CONSOL Energy Inc

NYSE:CEIX

Earnings Call Transcript 2019-Q1

[Operator]

Good morning and welcome to the CEIX and CCR First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mitesh Thakkar. Please go ahead, sir.

[Mitesh Thakkar, Investor Relations]

Thank you and good morning, everyone. Welcome to CONSOL Energy, ticker CEIX and CONSOL Coal Resources, ticker CCR, first quarter 2019 Earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have laid out for you in our press releases or in our 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 can also find additional information on our websites consolenergy.com and ccrlp.com. In conjunction with today’s earnings release, we also issued a separate press release announcing the launch of our Itmann low-vol metallurgical coal project, which we will refer to on this call. 10-Qs for both CEIX and CCR are also now available on our websites.

With me today are Jimmy Brock, our Chief Executive Officer; David Khani, our Chief Financial Officer; and Jim McCaffrey, our Chief Commercial Officer. In his prepared remarks, Jimmy will provide a recap of our key achievements during 1Q ‘19 and provide specific insights on marketing and operation as well as the Itmann project. David will then discuss some macro trends, detailed financial performance for 1Q ‘19 and 2019 guidance for CEIX and CCR. During the prepared remarks, we will refer to certain slides that were posted on our websites in advance of today’s call. After the prepared remarks, there will be a Q&A session in which all three executives will participate.

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

[Jimmy Brock, Chief Executive Officer]

Thank you, Mitesh and good morning everyone. I am very pleased to announce that we reported a solid set of operational and financial metrics this morning despite the commodity price headwinds during the first quarter of 2019.

Before I dive into the key drivers of our financial results, let me take a moment to congratulate our team for a very strong safety performance during the quarter. The Pennsylvania mining complex employees improved their safety metrics by 70% compared to the year ago period. The central preparation plant and the CONSOL marine terminal continued their strong safety performance with an incident free quarter. I want to thank all of our employees for prioritizing safety above all else.

Let me now provide you with a brief overview on each of our key focus areas and highlights for the quarter. Our two main assets, the Pennsylvania mining complex and the CONSOL marine terminal, had strong operational quarters. Despite two long-wall moves during the quarter, the Pennsylvania mining complex delivered production volumes slightly ahead of first quarter of ‘18. CONSOL marine terminal’s first quarter ‘19 throughput volumes when annualized put us on track for a record volume year as well. Our marketing and contracting strategy was validated once again, as our diversified domestic and international contracted position enables strong sales that posted a modest 7% year-over-year decrease in average revenue per ton despite sharper 33% and 12% declines in average PJM West power prices and prompt month API 2 prices respectively.

On the financial front, CEIX took advantage of its improving credit profile and markets to lower its interest expense, expand liquidity, and enhance its flexibility through the refinancing transaction we announced in March. More importantly, during the quarter, we also lowered our total outstanding debt by approximately $100 million, a continued strategic priority that we are focused on since our November 2017 spin-off. For CEIX we have continued to reduce our outstanding debt. We are now in a position to shift towards disciplined organic growth. In that regard, I am pleased to announce we have received Board approval and are efficiently moving forward with our Itmann low-vol metallurgical coal project. I will discuss this in more detail shortly.

Now, let me review our first quarter of ‘19 operational performance in detail. Coal production at the Pennsylvanian Mining Complex increased modestly to 6.8 million tons in the first quarter of ‘19 compared to 6.7 million tons in the year ago quarter. The improvement was due to higher production at the Enlow Fork and Harvey mines, partially offset by reduced production at the Bailey mine. We are also seeing improved consistency at our Enlow Fork mine as geological conditions steadily improve. For its share of the Pennsylvanian Mining Complex, CCR produced 1.7 million tons of coal during the first quarter of ‘19, in line with the year ago quarter.

On the cost front, our average cash cost of coal sold per ton was $29.71 compared to $29.21 in the year ago quarter. The increase was largely driven by an increase in projects expenses and gas well playing activities, partially offset by reduced lease expense. Since the fourth quarter of 2017, we have seen modest inflation in the cost of supplies that contain steel and other commodities for which prices are strengthening as well in the cost of contract labor. We have been successful in managing these cost pressures and keeping our overall cost increase under our target 5% annual limit through productivity gains and automations as we have discussed in previous earnings calls. This quarter, we did more the same. The CONSOL Marine Terminal had a very strong first quarter of ‘19 with throughput volumes of 4 million tons, an increase of approximately 15% compared to the year ago period. Of note, during the first quarter of 2019, the CONSOL Marine Terminal posted the highest shipment levels of any terminal of the U.S. East Coast. The combination of our Pennsylvanian Mining Complex and the CONSOL Marine Terminal provides us with a strategic advantage which helps us to lock in longer term deals in the export markets.

