion will be forward-looking in nature. Our ability to achieve forecasted results are dependent on and certain business risks as we have detailed for you in our earnings release released this morning at 7

[William J. Lyons:]

Thank you, Tom. For the quarter just ended CONSOL Energy reported net income of $75 million or $0.41 per diluted share compared with a $113 million or $0.61 per diluted share in the first quarter of 2007. Net cash from operating activities was a $146 million compared with a $183 million for the first quarter of last year. Overall, these financial results were mixed compared with our internal expectations. CNX Gas, which we own 81.7%, had a record-breaking quarter in terms of production and earnings. Overall, CNX Gas contributed over 50% of our net income for the period. In coal operations, average realizations increased over 9%. However, lower production and higher cost resulted in a 37% reduction in margins. Let me discuss some of the details of the quarter. Our share of CNX Gas earnings was $41 million in the first quarter of 2008. CNX Gas record production of 15.9 billion cubic feet of natural gas for the first quarter was over 10% higher than the 14.3 billion cubic feet for the first quarter of 2007. Of special note is that this record production was achieved with the Buchanan Mine longwall being done until mid March, which meant we experienced a deferral of mine related methane gas of approximately 1.2 billion cubic feet. Average margins at CNX Gas were $4.52 per Mcf, an increase of 24% over to $3.65 margins in the first quarter of 2007. CNX Gas is estimating 2008 methane production to be 72 billion cubic feet, a 24% increase over 2007 production. CNX Gas maintains its strategic vision of producing a 100 billion cubic feet of natural gas annually by the year 2010. On the Coal side, average realization per ton was $43.57, an increase of $3.73 per ton or 9.4%. This increase in per ton realization added $60 million to our revenue line. The other major metrics in the coal side, production and cost did not meet our expectations. Production was 16.2 million tons down 1.6 million tons from the first quarter of 2007. The Buchanan mine being down for most of the first quarter of 2008 caused 1.1 million tons of this impairment. We also lost the [inaudible] (4

[J. Brett Harvey:]

Thanks. Thank you, Bill. It's good to be with all of you and it's good to talk about the position of CONSOL Energy in this, I think very robust and exciting energy markets that we are in today. First of all let's talk about safety. The first quarter of 2008 was the best safety record that we have ever had in the history of the company, I want to commend our people for their attitude about safety and their ability to look after each other and get the job done. That's paramount to this company, paramount to management as well as it should be to our shareholders because the safe operation is also a very productive operation. Let's talk about the Gas Company first. Gas had an outstanding quarter as Bill just described, higher production by 10%, higher prices by 16%, almost 17%, 50% higher profit, strong revenue growth and the ability to grow that company at a 15% or higher compound rate going forward. The 100 billion cubic feet per year for 2010 is very achievable and it is part of what we call our double-edged sword of the energy business and a very valuable piece to our shareholders. Now let's talk about the coal business. The coal market in the first quarter changed, I think, dramatically and has lagged [ph] (10

[Thomas F. Hoffman:]

Operator, if you could instruct our listeners on their procedures for queuing in. Question and Answer

[Operator:]

Yes. Thank you. [Operator Instructions]. And we do have a question from Jim Rollyson with Raymond James. Please go ahead.

[Jim Rollyson:]

Good morning, gentlemen.

[J. Brett Harvey:]

Hi, Jim.

[Jim Rollyson:]

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

[J. Brett Harvey:]

Right. I would say for export, I would say we are going to be up about 100,000 tons for 2008 versus last year and the reason we are there, even though our Baltimore shipments are higher, say it's gone up from 6.9 million to 9.8 million tons to Baltimore. Our export tons on the steam side are not moving because the domestic market is rising faster than the Atlantic market. And what's happening with our utilities, our immediate utilities around us, they are very interested in term, volume, and this rising price structure. The availability of coal is more important to them than the price at this point in time. So we are doing long-term deals with lakes, with major utilities in the area and essentially we are tying up volume with them that don't have transportation components, which is a real value to our shareholders.

