CONSOL Energy Inc

NYSE:CEIX

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and welcome to the CONSOL Energy and CONSOL Coal Resources' First Quarter 2018 Earnings Conference Call and webcast. All participants will be in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded.

I would now like to turn the conference over to Mitesh Thakkar, Director of Finance and Investor Relations. Mr. Thakkar, the floor is yours, sir.

[Mitesh Thakkar, Director, Finance & IR]

Thank you, Mike, and good morning, everyone. Welcome to CONSOL Energy and CONSOL Coal Resources First Quarter 2018 Joint Earnings Conference Call. With me today are Jimmy Brock, our Chief Executive Officer; Dave Khani, our Chief Financial Officer; and Jim McCaffrey, our Chief Commercial Officer. We will start with prepared remarks by Jimmy and Dave and then open up the floor for the Q&A session. During the prepared remarks, we will refer to certain slides that are posted on our websites in advance of today's call.

As a reminder, any forward-looking statements or comments we make about future expectations are subject to business risks, which we have laid out for you in our press releases or in previous SEC filings. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in the press releases, and furnished to the SEC on Form 8-K. You will also find additional information on our websites, www.consolenergy.com and www.ccrlp.com.

Before we start, I also wanted to note that this is a joint call for both companies. We will provide some additional information about CONSOL Energy's operations and financial results that are not included in CONSOL Coal Resources' operations and financial resource as appropriate.

With that, let me turn it over to our CEO, Jimmy Brock.

[Jimmy Brock, CEO]

Thank you, Mitesh. Good morning, everyone and thank you for joining us on today's call. The CONSOL team delivered a very strong first quarter performance. We not only outperform some of our key operational metrics, but we were also able to accelerate some of our financial objectives. From a CEIX perspective, we commenced the delevering process and started returning capital to our shareholders through some debt and equity buybacks under the plan previously approved by the CEIX board. From a CCR perspective, we had record distribution coverage on an industry-leading distribution yield that allowed further debt reductions simultaneously.

We are also initiating some investment at the Pennsylvania Mining Complex and some really attractive efficiency improvement projects that should be beneficial to both companies. All of these was achieved due to our world-class asset base and our differentiated marketing and financial strategies. Some key highlights from the quarter include our Bailey Mine achieved record quarterly production in the first quarter of '18. Our marketing team was able to achieve the highest quarterly sales process for our coal since first quarter of 2015.

Our finance team was able to restructure some of the Pennsylvania Mining Complex operating leases which reduced the 2018 cash band by approximately $10 million for CEIX and $2.5 million for CCR. We expect these savings to continue through 2020. CCR achieved a record quarterly adjusted EBITDA of $35 million, the highest since it's RPO [ph] in July of 2015.

Now, let me review our operational performance for the first quarter of 2018. The Pennsylvania Mining Complex achieved a strong first quarter production of 6.7 million tons or an annualized run rate of 26.8 million tons, which is in-line with our sales guidance. At the end of quarter, we benefited from strong production at the Bailey Mine, partially offset by long-on move [ph] at the Harvey Mine and adverse geologic conditions at Enlow Fork Mine. Our Bailey Mine produced a record-setting 3.8 million tons in the first quarter, surpassing its previous high mark of 3.5 million tons set in the fourth quarter of 2016.

Our quarterly production declined by approximately 200,000 tons compared to the year-ago quarter, due to weather-related logistical challenges in early January. These challenges resulted in some demerged expense which will be minimized with our new export contract going forward. For it's share of PAMC, CCR produced 1.7 million tons of coal during the first quarter, an annualized run rate of 6.7 million tons which is also in-line with our previously announced sales guidance range of 6.5 million to 6.8 million tons.

For the first quarter, the productivity at the Pennsylvania Mining Complex measured as tons per employee hour improved by 2% compared to the fourth quarter of 2017. First quarter '18 was the most productive quarter for PAMC since the fourth quarter of 2005 and for the Bailey Mine since the first quarter of 2000. As consistency improves at Enlow Fork and geology normalizes, we expect our overall productivity to improve even further.

On the cost front, our average cash cost of coals over time was $29.21 compared to $28.75 in the year-ago quarter. This increase was essentially driven by high roll of this in production taxes, which are tied to higher sales process. As a management team, we prefer our cost to always go down, but in this case, we welcome the cost increase because it was a result of our success in achieving higher prices for our product. This fits with our strategy of being a margin leader rather than volume leader. At the end of the quarter, we continue to work on non-sales sensitive components of cost and had a notable win with the reductions in the lease expenses that are highlighted earlier.

