CONSOL Energy Inc

NYSE:CEIX

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to the CEIX and CCR Second 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, Director of Finance and Investor Relations. Please go ahead.

[Mitesh Thakkar, Investor Relations]

Thank you, Ben. And good morning, everyone. Welcome to Consol Energy and Consol Coal Resources second quarter 2019 earnings conference call.

Any Forward-Looking Statements or comments we make about future expectations are subject to some risk, which we have outlined in our press releases or in our 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 our press releases and filings to the SEC on Form 8-K. You can also find additional information on our websites, consolenergy.com and ccrlp.com.

With me today, are Jimmy Brock, our CEO; David Khani our CFO; and Jim McCaffrey, our Chief Commercial Officer. In his prepared remarks, Jimmy will provide a recap of our key achievements during second quarter of 2019 and an update on our major growth initiatives.

David, will then discuss our capital allocation strategy and the detailed financial performance for 2Q 2019 and our 2019 guidance. During the prepared remarks, we will refer to certain slides that we have posted on our websites in advance of today's call. After the prepared remarks, all three executives will participate in the Q&A session.

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

[Jimmy Brock, Chief Executive Officer]

Thank you. Mitesh and good morning, everyone. Today we reported a strong operational and financial performance for Q2 2019, despite the significant recent decline in commodity prices.

We continue to generate robust free cash flow powered by our differentiated marketing and operating strategy. Our innovative contract and strategy allowed us to improve our revenue per ton compared to the year-ago period. Even while spot commodity prices were materially lower.

On the financial front, we continued to rate of return driven and deployed most of our capital toward buying back our debt and equity securities rather than toward any of our other growth initiatives, as we believe those remains the most undervalued avenues per share value. Before I dive into our operating and marketing details, I want to recognize the strong safety performance of our team.

We continue to build on the momentum we generated in the first quarter of 2019 and delivered another strong safety performance during 2Q 2019. Our central preparation plant and the CONSOL Marine Terminal continued those strong safety performances with an incident-free quarter.

At the Pennsylvania Mining Complex, our employee safety performance was three times better than the national industry average, but was also improved by 30% compared to the year-ago levels, as measured by the number of reportable incidents.

Now, let me review our 2Q 2019 operational performance in detail. First, I will cover the PA mining complex and then the Marine Terminal. I’m proud to announce that our Harvey Mine achieved a record high quarterly production of 1.5 million tons during 2Q 2019.

At the Pennsylvania mining complex, we produce 7.2 million tons during the second quarter. While this was a 500,000 ton decline compared to the same period a year-ago, the decrease was mostly driven by the impact of an additional longwall move and a slower recovery followed the move, which covered more than five times the normal distance as we progressed to new area of the mine.

On the cost front, our average cash cost of coal sold per ton was $31.07 compared to $26.99 in the year-ago quarter. This transitional increase in the cash cost of coal sold was primarily driven by additional equipment, rebuilds and longer overhauls due to the timing of longwall moves and panel development. We also saw a slight increase in maintenance and supply cost as a result of a slower start up after the longwall move.

Despite a difficult comparison to the year-ago period, we expect our second half 2019, cost to improve and keep us within our previously announced guidance range.

For its share, CCR produced 1.8 million tons of coal during 2Q 2019 compared to 1.9 million tons in 2Q 2018. The CONSOL Marine Terminals continued to report a strong operating performance with throughput of 3.7 million tons. Revenues were in line with the year-ago quarter at $16.7 million. While production costs were improved by approximately 600,000.

As previously announced, CMT has a take or pay contract that yields approximately $15 million in quarterly revenue through 2020. This is a very steady, but strategically important business for us, and one of the key drivers of our differentiated market strategy.

During our annual maintenance shutdown, the terminals successfully completed a major project to replace its rotary dumper, which is a critical piece of infrastructure and had been in operation for more than 35 years.

Our investment in the new dumper helps us to ensure that the terminal is well positioned to reliably serve growing export markets for our coal going forward. With that, let me now provide an overview of the coal markets and an update on our sales performance and accomplishments.

The commodity markets have been under a lot of pressure since the beginning of this year and that trend continued to Q2 2019. Compared to 2Q 2018, average Henry Hub natural gas prices, PJM West power prices and Prompt Month API 2 thermal coal prices witnessed declines of 10%, 27% and 35% respectively.

Having said that, our own contracted position bought this trend. This morning we have reported that our 2Q 2019 revenue per ton improved 0.4% compared to the 2Q 2018. This is a testament to our prudent contracting strategy that is based on derisk and our revenue and production profiles while walking an attractive returns for our business.

That could mean that we may not be able to perfectly choose the top or bottom of the commodity prices, but in aggregate, on a risk adjusted basis, this provides a more sustainable business model. We continue to maintain flexibility in our playbook by getting exposure to a well diversified customer base. Fixed price domestic customers account for 40% to 50% of our customer base, followed by exports at 30% to 35% and domestic customers with net back power prices at 20% to 25%.

This has worked out very well for us. Providing us a good balance to our portfolio. For instance, in 2018, net back power contracts were top performing contracts. Pricing on those contracts has declined 21% during 2Q 2019 versus to 2Q 2018. Reflect on the decline in the PJM West power prices.

On the other hand, we are doing very well under our fixed price domestic contracts as well as our export contracts and we are seeing higher prices in 2Q 2019 compared 2Q 2018 as a result. Despite the swings and commodity markets, we continue to innovate and execute our strategy. We recognize that several of you are concerned about ongoing price declines in the thermal coal markets.

