CONSOL Energy (CNX)

Q3 2011 Earnings Call

October 27, 2011 10:00 am ET

Executives

Nicholas J. DeIuliis - President

William J. Lyons - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Brandon R. Elliott - Vice President of Investor and Public Relations

Robert F. Pusateri - Executive Vice President of Energy Sales & Transportation Services and Executive Vice President of Energy Sales & Transportation Services for CNX Gas Corporation

J. Brett Harvey - Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of CNX Gas Corporation and Chief Executive Officer of CNX Gas Corporation

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Mark A. Levin - BB&T Capital Markets, Research Division

Lucas Pipes - Brean Murray, Carret & Co., LLC, Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Lance Ettus

Michael S. Dudas - Sterne Agee & Leach Inc., Research Division

David E. Beard - Iberia Capital Partners, Research Division

Mitesh Thakkar - FBR Capital Markets & Co., Research Division

Brian D. Gamble - Simmons & Company International, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Presentation

Operator

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.

Brandon R. Elliott

Thank you, Tony. I'd like to welcome everyone to CONSOL Energy's third quarter conference Call. We have in the room today Brett Harvey, our Chairman and CEO; Nick Deluliis, our President; Bill Lyons, our Chief Financial Officer; Bob Pusateri, our Executive Vice President of Sales, Marketing and Transportation; as well as David Connie [ph], 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 our press release today, as well as in our previous SEC filings.

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

William J. Lyons

Thank you, Brandon. And good morning to everyone. As you've 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 and operating earnings per share for a third quarter. We entered into world-class partnerships for our Marcellus and Utica Shale gas 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 in a few minutes. From my perspective, the partnerships help us accelerate our asset development and strengthen the balance sheet through debt repayment and reduced future capital requirements. And also of significant note in the third quarter, our Coal marketing team has 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 in our history. For the third quarter, we generated operating cash flow of $457 million and adjusted EBITDA of $441 million. These outstanding results have enabled us to surpass our full 2010 totals for these metrics in just 9 months. The primary driver for the quarter results was a 47% increase in our coal margins, which were at $20.38 per ton. 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 4 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 the 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 are even 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 met coal in 2011. On the 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 cost, which averaged about $55.33 a ton or about $1.33 per ton higher than we had forecasted for the third quarter. While we produce nearly 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 our October 14 operations update. For the fourth quarter, we expect cost to be approximately $54 a ton across all the tons.

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