CNX Resources Corp (CNX) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CONSOL Energy and CNX first quarter earnings conference call. As a reminder, today's conference call is being recorded. I would like to turn the conference call over to the Vice President of Investor Relations, Mr. Dan Zajdel. Please go ahead, sir.

Thank you, John, and welcome to our joint earnings call today with CONSOL Energy and CNX Gas. With me this morning, is Brett Harvey, Chief Executive Officer of CONSOL Energy, and Chairman and CEO of CNX Gas. Also with us today are Bill Lyons, Chief Financial Officer, Nick DeIuliis, Chief Operating Officer, and Bob Pusateri, President of Sales. This morning we will be discussing the first quarter results for both companies.

In addition, we will be discussing our outlook for the remainder of 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. Let me start the call with you today, Bill.

Thank you very much, Dan. And thank you everyone for joining the joint CONSOL Energy and CNX earnings conference call. A new year is traditionally time for enthusiasm, excitement and often a start of change. These certainly apply to CONSOL Energy. The first quarter of 2010 continued our string of strong financial results, and with the acquisition of Dominion Resources Appalachian E&P business, 2010 will be a year that will change the landscape of CONSOL Energy. The key event in the first quarter of course, is the acquisition of the Dominion Appalachian E&P business for $3.475 billion. This is a transforming event for the Company. During our deal road show, and in today's release we have spoken at length on the merits of this transaction. So I won't repeat them here.

However I would like to briefly comment on the financial side of the deal. On March 26th, the CONSOL Energy offered 44.3 million common shares, concurrently with $2.75 billion high yield notes split between two tranches, and that's a seven and year senior notes. The simultaneous offerings were marketed over a four day road show that covered over 250 accounts in New York, Boston, New Orleans, Los Angeles and San Francisco, achieving a 76% hit rate on one-on-one equity meetings. The debt securities priced at 8% and 8.25% on the seven and ten year offerings, and the order book was multiple times over subscribed. And when you add to it, the $2 billion credit facility that we are in the process of completing, that's over $6.5 billion that various investors have entrusted to us. We are both humbled and inspired by the response of the capital markets to our investment thesis.

The Dominion E&P acquisition compliments our existing assets, and will be highly correlated to value creation for our shareholders. The Dominion transaction will close tomorrow. The second major event of the year is our launching of the tender offer for the shares of CNX Gas that we don't currently own. With a Dominion acquisition almost at hand, it makes sense for us to have all our gas assets managed as one business. With the tender price of $38.25 per share, and with 25 million shares outstanding, we anticipate paying $965 million for those shares. We expect the tender offer to be completed by May 26th.

Now let's re-review our results for the quarter. We had another excellent quarter. CONSOL Energy is reporting net income of $100 million, or $0.54 per diluted share for the first quarter 2010. The GAAP net income though, was impaired by several items. We incurred fees of $47 million associated with the Dominion acquisition. We also incurred non-cash charges totaling another $47 million. These charges include $25 million associated with reclamation accruals at the Fola mine, and $22 million associated with certain legal accruals. If you chose to adjust for these items, our adjusted net income for was $156 million, or $0.85 per diluted share. Our adjusted EBITDA was $349 million.

These numbers showed the underlying strength of our assets. Back in October, we characterized 2010 as a bridge year. Then in January we acknowledged that the bridge appears to be a lot shorter than it was in October. Our first quarter results support our optimism for 2010. What has happened? The low vol coking coal we expected to sell our unpriced of 2010 coal for around $135 or $145 per ton at the mine, our latest sales are in $170 per ton range. Also last October, we had an entirely new, we've added an entirely new category of sales. This is our high-vol Coking coal.

This coal from our Pittsburgh 8 seam mines in northern Appalachia. It is selling in Asia and Brazil for prices much higher than what we can get by selling it into the domestic thermal market. So far 2010 we have sold or committed 2.1 million tons, at an average price of $73.00. The thermal business has improved since last October also, The colder than normal winter, enabled generators to reduce stock piles from the record levels of early December. Our thermal our business has also benefited from of the selling of high-vol coal to Brazil and Asia. Since it's the same coal that we sell to domestic thermal customers, moving tons overseas has the added benefit of tightening up the domestic market.

Now that we're into the shoulder season, thermal demand has weakened a bit. Inventories are still higher than we care to see, somewhere around 55 to 60 days. On the gas side, spot prices have weakened considerably. At year-end, they were around $6.00 per Mcf. Today, they're at $4.25. In our first quarter results for gas, however, we had a very good average sales price of $7.24 per Mcf because of our strong hedge position. With our strong hedge position for 2010, and our low cost structure, we expect outperform our gas peers this year.