Usually, we do not disclose pricing trends for contracts, but we want to provide some perspective here. We completed a major export contract extension in Q1 of 2019, that added an additional 3.6 million tons for 2020 volumes, with a floor price above $45.52 per ton, which was previously disclosed 2017 average revenue per ton.

We recently added a significant multi-year contract with a Blue chip domestic utility for the 2019 through 2021 period. These new tons were priced favorably when compared to published markets for Northern App Coal and has [Technical Difficulty].

These moves, along with other smaller customer wins, puts us in a very comfortable 80% contracted position for 2020, assuming a 27 million ton production run rate. If you look at Slide six in our presentation, which compares our contracted position to other producers, we believe we have one of the best revenue visibilities out there. We still have some work to do, but I'm very happy with what we set today heading into the fall contracting season.

On the export front, we continue to gain market share. For 2019, we are planning to ship around nine million tons of our coal into the international markets, of which we expect 25% as crossover met and 56% has gone to India. Compared to 2018 levels when we shipped 8.1 million tons into the international markets, we are expecting to grow our crossover in Indian shipments each by double digit percentages.

Both of these should continue to be a growth path for the Pennsylvania Mining Complex coal business for 2020 and into the future. Specifically on the seaborne thermal coal front, we continue to believe that India would drive growth in seaborne thermal coal demand, and that is where we are focusing our efforts. Let me now provide an update on our growth initiatives.

The Itmann project. On a macro level, metallurgical coal continues to be a growth area for the coal industry. According to Wood Mackenzie, global seaborne demand for metallurgical coal is expected to increase by 35% in 2040 compared to 2019 levels.

Furthermore, if you look at Slide number nine, Wood Mackenzie is forecasting, a shortage of premium low-vol coal. Most of the plant production growth is happening in semi-soft coke & coal and other lower tier coals. There is a smaller top-line of low-vol coke & coal projects. These bodes really well for our Itmann project which we believe will serve that need.

Furthermore, we are now seeing met coal prices to climb. And several coal companies have filed for bankruptcy. While the industry is going through channels, the timing of our Itmann project will play in our favor. It allows us to have the best and most talented people without being up to labor cost.

We are also finding an attractive opportunities to buy equipment at cheaper prices, which will lower our capital spend. This is especially important when you are building a mine, an infrastructure that is planned to last for about 25-years and is designed to withstand multiple commodity cycles. I’m very pleased to announce that we have achieved several milestones since we announced our Itmann project on the last earnings call.

First, we received all the permits necessary for mine development, which allows us to move forward which is our preparation and construction activities for the mine during the third quarter of 2019. Second, we also began preparing equipment for the first of the CM development sections. Finally, we hired an experienced general manager with a strong safety record to complete the project implementations and eventually lead the operations.

Even though we have a deep bench of senior mine managers within our existing operations. We decided to select an external resource who brings us smaller mining complex mindset with specific expertise in room and pillar mines. We will combine CONSOL's core values of safety and continuous improvement with the new GMs best practices to get the best of both worlds.

One interesting, though often forgotten aspect of the Itmann project is its scalability. Itmann holds a significant reserve base for a Central Appalachian and CM mine and there are several other avenues of growth around it as well, which we can tap into opportunistically if we want to scale it little further.

I'm encouraged with the progress we have made so far on the project. Let me now provide you with a brief update on our OMNIS project, which involves developing a coal finance recovery facility at the Pennsylvania Mining Complex.

During the quarter, our project partner, OMNIS Bailey LLC secured financing for the first 25 ton per hour module of a coal farms refinery at the Pennsylvania mining complex, Central Preparation Plant. Site preparation and foundation work began in June and we expect construction of the first commercial scale module to progress through the second half of 2019. Startup is anticipated in the first part of 2020.

Successful completion of the OMNIS project, which ultimately seeks to construct eight such modules, will help reduce CONSOL's environmental footprint while providing us with additional high quality source of revenue and potential CapEx reduction benefits. I’m very excited to see how this technology take shape and changes the narrative on the coal space.

With that, now, let me hand it over Dave for the financial update.

[David Khani, Chief Financial Officer]

Thanks, Jimmy, and good morning. I will first go through our capital allocation process and then provide an update on our second quarter results and guidance. At the time of the spin, our immediate mission was to delever the balance sheet and derisk our cash flow profile.

We achieved both through aggressive debt reduction and focused contracting efforts. Earlier this year we fine tune our mission and began taking initial steps to grow our business and increase shareholder returns.

Accordingly, we announced our Itmann project and are now accelerating our share repurchase program. Our capital allocation process continues to be driven by creating a broad set of capital deployment opportunities and then spending on what we believe will be the best risk adjusted rate of return.

Our adjusted net leverage ratio now stands at 1.4 times adjusted EBITDA and our liquidity stands at approximately $500 million, which includes $155 million of cash on hand. While we will continue to pay down debt every quarter, we are planning to deploy surplus cash to further improve our corporate rate of return.

First, just as with our investors, the timing of entry into a project is important for us as it impacts a long term rates of return. As Jimmy noted, as many coal prices decline we have the opportunity to lock in savings on certain aspects of the Itmann project. This lowers the break even costs improve returns and lowers the payback period.

