CONSOL Energy Inc

NYSE:CEIX

Earnings Call Transcript 2018-Q3

[Operator]

Good morning and welcome to the CEIX and CCR Third Quarter Earnings Conference Call. [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, Director, Finance and Investor Relations]

Thank you, Shawn and good morning everyone. Welcome to CONSOL Energy and CONSOL Coal Resources third quarter 2018 earnings conference call. With me today is Jimmy Brock, our Chief Executive Officer; Dave Khani, our Chief Financial Officer; and Jim McCaffrey, our Chief Commercial Officer. We will start with prepared remarks by Jimmy and Dave and then open the floor for the Q&A session.

During the prepared remarks, we will refer to certain slides that we have posted to our websites in advance of today’s call. As a reminder, any forward-looking statements or comments we make about future expectations are subject to some risks, which we have laid out for you 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 GAAP financial measures in the press releases and furnished to the SEC on Form 8-K. You can find also additional information on our websites, www.consolenergy.com and www.ccrlp.com.

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

[Jimmy Brock, Chief Executive Officer]

Thank you, Mitesh. Good morning, everyone. Before I kickoff the earnings discussion, I want to express our condolences to the families impacted by the horrific event this past Saturday in the Squirrel Hill, neighborhood of Pittsburgh. Our thoughts and prayers remain with the community and all of those who were affected by this tragedy.

Now for our quarterly performance, once again the CONSOL team delivered a well executed quarter. As many of you know, the third quarter is typically our low production quarter for the year given the annual outage for maintenance and miners vacation and 3Q ‘18 was no different. However this year, we also had three longwall moves during the third quarter, which we highlighted on our last earnings call. Nonetheless, we delivered a record third quarter production at the PAMC during 3Q ‘18. I am very impressed with our team’s ability to perform consistently and overcome the various challenges inherent to mining operations.

On the marketing front, our customers continued to seek cold to replenish stockpiles in the near-term, while also committing to longer-term contracts for 2019 through 2021. The pricing for new contracts has been coming in better than the pricing for the contracts that are rolling off. So, overall, the blended average portfolio price for our fixed price contracts is improving. From a CEIX perspective, there were three major highlights this quarter. One, we accelerated the pace of CEIX share repurchases and started buying back CCR units, consistent with our strategy of allocating surplus capital to the best return avenues. Two, despite seasonality impacted production volumes and negative working capital adjustment and increased capital spending relative to 2Q ‘18 we still generated organic free cash flow. And third, for the third time this year, we are increasing the midpoint of our 2018 adjusted EBITDA guidance.

From a CCR perspective, our net leverage ratio improved to 1.4 times as expected and highlighted on our 2Q ‘18 call, we posted Sub 1 distribution coverage this quarter. This is due to the seasonality of our production in sales and this is why we focused more on annual outlooks than on quarterly outlooks. Year-to-date, our distribution coverage is approximately 1.4x, which gives us enough comfort to continue to pay the same high level of distributions that we have paid since the IPO. Accordingly, the Board of Directors of CONSOL Coal Resources GP approves the third quarter distribution payments at levels consistent with the previous quarters.

Before I move to review our operational performance, I am very pleased to highlight that CONSOL and Komatsu Mining Corporation, one of our key suppliers were recently awarded the 2018 NIOSH Mine Safety and Health Technology Innovations Award. We work together to develop and implement a first of its kind shield proximity system for use in the United States coal applications. Since activating the personal proximity detection system in December of 2017, no safety incidents involving automatic shield movement or CONSOL Energy’s longwall operations have occurred. We are honored to be recognized for this award and thank Komatsu for their leadership in enhancing worker safety and advancing the coal industry. We have been at the forefront of implementing proximity detection, because it is the right thing to do and is consistent with our core values of safety, compliance and continuous improvement.

Now, let me review our 3Q ‘18 operational performance. Some of the key operational highlights during the third quarter are; one, we achieved a record third quarter production of 6.4 million tons at PAMC. Two, our mine productivity continued to improve compared to the year ago quarter driven by improving geological conditions at the Enlow Fork mine. Three, we continued to make further progress on our technology and growth initiatives. Four, the CONSOL Marine Terminal continued to execute its plan with an exceptional safety performance, which registered zero safety incidents extending the streak to 92 consecutive months.

Let me now provide you with some of the detail behind some of those highlights. Coal production at PAMC increased approximately 4% in 3Q of ‘18 compared to the year ago quarter. We benefited from higher output at the Enlow Fork mine where geological conditions have improved. This increase at the Enlow Fork mine contributed to an overall productivity improvement at the PAMC. Additionally during the quarter, we successfully completed three planned longwall moves. For 3Q ‘18 the productivity of the Pennsylvania mining complex measured as tons per employee hour improved by 2.5% compared to the year ago quarter. Year-to-date, productivity at the PAMC is tracked at approximately 6.2% higher compared to the year ago period. We are starting to see some initial benefits of our longwall sheer automation and other de-bottlenecking projects. For its share of the PAMC, CCR produced 1.6 million tons of coal during 3Q ‘18 which has improved from 1.5 million tons produced in 3Q of ‘17.

