CNX Resources Corp (CNX) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's fourth quarter 2012 earnings conference call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to Vice President of Investor Relations, Dan Zajdel.

Thanks, Tony. I'd like to welcome everybody to CONSOL Energy's fourth quarter conference call. We have in the room today Brett Harvey, our Chairman and CEO; Nicholas Deluliis, our President; Bill Lyons, our Chief Financial Officer; Bob Pusateri, our Executive Vice President of Sales, Marketing and Transportation; Jim Grech, our Chief Commercial Officer; as well as David Khani, our Vice President of Finance. Today, we will be discussing our fourth quarter results. 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. We also have slides on the website available for this call. We will begin our call with prepared remarks by Bill Lyons, followed by Brett Harvey. Nick, Bob, Jim and David will then participate in the Q&A portion of the call. With that, let me start the call with you, Bill.

Thank you, Dan, and good morning to everyone. CONSOL Energy rebounded from a seasonally weak third quarter to post solid fourth quarter operational and financial results. The key driver was the much improved costs in our coal segment. With that, let's talk about how our 2012 fourth quarter results compared to the 2011 fourth quarter, which can also be seen on slide 3. CONSOL Energy posted net income of $150 million or $0.65 per diluted share for the fourth quarter of 2012, compared to $196 million or $0.85 per diluted share for the fourth quarter of 2011. Our 2012 fourth quarter earnings included two items that were not in the analyst models. The Company recognized a pretax charge of $13 million, or $0.04 per diluted share on an after-tax basis, for a voluntary severance incentive program for active salary and operations support employees with at least 30 years of service. We also recognized a pretax gain of $90 million, or $0.26 per diluted share after tax, on the sale of non-producing Western Canadian coal assets. While asset sales are discrete, we expect to continue our asset sale program in 2013. Brett will address this topic shortly in more detail.

Total revenue for the fourth quarter of 2012 was $1.24 billion, which was lower than the record $1.37 billion from the year earlier quarter. The decrease in revenue was primarily in the coal segment. Total coal prices were down $5.11 per ton, resulting in a drop of $75 million, and coal sales volumes were down 500,000 tons, resulting in a drop of $35 million. These revenue decreases were caused by the weak metallurgical coal market. CONSOL generated cash flow from operations of $198 million, and EBITDA of $406 million for the quarter.

Slide 4 shows that CONSOL's active coal divisions generated earnings before interest and taxes, or EBIT, of $266 million, which is a decrease of $19 million from the year-earlier quarter. Again, coal revenues were down $110 million, primarily due to the poor metallurgical coal market. However, costs were improved $91 million to substantially mitigate this revenue decrease. Average costs for the quarter across all our tons were $48.21 per ton, which is an improvement of $4.43 per ton in the year-earlier quarter. Cost containment has been a major focus of CONSOL Energy in 2012, as we have sought to maintain overall margins in the face of weaker prices for our metallurgical coal. We have additional coal cost data by segment in our press release.

Looking ahead to 2013, we have current coal production guidance of 55.5 million to 57.5 million tons. This is very similar to the 56 million tons we produced in 2012. Please note that we have surge capability in both our thermal and metallurgical coal, through available weekend capacity. If demand improves, we can quickly and economically capture incremental sales in any coal market. Coal capital expenditure forecasts for 2013 will decrease to a range of $410 million to $520 million, versus the $920 million for 2012.

The retooling of our mines is nearing an end. Over the last 10 years, we've invested capital to improve safety, productivity, and efficiencies of our mines. We're starting to see the result of this investment manifest itself in a number of ways. Our safety continues to improve, the active footprint in many of our mines is smaller, and we're adding to our productive capacity. We expect our BMX mine will be our lowest-cost coal operation. This mine should be fully operational in the first half of 2014. Following the completion of the BMX mine, we do not expect to invest in new major coal growth projects. Annual coal investments would then drop to a maintenance of production level of around $5 to $6 per ton.

Let me turn to our E&P operations. The gas division reported net income of $9 million in the fourth quarter of 2012, which is nearly flat with the year-earlier quarter when excluding the $33 million after-tax gain from the Hess transaction. The effect of lower prices offset volume increases. However, our commitment to continuous improvement is reflected on slide 5, which shows many of the improvements we have realized through the year, such as extending our lateral lengths while decreasing average stage costs. Also, in an environment that continues to see sub-$4 gas prices, we have shifted more focus to drilling in the wet areas of the Marcellus and Utica shale plays, where liquids add to well realizations. Slide 6 illustrates the shift in the percentage of expected liquid wells drilled for 2013 within the shale plays. 76% of our wells will be drilled in a liquids target in 2013, versus 35% in the liquids target in 2012. In 2013, we expect to invest between $835 million and $935 million in wells associated with gas activity. This range is net of the approximately $100 million in drilling carry we expect to receive from Hess. We estimated that this level of investment will result in 2013 production of somewhere between 170 Bcfe to 180 Bcfe.

