CNX Resources Corporation (CNX) Q3 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 Brandon Elliott - Vice President of Investor and 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

Brian Singer - Goldman Sachs Group Inc. John Bridges - JP Morgan Chase & Co William Eagan - Raymond James Brett Levy - Jefferies & Company Shneur Gershuni - UBS Investment Bank Michael Dudas - Jefferies & Company, Inc. Justin Fisher - Goldman Sachs David Gagliano - Crédit Suisse AG Paul Forward - Stifel, Nicolaus & Co., Inc. Jeremy Sussman - Brean Murray, Carret & Co., LLC Mark Liinamaa - Morgan Stanley

Ladies and gentlemen, thank you for standing by, and welcome to the CONSOL Energy's Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference call over to the Vice President of Investor and Public Relations, Brandon Elliott.

Thank you, John. I'd like to welcome everyone to CONSOL Energy's Third Quarter Earnings Conference Call. We have a full house in here today to help answer your question. In the room, we have Brett Harvey, our Chairman and CEO; Bill Lyons, our Chief Financial Officer; Nick Deluliis, our Chief Operating Officer; Bob Pusateri, our Executive Vice President of Sales and Marketing; and Dan and I are here representing our IR team. Today, we will be discussing our third quarter results as well as our outlook for the remainder of 2010 and some comments about 2011. Obviously, any forward-looking statements we make or comments about our future expectations are subject to the business risk we have laid out for you on our press release today as well as in our previous SEC filings. With that said, we will start the call today with Bill Lyons.