[Jim Rollyson:]

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

[Thomas F. Hoffman:]

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

[J. Brett Harvey:]

But, have... to that point like the expansion of the longwall phase and so forth these are very highly productive things, it lowers our overall cost, it increases our productivity and it also replaces the wind down of mine 84 [ph] (19

[Jim Rollyson:]

And any thoughts on the CapEx, just [inaudible] (20

[J. Brett Harvey:]

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

[Jim Rollyson:]

I think you guys were saying new ones in the 60 range?

[J. Brett Harvey:]

Yeah.

[Jim Rollyson:]

So, 20 or 30 kind of numbers?

[J. Brett Harvey:]

I would say so. Yeah.

[Jim Rollyson:]

Great.

[J. Brett Harvey:]

That's a good way to look at it.

[Jim Rollyson:]

Thank you.

[J. Brett Harvey:]

Yeah.

[Operator:]

And next we have a question from Michael Dudas with Bear Stearns. Please go ahead.

[Michael Dudas:]

Good morning gentlemen.

[J. Brett Harvey:]

Hi, Mike.

[William J. Lyons:]

Good morning, Mike.

[Michael Dudas:]

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

[J. Brett Harvey:]

Well. I think they are coupled together, I think permanently for at least the next five years. I think this global market is so powerful in terms of the... keep in mind we are building a much bigger base for coal worldwide. And that base is directly related to all the marketplaces. So, if you look at what's not coming into the U.S. in terms of the imports this year and if you look at what's going out of the U.S. in terms of exports that is a real effect. Let alone the effect of what we call on the bubble of metallurgical coal, it could be steam or it could be met dependent on how the met go. So, these world markets in met and steam directly affect the domestic markets, especially in the Eastern United States. And we are seeing the ability to move this coal either way and I think that's why we are seeing the domestic utilities try to lock in volumes and the surety of supply rather than worry about prices or [inaudible] (23

[Michael Dudas:]

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

[J. Brett Harvey:]

I think we are going to continue to see it to be very difficult. The markets will tighten based on the ability to permit coal in the eastern United States, the safety issues that were written under the new law, all those things affect the cost and ability to get to... you'll see a productivity drop based on these two issues and so on the capitalized very valuable mines that are already in place are becoming more valuable and as the international market takes some of that coal away from the natural markets, we are going to see some coal move from west to east, but that's a very expensive haul and I think the utilities will encourage more developments around it, our plans and they will to take long haul for long periods of time.

[Michael Dudas:]

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

[J. Brett Harvey:]

Well, I think if you look back to when we changed generations in the coal business last time, we saw a problem associated with safety. And that's what we're trying to avoid. We are looking at bringing new people into the business as an opportunity to train them to zero accidents and the mentality of zero accidents. But it takes a lot more training Michael as you know, and we see this as an opportunity, but I think there will be an influx of new people into the business and that is going to be a challenge for the industry, but I think it is something that we can do. And we are spending money and investing in our people to the point where we think we could be at zero going forward which gives us, I think, the advantage. People want to come to mines that have good safety records and that will give us the edge because a safe person is also a productive person, and we think they go hand-in-hand. So, I think that's the watchword that we need to look at going forward and that's the model of CONSOL now.

[Michael Dudas:]

Thank you Brett.

[J. Brett Harvey:]

Thank you

[Operator:]

thank you our next question comes from Luther Lu from FBR Capital Markets. Please go ahead.

[Luther Lu:]

Good morning guys.

[J. Brett Harvey:]

Hi, Luther.

[Luther Lu:]

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

[J. Brett Harvey:]

I'm pretty sure that they will. I think any time you see a dip in the market and on the shoulder months that we're seeing in Europe and other places. That puts us in discussions for longer-term prices that probably don't have spot market economics tool. But we are okay with that, as long as it dips [ph] (26

[Luther Lu:]

Okay. Great. And given that... or do you have any plans to expand the Baltimore Port?

