CNX Resources Corp (CNX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's third 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, Brandon Elliott.

Thank you, Tony. I would like to welcome everyone to CONSOL Energy's third quarter conference call. We have in the room Brett Harvey, our Chairman and CEO; Nick DeIuliis, our President; Bill Lyons, our Chief Financial Officer; Bob Pusateri, our Executive Vice President of Sales, Marketing and Transportation; as well as David Khani, our Vice President of Finance. Dan Zajdel and I are here representing our IR team.

Today we will be discussing our third 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 the press release today as well as in the previous SEC filings.

With that said we will start the call today with Bill Lyons. Bill?

Thank you, Brandon, and good morning to everyone.

As you have seen in our press release, CONSOL Energy had a very active and successful third quarter from an operational, financial and strategic perspective. Specifically, our mines and gas facilities operated safely and efficiently. We posted our highest revenue in operating earnings per share for a third quarter. We entered into world class partnerships for our Marcellus and Utica Shale acreage, and we announced that we are increasing our quarterly dividend by 25%.

Now, Brett will elaborate on the strategic value of the Noble and Hess partnerships. From my perspective, the partnerships help us accelerate our asset development and strengthen the balance sheet through dent debt repayment and reduce future capital requirements.

And also of significant note in the third quarter, our coal marketing team priced about 30% of our expected 2012 coal sales. This activity included our high vol met coal into the domestic steel market and making additional thermal coal sales to Europe.

Now, over the last few calls we have articulated a cogent strategy that is comprehensive, long-term and, as demonstrated by this quarter's activity, a strategy that is being aggressively executed. Some of the results for the third quarter.

Total revenue for the third quarter of 2011 was $1.522 billion, up 13% year-over-year. These were the highest sales for a third quarter if our history. For the third quarter we generated operating cash flow of $457 million, an adjusted EBITDA of $441 million. These outstanding results have enabled us to surpass our full 2010 totals for these metrics in just nine months. The primary driver for the quarterly results was a 47% increase in our coal margins, which were at $20.38 per ton.

Con CONSOL Energy reported net income of $167 million or $0.73 per diluted share for the third quarter of 2011, compared to $75 million or $0.33 per diluted share for the third quarter of 2010. While we have noted four discrete items in the third quarter in our earnings release, and these are related to asset sales and the settlement of the 2006-2007 IRS audit and related tax accrual adjustment, the overall impact of these discrete items on our third quarter net income was insignificant.

The coal division. For the third quarter of 2011 our coal division generated earnings before interest and taxes, or EBIT, of $299 million, up $95 million or 47% from the third quarter of 2010. This is the fourth quarter in a row of posting consistently strong operational results. Our low vol and high vol met coal operations generated nearly $211 million for the third quarter in EBIT, an increase of $65 million from a year ago. If we step back to 2009, we sold about 2 million tons of met coal. We are now on pace to sell as much as 10.5 million tons of coal in 2011.

On a thermal side we generated $88 million of EBIT, which is 52% higher than the $58 million from the third quarter of 2010.

Now, just a few comments on coal costs, which averaged $55.33 a ton, or $1.33 per ton higher than we had forecasted for the third quarter. While we produced near the upper end of our forecast production and sales range some of the cost increases were attributable to the roof issues at McElroy and Enlow Fork that we highlighted in the October 14 operations update. For the fourth quarter we expect costs to be approximately $54 a ton across all the tons.

A few comments on marketing. To continue to drive strong margins, ourmarketing team had layered in additional contracts and expanded our target markets. During the third quarter we priced 17 million tons of thermal coal at an average of $64 per ton for 2012. 700,000 tons of high vol met coal was priced at an average of $80 per ton in 2012. And we had 300,000 tons of low vol met coal at $210 per ton for the fourth quarter of 2011.

Further more, we remain on track to export up to 10.5 million tons of met coal -- of coal in 2011, proving the concept that we can produce from our backyard yet still capture world market demand and prices. With the expansion of our Baltimore terminal by 2 million tons and the opening of the Amonate Mine in 2012, CONSOL will have the capacity to export more coal in the 2012 year.

In the coal division in 2012 we reduced our production guidance by 1 million tons to reflect our updated mine plans. These plans consider the expected geology, the advanced footage projections and other operating factors.

Now let me turn to the gas operations. In the third quarter of 2011 our net income was $2.9 million, and that is down $21.3 million from the third quarter of 2010. Average realization was $4.92 per Mcf, and that is down $0.80 from the 2010 quarter. This was the main cause of our reduced profitability in the gas segment.