On the cost front, our average cash cost of coal sold per ton was $30.88 compared to $30.94 in the year ago quarter. This improvement was largely driven by a reduction in lease expenditures and improved productivity. Let me note an important underlying trend that is not obviously visible in our cost numbers yet. Since the fourth quarter of 2017, we have seen inflation in the cost of supplies that contained steel and other commodities for which prices are strengthening as well as in the cost of contract labor. Year-to-date, we have been able to successfully offset these inflationary pressures through productivity gains, modest benefits from our automation investments and reduction in lease expenses. We continue to keep a close watch on macro driven cost increases and strive to offset them through productivity gains. The CONSOL Marine Terminal continued to execute well. CONSOL Marine Terminal sales improved to $16.1 million for 3Q ‘18 compared to $15 million for 3Q ‘17. As a reminder we entered into a full capacity take or pay agreement for the terminal earlier this year. And it assures us a steady revenue stream through mid-2020.

With that, let me now provide an overview of the coal markets and an update on our sales performance and accomplishments. Some of the key highlights during the quarter are average revenue per ton improved approximately 7% compared to the year ago quarter. Low domestic coal inventories are bringing customers to the market early. Prices on fixed price contracts are improving compared to those rolling off. We added an additional 1.2 million tons to our 2019 export commitments at firm prices during the quarter bringing our 2019 export focus sales to 8.2 million tons. We improved our sales contract position for 2019 from 74% to 90% and for 2020 from 32% to 44% respectively. In the first quarter of 2018 our coal revenues increased due to higher domestic coal prices driven by our netback contracts which benefited from higher power prices during the winter.

In 2Q ‘18 our average revenue per ton improved approximate 6% versus the year ago quarter due to better pricing on our export sales as well as netback contracts. Now in 3Q ‘18 we received more normal revenues per ton on netback contracts, but significantly higher revenues on our export tons as our new export contracts kicked in. Our previously announced export marketing agreement is now fully engaged and provides improved visibility into our average revenue per ton through 2019.

Let me now provide you with some color on the near-term coal market outlook and how we plan to execute our marketing strategy. First, U.S. coal inventories continued to decline. As noted in our press release, total coal inventories at domestic power plant at the end of August were 104 million tons or about 26% lower than year ago levels. Bituminous coal inventories were lower by 28% year-on-year and several of our key customers, Northern App rail-served power plants continue to report around 20 days of burn heading into the winter compared to the typical 30 to 40 days. It is also noteworthy that this decline in coal inventories is occurring in the face of declining U.S. coal production, higher export prices and very low natural gas storage levels. Second, the U.S. supply picture is shrinking with limited capital expenditures and normal mine depletion, particularly for thermal coal supplies. Furthermore, coal producers continued to see an increase in export demand and are diverting supply away from domestic generators.

In its recently published short-term energy outlook, the EIA expects 2018 U.S. thermal coal exports to increase by 21% to 50.4 million tons from 41.7 million tons in 2017. The EIA also estimates that during the first three quarters of 2018 coal production in the U.S. has declined by 2.7% compared to the first three quarters of 2017. Given this backdrop in the domestic market, our marketing team was successful in signing several multiyear contracts with key domestic utilities. More importantly, they were able to capture higher prices on these contracts compared to the existing or previous contracts, while locking in rising prices during the next several years. These contracts extend our existing position with these utilities for an additional year while also rebasing the contract process in our portfolio. In some cases, these contracts extend to 2021 with steadily rising fixed coal proxies.

Internationally, we continue to see improving commodity pricing dynamics. The API 2 prompt-month prices improved by approximately 3% during the third quarter of 2018 to over $100 per metric ton driven by a hot, dry summer in Europe, which reduced wind and hydropower output. Forward, API 2 prices for 2019 improved by approximately 10% during the third quarter of 2018 and we have seen improvement in the back end of the forward curve relative to the prompt-month, which we believe reflects the industry’s optimism for sustainable coal fundamentals. This phenomenon continues to create opportunities for us to layer in longer term contracts. And recently we entered into an agreement to sell an additional 1.2 million tons of exports in 2019. This contract is in addition to the 2-year 14 million ton contract that we announced at the beginning of 2018. With this new contract, we have approximately 8.3 million tons or approximately 30% of our 2019 coal sales volume contracted to be shipped to international markets.

Looking forward to 2019 and beyond, we are in very good shape. We are 90% and 44% contracted for 2019 and 2020 respectively assuming a 27 million ton annual sales volume for PAMC. With low domestic coal inventories and a strong export market, we are very comfortable with our prospects to contract and optimize our portfolio. We will continue to be opportunistic in layering contracts and capturing pricing upside as we sustain and grow our already strong international presence.

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

[Dave Khani, Chief Financial Officer]

Thank you, Jimmy. This morning I will provide a review of the quarter and then update to our 2018 guidance. Before I do so let me provide some perspectives on what we are seeing in the coal and natural gas sectors. Early in the year, we highlighted a trend we are seeing in the commodity markets. Investors are becoming more return than growth focused, particularly in the energy space. This is more evident in the U.S. and in the coal industry as companies came out of the downturn and restructure their balance sheets. Since then U.S. coal companies have rightly focused on restoring investor confidence by keeping their balance sheet strong and focusing on improving shareholder returns. We’ve seen significant debt reduction, special dividends, share buybacks from U.S. coal companies over the past year.