With that, let me now provide an overview of the coal markets and an update on our sales performance and accomplishments. This was a turbulent quarter in the commodity markets. PJM West power prices which drive our domestic netback contract pricing was 33% lower in the first quarter of ‘19 compared to the first quarter of ‘18. As a result, we saw a significant decline in revenues generated from netback contracts compared to the year ago period. On a positive note, in 2019 our exposure to netback contracts is lower than in 2018. In the export markets, API 2 prices declined 20% during the first quarter of ‘19 and 33% through April 30 due to pull back in global LNG prices, weak weather related demand in Japan and Korea and softening demand in Europe due in part to an influx of Russian coal.

The good news for owners of CONSOL Energy is that the impact of our softening API 2 on our earnings was muted due to our prudent contract and strategy. As you may recall, we have a multi-year 14 million ton contract with fixed pricing through mid-2019 and callers through mid-‘20. We acted when export prices were attractive to help de-risk a significant portion of our revenues allowing us to protect that value for our shareholders. I am very pleased to announce this morning that we have now extended our current contract to lock in another 3.65 million tons of coal under the same cost for the second half of 2020. The incremental turns are split approximately 68% thermal and 32% cross-over metallurgical coal from the Pennsylvanian Mining Complex.

We also extended our take or pay contract at CONSOL Marine Terminal through the end of 2020 under the existing terms. For CONSOL shareholders this contract extension provides three major benefits. First, it provides significant pricing upside potential from current levels if API 2 prices improve while protecting against downside risk by maintaining a floor that is above with the current spot API 2 netback prices are. Second, it improves our contracted position for 2020 to 71%. This additional earnings visibility not only supports our existing share and debt repurchase programs but also supports our growth investments. Third, it locks in a strong export position for 2020, which now accounts for over 25% of our anticipated 2020 sales volume, while making sure that our CONSOL Marine Terminal revenues continue to stay strong.

The importance of this contract extension cannot be overstated at this time when global coal producers are finding it difficult to sustain their 2018 export levels. In essence, we believe that we’ve just cemented our position as one of the leading, exporter of thermal and crossover metallurgical coals from the U.S. East Coast. Let me now move to another very exciting part of our strategy: the Itmann project. As many of you may recall, we have been working on elevating the feasibility of our Itmann project for quite some time. After going through a rigorous capital allocation progress, I am pleased to announce that we have decided to move forward with the Itmann project. The Itmann project is expected to ramp up in 2021 and produce north of 600,000 tons of high quality, low-vol coking coal annually.

As Mitesh mentioned, you can find most of the details in the press release we issued this morning as well as our slide deck on slide number eight. But let me highlight some of the key benefits of this project. First, it is a high-quality product that will be serving a market where supply is tight. Itmann is expected to produce a high quality, low-vol metallurgical coal product. While we are starting to see several larger high-vol A and B projects being developed in the U.S., the pipeline for low-vol met coal projects is relatively light, and low-vol supply has recently come offline in Central Appalachia. Itmann is expected to fill this void. Second, it has a long life. Similar to the Pennsylvania mining complex, Itmann has a very long-life reserve. After the initial capital spending, we expect 25-plus years of production at maintenance capital levels.

Third, it adds diversity to our portfolio. The Itmann product expands our portfolio, which currently doesn’t include any low-vol met coal production. Over time, we expect our portfolio to consist of approximately 24 million to 25 million tons of thermal coal, 2 million to 3 million tons of crossover metallurgical coal and over 600,000 tons of low-vol metallurgical coal. Finally, the internal rates of return are very compelling. At sustained current met coal prices, we expect the project to generate around a 40% rate of return, and at the long-term consensus met coal price forecast of approximately $163 a ton for Australian premium low-vol coal, we expect project to generate an approximate 25% rate of return. Based on our analyses, we believe the returns on the Itmann project will significantly exceed our cost of capital even if we use a $150 ton met coal price.

