CNX Resources Corp (CNX) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's fourth-quarter earnings conference call. As a reminder, today's call is being recorded. I'd now like to turn the conference over to the Vice President of Investor Relations, Dan Zajdel.

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

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

Thank you, Brandon, and thank you everyone for joining us this morning for the CONSOL Energy earnings conference call. CONSOL Energy's reporting GAAP net income of $104 million, or $0.46 per diluted share for the fourth quarter of 2010. On an adjusted basis, and these adjustments are for items that analysts do not usually incorporate into their models, fourth-quarter earnings would be $122 million, or $0.54 per share.These adjustments totaled $18 million and relate to legal settlements, asset write-offs, and adjustments due to fair-value accounting. We have detailed these items in the earnings release [the AD] analyst community in reconciling our actual results to their forecasted amounts.

For the year 2010, CONSOL Energy is reporting GAAP net income of $347 million, or $1.60 per share. Net cash provided from operating activities for the year 2010 is a record-setting $1.13 billion, up $71 million or 6.7% from the $1.06 billion generated in the year 2009. This is the third consecutive year of generating $1 billion in cash from operations. From a CFO's perspective, cash generated from operations could be the most important financial metric on the financial statements. This cash generation enables us not only to develop our asset base and pay dividends, but also provides us with the financial flexibility to weather changes in economic environment. And with 53 million tons of our 2011 thermal coal production locked in favorable prices, we expect another year of strong cash generation from operations.

Let me go into the quarter of the year and the coming year in more detail. For the fourth quarter 2010, total active coal operations earned $281 million, up $75 million from the fourth quarter of 2009. Met coal operations earned $135 million, which is up $74 million or 120% from the fourth quarter of 2009. This reflects the strong worldwide demand for met coal in general and the demand for the quality of our coal in particular. On the thermal side, we earned $146 million, which is about the same as in the fourth quarter of 2009, thus maintaining some of the best margins in the industry for that market segment.

For the year 2010, total active coal operations earned a record $922 million, up $126 million from 2009. Average margins increased 10% to $14.80 per ton. Net operations earned $473 million, making this the first year where we have earned more from our met operations than from our thermal operations. This reflects the high quality of our coals, particularly in northern Appalachia, where we can switch our product between thermal and high-vol met, depending on market demand.

Our gas business had another outstanding quarter operationally, but was hurt by declining gas prices. Productions increased 44% quarter-over-quarter to a record 36.2 Bcf. This record production was primarily through the acquisition of the Dominion conventional gas assets. However, of significant note, our Marcellus assets produced 3.2 Bcf in the quarter, an increase of 1.7 Bcf from the 2009 fourth quarter. Coalbed methane operations produce 23.6 Bcf for the quarter, up slightly from the 2009 quarter.

In the fourth quarter 2010, we earned $32 million from our gas operations, down $43 million from the fourth quarter of 2009.Average realization was $4.84 per Mcf, down $1.63 from the 2009 quarter, and was the primary cause of our reduced profitability. The numbers for the year on the gas business are similar to those of the fourth quarter. Production increased 35% for the year to a record of 127.9 Bcf. As in the fourth quarter, this record production was primarily driven by the acquisition of the Dominion conventional gas assets. However, of note, is that our Marcellus assets produced 10.2 Bcf for the year, an increase of 5.2 Bcf. For the year 2010, we earned $247 million from our gas operations, down $59 million from 2009. Average realization was $5.83 per Mcf, down $0.85 from 2009, and was the primary cause of our reduced profitability.

Our financial position allows us to continue to prudently invest in our businesses, even in difficult economic times. In 2010, we invested $1.2 billion in CapEx to enhance safety, expand production, improve efficiency, and maintain world-class operations. We expect to invest $1.4 billion in 2011--$615 million will be in coal, $675 million will be in gas, and $110 million on other activities. In our coal division, we are investing $130 million in our new Northern App mine -- the BMX Mine -- which will start production in early 2014. We are also investing $56 million at Enlow Fork for an overland belt as a efficiency project. We expect to produce between 59 million and 61 million tons of coal in 2011. For the first quarter, we are essentially sold out and expect to produce between 15.5 million and 16 million tons.

