CNX Resources Corporation (CNX) Q4 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 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

James Rollyson - Raymond James & Associates John Bridges - JP Morgan Chase & Co Raymond Deacon - Pritchard Capital Partners, LLC Brian Gamble - Simmons and Company Andre Benjamin - Goldman Sachs Group Inc. Michael Dudas - Jefferies & Company, Inc. David Khani - FBR Capital Markets & Co. David Gagliano - Crédit Suisse AG Holly Stewart - Howard Weil 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 CONSOL Energy's Fourth Quarter Earnings Conference Call. [Operator Instructions] I'd now like to turn the conference over to the Vice President of Investor Relations, Dan Zajdel.

Thanks, Nick. Actually, I'll let Brandon do the introduction here. Go ahead Brandon.

Thanks, Dan. I'd like to welcome everyone to CONSOL Energy's Fourth Quarter and Year-End Results Conference Call. We have in the room today Brett Harvey, our Chairman and CEO; Nick DeIuliis, our Chief Operating Officer; Bill Lyons, our Chief Financial Officer; Bob Pusateri our Executive Vice President of Sales and Marketing; and obviously Dan Zajdel and I are here as well. Today, we will be discussing our fourth quarter and year-end results as well as our outlook for 2011. Obviously, any forward-looking statements we make or comments about our future expectations are subject to business risks we have laid out for you in our press release today as well as in our previous SEC filings. With that said, we will start the call today with Bill Lyons, Our CFO. Bill?

Thank you, Brandon, and thank you, everyone for joining us this morning for the CONSOL Energy earnings conference call. CONSOL Energy is reporting GAAP net income of $104 million or $0.46 per diluted share for the fourth quarter of 2010. On an adjusted basis, and these adjustments are for items that analysts do not usually incorporate into their models, fourth quarter earnings would be $122 million or $0.54 per share. These adjustments totaled $18 million and relate to legal settlements, asset write-offs and adjustments due to fair value accounting. We have detailed these items in the earnings release to aid the analyst community in reconciling our actual results to their forecasted amounts. For the year 2010, CONSOL Energy is reporting GAAP net income of $347 million or $1.60 per share. Net cash provided from operating activities for the year 2010 is a record-setting $1.13 billion, up $71 million or 6.7% from the $1.06 billion generated in the year 2009. This is the third consecutive year of generating $1 billion in cash from operations. From a CFO's perspective, cash generated from operations could be the most important financial metric on the financial statements. This cash generation enables us not only to develop our asset base and pay dividends but also provides us with the financial flexibility to weather changes in the economic environment. And with 53 million tons of our 2011 thermal coal production locked in at favorable prices, we expect another year of strong cash generation from operations. Let me go into the quarter the year and the coming year in more detail. For the fourth quarter 2010, total asset cooperations earned $281 million, up $75 million from the fourth quarter of 2009. Met coal operations earned $135 million, which is up $74 million or 120% from the fourth quarter of 2009. This reflects the strong worldwide demand for met coal in general and the demand quality of our coal in particular. On the thermal side, we earned $146 million which is about the same in the fourth quarter of 2009, plus maintaining some of the best margins in the industry for that market segment. For the year 2010, total active cooperations earned a record $922 million, up $126 million from 2009. Average margins increased 10% to $14.80 per ton. Net operations earned $473 million making this the first year where we have earned more from our met operations than from our thermal operations. This reflects the high quality of our coals, particularly in Northern Appalachia where we can switch our product between thermal and high-vol met depending on market demand. Our Gas business had another outstanding quarter operationally, but was hurt by declining gas prices. Productions increased 44% quarter-over-quarter to a record 36.2 Bcf. This record production was primarily through the acquisition of the Dominion conventional gas assets. However, of significant note, our Marcellus assets produced 3.2 Bcf in the quarter, an increase of 1.7 Bcf from the 2009 fourth quarter. Coalbed methane operations produced 23.6 Bcf for the quarter, up slightly from the 2009 quarter. In the fourth quarter of 2010, we earned $32 million from our Gas operations, down $43 million from the fourth quarter of 2009. Average realization was $4.84 per Mcf, down $1.63 from the 2009 quarter. And was the primary cost of our reduced profitability. The numbers for the year on the Gas business are similar to those in the fourth quarter. Production increased 35% for the year to a record 127.9 Bcf. As in the fourth quarter, this record production was primarily driven by the acquisition of the Dominion conventional gas assets. However, of note, is that our Marcellus assets produced 10.2 Bcf for the year, an increase of 5.2 Bcf. For the year 2010, we earned $247 million from our Gas operations, down $59 million from 2009. Average realization was $5.83 per Mcf, down $0.85 from 2009 and was the primary cost of our reduced profitability. Our financial position allows us to continue to prudently invest in our businesses even in difficult economic times. In 2010, we invested $1.2 billion in CapEx to enhance safety, expand production, improve efficiency and maintain world-class operations. We expect to invest $1.4 billion in 2011, $615 million will be in coal, $675 million will be in gas and $110 million on other activities. In our Coal division, we are investing $130 million in our new Northern App Mine, the BMX Mine which will start production in early 2014. We are also investing $56 million in Enlow Fork for an overland belt as a efficiency project. We expect to produce between 59 million tons and 61 million tons of coal in 2011. For the first quarter, we are essentially sold out and expect to produce between 15.5 million tons and 16 million tons. For the year we have between 2 million tons and 2.3 million tons of low-vol and between 2.2 million tons and 2.8 million tons of high-vol coal remaining to be sold and priced. In Gas, our primary objective is to delineate the Marcellus Shale acreage that we acquired from Dominion. We plan to keep the rig running all year in each of our three operating areas. A fourth rig will be available beginning in April that will also drill some Marcellus acreage and explore for gas and liquids in the Utica Shale. We expect to produce 150 billion cubic feet of gas to 160 billion cubic feet of gas in 2011. With our expected strong cash flows from operations and our anticipated cash proceeds from asset sales, we do not expect to borrow money to fund the 2011 capital program. Now with regard to the possible sales of certain metallurgical coal assets in central Appalachia that we discussed in previous earnings calls, we are in the process of negotiating with several bidders and expect to reach definitive agreements in the very near future. Because of the status of these negotiations, and confidentiality associated with them, we will not discuss this project during the call this morning. Our balance sheet remains strong and we continue to have excellent liquidity. At December 31, 2010, CONSOL Energy had $1.6 billion in total liquidity available for immediate use. There is no long-term debt coming due in 2011. As we start a year, it's natural to reflect on the happenings of the past year. CONSOL Energy is in many ways the same and in many ways different at January 1, 2011, than we were at January 1, 2010. During 2010, we maintained our industry-leading safety position in both our underground mining operations and our gas operations. But even more importantly, we improved on our overall safety performance in 2010. By any metric, CONSOL Energy established itself as a major force in the natural gas industry through the acquisition of the Dominion E&P assets and the take in of a 1/6 interest in CNX gas that was owned by the public. We took advantage of the evolving met markets through innovative marketing strategies. We executed our operating plans to ensure that our mines and gas assets ran safely, efficiently and effectively. We did major refinancing of the company at favorable times in the market. We increased our available liquidity by $1 billion. We start the year of 2011 excited about what lies ahead. The 8,630 employees at CONSOL Energy are ready and well positioned to safely provide the energy needs of the country and the world. With that, back to your comments.

