CNX Resources Corp (CNX) 2009 Q4 法說會逐字稿

Welcome to the Consol Energy and CNX Gas fourth quarter 2009 results conference call. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations, Mr. Dan Zajdel. Please go ahead.

Welcome to our joint earnings call with CONSOL Energy and CNX Gas. With me this morning is Brett Harvey, Chief Executive Officer of CONSOL Energy and Chairman and CEO of CNX Gas. Also with us today is Bill Lyons, Executive Vice President and Chief Financial Officer for both companies. This morning we will be discussing fourth quarter and annual results for both companies. In addition we will be discussing our outlook for 2010. Any forward-looking statements we may express or our expectations for results as you know are subject to business risks and we have enumerated those risks in both earnings releases issued this morning and in our SEC 10-K filings.

In addition, the US Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose any proved or unproved reserves that the Company has demonstrated by actual production or conclusive formation tests to be economically and legally produceable under existing economic and operating conditions. We may use certain terms in this conference call such as net unrisked resources which SEC guidelines strictly prohibit us from filing with our filings with the SEC. We also caution you that the SEC views such net unrisked resource estimates as inherently unreliable and that these estimates may be misleading to investors unless the investor is an expert in the gas industry. With that, let me begin the remarks and then take questions. We will start today with Bill Lyons. Bill.

Thank you, Dan. Thank you everyone for joining us this morning for the joint CONSOL Energy, CNX Gas earnings conference call. CONSOL Energy is reporting net income of $143 million or $0.78 per diluted share for the fourth quarter of 2009. This is about equal to the fourth quarter earnings of 2008, after adjusting for the special income item related to the recovery of (inaudible) excise tax. For the full year 2009, CONSOL Energy is reporting net income of $540 million, or $2.95 per share. This is almost $100 million higher than the net income for the year 2008 which was $442 million, or $2.40 per share. This is the second year in a row that CONSOL Energy has set an earnings record.

Net cash provided from operating activities is $216 million, compared with $346 million in the fourth quarter of last year. For the year, net cash provided from operating activities was $945 million, compared with $1.029 billion in 2008. EBITDA for 2009 was $1.224 billion, that's up $149 million from the $1.075 billion in 2008. The numbers speak for themselves.

CONSOL Energy has established itself as a Company that generates strong earnings and cash flows, by utilizing a sustainable model that provides financial and operational flexibility. This flexibility enables us to react and adapt to changing economic environments and markets, while continuing to prudently invest in our businesses. The quarter and the year again demonstrated the financial power of being a low cost, diversified energy Company. Let me go into the quarter, the year and the coming year in more detail.

Our met coal business, we sold 1 million tons in the fourth quarter at an average price of $108 per ton, with costs at $40.48 per ton, we had all-in margin of almost $68. I hope everyone had a chance to read our press release this morning announcing that we have sold five more vessels of high vol coking coal sourced from Bailey and Blacksville mines and invested in four integrated steel mills in China. The sales were made by X coal and as a continual result of our Asian marketing initiative that we announced last month. The sales from these five vessels total approximately 410,000 short tons, combined with our earlier vessel to China of 82,000 short tons, we have already sold 0.5 million tons of Northern Appalachian coal into the Asian met market in 2010.

Our coal terminal in Baltimore provides us with dedicated capacity of 12 million tons per year for export to these high value markets. We also have the ability to expand capacity at Baltimore by 6 million to 8 million tons if markets warrant this expansion. Brett will talk more about the met markets and our met capabilities in a few minutes. On the thermal or steam coal side, we sold 14.5 million tons in the fourth quarter at an average price of $54 per ton. That was up 17% from last year's quarter's average realized price per ton. Cost per ton of thermal coal in the quarter was just over $44, up about $5 from last year. The majority of this increase can be attributable -- attributed to our decision to reduce production to help the market stay in equilibrium. Thermal coal financial margins for the fourth quarter were $9.94 per ton, or 32% higher than the $7.52 financial margin for the prior year's quarter.

While many of our thermal coal contracts were priced in 2008 when the thermal coal market was tight, we believe that a substantial portion of this pricing reflects the continued scrubber buildout. Increasingly, our thermal coal is being priced for its high heat content, its location, and its stability of supply. You may have seen that last week we restarted our Shoemaker mine after a $205 million multi-year refurbishment. This mine now joins our premier fleet of efficient low cost Northern Appalachia long haul mines. The Shoemaker mine will have a production capability of approximately 5 million tons per year.

Operationally, our mines continue to do well. Our long wall development is in great shape and we can ramp up some additional production, should the market warrant this effort.

