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Consol Energy Inc (NYSE:CEIX)
Q3 2019 Earnings Call
Nov 5, 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 Third Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]

After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded.

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 risk, which we have outlined 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 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 then update on our pre-growth initiatives.

David will then discuss some macro trends, the detailed financial performance for 3Q '19 and our 2019 guidance. 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, all three executives will participate in the Q&A session.

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

James 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, which the marketing team has been building over several years.

On the finance front, we were very active in the open market repurchase in 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 credit 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 undervalued 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 longwall moves and minor vacations, while some were unexpected, such as an unusual amount of equipment breakdowns and 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 terminals 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 helps 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 as a 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 laundered 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, API 2 prices 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, API 2 prices now set 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 API 2, 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 markets is in supply rationalization.

Coal producers have started rationalizing production. Several high cost and unhedged coal producers in the US have started cutting production and industry sources are calling for a steep decline in US thermal coal exports. For instance, DTC expects US 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 [indecipherable] example. According to Wood Mackenzie, 60% of Indonesia's total Batubara 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 remain 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 continued to struggle financially. As we enter the annual budget season, we expect E&P producers to manfully reduce our 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 contracting 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 [indecipherable] 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 6, 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 costs at existing operations. Shearer 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 achieve 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. 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 a dominant [indecipherable]. 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 targeted rate 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 they relate 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 is the declining access to capital. On slide 7, you will notice that the E&P industry raised $81 billion in capital in 2014 and now is on pace to only raise $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 semi-annual bank redeterminations on the revolvers, and second is institutional or bank's 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 Markets estimates just 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 concern. We noticed a similar trend in 2016 before access to capital rebound in 2017, with a 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 deplete and new investments become scarce, supply will decline and create a 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 Colombia and in the US, 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 secondly 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 ruse our reliance on public debt markets. We plan to reduce our outstanding public debt by at least $25 million in the fourth quarter and at least an additional $50 million in 2020.

We will continue to fine-tune these goals, and will remain rate of return driven. In the fourth quarter year-to-date, we've 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've 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 loan 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 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 on 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 to favor debt reduction.

Second is our growth initiatives. This is another key area of value creation for us and we began articulating earlier this year. Jimmy just provided a 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 years to five years.

We fund these projects through small initial outlays of less than $5 million that can either piggyback other season capital. We have government support associated with them to offset risks 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 CIEX'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, but 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 can -- while we invest in our portfolio of opportunities, we fully anticipate, continue to reduce our debt and opportunistically buyback 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 CIEX first, then CCR. CIEX reported net income attributable to CIEX shareholders of $4.3 million or $0.16 per diluted share. CIEX also reported adjusted EBITDA of $82.4 million and organic free cash flow of $8.9 million. This compares to net income attributable to CEIX shareholders of $5.7 million, adjusted EBITDA of $83 million, and organic free cash flow $11.4 billion in the year-ago quarter.

The decline in our earnings metrics compared to the year-ago period is mostly the result of lower PJM West power prices, higher costs 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 payments, 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 to our distribution coverage. CCR finished the quarter with 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.

James A. Brock -- President and Chief Executive Officer

Thank you, David. Before we move on to 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 at 27 million tons at the Pennsylvania Mining Complex.

Export markets are challenging right now, and there is a widespread fear among investors that all US coal producers will have to retreat significantly from the export markets resulting in significant EBITDA declines. 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. Refer to slide 8 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 Xcoal, our coal quality and our low-cost operations have provided us with a solid base contracted position of 7 million export tons in 2020, from which we can build upon. For example, if we contract at the same 7 million tons into the export market for 2021, our contracted position in that year adjusted 62% assuming a 27 million ton run rate. Second, we have continued to invest in our mines through these cycles at the market conditions warranted as it has always been our strategy, we are prepared to run to the market demands in 2020. This will not only allow us to reduce our capital spending needs, but also reduce our operating cost as we scale back on over time, maintenance cost and reduce the overall need for equipment repair.

Third, slowing down growth spend. As we highlighted earlier, we have various buckets for growth spending. As our debt and equity securities become more attractively priced, the return expectations on new or even approved and existing projects 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 our 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're able to do it again, if necessary. Regardless of the external challenges faced in this space, our team's dedication to responsible operations remain unchanged.

With that, 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, a sustainability performance and the coal supply chain. As a better coal supplier, we recently participated in an independent assessment of our operations against the better coal, and internationally recognized standard of ethical, social and environmental operating principles for the global coal mining industry.

We are proud to be the only US operator to have all active operations assessed against these standards. This effort complements our continued emphasis on the 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

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question comes from Lucas Pipes, B Riley, FBR. Go ahead, please.

Lucas Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

Thank you very much. And good morning, everybody.

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

Good morning, Lucas.

James A. Brock -- President and Chief Executive Officer

Good morning, Lucas.

