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Consol Energy Inc  (NYSE:CEIX)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Mitesh Thakkar -- Director, Finance & Investor Relations

Thank you, Chad, and good morning everyone. Welcome to CONSOL Energy and CONSOL Coal Resources' Fourth Quarter 2018 Earnings Conference Call.

Any forward-looking statements or comments we make about future expectations, are subject to some risks, which we have laid out for you in our press releases or in our SEC filings. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise.

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

With me today are Jimmy Brock, our Chief Executive Officer; David 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 layout our key priorities for 2019. During the prepared remarks, we will refer to certain slides that were posted on our website in advance of today's call.

After the prepared remarks, we will have Q&A session, in which all three executives will participate.

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

James A. Brock -- Chief Executive Officer and Director

Thank you, Mitesh, and good morning everyone. 2018 was a very significant year for us at CONSOL. And I'm 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 volume records at the Pennsylvania Mining Complex and exceeded our financial goals we set at the beginning of the year. We also fulfilled the promises that we made to our shareholders, creditors and other key capital providers at the time of separation from our former parent in November of 2017.

Let me now provide you a brief recap of the year and how it has positioned us for success in 2019. First, on the safety front. 2018 was significantly improved from 2017, which already exceeded the industry average. On a year-over-year basis, we reduced our total recordable incident rate by 13% and reduced our total number of exceptions by 12%. We worked the entire year at our processing plant without a recordable safety incident. At OUR CONSOL Marine Terminal, we had zero recordable safety incidents and a 100% compliance record during 2018. All our employees including the executive management team remain focused on achieving zero life-altering injuries. Our two operating assets, the Pennsylvania Mining Complex and the CONSOL Marine Terminal had record breaking 2018 performances. The Pennsylvania Mining Complex produced 27.6 million tons, a new record and its third consecutive year of production growth.

Since 2015, we have increased our production at the PMC 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 defy the trend of a shrinking coal industry in the U.S.

Financially, both CEIX and CER delivered exceptional annual performances for their shareholders and unit holders respectively. CEIX generated strong organic free cash flow net to its shareholders of $246 million, delevered it's balance sheet up 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 pan of approximate $34 million of the inter-company debt to CONSOL Energy. As investors in various publicly listed partnerships have started focusing on balance sheet improvements, 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 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 has 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 two years. It is fair to say that the team has done a good job of keeping costs under control, even while inflationary pressures 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 cost 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 markets 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 continue 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 a 104 million tons, about 27% lower than year ago levels and the lowest November levels since 1997. Bituminous coal inventories were lower by 31% year-on-year and several of our key customers Northern App rail-served power plants continued to report around 20 days of burn compared to the typical 30 to 40 days.

It is also noteworthy, that this decline in coal inventories is occurring in the face of declining U.S. coal production and higher export shipments. While export prices have pulled back since our last earnings call, it is not due to the lack of demand. We continue to see robust demand trends in two key destinations for our coal.

Let me start with India, the demand for Northern App coal in India's brick-cem markets have 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 Pennsylvania Mining Complex coal on term basis. While international indices had declined, we are still seeing strong demand for our API2 product with mine netback prices at over $50 per ton.

In Europe, during the fourth quarter of '18, we saw some temporary pause in the (inaudible) of high-Btu coal due to the water levels at the Rhine river and some penetration of low-Btu coal. However, more recently we're seeing European buyers becoming more active in the high-Btu coal market. The good news is, there is a price contained in that market and we believe there are opportunities for long duration contracts with European utilities.

Europe and India are our key export destinations and we are not seeing any meaningful slowdown in demand for our coal. From a pricing standpoint, I will actually remind everyone that for the first half of '19, we have fixed prices for export shipments of approximately 4.7 million tons. So we we're 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're in good shape as far as the export markets are concerned. When the export market was hot in the first quarter of '18, we took advantage of high prices and locked in 14 million tons of our coal for multiple years. After that as the domestic markets strengthened, we capture some contract duration and higher 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 in 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 Dave to provide the financial update.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you, Jimmy. This morning, I will review our 2018 financial results, introduce our 2019 guidance and provide an update on our liability management efforts. Before doing so, it's important to highlight that we really meet two important strides in 2018 toward our sustainability focus. Jimmy talked about how we locked in multi-year domestic contract 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. 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, an 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, an 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 increase in 4Q18 versus 4Q17 from two items; first of CEIX trends and second, increased maintenance spending.