In summary, both our low-vol business and our high-vol business are doing very well. The thermal coal business has improved considerably, and the gas business is out performing it's peers. This quarter results show, once again, the value to shareholder in owning shares in a diversified energy company that has best-in-class assets in four separate categories, world class low-vol assets at Buchanan, high-vol assets in the Pittsburgh seam that doesn't exist six months ago, and we shipped out of our 100% owned Baltimore terminal, the highest Btu thermal assets in the country, and our gas Company's leading position in possibly the world's largest gas formation, the Marcellus shale.

This collection of assets can't be duplicated by a portfolio manager cobbling together pure plays. You can only invest in best-of-class assets by buying CONSOL Energy shares. The numbers speak for themselves. CONSOL Energy has established itself as a Company that generate strong earnings and cash flows, by utilizing a sustainable model that provides financial flexibility. This flexibility enables us to react and adapt to changing economic environments and markets, while continuing to prudently invest in our businesses. This quarter again demonstrated the financial power of being a low cost diversified energy company.

We remain steadfast in our confidences in our business model. Our balance sheet and our status is a safe, low cost producer enables us to effectively compete, and produce exceptional earnings and cash flows even in uncertain economic times. CONSOL Energy controls the greatest concentrations of Btu's in the eastern United States. From almost 15 decades now and through many business cycles, CONSOL Energy has remained committed to optimizing shareholder value, by putting safety first, by being respectful to the environment and the communities in which we operate, and by providing meaningful employment opportunities. We remain committed to these values. With that Brett, can we have your comments for the quarter?

Thanks, Bill. Thank you all for the spending time with us, to listen to us, and also give us the opportunity to answer your questions. Our format changed a little bit on our press release. So there's a lot of information there. I think it's very straightforward information. And some of my comments are there, so I'll make mine brief, and we'll get to the questions as soon as possible. But first I'd like to talk about some strategic things, as well as forward-looking things. First, let me say as a fourth generation coal miner myself, we grieve for the 29 lost lives in West Virginia. And those are tough things for the entire industry. I can tell you, though, that CONSOL Energy has an unwavering commitment to zero accidents. And we believe that we are the generation that can bring these minds to zero accidents. And our intention is to steadfastly do that until we're at zero everywhere in our corporation. Progress is being made inside CONSOL . And anytime we have an accident of any kind, it is an exception to our beliefs and our values, and we operate that way. And our shareholders need to be aware of that.

Let me move into the coal business. The met coal market plays itself. We see it as being very robust. Our expectations for the year have been exceeded on pricing. We've done some good deals on the pricing side. But let me talk about our China sales. Our relationship with with Xcoal has been a good one. I can tell you in 2010, that 90% of all met coal coming out of North America into China's steel mills, will come directly from CONSOL Energy and Xcoal. That should give you focus on who's moving the coal into that country, and into that great expanding market, and who has the legs up to do that. With our relationship with Xcoal, we've been able to do that. And I'm very proud of our marketing people and our abilities to get that done.

We see that as a growing market. We believe we'll hit 3 million tons of that high-vol coal into China this year, and we believe it's going to grow into next year. Now, we don't have firm numbers on what next year looks like. But we're optimistic it will grow from 3 million. And that gives us the concept of continuing to push the BMX mine, because of its high quality value, and it's a low cost structure that it will have on the high-vol met coal side. As well as expansion of the Baltimore port, when we see that that expansion is necessary for the use of our relationship, and our shareholders. I expect the market to be good enough to where we could approve the expansion of the Baltimore facilities in 2011. With this change in high-vol met and low-vol met, for 2010 we believe we will be either, the number one, or number two met producer in all of North America. That is a strong function of our asset base, and it is an attest to the value of this Company across the board.

Now let's talk about the steam coal side. The steam coal side is not getting the legs as quickly as, as we thought it might. I think the demand for power is down a little bit. But you can see there are margins are robust and powerful. And that, as we see the demand for power in the US come back, we believe that the supply will be short on the rebound, which will force upward pricing movement on all steam coal in the United States, especially for domestic power. We think thing will tighten dramatically on the environmental side, as well as safety constraints related to the accident in West Virginia. And I can tell you, that on the steam side, we are sold out at very high margins for 2010. We have no coal available in the Pittsburgh 8 seam for the steam market in 2010, beyond what's already been signed up.

