CNX Resources Corp (CNX) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's first-quarter 2011 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 Relations, Dan Zajdel.

Actually, this is Brandon Elliott. I'm going to kick it off. Thank you. I would like to welcome everyone to CONSOL Energy's first-quarter conference call. We have in the room Brett Harvey, our Chairman and CEO; Nick Deluliis, our President; Bill Lyons, our Chief Financial Officer; and Bob Pusateri, our Executive Vice President of Sales and Marketing. Dan and I are here representing our IR team.

Today, we will be discussing our first-quarter results. Obviously, any forward-looking statements we make, or comments about 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 filings.

With that said, we will start the call today with Brett Harvey. Brett?

Thank you, Brandon.

It's good to be with you all of you again, and catch up on CONSOL and where we're at. Things happen so fast these days. These calls are, I know, important to you, and important to us to get our story out. We have a little bit of a change in the lineup here. We'll go over the numbers with Bill after some comments that I make, and then we'll open it up to questions.

First of all, like we start every day, we need to talk about safety. We still continue to make great strides towards safety. We're gaining ground on our movement towards zero. We won't be satisfied until we're at zero and everybody is at zero, but we are gaining ground and our first quarter reflects that very well. We're also gaining ground on compliance, which is as we see MSHA change over time as it responds to problems in the industry, we see a changing bellwether of what we have to do in terms of risk, and we're gaining ground on compliance as well. When you look at it from a risk profile, zero and compliance really diffuse risk to shareholders, and I think we're very focused on that.

I would like to talk about the high performance assets that we have. We're evolving into a very powerful energy company that is not distributed worldwide, but very powerful in one area, one very valuable area of the world. We have our met business which is now being distributed worldwide. We have our steam business that is the core of the industry in the eastern United States, and now we have the gas business, which is a very low-cost product that will show growth not only to industry and utilities, but to the economy of the United States. So, we're very excited about all 3 of these legs that we have, and we will talk about those as we move forward.

Let's talk about coal first. Another quarter of record revenues coming off the coal side, expanding margins, expansion in the international market. We are a player in the international market, and we will continue to be a player in the international market. When you look at it from the met side, our expansion through our own port facilities and step-by-step expansion will just create huge value for our shareholders. Our low-vol piece is extremely valuable.

Our high-vol piece that we're now developing markets for is becoming extremely valuable to our shareholders, and let me remind you, that's only 12 months old in terms of our process there. So, that continues to be a very valuable spot. Now, we're opening the Amonate mine in a very robust market, and we see extreme value there. Those are good reserves. They are high-cost reserves, but they're good reserves in a very hot marketplace, and we see the volumes there going forward to be very valuable to our shareholders.

Let's talk about gas a little bit. We did the Dominion deal not even a year ago. There were a lot of questions about that because undeveloped in the Marcellus Shale. We've shown in the last 12 months very good results in Greene County and western Virginia, and now we've shown very good results in the questionable area that we purchased in central PA.

We've just completed some wells in northern West Virginia, and we will be showing those results in the next quarter. We are very satisfied with this purchase. As you can see from our cost structure on the Marcellus as it drops and becomes very competitive, even at low gas prices, it shows you the strength of the purchase and the assets that we have in this Company. When you look across the entire asset base, met, steam, and gas, we are the low-cost producer in a valuable position right on the same footprint. And on top of that, we have the Utica shale which is on its way to being explored this year, and we'll give you results on that.

Recently, we restructured our balance sheet. That was very successful. It also shows you the strength of the Company, and Bill Lyons and his group were set up to do that very quickly, and I appreciate the work that got done there.

With that, I'm going to turn it over to Bill to talk about the numbers, and then we'll open it up for questions.

Thank you, Brett.

As you have seen in our press release and as Brett has just mentioned, CONSOL Energy has had a great start to the year. Let me use some financial metrics to support our enthusiasm. Total revenue for the first quarter of 2011 was $1.465 billion. That's up 18% year over year. This represents the fourth consecutive quarter of record revenues. CONSOL Energy generated $435 million of operating cash flow, a record quarterly result, and we generated $466 million of EBITDA. That also is a record amount for a quarter. The primary economic driver for these highs was the record $21.93 margin per ton across all tons in the coal division.

Now that I have set the stage, let me review some of the financials in more detail. CONSOL Energy reported GAAP net income of $192 million, or $0.84 per diluted share, for the first quarter of 2011 compared to $100 million, or $0.54 per diluted share, for the first quarter of 2010. The higher than expected coal sales of 16.7 million tons combined with an $8 increase in average margins per ton were the primary drivers of this increase in profitability, and our 17.2 million tons of production significantly exceeded our previous guidance. Now we have another 500,000 tons to release into these profitable coal markets.