Thank you, Bill. It's good to be with all of you again and share my thoughts of the pretty high level and some of the strategic thoughts. 2010 on top was a real strong year for CONSOL Energy. And I think a defining year in terms of its future. The addition we made on the gas side certainly is fifty-year play and a lot value to our shareholders. And we will delineate and improve that out. Before I get into some of the details, I'm going to talk about the safety. Three years ago, we started our efforts on the road to zero and I'm proud to announce that at the end of the last year, 70% of all of our operations had no accidents of any kind. And that three years ago would have been unbelievable. So we're on our way to zero, we'll continue to work our way there. And being a very big gas producer and a very big coal producer, our people are very valuable and we're assessing the risk everyday of what we do on safety. Now let's talk about capital budget a little bit. This capital budget that we put out reflects growth and delineation. On the coal side, we continue to show growth with the BMX Mine which will have a life of 30 years of 5 million tons a year. It's a very, very powerful position. And over time, you'll see that it adds on the high-vol markets as well as the steam markets. On the delineation side, the acquisition of the Dominion acreage certainly needs to be delineated. We plan to put this in a position by the end of 2011 where we have a 10- to 15-year plan with a gas storage field that needs capital as the markets react to it. We really believe that, that's the position we're in. It's a very valuable position, and we feel strongly that, that was a great asset and it will continue to be a great asset going forward. We're not happy with the gas prices but that fluctuates, and we think that is related to the U.S. economy itself. So we think that will respond properly with very high rates of return. The coal side, on the capital side, there is pressure from the safety side. There's pressure from the environmental side. Mining companies are under attack by our own Federal Government in terms of permitting. And all of these things have a different capital structure going forward. We'll delineate that to you going forward as we describe where we're spending our money and why, to show that these long-term assets continue to perform over many, many years in the future. What's interesting to me right now, though, is in 2011 markets, we are very, very bullish on all coals in the marketplace. Not only are natural domestic market or steam coal or the met markets worldwide, are under extreme pressure based on weather, based on capitalized supply and growth in Asia and different parts of the world. As we see Europe and the U.S. try to come back, there's not enough capitalized met coal to meet the demand for steel, which pushes prices up with different weather problems like we see in Australia, that even pushes it up faster and makes it more erratic in terms of pricing. It's hard to predict quarter-by-quarter what price is going to be. But on the year basis, I think we have a pretty good handle on it. You saw our results from last year, we were right at the top of the market on our low-vol pricing and we expanded our sales into the high-vol market very rapidly and became the biggest supplier from North America into China, all in one year's time. That's an impressive record with impressive resources and good marketing efforts. We think that this entire market, whether it's steam coal in Europe or whether it's met coal in China or whether it's met coal in the United States or crossover coal that could go to India or anywhere else in the world, we think that market is very strong. We're bullish on it, and we believe the coal side is going to have two to three very strong years ahead of us and with margin expansion as we produce the coal safely and at a very low cost. One thing I always like to drive with shareholders, we are the low-cost producer in met coal, in steam coal and in gas. And as we develop the Marcellus Shale, we'll prove that the Marcellus Shale is a low-cost producer as well in the region based on our land footprint and our ability to get things done in our backyard, so to speak. So with that, I'd like to open it up for questions. And we'll move right into that as we go.