With that, let me now provide an overview of the coal markets and an update on our sales performance and marketing efforts. As discussed on previous earnings calls, our marketing strategy is unique, targeted and tailored to optimize the outcomes from our asset base. This strategy was evident in the first quarter as we capture significant upside in the domestic market by capitalizing on favorable market conditions. There is tangible proof that our market strategy works when looking back to recent history as well.

In 2017, this strategy enabled us to quickly pivot to the export markets when they offered better value. In 2016 during the market down turn, we were able to grow annual production compared to the previous year by drawing upon our broad market reach by the overall industry struggle.

In summary, our unique marketing strategy allowed us to win in three different ways over the last three years. In '16, through volume consistency; in '17, through export opportunities; and year-to-date '18, through domestic demand and pricing improvement. In the first quarter of 2018, we benefited from improved domestic burn, higher power process and higher priced contrasts kicking in. We registered increase revenue per ton in our traditional fixed price contracts as well as our net back contracts. We capture some upside during the days of high-powered process.

In the first quarter, winter was once again slightly milder than normal in the domestic regions we serve. Heating degree days were 3% to 7% below normal based on preliminary data. The good news is heating degree days were approximately 11% to 23% greater than the year-ago period, which translated into significant improvement and heating demand and improved burn at our customers' power plants.

Based on our internal estimates, inventories at several of our key Northern Appalachia rail serve power plants declined to less than 10 days at various points during the first quarter. This dynamic continues to create a demand from our customers. The return to more normal winter temperatures boosted the PJM West day ahead power process to an average of $45.31 per megawatt hour. As you may recall, during our fourth quarter 2017 conference call, we indicated that every $1 per million megawatt hour improvement over $32.50 per megawatt hour of PJM West power process results in a 30% to 40% improvement in our average revenue per ton compared to our annual guidance.

As a result, this improvement in power process alone drove an approximate $5 per ton improvement in our average revenue per ton this quarter. This traffic in optionality continues for the remainder of the year. For the first quarter, our average revenue per ton was $52.98 compared to $46.80 in the year ago period. It is important to note that this was accomplished in a sub $3 forward natural gas market.

On March 13, 2018, the National Energy Technology Laboratory published a report examining the impact of coal weather event of December 27, 2017 through January 8, 2018 on power markets. The key takeaways were: coal provided 55% of the incremental daily generation needed across six independent system operators including the PJM. In PJM, coal provided the most resilient form of generation.

Available wind energy was 12% lower during that period than for a typical winter day resulting in a need for base load fossil fuel power plants to make up this generation in addition to its resiliency role in meeting the greater demand during the event. Clearly, coal and traditional fossil fuel generation did their job and once again, highlighting the importance of having a diverse field generation fleet.

Now, turning to the export market. Global coal demand continues to improve, tying to overall broadening and accelerating economic growth. Based on current prompt and forward API 2 process, the net debts to our minds remains comfortably above $50 per ton through 2020. We continue to see improved demand for our coal in India.

Prior to 2017, our coal moving to India was primarily going into the industrial sector to the brick and cement industries. However, we are now beginning to penetrate into India's coal fire power generation sector as well. Other areas of the world are also expanding their coal powers. Industry sources suggest that Turkey is close to proving an increase in its sulfur count for input coal, whereby it will be able to accept up to 3% sub for specs, an increase from up to the 1.2% previously. This is a very good news for high quality Northern App coal as it opens up additional opportunities.

Within the U.S. coal industry, we believe we are best-positioned to serve as incremental market given our low-cost structure, high quality coal and logistical advantages. Also, given the limited investment incurring as a global coal industry, we believe the United States is set to become an essential piece of the seaborne market rather than a swing supplier.

Looking forward to the remainder of '18 and beyond, we are in very good shape. We are greater than 95% contracted for '18 shipments and are 74% and 26% contracted for '19 and '20 respectively. As disclosed in the press release this morning, our new export contract kicks in during the second quarter, which will provide us with pricing uplift in our export business. With low coal and natural gas inventories as well as a strong export market, we are very comfortable with our prospects to contract and optimize our 2019 through 2021 coal position.

With that, I will now turn the call over to David to provide the financial update.

