CONSOL Coal Resources' (CEIX) CEO Jimmy Brock on Q4 2017 Result - Earnings Call Transcript

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About: CONSOL Energy Inc. (CEIX)
by: SA Transcripts

CONSOL Coal Resources LP (NYSE:CEIX) Q4 2017 Earnings Conference Call February 6, 2018 11:00 AM ET

Executives

Jimmy Brock - CEO

David Khani - CFO

Jim McCaffrey - SVP, Coal Marketing

Mitesh Thakkar - Director of Finance, IR

Analysts

Lucas Pipes - FBR

Michael Dudas - Vertical Research

Paul Forward - Stifel

Mark Levin - Seaport Global

Jeremy Sussman - Clarksons Platou

Lin Shen - HITE

Operator

Good morning and welcome to the CCR Fourth Quarter 2017 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, Director of Finance and Investor Relations. Please go ahead.

Mitesh Thakkar

Thank you, Anita and good morning everyone. Welcome to CONSOL Coal Resources fourth quarter and full year 2017 earnings conference call. With me today are Jimmy Brock, our Chief Executive Officer; Dave Khani, our Chief Financial Officer; and Jim McCaffrey, Senior Vice President of Coal Marketing. We will start with prepared remarks by Jimmy and Dave and then open up the floor for the Q&A session, where Jim McCaffrey will join us as well.

As a reminder, any forward-looking statements or comments we make about future expectations are subject to business risks, which we have laid out for you in our press release or in previous SEC filings. We do not undertake any obligations of updating any forward-looking statement for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in the press release, and furnished to the SEC on Form 8-K. You can also find additional information on our web site, www.ccrlp.com.

Before I turn the call over to the speakers, I want to highlight the framework for our quarterly earnings communication process going forward. As you know, the old CONSOL Energy separated it's coal business and gas business into two public companies in November 2017. The new public coal company is now called CONSOL Energy and is our new sponsor. The new sponsor and the partnership have the same management team, and a significant asset overlap. So starting with 1Q 2018 results, we will hold a combined earnings call for both CONSOL Energy Inc. and CONSOL Coal Resources and take questions from both analysts and investors for both the companies.

We believe this will provide the investor community an opportunity to better understand and follow the strategy and progress of both the sponsor and the partnership, while allowing for a reduction in overlapping cost for both entities. Finally, we are providing additional transparency by including revenue and cost per ton guidance, and the press release. For today's conference call, I remind everyone, that this call is only for CONSOL Coal Resources and we will not be taking any questions related to CONSOL Energy Inc.

We have issued a separate press release announcing the fourth quarter and full year 2017 results for CONSOL Energy, and have also posted a slide deck on CONSOL Energy's web site, which you can refer to.

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

Jimmy Brock

Thank you, Mitesh. Good morning everyone and thank you for joining us on today's call. 2017 was a very eventful year for us on multiple fronts. The coal market recovery that started in mid 2016 continued through 2017 and now into 2018, despite changing demand dynamics in the domestic market. The flexibility and optionality that our asset base and market strategy offer, has allowed us to take advantage of improving export markets, expand our average revenue per ton, and grow our total revenue by 14.8% in 2017 compared to 2016, which should continue into 2018.

We delivered record production volumes at the Pennsylvania Mining Complex in 2017, in spite of several operational challenges that I will touch upon shortly.

The focus and perseverance of our team is even more commendable, when you take into account, that for the better part of 2017, many members of the corporate and operation teams were also involved in the spin-off process of our current sponsor from the previous sponsor.

I am proud of what the CONSOL Energy team has achieved in faces of challenges and uncertainties. We are extremely excited to what the future has in store for us, as we now have a coal-focused sponsor and an aligned management team.

For the fourth quarter, CCR generated $28.2 million of adjusted EBITDA, and a distribution coverage ratio of 1.2 times. The Board of Directors of our general partner, announced a cash distribution of $0.51 per unit to all unitholders. I will note, that this marks the 10th consecutive quarter of industry-leading distribution payout for our common unitholders. Including this payout, we have returned $5 per unit in cash distributions to our unitholders since our IPO, which equates to more than 33% of the IPO price, even while managing through the worst coal market downturn in my career.

We ended the year with just under two times leverage on our balance sheet, which is a conservative in the MLP landscape, but is a level where we feel more comfortable, and which expect to maintain in the long term.

Now, let me turn to reviewing our operational performance for the fourth quarter of 2017. CCR produced 1.6 million tons of coal during the fourth quarter, and 6.5 million tons for the full year, which is in line with our previous announced guidance range of 6.5 million to 6.75 million tons. The full year 2017 production marks the second consecutive year of production growth, despite the overall production decline in the industry. Furthermore, our 2017 production reflects 15% growth compared to 2015 levels, the year when we went public. We achieved this by expanding our sales portfolio, targeting top performing domestic customers, and growing our export book to find additional avenues for our coals.