[Operator Instructions] Our first question is from the line of Jim Rollyson with Raymond James. James Rollyson - Raymond James & Associates: Brett, you sounded fairly optimistic about the coal side of the business for the next couple of years or so at least with what's going on. Could you maybe talk a little bit about your opportunities in terms of exports? And if I look at things, you're basically sold-out this year for thermal with the production range you are kind of looking at and you got some open low-vol and you've got some open high-vol. I'm just curious if you got room to expand on the high-vol side from what you're looking at now and on the thermal side and if there's opportunities out there to get that short term or is that going to be more growing into 2012 type of situation?

I think in the short term, on the productivity side or if the mines perform well quarter-to-quarter, there'll be some opportunities to expand either into the thermal markets or the met market on the crossover high-vol. And I think marketing will come out with that as we go. Because remember if you look at our production schedule, it's lumpy through the year. So we'll have some good quarters, not so good quarters. And when we meet those opportunities in the vessels, we'll move it. What we like right now is the thermal coal in Europe is matching the price of the crossover coal in China, and so that really expands the value of what we would consider the traditional thermal markets in the U.S., especially in high volume. So we're really bullish on that. And we do see some short-term upside and long-term upside. I think we'll continue to grow with BMX and other things. James Rollyson - Raymond James & Associates: I know you're probably going to be limited on commentary but with respect to the potential sale of the met properties, just two kind of offcut questions here. One, has the situation with Australia and the tightening of everything helped that process along? And two, maybe Bill, proceeds of that go on to fund CapEx and maybe take down debt a little bit?

In terms of what we plan to do with the proceeds, we do have short-term debt and we can definitely put it there right away. When we get the proceeds. And that's basically our intention. However, we do have optionality and based on how operations do, and our generation of our cash flow, we'll put it where it's most advantageous to the shareholders.

On the question about met versus Australia problems and so forth, those problems tend not to translate. Quarter-to-quarter problems don't translate into big reserves of sales. But I would say, overall, the met market itself, in terms of the need for met coal in the world under capitalization of met coal, certainly, is going to drive some value out of that area, and we're going to see that. James Rollyson - Raymond James & Associates: Nick, I don't know if you saw the EQT guys put up a very strong IP result three-day average well production of about 23 million a day in Green County using what they called experimental frac. geometry. I don't know if you guys have seen that, familiar with it or something you are willing to look at, but if you have any comments or thoughts?

If you look at our Marcellus results from when we drilled our first horizontal to date. It's been basically a story of steady improvement from IP rate to declines to recoverable EURs versus our tight curves, drilling times and then overall, drilling and complete cost. And what contributed to all that continuous improvement, not just a growing experience of Marcellus or others within the industry, it's also the types of advancements and technologies or techniques, one of which, you just described with regard to that specific example. So our expectation is that's yet another opportunity and the toolbox to apply to the Marcellus. It's not going to be the last. And our focus right now is to continue on that path of continuous improvement like we displayed in '10 when we get into our drilling programs of 70 wells in 2011.

Our next question is from the line of Michael Dudas with Jefferies. Michael Dudas - Jefferies & Company, Inc.: Two questions, first, Brett, you mentioned in the press release some little bit more throughput capacity that could come out of Baltimore. Looking at just the ability to export out of Baltimore, your crossover ton, et cetera, and the strong met coal market, it looks like it's going to be around for a few years. Any thoughts on additional capital fee, the Buchanan or the port, too. I'm sure you're thinking about it, any update on those thoughts relative to getting those?

The port facility, what I try to indicate there is we will expand that port as we need it. There's probably 110 million tons of port capacity in the United States. We actually are in a position where we own more than 20% of that. And we're not in a position where we're being restrained by it. As we need to expand the Port in Baltimore, we think we can expand it by about 30% of its capacity and we'll probably do that in '11 and '12. And we'll do it incrementally as we need to go because it comes in incremental pieces. But as soon as we see constraints, we put the expansion to it and get it up its maximum footprint as we can go. So there's no hesitations on expanding that port when we need it. And I wanted our shareholders in the marketplace to be aware of that. Michael Dudas - Jefferies & Company, Inc.: The Buchanan?

On the Buchanan side, the expansion of Buchanan is really a bigger skips or some different kinds of haulage come out of the mine was the belt line going into that scene. We're looking at that, it takes time, and if the market's right, we'll do that as well. Michael Dudas - Jefferies & Company, Inc.: Could you or Nick talk about your decision on deferring to the fifth rig and how you looked at allocating the capital. How much capital was deferred because of the decisions you've made for 2011? And is this going to be a monthly basis or a quarterly basis or how are you going to adjust towards more delineation, or more up output relative to a gas market that may stay below $5 for 2011?

