CNX Resources Corporation (CNX) Q2 2010 Earnings Report, Transcript and Summary

Nicholas DeIuliis - Chief Operating Officer, Executive Vice President, President of CNX Gas Corporation, Chief Operating Officer of CNX Gas Corporation and Director of CNX Gas Corporation Robert Pusateri - Executive Vice President of Energy Sales & Transportation Services, President of CONSOL Energy Sales Company and Executive Vice President of Energy Sales & Transportation Services for CNX Gas Corporation William Lyons - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Dan Zajdel - Vice President of Investor Relations & Public Relations J. Harvey - Chairman, Chief Executive Officer, President, Member of Executive Committee, Chairman of CNX Gas Corporation and Chief Executive Officer of CNX Gas Corporation

Pearce Hammond - Simmons Kuni Chen - BofA Merrill Lynch Brian Singer - Goldman Sachs Group Inc. John Bridges - JP Morgan Chase & Co William Eagan - Raymond James David Lipschitz - Credit Agricole Securities (USA) Inc. Michael Dudas - Jefferies & Company, Inc. Brett Levy - Jefferies & Company Shneur Gershuni - UBS Investment Bank David Gagliano - Crédit Suisse AG David Katz - CIBC World Markets Paul Forward - Stifel, Nicolaus & Co., Inc. Jeremy Sussman - Brean Murray, Carret & Co., LLC

Ladies and gentlemen, thank you for standing by. Welcome to CONSOL Energy's Second Quarter 2010 Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to the Vice President of Investor Relations, Mr. Dan Zajdel. Please go ahead.

Thank you, John, and welcome to CONSOL Energy's Second Quarter Earnings Call. With me this morning are Brett Harvey, Chairman, CEO and President; Bill Lyons, Chief Financial Officer; Nick Deluliis, Chief Operating Officer; and Bob Pusateri, Executive VP, Marketing. We will be discussing our results and our outlook for the remainder of 2010 and beyond. Any forward-looking statements we may express or our expectations for results, as you know, are subject to business risks, which we have enumerated today in our release and previously in our SEC filing. Let's start the call today with Bill Lyons. Bill?