2009 is the most profitable year we have ever had in our coal segment. As I have mentioned on previous earnings calls, margin expansion is the key driver and our step change in profitability. Our gas segment CNX Gas of which we own 83 1/3% had another outstanding quarter. Production increased 13% quarter-over-quarter to a record 25.1 Bcf. This record production was driven by better than anticipated results in our Virginia coal bed methane and our Marcellus Shale operations. In the fourth quarter of 2009, overall cost of CNX Gas operations were $3.47 per Mcf, or $0.13 better than they were in the fourth quarter of 2008. However, the record production volumes and lower costs were not enough to overcome the depressed spot prices for natural gas. Even though we had 15.3 Bcf of our gas production hedged at $7.90 per Mcf in the quarter, our average realization per Mcf was $6.47, a reduction of 23% from last year's fourth quarter. Net income at CNX Gas was $41.1 million or $0.27 per diluted share for the fourth quarter, and this is down about 30% compared with the net income in the fourth quarter of 2008. The decrease in net income is solely the result of lower spot prices.

For the year 2009, CNX Gas net income was $164.5 million, or $1.09 per share and that's down $74.6 million from 2008. Annual production was 94.4 Bcf, a record, and was up 23% from 2008. We continue to be excited about our Marcellus Shale opportunities. We increased our footprint by 20,000 acres in the quarter, to 250,000 acres. Two-thirds of these acres are considered to be Tier 1 acres. We are actively seeking additional acreage, primarily in southwestern Pennsylvania and Northern West Virginia where we have synergies with our other operations.

Earlier this week, we issued our year-end gas reserve numbers. During 2009, CNX Gas increased its reserves by 34%, to 1.9 trillion cubic feet. We achieved a drill bit finding cost of $0.39 per Mcf, and replaced over 400% of our 2009 production in a falling price environment. Our financial position allows us to continue to prudently invest in our businesses, even in difficult economic times. In 2009, we invested almost $1 billion in CapEx, about the same amount we invested in 2008. We expect to invest a similar amount in 2010. In the 2010 numbers we've broken out about $500 million in coal, $400 million in gas, and $100 million on other activities.

The investments in coal operations are primarily in the efficiency area to maintain our position as a low cost producer. The investments in the gas Company are focused on growth with emphasis on expanding our Marcellus Shale acreage position, increasing drilling, and increasing production.

CNX Gas acquired approximately 19,000 acres of CBM leases and 63,700 acres of Marcellus Shale leases in 2009. In the Marcellus Shale area, our goal is to increase our position from 250,000 acres, to 400,000 acres. We are ramping up drilling in the Marcellus Shale and plan to add a second rig in March. The new rig will be a flex rig that will enable us to drill multiple wells on a single pad more efficiently. We have an option to add a third rig if the market dictates. We plan to drill 24 horizontal Marcellus Shale wells in 2010. We also will be drilling 175 Virginia CBM wells and 25 horizontal wells in the Chattanooga shale.

As I said, we're very excited about the potential of our Marcellus Shale assets. Next week, the first Marcellus Shale well that we drilled which was in October 2008 will have produced 1 billion cubic feet of gas.

Now let me return to CONSOL Energy's overall financial position. Our balance sheet remains strong and we continue to have excellent liquidity. At December 31d, 2009, CONSOL Energy and that's including CNX Gas had over $600 million in total liquidity available for immediate use at interest rates that are well below market. We remain steadfast in our confidence in our business model. Our balance sheet and our status as a safe, low cost producer enables us to effectively compete and produce excellent earnings and cash flows, even during times of economic turmoil.

Among our met coal reserves and our thermal coal reserves and our gas reserves in Appalachia, CONSOL Energy greatest concentration of BTU's in the eastern United States. For almost 15 decades and through many business cycles, CONSOL Energy has remained committed to optimizing long-term shareholder value by putting safety first, by being respectful to the environment in the communities in which we operate and providing meaningful employment opportunities. We remain committed to these values. Brett, your comments on the quarter and the year.

Okay. Thank you, Bill. And welcome to everybody on this call. I'd like to talk about where I see the future and especially in the short term. We'll talk somewhat about the long term on both coal and gas. First thing I want to talk about is our initiative on safety. We have a safety program that we're trying to drive the Company to zero accidents across the Company. Zero is achievable. Our gas Company stays at zero in terms of their reporting and doing a very good job, especially with all our expansion and the coal Company I can say on the coal side this is the best year we ever had in terms of safety. So we believe it's achievable. I think we'll see in our future a year where we're zero on all of our operations and we're looking forward to that.

On CONSOL Energy in total, I want to talk about the cycles of energy between coal and gas. If you go back to 2008, a big -- because gas prices were up, a big contributor was gas as it grew on volume as well as price. It was a higher percentage of earnings in 2008 than coal was. We saw that reverse in 2009 and a high percentage of coal added value to CONSOL Energy as gas prices dropped even though we added volume. In both cases, if you look at our ability to weather any environment in energy, on two different cycles, creates real value for our shareholders, not only in the gas Company, but in total in CONSOL Energy with its ownership of gas. These two cycles create record earnings as we run through the cycles. Our shareholders should be aware of that and understand that the growth of the gas Company is directly related to the footprint of the coal Company, and the combination of those two create real value for our shareholders over time.

