CNX Resources Corp (CNX) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the CONSOL Energy's third quarter earnings conference call, As a reminder, today's call is being recorded. I would now like to turn the conference call over to the Vice President of Investor and Public Relations, Brandon Elliott.

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

Thank you, Brandon and thank you everyone for joining us this morning for CONSOL Energy's third quarter 2010 earnings conference call. The third quarter 2010 continued our string of financially strong in an operationally significant quarters Revenues continued at a record pace with third quarter revenues of $1.3 billion which is up 23% from the third quarter of 2009. This growth was driven by over $1 billion revenue from our coal division which was up 22% from the third quarter of 2009. For the nine months ended September 30, our total revenue was $3.8 billion, up 15% from the nine months ended September 30 of 2009. Now revenue growth is critical as it provides us the capability to expand and develop our large asset position.

Net income was $75 million or $0.33 per diluted share for the third quarter of 2010, this compares with $87 million or $0.48 per diluted share in the 2009 quarter. For the quarter adjusted EBITDA was $347 million, or 45% higher than the adjusted EBITDA of third quarter 2009. We are pleased with the third quarter operating results.

On the coal side, the third quarter is usually the most challenging financial quarter for us because of normal vacation shutdown. In addition, these vacation periods provide us with the opportunity to do a wide range of maintenance while the mines are not in operation. These conditions normally result in lower production and higher operating costs in the third quarter. The coal segment produced a total of 14.7 million tons in the third quarter of 2010 compared with 13.5 million tons in the third quarter of 2009.

The quarterly production combined with a reduction of steam coal inventories resulted in 15.6 million tons of sales in this quarter compared to 13.7 million tons in the 2009 quarter. Coal inventories were 2.2 million tons at September 30 of 2010 and we currently plan to reduce coal inventories by another 500,000 tons before the end of this year.

On the gas side of the business, the quarterly production record of 38.5 BCF was obtained. This was 44% higher than the 24.8 BCF achieved in the third quarter of 2009. The record was achieved due to the addition of the dominion E&P business which occurred on April 30, of 2010, as well as the ongoing drilling program in our coal bed methane and Marcella shale operations. Our production record was also been achieved in third quarter without the Dominion E&P business.

Now, the Dominion E&P business, this acquisition has changed the mist of our production makeup. Historically, CNX gas production has been about approximately 90% coal bed methane with the acquisition of approximately 65% of our production is now coal bed methane, so just summarize that, in 2009, 90% was coal bed methane, about 10% was Marcella shale and in 2010 coal bed methane will be about 65%, Marcella remains 10% and now conventional gas is 25%. Now this conventional gas is higher cost operations and this filtered in into the increased costs we have in gas side. Now the gas segment offering costs were $4.08 per MCF for the third quarter of 2010 and this was compared to $3.44 per MCF for 2009. The increase was primarily attributable to a $0.40 per MCF higher depreciation and amortization costs of $0.14 per MCF higher lifting costs and $0.07 per MCF higher severance costs in the period to period comparison.

Now the increase in DD&A was primarily due to the acquisitions of the Dominion E&P business which was primarily reflected in conventional gas. Now, higher lifting costs were due to higher well pending costs, again, primarily due to the acquisition of the older Dominion conventional wells having a higher cost structure than our historical results. And finally the higher severance costs were a result of higher average realization. And again this is done before the impact of the hedging program. So you can see that overall, our coal bed methane costs really haven't changed much but the increase in costs is attributable to the increase in our conventional gas business.

Now there were two financial accruals that were made in the third quarter that are worthy of mention. First is Fola Reclamation. At our Fola operation's we accrued $28 million related to future reclamation work at that complex. This charge is a result of the final phase of a comprehensive engineering view of the reclamation plan that we started in the first quarter of this year. The charge is a as a result of changing markets conditions, permitting issues, new regulatory requirements and the resulting change in mining plans. Mining in some areas is anticipated to be curtailed earlier than originally anticipated and in some cases the quantity of material required to reclaim the operation in its present state has increased.