Lucas Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

So I have a bigger picture question, and it relates to the recent Murray Energy filing, and in CNX Gas' 10-K it notes that, quoted, 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 are unable to satisfy those liabilities. How do you think about potential liabilities from Murray Energy? Would very much appreciate your thoughts on that situation. Thank you.

James A. Brock -- President and Chief Executive Officer

Okay, good morning, Lucas. Well, we do not believe that there is a valid basis for CONSOL to be liable 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 Coal Act 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 will stay tuned for whatever other developments there are.

Lucas Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

Got it. And when you say the Coal Act related liabilities, those would be the only ones at disposition or could there be kind of other pockets of liabilities outside of Coal Act related one?

James A. Brock -- President and Chief Executive Officer

Yeah, in the event of Chapter 11 reorganization, we do not believe there is any basis for CONSOL to be liable 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 shouldn't be reorganized in Chapter 11.

Lucas Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

Got it. That's helpful. Thank you very much, Jimmy. And then second question is in regards to CEIX and CCR, and I believe there is about $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's debt to CEIX to be repaid as quickly as possible, even if it means a lower distribution for some period of time. Thank you very much for your perspective on that.

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 inter-company loan, we did that at the time of the spin, and we generated excess free cash flow above the distributions 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 inter-company 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 I'd say give and take when we created that piece of debt -- that inter-company loan. So and I think, I think what you're kind of also getting at is our distribution policy for CCR, because obviously, if we cut the distribution, we'd be able to pay down that debt. And I think what will -- we look at that every quarter, but we effectively look at the distribution on an annualized basis. And we'll continue to do that and so and -- but we do look at every quarter. So right now we're at a 1x coverage and so, we do not feel like there was a need to cut the distribution this quarter.

James 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 Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

Very, very helpful. Thank you. And so 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 Nathaniel Pipes -- B. Riley FBR, Inc. -- Analyst

Okay. Really appreciate it. And thank you for that detail and continued best of luck.

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

Thanks, Lucas.

James A. Brock -- President and Chief Executive Officer

Thanks, Lucas.

Mitesh Thakkar -- Director of Finance and Investor Relations

Thank you, Lucas.

Operator

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

Mark Levin -- Seaport Global -- Analyst

Great, 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 or the fall would not be material. And then I think you said, not worse than 5 -- 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?

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

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 had come down materially. How does the change in pet coke pricing effect your outlook for NAPP exports to India in 2020?

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

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 API 2 and API 4 some as well. At the end of the day, the brick kiln business and 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've seen some business offered into the marketplace with netbacks slightly above 40. So we're just going to go as the year goes. We're in solid shape. We're -- 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 US low-vol met price that you would look at and say you know what we 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?

James 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're doing this pre-split, 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 spending, and today's point we try to stay with the capital allocation process that yields the highest rate of returns. So there could come a time for Itmann that we see the market is being kind of flat or we wanted 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're 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 timing 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 [indecipherable] to go for speed ahead or to pull back and wait for the market.

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

Yes.

Mark Levin -- Seaport Global -- Analyst

Got it. I'm sorry, go ahead, Dave.

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 to be --

Mark Levin -- Seaport Global -- Analyst

And David, just to follow up on something, I think you said, I want to make sure I was clear on this. It sounded to me like you had said, I may have not heard it correct but that 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 that there is 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're seeing in the marketplace on the access to the capital markets. So 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 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 of time and get stuck where we can't pivot when we need to pivot more.

Mark Levin -- Seaport Global -- Analyst

Got it. And well I'll sneak one more in, so just on Northern App pricing, to the extent that you wanted to put stuff to bed in 2020 and '21 in terms of what is available, when we see quoted prices from CoalDesk 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 for 2020 or 2021, it would be around $40? Or is that not necessarily right?

James 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 CoalDesk's numbers here in front of me from yesterday. His prompt was 40 ton, his Q '20 was 41.40, 42.60 for '21 and 44.55 for the ensuing year.

Mark Levin -- Seaport Global -- Analyst

Okay.

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

I have business that we're working on right now that I expect will do better than those numbers.

Mark Levin -- Seaport Global -- Analyst

Fantastic. Good stuff, Jim. Congrats and good job guys on the quarter. Appreciate it.

James A. Brock -- President and Chief Executive Officer

Thanks, Mark.

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

Thank you.

Operator

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

Daniel Scott -- Clarkson -- Analyst

Thanks very much. Good morning, guys.

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

Good morning, Dan.

Daniel Scott -- Clarkson -- Analyst

I mean you listed in the release, comment about one of the longwalls in the second quarter that entered a new lower sulfur region of the reserves and that was could open up some new markets available 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?