Although not industry-wide, we saw a similar trend starting in the natural gas industry in 2017. 10 years ago U.S. E&P investors were focused on production growth with high commodity prices and the specter of shale – of the shale revolution. Over the past decade, the U.S. E&P Group spent several hundred billions of dollars in capital and drove strong operational gains. This resulted in a 50% increase in natural gas supply, but also a 50% decrease in natural gas prices. The net asset value of many of these companies essentially stay stagnant, while the expectations for future natural gas prices have come down. The industry seemed to have lost its overall return focus and posted low single-digit corporate returns metrics. Over the past 18 months the tie seems to be shifting and the focus on free cash flow generation and stock buybacks. For example, one of the Appalachian players is focusing on how to grow ROCE over the next year. This Appalachian E&P producer announced that it will spend less capital in 2019 versus 2018, and have reached lower production growth to redirect 50% plus of its free cash flow towards share repurchases and dividends.

We saw this company stock outperformance peers by about 10% of the day of the announcement. This has been a consistent focus for us. As you can see on Slide 13 on our slide deck, CONSOL Energy’s return on capital improved from 14% from 13%, calculated last quarter and above our cost of capital. Our goal is to continue to improve our ROC in 2019 through our disciplined return-driven capital allocation strategy, while improving returns we also intend to lower our overall cost of capital. We believe that the industry’s access to capital continues to improve for stronger assets in well-managed companies that can also provide long-term sustainability.

To achieve this, we’re focusing on improving both our debt and equity cost of capital. I'm pleased to announce that on October 25, S&P raised CONSOL Energy’s credit ratings by one notch across multiple tranches of debt. This is good news and is expected to be one of the contributing factors in helping us reduce our cost of debt. Another element to improving our cost of capital is reducing our cost of equity. Building and maintaining a business that is sustainable lowers the equity risk premium over time. We plan to do this by ratifying, developing and implementing high rate of return projects that allowed us to grow our cash flow per share value. Jimmy will provide more color on this in his closing remarks.

Now let me move over to our financial performance, where I’m very excited to recap the third quarter and give an update on our 2018 guidance. We will review our CEIX first and then CCR. CEIX reported a solid financial quarter with net income of $9.1 million, adjusted EBITDA of $83 million, and organic free cash flow $11.4 million. This compares to $8.5 million, $68.7 million and $39.8 million respectively in the year ago quarter. On a per ton basis, cash margins improved $3.11 to $16.33 compared to year ago levels as prices rose $3.05 and cash costs decreased $0.06.

We continue to buck this trend of rising year-over-year unit costs. During the quarter we generated $52 million of cash flow from operations and spent $41 million in organic capital expenditures. As a result, CEIX generated $11 million of free cash flow and what I will call the low quarter of the year. Our cash flow from operations include the $7 million outflow from working capital changes compared to $19 million benefit during last year's quarter tying to year-over-year differences.

Year-to-date, we have seen approximately $40 million benefit to working capital in part from the stronger credit controls that we put in place earlier this year. Through the third quarter of ‘18 and since implementing our disciplined capital allocation process, we have paid or repurchased $50 million of debt and spent $13 million purchasing CEIX shares and CCR units. In the fourth quarter of 2018 we also repurchased another $5 million of our second-lien bonds bringing the total debt repurchased to $55 million.

I will also remind everyone that CEIX’s term loan B facility includes a financial covenant that requires the company to repay a certain amount of its borrowings tied to excess cash flow generation during fiscal year 2018. We’ll repay within 10 days after the date we file the form 10-K. For 2018 such repayment shall be equal to 75% of the company's excess cash flow for such year less any voluntary prepayments of its borrowings under the term loan B facility made by the company if any during 2018. If this covenant was applicable as of September 30, 2018, management estimates the repayment under this covenant would be approximately $100 million. This of course will be subject to fourth quarter performance and other discretionary uses of cash.

Now, let me update you on CCR. This morning, CCR reported net income of $8.6 million, adjusted EBITDA of $21.8 million, and distributable cash flow of $10.7 million. This compares to $3.6 million, $18.5 million and $5.7 million respectively in the year ago quarter. In 3Q ‘18 CCR generated $16.9 million in net cash flow from operating activities, which includes $3.3 million outflow from changes in working capital after accounting for $8.1 million in capital expenditures and $14.3 million in distribution payments, we borrowed approximately $6.5 million on the intercompany loan with CEIX. Nonetheless, given the increase in trailing 12 months EBITDA, CCR’s net leverage ratio improved to 1.4 times. We believe the strong year-to-date distribution and low leverage on our balance sheet should provide an added comfort to our unitholders regarding long-term sustainability of our current distribution.

Now, let’s discuss our updated 2018 guidance. As stated before, our guidance philosophy remains to measure the risks appropriately and improve upon our guidance through strong execution as the year progresses. As a result this is the third successive quarter, which are increasing our full year adjusted EBITDA guidance. For PAMC, we are increasing our 2018 gross sales volume guidance by 300,000 tons and our margin by $0.45 per ton using the midpoint. Again, the market continues to be able to absorb all we can produce. Based on this new guidance, we raised our adjusted EBITDA forecast for CCR and CEIX by $4.5 million and $22.5 million respectively using the midpoint.

