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CONSOL Coal Resources LP (NYSE:CCR)
Q3 2019 Earnings Call
Nov 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Jimmy A. Brock -- President and Chief Executive Officer

Good morning, and welcome to the CEIX and CCR, Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn, the conference over to Mitesh Thakkar. Please go ahead.

Mitesh Thakkar -- Director of Finance and Investor Relations

Thank you Nick, and good morning everyone. Welcome to CONSOL Energy, and CONSOL Coal Resources, Third Quarter 2019 Earnings Conference Call. Any forward-looking statements, or comments we make about future expectations are subject to some risks which we have outlined in our press releases or in our SEC filings. We do not undertake any obligations of comparing 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 our press releases and furnished to the SEC on the 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 significant achievements during the third quarter of '19 and an update on our pre-growth initiatives. David, will then discuss some macro trends the detailed financial performance for 3Q '19 and our 2018 guidance. During the prepared remarks, we will refer to certain slides that we've posted on our website in advance of today's call. After the prepared remarks all three executives, will participate in the Q&A session.

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

Jimmy A. Brock -- President and Chief Executive Officer

Thank you Mitesh, and good morning everyone. I am pleased to announce, that this morning we reported a solid third quarter operating, and financial performance while continuing to make significant progress, on various fronts that, we believe will ultimately be value-accretive to our shareholders. Despite the ongoing volatility, in the commodity and capital markets we made progress on all key fronts. Our operations team turned in a record third quarter production as they were able to leverage our strong sales contract book which the marketing team has been building over several years. On the finance front we were very active in the open market repurchasing our debt, and equity securities, with the ultimate goal of reducing our cost of capital and accelerating shareholder value creation as we took advantage of the dislocations created in the marketplace. Consistent with last quarter we continued to be rate of return-driven and deployed most of our capital toward buying back our debt and equity securities rather than toward any of our growth initiatives as we believe those remain the most under-weighed avenues of per share value. As a result during the quarter CONSOL Energy repurchased approximately 5% of the company's outstanding common shares in the open market for just over $23 million.

We also made, net payments of total debt of approximately $21.5 million during the quarter. Now let me review, our third quarter operational performance in detail. Our operation team delivered a record third quarter production overcoming several issues some of them were expected such as long-haul moves and minor vacations. While some were unexpected, such as an unusual amount of equipment breakdowns and a roof fall at one of our longwalls. Our operation team deserves a lot of credit as it was able to manage through these events and deliver a record third quarter production of 6.5 million tons compared to 6.4 million tons in the year-ago period. Productivity as measured by tons per employee hour was improved compared to the year-ago period. Nonetheless our cash cost of production increased compared to the year-ago period due to a higher than normal level of repair and maintenance expenses associated with these issues. For its share CCR produced 1.62 million tons of coal during the third quarter of '19 compared to 1.5 million tons during the third quarter of '18. The CONSOL Marine terminal had a throughput volume of 2.4 million tons during the quarter compared to 2.7 million tons in the year-ago period. As reported earlier in the year the terminal successfully completed a major project during the quarter to replace its rotary dumper which is a critical piece of infrastructure and has been in service for more than 35 years.

Our investment, in the new dumper has to ensure that the terminal, is well positioned to reliably serve the growing export markets for our coal. Given the terms of our take-or-pay contract at the terminal our terminal revenues for the quarter were largely unchanged at $16.3 million compared to $16.1 million in the year-ago period while cash operating costs were improved by approximately $1.1 million. As previously announced CMT has a take-or-pay contract that yields approximately $15 million in quarterly terminal revenue through 2020. This is a very steady but strategically important business for us and one of the key drivers of our differentiated marketing strategy. With that, let me now provide an overview of the coal markets and an update on our sales performance and accomplishments. The commodity markets went under a lot of pressure during the first half of '19. However we are starting to see some improvements. On the export front after declining approximately 44% through June of 2019 API2 process started recovering and ended the third quarter approximately 22% higher versus the low point at the end of the second quarter. More importantly the forward curve is in contango. Fourth quarter of 20 API2 prices now sit just below $70 a ton or approximately 18% higher compared to the near-month price. Although the majority of our export coal doesn't price off the API2 we still have some volumes going into Europe and it is a directional indicator of improving end markets for the seaborne thermal coal demand. Another positive trend that we are seeing is the export market is in supply rationalization.

