CNX Coal Resources' (CNXC) CEO Jimmy Brock on Q1 2016 Results - Earnings Call Transcript

| About: CNX Coal (CNXC)

CNX Coal Resources LP (NYSE:CNXC)

Q1 2016 Results Earnings Conference Call

April 25, 2016, 5 PM ET

Executives

Mitesh Thakkar - Director of Finance and Investor Relations

Jimmy Brock - Chief Executive Officer

Lori Ritter - Chief Financial Officer and Chief Accounting Officer

Jim McCaffrey - Senior Vice President, Coal Sales

Analysts

Paul Forward - Stifel

Lucas Pipes - Friedman, Billings, Ramsey

Jeremy Sussman - Clarksons Platou

John Bridges - J.P. Morgan

Operator

Good afternoon and welcome to the CNX Coal Resources First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mitesh Thakkar, please go ahead.

Mitesh Thakkar

Thank you, Amy, and good evening, everyone. Welcome to CNX Coal Resources LP’s earnings conference call. Today, we will be discussing our first quarter 2016 operational and financial results.

In the room today are Jimmy Brock, our Chief Executive Officer; Lori Ritter, our Chief Financial and Accounting Officer; and Jim McCaffrey, Senior Vice President, Coal Sales.

We will begin our call today with prepared remarks by Jimmy and Lori and then open up the floor for the Q&A session. Jim will join Jimmy and Lori in the Q&A portion of the call.

As a reminder, any forward-looking statements or comments we make about future expectations are subject to business risk, which we have laid out for you in our press release or in previous SEC filings. We do not undertake any obligation of updating any forward-looking statement for future events or otherwise.

We’ll also be discussing certain non-GAAP financial measures. Definitions and reconciliations of such measures to comparable GAAP financial measures are contained in the press release and furnished to the SEC on Form 8-K. You can also find additional information on our website, www.cnxlp.com.

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

Jimmy Brock

Thank you, Mitesh. Good evening, everyone, and thank you for joining us on today’s call.

CNX Coal Resources turned in another solid operating quarter. While the challenges in the commodity markets are far from over, we have made tremendous progress in the last nine months to structurally reposition our mines not only to be able to withstand the decline in the coal markets, but also to thrive as the US coal industry reshapes over the next few years.

As you may have noted in our press release, CNX Coal Resources reported adjusted EBITDA of $13.1 million and distributable cash flow of $4.4 million for the first quarter of 2016. While coal pricing remains a concern, the improvements we have made on the operations front allowed us to improve our EBITDA guidance by approximately $2 million and our CapEx guidance by approximately $7 million. To reflect these improvements, our Board of Directors has approved a full quarterly distribution payment of approximately $0.51 per unit for the first quarter of 2016.

Now, let me provide a brief operating and marketing update. Let me begin with our core values of safety and compliance. After a very strong 2015, I would characterize the first quarter of 2016 as mixed. On a positive note, we reduced the severity of the incidents by 29% at our mines in the first quarter of 2016 compared to the same period last year. Unfortunately, this achievement was masked by an increase in the number of recordable incidents. We remained focused on the core values of safety and compliance and we are continuing our efforts to improve on both of these.

In January 2016, we announced the idling of one of our longwalls and returned to running the remaining longwalls on a more consistent schedule to achieve productivity improvements. This was a conscious strategic decision taken in spite of the risk of realizing some lower priced sales in the export market for additional mine production.

Our strategy worked as expected and led to improved mine consistency, significant cost improvements and better margins as the quarter advanced. Spot and export market sales, although lower priced than contracted sales, were able to absorb incremental mine production which provided economies of scale.

During the first quarter of 2016, CNXC also made several other operational adjustments, including vendor concessions, reduced staffing levels, refocused incentive plans, realigned benefits and deferred other non-essential spending. All of these steps resulted in reduced labor cost, improved productivity and improved cost structure.

Productivity for the first quarter as measured by tons per employee hour improved by 14% year on year, notwithstanding the reduced number of longwalls in operation. This productivity improvement along with the reduction in cost of labor per hour resulted in an overall reduction in labor cost of approximately 21% during the quarter compared to the year ago period.

As discussed in our last earnings call, CNXC also took steps to reduce spending on discretionary projects, contract manpower and mine supplies. Spending on these items declined by an average of approximately 37% in the first quarter compared to the previous year.

This improvement was a combination of a decrease in actual quantity in units as well as the unit cost. It also reflects the fact that we did not have any longwall moves during the quarter and for the most part we have boarded over time work. All of these changes allowed us to deliver a six-year low unit cost of coal sold at the Pennsylvania mine complex.