Compared to the year ago quarter, our production was impaired by about 200,000 tons, primarily driven by few operational challenges, such as unplanned longwall moves, the previously disclosed permitting issue at Bailey, inconsistent mining conditions at Enlow Fork and rail logistics issue during the month of December. The good news is that some operational adjustments at the Enlow Fork mine, were now able to advance the longwall faster.

As previously disclosed, we expect geological challenges to continue at the Enlow Fork mine through the first half of 2019, and plan as best we can, to offset them. Although it reached quarterly volatility, we do not see geology impact in our production target significantly on manual basis. The Bailey and Harvey mine are continuing to run well.

For the fourth quarter, the productivity at the Pennsylvania Mining Complex measured as tons per employee hour, improved at 6% compared to the third quarter 2017. As consistency improves at ML4 and geology normalizes, we expect our productivity to improve even further.

On the cost front, our average cash cost of coal sold came in at $27.30 per ton for the quarter, which was approximately 3% improved compared to the year ago period. The improvement in cash costs was driven by lower than expected subsidence expense, and reduced power utility related spending.

For 2017, our average cash cost of coal sold was $29.03 compared to $28.09 in the year ago period. The impairment of 3.3% was in line with our previously announced guidance range of up to 5% increase year-on-year.

With that, let me now provide an overview of the coal markets. During the fourth quarter, our marketing team was focused on booking sales for 2018 through 2020. The goal was to not only capture the upside in the export market, but also to start derisking some of our 2019 revenues. I am very pleased to announce, that our marketing team was successful in achieving that goal.

Against a strong export backdrop, we succeeded in concluding a multiyear contract for a significant piece of our coal export sales volume for the second quarter of 2018 to the first quarter of 2020. The newly contracted export volumes consist of approximately 70% thermal coal and 30% cross-over metallurgical coal. Approximately 50% of this volume is already priced, and the remaining 50% is contracted and collared. The collars have an average forward price that is greater than our 2017 average revenue per ton. So even if prices are forced to the floor by the market, our new contract will still be above versus our 2017 portfolio weighted average pricing.

In addition to providing this downside protection, the collars also afford us a meaningful opportunity to capture upside, if market conditions continue to improve, as they have selling prices that are above current market pricing for our product. This contract demonstrates the global attractiveness of our high quality and versatile [ph] coal assets.

Furthermore, it highlights our ability to put some duration on our export business, which until recently, has been more spot market focused. On a portfolio basis, we are now over 95% contracted for 2018, 70% contracted for 2019 and 24% contracted for 2020, assuming an annual production rate of approximately 6.75 million tons going forward.

Specifically for the quarter, we sold 1.6 million tons of coal, bringing our full year 2017 sales to 6.5 million tons. This marks our second consecutive year of sales volumes growth, an increase of 6% from 2016 and 14% from 2015. We achieved this growth in spite of mild peak season weather earlier in 2017 and several production and logistical challenges, which I touched upon previously.

We also increased our average revenue per ton sold by 5% in 2017 compared to 2016. We continue to see strengthening trends in both the domestic and export markets during the fourth quarter.

On the domestic front, PJM West Day-Ahead power prices averaged almost $3.50 per megawatt hour, or 12% higher during the fourth quarter than during the third quarter. Driving an uptick in average revenue per ton under our netback contracts.

More importantly, our plants have continued to exercise discipline in managing the coal inventory levels. The latest report from the U.S. Energy Information Administration, shows that power plant coal stockpiles were down by approximately 27 million tons, or about 16% at the end of November 2017 compared to the end of November 2016, prior to the cold snap in late December and early January. And many of our top domestic customers in Northern Appalachia rail markets reported inventory levels at less than 30 days of burn during January of 2018. We believe that these more balanced inventories will bring utilities back in the market, which could open up some spot business opportunities.

In the export markets, demand in pricing remained strong for both thermal and metallurgical coals. This strength was driven by a number of factors; perhaps the most noteworthy, during the fourth quarter, being low coal stockpiles and restrictions on petcoke in India, which helped to drive an increase in demand for Northern App coal in particular.

Continued coal from Asia has taken some traditional supply away from the Atlantic markets as well, and helped to bolster for other gains in Atlantic seaborne pricing, with prompt month API 2 index pricing for thermal coal delivered into northern Europe averaging 8% higher during the fourth quarter compared to the third quarter.

Looking forward to 2018 and beyond, we are in very good shape. Even though we are almost sold out for 2018, there is a meaningful potential for upside. For instance, about 30% of our coal for 2018 was sold to customers with netback contracts. With the strong start to winter that we witnessed in the beginning of January, those contracts are expected to perform very well.