The second item is at Mine 84. Mine 84, we took a $14 million noncash charge that was related to the abandonment of a portion of the previously developed area of the mine. A change in the mine conditions resulted in an area of the mine being sealed with no future plans to reenter that area. Charges previously capitalized where expensed to reflect this change. Our operating units in both the coal and gas divisions are working in accordance with plans.

The safety of our employees and contractors, the stewardship of the environment in which we operate and responsible citizenship in the communities in which we work and live continue to be the bench marks by which we judge ourselves. Net cash flows from operations for the third quarter of 2010 were $373 million. That's up 130% from the third quarter of 2009. Net cash flows from operations for the nine months of 2010 were $879 million.

Now, if you reference the net operating cash flows for the full year of 2009 at $945 million, and for the full year of 2008 at $1.03 billion, you can see that we are well on our way to matching or exceeding the strong cash flows for the past two years. Substantial and consistent cash flows from operations are critical to our success and provide the financial flexibility to invest in key projects or to adjust to unforeseen economic circumstances. Our financial flexibility was also strengthened in the third quarter by the successful refinancing of $103 million of industrial development bond associated with our Wholly Young terminal in Baltimore, Maryland. The new bonds mature in September 2025 and carry an interest rate of 5.75%. The previous bonds were to mature on December 10 and October 2011 and carried an interest rate of 6.5%.

Now our $1.5 billion credit facility, we have on the CONSOL Energy side had $136 million of outstanding borrowings and $268 million of outstanding letters of credit, leaving approximately $1.1 billion of capacity at September 30, of 2010. CNX gas is $700 million credit facility had $78 million of outstanding borrowings and $15 million letters of credit outstanding leaving approximately $607 million of capacity at September 30, 2010. We have no debt due until March of 2012 and that's $250 million.

Capital expenditures for the third quarter were $244 million compared to a prior year third quarter of $193 million. For the year to date period, capital expenditures were $822 million compared to $689 million. Capital expenditures for the third quarter were about 55% attributable to the coal segment and 45% attributable to the gas segment. We continue to spend capital within our cash flows that we've generated from operations. We continue to invest in high return projects in both the coal and gas segments of our business. While remaining disciplined to maintain financial flexibility with strong operating cash flow generation and available credit capacity to adjust the changes in the marketplace or to these unforeseen economic circumstances.

In summary, both our low vault business and high vault business are doing very well. Thermal coal business has improved considerably and overall the gas business is expanding and continues to grow production volume. This quarter results show again the value of the diversified energy company that has best in class assets in four separate categories. This is the low ball assets at the Cannon, the high ball assets in the Pittsburgh seam that can be shipped out of our wholly owned Baltimore terminal and the highest BTU thermal assets in the country.

And our gas divisions lean positions and possibly the world's largest gas formation which is the Marcella shale. CONSOL Energy controls the greatest concentration of energy in the Eastern United States. We remain steadfast and confident in our business model. Our balance sheet and our status as a safe, low cost producers enables to effectively compete and produce exceptional earnings and cash flow. With that Brett, your comments on the quarter.

Thank you, Bill and welcome from my perspective to all of you. It's always good to talk about the quarter and give you my views on where we're at. First I'd like to talk about safety. We're still improving towards zero. Like I said on the last call, we're not perfect, but we would like to achieve perfect in terms of being at zero. Our gas division has been at zero for many, many years and continues to be there. We're very proud of that and that's excellent performance.

Our river operations and our port facilities are at zero and have been there for a long time. We're working hard to get our underground mines at zero and we will continue to do that. We've made great strides this year towards that, and we will -- we will continue to make that our number one priority.

