Good day and welcome to the CEIX and CCR Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nathan Tucker, Manager of Finance and Investor Relations. Please go ahead.

Thank you, Jason, and good morning, everyone. Welcome to CONSOL Energy and CONSOL Coal Resources fourth 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 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 Form 8-K. You can also find additional information on our website, www.consolenergy.com and www.ccrlp.com. With me today are, Jimmy Brock, our Chief Executive Officer; Mitesh Thakkar, our Interim Chief Financial Officer; and Jim McCaffrey, our Chief Commercial Officer. In his prepared remarks, Jimmy will provide a recap of our key achievements during 2019 and specific insights on marketing and operations. Mitesh will then provide an update on our liability management program, financial results and 2020 guidance. In his closing comments, Jimmy will then lay out our key priorities for 2020. After the prepared remarks, all three executives will participate in the Q&A session. For additional information, we have posted a supplemental slide deck on our website in advance of today's call. With that, let me turn it over to our CEO, Jimmy Brock.

Thank you, Nate, and good morning, everyone. 2019 was a very difficult year for our industry in general, as we continued to see degradation in commodity prices, which then translated into declining stock prices and deteriorated access to capital markets. Although our financial securities were caught in the whirlwind of broader coal industry malaise as well, we nonetheless achieved several goals that we laid out for ourselves at the beginning of 2019. We improved our safety performance, delivered near record production in sales volumes at the Pennsylvania Mining Complex, achieved another record EBITDA year at our CONSOL Marine Terminal, successfully refinanced our credit facilities and term loans, and significantly reduced our absolute level of debt. We also advanced our growth strategy by launching our Itmann project and made investments geared toward alternative and lower-emission uses of coal that we believe may provide high margin revenue streams in the future. Let me now provide you with a brief recap of 2019 and how it positions us for success in 2020 and beyond. First, on the safety front. 2019 was significantly improved from 2018 as we further differentiated our performance from the industry average. On a year-over-year basis, we reduced the total recordable incident rate at the PAMC by 45% and reduced our total number of exceptions by 41%. As the CONSOL Marine Terminal, we had zero incidents and a 100% compliance record during 2019. However, despite a significant improvement in overall safety performance for the year, we cannot forget the tragic loss of one of our CONSOL family members in 2019. The entire Company continues to mourn his loss and our thoughts and prayers remain with his family and friends. We have taken significant measures to protect an accident of this nature from reoccurring in the future, and safety remains our…

Thank you, Jimmy, and good morning, everyone. Let me start with an update on our liability management efforts in the context of our capital allocation strategy. I will then review our financial results for 2019 and introduce our 2020 guidance. Over the past year, we have been very focused on improving the risk profile of our balance sheet. While commodity prices were volatile throughout 2019, we were laser-focused on reducing our debt. This remains our top priority, heading into 2020, and to achieve that goal, we have taken significant steps to reduce our capital spend and take advantage of the cost of capital arbitrage. As you are already aware, we successfully reduced our interest expense, extended our maturities, improved our liquidity and gained a lot of financial flexibility through our refinancing effort in early 2019. This was very timely as access to capital in the energy industry in general and coal in particular has steadily declined since then due to ESG concerns. With those capital market constraints in mind, we are preparing ourselves to be able to have significantly lower level of absolute debt before our 2024 Term Loan B matures. We also recognize the tremendous opportunity we have to take advantage of the decline in the prices of our public debt and have been very active in the open market. In 2019, we repurchased $52.6 million of our second lien notes in the open market, which we are only able to redeem on or after November 15, 2021 at a call [ph] price of 105.5. In aggregate, during 2019, we made net payments of nearly $184 million towards total outstanding debt. We continue to have over $400 million of liquidity. On the capital spending front, we are now targeting a significant reduction in maintenance capital spending at the Pennsylvania…