We will now focus on adding to our portfolio for 2019 and beyond, while optimizing existing book of business.

With that, I will now turn the call over to David to provide the financial update.

David Khani

Thank you, Jimmy, and good morning. I will provide a review of the quarter and our 2018 guidance. Before I do so, let me provide an update to our last quarter's discussion regarding commodities cycles.

One of the key indicators to the strength and duration of this upcycle, is the recent trend and shape of the forward curve. During the fourth quarter, global commodity prices were generally in an upturn and current forecast for global economic growth remains supportive. The key commodities tied to economic growth, such as copper and oil, rallied approximately 12% and 17% during the fourth quarter, respectively. Similar dynamics were visible in the international coal markets too, the API 2 thermal coal benchmark for the prompt month improved by approximately 8 percentage to be noted earlier. What we found most noteworthy is the significant improving of the backwardation of the curve from our last earnings call. In essence, the backend of the curve is increased by more than the front end.

From the fourth quarter 2017 to early February 2018, the 2020 calendar year future strip for API 2 rallied from a 24% discount to an 11% discount, when compared to the prompt month price. While we are all happy with the front end moving up, this improvement suggests that the market participants are now becoming more optimistic in the duration of the upcycle. As supplies challenge to meet the expanding global demand, we would expect the next step to be that the market moves into contango, prices continue to rise above the cost curve to incent production response.

We experienced this movement, relative to the cost curve in 2016 with metallurgic coal, and now starting to see this in seaborne thermal coal. While the current productive capacity is running out of the system, it will take high prices and several years for brownfield and greenfield supply to react. We at CONSOL are well positioned to participate in these markets, our open position in 2019 and then significant open position in 2020 and beyond, will allow us to capture the improving back end of the curve. We chose to be heavily contracted in near term, as we are more focused on derisking our balance sheet for the next 12 to 18 months.

Extrapolating the trend into the domestic market, we have now more coal going to the export markets than previous years. The EIA estimates that thermal coal exports from the U.S. were approximately 41 million tons in 2017, which is 111% increase compared to 2016. Arguably, the export market is stronger today than it was in the first half of 2017, which should help drive more exports in 2018. These tons moving out of the domestic market, along with sharply declining natural gas storage levels, should help tighten the domestic market as well. The market is setting up nicely, where both coal and natural gas inventory levels are likely to end winter nicely below normal levels, setting up a stronger restocking pool during the next seven months. The challenge for both is that the export market pool and pricing is higher than the domestic market. A good indicator of this trend is that spot tons are being sold today in the domestic market, something not seen since 2014.

Now let me move over to CCR performance during the quarter and provide a brief financial update. This morning, we reported strong financial quarter, with net income, adjusted EBITDA and distributable cash flow of $11.3 million, $28.2 million and $17.7 million respectively. This compares to $11.7 million, $25.1 million and $12.6 million versus a year ago. For the full year 2017, we reported an adjusted EBITDA of approximately $99.6 million, which was modestly above the midpoint of our guidance range of $95 million to $102 million.

Furthermore, our full year CapEx came at $19.5 million, significantly below our October guidance of $23 million to $27 million. We began 2017 with a guidance range of $30 million to $36 million and spent $13 million below the midpoint. This CapEx improvement reflects a $5 million in targeted CapEx rationalizations and $8 million in timing optimization that will be spent in 2018 and beyond.

Total fourth quarter coal revenues were $72.1 million tied to sales volume of 1.6 million tons and average revenue of $46.36 per ton. Our coal revenues were modestly below the year ago quarter, due to a 0.2 million ton reduction sales volume, that were partially offset by $1.21 per ton higher in average revenue. Total fourth quarter costs of coal sold was $42.7 million, which is approximately $10 million or $0.36 per ton lower than the same period a year ago. The decline in total cost, total cost of coal sold, was driven by lower production volume, and reduced subsidence in power utility related expenses.

During the quarter, we also incurred an extra $1.1 million of SG&A, largely driven by demurrage payments on certain export shipments, due to logistical challenges. As the demand for exports increased, ships were increasingly waiting to load coal at Baltimore.

The fourth quarter distributable cash flow came in at $17.7 million, reflecting cash interest expense of $1.6 million, and estimated maintenance CapEx of $8.9 million, calculating to a 1.2 times distribution coverage ratio. Our actual cash capital expenditures came in during the quarter at $7.2 million or $1.7 million lower than our long term estimated average use in our coverage calculation.

Now our balance sheet and liquidity is strong. As Jimmy mentioned, as of yearend 2017, we had $197 million drawn on our $275 million interloan facility. Our trailing 12 months lev ratio came down to 1.97 times versus 2.5 times versus a year ago.