Okay. Let's talk about gas. Great acquisition that we made, we're very excited about that. But I'm going to talk about what we're doing with, in CNX Gas first. The CBM side continues to be the low cost producer with expansion very rapidly on our Virginia properties, and add real value to our shareholders across the board. That has been a great success. That's where we started in the gas business. And we see great success going forward there, as a low cost producer in any gas marketplace.

Now let's move to our Marcellus shale piece. Now we already had that within our estate, as we moved from CBM into Marcellus shale, we saw the value there. We continue to see huge value there. We're having great success on those, those wells, as you can see in the documentation that we put out. It puts us in a position of the low cost producer in both CBM and Marcellus shale. In any marketplace, we are going to be the highest margin just like we are at coal and that brought us to the acquisition. When we saw the acquisition of Marcellus shale to be available., we moved forward with a strong balance sheet, tied up very valuable resources in our backyard. There's been some chatter about CONSOL Energy going more in the gas business, and walking away from coal. I can tell you from the earnings that we just announced, why would we walk away from the best assets in the country. What we've done, is enhanced our position in our backyard for our shareholders, and that will create huge value over time.

Let's talk about the acquisition a little bit more directly. That's a big acquisition, and it has a lot of value. We are putting together plans to optimize what we see for the next ten years for expansion in that Marcellus shale. And what, what we intend to do is take the net present value of the value of that deal, and move it forward for our shareholders, with innovations and development of the resources, however that looks. We're very flexible, we I know at the point to do -- intend to do that an monetize the value of that as quickly as we can into the pockets of our shareholders. We are in a low cost, high margin position across gas, Marcellus, as well as CBM. On the met business, we are in a low cost, high margin position. In the steam business, we're in a low cost, high margin position. And we have flexibility on every one of these assets with great transportation assets, as well as the skills and management to get the job done.

Let's talk about earnings a little bit. We did not have to rebound from a recession, because we had a record year last year, driven by the coal business. You go back to 2008, our strong year was driven by gas. If you go to 2009, our strong year was driven by coal. If you look at 2010, our strong year is being driven by coal and coal margins. We believe from 2011 and on, that our strong low cost position coal in gas will drive on these two different cycles, real value to our shareholders in an exponential way from where we've been in the past. We're very excited about our ability to operate these two very valuable resources in our backyard. When we call our backyard, we're talking about Pennsylvania, West Virginia, Ohio, and this region right here, where, this is the energy of the eastern United States. And we own the biggest low cost percentage of that. With that, I'd like to answer

John, could you please instruct the listeners on procedure for asking questions?

Certainly.

(Operator Instructions).

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

It's actually Chris Brown filling in Kuni Chen. Good morning.

Hi, Chris.

What level of production cuts in the App region are you forecasting in light of the tougher permitting process and higher safety inspections? And then any thoughts on what the per ton cost increase could be for underground miners going forward?

Every time we, we he see an adjustment like that in terms of the constraints, in terms of safety, there is a cost. But that usually winds out as the debate goes on with restrictions and so forth. We think it will tighten up. We don't know how much. I think last time we saw it, was almost $0.60 a ton, with the last act that was put together, so I think on the Dominion side, we're a little more concerned about, because the EPA has been very tight with their permitting in central App. And I think they're looking at state by state, with -- with new interpretations of the laws that we have to adjust to. So that's unfolding right now. We can't give you specifics. But what I can tell you is, when the economy rebounds dramatically, and we think it will. The supply was short going into the recession, and the supply will be tighter coming out. And that gives pressure on pricing. We don't have the specifics. We just feel the pressure, and typically when we see this kind of pressure, we see it on the cost structure, as well as the ability to get permits, probably six months out.

Okay. And then how much coal do you expect to ship from Shoemaker next year, and is this coal suitable for the high-vol market?

The Shoemaker coal, what we call the river coal, is, is the highest sulfur that we have. We plan to ship 4.8 million tons of it into the steam market, but it is not a met coal. The met coals are more the Bailey, Enlow, and, oh, by the way the 4.8 million tons is already sold. The met coal tends to be Bailey, Enlow, Blackville leverage type coals, more on the inner part of lower sulfur of the Pittsburgh 8 seam.

And then lastly, what type of Capex would be needed to expand the port capacity?

About 50 million tons -- or excuse me -- about $50 million, and we think it will take about 18 months, and that would not disrupt our flow right now. Now, we believe with operations and the coals that we have going through the port right now, that we can push the port up to about 13.5 million tons a year, with what we're doing now. If we add that $50 million of, of capacity, we could probably bring it up to about 18 million tons a year.