Thank you, Brandon, and thank you, everyone, for joining us this morning for CONSOL Energy's Third Quarter 2010 Earnings Conference Call. The third quarter 2010 continued our string of financially strong and operationally significant quarters. Revenues continued at a record pace with third quarter revenues of $1.3 billion, which is up 23% from the third quarter of 2009. This growth was driven by over $1 billion of revenue from our Coal division, which was up 22% from the third quarter of 2009. For the nine months ended September 30, our total revenue was up $3.8 billion, up 15% from the nine months ended September 30 of 2009. Now revenue growth is critical as it provides us the capability to expand and develop our large asset position. Net income was $75 million or $0.33 per diluted share for the third quarter of 2010. This compares with $87 million or $0.48 per diluted share in the 2009 quarter. For the quarter, adjusted EBITDA was up $347 million or 45% higher than the adjusted EBITDA of the third quarter of 2009. We are pleased with the third quarter operating results. On the Coal side, 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 a wide range of maintenance while the mines are not in operation. These conditions normally result in lower production and higher operating costs in the third quarter. The Coal segment produced a total of 14.7 million tons in the third quarter of 2010 compared with 13.5 million tons in the third quarter of 2009. The quarterly production, combined with a reduction of steam coal inventories, resulted in 15.6 million tons of sales in this quarter compared to 13.7 million tons in the 2009 quarter. Coal inventories were 2.2 million tons at September 30, of 2010, and we currently plan to reduce Coal inventories by another 500,000 tons before the end of this year. On a GAAP side of the business, the quarterly production record of 35.8 Bcf was attained. This was 44% higher than the 24.8 Bcf achieved in the third quarter of 2009. The record was achieved due to the addition of the Dominion E&P business, which occurred on April 30 of 2010, as well as the ongoing drilling program in our coalbed methane in Marcellus Shale operations. Our production record was also been achieved in the third quarter without the Dominion E&P business. Now the Dominion E&P business, this acquisition has changed the mix of our production makeup. Historically, CNX Gas production has been about approximately 90% coalbed methane, with the acquisition of approximately 65% of our production is now Coalbed Methane. So just to summarize that, in 2009, 90% was coalbed methane, about 10% was Marcellus Shale. In 2010, coalbed methane will be about 65%, Marcellus remains 10% and now conventional gas is 25%. Now this conventional gas is higher cost operations, and this filtered in into the increased cost we had on the Gas side. Now the Gas segment operating cost were $4.08 per Mcf in the third quarter of 2010 and this was compared to $3.44 per Mcf for 2009. The increase was primarily attributable to the 40% per Mcf higher depreciation, depletion and amortization cost, $0.14 per Mcf higher lifting costs and $0.07 per Mcf higher severance cost in a period-to-period comparison. Now the increase in DD&A was primarily due to the acquisition of the Dominion E&P business, which was primarily reflected in conventional gas. Now higher lifting costs were due to higher well tending cost, and again, primarily due to the acquisition of the older Dominion conventional wells having a higher cost structure than our historical results. And finally, the higher severance cost result of higher average realization. And again, this is done before the impact of the hedging program. So you can see that overall, our coalbed methane cost really haven't changed much, but the increase in cost is attributable to the increase in our conventional Gas business. Now there were two financial accruals that were made in the third quarter that are worthy to mention. First is Fola reclamation. At our Fola operations, we accrued $28 million related to future reclamation work at that complex. This charge is the result of the final phase of a comprehensive engineering view of the reclamation plan that we started in the first quarter of this year. The charge is the result of changing market conditions, permitting issues, new regulatory requirements and the resulting change in mining plans. Mining in some areas is anticipated to be curtailed early than originally anticipated. And in some cases, the quantity of material required to reclaim the operation in its present state has increased. The second item is in Mine 84. Mine 84, we took a $14 million non-cash charge that was related to the abandonment of a portion of the previously-developed area of the mine. A change in the mine conditions resulted in an area of the mine being sealed with no future plans to re-enter that area. Charges previously capitalized were expensed to reflect this change. Our operating units in both the Coal and Gas divisions are working in accordance with plans. The safety of our employees and contractors, the stewardship of 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. Net cash flows from operations for the third quarter of 2010 were $373 million, that's up 130% from the third quarter of 2009. Net cash flows from operations for the nine months of 2010 were $879 million. Now if you reference the net operating cash flows for the full year of 2009 at $945 million and for the full year of 2008 at $1.03 billion, you can see that we are well on our way to matching or exceeding the strong cash flows of the past two years. Substantial and consistent cash flows from operations are critical to our success and provide the financial flexibility to invest in key projects or to adjust to unforeseen economic circumstances. Our financial flexibility was also strengthened in the third quarter by the successful refinancing of $103 million of the industrial development bond associated with our wholly-owned terminal in Baltimore, Maryland. The new bonds mature in September 2025 and carrying an interest rate of 5.75%. The previous bonds were to mature on December 10 and October 2011, and carried an interest rate of 6.5%. Our $1.5 billion credit facility we have on the CONSOL Energy side, $136 million of outstanding borrowings and $268 million of outstanding letters of credit, leaving approximately $1.1 billion of capacity at September 30 of 2010. CNX Gas has $700 million credit facility, had $78 million of outstanding borrowings and $15 million of letters of credit outstanding, leaving approximately $607 million of capacity at September 30, 2010. We have no debt due until March of 2012, and that's $250 million. Capital expenditures for the third quarter were $244 million compared to a prior year third quarter of $193 million. For the year-to-date period, capital expenditures were $822 million compared to $689 million. Capital expenditures for the third quarter were about 55% attributable to the Coal segment and 45% attributable to the Gas segment. We continue to spend capital within our cash flows that we've generated from operations. We continue to invest in high-return projects in both the Coal and Gas segments of our business, while remaining disciplined to maintain financial flexibility, with strong operating cash flow generation and available credit capacity to adjust to changes in the marketplace or to these unforeseen economic circumstances. In summary, both our low-vol business and our high-vol business are doing are doing very well. The Thermal coal business has improved considerably. And overall, the Gas business is expanding and continues to grow production volumes. This quarter results showed again the value of a diversified energy company that has best-in-class assets in four separate categories. This a low-vol assets at the Cana [ph] (0:29:21), the high-vol assets in the Pittsburgh scene that can be shipped out of our wholly-owned Baltimore Terminal and the highest Btu thermal assets in the country and our Gas division's leading position and possibly the world's largest gas formation, which is the Marcellus Shale. CONSOL Energy controls the greatest concentration of energy in the Eastern United States. We remain steadfast and confident in our business model. Our balance sheet and our status as a safe, low-cost producer enables us to effectively compete and produce exceptional earnings and cash flows. With that, Brent, your comments on the quarter.