Slide 7 illustrates the Company's cash flow sources and uses. CONSOL generated $728 million in cash flow from operations, while investing nearly $1.58 billion in its coal and gas businesses. Asset sales and cash on hand funded the remainder of the investments. We also accelerated the declaration and payment of the dividend that shareholders normally would have received in February 2013. That means during the calendar year of 2012, CONSOL paid out total dividends of $142 million.

Our recently released -- issued release, as well as slide 8, details our expected net investment in 2013 of approximately $850 million. We have invested through the cycle, so when the upturn in energy occurs CONSOL will be bigger and stronger than we were when the downturn began. As for liquidity, slide 9 highlights the Company's solid position of nearly $2.4 billion, which includes $22 million of cash at year end. Also, CONSOL Energy continues to demonstrate financial discipline by not having to draw on its $2.5 billion of credit facilities. In summary, CONSOL achieved fourth quarter outstanding results. As a result of our continuing effort on cost control, our solid balance sheet and our strong liquidity, our 2013 contracted position for thermal coal and gas, and our expected asset sales, we are well-positioned to maneuver CONSOL Energy through this challenging macro environment. With that, let me turn it over to Brett for his comments.

Okay. Thank you, Bill. Good morning, everyone, and it's good to be with you again to talk about CONSOL Energy. I'd like to refer you to page number 11. I'd like to talk about personnel changes at CONSOL, and the transition that we're having at the management level. The team that is retiring basically, they are retiring age, and retiring their careers at CONSOL, are really the people that took us from the old coal company to CONSOL Energy to a diversified energy Company, and were very valuable to us in the transition and adding value to the Company. Bill Lyons and his financial discipline as the CFO for more than 10 years, a great contribution to the Company. Bob Pusateri, Global Sales, and his expertise in the domestic markets really expanded the revenue side, and we appreciate all his good work and service. These two gentlemen had more than 35 years of experience with CONSOL Energy. Jerry Richey, also our General Counsel, solid, good advice, and he's moving on to a new job as the General Counsel of University of Pittsburgh. I wanted to publicly thank them for their service, and tell them how much I appreciate them as their CEO, as well as publicly let everybody know that they -- I thought that they were some of the strong builders of what CONSOL Energy is today.

Now, in transition, it's important that we make a good transition for -- so the shareholders have that benefit of the value of all this expertise. David Khani will be our new CFO. He brings a new perspective. He's an industry expert, and he's focused on shareholder value. I'm sure he'll do a great job for us. Jim Grech, an excellent manager, innovative, great skills, high potential in global strategy in coal and gas. We're looking forward to having him on board in his new assignment. And Steve Johnson, solid legal advice, he came from our Gas Company as their General Counsel. He's been a major player on all our transactions, and I'm really excited about having him in that place as well. That, combined with Nick being the President for his first full year over the last year, we're building a very strong team with a good transition. For a Company that's 150 years old, the next transition is very important for the next 150 years, and so I think that's been well done, and I thank everybody for their service.

Now I'd like to refer you to slide 12. I want to talk a little bit about assets, because this is an asset-rich Company. If you look back to the history of it, of CONSOL, especially the last little while, we bought the gas position from Dominion as an opportunity in 2010. In 2011, we lowered the risk of that opportunity and decided to accelerate the development of it, and brought in Noble Energy and Hess Corporation as partners in the different plays, the Utica and the Marcellus Shale. We took risk off the table of our shareholders based on what we did, and we decided to develop it faster. We monetized the royalty stream that year and we had record earnings that year. So a lot of good things happened in 2011. In 2012, we sold more non-coal core assets, assets that weren't on our radar for the next 15 to 20 years, but were valuable assets to somebody else. It was not a fire sale, so-to-speak. These were assets that people wanted, willing to pay good prices, and we used those proceeds to grow the value of the Company in coal and gas, even as the markets were declining.

Now, let's look forward into 2013. We continue to look at non-core assets. We always will. We look at the number of assets we have and decide where they fit in the mix going forward. We've also developed a way of looking at all of our assets that are also core functions, but are undervalued in our share price. So is there a better way of getting that into our share price? We're looking at it from that perspective. And we're looking at things like distribution areas or assets that I think are hidden in the share price, but are very valuable to moving of energy through our systems. We're going to be looking at those going forward and I think you'll see some good things come out of that. In all cases, we are structuring these assets to bring value forward to our shareholders, as I promised you over and over the last three or four years. You'll see us continue to do that, and you'll see us continue to have very strong results based on that philosophy.

Now, if you go to slide 13. I'm going to do a little bit of a commercial here, but I should be doing that as the CEO. In the past two years, CONSOL Energy has earned over $1 billion of GAAP net income and $2.3 billion of operating cash flow. That's from a very, very solid, strategic plan of coal and gas, and where we see the future of coal and gas. It's also sitting on very high-quality, low-cost production assets in the highest energy use area in the United States, as well as our ability to distribute all of these products around the world. You can see we have premium low-vol coal in Buchanan. We've also expanded some of our met within our base. We haven't made acquisitions but we've expanded at very low cost within our base. We've taken thermal coal and crossed it over into the met markets in the last couple of years. We've expanded the Marcellus Shale rapidly. Our coal bed methane is very stable, and an opportunity, if gas prices rise we can expand that more. And the Utica shale, we will continue to add value there, as we research and find out what we have in that layer of the earth that we own.