One thing I want the shareholders to be aware of, many of the things we do, we do to get to zero, they're beyond the law itself. Many actions that we take are things that are done as we assess the risk of the mine, we do it for the good of our employees on the road to zero. Sometimes the law catches up with us and it becomes part of law, and sometimes we accelerate beyond the law with the goal of protecting our people. We will always do that, will continue it do it going forward.

Let's talk about the economy a little bit. The US economy is growing, 2.5%, 2.8% this year we believe. We think that's sluggish. We're concerned about the loads on the gas side as well as the electricity side. But that doesn't reflect in the coal price, and I'll talk about that in a little bit. When you look at the world marketplace, we think China is at 10% growth this year and we think they're going to be at 8.5% to 9% next year, and that really adds a lot of value to our port facilities and our ability to move coal offshore into a growing world that is very hungry for the BTU's that we create especially being a low cost producer with facilities that can move coal around the world.

I want to talk a little bit about our assets. One thing I don't talk a lot about is our land assets, which really are the base of CONSOL Energy. We have 500,000 private acres, which gives us access to 2.5 million to 3 million acres just on the coal footprint and now on the gas footprint is very much similar. Our coal position is very valuable as everybody knows, but what I always want to drive is the key position, 70% of what we own on the coal side is in fee and that is owned by our shareholders. It is not being rented, so to speak, from the federal government and that is an asset that we will always have and our shareholders will benefit from that. We are the low cost producer, high vol, low, low vol in steam coal. And the highest valued region of the United States, that is a great position we will continue to enhance that over time. That is our legacy and we're committed to that.

We're also the low cost producer on the gas side. As we develop the Marcella shale, now keep in mind, the Marcella shale is an infant in regards to the supply to the region and to the nation but that's has very high potential. That's why we made the purchase that we did.. That potential is right underneath our feet, underneath our coal seams and right in our backyard of this huge footprint of acreage that we have. That's the value of the deal. Now, that's the long-term deal, and as I talked about gas prices going forward, you'll understand that this is going to create huge value for our shareholders going forward as gas prices fluctuate between where the low price that they are today to the high prices that we see in the future based on demand by the utilities, we are following our customers. Our customers are going to build gas plants. We will supply them and that will be the mantra of this company on the gas side going forward.

Now, let's talk about the quarter a little bit. Third quarter is always a tough quarter for us. It's a vacation quarter. We do a lot of projects. Our costs rise, our tonnage is typically down. It reflects that in the numbers that you see, but as I talked to you last quarter, I said that would probably happen. When you look at the year, though, you can see we're going to be at a higher tonnage for the fourth quarter.

If you look at last year in total, our average costs across the board were about $44. And I think by the end of this year, we should be around $47. In total across the board. And that's including absorbing the higher royalties on the met coal coming out of the Cannon. Royalties -- the cost structure of the Cannon rose dramatically based on royalties more than anything else. We're okay with that because we have expanding margins to go with that. But it does effect the overall average cost. nd gives a reflection, I think, to our shareholders that our costs are rising more than the really are in terms of real costs at the mines.

Let's talk about gas. We have a great opportunity here in the Marcella shale as well as everything else we bought from Dominion. Gas prices are low. We see our competitors under huge amounts of strain. They're in position where they're going to lose leases if they don't drill. Most of everything that we have, in fact, over 95% of what we have is held by production. We don't have to drill it. And we won't drill it in today's world of gas prices for growth. We will drill it to delineate the value of what we have and then we will assess what we have and add capital based on the value to our shareholders going forward.

As we see gas prices rise, which we believe they will, keep in mind, the demand for gas on the generation side is going to exponentially move and we'll be ready for that. We think that will drive price and drive value especially when as we see the push back on coal from the EPA and others, especially in this region. So having said that, I think we're well setup. Our gas business will show discipline on that side, and we'll also grow on the coal side based on where we see the markets. I'm very enthused about the world market for coal. I feel strongly enthused about even the steam markets. In a poor economy in the United States the steam markets tend to be very strong. We think they'll be real strength if the economy rebounds and we think we'll have real possibility and strength to expand our margins there going forward. And with that, I'd like to open it up for questions.