Thank you, Bill, and welcome. From my perspective, to all of you, it's always good to talk about the quarter and give you my views on where we're at. First, I'd like to talk about safety. We're still improving towards zero. Like I said on the last call, we're not perfect, but we would like to achieve perfect in terms of being at zero. Our Gas division has been at zero for many, many years and continues to be there. We're very proud of that, and that's excellent performance. Our River operations in our port facilities are at zero and have been there for a long time. We're working hard to get our underground mines at zero and we will continue to do that. We've made great strides this year towards that, and we will continue to make that our number one priority. One thing I want the shareholders to be aware of, many of the things we do, we do to get to zero beyond the law self. Many actions that we take are things that are done as we assess the risk of the mines, we do it for the good of our employees on the road to zero. Sometimes, a lot catches up with us and it becomes part of law, and sometimes we accelerate beyond the law with the goal of protecting our people. We will always do that and continue to do it going forward. Let's talk about the economy a little bit. The U.S. economy is growing, 2.5% to 2.8% this year, we believe. We think that's sluggish. We're concerned about the lows on the gas side as well as the electricity side. But that doesn't reflect in the coal price, and I'll talk about that in a little bit. When you look at the world marketplace, we think China is at 10% growth this year. And we think they're going to be at 8.5% to 9% next year. And that really adds a lot of value to our port facilities and our ability to move coal offshore into a growing world that is very hungry for the Btus that we create, especially being a low-cost producer with facilities that can move coal around the world. Let me talk a little bit about our assets. One thing that I don't talk a lot about is our land assets, which really are the base of CONSOL Energy. We have 500,000 private acres, which gives us access to 2.5 million to 3 million acres just on the coal footprint, and now on the gas footprint is very much similar. Our coal position is very valuable, as everybody knows. But what I always want to drive is the fee position, 70% of what we own on the coal side is in fee, and that is owned by our shareholders. It is not being rented, so to speak, from the federal government, and that is an asset that we will always have and our shareholders will benefit from that. We are the low-cost producer of high-vol, low-vol of steam coal in the highest valued region of the United States. That is a great position. We will continue enhance that over time. That is our legacy, and we're committed to that. We're also the low-cost producer on the Gas side. As we develop the Marcellus Shale -- now keep in mind, the Marcellus Shale is an infant in terms of supply to the region and to the nation. But it has a very high potential. That's why we made the purchase that we did. That potential is right underneath our feet, underneath our coal seams and right in our backyard of this huge footprint of acreage that we have. That's the value of the deal. Now that is a long-term deal. And as I talk about gas prices going forward, you'll understand that this is going to create huge value for our shareholders going forward as gas prices fluctuate between where the low price they are today to the high prices that we see in the future, based on demand by the utilities. We are following our customers. Our customers are going to build gas plants. We will supply them, and that will be the mantra of this company on the gas side going forward. Now let's talk about the quarter a little bit. Third quarter is always a tough quarter for us. It's a vacation quarter. We do a lot of projects. Our costs rise. Our tonnage is typically done and reflects that in the numbers that you see. But as I talked to you last quarter, I said that would probably happen. When you look at the year though, you can see we're going to be at a higher tonnage for the fourth quarter. If you look at last year in total, our average cost across the board were about $44. And I think by the end of this year, we should be around $47 in total across the board. And that's including absorbing the higher royalties on the met coal coming out of the Cana. The cost structure for Cana rose dramatically based on royalties more than anything else. We're okay with that, because we have expanding margins to go with that. But it does affect the overall average cost and gives a reflection, I think, to our shareholders that the cost are rising more rapidly than they really are in terms of real cost at the mines. Let's talk about gas. We have a great opportunity here in the Marcellus Shale, as well as everything as we bought from Dominion. Gas prices are low. We see our competitors under huge amounts of strain. They're in position where they're going to lose leases if they don't drill. Most of everything we have, in fact, over 95% of what we have is held by production. We don't have to drill it. And we won't drill it in today's world of gas prices for growth. We will drill it to delineate the value of what we have, and then we will assess what we have and add capital based on the value to our shareholders going forward as we see gas prices rise, which we believe they will. Keep in mind, the demand for gas on the generation side is going to exponentially move and we'll be ready for that. We think that will drive price and drive value, especially as we see the pushback on coal from the EPA and others, especially in this region. So having said that, I think we're well set up. Our Gas business will show discipline on that side. And we'll also grow the Coal side based on where we see the markets. I'm very enthused about the world market for coal. I feel strongly enthused about even the steam markets. In a poor economy of the United States, the steam markets tend to be very strong. We think that the real strength of the economy rebounds, and we think we'll have real possibility and strength to expand our margins there going forward. And with that, I'd like to open it up for questions.

[Operator Instructions] And first from the line of Michael Dudas with Jefferies. Michael Dudas - Jefferies & Company, Inc.: Just looking at your overall 2011 guidance for production and the breakdowns. Maybe you can give a little bit more view relative to your expectations on met and thermal volumes here and abroad. Is there still a hesitancy about the turn in the U.S. economy on the thermal side and that's why we were going to hold back. And on the met side, is the market still quality oriented now as opposed a few months ago or less-quality oriented and that could shift some of your high-vol tonnage to different spots?

Well, there are two things going on there. One is on the thermal side, which is a big part of our business, there is pressure on productivity based on the compliance to the law and everything else that we're seeing. So some of our tonnage, I think we're hedging ourselves a little bit, and we'll have a drop in productivity next year and we'll feel that in terms of tons. We also have taken the Emery Mine out of the equation year-to-year, which is about 1.1 to 1.2 million tons a year. So when you put all that together, you'll see us being a little bit cautious. We think on the Steam side, on our sales it's going to be a very solid year and we think very solid prices. But we're not going to produce more that needs to be produced. And I think that's where we see it right now. On the Met side, Cana coal is the strength of our Met side, and we see it is going to get demand very high prices, and it will be the highest met product we have. And we see continuing demand in Asia, and we believe we could go anywhere from 3 million tons a year on the high-vol side coming out of the Bailey-type operations, up to 5 or 6 million tons a year, depending what the demand is. So we're not negative year-to-year. We think we'll do as well next year as we did this year on the high-vol Met side, and we think the demand for this could rise. But we're not ready to say that yet till we have it in our hand. Michael Dudas - Jefferies & Company, Inc.: And the announcement that you and [indiscernible] (0:39:57)are getting together in India. Is that something that's sort of 2012 or 2013 event? Is it something that could show up in the numbers next year?