Now let me provide you with our outlook for 2018. We are expecting 2018 volumes improve from 2017 levels, based on high run times at Bailey and less issues at Enlow Fork. The market appears set to absorb all we can produce. Accordingly, we are comfortable providing a 2018 sales guidance of 6.55 million to 6.8 million tons or up to a 5% increase.

Based on our contractual position and estimates on net back pricing, we are currently expecting our average revenue per ton to be in the $45.75 to $47.50 per ton range. This range reflects an average PJM power price of approximately $32.50 per megawatt hour, and we estimate that for every dollar per megawatt hour increase in average annual PJM power prices, our total sales portfolio would rise by an average revenue of about $0.30 to $0.40 per ton.

Now we expect our 2018 cash costs of coal sold to be in the range of $29.50 to $30.75 per ton. To manage some of the underlying inflation, we have several projects that will provide offsets, that can help raise production over time.

We currently expect our capital expenditures to be in the $31 million to $36 million range, with approximately $10 million shifting from 2017, as well as incorporating some of our debottlenecking projects.

Based on the above items highlighted, we expect our adjusted EBITDA to be in the range of $90 million to $110 million for 2018. Our annual guidance range is wide, and incorporates risk potential for upside and downside, including weather and shipment volatility. With the rising coal prices, our overall sales book is now under market, enabling the ability to increase realizations over time.

Furthermore, improved power prices could also help achieve the higher end of our guidance range. As we execute each quarter, our goal would be to move up as well as narrow this EBITDA range.

After our core values of safety and compliance, our teams are very focused and incented on driving unit costs down, as well as improving our internal free cash flow targets.

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

Jimmy Brock

Thank you, David. Before we move on to the Q&A session, let me take this opportunity to reflect on some of the achievements of 2017 and provide some perspective around how that foundation will help our performance in 2018 and beyond.

On the operating side; we achieved record production at the Pennsylvania Mining Complex. Harvey Mines hit its individual production record, and made up for some of the challenges we faced at Bailey and Enlow Fork during the year. This highlights the flexibility and optionality that we have with this five longwall complex. We maintain strong operating costs control to hit our cost targets and came in substantially below our guidance on capital expenditures. We will spend some of that CapEx in 2018, as we continue to invest in our business and ensure that demands remain well capitalized to perform in high levels of capacity utilization.

On the marketing front; we continue to develop new markets and expand our international exposure. Since 2015, our international sales volume has increased by approximately 50% and is accounted for 32% of our 2017 volumes. The new export contract will allow us to continue to develop and grow our international business.

With the response around export terminal, we will continue to have the best access to the international markets, giving us an edge over other players in the industry. During 2017, our marketing team was successful in placing approximately 8 million tons of coal for CCR, for the calendar year of 2018 and beyond. This represents about 125% of our annual sales books.

On the financial front; we grew our EBITDA by approximately 28% in 2017 compared to 2016. While we are guiding to a similar number in 2018, there is potential for upside. David highlighted some of those variables, and we will continue to work to improve upon our initial guidance ranges.

This should give our unitholders more comfort in our ability to continue to maintain our current distribution levels in 2018. On a more strategic level, as of November 2017, we have a new sponsor that is solely focused on the coal business. We expect that CCR unitholders will benefit from having this new coal focused sponsor. I also want to point out that members of the CCR management team are also on CONSOL Energy Inc's management team, which should allow for better strategic orientation moving forward.

And with that, I will hand the call back over to Mitesh for further instructions.

Mitesh Thakkar

Thank you, Jimmy. We will now move to the Q&A section. Anita, can you please provide the instruction to our callers.

Question-and-Answer Session

Operator

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

Lucas Pipes

Hey, good morning everybody and congrats on a very strong quarter.

Jimmy Brock

Good morning Lucas. Thank you.

Lucas Pipes

So I have a few questions on the pricing side, and the first one that was particularly interesting, was the kind of long dated export contract that you signed, and I wondered if you could give a little bit more color, as to who the counterparty is? Of course, I am not looking for a name, but is this utility, is this maybe a trader, and if so, what kind of what region have you targeted with that contract, if its applicable? Thank you.

Jimmy Brock

Let me say, that the target area is primarily Asia, but it could expand to other parts of the world. The customer is a long term trusted customer that we have worked with in the past. The contract enables us to speak with a more laser like voice to our end user customers, which is part of our strategy, in terms of being able to deal more with end users than with a number of different traders. We have found that by using multiple traders in the past, sometimes our coal competes with itself. We don't want that to happen in the future, and I think the pricing, you will find is, certainly commensurate with what you see in the published marketplace.

Lucas Pipes

And that would refer specifically to the fixed component of that contract, is that right?

Jimmy Brock

Yes. But as we said in the comments, that even if the second year of the contract is not fixed, but it is collared, and even if the market would sink to the -- force us to the low point of the collar, those prices are still on average, above our 2017 prices.