The project has an approximate 25-year life and we will go through multiple commodity cycles. As Jimmy mentioned we can be very measured in our approach to Itmann's capital spend. Dialing it up or down based upon market conditions and the scale we want to achieve.

Second, we spent $35.4 million in CEIX common shares repurchase through the second quarter of 2019. Our share price is much lower today than at any time since immediately after the spent. As we accelerate share repurchases, we will also lower the cost basis under our share repurchase program and our shareholders will benefit from owning a larger portion of the company.

Finally, referred to Slide four, which highlights our financial performance since the spend and also the value of our securities. The key takeaway here is that since the spend our last 12 months adjusting EBITDA has increased 20%, our net debt has decreased by 22%, and our net debt to adjusted EBITDA has decreased by 1.8 times.

We took advantage of the market opportunity and lowered our weighted average cost of debt by 76 basis points. Therefore, financially, we are in much stronger position than we were at the time of the spin. However, our share price has recently dipped below the spin price, which reflects a significant disconnect with our fundamentals.

The management team recognized this disconnect and not only deployed 100% of the organic free cash flow net CEIX shareholders generated during the quarter, but also some cash from the balance sheet to repurchase our second lien debt and undervalued common shares.

CIEX board has increased our repurchase authorization to $200 million from the previous authorized $175 million. We now have $112 million currently available under this authorization, which is more than 20% of our equity market capitalization. With that now, let me recap the second quarter and give an update on our 2019 guidance.

We will review CIEX first, then CCR. CIEX reported net income attributable to CIEX shareholders of $43.3 million or $1.56 per diluted share. CIEX also reported adjusted EBITDA of $112.9 million and organic free cash flow of $34.8 million.

This compares to net income attributable to CIEX shareholders of $45.2 million; adjusted EBITDA of $136.3 million and organic free cash flow of $128.2 million respectively in the year-ago quarter. The decline in an earnings metrics compared to the year-ago period is mostly the result of lower PJM West power prices and lower sales volume.

Our fixed price domestic and export contracts performed well in the quarter. During the quarter, we generated $83.6 million of cash flow from operations and spent $48.8 million in capital expenditures, resulting in $34.8 million of organic free cash flow. Now, let me update you on CCR.

This morning, CCR reported net income of $14.4 million, adjusted EBITDA of $27.6 million and distributable cash flow of $16.8 million. This compares to $19.4 million, $33.6 million, and $22.3 million respectively in the year-ago quarter.

The second quarter of 2019. CCR generated $21.9 million in net cash flow from operating activities, after accounting for $10 million in capital expenditures, $14.4 million in distribution payments, we borrowed $3.5 million in the intercompany loan with CEIX.

During the quarter, CCR had a negative cash change in working capital $5.3 million, which resulted in borrowings on the intercompany loan. Nonetheless, CCR finished the quarter with $110 million of liquidity, a net leverage ratio 1.6 times and a distribution coverage ratio of 1.2 times.

We have also previously announced that all of the CCR subordinate units owned by CEIX will convert on a one for one basis to common units on August 16, 2019. We believe the year-to-date distribution coverage, contracted position and low leverage on our balance sheet should provide added comfort to our unit holders regarding the long term sustainability of our current distribution.

Now, let me provide you with an outlook for 2019. As state before our guidance philosophy continues to measure risk and capture a multitude of outcomes in our guidance ranges, which protects us against unforeseen situations. 2019 is a reminder of this.

Earlier this year, we baked in a significant decline in the power prices that affect our netback contracts. To help guide the midpoint of our ranges and then stressed it even further to set the lower end of our guidance range.

As many of you aware, average PJM West Power Prices are down 30% year-to-date through June, compared to the same period in 2018, a decline much deeper than the power before suggested when we set the original guidance ranges.

As a result, we are adjusting our revenue per ton guidance to $47 to $48 from $47.40 to $49.40 per ton. The new guidance range reflects a 27.47 megawatt power, PJM West power price instead of a $30.50 megawatt hour used in the previous range. To reflect this new range for revenue per time, we are narrowing CCRs adjusted EBITDA guidance range to $95 million to $103 million from $92 million to $115 million.

For CIEX, the CONSOL Marine Terminal is tracking toward the higher end of the guidance range. So we are improving its EBITDA range to $42 million to $45 million from $40 million to $45 million. CIEX is also seeing better than expected royalty income, which helps the overall CIEX EBITDA guidance. Summing it all up we are tightening CIEXs EBITDA guidance to $390 million to $420 million from $380 million to $440 million.

We are constantly working on internal projects to improve our base plan and fight upside to our revenue, costs and EBITDA rangers. As Jimmy noted earlier, domestic and export thermal coal spot prices have been under significant pressure since the beginning of 2019. We recognize this and this has raise several questions about our 2020 contracted position and more importantly, pricing. Let me provide some perspective around this.

First, assuming the 27 million ton run rate, we are approximately 80% contract for 2020 or 21.4 million tons. Approximately 34% of the contracted tons are earmarked for the export markets and have a pricing floor above $45.52 per ton. Another 20% of the contracted tons are linked to our net back power prices.

Given that 2019 realizations are on those contracts are close to the floor price. We could see an uplift in pricing on those tons if power prices normalize next year. The remainder of our contracted coal is in the domestic fixed price market where prices have been relatively stable.