Now, before I turn it over to Jimmy, I want to highlight a lease accounting change that will be adopted in the first quarter ‘19 and will impact the public company universe including us. But as we issued a new leasing accounting standard which requires most leases to be recorded as an asset and a liability on the balance sheet, expenses will be recognized in a manner similar, so should not impact current guidance. The ultimate impact of the standard will depend on our lease portfolio at the start of the first quarter of ‘19 when we adopted new standard. More importantly, the new standard will not have any impact on current bank covenants or leverage ratios.

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 take this opportunity to provide you with an update on our Itmann project that we highlighted on our last earnings call. We continued to make meaningful progress in evaluating our Itmann project during the past several months. In the third quarter, we completed exploration drilling to collect 7 new Corvo samples to build our confidence in the geology and quality of the Itmann reserves. Results have all came back in line with or better than our expectations. As a result in late October, we proceeded with submitting our mining permit application for the Itmann #5 mine to the West Virginia DEP. We believe that Itmann hosts one of the most attractive remaining blocks of low-vol metallurgical coal in Central App, with quality that would be appealing to both domestic and international coal producers. This project continues to rank high on our list as a potentially attractive use of organic growth capital, pending permit approval and continued strength in the metallurgical coal markets.

Before I hand it over to Mitesh, I want to expand upon Dave’s comments on building and maintaining a sustainable business model that helps us achieve our financial goals. First, it starts with having the right team and focus on our core values of safety and compliance. Our teams are focused and incentivized based on achievement of these values. Our employees are open and eager to adapt new technology and innovation. Second, our business model and forecasting capabilities have enabled us to meet or beat our financial and operating performance targets. Hence, we reduced the overall business risk. Since the separation from CNX Resources, we are focused on raising our contracted position and adding duration. Our marketing team has done a great job, but once again putting us in a position where we are substantially sold for 2019 and have a solid and diverse book of business shaping up for 2020 as well. This visibility allows us to baseload our mines and we expect to run them at approximately 95% of the ready capacity. We can do that because these assets are capitalized for the long run and we continued to invest in them. Even though the PAMC is one complex and we run it as such, it really consists of five longwalls. Each has sufficient scale to serve as a standalone mine, an important diversification distinction which often gets lost. Third we challenge our finance team to allocate capital to the highest return projects. We also capitalize on our strong execution to build capacity across our insurance lines, surety, liquidity and equity base. This lowers our risk premium. So our base is very solid and our growth focused Itmann project as well as continuous improvement focused de-bottlenecking and automation projects are true growth. We continue to look for opportunities that help us improve operations, systems and processes. The idea is to continue the score singles and doubles while you wait for the right opportunity to hit a home run.

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

[Mitesh Thakkar, Director, Finance and Investor Relations]

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

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Dudas with Vertical Research. Please go ahead Michael.

[Michael Dudas, Vertical Research]

Good morning gentlemen. Jimmy or Dave with regarding to contract strategy having 44% locked in for 2020 if you would have thought 3 to 6 months goal, do you think you would be at that level, is there additional 2021 or even further contract that you have let out and on top – just to firm upfront are the utilities with their inventories low and going into the winter, are they also recognizing some of the M&A capital discipline issues that are emerging and has that been a big factor and then to lengthen out and get more urgent on their contracting?

[Jim McCaffrey, Chief Commercial Officer]

Well, Mike, this is Jim McCaffrey. Good morning. How are you doing?

[Michael Dudas, Vertical Research]

Great.

[Jim McCaffrey, Chief Commercial Officer]

I am glad you asked that. I mean I am really excited about the portfolio right now where we stand for ‘19 is it 90% sold and we have had the ability to add duration to key customers. And we have talked about our key customers in the past and they are still outperforming other providers by 12% to 13% in terms of capacity factors run. As far as the 44% for 2020, I don’t think we have done yet. I am certainly excited about where we are going. And we are in negotiations not concluded for the duration out as far as 2023. So there is certainly a recognition in the industry that producers need to have some security of supply to be able to continue to perform adequately to provide the energy that is needed for these utilities to run. And then on top of all of that Mike, there is a strong recognition of the export market in terms of how much coal is leaving this is close to 50 million tons, I think EIA is forecasting 52 million tons. We were thinking close in the 55 million tons this year leaving going offshore. And those opportunities are still very strong in those markets. And then finally, during the winter, severe winter events of last year renewables and natural gas did not respond very well and we are seeing ongoing pipeline delays on top of that, additional costs going into those pipeline. So we think that we are seeing a more normalized approach to contracting from our customers. And we are 90% so with the 10% we have sold left, we are going to have significant duration or significant pricing and probably both.

[Michael Dudas, Vertical Research]

Makes a very good sense and I appreciate that answer. And maybe Dave for you as we are looking into late this year and to next year regarding capital allocation, can you share a little bit of what’s happening on the pension side from your standpoint? And in looking into ‘19 with Itmann, any soft target on decision FID and a range of what type of capital allocation that could be there relative to the other decisions you’ll be making in ‘19?