There has been a paradigm shift in the unit cost structure at these mines. We have made significant improvements to our mine cost structure and we recognize that some of these may be difficult to sustain.

Remember, the first quarter of 2016 was an exceptional quarter when the mines were running well with improved shipment consistency, good mining conditions, no longwall moves, lower labor cost and operating the most efficient equipment. Timing of the longwall moves and any inflation in commodity prices or labor might result in future increases. But I’m very pleased at the way the CNX teams have repositioned these mines in a low commodity price environment.

With the improvement in productivity and the current shipment rate, we have decided to continue running at least four longwalls in Q2 of 2016. This is going to be beneficial to us on multiple levels as we will be able to improve some inconsistent shipment schedules at the mines and achieve economies of scale. The Pennsylvania mining complex is built for this type of optionality and flexibility.

With that, let me now provide a brief update on our marketing and sales effort. Challenging times continue for the coal industry as the demand for coal in the US remains subdued given the unusually warm winter and low natural gas prices.

Based on the most recent estimates published by the EIA in its April 2016 short term outlook, US coal demand declined by approximately 15% in the first quarter of 2016 compared to the first quarter of 2015 and the coal industry has responded with an approximate 31% reduction in production year on year.

While production cuts have occurred and are happened to regaining a fundamental balance for the commodity, power plants are still struggling with high inventories. Coal inventories at US power plants stood at approximately 100 days of burn as of the end of the first quarter.

Despite a challenging coal market backdrop, our marketing team was successful in improving overall coal shipments throughout the first quarter. During the first quarter of 2016, we sold 1.1 million tons to 39 different end users domestically and internationally, which is an improvement of 5% compared to the fourth quarter of 2015.

As expected, some customer shipments have been slower than usual, but our marketing team continues to work with those accounts. While several of our competitors are focused on balance sheet issues, the stability and consistency of our mines allow us to capture market share by penetrating newer markets.

In the first quarter, we successfully tested Bailey coal at two new customer plants and are currently in active negotiations for additional term business. Our first quarter 2016 pricing does not represent a fundamental shift in market pricing, but reflects a combination of a very mild winter and resulted in abnormally high inventories and understandably low gas prices. This caused domestic customers to defer higher-priced contracted [tons on their] contracts and we chose to replace those tons with export tons.

We expect the supply/demand imbalance for coal to begin to correct as supply cuts reach 30% plus in every basin. Going forward, bankrupt coal companies will restructure, with significant production coming offline. Likewise, oil and gas rig counts are plummeting, E&P companies have reduced access to credit and natural gas futures for rallying. We see the trends of an improving market and our short term strategy has improved both our EBITDA in the first quarter and our domestic committed positions for 2017 and 2018.

For the remainder of 2016, we expect a gradual recovery in shipments to some of our customers as they normalize their inventories while competing with low natural gas prices. This may result in us selling some coal in the spot market which could continue to weigh on our realizations due to the changing customer mix.

Finally, I want to make an exciting organizational announcement. CNX Coal Resources continues to build infrastructure needed to be a standalone entity. As a step in that direction, we have named Jim McCaffrey to lead our coal sales and marketing team. I have worked with Jim for more than 20 years and I’m very excited to have him lead our marketing team.

Jim’s background is perfect for this role. He is not only an excellent marketer of coal, but he has also worked in operations and led the supply chain management group at CONSOL. Jim knows these mines, their coal quality and their abilities inside and out. He has led the marketing efforts for our coal since 2009.

In his new role, he has the responsibility for coal sales and marketing. His team is dedicated to CNXC and the Pennsylvania mining complex. I am pleased to welcome Jim under the CNXC umbrella.

With that, I will now turn the call over to Lori for a financial update.

Lori Ritter

Thank you, Jimmy. Overall, CNXC reported total coal revenues of $45.2 million for the first quarter of 2016, from a sales volume of 1.1 million tons compared to $76.9 million from a sales volume of 1.3 million tons for the same quarter last year. The $31.7 million reduction in overall revenue was driven by a $15.83 per ton lower average sales price and a $255,000 reduction in tons sold.

The lower sales volumes and the lower average coal sales price per ton sold in the 2016 period was the result of the overall decline in the domestic and global thermal coal market. Unprecedented warm winter weather resulted in reduced coal burn and increased coal inventories at many of our customer sites, which caused some of them to adjust shipment schedule which is permitted under their contract.