For the year, we have between 2 million and 2.3 million tons of low-vol and between 2.2 million and 2.8 million tons of high-vol coal remaining to be sold and priced. In gas, our primary objective is to delineate the Marcellus shale acreage that we acquired from Dominion. We plan to keep a rig running all year in each of our three operating areas. A fourth rig will be available beginning in April that will also drill some Marcellus acreage and explore for gas and liquids in the Utica shale. We expect to produce 150 billion to 160 billion cubic feet of gas in 2011.

With our expected strong cash flows from operations and our anticipated cash proceeds from asset sales, we do not expect to borrow money to fund the 2011 capital programs. Now with regard to the possible sales certain metallurgical coal assets in central Appalachia that we discussed in previous earnings calls, we are in the process of negotiating with several bidders and expect to reach definitive agreements in the very near future. Because of the status of these negotiations and confidentiality associated with them, we will not discuss this project during the call this morning.

Our balance sheet remains strong, and we continue to have excellent liquidity. At December 31, 2010 CONSOL Energy had $1.6 billion in total liquidity available for immediate use. There is no long-term debt coming due in 2011.

As we start a new year, it's natural to reflect on the happenings of the past year. CONSOL Energy is in many ways the same and in many ways different at January 1, 2011 than we were at January 1, 2010. During 2010, we maintained our industry-leading safety position in both our underground-mining operations and our gas operations. But even more importantly, we improved our overall safety performance in 2010. By any metrics, CONSOL Energy established itself as a major force in the natural-gas industry due to acquisitions of the Dominion E&P assets and the take-in of a one-sixth interest in CNX Gas that was owned by the public.

We took advantage of the evolving met markets through innovative marketing strategies. We executed our operating plans to ensure that our mines and gas assets ran safely, efficiently, and effectively. We did major we refinancing of the Company at favorable times in the market. We increased our available liquidity by $1 billion. We start the year of 2011 excited about what lies ahead. The 8,630 employees of CONSOL Energy are ready and well-positioned to safely provide the energy needs of the country and the world. With that, Brett, your comments.

Okay. Thank you, Bill, it's good to be with you again and share my thoughts at a pretty high level and some of the strategic thoughts. 2010 I thought was a real strong year for CONSOL Energy, and I think a defining year in terms of its future. The addition we made on the gas side certainly is a 50-year play and a lot of value to our shareholders, and we will delineate that and prove that out.

Before I get into some of those details, I'm going to talk about safety. Three years ago, we started our efforts on the road to 0%, and I'm proud to announce at the end of last year, 70% of all of our operations had no accidents of any kind. And that, three years ago, would have been unbelievable. So we're on our way to 0%.We'll continue to work our way there.And being a very big gas producer and a very big coal producer, our people are very valuable, and we are assessing the risk every day of what we do on safety.

Now let's talk about capital budget a little bit. This capital budget that we put out reflects growth and delineation.On the coal side, we see -- we continue to show growth with the BMX mine, which will have a life of 30 years at 5 million tons a year. It's a very, very powerful position. And over time, you'll see that it adds on the high-vol markets as well as the steam markets.

On the delineation side, the acquisition of the Dominion acreage certainly needs to be delineated.We plan to put this into position by the end of the 2011, where we have a 10- to 15-year plan, with a gas storage field that needs capital as the markets react to it. We really believe that is the position we are in. This is a very valuable position, and we feel strongly that was a great asset and will continue to be a great asset going forward. We are not happy with gas prices, but that fluctuates, and we think that is related to the US economy itself. So we think that will respond properly with very high rates of return.

The coal side -- on the capital side, there is pressure. It's pressure from the safety side.There's pressure from the environmental side -- mining companies under attack by our own federal government in terms of permitting -- and all these things have a different capital structure going forward. We'll delineate that to you going forward, as we describe where we're spending our money and why to show that these long-term assets continue to perform over many, many years in the future.

What's interesting to me right now, though, is the -- in 2011, markets -- we are very, very bullish on all coals on the marketplace. Not only our natural domestic market, or steam coal, but the met markets worldwide, are under extreme pressure based on weather, based on capitalized supply and growth and in Asia and different parts of the world. As we see Europe and the US try to come back, there is not enough capitalized met coal to meet the demand for steel, which pushes price up.With different weather problems like we see in Australia, that even pushes it up faster and makes it more erratic in terms of pricing. It's hard to predict quarter-by-quarter what pricing is going to be, but on a year basis, I think we have a pretty good handle on it.You saw our results from last year.We were right at the top of the market on the low-vol pricing, and we expanded ourselves into the high-vol market very rapidly and became the biggest supplier from North America into China, all in one year's time. That's an impressive record with impressive resources and good marketing efforts.