Thank you, Mitesh. Before we move on to the Q&A session, let me take this opportunity to lay out some of our priorities for 2020. First and foremost, our strategy has always prioritized a strong balance sheet, and 2020 will be no different. We will continue to take advantage of the dislocations in the price of our debt securities to reduce our overall leverage as well as our interest expense. As Mitesh previously mentioned, we are constantly evaluating all avenues of shareholder return through our strict capital allocation strategy. In our past earnings calls, we have stated the willingness to slow down growth spending as our debt and equity securities become more attractively priced, and that is exactly what we're doing now. This also highlights the importance of our growth strategy, which has involved taking a measured approach to growth and selecting projects that involve manageable levels of capital commitment and a forward flexibility in the timing of the execution. This strategy allows us to adjust our capital deployment on an ongoing basis. Second, as you can see from our capital guidance range, we are always prepared to pull the necessary levers in a market downturn. We have reduced our capital spending requirements in 2020 due to our willingness to keep our minds well capitalized in strong markets. This gives us the ability to successfully weather market downturns. We prove the effectiveness of this strategy in 2016. Finally, we are approximately 95% contracted for 2020 at the midpoint of our sales volume guidance, which is above our stated target at our last earnings release. We also have 8 million export tons contracted for the year and, through our terminal in Baltimore, we can increase that position if market conditions warrant. As such, we have good revenue visibility for the year and can focus more heavily on strengthening our portfolio in 2021 and beyond. As we continue to strengthen our ESG efforts, we are pleased to announce the release of our annual sustainability report, our second as a stand-alone company. The report highlights our performance against sustainability goals that differentiate CONSOL throughout the coal life cycle. From extraction to utilization, we continue to deploy innovation technologies that increase operational efficiencies, reduce our carbon footprint, and provide opportunities for diversification. As energy markets evolve, the need for low cost, high quality and sustainable coal operators will become more critical than ever. As a result of our operational and ESG endeavors, CONSOL is prepared to meet that need. In summary, our key priorities for 2020 are; to safely and compliantly produce our high-quality coal at the lowest possible cost, continue to improve our balance sheet through debt repayment, stay nimble and flexible so we are prepared to run to the market and return capital to shareholders in the most attractive form. With that, I will hand the call back over to Nate for further instructions.

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

[Operator Instructions] The first question comes from Lucas Pipes from B Riley FBR. Please go ahead.

Hey. Good morning, everyone.

Good morning.

Good morning, Lucas.

So, I have a longer term, higher level and also somewhat maybe more difficult question. So, you gave guidance this morning that points to another very strong year of free cash flow generation. And with where the stock and the debt is trading. The market seems to express considerable doubt about kind of your long-term cash flow outlook. And so, I was hoping you could -- and I know you just gave 2020 guidance, but could you maybe share some perspective on the sustainability of kind of your big cash flow buckets. Obviously that the operating costs or the capital cost where would you be pricing in the current environment, are there any major cash items we should consider from your legacy liabilities? I would really appreciate your perspective on that and I think the market looks -- look some more color on that point as well. I always -- we think you're in a great position but would really appreciate your long-term outlook. And then, are there any other items on the cash side that you could maybe take off the table such as the distribution at CCR? Thank you very much.

Good morning, Lucas. It's Jimmy here. Well, let's talk about some of our long-term. And as you said, we don't give guidance past the year. But for our cash flow and looking forward, we've said before on our earnings call that we are moving in a more favorable reserve lock at Enlow Fork, which we think is going to lower our operating costs some. We'll move out some of those higher subsidence areas and we move -- reduce our footprint with sales that have put us over in the east reserves, which number one should be cheaper mining, it's a better quality of coal, the sulfur content is lower. So we think that'll help the overall portfolio in the future as far as cash cost goes. Also on the capital front, we've said many times before, the complex is well-capitalized and we have made continued capital investments when they need to be, but we still continue to believe that we can operate that with this maintenance of production for the foreseeable future somewhere between $4.50 and $5 a ton for maintenance capital. And then, when I look at other potentials, you heard us talk about that a little bit this morning that some of these is getting into other uses of coal that could bring in revenue, diversifies us a little bit away from coal-fired generation. And then, of course, pretty excited about our Itmann project that will come online that will allow us to participate in a peer lowball metallurgical coal mine or coal product. And we continue to look for ways to reduce costs. So, looking out in the long-term, I think things will improve for us as we reduce our footprint, and we continue to employ technology and innovation to help us on the cost front as well as generating free cash flow and revenue.