Putting it all together, we do not expect to see a material decline in our per ton revenues in 2020 compared to 2019. Consistent with our past strategy we will provide more granular revenue per ton ranges when we provide the rest of our 2020 guidance, typically with a fourth quarter 2019 earnings release.

Now second, on the cost front, we are seeing several positive trends that we expect to create tailwinds for us in 2020. First, inflationary pressures are beating on raw materials we purchased. Second Enlow Fork Mine recently commissioned a new portal which will reduce the travel time of our miners to their assigned working areas.

Third, the second half of 2020 and Enlow Fork will enter a new reserve area, which will result in lowered development costs going forward. Now, finally, on the capital spending front, we have significant optionality control the pace of spend, particularly with regard to our growth projects such as Itmann.

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 do not believe that there has been a significant fundamental change in the strength of our business in the last six-months. We continue to execute our plan and deliver results for our shareholders. Challenges have always been a part of the mining business, and coal is no different.

Commodity prices have fluctuated and have had a modest impact on our 2019 performance, but our operating and contract and strategy has significantly mitigated the impact of the decline in commodity prices. Our best marketing tool is the quality and reliability of our top-tier operations and the security provided by stable cash flows and financial stability.

Domestic customers and the risk managers base that security. On the export front the quality of our export terminal and our operating consistency enabled ESCO to confidently head significant tonnages with the knowledge that our team will deliver.

Second, as Dave mentioned. We are in a very good shape from a balance sheet and cost of capital perspective, compared to when we lost as an independent Company. We believe our contracted position is among the best in the industry and that significantly reduces the risk of the balance sheet. Every single quarter, we are generating free cash flow, repurchasing our debt and de-risking the balance sheet.

Finally, at CEIX, we have nearly $500 million in liquidity of which a $155 million or nearly 30% of our equity market cap set as cash on the balance sheet. The management team and the board both recognize that our shares are significantly undervalued given the revenue visibility we have. Accordingly, we will be more aggressive and bump back our shares in the second half of the year.

With that, let me hand it back over to Mitesh for final instructions on Q&A.

[Mitesh Thakkar, Investor Relations]

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

[Operator]

I sure can. [Operator Instructions] Our first question comes from Michael Dudas with Vertical Research. Please go ahead.

[Michael Dudas, Vertical Research Partners]

Good morning, gentlemen. Two questions. First maybe further observations on the thermal coal market. You know, you have had some very good supplemental slides that you have put out this morning. How long before you think we start to see a turn in supply demand dynamics internationally?

And secondly, how much more difficult will the coalfields be relative to some of the recent bankruptcies and how do you look at that relative to your internal growth production, but also your, as I agree, is significantly undervalued share price given that the disconnect?

[Jim McCaffrey, Chief Commercial Officer]

Well, Mike guess is, Jim. I think that Jimmy discussed that in his comments already. First of all, on the domestic coal front, you know, 40% to 50% of our portfolio is going to be put there. And our recent negotiations added in some Blue Chip - we take some blue chip business to our portfolio. But when we look at how that, that business was priced.

It was priced favorably compared to what you may read in any of the rags. So SNL or Coal Desk or IHS. So while I'm not prepared to say specifically where it ended up because we have ongoing negotiations with other players, we were relatively pleased with that stability and Dave discussed that some too.

On the export side, you know, it's been a tough year for API 2, but certainly at the end of June we saw a complete reversal in the API 2 curve driven somewhat by weather in Europe in the summertime. Now, there is still some inventory issues.

The ARA largely due to [indiscernible] being as navigable as it had been in the past due to lack of rain over the weather and then the extreme heat in the summertime. But we expect that to clear up as we get into the fall and we think if we get a rival winter, especially some early weather, that we will see the API 2 stabilize relatively quickly.

So, you know, we have protected our portfolio in terms of the export market and Jimmy covered that pretty well in his remarks, but just to be clear, we have 7.1 million tons of export business that is put to bed with the floor of the color is where, we are going to be - the floor of the color and that floor of the color has represented by what our price was in 2017, because Jimmy said it was $45.52.

So, that 7.1 million tons is hedged and will be priced at a level at or above that floor. Along with that Jimmy also said in his comments that we have an ongoing take or pay deal at the terminal that also goes through 2020. So those two deals kind of go hand-in-hand. Then finally, the last thing on terminal pricing is our power net back price.

Now, we have been involved in these power contracts, I have talked about them several times in the past. Since 2012, and we have discovered that over time they represent the market, although there are been times when they have been above market and times like this year, when they have been below market.

When we look at those power prices, in 2018, those power prices, those power prices and power price contracts contributed about $2 a ton across our entire portfolio. This year were just the opposite. We are down about $2 a ton as compared to what we had forecasted.

But as we look at the power markets, they are running in correlation with the gas prices. The gas prices have been very low so far this year. But our expectation is as with weather and as we listen to many gas companies released their earnings, everybody is talking about pulling back on their production, living within their cash flow.

So we expect to see some increase in the gas price next year, which we think will improve from where we are at on the power net back prices. So that is the thermal market for us.

[Michael Dudas, Vertical Research Partners]

Excellent, excellent review, Jim. And just maybe a quick follow up, maybe for Dave. Maybe can elaborate a little bit more on the dynamics of being able to governor spending on it, in scale and where you are relative to, what you announced three months ago and doing the analysis 12-months ago and as I was interest on those cost savings that might impact the long term rates return. How significant real are you seeing some of that kind of already or is that something you expect as you move through as you get through procurement and labor rates?