We think that this entire market, whether steam coal in Europe, or whether it's met coal in China, or whether it's met coal in the United States, or cross-over coal that could go to India or anywhere else in the world, we think that market is very strong. We're bullish on it, and we believe the coal side's going to have to two to three very strong years ahead of us, and with the margin expansion, as we produce the coal safely and at very low cost. One thing I always like to drive with shareholders -- we are the low-cost producer in met coal and steam coal and the gas.And as we develop the Marcellus shale, we'll prove that Marcellus shale is a low-cost producer as well in the region based on our land footprint and our ability to get things done in our backyard, so to speak. So with that, I'd like to open it up for questions. And we'll move right into that as we go.

All right, Nick, you can go ahead and open up the lines for our Q&A.

Thank you.

(Operator Instructions)

Our first question is from the line of Jim Rollyson, with Raymond James. Please go ahead.

Brett, you sounded fairly optimistic about the coal side of the business for the next couple of years or so, at least with what's going on. Could you maybe talk a little bit about your opportunities in terms of exports and -- if I look at things, you're basically sold out this year for thermal with the production range you're looking at.And you've got some open low-vol, and you've got some open high-vol.Just kind of curious if you've got room to expand on the high-vol side from what you're looking at now and on the thermal side, and if there's opportunity out there to get that short-term, or is that more of a growing into 2012 type of situation .

I think in the short term, on the productivity side, or if the mines perform well quarter-to-quarter, there will be some opportunities to expand either in the thermal markets over the met market on the cross-over high-vol. And I think marketing will come out of that as we go. Because remember, if you look at our production schedule, it's lumpy through the year. So we'll have some good quarters, not so good quarters.And when we meet those opportunities in the vessels, we'll move it.

What we like right now is the thermal coal in Europe is matching the price of the cross-over coal in China.And so that really expands the value of what we would consider the traditional thermal markets in the US, especially in the Ohio Valley. We're really bullish on that, and we do see some short-term upside and long-term upside.I think we'll continue to grow with BMX and other things.

And I know you're probably going to be limited on commentary, but with respect to the potential sale of the met properties, just two off questions here. One -- has the situation with Australia and the tightening of everything helped that process along?And two -- maybe Bill -- proceeds of that going to fund CapEx and maybe take debt down a little bit?

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

On the question about the met versus Australia problem and so forth, those problems tend not to translate -- quarter-to-quarter problems don't translate into big reserves of sales.But I would say overall, the met market itself in terms of the need for met coal in the world -- with the undercapitalization of met coal -- certainly is going to drive some value out of that area, and we're going to see that.

One last final question for Nick. Nick, I don't know if you saw that the EQT guys put up a very strong IP result -- 30-day average oil production of about 23 million a day in Greene County using what they called experimental frac geometry. I don't know if you guys are -- have seen that or are familiar with it or something you're willing to look at. Just if you have any comments or thoughts.

If you look at our Marcellus results from where we drove our first horizontal to date, it has been basically a story of steady improvement from IP rate to declines to recoverable EURs versus our tight curves, drilling times, and then overall drilling complete cost. What contributed to all that continuous improvement is not just the growing experience of Marcellus or others within the industry.It's also the types of advancement in technologies or techniques, one of which you just described with regard to that specific example. Our expectation is that's yet another opportunity in the toolbox to apply to the Marcellus.It's not going to be the last, and our focus right now is to continue on that path of continuous improvement -- like we displayed in '10 -- when we get into our drilling growing program in [70] wells in '11.

Great, thanks.

Thank you. Our next question is from the line of Michael Dudas, with Jefferies.

Two questions.First -- Brett, you mentioned in the press release a little bit more true capacity that could come out of Baltimore.Looking at the ability to export out of Baltimore, your cross-over tons, etc. -- and the strong met coal market that looks like it's going to be around for a few years -- any thoughts on additional capital with Buchanan or the port too?I'm sure you're thinking about it.Any update on those thoughts relative to getting to -- ?

That's a good question. The port facility is -- what I tried to indicate there is that we will expand that port as we need it. There is probably 110 million tons of port capacity in the United States. We actually are in a position where we own more than 20% of that. And we're not in a position where we're being restrained by it. As we need to expand the port of Baltimore, we think we can expand it by about 30% of its capacity.