Okay. Great. Good luck guys.

Thank you.

And next we go to Michael Dudas, with Jefferies, please go ahead.

Good morning, gentlemen.

Hi Mike.

Hi Mike.

You mentioned about the, the virgin opportunity relative to high-vol coal to China. How do you foresee that playing through your discussions with traditional thermal coal customers for that type of coal product? Has there been a bit more of a concern? And if this market is sustainable in China, how significant could Pittsburgh 8 supply the Chinese coal market with that product?

Well, we have, we have about 25 million tons open for, for pricing next year. And we have sometimes opened -- the -- we could actually move into that marketplace over time. The steam side, you can see this is, it started out as met coal. If you go way back, it went to the steam business, as we built the plants in the region. Now it's going back to met market, the Pittsburgh 8 seam. I think we will see a split there. I think we'll see an expansion of the BMX. And I think the region will demand these Btus on the steam side. But I think we'll see a convergence of price, between the met side of the mine and the steam side of the mine, because it's the same coal. And the same capitalized region, So I think you'll see a convergence of the price towards the met price, at the mine.

When you do you think the Board will be ready to receive a proposal for BMX expansion to approve, and possibly what you can be doing on the water side, to expand Buchanan's opportunities?

Well, I expect that we'll be building -- in the budget for next year, we'll authorize the expansion of the port. That will be in the 2011 budget. On BMX, we're already developing the mains of BMX. And I --would expect full capitalization -- will have a lot to do with the way we see the market unfold. And the next 6 to 12 months will probably dictate that.

And Buchanan?

Buchanan itself, we don't have a plan to expand Buchanan where it's at -- the vertical belt -- and some of the issues around Buchanan -- it's running very well at 4.8 to 5 million tons a year. We don't plan to expand it, that would be after BMX, if we did anymore expansion there.

And finally, Brett, you mentioned, or, or Bill mentioned in prepared remarks about looking at the new Marcellus assets. and looking at a ten-year plan to optimize and bring forward MPBs to shareholders. How, how quickly can you get to those types of numbers? How are you, how are you going to share that with the investment community? And -- in early indications, do you think it's significantly different or changing from what you've put forth to shareholders in the, in the deal show last month?

I'll let Nick it talk to that because he's done a lot of work on that the last few weeks.

Well our plans to drill and monetize the 750,000 acre Marcellus footprint, they continue to evolve. And right now, the general rig schedule that we see, is having three rigs running by late summer this year. Having five rigs up and running, the start of 2011, and then going to ten rigs by the start of 2012. So that's the general sort of rig schedule which correlates to the drilling schedule. The specific drilling plans are laid out in detail. And when you look at the major areas of, of where we have the 750,000 acres, right now obviously we've drilled 17, and put into sales 17 horizontal wells in the Greene County area. That's going to be continue to be an area of focus or drilling.

We'll be drilling wells -- horizontal wells in the Upshur Barber county area, in northern West Virginia by late this year. And we'll be drilling wells in sort of the Westmoreland county, Indiana county corridor, as well by the end of 2010 into 2011. We see in regard to those two areas, that's the northern West Virginia, Indiana, Westmoreland county areas, excites it. These were the acres we picked up from the Dominion acquisition. And we start looking at well logs, vertical wells that were drilled by Dominion prior to the acquisition, and horizontal wells that were drilled by third parties in both of those areas, you'd be excited as well.

One point I want to make, Mike, that's if we don't see core in that long-term plan, we're likely to do some department shift to add value to our shareholders to bring value forward. If it's, if it's of interest to other people.

Yes.

So that is still open?

Oh, yes.

Thanks. Brett, Nick, appreciate it.

Yes.

Our next question is from Shneur Gershuni, with UBS.

Hi, good morning guys.

Hi, Shneur.

I guess just as kind of a follow-up to the last questions on gas, if I understand it correctly, would you be interested in shedding some of the shallow reserves, or entering into J Vs in that, or were you just talking specifically with the Marcellus?

I can tell you, we're open to all of the possibilities. Whatever we, whatever's good for our shareholders and we see value, we'll go ahead and do that. We'll keep the core where we see expansion value to our about own balance sheet. But if there's pieces that we don't see in the 10 to 15 year plan, we'll, we'll obviously create value very quickly, in any core horizon. Meaning when we did the deal with Dominion, we didn't just buy Marcellus shale, which is the buzz right now as you know. We've got every level of value associated with that company. And if it's Huron, or whatever it is, we'll be looking to, to monetize or do some partnerships with people. And that's only good for our shareholders and the proper way of moving that present value forward.