We replaced the reduced contracted tons with export tons, which significantly impacted our average realization. During the quarter, we sold approximately 274,000 tons of our coal in the export market or 26% of total tons sold during the quarter. The total cost of coal sold was $34.9 million for the first quarter of 2016 or $20.8 million lower than the $55.7 million for first quarter 2015. The decrease in the total cost of coal sold was driven by the significant cost reduction efforts Jimmy highlighted and lower sales volumes.

Total cost per ton sold were $33.16 per ton for the current quarter compared to $42.62 per ton for the prior year quarter. Unit cost benefited from lower labor cost, productivity improvements and reduced discretionary spending on maintenance projects and mine supplies.

Adjusted EBITDA was $13.1 million for the first quarter of 2016 compared to $29.3 million for 1Q 2015. The $16.3 million decrease was mainly due to lower realization and sales volume, partially offset by reduced spending as we’ve already discussed.

During the quarter, we generated $4.4 million of distributable cash flow after accounting for $2 million in cash interest and $6.7 million in estimated maintenance capital. Note that the actual cash capital expenditure for the first quarter of 2016 was $2.6 million compared to $6.5 million in the first quarter of 2015.

During the first quarter, we have reduced our expectations of capital spending over the next 10 years, which has resulted in approximately $800,000 reduction in estimated maintenance capital expenditures relative to previous quarter. We expect this rate to be continued through our next evaluation.

From a liquidity perspective, as of March 31, 2016, our $400 million revolving credit facility had $200 million of borrowings outstanding, which is in line with the borrowing at the time of the IPO. As of March 2016, our debt to EBITDA ratio was 2.4 times.

Let’s now turn to an update on our expectations for 2016. We have slightly tightened the guidance range on coal sales volumes to 4.5 million to 5.1 million tons, which at the midpoint is consistent with our previously announced guidance.

On the capital expenditure front, we are reducing our 2016 spending target to $18 million to $20 million, which is a $7 million improvement versus our previous guidance range. The reduction in capital spending follows a thorough review of spending and reflects improvements in cost of supplies, reduced labor costs and the deferral of some discretionary spending.

Moving to the adjusted EBITDA guidance for 2016, despite a significant decline in average realizations for our coal, we are increasing our adjusted EBITDA guidance range by approximately $2 million to $59 million to $69 million. As we look ahead, we expect a gradual improvement in shipments to our domestic customers which should help us achieve our annual shipment target and slightly higher realizations. On the cost side, we have four scheduled longwall moves in the second quarter, which will negatively impact our costs lightly compared to the first quarter.

Let me explain some of the variables around our EBITDA guidance range. At the midpoint of our sales volume guidance range, we are 97% contracted and priced for 2016. This is below the 100% level we reported last quarter and takes into account the updated delivery schedule from our customers and our expectations of potential deferrals. These deferrals have resulted in an increase in our 2017 and 2018 sold position. We are currently 70% sold for 2017 and 52% sold for 2018.

Our updated guidance reflects a slight improvement in average coal realization for the remainder of 2016. Some of the expected deferred tonnage is replaced by lower priced export or spot volumes, which allows only a slight improvement in our overall average realization.

However, as an offset to the lower realization, we have been able to successfully reduce our expected cost of coal sold for 2016. We now expect a 10% to 15% decrease in unit cost of coal sold on a year over year basis. This is a meaningful improvement from the year over year decrease of 5% to 10% we guided on the fourth quarter earnings call.

On the marketing front, we are seeking incremental sales for 2016 that could help improve volumes and allow us to keep running the mines consistently. As the year unfolds, we will gain better clarity on the market and look for additional margin improvement opportunities. We will keep you posted on the results of these efforts.

As disclosed in our press release, our Board announced that the partnership will pay a full distribution of approximately $0.51 per unit to all the unit holders for the quarter ending March 2016. Based on our distributable cash flow of $4.4 million for 1Q 2016, our estimated coverage ratio is that approximately 0.4 times.

As we have mentioned before, we make quarterly distribution decisions based on our annual outlook. To put this decision in perspective, let me compare to where we were a quarter ago. On our fourth quarter 2015 earnings call, we announced that we intended to pay distributions to all unit holders and we understood that we had a funding gap given or EBITDA and CapEx guidance at that time.

Since then, we have made significant changes to our capital and our operating cost, which allowed us to increase our 2016 EBITDA guidance to $2 million and reduced our CapEx guidance by $7 million. So for the full year of 2016, we improved our potential cash generation by about $9 million since the last earnings call. Even though we did not generate sufficient cash flow during the quarter, we feel good about our improving annual outlook and our ability to borrow slightly if needed. We’re still working on closing the remaining funding gap; stay tuned.

