Core Natural Resources Inc (CNR) 2018 Q3 法說會逐字稿

Good morning, and welcome to the CEIX and CCR Third Quarter 2018 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.

Thank you, Sean, 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 risk, 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, www.consolenergy.com and www.ccrlp.com.

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

Thank you, Mitesh. Good morning, everyone. Before I kick off 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 3 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 continue to seek coal 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 3 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 1.4x. As expected and highlighted on our 2Q '18 call, we posted a sub-1x distribution coverage this quarter. This is due to the seasonality of our production and sales and this is why we focus 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 approved 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 worked 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 the 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 continue to make further progress on our technology and growth initiatives. Four, the CONSOL Marine Terminal continued to execute as planned with an exceptional safety performance, which registered zero safety incidents, extending its 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 3 planned longwall moves.

For 3Q '18, the productivity at 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 tracking approximately 6.2% higher compared to the year-ago period. We are starting to see some initial benefits of our longwall shearer automation and other debottlenecking 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 contain 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. Lower 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-focused 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 netback contracts, which benefited from higher power prices during the winter.

In 2Q '18, our average revenue per ton improved approximately 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 our near-term coal market outlook and how we plan to execute our marketing strategy. First, U.S. coal inventories continue 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, continued 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 continue 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 3 quarters of 2018, coal production in the U.S. has declined by 2.7% compared to the first 3 quarters of 2017.

Given this backdrop in the domestic market, our marketing team was successful in signing several multi-year 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 additional years while also rebasing the contract prices in our portfolio. In some cases, these contracts extend to 2021 with steadily rising fixed coal prices.

Internationally, we continue to see improving commodity pricing dynamics. The API2 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 API2 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.

Thank you, Jimmy. 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 what we are seeing in the coal and natural gas sectors. Earlier in the year, we highlighted a trend that we're 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 restructured their balance sheets. Since then, U.S. coal companies have rightly focused on restoring investor confidence by keeping their balance sheets 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 tide 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 embrace lower production growth to redirect 50% plus of its free cash flow towards share repurchases and dividends. We saw this company's stock outperform its peers by about 10% on 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 [to] 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 and well-managed companies that can also provide long-term sustainability. To achieve this, we are 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 1 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 identifying, developing and implementing high rate of return projects that allow 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 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 of $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 in what I will call the low quarter of the year. Our cash flow from operations included a $7 million outflow from working capital changes compared to a $19 million benefit during last year's quarter timed 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 $30 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 will repay it within 10 days after the date we filed 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 company -- if this covenant was applicable as of September 30, 2018 management estimates a 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, $18.85 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 1.4x. We believe the strong year-to-date distribution and low leverage on our balance sheet should provide added comfort to our unitholders regarding the long-term sustainability of our current distribution.

Now let'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 in which we 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. FASB 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 adopt the 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.

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 core hole 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 holds 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 coke 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 focusing 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 reduce the overall business risk. Since the separation from CNX Resources, we have focused on raising our contracted position and adding duration. Our marketing team has done a great job of 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.

The visibility -- this visibility allows us to base load our mines and we expect to run them at approximately 95% of their rated capacity. We can do that because these assets are capitalized for the long run and we continue to invest in them. Even though the PAMC is one complex and we run it as such, it really consists of 5 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 debottlenecking 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 to 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.

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

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Dudas with Vertical Research.

Jimmy or Dave, regarding the contract strategy, having 44% locked in for 2020. If you had thought 3 to 6 months ago, would you think you'd be at that level? Is there additional 2021 or even further contract that you've laid out? And on top -- just to firm up front, 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 for them to lengthen out and get more urgent on their contracting?

Mike, this is Jim McCaffrey. I'm glad you asked that. I mean I'm really excited about the portfolio right now. Where we stand for '19 is at 90% sold and we've had the ability to add duration to key customers. And we've 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're done yet. I'm certainly excited about where we're going and we are in negotiations not concluded for 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 that, Mike, there's a strong recognition of the export market in terms of how much coal is leaving this close to 50 -- I think EIA is forecasting 52 million tons though, we were thinking closer to 55 million tons, this year leaving and going offshore and those opportunities are still very strong in those markets. And then finally, during the winter events -- the severe winter events of last year, renewables and natural gas did not respond very well and we're seeing ongoing pipeline delays on top of that, additional cost going into those pipelines. So, we think that we're seeing a more normalized approach to contracting from our customers. And we're 90% sold. With the 10% we have sold left, we're either going to have significant duration or significant pricing, and probably both.

Makes very good sense, Jim. And maybe Dave, for you, as we are looking into late this year into next year regarding capital and allocation, maybe share a little bit of what's happening out on the pension side from your 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?

We'll be very careful about talking about 2019. But just to reiterate, you know that our base maintenance of capital is still that $4 to $5 per ton. That's been our standard rate. And then your question is how much capital do we allocate to these other areas of growth, right? So, we have our debottlenecking efficiency projects that we talked about this year and how much do we have for next year. We have our Itmann project, 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 our board approval and so what is the capital and the plan that we are going to put behind it. So, that hasn't been deemed commercial. But it's not going to be a huge amount of capital and we will not disclose this morning on it, but just know it won't be a huge amount of capital. And it will 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 of the, I'd say, highlights of how to manage our capital over the long term. We are -- as of the third quarter, we are 99% funded. We have not put any dollars in, 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 more over to fixed income, reducing the risk and therefore reducing the risk that we have to fund it.

I certainly think that is a highlight and I do share your thoughts on the people of Pittsburgh.

