CONSOL Energy Inc

NYSE:CEIX

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the CEIX and CCR Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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, sir.

[Mitesh Thakkar, Director, Finance & Investor Relations]

Thank you, Chad, and good morning, everyone. Welcome to CONSOL Energy and CONSOL Coal Resources fourth quarter 2018 earnings conference call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have laid out for you in our press releases or in our SEC filings. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise.

We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in the press releases and furnished to the SEC on Form 8-K. You can also find additional information on our websites, consolenergy.com and ccrlp.com.

With me today are Jimmy Brock, our Chief Executive Officer; Dave Khani, our Chief Financial Officer; and Jim McCaffrey, our Chief Commercial Officer.

In his prepared remarks, Jimmy will provide a recap of our key achievements during 2018 and specific insights on marketing and operations. David will then provide an update on our financial results and 2019 guidance. In his closing comments, Jimmy will then lay out our key priorities for 2019. During the prepared remarks, we will to refer to certain slides that were posted on our website in advance of today's call. After the prepared remarks, we will have Q&A session, in which all three executives will participate.

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

[Jimmy Brock, Chief Executive Officer]

Thank you, Mitesh, and good morning, everyone. 2018 was a very significant year for us at CONSOL, and I am pleased to report that we have delivered on our key goals we set at the beginning of the year. We improved our safety performance, set production and sales volumes records at the Pennsylvania Mining Complex and exceeded our financial goals we set at the beginning of the year. We also fulfilled the promises that we made to our shareholders, creditors, and other key capital providers at the time of separation from our former parent in November of 2017.

Let me now provide you a brief recap of the year and how it has positioned us for success in 2019. First, on the safety front, 2018 was significantly improved from 2017, which already exceeded the industry average. On a year-over-year basis, we reduced our total recordable incident rate by 13% and reduced our total number of exceptions by 12%. We worked the entire year at our processing plant without a recordable safety incident.

At our CONSOL Marine Terminal, we had zero recordable safety incidents and a 100% compliance record during 2018. All our employees, including the executive management team, remain focused on achieving zero life-altering injuries. Our two operating assets, the Pennsylvania Mining Complex and the CONSOL Marine Terminal, had record-breaking 2018 performances. The Pennsylvania Mining Complex produced 27.6 million tons, a new record and its third consecutive year of production growth.

Since 2015, we have increased our production at the PAMC by approximately 21% even though the EIA estimates that total U.S. coal production declined by 16% during the same time frame. The CONSOL Marine Terminal finished the year strong and set a new annual revenue record, while also continuing its outstanding safety performance. It is important to note that these records are being set by assets that have been in operations over 30 years and defied the trend of the shrinking coal industry in the U.S.

Financially, both CEIX and CCR delivered exceptional annual performances for their shareholders and unitholders respectively. CEIX generated strong organic free cash flow net to its shareholders of $246 million, delevered its balance sheet by 0.7 times and bought back several undervalued securities from different parts of its capital structure.

Staying true to our capital allocation framework laid out at the beginning of the year, we originally focused on reducing leverage and repurchasing our expensive debt, but quickly pivoted to significant equity repurchases in the fourth quarter, as market volatility provided us attractive opportunities to buy our shares.

CCR generated its highest annual distributable cash flow since its 2015 IPO. This resulted in us fully covering our double-digit distribution yield, even while paying off approximately $34 million of intercompany debt to CONSOL Energy. As investors in vast publicly listed partnerships has started focusing on balance sheet improvement CCR is ahead of the pack.

Now let me review our fourth quarter operational performance in detail. Coal production at the Pennsylvania Mining Complex, increased nearly 10% in the fourth quarter of 2018 compared to the year ago quarter. The improvement was due to higher productivity, early benefits of debottlenecking projects, as well as improved geological conditions at the Enlow Fork mine. These factors also drove a 6% overall improvement in production for the full year 2018 versus 2017. In addition, the Bailey and Harvey mines each set individual production records of their own during 2018.

For the fourth quarter of 2018, the productivity at the Pennsylvania Mining Complex, measured as times per employee hour, improved by approximately 2% compared to the prior quarter. Year-over-year, productivity at the Pennsylvania Mining Complex is approximately 4% higher in 2018 when compared to 2017.

We are also beginning to see initial benefits of our longwall shearer automation and other debottlenecking projects. For its share of the Pennsylvania Mining Complex, CCR produced 1.7 million tons of coal during the fourth quarter of 2018, which is improved from the 1.6 million tons produced in the year ago quarter.

On the cost front. Our average cash cost of coal sold per ton was $30.54 compared to $27.30 in the year ago quarter. This increase was expected and driven by increased subsidence expense and mine maintenance spending compared to the prior period. However, if you look at the full year comparison, average cash cost of coal sold per ton increased by less than 1% compared to the year ago period.

Furthermore, if you look at our performance over multiple years Pennsylvania Mining Complex reduced its average cash cost per tons sold by 25% during the 2014 to 2016 period and only gave 4% back in the last two years. It is fair to say that the team has done a good job of keeping cost under control, even while inflationary measures have been mounting throughout the last couple of years.