(Operator Instructions) First from the line of Michael Dudas from Jefferies. Please go ahead.

Good morning, everybody. Just looking at your overall 2011 guidance for production and the breakdowns, maybe you can give a little more view of relative to your expectations on met and thermal volumes here and abroad is there still a hesitancy about the turn in the US economy on the thermal side and that's why we're going to hold back? On the met side, is the market still quality-oriented now as opposed to a few months ago where it was less quality oriented and that could, you know, shift some of your high vol tonnage to different spots?

There are two things going on. One is on the thermal side, which is a big part of our business, there is pressure on productivity based on the compliance to the law and everything else that we're seeing. So some of our tonnage, I think we're hedging ourselves a little bit saying we'll have a little drop in productivity next year and we'll feel that in terms of tons. We also have taken the Emery mine out of the equation year to yearly which is about 1.1 million to 1.2 million tons a year. When you put all that together, you see us being a little bit cautious. We think on the steam side, it is going to be on our sales, it's going to be a very solid year and we think very solid prices. But we're not going to produce more than needs to be produced and I think that's where we see it right now. On the met side, Canon coal is the strength of our met side and we see it as going to demand very high prices, and it will be the highest met product we have. And on -- we see continuing demand in Asia, and we believe we can go anywhere from 3 million tons a year on the high vol side coming out of the Bailey type operations up to 5 million or 6 million tons a year, depending what the demand is. So we're not negative year to year. We think we'll do as well next year as we did this year on the high vol met side and we think the demand for this could rise. But we're not ready to say that yet until we have it in our hands.

And the announcement that you and Ernie getting together in India, is that something that's a 2012 or 2013 event or is that something that could that show up in the numbers next year?

I'll let Bob Pusateri answer that.

Hi, Mike. Mike, last year at this time, we were not shipping any of our high vol coal to China. And so we've learned a lot since November of 2009 when we started this venture, and we made a few mistakes, but what we learned, we felt that we could take that and move it into India and -- to look at the possibility of not only moving high vol coal into it but also participating in a growing thermal market in India. So between CONSOL and ourselves, we believe that in 2011, we will have success, either on the metallurgical side or thermal side in India.

Terrific. And just one follow-up Brett, on your discussions on your expectations for capital in the gas side. I assume we'll get those numbers when you report fourth quarter results you mentioned what you had thought early on or something we should kind of focus on as we move forward if gas is in a sub $4 strip environment?

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

Thank you, Brett.

Your next question is from Shneur Gershuni with UBS. Please go ahead.

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

Shnuer, first I'll say is what we did was we put tons into the European thermal market on a term basis. The tons are a blend of both our Bailey coal and higher sulfur Robinson Run coal. And we thought that it was necessary for us to go out and to actually take the business and using our terminal facility through Baltimore, we were able to contract this for a three-year deal. We are currently in negotiations with several other European buyers, and we're talking about prices higher than what we took the first contract and we'll continue to push that price up. As you've seen in recent -- in recent days, the API 2 index price has gone and stayed above the hundred mark and we'll use that index to continue to grow our business as long as we see the opportunities in Europe being better than those that face us here in the United States.

As far as terminals go, we have 12 million tons of capacity through Baltimore. We are in talks with CSX for acquiring additional space at their Chesapeake terminal and on the met side, we have, you know, four to five million tons of capacity at Lambert's Point. So we don't see for ourselves terminal capacity being a constraint in 2011.

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

I think CONSOL would do everything they can do to shift around value inside the 60 million to 61 million tons we're looking at. But really, the big growth and the biggest growth in northern ap is going to be the BMX mine which we think we'll bring on in 2013 and 2014 and it will be specifically for that market. For us to push the mines or eat up development would probably not be a good idea, but we probably change our mix on the 60 million tons to hit that marketplace.