Lucas Pipes

Got it. And does the open position on that contract, does that have a collar as well, or is it just a portion that is collar?

Jimmy Brock

The first year of the contract is from fiscal 2018 through to March 31, is entirely fixed. The contract allows for some spot sales, which would be in market, and then beyond that, the second year is collared entirely for the whole year.

Lucas Pipes

Perfect. Thank you very much. And to stay on the pricing side, David, I think you mentioned the sensitivity of $0.30 to $0.40 per ton for $1 change per megawatt hour in PJM West power prices. And just to confirm, that would apply to your entire sales portfolio, so when I look at guidance in 2018, that'd be 6.55 million to 6.8 million tons. So I wouldn't have to worry about making adjustments for what's going in export, and etcetera.

Jimmy Brock

That's right. I think as a further comment, Lucas, we have the downside covered in the range, and we would expect the upside to be exactly as we predicted here, $1 megawatt hour would affect the entire portfolio by $0.30 to $0.40 per ton.

Lucas Pipes

That's very helpful. Thank you for that. And then another quick question, also on the marketing side, so to say, Jimmy, I think you mentioned that there have been spot sales here in the domestic market, and I wondered if you could speak to the causes for that? Was it that utilities under bought due to the weather, or is this just part of their strategy, and finally after years of inventories coming down, they are comfortable with higher degree of spot sales, going from zero to something. Could you give a little bit more color as to where the spot sales hit into your customers' purchasing strategy? Thank you.

David Khani

Yeah, I will take the first part and then turn it over to Jimmy. But it's a combination those things you mentioned. The Northern App tighter supply in the market. There has been some operational challenges in Northern App, and it has created some of those opportunities where they couldn't deliver. And Jimmy, I think you can add to that?

Jimmy Brock

I think there is a couple of reasons. The weather certainly played a part in it. I think all the utilities from Florida to Northeast, have all burned more than they anticipated. They have exceeded their burn forecast. On top of that, with the real severe freezing conditions we had for those 10 days between December 27 and January 7, there were frozen coal issues, both at utility stockpiles, which caused them to -- didn't have the need for fresh coal, and there were further coal issues with the railroads, and quite honestly those conditions of weather make it very difficult for railroads to perform. So their performance fell off a little bit during that 10 day period, and because of that, some shipments weren't being made.

So if you were a customer, you were burning more tons, because of the weather, and receiving less tons because of the weather, and that created the spot opportunities.

Lucas Pipes

Got it. Very helpful. Thank you. I will leave it here for now, but good luck with everything.

Jimmy Brock

Thanks Lucas.

Operator

The next question comes from Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas

Good morning and congrats on the spin and being out there.

Jimmy Brock

Thank you.

Michael Dudas

All right. Given the surprising strength, I guess for many people in 2017 on the export market and then the tightness we are seeing in Northern App, and certainly the Indian situation certainly can add some more upset, where do you see the most optionality in how you look to place your remainder coal, as you look into 2018 and 2019 books, given where we are today? And obviously that changes as we move forward?

Jimmy Brock

Well first of all, we have defined it -- for 2018, we are going to do whatever we need to do, to best optimize the portfolio, based upon where we stand today. For 2019 and beyond, we are not changing our essential basic strategy that we have discussed, which is that we intend to be 70% into the domestic market. We intend to move tons into the met crossover market, and whatever tons remaining, we will choose the best arbitrage.

Now admittedly, we were 32% into the export market in 2017. That was the highest level we have been at for quite some time, as long as I have been in this job, but some of that continue to be met crossover, a lot of that was thermal, and that's where the best arbitrage was. So we had a little bit of pushback at the beginning of the year from domestic customers, that enabled us to move more tons into the export market.

I think going forward, we will still try to be in that strategic range of 70% or so domestic and 30% export. But we have the ability to pivot quickly from one market to another, based upon our logistics and the strength of our parent's logistics, and that will enable us to better optimize our portfolio, as these opportunities continue.

Michael Dudas

I appreciate that answer Jimmy, and my follow-up is, as you look out and you are running your mines, you've run them [ph] very well and you have such a balance sheet and an operational advantage. How do you see some of your competition who isn't maybe as well positioned from a balance sheet standpoint or from a labor infrastructure standpoint, to meet the needs of what could be a surprising uptick in demand for the products that you guys are selling, as you look to 2019 and 2020?

Jim McCaffrey

I think as you look out across -- some of the reasons that you are seeing the tightening in supply in Northern App, is because of some of the production issues that has been out there. We have had some of them. Some of our peers have had some of them as well, and I think the ones that have invested the capital in their coal mines, just like we have done that, are going to be able to participate in the upside. Some of the others may not. And I think there, particularly in Northern App where we are now, we are really well positioned as Jimmy had mentioned earlier, that we are pretty much sold out for 2018, really close to -- but we do have the potential to get extra tons, by running weekends or whatever, and if those tons can't be provided by other competitors, we certainly will have an opportunity to go get them.