We'll probably do that in '11 and '12, and we'll do it incrementally as we need to go because it comes in incremental pieces. As soon as we see constraints, we'll put the expansion to it and get it up to its maximum footprint as we can go. There's no hesitations on expanding that port when we need it. I wanted our shareholders and marketplace to be aware of that.

The Buchanan?

On the Buchanan side -- the expansion of Buchanan is really bigger skiffs or a -- some different kinds of polys coming out of the mine, or there's a beltline going into that seam. We are looking at that.It takes time. If the market's right, we'll do that as well.

My second question is looking -- could you or Nick talk about your decision on deferring the fifth rig and how you looked at allocating the capital?How much capital was deferred because of the decisions you made for 2011? Is this going to be a monthly basis or quarterly basis? How were you going to adjust towards more delineation or more output relative to gas market that may stay below $5 for 2011?

The capital budget on the gas side and the drilling plan that goes into it really were the result of three things -- the lower gas price environment, the fact that we're 98% held by production on the acreage position in the Marcellus, and our capital discipline that we've got a history of displaying on the coal and gas side with regard to returns and spending the money when the returns are there.When you take those three factors, what we ended up doing was we really wanted to retain and protect our objective of not delaying the timing or delineation of our Westmoreland County, Indiana County, Pennsylvania acreage that we acquired from Dominion, and the northern West Virginia Marcellus acreage that we acquired from Dominion. What you see there is basically the result of those different issues. When you look at our gas capital budget, it's about $675 million.

If you want to break that down, about $225 million of it is what I'll call development drilling. It's our Virginia CBM field, and our Marcellus drilling in southwest Pennsylvania -- Greene County -- where we had the history. About another $215 million of that is what I'll call delineation.That's the Westmoreland, Indiana County and the northern West Virginia Marcellus that I just spoke about. As Bill Lyons commented, we've got about $35 million in there for what I'll call exploration, which is the Utica shale. And then the rest of the capital budget, about $150 million to $200 million of that, is midstream.Will those numbers change?I think our position and our history have shown that if gas prices go up, drilling's going to go up beyond four rigs.That's the advantage we have.If gas prices decline and the returns are not there and we have delineation already proven at that point, we'll probably reduce the capital in line as well.

My final question may be for Bob, or Bill. It looks like you've taken some inventory out of your system pretty nicely.Maybe can -- share with us some thoughts on how your customer base is looking from the US thermal side on their inventories.And is there -- could you see some upside to current quoted prices for App -- central and northern App coal -- if we continue to have weather and global export issues that constrain the US -- the [bleeding ship].

Michael, first I would tell you, CONSOL ended 2010 with roughly 2.1 million tons of coal in inventory. We are forecasting at the end of 2011 for the inventory value to be around 1.5 million. We fully expect that the inventory reduction probably -- those tons most likely will be spread equally between the export market as well as the US thermal market. Inventories at our customers in our target areas are probably in the range of 25 -- 20 to maybe 35 days.That's down from the 40 days that we saw at the end of the third quarter.

Right now, there is a heavy demand for thermal coal in our market areas. We expect that to continue for the balance of the year. Weather has had a dramatic impact on shipments. We're happy to say that we are getting full cooperation by both eastern railroads in moving coal to our customers, as well as the coal going to the terminals. As far as price goes, we actually believe that the utilities had plans to come into the market starting about mid-year, but I think due to the exceptional weather that we're having, that we will see them start to come in much sooner, and that could be as early as this March.

Thank you, gentlemen.

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

Couple questions.First, could you give any color your negotiation to place more of your cross-over volumes into the market in 2011?Are you currently in more of a position where the volumes are more certain based on the conversations you're having, but you just haven't priced them yet? Or is there still some risk that you may not hit your targets if the second half of the year improves?

Andre, as far as hitting our targets, I think we're safe to say that we believe that we will hit our targets as we've outlined in our guidance table. And we actually believe that we will exceed them. As far as pricing goes, on our high-vol met coal, we actually price that coal on a quarterly basis. We are looking for an increase, as reflected in our table, from about the $75 to $76 range where we are today. We see -- hopefully, it could reach as high as $85 beginning in the second quarter of the year starting in April.

As I said, we price that quarterly, and we're hoping that the Chinese market will take that coal evenly throughout the year.But as you can recall from last year, the Chinese government did hit the pause button sometime in the third quarter, and we're optimistic that we will not see that type of reduction this year. We continue to be opportunistic with our spot coal shipments. If the opportunity presents itself, we will ship a spot cargo to that customer.