In summary, I’m very excited as we move forward with the Itmann project.

With that, let me now hand it over to David to go over some of the macro trends and our financial performance.

[David Khani, Chief Financial Officer]

Thanks, Jimmy, and good morning. While we’ve seen softening of coal and natural gas prices during the past few months, I want to remind everyone about the benefit of our focus on sustainability we’ve been driving toward and highlighting on the last few conference calls. We are positioned very well to handle a weakening commodity price as our operations are well capitalized, our balance sheet is close to our debt target debt levels and our contracted position is very solid with duration. This is why we are comfortable with allocating capital toward modest met coal growth with our Itmann project. This is a controlled pace of capital spend and ties to our allocation process.

So, let’s talk about what we’re seeing out there in the marketplace. The demand for thermal coal has slowed down, slightly exacerbated by less favorable weather this winter. Also, as export prices have been strong, we’ve seen U.S., Russian and Indonesian exports increase. This is why we are very focused on building our domestic contract book in the second half of 2018, while others were focused on shorter-term high-priced export opportunities. Now we expect that over the next year, global export thermal coal shipping should recede. We also expect multi-year demand growth from new coal-fired generation under construction. Outside of these cyclical down-dips we continue to believe that high BTU, seaborne thermal coal has favorable supply demand dynamics.

As we have highlighted on Slide 9, coal fired generation capacity build out continued around the world driven largely by Asia. According to our analysis of data from IHS Markit, approximately 111 gigawatts of new coal fired capacity is under construction globally for commissioning between 2019 and 2024. Furthermore, an additional 300 gigawatts of new coal fired capacity is in the planning stages. We believe this bodes well for seaborne thermal coal demand particularly high Btu Northern App coal. We are seeing similar trends with other fuels too. LNG prices have recently come under pressure as new supply comes online in 2019. According to Wood Mackenzie, approximately 38 million metric tons of new LNG supply is coming to market this year and that is weighing on prices. However, Wood Mac also believes that LNG demand is expanding on a rapid pace and slowing supply additions in the next few years will create a deficit in the LNG market again.

So in summary, with significant coal fired capacity still being built in the LNG market moving back towards a deficit in 2 years to 3 years, we believe that seaborne thermal coal market will remain attractive for us. In the near-term, we have protected our revenue stream through our export contracts that we already have in place. Let me shift to the domestic natural gas where storage levels are very low, but have been filling quickly in the spring mainly from last year’s supply. However, we are continuing to see forced discipline being placed on the E&P industry which is driving down capital spending particularly in Appalachia. This capital discipline combined with the major pipelines is causing a meaningful shift down in natural gas production growth expectations this year into 2020.

Now let me move over to our financial performance where I am very pleased to recap the first quarter, give an update on our 2019 guidance. We will review CEIX first, then CCR. CEIX reported net income attributable to CEIX shareholders of $14.4 million which includes $19.2 million after tax loss on debt extinguishment related to the refinancing. Excluding this impact our adjusted EPS came in at $1.21. CEIX also reported adjusted EBITDA of $118.5 million and organic free cash flow of $48 million. This compares to net income attributable to CEIX shareholders of $62.4 million, adjusted EBITDA of $150.3 million and organic free cash flow of $93.8 million respectively in the year ago quarter. The decline in earnings metrics compared to the year ago period is mostly from lower PJM West power prices.

Our fixed price domestic and export contracts preformed well in the quarter. Jimmy highlighted the modest increase in unit costs which averaged about 1.7% in the first quarter of ‘19 versus the first quarter of ‘18. With lower prices and slightly higher costs our cash margins declined $4.10 to $19.67 per ton. We have multiple programs in place to help tamp down inflation. During the quarter, we generated $82.2 million of cash flow from operations and spend $34.2 million in capital expenditures resulting in $48 million of organic free cash flow. Our cash flow from operations included $18.6 million use of working capital as March was the heavier shipment month compared to February which moved some cash collection into April.