[Dave Khani, Chief Financial Officer]

Yes. We’ll be very careful about – talking about 2019. But just to reiterate that our base maintenance of capital is still that $4 million to $5 million – $4 per ton to $5 per ton, that's been our standard, right.

[Michael Dudas, Vertical Research]

Sure.

[Dave Khani, Chief Financial Officer]

And then your question is how much capital do we allocate to these other areas of growth, right. So, we have our debottlenecking and efficiency projects that we talked about this year and how much do we have for next year. We have our Itmann projects, which is becoming improved in visibility as far as how we like it. The question now is, do we have a commercial project that we have to get a board approval and so what is the capital in the plan that we’re going to put behind it. So that hasn’t been deemed commercial, but it's not going to be a huge amount of capital. We will not disclose it this morning on it, but just to know it won’t be a huge amount of capital and it allow us to do multiple different things with our cash flow next year. You asked about the pension, if you look, we have a legacy liability slide in our slide deck. And our pension has been really one I'd say highlights of how to manage our capital of the long-term. We are as of the third quarter, we are 99% funded. We have not put any dollars in the last couple of years and we don't anticipate putting any dollars in really through 2023 or maybe longer. And that's because our portfolio has been working very well. In the downturns we've been funding it in the prior years and our portfolio approach has been very good in that between our funding and the returns, we've been in the top 5% of all S&P 1500 pension funds over the last decade. And so as a result we’ve been in very good shape to not have to fund our pension and so – and we don't anticipate it. So, our goal is, as the equity markets and as the discount rates rise, we will continue to immunize our portfolio move moreover to fixed income reducing the risk and therefore reducing the risk that we have to fund it.

[Michael Dudas, Vertical Research]

I certainly think that as a highlight and I do share your thoughts on the people at Pittsburgh. Gentlemen, thanks for your time.

[Dave Khani, Chief Financial Officer]

Thank you.

[Jimmy Brock, Chief Executive Officer]

Thank you.

[Jim McCaffrey, Chief Commercial Officer]

Thank you, Mike.

[Operator]

Our next call comes from Nick [indiscernible] with Seaport. Please go ahead.

[Unidentified Analyst]

Hi, good morning. I was hoping you could expand on your comment regarding the more normalized contracting environment. Is it just that the utilities are willing to enter longer term contracts or is there more to the comment?

[Jim McCaffrey, Chief Commercial Officer]

No, I think it’s the utilities are showing willingness to enter into multi-year contracts as they see the decline in production generally ended a spike in demand and the export market that is obvious to become very real. So, when I say more normalized more or like it was five or 10 years ago when utilities routinely did two-year to five-year contracts.

[Dave Khani, Chief Financial Officer]

And with fixed pricing.

[Jim McCaffrey, Chief Commercial Officer]

And with fixed pricing.

[Unidentified Analyst]

Okay. And then do you guys come across any irrational competitors in any of the RFPs you guys are entering into?

[Jim McCaffrey, Chief Commercial Officer]

So far this season I would say no, but we have not seen a lot of irrational ability. We’ve seen some pricing that we think is pretty consistent with where the market needs to be for customers to perform and we have not seen serious irrationality by any of our competitors.

[Unidentified Analyst]

Okay. And then last one, in terms of open market purchases of CCR stock, CEIX and bonds. How do you prioritize the mix of that?

[Dave Khani, Chief Financial Officer]

Sure. Jimmy, you want to go?

[Jimmy Brock, Chief Executive Officer]

Yes. We have a capital allocation process that we use and we evaluate each one of those purchases as to what the daily price not be – when we’re going to actually execute it and which everyone we figure as the highest rate of return is the one that wins out.

[Dave Khani, Chief Financial Officer]

So for example, today as our stock has come down, the rate of return of buying CEIX start to look more and more appealing here and so we’d probably reprioritize our cash towards buying back stock more.

[Jimmy Brock, Chief Executive Officer]

Yes. At today’s price we certainly would.

[Unidentified Analyst]

Okay. That’s all I had. Thank you.

[Operator]

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

[Mark Levin, Seaport Global]

Yes. Couple of things. Well first thing is, great job on the cost quarter particularly with three longwall moves, that’s impressive. The first question has to do with the exports in ‘19. I think you referenced during the call you've already committed and priced 8.2 million tons, about roughly 30% of your book. Is there upside to that? It sounds like you've already done this much and the netbacks are still pretty, I assume pretty attractive that you might do more than 30% of your total book exports next year. Is that fair?

[Jim McCaffrey, Chief Commercial Officer]

We have 8.2 million tons contracted, Mark, of which 4.7 million tons of it is firmly priced and the second half deliveries are still subject to what we said last year, a collar that – it has the bottom of the collar higher than 2017’s average price. So, we anticipate of that 8.2 million tons delivering between 4.5 million tons and 5 million tons in the first half, and we may choose to have something similar in the second half. So that’s still remains to be seen in terms of the whole portfolio construction.

[Mark Levin, Seaport Global]

Got it. Got it. Yes. I’m sorry.