Coal producers have started rationalizing production. Several high cost, and unhedged coal producers in the U.S. have started cutting production and industry sources are calling for a steep decline in U.S. thermal coal exports. For instance DTC expects U.S. thermal coal exports to decline to 26 million tons in 2020 from 56 million tons in 2018 or a 54% decline. Globally the situation is not much different. Colombian coal exports are projected to fall by 9 million tons or 13% in 2019 versus 2018 levels. Some producers are still maintaining significant amounts of production at below breakeven economics and could be the next to make production cuts. Indonesia is a relevant example. According to Wood Mackenzie, 60% of Indonesia's total bituminous seaborne export coals or approximately 72 million tons have negative operating margins at September price levels of $63 per ton. In the domestic markets trends are mixed. Henry Hub natural gas prices remained low during the quarter which weighed on power prices and impacted coal consumption. As a result overall stockpiles of coal at domestic utilities have continued to increase throughout the year. The interesting aspect here is that natural gas producers continue to struggle financially. As we enter the annual budget season we expect E&P producers to meaningfully reduce their projected 2020 capital spending. As such we are optimistic that prices could recover but are preparing ourselves for this depressed pricing environment to continue through 2020.

In summary, there is a lot of pain in the marketplace but we are starting to see some underlying improvements through supply rationalization and recovering export prices. As the industry goes through this curing process we expect to hold our ground. We anticipate that our strong contracted position in 2020 and solid balance sheet will allow us to navigate through this period of low pricing and preserve value for our shareholders. Moving to our own marketing performance. We reported, that we increased our third quarter '19 sales volumes and total revenues by approximately 4% and 3% respectively compared to the third quarter of '18. Our average revenue per ton declined by 1.3% primarily driven by 20% lower PJM west power prices which impacted our netback related contracts. Our ability to achieve revenue growth even in a declining commodity price environment is a testament to our prudent contract and strategy that is based on derisking our revenue and production profiles while locking in attractive returns for our business. During the quarter we were also successful in landing on additional contracts for 2020 and 2021. Let me now move on and provide an update on our growth efforts. Over the last several quarters we have discussed our strategy to pursue growth opportunities.

Let me summarize, the four major categories of these initiatives and how they fit into the context of our overall business strategy. I will lay out the broad framework and then David will discuss how some of these fit into our overall capital allocation process. If you refer to slide six. We expect to pursue growth in four different ways: first efficiency and continuous improvement. These are relatively small-dollar value projects that either raise our production capacity or lower our operating cost at existing operations. Share automation and prep plant debottlenecking are some examples. Second emerging technologies and alternative uses of coal. Such projects, will involve a new technology or an innovative use of coal. By the way -- by their very nature they are R&D type projects involve a technical collaboration and have long gestational periods. We currently have several of these in the pipeline. Our OMNIS project falls into this category. Our initial spend on such projects is relatively modest but could grow significantly once certain milestones are achieved. Given the high risk high-reward nature of these investments we take a portfolio approach and plan to make small investments in multiple projects. If one of them achieves its full potential it could be a home run.

Third organic growth projects, and expansions of our core mining business. These projects are well aligned with our skill set carry low technological risk and are expected to become meaningful contributors when completed. They require a larger initial investment outlay relative to the previous two types of projects. Itmann is a perfect example of this. And finally possible acquisitions or other strategic transactions. We regularly evaluate these types of potential transactions to find the dominant era. We haven't found one yet but we will continue to explore our options irrespective of which category the project falls in. Our overall strategy is to focus on opportunities for high target rates of returns meaningful revenue potential long-term cash flow generation and the ability to grow the base investment over time.

With that, let me hand the call over to David.

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

Thanks Jimmy, and good morning. I will, first go through some industry trends as it relates to financing and how they tie to our capital allocation process. I will then provide an update on our third quarter results and guidance. One of the trends that, we are seeing in the energy industry the declining access to capital. On slide seven you will notice that the E&P industry raised $81 billion in capital in 2014 and now is on pace to only raised $13 billion for 2019 suggesting an 84% decline. Companies, are being forced to rely on internal funding sources. E&P companies have two near-term issues to deal with. First is their semiannual bank redeterminations on the revolvers and second is institutional or bank debt coming due. For the revolvers commercial banks are using as low as $5 per barrel for oil and $2 per MCF for Henry Hub natural gas prices to base their redeterminations. S&P Global market estimates there's approximately $150 billion of debt coming due in the E&P space over, the next three years. We are watching initial capital spending budgets coming down meaningfully to pay down debt and prepare for the imminent refinancing wave. This is leading to a slowing of production and should raise the forward curve at some point. Now let's discuss coal. We are also noticing a similar trend here as well. This trend is marked by a decline in commodity prices and a flurry of recent coal company bankruptcies making investors concerned.