Now, during the third quarter we announced two joint venture agreements and one asset divestiture. Financially these transactions establish the market marker of our natural gas business and enable us to pull forward the value of decades of drilling inventory. Our gas business achieved a significant operational milestone in the quarter. We drilled the first ten well pad on Hutchinson, both derisking and confirming the value of our Central Pennsylvania acreage. We expect to continue to drive down costs through multi-well pads and expect to move a rig to drill our first liquids rich well, which should spud next month. Overall, we are on pace to achieve our 2011 Marcellus goals of accelerating activity to 80 to 85 wells, ourlengthening of our laterals to 4,000 feet from 3,000 feet, and drive down unit costs with the use of multi-well pads.

On the financial side, I tell you that our balance sheet has never been stronger. At quarter end, CONSOL Energy had liquidity of $2.8 billion. We had outstanding operating cash flows of $1.25 billion after nine months. And we have been able to reduce our capital call for our future drilling program by about $2.6 million through our joint venture agreements.

As noted during our Noble joint venture conference call, we can pay down debt, raise the dividend or buy back shares as access for -- as avenues for free cash flow above our capital requirements. We have initially chosen to retire our short-term debt and raise the dividend, and we will revisit the share buyback option after finalizing our 2012 capital plan.

So to summarize, before I turn this over to Brett, certainly the themes for the quarter were the outstanding operating results, themajor execution events of our strategic plans for the joint ventures, and the fact that the balance sheet has never been stronger.

Brett, your comments.

Thank you, Bill. Greetings to everyone on the phone, and it is good to share our thoughts with you again after a good quarter.

I always talk about safety at the front of this, and from a numbers perspective we continue to work toward zero, and our numbers get better toward zero. Unfortunately, we did have a fatality on the surface of the Shoemaker Mine. We were devastated by that. That is being investigated, but that does not limit our efforts or negate our efforts on moving everybody toward zero so these things don't happen. That is as much as I want to say about that at this point.

We had a very active quarter overall. I don't want the deals to overshadow the performance of this Company. The earnings and the increase in revenues I think show the strength of the assets and the focus that our people have on getting the job done. It is important that our shareholders understand that we are executing the strategy of bringing value forward to them as quickly as we can. After we did the deal we bought E&P from Dominion, we announced to you that we are doing that as fast as we could. We are bringing that value forward, and I think we are positioned well in both coal and gas for real growth and value for our shareholders.

Let's talk about coal for a minute. About three weeks ago I got back from a trip to China where we spent ten days over there with Xcoal and Bob Pusateri and I, and I wanted to give you my look at it personally, because it really confirmed what I had been hearing from our people and our consultants in that marketplace.

That is a very mature growing market. It is powerful. Because of their population, they do things about four times as big as what we do here in the United States, andyou can see it when you have boots on the ground and you look around. The volumes big, the customers are big. Things are happening over there, and we really see where our products can go into there and add volume.

When you look at us this year, we have a little over 3 million tons going into China, but that could be 20 million tons. It is based on delivered price, I think when they look at their mix, our diversification is important to them. Reliability is important to them. Our products they like intheir steel mills. They are being distributed to small steel mills, large steel mills, and we see where there is real value added to us and added to them.

Of course, it is all about the delivered price. It's a long ways away from our mines here in Northern Appalachia. But it shows the value of the high Btu coal can travel worldwide. We intend to expand into Japan and Korea as we move forward, and we think there is really value there for the shareholders.

A little more about the coal strategy. Our strategy really is to distribute high value products from well capitalized mines right here in Northern Appalachia, where we have a handle on it, it is well capitalize, the money is sunk, and our shareholders will get value from that. We are expanding into domestic markets. We picked up more high vol coal here in the United States, as well as the world markets in steam and high vol coal. You can see by the revenue records and outside markets that it continues to grow, and we will see more value going forward are. So we plan to expand into these markets more and more as time goes on.

Now, we really are focused on expanding our existing reserves. These are fee reserves owned by our shareholders. So when you look at acquisition versus expansion, our focus really has been to expand the margins of what is already capitalized, and you have seen that dramatically on our balance sheet. The next step we will take will be to expand the fee position that we already have with our shareholders with the BMX Mine and the Amonate Mineon the met side.

When you look at acquisitions, you compare those to these, and because of the strong value that we have in the reserves that we have compared to our competitors, we look inward for much higher value than we see in acquisitions. We are maximizing this distribution of this high value products through our port facilities, and the strategy is working very well.