Let me add to that a little bit, Lucas. This is Jim. Jimmy talked about the sulfur on the east panels of Enlow Fork. And what that sulfur is allowing us to do is, we still have certain customers that blend our coal without a PRB coal or cap coals. And we believe that we can increase -- well, we all believe we're certain that we can increase our share of more than half of those utilities in such a manner that we can price that coal more effectively, and the customer also gets more effective cost, so it's a win-win. And that's something that we see carrying out for the next several years and is a big part of our strategy. And when you look at the international, you heard the numbers that Jimmy quoted about India, 166 gigs that need FGD installation, and we're working with Xcoal on helping develop the technology and making sure that we have plants that are retrofitting their FGD so that they will allow the burning of high sulfur Northern App coal. We also see some advantageous opportunities in Vietnam. We're working with our partner there. And in the Dominican Republic, we have talked about it in the past, there's a new power plant there that convert to 2 million tons a year. It really began burning last spring. So it's got the bugs worked out now, and they are out for a significant RFP for a large portion of the plant. All the coal that's burned in that plant has included our Bailey coals, and -- or Bailey coal now is going to get a chance to burn directly by itself. So we see that as an opportunity. Then, when you look at today's market versus the long-term, the tariff situation certainly…

That's super, super helpful. I appreciate all of your color. My follow-up is on the export side. Jimmy and Jim, there's considerable confusion with how the current market affects your net-back pricing. I think the analyst community has been anchored historically on the API 2. API 2 is very weak. But when you look at some of the market indexes over in India, South Africa, Newcastle, they're considerably stronger. How should we think about your pricing in today's world? I think it would be really helpful to have you walk through us and maybe everybody can be reset on how to model this correctly. Thank you.

Well, the API 2 has been the standard bearer for quite some time. But there's less and less coal going into Europe. And obviously more coal going into Southeast Asia, India, Egypt and other countries where the API 2 just does not perhaps applies. It's done in the past. So, recently at the conference in Miami, there was quite a bit of discussion about replacing API 2 or moving API 2 to the backburner because it just doesn't apply all over the world. API 4 is basically not being used very much by anybody as an index. I think, generally speaking, people think that the South Africans manipulate that number; and therefore, we don't find it a good number. We certainly pay attention to the passcode number going into India. And certainly, the freight numbers from the US are significant. Petcoke is traveling to India from both the East Coast of the US and the Gulf Coast area. The East Coast has a deeper burst, so it's less expensive to -- less expensive freight to -- from the East Coast to India. So, I mean that's basically I think the state of things today, I think they'll develop a little bit more as we go forward. But I think the API 2 is going to be fading into the sunset.

And maybe just one follow-up because it is important for me, and I think the investor base to really get a sense for how economical this export business is in today's market. What are some of the numbers you would put around it? If API 2 is less important, is it maybe 30% of your export volumes and there are still price stuff maybe 20%, 50% and really -- it's really a modeling question. How should we model this business in today's world?

Well, I guess, I have to think about that a little bit, Lucas. But if I looked like last year, we shipped almost 8 million tons overseas. 3.5 million that, almost 4 million went to India and India is negotiated pricing or priced off the pet-coke price. We did have some coal into Europe last year, 1.5 million tons or so. Let me think about that and get back to you on that, Lucas because in terms of modeling. I just haven't thought it through.

The next question comes from Mark Levin from Benchmark. Please go ahead.

Okay, great. Thanks, guys for the time this morning. First question, 2021, it looks like you put some tons to bet in 2021. Could you give us some color about how many tons you contracted for 2021 in the sort of zip code -- pricing zip code?

Yes, Mark. We can. We have a little bit of over 11 million tons sold, 5.5 million tons of those are in fixed domestic priced pretty much at market. We have 5.3 million tons of netback, our large netback contract going forward. And today, just 200,000 tons of export. So, we're not guiding on pricing for those tons yet, but I think you can assume that the fixed domestic is at or slightly above the current market.