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

Jimmy Brock

Thank you, Lori. The first quarter financials only convey a partial story and one that is weighed down by one of the worst winter burns for the domestic coal power plants, a utility industry which was not prepared for such a dramatic decline in burn and that our coal producers who faced uncertainty around their contracted sales.

What is lost in those numbers is the unprecedented improvement we have been able to make on the operational side, including an approximately 25% reduction in our total cost of coal sols since the IPO. I want to thank our workforce and recognize their sacrifices for making this happen. For the things that we have direct control over, such as production, cost, discretionary spending and efficiencies, our team has done an exceptional job responding.

And with that, I’d like to turn it over to Mitesh to give some instructions for the Q&A.

Mitesh Thakkar

We will now move to the Q&A section. Amy, can you please provide instructions to our callers?

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] And our first question comes from Paul Forward at Stifel.

Paul Forward

Congratulations on the really nice cost number in the first quarter. I wanted to ask about, let’s see, maintenance CapEx level, you had a $6.7 million in the first quarter, but I think the implied number when you have a guidance of $18 million to $20 million for the full year, you’re implying that the maintenance CapEx goes down significantly over the next three quarters around a little above $4 million a quarter. Is that right? And just wanted to see what went into the lower maintenance CapEx guidance?

Lori Ritter

The $6.7 million you referred to is the accrued maintenance capital. We have lowered that based on looking at our 10-year average capital numbers, we’ve been able to pull that down and it also includes $0.50 of reserved replacement per ton. The actual capital for the quarter is what the capital guidance is based on, the cash capital, and so for the quarter I believe that number was $2.5 million, the cash number for the quarter.

Paul Forward

So that’s what we add to the – the next three quarters and add that to $2.5 million of that to get to your guided full year rate?

Lori Ritter

For cash capital, correct.

Paul Forward

So I think Lori you had said stay tuned about, potentially ways to address the funding gap, I guess just to see if I could ask a question around that, it seems like the options for boosting the distribution coverage would be some mix of market recovery, which it sounds like you’re suggesting some moderate or slight to moderate recovery in pricing over the next few quarters, lower maintenance CapEx which you’re guiding to, expanding the asset base through dropdowns or other acquisitions, or reducing the distribution. Can you talk a little bit about how the company is looking at those possibilities and what – as it stands today, what you see your best options might be?

Lori Ritter

There was an awful lot in that question, so let’s take them apart a little bit. We do hope for some market recovery here as we discussed in our guidance. You see slight improvement in our guidance if you do the math in our realizations. Our cost numbers we’re continuing to evaluate to see how much more we can get out of cost. Obviously, that first quarter cost was a six-year low and that’s a really good number.

So I’m not certain that will hold that low of a number, but we do not expect them to increase dramatically as our guide suggests. We also are looking to place additional volumes in the market which helps us, regardless of their export, with these cost numbers we can move on coal in export money and still EBITDA and cash margin. So those are all important.

As far as a drop or other acquisitions go, we are constantly evaluating those. We review them; they obviously have to be accretive immediately to the MLP. Valuations are a key. What we’re looking at is basically as Jimmy and I have stated on previous calls, we’re open to anything and we’re looking at an awful lot of things. If and when that happens is yet to be determined.

Paul Forward

And I guess the other option would be reduced distribution which would be first borne by the parent company because your statements in the prepared remarks were very much supportive of keeping the distribution at this level for now, but how often do you evaluate that question about the distribution policy?

Lori Ritter

Actually the distributions, we review that officially every quarter, but we’re looking at that all the time as well. Our full intent as a management team is to pay those distributions both to our subordinate and to our common unit holders. As we say that, as we look at improving guidance for the year, we do pay distributions, look at our annual outlook, not on a quarter to quarter outlook because we do get some volatility in our quarter.

So we’re looking at paying distributions on the annual outlook. Now, if things don’t transpire as we see them happening today, we do have the ability to cut the subordinate distribution as a first resort if need be, but we are working very hard to prevent that from happening.

Operator

The next question is from Lucas Pipes at FBR & Company.

Lucas Pipes

Jim, also congrats to you on the promotion, that’s exciting. So maybe you can help me understand the current coal market in northern Appalachia a little bit better. So when I look at some of the inventory data that’s out there, one could say arguably that northern App is among the most oversupplied regions in the US coming out of the winter. And two questions on the back of this backdrop and I’d be curious to hear your thoughts on that.