We noticed, a similar trend in 2016 before access to the capital rebound in 2017, with the rebound in coal prices and improving earnings profile. Why does all this matter? First from a coal industry standpoint this forces corporations to fund their projects with internally generated cash flow. It becomes harder to fund long duration and very capital-intensive projects. As existing mines to fleet and new investments become scarce supply will decline in created deficit. This deficit should provide fundamental support for coal prices. The cure for low prices is low prices. As Jimmy discussed we are already seeing coal production cuts in Columbia and in the U.S. and we expect to see them occur in Indonesia at some point. Second from a CONSOL Energy perspective this validates our strategy to continue to reduce our debt. As such S&P credit rating agency just reaffirmed our debt ratings last week. Debt reduction is an important part of our capital allocation strategy and dictates the amount of risk that we want to carry on our balance sheet. Since our listing in 2017 we have significantly reduced our net debt by approximately 20% and our term loans and our outstanding second lien notes by $210 million or 26%. We are committed to further deleveraging our balance sheet. As you all know we completed our debt refinancing in March of 2019 which lowered our interest rate and extended our maturities to 2023 and beyond. We will use this flexibility to continue to reduce our reliance on public debt markets.

We plan, to reduce our outstanding public debt by at least $25 million in the fourth quarter and release an additional $50 million in 2020. We will continue fine-tune these goals and will remain rate of return driven. In the fourth quarter-to-date we have already repurchased approximately $16 million of our second lien debt as our debt traded at a discount to par value. To put this in perspective we repurchased approximately $76 million of our second lien notes at an average price of $105 since we issued them in 2017. We're only able to redeem these notes on or after November 15 2021 at a coal price of $105.50. With our strong balance sheet solid contracted position, and our low maintenance capital we are in a position to generate free cash flow in all parts of the cycle. We can flex our capital spending up and down to generate a free cash flow outcome and do not have any large funding commitments in 2020. With our capital allocation strategy we have several avenues to improve revenue and returns. First repurchasing our debt and equity securities. We've historically focused approximately 84% of repurchasing activity on debt. With a significant discount that our debt is trading at currently we believe that our capital deployment mix will continue favor debt reduction. Second is our gross initiatives. This is another key area of value creation for us and we began articulating earlier this year. Jimmy just provided much more insight into our thought process and our four buckets of deployment.

These buckets, have various -- varying degrees of capital needs. The efficiency bucket has very high rates of return and directly impacts our existing operations through higher production and/or up lower operating costs. The technology bucket carries a higher risk but also very high rates of returns with big addressable markets that could be meaningful to our bottom line within two to five years. We fund these projects through small initial outlays of less than $5 million that can either piggyback other season capital or have government support associated with them to offset risk and accelerate commercial viability. The organic growth bucket will be projects that typically fall under our existing skill set. We would invest anywhere from $50 million to $100 million in such ventures but they will move the needle on CEIX's per share values and cash flow contribution while diversifying our cash flow streams over time. Finally our M&A bucket is still a work in progress for us. We haven't committed to anything here what we review and analyze many opportunities. In summary while we are focused on executing our base plan to navigate through this part of the cycle we are also working on ways to elevate revenue streams and returns through a thoughtful investment approach. While we invest in our portfolio of opportunities we fully anticipate continue to reduce our debt and opportunistically buy back equity since we expect to generate free cash flow.

With that, let me now recap the third quarter results and give an update on our 2019 guidance. We will review CEIX first and then CCR. CEIX reported net income attributable to CEIX shareholders of $4.3 million or $0.16 per diluted share. CEIX also reported adjusted EBITDA of $82.4 million and organic free cash flow of $8.9 million. This compares to net income of attributable CEIX shareholders of $5.7 million adjusted EBITDA of $83 million and organic free cash flow of $11.4 million in the year-ago quarter. The decline in our earnings metrics compared to the year-ago period mostly the result of lower PJM West power prices higher cost and a higher tax rate. Our fixed domestic and export contracts performed well in the quarter. During the quarter we generated $57.4 million of cash flow from operations and spent $48.5 million in capital expenditures resulting in $8.9 million of organic free cash flow. Now let me update you on CCR. This morning CCR reported net income of $7 million adjusted EBITDA of $20 million and distributable cash flow of $9.2 million.

This compares to $8.6 million $21.8 million and $10.7 million, respectively in the year-ago quarter. In the third quarter '19 CCR generated $20.4 million in net cash flow from operating activities. After accounting for $11.3 million in capital expenditures and $14.4 million in distribution payment our net debt increased by $6.2 million. This is typical for us during the third quarter which is normally our weakest quarter of the year. Year-to-date we maintained a 1x distribution coverage. CCR finished the quarter with a net leverage ratio of 1.6x essentially flat from last quarter. Now let me provide you with an outlook for 2019. As stated before our guidance philosophy continues to measure risk and capture a multitude of outcomes in our guidance ranges which protects us against unforeseen situations. We reaffirm our full year 2019 guidance based on our year-to-date results and expectations for the fourth quarter.