Now, let me update you on our leverage and liquidity position. After our first quarter ‘19 refinancing and debt pay down we have lowered our annual interest expense by $15 million, improved operational financial flexibility, extended maturities and boosted liquidity. What’s really important is that we have expanded our access to capital and continued to brand our company with key low cost capital allocators. As a result we have been reducing our cost of capital. Our leverage ratio sits around 1.7x and liquidity at $504 million. We expect to continue to generate nice free cash flow which will enable us to find Itmann, pay down debt and buyback stock.

This quarter we also recognized a new lease accounting which as we noted in the last quarter’s conference call, we recorded an asset and liability on our balance sheet which has no impacts on our bank covenants. Now this morning CCR reported net income of $15.2 million, adjusted EBITDA of $28.2 million and distributable cash flow of $17.3 million. This compares to $22 million, $35.1 million and $25.3 million respectively in the year ago quarter. In the first quarter ‘19 CCR generated $25.2 million in net cash from operating activities which includes a $2.5 million use in working capital and for accounting for $8.1 million in capital expenditures and $14.4 million in distribution payments, we reduced our outstanding debt by $1.5 million on the intercompany loan with CEIX. Nonetheless, CCR finished the quarter with $113.9 million of liquidity, a net leverage ratio of 1.5x and a distribution coverage of 1.2x. We believe the year-to-date distribution coverage, contracted position and low leverage on our balance sheet should provide added comfort to our unitholders regarding the long-term sustainability of our current distribution.

Now let me provide you with an outlook for 2019. As stated before, our guidance philosophy remains to measure the risk appropriately and attempt to improve upon our guidance through strong execution as the year progresses. We attempt to capture a multitude of risks through our guidance ranges that help us protect against unforeseen situations. This quarter was no different. For example, we recognized a weakness in the 2019 forward curve for PJM West power prices early on and set our guidance range appropriately. We also focused on shipping to top performing power plants in other regions and benefit from colder weather in some of those regions.

And while we beat consensus estimates in the first quarter, we are maintaining all of our current guidance ranges for our key operating metrics due to the weaker commodity environment. We are constantly working on internal projects to improve upon our base plan and to provide upside to our revenue, cost and EBITDA ranges. For capital spending, we are modestly raising our 2019 CEIX CapEx guidance range by $20 million to $30 million to $155 million to $185 million to reflect the Itmann project. The CapEx range for CCR remains unchanged at $34 million to $38 million. While we’re focused on improving our corporate values, senior management has also incentive compensation tied to free cash flow generation and total shareholder returns.

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

[Jimmy Brock, Chief Executive Officer]

Thank you, Dave. Before we move on to the Q&A session, let me provide some final thoughts to summarize the quarter and our execution strategy. First, we continue to strengthen the core of our business, which is the Pennsylvania mining complex and the CONSOL Marine Terminal. Both of these assets are running at very high levels of utilization and we continue to invest in them and support them while providing an adequate amount of capital to ensure sustainability for long periods of time.

From a marketing perspective, we continue to provide a backlog of sales and visibility for our mines to run at optimal production levels through our incentive contracting strategies. Second, we remain rate of return driven and take on projects that will improve the value per share for our owners. The refinancing transaction and the Itmann project went through the same filters and should drive long-term value creation. We are very excited about our Itmann project, which will provide us some diversification and a long duration, low-cost asset. Third, we continue to de-risk our cash flows to fund our capital return programs and growth initiatives. If we can lock in good value on the cash flows in the near-term, it reduces the overall risk to the enterprise and enables us to move forward with prudent investments in growth projects or/and buying back our shares or debt, all of which we consider to be long-term assets. We can achieve this de-risking through base-loading our mines, controlling our costs and locking in attractive contracts such as the recent extension of our export contract.

Looking forward, we are executing our plans and expect to deliver on our goals. We have an extremely dedicated and talented workforce, embracing technology and innovation to safely and compliantly deliver exceptional performance. Before I hand it over to Mitesh, let me provide some quick comments on an equally important topic: ESG. As many of you may know, we made two announcements in the first quarter to emphasize our ESG focus. In February, we announced the election of Sophie Bergeron as a new Director to succeed Pete Carpenter on the CEIX Board. I thank Pete for his counsel throughout the spin process and first year as a public company. Sophie brings a very diverse perspective to our Board. Among other things, she has very strong roots in mining engineering and operations. Her position as General Manager for Goldcorp’s Eleonore mine and our earlier services Xstrata adds unique experience to guide us on operating and continuous improvement initiatives. On behalf of the Board, I welcome her to CONSOL Energy. In March, CEIX released its inaugural corporate sustainability report that highlighted our principles, culture and initiatives that we prioritize about CONSOL Energy. For example, these initiatives include developing innovative technologies, enhancing employee safety and reducing environmental impacts. These issues are very important for us and our shareholders. We continuously strive to be at the leading edge on this front.