Shifting over to natural gas in the follow-up to Mike's questions there, is it fair to say that there's a distinct possibility that we could see you pull rigs from all your legacy properties where you know where the gas is and move them over to the recently acquired Dominion acreage as well as seeing what you can do with the Utica shell in Ohio?

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

Sure. As Brett said, we're going to have at focus on the Marcella drilling side of things at lease for 2011 to be on delineating the three large regions within the Marcella. We'll call it sort of the Westmoreland County, Indiana County corridor, Green County, Pennsylvania and then last but not least, northern West Virginia. So at any given point in time, under just about any foreseeable gas price, we would have a rig in each of those regions to further delineating the opportunities and they're doing that literally as we speak with regard to being out across those three areas. The Utica shale and drilling beyond deliniation of those areas, and the Marcella that's where we look at opportunities above and beyond that and we're probably going to want to look at an explorer, horizontal well in the Utica sometime next year and that follows up of course on open flow on stimulated vertical well. With regard to drilling beyond that in the Marcella, that's what Brett is going back to with regard to being a function of gas prices. And we still see 170 BCF as our production bogey for next year and 350 B's in 2015.

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

Okay. In terms of converting that, this was reclamation and this is going to be future reclamation. We incurred during the year about $81 million of total charges and it's hard to put it on per ton basis because some of the areas are areas we just won't mine any more or we had to curtail the mining. So Shnuer, I don't know if its relevant to try and do that on per ton basis.

Okay. Great, thank you very much, guys.

One comment on that reclamation, it's very frustrating to have the rules changed as we're trying to get things done at an operation like fola and the regulatory environment is very difficult to surface mining as we all know in West Virginia. We don't have much expose ewe to it but when we did, we're making sure the books are right and we're meeting the proper weight of book fees taken. It's irritating to management but if you look at the overall operations and our abilities to produce on the core business, we're doing very well.

Your next question is from David Gagliano from Credit Suisse. Go ahead.

Hi, David.

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

Hi. I don't know, can you hear me now?

Yes.

Sorry about that. First of all, can you break down your 60 million ton 2011 volume target by thermal versus high vol met versus low volume met? That's my first question.

Certainly. On the steam side, the total is roughly about 54 million tons of steam, 3.3 million tons of high vol met, and the balance of 4.3 million or so, 4.4 million will be Buchanan low vol for a total of, you know, 60 million to 61 million tons.

Okay, great. That's helpful. Thanks. The targets for the 60 million tons targets in total, it works out to, you know, about a 6 million ton decline versus the run rate in Q4. I get the run rate's about 1 million. What accounts for the other 5 million ton decline? Is it holding back production or are there other constraints at the mine?

The fourth quarter production numbers historically one of our strongest quarters and when you look at this years fourth quarter, it's certainly the case as well as with timing with regarding to Longwall move's not hitting in the fourth quarter when they hit in the third quarter so, taking the fouth quarter number bogey that we've got and multiplying it by 4 is not a good way of estimating. This goes back to the variability and the lumpiness in our quarters with regard to things like vacations, Longwall moves and schedulings.

So let's try it this way then. The third quarter, the full year 2011 is consistent with the third quarter which is always, you know, the lowest quarter. What I'm trying to figure out what's -- are there other things driving -- where is the volume coming out of is basically what I'm trying to figure out?

Emery is the big driver where Emery was in the production mix earlier this year. It's been idle and until that markets rebounds, right now we're assuming zero tons of production at Emery for 2011.

So that's taking you from 63 down to 62. If you average the other million over it, I think we're being conservative about what we're going to do on productivity and so I would say that we're probably going to be a million tons less based on being cautious about the new laws that we're seeing.

Okay. Fair enough. My last question, you talk about the value of the gas in the ground. The fact that you don't need to produce because you don't own it. Then you talk about the weak gas price and the willingness to hold back. Why grow the volume in 2011 if you don't need to it it?

