Core Natural Resources Inc (CNR) 2018 Q1 法說會逐字稿

Good day, and welcome to the CONSOL Energy and CONSOL Coal Resources First Quarter 2018 Earnings Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

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

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

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

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

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

Thank you, Mitesh. Good morning, everyone, and thank you for joining us on today's call. The CONSOL team delivered a very strong first quarter performance. We not only outperformed some of our key operational metrics, but we were also able to accelerate some of our financial objectives.

From a CEIX perspective, we commenced the delevering process and started returning capital to our shareholders through some debt and equity buybacks under the plan previously approved by the CEIX board. From a CCR perspective, we had record distribution coverage on an industry leading distribution yield that allowed further debt reductions. Simultaneously, we are also initiating some investment at the Pennsylvania mining complex and some really attractive efficiency improvement projects that should be beneficial to both companies. All of this was achieved due to our world-class asset base and our differentiated marketing and financial strategies.

Some key highlights from the quarter include our Bailey mine achieved record quarterly production in the first quarter of 2018. Our marketing team was able to achieve the highest quarterly sales price for our coal since first quarter of 2015. Our finance team was able to restructure some of the Pennsylvania mining complex operating leases, which reduced the 2018 cash spend by approximately $10 million for CEIX and $2.5 million for CCR. We expect these savings to continue through 2020.

CCR achieved a record quarterly adjusted EBITDA of $35 million, the highest since its IPO in July of 2015.

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

Our quarterly production declined by approximately 200,000 tons compared to the year ago quarter, due to weather-related logistical challenges in early January. These challenges resulted in some demurrage expense, which will be minimized with our new export contract going forward.

For its share of PAMC, CCR produced 1.7 million tons of coal during the first quarter, an annualized run rate of 6.7 million, which is also in line with our previously announced sales guidance range of 6.5 million to 6.8 million tons.

For the first quarter, the productivity at the Pennsylvania mining complex measured as tons per employee hour improved by 2% compared to the fourth quarter of 2017. First quarter 2018 was the most productive quarter for PAMC since the fourth quarter of 2005, and for the Bailey mine, since the first quarter of 2000. As consistency improves at Enlow Fork and geology normalizes, we expect our overall productivity to improve even further.

On the cost front, our average cash cost of coal sold per ton was $29.21 compared to $28.75 in the year-ago quarter. This increase was essentially driven by higher royalties and production taxes, which are tied to higher sales prices. As a management team, we prefer our cost to always go down, but in this case, we welcomed the cost increase, because it was a result of our success in achieving higher prices for our product. This fits with our strategy of being a margin leader rather than volume leader.

During the quarter, we continued to work on nonsale sensitive components of cost and had a notable win with the reductions in the lease expenses that I highlighted earlier.

With that, let me now provide an overview of the coal markets and an update on our sales performance and marketing efforts.

As discussed on previous earnings calls, our marketing strategy is unique, targeted and tailored to optimize the outcomes from our asset base. This strategy was evident in the first quarter as we captured significant upsize in the domestic market by capitalizing on favorable market conditions. There is tangible proof that our market strategy works when looking back to recent history as well.

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

In summary, our unique marketing strategy allowed us to win in 3 different ways over the last 3 years. In 2016, through volume consistency. In 2017, through export opportunities. And year-to-date 2018, through domestic demand and pricing improvement.

In the first quarter of 2018, we benefited from improved domestic burn, higher power prices and higher price contracts kicking in. We registered increased revenue per ton in our traditional fixed-price contracts as well as our netback contracts. We captured some upside during the days of high power prices.

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

Based on our internal estimates, inventories at several of our key Northern Appalachia rail serve power plants declined to less than 10 days at various points during the first quarter. This dynamic continues to create a demand from our customers. The return to more normal winter temperatures boosted the PJM West day ahead power prices to an average of $45.31 per megawatt hour. As you may recall, during our fourth quarter 2017 conference call, we indicated that every $1 per million megawatt hour improvement over $32.50 per megawatt hour of PJM West power prices results in a $0.30 to $0.40 improvement in our average revenue per ton compared to our annual guidance. As a result, this improvement in power prices alone drove an approximate $5 per ton improvement in our average revenue per ton this quarter. This pricing optionality continues for the remainder of the year.

For the first quarter, our average revenue per ton was $52.98 compared to $46.80 in the year ago period. It is important to note that this was accomplished in a sub-$3 for natural gas market.