The CONSOL Marine Terminal capped off the year with another strong quarter. Terminal revenues came in at $17 million for the fourth quarter, which was relatively flat compared to the fourth quarter of 2017.

Operating costs also remained flat across the same time period. The take-or-pay agreement we entered into earlier in the year has provided us with a steady revenue stream and helped us finish 2018 with a record revenue year. This agreement runs through mid-2020.

With that, let me now provide an overview of the coal market and an update on our sales performance and accomplishments. Some of the key highlights during the quarter are, one, average revenue per ton improved by more than 7% compared to the year ago quarter due to improved pricing on our export sales as well as our domestic netback contracts.

Two, driven by the strength in natural gas markets during the fourth quarter, we continued to contract more coal for future business and are now greater than 95% contracted for 2019, 53% contracted for 2020, and 28% contracted for 2021. Despite the pricing volatility in export markets, demand for our coal remains robust and we expect to ship over 8 million tons of coal internationally in 2019.

Let me now provide you with some color on our 2019 coal market outlook. First, U.S. coal inventories continued to remain at very low levels. As noted in our press release, total coal inventories at domestic power plants as of the end of November were 104 million tons, about 27% lower than year ago levels and the lowest November levels since 1997.

Bituminous coal inventories were lower by 31% year-on-year and several of our key customers, Northern App rail-served power plants continued to report around 20 days of burn 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 and higher export shipments. While export prices have pulled back since our last earnings call, it is not due to the lack of demand. We continue to see robust demand trends in two key destinations for our coals.

Let me start with India. The demand for Northern App coal in India's brick kiln markets has traditionally been seasonal. We are pursuing more consistent demand from other industrial and utility customers. Large industrial customers in India are willing to commit to purchase of Pennsylvania Mining Complex coal on term basis.

While international indices have declined, we are still seeing strong demand for our high-BTU product with mine netback prices at over $50 per ton. In Europe, during the fourth quarter of 2018, we saw some temporary pause in the imports of high BTU coal due to the water levels of the Rhine River and some penetration of low BTU coal.

However, more recently, we are seeing European buyers becoming more active in the high-BTU coal market. The good news is, there is a price contained in that market and we believe there are opportunities for the long-duration contracts with European utilities.

Europe and India are our key export destinations and we're not seeing any meaningful slowdown in demand for our coal. From a pricing standpoint, I would like to remind everyone that for the first half of 2019, we got fixed prices for our export shipments of approximately 4.7 million tons, so we are insulated from the pullback we saw in the fourth quarter of 2018.

For the second half of 2019, we are expecting about 3.5 million tons of exports, which have a pricing floor in place. Therefore, I think we are in good shape as far as the export markets are concerned.

When the export market was hot in the first quarter of 2018, we took advantage of high prices and locked in 14 million tons of our coal for multiple years. After that as the domestic market strengthened we captured some contract duration and high prices in the domestic market.

We are leveraging our cost competitive assets, our reputation as a reliable supplier in the domestic market while taking advantage of the domestic assets and coal qualities in the international markets to capture the best arbitrage for our product.

Looking forward to 2019 through 2021 we are in very good shape. With continued low domestic inventories, we believe that it will be more opportunities in the domestic market to contract and optimize our portfolio.

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

[Dave Khani, Chief Financial Officer]

Thank you, Jimmy. This morning I will review our 2018 financial results, introduce our 2019 guidance and provide an update on our liability management efforts.

Before doing so it is important to highlight that we really made two important strides in 2018 towards our sustainability focus. Jimmy talked about how we locked in multiyear domestic contracts to supplement our strong export book. Second, we've strengthen both CCR and CEIX balance sheets, which I will discuss later. Last, we are releasing our first sustainability report for CONSOL Energy this month.

Now let me start with our financial performance. We will review CEIX first and then CCR. CEIX reported a solid financial quarter with net income of $46 million, adjusted EBITDA of $115.2 million and organic free cash flow of $34.4 million. This compared to a year ago net loss of $24.6 million, adjusted EBITDA of $119 million, and organic free cash flow of $46 million.

Our year-over-year cash margins improved by $0.21 to $19.27 from prices outpacing cost increases. Our per ton cost increased in 4Q 2018 versus 4Q 2017 from two items; first, subside expense; and second increased maintenance spending. The timing of these two items are lumpy and should be looked at on an annual basis. Overall, our 2018 cash costs were up less than 1% to 2017.

For fiscal year 2018, we reported adjusted EBITDA of $484 million, which was right at the top end of our last guidance range. We generated $414 million of cash flow from operations, spent nearly $146 million in capital expenditures, and paid $22 million in distributions and non-controlling CCR unitholders.

As a result, CEIX generated $246 million of organic fish cash flow net to CEIX shareholders. We also benefited from approximately $35 million of positive working capital in part from the stronger credit controls that we put in place earlier this year. Traditionally, we see working capital outflows in a rising market and credit should be given to our marketing and treasury teams.

One note on why we ended at the top end of our 2018 capital spending range. We've invested in a new state-of-the-art enterprise resource planning system last year and went live in January 2019. This system will allow us to be even more granular on tracking and managing our costs.