Our next call comes from Nick Jarmoszuk with Stifel.

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?

No, I think it's the utilities are showing willingness to enter into multi-year contracts as they see the decline in production generally and a spike in demand in the export market that has obviously become very real. So when I say more normalized, more -- more like it was 5 or 10 years ago when utilities routinely did 2- to 5-year contracts.

And with fixed pricing.

And with fixed pricing.

Do you guys come across any irrational competitors in any of the RFPs you guys are entering into?

So far this season, I would say no. We have not seen a lot of irrationability. 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.

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

Sure. Jimmy, why don't you go?

We have a capital allocation process that we use and we evaluate each one of those purchases as to what the daily price might be or when we're going to actually execute it. And whichever one we figure has the highest rate of return is the one that wins out.

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 will probably re-prioritize our cash towards buying back stock more.

Yes. At today's price, we certainly would.

Our next question comes from Mark Levin with Seaport Global.

Great job on the cost quarter, particularly with 3 longwall moves. That's impressive. The first question has to do with 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?

We have 8.2 million tons contracted, Mark, of which 4.7 million tons of it is firmly priced and second half deliveries are still subject to what we said last year, a collar that 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 still remains to be seen in terms of the whole portfolio construction.

(multiple speakers) We certainly have the capacity to take it higher.

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 rags for 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?

Well, in terms of the domestic market, Mark, I'd prefer to wait till next time to answer that question. We're 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 netback side, August and September were particularly hot 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 market's cooled off now some, but even at that, the 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.

Those are 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, 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?

Mark, I'll start and then Dave or Jimmy could jump in. Jimmy has said time and time again that we have three -- a 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 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 get 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 had seen in some previous years.

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

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, this will increase value. For us we will -- there's no intention for us to ever want to put this on the market, but I wouldn't say -- you can never say never as 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 higher 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's been heading in that direction, but again, that's not our intent right now.

Yes. Said 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.

That's all fair points, yes. One last question just around rail. I think the last time we spoke, or maybe it wasn't the last time, but at some point previous, there was some discussion about the Eastern railroads adopting more of a variable price or rate scenario to try to incentivize more coal burn in [NAP], 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?

We are. At least two of our customers in the Southeast have entered into, or are attempting -- I don't know if they are finalized, Mark -- either have entered or attempting to enter 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.

Our next question comes from Lucas Pipes with 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. Do 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?

I'll 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 to 3 years, call it. But I think the overall tightening 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 on to the marketplace. Q4, we think it's going to be a good quarter for us to finish out the year. We've got possibly 1 and it could be 2 longwall moves in Q4. So, I think we are in pretty good shape. We do have the ability, as I've said many times before, to add that second longwall if the market continues to be as strong as it is and we see it headed into the future that way.

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

No, that's true.

And then I know they were prepared remarks on the pricing side and a lot of questions on it and I'll 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?

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

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?

If we were to go out to 2019, that still holds.

Our next question comes from George Wang with Citigroup.

Congrats on a strong quarter. So most of my questions have been answered, just a couple of quick ones. Just from MLP's perspective, I just want 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?

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

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

Right.

So -- but we take an annual approach to how we do things, right. So, we don't look at quarter-to-quarter. We look at 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.

And also just on the operating cost side kind of going forward, it's encouraging to see you guys lower the cost for next year even despite some input costs higher and also higher inflation. So you mentioned a few elements and components for lower costs going forward, so which one do you think has the biggest contribution for lower cost -- operating cost guidance going forward? Just -- basically I am just asking in terms of the biggest lever for -- to sustain the lower operating costs going forward despite the higher inflation?

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

Our next question comes from Jeremy Sussman with Clarksons.

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, I'm maybe a bit surprised to see the volume decline from admittedly a pretty high number, 3.5 million tons last year to 2.7 million tons 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?

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 3 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 a big part of it.

And that was planned.

Yes.

Okay. 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're seeing today versus maybe what you were seeing earlier in the year?

Well, I told you when I went to India earlier in the year, I was amazed by the enthusiasm for buying more coal. That has softened a little bit as pet coke prices have come down. But Jeremy, I still firmly believe that the horse has left the barn 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. coals. 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 any bad 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 day 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.

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, Jim, you wouldn't mind if there was met coal in the portfolio for you to sell.

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 schedule where 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 is what we think it is in both terms of seam thickness, gas absorption as well as quality, and we are well ahead on that. In fact, as I said earlier, we have went ahead and filed the full application for permit. If things go well, which we don't see any holdup or hiccups here, if they go well, we could have that permit mid-2019 which will be right in line with the equipment. We could be in there producing out of Itmann late in '19.

And any magnitude on production?

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 -- but you will have to just stay tuned. The second part your question really was about how we compare it to outside opportunities. So we spent probably the first 3 or 4 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, that 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 costs a lot of money, creates a lot of risk in our mind. So, we just we'd be very, very careful if we ever did go out on the outside and buy something.

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

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 at what level that pricing would roughly come in just so that we can kind of get a sense for 2019?

Lucas, first of all, we said we have 10% still to sell in price, so there 10% on price there. We have 20% to 25% in a netback pricing and that is clearly our price, although 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 collared but not firmly priced. And as far as 2019 pricing, I'm 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.

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, it may be a little bit higher than that?

Jeremy, we are not going to go there because we're -- excuse me, Lucas -- we are not going to go there because we are really -- we are into negotiation with several utilities right now.

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

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.

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.

The conference has now concluded. You may now disconnect.