We are very excited about India. We've seen that India is offering a place for us for both our met and thermal coals.We will utilize the same platform that we put into place in China, where we are developing and branding CONSOL's products. We think we will be very successful in India, and we look for to India to pick up any of the slack that may be created with a slowdown in China later in the year.

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

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

Thank you very much.

Our next question is from the line of David Gagliano, with Credit Suisse.

Great. Thanks for taking my question. You touched a part of this a minute ago, but I wanted to talk a bit more about the pricing environment for thermal high-vol and low-vol. First, on the thermal, when did you sell the thermal that you locked up in Q4?Was that early or late in the quarter?

In the fourth quarter, David, we locked up -- as you probably calculated from the implied pricing -- we locked up about 12.3 million tons of thermal coal in the quarter. That carried an average price of about $64. Please deep in mind that in that, there is over 3 million tons that are partially washed products coming from one of our northern West Virginia mines -- 12,000 BTUs.There is another 1.3 million of high-vol river coal.Again, it's roughly 12,300 BTUs. These two alone skewed that price to where you see you at the $64 range.

We also have roughly 6.8 million tons of Bailey coal that we sold during the quarter and with that, over half of that was several very long-term coal contracts that were already in place. We were just reacting to price re-opener provisions. On the metallurgical coal, that table shows we have roughly 2.3 million tons open. There's a lot of issues that need to be cleared up, mainly what is the first quarter BMA price.Also, what are the railroads going to do with their prices?The numbers that we reflect are still based on the prices that are still in effect through the end of March.

Okay. That's helpful.There's a lot of information there on both sides. I appreciate it. Just one thing follow-up on -- something I think you just mentioned.You said you sold 6.8 million that's a long-term contract on the thermal side.That's a decent amount of volume on the thermal. What were the price for that part?

Over -- half of the 6.8 million were sold under long-term contracts. That price was in the mid- $60s.

Okay. And then just to sort of round out this question.Second follow-up question -- very simplistically, where do you see contract prices today? For your high-vol met, your low-vol met -- and thermal if you had any thermal left to sell in 2011.

David, I got to tell you -- where we see it today based on what we know, they're exactly where they are on the table.

Okay.

I can tell you that's where to look, and we'll update the table at the end of each quarter.

You want to keep in mind that the table also has volume tied into it. Don't try to tie these numbers to spot prices.Because there's a lot of volume in this table -- probably more volume than you're going to see from any company in the eastern United States.

Okay. Fair enough. The last question. On the high-vol met -- I did say last question before, but this is really the last one. On the high-vol met, can you talk a little bit about the specs?I thought high-vol met prices were a bit higher, but perhaps that's a quality difference, or is that -- ?

High-vol met, it's 2% sulfur. It's 8.5% ash.

Okay.

(inaudible) is plus 36.

All right, thanks very much.

Our next question comes from the line of John Bridges, with JPMorgan.

I just wanted to dig a little bit more. I was intrigued that you said that you might be selling thermal coal into India.Is that using your mechanism of loading up a cape-size and sending that around Africa?

Yes, sir. In order to be able to continue to take advantage of vessel rates, John, we will look at topping off. We're currently predicting now into China for our high-vol coal.We're looking at two top-offs a month, and we'll continue this once we break into the Indian market.

If you have thermal into India and thermal opportunities into Europe, then I'm surprised that you're not going at it even more quickly with the expansion at Baltimore.

John, the capacity of Baltimore is -- every month, there's a new number based on circumstances. We're currently on pace right now, before today's snowstorm, to actually set a new monthly record of capacity through Baltimore. On an annual basis, that would be well over 14 million tons. I think what's important is CONSOL's coal will not be constrained in any way, because we have the capacity to our own port.We have another 2 million to 2.5 million tons of capacity through the CSX -- the Chesapeake terminal -- and plus we have 5 million to 6 million tons of capacity available to us through the [MX] port at Lambert's Point. You add all that up, that's 20-some million tons. We'll continue to move the chess pieces around in order to take advantage of the market and to sell the coal at the highest prices possible.

Basically, it sounds as if Baltimore is pretty scalable. It's not a question of restricting production or throughput for six months while you build a new piece of equipment.It seems pretty scalable.