For the first quarter of 2011, total active coal operations earned $377 million. That's up $156 million from the first quarter of 2010. Met coal operations earned $186 million, which is up $112 million from the first quarter of 2010. This reflects the strong worldwide demand for met coal in general, and demand for the quality of our coal in particular. On the thermal side, we earned $191 million, which is about $44 million higher than the first quarter 2010. Keep in mind, too, that we shifted some more of our Pittsburgh HC coal from the thermal market to the higher margin high-vol met market giving further evidence of the sustainability of this newly created market.

Our gas business had another outstanding quarter operationally, but was hurt by weak gas prices. Production increased by nearly 50% quarter over quarter, to 35.9 bcf. This increase was primarily through the acquisition of the Dominion conventional gas operations. However, of significant note, our Marcellus operations produced 4.7 bcf in the quarter, or more than 3 times the 1.4 bcf from the 2010 first quarter. Coal bed methane operations produced 22.4 bcf for the quarter, up slightly from the 2010 quarter.

In the first quarter 2011, we earned $15 million from our gas operations, and that's down $46 million in the first quarter of 2010. Average realization was $4.93 per mcf and that's down $2.31 from the 2010 quarter, and was the primary cause of our reduced profitability.

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 3 operating areas. A fourth rig arrived earlier this month that will also drill some Marcellus acreage and explore for gas and liquids in the Utica shale. We continue to expect to produce 150 billion to 160 billion cubic feet of gas in 2011.

One gas item of note that is not tin release but will be in the 10-Q, is the dramatic improvement in our Marcellus Shale cost structure. We believe that as our Marcellus Shale program grew, the unit cost would decline; however, the swiftness of the decline was impressive.

In the just ended quarter our all-in, and that's fully loaded cost, came in at $2.98 per mcf. The increased number of wells per pad in Greene County, Pennsylvania is largely responsible for the improvement in cost. Given the acreage we own in fee plus the acreage held by production, we're able to drill for economics as opposed to holding leases. This lower cost structure we believe is sustainable in areas included in our development drilling programs.

From the CFO's perspective, cash generated from operations could be the most important financial metric in the financial statements. This cash generation enables us not only to invest in our asset base and pay dividends, but also provides us with the financial flexibility to weather changes in the economic environment. And with the higher pricing for our low-vol coal sales beginning April 1, we expect a year of strong cash generation from operations. Generally, we expect our cash flow from operations and asset sales to be in the range of our 2011 capital expenditure program of $1.4 billion of which we spent $255 million in the first quarter.

Our balance sheet remains strong with excellent liquidity. We were very active in the quarter in restructuring the finances of the Company, and as a result we have no financial debt coming due until 2016. We issued $250 million of 10-year notes at 6.375% to replace $250 million of 7.875% notes, which were coming due in 2012. We were able to take advantage of favorable debt marks to reduce costs by $14 million over the life of the notes, and also to eliminate refinancing risks.

We amended our credit facilities for both CONSOL Energy and CNX Gas Corporation to lengthen there terms and to reduce costs. Both have 5-year terms expiring in April 2016. This is an extension of 2 years. The CONSOL Energy facility remains at $1.5 billion. The drawing cost has been reduced by 0.75% with a resultant expectant savings of $22 million over the term of the facility. The CNX Gas facility line was increased from $700 million to $1 billion. The drawn cost has been reduced by 0.5% with the resultant expectant savings of $8 million over the term of the facility. We operate in a business environment that requires swift response to new opportunities and challenges. Our new credit facilities give us the capability to respond to these events.

We're encouraged by our first-quarter financial results. We recognize that long-term investment decisions, such as our investment last year in the Dominion gas properties, will be judged with a view that will be measured in years and not quarters. But we believe that these financial results attest to the fact that we are making significant progress in achieving our long-term growth and profitability objectives.

With that, Brandon, I will turn it over to you, so we can take questions.

Thanks, Bill. Lola, we are going to keep the call today to an hour. So, if everyone would please ask one question and one follow-up, and then jump back into the queue if you have any additional, that would be great. We'll try to get as many people as possible time to ask questions. So Lola, if you will give instructions for the Q and A.

First, we will go to the line of David Khani with FBR.

Nice quarter. It's good to see the coal operations running really nicely. So, question on monetization of assets. You put in there in print about continuing to push forward on the gas monetization, and obviously you gave us an update on some of the coal side. Is there anything else that you could talk about as far as timing or size or what you're thinking?

David, the asset monetization effort continues. I think that the big development this quarter, of course, is with regard to Amonate, as Brett spoke about, where the market got very hot with regard to the demand for the coal. As we went through that sale process, although there were offers there, they weren't as compelling as what the economics were of the asset. Also, in fact, some entities were also expressing some interest about partnering with us on that project. So, that's the big development there with regard to what I will call the organic growth track instead of the asset sale track.