I'm going to talk specifically about gas now. As Bill said, record year in production. 23% growth. Proven reserves are up 34%. Since we became public in the gas Company in 2005, we have doubled our annual production. We have almost doubled our proven reserves. The interesting thing is we plan to do that again in the next five years. And our intentions are to keep growing this Company, because it's a low cost producer in any marketplace and we'll always have the advantage on margins. We are the fastest growing Company I think in the United States in terms of gas, but in Appalachia for sure, of major companies. We believe we can continue to do this and what's another very interesting part of it, it's being done with its own cash flow. We're not borrowing money to grow it so it's a very powerful position.

I would say when you look at the gas Company, its future has never been brighter. It has a real strong position in Marcellus Shale. It has an annuity type project in Virginia. It continues to grow in both places and we see real value in both those spots and real potential to grow in the Marcellus Shale, based on our fee footprint. We didn't borrow money to get this footprint. We have it in our Company.

Let's talk about those markets. We see storage on the gas side at about -- it's approaching a five year average storage and we think that that's a good place for gas at this point in time. We see switching from coal to gas at about e450 million when it touches that between 450 million and $500 million, we'll see switching between coal and gas on generation. We're very excited about the future of the gas Company and where it's headed.

Now let's talk about coal. Coal's very interesting at this point in time as well. Keep in mind, we have the highest concentration of low cost, high Btu coal anywhere in the United States. Now, what we're finding is that that concentration of capital spent on that coal, especially in the Pittsburgh A seam, is showing two different marketplace strengths.

One is the traditional steam market, of which we've always been very powerful and high margin and low cost driven. But if you go back in time, this same seam of coal is what made the steel business powerful in Pittsburgh itself. Steel came to Pittsburgh because of coal and water. This same coal is the coal we mine typically for steam, but has metallurgical characteristics that the world is now demanding. That's why you see us moving this coal into a marketplace when the value of the dollar is right, the transportation's right and the demand for this type of product lines up together. So it's important that you understand, we're already capitalized to move into these marketplaces between steam and coal, especially with the investment that we have in our own facilities in Baltimore. To move the coal offshore when the time is right. We are a low cost producer in this product and it creates real value for our shareholders and margin expansion as we move between these two different products.

Now, let's not forget about McCannon. McCannon is the lowest cost, highest quality low vol coal in Appalachia and so margin expansion there is rather easy as we see prices rising there. That is a solid mine. It's well capitalized. We've done a lot of work to make it more consistent over time. And we see rising markets on that very high quality product itself.

The high vol coking coal that we call coming out of the Pittsburgh seam, we think that will range right now, the pricing is ranging between 70 and $85 a ton, depending on the quality from mine to mine. What we see at Buchanan right now, we have 2.7 million tons to reprice for 2010. We see between 135 and $145 a ton if we sold that today, that's where we see the marketplace right now. Margin expansion is what drives us. If you saw what we did in 2009, even though we dropped volume, we were focused on optimum places, margin expansion and let me say something about the operations of the mines themselves. We pulled back and developed long wall panels even when we didn't run long walls. It put us in a great position for 2010. As the market's been unfolding, remember last time I talked about 2010 being a bridge for CONSOL to I think a brighter marketplace in 2011. We see that bridge shortening right now. These changes in the met markets as well as demand for electricity as it begins to rise as well as cold weather, that have drawn stockpiles down in our natural marketplace, puts us in a position where we think that prices on coal for steam will rebound quicker than what we originally anticipated. More like second half of 2010 versus the first half of 2011.

We are spending money in the mines. We're spending money on long wall expansion to keep our costs down in terms of we're making the faces wider and when we finish those projects, we will re-evaluate what projects we do going forward. I see the expansion of the gas business as our number one priority. We see the capitalization of what is already in place on the coal side as a priority in terms of maintaining what we have and expanding margins in that area. So I'm very enthused about both pieces. I'm enthused about the steam side, the metallurgical side, the gas side, the Marcellus play and if you go right down into on the gas side down into Virginia where every hole we poke in the ground we make a lot of money, that's also the base of our gas Company and we're excited about that as well. With all those pieces I'm enthused about our ability to work our way through tough marketplaces. And I'm very impressed with this Company's assets and the people's ability to adjust to the marketplaces as we see them shift. This is very valuable Company with great assets. And I would be glad to open this up for questions at this point in time.

Stacy, could you instruct the callers on you how to queue up for questions, and I would ask if you're a member of the media please ask your questions until after the call and I'll take you individually offline. Stacy?

Thank you. (Operator Instructions) And our first question will go to Kuni Chen from Banc of America. Please go ahead.

Hi, good morning everybody.

Good morning.

Nice job there. I guess just first question, on Buchanan, looks like the overall met production was a little bit below a million tons in the quarter. Can you just talk about your ramp-up process there as we go through 2010, when do you expect to be at a 5 million-ton run rate?

We're at that run rate right now. Buchanan will run at that rate all year long, the 5 million-ton rate.

Okay. All right. That's pretty straightforward. As a follow up as far as your market views with thermal being back into balance by the middle of the year, can you talk about your approach to 2011? Do you wait more until the second half of the year to commit more of those tons or do you see opportunities to sort of layer that in as we go through the first half of the year, if you could just talk about your thought process there?