Thank you, Dan, and thank you, everyone for joining us this morning for CONSOL Energy's Second Quarter 2010 Earnings Conference Call. The second quarter 2010 continued our string of financially strong and operationally significant quarters, combined with meaningful asset expansion and development. On the financial side, we had record quarterly revenue of $1.3 billion, which is up 20% from the second quarter of 2009. This growth was driven by over $1 billion of revenue from the Coal Division. For the six months ended June 30, 2010, our revenue was $2.5 billion, up 10% from the six months ended June 30, 2009. Revenue growth is critical, as it provides us the capability to more rapidly expand and develop our large asset position. Through the quarter ended June 30, 2010, adjusted EBITDA was $350 million or 18% higher than the adjusted EBITDA of the second quarter of 2009. Net cash flow from operations for the second quarter 2010 was $332 million, up 5% from the second quarter of 2009. Net cash flow for the six months ended June 30, 2010, was $506 million. If you referenced the net operating cash flows for the full year of 2009 of $945 million and for the full year of 2008 of $1.03 billion, you can see that we are well on our way to matching the strong cash flows of the past two years. Substantial and consistent cash flows from operations are critical to our success by providing the financial flexibility to invest in our key projects or to adjust to unforeseen economic circumstances. Our operating units in both the Coal and Gas divisions are working in accordance to what's planned [ph] are without major incidents. The safety of our employees and contractors, the stewardship to the environment in which we operate and responsible citizenship in the communities in which we work and live continue to be the benchmarks by which we judge ourselves. One item of significant operational note is the quarterly production record of 31.9 Bcf obtained by our gas division. This was 42% higher than the 22.5 Bcf achieved in the second quarter of 2009. This record was achieved from the addition of the Dominion E&P [Dominion Appalachian E&P] business on April 30, 2010, and our ongoing drilling program in the coal bed methane in Marcellus Shale operations. Now even without the Dominion acquisition, we would have still achieved a production record for the quarter. We have seen outstanding results in the last five Marcellus Shale wells, including three wells brought online in the second quarter. The estimated ultimate recoveries of these wells range from 5.5 Bcf to 9.9 Bcf. These estimated ultimate recoveries, though still preliminary, are far higher than the standard type curve that we have previously seen. The second quarter of 2010 also saw the completion of a substantial expansion of our Gas division. On April 30, 2010, CONSOL Energy closed on the $3.5 billion Dominion acquisition. The acquired assets exclude 1 trillion cubic feet of proved reserves and 500,000 acres of Marcellus Shale. Nearly all the Marcellus Shale acreage acquired is held by production. Such acreage has no drilling commitments, thus allowing capital to be allocated on the basis of economics, not simply to hold expiring leases. The majority of acquired acreage has a 12.5% royalty, except for about 20,000 acres held in fee, thus having no royalty. Most of the Marcellus Shale acres are in Central and Southwestern Pennsylvania and Northern West Virginia. On May 28 of 2010, CONSOL Energy completed a tender offer for all the shares that the CNX Gas common stock that we did not previously own at a cash price of $38.25 per share. CONSOL Energy paid $991 million to acquire 25.3 million shares of CNX Gas common stock and outstanding vested options. CONSOL Energy completed an equity offering on March 31 of 2010, of 44.3 million shares of common stock, which generated net proceeds of approximately $1.8 billion. And on April 1 of 2010, CONSOL Energy issued $1.5 billion of 8% senior secured notes that are due in 2017 and $1.25 billion of 8.25% senior unsecured notes due in 2020. Let's now turn to the markets where we see many positives. Given the continued projected growth in the Chinese economy, the shortage of high-quality metallurgical coal and the relatively low steel inventories, we anticipate that metallurgical coal markets will continue to provide strong, long-term pricing similar to what we have seen in the first half of 2010. The thermal coal outlook continues to improve due to the unseasonably hot weather in the eastern United States, the decline in inventories and increasing industrial activity. Also, inventories at utilities in our major market areas, which is the Mid-Atlantic and the South Atlantic markets, are lower than in other regions of the United States with inventories at some plants below 30 days of burn as of the end of June. The thermal coal market in Northern Appalachia is also being strengthened by CONSOL Energy's exporting of coal from its Northern Appalachian mines to Asia and South America as high-vol coking coal, and in Europe as thermal coal. Longer term, exports of thermal coal look increasingly more favorable. This is driven by economic growth in developing countries like China and India and shifting of traditional supply to meet these growth demands. Regulatory pressures in Central Appalachia continue to reduce coal supplies as permits become increasingly more difficult to obtain and cost increase. CONSOL Energy estimates that annual production from Central Appalachia will decline another 40 million tons by 2015. The issues in Central Appalachia, combined with the general economic recovery, are expected to increase coal sales opportunities and expand market share of CONSOL Energy in both the short and long term. CONSOL Energy's low cost Northern Appalachian mining operations are well positioned to replace production declines in Central Appalachia. We believe that coal will continue to provide the baseload of the nation's energy needs through our efforts during the last 10 years to improve operating efficiencies at our major coal production sites. We believe we are well positioned to continue to provide our customers with a stable, long-term supply of high-quality coal that will generate substantial returns to our shareholders. On the gas side, CONSOL Energy's position on the Marcellus Shale will allow us to be profitable in the current pricing environment due to the basis premium for being close to important northeast markets and our position as a low-cost producer within the Marcellus play. In summary, both our Low-Vol business and our High-Vol business are doing very well. The Thermal Coal business has improved considerably and the Gas business is expanding and outperforming its peers. This quarter's results show once again the value of owning shares in a diversified energy company that has best-in-class assets in four separate categories. We're talking about world-class low-vol assets at Buchanan, high-vol assets in the Pittsburgh 8 seam that is shipped out of our 100%-owned Baltimore terminal, the highest Btu thermal assets in the country and our Gas division's leading position and possibly the world's largest gas formation, the Marcellus Shale. CONSOL Energy controls the greatest concentration of energy in the eastern United States. CONSOL Energy has established itself as a company that generates strong earnings and cash flows by utilizing a sustainable model that provides financial flexibility. This flexibility enables us to react and adapt to changing economic environments and markets while continuing to prudently invest in our businesses. This quarter again demonstrated the financial power of being a low-cost, diversified energy company. We remain steadfast in our confidence in our business model. Our balance sheet and our status as a safe low cost producer enable us to effectively compete and produce exceptional earnings and cash flows. Brett, your comments on the quarter.