All these other efforts, whether it's the metallurgical coal efforts or the Marcellus or others continue. And on the Marcellus, we're looking at anything from basically leasing or selling acres beyond our core 3 areas where we're doing development drilling. That's of course, Greene County, Pennsylvania, central PA, and northern West Virginia. So, it's sort of sale of assets or acreage beyond that, to joint ventures or things like that on a bigger scale moving forward.

Good, thank you. Follow-up question on exports. How much do you think you will export this year, both steam and met, if you could break it out? And then, more important, we're looking forward with the port expansion at Baltimore and all the other port capacity that you do have, how much do you see CONSOL exporting looking out 5 years from now?

David, for 2011, we're forecasting exports of roughly 10.2 million tons, and that's up roughly 49% or so from the 6.8 million tons that we did in 2010. The breakdown of that is basically 4.5 million tons of our high-vol metallurgical coal, our low-vol Buchanan coal looks like it's going to be at 3.7 million, and our thermal exports are approximately 2 million, for a total of 10 million, 10.1 million, 10.2 million. That's where we are today. We still have some additional upside, certainly in the overseas thermal coal. We're very active in that market. Looking forward for 2012 beyond, we're forecasting our high-vol metallurgical coal will go from 4.5 million to upwards of 6 to 7 million tons by 2015. Our low-vol coal will continue to be sought after throughout the globe as a premium metallurgical coal. So, at the end of the day, we're probably looking at about 15 million tons of both thermal and metallurgical coal exports around the year 2015.

Great. Thank you.

Next we'll go to the line of Michael Dudas with Jefferies.

Brett, can you share your thoughts on how you think this coal market has evolved over the last 12 months, and what you see over the next couple years? How surprised or not surprised are you, especially given the headwinds in the United States from the utility announcements and the low natural gas price?

Well, I'll give you a broad look, and I'll have Bob give you more specific. But I tell you, our ability to move high-BTU coal around the world really is an advantage to us. Also, we own the port facilities and have the ability to expand those is another big advantage. The third leg of that is, we're the biggest mover on both Eastern railroads, and we have dual tracks into most of our big mines. That's another big advantage. So, if you had add those 3 together, as the world gets very hungry for this energy, we have the ability not to distribute ourselves worldwide and mine coal worldwide, but distribute a very valuable product from a centralized low-cost area, which gives us high margins.

Now, with that, I will let Bob talk about the international markets overall.

Mike, first I would say, we see the European demand for thermal coal imports to remain strong for some time to come. Mainly that's going to be driven by the decision made by the European Union to eliminate subsidies on high-cost coal mines, and that will cause the loss of tens of millions of tons of traditional thermal supply.

So, we're looking very hard at that, and that's one of the reasons that we made the decision to expand our Baltimore terminal by 2 million tons. And you saw from the numbers in the first quarter that Baltimore is actually on a pace of roughly 14 million tons of throughput capacity. We did 3.5 million in the first quarter, and if we can continue this pace, we'd be at 14 million, and that's not enough. And that's why the decision was made by management to spend some money to increase the capacity to 16 million.

We also know that 87%, thereabouts, of the energy produced in China comes from fossil fuels, with the vast majority of that coming from coal. We want to be there to serve that market. So, those are the 2 top areas that we're concentrating on. And then there's always India. We're constantly in negotiations with utilities in India for thermal coal, and we're getting close. We're just not there yet. So, all of this we see as very good, not only for our metallurgical coal, but we see our high-BTU thermal coal as being able to travel long distances, and with our Baltimore terminal it's a natural entry into those markets.

One other thought about that terminal. This is a first phase on that terminal. We think right behind it we'll be doing the second phase, and we want to make sure that phase brings it to the maximum potential. That's why we're doing some more engineering on that, but it's going to come in right behind it.

Bob, what are your traditional utility customers thinking about, given that backdrop of the global coal markets?

Mike, I think right now they're wondering about how long this is going to continue. They're probably glad that you asked that question from that standpoint. There's a lot of traditional [east route] coals that are going overseas, and I think that will continue. CONSOL itself, we have nearly 32 million tons of domestic thermal coal that we'll be renegotiating price on in the next 4 to 6 months. And so, that price expectation for us is higher because of what's happening to all of these coals that are going overseas.

Seems like you'll be pretty busy, Bob. Thanks for your time, gentlemen.

Next, we'll go to the line of Shneur Gershuni with UBS.

Just wanted to start on the global side of things. I know we've talked about it this past couple of callers, but you've made a lot of decisions this quarter with the port expansion, Amonate, and so forth. I was wondering if you can talk about what you're seeing in the market for low-vol coking coal prices, given the fact that you're willing to keep a couple of tons back to go quarterly where some expect the market to backward date. And also I was wondering, Bob, if you can specifically address the high-vol side. In the past, Bailey has gotten a bit of a discount to the high-vol B products that's out there. The fact that it's being tested in more countries and more markets as a coking coal blend, could we see that discount narrow over time?