Sure. The capital budget on the gas side and the drilling plan that goes with it, really were the results of three things, the lower gas price environment, the fact that we were 98% held by production on the acreage position and the Marcellus and our capital discipline. We've got a history of a disclaim on the coal and gas side with regard to returns and spending the money when the returns are there. So when you take those three factors, what we ended up doing was we really wanted to retain and protect our objective of not delaying the timing for delineation of our Westmoreland County, Indiana County, Pennsylvania acreage that we acquired from Dominion and the Northern West Virginia Marcellus acreage that we acquired from Dominion. What you see there is basically the results of those different issues. So when you look at our gas capital budget, it's about $675 million and if you want to break that down about $225 million of it is what I'll call development drilling, that's our Virginia CBM fields and our Marcellus drilling in Southwest Pennsylvania in Green County where we have had the history. About another $215 million of that is what I'll call delineation. That's the Westmoreland Indiana County and the Northern West Virginia Marcellus that I just spoke about. As Bill Lyons commented, we got about $35 million in there for what I will call exploration which is the Utica Shale. And then the rest of the capital budget, about $150 million to $200 million of that is midstream and will those numbers change, I think, our position in our history have shown that if gas prices go up, the drilling is going to go up beyond four rigs that's the advantage that we have, if gas prices decline and the returns aren't there, and then we have delineation already proven at that point, we'll probably reduce the capital in line as well. Michael Dudas - Jefferies & Company, Inc.: For Bob or Bill, it looks like you've taken some inventory out of your system pretty nicely. Maybe you can share with us some thoughts on how your customer base is looking from the U.S. thermal side on their inventories? Could you see some upside to current quarter prices for App Central and Northern App coal if we continue to have weather and global export issues that constrain the U.S.? I believe you should.

Mike, first, I would tell you CONSOL ended 2010 with roughly 2.1 million tons of coal in inventory. And we're forecasting at the end of 2011 for that inventory value to be around 1.5 million. We fully expect that, that inventory reduction. Probably those tons most likely will be spread equally between the export market as well as the U.S. thermal market. Inventories at our customers in our target areas are probably in the range of 20 to maybe 35 days, that's down from the 40 days that we saw at the end of the third quarter. Right now there's a heavy demand for thermal coal in our market areas. We expect that to continue for the balance of the year. Weather has had a dramatic impact on shipments, we're happy to say that we're getting full cooperation by both the Eastern railroads and moving coal to our customers as well as coal going to the terminals. As far as price goes, we actually believe that the utilities had plans to come into the market starting about midyear. But I think due to the exceptional weather that we're having, that we will see them start to come in much sooner and that could be as early as this March.

Our next question is from the line of Andre Benjamin with Goldman Sachs.

Could you give any color on your negotiation to place more of your crossover volumes into the markets in 2011? Are you currently in more of a position where the volumes are more certain based on the conversations you're having but you just haven't priced them yet? Or is there still some risk that you may not hit your target if the second half of the year improves?

Andre, as far as hitting our targets, I think we're safe to say that we believe that we will hit our targets as we've outlined in our guidance table. We actually believe we will exceed them. As far as pricing goes on our high-vol met coal, we actually priced that coal on a quarterly basis. And so we are looking for an increase as reflected in our table from about the $75 to $76 range where we are today. Hopefully, it could reach as high as $85 beginning in the second quarter of the year starting in April. As I said, we price that quarterly. And we're hoping that the Chinese market will take that coal evenly throughout the year, but if you can recall from last year, the Chinese government did hit the pause button some time in the third quarter. And we are optimistic that we will not see that type of reduction this year. We continue to be opportunistic with our spot coal shipment, if the opportunity presents itself, we will shift a spot cargo to that customer. We are very excited about India. We see that India is offering a place for us for both our met and thermal coals, we will utilize the same platform that we put into place in China. Where we are developing and branding CONSOL's products. We think we will be very successful in India and we look for India to pick up any of the slack that may be created with a slowdown in China later in the year.

I guess on the gas side, I think you're in the same bucket with a lot of other producers in that you are looking to respond to the low gas prices and reduce some drilling. Should we expect to see any more cuts if prices were to stay soft in around $4? And then on the opposite side, what will we need to see to expect Q2 re-accelerate activity versus the four rigs that you're currently planning?

That's a good question. We're going to show discipline around $4 clearly, and we've already shown that from what the plan we put out last year. I think if you look at our ability being held by production is very valuable to our shareholders, and our ability to extract this gas when the price is right. We think when the gas prices started approaching $6, we'll expand very rapidly and that's why we're putting infrastructure and delineating what we have and getting ready to do that. Now the watchword here is flexibility. If it stays down or gets worse, you'll see us go down with it. And we will maintain our cash and do the prudent thing for our shareholders. These aren't leases that are going to expire. We own them; we'll bring that gas out of ground with good rate of returns based on the gas prices. And if it continues to stay down? That's what we'll do, we own them.

Our next question is from the line of David Gagliano with Crédit Suisse. David Gagliano - Crédit Suisse AG: I wanted to talk about more about the pricing environment for thermal high-vol and low-vol. First, on the thermal, when did you sell the thermal that you locked up in Q4, was that early or late in the quarter?