Great. Just continuing on the gas front, and Nick, maybe you can help me with this here. But you drilled the GH 2B CV well this quarter and you had an IP rate of 5.7 million cubic feet per day, and you averaged 5 million cubic feet per day for the first 47 days, how does that make you think about your ultimate recoveries from those wells? Does that make you think about changing them and revising them upwards? Or one well doesn't make one test, and so forth. I was just wondering if you can comment on that.

That's a great question. Even we've drilled 17 horizontals to date. and put them into the sales meter as we speak. And we've just completed two additional ones that we will be fracing shortly. When you look at those wells collectively and cumulatively, when you look at sort of the IP and the -- the EUR per footage drilled of horizontal leg, we're basically at, or doing better than what our original EUR projections indicated. And we're also actually doing better than the peer group on average.

So what happens with regard to those specific wells, and then what's the implications moving forward, I think there's an upside potential with regard, to what we've been assuming for recoverable reserve, for the 17 we've drilled to date and put in line. I also think when you look at future wells that we are going to be drilling, 3500 foot plus laterals, along with ten plus frac stages per horizontal well are going to be the norm. And that will have a more than proportional increase in EUR, and production curve NPV as opposed to capital costs. So from our perspective, we're starting a conserve sieve based on reserve. and the trick there obviously is improve on that, and incrementally increase the recoverable reserve with with longer footage.

I was wondering if I could follow-up with two questions on the cost base. I was wondering if you can kind of talk about, you put out some great new information, really appreciate the new tables. But you, you sort of highlight your high-vol costs and so forth. And they're interestingly low, and I was wondering, one, if the royalty costs associated with the higher priced tons are included in that? And then secondly, when we think about relative to the tables you've put out in the past, were these basically you're absolutely lowest cost lines in thermal assets, prior to moving them into the high-vol category?

Obviously when you take a look at where the coal is coming from on the high-vol side, it's coming from the Bailey/Enlow . And Bailey/Enlow is our lowest cost producer in the Pittsburgh seam. So that's what reflecting the lower cost on the high-vol side. And the royalties are in

And the royalties are in. One last question, with respect to the Baltimore port you indicated that you're sold out this year. My understanding is that Xcoal is obviously using some of the capacity over and above what you're shipping of your own tons. When you look out to next year, is there a potential for conflict of interest. Does Xcoal have to ship your tons first before it uses any capacity for any other deals it would like to use?

There's no conflict, because we own the port, we have the right to the capacity. We'll work that out with Xcoal, but that's not a problem. That's why we considered expanding, rather than having any conflict, we'll expand for value between us.

Right. Thank you very much.

And next go to Brian Singer with Goldman Sachs, please go ahead.

Thank you, good morning.

Good morning.

On the thermal side, what's the reaction among your utility customers when they see thermal tons getting sold in the met market. Is the magnitude too small to raise any eyebrows, in the face of high inventories levels? Are you seeing any more specific willing willness among utility customers to contract here?

Brian, this is Bob Pusateri. Brian, we're currently engaged in several discussions with utilities for coal for the calendar year 2011. And those discussions are going such, that they're more concerned about reliable sources of supply. And I think overall, they understand that prices in northern App are going up, given what's happened in, in central App. And so far we're very pleased about the business that we've taken so far for 2011. And you can probably get to that calculation with -- with the table that we provided. So right now, I think we're sitting in a really good spot. And we have nearly 30 million tons of coal that will be priced for 2011, and we're, we're expecting a great margin increase.

And do you expect those 30 million tons will be contracted gradually over the course of the year, or are you looking more sooner rather than later?

We'll do on the normal schedules, and within the contracts and the confines of our relationships with the utility. One thing I can say about this, is there is a concern about capitalized capacity that's built for power plants that were built in the region. And when some of that coal leaves the area, we tend to see a gravity of -- of there's a rise in price to match whatever the sales price is. Is it the mine, whether it's steam or met.

Great. Thanks, and, shifting to, shifting to that other Marcellus, can you talk a little bit more about the West Virginia portions of your acreage and what you're acquiring? Obviously the state line was not, drawn on geologic boundaries. But can you just talking about the timing on how you plan to choose your drilling locations between southwest PA and West Virginia?

