Core Natural Resources - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day, ladies and gentlemen, and welcome to the CEIX and CCR First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone at any time. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to Nathan Tucker, Manager of Finance and Investor Relations. Please proceed, sir.

Nathan Tucker (Manager of Finance and Investor Relations)

Thank you, Eric, and good morning, everyone. Welcome to CONSOL Energy and CONSOL Coal Resources First Quarter 2020 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, and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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 websites, www.consolenergy.com and www.ccrlp.com.

On the call 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 the Q1 of 2020, specific insights on marketing and operations, and our response to the COVID-19 pandemic. Mitesh will then provide an update on our liability management program, financial results, our cost reduction efforts, and outlook for 2020. During the prepared remarks, we will refer to certain slides that were posted on our website in advance of today's call. After the prepared remarks, there will be a Q&A session in which all three executives will participate. With that, let me turn it over to our CEO, Jimmy Brock.

James Brock (CEO)

Thank you, Nate, and good morning, everyone. As we all know, these are unprecedented times we are navigating through. Thus far, 2020 has been very challenging for our industry and the world. We have seen significant declines in energy demand and have faced many uncertainties, first due to a warmer-than-normal winter and most recently due to the economic slowdown brought on by the COVID-19 pandemic. The widespread government-imposed shutdown of businesses has resulted in reduced electricity demand, both domestically and abroad, which has weighed on our customers' ability to burn coal. Before I go any further, let me be clear: ensuring the safety, health, and well-being of our employees and their loved ones is paramount. The world has changed significantly in the last few months, and all of us have to adapt to this new reality.

I am proud of the CONSOL team and the way they responded to this pandemic. We also know that being classified as an essential business comes with a lot of responsibility and pride. Our frontline employees, who mine the coal that ensures an uninterrupted power supply during this time of need, embrace the challenge. We have adopted enhanced sanitizing and social distancing measures at our operations and implemented staggered shifts at our mine sites. Our corporate employees continue to support our operations very effectively while coordinating and collaborating remotely to support government efforts to restrict the spread of the disease. I am very thankful to the entire CONSOL team as they continue to excel in these challenging times. We will continue to monitor the risks posed by the COVID-19 pandemic and will take any additional steps that we deem necessary to keep our employees, their families, and the community safe.

Before I dive into operations and marketing details, let me now provide a brief recap of the quarter. Despite the significant demand decline, we achieved several important goals during the Q1. On the safety front, we delivered a very strong safety performance with our Harvey Mine, Bailey Preparation Plant, CONSOL Marine Terminal, and Itmann Project, each having zero recordable incidents.

On the operations and marketing fronts, even while we faced several headwinds and reduced demand from our customers, our strong contracting position and operational flexibility softened the impacts of these declining market conditions. We drew upon the tremendous partnerships we have with our customers and continue to identify creative solutions to help navigate this extremely challenging situation. On the financial front, we completed a number of transactions during the quarter, which reduced our outstanding debt, improved liquidity, and enhanced our financial flexibility. Mitesh will discuss these in more detail shortly.

Now, let me review our Q1 operational performance. Coal production at the Pennsylvania Mining Complex decreased to 6 million tons in Q1 of 2020 compared to 6.8 million tons in the year-ago quarter. The decline was mainly due to the aforementioned reduction in customer demand and a corresponding reduction in operating days as we sought to match production with demand. For its share of the Pennsylvania Mining Complex, CCR produced 1.5 million tons of coal during Q1 of 2020 compared to 1.7 million tons in the year-ago quarter. On the cost front, our average cash cost of coal sold per ton was $32.41 in Q1 of 2020 compared to $29.71 in Q1 of 2019. The per-ton increase was largely driven by the decline in the production volumes and higher subsidence-related costs at our Enlow Fork Mine.

The CONSOL Marine Terminal had a throughput volume of 3.4 million tons during the quarter compared to 4 million tons in the year-ago period. Given the terms of our take-or-pay contract at the terminal, and despite a decline in shipment, our terminal revenues for the quarter were only modestly impaired at $16.5 million compared to $17.8 million in the year-ago quarter. However, cash operating costs were slightly improved at $5.2 million versus $5.6 million in the year-ago period. I am pleased to announce that our Itmann Project mined its first cut of coal and shipped product to a third-party processor in early April. We remain very excited about this project, and even though we've slowed down the pace, we've been successful in proceeding with development mining at a controlled level of net expenditures.

This gives us the flexibility to ramp up the project back up at our discretion in the future when market conditions warrant. Let me now provide an overview of the coal markets and an update on our sales performance and accomplishments. This was a challenging quarter for coal markets, to say the least. Coal demand was first impacted due to a mild winter and low natural gas prices, and then was impacted as a result of the government-imposed shutdowns of non-essential businesses. On the power price front, average PJM West day-ahead power prices were 33% lower in Q1 of 2020 compared to Q1 of 2019, and more than 50% below the Q1 2018 levels, which helps to illustrate the severity of the decline. For the most part, our power price-linked contracts were yielding realizations at their contractual floors.

Henry Hub natural gas prices averaged $1.90 per MMBtu during the quarter, which was down 35% compared to Q1 of 2019. These low natural gas prices amid a significant overall demand decline resulted in substantial coal-to-gas switching in the U.S., which in turn led to increased coal inventories for our customers. This all translated into reduced demand for our coal and led us to complete several contract buyouts in the quarter as we sought to help our customers manage their inventory levels. These contract buyouts involved the negotiations of early terminations of several customer contracts in exchange for payment of certain fees to us during the Q1 of 2020, which contributed $10.8 million to our miscellaneous other income.