Now, let's talk about gas for a minute. It has been a busy quarter, andwe have picked up two great partners. If both cases they brought value to our footprint. One in the Marcellus Shale, and one in the Utica Shale. When you look at Noble Energy, they made a big commitment to be our partner. We wrote the deal between each other to make sure that the partnership reflected capital discipline and value going forward. The same thing with the Hess group in the Utica.

We plan to be partners with them to grow these values and get back-to-back and take it from the marketplace rather than write contracts to try to take it from each other. The values is there. Our shareholders are going to get great value. The commitment is there from two very powerful companies, and they will bring a lot to the table, with CONSOL's strong balance sheet as well as our strong and long history right here on this footprint.

We have aligned our management philosophy with both these companies. We have talked at the highest levels. We are very focused. The watch word between all of us is wise use of capital, because that is a limited supply, and return on capital is very important to us.

We are -- our goal is to be the low cost producer in everything that we do, just like what we have done in coal. And when you look at the held by production position, it looks very much like our fee position on goal. So when you put these two very strong engines together, I think great things are going to come to our shareholders, and the fruit of what we have done in the last 18 months is really going to come bear in the next 24 months.

So with that, I would like to open it up for questions.

Thank you very much. (Operator Instructions). We will take your first question in queue from the line of Shneur Gershuni with UBS.

Good morning, guys.

Hi, Shneur.

My first question is more a follow through on some of the strategic comments that you just made. We are seeing the results today of the investments that you have made in our mines and how they are performing on a more consistent basis. You mentioned about moving inwards, or looking inwards, you BMX and Amonate on the table. But we'rewill be approaching those as well too, and you've got cash coming in the door obviously from the JVs. Can you give us more clarity with respect to kind of the strategic focus going forward? Where do buybacks fit? Is it going to be a 50/50, half organic growth, half buybacks? And also if you can talk about where you would specifically be targeting? Would you be doing more port investments, is the Illinois basin on the table as well too? If you could give us some color on that, that would be great.

I think that is good. I will have Bill Lyons talk about the buyback. Let me say that the Board looked at where our cash position is. We talked about it. We raised the dividend. We've paid down the debt. And we continue to look at share buybacks based on where we see our capital in the short-term and the long-term. We do see cash flows coming in, and I will turn that over to you.

Shneur, certainly we feel that share buybacks have a place in our overall mix of what we do with capital, but until we get our 2012, 2013 and 2014 capital plans in line, and until we see a little more clarity in gas prices, we really have no comment on share buybacks.

Now, certainly when you take a look at what we have done so far, I think increasing our dividend was a significant event, and I think it puts us in the top class of companies in terms of return to shareholders.

Well, one other thing. You asked about some assets as well. All assets that aren't strategic to us going forward will be looked at as monetization or opportunities to monetize. So we will continue to look at the asset base that we have to optimize where we are at.

Okay. A follow-up question on the coal side. You mentioned in your press release today about how you sold some high vol coal to a domestic customer. Are there other tests with other customers? I mean, is this an emerging opportunity where you can expand the volumes that you will be pushing into the high vol met coal market domestically as well?

Shneur, this is Bob. Shneur, we were very pleased to announce the successful test and ultimate sale of our high vol coal into the domestic market. It is something that our sales team had been working on for some time. We are also currently conducting another test with a domestic steel supplier, and we are hopeful that we will end up in a sale of coal there.

It is very interesting, because we are pushing our high vol coal into the domestic market, and we are making -- continuing to make inroads of this product also in Brazil. And we told you earlier in the year that we would sell 2.5 million tons to 3 million tons of high vol coal into China. Right now, as Brett indicated, that number is probably for the year closer to 3.5 million. And so we are very pleased about that, and we are looking forward to 2012.

If the Chinese economy is slowing down with respect to its appetite for US coals, no one has told the Chinese. They are very active in the marketplace with us, andwe are looking forward to a very robust year in 2012.

Great. One final question on gas. Can you just walk us through how many rigs you are sitting on in the Noble JV at this point right now, and kind of what your expectation is for drilling wells for the next two quarters?

Shneur, if you look at the Marcellus and in the drilling project to date moving forward, last year we drilled 24 who horizontal wells. This year so far, at the end of the quarter, we're at about 58. We will do between 80 to 85 horizontal wells on a 100% basis in 2011. Next year we are still finalizing and refining the drill plans with our partner Noble, but we still expect somewhere 120 to be the well number on a -- again, on a gross basis when you add in what we are doing versus what Noble would be operating.

Great. Thank you very much, guys.

Thank you.

Thank you. Our next question in queue, that will come from the line of Brandon Blossman with Tudor Pickering.. Please go ahead.

Good morning, gentlemen.