Well first of all, a lot of this West Virginia acreage was locked up by Dominion. And that's why you didn't got a lot of buzz about it, like the money that was spent to the north like in Greene County and Washington county. We plan to go in and make sure that that value is there. We see success there. We see a very rapid rising amount of permits being done there from our competitors. We also, when we look at the geologic structure, the Marcellus is actually thicker in that area. And all of the indications on the, the wells that Dominion had drilled vertically there, the lock show, that it's very prosperous in terms of gas. And so we're, we're excited about putting laterals into that, with the technology that has been developed in the north. And we think it could, could possibly be better than Greene County and Washington county. Wouldn't that be great for our shareholders?

What's the timing of testing that?

We'll be drilling horizontal wells in northern West Virginia by the end of this year, early next year, so late 2010, early 2011.

Thank you very much.

You bet.

And next we have John Bridges with JPMorgan, please go ahead.

Good morning. Brett, everybody. Hi.

Hi John.

Congratulations on the results.

Thank you.

It looks like your starting a new fashion from the Walters result, that everybody wants to buy gas.

Well, if, if it makes sense and if it's in their backyard like ours, it does makes sense, because if you add gas and coal together on the steam side, it's 75% of electricity, that's the business we're in.

Right. Great, great. With respect to the Pittsburgh 8 coal going -- going coking. Last time we spoke, you were saying that it was sort of being used in blending, and -- and in sort of semi coking. What I'm trying to get a handle on, is the extent to which the new technology is enabling the steel makers to use more of this stuff. Have you been able to pin down what they're up to?

John, I can it will you, in the recent visit to China, what we saw was that the Chinese are using this product as a blend with their own coals within -- within the country of China. And this makes us very, very excited, because we thought at first that we were going to have to blend here in the United States, our -- our high-vol coking coals with something else in order to make them acceptable. But to date, all of the vessels we've shipped, they've been 100% high-vol coal, and the tests that have occurred so far have been, we've gotten excellent results on them. And we, we look forward to increasing our tons to China, and we believe that we're going to get several opportunities in both Japan and Korea the second half of the year. John, one comment there on that, John, this is Brett. Our brand at CONSOL is going directly into the steel mills not as a blend with our coals, but it's being branded by Xcoal directly into those steel mills, which I think really gives us a good reputation, a leg up on a very rapidly growing market.

And then you say that it's going, going as PCI coal into Brazil?

Yes.

Amazing. Great. Great. And then just a bit of bookkeeping, the Fola reclamation? What was that?

Basically it's a reclamation accrual. You know anytime that you have somewhat of a change in mine plan, you always have an adjustment to reclamation accruals. And this has to do with everything from having to reduce some -- some of our capacity there due to market. Also has to do with things like changes in how regulators view certain things. We do our annual study on, on mine closing reclamation every year. This is part of our normal review of Fola. It's just that Fola because of particular circumstances, we decided that we needed to accelerate the recognition of some of those accruals. So it's not a cash item. It's, it's accrual item related to, just changes of circumstances at Fola.

Many, many thanks, and we appreciate your comments on mine safety Brett, thank you.

Thank you

Next go to David Khani with FBR Capital Markets. Please go ahead.

Hi David.

David Khani, your line is open. Possibly take yourself off mute.

Sorry about that. Can you hear me now.

Yes.

Sorry about that. I should know by now. Can you talk a little bit about the size of exports to China, is there any ability to also ship some of your coal as, as a met coal to Japan?

That's, Bob just mentioned that that market is being developed. We focused like a laser on China, because we see that as the most rapidly growing market first. The more established marketplaces and the, the coal that they're used to using like in Japan and Korea, are a little bit different. But as we show success in China, we'll, we'll see that coal move into those areas as well. We, we're just focused on China first. We think it can move to those too. And I think we'll see some success of that in the second half of the year.

Okay. Great. Thanks, guys.

Thanks.

We'll go to Jeremy Sussman with Brean Murray, Caret, please go ahead.

Hi, good morning everyone.

Hi, Jeremy.

Hi, really two things. First, is, from the Bailey high-vol, can you give us a little bit more of a sense of maybe what we can see next year maybe if you can, what's the limiting factor there? And then secondly, also on the, in the high-vol side, you've idled a couple of mines in the past there, I mean, any thoughts about wrig, bringing anything back on-line on that front?