Thank you, Bill, and welcome to everybody. Bill has given a lot of details here, but I'd like to look at some of the major issues and look forward with the shareholders today. First of all, I'd like to talk about safety. Because of all the issues around safety and new laws being written in Congress or being contemplated, CONSOL has been very involved with Labor, as well as Congress to talk about the future safety, especially in underground mines and this is a critical issue to us. We take it very serious. We have influence on the new laws. We'll adapt to the new laws and we'll recommend to the government laws that makes the mines safe for individuals and eliminate risks for big problems as we've seen. We are committed to zero. Our people are committed to zero, not only on the coal side, but on the gas side as we see new technologies being developed in the Marcellus Shale. We look at our processes, we look at our techniques and we continue to be at zero from our gas company since 1994. We will continue to do that and our commitment is there, from the board level to the management level, all the way down to all the employees. Safety has no rank. Zero is a real number and we intend to drive the company towards that goal. We don't believe we're perfect, but we believe we can achieve a perfect place when it comes to the safety of individuals. Let's talk about assets a little bit. Coal assets, 4.3 billion tons from the position in the Pittsburgh 8 seam, I think the most prolific and valuable seam of coal in North America. We're in a very low-cost position there, high-margin positions you see what we've put out. And that we are committed to the Coal business and we'll expand that Coal business as the markets develop going forward. Let's talk about gas. Between CNX Gas acquisition all the way back in and the Dominion acquisition, we have a very powerful division, tight [ph] CONSOL of 2.9 trillion cubic feet of gas that is proven, with a lot more to prove out. Huge opportunities as Bill talked about that these opportunities do not have a timeframe on them. We will drill them and do it according to the value that we see in the marketplace on the timeframe that's good for our shareholders. Very high margin position, low-cost position there and I think what's interesting in any gas market that we've seen in the last 10 years, this division has value and has margins that is substantial to keep adding volume there. Two great assets that we plan to develop. One is the BMX Mine, I believe would be the lowest cost mine in the Pittsburgh 8 seam and one of the highest quality mines in the Pittsburgh 8 seam that would be sold as high-vol met coal into the international markets or in the domestic markets. Clearly, we made the acquisition on the Marcellus Shale from Dominion and to all the other assets they had on the E&P side because we saw the value and that value will be developed for our shareholders going forward. There's 750,000 acres of Marcellus Shale we will prove out to show that, that was a very good acquisition. And by the end of the year, and we'll have 30 wells in that to prove that and you can see the results as we announce. They're better than we thought it was going to be and we think that will just continue to be a great story for our shareholders. So growth in gas and coal are real to us. We have the financial strength to internally do this. Between our balance sheet and our borrowing capabilities to expand these values for our shareholder going forward. We are focused on creating shareholder value. We will develop low-cost assets in both coal and gas. We are investigating, monetizing non-core assets in coal and gas that are beyond our 10- to 15-year plan. We are serious about that. We intend to bring net present value to our shareholders in a proper way so as reflects in the share price. We continue to expand coal market segments in Asia, South America, Europe and both high-vol met coal, low-vol met coal and steam coal; and as you see, at the highest margins, I think in the industry. The acquisition of the Dominion E&P business in Appalachia has given us the opportunity to double our earnings capability on the same geologic, geographic, political and possible fuel footprint that we've been operating on since 1864. 70% of electricity fuel comes from these two products in the most energy intense part of the world. We believe we have the best position in both of those. We did not have to leave our backyard to add more value for our shareholders, and we believe that we can double our earnings capability by the end of 2012 by the acquisition of this Dominion assets. We are solidly in a very solid position market-wise on our met contracts for the year. We think they're great opportunities for next year. We will meet whatever the world price is on the met side and have the highest margin based on our low-cost position. Rising steam prices that we see now, based on a heavy burn in the winter and now a heavy burn in the summer, we see real value being created for the end of 2010 and 2011, as we negotiate steam prices in our major domestic markets. And we see real opportunity to continue to move coal into Asia based on the high-vol marketing that we've done recently. What we're seeing in the marketplace right now is the drag is in on the industrial load side of the utilities. The utilities are telling us that industrial load was off year-to-year 12% to 15%. It's a gain of about 1% per month, back on the industrial load. So there is a rebound in the economy and we think that not only strengthens steam coal prices, but will eventually strengthen gas prices as well. So having said that, I'd like to open it up and see what's on the mind of everybody and answer the question.

[Operator Instructions] And the first will go to the line of Bryan Singer of Goldman Sachs.

First question on cost, just wondering if you could give us your thoughts on the potential cost creep both as it relates to Northern Appalachia and Central Appalachia and what you're seeing on a company-specific basis, what's regulatory driven and what potential cost inflation you might be seeing beyond that?

I think if you look quarter-to-quarter, our cost is more related to volume than it is to regulatory issues. I think going forward, there will be some regulatory issues and that cost hasn't been decided put into our model yet as we see what the new laws so forth are. Keep in mind, Northern App coal is the lowest cost position in all of Appalachia coal. Central App tends to be a higher cost because I think there's a movement towards underground mining, a surge of underground mining based on lack of permits on surface mining. So you're going to see those costs rise. As it relates directly to CONSOL, I believe that we probably will stay in a position we're in, in Central App and expand our low-cost position in Northern App because it's much higher margin position for us and has better economics. We're not seeing a lot of pressure right now on commodities. Labor seems to be pretty stable, and I think if you look at the second quarter itself is more volume issue. As I've always said on these calls, CONSOL is very lumpy in terms of cost structure quarter-to-quarter. But over the year, we're very close to what we predicted and I think we'll be that way this year.