In the fourth quarter, David, we've locked up probably calculated from the implied pricing. We locked up about 12.3 million tons of thermal coal in the quarter. That carried an average price of about $64. Please keep in mind that in that, there is over 3 million tons that at are partially washed product coming from one of our Northern West Virginia mines, 12,000 BTUs. There's another 1.3 million of high-vol river coal. Again, it's roughly 12,300 BTUs. These two alone skewed that price to where you see it at the $64 range. We also have roughly 6.8 million tons of Bailey coal that we sold during the quarter. And over half of that was several very long-term coal contracts that were already in place. And that we were just reacting to price re-open or provisions. On the metallurgical coal, as the table shows, we have roughly 2.3 million tons open. And there's a lot of issues that need to be cleared up mainly what is the first quarter BMA price. Also, what are the railroads going to do with their prices? The numbers that we reflect are still based on the prices that are still in effect through the end of March. David Gagliano - Crédit Suisse AG: Just one thing to follow up on something, I think, you just mentioned. You said you sold $6.8 million, that's long-term contract on the thermal side, that's a decent amount of volume on the thermal. What was the price for that?

Over half of the $6.8 million were sold under long-term contracts. And that price was in the mid-60s. David Gagliano - Crédit Suisse AG: Very simplistically, where do you contract prices today for your high-vol met, your low-vol met and thermal, if you have any thermal left to sell in 2011?

David, I've got to tell you where we see it today based on what we know, they're exactly where they are on the table. I would just tell you that's where to look. And we'll update this table at the end of each quarter.

You want to keep in mind that table also, has volume tied into it. So don't try to tie these numbers to spot prices because there's a lot of volumes in this table. Probably more volume you're going to see from any company in Eastern United States. David Gagliano - Crédit Suisse AG: On the high-vol met, can you just talk a little bit about the specs around the high-vol met? I thought high-vol met prices were a bit higher, but perhaps it's quality difference or is that...?

High-vol met is 2% sulfur, it's 8 1/2% ash and coal plus 36%.

Our next question comes from the line of John Bridges with JPMorgan. John Bridges - JP Morgan Chase & Co: I just want to dig a little bit more. I was intrigued that you're saying that you might be selling thermal coal into India. Is that using your mechanism of loading up a cape size and sending that around Africa?

Yes, sir. In order to be able to continue to take advantage of vessel rates, John, we will look at topping off. We're currently predicting now into China for our high-vol coal. We're looking at two top off a month and we'll continue this once we break-in to the Indian market. John Bridges - JP Morgan Chase & Co: If you got thermal into India and thermal opportunities into Europe, I'm surprised you're not going at even more quickly with the expansion of Baltimore.

The capacity of Baltimore is every month, there's a new number based on circumstances. We're currently on pace right now before today's snowstorm actually set a new monthly record of capacity through Baltimore. And on an annual basis, that would be well over 14 million tons. So I think what's important is that CONSOL's coal will not be constrained in any way because we have the capacity through our own port. We have another 2 million to 2.5 million tons of capacity through the CSX Chesapeake terminals. And plus we have 5 million to 6 million tons of capacity available to us through that's supported at Lambert's Point. If you add all that up, that's 20 some million tons. We'll continue to move the chess pieces around in order to take advantage of the market and to sell the coal at the highest prices possible. John Bridges - JP Morgan Chase & Co: So it basically sounds as if Baltimore is pretty scalable, it's not a question of restricting production or throughput for six months while you build a new piece of equipment. This seems pretty scalable.

You're exactly right about that. It's not scalable like that. We can continue to do what we're doing, while we build into it. The issue really is, we will build in as the contracts come and we can see ourselves being constrained and we'll time that right. The other has a lot to do with what coal are you actually moving through it, if you're blending a lot of coals then the capacity goes down. And if it's big mass volumes, say, at high-vol coal then the capacity goes up because you're just moving one kind of coal through there. So there's a lot of moving pieces here. What I want the shareholders to be aware of is we are committed to expand that port for the shareholders bank account at the right timing and the right capital spend for a great return. John Bridges - JP Morgan Chase & Co: Do you have any updates on the capital needs, to do that expansion?

The first phase, John, will be for about 2 million to 2.2 million tons. And it will cost about $10 million. And it will involve both an upgrade to both the inbound and the outbound tracks. But John, I think it's important for us to also to tell you, in order to increase the volumes, we need the help of both Eastern railroads. Because we can produce it and we can put it through the thermal, but we got to get in there first. John Bridges - JP Morgan Chase & Co: I'm intrigued by the high-vol coke and coal and how the steelmakers are using it. Are they working hard to use more of this and protect themselves from dependency on the very highest grade coals which -- harder to get to them?

John, that's, in fact, what we're seeing right now. We're having more of our Bailey coal go into the heartland of China. It's being used as blends, more of it is being blended. At first, they started off with blends of 25%. We've now been in contact with some of the mills and that has increased to 38% to 40%. So we're hoping that when it's all said and done, that they can get comfortable with blending as much as 50% of our high-vol coal into their blends. John Bridges - JP Morgan Chase & Co: Have you sort of got any sort of ballpark figures as to what the potential market is for this material?

Well, I tell you what. We can -- I can tell you that it's about 10 million tons.

Your next question is from the line of Brian Gamble with Simmons & Company.