The timing of these two items are lumpy and should be looked at on an annual basis. Overall, our 2018 cash costs were up less than 1% to 2017. For fiscal year 2018, we reported adjusted EBITDA of $484 million, 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 non-controlling CCR unit holders.

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 $11.13 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 inter-company 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 the capital expenditures.

Of the remainder, we returned $57 million to our unit holders 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-prong approach of maintaining a high coverage ratio and low leverage should provide added comfort to our unit holders regarding the long-term sustainability of our current distribution policy. As we worked on reducing our cost of capital, we were successful in strengthening the CEIX balance sheet in two main ways. First, we've improved our liquidity and significantly increased our capacity across our key capital sources, including a surety bond providers. Our access to capital continue 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 would 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 cost more efficiently. In 2018, we reduced our total legacy liabilities by approximately $96 million compared to the year-end 2017 levels, primarily driven by reduction in OPEB liabilities.

Slide 6, shows how we tactically allocated our capital last year to achieve our goals with our 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 in CCR units. With the market being volatile, we will continue to be very careful on how we allocate our capital to the highest rates of return areas. Since the beginning of 2019, we've 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 we lower our cost of capital.

Slide 11, highlights 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 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 reduce some of the downside risks. For PAMC, we are expecting our 2019 sales volumes to be consistent with 2018 levels. The market has been able to absorb all we can produce and we expect this trend to continue.

As such, we are providing CEIX and CCR 2019 coal sales volumes of 26.8 million tons to 27.8 million tons and 6.7 million tons to 6.95 million tons, respectively. As a reminder, during 2018, we ran the complex at 97% capacity utilization and we currently expect to run the same this year. The high level 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 then realized in 2018, offset by lower net-back prices. The midpoint of our guidance range reflects the PJM forward curve of $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 that for every $1 increase in megawatt hour, in annual PJM West power prices, our total sales portfolio we increased 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're expecting approximately 5% increase in cost compared to 2018 due to higher subsidy 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 are 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.

James A. Brock -- Chief Executive Officer and Director

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 Itmann low-vol metallurgical coal project. The permitting process is advancing very well. The (inaudible) data has confirmed our expectations regarding the favorable quality characteristics, same 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 plant. 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 has now shifted toward strengthening our portfolio for 2020 and 2021.

In summary, our key priorities for 2019 are: A: To safely and can finally (ph) produce our high quality coal at the lowest possible cost. B: Continue to improve our balance sheet to 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 all of our hard working employees for their outstanding contributions and innovative efforts. We've recognized their importance and would not be in this great position without them.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

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

Questions and Answers:

Operator

Certainly. Thank you. (Operator Instructions) First question will be from Mark Levin with Seaport Global Securities. Please go ahead.

Mark Levin -- Seaport Global Securities -- Analyst

Congratulations guys on a fantastic year. First question. So, David, you mentioned over the course of 2018, you guys raised guidance each quarter, when you look at 2019 in 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 other opportunities to potentially be able to walk up EBITDA guidance?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Yes, I just keep it at a very high level. So if you think about what we did last year and sort of parallel to this year, we improved realizations, some of that was due to net back, a good piece of it. We improved our production and we also did a good job of improving our cost. So we think it was all three buckets some more impactful than others, and we have a list of projects that we're working on to try to improve our guidance.

Mark Levin -- Seaport Global Securities -- Analyst

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 in a materially different from the others?

James A. Brock -- Chief Executive Officer and Director

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

Mark Levin -- Seaport Global Securities -- Analyst

Got it. That makes sense. And then just a last question. So obviously API2 prices, if -- have come off a lot probably since the last time we did a conference call and 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 API2 prices are today and what the ARB looks like going forward? Is it reasonable for us to assume that, that domestic probably wins out over export all else being equal?

James J. McCaffrey -- Senior Vice President of Coal Marketing

This is Jim. Mark, I think for us, the advantage is, is the way we're positioned in our portfolio and now we can be somewhat patient with that. For example, if you look at the prompt net back for API2 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 5 handle on it, some, which will be met tons, so it will be a 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 color on those tons that has a pool (ph) 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 part of us to maybe hedge a little bit well to take advantage of some hedges, we've already laid in. So, we expect the second half export tons to be north of $50 as well. As far as comparing it to the domestic market, the domestic market has been fairly strong. I think that on a spot basis, prices are in the low $50 to mid $50 range. I don't think 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 bet for the future as well during these last several months.