We're growing production in coal and in gas, in energy markets that I think are soft and continue to be somewhat soft. We do see bright spots compared to last year, but there's more energy out there than the economies of the world are demanding for at this point in time. Even saying that, our demand for thermal energy in the United States is very robust, showing that even our inventories on coal, especially steam coal, in the United States are the lowest level they've been in five years. I think that's tremendous in this marketplace. We see new potential in oil and liquids. Marcellus, gas production is rising rapidly. The value of going to the wet side has been very valuable to us.

Our financial strength is still solid. We have the ability to make the moves we want to make, and we're not desperate to do anything, but we're focused to add value to our shareholders. So having said that, we believe growing that both sides of the business, as the economy turns, the key is when it turns and the demand for energy there, we're going to have very high margin gas and coal, and metallurgical coal, to take care of the economy. With that, I'd like to turn it over to questions. Thank you.

Operator, could you please instruct the callers on how to queue up for questions.

(Operator Instructions)

Our first question in queue will come from Shneur Gershuni with UBS. Please go ahead.

Good morning, guys. First, wanted just to offer my best to Bill and Bob on their recent decisions to retire after such long careers with CONSOL, and also to offer congratulations to David, Steve and Jim on their recent promotions.

Thank you.

My first question, kind of in the prepared remarks and in the release you sort of noted that there was -- you've decided to shift a little bit and sell some domestic met coal versus going international. Some of the steel companies that reported recently suggested that met coal pricing is selling a little better in the US than international markets. Is that an experience that you're achieving, you're seeing something similar to that? I was wondering also if you could comment a little bit about the met market in general, just given the rains that we've had in Australia, if there's been an increase in inquiries as of late?

Yes, Shneur, the domestic markets, the net back prices to us usually are better than going export. There's a lot less transportation involved. So we get more favorable pricing domestically than internationally. The question about the situation in Australia, we think that's a little bit too soon to assess the impact on the markets. There is some potential for production to come out of the markets, but there has also been an oversupply in the markets of production. So the story of Australia and the impact on the markets is still yet to be seen, in our opinion.

Great. And a follow-up question. You've had very good results when things are running well, both in the coal business and the gas business. You've talked about BMX CapEx rolling off next year, and it's an asset that's become available to you. What steps do you think are next that are going to be taken to help unlock shareholder value? You talked about some asset sales. Is there going to be a strategic review with the new management team, given all the changes and so forth? I was just wondering if you can provide some additional color with kind of how you think about things, and how you would use the balance sheet appropriately?

I think that's a good question. We announced we're not going to do any more big coal projects, which tells you that we're going to have free cash flow beyond our capital choices that we've made in the last couple years. With free cash flow, opportunities come. Do you put it back into your asset base? How do you look at future energy markets? Should you be buying shares back? Should you raise your dividend? Strategically, we'll look at all of those pieces and decide where the best value is for our shareholders at that given time, especially as the free cash flow starts to generate.

Is there a point in time where you expect to be able to shift to that point, where the free cash flow starts to come in and where you need to start thinking about that, or is that something that's more --

I think that's -- if you look at CONSOL in total, we build a lot of free cash flow and then we decide to reinvest into our asset base, and BMX was a long decision. That will be over next year. On the gas side, that's more of a faucet you turn off and on based on where you see gas prices. So between those two, we see '14 as a pretty heavy gas -- excuse me, cash building year, and so we'll be focused in '13 to look and see what we do with that going forward.

Does that include midstream as well, too?

Yes, all of that.

Great. Thank you very much.

Our next question in queue will come from Andre Benjamin with Goldman Sachs. Please go ahead.

First question, I was wondering if you could provide a little more color on your views specifically of high vol met exports? If I look at the difference between your first quarter and full year guidance, it doesn't look like you are currently planning to sell much in the back half of the year. Maybe a little bit on what's changed versus, say, your previous bullishness? And I guess the last piece would be, do you expect to you now sell that into the thermal market?

Andre, what's happened to date with our oil is we've shifted from last year to this year 3.5 million more tons into the domestic markets, and that just goes to the flexibility of our coal mines and the quality of coal as we put it in the market where we think we can get the best revenue for our Company. And as a result of that, the high vol projections that you're seeing are lower than they were year-over-year from 2013 back to 2012. But we want to point out though, as we said in our Earnings Release, that there is upside potential in our production if opportunities present itself, and of course the prices are favorable to us, that we would look to take advantage of the -- of additional sales. One of those may be in China. A fact about our inventory, the high vol inventory of daily coal in China, last September we had 1 million tons of coal on the ground in the ports in China, and as we sit today we have about 100,000 tons of coal on the ground of high vol coal in China. So hopefully that will translate into more opportunities for us later in the year.