Okay, first, for the second quarter, you saw in the release that we showed open tonnage of 200,000 tons. Shneur, we've moved those tons already. We've moved them at a price in excess of $230 FOB mine. So, we're very pleased with that. Going forward, our crystal ball is not much more clearer than everybody else as to what the BMA price is going to look like for the third and fourth fiscal quarters. But if I had to guess, I would say that the number for the second fiscal quarter starting July 1 will be in excess of $295 FOBT metric which, as you know, is very strong. It's down from the first quarter, but the first quarter had built into it the effect of the Australian floods.

So, we took 1.5 million tons of high-vol metallurgical coal, and we took that at an annual number of $290, which -- I'm sorry, of low-vol, and that equated to roughly $214 FOB mine. We did that. We also decided that we would enter the market, and we would take some business on a quarterly basis. So, we're hoping that the mix of the 2 will, at the end, when we're sitting here next year, we'll be able to tell you that decision was a good decision to be able to split it between an annual and a quarterly basis.

On the high-vol side, our high-vol numbers still are in the high $70s to low $80s. Shneur, the thing to keep in mind is that we're selling a 2% to 2.2% sulfur coal. All of the high-vol B that you refer to is a 0.9% sulfur to a maximum 1% dry sulfur. So, the coals, just by their rank, are different. So, we try to avoid trying to make a correlation between what a high-vol B price looks like and what our high D price looks like, and on a sulfur basis that's the way we refer to it. We plan on moving some 4.5 million tons of Bailey coal into the high-vol market. The average realization should be right around $80 for the year, and given our low cost structure at Bailey mine, that's a considerable pre-tax margin.

Definitely fair enough. I was just wondering if you thought that with more people testing that, maybe it can move up a little bit higher and so forth over time as they get used to the coal and used to the sulfur content.

Yes. I think we're still getting it branded. We're moving it further into the interior in China. We're doing extremely well in Brazil with it, and more importantly, we have a test here in the United States of -- a major steel producer has agreed to take a test of our Bailey coal. So, all of that coupled is very good, and we're hoping that we can push the price later on.

That sounds great. And then the next question just with the decision to go ahead with the Amonate mine opening and so forth, you have 240 million tons of reserves. You're looking for a peak production rate of about 800,000 tons. Brett, you did mention earlier in your comments that it is a higher-cost mine and so forth. Is that the constraint for not taking that production up even further over time? Is it rail, or is it a prep plant? If you can give us some color as to why you can't take this to 2 or 3 million tons of production on an annualized basis.

Shneur, we refer to the Amonate mine, but really it is a complex of smaller mining operations that feed into a central preparation plant. And that ramp-up that you see from the 400,000 ton level in 2012 to the 800,000 ton level around early 2015 is the result of basically bringing on an extra mine within the complex. There are other opportunities to do things beyond that. Quality is really the issue we want to look at to make sure we meet quality spec. When you look at the cost structure, at say the lower production levels, say 400,000 tons that we're expecting at the start of '12, the cost structure there is somewhere around $80 a ton all-in operating costs, and probably about $100 a ton fully loaded costs when you add in your capital and overhead.

Okay. But is that what limits you from taking it further, or -- ?

The additional production beyond the 800,000 tons can come from additional mining units within the complex. What will limit that will be making sure we meet quality spec to hold the metallurgical quality that gets us the price FOB mine.

Right, and 1 final question just on the gas side. If you can remind us the amount of Utica and Marcellus wells that you plan to drill this year on the Dominion acreage?

When we look at the 2011 drilling program for Marcellus, we're looking at about 70 Marcellus wells in total. In terms of geography, roughly 40% of those 70 wells will be in southwest PA, Greene County, about 20% in central PA, and about 20% in northern West Virginia. The additional wells that we're looking at with regard to Utica, probably somewhere between 4 and 6 Utica wells later in the year in eastern Ohio. So, 70 wells total. I think I told you 40% in southwest PA, call it 60% in southwest PA, 20% in central PA, and 20% in northern West Virginia.

Perfect. Thank you very much, guys.

Paul Forward with Stifel Nicolaus, please go ahead.

Couple questions on the guidance table. On high-vol met for 2011, you're showing 3.5 million estimated sales, but I think you've been saying elsewhere 4.5 million. 3.4 million of that is priced. Is it correct to say you have 1.1 million unpriced high-vol met sales this year?

Paul, the table does say $3.5 million. That's what our expectation is. We believe that we can move that number up by another 1 million tons, so I'm aspiring to get to the 4.5 million tons for the entire calendar year. We believe we have roughly about a little less than 1 million tons of that to price, as we go forward.