[David Khani, CFO]

Thank you, Jimmy, and good morning. This morning, I will provide a review of the quarter and an update to our 2018 guidance. Before I do so, let me provide some perspectives on the current energy markets. During the last earnings call, we discussed reviews on the coal pricing cycle and how global demand growth coupled with [indiscernible] is setting us up for sustainable pricing improvement for coal.

As Jimmy just highlighted, the global demand for coal has been accelerating as well as the demand for all the commodities. This is important as we benchmark pricing of our product against these other commodities. While it's easy to compare thermal coal prices to domestic natural gas, we also watch and market off other key international thermal and net prices that tie to rising L&G, oil and steel prices.

On Slide 10, we provide you the prices of various energy sources throughout the world including several wildly used benchmarks. As you can see from a dollar per MMG2 [ph] basis, there is a nearly an 80% arbitrage for Northern App Coal versus the global L&G market. As these commodities prices rise, this puts in more pressure on the consumer to close the gap. The key differentiator is that we have very high VQ [ph] coal and that all majority of our coal can be exported to our wholly owned export terminal in Baltimore.

Our market reaches very broad with our product shipping to five continents last year. We believe this creates upside opportunities for us as global markets are going forward. There has also been an interesting development in the domestic oil and gas production markets. Investors in the past supported production growth are steering management team to raise overall returns, generate free cash flow and include shareholder-friendly actions, similar to the trend we saw back around the year 2000.

The spot performance of companies that generate free cash flow are outperforming companies that outspend their cash flows. This trend has been overlaid on to the coal space as well forcing most of the coal companies to return capital instead of just investing in growth. While nearly 100% of the coal companies are focusing on generating free cash flow, we've seen several E&P analyst reports that show between 50% and 75% of the E&P companies are expected to stay within cash flow within 2018 with an improving trend in 2019.

This trend towards investment discipline along with the rising domestic and export demand provides daylight for supporting healthy natural gas prices. Over the past eight years, the energy space has had a whole record of generating returns above their cost to capital as companies continues to spend on growth inspite the falling commodity prices.

For the trailing 12 months, our return in capital employee calculates the 13%. With this backdrop, we have developed the discipline approach to capital allocation with an eye on raising our corporate returns. We have a focus list of internal and external generated projects that will be marked against stock and debt buy back opportunities, subject to certain limitations. We have just begun to spend our highest rate of return deep oil making [ph] projects with full optimized or existing production. We will not spend significant capital to air production unless we have sustainable pricing.

Also, some of these internal projects are candidates for divestitures as swaps. Let me move over to our financial performance now where I am very excited to recap the quarter and give an update on our guidance. We will review CEIX first and then CCR.

This morning we reported a strong financial quarter with net income of $71 million, adjusted EBITDA of $150 million and organic free cash flow net to CEIX shareholders of $88 million. This compares to $46 million, $116 million and $34 million respectively in the year-ago quarter. On a per ton basis, our coal margins improved $5.72 to $23.77 compared to a year-ago levels as prices rose $6.18 to $52.98 or cost increased $0.46 to $29.21. With the high percentage of cost fixed, rising prices mostly fall to the bottom line.

What is also interesting is that domestic price realizations have now outperformed export prices for the second quarter in a row, which will likely change in a second quarter with a new export contract. Now, during the quarter, we generated $115 million of cash flow from operations and spent $22 million in capital expenditures. This allowed us to opportunistically pay down $26 million in outstanding debt, which we had an average financing cost of 8.2%. One of the goals we've highlighted on our standing related debt and equity road shows was to take on net bank leverage ratio down to 2x by year-end 2018. We have achieved this target three quarters early as we have outperformed the last two quarters. We believe that our stock is currently undervalued and brought back approximately 44,000 shares as well.

While we're raising our corporate returns, we will also work on lowering our cost to capital. Our access to capital as well as interviews continues to improve and we took advantage of this with our leasing program in the first quarter. Now, let me move over to CCR.

This morning, CCR reported a strong financial quarter with net income of $22 million, adjusted EBITDA of $35 million and distributable cash flow of $25 million. This compares to $14 million, $28 million and $15 million respectively in the year-ago quarter. The most important metric for CCR is the distribution coverage. We generated distribution coverage of 1.8x during the quarter which is the highest in our history as a public company. During the quarter, CCR generated $29 million in net cash from operating activities. After counting for $5 million in capital expenditures and $40 million in distribution payments, we were able to pay down approximately $10 million in debt. CCR's net leverage ratio improved just 1.8x.