Great. I guess on the E&P side of the business, could you maybe talk a little about midstream development plans in the Utica, say timing and cost to CONSOL to build out? And on the fourth quarter operations update, you said that you were going to have limited production this year due to infrastructure constraints, so when can we start to anticipate a more meaningful contribution from the Utica to the bottom line?

The Utica shale on the midstream side of the equation is obviously a bit behind the Marcellus. It's not as developed as the Marcellus has been, and that's really deferring the development of midstream two ways. One, just because of the time lag itself and getting the infrastructure in place. But secondly, and maybe more importantly, the data and the accuracy of what the actual products will be out of different sub-regions within the Utica, so that then you could capitalize the midstream and the processing accordingly. Now, the piece of good news that should accelerate and work in our favor on midstream is that ourselves, like many in the industry, have gone and begun to focus drilling and activity in the wet area of the Utica. All of our wells on slate within our Hess joint venture in 2013 are going to be in the wet area of the Utica, as an example, to 27 wells in total. So there, the accuracy and the certainty, and the specific nature of it should help us develop the assets. So I think it's more of a 2013 story than anything else that reflected the assumptions that we made in the Earnings Release and the production update. I think by 2014, specific to the wet areas that we're focusing in on, I think we'll have midstream and processing ready to go.

Thank you.

Our next question in queue will come from Brandon Blossman with Tudor, Pickering Holt. Please go ahead.

Let's see. I guess let's stay on the gas side of things. You do a nice job of delineating costs by per drill, and lateral costs in the Marcellus for '11 and '12. Any directional indications for '13 on both of those components?

For the Marcellus, a lot of those cost trends are going to track what laterals are doing, lateral lengths on average. So if you look at the lateral length history over that time period you quoted, in '11 we were around 3,300-foot average lateral length. That grew to over 5,500 feet in 2012. We exceeded in some instances 8,000 feet, depending on the specific well or well pad. If you look at 2013, and our drilling program between ourselves and Noble, we're going to be somewhere north of 6,000-foot average lateral length. So that sort of sets the stage and the tone for what happens with drilling costs, and costs per lateral foot and completion costs.

If you look at the average drilling cost, we're doing very well on the cost per lateral foot. 2012 was a further reduction in that cost compared to '11. And for '13 we want to hold that, if not improve upon it, in things like steerable tools, and the longer laterals that I mentioned, those will help us hold the line or do better in '13 on the cost per lateral foot. The cost on the vertical section has increased in '12 compared to '11 because of things like casing requirements, but what we're seeing is, and what we're attempting to do is improvements on the completion side and improvements on that lateral section, over -- compensating for the vertical pressures that we've seen. So all in all, our expectation is, whether it's the finding and development costs or the all-in field costs for the Marcellus, our objective is to hold the line on unit costs that you've seen in 2012 when we get into '13.

And then of course the complementary question is the trajectory of EURs from '11 to '12, and then what you're thinking about for '13?

The EURs, we're going to come out with our reserve report here shortly, and there will be a lot more detail in that release on what we've seen in the Marcellus. But looking at lateral lengths and looking at the IP rates and well histories that we reported throughout 2012 across these different regions, it was a very successful year in the Marcellus, and our expectation is that the well-type curves should show some steady, continuous improvement in that, to reflect the results that we've seen. But there will be a lot more to say about that in a week or two, when we release the reserve report.

Looking forward to that. Just shifting to coal, quickly. Cost structure, obviously an excellent fourth quarter. Is there color available for '13 kind of beyond, what the pressures are from that point forward, and what the offsets are from a cost perspective?

When you look at the coal costs for '12 total year and for fourth quarter, there's some general big picture factors to take into account, and there's some very specific items when we get into '13 to think about. On the big picture items, Bill and Brett both mentioned the retooling, I'll call it, of the coal segment over the past number of years, with the efficiency projects and the capital investments that we've made. Those have resulted in numerous economies of scale, and efficiencies that result in the unit costs that we demonstrate. We've also mentioned prior to today about the safety performance and our compliance performance steadily improving. That helps drive production and costs at the end of the day.

So big picture wise, this is a large result, the unit costs are, of the retooling that we've seen. When you look at 2012 versus '13, if you look at 2012 total year we were at about $52 a ton. The fourth quarter of course is better than that, just over $48 a ton. Our views is for '13 that we're going to try to hold the line on unit costs that we saw for 2012 total, so it's the $52 per ton. We might see a slight increase or escalation in that. When I say slight, 2 percentage points perhaps, but that will be a function of what Jim Grech spoke about earlier, what are the incremental opportunities in the market that we can take advantage of which will allow us to produce more tonnage numbers from our complexes, which will of course help us put a downward pressure on unit costs for the coal segment. So base case, call it even to a slight increase from '12 unit costs, and alternate case, if we can take advantage of some market opportunities we should do better than that.

Thank you very much, good color.

Our next question in queue will come from Timna Tanners with Bank of America. Please go ahead.

If you could comment a little bit more about your divestitures, and characterize the type of interest that you might be getting and what kind of interest, what kind of buyers in the market, to understand that a little bit better?