I'll let Bob Pusateri answer that.

Mike, last year at this time, we were not shipping any of our high-vol coal to China. And so we've learned a lot since November of 2009 when we started this venture. And we made a few mistakes, but what we learned we felt that you could take that and move it into India to look at the possibility of not only moving high-vol coal into, but also participating in a growing thermal market in India. So between CONSOL and ourselves, we believe in 2011, we will have success either on the metallurgical side or thermal side in India. Michael Dudas - Jefferies & Company, Inc.: On your discussions in your expectations for capital in the Gas side, I assume we'll get those numbers when you report fourth quarter results. You've mentioned about you're going to drill to delineate but not for growth at this gas price environment, is that something that's a change from what you had thought early on or is it something we should kind of a focus on as you move forward with gases in a sub $4 strip environment?

Well, I think we always said we'd delineate what we have. And into that sense, it is growth in terms of volume. We won't be real aggressive on the growth plans and we originally had at sub-$4 levels. I think you hit that right on the nose. Once we delineate what we have, from my perspective, we know that guess is there. It looks a lot like a storage build that needs capital. That capital will be applied when we see the right rates of return for our shareholders because we already own the asset and I can't be more direct about this, this is held by production. We'll drill it when it's ready. We don't have to drill that to survive.

The next question is from Shneur Gershuni with UBS Securities.

Just starting on the Coal side, you've contacted some tons into the European market. I was wondering if you could talk about that opportunity a little bit and tell us, are there going to be any limitations with respect to export capacity issues, given that you're already shipping metallurgical coal from some of your existing export facilities? And then secondly, if you can talk about it, that marker was to really move up how high you can potentially flex your overall production upwards if the market is to move up?

Shneur, first I'll say, what we did was we put tons into the European thermal market on a term basis. And the tons are a blend of both our Bailey coal and our higher result for Robinson Run coal. And we thought that it was necessary for us to go out and to actually take the business and using our terminal facility through Baltimore, we were able to contract this for a three-year deal. We are currently in negotiations with several other European buyers, and we're talking about prices higher than what we took the first tranche at, and we'll continue to push that price up. As you've seen in recent days, the API II index price has gone and stayed above the 100 mark, and we'll use that index to continue to grow our business as long as we see the opportunities in Europe being better than those that face us here in the United States. As far as terminals go, we have 12 million tons of capacity through Baltimore. We are in talks with the CSX for acquiring additional space of their Chesapeake terminal. And on the Met side, we have $4 million to $5 million tons of capacity at Lambert's Point. So we don't see for ourselves terminal capacity being a constraint in 2011.

I guess it's kind of a two follow-ups to that. One is that you sort of talked about low 60s tons right now as a production rate for next year. If that market was to really accelerate upwards, can CONSOL bring on 2, 3 or even 5 million tons worth of production next year on an annualized run rate?

I think CONSOL would do everything that it can do to shift around value inside the 60 to 61 million tons that we're looking at. But really, the big growth and the biggest growth in Northern App is going to be the BMX Mine, which we can bring on late 2013 or '14, and will be specifically for that market. For us to push the mines or eat up development will probably not be a good idea, but we'd probably change our mix on the 60 million tons to hit some of that marketplace.

Just shifting over to natural gas and a follow-up to my questions there, is it fair to say that there's a distinct possibility that we could see you pull rigs from all of your legacy properties, like the Greene Country region where you've delineated. You know where the gas is and really move them to the recently acquired Dominion acreage as well as seeing what you can do with the Utica Shale in Ohio?

Nick, why don't you give your thoughts on that?

As Brett said, we're going to have the focus on the Marcellus drilling side of things, at least for 2011 to be on delineating the three large regions within the Marcellus. We'll call it sort of the Westmoreland County, Indiana County, Corridor Greene County, Pennsylvania and then last but not least North and West Virginia. So at any given point in time, under just about any foreseeable gas price, we would have a rig in each of those regions further delineating the opportunities. And they're doing that literally as we speak with regard to being out across these three areas. The Utica Shale and drilling beyond delineation of those three areas in the Marcellus, that's where we look at opportunities above and beyond that, and we'll probably going to want to look at and explore horizontal well in the Utica sometime next year and follow that of course on our open-flow unstimulated vertical well. And with regard to drilling beyond that in the Marcellus, that's what Brett's going back with regard to being a function of gas price. And we still see 170 Bcf as our production bogey for next year and 350 Bs in 2015.