On March 13, 2018, the National Energy Technology Laboratory published a report examining the impact of cold weather event of December 27, 2017 through January 8, 2018 on power markets. The key takeaways were coal provided 55% of the incremental daily generation needed across 6 independent system operators, including the PJM. In PJM, coal provided the most resilient form of generation. Available when energy was 12% lower during that period than for a typical winter day, resulting in a need for baseload fossil fuel power plants to make up this generation, in addition to its resiliency role in meeting the greater demand during the event. Clearly, coal and traditional fossil fuel generation did their job and once again, highlighting the importance of having a diverse fuel generation fleet.

Now turning to the export market. Global coal demand continues to improve, tying to overall broadening an accelerating economic growth. Based on current prompt and forward API2 prices, the netbacks to our mines remains comfortably above $50 per ton through 2020. We continue to see improved demand for our coal in India. Prior to 2017, our coal moving to India was primarily going into the industrial sector to the brick and cement industries. However, we are now beginning to penetrate into India's coal-fired power generation sector as well.

Other areas of the world are also expanding their coal pellets. Industry sources suggest that Turkey is close to proving an increase in its sulfur cap for input coal whereby it will be able to accept up to 3% sulfur specs increase, an increase from up to the 1.2 previously. This is very good news for our high-quality Northern App coal, as it opens up additional opportunities.

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

Looking forward to the remainder of 2018 and beyond, we are in very good shape. We are greater than 95% contracted for 2018 shipments and are 74% and 26% contracted for 2019 and 2020, respectively. As disclosed in the press release this morning, our new export contract kicks in during the second quarter, which will provide us with pricing uplift in our export business. With low coal and natural gas inventories as well as a strong export market, we are very comfortable with our prospects to contract and optimize our 2019 through 2021 coal position.

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

Thank you, Jimmy, and good morning. This morning I will provide a review of the quarter and an update to our 2018 guidance. Before I do so, let me provide some perspectives on the current energy markets.

During the last earnings call, we discussed our views on the coal pricing cycle and how global demand growth, coupled with several years of investment, is setting us up for sustainable pricing improvement for coal. As Jimmy just highlighted, the global demand for coal has been accelerating as well as the demand for other commodities. This is important as we benchmark pricing of our product against these other commodities. While it's easy to compare thermal coal prices to domestic natural gas, we also watch and market off other key international thermal and net prices that tie to rising LNG, oil and steel prices.

On Slide 10, we provide you the prices of various energy sources throughout the world, including several widely used benchmarks. As you can see from a dollar per mmBTU basis, there is a nearly an 80% arbitrage for Northern App coal versus the global LNG market. As these commodity prices rise, this puts even more pressure on the consumer to close the gap.

The key differentiator is that we have very high BTU coal and that a majority of our coal can be exported to our wholly owned export terminal in Baltimore. Our market reach is very broad with our product shipping to 5 continents last year. We believe this creates upside opportunities for us in the global markets going forward.

There's also been an interesting development in the domestic oil and gas production markets. Investors who in the past supported production growth are steering company management teams to raise overall returns, generate free cash flow and include shareholder-friendly actions, similar to the trend we saw back around the year 2000.

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

This trend towards investment discipline, along with rising domestic and export demand, provides daylight for supporting healthier natural gas prices. Over the past 8 years, the energy space has had a poor record of generating returns above their cost of capital as companies continue to spend on growth in spite of falling commodity prices. For the trailing 12 months, our return of capital employed calculates to 13%.

With this backdrop, we have developed a disciplined approach to capital allocation with an eye on raising our corporate returns. We have a focused list of internal and external generated projects that will be marked against stock and debt buyback opportunities, subject to certain limitations. We have just begun to spend our highest rate of return debottlenecking projects, which will optimize our existing production. We will not spend significant capital to add production unless we have sustainable pricing. Also, some of these internal projects are candidates for divestitures or swaps.

Let me move over to our financial performance now where I am very excited to recap the quarter and give an update on our guidance. We will review CEIX first and then CCR.

This morning, we reported a strong financial quarter with net income of $71 million, adjusted EBITDA of $150 million and organic free cash flow net to CEIX shareholders of $88 million. This compares to $46 million, $116 million and $34 million, respectively, in the year ago quarter.