Well, on the idled mines, we won't bring anything back until we've optimized what's already running, because it's cost structure expands margins, we wouldn't bring on high cost lines until we optimize what we already have, and that just makes sense. So if you go beyond that, and you look at the high-vol mines themselves, six months ago, we weren't even talking about China. In fact, I've chastised some of our competitors for even talking about it then we got right into it. That's evolving. And I would say if we look at next year, the 3 million tons this year, we know are for real, and the, the freight is showing up. We're loading them up, and we're, we're getting the job done. They are being introduced into the steel mills. Bob Pusateri was there the, about a month ago, and he saw this happening.

We expect it to continue expand as our reputation increases in China, and opportunities unfold. And, so we have essentially 30 million tons of capacity that's already built into our mine that this kind of coal that can go that direction. Of course, right now it's in the steam market. And so I think we'll see a gradual movement -- and I don't know where it ends. Right now we see it at three. Next year, we probably can see it at --double that, but we don't have that in hand, I'm just estimating. So and it could move up to ten over time. We don't know. It's a new market. We're expanding, and we'll give you both blow by blow as we know. But we do know this is a real market and they're excited about it. Bob?

Jeremy, what will really drive the number of tons that we decide to put into that market, will be the response that we get from the utilities here in the United States. And as we move on throughout the calendar year, we will look at all of our opportunities. And we will weigh those opportunities here versus what we did in 2010 over, over in China. And if we can match the price for term business here in the United States, then that's the way we'll go.

Great, and I, thanks Bob and I just as a follow-up. Assume it's safe to say that the, the utilities are well aware of the premium that you guys are getting in China for these prices?

It's, it's my hope that they're listening to this phone call.

That's great. Thanks.

Next question is from David Gagliano, Credit Suisse, please go ahead.

Hi, actually I have a related question to the previous one. Just overall, regarding your volume growth next year with the restart of Shoemaker, and the switching from thermal to PCI etc. What should be assuming for 2011 total -- total coal sale volumes. And if you could take a stab at breaking that down between thermal, high-vol, which I think we may have gotten a bit number. Thermal, high-vol, low-vol and PCI? Thanks.

I would say it will be, we haven't really given guidance for '11 but I can say that 55, 55 million of steam, the rest will be met, and I think we can be between anywhere from 63 to 68 on the total for next year. That, that isn't -- hasn't been totally brought out yet, but I'm giving you broad numbers. So we aren't really ready to talk about the totals for 2011 yet.

Okay. Well that's a helpful framework. Just my follow-up. Stepping back for a minute, obviously you're business is encompassed thermal, met ,and that gas market. My question is on you a industry wide basis, how much coal do you think could be displaced by natural gas incrementally from here, assuming that gas price stays around $4.00? And at the same time, how much coal do you think, will move out of thermal market on a industry basis and into the PCI high-vol markets?

I would say, in our market area, about 10 to 15 million tons will be displaced by gas. In total, country wide, I would say 25 to 30. And most of that will be in the, what I call the southern company area, would be the south, we see a lot of gas generation there. If it stays around $4.00, we're going to see that happen.

I also believe that we're going to see about 20, 20 to 25 million tons of capacity pulled out of central App, just based on restrictions of mountain top mining, and the permitting issues we see down there. So there's a lot of combinations moving here, but the, the growth on gas versus coal will not happen beyond that number, I don't believe, until we see more gas plants built. And the utilities or somebody making the commitment to build these gas plants.

I do believe that will happen in the next couple of years. But right now, with the demand for energy down overall compared to where the market was a couple years ago, there's capacity in coal and gas to the point, where all markets are being fed on of existing plants. So the max we're going to see, I think is about 25 to 30 million tons a year, until we see new gas plants built. But I think new gas plants will be built before new coal plants.

Okay. And just to confirm, 25 to 30 million tons displaced incrementally from here, not counting what was displaced last year, correct?

No. No. I would say, I would say, that's the total on a yearly basis you would see.

Okay.

I, I wouldn't say that it was 20 last year, and another 20 now, because the capacity on gas side is not there.

Okay. Okay. And then the one component that, I don't think you address, was the switch. How much thermal do you think leaves -- or how much coal leaves the thermal market and moves into the high-vol/PCI market?

Go ahead. I'll let Bob talk about that.

David, what we're seeing is -- estimates of about 15 million tons of central App coal that will crossover into the met market. And as you can recall, that 15 million tons is pretty much what, what we saw in 2008. And we believe the conditions, the second half of the year will be similar to what we saw back then. And it will be somewhere in the, in that range.

Okay. Perfect. Thanks very much.

Sure

And we go to Pearce Hammond with Simmons & Company. Please go ahead.

Good morning.

Hi, Pearce.