I think we'll layer it in softly, I think would be in the first half of the year. The second half will be more intense. The closer you get to the next year the negotiations get there. One of the big swings is how much high vol coal are we going to move away from the steam market and that helps us in the negotiation process in terms of where we want to move this coal. It gives us the optionality. We can move as much as maybe two -- at least 2 million more tons into the Asian market if we can get those sales done. So that creates a shift and we would rather be negotiating towards the second half of the year based on where we see high vol coking overall going.

Great. I'll turn it over. Thanks.

We have a question from Jim Rollyson from Raymond James. Please go ahead.

Good morning, everyone. Brett, going back to your commentary on the CapEx front, you guys have had going back to I think '08 -- '07, '08, a lot of efficiency projects targeted for the coal side which you continue to work on. When those start to wrap up and maybe give us some sense of time frame of that, do you think you're going to come up with additional projects like that to continue to deploy capital towards or does your CapEx come down some or do you redeploy some of that capital towards the E&P business?

I would say if you look at what we just came back with, Shoemaker was really a three year project. It just came on this month and we have the widening of the long wall faces which we'll finish up this year. We have some refuse piles that we're working on at Bailey and other places. The most likely big project that you will see is the Bailey, Lowe overland belt that will be put in but that's already in the buck budget cycle and being built. It will be done in 2010. We really see and our plans the way we see the market right now is to continue to try to develop on the development side the BMX would be the fifth long wall of Bailey, but that will be kind of year by year depending on where we see the marketplace, but our emphasis from a CONSOL Energy perspective is going to be very, very rapid growth in the gas business because of our low cost position there. So I would look at the Company as the coal side would be well-capitalized, creating cash to grow the gas business until we see real demand for coal, while the nation tries to figure out what they're going to do between coal and gas. It's nice to have that optionality and looks like what we're going to do in the next five years.

That's helpful. Then on the Bailey and Lowe side, obviously you're selling some of that now into China as a met product.

Yes.

Curious how your domestic steel customers are viewing the fact that you're shipping some of this overseas. Is it something that they're taking notice of? Can they overcome the sulfur content issue? Just kind of curious what opportunities you have in addition to the export side, domestically for that coal?

Well, keep in mind, as I said earlier, that this coal was the met coal for the domestic supply. That's how it all started. And over time, the equipment, what their needs are, what their abilities are, that's all changed over time. It seems to me that newer equipment overseas has a better ability to pull sulfur out of the Pittsburgh A seam than older equipment in the United States. That doesn't mean that the domestic steel companies won't look to this again because the pricing is pretty good on it and supply is good so we are having conversations but I think this movement to China gives the steel business a whole different look at the Pittsburgh A seam again.

Great. Thank you, guys.

Thank you. We have a question from the line of Brian Yu from Citi. Please go ahead.

Great. Thank you. My question is regarding the met coal tons, what's left unpriced. Is it safe to assume that those are all Buchanan product?

Buchanan's unpriced, yes.

All right. An just in terms of your production cost for 2010, both met and thermal, met's been pretty volatile. Can you give us a sense of where you see that headed?

Well, on the Buchanan mine itself, it's probably going to be right around 45 to $48 a ton, fully loaded. And I think that's a good number for Buchanan. We don't give individual numbers about Bailey and those kind of projects but if you look at our average thermal price on Pittsburgh 8 seam type mines, it's going to be around $44 a ton, I would say. That's an average for all of Pittsburgh 8 seam.

All right. And when you choose to sell the high vol coal into the met market, are there incremental processing costs?

No, there is none. We're actually selling exactly the same product either to the utilities or to the steel companies.

All right. Great. Thank you.

Thank you. We have a question from the line of Brian Singer with Goldman Sachs. Please go ahead.

Thank you, good morning.

Hi, Brian.

Following up on a question on the cross-over tons, it looks like you contracted overall more than the 0.5 million tons in the quarter to Asia. Did you do contract tons to -- crossover tons or crossover volumes to places other than Asia and can you comment on what the additional capacity to sell Bailey into the met market beyond Asia?

We did that. In fact, the first sale that we did before we did the deal with X coal, last year we did a sale to Brazil to be delivered this year, it was a half a million tons going to Brazil. It was -- I think it was as little lower price than what we ended up with on the sale through X coal to China but that tells you the strength. I mean, we see the market of Brazil, China, Korea, Japan, all of these met places are going to be looking to this coal, our typical markets are in the Atlantic will look at them and when you look at the crossover, if the market's right, you could look at the whole Bailey and Lowe complex over time as a high vol met market, if it holds. Now, that's not likely to happen. So we have some studies that say what would it look like if half the coal went to the met market and for 2010, we see another 2 million tons that we could move out of that market, out of that mine, if the market's there or that combination of mines.