[Jimmy Brock, Chief Executive Officer]

Yes, Mark it's Jimmy, I will take the first part of that. As I said, so far, we are pleased that when we are with it. And we do have the ability. You know, we are excited about it, man, because it's going to diversify our portfolio that - in time tensions have going in there. We think we can go in at a lower cost of capital than some of the other investments we can make in some of the other M&A opportunities that we looked at.

So some of the cost savings that we are seeing already because of the availability and, some challenges in the mining issue, we are able to pick up some used mining equipment that is in very good shape. I mean, we have sent our maintenance personnel, our operators there to look at it and that is, of course, saves us from purchasing brand new equipment.

So we are seeing a cost savings there. The other thing is we have been very methodical about where we enter the mine to make sure that our reserve plan and mining activities are laid out to the lowest cost possible.

So we are excited about that as well and then as far as scaling up or down when you start looking at capital expenditures, if the market's not there and we get to a certain point, then we can wait before we start, all of our permitting is done now to allow us to face up, to start to site preparation and then we began working on a preparation plant and the refuge area up there.

So, those are exciting times. We do have a better variability, when we talked about scaling that up, their reserves that we are very familiar with that are located around us. But to start with, we have a big enough reserve base to operate there for, 25-years, that is 600,000 tons a year.

So, we feel pretty good about Itmann, we will continue to monitor that. But again, every capital dollar we spend will go through our capital allocation process. So therefore, the highest rate of return will get those capital dollars.

[David Khani, Chief Financial Officer]

And just, you know, we give you projections, it's obviously our intent to try to beat those projections, in this, I just say this market environment as commodities have come down, creates opportunity, better opportunity for us to come in and beat those projections.

So, I would just say we are not going to give you any updated guidance, right now. I think it's way too early, I just say that, we are in a position now where we feel even better about the Itmann project than when we put the economics together from all the basic capital and stuff. So, I just say stay tuned.

[Michael Dudas, Vertical Research Partners]

Okay. Thank you gentlemen. And keep up the good work.

[Operator]

Our next question comes from Daniel Scott with Clarksons. Please go ahead.

[Daniel Scott, Clarksons Platou Securities]

Hey, thanks. Good morning, guys. And nice job on the quarter. Clearly, your contracted book is a differentiator for you against some of the other players in the space. So I just want to draw into that a little bit. On the exports side as you look to next year. I think you are talking about, doing about nine million tons this year. What is the total level you are thinking for next year? And is it that mix of 25% crossover and over 50% India? Is that going to be similar or increase? How do you look at that?

[David Khani, Chief Financial Officer]

Well, you know, right now. Daniel, we have 7.1 million tons that are hedged for the year. So, often times, we still, I will go away from the exports and [indiscernible] and I will come back. Our open tons, we still have some domestic contracts that we feel are very key contracts for us and important and we expect that we will get those contracts, you know, based upon some of the stuff that Jimmy covered in his remarks.

So, well, once we get those contracts we will look and we will be probably close to 90% or over 90% . So, if we are successful. That last 10% them will always take us to arbitrage recently that has been export.

If it appears to be export again, we will go to their and you know, one thing that we have talked about over the past couple of calls that are now becoming more and more clear is that Enlow Fork as moved into a new area in the mine were the quality is considerably better than where they have been the past.

Over the last few years, we have only been able to do 1.15 million tonnes, 1.6 million tons a year and crossed over a met market. We expect to be able to increase that to 2.5 million to 3.5 million in that range. So that is where we expect to close the GAAP on the final piece of our portfolio for 2020.

[Daniel Scott, Clarksons Platou Securities]

Okay, that is helpful. And then on the domestic side, do you think that you will skew more or less toward these power price tied contracts versus fixed price, going forward?

[Jimmy Brock, Chief Executive Officer]

I think in general, we are about where, we are going to be - we have discussed them with some other people. We have one of the customer that was on a net back contract - through 2018. They have elected to go to fixed price contract that is where we negotiated with them this year.

So that took our total down a little bit in the 5.5 million ton to six million ton range. I don't anticipate that will do anything for 2020 in that area. But, we are always looking for ways to better innovate our contracts to benefit both us and our customers. And we have plenty of ideas on how to do that. So stay tuned.

[David Khani, Chief Financial Officer]

Yes, Mike. That is one of things that we debate a lot among ourselves internally as what percentage do we want associated with his power prices. Those have been a very favorable force in the past. And I will tell you, on an annualized basis, they normally outperformed the debt from the domestic market.

I will get somewhere close. But we want those, as Jimmy mentioned earlier, we want them to be a win-win for both sides. And the main goal there is get them to a higher capacity factor where those plants are burning.

[Daniel Scott, Clarksons Platou Securities]

Okay, great, great. And then one last question. Maybe to kind of help some of the fears out there about API 2 price weakness. Can you talk about how your call, which is a huge BTU premium per pound versus, kind of API 2 specs. How that is holding up in a falling price environment, is it outperforming, helping it to coal to be little stickier in the market?

[David Khani, Chief Financial Officer]

Well, we have had good - because as we shift to 12 different countries in the first half of the year, Daniel. And again, quite a bit to India to 2.3 million tonnes to India so far this year. And we expect a strong second half to India.