Well, we have a very broad asset base and what I said was we were going to shift from what we consider non-core, and we're going to look at some core things and look at the structure of the core processes and get that value out somehow. A good example would be midstream, where do you need to own it versus have control of the capacity, can you get more shareholder value by looking at that different. That's just an example of it. But what we've learned in selling assets is, we don't announce what we're going to do. That's not a good thing. We look for the markets. We create the markets. We find a buyer, and then we add shareholder value that way. We tried it by announcing it once and it didn't work, so I think we learned our lesson. So I would say that you'll see a lot of action coming out of us, and I think it will be positive, but we're not ready to announce where and why we're going to do it.

I was trying to get at really more the appetite and the interest level that you're seeing, and what they're looking for, buyers, that kind of thing?

Based on our results, you can see the appetite's very high for these assets that we're putting onto the market. We have very high quality -- and these were assets that we -- didn't look as real valuable to us from a portfolio perspective, if you look at '11 and '12. In '13, I think we even have some things that are more valuable, and I think the appetite will be very good.

Just my other question, if I could, you talked a little about high vol. But I was just curious on the low vol side, Buchanan has run off and on a lot over the last year. Just wondering if you think the -- if your outlook calls for ability to run that a little more steadily, or if you have any other thoughts about the outlook for low vol?

We feel fairly comfortable, very comfortable with Buchanan for this year, as far as production and able to keep it online. With our base case, the unsold coal is just about over 1 million tons, which is not a bad position for us to be at this time of the year. We had a very good first quarter with demand from China to Buchanan coal, and we actually had some interest already building for the second quarter for some vessels. So if the market keeps on this trend that we're seeing right now, and with the sales that we already have in our portfolio, Buchanan should be running all year long.

Great. Thanks a lot.

Our next question in queue will come from Lucas Pipes with Brean Capital. Please go ahead.

First, a quick follow-up question on Buchanan. Just in terms of the pricing, I think last year you mentioned it was about a $20 spread off the benchmark. Would you say this roughly still holds today? Directionally getting better, worse? How do you see that?

Lucas, I think I need to be -- depends on which market the coal is going into, that there could be discounts based on the quality, but the $10 to $15 range is probably a more accurate number of the discounts that we see at times on the Buchanan coal off of the BMA index.

That's helpful. Thank you. And shifting to the gas side really quickly, you did reach some major milestones in the Utica, and as you move more into development there, can you give us a sense of the timing of ramping up there? I would appreciate that.

Right now in the Utica, when you look at '13, the entire emphasis will be -- on the 27 well program, will be in the wet area of the Utica zone. That basically just follows the pricing spreads that we see today, and the economics as to where they sit. So right now we've got four rigs running there, two they we're operating, two that Hess is operating. As I said, all four of those rigs, and all the 27 wells for 2013 will be in the wet zones. Now, moving out and looking forward, we obviously have acreage positions beyond counties or sub-regions of counties in Ohio that offer opportunities beyond just the wet zone, the dry gas, so to speak. That's going to be much more a function -- and that ramp-up will be much more a function of gas price, so as the gas price changes and increases, which inevitably it will do, as history has shown, that's when, going back to Brett's comment about being able to ramp up drilling or ramp it down, as a function of pricing, that's where we'll look at probably the most significant incremental increases in drilling. But that's going to be a wait and see for now, until we see gas prices getting a level where those returns on that capital investment warrant the investment, because they're above our cost of capital.

That's very helpful. Thank you.

Our next question in queue will come from Holly Stewart with Howard Weil. Please go ahead.

First question on exports. Can you remind us of your export level in 2012, with a breakdown of met and thermal? And then maybe given your -- that you have your own terminal, what your expectations are for total US volume for 2013?

Holly, for 2012 our export tons, we had 4.5 million tons on the thermal market, 2.6 million tons on the low vol, and just over 3 million tons on the high vol. And I think the second part of your question was the expectations that we have for our Baltimore terminal. Our Baltimore terminal's going to have a very good January. We should do over 1 million tons through the terminal in January. We'd like to think we can maintain that level through the rest of the year, but as we get out past June or so, gets a little bit cloudy as to some of the demand there internationally. But we're off to a good start, and we're hoping we can maintain that through the rest of the year.

Any insight for total US volumes for the year?

Total US volumes for export?

Yes.

For '13, we're looking -- our view is it's going to be about 106 million tons of total export volumes.

Perfect. Thank you. And then maybe just another kind of met-related question on the European market. You talked about several blast furnace restarts as of late, and sustained demand for your Buchanan products. Any kind of color on the European market?

Holly, as far as CONSOL sales I said the blast furnaces, two of them, one in Spain and the other one in France, have restarted. They were shut down since last summer, and they have restarted here in January. Right now, the shipments that we had booked, everything's moving for our forecasts. So right now, the demand is steady for us.

Wonderful. Thanks, guys.

Our next question in queue will come from Mitesh Thakkar with FBR. Please go ahead.

My first question is just on the high vol side. You're guiding to almost 1.8 million tons of high vol in the full year, 1.4 is contracted. So very little target contracting for the rest of the year, and we almost have the full year to go. How do you think about that? And when you look at the year-over-year change in the high vol, has that all fallen into the steam coal bucket now or you've taken some off the production?