The business that we have in China is mainly sold on a quarterly basis. We price it on a quarterly basis, and that allows us to take advantage of changes in vessel rates. As vessel rates start to move, we make a decision whether or not to lock in enough of ships for either 1 full quarter or maybe go a little longer, maybe take it for 4 or 5 months. So, we're trying to get the highest price possible back at the coal mine, and that's why we have about a little less than 1 million tons unpriced.

Great. And looking at 2012, 2013, you're showing about 4 million tons a year of high-vol met. I think you had said in your comments earlier that that number should be able to do on the order of 6 to 7 million tons. Is that 6 to 7 million tons dependent upon the BMX to get to that level?

That's correct. My 6 to 7 million tons would be after BMX comes on and reaches full production, which is slated for 2014.

Okay, and maybe just lastly, you're showing $75 to $85 as 2012, 2013 anticipated price ranges for the high-vol met business. Just curious, I understand the sulfur content, putting a cap on what you can expect to charge relative to other types of met coal. Just curious about whether or not, if you have to settle at $75 or somewhere in the lower half of that range, why not just redirect that tonnage to the thermal markets if that's the kind of pricing you have to settle for?

The nice part about that is we have that option. We can move it wherever the highest price is, and that's the beauty of this entire reserve. As we'll capitalize it as it is, we can take it to the highest price, and that takes a lot of risk away from our shareholders because those BTUs are going to move into the steam market as that demand comes, or the met market as that demand comes.

So, Paul, our $78, $80 number is roughly about $132 FOBT metric ton.

Okay. Sounds good, thanks.

Next, we'll go to the line of David Gagliano with Credit Suisse. Please go ahead.

Congrats on a good quarter. My first question is regarding the second phase of expansion at the Baltimore terminal. What is the export capacity under consideration for phase 2, and what's the timeline for that next stage?

Well, phase 1, as Brett referred to, deals mainly with track expansion as well as changing out a number of the belts and chutes. We believe we'll start that here early summer, and we'll finish phase 1 sometime in September of 2012. Phase 2 could get us as many as another 12 million tons to 15 million tons.

It's a much longer time frame, and what that involves is a new dumper, a complete new stacker reclaimer. We would also refurbish one of the piers that is already there. It's a costly endeavor, David. We're still waiting for the engineers to give us a new number, but for another 12 million to 15 million to 16 million tons that would make us in total roughly around 32 million to 34 million tons of annual throughput. For the right set of circumstances going forward, I think the Company seriously would look at that. What we're looking for is, we're looking for term business both in Asia as well as Europe. That will get that done.

So, in terms of any early read from the engineers in terms of how long that would take, and in terms of permitting constraints and things like that?

We don't believe that we'll have any permitting constraints on that part of the construction. Time-wise, we think that it would probably take a little over 2 years from the time that we start to complete. The problem with this phase is that, in order to complete it there will be times when we'll have to reduce the throughput capacity of the terminal in order to make the tie-ins with the existing equipment. So, all of that is being looked at. We have an outside engineering company that we're very pleased with, and we are going to look for ways to do it.

We'll be making a decision, but we won't make it until we know that we have the firm business behind it. As you know, CONSOL has -- we now have 14 million tons of throughput at Baltimore. We have 2.5 million tons at the Chesapeake Bay terminal, and we also have 4 million to 6 million tons of throughput capacity at Lambert's Point. All of this will allow CONSOL and its partner Xcoal to be the largest exporter in the United States in 2010, and we're by far the largest exporter of coal off the East Coast in the first quarter of 2011.

Okay, great. Thank you. Just on the second question, a follow-up question, regarding the European thermal export opportunity, the rails are now charging a lot more to move met versus thermal, and global thermal prices are just now starting to move higher. So, my question is, given all the moving parts, freight rates, met prices, US thermal prices currently, what European thermal coal prices do you need to see today in order to move even more thermal into the export market?

For us, that price is in the high $60s FOB mine for 3.2% as received sulfur.

Okay, great. And what does that equate to in terms of, say, a European price?

You mean on an FOBT basis?

Yes, say if we were to look at one of the API, what is it, API 2?

API 2, that's probably just at about $100.

Okay, perfect. Thanks very much.

Next is Andre Benjamin with Goldman Sachs.

Another question about your 2012 and 2013 thermal guidance. Could you please provide a little bit more color as to why you're guiding down in volumes year over year in '12, even adjusting for the 500,000-ton increase into the high-vol market? If you're expanding the Baltimore terminal, and you're feeling good about export growth, is that really more reflective of a view about the domestic market, the ability to get the coal out of the ground or something else?