[J. Brett Harvey:]

Well. We have a study going on right now and we are determined that with the capital expenditures of about $20 million we think we could on a yearly basis get up to $18 million and stay there. We have another piece of that study that we are looking at. We have a big footprint there and we think maybe with some more capital we can bring it up. We know [ph] ( 27

[Luther Lu:]

Right. And the railroad has to... I guess co-operate as well?

[J. Brett Harvey:]

Well. The railroad, keep in mind, our port facilities have dual railroads going into it. We have access to our major mines on direct hauls. I don't think, I think they see that as very lucrative business and would be a great partner in expansion of our Baltimore facility.

[Luther Lu:]

Okay. And I have a question for Bill. Bill, what do you see cost... what's your cost projection for second quarter or for balance of the year?

[William J. Lyons:]

Luther, we don't give those cost projections out, that’s sort of as Brett said we expect them to come down, but we don't give… we don’t give guidance on that.

[Luther Lu:]

Okay. And for your DD&A projection given out earlier this year is still at… little over $400 million?

[William J. Lyons:]

Yeah. That should be okay.

[Luther Lu:]

Okay. Thank you.

[Operator:]

Our next question comes from the line of Brian Gamble [ph] from Simmons & Company. Please go ahead.

[Unidentified Analyst:]

Yes, good morning guys.

[J. Brett Harvey:]

Hi, Brian.

[Unidentified Analyst:]

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

[J. Brett Harvey:]

Yeah, I think the latter part of that. I think we'll see... in any given moving market where we see a step change like this, it's probably not very prudent for the supplier and we understand the demand very well for the supplier to lock in prices on the early end of the move. And so, we decided there was such a need from the utilities who want to have the volume and they wanted to have it for term, we were willing to negotiate those prices later in the year. And I will give you a good example, one of the... when Bailey coal was moving at $65 a ton and this was early on in the move in the first quarter. Clearly we could have signed it up and it would have been $15 a ton higher than we kind of expected as it started to move, with that spot market for Bailey coal today is 110, so it would have been very imprudent of us... to sign that up that early. So I think it was just a function of us understanding where the market is. We are also spend a lot of time looking at forward electricity prices and seeing what their ability to pay as well is. So, if you add those together, we did sign contracts with them, they have… both of us have handcuffs on them but at market [inaudible] (30

[Unidentified Analyst:]

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

[William J. Lyons:]

Brian that breaks down in... there is a lot of things that are in that cost number. You are going to realize when you have all the complexes we have, they are not all the same, we tend to laniaries [ph] all this stuff. There is no doubt that reduced production hurt us in terms of the calculation of unit cost. Also AMVEST, we think is going to do better than what it did in the first quarter. So, we also think that's also going to help us in terms of the unit costs. Again, as I... we've talked about in the beginning, that first quarter of 2007 was an extremely good quarter for us and it was aided by that $33 million combined fund settlement. That was a non-recurring event, so naturally when you do the comparisons 2008, it’s going to pale by comparison. We have experienced increase in labor costs and increase in supply costs and that will show an upward trend as we continue up. But you got to realize when we take a look at these met prices for coal we're talking about that is a key ingredient in steel manufacturing. And we use a lot of steel in the mining process both for roof control as well as in equipment. So I think you're going to see increases in costs. But as we talked about before, I think the focus needs to be not so much on cost but to focus on margins. And you're going to see that margins are going to outstrip increases in cost.

[Unidentified Analyst:]

And then one last question based on kind of that margin comment. When I'm trying to back into the 2010 committed and price volumes quarter-over-quarter I get to kind of a 3.8 million incremental tons after 2010 kind of in the low 50s. I was wondering if you guys could explain where those tons came from and why those prices don't seem as high as the realizations that you're getting on the '09 tonnage signed during the quarter?

[J. Brett Harvey:]

I think, that's a function of the mix that we see out there. I wouldn't dwell too much on the... what you saw signed up for that. At that time frame I think it had to do with the mix that we are putting in and they were signed. There are deals that were signed in mid '07. And if you look at mid-'07 versus the market, we're seeing, say mid-'08 is dramatically different. So I think that was more of a clean up contracts that we were looking at than anything that you could compare to the new marketplace. I want little back on your other question too about AMVEST, I don't want you to get the impression because we thought the cost were a little bit high in AMVEST for the first quarter that we are discouraged about that. We think AMVEST is going to be a real winner for this company for many, many years and it's going to be one of the biggest workhorses in Central App I think for the next 20 years. So you're going to see some real value come out of AMVEST.