First, how quickly do you think the supply/demand balance can improve in northern Appalachia? And then secondly, longer-term, what do you think is the outlook for northern App specifically given the potential for new gas fired generation to come online in that region?

Jimmy Brock

I can certainly understand why someone would look at the [NApp] region and say it’s a disadvantage. Based upon the fact that we’re sitting here in the Utica and the Marcellus region with so much gas bottled up, certainly [indiscernible] low basis price compared to Henry Hub and resulted in lower power prices which have driven some of the inventory issues that you have just discussed.

But I think if you look at it more closely, you’ll see that there are a number of announced pipeline projects. I’m sure you know that. And there’s the least 10 bcf committed in terms of pipeline projects. When you couple that with the fact that in northern Appalachia rigs have dropped significantly, rig counts have dropped significantly in the Marcellus and Utica regions over the last two years and while it’s hard to figure out exactly how many drilled and not completed wells are on Pennsylvania, I could tell you for sure that those drilled and not completeds have dropped as well as drilling permits for gas wells.

So when you take a look at that and you look at the CapEx situation in the energy markets today, particularly for natural gas, and you say from 2014 through 2016, CapEx has dropped 6% to 70%. You start to look around and you say what’s going to happen next we think the uncompleted wells will begin to reduce and we think that as exports grow and demand increases, the price recovery is potentially just around the corner. A hot summer could really exacerbate that recovery. And we think therefore the northern App is poised for some marginal recovery in the short term and perhaps is best poised for recovery versus any other coal basin.

When you take that and you add to that our geographic location and we’ve talked about this in the past, our access to both eastern Class 1 railroads and primary markets on our primary systems gives us a tremendous logistics advantage versus customers who are in their secondary systems, both railroads are deemphasizing some of their secondary system. So it’s going to make it less efficient and more costly for those in those markets, especially central Appalachia to continue to perform aggressively.

And then we’re right on the artery for those two railroads and they both have been aggressively seeking our business. So that helps us take advantage of this location. We have access not only to the rail, but to the barge and truck markets and allocation allows us to reach out to more customers than any other cooperation in the country, we believe.

And when you consider our location to both Baltimore and Norfolk, where there’s deep earth piers, that gives us better access to the international market as well. So it really makes we think the northern Appalachian market quite poised for recovery. There’s been plenty of bankruptcies around the country. We all are well aware of that. So far, NApp is the least affected of any region. I think you have to ask yourself why that is. We think we’re well positioned for the future.

I think you asked, the second part of your question was about natural gas coming online. And when you look at the northern App region and [PGM] particularly, you have about 186 rigs of capacity. There is 63 gigs of coal today and about 60 of gas. There is a 11 gigs of gas being built. But power plants, the coal fired plants that are left are among the best most well maintained, certainly controlled and we’re well positioned in almost all of those plants, everyone except for one company. And so we see the opportunity to take some of the excess load in the grid for recovery as well. So I’m optimistic that we’ll see a slight recovery in the second half, maybe continuing into 2017.

Lucas Pipes

Maybe just a few quick follow ups, you mentioned the access to the arteries of the railroads and your Baltimore port terminal, so should we be thinking of the spot shipments that were referenced in the prepared remarks as going exclusively into the export market or are some of them also going to be staying here domestically? And you also kept production flat, how do you think your competitors are going to be looking at the market over the course of this year? Do you think they’re also going to pursue similar opportunities? Do you think really this is a competitive edge for CNXC?

Jimmy Brock

I think our logistics remain to be a competitive edge, Lucas. As you know, to take export out of the Gulf, [the burst] in the Gulf are not as deep as they are in the East Coast. So you can only load a boat in the Gulf to 65% to 70% of what you can load in Norfolk or Baltimore. So that makes export more costly than what we have here out of the northern App. And transportation to those peers is also more costly. So we think that that is a major benefit for us.

No, not all the spot we’ve taken in the first half is exports, but we have taken a majority of spot tons in export during the first half. As Lori said, we chose to take those export tons because we felt that we could deliver the kind of performance that our mines ultimately did deliver. About 26% of our tons in the first quarter were export tons.

As we go through the rest of the year, we see that kind of smoothing out and I would expect by year end we will be somewhere in the 15% to 18% range of total export. And that will also give us some improvement in our realizations, some slight improvement.