Now let me update you on CCR. CCR reported net income of $16.6 million, adjusted EBITDA of $29.4 million and distributable cash flow of $18.5 million. This compares to $11.3 million, $28.2 million and $17.7 million respectively in the year ago quarter.

For the full year 2018m we reported adjusted EBITDA of $119.8 million, which was above the $119 million high-end of our last guidance range. Furthermore, our full year CapEx came in at $31.1 million, which was at the bottom end of our CapEx range.

In 4Q 2018, CCR generated $30.2 million in net cash from operating activities, which includes a $1.6 million inflow from changes in working capital. After accounting for $10.9 million in capital expenditures and $14.3 million in distribution payments, we reduced our debt outstanding on the intercompany loan with CEIX by $4 million.

For the full year 2018, we generated $125 million of net cash flow, cash from operating activities, and incurred $31 million in capital expenditures. Of the remainder, we returned $57 million to our unitholders and repaid $37 million of total debt.

CCR finished the year with a healthy net leverage ratio of 1.4 times. We believe that our two-pronged approach of maintaining a high coverage ratio and low leverage should provide added comfort to our unitholders regarding the long-term sustainability of our current distribution policy.

As we worked on reducing our cost of capital we were successful in strengthening the CEIX balance sheet in two main ways. First, we've improved our liquidity and significantly increased our capacity across our key capital sources including our share re-bond providers.

Our access to capital continued to improve throughout 2018 and into 2019. Second, our public debt and legacy liability profile continues to meaningfully improve. In 2018, we reduced $56 million of our public debt and expect to reduce up to another 20% in 2019. This will reduce our public debt by about 25%, since we spun out. We also reduced our balance sheet legacy liabilities by about 16% or $200 million over the last two years primarily by managing our costs more efficiently. In 2018, we reduced our total legacy liabilities by approximately $96 million compared to the year-end 2017 levels, primarily driven by a reduction in OPEB liabilities.

Slide 6 shows, how we tactically allocated our capital last year to achieve our goals with our disciplined debt – disciplined capital allocation process. We initially focused on our high-cost debt and then capitalized on the decline on our stock price to buyback our CEIX and stock and CCR units. With the market being volatile, we will continue to be very careful in how we allocate our capital to the highest rates of return areas.

Since the beginning of 2019, we have already repurchased approximately $7 million of our second lien notes in the open market taking advantage of the December short credit spread event. We will also repay approximately $110 million of our Term Loan B at par in the next couple of days. Our goals are to drive our return of capital higher as the lower our cost of capital.

Slide 11 highlights of our success. CONSOL Energy's return on capital improved to 15% from 14% last quarter and from 13% at the beginning of the year. Now, let me provide you with our 2019 outlook. Just like last year, we will continue to measure our risk appropriately and improve upon our guidance through strong execution as the year progresses. We successfully walked up our guidance each quarter last year as we captured some of the upside opportunities and reduced some of the downside risks.

For PAMC, we are expecting our 2019 sales volumes to be consistent with 2018 levels. The market has been able to absorb all we can produce and we expect this trend to continue. As such, we are providing CEIX and CCR 2019 coal sales volumes of 26.8 million tons to 27.8 million tons and 6.7 million tons to 6.95 million tons respectively.

As a reminder, during 2018 we ran the complex at 97% capacity utilization and we currently expect to run the same this year. The high level of utilization is attributable to the significant amount of capital we have and will continue to invest in our business, our safety focus and the strength of our operating teams.

Based on our strong contracted position and estimates on our netback pricing, we currently expect our average revenue to range between $47.70 and $49.70 per ton. This incorporates a higher domestic fixed price contract and export shipments than realized in 2018 offset by lower netback prices.

The midpoint of our guidance range reflects the PJM forward curve for $30.50 per megawatt hour for 2019. As we've seen last year, these prices are very sensitive to supply-demand changes.

Last year, our initial guidance started at $32.50 per megawatt hour and we ended up realizing $36.50 per megawatt hour for the full year 2018. We estimate for -- that for every $1 increase in megawatt hour in annual PJM West power prices, our total sales portfolio will increase by $0.25 per ton.

Now we expect our 2019 cash costs of coal sold to be between $30.40 and $31.40 per ton. At the midpoint, we are expecting approximately 5% increase in costs compared to 2018 due to higher subsiding expense and inflationary pressures that we discussed last quarter. The good news is we're starting to see some steel price moderating compared to mid-2018 levels and the higher subsiding expenses that we have in 2019 should decline after 2019.

We have several technology and debottlenecking projects that will focus on improving efficiencies that could benefit operating costs. Rolling it all up, we expect CEIX and CCR adjusted EBITDA of $380 million to $440 million and $92 million to $115 million respectively. We're changing our CONSOL Marine Terminal methodology to be based on EBITDA rather than throughput volumes. This provides more visibility into the business and better reflects the take-or-pay contract that we entered into early 2018. For 2019, we expect the CONSOL Marine Terminal EBITDAs to be between $40 million and $45 million range.