Now let me provide you with an update on our 2018 guidance. As we stated last quarter, our goal is to be able to walk up our guidance as the year progresses. As a reminder, our management team is compensated on generating free cash flow and our core values of safety and compliance. For the PAM [ph] mining complex, we are maintaining our 2018 sales volume guidance. The market appears to set to absorb all we could produce with significant restocking needed as inventories are well below normal.

As new PMC guidance reflects, $2 and 20% per ton margin expansion, using the midpoint of guidance based on $1.33 increase in expected prices and an $0.88 decrease in cash cost of sales can be done using the midpoint of guidance. Based on the revenue, cost and sales guidance, we are also increasing our adjusted EBITDA guidance for CCR and CEIX by $5 million and $30 million respectively, again, using the midpoint.

The CEIX adjusted EBITDA guidance improvement also reflects better than previously-expected CONSOL marine terminal profitability and higher royalty income.

With that, let me turn it back to Jimmy to make some final comments.

[Jimmy Brock, CEO]

Thank you, Dave. Before we move on to the Q&A session, let me take this opportunity to lay out some key priorities for us. For CEIX, our priorities are very clear: de-risk the balance sheet. We made some very good progress since the spend, but we have more work to do on this front.

Grow opportunistically. Our capital allocation process has helped us identify some small, but higher rated return projects. We also recently formed an in-house business development team which consist of individuals from key verticals within the company, operations, marketing, land, permitting and finance. The team is evaluating a significant number of asset monetizations or investment opportunities.

Improved shareholder returns. As David mentioned, we will be rate-of-return driven. As we improve our rate of return and lower our cost of capital over time, we will create tremendous value for our shareholders. At all times, our internal projects will compete against shareholder repurchases as well as debt repayments which are subject to certain limitations.

For CCR, our number one priority is to maintain an attractive distributions with adequate coverage for all unit holders. Our second priority is to opportunistically from some of the projects that our sponsor executes FEAMC.

Finally, we will continue to delever the balance sheet and position ourselves to withstand the cyclicality and the commodity prices. While this was a great quarter for us, we have several attractive opportunities in front of us. First, our new export contract is kicking in during the second quarter of 2018 which will give us a pricing uplift on our export volumes. Second, the Enlow Fork Mine geology is improving, which should help us better control our cost. Third, the sulfur content of our coal is expected to further improve the '19 and '20, which should enable us to expand certain markets for our product and capture higher pricing. Fourth, with coal and gas inventories at significantly low levels, we expect to continue to see improving domestic contract prices for '18 through 2020. Finally, we have a management team and workforce that are highly motivated and excited to be a stand-alone coal company again. They continue to be highly productive and are looking for new innovative ways to reduce cost while adhering to our values of safety and compliance.

With that, I will hand the call back over to Mitesh for further instructions.

[Mitesh Thakkar, Director, Finance & IR]

Thank you, Jimmy. We'll now move over to the Q&A session. Mike, can you please provide the instruction to our callers?

[Operator]

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Mark Levin of Seaport Global. Please go ahead.

[Mark Levin, Seaport Global]

Great. Thanks very much. Congratulations on really one of the better quarters -- I think maybe the best quarter I can remember in a very long time from CONSOL. So congrats on that. Let me ask you a couple of questions. With regard to kind of just thinking about Q2 through Q4, obviously Q1 was huge, $150 million of adjusted EBITDA, but if I take the midpoint of your guidance, let's call the number around $400 million, it seems like that there's a fall off in Q2 through Q4. Is that a function of the net back contracts impacting the realized price by $5 in this quarter? How should we think maybe back Q2 through Q4?

[David Khani, CFO]

Yes. One, the net debt contracts are very strong in the first quarter. They could be strong in Q2 through Q4, but we obviously want to be very careful with weather because weather is important factor. The second thing as I would say, we have the export contracts kicking in that it takes the material pricing up as well; and then third is if you listen to my commentary, we are going to hopefully walk our guidance up over time. So as we outperform well, we should hopefully -- you should see the numbers up. You should be careful about -- we're thinking about what Q2 through Q4 is relative to Q1.