And secondly on the Gas business, can you give us an update, both on your interest in bringing in any kind of partner doing asset sales within your large Marcellus position and how you're thinking about potential well results out of West Virginia as you add a rig there relative to the well result in the recent well results you've seen in Greene County?

Well, on the latter, we're very optimistic about what can be done in the West Virginia area. The people that are down there and some other people have already developing down there are having very good success. We believe we can take that same success and move it forward. In effect, operations people -- Nick's actually talked to me about he thinks it could be as good as the Greene County area in Pennsylvania. So we're optimistic about that. But we will prove that out and we'll have a rig in there by the end of the month. So we're optimistic about that piece of it. In terms of the overall, we have a big footprint in gas, we have a lot of opportunity. There were other opportunities even beyond the Marcellus shale, in the E&P side of what we bought from Dominion and we also have the Huron Shale and the Chattanooga piece down south. We're seeing real opportunities in all of those. And what we look at as we put our 10- to 15-year plan together, clearly that is not what we would consider core value to us based on transportation and how it's located within the rest of the acreage that we have. We will find some way to monetize that and then we'll monetize that to the benefit of the present value to our shareholders, which will reflect in share price. That is all in operation. We're talking to people. We have a good plan in place and I'm very optimistic that this value is going to come back to our shareholders quicker than what we originally thought.

Our next question is from Shneur Gershuni with UBS.

A couple of questions, starting on the coal side. I guess I was wondering if you can give us some commentary about European thermal opportunities, kind of where you see inventories in Europe and the likelihood that you'll be contracting further for thermal tonnage into Europe for 2011?

I'll let Bob Pusateri speak to that.

Shneur, first I'll say this. We've been engaged over the last six weeks with several utilities in Europe and we are pretty far along with signing a term deal for a substantial amount of tonnage of thermal coal into Europe. We've also responded to several requests for proposals for other utilities in Europe. And we believe that we'll have some success in there as well. The inventory stages in Europe are coming down, even though they haven't had an extremely hot summer as we have had here in the United States. Inventories are still dropping. And as you can see by the API to index pricing, where it's now over 100, and we see that as very good for us going forward. We've signed some business for 2011 at prices around $68 a ton.

One more question on coal then one on gas. You mentioned in your press release you're kind of doing a strategic review with respect to some met coal reserves in Central Appalachia. What prevents you from actually deciding to actually go ahead and just execute and put through the reserves yourself rather than finding a partner? Is it cash flow related? And would you consider pulling back on some legacy gas drilling just to the gas prices to go after the higher margin coal opportunity?

We'll do what's best for our shareholder, net present value. We look at these assets in competition with each other, if there's a very high margins we can pick up there at the net present value level. Remember, the development cycle of gas and coal are on two different cycles so it's a matter of bringing the money back as quick as we can. When we look at Central App, clearly there are permitting issues in Central App, and we tend to have higher margins in the North. And so we'll look at all those issues. Now we'll either mine it, we'll partner or we'll sell it, depending on what the best thing for our shareholders are. It's all about giving value back.

With respect to gas, you're EURs for these wells were much higher than anything that we've seen out of you guys in the past. I was wondering if you happen to have IP rates or 30-day IP rates with respect to those wells?

The wells that we disclosed there were sort of the wells that were tied to the line in 2010 to date. And if you look at the 50-day average for the IPs that, that would correspond to, it's somewhere around 4.5 million a day.

And then that's what gives you the confidence of those EURs?

Yes.

And next we'll go to the line of Kuni Chen with Bank of America Merrill Lynch.

I guess just a question on the met coal reserves that you had talked about monetizing. Can you give us a little bit more color on that? Talk about capital spending that would be required if you develop it yourself. And can you also give us some details on the size of the reserve block?

Well, these are met coal reserves that we typically have permitted. We have mined them in the past, it's the Amonate area, I guess would be part of the heart of that area. The capital structure, we can get you those numbers. There's a lot of detail there. If we decide to go out with that, we'll probably put that into the market. But we do believe it has the capability of about go 5 million tons a year and we think it has EBITDA capability of about $350 million a year. So I think that it's a strong position. We'll either mine it ourselves or monetize it. One way or the other, our shareholders are getting value there.

How about the size of the reserve block that would help us to at least sort of think about the value of that?

Off the top of the of my head, it seems like there's about 80 million to 100 million tons there.