Okay, got it. And by that you mean just sort of using of the kind of forward curve for that, maybe coal desk...?

Coal desk or someone like that.

Second modeling question, in the past, you guys have given a price sensitivity or revenue per ton sensitivity to PJM West power prices. Do you guys have one for this year?

I do have one for this year, Mark. And if you don't mind, I'd like to talk about it a little bit because we're sitting here with no winter and very low gas prices. And I would say that, that with this point and with the net back power pricing so far this year, but you know, I would also say that this market -- this contract was designed to be in market and unfortunately it is. Just to give you some clarity, we have a base price that we have said is approximately our total cost line and we begin to get a share benefit from the customer with PJM West prices are above or around $24.40. And then, the $1 change in PJM price adds up to about $0.20 across our entire portfolio. So, when I look this year you know the contract based upon is designed pretty much gives us the best pricing for the winter. Next best pricing for the summer and then obviously the shoulder months should give you the lowest pricing. But January has been a very low month, and in 2019 the gas price fell and the power price fell, prices slip too. So, we're looking at the gas curve going forward and it does get back over $2 in July is in contango. And we do anticipate that we will get some better market share as the year goes on. We have basically forecasted for this earnings call. We have forecasted the NASDAQ prices at the floor. So, it can't get any worse than what we've reported this morning, and I do think there's opportunity for it to improve.

Got it. That's very helpful. And then, back on the domestic market. In terms of your volume guidance for this year, contract buyouts and deferrals, maybe emphasizing deferrals, how much deferrals have you guys seen from utilities at this gas environment? How much is baked in the guidance? And then, is this year going to look worse than the -- from the deferral or do you expect it to look worse from the deferral perspective than it did the last time gas prices went below, too?

Well, so far, we've had one or two customers that have had more than just a little bit of pushback. So, the rest of the customer portfolio is performing so far. And there may be one or two customers that are trained or so behind, but all in all, they're performing. We have one significant customer that could not perform and we did a buyout of those tons, 0.5 million tons already this year. And we were well played for the buyout, so we just need to resell those tons at a higher price, which I don't think will be a problem as the year goes on.

Got it. And my last and final question, the Coal Act. I get a lot of incoming questions or have done a lot of incoming questions in the past about potential liabilities surrounding the Coal Act and your competitors' bankruptcy. Any comments or thoughts that you can provide as to how you guys are approaching that situation? I know it's a sensitive one, but just because -- it is for many investors thought I would throw it out there.

Yes. Mark, it is a sensitive question and of course we can't speculate or answer legal questions from the Murray bankruptcy. But what we believe on the Coal Act liabilities is, Murray's Coal Act obligations were current as of the bankruptcy. And we understand that Murray has remained current on such obligations to the bankruptcy. So, we believe there is no basis for that to change and that it is not necessary for Murray to modify its Coal Act liabilities acquired from CNX in order to successfully reorganize its business. Now, as I stated before it is a large and complex bankruptcy, but that's about all we can say at this time. We haven't had any claims and we have -- the obligations are current as we understand it. But we are monitoring that and staying with it, but that's about all we can say about it today.

Thanks for. The next question comes from Daniel Scott from Clarksons. Please go ahead.

So, when you look at the guidance for this year the volumes being down. How are you planning on achieving those lower volumes? Is it -- are you going to keep all your longwalls running all year and just do it by a shift or is there contemplating taking one longwall off, based on market conditions? Just kind of walk me through that, if you could.

Well, unfortunately, Dan, we have experience at this. We went through this in 2015 and 2016. So, the exercise here will be to run our operations at the lowest possible cost which generates the highest free cash margins. So that could be running four longwalls, it could be running all five at a reduced schedule. And a lot of it will depend on the quality specs that we need to make and what this marketing team tells us that we need to run. So, we have a very good team there, more than likely starting out of the gate will run at some sort of reduced schedule at all three coal mines. And then we will continue to monitor that as we go forward. But like I said, we do hope there is going to be a turnaround in the second half of the year that will provide us an opportunity to have upside to these numbers that we've guided to this morning. But as far as the operating schedule, it will be one that meets the specifications and allows us to run at the lowest possible cost.