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

[Mitesh Thakkar, Investor Relations]

Thank you, Jimmy. We will now move to the Q&A session of our call. Operator, can you please provide the instructions to our callers?

[Operator]

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And this morning’s first comes from Matthew Fields with Bank of America/Merrill Lynch.

[Matthew Fields, Bank of America/Merrill Lynch]

Hey, everyone. Just want to ask about increased CapEx guidance for development, should we expect to see the same level of CapEx in 2020 as well given the continued development over that period?

[Jimmy Brock, Chief Executive Officer]

No, the capital guidance that we gave is a really 2-year project. It will start in the first year and then ramp up into 2021, but that is the total capital expenditure that we will have.

[Matthew Fields, Bank of America/Merrill Lynch]

Should we expect an overall company-wide $155 million to $185 million level for 2020 as well?

[Dave Khani]

We are not giving guidance for 2020, but I think to Jimmy’s point, I think we will have a higher CapEx spend on Itmann in year two and year one, but that does not mean that our overall capital number will be around the same. It could be down or could be up, we have to go through the capital allocation process for next year.

[Matthew Fields, Bank of America/Merrill Lynch]

Okay, got it. And then you mentioned sort of you are able to do this in maintaining your target debt levels, can you just remind us kind of what those target debt levels are?

[Dave Khani]

Well, we said on the last earnings call that we expected to have reduced our overall debt from the spend about 25% which would mean apply about another $50 million reduction of debt by the end of this year. We haven’t given you the 2020 level but I would just tell you that, that level will continue to trick down into 2020.

[Matthew Fields, Bank of America/Merrill Lynch]

Okay, great. That’s very helpful. And then I know that your bonds are not callable, but obviously there are very high coupon and they trade as if they might get called early, they don’t have a whole lot of RP capacity in them, so do you find an early take out of those bonds to give yourself a wider latitude for share buybacks and attractive possibility?

[Dave Khani]

We actually feel we have adequate RP coverage already and so we don’t feel like we are constrained by the RP basket of the second lien, but we will be very rate return driven with the focus of continue to de-lever. And so we will look at all pieces of our capital structure and determine how we are going to get there as well as including buyback stock and funding our growth initiatives.

[Matthew Fields, Bank of America/Merrill Lynch]

Okay, great. That’s it for me. Thanks.

[Jimmy Brock, Chief Executive Officer]

Thanks Matthew.

[Operator]

Thank you. And the next question comes from Michael Dudas with Vertical Research Partners.

[Michael Dudas, Vertical Research Partners]

Good morning gentlemen.

[Jimmy Brock, Chief Executive Officer]

Good morning.

[Michael Dudas, Vertical Research Partners]

I appreciate your efforts on ESG, I think it’s much more important as we move forward, especially from mining sector, so I think it’s well that you discussed that in your prepared remarks. Turning on Itmann, as you did the analysis what – can you just remind us of good, low-vol coal, what the type of market are you thinking about, have you done a market or – the analysis especially when you think about how you place your coal with top quality utilities – were there near the mine? Are you thinking similar with this type of coal or is it be just be more of a high-quality NIM market, especially some of the core holes outside the U.S., how to think about the positioning that with the timing and the opportunity to market the coal?

[Jimmy Brock, Chief Executive Officer]

Yes. I will take the first part of it and then turn it over to expert in the market, Jim McCaffrey, but when we were looking at the Itmann project and as I have mentioned in the remarks, we have done a lot of due diligence on the project. We drilled extra core holes to make sure that we had the quality aspects of the core data that we needed. And we think that it will easily fit into marketplace, it’s a very high quality coal. There is not a lot of it in the low sulfur markets, particularly with some coming off in Central Appalachian. And Jim, you have something you want to add to that?