Right now, Andre, we're forecasting roughly 1.9 million to 2 million tons of thermal steam coal going to Europe in 2011. We're in active negotiations with several European utilities to increase those volumes going forward for 2012 and 2013. We believe that we'll grow the business. We grew it year over year from 2010 to 2011. We believe we'll be successful in growing it from '11 to '12. That magnitude is somewhere between 500,000 to 750,000 tons. That's the growth that we're looking for in 2012.

Again, it's all about price. It's where is the best place to move the coal at the end of the day in order to receive the best cash margin. As Brett indicated, we have the flexibility. We're looking for term from our customers. We're looking for customers that have a good credit rating, and we're here to fill that void as it presents itself to us.

One point I want to make here is, that movement is not CONSOL-centric. If we expand that port, we're libel to move a lot of tons that are reserves to us, say Rosebud or somebody else who are mining this movement with Xcoal, and we're getting a royalty on that. So, the flexibility, whether it goes to the utility or it goes through the port at our sale is one of the power of -- one of the most powerful pieces of this Company. So, I wouldn't try to just match those numbers up with our port expansion because we're going to make money on it every time it goes through that thing.

No, I definitely understood that. I just assumed that you guys are feeling good, and I know you have a little bit of room to move your production.

We do feel good, yes.

I was just expecting the number to maybe go up year over year.

Okay. All right.

Next we'll go to the line of John Bridges with JPMorgan.

Just on the port expansion, how much coordination are you going to need with the rails, because you're probably not going to have a lot of inventory capacity at that size, right?

Well, right now for the 2 million tons that we're going to expand, we will not be expanding the actual footprint of our stockpile capability. What we're going to be doing is we're going to be working on the tracks, John. We're going to be adding another inbound track, as well as another outbound track, and what that will do is that will relieve some of the congestion from both railroads for one reason. One, there's a tunnel issue with one railroad. The other railroad has some issues with respect to when they can move trains in because of Amtrak.

So, with having an additional inbound and outbound track in relieving some of the other bottlenecks associated with belts, we believe we'll be successful in doing that. The railroads are excited about this. They've done a good job in the first quarter of moving coal to Baltimore for us. It could always be better.

There's probably another 150,000 tons maybe that did not get moved because of crew delays and equipment shortages, but we had some very tough weather in the first quarter that we had to deal with. There were a number of days in Baltimore when they were snowed in. There were high winds. So, we're pleased with our results in the first quarter, and we're off to a good start for the second quarter.

I remember that weather. And then the phase 2, how much inventory are you going to be able to add at the port?

The engineering on that, John, is still being done. We have about 1 million tons of space right now on the ground. We're definitely going to increase it, John, but to what extent, I don't know. There's some land acquisition items that we need to complete. So, I don't think I can give you a number that I feel comfortable with at this time.

Okay, and then quick as a follow-up, I see the EPA is talking about getting involved in permitting the gas wells. How much of an impact do you think that's going to be, and how do you think that's going to affect the problems you are currently having?

The regulatory, I'll call it standards or scrutiny that the gas industry and the Marcellus industry is going to be facing moving forward is probably going to come up to speed and be on par with the current standards and scrutiny that the coal industry operates with under. That, of course, gives us a little bit of at least perspective, and we might argue advantage, with regard to getting up to speed on that.

More regulation, I think, is going to be the norm to say the least, and it's going to be across a range of issues with regard to the Marcellus from water sourcing, water discharge, and standards of water discharge, where the water can be discharged, stream permit crossing issues for pipelines and gathering lines, and just about everything in between. So, it's coming. We are prepared to partner with the regulatory agencies on the gas side just like we do and we've done historically on the coal side, and the industry is going to need to be in position to do so as well.

Okay, best of luck with that. Great results. Well done.

Next we'll go to the line of Jeremy Sussman with Brean Murray.

Can you give us a sense of, in today's pricing environment what your cash margins at Amonate might be?

Amonate, looking at the 400,000-ton per-year case that would start in '12, expecting all-in cash operating costs to be about $80 a ton, and all-in fully loaded costs including the capital charges to be about $100 a ton. When you look at what the market price might be for the product line there, it's probably on a cash margin basis approaching $100 a ton margin.

Great. Obviously, very attractive returns then.

Yes.

Then just as a quick follow-up, you boosted your high-vol met coal, your Bailey sales estimate, which is obviously great to see. What was the catalyst behind this, and how close do you think you are to countries outside of China and Brazil accepting this product?

Well, we're forecasting roughly about 3.3 million of our estimate to go to Asia, Jeremy, and we're looking at about 1.1 million going to Brazil. That's basically the 4.5 million that I talked about.

Okay. With the increase coming from greater tons to China from last time we had -- .

Absolutely. There's an increase in both our shipments to Asia, as well as South America.

Fantastic. Thanks, Bob.

Next is Curt Woodworth with Macquarie. Please go ahead.