Now Slide five highlights our 2019 capital expenditures for CEIX and CCR to be between $135 million and $155 million and $34 million to $38 million respectively. This is largely in line with our 2018 capital spending levels and reflects continued spending on our refuse project, equipment rebuilds and air shifts. Our capital budget excludes our potential growth projects such as Itmann where both the capital revenue and costs are not in our forecast.

With that, let me turn 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 lay out some of the priorities for 2019. First and foremost, as Dave mentioned, we still have some work to do on the debt reduction front. The upcoming debt prepayment and open-market buybacks will help us save about $10 million in annual interest expense and improve our overall risk profile.

Secondly, in 2019, we expect to transition from the delevering mode to opportunistic growth mode. As you know, we are currently seeking a permit for our Itmann low-vol metallurgical coal project. The permitting process is advancing very well. The core haul data has confirmed our expectations regarding the favorable quality characteristics, seam thickness, and gas content of the reserve.

We have also received favorable feedback from potential customers based on the quality specs. We have started the permitting and engineering process for a standalone preparation plan. We are deep into our economic analysis phase and the only remaining piece is the process and cost component. We are currently looking at a couple of options and expect to provide you full project economics and capital expenditures needs on or before our first quarter earnings call. We do not expect any material impact on our share or debt repurchase program due to the funding needs of the Itmann project.

Finally, we expect to continue the momentum generated in 2018. Our operations are well capitalized and positioned to continue to run at high capacity utilization. The market is set to absorb all we can produce with our contract, but firmed up for 2019, our focus is now shifted towards strengthening our portfolio for 2020 and 2021.

In summary, our key priorities for 2019 are; A, to safely and competently produce our high-quality coal at the lowest possible cost; B, continue to improve our balance sheet through debt repayment; C, selectively pursue earnings growth opportunities that increase the per share value and return capital to the shareholders in the most attractive form.

We are very confident in our plans for 2019 and more importantly, the team's ability to execute the plan. Before I hand it back over to Mitesh on behalf of our Board of Directors and the Executive Management team, we want to thank of our hard-working employees for their outstanding contributions and innovative efforts. We recognize their importance and would not be in this great position without them.

[Mitesh Thakkar, Director, Finance & Investor Relations]

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

[Operator]

Certainly. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Mark Levin with Seaport Global Securities.

[Mark Levin, Seaport Global]

First question so David you mentioned over the course of 2018 you guys raised guidance each quarter. When you look at 2019 and the starting point today and you think of the potential opportunities as the year progresses is that mostly around PJM West power price changes and potentially adding Itmann to the portfolio? Or are there other opportunities potentially be able to walk up EBITDA guidance?

[Dave Khani, Chief Financial Officer]

Yes. I'd just keep it at a very high level. So, if you think about what we did last year and sort of parallel to this year we improved utilizations. Some of that was due to netback a good piece of it. We improved our production and we also did a good job of improving our cost.

So, we think it was all three buckets. Some more impactful than others and we have a list of projects that we're working on to try to improve our guidance.

[Mark Levin, Seaport Global]

Got it, fair enough. And then the cadence of EBITDA throughout the year as we kind of put together our quarterly estimates things that we should be thinking about as it relates to longwall moves? Or any other sort of specific items that might make one or more quarters materially different from the others?

[Jimmy Brock, Chief Executive Officer]

Mark I think if you look at just the schedule of our longwall moves, for this year we will have an additional longwall move because of the short panel that we're mining at Bailey mine.

So I think if you look at the first quarter we're in now - we will have probably two longwall moves and then there’ll be spread out. So if you're looking for the lumpiness in the quarter, quarter two only has one longwall move in it. So it'll be a strong quarter for us. And then keep in mind that Q3 we do have a week for summer shutdown. And then we have the other two additional longwalls one in each quarter three and 4.

[Mark Levin, Seaport Global]

Got it, that makes sense. On then just a last question. So obviously API 2 prices have come off a lot probably since the last time we did a conference call or an earnings call. Maybe you can give us some color on what the ARB looks like in terms of domestic opportunity, I mean versus export?

I know you guys have done a great job contracting and you deserve a lot of credit for that. But when you think about where API 2 prices are today and what the ARB looks like going forward is it reasonable for us to assume that domestic probably wins out over export all else being equal?

[Jim McCaffrey, Chief Commercial Officer]

Well, this is Jim, Mark. I think for us the advantage is, the way we're positioned in our portfolio and we can be somewhat patient with that. For example if you look at the prompt netback for API 2 today, it's probably in that $43 range.

But as Jimmy and Dave covered in their remarks, we're totally hedged for the first half. So we expect to ship four million to five million of export tons in the first half, all of which will have a 5 handle on it. Some of which will be met tons so it'll be 8% to 10% higher than the thermal tons.

For the second half, we still have as we explained on the last call, we still have a collar on those tons that has a floor equal to our 2017 -- well higher than our 2017 price which was $45.52.

But quite frankly, we anticipate some recovery in the market by then and some other opportunities that are -- that we see in front of us too maybe hedge a little bit -- to take advantage of some hedges we’ve already laid in.