Hi, Brandon.

Let's see. Can we talk a little bit about -- I know that you are the budgeting process now, but just at least directionally CapEx in 2012 and 2013 on a coal versus gas basis. What are you guys thinking there? And maybe just frame it in terms of year-over-year?

This is Bill Lyons. When we take a look at capitals, we do it not by coal, not by gas, wedo it by rates of return. And whatever projects end up with the higher rates of return are the projects that we fund. I think if you take a look at our track record the last three years, that is basically how we looked at it. We will continue to invest in our business into high rates of return projects, and I think if you take a look at what we have done the last three years, we consistently in invested over $1 billion in businesses that -- our operating businesses. You can see the fruits of those investments in our operating results -- financial results over the last really four or five quarters.

So that is basically how we look at it. We are in the middle of doing the capital review. It as very extensive and intensive process, and really until we get the results of that, we really can't comment on capital. But as I said, I think we can expect to see what we have been doing.

Fair enough. And perhaps somewhat related, for 2012 it looks like there is a 500,000 ton cut in your forecast -- production forecast for both met -- low vol met and thermal. Is there more detail around -- and you mentioned I think in the prepared remark -- comments there was a change in mine plans, or just a refinement in mine plans. Is there more detail available on that?

On the low vol, of course that's our Buchanan coal mine. This year, 2011, we're probably going to do some where between 5.3 and 5.5 million tons production, which would be the best year for that mine in the history of that coal mine. So alot of things went right this year, which is great. And as Bill Lyons has stated, a lot of that was driven by our capital investments and operating plans that we invested into the Buchanan coal mine.

And when you project out and look at 2012, and you look at everything from geology to what we think the 50% case is on a run rate basis, we come in at the 4.5 million to 5 million ton range. Now, we update that, as you know, each quarter once quarters come in, and as we beat that number or do better, because we are fortunate enough that things go well for a quarter, that would change the 4.5 million to 5 million current estimate. But right now, 2012, low vol, Buchanan mine 4.5 millionto 5 million is the best 50th percent tile estimate.

The same issue is happening across the overall coal operations when you get beyond Buchanan, and some issues with geology or advance rates specific to each mine that gets more accurate and better forecasted as we approach the coming year, along with one extra long wall move that we've got next year versus this year. That results in the overall projection next year of about 59.5 millionto 65.1 million tons total.

Great. Useful color. Thanks, guys.

Thanks.

Thank you. Our next question from queue, that will come from the line of Jim Rollyson with Raymond James. Please go ahead.

Good morning, everyone.

Hi, Jim.

Brett, you are obviously pumped up on the export opportunities this year and kind of long-term. Wondered if, A, you might spend a minute on what your kind of preliminary thoughts might be for next year. And also in the prepared remarks you guys referenced the continued strength in European export thermal demand, and I think mentioned there is possibly some pricing premium there versus domestic sales. Kind of curious the magnitude of what you are seeing on the premium.

Yes, that is a good question. Clearly we are bullish on the international markets, because that is a growing market. The world is, for lack of a better terms, starved for Btus and coal, and they are going to use it. And we have a great, I think a great asset base here.

Now, 13000 Btu coal moves a long way. What is unique about this coal is it also makes steel, and so it can move into the steam market at a competitive rate, or it can move into the met market at a very competitive rate, and but we don't change anything. We don't change the nature of this. We don't wash it any different. We don't add more capital. We don't do anything. So we just move it.

Now those markets compete with each other, and when you have a product that moves back and forth, it is an advantage to us. That is why I'm so bullish on the international markets.

Bob, why don't you give us color about what you see in Europe?

Jim, as we reported in the release, we expect our 2011 exports to be around 10.5 million tons. For 2012, we look at our ability to be able to move the tons around to where we can receive the highest value. We are very sensitive to new market conditions and what our customers are looking for, and the best example that I can give all of you today would be in the third quarter we saw CONSOL moving its premium high volatile coal into China for the first time.

Now, how did we do that? We understood that the Chinese were not willing to pay our price for a low ash premium low volatile coal. So what we did is we worked with our operations group, and we developed a way in which we managed to raise the ash from roughly 5.5% to it 9.5%, and by doing that we were able to use the recovered refuse material from the heavy media cyclones to produce a 9.5% ash.

Now what I need to tell you is that this material that we use to raise the ash from 5.5% to 9.5%, that material normally would have been disposed of. But we've managed -- our operators figured out a way to put it together, and we are shipping this product now into China.