I mean when you look out competitive coal, Illinois basin for example they have really strong struggled with export this year because of the conditions in the Mississippi the fact that the draft is not so good in the delta for load-out then you know then, as you mentioned lower Btu higher just transportation it's been a real killer for them this year.

So they are just not as competitive as they have been in the market before. But you know what one thing Jimmy said in his remarks about the quality of our operations, how reliable they are I mean that gave - that gives our customers confidence that they know that we are going to do what we say we are going to do and that really enabled us to work with x-cop to secure these hedges and that is really the main differences in our portfolio today.

[Daniel Scott, Clarksons Platou Securities]

Yes, and just let me sorry to follow up to that one point there I think it was alliance on their call talked about how you don't be so fixated on API 2 for exports when there is a lot of coals going other places besides Northern Europe think more of a blend API 4 for as well. Is that a fair assessment you guys well given your India exposure?

[Jimmy Brock, Chief Executive Officer]

Yes, when you look at India you are really compared to the [indiscernible] price more than you are to the API 2.

[Operator]

Our next question comes from Mark Levin with Seaport Global. Please go ahead.

[Mark Levin, Seaport Global Securities]

Great, thanks. A couple just really quick ones. On the crossover met which looks like it will be a pricing tail wind in 2020 or 2019. Still correct to think about that pricing maybe 10% to 15% above NAPP thermal or is there a more updated way to think about that?

[Jimmy Brock, Chief Executive Officer]

I think in the past, Mark, I have said 5% to 10% above NAPP thermal. I will still stick with that, you know perhaps we will do a little bit better than 10%, so - …

[Mark Levin, Seaport Global Securities]

Okay fair, enough. And then with regard to India in 2020. I know IMO 2020 is going into effect and I know there is some concern early some articles out there talking about a surplus of the fuel oil. Do you expect that to have any impact on your ability to sell NAPP coal, IMO 2020 your ability to export NAPP coal into India as a consequence to IMO 2020?

[Jimmy Brock, Chief Executive Officer]

I don't expect any difference, I take it depending on how this all works out that it will work out as the past due is what I'm hopeful. There is a lot of confusion on market place about IMO 2020. I'm sure you know that Mark. So I think I don't anticipate a big effect on our export times, but there could be a pass through there to the customer.

[Mark Levin, Seaport Global Securities]

Got it and then on, David, when you talk about the OMNIS project in particular, maybe some of the capital that goes above and beyond maintenance. Can you maybe talk about how that could translate into revenues, EBITDA, free cash flow, in 2020 and beyond? Thinking about stuff maybe beyond Itmann?

[David Khani, Chief Financial Officer]

So, once the first commercial project is up and running as Jimmy mentioned, they are going to go and build another seven. OMNIS is basically putting up about 85% of the capital and for us we are going to be spending some capital probably more next year than it would be this year.

Putting some infrastructure in place, with the logistics of shipping those tons and we talked about in the past that with all eight running if they run properly that creates about 1.5 million tons of incremental higher B2 lower sulfur coal and which will see how we will market it, either as a thermal or is into a metal one.

So and we split some of that with OMNIS was putting a lot of the capitol front. So it will create a nice, very long revenue stream for us that you think about could you start to really kick in, at some point in 2020 and then would wrap up as its been put on the other - get the others, our plans up and running.

[Jimmy Brock, Chief Executive Officer]

Yes, Mark, The big thing about the OMNIS project going forward, is if it comes to fruition which we have a high believe it will, we see in some of the specs, it’s going to allow us to do several things. One, that revenue stream that Dave is talking about is actually a cost worth now because we will recover those talents is coming out of be it Fichtner.

That normally we would - dispose of put out there now would actually be turning that into sellable product and secondly, we may not have to ever build another slurry pond, if we get this working that would save us a lot of cost and cost in the future build in a slurry pond, we would reclaim one use it slurry and then we alternate to another the year after.

The other exciting piece about it is, we would drastically reduce our environmental footprint and it will be a huge environmental win force looking forward. So we are excited about the OMNIS project, we are excited about where they are, most of the capital will be spent by them, our capital will be time to whereas they approved they have got that one muscle up and running. It is 200 tons per hours and then obviously, when they get eight of them up, we could get as much as 4,800 tons a day of products that were typically thrown away.

[Mark Levin, Seaport Global Securities]

Got it. That is very helpful. I'm sorry, go ahead.

[David Khani, Chief Financial Officer]

I'm just add on to Mark. We are not going to talk about our exact strategy, but we have a very defined strategy to move the product as well. So stay tuned for that.

[Mark Levin, Seaport Global Securities]

Got it. Got it. Got it. And then, David, back to you for a second. I said, two really quick ones. Back to you for a second. So on 2020 you mentioned don't expect and I think, I'm just, I'm quoting you right, a material decline in revenue per ton.

By material. Any way you can kind of frame what that means in terms of what would be immaterial. And then at what point do you think you would tell the market where you expect revenue per ton, with the range maybe for 2020. Is that a next quarter of event or is that is something you will wait until the beginning of 2020?

[David Khani, Chief Financial Officer]

So we will define material as 5% or less.

[Mark Levin, Seaport Global Securities]

Okay.

[David Khani, Chief Financial Officer]

That we used to think about as threshold of the materiality. Right. And I'm sorry, could you repeat the second question?

[Mark Levin, Seaport Global Securities]

Yes, and then maybe when you would provide that specific range. Would that be, with the next quarter or would you just wait until you issue 2020 guidance in January? Or to be determined?