Common theme that we've seen, too, some of the other companies this earnings season is just underground cost moving up and lost productivity. What impacts are you seeing there? Do you think this starts more on the Central App region and then starts to bleed out to other underground regions?

I'll let Nick talk to you about that.

As a company, we probably spent somewhere in excess of $200 million a year on what we would deem or what others would deem safety and compliance. But when you look at the reality of that, the vast majority of that $200 million are also efficiency and productivity improvements because safety and compliance go hand-in-hand with productivity and improvement. When you look at the new regulations coming down, there's probably going to be a portion of that, that may result incrementally in our unit costs. But I think that would be in the minority. I think the bulk of it will ultimately resolve itself in increased efficiencies. We don't expect an appreciable change in our unit costs as a result of that.

And next we'll go to the line of Brett Levy with Jefferies & Company. Brett Levy - Jefferies & Company: In terms of the CapEx going forward based on where your plans are around current natural gas plays and that kind of thing, talk about what the number is for 2010, maybe even 2011? How much of it is the BMX mine, how much of it is development of Dominion or CNX Energy assets? Can you give a little detail around the CapEx going forward and what it's all going to?

Sure. We added $100 million for the year. That's going to the gas side. And most of that's around the Marcellus Shale development. On the BMX side, we are developing the mains for that mine. And that is a cost that we're incurring right now. And on the capital side, I would say we probably have committed $15 million to $20 million this year on the development of that. I think next year it could be as high as $100 million. And I think going forward, once the whole project's done, it'll be right around $500 million. To get BMX up and running to gain 5 million or 6 million tons a year. Brett Levy - Jefferies & Company: And so essentially, I mean just so I'll get the math right, you got to put $500 million in and you'll be getting $350 million of EBITDA out per year?

No, that $350 million that I was talking about is more related to the potential sale of Central App Amonate property. So still same properties that we've mined in the past. The EBITDA related to the BMX Mine is much higher. We can probably run some numbers on that, but it's going to be -- we expect that to be probably $35- to $40-tons margins on 5 million to 6 million tons a year, so that's much bigger number. Brett Levy - Jefferies & Company: But still quick paybacks?

Oh, yes, that's probably going to be one of the most profitable mines in the United States when it comes online. Brett Levy - Jefferies & Company: Do you have an overall CapEx number for 2011 for us, sort of as you now think about it?

We have not announced that yet. We typically announce that the first year.

And we'll go to Michael Dudas with Jefferies & Company. Michael Dudas - Jefferies & Company, Inc.: Talk about maybe the dynamics in the eastern coalfields. You're pretty aggressive on the Central App production declines. Are you looking at Illinois and PRB taking much of that and therefore, using your high-quality coal again? It seems like your strategy is put forward to sell outside the country at better margins. Is that where you see the mix shift being as your utility customers kind of figure out, not only the Central App production issues but also the new care rules with regard to scrubbers and emissions, et cetera?

Mike, this is Brett. I'll have Bob talk to you about that but first comment is, strategically, we're going to sell at the highest margin whether it's domestic or international. And I'll turn it to him for that.

Hey, Mike. When we look at replacement coal for Central App, we first take into account that the Illinois basin coal will come East, as well as the PRB coal. And in addition to that, we see some specific places where we're looking to put our Northern App coal. Given the fact that the railroads have been opened to moving our Northern App coal into the South, we see this as a huge market opportunity for us going forward. So we've already had begun discussions with a major utility in the South for Northern App coal as a replacement for Central App coal and we see this continuing. Michael Dudas - Jefferies & Company, Inc.: Brett, looking at your gas positioning in the marketplace, is it safe to say your investment in gas is driven by economics and the industry right now is still investing in other ways that's causing this oversupply? It's a pretty big pull on bulls and bears on what's going to happen to the gas market but I think, net-net, people are thinking gas is going to be a fairly wealthy [ph] (40:06) little price than what it was a few years ago. Is that something that -- is how you think about things as you add capital to new gas business?

Clearly, we're going to add capital where it makes the highest margin for us whether its coal or gas. And I think I've made that clear to everybody. We believe that there's going to be a big supply of gas coming out of the Marcellus Shale. We also believe it's going to take billions of dollars to develop it. We believe that the price of gas is more related to the industrial load in the United States right now than it is to supply. Say for instance, if our economy got hot in the next 18 months, we believe gas prices would rise pretty fast just based on supply. So a lot of talk you hear about -- people believe that Marcellus Shale is already capitalized. It's just beginning. And so it will take years to develop it out and you'll see a shift in supply in gas, but what you're going to do is see companies like CONSOL have the lowest cost position in any given market. In the meantime, we'll either deploy our money to the Marcellus Shale or will deploy it to the BMX project or both depending on where we see that these markets. So I wouldn't -- I remember in 2001 and 2004 where the prediction of $2 gas to $3 gas and then there was $4 gas to $5 gas, and every time that market spiked right behind that. So a lot of this chatter I think's premature because the gas supply is not that robust at this point in time. The demand is down, but the supply hasn't changed that much. Michael Dudas - Jefferies & Company, Inc.: My final question is, regulatory legislative issues in the U.S., how do you see those trends impacting one way or the other CONSOL Energy?