And one final question, just as a confirmation for some of Bill's comments. You've mentioned that you'd converted some of the capital expense for Fola and put it through as a natural expense for the quarter, I was watching if you could quantify that on a per ton basis so that we can better understand the impact with respect to the quarter?

In terms of converting that, this was reclamation. And this is going to be future reclamation. We incurred during the year about a $81 million of total charges. And it's hard to put it on a per-ton basis because some of this area were areas that we just won't mine anymore or we had to curtail the mining. So, Shneur, I don't know if it's relevant to try to do that on a per-ton basis.

One me comment on that reclamation that is very frustrating to have the rules changed as we're trying to get things done out of an operation like Fola. And the regulatory environment is very difficult for surface mining. As we all know, in West Virginia, we don't have very much exposure to. But where we did, we're making sure our books are right and we're meeting the proper way to book these things. So it's irritating to management, but if you list the overall operations and our ability to produce on the core business, we're doing very well.

The next question is from David Gagliano with Credit Suisse. David Gagliano - Crédit Suisse AG: I was wondering, first of all, can you break down the your $60 million ton in 2011 volume target by thermal versus high-vol met versus low-vol met? That's my first question.

Certainly. On the steam side, the total is roughly about 54 million tons of steam. 3.3 million tons of high-vol met, and the balance of 4.3 million tons or so, 4.4 million tons will be Buchanan low-vol for a total of 60 million tons to 61 million tons. David Gagliano - Crédit Suisse AG: And then the targets for the 60 million tons target in total, works out to I think about a 6 million-ton decline versus the run rate in Q4. I guess the Emery is about 1 million. What accounts for the other 5 million-ton decline? Is it just holding back production or are there other constraints at the mine?

Dave, the fourth quarter production number is historically one of our stronger quarters, and when you look at this year's fourth quarter, it's certainly the case, as well as the timing with regard to longwall moves not hitting in the fourth quarter when they hit in the third quarter. So taking the fourth quarter number bogey that we've got, multiply it by four is not a good way of estimating. This goes back to the variability and the lumpiness in our quarters with regard to things like vacations, longwall moves, and scheduling. David Gagliano - Crédit Suisse AG: The third quarter, the full year 2011 is consistent with the third quarter, which is always the lowest quarter. So what I'm trying to figure out is are there other things driving that? What are the longwall moves? Where is the volume coming out of, is basically what I'm trying to figure out?

Emery is the big driver where Emery was in the production mix earlier this year. It's been idle, until that market rebounds it's going -- right now, were assuming 0 tons of production at Emery for 2011.

And so that's taken you from 63 down to 62. If you average the other million over it, I think we're being conservative about what we're going to do on productivity. And so I would say that we're probably going to be 1 million tons less just based on being cautious about the new laws that we're seeing. David Gagliano - Crédit Suisse AG: My last question, you talked the value of the gas in the ground. In fact, you don't need to produce because you own it. Then you talked about the weak gas price and the willingness to hold back. But you have reaffirmed your target to grow gas lines by 34% year-over-year, why grow the volumes much in 2011 if you don't to need to do it?

There's national growth based on delineation. I think it's our obligation to the shareholders as well just to look at what our core is going to be based on this. We're still developing at low levels compared to all the other gas players. If we got three to five rigs out there, that's still half of what we're seeing with our competitors. We're having a lot of success and that's creating a lot of gas. So I think once we delineate that, and I think it will be about mid year there, then we'll decide what we're going to do on the capital structure on the Gas side and going forward, based on where see forward-looking prices. But that was a good question, obviously, you're going to get a lot of gas on delineation. And I think that's just prudent.

And next, it will be Jeremy Sussman with Brean Murray. Jeremy Sussman - Brean Murray, Carret & Co., LLC: It's certainly good to hear about all the interested parties for the sale of the non-core met coal assets. I guess you probably can't get too granular, but maybe broadly speaking, any update on your thoughts on kind of what you're expecting on that front versus maybe where your initial thoughts were when you first started the process?

I'm very pleased that there is a lot of interest in it and I thank that people are realizing that's a valuable asset. It's not good for me to talk about what the expectations are right in the middle of the negotiations and the presentation. But I will say that I'm enthused about the number of players, about the interest, about them understanding what a valuable asset it is. And if we don't get the price we want, we'll get the value of that ourselves through mining it. It's just taking a little bit longer because there's so many people coming through. The schedule probably slid 30 days because of it, which we're okay with. That's a positive slide. Jeremy Sussman - Brean Murray, Carret & Co., LLC: And just as a follow-up. You priced that 11 million tons this quarter for next year at an average of about $60 a ton. Was there a fair amount of lower quality, high sulfur coal in there? Or granularity any to give of that would help.