And so we continue to take advantage of whatever market conditions we can determine in order to better move -- be a global supplier. We are continuing to gain from our collaboration with Xcoal, and we are gaining further penetration into other markets. We are trying to get into Chile in South America, and we are -- that is why see we are so bullish on 2012.

Any stab, Bob, on a volume number next year for exports?

There is no reason, Jimmy, for me to say that it will be less than what we have seen in 2011. And if I was in a room with a different bunch of guys, I would give you the number, but I can't.

Fair enough. Follow-up, maybe, Nick on the gas side. You guys, when you did the call on the Noble JV, talked about still thinking a 350 Bcfe number for production net to CONSOL by 2015 after the JV but in light up of the ramped up activity. Given the Utica JV that happened since, are you still thinking 350 for the next -- for four are years from now?

Yes, the production [bogey] for 2015 on a net basis is still 350 B.

And from the thought of -- I know you guys haven't guided next year, but we should probably just assume a nice straight line between 2011 guidance and that magic number of 350?

On a net basis, for this year we will be some where between 150 and 152 net. And 2015, 350, that ramp up, as you say, will be dependent on the JV joined drilling schedules for both Utica as well as Marcellus. We haven't disclosed it yet, but we will get you something soon for at least, at a minimum, 2012.

Okay. Great job, guys.

Thanks, Jim.

Thank you. Our next question in queue, that will come from the line of Mitesh Thakkar with FBR. Please go ahead.

Good morning, gentlemen.

Hi, Mitesh.

A quick question on the gas side. With gas under $4, how are you thinking about the carries from Noble? And assuming gas stays in this kind of range -- or put other ways, what kind of gas prices are you model modeling to reach the 350 Bcf number?

The gas prices we typically use to forecast are [essentially] the Nynex forwards, less or net our hedges.

The capital allocation philosophy -- as you recall, when we announced both the Hess and Noble transactions, we said there were two overriding qualitative things that we were looking for in partners. One the shared values of safety and compliance. That was the first thing. The second was a shared philosophy on asset acquisition. That carry issued with Noble at $4 gas prices simply reflects and confirms that Noble shares the same philosophy that we do.

We will sit down with them. We are already in process of doing that as part of the normal course of the JV, let alone the gas price environment we're faced with, to figure out what's the optimal allocation of capital on the drilling side in light of what the Nynex forwards are. As we said earlier on a prior question, we still think that results in a 350 Bcf net number for to 2015, but it's good to know we have a partner that does share the capital allocation philosophy much the way that we to.

Great. Last question. Could you provide us information on the BMX expansion and Amonate, if you will?

Both projects are on schedule. BMX continues to move forward with a very early -- I will call it January 2014 -- start date. Production estimates still in the 5 million ton per year range. That creates a lot of opportunities for Bob on the sales front as well, with all the export discussions we went through.

Amonate is also on schedule and on target for a very early 2012 start up at a 400,000 ton rate production level for next year. That ultimately has the potential to ramp up to about 800,000 tons her year around late 2015, early 2016. So both projects are on schedule. No serious variations on production projections or capital projections that we provided earlier.

Great. Thank you.

Thank you. Our next question in queue, that will come from the line of Lucas Pipes with Brean Murray. Please go ahead.

Good morning, gentlemen, andcongrats on the good quarter.

Thank you.

My first question is about the domestic thermal coal market. Could you make expand a little bit on what you are see there. I know you locked up a lot of volumes for 2012. How does this fit in with the view of the domestic thermal coal market?

Our customers continue to struggle with the timing of the cross states and the hazardous air pollution rules. And with that they are skittish about coming in to the marketplace at this point in time. We are very fortunate. We have been positioning ourselves over the last couple of years to sell our coal into the larger [scrubbed] plants. We estimate today that that is roughly about 90% of our thermal production, giveor take depending how much we send over as crossover.

We expect to enclose the gap on this so-called 10% by selling additional thermal coal into these very large plants. We plan on taking market share from other regions -- forexample, Central App -- and whatever is left will increase our export volumes as either met or steam. The good thing about this is that the windfall of this -- some of these benefits also accrue to our gas segment.

Yes, yes. No, that is very helpful. And then with the Baltimore port expansion, how is that going? Is that on schedule?

Sure, our Baltimore port facility is -- the construction is on schedule. During the quarter we loaded I think 33 vessels, that is down from the 41 vessels that we shipped in the second quarter, but the third quarter was unique. As you know, July is a maintenance quarter for both the mines and the railroads. We turned around, and we were looking for a strong August. The terminal then was impacted by one hurricane, an earthquake and a couple of tropical storms.