Many coal producers have discussed increasing their high-vol or crossover met coal production during these quarter earnings updates. Because of this, have you started to see any change in customer behavior, any weakness in the high-vol met markets?

No. You heard Brett say earlier that at least we believe the CONSOL -- CONSOL will put upwards of 93% of all of the northern App coal in, into Asia in 2010. So far we haven't seen any other northern App producers do that. As we go forward, for 2011, we believe that that will be, that will continue. A number of utilities are out, Pearce, looking for solicitations. I think a lot of them are testing the market, because they're, their starting to see a -- they're starting to see a possible shortage of high Btu thermal coal starting, as early as maybe the fourth quarter of this year.

Great. And then, Bill, on this certain legal accruals, the 22 million, what's specifically was that?

Usually I don't go into specifics on the legal accruals, they're part of overall contingencies that we listed in our foot notes. I can tell you that's nothing unusual there. However we will disclose it in 10-Q, that about $12 million of that is related to a settlement that we had at our Jones Fork mine, where basically we gave an option as part of that settlement. It's sort of technical. In terms of the accounting ways you do it, is basically you have to -- we did it on a royalty basis as part of that settlement. We get a royalty, we have the present value of the stream of royalties, and we compare that to the net book value of those assets. As a result, that indicated there was a loss of $12 million. Obviously if there's more coal mined, our prices go up, that accrual will be less.

Great and one last housekeeping question. So for 2010 it's compare to a your sold out of low-vol Buchanan product.

Yes, Pearce, that is correct.

And for high-vol, you could have more to go.

That's correct we have about another million tons that we're holding back.

Perfect. Thank you, gentlemen.

Thank you.

And next go to Paul Forward with Stifel Nicolaus, please go ahead.

Good morning. Very good performance on the cost side in northern Appalachia for the quarter. I was just wondering when you're looking at the low-vol total cost per ton for the quarter, it was at about $69. And in the previous -- when you split that out, it was mostly the Buchanan mine in the fourth quarter, but it was a very strong quarter, I know it was in the 40 territory. What was the, what was the difference between the between the fourth and the first quarter on the cost side of things in, in low-vol and where would you expect that to trend going forward?

Well, Paul, there were a lot of things that went into the, the calculation of the cost per ton there. Part is the volumes we had. Part was -- as we tried to develop the mine, redevelop that mine and make sure that it runs efficiently and effectively. I think overall what you have to look at, not so much the costs, but the margins. We have outstanding margins there, and we're going to operate that mine in a way to protect those margins. I would expect that the cost for the quarter in, in the, in first quarter. We're probably a little bit on the high side. And there could be some reduction in there, but again, I want you to take a look at, at the margins. It's very important that we operate that mine effectively and efficiently, and also protect both the gas operations here.

Okay. Great. And then the, when you look at the guidance of, when you add the Dominion properties, you're suggesting 127 Bcf of production of gas for the full-year. What would you say --that seems like what you're essentially taking the 40 or the current production rate at Dominion, and, and then adding it to the 100 Bcf at CNX Gas. I was just wondering what you see as any upside potential to that 127 number?

Let me, let me speak to that. We're adding what we said CNX Gas was going to do, and then what Dominion was going to do on a prorated basis. Those two add up to that number. Remember, the expansion that we're going to do was already calculated into the, the 100 Bcf on the, on the CNX Gas side. And --there's really a lot of drivers here, with permitting and rigs coming on and everything else, I would say 2010 is a real gear up for a rapid expansion in 2011, when you put all these pieces together. So I think it, the 127, that's a good number. There might be a little bit upside, but, I, we're not ready to say that at this point in time.

All right. Appreciate it.

Yes.

And --

John, before you give the replay information, just let me remind everybody that any forward-looking statements that we may express here today, or expectations or results are subject to certain business risks. And we've enumerated those risks in both the earnings release issued this morning, and in our SEC 10-K filings. So with that, just as a reminder, John, could you please give us the, the replay information?

Certainly, ladies and gentlemen, it starts today at 1:00 PM Eastern Time. It will last until May 6th at midnight. You may access the replay at anytime by dialing 800-475-6701 or 320-365-3844. The access code is 153450. Again, those numbers, 800-475-6701 or 320-365-3844. And the access code is 153450. Mr. Zajdel, Any closing comments?

Thank you everybody. I will be in my office for the rest of day, if anybody has any follow up questions.

Thanks for listening. And ladies and gentlemen that does conclude your conference. Thank you for your participation. You may now disconnect.