You're exactly right about it. It's not scalable like that. We can continue to do what we're doing well while we build into it.

The issue really is, we'll build in as the contracts come.We can see ourselves being constrained, and we'll time that right. The other half has a lot to do with what coal are you actually moving through it. If you're blending a lot of coal, then the capacity goes down. If it is big mass volume say, of high-vol coal, then the capacity goes up because you're just moving one kind of coal through there. There's a lot of moving pieces here. What I want the shareholders to be aware of is we're committed to expand that port to the shareholders' bank account at the right timing with the right capital spend for a great return.

Great. Do you have any updates on the capital needs to do that expansion?

The first phase, John, will be for about 2 million to 2.2 millions tons, and it'll cost about $10 million.Then it will involve both an upgrades to both the inbound and outbound tracks. John, I think it is important for us to tell you -- in order to increase the volumes, we need the help of both eastern railroads. Because if we can produce it and it we can put it through to thermal, but we got to get it there first.

Okay. Just finally, I'm intrigued by the high-vol coking coal and how the steel makers are using it. Are they working hard to use more of this and protect themselves from dependency on the very highest-grade coals, which are harder to get to?

Yes, John, that's in fact that we're seeing right now. We're having more of our Bailey coal go into the heartland of China. It's being used as blend -- more of it is being blended. At first, they started off with blends of 25%.We have now been in contact with some of the mills. That has increased to 38% to 40%. We're hoping that when it's all said and done, that they can get comfortable with blending as much as 50% of our high-vol coal into their blends.

Have you got any ballpark figures on what the potential market is for this material?

I tell you what, I can tell you that it is about 10 million tons.

Okay. That's interesting. Thanks a lot. Good luck, well done.

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

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

I can tell that you there is room. We know that. We probably would tell you that it would probably take two years to get up to the 110 million-ton level. We probably can get from 80 million to 90 million, 95 million this year if everything works right. Again, a lot of it depends on the arrival times of the vessels, the weather, the trains.There are a lot of moving parts here.

Brian, and that's the problem. That's why CONSOL's own terminal -- it's very difficult for us to answer the question as to what is the true capacity of Baltimore.As I said earlier, we're on a record pace for January. If we kept the same pace on an annualized basis, we'd be well over 14 million tons. I think that is true of all the other terminals as well.

And then on a coal-production footprint, you mentioned the possibility earlier of expanding Buchanan at some point. What would an expansion at Buchanan look like, and what would that cost?

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

No problem. Appreciate it.

Our next question is from the line of Jeremy Sussman, with Brean Murray.

It seems that the thermal export markets are being overlooked a little bit.But you mentioned earlier that the Europeans are buying.Can you give us a sense of how things have changed on this front over the past month or two and what pricing you're seeing on this end?

Sure. Jeremy, we told you at the end of the third quarter that CONSOL's strategy was going to be that we were going to look for term business in Europe. Since then, we have been able to lock up about 1.5 million tons of a 3% sulfur steam coal. Jeremy, that 3% sulfur is made up of 50% from our Bailey mine and 50% from our higher-sulfur northern West Virginia mines. We probably have about another 300,000 tons that holds a term of just one year. And the average price for all of this, when you take into consideration higher sulfur, is in the range of $68 to $70 FOB mine.

I appreciate that. Shifting gears -- in terms of the BMX mine, what type of coal / PCI potential do you see out of the 5 million tons on that front?

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

Okay. Great. Thanks very much.

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

Hello. On coal costs, can you give any commentary on what you expect year-on-year cost inflation to be?And specifically, what the low-vol met you cite in the release -- some cost inflation due to safety-type investment. Do you get any giveback on that this year? Thanks.

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

Thanks for that. Maybe this one is for the Nick. Relative to the capital spending and the gas business under delineation and exploration, could you give us -- that value added a process and an important part of the investment thesis for the stock --What kind of things can we look for for the return on that money when you talk about it 12 months from now?

If you fast-forward to 12 months from now -- if we stick to the $675 million capital budget on the gas side that we have in the release -- again, about $215 million of that is delineation in Westmoreland, Pennsylvania, northern West Virginia. We would expect by year-end to have definitively shown to the Street and to our shareholders that what we were hoping with regard to Westmoreland and Indiana County and with regard to northern West Virginia on the Marcellus was indeed that. We should have a number of wells not just drilled and completed but well-production results and IP rates and declines and 30-day averages from those two areas.