So we had that behind us, and so we were ready to go for September to catch up, and then September hit us with record rain, which just tormented us week after week, and we were also tortured with high winds. Given that, we still managed to load 33 vessels, and we are on target to put about 12 million tons of coal through the terminal.

Great. That's helpful. And then really briefly on kind of the average cost side for your coal operations. [Do you] have early projections what it is going to look like for 2012, and maybe if you can provide color for the fourth quarter that would also be helpful?

I think we said in our comments we expect about $54 on that overall cost.

Got you. All right. That's very helpful. Thank you for all the detail.

Thank.

Thank you. Our next question will come from Michael Dudas with Sterne Agee.

Good morning, gentlemen.

Hi, Michael.

Brett, interesting remarks from your trip to China. You mentioned about 20 million ton potential for CNX type coals. Is that a reflection of potential thermal end coking coal opportunities in the region? And maybe talking about other well as well. Is that a reflection of what could certain be happening in the next five to seven years in the US that seem to be hamstrung between regulation and a low gas price.

I think -- it is thermal. And remember that is a crossover coal, and also very high Btus, so they would look at it from both directions. But in discussions, when we talked to -- I guess it would be the trading companies that distribute to these smaller groups as well at the big steel companies, they didn't talk so much about -- they talked about price immediately. They wanted the volume. They wanted to know how much we could actually deliver to them.

And when you tie all these pieces together, I saw the market as much bigger than the -- we were cutting it off at price basically, and that was our -- we were doing that on purpose. We were selling our Bailey coal and establishing our Bailey coal into China, and now it looks like that Bailey coal can stretch into -- stretch its wings into bigger markets because of its quality. It is very high, and its very dependable, and we are seeing that.

So that is kind of position we are at. Now, how do we get to 20 million? Well, we will work our way there, but I think the appetite is there and thatis a huge marketplace.

And certainly not so much going in the US?

Well, the US itself -- we own 30% of the world's coal, but we sit and debate whether we are going to use it or not. I think the US itself has to get an energy plan together that uses its resources, and in our case it is either coal or gas, and that is what the choices are. So we are ready for either one of them.

That's fair, and I appreciate the color. Thanks, guys.

Thank you. The next question in queue, that will come from the line of Mark Levin with BB&T Capital Market. Please go ahead.

Couple quick questions. First, just as you kind of think about what the optimal capital structure is for CONSOL, and how you think about that over the next couple of years, maybe from a debt to cap perspective, or a debt EBITDA perspective, what do you think is the appropriate leverage metrics for CONSOL going forward?

[I don't know] that there's type of -- one formula that we use. It is based on how the markets are at the time we do transactions. I am going to tell you I certainly feel comfortable where we are at right now. If fact, as I mentioned the balance sheet, I feel good that we have no short-term debt or no debt coming through until 2017, and in we have $460 million of cash on the balance sheet.

What this does is give us tree men thus optionality to take advantage of things that will come about, whether it is the acquisition -- any keep of development about our properties, or if we take a look at if we are going to pay down the debt in the future or other things. Right now we are in a great position to take advantage of the options that will be presented before, and also I feel very comfortable with the capital structure we have right now.

Brett, do those options going forward include M&A, or feel that you have enough on your plate in terms of the JVs that you entered into and that next year will be more of a year of kind of harvesting, or are still out there looking at potential M&A opportunities?

We are very focused on the JVs and the success of those JVs, because I think we want these JV situations to come to our balance sheet, build a lot of free cash flow, and put us in a good position to make good decision for our shareholders. Obvious any M&A stuff would be looked at against internal projects, but we are not out hunting. We have a lot to do on our plate, and we executed a lot, and now we need to make it happen. And our partners are important to us to get that done.

Okay. One last question. Just in the context of the broader global market where steel prices both in China and globally have been declining, and we have kind of seen it at least in the various spot coking coal indexes. As you guys think about the health of the market and as you kind of capital plan for 2012 against a fairly uncertain macro, obviously things are moving quickly. We saw that in Europe last night. How do you guys think about coking coal prices next year as you develop your capital budget in a world where steel prices have been under a fair amount of pressure, and if you listen to the steel companies, they are obviously concerned about demand going forward.

Mark, this is Bob. First just let me tell you that the Chinese steel production, although it has slowed in the last couple of weeks, it still remains 10% above comparable levels in 2010. Global steel production, even despite some of the overtones we hear into the news every day, it is up 10% year-over-year.

We are seeing a reduction in iron ore prices, but I don't think that is translating dollar for dollar to a reduction in metallurgical prices. We're positive with respect to next year's pricing. It has been estimated that pricing will be in the range at some where around $240 to $270 a metric ton, and we are basing our capital outlays on that range.