Question on the thermal market, and where you see the northern App prices currently, on the forward curve for central App, at least in the paper market, it's gone to the mid-$80s for next year. I'm curious where you see northern App today, and also what is the appetite for utilities in terms of their contract and desires for next year?

Curt, as you heard me say earlier, CONSOL has roughly 32 million tons of thermal sales here in the United States that we need to renegotiate sometime this year. We have multiple sulfurs that we have to sell into the marketplace. Not everything is Bailey, Enlow Fork at 2% to 2.2% sulfur. We have a lot of high-sulfur coal, sulfurs ranging greater than 4%. So, the price range that I'm going to give you, we just can't apply it to all of our open steam tonnage that we have for 2012.

But our Bailey coal into the marketplace next year, clearly we think that coal is worth $77 to $80 a ton FOB mine. We would tell you that our 4.5% sulfur coal is probably worth in the marketplace somewhere between $72 to $74. So, we think that given the environment that we're in, the demand overseas, for CONSOL's reliability and the amount of money that we've put into our coal mines, we think those are fair prices.

Great, that's very helpful. Brett, in terms of monetization of some of the shale acreage, it seems like it's pretty logical to do something small regarding leasing or selling beyond the core acres that you're targeting. But what's the thought process, or key factors you think about in terms of doing a JV or something on a bigger scale? And what could be the timing around a decision like that? Thank you.

I think when you look at that overall, we're willing to look at everything you talked about. The small pieces, we're certainly interested in. We weren't in a big hurry to sell a lot of pieces off until we proved that the north and the south, so to speak, had a lot of value. There were a lot of questions about that when we bought it. A lot of people pointing, saying that we didn't get into the sweet spots. I think we've proven that that's not true, and that creates different value even for what I would call the peripheral acres.

We're going to continue to try to sell those at values we see in the marketplace. We could have sold a lot of this last year at what we paid for it because people came in the back door saying -- we'll take it off your hands. We weren't interested in that, but now we're interested in good value to our shareholders. We'll do a JV if it's a good fit, and all these other pieces we'll sell where the market is, and we don't think the market is going to go down on any of this. We think we have a very powerful position.

Great, thank you.

Next we'll go to the line of Holly Stewart with Howard Weil.

First question for Nick, specifically on the Westmoreland results, but more in general on tighter spacing between frac stages. I know you guys have talked about this a little bit in the past, and we're going to test this. Is this something that you've done? Can you talk around that a little bit, and have you tested this on those Westmoreland results?

The Westmoreland results, Holly, when you look at the spacing, we're basically 300-foot spacing fracs on the stages. That is one of the key parameters, as we've discussed in the past, along with 5 or 6 other parameters where we're trying to statistically assess, I'll call it delineation region by delineation region, so central Pennsylvania versus Greene County versus northern West Virginia. Half of these data, whether it's from our own well results or whether from Marcellus plus third-party results, what those statistics say with regard to how we want to drill these, and how we want to complete them. What zones within the Marcellus, what depth, what frac stages, how many frac stages, spacing on frac stages, et cetera.

And what you are seeing is a learning curve for something like central PA, where we've drilled our first few wells, is an order of magnitude quicker than the learning curve was for Greene County. Our expectation would be, as we complete the wells in northern West Virginia, it will be even more accelerated than what we saw in central PA. So, little bit of a different variation across these regions, but right now, 250 to 300-foot frac spacing on the stage is about where we're at.

Okay. So, you haven't tested anything tighter than that at this point?

Not at this point.

Okay, and you're planning on doing that?

Yes.

Okay, and then just as my follow-up, can you just give us a little bit of color on the stream crossing permit issue? I know you mentioned it within the release.

The best illustration of the stream crossing permit issue I can give you is the actual central Pennsylvania horizontal wells we've just drilled and completed. As you have seen in the operational release we put out a couple days back, those 2 wells together that we just completed and brought on to production, at least with regard to open flow, is about 15 million cubic feet a day. Because we don't have the stream crossing permit for the gathering line, right now we're only selling into line about 2.5 million, maybe 3 million a day with that production.

So, there's a great example of, yes, we do have those wells in line, sort of, at a 2.5 million to 3 million cubic feet a day rate, where the open flow production indicates it should be 15 million cubic feet a day of sales. That's an example that you see now spread across the entire Marcellus fields. And where you have these concentrations of economies of scale like we do, in a central PA, Westmoreland County, in a Greene County, northern West Virginia area, that's going to help alleviate the stream crossing issues because now where you're looking at one stream crossing permit, it's feeding in production from a number of wells instead of just 1 well to hold the lease.

Okay. So, do you have wells that haven't been completed because you're waiting on stream crossing permits?

No, not at this point. We do have wells, as I've said, that the production is curtailed into the sales line because of stream crossing permits.

Okay. Thanks, guys.

We'll go to the line of Brian Yu with Citi.