[Jim McCaffrey, Chief Commercial Officer]

Yes. Mike, it’s a very high quality, low-vol coal. It’s coming in it should come in around 18. vol, 0.9 sulfur and 60 or greater CSR. So, we’ve been talking it up in the marketplace. We have a lot of interest both domestically and international. We’ve had some people suggest to us that they’d be interested in doing some term. But right now, with the level of interest we have, we don’t feel compelled to. We have to run out and time is something up right away. So, we’re going to keep our powder dry and try to make sure we maximize the price for the project.

[Michael Dudas, Vertical Research Partners]

That makes sense to me and my follow-up going to be for Dave. You’ve done a very admirable job of looking forward in the marketplace, positioning your contracting domestic, then export [indiscernible]. So how are you looking at the next 6 months, given we’ve seen a pretty strong downdraft. I know you mentioned that there’s hope in 2020 and 2021 to pick up on the thermal side. But how are you thinking about it? Are you being a little more patient in that marketplace and or are you getting set up to attack a certain market segment relative to others given where your coal pricing is now what it looks like in the medium term?

[David Khani, Chief Financial Officer]

You’re going to have to I guess stay tuned because I think we’re until we actually put the tons to bed. But I think from what we’ll see from a macro standpoint, to try to help you a little bit is, watching gas production growth slow within Appalachia as well as the target areas where we sell coal, we’re actually we’re starting to see a reaction to low API2 prices and starting to see particularly out of the U.S., slowing exports, and we will see continued production decline overall coming out of the U.S. and so, I think we see sort of the next sort of 6 months sort of a recovery in the fundamentals. And we’ll figure out how we contract after that.

[Michael Dudas, Vertical Research Partners]

You seem to be well positioned to take advantage of that over the next 6 months. Thanks, David. Thanks, gentlemen.

[Jimmy Brock, Chief Executive Officer]

You are welcome, Mike.

[Operator]

Thank you. And the next question comes from Mark Levin with Seaport Global.

[Mark Levin, Seaport Global]

Great. Thanks very much. So just a couple of quick questions. I guess the first one is, more-big picture. So, you guys put to bed an additional what 3.65 million tons of export coal, of which 70% was thermal. I guess the first question would be is how would you do that in an environment in which API2 had fallen as much as it had during the quarter? Kind of seeing other companies pull back a little bit. I’m just curious how or what was the reason or how you’re able to do it?

[Jimmy Brock, Chief Executive Officer]

Well, Mark, first of all, we already had the two-year contract that we had discussed. So, both us, our customer, our partner, we’re interested in extending it through the calendar year. We negotiated from the point of an enterprise kind of deal rather than just a specific deal. So, it includes the terminal as well. And we also we probably didn’t make it clear in our discussion this morning, but we also priced off of tons for the second half of ‘19 and I can tell you that the combination of thermal and met coal in the second half of ‘19, all said, will average over $50 for those coals for the year. So, 2019 is priced. There is no more un-priced coal in 2019. Beyond that, I think both Xcoal and us have a more positive view of the market than perhaps the current forwards indicating current forwards are in contango. If you look just 10 months ago, last September, the API2 was just $98. No one was forecasting that it would fall as quickly as it fell. And then finally, all during last fall, in discussions with our customer Xcoal and Dave and I, we talked about hedging as much as we could for ‘19 and ‘20. So, we strategically hedged that position when we had the opportunity to taking duration versus worrying about getting every nickel out of every time and that’s paid off for us.

[Mark Levin, Seaport Global]

It sure has. Let me ask you, I know it’s early, I want to talk a little bit about 2020 pricing relative to 2019 and tell me if I am thinking about this incorrectly, obviously PJM West power prices got hit very hard this calendar quarter, I think you referenced down 33% with weather in gas. So I would assume in 2020 just assuming normal weather or some type of recovery in that gas prices that you would get an uplift from PJM West, the other thing and I think it was referred to in the press release. I think you somebody mentioned along the way about being in lower sulfur at PAMC whereby you might be able to extract more met coal, so when you think about all the moving pieces, if we look at kind of the reported prices for Northern App for 2020, it looks like the prices have come down maybe $4 or $5 if you read what we believe or we believe what we read, when we think about all of these different pieces whether it would be domestic prices coming down or PJM prices just getting back to normal or the easy comparison as it were in more met, how does 2020 feel from a pricing perspective relative to 2019 at this point. And then keeping in mind you have committed 70% already?