David Khani

And I'd just add that, I think you saw -- one of advantages here is we are able to capture the market and put in multiyear deals, and I think customers understand we can deliver, and so I think as you see the market continue to rise, we will capitalize on that market and lock in the multiyear deals.

Michael Dudas

I think that's an excellent point David.

Jim McCaffrey

Thank you.

Jimmy Brock

Thanks Mike.

Operator

The next question comes from Paul Forward with Stifel. Please go ahead.

Paul Forward

Thanks and good morning.

Jimmy Brock

Good morning Paul.

Paul Forward

I wanted to ask about the cash cost guidance for 2018. You have got the midpoint a little above $30 a ton, and that's -- when you look at the volumes, you are going to be operating at the midpoint, above the rate that you were in the fourth quarter. But fourth quarter cash costs were down $27.30. So just wondering if you could talk a little bit about what you are anticipating as the drivers of inflation or the differences between the fourth quarter levels and what your guidance is there for 2018 on costs?

David Khani

Yeah. Let's talk about it in a couple spaces, Paul. One, we have in our plans, some slower rates for the geology conditions that we have at Enlow Fork, up in the North End. We think we are going to manage those, getting better as the panels go, but that's one of the reasons.

The other reason, Q4 was improved, as we mentioned before, was because of a lot of subsidence, that we were able to save on expense. We have kind of changed the methodology in how we do that. We don't necessarily buyout every home that we undermine now.

So as we look forward to 2018, some of that pricing seen is for the geology in the North End, and in some of it is for a bit of inflation for commodity; because as you know, as prices continue to rise in commodities, there is going to be a little bit of inflation into commodities, and that's what we have in numbers. But we still think that we are going to be low single digits increase in costs for 2018.

Paul Forward

Okay, thanks Jimmy. And just as a follow-up, I think you had mentioned, if the market stays strong, and then you can do weekend shifts or potentially, other things to place additional volumes into the market, and I think David, you had mentioned that you had some demurrage costs and logistical challenges in the fourth quarter. Just wondering if you could talk a little bit about, what's going to be the limiting factor in terms of your ability to place additional volumes into the market? Is it going to be, as you see it right now for 2018, would it be the ability to ship from the terminal, would it be rail issues, would it be mine issues, where do you see the most likely limiting factor on your ability to put additional tons, maybe above the top end of your guidance into the market?

Jim McCaffrey

Let me take the first part of that, then I will let Jimmy take the second part, this is Jim. In terms of the logistics, we have a strong logistics team, working together with the terminal that the parent owns. The railroads struggled a little bit earlier in the year, due to extreme weather, and the course of 2017 for the CSX was well documented, they have had their ups and downs. But I expect both railroads will perform very well for the balance of the year. I have no reason to expect otherwise. We have been in meetings with them both, and they have assured us that they are set to go, and we are comfortable with them. Our terminal position is very good for us. So from a logistics point of view, I think we are in very good shape, probably better than any competitor we have.

Jimmy Brock

And from a production standpoint, in the operations, I think the coal mines are in really good shape. We have normal longwall moves for the year. Once we get out of our course, 5L panel there in Bailey, we will be out of the state park, we have those permits for the next three years out there. So we should be in good shape. I think it's just -- it depends on the geology at Enlow 4, is the main driver of how aggressive we can run going forward. Bailey is in great shape and Harvey is in great shape.

Paul Forward

Great. Thanks Jimmy. Thanks Jim.

Jimmy Brock

Thank you.

Jim McCaffrey

You're welcome.

Operator

The next question comes from Mark Levin with Seaport Global. Please go ahead.

Mark Levin

Great. Thank you very much. First one more of a modeling question, and I realize you guys don't give specific guidance to this end, but maybe just some directional help. When thinking about 2019 pricing, and where you guys are? I think you referenced to 70% price. Is the number around or similar to the 2018 expectation, above, below? How should we think about where you guys are counteracted in 2019?

David Khani

I think you should think that we are at or around market, Mark. I mean, we still are going to have -- not quite 30% in 2019, about 20% of our contracts today are based upon netback in 2019. So good weather like we have had recently. We call it good weather. Most people would call it bad. Good weather like we had recently will help continue to drive good margins.

We have a firm collar around the new export deal that we have done, and it provides us upside and downside risk protection. So I anticipate we will be very close to the market numbers you see today, and maybe, just a little bit of improvement to 2018. It really depends on how the netbacks will perform.

Mark Levin

Appreciate that, thank you. Second question has to do with more of a general market related question; around two plans that I don't believe you guys serve, but certainly, taking a lot of Northern App coal, Mansfield and Sammis, and how you see that situation shaping up? If Mansfield and Sammis were to close, how do you think that that would impact the net market, and what would that mean to CONSOL?