So we expect that the second half export tons to be north of $50 as well. As far as comparing it to the domestic market, the domestic market has been fairly strong. I think that on a spot basis prices are in at low 50 to mid-50s range. I don't think that that's available on a term basis, but I think prices are pretty solid on the term basis as well. And we've been able to put some term to bed for future as well during these last several months.

[Mark Levin, Seaport Global]

That all sounds great. I'm going to sneak one last one in and then I'm done. The likelihood of refinancing 2019, I think you guys have an excess cash flow sweep. David when you look at the possibilities or the probabilities of refinancing either one portion or all of your debts back, how are you thinking about that this year?

[Dave Khani, Chief Financial Officer]

Obviously our -- if you look at our second lien debt and where it's trading it would give you an indication that our -- the spreads have come down pretty meaningfully versus what we have in place. I'll just stick to kind of what I've been saying for the last year which is, if we do it, we'll do once, we'll do it right and not do it multiple times. So I guess, my answer's kind of stay tuned.

[Mark Levin, Seaport Global]

Perfect. Thanks guys. Appreciate it.

[Jimmy Brock, Chief Executive Officer]

Thanks, Mark.

[Dave Khani, Chief Financial Officer]

Mark, thanks.

[Operator]

The next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

[Michael Dudas, Vertical Research Partners]

Good morning, gentlemen.

[Jimmy Brock, Chief Executive Officer]

Hi, Mike.

[Dave Khani, Chief Financial Officer]

Good morning, Mike.

[Jim McCaffrey, Chief Commercial Officer]

Good morning.

[Michael Dudas, Vertical Research Partners]

Jimmy to follow-up on your prepared remarks. Talk a little bit about restocking opportunities in the U.S. market certainly, inventory levels are quite low. Are you seeing a difference between your merchant and your regulated utilities? And how they think about term? And is the competitive environment and some of the lack of capital spend? Some of the issues were seen throughout the coal sector in the U.S going to continuing to pressure those inventories and maybe provide share -- more share opportunities or better maybe term pricing for CONSOL as you get your book out for 2021, 2022?

[Jimmy Brock, Chief Executive Officer]

Mike, it's Jim again. Let me give you a little bit of long-winded answer there and hopefully, we can cover your question. What we've done in the last quarter is we were able to book term business with five significant customers. One on a two-year term, three on a three-year term and then one on a five-year term. Four of those five deals are based on fixed prices. The fixed prices are in contango. So we feel like we've locked in a good piece of the domestic market. Now some of those deals, we have both regulated and deregulated merchant customers, so no apparent difference from the business that we booked. We did move one customer from a netback position to a firm position based upon their desire and pretty much our desire as well.

The netback concept is built on the customer kind of turning and burning. Taking the coal and burning it. And the customer that went back to a fixed-price basis was playing the power markets a little bit more frequently. And so it didn't make as much sense for them to continue down that mode. So we were able to lock in three year term with them prices again north of $50, and so we feel like we've done a pretty good job putting that portfolio altogether. Now I'm sure a missed a part of your question in that answer, but...

[Michael Dudas, Vertical Research Partners]

No, it's very helpful. And maybe about the rest of the U.S some of your competitors and the difficulties you're seeing getting new investment in coal to the marketplace? How that's going to play out relative to your market and your positioning?

[Jimmy Brock, Chief Executive Officer]

Well on a short-term basis, Jimmy mentioned the November inventory numbers. I'm assuming that we'll see lower numbers in -- at the end of December and probably again at the end of January. I think there have been some production difficulties out there with some of our competitors and that's going to create some opportunity for us. The other thing we're looking at hard Mike is we've been talking for every earnings call we did so far since we spun off that our sulfur was getting better. And we'll have a step change in our sulfur actually two step changes in our sulfur during 2019. One will occur midyear and one will occur at the end of the year. And we think that that will allow us to pursue business with customers that we have that currently blend our coal with cap coal to lower the sulfur some. We'll be able to deliver a lower sulfur product, which will give us a larger part of the blend, which will enable our customers to no longer have to spend a lot of money on cap coal that is either starting to go away or chasing the export market.

We think it will provide a win-win for our customers. As far as our other competitors, I mean, they're out there but we have several advantages. Our logistics are advantage to us. So our terminal has certainly been a big advantage to us, and the fact that our customers find that our operations are very reliable and our assets are among the best.

[Michael Dudas, Vertical Research Partners]

We appreciate your thoughts there. Thank you. Just two quick ones for David. First, Dave, you talked about cost inflation this year because of higher material and subsidence cost. As material prices moderate, subsidence goes away in 2020 and you add these technology and some more productivity enhancements, is the expectation to net off deflation, or is there some more meaningful cost improvement can you make relative to inflation target going forward?

[Dave Khani, Chief Financial Officer]

Yes. So the biggest increase year-over-year that we're experiencing 2019 in our guidance versus 2018 is the subsidence. So that -- we always experienced subsidence but we have a higher period of impact in 2019. So you would expect then that our unit cost deflation from subsidence would be decent. We're going to see how we can capture the sort of the raw material inflation impact and try to reverse that in 2019.