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

Okay. Fair enough. Thanks.

Yes.

Next will be Jeremy Sussman with Brean Murray.

Good morning. It's certainly good to hear about the -- all the interested parties for the sale of the noncore met coal assets. I guess, you probably can't get too granular but maybe broadly speaking, any update on your thoughts on kind of what you're expecting on that front versus maybe where your initials thoughts were when you first started the process?

I'm very pleased that there's a lot of interest in it and I think that people are realizing that the valuable asset. It not good for me to talk about what the expectations are right in the middle of the negotiations and the presentation, but I will say that I'm -- I'm enthused about the number of players, about the interest, about the -- them understanding what a valuable asset it is, and if we don't get the price we want, we'll get the value of that ourselves through mining it. So it's just taking a little bit longer because there's so many people coming through. We probably -- the schedule probably slid 30 days because of it, which we're okay with. That's a positive slide.

Certainly that's good to hear. I appreciate that. And just as a follow-up, you know, you priced about 11 million tons this quarter for next year at an average of about $60 a ton. Was there a fair amount of lower quality, you know, high sulfur coal in there or real any granularity you can give on that would help?

Certainly, Jeremy, 4 millions of that coal was coaled at was colic and as you see by our second quarter release we showed the 4 million tons. Here in the third quarter, all 4 million tons rolled up from being on price to price. So that's where 4 million of that was priced and that number was just slightly under $60. The balance, the 6.8 million tons that were left were all priced at numbers between $65 and $66 dollars for the third quarter.

Okay.

Keep in mind that also represents not only our Bailey coal but represents our medium sulfur black coal leverage as well as our high sulfur coal coming out of Moundsville, West Virginia.

Understood. That's very helpful. Thanks, Bob.

Your next question is from Justine Fisher with Goldman Sachs. Please to ahead.

Good morning.

Good morning.

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

I don't believe we'll see negotiations of redoing the contracts. I think what we're going to see and we don't give the right to resell, so we think the market is in balance. In our market area, we think the supply is about 25 to 35 days of supply. On the export side, we'll probably move more on the export side. If there's any give back at all, we would take the coal back or readjust it ourselves, but we are not giving license to resell it at any point in time. These are based on units we produce and deliver to and I think we'll be solid on that. And we also see declining central production which I think affect northern half as well in that sense.

Another question just on cost. I know you guys had spoken previously at least on your Q2 call you said 4 Q costs would be more or less in line where they were in the first quarter, but with the lower production run rate next year, should we think of CONSOL thermal mines being in the $35 to $40 dollar ton cost rate, probably closer to $35, but as opposed to the low $30 a ton cost range? Is that kind what have we should be thinking until CONSOL thermal production comes back to normal run rate levels?

I think what you've seen year it date so far and looking at 2010 as an example, we should see a modest increase, modest maybe being a $1.00 to $2.00 per ton increase in cost into 2011 from the flagship long wall thermal coal mines. Much of that is investment aimed at regulatory issues, et cetera. When you couple that with the pricing that we're see for 2011, we still see market expansion.

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

Great. Thank you.

Next we go to Mark Liinamaa with Morgan Stanley.

Hello.

Hi, Mark.

Relative to your comments, your forecast for a 40 million decline in central app production, can you discuss a little bit how you arrived at that estimate and then how you think that short fall will be divided between retirements at coal burning plants, natural gas and then other coal regions? Thanks.

Mark, first, we believe that there will be a 10 million to 13 million ton decline in central app this year over what was experienced in 2009. And as you go out into 2012, we probably will see another 5 million to 7 million ton decline, so that's how we get to the 40. When we look at how that 40 million tons will get made up, we see the two producing regions being the Illinois basis and northern app. We're already moving some of our high BTU coal from our west Virginia mines by rail into the southeast area. West Virginia mines by rail into the southeast area. And we see that continuing for the balance of the decade. That's one of the reasons we're bringing on the BMX mine.