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

Jimmy A. Brock -- President and Chief Executive Officer

Thank you, David. Before we move onto the Q&A session, let me provide some final thoughts about how we have been preparing for 2020. First, we have a strong contracted position which grew once again this quarter. We are constantly in touch with our customers and have a few more bids out there for 2020. We would like to be above a 90% contracted position by year-end which is typical for us. Also remember that we are basing our contracted position statistics on achieving a near-record production run rate of 27 million tons at the Pennsylvania Mining Complex. Export markets are challenging right now. And there is a widespread fear among investors that all U.S. coal producers, will have to retreat significantly from the export markets resulting in significant EBITDA decline. CONSOL Energy is not a swing producer in the export market. We have been in tough markets many times before and we have successfully navigated through each one. We refer to slide eight, and note 2016 as an example. It wasn't easy then and we don't expect it to be easy now. Our terminal at Baltimore our contract with ESCO our coal quality and our low-cost operations have provided us with a solid base contracting position of 7 million export tons in 2020 from which we can build a pulp. For example if we contract at the same 7 million tons into the export market for 2021 our contracted position in that year just to 62% assuming a 27 million ton run rate.

Second, we have continued to invest in our minds through these cycles. And if the market conditions warranted. As it has always been our strategy we are prepared to run to the market demands in 2020. This would not only allow us to reduce our capital spending needs but also reduce our operating costs as we scale back on overtime maintenance costs and reduce the overall need for equipment repair. Third slowing down gross spend. As we highlighted earlier we have various buckets for gross spending. As our debt and equity securities become more attractively priced the return expectations on new or even approved and existing project become higher. Given the fact that most of our projects do not call for a significant capital commitment at any given time we have the optionality to extend the execution period or adjust the timing of the projects to prioritize other uses of cash. In summary we are committed to generating free cash flow in all parts of the commodity cycle. When times are challenging we will make choices and adjustments necessary to achieve our goals. We did that in 2016 and we are able to do it again if necessary.

Regardless of the external challenges, facing the space our team's dedication to responsible operations remained unchanged. To that end we are pleased to announce our commitment to become a better coal supplier. Better coal was established by a group of major coal buyers to promote the continuous improvement of sustainability performance in the coal supply chain. As a bare coal supplier we have recently participated in an independent assessment of our operations against the better coal code an internationally recognized standard of ethical social and environmental operating principles for the global coal mining industry. We are proud to be the only U.S. operator to have all active operations assessed against these standards. This effort complements our continued emphasis on ESG and aligns with our principal core values of safety compliance and continuous improvement.

With that, let me hand the call back over to Mitesh for instructions on the Q&A.

Mitesh Thakkar -- Director of Finance and Investor Relations

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

Questions and Answers:

Operator

[Operator Instructions] First question comes from Lucas Pipes B. Riley FBR. Go ahead, please.

Lucas Pipes -- B. Riley FBR -- Analyst

Thank you very much and good morning, everybody.

Jimmy A. Brock -- President and Chief Executive Officer

Good morning, Lucas.

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

Good morning, Lucas.

Lucas Pipes -- B. Riley FBR -- Analyst

So I have a bigger picture question and it relates to the recent Maria Energy filing. And in CNX Gas' 10-K it notes that it could be liable so that CNX Gas. It could be liable for liabilities assumed by Murray Energy in connection with the disposition of certain mines to Murray Energy in 2013 in the event that both Murray Energy and CONSOL Energy unable to satisfy those liabilities. How do you think about potential liabilities for Murray Energy? Would very much appreciate your thoughts on that situation?

Jimmy A. Brock -- President and Chief Executive Officer

Okay. Well, we do not believe, that there's a valid basis for consolidated label for Murray Liabilities required from CNX. At the time of the Murray transaction in December of 2013 the assets of consolidation coal company were profitable and we believe they still are. Per Murray's public filings murray's coact obligations are current as of the bankruptcy and Murray will remain current on such obligations during the bankruptcy. So therefore that's about all we have on the liabilities. It's a complicated bankruptcy and we will stay tuned for whatever other developments there are.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. And when you say the coact-related liabilities those would be the only ones at disposition? Or could there be kind of other pockets of liabilities outside of coact-related?

Jimmy A. Brock -- President and Chief Executive Officer

Yes in the event of Chapter 11 reorganization we do not believe there's any basis for consolidatable for the Murray liabilities. There are other liabilities that was acquired there when we did the transaction but we believe that the assets of consolidation coal company and its subsidiaries should be reorganized in Chapter 11.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. That's helpful. Thank thank you very much Jimmy. And then second question is in regards to CEIX and CCR. And I believe there's about a $163 million affiliate company credit agreement at the rate of about 3.75% kind of CEIX being the lender. And given the cost of debt in the capital markets today for coal producers unfortunately including CEIX would there be -- wouldn't there be an interest of CEIX shareholders for this debt meaning CCR stead to CEIX to be repaid as quickly as possible even if it means a lower distribution for some period of time?