That's basically our A-number-one job this year with regard to the Marcellus. On top of that, we would also hope that we would be in the position by year-end '11 to talk about what we see from our preliminary exploration-drilling effort in the Utica, which, again, is another big opportunity for us with regard to our footprint and how many acres we hold within Utica. When you think about delineation and you think about exploration, those would be what I consider to be the main objectives of 2011, and that's in the capital plan that you see.

Thanks. Just on the horizontal drilling, could you comment on little bit about that and where you stand relative to the best in class?

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

What's the maximum length you're at now?And I will stop there. I promise.

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

Thanks. Good luck.

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

Yes. Hi, I'm sorry. I had it on mute.I was wondering, is there a chance you can give a little more detail on the Utica shale and what you see as the potential there?And how many wells you will drill with that $35 million?

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

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

The rate of returns received with regard to BMX are pretty compelling based on everything Bob Pusateri and Brett have discussed with regard to what is developing on all these different markets. BMX is a pretty much standalone compelling investment opportunity. With regard to the delineation on the Marcellus in northern West Virginia and Westmoreland, Indiana County, Pennsylvania, if we hit our pipe curves that we set with regard to expectation in those regions, we do expect a rate of return above our cost of capital, even for this gas-price environment. But (inaudible) at BMX at this point with regard to where the coal markets are and gas prices are, no.

Okay. Got it. Great.I guess do you have a thought yet on what type of reserves you'll add in the Marcellus per thousand feet of lateral drilled?

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

Okay. Got it.Thank you.

Our next question is from Paul Forward, with Stifel Nicholas.

Got a question for Bob. You had mentioned earlier that some of your utility customers might be sitting on as low as 20 days of inventory. And they see that basically CONSOL has sold out on thermal coal for 2011. I was just wondering if you're getting a little bit more concern from your customers about the weather impact on demand. And if they are looking to CONSOL for additional tons, are they in the situation where they are essentially looking at the high-vol met?You've got 2.5 million tons unpriced, uncommitted for 2011.Is that what you've got left for them to potentially try to outbid your steel customers for that business?

I will start at the end of your question, Paul. The answer to that is yes. Given the production estimates that we are putting out today, CONSOL would only have 2 million to 2.4 million tons of Bailey coal left. They would have to compete with the export market for those tons. It's a global market and that is what was important to us. That is why we attempted and were successful in getting our Bailey coal branded in China. So I think that the utilities are telling us now that all of the coal from CONSOL that they've purchased -- that they want the coal.They've informed the railroads vis a vis shipping schedules that they are going take all the tons. But again, a lot of things could happen here, Paul. We can get to the shoulder months.Power prices could fail to rise. We could have a mild summer. There's a lot of dynamics here. The good thing is with CONSOL, given the fact that we can put the coal offshore, we will continue to do that. And we'll always look for the highest price possible.

Okay. Thanks. On Buchanan, you've got a pretty big quarter -- 1.4 million in the first quarter. Just wondering if -- your guidance is not suggesting that that kind of rate is going to continue for the rest of the year. Just wondering if you've got any quarterly outlook that you can give us Buchanan's output -- any events that might cause one quarter or another to be weak in that coal?

I tell you, I would love to multiply that by four quarters, but that's not the way big underground mines work. It is going to be about 4.5 million in total production for the year. You will see that flex according to schedules and longwall moves and everything that comes with that. Maintenance schedules, vacations -- all those kind of things are built into it, but at the end of the year, it will be 4.5 million -- maybe a little bit more, but not much. I think there's about 200,000 tons of inventory that I think Bob can sell. He'll get that sold. That's a one-time deal. That is what I'd count on. In terms of how it comes out of the mine, I've always said that it is lumpy quarter-to-quarter, but we are always pretty close to our numbers in a year's time.

All right. Thanks very much.

Next we'll take questions from the line of David Khani, with FBR.

Just a follow-up on Paul's question. I believe last year you were closer to five. Is there anything going on at the mine this year versus last year? Is the seam a little thinner? What's driving a little bit of the lower production expectations, or maybe just being a little bit more conservative?

Dave, I think the key drivers there are everything from longwall moves to what we're looking at with regard to the new -- I'll call it engineering -- with regard to the Buchanan mine moving forward such as the narrower panels.We did not have a full year of that last year. We've got a full year of that moving forward this year and beyond. At the end of the day, when we look at the way we are engineering and designing the Buchanan mine moving forward, it is much improved with regard to safety compliance and productivity, reflecting the geology and the regulatory environment we are in. 4.25 million and 4.5 million I think is where we put our sales bogeys -- our production bogeys in there -- with regard to '11. That is our best guess based on all these factors I just described at this point in time.