Mitesh, in response to your first question, as we said in our Earnings Release, and I think Nick mentioned it earlier as well, that the markets are there for us, we have the production capacity poised and ready to go. So the numbers you're seeing in that table reflect our base case production forecast, but if opportunities arise we will be -- I think we'll be able to take advantage of them, of course providing that the price is there for us. The other question you had was -- I'm sorry, you're asking the high vol, how is it -- where did it end up? Is that what -- the question?

Yes.

Right now, I said the domestic thermal market for this year versus last year, 3.5 million tons total more tons in the domestic markets in '13 versus '12, and on the thermal market that's about 3 million of it. So that high vol coal, we were getting better realizations in the thermal market domestically, and we flipped it back over to those markets.

Okay. So basically, 3 million tons of met from your portfolio switched into the thermal market? Is that a fair statement?

Not completely. Last year we did a little over -- we did about 3.1 million tons of high vol and -- internationally, not domestically. And this year so far of the 1.8 that we have there, about 1.2 is international, so that difference is about 1.8 million tons there. Right now, that 1.8 million tons that was export is slated to go to our domestic market. Again, I want to stress the point that if we have opportunities and the price is favorable, that we have the capacity sitting there to take advantage of it.

Great. And one just follow-up on -- you had this Western Allegheny joint venture in 2012. Can you provide us any color on that, any update? I remember last time you didn't disclose any sort of an NPV. Is that something you can talk about right now?

The Western Allegheny joint venture is off to a very strong start, operationally as well as market-wise. So our expectations that we had set out when we announced the joint venture remain intact today. The way to also think about the Western Allegheny joint venture is there's what I'll call the billing concern that it's currently producing at today, and then there's that incremental expansion or upside that occur -- could occur if the markets warrant, and our share of that would be around 1 million ton-a-year neighborhood. But that again is a function, as Jim has said, of metallurgical prices and overall pricing environment.

Great. Thank you very much, guys.

Our next question will come from David Gagliano with Barclays. Please go ahead.

I just have a few clarification questions. First, on the cost in the coal business for 2013, $52 to -- I guess implied $53 a ton, obviously flat year-over-year, but it is up 8% to 10% versus the Q4 number. I'm trying to get a little more color on what's behind that. Is that mix-related or is it -- what are the main drivers for the increase?

One big driver, we don't -- we tend not to get into specifics on things like long wall moves, but we have four more long wall moves in '13 than we did in all of '12. So that's just timing, and issues related to timing of the panels. So additional long wall moves, of course, will have an impact on unit costs. Other issues in there that are changes, for example, our leaching of our long wall shields, that lease expense is going to hit the operating cost line in 2013 where we didn't have it in 2012. It's basically those two types of impacts that are resulting in that view we gave on unit costs for '13 versus, say, fourth quarter of 2012.

Okay, and just on that long wall move, are there any lumpy quarters that we should be modeling in or is it pretty even each quarter?

First quarter will be the lumpiest. We've got eight long wall moves, and I don't think our operating team can remember the last time we had eight long wall moves in one quarter.

Did you say the first quarter?

This quarter, yes.

Okay, sorry. Then shifting gears, on the met price commentary with regards to Buchanan, a $10 to $15 discount, what's the transportation component now, or at least you how should we be thinking about that transportation cost for 2013?

David, we try to stay away from specific numbers on transportation or net back prices. I will say that on the transportation side, the railroads have been working with us, and it's almost on a train by train or vessel by vessel basis, to go after these markets. So in that regard, the railroads have been very supportive of us in trying to get these export sales.

Okay. And then my last question, just one clarification on the export. In the press release and in the commentary, I believe, 5 million to 10 million tons of total export was the number I recall. Then you mentioned the terminal's running at 1 million tons, at least in January. Are those apples-to-apples comparisons, and if so, why the expectation for -- 5 million seems a little light, obviously, if you've got 1 million already in January. Is that apples-to-apples or am I missing something there?

You've got to remember, we're not the only ones going through the terminal. We have a part -- with Xcoal, they're moving their coal through the terminal. We have first rights on all of it, but clearly if there are other sales, they'll go through it. So there's the terminal number, then there's what CONSOL may or may not do. If the price rises on the met, especially the crossover met, you'll see us accelerate pretty fast there, and we'll probably push our mines a little bit harder if the price is right. So we'll react to the marketplace at that point.

Okay. How much of the -- I guess the last question, obviously. How much of the 1 million in January was CONSOL's coal versus others?

About a third of it was CONSOL coal.

Perfect. Thanks.

Our next question in queue will come from David Lipschitz with CLSA. Please go ahead.

My question to you is on the logistics business. Is there any plans for that, in terms of if you need cash or anything like that, what are you looking for with the logistics business?