Thanks. And secondly, shifting to the gas, you're guiding the second rig in the Marcellus. Can you talk to your expectations for what that could add from a production perspective and why not then raise guidance or is there any reason why there wouldn't be upside to guidance given that you are adding that second rig there?

Well, we are going to add the second rig. We have the permits to do that. The rig's on its way. It's been ordered. We think that if it's very successful we'll give a higher guidance as we see the success of it. It's probably going to cost us -- every rig costs us about $100 million a year to put in place. So I think we'll announce success as we see success. I think we're looking at it as being cautious to make sure we do it right, we develop the right technology, and that we grow in a proper way to where we get maximum value for our capital.

Great. Thanks. And just if I could ask one follow-up on that. You had mentioned restrained acreage or some acreage issues that forced you to drill maybe not as long a lateral in the Marcellus. Is that something that could be recurring?

No. In fact, we're moving to places where the lateral's are going to be optimized rather than restricted by ownership. We also have an option on a third rig if we have a lot of success. We're going to 3,000-foot laterals and I think the others were restricted to 2,000-foot laterals. So I think you'll see much higher production out of the ones that we have going forward.

Thank you.

Thank you.

Thank you. We have a question from John Bridges from JPMorgan. Please go ahead.

Good morning, Brett.

Hi, John.

Bill, everybody.

Hello, John.

Thanks for the clarity on your sales. You're saying 75 to $85 a ton for the Bailey met product?

Yes, at the mine, yes.

Right. So that sounds like equivalent to sort of PCI product. Is that a good benchmark that we should use for pricing going forward?

Well, I think in the market right now, I would say a lot of it has to do with the volumes and the vessel rate and all, getting it clear to China. I wouldn't say that that's the exact number but it's a moving target. I would say on domestic stuff you might see a little higher pricing because of the freight's different. But it's all a function of demand and how you get it there. So that's a long way, as you know, but it's a very valuable asset to us and moving that steam coal into that marketplace gives us a lot of strength because we're not doing anything else to the coal.

That's incredible.

It is, really is.

On Shoemaker, was that going to bring down your average cost? That's a lower cost mine. Are you going to bring in a smaller tonnage this year? How should we look at that and is that stuff sold?

Yes, it is sold and it should bring our cost -- if nothing else, stabilize our cost for the year. It is a lower cost mine than it was when we took it out and it will stabilize the cost for the year and the next five years, I would say.

Okay. Well done, guys. Thanks a lot.

We have a question from the line of David Gagliano from Credit Suisse. Please go ahead.

Hi, everybody. Thanks for taking the question.

Hi, Dave.

Hi. My first question, on the thermal, just for 2011, just the back of the envelope estimate when we compare Q3 press release with Q4, seems to imply you sold about 3 million tons of thermal. For 2011 delivery at a price of around 54. Is that right or is there something else going on in terms of the comparison between those two tables?

It might have been -- I'll have to look into that in more detail. It might have been something we were selling on a quality spec that was a little bit different or might have been a carry-forward tons. If you would call in after the call, we'll give you the specifics on that, David.

Okay. Great. My follow-up, in relation just to that 134 to -- 135 to 145 net back to the mine price that you highlighted, what's a reasonable assumption for transportation cost, just so we can compare that to the global numbers. Obviously we have to adjust for short to met ton, but just for the transportation component.

I would say $35 on the rail side, and on the freight side, vessel rates, if we're talking China, is $55.

Okay.

So 35 rail, 55 vessel.

Okay. All right. That's very helpful. That was it. Thank you.

We have a question from Brian Gamble with Simmons & Company.

Good morning, everybody. Quick question on the Buchanan tonnage already headed over to China. Is that all Q1 shipments? I know you mentioned 2 million additional tons are possible. Are you hoping to ship 0.5 million tons in the first quarter and then go from there or is this a first half type number?

I want to make sure you understand. Buchanan tons aren't going to China. It's Bailey tons which were typical steam tons and it's 0.5 million tons that is going to China and it's being used as a met coal directly in the steel mills in China. And that's kind of a new product that we're selling into China. The 2 million tons beyond that would be Bailey type tons but it could come from the Blacksville mine or the Leverage mine.

My apologies. On misspeaking. Bailey is what I've got written down in my notes. So we can put the 0.5 million in the first part of the year is essentially is what I was asking.

I would say in the first quarter.

Then my follow on. Great cost control for the quarter, clearly helping everything across the board. Do you think that with the overall movement in thermal prices recently, that has enabled I guess some of the smaller producers to see some of those same sort of cost reductions and, therefore, might have incentivized some people to keep some tons on that might have been rolling off at the end of the year from higher priced contracts in '08 or do you think those tons are still at a disadvantage and thermal tons continue to kind of roll out of the market, both kind of Northern App and Central App, just wanted to get your general feel for that?

I would say keep in mind, Central App's cost structure is probably 15% to 20% higher than Northern App's cost structure. And that's constant. I think that the prices don't reflect bringing back anything in Central App yet. In Northern App, there's not that much tonnage that isn't long-wall oriented that would bring these people back. If it does, I think they would come back in the met type markets first. What we'd see in central PA and things like that, so we've still got mountain top mining issues, permitting issues and those costs are going up. I don't see where there's going to be incremental tons coming back into the market right away.