Jeremy, 4 million tons of that coal was coal that was coke. And as you see by our second quarter release, we showed the 4 million tons here in the third quarter, all 4 million tons rolled up from being unpriced to priced. So that's where $4 million of that was priced, and that number was just slightly under $60, the balance, the 6.8 million tons that were left were all priced at numbers between $65 and $66 for the third quarter. Keep in mind that it also represents not only our Bailey coal but represents our medium sulfur Blacksville leverage as well as our high sulfur coal coming out mountain that are in West Virginia.

Our next question is from Justin Fisher with Goldman Sachs.

So it seems as though companies like yourselves and you guys one of the bigger players, I think, it's a pretty good indicator. You're being very cautious about the thermal outlook, reducing your production. And so I was wondering how your customers are dealing with this. I mean, how are you seeing inventories at the utilities? And then if your customers end up having coal that they have to take from coal companies under contract, are they allowed to resell some of that coal abroad in order to reduce their inventories and ensure that they can continue to take coal under contracts from you guys? Or do you expect that we may see some coal companies coming back to start renegotiating delivery contracts like we saw a year and a half ago?

Well, I don't believe we'll see negotiations of redoing the contracts. I think what we're going to see and we don't give the right to resell. So we think the market's imbalanced. In our market area, we think the supply is about 25 to 35 days of supply. On the export side, we'll probably move more on the export side. If there is any give-back at all, we would take the coal back or re-adjust it ourselves. We are not giving license to resell it any point in time. These are based on units we produced and delivered to, and I think we'll be solid on that. And we also see declining Central App production, which I think affects Northern App as well in that sense.

And then another question just on cost. I know that you guys have spoken previously a release on your 2Q call, you said that 4Q cost could be mor or less in line where they were in the first quarter. But with a lower production run rate next it, should we think of CONSOL thermal mines being in the $35 to $40 time costs rate probably closer to $35. But as opposed to the low $30 a ton cost rate, is that kind of what we should be thinking until CONSOL thermal production comes back to more normal run rate levels?

I think what you've seen year-to-date so far and looking at 2010 as an example, we should see a modest increase, modest being maybe $1 to $2 a ton increase in cost into 2011 from the flagship longwall thermal coal mines. And much of that is investment aimed at regulatory issues, et cetera. When you couple that with the pricing that we're seeing for 2011, we still expect margin expansion.

I think you have to keep in mind that the key to us is margin expansion and people just miss it if you just focus on the cost line. Let's take a look at our low-vol Met business, for example. We didn't hit a home run there. We hit a grand slam home run this quarter. When you take a look at our production volumes of 1.3 million tons, that's a run rate of over $5 million, which is higher than we normally achieve. We had a margins of $104 a ton, and that was driven by a 70% increase in realization. I know people have focused on the cost and said that Cana would increase their cost by $11 a ton. But over half of that is related to royalties and production tax because the increase in realization. So you're going to see increases in cost that, quite frankly, are related to increases in profitability, and we're certainly okay with that trade off and that ratio. Overall, our cost was not outlined. There was no significant increase in cost. So again, as I said, operationally, we're very pleased with the quarter in terms of our operations. Our costs are under control.

And next, we go to Mark Liinamaa with Morgan Stanley.

Relative to your comments, your forecast for a 40 million decline in Central App production, can you discuss a little bit how you arrived at that estimate, and then how you think that shortfall will be divided between retirements at coal-burning plants, natural gas and then other coal regions?

Mark, first, we believe that there will be a 10 million to 13 million-ton a decline in Central App this year over what was experienced in 2009. And as you go out again to 2012, we probably will see another 5 million to 7 million-ton decline, so that's how we get to the $40 million. When we look at how that 40 million tons will get made up, we see the two producing regions being the Illinois Basin and the Northern App. We're already moving some of our high Btu coal from our West Virginia mines by rail and into the Southeast area, and we see that continuing for the balance of the decade. And in fact, that's one of the reasons why we're bringing on BMX Mine.

And what about coal plants retirements? Do you have a view on that? And so you don't think PRB is a competitive threat?

I think in my opinion, Mark, PRB coal will be shut off when it gets to the Illinois Basin. I think the Illinois Basin coal, as you can see, the Illinois Basin is already ramping up. A lot of those coals will move in to the Southeast, and the PRB coal will go that far, and I don't see going any further.

And coal plant retirements, any....

For us, this is something that we look at all the time. And we see that there is an impact on us, but it's a very small. And we see the growth that is being developed by Central App filling the gap for us into baseload units that are equipped with scrubbers.

Our next question from Brian Singer with Goldman Sachs.