Well, we don't need cash. We have a strong balance sheet. We're growing off of asset sales, basically. But that business is -- we're looking at values in the different pieces of the Company that could be -- I talked about midstream a little bit, and that's a good example to where you need the capacity, but it's hidden in the value of the stock. So can you sell that as an asset and keep the capacity, and redeploy the cash into your growth, or some other form of value to the shareholder? That's what we would look at. So we're not going to be specific beyond that. We're just letting everybody know we're looking deeper than non-core assets.

Okay. Thank you.

The next question in queue will come from Michael Dudas with Sterne Agee. Please go ahead.

I echo Shneur's comments, and hope that Bill and Bob don't suffer from quarterly conference call withdrawal when they leave.

I think they'll be fine.

A question for Nick. Nick, as we look towards 2013, could you identify two or three targets or goals for the gas business that we should look for, or that will generate a successful positive year for the gas operations?

I think if I look at three overarching objectives, one would be in the Marcellus to demonstrate that through the joint venture our joint venture partner and ourselves can drill at what I'll call gas manufacturing rate in the wet areas. So this goes to the 90 wells that we have on slate in the wet area of the Marcellus for 2013, to be able to take advantage of efficiently and safely these pricing windows and economic windows that open up. So that will be one item. I think a second item will be on the Utica, to give and provide much more comfort to not just the results that we're seeing in these specific areas we're drilling such as Noble County, but to also give some comfort about what the run rates might be in those areas to get to the point where our Marcellus is at today. And then the third thing I think would be to continue that march on continuous improvement that we've been demonstrating, mostly in the Marcellus but of course now with the Utica up and running, where we can show year-on-year competitive, industry-leading finding and development costs, all in unit costs. So again, that's more of an ongoing evolution, not something new, we've been doing that '10 through '11 through '12 in these shale plays, but to continue that march from last [costs], the completion costs, et cetera, in '13.

Nick, that's very helpful. I have a question for Brett. Brett, as you look into 2013 and '14, do you get the sense that CONSOL should be managing for the recovery in the coal and gas markets, or do you think we're still bumping along the bottom, or there's some concerns or fears either international or domestically that may cause it to linger a little bit longer?

I think right now, we're looking at a positive feeling that there's a recovery going on. I wish I knew if that was going to turn the other way, but we don't. So we're cautiously growing and adding capital on both sides, and on the coal side, we said we're not going to do any more on the coal side in terms of commitment. On the gas side, we can turn it off and on. So I think we've actually set ourselves up to be very flexible, depending on where the market goes. And remember, it's demand for energy. It's not the ability to serve the customer. The demand is just not there, and we think China's turning a little bit, and that looks pretty strong. As Jim talked about, our inventories there have dropped right inside of China, and we're optimistic. But it's a little bit dicey, yet. I wouldn't give a robust look, but I can tell you we're cautiously optimistic.

Well said, Brett. Thank you, gentlemen.

The next question in queue will come from Richard Garchitorena with Credit Suisse. Please go ahead.

So one quick point of clarification. On the gas acreage update, in the release you basically talk about acres that are potentially up for [Title V] effects. Can you give us some color in terms of whether those are legacy or new or -- and also, location, particularly in the Utica, if you have any details on that?

What we've done in the Earnings Release today is something that we're going to likely do in future releases as a matter of course, because these joint ventures on the Marcellus and Utica have obviously become major components of our businesses and our capital spend. So what we try to do there is walk you through what's occurred over the past quarter, or whatever the appropriate time frame is, within the Marcellus acreage count and within the Utica count. When you look at the Marcellus count, we quoted about 26,000 acres of defective acreage that Noble, our partner, sent back to us. We think that we can cure a significant portion of those. Those are generally scattered throughout the joint venture footprint, as you might expect.

We also gave you some details on what I'll call adds, or new acres in. We have almost 9,000 acres consolidated within the Pittsburgh International Airport that we're working on, and in discussions with the airport authority. We gave you about 24,000 acres that were tied to some pref rights, and about 36,000 acres of what we call found acres. The preferential right acreage position in the airport are what I would call core, they're consolidated, relatively speaking, and those found acres, the 36,000 acres, they're like the defect acres, they're widely scattered for the most part across our various footprints. So you net that all out, we're up about 40,000 acres under the worst case scenario if we don't cure any of those defects.

You switch over to the Utica, same sort of math. Our joint venture partner there, Hess, has claimed defect on about 36,000 acres per the joint venture agreement. Under the process we've aligned and assigned, we think most of those are going to remain defective. We added about 5,600 acres through our acquisition process along with Hess, that's core. Those 36,000 acres were wildly scattered throughout the footprint, and we've got about another 10,000 acres in process that I would deem, again, core to the areas we're going to operate in. So that nets out to about a 20,000-acre reduction under the worst case, if all those defective acres fail. So that's the type of math and color that we want to walk you through on a regular basis, now that once again these JV partnerships are such a big part of what we do.

That's very helpful. Then just turning to low vol, can you give us an update on Amonate, and where do we need to see prices for you to ratchet that back up I guess?