Bob, I just want to follow-up on that export situation. The expectation for, and Brett, earlier you said, the capacity in the U.S. around 110 million tons. We did 80 million tons, 82 million tons, this year 30 million tons, essentially spare capacity. How much of that do you think is realistic to go out both in East Coast and Gulf Coast this coming year? And then also, how long do you think it could theoretically take us to get to that full run rate of 110 million tons?

I would tell you that there is room. We know that. We probably would tell you that it will probably take two years to get up with 110 million-ton level. You probably can get from 80 million ton, 90 million ton, 95 million ton this year if everything works right. Again, a lot of it depends on the arrival times of the vessels, the weather, the train, there are a lot of moving parts here, Brian. And that's the problem, that's why at CONSOL's own terminal, it's very difficult for us to answer the question as to what is the true capacity in Baltimore. As I said earlier, we're on a record pace for January if you kept the same pace on an annualized basis, we'd be well over 14 million tons. And I think that's true of all the other terminals as well.

On a coal production footprint, you mentioned the possibility earlier, of expanding Buchanan at some point, what would an expansion at Buchanan look like and what would that cost?

We're looking at that and undergoing the studies as we speak. So we're really not in a position, at this point, to say specifically what we would do. But as Brett indicated earlier, really the two key critical components would be where we would put our production hoist and how we would get that production once it is on the surface back to the preparation plant. So it's being looked at. We think there are opportunities there moving forward. But as to what that is and the timing and the capital, we're not in a position to talk about that just yet.

Our next question is from the line of Jeremy Sussman with Brean Murray. Jeremy Sussman - Brean Murray, Carret & Co., LLC: It seems a bit like the thermal export market is being overlooked a little bit. But you mentioned earlier that the Europeans are buying. Can you give us a sense of maybe how things have changed on this front over the past month or two and maybe what pricing you're seeing in the sense?

Jeremy, we told you at the end of the third quarter that CONSOL Strategy was going to be, we were going to look for term business in Europe. And since then we've been able to lock up about 1.5 million tons of a 3% sulfur steam coal. Jeremy, that 3% sulfur is made up of 50% from our Bailey Mine and 50% from our higher sulfur Northern West Virginia mines. We probably have about another 300,000 tons that holds a term of just one year. And the average price for all of this when we take into consideration higher sulfur is in the range of $68 to $70 FOB Mine. Jeremy Sussman - Brean Murray, Carret & Co., LLC: Shifting gears to the BMX Mine, what type of met coal/PCI potential do you see out of the 5 million tons on that front?

It's almost exactly like the Bailey coal but it's lower in sulfur and in total reserves. So it's going to have a higher value based on sulfur, but the rest of its characteristics are very much like the Bailey coal.

Next we go to the line of Mark Liinamaa with Morgan Stanley.

On coal cost, can you give any commentary on what you expect year-on-year cost inflation to be, and maybe specifically what the low-vol met you cite in the release some cost inflation due to safety-type investment, do you get any give back on that this year?

There are pressures coming from safety issues, from environmental issues. When you put it all together, it looks like there's going to be pressure on coal cost across the board at around 5%. So if you look into full cost of last year, in 2010, at the rates that we put in our table of how much we mine, I think the 5% number is a good modeling number to use.

Maybe this one is for Nick, relative to the capital spending in the Gas business under delineation and exploration, could you maybe give us that value added or processed in important part of the investment pieces for the stock? What kind of things could we look for the return on that money when you talk about it maybe 12 months from now?

If you fast forward to 12 months from now, if we stick to the $675 million capital budget on the gas side that we have release. Again, about $215 million of that is delineation in Westmoreland, Pennsylvania, Northern West Virginia. We would expect by year-end to have considerably shown to the Street and to our shareholders that what we were hoping for with regard to Westmoreland and Indiana Counties and with regard to Northern West Virginia on the Marcellus was indeed there. So we should have a number of wells not just drilled and completed but oil production results and IP rates and declines of 30-day averages from those two areas. That's basically our a number one job this year with regard to the Marcellus. On top of that, we would also hope moving in a position by year-end '11 to talk about what we see from our preliminary exploration drilling effort in the Utica, which again is another big opportunity for us with regard to our footprint and how many acres we hold within Utica. When you think about delineation and you think about exploration, those would be what I would consider to be the main objectives for 2011 and that's in the capital plan that you see.

And just on the horizontal drilling, could you comment a little bit about that and where you stand relative to the best in class?

I think that we talked about this on the third quarter earnings call, we feel that on per footage lateral basis whether it's capital cost or recoverable reserve for lateral foot drilled that we are indeed best in class. Well history and well count continues to grow, not just for ourselves but for the industry and we saw some of the improvements we talked about earlier. Our goal and our objective is to remain best in class with regard to that key metric.

What's the maximum length you're at now?

I think our average to date was around 3,500-foot for the wells that we've drilled to date and then when you look at our well program moving forward to 70 wells this year, we're probably looking at average of north of 4,000-foot laterals per well.

Our next question is from the line of Ray Deacon with Pritchard Capital.

I was wondering, is there a chance you could give a little bit more detail on the Utica Shale and what you see as the potential there? And how many wells you will drill with that $35 million?

