Core Natural Resources Inc (CNR) 2018 Q4 法說會逐字稿

Good morning, and welcome to the CEIX and CCR Fourth 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, sir.

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 3 executives will participate.

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

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 the 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 0 recordable safety incidents and a 100% compliance record during 2018. All our employees, including the executive management team, remain focused on achieving 0 life-altering injuries.

Our 2 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 CER (sic) [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 0.7x, 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 the intercompany debt to CONSOL Energy. As investors in various publicly listed partnerships have 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 '18 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 '18, the productivity at the Pennsylvania Mining Complex, measured as tons 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 '18, 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 ton sold by 25% during the 2014 through 2016 period, and only gave 4% back in the last 2 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 '17. 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 continue 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 2 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 products, with mine netback prices at over $50 per ton.

In Europe, during the fourth quarter of '18, 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 contango 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 '19, we have 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 '18. For the second half of '19, 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 '18, we take 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 logistic 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 there will be more opportunities in the domestic market to contract and optimize our portfolio.

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

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 2 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 have strengthened 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 '18 versus 4Q '17 from 2 items: first, subsidence expense; and second, increased maintenance spending. The timing of these 2 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, of 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 to noncontrolling CCR unitholders. As a result, CEIX generated $246 million of organic free 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 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 $11.1 million -- $11.3 million, $28.2 million and $17.7 million, respectively, in the year ago quarter.

For the full year 2018, 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 '18, 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 1.4x.

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 2 main ways. First, we've improved our liquidity and significantly increased our capacity across our key capital sources, including our surety 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 2 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 in 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 sharp 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 on 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 to 27.8 and 6.7 million tons to 6.95 million tons, respectively. As a reminder, during 2018, we ran the complex at a 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 our higher domestic fixed-price contracts 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 and 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 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 subsidence 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 subsidence expense 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 EBITDA to be between $40 million and $45 million range.

Now Slide 5 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.

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 hull 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 stand-alone preparation plan. We are deep into our economic analysis phase and the only remaining piece is the processing 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. And with our contract book 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 compliantly 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.

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 Instructions) The first question will be from Mark Levin with Seaport Global Securities.

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 to potentially be able to walk up EBITDA guidance?

Yes. I would just keep it at a very high level. So if you think about what we did last year and think -- and sort of parallel it to this year, we improved realizations. 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 3 buckets. Some more impactful than others. And we have a list of projects that we're working on to try to improve our guidance.

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?

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 2 longwall moves, and then they'll be spread out. So if you're looking for the lumpiness in the quarter, quarter 2 only has one longwall move in it. So it will be a strong quarter for us. And then keep in mind at Q3, we do have a week for summer shutdown. And then we have the other 2 additional longwalls, one in each quarter 3 and 4.

Got it. That make 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?

Well -- this is Jim, Mark. I think, for us, the advantage is the way we're positioned in our portfolio, now 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 4 million to 5 million of export tons in the first half, all of which will have a five 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 those 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-$50 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 the future as well during this last several months.

That all sounds great. I'm going to sneak one last one in and then I'm done. The likelihood of refinancing in 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 debt stack, how are you kind of thinking about that this year?

Obviously, our -- if you look at our second lien debt and where it's trading, it would give 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 it once, we'll do it right and not do it multiple times. So I guess my answer's kind of stay tuned.

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

Jim, need to follow-up on your prepared remarks. Talking a little bit about restocking opportunities. In the U.S. markets, certainly inventory levels are quite low. Are you seeing a difference between your merchant and your regulated utilities? And how do you think about term? And is the competitive environment and some of the lack of capital spend, some of the issues we're seeing throughout the coal sector in the U.S, going to continue 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 '20, '21, '22?

Mike, it's Jim again. Let me give you a little bit of a long-winded answer there, and hopefully we can cover your question. What we have done in the last quarter, is we were able to book term business with 5 significant customers: one on a 2-year term, 3 on a 3-year term and then one on a 5-year term. Four of those 5 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've 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 3-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 I missed a part of your question in that answer, but...

No, that was 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?

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, 2 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'll 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 an advantage to us. Also 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.

I really appreciate your thoughts there. Just 2 quick ones for David. First, David, you've 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 inflation? Or is there some more meaningful cost improvement can you make relative to an inflation target going forward?

Yes. So the biggest increase year-over-year that we're experiencing '19 in our guidance versus '18 is the subsidence. So that -- we always experience subsidence, but we have a higher period of impact in '19. 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 '19. 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 roll it through our plan. Then we have other things, I would just say, other projects that we're 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.

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 '17. So we have been on this cost initiative, driving it down by 25% since 2016 and '17 numbers. ['14] to ['16], and then the 1% in '17. So I would tell you that going forward, there won't be a large step down in cost, but we'll continue to monitor it. We have every employee that works at this company tied to unit cost, so they're all looking at innovative ways to do that. And what I expect to see is just try to hold that cost as we guided to that 5% number in single digits and continue to get these efforts from all of our employees.