Also Dan, I'll just add that typically our fourth quarter is very strong. But for this year, we have first half which is loaded with unusual number of longwall moves. So the production is going to be low from an operational standpoint in the first half. And if we are expecting a second half recovery, I think from a longwall move perspective, we'll be positioned really well to capture if the market recover. So, from an operational cadence standpoint, I think first half is going to be a little bit weaker from an operational standpoint anyway.

Yes. And I mean, just to follow-up a little bit on that, we've just completed one of our longwall moves at Harvey, and we have three to four more, it could be four in the second quarter. So, then it will last only a one longwall move in the second half or worst two, depending upon timing of who that one moves to.

And then, when I look at the realized price gains for this year, by my math at the midpoint, it looks like it's down close to 7% versus 2019's realized prices. And I think up until this quarter, we talked more about being in the neighborhood of 5% down. With the additional terms we put to bed to get 82% to 95% book this year, I assume that's all domestic in that combination of that plus the maybe a more conservative outlook around the collars. Is that what's driving that slightly higher decline in realizations?

Dan, it's all in the net back pricing.

Okay.

So, when we provided that less than 5% we were using the forward step on the net back prices, which you know now is we are using the floor price. So, I think that's the biggest driver.

Yes.

Then last, on the Itmann ramp, as you guys slow the ramp down to conserve cash and potentially buyback some debt. What does that mean for -- I see, it's going to be a higher run rate, went into full capacity. When is that going to be based on the roughly the market stand in this 150, 160 range for benchmark coal?

Well, what we've said currently that it would take a 1 year to 1.5 year to ramp that up to full production. So that could push us into 2021, somewhere middle of 2021 if we get all three of those units up and running. Now, what we'll do there, this first -- right at the gate which we're pretty much ready here sometime this month will be to go in and do the exploratory mining that I talked about before, make sure the coal seam is what our core data shows. Make sure the quality is there. Make sure -- look at the roof control and everything else and run that one unit, just one shift a day as we're waiting for the market to respond. Then obviously we'll get at a second unit, we have to develop that to do that, and then we have to develop about more to add the third unit. But I would say mid-2021, we could be up to that four range of guidance based on what we know today.

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

On the 2020 CapEx, could you give us a split between maintenance and the amount that you guys are anticipating on it?

Sure. So at the Pennsylvania Mining Complex, we are around $4 a ton mark on maintenance CapEx.

Okay.

And the rest of it is efficiency and a little bit of Itmann CapEx.

Okay. And then, on the relationship that you have with Xcoal, they were mentioned earlier in the call as well. You guys are working with them to develop the Indian markets that the scrubbers eye. Could you talk about the relationship you have with them, how you think about the take-or-pay, the terminal and then the export tonnage that they're looking to maintain?

Our relationship with Xcoal is very solid. It's a good one. We like the take or pay contract that we have at the terminal, it certainly gives us some steady revenue that we know is there. And secondly, Ernie has people in almost every sales corner in the world. So we feel like we get opportunities. He brings those to us and we talk through strategy and where would want to move it. It also helps with the total market of the global market for coals. And I would say, to this point, he has been able to deliver, and we've went to some of our customers with him to visit. He has a very good visibility of what's going on globally. And we're satisfied with where we are today with the contract, and Jim probably can add some more color to that, but so far we're very pleased with our Xcoal contract.

I think that pretty much covers it.

Nick, is that background noise on your side?

It probably is, yes. The makers were quieter. With the Xcoal contract, when do you anticipate discussing with them the renewal or extension, and when could we expect some news coming to the market on it?

We currently have a contract through 2020, through the full year 2020. I would think somewhere second half of 2020 when we have a little better understanding of where the markets are playing out that we would start negotiating the following year, even years out contract.