Jimmy Brock

There was a time, Mark, when Sammis and Mansfield were among our largest customers. But after we sold those mines to Murray Energy Corporation, that changed. We do not have any of our coal going into Sammis and Mansfield. As far as what might happen, I'd prefer not to speculate on what might happen. I will leave it up to you guys to speculate what might happen, if Mansfield and Sammis go away?

Mark Levin

Got it. Fair enough. And then the last question, and I am going to stay away from CEIX questions and limit them here, so I will focus on the export side. When we are calculating netbacks -- I am not looking for specific numbers, but ranges would be fine. What are you seeing from a rail rate perspective, and then also, what are you seeing from a sulfur discount perspective?

Jimmy Brock

Well as you know Mark, the API 2 has dropped a little bit here recently, $6 or $7, and with it, we expect that the sulfur discount will also drop $5 to $7. Now admittedly, prop demand in Europe is not that great, so I can't give you a solid fix on that today. But we anticipate -- we are modeling that sulfur discount to be around $10 to $12 in the new pricing range. But again, I don't have a firm deal that I can put that on.

Mark Levin

Got it. And how about rail rates? I think the numbers that we had kind of seen before, maybe in the $15 to $20 ranges, if I am not mistaken, including dump. Where are rail rates today, and how are they trending on the export side?

David Khani

I think if you want to consider the rail rate, you are talking about including the dump? So from the mine to the ship. I think that -- you said $15 to $20, I would say $17 to $22.

Mark Levin

Got it. And has that been trending up or down?

David Khani

It's trending up a little bit.

Mark Levin

Trending up a little bit? Great. Appreciate it. Thanks very much gentlemen.

David Khani

Welcome Mark.

Operator

[Operator Instructions]. The next question comes from Jeremy Sussman with Clarksons. Please go ahead.

Jeremy Sussman

Hi. Thanks for taking my question. Very solid quarter.

Jimmy Brock

Hi Jeremy.

Jim McCaffrey

Hey Jeremy.

David Khani

Thank you.

Jeremy Sussman

Hey guys. So you -- I think, you mentioned, Northern App inventories are below 30 days for some of your customers. I guess, maybe starting with the domestic side. I guess, first, kind of how does this kind of compare -- how do inventories as a whole to your customer bear compare to kind of where there were the last couple of years? And then second, as you begin to have multiyear discussions, especially let's stay on the domestic side for now, at what point in the discussions does the sort of -- does the balance sheet come up? And clearly, you guys are in a good position there, but this could be seen as an issue for some of your, kind of large direct competitors, I would think?

David Khani

Yeah, we have not experienced any questions or interrogatories about our balance sheet or our credit, Jeremy. For the most part, our customers seemed happy, that we are separated from the E&P company and that we are standalone. They have a lot of faith in our ability to deliver, and we haven't let them down. So we haven't done a big domestic deal since the spin, but we have not had any issues in doing deals that we have done, especially some spot domestic deals.

As far as inventory levels, inventory levels are certainly down, but throughout the entire year, we have seen inventory levels declining at some of our best customers, and in the fourth quarter, I think that they have declined even further.

We have some customers, two in particular, that told us that they will not buy any coal until 2019, and they are both in the spot market for coal in 2018. So that tells me that there is a need based upon the burn that this weather has generated, and that the higher gas prices have generated.

So I am relatively optimistic about both the domestic and export markets, and I think that it's going to take some time to get these inventories rebuilt to the level that customers are comfortable with.

Jeremy Sussman

That's helpful. And I guess, on the balance sheet, it was more, coming out, you guys obviously have a very good balance sheet. Just curious if you have been able to use that as a strength relative to others, where there are bonds out there that are trading of course much lower than where CONSOL's are trading?

David Khani

Our legacy and our customers seem relatively happy with our position, and it's not -- we have always talked about our financial position, as a benefit to us and to our customers, and I haven't seen that change at all.

Jimmy Brock

And Jeremy, I think it does add value to allow us to try some of those, and I have to be careful when I say longer term contracts, because longer term is defined differently today than it was many years ago. But there is no doubt that the balance sheet plays a part in allowing us to get these two and three year deals.

David Khani

I think Jeremy, if you look at 2017. Jimmy talked about in his remarks, how we went through the process of selling and ultimately spinning the company. And during that time, we sold 8 million tons going forward. So even though some customer may have looked at us and thought there might be some turmoil, we didn't see that in our ability to market tons. So CCR marketed and sold 8 million tons going forward for the forward years.