[Jimmy Brock, Chief Executive Officer]

We certainly have the capacity to take it hard, right.

[Mark Levin, Seaport Global]

Got it. Okay. And then around pricing for a second, maybe talk a little bit about where the contracted market is, I mean, we see $50 plus on our screens from the trade ranks or calendar ‘19. Maybe you can talk about what the prices look like for calendar ‘19 in the market in general not just necessarily what you guys are contracting, but what they look like in general? Is that kind of the right ZIP Code, and then what type of netbacks on the export side, how do they kind of compare?

[Jim McCaffrey, Chief Commercial Officer]

Well, in terms of the domestic market, Mark, I’d prefer the way till next time to answer that question. We are in the middle of several negotiations now. Let me just say like we said in the prepared remarks that the contracts that we’re rolling off are all coming back at higher pricing. Now on the export side, on the netbacks side, August and September were particularly hard markets, and we were able to work with our partner to do some hedging going forward to tie in some pricing that we found was particularly attractive, thus the 1.2 million tons of additional sales. The markets cooled off now some, but even if that prices look to me to be firmly in the low-to-mid-50s netback at the coal mine for current netbacks based upon what I’m looking at this morning.

[Mark Levin, Seaport Global]

Those were great prices. One more, on the terminal maybe for a second, just kind of switching gears. David, can you maybe remind us what the EBITDA has been year-to-date or last – last 12 months? And then maybe how you’re thinking about that strategically? It would seem like there are very few exports, I mean, there's not a lot of capacity right now, you guys own a very valuable asset I would think, I’m assuming there aren’t any more coal terminals permitted in the Eastern United States. How are you thinking about maximizing the value of that asset?

[Jim McCaffrey, Chief Commercial Officer]

Mark, I'll start and then Dave or Jimmy could jump in. Jimmy has said time and time again that we have three – three-legged stool there at the terminal. We have a area for inventory. We have a throughput opportunity to certainly bring revenue into the company and EBITDA and we have a very strategic facility that we intend to use to do the best we can for our coal mines. And part of our strategy this year was – is that we did lock significant revenue and thus EBITDA in place for the year and we wanted to make sure that as we move forward that we have some capacity allowed for our coal mines that allow us to toggle in and out of the marketplace. For example, I think we’re in great shape contracting wise going into 2019, but if we got a extremely warm winter, we have the capacity to toggle coal away from the domestic market to the export market if there's pushback from customers like we'd seen in some previous years.

[Jimmy Brock, Chief Executive Officer]

Yes. And an important part of that strategy as well is, when we take third-party coal or even our own call, we want to make sure that we’re not hurt in the market price on the other end.

[Dave Khani, Chief Financial Officer]

And as far as value – maximizing value, right now this terminal is very strategic to us as you can imagine. We are getting a lot of people banging on our door to want to ship coal through that terminal. And so we know that in today’s environment those will increase value. For us we will – there is no intention for us to everyone to put this on the market, but I wouldn’t say you can never say never is a public company, but if we ever wanted to sort of really truly maximize the value of this terminal and monetize it down the road, again with no interest right now. We would lock in longer term contracts with high prices on it, lock in our wedge of throughput through it and then we would have something that we could monetize in the future. The market has been heading in that direction, but again that’s not our intent right now.

[Jimmy Brock, Chief Executive Officer]

Yes. Said in another way, the terminals value is more than just its revenue and its EBITDA in terms of what it provides for us in the marketplace.

[Mark Levin, Seaport Global]

No, that’s all for your points. Yes, one last question just around rail, I think the last time we spoke or maybe wasn’t the last time, but at some point previous there were some discussion about the Eastern railroads adopting more of a variable price or rate scenario to try to incentivize more coal burn in NAPP looking at more creative contract structures for lack of a better way of putting it, are you seeing that, are you seeing the Eastern rails taking a more creative approach to how they charge utilities with rates to try to incentivize more burn?

[Jimmy Brock, Chief Executive Officer]

At least two of our customers in the Southeast have added into are attempting, I don’t know if they are finalized Mark. Either have ended or attempting to have run into contracts that will make coal burn more favorable in their markets. And I anticipate that the railroads will continue to move in that direction as long as they can get customers to move with them.

[Mark Levin, Seaport Global]

Great. Thank you, guys.

[Jimmy Brock, Chief Executive Officer]

Thank you.

[Dave Khani, Chief Financial Officer]

Thanks.

[Operator]

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

[Lucas Pipes, B. Riley FBR]

Yes. Thank you very much and good morning everyone.

[Jimmy Brock, Chief Executive Officer]

Hi Lucas.

[Lucas Pipes, B. Riley FBR]

I wanted to ask a little bit about the broader supply picture earlier this week, one of your peers announced a stronger supply outlook for 2019 specifically, did you see that as a broader trend in the industry specifically in the Eastern United States with higher price environment more supply coming back and then to that extent do you believe you have any further capacity to be unlocked? Thank you.