[Jim McCaffrey, Chief Commercial Officer]

Mark, this is Jim. Let me jump in a little bit, too. We target export contracts. In the first quarter, we shipped about $1.9 million tons of export. Only 200,000 tons of that was net crossover. As we look for the balance of the year, we expect to ship another 1.3 million to 1.5 million tons of net crossover at a $10 premium to what we shipped the first 200,000 tons. On the thermal side, we expect to ship similar levels to be around 5 million to 6 million tons as the end of the year of thermal sales and we would expect those to be $5 higher than we showed in the first quarter.

We expect some solid strength on the export front. Now on the domestic front, on the net back contracts, we gave a lot of color last time about how to take a look at depreciation of those contracts versus a base point of $32.50 a megawatt hour. The good news is we saw great results in the first quarter, but we've continued to see solid results into April and we're seeing some volatility in the power markets that we think will help us continue to promote solid, solid net back pricing. Now, will it be quite as strong as Q1? Perhaps not, but we expect solid performance from those contracts still.

[Mark Levin, Seaport Global]

All that leads me to the conclusion to David's last point, that maybe there could be some upside to where EBITDA guidance is. On the second point, just in terms of 2019, so just thinking it out a year from now, anything that you can say or color that you can give us on how to think about what pricing might look like? I realized the net -- but we don't know what the weather is going to be and what the net backs are going to do -- but just broadly speaking, how to think about where stuff is getting priced in '19 versus '18.

[David Khani, CFO]

Well, we talked about the new export contract we have and I don't think there's any secret that we need to deal with X coal. I think the market is aware of that now. As we look into '19 and we're seeing very consistent performance with pricing, me and my team have been traveling some of the expo [ph], we've been to four different areas of the world in the last quarter and we're seeing surprising eye-opening interest in our products. I anticipate that based upon export pricing, there will be a strong, if not stronger and I'm still excited about the net back pricing.

We look at the weather like the bottom cycle and we say, 'Hey, that's a big anomaly which drove pricing' but if you look at the last five winters, '14 and '15 both had strong periods; '18 have strong periods, so I'm going to suggest to you that '16 and '17 was the anomaly with specially weak winter weather. And even in those years, our net back pricing was at or slightly above the rest of our market pricing. I'm anticipating some more volatility in the marketplace based upon some increased economic activity. The fact that we've had some retirements for both coal and new and the home resiliency and price formation discussions continue -- all of that would benefit us in terms of where we see power pricing moving to.

[Mark Levin, Seaport Global]

That makes sense. Last question has to do with maybe one of David -- or definitely with one of David's comments with regard to the opportunities that you have. I think you mentioned, obviously looking for the highest return opportunities, whether it be buy backs as you get under 2x levered. But I think you also mentioned the bottle-necking opportunities. What's the opportunity there and maybe some of the internal stuff, some of the higher return internal projects that you have that you would highlight?

[Jimmy Brock, CEO]

Some of those, Mark, are things that we currently have under way now. Some of it is automation. We're using some automation with our shares underground that could increase our yield and reduce our cost to prep plan as well. Then we also have some of the other projects that we'll value and we look at all of these opportunistically. We may have some opportunities and you have to stay tuned to get into some of the METCO [ph] markets, peer metallurgical markets, those things that we have. That's what this BD team is working on, but we're just under way on that. So you have to stay tuned for those.

[David Khani, CFO]

Yes. Just note, what they'll do is they'll have two pushes to our forecast. One would be it could take our production op and it could take our cost down, so margins would improve. And these things will probably kick in, probably some point later this year into '19 and '20 as we deploy them because they have different time horizons when we put them in place. I'll just say the rates return are meaningfully above 30% or 40%. They are extremely high rates return.

[Mark Levin, Seaport Global]

David, are we talking like a million tons, two million tons? Any way to quantify what some of the stuff might mean?

[David Khani, CFO]

Yes. I would say more than a million tons and less than five.

[Mark Levin, Seaport Global]

Got it. Perfect. Thank you very much.

[Operator]

Next, we have Lucas Pipes with B. Riley FBR. [Operator Instructions]. Please go ahead, sir.

[Unidentified Analyst]

Ted [ph] here for Lucas Pipes. First thing, good job on the quarter.

[Jimmy Brock, CEO]

Thank you.

[Unidentified Analyst]

My first question is with inventories that's on the NAPP power plants below 20 days of burn and given the general demands right now, do you see the potential for any sales volume upside and if so, when would you expect these incremental domestic spots off to hit?