Okay. And then, on CCR, is there any thoughts of changing the distribution policy, start paying down the intercompany notes?

Well, for CCR, we look at all those things. And as I've said many times before, we look at CCR on an annualized basis. We do understand that quarters can be lumpiness, we do understand that there's other things, but basically what it comes down to with CCR is uses of free cash flow generated. So there's different things to look at. At the end of the day, it comes down to a Board decision, to whether or not we pay those distributions or not. For an example, in 2019, we had some quarters that we're under 1%, we had some quarters that were slightly over 1%. And at the end of the day, we looked at the cash, we committed to our unitholders if we generate 1% coverage ratio, we will be paying those distributions. That's exactly what we did. Going forward, it's the same exercise. We'll take a look at that, make a recommendation to the Board, and then they'll decide whether or not we paid distributions or not.

Okay. And then, working capital as a use in 2019, how should we think about that for 2020?

Yes. So, Nick, if you think about it, the working capital changes were mostly driven by about, let's say, of the $80 million, $44 million were due to trade receivables. And that is typically what you see depending on where you are in the market cycle. For instance, in 2018, we had a positive working capital adjustment from trade receivables of about $43.9 million. So essentially, we gave all that back in 2019, and depending on where the market was. A couple other smaller things, there were some income tax related payments in 2019, which were from a strong year in 2018, and so was another $10 million payment on discretionary 401(k) match. We don't anticipate those two of that magnitude, 401(k) match is definitely not happening for 2020 -- for 2019 year. And the income taxes might -- the impact might be not as much as what we saw in 2019. Trade receivables -- one of our focus area has been to collect on those trade receivables faster, so that's what we are focused on 2020. So if anything, I'm inclined to say that there will be a positive benefit from those aspects in 2020.

Okay. And then, last question would be of cash flow sweep in the first quarter. Can I just know what that number's going to be?

I think given the amount of second lien debt that we have bought in 2019, I don't think we're going to have any free cash flow sweep for the Term Loan B.

[Operator Instructions] The next question comes from Matthew Fields from Bank of America. Please go ahead.

Hey, everybody. Thanks for the disclosure on the bond repurchases in 4Q. Have you ever -- have you purchased any more bonds -- second lien bonds in the first quarter to-date?

So, Matt, our approach to bond repurchases, as you are following -- the bond market, you know our bonds are very volatile. So we try not to do anything significant in any given week. We do bits and pieces and, you are right, we did buy some bonds earlier in this year. So 2020, I think, we have done probably high single digits of bond repurchases, but we'll continue to do that. I think our game plan remains the same like, we can't predict where the market is going. So we are just going to dollar-cost averages. And in a way it works --it has worked out in our favor over the last three to six months, because the prices have been coming down.

Yes. So given that, you know now your bonds right today are kind of in the mid-$60s which is 21%, 22% yield. So, given the attractiveness sort of now versus during -- over the course of last year, do you think that on repurchases will be more aggressive in 2020 -- sort of zero risk plus-20% IRR in that investment?

I would not say more aggressive, I would continue to maintain measured approach to it. We will continue to participate in the marketplace. But as you noticed that we have elevated the priority of that capital return project to above Itmann, so you can imagine how strongly we feel about that.

Yes, currently, where it sits today, it ranks pretty high among our capital allocation returns.

Okay, great. And then I wanted to follow up on next question on the CCR distribution. Don't have the Q yet or the K I guess for that yet, but through the nine months, CCR has basically been borrowing on that intercompany loan to pay this distribution. And I know that you got a good chunk of that distribution, but how sustainable is that practice and should that really continue?

So, we -- again, like Jimmy said, we'll look at it on a quarterly basis with an annual outlook in mind. And again, it's too early to tell market conditions could change. But generally speaking, I think, the way we think about things is whether CCR has generated enough distribution or expect to generate enough distribution in the year. And sometimes things could change, and I think you will have to stay tuned for that till our April decision.

This concludes our question-and-answer session. I would like to turn the conference back over to Nathan Tucker for any closing remarks.

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

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