Well, clearly the issues around water, the issues around air, the issues around mining permits, all those kind of things, we strip supply to the marketplace. As we see the economy rebound, the demand for energy -- as you see in China. China just now is said that they're burning more oil than anybody else in the world. Guess what, their economy's on a full blast gross pattern. As ours comes back, we're going to need more energy and we think the capitalized on that is undercapitalized. We believe that'll drive prices and I don't believe in a hot economy there's enough energy capitalized in the United States and we think that will drive prices and margin for CONSOL Energy.

One other thing I wanted to say, before I said when we talked about Central App, I said about 100 million -- we would consider selling 100 million tons of reserves. I was just thinking about one piece of it. The total tons of reserves that we would consider in that area is about 300 million, because there's three properties and I was just thinking about one of them when I said 100 or so. I wanted to correct that on the phone.

Our next question's from Jeremy Sussman with Brean Murray. Jeremy Sussman - Brean Murray, Carret & Co., LLC: You talked in your press release I guess about our, and you mentioned on the call about, European pricing in the $68 range for 2011 and then a little higher I think $73 for 2012. When you think about signing term business, how did those prices kind of fit in with where your expectations are?

Well, Jeremy, we were pleased with the $68 and $73 number posted for '11 and 12. What we're going to do is we're going to layer in our open position for '11 and '12 to make sure that we give ourselves enough flexibility in the event that if something happens here in the United States that we have other outlets for our coal. And given the fact that we are the low-cost producer in Northern App, as you can appreciate with those types of selling numbers, we make a substantial margin. So we're very pleased with the outcome of those negotiations. Jeremy Sussman - Brean Murray, Carret & Co., LLC: As I think about your full year production this year and next, with everything, low-vol, high-vol and thermal, what type of annual sort of production figures should we be thinking about here?

For 2010? Was that your question? Jeremy Sussman - Brean Murray, Carret & Co., LLC: Yes, and '11 if you could.

2010. I don't think we've announced '11. The 2010 is going to be between 62.5 and 63 million tons. Jeremy Sussman - Brean Murray, Carret & Co., LLC: And then just lastly same thing on the cost front, relative to Q1 costs versus Q2 costs, what do you think the back half is going to shake out?

I think it's going to be -- actually, I believe it's going to be right in between the two quarters because we're going to have an upward tick in production for the third quarter and it will be a pretty real strong fourth quarter it looks like from a production side the way the plans and the mines are laid out right now.

Next we'll go to the line of Bill Eagan with Raymond James.

I just wondered maybe you'd talk a little bit about how the Bailey coals in China. Are you seeing strong demand for that?

Sure. Bill, during the quarter, as you can see from the release, we shipped roughly 700,000 tons of our high-vol Bailey coal into China. Our estimate for the balance of the year is roughly another $1.1 million for a total of 2.7 million tons for the year and I think that's consistent with what we said in our first quarter release. The average price though for those tons in the last six months of the year will be slightly over $76, and it's a combination of our Bailey coal, as well as about 200,000 or 250,000 tons of our Blacksville coal.

Maybe initial expectation for next year...

Well, we spent the year, at least the first six months, establishing CONSOL as a major player in the global coking coal market. Next year, at the very least, we would duplicate our efforts for 2010, so we're looking at, at least 2.7 million tons for next year and we're hoping that things will improve and I will be able to push that number higher for 2011.

And we'll go to Paul Forward with Stifel, Nicolaus. Paul Forward - Stifel, Nicolaus & Co., Inc.: Just following up on that last question, how far apart are we -- as far as we know there's been some softening in demand for the export high-vol. How far apart are we in selling it as a high-vol versus selling it as a thermal? Are we close to the point that the thermal markets have picked up and you don't have that same comp price motivation to keep moving the volumes to the export market as a high-vol?