That's excellent perspective, I appreciate it. One quick, final one. David, with your nondebt obligations in '19, more of those positive trends, are we going to see anything to look for, special or otherwise?

When you -- can you explain, you said nondebt?

I mean, you have the pension and OPEB? Anything really...

Oh, yes, yes. A lot of what we experienced the last 2 years really has been managing the costs very effectively, and we've just got a -- just 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 an ongoing process. We have a team very focused on it. And as we get some -- a track record of multiple years, our Mercer team actuaries allow us to roll it through and put it in through -- into our balance sheet numbers. 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.

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.

(Operator Instructions) Our next question will come from Lucas Pipes with B. Riley FBR.

So 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 cost 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 IRR basis?

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 it would be very prudent for me to give you numbers because, quite frankly, we don't have them locked down yet. And when we do put those numbers out 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 just being prudent, I wouldn't want to put any numbers out there until we have the entire package ready to go for Itmann. But we think Itmann is 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, seam 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 a -- be patient with us, so when we do get the numbers out, they are numbers that we believe and we can get them to you, and they'll pertain to the Itmann project.

Well, look forward to that. 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. But then second half of '19 and then also looking out to 2020.

I think we have 4 million to 5 million tons that will ship in the first half. Those prices are all hedged. We did that with Xcoal -- we hedged physically and they hedged financially. In the second half, there's close to 1 million tons of the 3 million to 4 million tons that are hedged, both physically and financially, again. And I can tell you that working closely with Xcoal's 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.

Anything on 2020?

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

Our next question comes from John Bridges with JPMorgan.

I was just curious, 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?

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 Rhine River that allowed inventories to build up significantly in ARA. Today, there's still 7 million to 8 million tons of inventory at ARA. It's starting to get ferreted 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 on 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 Xcoal, we're planning that out as we speak.

This is a follow-up. You're talking about having price contracts out to 2020. As I understand it, beyond there, 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 with those utilities are fully exposed to these elevated carbon costs?

Well, I agree with you that the German utilities have their power hedged for 2020. They still need 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.

And I think it's also -- it will be a function of what do you think the alternatives will be? What will the [L&G] prices be, which obviously are meaningfully higher. And then also, what is the impact as you see shrinking higher Btu coal and what does that do to the upward pressure on higher Btu coal quality, the pricing?

The next question comes from Vincent Anderson of Stifel.

You touched on this a bit earlier about the more recent export dynamics. But I wanted to back up 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 2 years. Looking specifically at thermal, I'd love to get your thoughts on what's been different over the last 2 years in terms of contract structures, customer mix? And then specifically, how has NAPP been positioned recently compared to, say, the likes of Illinois Basin, relative to our last run back in 2010, 2012?

Well, the big difference between today and 2010 to '12 could be said in 2 words. In 2010 and '12 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 with. So India is, certainly, a 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 new power plant has been built. It's the newest, most state-of-the-art power plant in the Western hemisphere today. Punta 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 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 in India. We think that, as I said to John, as Europe grapples with the cost of -- to their economy of leaving coal that they -- 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's share of that business.

That's very helpful. And just following on that. I mean, obviously, very constructive on the export markets. But at what point is there a trade-off for 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?

When we spun off, as we made our trip around meeting 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 that's 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 that the opportunity with our sulfur is going to allow for a win-win opportunity for both us and our customer to create a 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 the terminal in Baltimore there available to us, makes it even a stronger opportunity for us.

The next question comes from Jeremy Sussman of Clarksons.

Jimmy, I think in your closing remarks, you noted, sort of, I think you characterized 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?

Yes. When we look at growth, and 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 is something out there we can do the 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 is a growth project out there that helps us, helps diversify us a little bit to get into that, we certainly would take that opportunity to look at it.

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, 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?

Jeremy, this is Jim again. We think it's sustainable. Things have gone very well for us in India. We worked closely with Xcoal. So my team -- Bob Braithwaite from my team will be in India the next 2 weeks, gathering some additional color for us. Yes, we certainly think it's sustainable. We don't have any reason to believe otherwise today.

The next question will be from Lin Shen with Hite.

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 2019?

Yes. What I said is that of the 5 deals that we've done, 4 of them are at fixed price and the fixed price has contango going forward. So there's escalation in the price of all those deals in the forward years. And specifically, we're not discussing the price for the odd years today, but every one of them has some escalation in price in -- on a fixed basis. And then of course, like I said, one of the deals that we did was a netback deal.

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

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.

Yes. What also gives us comfort is, if you look at the capital spending trends in the whole industry, I mean, capital spending is down by 2/3 and that's probably a big -- and it's been sitting there for a while. So not only are you not seeing replacement capital, then you're seeing also the trend where the quality of coal over time 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.

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.

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.

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