We have a question from Shneur Gershuni with UBS. Please go ahead.

Good morning, gentlemen.

How you doing?

Good. Most of my questions have actually been asked and answered. We spent a lot of time talking about the Bailey coal going into the Asian market and so forth. If I recall correctly that also has the potential to go into the European thermal market as well too. Was wondering if you could sort of talk about what's going on in the European thermal market and if Bailey is going into the Asian market, where you would have tons available to hit European demand if it started to spike up in the AP2 market?

Well, on the thermal side, since it's the same product, what we would move it to the highest price, obviously. And there's limited tons what we would move. I think Bailey is going into the European market under some contracts that we already had in place for steam, but I don't see that those steam contracts even if you look at the forward pricing, even close to what we're selling coal for on the high vol side. So there's a big spread. So we're not looking to that market with Bailey type coal unless it approaches the high vol numbers.

Should demand spike there and you commit Bailey into the Asian market, do you have any other mines that you would look to try and send into the Asian -- sorry, into the European market or that's pretty much the bulk of it?

We do have some. In fact, we would move every ton if the price is right. I mean, that's not contracted for because we have the port facilities to do it and our Btu structure travels a long ways. Europe likes our coal but it tends to be depend on the strength on the dollar, tends to be a swing supply rather than a constant supply to Europe, as we've seen.

Just moving on to cost for a second for both 2010 and 2011, I guess on a more normalized basis, I was wondering if you could sort of talk to -- you've done a lot of these efficiency projects. You're supposed to -- they're supposed to have improved cost and so forth. Kind of where do you think normalized cost structure should be absent the moves in royalty, just due to pricing.

I would say if you looked at the cost structure on the met side, we're going to hold around $45 in the next couple years. And I would say on the steam side, we'll see some effect on the expansion of the long walls, but that will trickle in. I would say anywhere from 42 to 45 depending on how -- we've got labor contracts coming up, things like that. But I would say 42 to 45.

Great. And just if I could just switch to gas for a second here, just to confirm what you said to Brian before, your production guidance does not include the second rig or it does include the second rig?

It does include the second rig. I think one way to understand that better is a lot of the movement that we got in 2009 was a lot of spending and permitting and things that were done in 2008 so that as you go through this cycle, remember we cut off -- we slowed down spending based on the poor economy last year and some of that momentum rolled through 2009 and to build back again you've got to build momentum again in your process. So the 23% jump that we saw in 2009 relates to 2009 and '8 and the jump that we see in 2010 is more related to '9 and '10 spending and as we -- the effect of that second rig will have a big effect on 2011.

Okay. And then just a final question on gas. Can you remind us what your costs are to drill a well at this point right now and kind of what your cycle times are to turn it to sales?

In the Marcellus Shale area it's about $3.5 million a well. And takes about 14 days on the -- with the flex drill, about 14 days to drill it. Down in the Virginia area, on these coal bed methane, takes about three days to drill them and they're about $150,000 to $160,000 a well. Perfect. Thank you very much.

Thank you.

We have a question from Michael Dudas from Jefferies. Please go ahead.

Good morning, gentlemen.

Hey, Mike.

Brett, how do you look at your outlook on gas hedging and how do you want to play the market, given the growth, low cost, and maybe your belief on where gas is going to normalize over the next few years?

Okay. That's a good question. Everybody wants to know what the gas prices are going forward. I would say this. We look at the entire Company, CONSOL Energy, and we break it into BTU's and hedged BTU's. So if you look at it from that perspective, gas is a place where we lock in at levels. We raise it about $0.50 -- every time the market moves $0.50 we put more gas hedges in. We're 46% hedged for 2010 and we think that's a good place. So if you look at it across the entire Company, that 50% that's not hedged really gives us an opportunity to work the market when it spikes, and if you see our history, we've been very good about doing that. So I would say we're where we want to be. Now, if you talk about gas prices, I can give you four different estimates.

I'm sure you can.

We think gas prices are going to be, because of the cost structure of Marcellus Shale, between $6 and $7 going forward on an average, if you gave a five year average, it would be between $6 and $7.

I appreciate those thoughts, Brett. Thank you. Second question. When you think about the sales to China for the Bailey type coal, it's early yet but how sustainable do you think that is and how do you characterize the sustainability of year in and year out volumes at reasonable prices all the way to China versus your term contracts to good customers that are well-capitalized in the US or possibly in Europe for that coal?

Well, I think it's all a function of price and volume. And the customers that we typically always supply, we have good relationships with some that we always supply them based on agreed prices and if we see real demand for this coal in China and in Asia, that becomes a swing supply for other sources for them, they might want to -- we think China burns about 200 million tons a year of met coal and so for us to move 5 million to 10 million tons of met coal from the Pittsburgh 8 seam, it's a drop in the bucket to them but it's also a swing supply for them because we are very dependable. We have the port facilities and we have the ability to get there and they have a lot of strength in terms of shipping. So I would say the market's changing and the demand for energy coming out of Asia, especially China, and I -- remember two quarters ago, Mike, I never would have said that we would be shipping coal to China. I'm pleasantly surprised at how this -- so it could end up being a long-term relationship.