[David Khani, Chief Financial Officer]

Yes, I think. What we said when I said in my prepared remarks is most likely we are going to report it on a fourth quarter release when we get - if our guidance, that is when we will have Jim McCaffrey and team will have had the Colt pretty much blocked up and we will have, our budgeting through of the board and everything like that.

So I think that is probably the proper time for us to put out. We might, as we have more information, we might put up bits and pieces of stuff. But I think to have a full budget and everything will be in the fourth quarter release.

[Mark Levin, Seaport Global Securities]

That is fantastic. And last final question is, when you think about the cadence of EBITDA for the remainder of the year. Maybe you can provide some color in terms of how Q3 might look relative to Q2 or Q4 might look relative to Q3 in terms of long walls, minor vacations, maintenance, those types of issues?

[David Khani, Chief Financial Officer]

Just generally, our third quarter is generally are lowest quarter because of minor vacation. So I would say third quarter will be lower and fourth quarter will be higher.

[Mark Levin, Seaport Global Securities]

So third quarter lower than the second quarter and fourth quarter higher than the third?

[David Khani, Chief Financial Officer]

Correct.

[Operator]

Our next question comes from Lucas Pipes with B Riley FBR. Please go ahead.

[Lucas Pipes, B Riley FBR]

Good morning, everyone. I wanted to follow up on Mark's second to last question. I believe it was in regards to the contractor tons for 2020. David, don't have the transcript in front of me, but would this assume kind of does not materially different contracting for 2020. Would this assume that net back - that the power prices improve again to more normalized levels so is that kind of at the status quo as the contracts currently stands? Thank you very much.

[David Khani, Chief Financial Officer]

Yes, we do not expect the material improvement in the forward curve. I think that creates optionality to raise it. So I think there is two things that get us very excited about next year. One is our export deal where we have our floor set above the $45.52 and then the second piece will be our net back contract and if that - weather shows up, gas prices rallied somewhat I think we see upside to our net back contract…

Yes, right near the floor and so again that we are not be baking into our forecast for next year when I say it's not material dividend.

[Lucas Pipes, B Riley FBR]

So with the forecast assumed the forward curves or current prices?

[David Khani, Chief Financial Officer]

Basically it's about the forward curve. Right.

[Lucas Pipes, B Riley FBR]

Got it. Perfect thank you very much for that. And then on the share repurchase program first congratulations on having a lot of dry powder in the current environment and then David, what is the cadence on that. Do you expect to use that up over the remainder of the year is that maybe the more than evergreen use it opportunistically. Would very much appreciate your perspective on how you intend to utilize this program? Thank you.

[Jimmy Brock, Chief Executive Officer]

Yes I think we have said that we will be more aggressive in the second half than in the first half and I think if you think about why? One is that we have got our balance sheet in a fairly good shape and now our debt repurchases are going be continue but at smaller levels and so now we have more availability of free cash flow to spend on share repurchase as well as the cash sitting on our balance sheet.

So I don't think we are going get very particular in how much we are going to buy, but just to say, we up the authorization for a reason. Our stock is come down very materially and now we see as the owners here that this is really a great opportunity for us to step in and buy a bunch of stock.

[Jim McCaffrey, Chief Commercial Officer]

Alright.

[David Khani, Chief Financial Officer]

Yes. I think when you look at our capital allocation process that we have used ever since we spun out in late 2017 right now where our share prices trading today, I mean we believe as well as the Board that is way undervalued. So it would be hard to find the return on capital is probably going to be harder than share repurchases now.

Now, with that said, we will look at everything is out there with the dry powder, as you say, that we have left to remain in, but we expect to be much more aggressive on our share repurchase in the second half of the year.

[Lucas Pipes, B Riley FBR]

Very, very good. Good to hear. Thank you, and then I will sneak one last in, if that is alright. Obviously, you have a growth project on the met coal side. I assume you did a lot of market research as to the competition out there in central appellation of the cost structure, et cetera. I was curious, what do you think the kind of 90 percentile is for some of your competitors out there cost wise? I would appreciate any perspective as to where we may see some slowdown in terms of output levels from US producers. Thank you very much for your perspective.

[David Khani, Chief Financial Officer]

I think you are talking about on our Met project or you talking about on our overall…

[Lucas Pipes, B Riley FBR]

Yes, Yes, overall. So I'm looking for market color, where you see the US cost curve on the met coal side?

[David Khani, Chief Financial Officer]

Yes, I think we have done it more on I think on a global basis. And I think we will tell you that we fit in the - we are in that. I will say in the top half of the cost structure. And I think within the U.S. we are even better than that, materially better than that.

[Lucas Pipes, B Riley FBR]

And - where would you say is the coal - where would you say is the 90 percentile of the US cost curve in today's environment?

[David Khani, Chief Financial Officer]

You know what? I don't have that right in front of me. So let we will come back and we will answer that question offline.

[Lucas Pipes, B Riley FBR]

Perfect. Okay. I really appreciate your color and continue. Best of luck.

[Jimmy Brock, Chief Executive Officer]

Thanks Lucas.

[Operator]

Our next question comes from Matthew Fields, Bank of America Merrill Lynch. Please go ahead.