Mark Levin -- Seaport Global Securities -- Analyst

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 suite, David when you look at the possibilities of the probabilities of refinancing either one portion or all of your debt stack, how you kind of thinking about that this year?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Obviously, if you look at our second lien debt, and where it's trading, it would give you an indication that -- 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 is kind of stay tuned.

Mark Levin -- Seaport Global Securities -- Analyst

Yeah. Perfect. Thanks guys. Appreciate it.

James A. Brock -- Chief Executive Officer and Director

Thanks, Mark.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Welcome Mark, thanks.

Operator

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

Michael Dudas -- Vertical Research Partners -- Analyst

Good morning, gentlemen.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Hi Mike, good morning.

James A. Brock -- Chief Executive Officer and Director

Good morning.

Michael Dudas -- Vertical Research Partners -- Analyst

Jimmy, the follow up on your prepared remarks. Talk a little bit about restocking opportunities in the U.S. market, certainly inventory levels are quite low. Are you seeing a difference between your merchant and your regulated utilities and how do you think about term? And is the competitive environment in 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, maybe provide share up -- more share opportunities or better maybe term pricing for CONSOL as you get your book out to '20, '21, '22?

James A. Brock -- Chief Executive Officer and Director

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

The netback concept is built on the customer kind of turn in and burn in, taking the coal and burn it, and the customer then went back to a fixed price basis, was playing the the power markets a little bit more frequently. And so, it didn't make us much sense from the continued dynamo (ph). So, we were able to lock in a three-year term with them, prices again north of $50. So, we feel like we've done a pretty good job, putting that portfolio together. Now. I'm sure I missed the part of your question and that answer, but...

Michael Dudas -- Vertical Research Partners -- Analyst

No, to me, that was very helpful. Maybe about like 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, your positioning?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

On a short-term basis, Jimmy mentioned, the November inventory numbers, I am assuming that we'll see lower numbers 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 spin off that our sulfur getting better and we'll have a step change in our sulfur. Actually, two step changes in our sulfur during 2019; one that will occur mid year and one that 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, will 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 advantage to us. Our terminal certainly been a big advantage to us. And the fact that our customers find that our operations are very reliable and our assets are among the best.

Michael Dudas -- Vertical Research Partners -- Analyst

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

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Yes, so the biggest increase year-over-year that we're experiencing '19 on 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 takes 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 and roll 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 they will be -- there will not be -- they won't be small, there'll be meaningful, I just can't give you any sort of dollar-per-ton impact.

James A. Brock -- Chief Executive Officer and Director

And Michael, one of the thing -- one of the things to think about when you're looking at the cost number, we are comparing ourselves to 2018, which is a very low number for us. In order to just talk about we were only up 1% over the prior year of '17. So, we have been on this cost initiative, driving it down to 25% since 2016 and 2017 numbers; 14 to 16 and then the 1% on '17. So I will tell you that going forward, there won't be a large step down in cost, but we'll continue to monitor. We have every employee that works 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 trying 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.

Michael Dudas -- Vertical Research Partners -- Analyst

That's an excellent perspective, appreciate. One quick final one, David, with your non-debt obligations in '19, more of those positive trends we're going to see anything to look for special or otherwise?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Can you explain, you said non-debt...

Michael Dudas -- Vertical Research Partners -- Analyst

You had the pension, OPEB any can you give like --?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

A lot of what we experienced the last two years really has been managing the cost very effectively. And we've just got such a tiny bit of benefit for the first time in a very long time of 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 get flow through. It is a ongoing process, we have a team, very focused on it and as we get some track record of multiple years, our merchant (ph) team actuaries allow us to roll it through and put it through into our balance sheet numbers. So, it's a constant process. I think generally, you will 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.

James A. Brock -- Chief Executive Officer and Director

And 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 every day and look for ways to improve it.

Michael Dudas -- Vertical Research Partners -- Analyst

It's duly noted, thanks for your thoughts, gentlemen.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you.

James A. Brock -- Chief Executive Officer and Director

Thanks Mike.