Jim McCaffrey

And Lucas, one thing I’ll add to that. This is Jimmy by the way. We have a cost structure that we’ve worked really hard on and it gives us the ability to not only growing these exports, but to also generate cash margins in these exports.

Lucas Pipes

Great job on the cost side. Can’t be said enough. So appreciate all the color. Maybe I’ll jump back in the queue, but thanks again and good luck.

Operator

[Operator Instructions] Our next question is from Jeremy Sussman of Clarksons.

Jeremy Sussman

I’d echo the congrats to you, Jim. I’ll buy you beer at the free cocktail session at Eastern Fuel Buyers next week.

Jim McCaffrey

And I’ll reciprocate.

Jeremy Sussman

I guess one question, obviously the export pricing came in a lot lower than what you were contracted in. Is the math pretty simple in terms of the 300,000 tons or so of export business minus sort of I guess high 40s to low 50s that you are hedged out for the domestic business or were there some other kind of adjustments in there that make it tough to kind of doing apples to apples number?

Jimmy Brock

The primary judgment, Jeremy, is from the deferrals that we experienced in the first quarter. As Lori said, we had some customers that deferred tons based upon their contractual rights and we’re working with those accounts to maximize them the best we can.

We had some customers that deferred tons that did not have contractual rights. We are dealing with them individually, but appropriately as per their contracts. And those deferrals ultimately resulted in us being about $5 to $5 off of our mark. So those deferrals cost us about $5 to $6 a ton in total realization.

Jeremy Sussman

So that should get made up at some point down the road, is that right?

Jimmy Brock

Yes.

Jeremy Sussman

And just the only other follow up, obviously a marginal tweak higher on the volume side, is that on the back of better export volumes than expected and I guess what would it take to get to anything above the midpoint of the range?

Lori Ritter

I believe we held the midpoint of our range consistent with last time, although we did narrow the range of tons for the first part of the question.

Jimmy Brock

Jeremy, as Lucas pointed out, there are some spun opportunities left for 2016. We are pursuing those as well as some term deals for 2017 and beyond. I think the 2016 tons will be very competitive based upon the state of the industry today, but I feel so good that we have an opportunity to get those. So again, they will give us some slight movement versus the export markets. I do not expect us to be 25% at year end on the export market. Like I said, I think it will be 15% to 18%.

Operator

[Operator Instructions] We have a question from John Bridges at J.P. Morgan.

John Bridges

I was just wondering how was this whole process behind the export sales, I understand that it’s giving you the volume to get the economies of scale, but what sort of hurdle does the price have to reach to make it worth your while? What’s your thought process there?

Jimmy Brock

John, we really don’t have a specific price, we have a range and keep in mind we’re trying to guide to an annualized basis. But we make those decisions based upon what we know and Jim and his team have been at and we know we have tons that are going to be deferred. We look at those as to which longwalls we run. We run those low-cost longwalls to where we can generate cash margins when we take those.

John Bridges

So it’s a pure cash decision?

Jimmy Brock

Yes.

John Bridges

Because the exp prices have been pretty weak recently, so if you look at the numbers on a basic net back, then people would say this business doesn’t make any sense.

Lori Ritter

We agree and we watch those sales as far as what price we’re willing to accept based on our expectation of what the cost structure is going to be. So it is a pure cash decision based on the individual sale that we take.

John Bridges

Okay, thank you. And congratulations on the results and hope you’re able to keep those small price increases to a minimum.

Operator

The next question is from [indiscernible].

Unidentified Analyst

I was wondering looking at the other side of the equation if we have a cooler than normal summer and as a result gas prices don’t improve and you may have noticed that New York just allowed the constitution pipeline for example. What would the effect of that be? How much are you building in terms of a warmer summer and higher natural gas prices?

Jimmy Brock

I think where we stand today we feel pretty comfortable that we have our arms around the plan with a normal summer. We think that there will be some slight upside if we get a hot summer and all the weather services that I’ve read are indicating a hot summer. As far as deferrals that we have experienced, we think we’re through the worst of that. And I do want to comment that the value of those deferrals we’ll still experience in 2017 and 2018, so we’ve not given up that value. So our plan is based on a normal summer, although I must admit I’d love to have [a hot weather].

Operator

At this time, I show no further questions. And I’d like to turn the conference back over to Mitesh Thakkar for closing remarks.

Mitesh Thakkar

Thank you, Amy. We appreciate everyone’s time this evening and thank you for your interest in and support of CNXC. Hopefully, we were able to answer most of your questions today. We look forward to our next quarterly earnings call. Thank you everybody and have a good rest of the day.

Operator

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

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