And please keep in mind that there is limited met coal production, certainly here from the United States, and we are very pleased that our Buchanan Mine is producing extremely well ,and we have been able to take advantage of that security of supply in the global marketplace.

Okay, great. Thank you, gentlemen.

Thank you. Our next question in queue, that from the line of Brian Gamble with Simmons & Company. Please go ahead.

Good morning, guys.

Hi, Brian.

A question for you, Bob. I'm looking at the table and thinking about the low vol sales for next year. Last year are you had about 0.5 million tons at $84. The new tonnage seems to be selling in the low 80s, and the projection on the table seems to imply a $70 to $75 level. Is that based on your current conversations with the next test burn potential in the US? Is that based on some blend of US and export? Kind of maybe walk me through why that number is softer than your current commitments.

Brian, I -- you referenced low vol. I think you meant high vol.

I meant high vol. Thank you, Bob.

No problem. For 2012 right now we are sitting on about a 1.2 million tons of high vol coal that has already opinion priced, and we're -- and that is both domestic and overseas. In addition to that we are looking at potential tons in Europe, Asia, South America, North America, and we are projecting that number some where right now today, because we don't have our vessel rates locked up for 2012. So, Brian, we are projecting that number to be some where between $70 and $75 for planning purposes.

Are you expecting a drastic change in vessel rates for next year? It seems like those have been pretty stable and with the capacity coming on line, it doesn't seem like those would have very much volatility next year?

Capesize vessels, you are right. It hasn't changed. We are concerned there might be some added salvage retirements of a number of capesize vessels. We are not sure exactly how many are going to show up as new equipment. And we are actively in the market now, trying to get this number locked down, Brian, butI don't have it for you today as we go forward. So when asked I tell everybody that I'm -- we are expecting to sell our high vol coal into the market -- in the export market of some where between $70 to $75 a ton.

Great. And then you mentioned that the current Baltimore expansion is on schedule, as are the other mine expansions that you currently have ongoing. But given, Brett,your comments about 20 million ton, obviously there is not a time period on that, but since you have been there and you known the demand is coming sooner rather than later, is this a sense that you might try to push forward the kind of phase two plan at Baltimore? Is that one of the items that is being discussed, and if it has been discussed, is there any detail you can provide on when that will be a decision that you can make?

Well, I think certainly we're going to look for as much capacity to move tons offshore as we can. I think the Baltimore are expansion is going to come in due course. It is going to match up with the BMX coming on. Our investment -- we think a good portion of the BMX Mine will be exports. So you are going to see steady growth.

Key in mind we already produce over 20 million tons of Pittsburgh 8 coal that looks like this. And so itis a matter of export capacity and matching with the markets versus what the domestic market will take. When I mentioned 20 million tons, I didn't expect it to happen right away, but it could build to that based on capitalization that we are already set up at.

Thanks, guys, I appreciate it.

Thanks.

Thank you. The next question in queue, that will come from the line of Richard Garchitorena with Credit Suisse. Please go ahead.

Great, thanks. Good morning.

Good morning.

First question was I wanted to touch a little bit on the cost side. Obviously good quarter this year -- or this quarter. But maybe on McElroy, I guess the cost, given the [$50] target for costs in Q4, that is largely behind you?

Yes, it is.

Okay. And then just maybe some detail on the higher than expected production costs comment in the press release? If you had a breakdown, maybe, of the different components that impacted that?

There were -- well, the cost for the third quarter you saw were $55 a ton overall. And if you look at our fourth quarter guidance number, it is $54 a ton and projecting a bit a lower production rate for fourth quarter versus what we did prior periods. So that nets out to the impact that you are seeing with the McElroy and Enlow roof conditions we experienced in the third quarter of 2011. We managed the mines as a portfolio, and we anticipate that these things will happen from time to time. And the key for us is to make sure that we have got the ability to make up the lost production at one location with upside that is ready to be tapped at another location, and that is what we did in third quarter.

Okay. Thanks. And then on Amonate, do you have any idea where cost may come out? Think about it in terms of your current operation on the high vol side?

$100 a ton is a good estimate for expected production costs.

Keep in mind, that is very thin seam, high quality coal, and it will have a different cost structure than what you would see in a Pittsburgh 8 seam. Definitely. And even muchdifferent than the big long wall operations like Buchanan.

Great. And just one more question on just the outlook. It sounds like you have seen customers on the met side basically not shy away despite the fact we are seeing a lot of nervous sentiment. Would it be safe to say that current negotiations for next year really -- haven't really seen much fall off in demand as Bob mentioned earlier?