[Jimmy Brock, CEO]

I think that based upon natural gas storage, based upon the inventory levels that we see PJM, based upon natural gas demand, based upon a number of different factors, that there is going to be desire for NAPP cost upon pricing in the second half of the year. I also think that most customers that come out looking for it find it it's pretty scarce. I think NAPP coal is going to be very tight and I think that tightness could continue into '19 as well. I talked to Mark about net back pricing and export pricing, but traditional domestic pricing for the quarter was in the upper 40s and I think there's room for improvement there as well.

[Unidentified Analyst]

Okay, got you. Great. And now shifting to exports. How do you guys think the breakdown of thermal exports by geography will change going forward in the coming years? And where is the interest from new export contracts and mostly coming from today? Would that be India?

[Jimmy Brock, CEO]

Well, in 2017, we shipped 8.3 million tons of export coal -- 44% of that went to India and 35% of it went to Europe. The rest went to Asia and South America. As we look at our first quarter numbers and our first quarter, I think is a little imbalanced. We have 72% of our tons that we shipped go into India and 21% to Europe and the balance going to again, Asia and South America. I think that that balance will improve some or level up some as the year goes on, but I would expect to see continued strong demand for India. I spent 10 days in India in February. We visited over 20 different customers and like I said, the amount of demand we saw was pretty astonishing. When you're there, you get the feeling of India that this pet coke thing, sort of like match was in the United States. Nobody knows for sure it's going to happen, but everybody is taking steps to counteract in any way. And I think most people in India are very concerned about the Supreme Court continuing to reduce the limits on burning pet coke and all of that is going to be a big advantage for Northern App Coals.

[Unidentified Analyst]

Got you. That's good news. And then lastly, could you just offer maybe a little farther detail on the geology issues at Enlow Fork in the first quarter? Just perhaps a little bit more color? That will be all.

[Jimmy Brock, CEO]

Yes. We've had some fast-drawn intrusions on one of our long haul panels at Enlow Fork, it's nothing new. We've dealt with this for the last year or so. It has been a little more predominant than it had been previously, but the management team is on that, the management very well. We are continually moving there and it's less severe now than it was it is improving and then about mid-'19, we'll be out of that north end of Enlow Fork is where the problem is and we'll be moving into the new reserves. But it's something that we're managing now, they are safely and can partly [ph] moving through it and it's only going to get better as we continue.

[Unidentified Analyst]

All right. Well, thanks so much, guys, and great job on the quarter again. Thanks.

[Jimmy Brock, CEO]

Thank you.

[Operator]

Next with Nick Dromasic [ph] of Stifel.

[Unidentified Analyst]

Hi, good morning. Nick Charmer [ph] from Stifel. Question for you on the turkey regulatory front. When do you expect there to be a finalization regarding the sulfur content of the thermal whole there?

[Jimmy Brock, CEO]

You know Nick, that's a great question. Everybody I talk to keeps saying 'two more weeks', 'two more weeks.' It's going to happen. I think that the issue is simply this, Turkey today has an input sulfur limits. You can't bring coal into the country at any higher sulfur limit than 1.2%. That input limit is going to be eliminated. They're going to start looking at affluent limits, emission limits going forward and I think that what's going on is they're looking at individual plants, stations, based upon their level of ability to scrub and that's what's delaying the process. They're visiting every individual plant that burns coal in Turkey and I think they'll all have different emission limits, but the input level is definitely going to be eliminated and that is what has taken the extra time.

[Unidentified Analyst]

What do you think the market opportunity there is?

[Jimmy Brock, CEO]

I think in the very short term, the market opportunities, 2 million to 4 million tons, I think in the long term it can grow to 2x that perhaps. Again, it depends upon the individual burners, how they want to blend coals. You have a bunch of power plants over there that have been burning low sulfur coal for quite some time. They will need some help in terms of converting the high sulfur coal and we have a team, we've always had a team of combustion experts that have benefited us in terms of helping our customers burn our Northern App coals and that's why I say in the short term, it's a more limited number, but in the long term, I think we can get it expanded.

[Unidentified Analyst]

Okay. And then question on your contract book. It looks like you were slightly active in the market. Coming in from 70% to 74%. But can you talk about what you're seeing the RFP environments and if there's been any change in the competitive environment since there was some consolidation earlier in the first quarter?