As you know, these things are not purchased on a spot basis, they're generally with contracts that take some time to roll on and roll off. And so as we see these metrics start to come down, we'll figure out how we're going to be able to capture it and role it through our plan. Then we have other things, I'll just say, other projects that we are going after and we'll see what kind of impact there will be. There will not be -- they won't be small they'll be meaningful. I just can't give you any sort of dollar per ton impact.

[Jimmy Brock, Chief Executive Officer]

And Michael, one of the things to think about when you're looking at the cost number. We're comparing ourselves to 2018 which is a very low number for us. You heard us talk about we were only up 1% over the prior year of 2017. So we have been on this cost initiative, driving it down by 25% since 2016 and 2017 numbers, 2014 to 2016 and then the 1% in 2017. So I would tell you that going forward there won't be a large step down in cost, but we'll continue to monitor. We have every employee that works this company to tie down unit costs so they're all looking at innovative ways to do that. And what I expect to see is, is try to hold that cost as we guide it to that 5% number in single digits and continue to get these efforts from all of our employees.

[Michael Dudas, Vertical Research Partners]

That's excellent perspective. Appreciate it. One quick final one, David, with your non-debt obligations in 2019 more of these positive trends, are we going to see anything to look for special otherwise?

[Dave Khani, Chief Financial Officer]

When you - can you explain, you said, non-debt?

[Michael Dudas, Vertical Research Partners]

Yes, the pension and OPEC, anything...

[Dave Khani, Chief Financial Officer]

Oh, yes. A lot of what we experienced last two years really has been managing the costs very effectively and we've just got such a tiny bit of benefit for the first time in a very long time with interest rates, so going up a tiny bit this last year. We will continue to go after and figure out how we can mitigate those costs and how they will get flowed through. It's been a – it is a ongoing process.

We have a team very focused on it. And as we get some – a track record of multiple years our – team our merger team actuarial allow us to roll it through and put in into our balance sheet number. So it's a constant process. I think generally you'll see that over time just based on demographics and closing classes that the cash cost will go down over time and then our team tries again to try to accelerate that and improve upon it.

[Jimmy Brock, Chief Executive Officer]

But Michael we do have a dedicated team that works on that daily and they've done a fantastic job. And they continue to monitor it everyday and look for way to improve it.

[Michael Dudas, Vertical Research Partners]

Yeah, absolutely noticed. Thanks for your time gentlemen.

[Operator]

[Operator Instructions] Our next question will come from Lucas Pipes with B. Riley FBR. Please go ahead.

[Lucas Pipes, B. Riley FBR]

Hey, good morning, everyone. And I would like to add my y congratulations to very strong year and very good. Jimmy, I wanted to follow-up a little bit about on your comments on the growth side. Sounds like you're focused on Itmann. Can you remind us what sort of capital because we could be looking at? And then I know you're kind of in the final stages of the analysis but what returns are you targeting on an in IRR basis? Thank you.

[Jimmy Brock, Chief Executive Officer]

Well, when you look at growth Lucas for us there are many forms of growth. There's the production growth that we had this year, the 1.5 million tons. There's revenue growth. There's share buybacks and there's M&A. Now in particular to Itmann, I don't think I'd be very prudent for me to give you numbers because quite frankly we don't have them locked in yet. And when we do need to put those numbers out and we as we announced it would be before the first quarter earnings call.

We want to make sure that we have them. We've done all of our due diligence and we'll get them flat. So it just being prudent I wouldn't want to put it on the numbers out there until we have the entire package ready to go for Itmann. But we think it's going to be a very good project, the permitting has come along very well.

All of the analysis that have come back on the specs same thickness gas absorption all of those things are very, very favorable and we're excited about the Itmann project. And just stay tuned and we'll give you more of it. Be patient with us. So when we do get the numbers out there, the numbers that we believe and we can get them to the and they'll pertain to the Itmann project.

[Lucas Pipes, B. Riley FBR]

Well, look forward to that. Thank you. And on the export market that Jim, could you remind us what are your hedges? It sounds like you have some open positions second half of this year? But can you just kind of give us an update as to percent hedged. First half of this year it sounds like you're fully locked up. And then second half of 2019 and then also looking out to 2020? Thank you.

[Jim McCaffrey, Chief Commercial Officer]

I think we have four million to five million tons that will ship in the first have. Those prices are all hedged. We did that with EXCO we hedged physically and they hedged financially. In the second half there's close to one million tons of the three million to four million tons that are hedged, both physically and financially again. And I can tell you that working closely with EXCO team we're very confident that we'll be able to bring those in with a five handle. So that's where things stand Lucas.

[Lucas Pipes, B. Riley FBR]

Anything on 2020?

[Jim McCaffrey, Chief Commercial Officer]

We have a tiny bit of work we done on 2020. But it's -- we're not ready to discuss that just yet.

[Lucas Pipes, B. Riley FBR]

Got it. Okay. Well, I will leave it here and thank you very much.

