Oct 22, 2009
Executives
Dan Zajdel - VP of IR Bill Lyons - EVP and CFO Brett Harvey - President and CEO of CONSOL Energy, Chairman and CEO of CNX Gas
Analysts
David Khani - FBR Capital Markets Shneur Gershuni - UBS Jim Rollyson - Raymond James Michael Dudas - Jefferies Kuni Chen - Bank of America-Merrill Lynch
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Scott Hanold - RBC Capital Markets Brian Yu - Citi Paul Forward - Stifel Nicolaus
Operator
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I would now like to turn the conference call over to the Vice President of Investor Relations, Dan Zajdel. Please go ahead sir.
Dan Zajdel
Thank you, Tony and good morning everyone, and welcome to our joint earnings call with CONSOL Energy and CNX Gas. With me this morning is Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas.
Also with us today are Bill Lyons, Executive Vice President and Chief Financial Officer for both companies. This morning, we will be discussing third-quarter results for both companies.
In addition, we will be discussing our views on the outlook for the remainder of 2009 and for 2010. Any forward-looking statements we may express or our expectations for results as you know are subject to business risks, and we have enumerated those risks in both earnings releases issued this morning and in our SEC 10-K filings.
In addition, the US Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose any proved reserves that the company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. We may use certain terms in this conference call such as unproven reserves or resources which SEC guidelines strictly prohibit us from filing with our filings with the SEC.
We also caution you that the SEC views such unproved resource reserve estimates as inherently unreliable, and that these estimates may be misleading to investors unless the investor is an expert in the gas industry. With that, let me begin the remarks and then take questions.
We will start today with Bill Lyons. Bill?
Bill Lyons
Thank you, Dan, and thank you everyone for joining us this morning for the joint CONSOL Energy and CNX Gas earnings conference call. CONSOL Energy is reporting net income of $87 million or $0.48 per diluted share for the third quarter of 2009, just about equal to the net income of $90 million or $0.49 per diluted share in the third quarter of 2008.
Net cash provided from operating activities is $162 million compared with $213 million in the third quarter of last year. The third quarter is usually the most challenging financial quarter for us because of normal vacation shutdowns.
In addition, these vacation periods provide us with the opportunity to do wide ranging maintenance while the mines are not in operation. This results in higher operating costs.
We are pleased with the third quarter results, particularly in light of the current economic environment. This past quarter again illustrated the financial power of being a low cost diversified energy company.
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In our met coal business, we sold 700,000 tons in the third quarter at an average price of $97 per ton. With costs of just over $60 per ton, we had an all-in margin of $37.
We believe our met coal costs may be the lowest in the United States. Low cost coupled with premium low-volatile coal makes us believe that our met coal business is without equal.
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Cost per ton of thermal coal was $47.83, up 5% from last year. Almost all of the increase can be attributed to our decision to reduce production to help the market stay at an equilibrium.
Thermal coal financial margins for the third quarter were $10.24 per ton or seven times the financial margin of a year ago. While many of our thermal coal contracts were priced last year when the thermal coal market was tight, we do believe that a substantial portion of this pricing reflects the continued scrubber build-out.
Increasingly, our thermal coal is being priced for its high heat content, not its sulfur content. Margin expansion is a key driver in our step change in profitability in both our metallurgical and thermal coal businesses.
We are maintaining our 2009 production guidance of 58 million tons. Of this, 1.9 million tons will be Buchanan coal destined for met coal customers.
This means that in the fourth quarter, we expect to produce 700,000 tons of met coal, and 13.4 million tons of thermal coal. Our current inventories are at 500,000 tons of met coal and 2.8 million tons of thermal coal.
By year end, we expect no change in our met coal inventories and we expect to reduce our thermal coal inventories by 700,000 tons. Our mines continue to do well.
We are out in front with our development work so that when the demand for thermal coal rebounds, we will be ready and able to meet the increased need. As the low cost producer for both met coal and thermal coal, we are well positioned for additional profitable growth.
Our gas segment, CNX Gas, of which we own around 83.33% interest, had another outstanding quarter. Production increased 26% quarter-over-quarter to a record 24.8 Bcf.
This record production was driven by better than anticipated results in our Virginia coal bed methane and our Marcellus Shale operations. In the third quarter of 2009, overall costs of CNX Gas operations were $3.44 per Mcf or $0.41 better than they were in the third quarter of 2008.
However, the record production volumes and lower costs were not enough to overcome the depressed spot price for natural gas.
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Our goal is to increase our position to 250,000 total acres by the end of the year. Our acquisition efforts remain focused on Southwest Pennsylvania and Northern West Virginia where we have many inherent advantages.