A couple of Marcellus questions. First, just looking at some of the well result and relative to initial production EURs, wanted to see if you could just go through what you're seeing and your expectations for decline rates and whether you are doing any restricted rate drilling in the Marcellus. It looked like relative to, I think, what we see from some other companies, the EUR seemed strong relative to the IP rates.

Sure. The Marcellus, from our perspective, across wide varying regions and even within a subregion such as Greene County, Pennsylvania, our experience to date has been that the geologies. We tend to look at Marcellus as a single uniform play. The geology does vary, even within a region like Greene County, Pennsylvania. And that sort of manifested itself with regard to the results that you saw that we recorded today. We've got certain areas in Greene County, Pennsylvania as an example where there are relatively slow initial production rate compared to what we've seen historically, but relatively zero decline, again, for an early period of time, say, 60 to 90 days. We've got other areas within Greene County with relatively higher initial production rates but also higher decline curves. And I think the answer to this goes back once again to geology. As time unfolds, we'll get a better feel for which one of those two well profiles gives us a higher EUR. In other words if that remains at zero decline for a significant period of time, at some point, the high IP rate, high decline well passes under that production level that could have an impact with regard to which type of sub-area has a higher EUR. So this is a great example of why this is still an opportunity across the entire industry. There's probably 5% of the way to fruition. There's an awful lot to learn. We learn something every single day we drill a well. And to think that the industry is 75% or 80% away there, just doesn't reflect where we're at across the board.

And then, I guess, secondly and just really in response to I think your answer on the earlier question regarding how you're thinking about activity levels in the Marcellus. Is it fair to kind of characterize your strategy as you want to maintain a rig count here to get to some critical mass of production relative to the competition at which point you reach a threshold where you become more gas price sensitive or maybe you could kind of put into a little bit more context how you think about managing rig count overall production relative to the gas price environment, given your flexibility relative to others?

Right now, you see a drilling schedule in front of you between now and, say, 2015 to get to 350 Bcf. Its first priority is delineating those three major areas that we've discussed earlier. And again that example of Greene County just seen how we see differences within a region is a great example of why we want to continue with regard to that capital and redeployment. So that's our first priority. On top of that, with regards to taking the approach where we're not going to outspend our cash flow, especially the low-vol gas price environment, with regard to capital to budget, we do have the capacity to not just do that delineation but also to grow gas production to the tune of the 350 Bcf in 2015. Now gas price has increased significantly, which over the long term we expect they will. But if that happens next year or sooner rather than later, there is the opportunity to drill more than what we see with regard to the current drill schedule.

Our next, we'll go to Paul Forward with Stifel, Nicolaus. Paul Forward - Stifel, Nicolaus & Co., Inc.: I was just wondering about the high-vol shipments in the quarter. Why did they dip down to 400,000 tons? And am I right in saying backing into an 800,000 ton number for the fourth quarter on high-vol shipments?

Right. Third quarter, there really was a back off by China overall, and they've deliberately just backed off. I think it had a lot to do with the time of year and where they are in their cycle. But we're already seeing the vessels come at us, and it's going to be about 700,000 tons plus for the fourth quarter and the vessels are on their way. So we think that was just a low, and it's going to pick right back up. Paul Forward - Stifel, Nicolaus & Co., Inc.: And just a little more broadly, can you talk about having a few quarters now under your belt in selling this coal to Asian customers? Has there been anything -- can you talk about what's holding them back from committing more tons for 2011 to you and taking a high-vol? And can you also talk about what's been your experience in trying to market this high-vol coal outside of China, into Japan or India or elsewhere?

Bob, why don't you handle that one?

Certainly. Paul, what's keeping us from getting a commitment from the Chinese is pretty much price at this point. I think as we get closer to the end of the year, we'll be able to sit down with most of our customers that we serviced this year and agree on pricing fourth 2011. We are not willing at this point in time and to give them quarterly pricing on this coal. We are telling them that we wanted an annual price. We are also in discussions with vessel companies to secure the vessels as well as good rates for calendar year 2011. And all of that has to come together in order to be able to positively give you a number, both the quantity and the price for 2011. As we look at India, as I said earlier, we think we will be successful in either moving thermal coal or coking coal into India in 2011. It takes time. It's taken our partner Xcoal a number of years to get to where we are in China, and it's not something that can be done overnight in India. As we look forward to Korea and Japan, we actually believe that we'll be able to penetrate those markets as well in 2011, with our Buchanan coal as well as our thermal coal.

One bit of color on that, Paul, is think about this. I made a comment about this time that last year, why is everybody talking about China? And by the next call, we were already committed and on our way to being the largest mover out of North America into China and we did it and proved it. We've learned a lot. And that tells you, this coal travels and well-capitalized operations like the Bailey/Enlow, have a world market access that I think nobody else has in North America. And we will prove that by expansion into Korea and India and Japan, if we can. So we're just at the beginning of this. And remember, Bailey/Enlow was out, 22 million tons of coal and we're adding BMX to add another 5 million to 6 million tons of that. So the potential is great here, and we're excited about that.