Operator

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

Lucas Pipes -- B. Riley FBR. -- Analyst

Hey, good morning everyone and I'd like to add my congratulations to a very strong year and very good outlook. 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 costs we could be looking at and then I know you're kind of in the final stages of the analysis, but what -- what returns are you targeting on an IRR basis? Thank you.

James A. Brock -- Chief Executive Officer and Director

Well, when you look at growth Lucas, for us, there are many forms of growth. There is the production growth that we had this year, the 1.5 million tons, there is revenue growth, there is share buybacks and there's M&A. Now in particular to Itmann, I don't think it'll be very prudent for me to give you numbers because quite frankly, we don't have them marked down yet, and we do put those numbers out as we announced, it will be before the first quarter earnings call. We want to make sure that we've done all our due diligence and we'll get them flat. So just to be imprudent, I wouldn't want to put in numbers until we have the entire package ready to go for Itmann. But we still think Itmann is going to be a very good project. The permitting is coming along very well. All of the analysis that have come back on the spec, 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 it. Be patient with us, so when we do get the numbers out, there are numbers that we believe and we can get them to you and else (ph) pertain to the Itmann project.

Lucas Pipes -- B. Riley FBR. -- Analyst

Well, look forward to that. Thank you. And on the export market that Jim, could you remind us what are your hedges, it sounds like you have some open positions second half of this year. But can you just kind of give us an update as to percent hedged first half of this year, it sounds like you fully lock-up and then second half of '19 and then also looking out to 2020? Thank you.

James A. Brock -- Chief Executive Officer and Director

We have 4 million tons to 5 million tons that will ship in the first half, those prices are all hedged. We did that with EXCO, we hedged physically and they hedge financially. In the second half, there is close to a million tons, of the 3 million tons to 4 million tons that are hedged, both physically and financially again, and I can tell you that working closely with EXCO's team, we're very confident that we'll be able to bring those in with a 5 handle. So, that's where things stand, Lucas.

Lucas Pipes -- B. Riley FBR. -- Analyst

Anything on 2020?

James A. Brock -- Chief Executive Officer and Director

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

Lucas Pipes -- B. Riley FBR. -- Analyst

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

James A. Brock -- Chief Executive Officer and Director

Thank you Lucas.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you Lucas.

Operator

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

John Bridges -- JPMorgan -- Analyst

Hi, good morning everybody. I was just curious. You mentioned the contango, you're seeing in the API2 price. I just wondered what you saw was going on there and perhaps in general what you -- what you think about the direction of those prices? Thank you.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

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 that Jimmy mentioned the low levels in the Rhine river that allowed inventories to build up significantly in ARA. Today there are still 7 million tons to 8 million tons of inventory in ARA, it's starting to get paired it out to the customers, but it's taken some time to catch up. And then of course, the Chinese always have some effect on the market, we're in the middle of the Lunar New Year celebration. So, the markets are particularly quiet.

I think so, I don't think there's a lot of activity driving. We do expect and we do see based upon our connections in Europe, stronger birds in Europe, particularly in Germany, stronger birds in Germany as the Germany economy is starting to realize the cost of moving away from coal to renewable 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 toward trying to do some term business and again working closely with EXCO, we're planning that out as we speak.

John Bridges -- JPMorgan -- Analyst

This is a follow-up, you are 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 had any thoughts as to what might happen when those utilities are fully exposed to these elevated carbon costs?

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

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

James A. Brock -- Chief Executive Officer and Director

And I think it's also -- it will be a function of what do you think the alternatives will be, prices be, which obviously are, a 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 price.

John Bridges -- JPMorgan -- Analyst

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

James A. Brock -- Chief Executive Officer and Director

Thank you John.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you John.

Operator

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

Vincent Anderson -- Stifel -- Analyst

Good morning, thanks for taking my question. You touched on this a bit earlier about the more recent export dynamics. But I want 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 two years. Looking specifically at thermal, I'd love to get your thoughts on what's been different over the last two years in terms of contract structures, customer mix and then specifically how is Itmann (ph) positioned recently compared to, say, the like of Illinois Basin, relative to our last run back in 2010, 2012.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Well, the big difference between today and 2010 to 2012, could be said in two 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. We're excited to talk about today the fact that there is a big opportunity for us in 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 expected 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 are 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 that as Europe grapples with the cost of -- to their economy of leaving coal, they will continue to have opportunities in Europe, and we're excited to pursue this opportunity into DR and we anticipate pursuing it to the end and getting a lion share of that business.