Richard, we are currently in discussions for met coal pricing for the first quarter or fourth quarter of the fiscal year. We probably won't see a lot of dialogue between us and some of our major customers with respect to price for the fiscal year until sometime in February.

We have a production plan in place for our met mines for the first quarter. It's -- they are good numbers, and we managed to balance our sales forecast against our production forecast. So we are not going to be looking for a place at a reduced price in the first quarter. And when I told -- said earlier that I was is positive, that is one of the items that is driving my enthusiasm, is because right now our supply and demand are matched for the first quarter.

Great. Thank you.

Thank you. Our next question in queue, that will come from the line of David Beard with IBERIA. Please go ahead.

Good morning.

Hi, David.

I was -- appreciate the color on the coking coal pricing guidance, and I was really trying to reconcile all of the different comments out there on the status of the coking coal market, and my thoughts were that either it was a company specific production rate or quality of coal being marketed. Do you have any other thoughts that would account for the wide variation in the outlook of the coking coal market we are seeing from coal companies?

Again, I think from a low volatile standpoint it is limited production. It is CONSOL and a few others. The good thing for us is that we have a relationship with the railroads that allow is to get our coals to the ports, get it loaded. We have the right quality. We have our relationship with Xcoal that is working extremely well. We are selling coal into Korea, into Japan.

Some up the prices that I have seen in print lately, David, are a surprise to me. I cannot understand based on the market, as we see it, why the prices are at the level they are for some of these coals. Again, some of the lower quality coals may not have a home in 2012, but the premium coals definitely should sell. And it is going to rain again in Australia; it's just a matter of when.

Great. I appreciate it. Thanks for the color, and congratulations on the quarter.

Thank you.

Hey, Tony, this is Brandon. Let's go ahead and take one more, and we will wrap it up.

Thank you, sir. The final question will come from Lance Ettus with Touhy Brothers. Please go ahead.

Thanks, guys. I just want to know a little more about -- you commented a little about Central Pennsylvania in the past. Just if there is much more of an update there?

And also talking a lot about the high vol. It only prices around basically a $10 premium, give or take a few dollars, to cap thermal, and obviously you were saying that you have a lot of flexibility there with exporting to the thermal market. But what do you think is kind of the upside there? Could it eventually -- after you have been kind of laying the ground where customers could eventually go to a $20, $30, even $40 premium to other kind of -- similar to other kind of low grade mets that we saw the premiums expand in the last few years?

The first question about Central Pennsylvania. As Brett and Bill had indicated, over 4 billion plus tons of coal reserve, there is a lot of optionality and opportunity for assets that aren't currently what we will call going concern. And one of those areas is Central Pennsylvania as it relates to the global metallurgical markets. We're currently refining different plans through different partnerships to assess what those opportunities might be. They will be there. It's just a function of market and what Bob's team sees synching up with margins. But right now no key definitive plans to expand beyond where we are at in central, Pennsylvania.

When you look at the Central Appalachian price, being around $80 for a thermal coal that possibly could cross over into the met market, you heard me say earlier, Lance, we are forecasting prices for our high vol met crossover tons of between $70 to $75. When we look at our high vol price for 2011, the average price that we are getting is $75 -- $79 and change.

So we are providing ourselves a little bit of a cushion in our estimates for 2012, because there are some things -- as I indicated earlier, that vessel rates are still unknown. We are looking at different production scenarios, but at the end of the day we have a strong position. We expect to duplicate if not exceed our 2011 numbers, and we have about 84% of all of our coal sold for 2012. And we have probably another few percent that is sold, but is [stalled] on price. All those negotiations are going well. And all of it adds up to support our enthusiasm as we go forward for next year.

One thing I want to bring to the point here is the inventory is as low as it has ever been. Across the board. So you have got a company, the largest steam company and one of the largest met companies going into the winter and going into met negotiations with no inventory. And so it is clear to me that when the market turns, there is going be real value here. If there is coals on the margin, I guess they will be priced as marginal coals, but when it comes to our coals, I think we are going to get good pricing and get the volume. So moving into 2012 we feel pretty good.

All right. Thanks, everyone, for joining us today. Obviously, Dan, David and myself will be around to take any follow-up questions you may have. We appreciate everyone taking the time and your interest in CONSOL Energy. And we obviously look forward to updating you again on our fourth quarter conference call at the end of January. Tony, can you please give the replay information, and then we will sign off.

Thank you, sir. And, ladies and gentlemen, this conference will be available for replay after 12.30 PM Eastern Time today, running through November 3, 2011, at midnight.

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