Good morning, congrats on the quarter. With the incremental tons you are getting out of Amonate, and with the $100 cash margin that was mentioned, it sounds like this is going to be maybe a mid- or low-vol product. Where does that show up in your guidance for next year in terms of the expected tons sold?

Brian, this is Dan. We increased the overall 2012 and 2013 guidance range by 0.5 million tons to reflect the Amonate production. So, that's why the upper end of the range now is 61.5 million tons instead of 61.0 million. So, that's where it applies specifically at the top, and then in the footnote we mentioned that the Amonate tons are not shown in tabular form.

Okay.

So, we didn't think it necessary to add another 3 or 4 rows to talk about the 0.5 million Amonate tons.

And then, to get the incremental 400,000 tons by 2015, does that require another $100 million in capital expenditures?

It will require additional capital, but it won't be the -- and right now, we're saying under $100 million. We have a range somewhere between $50 million and $100 million. We're trying to finalize those numbers for the first 400,000 tons of production. There will be incremental capital to get to 800,000 tons by the 2015 period, but it won't be on par with $100 million. We just don't have that number finalized yet.

Okay, and then I want to reconcile a couple comments that were made earlier to questions. It seems like your assessment of northern App prices is somewhere in the low to all the way up to $80 per ton, but then I think there was an answer to David's question earlier about what it would take for you to move coal in the European markets. I think it was mentioned high $60s.

Right.

Does that mean that you're willing to sell thermal product at a high $60s to move into Europe, and hopefully that tightens up the domestic market to look at that as an opportunity cost?

No, Brian, the coal that we're moving into the European market has a sulfur content of 3%. And so, based on the API 2 index and 3% sulfur, we think that the high $60s is where that number will shake out for 2011.

Our Bailey coal is going as a high-vol met coal. That gives a price of between $77 and $80. We're selling very little Bailey coal, only as part of a blend into the European steam market, and when we do that the Bailey coal gets a price comparable to the high $70s.

Okay. And the 4.5%, you said it was $72 to $74?

That's correct.

Thank you.

Next, we will go to the line of David Gagliano with Credit Suisse. Please go ahead.

I'm glad you took my follow-up question because it's related to the previous question. Just to clarify again, the high $60s number, I thought you said equated to an API 2 price of $100 a ton.

That's correct, right around $100.

Last I looked, API was around $128 a ton.

I know, but the tons that we're going to sell will carry that number. The tons that we've already sold were at an API 2 index price of about $100.

Okay, but in today's market, those tons could be moved at, say, $90 or higher?

Very well could be, David. We'll look at the opportunity as they present themselves to us.

So, then my question is, if everything stays as is, you gave the prices for Northern App next year, and you gave the API 2 prices, if prices stay where they are, and given your port capacity, is it a stretch to say that you could move another 10 million tons into the global thermal market?

That is a stretch, David. It's hard to say. Europe had a very tough winter. There were a lot of factors. If the opportunity presents itself, the good thing is that we can respond to it. We have the port capacity, we have the mines, we have the quality. We will take advantage of where the best dollars are, whether they're in Europe or here in the United States.

Okay. Understood, but the economics suggest right now that that would make the most sense.

That's correct.

Okay. Thanks.

Lola, this is Brandon. We're going to take one more call, and then end.

That will be from the line of Brian Gamble with Simmons & Company.

Good morning, guys. Just real quick. On what you are shipping, Bob, this year, the 4.5, you mentioned 3.3, 1.1, to various markets, were you limited by your prior commitments from the Bailey coal specifically, meaning, have you had additional demand that could have been filled if you had the right spec coal available to send out?

In the first quarter, Brian, we experienced some higher sulfur coal that we were not expecting, so we were somewhat limited in the first quarter. Now the sulfur has dropped down to the levels that we need. So, as we go forward, for the balance of the year, we'll look at those opportunities that present themselves. And again, it's just a matter of having all the right railroad equipment come in, to getting it, and having the ships come in.

For instance, today we have 7 vessels sitting off waiting to be loaded off of Baltimore. At the end of March it was 6; right now, it's 7, and I was informed yesterday that we probably will have as many as 8 at the end of April. So, we're moving as many tons in that direction as we possibly can with the help of both railroads.

Great, guys. That's all I had. Appreciate it.

All right, ladies and gentlemen, thanks for joining the call today. We obviously appreciate everyone taking the time and your interest in CONSOL Energy. And we look forward to updating you again on the second-quarter conference call.

Lola, could you go ahead and please give the replay information, and we'll sign off, and everybody have a good day.

Thank you, and ladies and gentlemen, this conference will be made available for replay after 12.30 PM today through May 5. You may access the executive replay system at any time by dialing 1-800-475-6701, and entering the access code of 200791. International participants may dial 320-365-3844 with the access code of 200791. That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive TeleConference. You may now disconnect.