[Matthew Fields, Bank of America Merrill Lynch]

Hi, everyone. Just a follow-up on Lucas's question, if you can get that 90th percentile data point. I would love that one too, offline. In project, I think, I know you don't have budgets finalized and everything. But the last guidance we got was $65 million to $80 million of CapEx over two years. Is that still the right range or do you think that given the sort of cheaper equipment and availability of people that you mentioned in Appalachian, that might be, that might be coming in lower?

[David Khani, Chief Financial Officer]

Yes, at this point in a project, we would stay with the range we have, but we are seeing some reductions on the front end. For an example our equipment expand and those type things that would indicate that we may come in toward the lower part of the guidance, but it's early to tell us, so we will stick with the guidance range that we have now.

[Matthew Fields, Bank of America Merrill Lynch]

And you have a rough split of that amount between 2019 and 2020?

[Jimmy Brock, Chief Executive Officer]

Yes, I think we said last time, I think we are going to spend around $20-ish million in this year in 2019 and the remainder will be spent next year.

[David Khani, Chief Financial Officer]

Next year.

[Jimmy Brock, Chief Executive Officer]

Next year. Excuse me.

[Matthew Fields, Bank of America Merrill Lynch]

And then is that 600,000 tons of met? Is that all destined for the export market through the CONSOL terminal?

[Jimmy Brock, Chief Executive Officer]

Not necessarily, we think there will be opportunity for that specific quality in the domestic market as well. And if it goes, export is likely goods of leverage point rather than the CONSOL export terminal just…

[Jim McCaffrey, Chief Commercial Officer]

Closer.

[Jimmy Brock, Chief Executive Officer]

It's closer better, better favor rate.

[Matthew Fields, Bank of America Merrill Lynch]

Okay. Great. And then I read that you have got 7.7 million tons to date through the terminal. It’s kind of above your nameplate capacity, is the right way to think about? Are you sort of running up against capacity constraints at the terminal? And you might need to create more there for yourself?

[Jim McCaffrey, Chief Commercial Officer]

No, we don't think. We are running up against the maxim that we have put through it. We really don't know what that is. I mean, we say that 15 million tons is the max to go through there, obviously, been a 7.7 midway through the year with indicate that we can go higher than that. So our partner Exxon is moving coals through there and we are moving our own till there and we think we will are going to be north of that 50 million tons this year.

[Matthew Fields, Bank of America Merrill Lynch]

Okay, great. And that is, it seems like you'd have an opportunity for more third party coal revenue potentially, because I think doing the math on half of 9 million export tons is about 4.5 and that is 60% of today, which is similar to last years. Is that is that 60% of sort of your own coal through that terminal. The right way to think about that?

[David Khani, Chief Financial Officer]

I think 50% to 60%.

[Matthew Fields, Bank of America Merrill Lynch]

Okay. Great. And then lastly, I appreciate that you want to get more aggressive on share buybacks in the second half given the stock price. Do you think you will continue to allocate capital toward continuing to pay down, secondly, notes as well, given their high costs?

[Jimmy Brock, Chief Executive Officer]

Yes, I think we will continue buy back debt. But I would just tell you, we will be opportunistic. We will look at all different instruments. We are not just going to look at second leans. It just so happened they were the highest cost of capital and so - but yes, we will continue buyback debt. We were very aggressive in the last year and a half to get our balance sheet in really good shape.

And now that we are feel very good about our contracted position, we feel now as the stock has come down, this is a more opportune time to allocate more an increasing piece of our capital allocation to buy back stock. So we will do both. I just think we did very little stock buyback in the beginning of last 18-months for a reason. And now we will just do - now we will start to pick up the pace.

[Jim McCaffrey, Chief Commercial Officer]

But they will continue to be a mix.

[Matthew Fields, Bank of America Merrill Lynch]

Great. And on that front, is there a leverage target? That is kind of updated with your 2020 contract position or an absolute dollar value of that or you are feeling more comfortable?

[Jimmy Brock, Chief Executive Officer]

No, not really.

[Jim McCaffrey, Chief Commercial Officer]

But we have. Well, I will just tell you - from our philosophy. What we do - do, is we run different stress tests and we look at a lot of different scenarios and over time we will continue to pay down debt to that level to protect our balance sheet. But, I think we have, we want to make sure that we look at our covenants and stay within our comments and give us the maximum flexibility. We do have free cash flow suites that we need to follow through.

And so, we will make sure at the end of the day that we keep our balance sheet very, very good shape and that will be a combination of paying down some debt, contracting, working on our cost structure, working on our capital intensity as well and make sure that we keep that flexibility to be able to do that capital allocation process that we need to do to be able to take advantage of driving that rate of return higher.

[Operator]

Our next question comes from [indiscernible]. Please go ahead.

[Unidentified Analyst]

Hey, good morning and thanks for taking the call. Very quickly, for your 2021 contract position. You have 34% of production contracted, are these all domestic sales or any export wall? And also I would like to know, what kind of pricing profile you have there?

[David Khani, Chief Financial Officer]

2021 is largely domestic sales. A portion of that is the power price net back tons. So, I really can't offer you a price today. It's just, we have already talked about where we see the power prices going and that wouldn't reflect the majority of those cuts.

[Operator]

That concludes our question-and-answer session. I would now like to turn the conference back over to Mitesh Thakkar for any closing remarks.

[Mitesh Thakkar, Investor Relations]

Thank you, Ben. We appreciate everyone's time this morning. And thank you for your interest and 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.

[Jimmy Brock, Chief Executive Officer]

Thanks, everyone.

[Operator]

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