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

Yes, and good question. And I would just say that Lucas, if you noticed that when we created that intercompany loan we did that at the time of the spin. And we generated excess free cash flow above the distribution and we actually have been paying it down. We took that from $200 million down to $163 million or so. So we have actually been paying it down. And when we put the -- when we put that intercompany loan in place we had to go replace a much larger revolver with a smaller revolver and we actually put much tighter covenants in there as well. So there was a lot of a give and take when we created that piece of debt and company safety coming alone. So -- and I think what you're kind of also getting at is our distribution policy for CCR because obviously if we cut the distribution we would be able to pay down that debt. And I think what we will -- we look at that every quarter but we effectively look at the distribution on an annualized basis and we will continue to do that. And so -- but we do look at it every quarter. So right now we are at a 1x coverage. And so we did not feel like there was a need to cut the distribution this stuff.

Jimmy A. Brock -- President and Chief Executive Officer

Yes. And Lucas we have responsibilities for CEIX and CCR. And today's point we look at that on an annualized basis. But basically it comes down to a board decision. So we look at that every quarter whether or not we generated a coverage enough to pay distributions or on an annualized basis are we going to be at the one coverage mark and that pretty much drives our decisions.

Lucas Pipes -- B. Riley FBR -- Analyst

Very, very helpful. And maybe, just one quick follow-up. If in the event that the distribution coverage ratio at CCR goes below 1x that's -- I mean that's where you kind of would draw the line and would reduce the distribution back to a 1x coverage or maybe more than that?

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

So, I would say that's an important factor because we need to look at the sustainability of that distribution. But we also look at the level of leverage and liquidity inside the company too. So it's a multitude of factors. But I think one of the key ones is the coverage ratio.

Lucas Pipes -- B. Riley FBR -- Analyst

Okay, Really appreciate it. And thank you for that detail, and continue Best of luck.

Jimmy A. Brock -- President and Chief Executive Officer

Thanks Lucas.

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

Thanks Lucas.

Operator

Thank you. Our next question comes from Mark Levin Seaport Global. Please go ahead.

Mark Levin -- Seaport Global -- Analyst

Thanks very much. So David I want to follow-up with a question that I asked you last quarter about how to think about 2020 revenue per ton? I think you mentioned that the degradation of the fall would not be material. And then I think you said not worse than five -- down 5%. I guess as you sit here 90 days later or roughly 90 days later. Is that still the same way you see 2020 revenue per ton?

Jimmy A. Brock -- President and Chief Executive Officer

Mark this is Jim. I'm going to take that. Our expectations are that we are going to be within that 5%.

Mark Levin -- Seaport Global -- Analyst

Okay great. So still the way you kind of see the world. And Jim since I have you so when you think about the export situation. I know you guys export a lot of coal into India and pet coke prices in India have come down materially. How does the change in pet coke pricing affect your outlook for NAPP exports to India in 2020?

Jimmy A. Brock -- President and Chief Executive Officer

In general Mark the market in India is very volatile at the current time. So we do market against somewhat against the pet coke numbers we do market against the API2 and API4 some as well. At the end of the day the Brick Hill business the cement business is all really basically negotiated. So while in the last few days we have seen a big drop in the pet coke price also in the last few days we have seen some business offered into the marketplace with netbacks slightly above 40%. So we are just going to go as the year goes we are in solid shape. We don't have to be in a hurry to book business today and we expect the volatility will come our way.

Mark Levin -- Seaport Global -- Analyst

Got it. Now that makes sense. And then as you think about -- and maybe this is for Jimmy or David Itmann and how you think about Itmann at this point? I know you have the ability to do it in sections and you have the ability to spread the capital out over time. I'm just wondering given the decline in met prices quarter-over-quarter. Is there a point at which you would or a met price or U.S. olive oil met price that you would look at and say you know what need to kind of cool our heels? And how are you guys thinking about capex with related -- related to that project in 2020 and beyond?

Jimmy A. Brock -- President and Chief Executive Officer

Yes Mark, you're right on point with all of those assumptions. So currently today we are continuing with the Itmann project because we have -- we are doing those presplits. We're doing the construction work. We had already planned to put one section in there just to kind of make sure that the same is consistent with what our core data tells us. But you're absolutely right. We do have the ability to flex that capital spend. And today's point we try to stay with that capital allocation process that yields the highest rate of returns. So there could become a time for Itmann that we see the market is staying kind of flat not where we want it to be that we would take that cash and put it toward something else that's creating a higher rate of return. But currently as we said today we are still on schedule. The Itmann process -- project is going very well. We expect to have production sometime in Q1 and the team is working hard there. So talent could be really good for us. We'll see what happens when we get ready to produce the coal there. But yes we do have the optionality to go full speed ahead or to pull back and wait for the market.

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

Just going to add that. Because we don't put out large capital at one-time in any one thing that we do have that flexibility to be very rate of return driven and that's a key part of our ability to generate the highest rates of return, if it slight ...