[Jim McCaffrey, Chief Commercial Officer]

Thank you

[Operator]

Our next question comes from John Bridges with JPMorgan. Please go ahead.

[John Bridges, JPMorgan]

Hi, good morning, everybody.

[Jim McCaffrey, Chief Commercial Officer]

Good morning.

[John Bridges, JPMorgan]

I was just curious -- hi -- you mentioned the contango you're seeing in the API 2 price. I just wondered what you thought was going on there? And perhaps in general what you think about the direction of those prices? Thank you.

[Jim McCaffrey, Chief Commercial Officer]

Well, we think that the prices in -- the spot prices in Europe today are basically due to a lack of activity driven by a number of factors. Of course the -- Jimmy mentioned the low levels in the Oran River that allowed inventors to build up significantly in ARA. Today there's still seven million to eight million tons of inventory in ARA. It's starting to get burned out to the customers, but it's taken some time to catch up.

And then, of course, the Chinese always have some effect in the market, we're in the middle of the Lunar New Year celebration. So the markets are particularly quiet, I think so. I don't think there's a lot of activity driving. We do expect and we do see based upon our connections in Europe, stronger birds in Europe particularly in Germany, stronger birds in Germany as the German economy is starting to realize, the cost of moving away from coal to renewables and it's driving considerable debate in Germany.

And then on top of that, German power prices are -- have been relatively strong among the highest in the world and coal is still the cheapest source to generate electricity. So, we think that as the year goes on those prices will recover. And we expect that contango to last and if it does we'll be moving towards trying to do some term business. And again working closely with the Exco, we're planning that out as we speak.

[John Bridges, JPMorgan]

Just as a follow-up. You're talking about having price contracts out to 2020. As I understand it beyond the hedges that some of the coal burning utilities have on their coal-fired power plants run off. So, I just wondered if you have any thoughts as to what might happen when those utilities are fully exposed to these elevated carbon cost?

[Jim McCaffrey, Chief Commercial Officer]

Well, I agree with you that the German utilities have their power hedged for 2020. They still need to buy coal to cover those hedges. I don't have any reason today to believe that that will change in future years. So, we're going to keep our eyes peeled on that subject, because Europe has been a significant player for us in recent years.

[Dave Khani, Chief Financial Officer]

And I think it’s also -- it will be a function of what do you think the alternatives will be? What would LNG prices be, which obviously have meaningfully higher. And then also what is the impact as you see shrinking higher Btu coal and what does that due to the upward pressure on higher Btu coal quality.

[John Bridges, JPMorgan]

Thank you. It’s going to be fascinating to watch. Thank you.

[Jim McCaffrey, Chief Commercial Officer]

Thank you, John.

[Operator]

The next question comes from Vincent Anderson of Stifel. Please go ahead.

[Vincent Anderson, Stifel]

Good morning, thanks for taking my question. You touched on this a bit earlier about the more recent export dynamics. But I want to backup a little bit. I mean, we have to go back to 2010 obviously to find anything like the export growth that we've seen over the last two years.

Looking specifically at thermal, I'd love to get your thoughts on what's been different over the last two years in terms of contract structures, customer mix? And then specifically how is NAPP been positioned recently compared to -- say the Illinois Basin and relative to our last run back in 2010, 2012?

[Jim McCaffrey, Chief Commercial Officer]

Well the big difference between today and 2010 to 2012 could be said in two words. In 2010 and 2012 it was China. Today it's India. And we have done about 4.5 million tons to India last year. We expect a similar opportunity this year. And we also have at least one customer that's done a term business of at least a year and other customers that have done shorter-term business, but not just one vessel at a time in India.

So we're starting to build a book in India of end-user customers which has always been our goal that we think we can do protracted business way. So India certainly big part of the answer, but we're looking for other places to grow as well.

And we're excited to talk about today, the fact that there's a big opportunity for us in the Dominican Republic. A newer power plant has been built. It's the newest most state-of-the-art power plant in the Western hemisphere today, Catalina, it's a 770-megawatt unit. We expect it to burn 2.5 million tons a year.

And we were awarded the commissioning order to have our coal commissioned at the plant. Jimmy and I visited the DR just last week and we're very optimistic about that in the future. So we think that there will be further opportunities.

India, we think that as I said to John that as Europe grapples with the cost of -- to their economy of leaving coal that we'll continue to have opportunities in Europe. And we're excited to pursue this opportunity in the DR and we anticipate pursuing it to the end and getting a lion share of that business.

[Vincent Anderson, Stifel]

That's very helpful, thank you. And just following on that, I mean obviously very constructive on the export markets. But at what point is there a trade-off where you start seeing enough term contract availability in the domestic market where you have to face -- you face the decision between maximizing your netback for today via the export market versus maybe coming back proactively to the domestic market to take share of those term contracts especially if you start seeing these 3, 4, 5-year agreements open?

[Jim McCaffrey, Chief Commercial Officer]

When we spun-off as we made our trip around many people we said that, our goal was to say 70% in the domestic market and 30% in the export market. We've adjusted that sum to say 60% to 70% now. I think I'd still -- where we're going to stay. As I explained earlier to Mike, this opportunity with our sulfur, we think we have customers that can no longer find reliable cap coal.