[David Khani, CFO]

Like I mentioned to Mark, there are some customers coming out for spot business. No one is really out in the market for '19, but I'm convinced that there will be some opportunity to do some term deals as we roll into later in the year. I really think that our coal is going to be tight like I said. Right now, I'm keeping my powder dry as we take a look forward into '19 to '20. But I'm confident about being able to show [indiscernible].

[Jimmy Brock, CEO]

Yes. We're actually ahead of our normal contracted percentage at this time of the year.

[David Khani, CFO]

So stay tuned on that one.

[Unidentified Analyst]

Okay. It's all I had. Thank you.

[Jimmy Brock, CEO]

Welcome.

[Operator]

[Operator Instructions] Next, we have a follow-up from Mark Levine of Seaport Global.

[Mark Levin, Seaport Global]

Thanks. Yes, one other question that just occurred to me. CSX has talked about verbalizing their rate structure to try and incentivize more NAPP utility coal burn out. I realize that's an issue that the utilities would directly negotiate with CSX. But I'm just curious if you have any preliminary thoughts on what we might to expect to see there or what you expect to see there? Do you think CSX, that this could help NAPP burn or is this something that we shouldn't get our hopes up too much about?

[Jimmy Brock, CEO]

I think it's a little too soon to say about CSX, Mark, but I'm optimistic that they're talking about that. I'd say that that will benefit NAPCO burn. I just don't have enough detail to talk about it intelligently just yet.

[Mark Levin, Seaport Global]

Got it. And then the second question, you whipped my appetite on the met coal side. I know you guys earned significant amount of met coal reserves, I think some low vol reserves as well, some higher quality stuff. What are some of the options and thoughts you have around those reserves given the met market has obviously gotten a lot better in the last couple of years?

[Jimmy Brock, CEO]

We look at it in a couple of different ways, Mark. One is it definitely had some diversity to our portfolio, so we like that, pleased of it. And every dollar that we spend in capital obviously competes. So we do have some very high quality coal reserves in the met market. We're currently evaluating those. We could do a couple of things: one, we made mine those ourself. One of these probably would not be long well-mined, it will be a continuous mine-to-mine that we may want to JV with someone who has expertise and are better continuous miners than we are. That opportunity set is out there as well and then the other is it's in a market to who has the markets pretty nice right now, so it could be an opportunity to outright monetize it. All of those things are being evaluated.

[David Khani, CFO]

And we won't put a lot of capital in and so that we're not going to take a lot of commodity risk without having enough either contracted position or something. So we'll do it enough as called on low capital intensive way.

[Mark Levin, Seaport Global]

It makes sense. And how about M&A? Does M&A not just selling, but actually going out and buying some? Where does that rank in terms of the things that you've been talking about, whether it be the bottle-necking projects, some of the other internals? How does M&A look to you right now?

[Jimmy Brock, CEO]

I think we would continue to look at those. Obviously, we're open to everything, but evaluation is an important metric there. We would look at the cost to capital, do the due diligence and see which project returns the house-rated capital.

[David Khani, CFO]

For the risk that it presents. And again, it would have to be stuff that we understand and understand well before we'd ever take the change of doing any acquisitions. It might be mines as opposed to corporation.

[Jimmy Brock, CEO]

Yes. It could be a mine. But the one thing -- when you do an M&A, you got to make certain you know what you're acquiring. And we're seeing a lot of times you go through due diligence, you pick something up and you have to invest significant capital to get the numbers that you anticipated getting. So we've seen over the last five or six years, there hasn't been a lot of capital invested in coal mines, so that would be at the fore front when we start to due diligence to look at them. But again, it will come down to valuation and how attractive we think that return can be for us.

[Mark Levin, Seaport Global]

It makes perfect sense. Thanks very much. Appreciate it.

[Jimmy Brock, CEO]

Thank you.

[Operator]

At this time, we're showing no further questions. We'll go ahead and conclude our question-and-answer session. I will now like to turn the conference call back over to Mr. Mitesh Thakkar for any closing remarks. Sir?

[Mitesh Thakkar, Director, Finance & IR]

Thank you, Mike. We appreciate everyone's time this morning and thank you for your interest and support on CEIX and CCR. Hopefully we were able to answer most of your questions today. We are available to answer any follow-up question you may have today. We look forward to our next quarterly earnings call. Thank you, everybody.

[Operator]

Thank you, sir and to the rest of management team, also for your time today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care and have a great day.

[Jimmy Brock, CEO]

Thank you.