[Jimmy Brock, Chief Executive Officer]

Yes. I will take the first part of that Lucas. If you look at what production is today, we said that it’s 2.7% down versus the same period in 2017. We all know that we are in a pretty good marketplace. I don’t think it’s that easy to bring new production online now because of the lack of capital investments that’s been put forth in the last 2 years to 3 years, call it. But I think the overall pattern of supply is going to continue. As far as us having the ability or capacity to bring on more production, we have and we have brought that onto the marketplace. Q4, we think it’s going to be a good quarter for us to finish out the year. We got possibly one and it could be two longwall moves in Q4. So I think we are in pretty good shape. We do have the ability as I have said many times before to add that second longwall if the market continues to be as strong as it is and we said it head into the future that way.

[Jim McCaffrey, Chief Commercial Officer]

But that’s a 2.5-year or maybe 3-year project if we were to do it, so it’s not today an impact.

[Lucas Pipes, B. Riley FBR]

Very helpful. Thank you. And then I know they were prepared remarks on the pricing side and a lot of questions on it and I try to ask maybe slightly more directly, Jim today in today’s market – in today’s export market what is the netback price on a dollar per ton basis?

[Jim McCaffrey, Chief Commercial Officer]

I thought I answered that question Lucas. In today’s market the netback is based upon API 2 and the pet coke prices a number of different things to look at. I would still say that today’s netback to the mine is in the low to mid-50s rate.

[Lucas Pipes, B. Riley FBR]

Got it. And is that – that’s kind of on a spot basis if you were to go out to 2019 would that still hold?

[Jim McCaffrey, Chief Commercial Officer]

If we regard to 2019 that still holds.

[Lucas Pipes, B. Riley FBR]

Very helpful, alright. Well, I will leave it here. Thank you very much and best of luck.

[Jimmy Brock, Chief Executive Officer]

Thanks Lucas.

[Operator]

Our next question comes from George Wang with Citigroup. Please go ahead George.

[George Wang, Citigroup]

Hi guys. Congrats on a strong quarter.

[Jimmy Brock, Chief Executive Officer]

Alright. Thank you, George.

[George Wang, Citigroup]

Yes. So most of my question have been answered, just a couple of quick ones, just from MLP perspective, I just wanted to ask you again just on the distribution policy just to see if anything has changed regarding the common and subunits payout for the distribution?

[Jimmy Brock, Chief Executive Officer]

No there is really no strength or no change at all in our strategy there to CCR. We continued to generate plenty free cash flow to pay those unitholders. We look at all options that come in, but the strategy hasn’t changed there.

[Dave Khani, Chief Financial Officer]

Yes. And quite honestly George with year-to-date 1.4x coverage, I thought the question would be why aren’t we raising our distributions.

[George Wang, Citigroup]

Right.

[Dave Khani, Chief Financial Officer]

So – but what, we take an annual approach to how we do things, right. So we don’t look at quarter-to-quarter, we look at the kind of the full year and we basically right now we are very comfortable where the distribution is, it’s a very high yield as it is and so I think we are very comfortable.

[George Wang, Citigroup]

Got it. And also just on the opening cost side going forward, it’s encouraging to see you guys lowered the costs for next year even despite some input costs higher and also higher inflation, so I know you mentioned CO2 elements and components for lower cost going forward, so which one do you think has the biggest contribution for low cost, operating cost guidance going forward and just – basically I am just asking in terms of the biggest lever for i.e. sustaining the lower operating costs going forward despite a high inflation?

[Jimmy Brock, Chief Executive Officer]

Yes. We put extreme amount of importance on unit costs. All of our employees whether they are in this burden or at the coal mine or incentivized of unit cost. They continue to bring new and innovative ways to us. Most of this cost reduction that we have been able to offset the inflationary pressures have come from efficiencies from the mine, other in term of productivity gains, some of automation that we have on the shares that’s giving us a little higher yield and ease of running that equipment which is a little cheaper as well. And we continued to look at cost initiatives every single day. We understand the importance of it. And so far we have been able to stave off those inflationary costs and we think we are going to be able to do that moving into the future.

[George Wang, Citigroup]

Got it. Thanks a lot.

[Operator]

Our next question comes from Jeremy Sussman with Clarksons. Please go ahead, Jeremy.

[Jeremy Sussman, Clarksons]

Hi, good morning and thanks for taking my questions.

[Jimmy Brock, Chief Executive Officer]

Hi Jeremy.

[Dave Khani, Chief Financial Officer]

Good morning.

[Jeremy Sussman, Clarksons]

Good morning, I guess just maybe following-up on the CONSOL Marine Terminal, while it was great to see the revenue increase due to a take-or-pay contract, maybe a bit surprised to see the volume decline from admittedly pretty high numbers 3.5 million tons last year to 2.7 million pounds year-over-year, so was this a company specific issue with whomever had to pay the take-or-pay penalty or was it something market related?

[Dave Khani, Chief Financial Officer]

In the quarter Jeremy, we ended up shipping 26% of our production to the export market and the balance to the domestic market based upon having the three longwall moves, we had obligations in the domestic market that we had to fulfill. So we shipped less than we typically would have done through the terminal, that’s the big part of it.

[Jimmy Brock, Chief Executive Officer]

And that was planned.

[Dave Khani, Chief Financial Officer]

Yes.