[Unidentified Analyst:]

[inaudible] Brett. Thank you guys.

[J. Brett Harvey:]

Yes.

[Operator:]

Our next question comes from the line of Paul Forward from Stifel Nicolaus. Please go ahead.

[Paul Forward:]

Okay.

[J. Brett Harvey:]

Hi, Paul.

[Paul Forward:]

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

[J. Brett Harvey:]

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

[Paul Forward:]

So, you say the incremental demand is limited, did I hear that right?

[J. Brett Harvey:]

No, production.

[Paul Forward:]

Okay.

[J. Brett Harvey:]

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

[Paul Forward:]

Right. And just also the Northern App markets, if we are at 35 days of inventory right now, you had a... which is a number that your competitor gave. You put a line in here in your press release that said we believe this tightness in the market will intensify as we get further into the year. Where do you see... where do you see that inventory possibly go into... meaning the utilities that [inaudible] (35

[J. Brett Harvey:]

Well, it's a hot summer. I would say that the utilities is going to be in a very panic position because... and here is why, because the inventories I think are stable to low right now. If it gets real hot, at the Northern App supply will be way down as a response. So they can't respond that quickly with volumes, we have a lot of people calling us, they want coal for the summer and we don't have… we don't have the coal and there is a lot of issues around, where they are going to get it and if they burn up this 20 days supply, how are they going to resupply for the winter. I think that's a concern, so the supply response is very weak, that's why the price is the way they are.

[Paul Forward:]

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

[J. Brett Harvey:]

Well, we've always been the swing suppliers for a lot of the people along the coast, because of our high-Btu travel. We have been a swing supplier for the coast guys who bring them in and play [inaudible] (37

[Paul Forward:]

Okay, thanks a lot Brett.

[J. Brett Harvey:]

All right, thanks.

[Operator:]

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

[Justine Fisher:]

Good morning.

[J. Brett Harvey:]

Hi Justine.

[Justine Fisher:]

If we've already seen the step change function in Eastern prices for both Northern and Central App, but the PRB produces are arguing that we are yet to see a PRB coal and PRB coal will backfill some of the holes left by eastern coal that's exported. Are you guys looking at all at developing more in the PRB just sort of get into that market more from a production standpoint before that potential step change, do you guys not see a step change there because of different sulfur content and transportation etcetera?

[J. Brett Harvey:]

Well, in the marketplace we have Youngs Creek that can come on in 2012, but we won't bring it on unless we have the coal sold. We're not going to use our shareholders’ money to speculate. Although I do think there is a possibility of the high-Btu coal that we have coming out of Youngs Creek and our value as a fee product versus a royalty product that the competitors have there that we can have a niche there with our sharing partners to get some things done. I think the Powder River Basin has a different marketplace in the eastern coals, and if you draw a circle around this transportation nationwide. The inventory is high at the utilities that they feed and I think that drives the price as long as the utilities in that marketplace feel comfortable, we are not going to see the push for higher prices yet. Now, if it turns out, those inventories drop or the production of the PRB is limited somewhat in the future, I think you will see prices rise pretty fast. But, right now we are not going to speculate by bringing on a lot of volume in the PRB.

[Justine Fisher:]

And I guess any... there is no timeframe as to when you would try and commit those new Brownfield expansions in the east, right? I mean, is there any way we can gauge how long you would wait to commit that goal [inaudible] (39

[J. Brett Harvey:]

Right. I would say a good signal is and I am trying to send this signal in this call is the utilities around us are tying up very large volumes on our base capitalized mines. That tells you the next Brownfield expansion mine like the fifth longwall at Bailey, Enlow could happen earlier than later, but I can't give you a date on that.