I guess a follow-up with you, Nick. Can you give us some of the safety measurements that you look at and think are important?And then also how you compared the year before or three years before, whichever way you want to compare yourself?

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

What's a good number to use, Dave, if you look at total incident rate against all big underground mines, or underground mines in the United States, we're probably about three times better than the statistics show, or 2.6 times better than statistics. That includes us in the numbers. We're probably 25% of that total number. If you took us out, we're probably maybe four times better than the national average.

That's great. If you look over to India -- I know you talked about this. When do you think you'll actually get first sales? Can you get it this year, you think?

Yes, David, we're hopeful that we'll have something to announce on our first-quarter call in April.

And is the plan -- and you might have said this -- is the plan to do one-year spot or try to do multi-year?

We're hopeful that we'll be able to sell both met and thermal coal to India in 2011. We're estimating that between the two of them, it should be around the 750,000 ton mark.Right now, we are splitting that equally between met and steam.

Would that be short-term or would you try to do on the thermal side at least multi-year?

If their economy continues to mature, and we get comfortable with payment terms, then we'll look for a longer-term deal. Right now, we're just looking for this calendar year.

Got it. You're kind of dating and you want to see if you're going to get married. I got it. Hedging on the gas side, can you give us a little bit of color on what you'd like to do if we get a little bit more improvement in gas prices?

On the hedging side, right now what we did, we instituted a program hedging for calendar years '12, '13, and '14. What we said there is that we would hedge up to 60% of our expected volumes. We've got that process already in place for 2011. We're being diligent in -- we're moving that price up. In terms of every $0.10 to $0.20 forecasted, we'll hedge the volume.

Okay. And then last question on Marcellus shale JV. I know that you obviously have some nice, positive expectation out of Utica, and you want to drill it out. Is that -- do you expect to have any JVs or potential Marcellus asset sales at all this year? What's the expectation?

That is a good question. I think something will happen this year. I think there's a lot of interest. We are talking to a lot of people. There's a lot of consolidation going on with people around us. And whose got what in any given county or region. In terms of our need to do something, or feeling pressured to do it, we are not there. We want to get value. What's interesting is that the value of all these acres are increasing in terms of how much gas per well. We're not in a hurry to do that. If we can find the right partner, when we partner up, we will sell a piece. (inaudible)You will see some action in '11 on that.

We will. Okay. Sorry, one last question. Maybe for Bill Lyons. Bill, what do you hope to potentially pay down in debt this year? What would be your hopeful goal here?

David, at any given time, we have between $400 million and $500 million of short-term debt. If you are asking me, ideally, I would like to get that to $0. We don't feel uncomfortable with that level of debt. Obviously, we pay down some. That would be good, too. But we have the flexibility that any extra cash we get in we can immediately use that to pay down, to draw down some of the credit facility.

Okay. Great. Thank you.

Hi, Nick, this is Brandon. Let's go ahead and make the next one the last question.

Thank you. Our final question will come from the line of Holly Stewart, with Howard Weil.

Just a quick -- this is for Nick, last question of the day. You've provided some improving rates here in the release within the Marcellus. It feels like your 30-day production rate within the tight curve is a little stale. A question for you is do you agree with that? And then when or -- what's the timeframe you'll feel comfortable to increase, again, the 30-day rate or your EUR assumption?

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

Okay, but if you were to separate out the delineation progress with West Virginia etc. and Southwest PA, I think we're still -- correct me if I'm wrong -- but I think out there is still 1.5 million a day for your 30-day rate and the release says 3.5 million is what you've been averaging. I'm curious because it certainly makes it a difference in the valuation.

We have on average beat our tight curve in southwest PA with regard to the wells we drilled to date. That fact needs to be reflected in terms of what we say about reserves in about a week.

Okay. Great. Thanks.

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

Ladies and gentlemen, today's conference will be available for replay beginning today and running through February 3. You may access the AT&T replay service by dialing 1-800-475-6701, or internationally using the number 320-365-3844 and entering the access code of 188233.

(Operator Instructions)

Thank you, ladies and gentlemen, for your participation today. That concludes our conference call. You may now disconnect.