And we think the opportunity with our sulfur is going to allow for a win-win opportunity for both us and our customer to create larger portfolio and better returns for both us and the customer.

So in general, that has been our strategy, that will remain our strategy. But of course, we will never turn a blind eye to the export market. And the fact that we have this terminal in Baltimore there, available to us, makes it even stronger opportunity for us.

[Vincent Anderson, Stifel]

Great. Thanks, and great job this year.

[Jimmy Brock, Chief Executive Officer]

Great. Thank you.

[Operator]

The next question comes from Jeremy Sussman of Clarksons.

[Jeremy Sussman, Clarksons]

Yes. Hey, everyone. Great quarter and thanks for taking my questions.

[Jimmy Brock, Chief Executive Officer]

Thank you, Jeremy.

[Jim McCaffrey, Chief Commercial Officer]

Thanks, Jeremy.

[Jeremy Sussman, Clarksons]

Jimmy, I think in your closing remarks you noted sort of -- I think you characterize that in 2019 you'll be switching from kind of delevering mode to more opportunistic growth mode. And you, of course, noted the Itmann growth option, which sounds like we'll be getting more detail in a few months on that, which would certainly help on the met side. And so, I guess, as you assess various growth options out there, are there other opportunities? And I guess, in general, how do you kind of compare and contrast the outlook for either thermal or met coal growth? Thank you.

[Jimmy Brock, Chief Executive Officer]

Yes. When we look at growth, again, Jeremy, there's a lot of different ways to look at it. We want to grow our revenue for the business. So we did that this year pretty much with increased production. We are constantly evaluating and looking at other opportunities out there. But anything that we do in the growth market is going to compete on rate of return for capital.

So if there's something out there we can do with due diligence on that fits our plan, it fits for us. We have a market strategy behind it with some duration, we certainly would be open to looking at it. So we're not going to close the doors on anything moving forward. If there's a growth project out there that helps us, helps diversify us a little bit, get into that, we certainly would take that opportunity to look at it.

[Jeremy Sussman, Clarksons]

Okay. No, that's very helpful. And maybe just finishing up on the international markets. Obviously, Indian thermal imports were a nice tailwind in 2018. I think they, overall, were up about 18%, give or take. And I guess, based on kind of what you're seeing today, I mean, how do you see potential growth there in 2019, 2020, as what we saw last year, is it sustainable?

[Jim McCaffrey, Chief Commercial Officer]

Jeremy, this is Jim again. We think it's sustainable. Things have gone very well for us in India. We worked closely with ex-coal. Bob Braithwaite from my team will be in India the next two weeks, gathering some additional color for us. Yes, we certainly think it's sustainable. We don't have any reason to believe otherwise today.

[Jeremy Sussman, Clarksons]

Great. I appreciate that and god luck guys. Thank you.

[Jimmy Brock, Chief Executive Officer]

Thank you, Jeremy.

[Jim McCaffrey, Chief Commercial Officer]

Thank you, Jeremy

[Operator]

The next question will be from Lin Shen with Hite. Please go ahead.

[Lin Shen, Hite]

Hey. Good morning. Thanks for taking the call. Appreciate it. Just want to ask, what do you see the price for 2020 and 2021 when you contract your volumes. You mentioned that you see some contango for the term price, so pricing the 2020, 2021 contract prices are higher from 2019?

[Jim McCaffrey, Chief Commercial Officer]

Yes. What I said is if the five deals that we've done, four of them are in fixed price and the fixed price has contango going forward. So there's escalation and the price of all those deals and the forward years. Specifically, we're not discussing price for the out years today, but every one of them has some escalation in price on a fixed basis. And then of course, like I said, one of the deals that we did was a netback deal.

[Lin Shen, Hite]

Got it. Understand. So sounds like there are price reductions for 2020, 2021 is very encouraging.

[Jim McCaffrey, Chief Commercial Officer]

We have -- as we said earlier, we have 53% booked for 2021. And yes, we are encouraged for 2020 -- I'm sorry for 2020; and 28% for 2021. We're very confident that we'll be able to fill that portfolio. And from our view today, we certainly think that there will be some contango in the market.

[Jimmy Brock, Chief Executive Officer]

Yes. What also gives us some comfort is if you look at the capital spending trends in the whole industry, I mean, capital spending is down by two-thirds and that's probably a big -- and it's been sitting there for a while. And so not only are you not seeing replacement capital than you're seeing also the trend where the quality of coal overtime is getting -- is deteriorating.

And so for us, we can keep our quality -- or actually improve our quality from a sulfur standpoint, but keep our quality from a BTU content flat that that just over time just plays very well for our ability to export coal and capture higher prices over time.

[Lin Shen, Hite]

Great. Thank you. Appreciate it.

[Jimmy Brock, Chief Executive Officer]

Thank you.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mitesh Thakkar for any closing remarks.

[Mitesh Thakkar, Director, Finance & Investor Relations]

Thank you, Chad. 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. Thank you for attending today's presentation. You may now disconnect.