Amonate right now, Richard, we have shut down. We do have some sales in our forecast, but that's coming off of coal that we had on the ground out of inventory, so the mine is not running right now. And as far as regard to the market right now, the market's substantially below what it would take for us to run Amonate, and we're hopeful that maybe there's an opportunity in the fourth quarter for us to bring that mine on, but I would say that's maybe a little more optimistic than reality, based on the prices that are out there right now.

Great. Thank you.

High marginal cost mines aren't in the radar right now.

Our next question in queue will come from Paul Forward with Stifel Nicolaus. Please go ahead.

Just one comment on the strong export rates out of Baltimore in January. We can at least report that the city of Baltimore's in a pretty good mood these days, and we're anticipating that will continue into February.

You're talking to Pittsburgh people, so you're rubbing us a little bit here.

Okay, so I think, Bill, you talked about the BMX coming online as your lowest-cost operation, and -- when that starts up in the first half of '14, and I guess I wanted to ask about -- you're anticipating a move back up into the low $50s on cost per ton into 2013. How is the addition of BMX going to affect the overall cost structure of the coal business in '14, and is it going to be enough to allow us to say, overall, costs should be flat or possibly even down in '14, driven by the really low-cost tons?

I think your conclusion there is a reasonable one. When you get into '14, adding BMX to the portfolio, call it 5 million tons, depending on what year we look at, that is going to help, not just because it's a lower cost on the ranking within the mix but also because it gives us some economies of scale on the fixed costs that impact the coal segment. So I think when you look at '14, that's definitely going to be a positive that will help us with downward pressure on unit cost with the coal segment. Where that nets out, and what the '14 costs ending up looking like, obviously we don't give '13 costs guidance, so we're probably not in a position to give '14 unit cost guidance just yet.

Exactly.

Right, and I wanted to ask, you talked about first half '14, BMX hitting full capacity. Just wanted to ask about -- sort of as you've done the development work there, has there been any sort of -- any negative surprises that might have pushed out the start of the long wall at all, or possibly is there -- is the market weak enough where you can say you're not really pushing to get that long wall started up as quickly as you might have in a really strong market? And maybe as a follow up to that, how much of BMX approximately do you have committed to customers?

On the mining development timing part of your question, if you recall, earlier in '12 we made a conscious decision to change the start-up of that long wall from late '13 to early '14, and that was a decision that took into account our capital spend, the management of the balance sheet, coupled with how the new production coming on could be optimized within our sales portfolio. So in terms of the development of the mine, it's pretty much as we had planned with the adjustments, as I said, being taken into account that we consciously made.

Okay. Thanks a lot.

Our next question in queue will come from Meredith Bandy with BMO Capital Markets. Please go ahead.

Thanks for taking my question. Just one quick follow-up on the asset sales. So obviously, you don't want to engage in any sort of fire sale. If the interest you're getting isn't what you hoped for, and you feel the need to walk away, would you look to cut CapEx further? Would you try to conserve cash in other ways? What would be the next step to take?

Well, clearly we -- our philosophy in this kind of an energy market and the world that we're in, we want to keep a strong balance sheet. We want to stay within our cash flow. And if we don't see markets opening up, we'll dial things back to match where we think we should be. As you've seen what we've done, though, even in poor energy markets we're growing both sides, and we've been able to do that. You'll probably see us continue to do some of that, but if things got real bad you'll see us shut it all off. So it really is a function of how we see the next 6 to 12 months ahead of us. That could change, as you know. So we're not in a desperate situation anywhere, we have a strong balance sheet.

Is there any more -- are you sort of at the bone for the CapEx for the coal side at this point, or is there more that you could trim there?

The coal CapEx for '13, of course, has things like the BMX expansion project and the Enlow Fork overland belt capital in it. Those are the -- it's the final year, effectively, for those two projects. When you look forward for coal capital, and I think we discussed this in our operations capital budget releases, somewhere between $5 and $6 a ton, as Bill Lyons had said earlier today, is a good maintenance production run rate for the coal segment. So if there's 60 million to 65 million tons per year of production with or without BMX in there, between that range, $5 to $6 a ton depending on the year, because it does bounce around a bit depending on the specific maintenance projects that are in there, that's a good assumption for what coal CapEx should be running forward.

Okay. Thank you.

Our next question in queue will come from Dave Martin with Deutsche Bank. Please go ahead.

Good morning, and thanks for all the detail, including on coal costs for this year. Just had a couple remaining detail questions. The first is on low vol, and the average price change. Average price for committed and priced tons for this year dropped, I believe, $15 from the last release, which was a little larger than I would have thought. So I just want to understand the moving parts?

David, when you look at the average price that we have there for the low vol of $115.63 on 1.5 million tons, you have to look at the whole portfolio, first off. Looking at it incrementally can lead to some skewed math, because there's other things that move in the portfolio versus just what appears to be the incremental tons. So I wanted to get that out there, because there seems to have been some confusion on that. Secondly, when we're selling coal, David, we're selling -- the sales that we've taken in the first quarter have been at world market prices, so based off of the BMA index, and that's what we're selling off of.

Okay. We're ready to wrap up the call, Operator, if you could please tell our folks how to get ahold of the replay?

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