[Justine Fisher:]

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

[J. Brett Harvey:]

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

[Justine Fisher:]

Okay. And then one more question, asked a competitor about SO2 prices and what the potential reason for the.. for the recent lag in SO2 prices was and I was wondering if you guys haven’t yet seen on that whether it's scrubbers or how would you explain the recent dip in SO2 prices?

[J. Brett Harvey:]

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

[Justin Yagerman:]

Okay. Thank you very much.

[J. Brett Harvey:]

See you, thank you.

[Operator:]

[Operator Instruction]. We will go through the line of David Gagliano from Credit Suisse. It's go ahead.

[David Gagliano:]

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

[J. Brett Harvey:]

Okay. David, we think... we think that that softening in the market you're seeing is based on the shoulder months and the demand has backed off a little bit. But, if you look, we still have major problems in South Africa. The supply side, when the demand comes back it’s just not going to be there, so we think that the Atlantic markets are going to continue to be strong. In the short term I think the domestic market is a little stronger based on the inventory and they're trying to build their inventories. So, if you look at the balance between the two I think it's switches back and forth. But this is the first time I've see since I have been at CONSOL where a switching back and forth on a two or three months basis instead of a two or three year basis. So, I would say we got a balance there, we haven't changed our philosophy, we have the ability to either move it to the domestic and make high margins or move into the Atlantic and make high margins, because of the high-Btus, and the port facilities that we have. So, I think it's a matter of leverage, yes.

[David Gagliano:]

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

[J. Brett Harvey:]

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

[David Gagliano:]

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

[J. Brett Harvey:]

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

[David Gagliano:]

Okay perfect. Thanks very much.

[Operator:]

Thank you our next question will come from the line of Wayne Admiral from Hudson Capital [ph]. Please go ahead.

[Unidentified Analyst:]

Thank you. What's your lead-time on buying a longwall?

[J. Brett Harvey:]

Right now it's about 12 months.

[Unidentified Analyst:]

12 months. And how long would it take to... if you decided this morning you wanted to build one and you have the 12 months lead time, how long will it take to have one up and running.

[J. Brett Harvey:]

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

[Unidentified Analyst:]

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

[J. Brett Harvey:]

Yes. Yes depends on... depends on the demand for coal. But if somebody signed up with us for delivering in all eleven we could probably get one going, yes.

[Unidentified Analyst:]

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

[J. Brett Harvey:]

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

[Unidentified Analyst:]

Yes. If I am not mistaken, few years ago you had about a trillion and now you are at a trillion three. So I mean is this...

[J. Brett Harvey:]

Right.

[Unidentified Analyst:]

Yes. Is this the case where you could go to 2 trillion or 3 trillion or is it just like 1.5 trillion or 1.7 trillion?

[J. Brett Harvey:]

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

[Unidentified Analyst:]

Well and if I am not mistaken there is an area where you are really excited that you are sort of spending a lot of money and energy on?

[J. Brett Harvey:]

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

[Unidentified Analyst:]

And in the highest value that asset is to keep it within the [inaudible] (47

[J. Brett Harvey:]

Yes. Yes, that's been determined by the Board and I agree that the value there. If there is any pushback on coal based on CO2, that extreme value comes on natural gas and that's part of the double-edged sword that CONSOL has. So that's good.

[Unidentified Analyst:]

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

[J. Brett Harvey:]

Yes. It certainly did and it gets better every year as it works out --.

[Unidentified Analyst:]

Superb. Thank you.

[Operator:]

And at this time we have no further question, speakers. Please go ahead with any closing comments.

[Thomas F. Hoffman:]

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

[Operator:]

Thank you. And ladies and gentlemen, today's conference call will be available for replay after 12 P.M. today until midnight May 1st. You may access the AT&T Teleconference replay system by dialing 800-475-6701 and entering the access code of 918708. International participants may dial 320-365-3844. Those numbers once again, 800-475-6701 or 320-365-3844 and enter the access code of 918708. That does conclude our conference call for today. Thank you for your participation and using AT&T Executive Teleconference Service. You may now disconnect.