Mark Levin -- Seaport Global -- Analyst

And David, just to follow up on something. I think you said I just want to make sure I was clear on this. It sounded to me like you had said I may have not heard it correctly but you've already retired about $16 million of debt in the fourth quarter. And it also sounded to me like that and again correct me if I'm wrong but it sounded to me like that there will be -- continue to be a very strong emphasis on debt repurchases in 2020. I mean do you look at the rate of returns on the debt versus the equity? I mean do you feel like they're -- that there's a greater -- maybe leaning more toward debt than equity at this point? Is that a fair representation or not necessarily?

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

I think that's a fair, representation that because of where our debt is trading at and because of what we are seeing in the marketplace on the access to the capital markets. I think we feel it's more prudent. And that's why we will -- we look at this every quarter. We stress test our balance sheet with what we look out into the future and then we adjust accordingly. We look at our leverage we look at our liquidity and we always want to make sure we are staying ahead of the trends and not -- and again that's why we don't put a lot of capital out at one moment in time it gets stuck where we can't pivot when we need to pivot.

Mark Levin -- Seaport Global -- Analyst

Got it. And I'll sneak one more in. So just on Northern App pricing to the extent that you wanted to put stuff to bid in 2020 and '21 in terms of what is available. When we see quoted prices from coal desk and places like that you can see numbers today that are sub or around $40. Is that a real number? I mean do you feel like that if you went to go put tons to bed at 20 -- for 2020 or 2021 it would be around $40? Or is that not necessarily right?

Jimmy A. Brock -- President and Chief Executive Officer

Well Mark, let me answer it this way. We're in the middle of some negotiations. So I don't want to talk about pricing specifically. But I have Dan's Coal desk numbers here on my -- in front of me from yesterday. This profit was $40.10. This Q '20 was $41.40, $22.60 for '21 and $44.55 for the ensuing year. I have business that we are working on right now that I expect we will do better than those numbers.

Mark Levin -- Seaport Global -- Analyst

Fantastic. Good stuff Jim. Congrats on a good job these guys on the quarter. I appreciate it.

Jimmy A. Brock -- President and Chief Executive Officer

Thanks Mark.

Operator

Our next question comes from Daniel Scott from Clarkson. Please go ahead.

Daniel Scott -- Clarkson -- Analyst

Hi, thanks very much. Good morning guys.

Jimmy A. Brock -- President and Chief Executive Officer

Good morning Dan.

Daniel Scott -- Clarkson -- Analyst

You listed in the release comment about one of the longwalls in the second quarter and entered a new lower sulfur region of the reserves and that that was going to open up some new markets availability for you guys. Can you talk about which markets that is? How long that lower sulfur production is expected to last? And I think you actually said it had improved mining conditions as well in the release. So is that actually going to be a downward pressure on costs?

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

I'll take the first part, of it and then turn it over to Jimmy. But as far as moving over into the lower sulfur area of the mine. We have -- we are successful there mining our first longwall panel now. And as far as the new markets and Jimmy will talk a little more in detail about it. But our hope was that we could get more crossover metallurgical coal in that market. And the mining conditions to answer those. We're only in our first panel we have mined probably 1/3 of the panel but we are seeing improved conditions as far as the roof but it's too early to tell on how that entire district of that block is going to play out. But I can tell you the average software content for those reserves over there is shown in our models that it's around forecaster 2.3% to 2.4% soft.

Jimmy A. Brock -- President and Chief Executive Officer

I mean, it should be that way for five or six years into the future. The first Longwall Ella fork had moved from the north to the eastern fields in early summer. The second one will move later this quarter. And when that happens with two longwalls running in relatively low sulfur on the fork and one running in relatively low sulfur at Harvey. So what's that done for us? Well first of all in Q3 the quarter just passed we shipped 650000 tons of crossover met. That's the most we shipped in a quarter in a while. Annualize that that's up to $2.6 million. And as you know for these last several years and including this year we have been in the $1.7 million to $1.8 million range. So we see a big benefit there. The other place Dan is that we have customers both in the Midwest and in the Southeast that blend coal with CapCos and/or with PRB coals. And our low sulfur we think will give us a chance to get our low BTU -- our high BTUs into this market to replace cap and/or PRB. All right.

Daniel Scott -- Clarkson -- Analyst

That's good color. I'd say going into the quarter results that on the investor side there were some concerns that even though you're extremely well contracted this year and next that there might be some flavor of pushbacks or blend and extend or test for cancellation. And clearly by moving every ton of a record production quarter that seems to be not the case. But if you could just give a little more color on kind of how the existing contracts are holding up through the end of next year? And how the new business you contracted kind of blends in with that?