I understand. My final question is, Brett, when you think about three things, your -- the coal and gas markets, your Company, or legislative regulatory issues, which ones are you most concerned about?

Well, I guess if you look at it across the board, I'm concerned about two things. One is CO2 legislation, what does that really mean to the coal industry. I think well capitalized mines like what we have will supply these big power plants for the next 25 to 30 years, no matter what. The question is, how much restraint's going to be put on the utilities. What I think will happen, if you do a lot of C02 legislation, you're going to ends up stopping capital from coming into development of coal supplies, and that will drive the price of coal up to the utilities and in the short term, I think well-capitalized companies make a lot of money. In the long term I think the cost of energy's going to rise pretty fast in the United States. The other thing that's going to be hit very hard and this is on the gas side and the coal side, the EPA is very focused on water and discharge of water, whether it's a drill hole or a mine hole. And that water is going to be -- it's like the new air. Remember the '90s, all the changes in the air regulation. We're seeing the same kind of thing on water and it's going to drive the price of energy up domestically so those are the two places that I show concerns but I think these are costs that society will bear.

Brett, appreciate your comments and well done safety issues. Thank you.

Thank you.

We have a question from David Khani from FBR Capital Markets. Please go ahead.

Hello, gentlemen.

Hey, Dave.

A bunch of questions have been asked. I wanted to sort of step back a little bit. Nick has been put in place as the COO for about a year now. What are some of the key accomplishment's you think he's gotten done. I think safety you can highlight as one of the things that have been pushed but what other things have been happening and particularly on the coal side because I think we can see what he's done on the gas side.

I tell you, he grabbed right ahold of the operations. First of all, he really tied gas and coal together in terms of optimization between the two in terms of what we do in our energy footprint in the region. He did a good job because he knew both sides of that. The other thing that I thought he did very well, as the market dropped last year, in terms of volume, he focused on long wall development and where we didn't run our long wall to full capacity, he worked with marketing, Bob and those guys, and made sure the long wall development got out ahead to where when the market changed, we have capacity that would -- you would consider incremental, based on that we're not running short on development. So he made that a goal and objective for the mines and did a very good job of doing that. He drove safety and he also drove focus on the cost of coal rather than the volume of coal, which any mining Company I think that's where we need to be.

So would you say that production reliability is improved as a result of what he's done?

Yes, definitely. The problems we were having was reliability and the ability to keep the long wall ahead of development. I think that has done very well. And he also spent a lot of money sealing the mines, especially in Buchanan, putting the seals in there makes that mine a lot more reliable than it was in the past because it's totally sealed from the problem area that we had before.

Great. Well, we're looking forward to that reliability. That would be great. Could you give us a sense now, I guess everybody is sort of asking now that the cold weather is starting to draw down the utility stockpiles and then the added benefit I guess of pulling Bailey out of the steam market, what are the utility buyers thinking today, because they were obviously very confident I guess two months ago. Are you starting to see a pickup in inquiries?

I would say we're seeing a pickup but it's too early to tell what the results are going to be. We're going into another cold snap. That last cold snap we had was so dramatic that one day was like two days of burn. And so we actually pulled down about 20 days of supply in our area through that last cold snap. We've got another one coming. So the combination of moving coal from high vol into the high vol coking coal area out of the steam market and the effect on the weather gives me a lot more optimism about the second half of 2010.

That's great.

And then it will improve pricing in 2011, I believe.

If you look at then just sort of the total expert expectations that you think you'll do for 2010 versus 2009, if you could give us sort of a sense of how much steam and how much met you'll do?

Well, I would say on the met side, there will be 5 million coming out of Buchanan, probably 3 million coming out of Pittsburgh 8 on the met side and there will be another 100,000 tons coming out of a new mine that we just opened up. So that's the met side. And that's a small mine that we've -- in central PA that we're doing with Rosebud Coal. On the steam side, the difference will be we'll match the market. Whatever the market is. We're not going to build inventory so whatever the market will bear, we'll match that side. My guess is we're going to end uncommon by up combination of the two, right around 62 million tons.

I'm sorry, I misunder -- how much steam do you think you'll do this year?

Okay. I would say you take eight from 62, would be 50 -- about 54.

54.

Yes, 54 million tons of steam. That would be a good number to go off of.

Do you think you're going to export any steam this year? Do you have steam under contract from prior years?

Yes, I think about 2 million tons.

2 million tons. Okay. That's great. Good. And then I guess last question, because you're really talking up gas, I guess the questions people want to ask also behind the scenes is you've been buying back gas, the gas stock over time and you've kind of had a hiatus. How do we think about what you're going to do with the remaining stub piece?