On a per ton basis, our coal margins improved $5.72 to $23.77 compared to year ago levels as prices rose $6.18 to $52.98, while costs increased $0.46 to $29.21. With a high percentage of costs fixed, rising prices mostly fall to the bottom line. What is also interesting is that domestic price realizations have now outperformed export prices for the second quarter in a row, which will likely change in the second quarter with our new export contract.

Now during the quarter, we generated $116 million of cash flow from operations and spent $22 million in capital expenditures. This allowed us to opportunistically pay down $26 million in outstanding debt, which we had an average financing cost of 8.2%. One of the goals we highlighted on our spin-related debt and equity road shows was to take our net bank leverage ratio down to 2x by year-end 2018. We've achieved this target 3 quarters early as we've outperformed the last 2 quarters. We believe that our stock is currently undervalued and bought back approximately 44,000 shares as well.

While raising our corporate returns, we will also work on lowering our cost of capital. Our access to capital as well as industries continues to improve and we took advantage of this with our leasing program in the first quarter.

Now let me move over to CCR. This morning, CCR reported a strong financial quarter with net income of $22 million, adjusted EBITDA of $35 million and distributable cash flow of $25 million. This compares to $14 million, $28 million and $15 million, respectively, in the year ago quarter. The most important metric for CCR is the distribution coverage. We generated distribution coverage of 1.8x during the quarter, which is the highest in our history as a public company.

During the quarter, CCR generated $29 million in net cash from operating activities. After accounting for $5 million in capital expenditures and $14 million in distribution payments, we were able to pay down approximately $10 million in debt. CCR's net leverage ratio improved to 1.8x.

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

As new PMC guidance reflects, a $2.20 per ton margin expansion, using the midpoint of guidance, based on a $1.33 increase in expected prices and an $0.88 decrease in cash costs of sales as an improvement again, using the midpoint of guidance.

Based on the revenue, cost and sales guidance, we are also increasing our adjusted EBITDA guidance for CCR and CEIX by $5 million and $30 million, respectively, again using the midpoint. The CEIX adjusted EBITDA guidance improvement also reflects better than previously expected consolidated marine terminal profitability and higher royalty income.

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

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

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

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

For CCR, our #1 priority is to maintain an attractive distributions with adequate coverage for all unit holders. Our second priority is to grow opportunistically from some of the projects that our sponsor executes at PAMC.

Finally, we will continue to delever the balance sheet and position ourselves to withstand the cyclicality in the commodity prices.

While this was a great quarter for us, we have several attractive opportunities in front of us. First, our new export contract is kicking in during the second quarter of 2018, which will give us a pricing uplift on our export volumes.

Second, the Enlow Fork mine geology is improving, which should help us better control our costs.

Third, the sulfur content of our coal is expected to further improve in 2019 and 2020, which should enable us to expand certain markets for our product and capture higher pricing.

Fourth, with coal and gas inventories at significantly low levels, we expect to continue to see improving domestic contract prices for 2018 through 2020.

Finally, we have a management team and workforce that are highly motivated and excited to be a stand-alone coal company again. They continue to be highly productive and looking for new, innovative ways to reduce cost while adhering to our values of safety and compliance.

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

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

(Operator Instructions) Mark Levin of Seaport Global.

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

Yes. So one, the netback contracts were very strong in the first quarter. They could be strong in 2Q through 4Q, but we obviously want to be very careful with weather because weather is an important factor. The second thing is, I would say we have the export contracts kicking in. That had to take some material pricing up as well. And then third is, if you listened to my commentary, we are going to hopefully walk our guidance up over time. And so as we perform well, we should hopefully -- you should see the numbers up. So should be careful about -- thinking about what 2Q through 4Q is relative to Q1.

Mark, this is Jim. Let me jump in a little bit, too. With our export contracts, in the first quarter we shipped about 1.9 million tons of export. Only 200,000 tons of that was met crossover. As we look toward the balance of the year, we expect to ship another 1.3 million to 1.5 million tons of met crossover at a $10 premium to what we shipped the first 200,000 tons. On the thermal side, we expect to ship similar levels to be around 5 million to 6 million tons at the end of the year of thermal sales. And we would expect those to be $5 higher than we showed in the first quarter. So we expect some solid strength on the export front. Now on the domestic front, on the netback contracts, we gave a lot of color last time about how to take a look at the appreciation of those contracts versus a base point of $32.50 a megawatt hour. The good news is we saw great results in the first quarter, but we've continued to see solid results into April. And we're seeing some volatility in the power markets that we think will help us continue to promote solid netback pricing. Now will it be quite as strong as Q1? Perhaps not, but we expect solid performance from those contracts still.