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You might have seen that we reiterated our 2010 gas production guidance of 100 Bcf. We feel that 100 Bcf is a reasonable starting point.
It assumes one horizontal Marcellus Shale rig for the next year and the drilling of 175 Virginia CBM wells, plus some ancillary drilling. We are currently formulating our 2010 plans but this much is clear.
When gas prices rebound, we will have the ability to quickly add rigs. There are some other items in the quarter that may be helpful to mention.
We incurred additional idling costs primarily at Mine 84, Shoemaker and Jones Fork that impacted net income by about $13 million. Additional reclamation requirements at our Central Appalachia surface operations impacted net income by $4.2 million, and dry hole costs and lease drops impacted net income by $3.5 million.
Also of note is that the decrease in coal demand caused a reduction of $6.3 million in net income from our transportation activities this quarter compared to the 2008 third quarter.
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You might have seen that we reiterated our 2010 gas production guidance of 100 Bcf. We feel that 100 Bcf is a reasonable starting point.
It assumes one horizontal Marcellus Shale rig for the next year and the drilling of 175 Virginia CBM wells, plus some ancillary drilling. We are currently formulating our 2010 plans but this much is clear.
When gas prices rebound, we will have the ability to quickly add rigs. There are some other items in the quarter that may be helpful to mention.
We incurred additional idling costs primarily at Mine 84, Shoemaker and Jones Fork that impacted net income by about $13 million. Additional reclamation requirements at our Central Appalachia surface operations impacted net income by $4.2 million, and dry hole costs and lease drops impacted net income by $3.5 million.
Also of note is that the decrease in coal demand caused a reduction of $6.3 million in net income from our transportation activities this quarter compared to the 2008 third quarter.
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Determining the proper level of capital spending is always the challenge, and the challenge is magnified in this uncertain political and economic environment. Our goal is to provide and allocate capital in a manner that maximizes long-term shareholder value.
In the energy business, this requires a high degree of understanding of pricing, demand, cost, competition and project investment requirements.
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Determining the proper level of capital spending is always the challenge, and the challenge is magnified in this uncertain political and economic environment. Our goal is to provide and allocate capital in a manner that maximizes long-term shareholder value.
In the energy business, this requires a high degree of understanding of pricing, demand, cost, competition and project investment requirements.
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On the thermal coal side, we will not be starting any new production projects until we begin to receive additional customer commitments. The increasingly stringent regulatory environment for coal also concerns us.
We remain steadfast in our confidence in our business model. Our powerful balance sheet and our status as a safe, low cost producer enables us to effectively compete and produce excellent earnings and cash flows even during times of economic turmoil.
Among our met coal reserves, our thermal coal reserves and our gas reserves in Appalachia, CONSOL Energy controls the greatest concentration of BTUs in the Eastern United States. We believe our diversification into three premium products gives us a diversified portfolio that will prosper in the decade to come by providing safely and economically a fundamental human need which is energy.
Brett, your comments on the quarter?
Brett Harvey
Thank you, Bill. Bill has done a good job of covering the numbers and part of the strategy.
I would like to give you a color or my perspective on where we are at and where we see the marketplaces.
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Now, we still see 2010 is a bridge year. Our capital is going to be very focused on efficiency projects that were already authorized in 2008, and we will finish those.
We will only do mop capital. We will add no new projects in coal.
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Now, we still see 2010 is a bridge year. Our capital is going to be very focused on efficiency projects that were already authorized in 2008, and we will finish those.
We will only do mop capital. We will add no new projects in coal.
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Now, we still see 2010 is a bridge year. Our capital is going to be very focused on efficiency projects that were already authorized in 2008, and we will finish those.
We will only do mop capital. We will add no new projects in coal.
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So, with that, I would like to open it up for questions.
Dan Zajdel
Tony, could you please instruct the listeners on how to place questions?
Operator
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David Khani - FBR Capital Markets
Can you talk a little bit about your expectations for natural gas price, because obviously it has a big swing factor both on the coal side and obviously on your current natural gas production?
Bill Lyons
Right. We expect 2010 to average $6 to $7.
David Khani - FBR Capital Markets
$6 to $7. Okay.
The second is, can you talk a little bit about your customer base and sort of the industrial nature I guess of the Northern App region? Are you starting to see signs that the industrial side is picking up and so therefore the demand for power would pick up?
Brett Harvey
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David Khani - FBR Capital Markets
Okay, and then going back a little bit to the $6 to $7 per Mcf or MMBTU, how much of an impact do you think that will be on the steam coal demand inside your region? Have you guys done to math there?