Jeremy Sussman

That's super helpful. And maybe, just last, if I switch to the international side. I mean, certainly one of the biggest stories in Q4 seem to be the kind of dynamics taking place in India. And specifically, Indian imports, especially from the U.S. began to pick up in part on the back of, I'll call it questions, that arose from India's perhaps overreliance on petcoke. So lot of questions out there, but it seems like things are trending in the right direction, I guess, how do you see this all playing out specifically within India in kind of 2018 and maybe beyond?

David Khani

Obviously, don't know how it's going to play out. We are modeling in, that there's going to be the 10% import tax going into India for petcoke. We think that that's going to benefit us. Our assumptions are that we are going to continue to be able to move considerable amounts of coal with India, if that's the best place in the market to move it to. We have plenty of interrogatory, plenty of questions, plenty of activity with Indian customers. So it's foremost on our list. In fact, we will be traveling to India here in mid-February. So we are trying to get to the end user, that's our goal.

Jeremy Sussman

Understood. Well thanks for the color and good luck guys.

Jimmy Brock

Thanks Jeremy

Operator

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

Lin Shen

Good morning. Thank you for taking my question. First, I want to ask, for your 2017 volume, how much are the crossover met coal?

Jimmy Brock

The crossover met coals were -- I got to put it in 25% rate -- were approximately 500,000 tons for CCR.

Lin Shen

Okay, got it. 500,000.

Jimmy Brock

Probably closer to 490,000 or above that.

Lin Shen

Got it. And most of this are sold domestically or exported?

Jimmy Brock

All of them were sold export in 2017. As we move forward, our sulfur position is improving, and we think that will enable us to move more crossover met, both into the export and domestic market as well. We are working on those markets today. But in 2017, based upon the quality of our sulfur, we will rally in the export markets, and only at that 485,000-490,000 ton level.

Lin Shen

Great. And you expect the 2018 -- their volume or percentage should increase, because your sulfur quality improves?

Jimmy Brock

I would expect to increase the volumes by 10% in 2018, and then in 2019 and beyond, our sulfur gets vastly better, and I would expect that we will be able to improve considerably in those years.

Lin Shen

Great. And also, I'm just wondering, given you have a new sponsor, which is a spinoff from their E&P company now. So now we have MLP -- I'm sorry, coal MLP and also our core C-corp parent, basically one operation, two entity. Is there any internal discussion about what are the long-term strategy to use MLP's currency with the GP parents, or how should we think about the long-term strategy between two entities?

Jim McCaffrey

Good question. It's one that we have given a lot of thought to. I will tell you now, that for CCR, currently today, we do have the latent industry distributions that are out there. But really, nothing has changed as of today. We still have the ability with the intercompany loan to do a drop, if we need to do that. We will continue to look for accretive opportunities for both. But primarily, the strategy really hasn't changed at this point for CCR.

Lin Shen

Great. Thank you very much. Really appreciate it.

Operator

The next question is a follow-up from Lucas Pipes with B. Riley FBR. Please go ahead.

Lucas Pipes

Yes, thank you for taking my follow-up. And Lin, just asked one of them, but I did have two. So over the course of earnings season, we have had some of your peer's -- domestic thermal coal peers, talk about pricing in the Eastern United States. And you have noted in the past, difference between the rail and the river market. I just wanted to ask, if you could maybe give us a refresher on where you see the prices domestically, both for the rail market, Northern App, as well as the river market? Thank you.

Jimmy Brock

Well, I think that the prices that you see published today, the published prices are pretty accurate, Lucas. So I think that's all I am ready to say about prices. I will say, that for us to get from our mine to the river market is going to cost us $6 to $8 and vice-versa for the river guys to get to the rail market. So I will just leave it at that I think.

Lucas Pipes

And the published prices, can you remind everybody where would you say they are and would they apply to your quality coal as well?

Jimmy Brock

I would say the prop prices for our coal are in the $50 plus range. The forward prices are in the $48 to $50 range.

Lucas Pipes

Perfect. That's very helpful. Thank you. And very lastly, on the CapEx side, just wanted to follow-up there. I think it looked a little lower in 2017 and maybe a little higher in 2018 versus my numbers. And if you could just give a couple of quick data points on what may have caused that change? Thank you.

Jim McCaffrey

Yeah. It's primarily just timing Lucas. Some of it is, in our coarse refuse area, where we had some weather, and it will be spent in 2018, that's what I was talking about earlier, just moving forward. And then the other is some of the longwall rebuilds that we had to do, that the timing is out of skew a little bit. So it's basically timing.

David Khani

I think there was a $5 million of -- I would call, more efficiency benefits, and then the remainder $8 million was more timing.

Lucas Pipes

Got it. Okay. Thank you so much. Appreciate it.

David Khani

Welcome.

Jim McCaffrey

Thank you, Lucas.

Operator

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

Mitesh Thakkar

Thank you, Anita. We appreciate everyone's time this morning, and thank you for your interest in and support of 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

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.