Well, I can tell you this. We like that Company. We buy shares from time to time. When they're available at the right price, and the Board's last decision was that it's going to stay a public Company unless we get an opportunity to buy it all in. But right now, we have partners and we're running it as if we do have.

But there's no gun to your head or anything, you don't need to do this now, it's just whether you can just get it -- do it at the right way?

That's right. There's no pressure on that.

Okay. Great. Okay. Thanks, guys.

Thank you.

Thank you. We have a question from Jeremy Sussman from Brean Murray. Please go ahead.

Hi, good morning.

Hi, Jeremy.

The 8 million tons of met coal that you just mentioned, can you tell us about how much of that's going to be exported?

I think all but 2.5 of it.

Okay.

I think 2.5 will go to domestic.

Okay. And that 8 obviously includes the incremental 2 million of Bailey quality coal that you mentioned previously?

That's right. That's right.

Okay.

All that -- I need to clear something up. The 2 million tons that we're seeing is available at Bailey, they're not sold yet. We think that could be available if the price is right and the ability to move it's right. We have the port capacity to do it but that's not sold yet. We could move it into that. We're not saying we will, but we could.

And on the potential for thermal coal exports out of the Pittsburgh 8, what are you seeing there? Obviously we've seen a big pickup in Australian pricing, at one point API2 prices moved up a fair amount. They've come back up a little bit. Can you maybe talk about the timing or potential that you see there for incremental tons on the thermal side?

Well, two things will affect that. One is the price now between where we would move it as met coal versus steam coal, there's about a $15 or $20 spread right now. On the API2. That's a pretty big spread. The other thing is capacity to move it out. Clearly, the higher -- the high vol coking coal will move before the steam coal does for our own port facilities and so it all depends on what the capacity at the ports are to move steam. Because I think met's going to overtake that.

Okay. Great. Thank you.

Thank you. We have a question from Curt Woodworth from Macquarie.

This is [Warren Chan] on the line for Curt. Most of my questions have actually been asked and answered. Just want to follow up up to Jeremy's questions. According to the port statistics it looks like you accounted for about 60% of the throughput through Baltimore in December versus 20% in November. Could you just elaborate and comment a little more on the recent treads on the sea borne side of the business, what you're hearing from your overseas customers and where you're seeing strength and weakness right now.

Well, I could -- month to month, I guess you could call back when we give you specifics on it what's going on at the ports. The first quarter we see about 3.3 million tons going through our facilities. For the first quarter. In terms of sea borne freight and all of those issues, we tend to sell all of our product at the mine or at the port. That tends to be on the customer side. Our transportation people might be able to give you some stuff if you call back in later.

Okay. Thank you. That's it.

Thank you. We have a question from Paul Forward with Stifel Nicholas. Please go you ahead.

Good morning. Just wondering what you would call your upper limit on coal production capacity in 2010 and 2011?

Let's see. If we ran flat-out, I think it would be about 62 to 64 for 2010. And 2011, it would probably approach 66 to 68.

All right. And that would assume a full production from like a full on mine from example?

That would be full on line, everything online with some overtime.

All right. Thanks for that. You mentioned earlier $35 rail rate from Buchanan to the export markets. Was just wondering, can you give us a comparable figure for the Northern App coal, just a lower price and shorter distance mean a lower rate?

We don't disclose that.

Okay. I tried. Maybe lastly, you have got a -- you've now got your finger on the pulse of the Chinese market with the help of X coal. Just wondering if you'd seen anything over the past couple weeks of importers not being able to get financing or get a letter of credit, anything very recently that has you concerned at all?

We, in fact, we're seeing more orders come our way and the letter of credits are in place, as well as insurance, so we should be all right.

Great.

We don't see any real indicators there's any problems.

Excellent. Thank you.

We have a question from Michael Goldberg from Loomis Management. Please go go ahead.

Hi, how are you. Gentlemen, I just wanted to ask you how you view when you think about excess cash and how you view it versus for a different investment to the coal and gas business versus M&A or dividend or share buyback, what are your thoughts?

We've been consistent on that, Michael. One of the advantages of CONSOL Energy is we have great optionality. We talk about some of our organic projects such as the BMX mine and any time you look at an acquisition opportunity you have to put into the queue along with our organic opportunities and quite frankly most of our organic opportunities are far better than what we see on the M&A side. We're going to continue on to do what we've always done, that means where we see opportunities to invest in our business, we do that. However, when periods of time where we see that stock has tremendous value, is we'll go out and repurchase some of the shares or, again, buy more shares of the gas Company when they look very advantageous, as Brett said, that's not out of the realm of possibility either. So I think you have to look at what we've done and so we'll continue along that bend.

With that, I think we'll wrap it up, Stacy. So could you please instruct us on the replay information.

Sure. This conference will be available for replay after 1 today running through February 4, until midnight. You may access the AT&T replay system at any time by dialing 1-800-475-6701, or 1-320-365-3844, access code 140539. Those numbers again 1-800-475-6701, or 1-320-365-3844, access code of 140539.

Thanks, everybody.

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