We probably going to be looking at drilling horizontal wells only at this stage, not vertical wells. And we're probably going to look at spacing in terms of where those wells will be drilled. We're talking less than half a dozen wells on the initial exploration stage. We'll be looking at drilling them probably in some combination between Southwest PA and Eastern Ohio. When you look at our overall Utica acreage position, it's probably north of about 800,000 acres. But we consider it to be the core fairway of Eastern Ohio and Southwest PA probably closer to about the 400,000 to 500,000 acres of that 800,000 acres. And that's where we would focused our drilling of, say, two to four wells with regards to the 2011 plan when that fourth rig shows up starting in April.

Could you talk just a bit more about capital allocation in terms of when you look at sort of spending on the E&P side. I would assume the CapEx on BMX is going to have a higher rate of return versus capital that's being spent to delineate the Marcellus on your you acreage there because you're not kind of in development mode, I guess, is that fair?

The rate-of-return we see with regard to BMX are pretty compelling, based on everything you heard Bob Pusateri and Brett discussed with regard to what's developing on all of these different markets. So BMX is a pretty much stand-alone compelling investment opportunity. With regard to the delineation on the Marcellus and Northern West Virginia and in Westmoreland Indiana County Pennsylvania, if we hit our tight curves that we set with regard to expectations in those regions, we do expect a rate-of-return above our cost of capital even for this gas price environment. But does it approach that at BMX at this point with regard to where the coal markets are and gas prices are, no.

Do you have a thought yet on what type of reserves you'll add in the Marcellus per thousand feet of lateral drilled?

A lot more to say about that in about a week when we release our reserve report with regard to year-end 2010. And that will not be an issue not just for proved reserves but also for our probables and possibles that we will want to highlight specific to the Marcellus.

Our next question is from Paul Forward with Stifel, Nicolaus. Paul Forward - Stifel, Nicolaus & Co., Inc.: I got a question for Bob. You have mentioned earlier that some of your utility customers might be sitting on as low as 20 days of inventory. And they see that basically CONSOL is sold out on thermal coal for 2011. I was just wondering if you're getting a little concerned from your customers about the weather impact on demand. And if they're looking to CONSOL for additional tons, are they in the situation where they're essentially looking at this high-vol met, you've got 2.5 million tons unpriced uncommitted for 2011. Is that what you got left for them to potentially try to outbid your steel customers for that business?

I'll start at the end of your question, Paul. And the answer to that is yes. Given the production estimates that we're putting out today, CONSOL will only have 2 million to 2.4 million tons of Bailey coal left. And they would have to compete with the export market for those tons. It's a global market that's what was important to us. That's why we attempted and were successful in getting our Bailey coal branded in China. So I think that the utilities are telling us now that all of the coal from CONSOL that they have purchased that they want the coal. They informed the railroads vis-a-vis shipping schedules that they're going to take all the tons. But again, a lot of things could happen here, Paul. We can get to the shoulder months, power prices could fail to rise. We could have a mild summer. So there's a lot of dynamics here. The good thing is with CONSOL, given the fact that we can put the coal offshore, we will continue to do that. And we will always look for the highest price possible. Paul Forward - Stifel, Nicolaus & Co., Inc.: On Buchanan, you've got a pretty big quarter, $1.4 million in the first quarter. I'm just wondering if your guidance is not suggesting that, that kind of rate is going to continue for the rest of the year. I was just wondering if you got any kind of quarterly outlook you can give us on Buchanan's output, any events that might cause one quarter or another to be week in that coal?

I would love to multiply that by four quarters but that's not the way the big underground mines work. It is can be about 4.5 in total production for the year. And so you'll see that flex according to schedules and longwall moves and everything that comes with that, maintenance schedules, vacations. All of those kind of things are baked into it, but at the end of the year, it will be 4.5, maybe a little bit more, but not much. I think there's about 200,000 tons of inventory that's bulk in sale. And he'll get that sold, that's a one-time deal. So that's what I count on. In terms of how it comes out in the mine, I've always said, it's lumpy quarter-to-quarter. But were always pretty close to our numbers in year's time.

Next, we'll take questions from the line of David Khani with FBR. David Khani - FBR Capital Markets & Co.: Just a follow-up on Paul's question. I believe last year you were closer to five. Is there anything going on at the mine this year versus last year. Is the scene a little thinner? Or what's sort of driving a little bit of the lower production expectations or maybe just being a little bit more conservative?

Dave, I think the key drivers there, everything from longwall moves to what we're looking at with regard to the new, I'll call it, engineering with regard to the Buchanan Mine moving forward such as the narrower panels, we didn't have a full year of that. Last year was a full year of that moving forward this year and beyond. And at the end of the day, when we look at the way we're engineering and designing the Buchanan Mine moving forward it is much improved with regard to safety, compliance and productivity reflected in geology and the regularity environment we're in, and 4.25 to 4.5 is where we put our sales bogeys/production bogeys in there with regard to '11. That's our best gauge based on all those factors I just described at this point in time. David Khani - FBR Capital Markets & Co.: A follow-up with you Nick. Can you give us some of the safety measurements that you guys look at and think are important? And then also, how you compared the year before, three years before whichever way you want to sort of compare yourself?