Jimmy A. Brock -- President and Chief Executive Officer

Well, first of all Dan in your best and/or your worst years you have some customer pushback based upon maybe maintenance problems at their plant or something like that. And we have had some limited pushback but all of it basically isolated to one or two customers. So pushback has not been a big problem for us to date in 2019. Going forward I mean we are really excited about some opportunities that we have right on the horizon. But let me just say that I've learned long ago until I have the signature on the contract I don't put that into the sold column. So we are working hard to get that done. I think there's a part of your question and I'm missing. Was that everything?

Daniel Scott -- Clarkson -- Analyst

Basically just the new business and how that's consistent with the behavior of the existing contracts. You expect it all to be kind of on schedule on time.

Jimmy A. Brock -- President and Chief Executive Officer

I expect to have some new longer-term contracts that are on schedule on time yes.

Daniel Scott -- Clarkson -- Analyst

Okay, great. And then last question for me. In the measured approach to growth slides I noticed in the M&A column which seems to be kind of the most distant at the moment given your debt and equity valuations. But under the column of diversifying its clicked at a yes. Now just -- can you in the event you were to go into the M&A market? Is that basically implying your -- it wouldn't be complementary high BTU thermal coal it would be more met coal? Or would be we talking outside coal mining? What's the kind of thought there?

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

Yes, the diversity play for us would be obviously organic first which is our Itmann project that will get us some lowball coal that we could have in our portfolio. Obviously we would look for more if we can get it at the right M&A project comes along would look at that. And then as I said some of that innovation and new technology some of those things are -- could be technology that's -- it's not necessarily outside of coal. It's part of R&D projects. And we can't talk a lot about those but we have a couple of those in the pipeline now as well.

Jimmy A. Brock -- President and Chief Executive Officer

But I think the diversification might be like met and some other things I think is kind of what we are talking about. And I don't think you're going to see us go do something completely outside of our skill set.

Daniel Scott -- Clarkson -- Analyst

Okay, it had a fun in that, Okay. All right. Thanks very much, guys.

Operator

Our next question comes from Vincent Anderson from Stifel. go ahead.

Vincent Anderson -- Stifel -- Analyst

Thanks. I guess I had a few more questions on Murray Energy but more on the opportunity side than the risk side. First is your impression that any of those assets were being run more to service debt than for rational economic reasons? Second is any of their customer portfolio within your network and offers essential market share gains? And then finally of course relative to share repurchases at the moment M&A doesn't make a ton of sense. But is there anything in the asset base that if we were offered up for sale would have a nice strategic fit obviously beyond the mine be sold to them for a reason?

Jimmy A. Brock -- President and Chief Executive Officer

Well, first let me talk about Murray Energy. I can't really speak for Murray Energy on what they plan or what they plan to do. We know obviously that market space and those coal mines. So there are there's two sides of that. One is the river opportunities that Mr. Murray has that we do not compete in at all. And then the other one is some of the rail or direct ship coal that's coming in. And we will wait and evaluate that and see what happens there. But for us we would like to stick to our unique marketing strategy that we have had for the last decade that's boded very well for us. As far as picking up different coal mines or something in another basin. We look at all opportunities if they come and they look like they make sense. We do the valuation work on them. We look at them if we can make it accretive and something that we would want to add that strengthens our portfolio and is a revenue generator then obviously yes we would look at that.

Vincent Anderson -- Stifel -- Analyst

That's fair. So to turn it over to India maybe a little bit of a longer-term question but I believe they recently opened up their domestic markets for a 100% foreign ownership of coal mines. Just based on your impression how attractive do you believe that market is for a global mining company to come in and try to increase productivity of the domestic coal industry? Or do you think the problems that face producers like Coal India go well beyond just the company's own internal issues hitting production targets?

Jimmy A. Brock -- President and Chief Executive Officer

Vincent I really can't comment on that. As far as what other coal companies may decide to do in terms of investing in India. I don't know the answer to that.

Vincent Anderson -- Stifel -- Analyst

Okay fair enough. And then I guess what gives you a certain level of confidence that Indonesia is a disciplined producer during this particular down cycle?

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

I think Vince I think at the end of the day all we are doing is looking at economics and saying that if economics don't warrant production over time. And sometimes it takes time to work its way through that you get -- eventually get economic rationality. I think that's kind of more of a point.

Jimmy A. Brock -- President and Chief Executive Officer

And, I think the follow-up on what Dave said there Vincent. When you look at the international seaborne markets Columbia is forecasted to be off $9 million this year; the U.S. $14 million; South Africa $4 million to $5 million. That's $27 million out of the market and there's another $72 million underwater in Indonesia. So we think prices have to ultimately respond. And as I said earlier about Indonesia -- I mean as I said earlier about India we think the volatility will come our way.

Vincent Anderson -- Stifel -- Analyst

That's helpful. Thanks.

Jimmy A. Brock -- President and Chief Executive Officer

Thanks.