Paul, if we were looking at the short-term spot market for delivery in September, I would tell you that the gap between those two numbers is definitely shrinking. For a Bailey-type coal, it's $80 versus $73 to $75 here in the domestic. Longer-term, it's probably $8 for 2011 would be the difference. Now given the fact that CONSOL is able to control the transportation, we believe that we can possibly do better than $80 for 2011 in selling coal into Asia. Paul Forward - Stifel, Nicolaus & Co., Inc.: Shifting over to the production side, you had about a -- when you compare the first quarter and the second quarter on thermal coal production, you were down about 1 million tons in the second quarter. I was just wondering, we've talked about some of the cost pressures so I was just wondering was the decline part of a desire by CONSOL to work down its inventories, which had gotten up to 3.8 million tons at the end of the first quarter or was the decline more related to become unplanned productivity issues related to workers' safety oversight?

I think two things happened there. One is, we don't like to build inventory as you know. So I don't think we're working as many Saturdays as we could and I think we did that on purpose. The other thing is we did want to bring that inventory down. But in a mining cycle of a big mining company like this, a couple of things happen. One is, you decide whether -- depending on the market, the inventory and how many Saturdays you're going to work on all these long walls. You look at your development cycle, you look at your movement of equipment and then you look at how all that fits over the years. So our development is on pace, our inventories are ripe, our cost structure was a little bit higher and we had a couple of roof falls on major belt lines in the second quarter that actually took out some productivity. But if you look at it over the year, we're in a very solid development position as well as financial position on the Coal side. So I would say it was just a lumpy quarter but we are consciously looking at how many days we work based on inventory. I think you hit it on the question.

Our next question is from Pearce Hammond with Simmons & Company International.

There's certainly been a lot of foreign interest in the Marcellus Shale and with prices being paid well above what you guys bought in at. How do you see the timing on the closing of the JV and then what major criteria are you utilizing to evaluate a potential JV?

The opportunity to JV, we really look at the asset base from two components. And remember, both of these components the same issue applies. 95 plus percentage breadths that is held by production. So the treadmill, so to speak,, that many in the base that are on with regard to drilling commitments, that does not apply to us. And that's critically important because, a, it buys us timing and, b, it creates optionality for any potential buyer our JV partner that would want to come in. They know that they'll be able to drill at higher rates when gas prices are high and they'll be able to stop or throttle back when gas prices are low. If you have drilling commitments, you can't do that. You got to drill to hold the leases. So with that being said, you look at the 750,000 acres, it's two broad groups. One group are the acres, as Brett said, that we'll get to in the next 10 to 15 years, throw in development plan. It's built in, we got the operating cash flow to get to that. And frankly, that math becomes pretty simple with regard to a JV or they're willing to pay more than we think we can do with it on our own development plan. The second group are the acres we're not going to get to. And that's where the quickest path to monetization outside of our core Marcellus area that we operate within would be either sale or the lease.

As far as timing of getting something done, do you think it's before the end of this year?

By the end of this year we'll know definitively what the northern West Virginia and Central PA acreage positions look like because of our drilling program so I think we'll have a much better view on our 10- to 15-year drilling development plan on a standalone basis. And at that point, I think we'll be in a much better position to see not just what asset-based portion we want to monetize, but what the market opportunities are with regard to it.

Keep in mind we'll have four rigs running by the end of the year, which gives us a lot of information on where we see core values and give us a good look at this. In the quarter we're talking about, we were only -- I mean we only closed it. We had two months in that quarter when we closed it. So we're doing a lot of evaluation but that evaluation from my perspective as the CEO, it's coming along very well with a very good plan.

And then a final question on our gas hedging policy. No change in hedges for '11 and '12 but yes we're adding another rig here towards the end of the year. So if you can update your gas hedging policy?

I think the hedging decisions come down to the same types of issues we spoke about earlier, rate of return, NPV-driven. We don't know what gas prices are going to do any more than anyone else out there with regard to the short or the long term. So I think, moving forward, with gas being a higher proportion of what we're doing to what we've done historically, a bigger balance between coal and gas, we probably will consider additional hedging going in to calendar years. We're going to 18- or 24-month strip periods as a matter of policy. Now what that level is and how much we hedge and when, we're still working on that. It begs direction.

Our next question's from John Bridges from JPMorgan. John Bridges - JP Morgan Chase & Co: Just a bookkeeping question, and a bigger one. what sort of DD&A should we work with going forward for the new and large company?

You mean Dominion assets? The conventional assets are probably about $2. And Marcellus Shale is, right now, it's probably about $1.80, $1.90. We expect that to go down as we get more volumes there. John Bridges - JP Morgan Chase & Co: Brett, I hear what you're saying about the big advantage to CONSOL of not being forced to drill on these assets. But from an investment perspective, that's a double-edged sword because where you got investors who are looking for shorter-term performance, then it means that the benefit of those we'll not be seeing for some time. How do you square the circle between the great strategic position you've got in this new gas portfolio and the need of investors in a sort of 12-month contract?