The easiest, most often quoted statistic is incident rate and that's fine with regard to an overall view, with regard to things but it's not a perfect indicator by any stretch. Incident rate has improved year-on-year, I think, for the past three or four years, at least within CONSOL Energy. We look at severity. Obviously, that's important, not all accidents are the same. We look at near misses, accidents or could have been accidents where no injuries occurred but, "near miss", what was the root cause with regard to that. And all of those, whether it's serious accident or not serious accident or near miss, we're going back to what I will call root cause analysis and engineering out the hazards whether it is equipment improvements, whether it's procedural improvements, whether it's training improvements with regard to our rank and file. So we're basically at this stage going past the culture of zero accidents and sustaining that but moving into more of the engineering and putting the science to it. And we look at all these factors by location by shift, by job category by every imaginable type of parameter you could imagine.

One good number to use Dave if you look at total incident rate against all the underground mines in the United States, we're probably about 3x better than the statistics show. 2.6x better than statistics. And that includes us in the numbers. And we're probably 25% of that total number. So if you took us out, we're probably maybe 4x better than the national average. David Khani - FBR Capital Markets & Co.: If you look over to India, I know you talked about this. When do you think you actually get first sales, can you get it this year, you think?

David, we're hopeful that we'll have something to announce on our first quarter call in April. David Khani - FBR Capital Markets & Co.: And is the plan to do one-year spot or trying to do multiyear?

We are hopeful that we'll be able to sell both met and thermal coal to India in 2011 and we're estimating that between the two of them. It should be around the 750,000 tons mark. And right now we're splitting that equally between met and steam. David Khani - FBR Capital Markets & Co.: But would that be short term or would you try to do on the thermal side the least multiyear?

As their economy continues to mature and we get comfortable with payment terms, then we'll look for a longer-term deal. But right now, we're just looking for this calendar year. David Khani - FBR Capital Markets & Co.: Hedging on the gas side, can you give us a little bit color on what you'd like to do if we get a little bit more improvement in gas prices?

On the hedging side, well, right now, what we did is we instituted a program hedging for calendar years 12, 13 and 14. What we said there that we would hedge up to 60% of our expected volumes. We've got that process and already in place for 2011. We're being diligent and we are moving that price up in terms of every $0.10 to $0.20 forecasted where we'll hedge volume. David Khani - FBR Capital Markets & Co.: And then last question on Marcellus Shale JV. I know you obviously have some nice positive expectation out of Utica and you want to drill it up. Do you expect to have any JVs or potential Marcellus asset sales at all this year? What do you think we should -- what's kind of the expectation for us?

I think something will happen this year. I think there's a lot of interest. We're talking to a lot of people, there is a lot of consolidation going on with people around us. Who's got what, any given county or region. But in terms of our need to do something or are feeling pressure to do it, we're not there. We want to get value and what's interesting is the value of all of these acres are increasing in terms of how much of gas per well. So we're not in a hurry to do that, but if we find the right partner we'll either partner up or we'll sell a piece, one way or the other. Perhaps you'll see some action in '11 on that. David Khani - FBR Capital Markets & Co.: For Bill Lyons. Bill, what do you hope to potentially pay down in debt this year? What would be your hopeful goal here?

At any given time, we have between $400 million and $500 million of short-term debt. You're asking me ideally, I guess I would like to get that to zero. But we don't feel uncomfortable with that level of debt. And obviously, we paid down some and that would be good too. But we have the flexibility that any extra cash we get in, we can immediately use that to pay down or draw down some of the credit facility.

Our final question will come from Holly Stewart with Howard Weil.

You provided some improving rates here in the release within the Marcellus. It feels like your 30-day production rates you have given within your tight curve is a little stale. The question for you is do you agree with that? And then when or how is the time frame when you feel comfortable to increase your 30-day rate or your EUR subject?

I think with regard to what you seen through the Marcellus program on 10, you are correct in your conclusion with regard to what the 30 day have been looking like with regard to our typical tight curve for Southwest PA. And again, our views on what that means with regard to reserves and proved reserves, probables and potentials moving forward, I think we'll have more to say about in our reserve release in about a week. With regard to the tight curves and how those results would impact the type curves for the delineation areas beyond South West Pennsylvania, I think, we'd hold to those curves right for now until we get some actual wells on the ground and see what those results look like.

If you were going to separate out the delineation progress with West Virginia, et cetera, and Southwest PA, correct me if I'm wrong, but out there is still 1.5 million a day for your 30 day rate, the release says kind of 3.5 million, is what you've been averaging. I'm curious because it's certainly makes a difference in the valuation?

On average, we are tight curve in Southwest PA with regard to the wells that we drilled today. That fact needs to be reflected in terms of what we say about reserves in about a week,

Thank you, everyone for joining us today and we certainly appreciate you taking the time and your interest in CONSOL Energy. We look forward to updating you again on our first quarter conference call. And Nick, if you could please give the replay information.

Ladies and gentlemen, today's conference will be available for replay beginning today and running through February 3. You may access the AT&T replay of service by dialing 1(800) 475-6701 or internationally using the number (320) 365-3844 and entering the access code of 188233. Thank you ladies and gentlemen for your participation today. That does conclude our conference call. You may now disconnect.