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

Well, we talked about the new export contract we have and I don't think there's any secret that we did the deal with XCoal. I think the market is aware of that now. As we look into '19, we're seeing very consistent performance with pricing. Me and my team have been traveling some with XCoal, we've been to 4 different areas of the world in the last quarter and we're seeing surprising, eye-opening interest in our products. So I anticipate that based upon export pricing, it'll be as strong, if not stronger. And I'm still excited about the netback pricing. We look at the weather like the bomb cyclone and we say, hey, that's a big anomaly, which drove pricing. But if you look at the last 5 winters, '14 and '15 both had strong periods. '18 had strong periods, so I'm going to suggest to you that '16 and '17 were the anomaly, with especially weak winter weather. And even in those years, our netback pricing was at or slightly above the rest of our market pricing. So I'm anticipating some more volatility in the marketplace based upon some increased economic activity, the fact that we've had some retirements both coal and nuke, and the whole resiliency in price formation discussions continue. All of that would benefit us in terms of where we see power pricing moving to.

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

Yes. Some of those, Mark, are things that we currently have underway now. Some of it is like automation. We're using some automation with our shears underground that could increase our yield and reduce our cost at the prep plant as well. Then we also have some of the other projects that we'll value and look at all of these opportunistically. We may have some opportunities and you'll have to stay tuned to get into some of the met coal markets, pure metallurgical markets, those things that we have. That's what this BD team is working on. But we're just underway on that, so you'll have to stay tuned for those.

Yes, and just know these will probably, what they'll do is they'll have 2 pushes to our forecast. One will be it could take our production up and it could take our costs down and so our margins would improve. And these things will probably kick in, probably some point later this year into '19 and '20 as we deploy them because they have different time horizons when we put them in place. And I would just say the rates of return are meaningfully above 30% or 40%. They're extremely high rates of return.

David, are we talking like 1 million tons, 2 million tons? Any way to quantify what some of this stuff might mean?

Yes, I would say more than 1 million tons and less than 5 million tons.

Next, we have Lucas Pipes with B. Riley FBR. (Operator Instructions)

Ted Beachley here for Lucas Pipes. My first question is with inventories that's on the NAPP power plants below 20 days of burn and given the general demand right now, do you see the potential for any sales volume upside? And if so, when would you expect these incremental domestic spot sales to hit?

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

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

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

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

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

Next, we have Nick Jarmoszuk of Stifel.

Nick Jarmoszuk from Stifel. Question for you on the Turkey regulatory front. When do you expect there to be a finalization regarding the sulfur content of the thermal coal there?

That's a great question. Everybody I've talked to keeps saying 2 more weeks, 2 more weeks. It's going to happen. I think that the issue is simply this. Turkey today has an input sulfur limit, so you can't bring coal into the country at any higher sulfur limit than 1.2%. That input limit is going to be eliminated. So they're going to start looking at effluent limits, emission limits going forward. And I think that what's going on is they're looking at individual plants and stations based upon their level of ability to scrub and that's what's delaying the process. They're visiting every individual plant that burns coal in Turkey and I think they'll all have different emission limits. But the input level is definitely going to be eliminated. And that's what's taking the extra time.

And what do you think the market opportunity there is?

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

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

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

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

So stay tuned on that one.

(Operator Instructions) Next, we have a follow-up from Mark Levin of Seaport Global.

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

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

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

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

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

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

I think we would continue to look at those. Obviously, we're open to everything, but valuation is the important metric there. So we would look at the cost of capital, do the due diligence and see which project returns the highest rate of capital.

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

Yes, it could be a mine. But the one thing, you -- when you're doing M&A, you've got to make certain you know what you're acquiring. And we've seen a lot of times you go through due diligence, you pick something up and you have to invest significant capital to get the numbers that you anticipated getting. So we've seen over the last 5 or 6 years there hasn't been a lot of capital invested in coal mines, so that would be at the forefront when we start to due diligence to look at them. But again, it would come down to valuation and how attractive we think that return can be for us.

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

Thank you, Mike. 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 are available to answer any follow-up question you may have today. We look forward to our next quarterly earnings call. Thank you, everybody.

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