Bill Lyons
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David Khani - FBR Capital Markets
How much met do you expect to export for 2010? Then are you seeing any signs also for the steam coal side for 2010?
Brett Harvey
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David Khani - FBR Capital Markets
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Brett Harvey
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David Khani - FBR Capital Markets
3 million tons on the steam side, okay. One last question.
If you add back the shifts and then obviously run Shoemaker, what would be your productive capacity you think, assuming the demand was there?
Brett Harvey
If it was a demand driven market, I think we could probably add 6 to 7 million tons.
Operator
Our next question in queue is Shneur Gershuni with UBS.
Shneur Gershuni - UBS
I was wondering if I can just start on the gas side for a second. I was trying to reconcile I guess your production guidance and so forth.
Just given the strong performance of the three quarters thus far, are you kind of expecting the fourth quarter to tail off relative to the third-quarter production levels or would you expect the trend to continue to be up quarter-over-quarter?
Brett Harvey
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Shneur Gershuni - UBS
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Bill Lyons
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Shneur Gershuni - UBS
Okay. My next question is just with respect to your thought process with respect to your 2011 hedging strategy and so forth.
Should we continue to expect you to layer in hedges in 2011? Is that sort of how we should be thinking that you will do one to two years at a time and so forth?
Brett Harvey
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Shneur Gershuni - UBS
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Brett Harvey
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Shneur Gershuni - UBS
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Brett Harvey
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Shneur Gershuni - UBS
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Brett Harvey
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Shneur Gershuni - UBS
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Brett Harvey
Well, what happens is, when you widen the face, you drop your ratio between your development ton and your longwall tons. So, we should see a downward pressure on longwall production costs and that is part of the mix.
So, overall, it should rise in productivity. We expect to see, I would say, on tons per hour, we expect to see about 2% to 5% increase in productivity.
Operator
Thank you. Our next question is queue that will come from the line of Jim Rollyson with Raymond James.
Your line is open.
Jim Rollyson - Raymond James
Brett, it looks like just on the bookings side, it looks like you guys added about 11.7 million tons this quarter versus last and the kind of imputed prices is in the low 50s. I was kind of wondering if some of that was the collared coal you guys have noted from quarter to quarter, it looks like that number went down, and just maybe trying to back into what kind of prices you are seeing for what you are booking outside of those collars in this market.
Brett Harvey
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Jim Rollyson - Raymond James
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Brett Harvey
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Shneur Gershuni - UBS
Excellent. The last question from me is, your kind of view on number one, the EPA shenanigans as it relates to permits and how you feel you guys are positioned.
Secondly, any thoughts on this recent regulation potential of the coal waste as hazardous material instead of non-hazardous.
Brett Harvey
As always, when you see a change in administration, you see a change one way or the other in how they look at all these mining issues. It never gets better.
It always gets tighter and that tightness reflects on two things. One is larger companies have the ability to adjust to that, and smaller companies have a much tougher time adjusting to those kind of issues.
We think in Central App, the mountaintop mining issue is I think a very poignant issue there and critical to get permits there. We have low exposure to Central App but we think it will affect Central App in a big way and that could translate back into an advantage for Northern App because we have very big mines that are well capitalized and have 20 to 25 year lives, which is a function of the government pushing it around.
We would rather see everybody get permits and be competitive, but if there is a positive for us, it does push value back to Northern App if Central App continues to struggle based on permitting.
Shneur Gershuni - UBS
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Brett Harvey
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Operator
Thank you. Our next question in queue that will come from the line of Michael Dudas with Jefferies.
You line is open.
Michael Dudas - Jefferies
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Brett Harvey
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Michael Dudas - Jefferies
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Brett Harvey
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Michael Dudas - Jefferies
Brett, turning to the export terminal market, given where the dollar is and freight rates are, could you see a scenario where we start to see a recovery and some more demand for Northern App or Central App steam coal maybe sooner than people anticipate if the Pacific basin continues to be strong and Europe may need our coal?
Brett Harvey
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Michael Dudas - Jefferies
My final question is, a year from now, do you anticipate further significant involuntary production cutbacks in the market, and do you think that the market will see some continued discipline as we move through the first part of 2010?
Brett Harvey
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Operator
Thank you. Our next question in queue that will come from the line of Kuni Chen with Bank of America.
You line is open.
Kuni Chen - Bank of America-Merrill Lynch
I guess just first off on the EPA, some new rules coming down the pipeline as far as sulfur emissions. I just want to get your take on how you see that playing out as emission caps come down and how that could be certainly a positive for Northern App.