What about coal plant retirements? Do you have a view on that? You don't think PRB is a competitive threat?

In my opinion, Mark, PRB coal will be shut off when it gets to the Illinois basin. I think the Illinois basis calls, as you can see, the Illinois basis is already ramping up. A lot of those coals will move into the -- move into the southeast in the Illinois basin and the PRB coal will get that far and I don't see it going any further.

And coal plant retirements?

For us, this is something that we look at all the time and we see that there is an impact on us, but it's very small and we see the growth that will -- that's being developed by central app filling the gap for us into base load units that are equipped with -- with scrubbers.

Thanks, guys.

Your next question is from Brian Singer with Goldman Sachs. Please go ahead.

Thanks, good morning.

Good morning.

Couple Marcella questions. Looking at the well results and relative to the initial production rates relative to the EUR's, want to see if you can just go through what you're seeing and your expectation for decline rates and whether you're doing any restricted rate drilling in the Marcella, looked to relative what we see from other companies, the EUR seemed strong relative to the IP rate.

The Marcella from our perspective across wide varying regions and even within a subregion such as Greene County, Pennsylvania, our experience today has been that the geology, we tend to look at Marcella as a single uniform play. The geology does vary even within a region like Greene County, Pennsylvania. And that sort of manifests itself with regard to the results that you saw that we recorded today. We got certain areas of Greene County, Pennsylvania, as an example where their relatively low initial production rate compared to what we've seen historically but relatively zero decline, from an early period of time, say 60 to 90 days. We got areas within Greene County with relatively higher initial production rates but also higher decline curves.

I think the answer to this goes back once again to geology. As time unfolds, we'll get a better feel for which one of those two well profiles gives us a higher EUR, in other words, if that remains at zero decline for a significant period of time, at some point, the high IP rate, high decline wells passes under that production level, that could have an impact with regard to which type of subarea has a higher EUR. So, this is a great example of why this is still an opportunity across the entire industry, there's probably 5% of the way to fruition. There's an awful lot to learn. We learn something every single day we drill a well. To think the industry is 75% to 80% of the way there just doesn't reflect where we're at across the board.

Great, great, thanks. That's helpful. And then I guess secondly and it was in response to your earlier question regarding how you're thinking about your activity levels in the Marcella, is it fair to characterize your strategy as you want to kind of maintain a rig count here to get this in critical mass of production relative to the competition at which point you reach a threshold where you become more gas price sensitive? Or maybe you could kind of put it into a little more context how you think about managing rig count overall production relative to -- relative to the gas price environment given your flexibility relative to others?

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

Great. Thank you.

Next we go to Paul Forward with Stifel Nicolaus. Please go ahead.

Hi, Paul.

Good morning. I wonder about the high vol shipments in the quarter, why do they dip down to 400,000 tons and am I right in backing into an 800,000 ton number for the fourth quarter on high vol shipments?

Right. third quarter, there really was a backoff by China overall and it was based on they deliberately just backed off. I think it had to do with the time of year and where they are in their cycle but we're already seeing the vessels come at us and it's going to be about 700,000 tons. We think that was a lull and it will pick right back up.

Thanks. And the just a little more broadly, can you talk about having a few quarters under your belt and selling this coal to Asian customers, has there been anything -- can you talk about what's holding them back from committing more tons for 2011 of the TU and taking the high vol and can you also talk about what's been your experience in trying to market this high vol coal outside of China and to Japan or India or elsewhere?

Paul, what's keeping us from getting a commitment from the Chinese is pretty much price at this point. I think as we get closer to the end of the year, we'll be able to sit down with most of our customers that we serviced this year and agree on pricing for 2011. We are not willing at this point in time to give them quarterly pricing on this coal. We are telling them that we want an annual price. We are also in discussions with vessel companies to secure the vessels as well as good rates for calendar year 2011, and all of that has to come together in order to be able to, you know, positively give you a number, both at the quantity and the price for 2011.