[Jimmy Brock, Chief Executive Officer]

Let’s take your question in three parts one at a time. First of all on the netback prices, the PJM netback prices, we are now 33% this year, every other pace of our portfolio is up domestic, fixed domestic prices, domestic met exports, thermal export, met and everything was up. But the netback did weigh us down thus resulting in being down 7% in the first quarter. Now, we just didn’t get the path in the first quarter issue that we had last year. So I would expect that we will see normal pricing next year, I think there are some other things happening in the marketplace. But we are forecasting based upon the forward power curves and that’s the best I can predict. As far as the met coal, the last several years we have always been shipping like 1.5 million to 1.8 million. I think we will get to 2 million this year. I think we will see that in the following year that is partly due to our improved quality that we have been discussing. We have talked about that on the last couple of calls. And we are finally going to reach that area where things are better. As far as the general overall domestic coal market for utilities, I would like to tell you this is we have a strategic plan. And when we look at our overall portfolio, we feel we have a solid flow at 45 and we expect that if we execute our plan properly we will certainly be able to improve upon that.

[Jim McCaffrey, Chief Commercial Officer]

And Mark one thing, you stay there as we move into our new block of reserves at Enlow Fork into the East block reserves, the sulfur content does get lower, it will help throughout the lot of those reserves. And on top of that, the conditions improved as well, the geological conditions that we expect to be able to produce and have a better product come out of Enlow which will really help in our blend. And those remaining tons for 2020 will remain open and optimistic. And the greatest thing as we have an asset and a operation that is very flexible and lot of optionality to us to go deliver.

[Jimmy Brock, Chief Executive Officer]

I will go back to your previous question, the reliability of our operation also helps us kind to place the hedges that we placed to get the results that we need. So it’s great working with the team and you know it’s going to deliver.

[Mark Levin, Seaport Global]

That makes sense. And then my last question just for David, when you think about the cadence of EBITDA Q2 through Q4 maybe long, long moves and maybe some early thoughts on sitting here in the middle of almost I guess 10 days into May, how Q2 would look, what are the puts and takes versus Q1 from an EBITDA perspective?

[Dave Khani]

Yes. I will just say I want to be careful about going from quarter-to-quarter. I will just say normally you know that we have our normal vacation period in the third quarter so that generally hurts from a production standpoint. But otherwise I’ll just tell you that the other quarters are fairly normal, and obviously, we’ll be in part, the second half, we’ll start to get the benefit of the lower sulfur and maybe a little bit more of that.

[Mark Levin, Seaport Global]

Okay, great. Thanks guys. Appreciate it.

[Jimmy Brock, Chief Executive Officer]

Welcome, Mark.

[David Khani, Chief Financial Officer]

Welcome, Mark.

[Operator]

Thank you. [Operator Instructions] And the next question comes from Lucas Pipes with B. Riley FBR.

[Lucas Pipes, B. Riley FBR]

Hi good morning, everyone, and congrats on a good quarter and the Itmann announcement.

[Jimmy Brock, Chief Executive Officer]

Good morning, Lucas.

[David Khani, Chief Financial Officer]

Hi, Lucas.

[Lucas Pipes, B. Riley FBR]

I wanted to ask a little bit more about Itmann and kind of the strategic considerations that went into that announcement. So, is it, first, how did you evaluate that project versus, for example, increased share repurchases? Secondly, should we think of Itmann as kind of a one-off great project? Or is this potentially a bridgehead into greater met coal exposure? Thank you very much.

[Jimmy Brock, Chief Executive Officer]

Okay. Well, first, we’ve spent a lot of time strategically looking at Itmann. If you remember, at the very start of our company, we had three priorities that we wanted to deliver on. We delivered on the debt repayment. So, we’ve got our balance sheet in excellent shape to whereas we could go out and look at projects like this. And we put a rate of return on it. So, with the met prices, they’ve been pretty stable for the last two years. We think they’re going to remain somewhere around there stable. But we’ve built into our plan a lower price and the rate of return was still really good. Like I said, at $150 a ton, it’s still around 25% rate of return. So, we wanted to develop that block. It’s a really good long-duration asset of very high quality and we wanted to tie that into our portfolio to have some diversity. So, we’ve got now we have some low-vol metallurgical coal that’s in our portfolio, our sales portfolio. We have the crossover met and thermal as I mentioned earlier. And we think it’s one that we can go down and maybe add on to that. We’re going to be able to get the coal out; we’re going to be able to take it to market; there’s other reserves around us. And right now, with the reserve base we have, we could mine at Itmann for plus-25 years at that 600,000 range that we’ve talked about in the press release. So, we feel really, really good about the diversification it provides us, about the market opportunities we have and about the cost structure and how we can develop the Itmann project.