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

Yes, I'll take the first part of it and then turn it over to Jimmy, a little later. But as far as moving over into the lower sulfur area demand we have, we're successfully there mining our first longwall plant now. And as far as the new markets, and Jimmy will talk a little more 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've learned probably a third of the panel, but we are seeing improved condition as far as the roof, but it's too early to tell on how that entire district or that block is going to play out. But I can tell you the average sulfur content for those reserves over there is showing in our models that it is around, forecasts 2.3% to 2.4% sulfur.

James 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 Enlow 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, we'll have two longwalls running in relatively low-sulfur in Enlow 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 650,000 tons of crossover met. That's the most we shipped in the quarter in a while, annualize that, that's up to 2.6 million and as you know, for those last several years and including this year, we've 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 CAPP coals and/or with PRB coals and our low-sulfur, we think will give us a chance to get our low Btu or our high Btu's into this market to replace CAPP and/or PRB.

Daniel Scott -- Clarkson -- Analyst

All right. That's good color. Thank you. 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?

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

Well, first of all Dan, in your best and/or your worst years, do you have some customer pushback based upon maybe maintenance problems that their plant or something like that. And we've 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're 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 call. So, we're working hard to get that done. I think there is a part of your question that I'm missing. Was that everything?

Daniel Scott -- Clarkson -- Analyst

So basically just at the new business and how that's -- is it consistent with the behavior of the existing contracts, you expect it all to be kind of on schedule, on time?

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

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 destined at the moment, given your debt and equity valuations, but under the column of diversifying, it's clicked as yes. Now that -- can you -- in the event you were to go into the M&A market, is that basically implying it wouldn't be complementary, high-Btu thermal coal that would be more met coal or would be we are talking outside coal mining? What's the kind of thought there?

James A. Brock -- President and Chief Executive Officer

Yes, the diversity play for us would be obviously, organic first, which is our Itmann project that would get us some low-vol metallurgical 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 we would look at that. And then as I said, some of the 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.

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

Yes. But I think the diversification might be like met and some other things I think is kind of what we're 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. You've had enough fun in the E&P world last few years. Okay, all right, thanks very much guys.

James A. Brock -- President and Chief Executive Officer

Thank you.

Operator

Thank you. 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 then for rational economic reasons. Second, is any of their customer portfolio within your network and offers residential 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, sort of were offered up for sale would have a nice strategic fit? Yeah, obviously beyond the mines you sold to them for a reason.

James 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'll wait and evaluate that and see what happens there. But for us we like to stick to our unique marketing strategy that we've 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 and 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. To turn over to India, maybe a little bit of a longer-term question, but I believe they recently opened up their domestic markets for 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?

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

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're 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 rationale. I think that's kind of more of a point.

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

And I think the follow-up on what Dave said there, Vincent, when you look at the international seaborne markets, Colombia is forecasted to be off $9 million this year, and the US $14 million, South Africa $4 million to $5 million, that's $27 million out of the market and there is 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 guys.

James 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. Just wanted to ask a little bit of a policy question. Governor Pennsylvania basically wants to get the state into the Regional Greenhouse Gas Initiative, presumably puts more sort of costs on the state power plants, 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?

James A. Brock -- President and Chief Executive Officer

Hi, Matt. Yeah, that's a good question and a fair one. I would say currently, today, it's a proposed regulation, it's not a regulation. 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, RGGI 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'll do work on this end, it's too early to tell. As I've said before, it is proposed, it's not a regulation. But if it goes through 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?

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

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. Thanks a lot. And then just a little bit of detail, I just want to clarify, you said in the fourth quarter, you bought back $16 million of second lien bonds or you spent $16 million buying back bonds at a discount?

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

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

Vincent Anderson -- Stifel -- Analyst

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

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

At least. I think it depends, again we're 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 the -- of this market.

Vincent Anderson -- Stifel -- Analyst

Great. 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 secondly in repurchases.

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

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

Vincent Anderson -- Stifel -- Analyst

Right.

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

And amortization.

Vincent Anderson -- Stifel -- Analyst

Okay. Thanks very much, I appreciate it.

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

You're welcome.

James A. Brock -- President and Chief Executive Officer

Thank you.

Operator

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

Nick Jarmoszuk -- Stifel -- Analyst

Hi. 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 as amount of term loans and bonds?

James A. Brock -- President and Chief Executive Officer

Yes, I think that's, I just say we think about our cost of capital. We think about who is actually supplying it and we spend a bunch of time going in building up our access to capital in other areas. So I 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 moment of time if you ever needed to tap 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

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

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

I would just simply say that we're close in both areas and stay tuned. Like I said earlier in the call, I won't count something in the sold column 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?

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

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.

James A. Brock -- President and Chief Executive Officer

Thank you.

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

Thank you.

Operator

This concludes our question-and-answer session. I'd like to turn the call or 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:

Mitesh Thakkar -- Director of Finance and Investor Relations

James A. Brock -- President and Chief Executive Officer

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

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

Lucas Nathaniel Pipes -- B. Riley FBR, Inc. -- 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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