And obviously, what I said was, we are going to monetize and move the value of this back to our shareholders as quickly as possible. So when we look at the core of what we can do ourselves or the best economics, whether it's a JV or whether it's our own balance sheet or whether it's a sale, that's all going to be evaluated. We're not going to put this and lock it into the ground. It's nice to have that optionality which doesn't put us to where we're borrowing money to whole leases, which is a very inefficient way of doing that. That was the point I was trying to make. The other point I'm trying to make is, we're going to bring the value of this all forward. And we're going to have a lot of data within two months that could give us some very specific answers about what we're going to do. So that's maturing, John, and I can tell you this. We will bring it forward because I said it on the last call, our commitment is to bring this value forward to our shareholders.

We'll go to Dave Gagliano with Credit Suisse. David Gagliano - Crédit Suisse AG: Unfortunately stock's taking a bit of a hit today and I think one of the issues is the underlying operating results in the coal segment, which you've given us some really good information to help explain why Q2 isn't representative of the next few quarters. But I was hoping to try to avoid some similar surprises in quarterly volume variability. And can you give us a bit more detail on the expected rebound in Q3 and Q4, i.e., timing of long wall moves, minor vacations, things like that? And are those roof fall issues now behind the company or are you still working through those...

I don't want to emphasize roof falls. I mean, that is part of it but roof falls happen every year and when the mine drives down, so forth. What we would expect is about 15.2 million tons of production in third quarter and about 16.5 million tons in the fourth quarter and that's the way we look at it now. So the cost structures associated with that difference in the 15 million tons is in the second quarter. But if you look at overall, we're going to be between 62.5 and 63 for the year, our cost structure is going to be very close to what our plan was to start with. David Gagliano - Crédit Suisse AG: So there's basically no change to the outlook

No. David Gagliano - Crédit Suisse AG: And just on the cost, you mentioned earlier that the cost will be between Q1 and Q2 numbers. And I'm just wondering, with the uptick in production in Q3 and Q4, why they wouldn't be below?

I think the question was about the second quarter or the third quarter. I would expect the fourth quarter to be more like the first quarter or even better.

And we'll go to the David Lipschitz with CLSA. David Lipschitz - Credit Agricole Securities (USA) Inc.: Over the next two, three, five years, what do you think your asset base in terms of production will be and how will costs be impacted by that, do you think?

On the Coal side? The Coal side we'll see up until the end of 2013 that that same production level that we're looking at with regard to 2010, give or take a million tons here or there, depending on market conditions that we take our lead from the Sales group on that. And the cost structure should be somewhat similar to what we're seeing this year with regard to that. So I'll call it steady state for lack of a better term on the Coal side until the end of 2013, 2014, when BMX comes online. On the Gas side, we would expect our unit cost to decline from what we're seeing currently because at some point with production growth ramp up in the Marcellus Shale, we're going to start to see the economy to scale for the capitalization we've done to date with regard to midstream and process and range, and all of those things.

And then just keep in mind on the Coal side though is that even though costs are extremely important when we look at those, we really focused in on margins and margin expansion. So there'll be certainly be opportunities for us to capture some business that we'll look overall as relatively high-cost. But if we expand our margin, will get into those businesses. David Lipschitz - Credit Agricole Securities (USA) Inc.: Just a quick maybe accounting question, last quarter you had 900,000 of coking coal signed for next year, 170. Now you have 1.1 million at 160. What was that 200,000 tons to bring the price down?

I think 100,000 of it was a settlement that we did and where we sold 100,000 tons of Buchanan at a $20 margin. That was one of it. The other 100,000 tons I don't know.

Dave, the other 100,000 tons is just some carryovers from some previous years that we're showing that we'll have to fulfill those obligations for 2011.

Our next question is from Dave Katz from JPMorgan.

The non-controlling interest balance on the balance sheet went from a strong positive to a negative. Now I understand why it went down following the CNX Gas transaction but I was curious why it's actually showing a negative balance?

You're right. It's a technical accounting issue. It has to do with variable interest entities and it's a drilling company that we've made some guarantees to. And as a result, we have to show them consolidation and it shows up in that line. As you said, it's totally immaterial and it's really not significant going forward.

With that, operator, I think we'll call an end to the questions. And I'll be available for the rest of the day. If anybody has any follow-up questions, I'll be glad to try to answer them for you. Could you, John, please instruct our callers on the replay information?

Certainly. Ladies and gentlemen, this conference is available for replay. It starts today at 12:30 p.m. Eastern time and will last until August 5 at midnight. You may access the replay at any time by dialing (800)475-6701 or 320-365-3844. The access code is 164326. That does conclude your conference for today. Thank you for your participation. You may now disconnect.