Operator

[Operator Instructions] Our next question comes from Matthew Fields Bank of America Merrill Lynch. Go ahead.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey, guys. I just wanted to ask a little bit of a policy question. Governor of Pennsylvania basically wants to get the state into the regional greenhouse gas initiative presumably put some more sort of costs on the state power plant. So that's a big state for you. Can you just comment on kind of what the initial reaction is? And how you kind of plan to deal with those ramifications going forward?

Jimmy A. Brock -- President and Chief Executive Officer

Yes, that's a good question and a fair one. I would say at currently today it's a proposed regulation. It's not a regulation. But I'm sure there'll be a lot of political assumptions on both sides there. But really it's too early to tell. And the answer is not really simple. Generally speaking Reggie is not good for any fossil fuel whether it's coal or natural gas. It makes us less competitive versus the renewables which are already heavily subsidized. So we will do work on this. And it's too early to tell. As I said before it is proposed it's not a regulation. But if it goes to as proposed it certainly would not benefit any fossil fuel.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

And, I know you're pretty heavily contracted especially compared to peers. Are you does your big coal deliveries in Pennsylvania to those kind of three key plants are those reflective of your overall contracted portfolio? Are there less contracted more contracted? Can you just give us a little color there?

Jimmy A. Brock -- President and Chief Executive Officer

Look they are reflective of our contracted portfolio. They are in the 2020 portfolio and in the 2021 portfolio as well.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay, all right. And then just a little bit of detail. I just want to clarify so in the fourth quarter you bought back $16 million of second lien bonds? Or you spent $16 million buying back bonds at a discount?

Jimmy A. Brock -- President and Chief Executive Officer

We spent $16 million buying at a discount. So we have a higher face value that we bought back.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Okay, great. And then you intend to spend $9 million more to buy back bonds at a discount?

Jimmy A. Brock -- President and Chief Executive Officer

At least, I think it's -- again we are -- we are giving you a framework but we also tell you that we take advantage of dislocations. And so we just want to make sure people understand our focus is to reduce debt and take advantage of this market.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Right. And I don't want to put words in your mouth but presumably with your bond prices at yielding 14% 15% that's predominantly going to be second lien repurchases?

Jimmy A. Brock -- President and Chief Executive Officer

Generally yes, that's correct. And remember we also have a sweep in the first quarter that we have to deal with as well.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Thanks very much. I appreciate it.

Jimmy A. Brock -- President and Chief Executive Officer

You are Welcome.

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

Thank you.

Operator

Our next question comes from Nick Jarmoszuk from Stifel. Please go ahead.

Nick Jarmoszuk -- Stifel -- Analyst

Regarding the capital markets I think you guys have a good read as to the deteriorating conditions. So longer term can you talk about how you think about target capital structure the amount of term loans and bonds.

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

Yes, I think that's -- I'd just say we think about our cost of capital we think about who is actually supplying it. And we spent a bunch of time going and building up our access to capital in other areas. So I'd just say we have a whole process. We think about it you see how we went out and refinanced the timing of how we did it. And so I think it's always a moving picture right now when the commodity prices are low you obviously access to capital becomes a bigger issue. When commodity prices rally the access to capital changes. And so I think you just have to be very flexible and think about it and always continue to work on it so that you know where at moments in time if you ever needed to tap the capital markets you have access to it. So it's not a really simple answer that you gave us and it's a moving target over time.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And a question on your contracted position this time last year you were at 90% for the following year and 44% two years out. Can you talk about which part of the book is lagging whether it's domestic contracts or export contracts?

Jimmy A. Brock -- President and Chief Executive Officer

I would just simply say that we are close in both areas and that's stay tuned. Like I said earlier in the call I won't count something into Solcom until we have the signature on the contract.

Nick Jarmoszuk -- Stifel -- Analyst

Okay. And then regarding the financial distress of your NAPP competitor. Are you seeing any changes in market conditions or opportunities as a result?

Jimmy A. Brock -- President and Chief Executive Officer

I think that the marketplace has become a little bit more competitive as a result. But it's a little too early to say.

Nick Jarmoszuk -- Stifel -- Analyst

Okay, that's all I had. Thank you.

Jimmy A. Brock -- President and Chief Executive Officer

Thank you.

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

Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Mitesh Thakkar for any closing remarks. Go ahead.

Mitesh Thakkar -- Director of Finance and Investor Relations

Thank you Nick. We appreciate everyone's time this morning and thank you for your interest in 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

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Jimmy A. Brock -- President and Chief Executive Officer

Mitesh Thakkar -- Director of Finance and Investor Relations

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

Lucas Pipes -- B. Riley FBR -- Analyst

Mark Levin -- Seaport Global -- Analyst

Daniel Scott -- Clarkson -- Analyst

Vincent Anderson -- Stifel -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Nick Jarmoszuk -- Stifel -- Analyst

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