As we look at India, as I said earlier, we think we will be successful in either moving thermal coal or Coke and coal into India in 2011. It takes time. It's taken our partner, X coal, a number of years to get to where we are in China and it's not something that can be done overnight in India. As we look forward to Korea and Japan, we actually believe we'll be able to penetrate those markets as well in 2011 with our Buchanan coal as well as our terminal coal.

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

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

Okay. Well, thanks very much.

Your next question is from John Bridges with JPMorgan. Please go ahead.

Good morning.

Good morning, everybody. I wanted to follow up on who's going to take share from the central out decline? The issue with getting PRB further into the east, is that a rail issue or is it anything specific?

Well, I would say on the front end, when you're moving energy that far, it's always a rail issue. And the ability to move the coal that far against coals that are already in the ground that are capitalized, it's hard for the railroad and coal companies to cross capitalized production at higher BTU levels. When you see the growth in the Illinois basin, that really is, as they build scrubbers in the Illinois basin it also creates a problem. So when you're looking this place in central app, you're asking those BTU's to travel a lot farther in terms of heat and I think it's all based on location and what the plants will burn. So we have models that show plant by plant, stack by stack, what can be burned and what can be done, what can be replaced, and we think that the Illinois basin coal in northern app have much stronger position to replace central app than the powder river basin even though the costs are very low in the Powder River basin. If I'm a buyer, I'm paying a lot more for freight than coal.

And the ability of you to put natural gas into those?

That's definitely part of our plan.

Finally, the Panama Canal is going to open up in a couple of years. Is that going to -- what sort of impact will that have on your high vol exports?

It will be something that will be positive for us. As you know right now, when we take a vessel off the east coast on its way into Asia, it's roughly 49 to 50 days. We have been able to reduce that, reduce the cost by taking the vessels and topping them off the coast of Nova Scotia. We believe vessel rates will be lower and the Asia market will be able to see that the United States is a real player in terms of the fact the price can go up and down, but we can still sustain supply.

What's that going to do to the cost? You're doing what, $40.00 odd a ton into Asia?

Around $40.00 to $42.00.

After the Panama can, just an indication?

It will be -- we suspect it will be lowered -- to give, John, to give you a number, I really can't do that today. We're involved having discussions with several ship owners now going forward and I just can't give that you number.

Okay. I appreciate it. Best of luck, guys.

Thank you.

Next go to Brett Levy with Jefferies.

As you move production into the Marcella and curtail some of your other production? Do you guys have a revised number for CapEx in 2011 and then also can you talk about how much you're going to be spending on rigs and how much you're going to be spending on things like gathering systems relative to the current year? You know, when does it start to make sense to actually put the pipe lines in?

We will put out that plan when we put our 2011 plan. That will be on our next call. We know each rig is about $80 million to $100 million per year in full operation. And that's about where we're at. And we'll add some rigs for next year. We're going to show a lot of discipline once the deliniation is finished. All that will roll out and give you an idea of pipes as well as rigs for 2011.

Is it fair to say that 2011 will be more pipe intensive than 2010?

Well, as volume grows, we'll add the pipe to do it.

All right. Also, can you give some metrics around the noncore met assets that you guys are marketing at this point, any other metrics that we could sort of use to guesstimate?

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

Thanks very much, guys.

Hey, John, this is Brandon. Let's go ahead and take one more call and we'll wrap this up and let everybody get on to a busy schedule.

Certainly. That will be Bill Eagen with Raymond James. Please go ahead.

Can you give me a breakdown of where your shipment of low vol coal this year?

Our local vol coal domestically, North America, Europe and South America.

Okay. Give us a percentage on that?

I'm sorry?

Can you give us a percentage on that?

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

Okay, thank you very much.

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

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