[David Khani, Chief Financial Officer]

And could this get bigger? Yeah, this could get bigger. There’s, opportunities in and around there to either expand the Itmann project as it is or other reserves in and around. So, yeah, you could see us over time getting bigger in met.

[Lucas Pipes, B. Riley FBR]

And that would be on the organic side. So, it’s not something that you may increase or bolster further through M&A? Or could M&A fit in on the met coal side on the back of Itmann?

[Jimmy Brock, Chief Executive Officer]

Well, I think to get to that 600,000 tons that we announced, you’re pretty much going to run three CM units. So, you could increase by putting a fourth CM unit in there, but remember, we always run to the market to see what’s there. But if you want to grow in much larger production volumes from that, you’d probably have to bolt something onto it. And quite frankly, we’ll be looking in the future, same as we have been, for the right opportunity to add something to it if it presents itself and it’s at the right valuation metrics.

[Lucas Pipes, B. Riley FBR]

That’s very helpful. Thank you. And then to switch on to the broader market, you are in a enviable position in terms of accessing the seaborne market, both from your cost structure, the Baltimore terminals, but when you think and you commented on this earlier on the call that you are seeing U.S. exports start to decline. So, if this current market were to persist and contracts start to roll off with some of your peers, where do you see kind of the soft spots in the market? I would appreciate your comments on that. And then, just in general, how quickly do you see the seaborne market recover? I would appreciate your thoughts on this. Thank you.

[Jim McCaffrey, Chief Commercial Officer]

I’m not sure what you mean specifically by soft spots, Lucas. But certainly, if you look at the API2 prompts today, the prompt is around $64 I think this morning, give or take a little bit. And the five-year prompt, in calendar ‘22, I mean, the 5-year curve in 2022 only gets us to about $73.50. So I think that there are players that will have considerable trouble continuing to deliver and that’s our thoughts about reduction and other U.S. exports and I think ultimately that becomes an advantage for us as there is less players in the market, more opportunity for us to deliver to that subset of international customers. We delivered over 2 million tons of export thermal in the first quarter to 13 different countries, 1.1 million went to India, there were 0.5 million went to Europe, the rest was scattered out. So I feel like we are very solidly positioned and I feel that in a long run we are going to have players drop out that’s going to be to our advantage.

[Lucas Pipes, B. Riley FBR]

That’s helpful. So you think this could shake out some of your competitors as contracts roll off and then you have a greater, larger market share following that, is that kind of the way you think about it?

[Jimmy Brock, Chief Executive Officer]

I think gaining market share in any market whether it’s the domestic utilities, the domestic met, thermal met or thermal export, it’s going to be key for us going forward. And I think that this is going to help create opportunities to do that.

[Jim McCaffrey, Chief Commercial Officer]

Yes. And then don’t forget that the export market is actually growing from our demand standpoint over time. And so put it all we see cyclical down turns and there is competition from LNG in moments in time that create down drafts here, but generally it’s growing and it’s growing about 1% to 1.5% a year on average.

[Jimmy Brock, Chief Executive Officer]

We believe in the demand out there, Lucas. So we think that the met is going to stay strong and there is not a tremendous amount of production and there is not a tremendous amount of inventory. So a smaller change in advance can change the market pretty quickly.

[Lucas Pipes, B. Riley FBR]

Got it, very helpful. I will jump back in the queue. I appreciate your color very much. Thank you.

[Operator]

Thank you. And as there are no more questions, I would like to return the conference over to Mitesh Thakkar for any closing comments.

[Mitesh Thakkar, Investor Relations]

Thank you. Thank you very much. We appreciate everyone’s time this morning. And thank you for your interest and in support of CEIX and CCR. Hopefully we were able to answer most of your questions today. We look forward to our next quarterly earnings call. Thank you everybody.

[Operator]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.