Brett Harvey
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Kuni Chen - Bank of America-Merrill Lynch
Do you see a potential material shift in those emissions caps?
Brett Harvey
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Kuni Chen - Bank of America-Merrill Lynch
Then just on Buchanan and going back to met coal, any operational issues that we should be thinking about going forward, anything that kind of keeps you up at night from an operational perspective as we ramp up to higher rates next year?
Brett Harvey
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Operator
Thank you. Our next question in queue that will come from the line of John Bridges with JPMorgan.
Please go ahead.
John Bridges - JPMorgan
One interesting question that keeps on coming up is this disconnect between the firm coking coal prices and the sloppy or flat steel prices in China. I just wondered if you had a view on that?
Brett Harvey
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John Bridges - JPMorgan
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Brett Harvey
Okay.
John Bridges - JPMorgan
You had some AMVEST related permits that the EPA is looking at. When would that be heard?
Brett Harvey
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John Bridges - JPMorgan
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Bill Lyons
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Operator
Thank you. The next question in queue that will come from the line of Scott Hanold with RBC Capital Markets.
Please go ahead.
Scott Hanold - RBC Capital Markets
Can you talk about any kind of thought change or process going on regarding how you best allocate capital between the coal and the gas, because it sounds like you did state a $6 to $7 gas price outlook for 2010, which is actually pretty good relative to the rates of return you guys can get? So, could you just talk in general about your appetite to ramp up in that type of environment?
Brett Harvey
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Now, going forward, if gas price has strengthen, we will add the second rig and we will add more volume as quickly as we can as we continue to add more acreage into the Marcellus Shale.
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Now, going forward, if gas price has strengthen, we will add the second rig and we will add more volume as quickly as we can as we continue to add more acreage into the Marcellus Shale.
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Scott Hanold - RBC Capital Markets
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Brett Harvey
We could get there, yes.
Scott Hanold - RBC Capital Markets
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Brett Harvey
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Scott Hanold - RBC Capital Markets
Okay. It sounds like all of the above.
Then how big do you want to try to get the Marcellus? I mean, is there a number that is comfortable or is it just add it as you can?
Brett Harvey
I think if we were at 400,000 acres, I think that would be a good place for us to be, and I think we can accomplish that.
Scott Hanold - RBC Capital Markets
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Brett Harvey
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Dan Zajdel
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Scott Hanold - RBC Capital Markets
Are you expecting to put more frac stages on those longer lateral wells too?
Dan Zajdel
Right now we are doing frac stages for about every 300 to 350 feet of lateral.
Brett Harvey
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Operator
Thank you. The next question in queue that will come from the line of Brian Yu with Citi.
Your line is open.
Brian Yu - Citi
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Brett Harvey
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Bill Lyons
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Brian Yu - Citi
Got it. When should we next expect any major longwall moves, because it looks like all of them are running now?
Bill Lyons
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Brett Harvey
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Brian Yu - Citi
Okay, and then just on the metallurgical coal with your commitments, could you provide us a breakout of how much might be related to domestic versus international business? Also, is there any kind of pricing differential between those two markets relative to your $115 per ton position?
Brett Harvey
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Brian Yu - Citi
What about as it pertains to the 1.4 million tons you have committed right now?
Brett Harvey
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Dan Zajdel
Tony, we have time for one more question.
Operator
Thank you, sir. Next question will come from the line of Paul Forward with Stifel Nicolaus.
Your line is open.
Paul Forward - Stifel Nicolaus
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Brett Harvey
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Paul Forward - Stifel Nicolaus
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Brett Harvey
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Paul Forward - Stifel Nicolaus
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Brett Harvey
Somehow we got a [bust] here, because I got almost 1.2 million tons in the fourth quarter from Buchanan.
Paul Forward - Stifel Nicolaus
Okay. I guess the thing is that, in your press release, you say 1.9 million tons of met coal production for the full year, and I believe the year-to-date production number was 1.2 which would get to the 0.7 number.
Brett Harvey
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Paul Forward - Stifel Nicolaus
You are anticipating production at Buchanan at 1.2 in the fourth quarter?
Brett Harvey
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Paul Forward - Stifel Nicolaus
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Dan Zajdel
Thanks everyone for participating on the call. Tony, could you instruct us on the replay information?
Operator
Thank you, sir. Ladies and gentlemen, this conference will be available for replay after 1 PM Eastern Time today through October 29, 2009 at midnight.
You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701, and entering the access code of 106655. International participants may dial 320-365-3844.
Those phone numbers again, 800-475-6701 and 320-365-3844, using the access code of 106655. That does conclude your conference call for today.
We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.