Vincent Anderson -- Stifel -- Analyst

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

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

When we spun-off, as we made our trip around many people. We said that our goal was to say 70% in the domestic market and 30% in export market. We've adjusted that some to say 60% to 70% now. I think that's still where, where we're going to stay. As I explained earlier to Mike, this opportunity with our sulfur, we think we have customers that can no longer find reliable cap coal and we think the opportunity with our sulfur is going to allow for a win-win opportunity for both us and our customer, to create 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, they are available to us, makes it even a stronger opportunity for us.

Vincent Anderson -- Stifel -- Analyst

Great, thanks and great job this year.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you.

James A. Brock -- Chief Executive Officer and Director

Thank you.

Operator

The next question comes from Jeremy Sussman of Clarksons.

Jeremy Sussman -- Clarksons -- Analyst

Yeah. Hi, everyone. great quarter. And thanks for taking my question.

James A. Brock -- Chief Executive Officer and Director

Hi, Jeremy.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you Jeremy.

Jeremy Sussman -- Clarksons -- Analyst

Jimmy, I think in your closing remarks you noted, sort of, I think you characterized that in 2019 you'd 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 math side. And so I guess as you assess various growth options out there, are there other opportunities and I guess, in general, how do you kind of compare and contrast the outlook for either thermal or met coal growth? Thank you.

James A. Brock -- Chief Executive Officer and Director

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

So if there's something out there. We can do the due diligence on that fits our plan, it fits for us. We have a market strategy, behind it was 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, help to diversifies a little bit, get into that, we certainly would take that opportunity to look at it.

Jeremy Sussman -- Clarksons -- Analyst

Okay, tat's very helpful and maybe just finishing up on the international markets, obviously Indian thermal imports, where a nice tailwind in 2018. I think they overall are 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 and in 2019, 2020 as what we saw last year. Is it sustainable?

James A. Brock -- Chief Executive Officer and Director

Jeremy, this is Jim Again, we think it's sustainable. Things have gone very well for us in India. We work closely with EXCO, so my team, Bob, Paul Griffin (ph) and my team will be in India in the next two weeks, gathering some additional color for us. Yes, we certainly think it's sustainable. We don't have any reason to believe otherwise today.

Jeremy Sussman -- Clarksons -- Analyst

Great. I will appreciate that and good luck guys. Thank you.

James A. Brock -- Chief Executive Officer and Director

Thank you, Jeremy.

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Thank you, Jeremy.

Operator

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

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

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

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

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

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

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

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

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

James A. Brock -- Chief Executive Officer and Director

Yeah, what it also gives us some comfort is, if you look at the capital spending trends in the whole industry, mean capital spending is down by two thirds and that's probably a big -- and that's been sitting there for a while and so, not only are you not seeing replacement capital then you're seeing also the trend where, the quality 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 just over time just plays very well for our ability to export coal and capture higher prices over time.

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

Great, thank you. Appreciate it.

James A. Brock -- Chief Executive Officer and Director

Thank you.

Operator

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

Mitesh Thakkar -- Director, Finance & Investor Relations

Thank you, we appreciate everyone's time this morning and thank you for your interest and support of CEIX and CCR. Hopefully, we were able to answer most of your questions today. We look forward to our next quarterly earnings call. Thank you everybody.

Operator

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

Duration: 58 minutes

Call participants:

Mitesh Thakkar -- Director, Finance & Investor Relations

James A. Brock -- Chief Executive Officer and Director

David M. Khani -- Executive Vice President, Treasurer and Chief Financial Officer

Mark Levin -- Seaport Global Securities -- Analyst

James J. McCaffrey -- Senior Vice President of Coal Marketing

Michael Dudas -- Vertical Research Partners -- Analyst

Lucas Pipes -- B. Riley FBR. -- Analyst

John Bridges -- JPMorgan -- Analyst

Vincent Anderson -- Stifel -- Analyst

Jeremy Sussman -- Clarksons -- Analyst

Lin Shen -- HITE Hedge Asset Management LLC -- Analyst

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