[Jeremy Sussman, Clarksons]

Okay. Now that’s helpful. And maybe since it doesn’t sound like it was market related, maybe I can just follow-up and ask you a market question and just maybe Jim I mean how would you compare the environment in India generally speaking to what you are seeing today versus maybe what you are seeing earlier in the year?

[Jim McCaffrey, Chief Commercial Officer]

Well, I told you when I went to India earlier the year. I was amazed by the enthusiasm for buying more coal. That has softened a little bit as pet coke purchases have come down. But Jeremy I still firmly believe that the horse is left to born on pet coke, it may not be today or tomorrow, but at some point we are going to see a lot less pet coke burned in India and a lot more U.S. coal. So I think that that continues. 66% of our export close to 4 million tons year-to-date has gone to India and the demand is still there. Like I said in the last few months, the price has softened a little bit with the pet coke price, but certainly not to the point where it would be that concern. It was just not quite as strong as it was in August and September. India is going – you can read some crazy things about India today. India is going through kind of a weather inversion right now. There is very little wind, so they have very poor air quality throughout the country and especially in the NCR, so they have banned all combustion activities not just coal burning, but all combustion activities for 10 days. During the Diwali festival which is the festival of lights in India that will come to end on November 10. We don’t expect any major impact in the market on that. So I would say overall Jeremy a little bit softer, but still very encouraging.

[Jeremy Sussman, Clarksons]

That’s super helpful. Maybe if I can just sneak one last one in, on the met coal side, I guess how do you balance the kind of permitting and development of Itmann versus the potential to maybe buy some existing production especially as the balance sheet continues to improve, I mean I am not sure of the Itmann timing, but I am sure Jimmy wouldn’t mind if there was met coal in the portfolio for you to sell?

[Jimmy Brock, Chief Executive Officer]

That’s absolutely true. That’s one of the reasons why we are looking at it as one of our high priority projects. The Itmann development has actually came along pretty well, right on the schedule what we thought it would be as far as getting the permitting done. And then of course we want to do our due diligence and make sure that coal seam as what we think it is in both terms of same thickness, gas absorption as well as quality. And we are well ahead on that. In fact as I have said earlier we have went ahead and filed the full application for permit. If things go well which we don’t see any hold up or hick ups here, if they go well we could have that permit mid-2019 which will be right in line with the equipment, we could be and/or producing out of Itmann late in ‘19.

[Jeremy Sussman, Clarksons]

Any magnitude on production?

[Jimmy Brock, Chief Executive Officer]

No we haven’t given any magnitude of production. But again it’s not going to be very high capital project, so it’s going to – production will be commensurate with the capital. So what we will have to just stay tuned. The second part your question really was about how we compare it to outside opportunities, so we spend probably the first three months, four months our business development team looking at our internal projects then to make sure that if we look at anything on the outside and we do look we can benchmark it against our internal projects. And so we will look. But in this environment going out and buying something that doesn’t have any pricing duration that cost a lot of money creates a lot of risk in our mind. So we just we would be we will be really very careful if we ever did go out and buy something.

[Jeremy Sussman, Clarksons]

That’s fair. I appreciate all the color guys and good luck.

[Jimmy Brock, Chief Executive Officer]

Thank you.

[Operator]

Our next question is a follow-up from Lucas Pipes with B. Riley FBR. Please go ahead Lucas.

[Lucas Pipes, B. Riley FBR]

Thank you very much for taking my follow-up question. I wanted to circle back on the pricing side for 2019, you have about 90% contracted and I know earlier in the call there were a few questions on that, but just to circle up on this kind of what percentage is of that amount of that 90% that’s contracted is fixed price, I think you mentioned it and can you give us a sense for what level that that pricing would roughly come in just that we can kind of get a sense for 2018?

[Dave Khani, Chief Financial Officer]

Lucas, first of all we said we have 10% still selling price, so there 10% on the price there. We have 20% to 25% in a netback pricing and that is clearly probably some of it does have a floor, but I would point to the performance of the netback pricing in 2018 which is north of $50. And then we have 13% of the export business that is colored with not firmly priced. And as far as 2019 pricing I am just not prepared to talk about that today based upon the fact that we are still in negotiations with some customers for contracts going forward, but perhaps in the next call we can be more explicit.

[Lucas Pipes, B. Riley FBR]

But in terms of what is fixed at this point is maybe what you realized during Q3 a good starting point for possibly due to the strength we have seen in the market recently maybe a little higher than that?

[Dave Khani, Chief Financial Officer]

Yes, Jeremy, we are not going to go there – excuse me, Lucas, we are not going to go there because we are really we are in negotiation with several utilities right now.

[Lucas Pipes, B. Riley FBR]

Okay, alright.

[Jimmy Brock, Chief Executive Officer]

I am very excited about the portfolio, Lucas. I think we are going to be in very good shape.

[Lucas Pipes, B. Riley FBR]

Okay, alright. Well, appreciate it and best of luck.

[Jimmy Brock, Chief Executive Officer]

Thanks.

[Operator]

This will now conclude the question-and-answer session. I would like to turn the call back over to Mitesh Thakkar for any closing remarks.

[Mitesh Thakkar, Director, Finance and Investor Relations]

Thank you, Sean. 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.

[Operator]

The conference has now concluded. You may now disconnect.