Paul, also we're estimating that China will import nearly 50 million tons of coking coal in this calendar year. And of which, by our numbers, 5.5 million tons will come from the United States. Well, when you look at CONSOL and our partner Xcoal, we'll be nearly 5 million of that 5.5 million tons. So we see that as significant. And we're going to take what we've learned, and we're going to move it to other countries.

Our next question is from John Bridges with JPMorgan. John Bridges - JP Morgan Chase & Co: Just wanted to follow up on who's going to take share from the Central App decline. The issue with getting PRB further into the East, is that a rail issue of or is it anything specific?

Well, I would say on the front end, when you're moving energy that far, it's always a rail issue. And the ability to move the coal that far against coals that are already in the ground that are capitalized. It's hard for the railroad and the coal companies to cross capitalize production at a higher Btu levels. And when you see the growth in the Illinois Basin, that really is -- as they build scrubbers in the Illinois Basin, it also creates a problem. So when you're looking at this place in Central App, you're asking those Btus to travel a lot farther in terms of heat and I think it's all based on location and what the plants will burn. So we have a model that show plant-by-plant, step-by-step, what can be burnt and what can be don't, what can be replaced, and we think that the Illinois Basin coal in Northern App have much stronger position to replace Central App than Powder River Basin even though the cost is very low in the Powder River Basin. If I'm the buyer, I'm paying a lot more for freight than I am for coal. John Bridges - JP Morgan Chase & Co: An the ability to put some of your natural gas into those utilities?

That's part of our forward plan. John Bridges - JP Morgan Chase & Co: And then finally, the Panama Canal is going to open up in a couple of years. What sort of impact will that have on your high-vol exports?

It's certainly will be something that's positive for us. As you know right now, when we take a vessel off the East Coast on its way into Asia, it's roughly 49 to 50 days. We have been able to reduce the cost by taking the vessels and topping the move off the coast of Nova Scotia. As the Panama Canal -- the improvements are finished, we'll be able to move larger vessels. And we believe that the vessel rates will be lower and therefore the Asian market will be able to see that the United States is a real player in terms of the fact that the price can go up and down, but we can still sustain supply. John Bridges - JP Morgan Chase & Co: What's that has to do to the cost? You're doing, what, $40-odd a ton into Asia?

Around $40 to $42. John Bridges - JP Morgan Chase & Co: And after the Panama Canal, just an indication?

It'll be, we suspect it'll be lower. To give you a number, I really can't do that today. We're involved, having discussions with several shipowners right now going forward. And I just can't give you that number.

And next, we go to Brent Levy with Jefferies. Brett Levy - Jefferies & Company: As you move production over into the Marcellus and that kind of thing and then curtail some of your other production, do you guys have revised number for CapEx in 2011? And then also, can you talk about how much you're going to be spending on rigs and how much you're going to be spending on things like gathering systems relative to the current year? When does this start to make sense to actually put the pipelines in?

We will put out that plan when we put out our 2011 plan. It would be on the next call. We do know that each rig is about $80 million to $100 million per year in full operation. And that's about where were at. And we'll add some rigs for next year. But we're going to show a lot of discipline once the delineation is finished. All that will roll out and give an idea on pipes as well as rigs for 2011. Brett Levy - Jefferies & Company: Is it fair to say that 2011 would be more pipe-intensive than '10?

Well, as volumes grows, we'll add the pipe to do it. Brett Levy - Jefferies & Company: And then also can you give us some metrics around the non-core met assets that you guys are marketing at this point? Proven and probable or any other metrics that we can sort of use to sort of guesstimate?

Well, there's a couple of metrics that we had used to assess what the implied value might be of those three assets. They are three producing assets. They're all in close proximity to one another. And when you look at it from a reserve standpoint, it's somewhere in the neighborhood of about 300 million tons of metallurgical grade. It varies between high, low and mid-vol products. When you look at what that translates to in terms of potential financial impact, within three to four years with certain pricing assumptions and cost assumptions we feel it's about $350 millions a year of EBITDA. So financial metric try to gauge value or a reserve metric, these are two I would use.

Bill Eagan with Raymond James.

Can you just sort of give me a breakdown of where you're shipping your low-vol coal this year?

Our low-vol Coal we ship it domestically, North America, Europe and South America.

And can you give us a percentage on that?

In calendar year 2011, right now, we have roughly about, 900,000 to 1.1 million will be domestic, and the balance of it will be export.

Great. Thanks, everyone, for joining us. We're going to go ahead and wrap it up, and let everyone get on to the rest of the calls they have today. We appreciate you guys attending and look forward to updating you on the next call. Thank you.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.