On the export front, international thermal coal prices have been in decline since the start of 2019 due to a pullback in global LNG prices and now due to the global COVID-19-related shutdowns. However, as a result of this unprecedented demand decline and low prices, we believe that the global supply rationalization will be forced upon the industry. As you can see on slide seven of the supplementary slide deck that we posted to our websites this morning, Wood Mackenzie estimates that at current spot prices, 36% of seaborne coal supply is at high risk of curtailment. The majority of this is thermal coal, with estimates of 440 million tons of high-risk production globally. We believe this could help to tighten the market as we move forward.

From a marketing perspective, we continue to maintain 100% of our existing customer base and continue to find opportunities to selectively grow and capture market share in the export markets. We announced this morning that our customer, Xcoal, recently won a contract to supply 1.8 million tons of coal to the Punta Catalina Power Plant in the Dominican Republic. To fulfill that contract, Xcoal increased the volume of tons to be acquired under a supply contract with us. In aggregate, we are now contracted for 10-plus million export tons in 2020. While we do not like the prices that we're seeing in the current market, we will generate cash margins on these new tons and will hopefully gain a long-term end user for our coal. While we are mostly contracted for 2020, we have some more work to do for our volumes in 2021 and beyond.

Despite our strong contracted position, we do face significant uncertainties given the unpredictable nature of the COVID-19 pandemic and the resulting economic slowdown. As always, we will work together with our customers to help them manage the contractual obligations that we both have. With that, I will now turn the call over to Mitesh to provide the financial update.

Mitesh Thakkar (Interim CFO)

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 1Q20 and touch upon our cost management efforts and 2020 outlook. As we stated on our last earnings call, our top priority heading into 2020 was to remain laser-focused on improving the risk profile of our balance sheet by reducing our outstanding debt and creating long-term value for our CEIX shareholders and CCR unitholders. I'm pleased to inform you that we believe we have gotten off to a good start in 1Q20. For CEIX, we retired $53 million worth of our outstanding debt in the Q1 of 2020.

Most meaningfully, we spent less than $26 million to repurchase approximately $43 million of our second lien debt as it continued to trade at a significant discount to its par value. To put that number in perspective, we repurchased approximately $53 million of our second lien debt in the entire year of 2019. These discounted second lien repurchases provided a high rate of return and were extremely accretive to our equity holders. As we have stated in the past, our goal is to have a significantly lower level of absolute debt before our 2024 term loan matures, and this debt reduction during the Q1 was another big step towards that goal. We recognize that our financial securities are very volatile, and as a result, we intend to spread our purchases out over time and take advantage of dollar-cost averaging.

We also recognize that liquidity is very important during these uncertain times. In spite of deploying a significant amount of capital buying back our debt, we still ended the quarter with a cash balance and liquidity that were in line with the beginning of the Q1. To achieve this, we completed multiple transactions during the quarter to provide additional sources of low-cost capital and to improve financial flexibility, despite a decline in organic free cash flow versus the prior year period. First, we closed the finance lease transaction on a set of longwall shields, which provided net cash proceeds of $16.3 million at an interest rate of approximately 5.6%. Second, we secured a commitment to provide an additional $20 million for future equipment financing needs.

Finally, we successfully amended and extended the term of our accounts receivable securitization program, extending the maturity to March 2023 from August 2021 while keeping the size of the facility unchanged. Last quarter, we also indicated that improving our net accounts receivable outstanding was one of our priorities for 2020. During the Q1, we had some success on that front as well. Our trade accounts receivable had declined to $113 million at the close of March 31, 2020, from $132 million at the close of December 31, 2019. While current market conditions are acting as a headwind in this process, we believe we will continue to make slow and steady progress towards normalizing our accounts receivable conversion cycle. Let me now discuss CCR. On April 24, CCR announced that its board of directors has made the decision to temporarily suspend its cash distribution to all unit holders.

While painful, we believe this was a necessary step for several reasons. First, the uncertainty created by the COVID-19 pandemic-related demand decline resulted in significant earnings decline for CCR. We started seeing it in the Q1, and we expect it to continue through at least the Q2 and potentially the rest of the year. Accordingly, we believe it is prudent to manage our cash flows, leverage ratios, and liquidity to ensure the maximum financial flexibility possible. This distribution suspension helps CCR conserve approximately $14 million of cash every quarter. On the trade receivables front, CCR, like CEIX, had similar success and ended the quarter with $28 million in trade receivables compared to $33 million at the beginning of the quarter. With that, let me now recap our Q1 2020 results. We'll review CEIX first, then CCR.

CEIX reported Q1 2020 net income attributable to CEIX shareholders of $2.4 million or $0.09 per diluted share compared to $14.4 million or $0.52 per diluted share in 1Q19. CEIX also reported 1Q20 Adjusted EBITDA of $62.9 million and organic free cash flow of $24.2 million, which compared to $118.5 million and $48 million, respectively, in the year-ago quarter. The decline in our earnings metrics compared to the year-ago period is mostly the result of lower PJM power prices and coal export prices and the reduction in volumes that Jimmy previously discussed. In 1Q20, we generated $51.4 million of cash flow from operations and spent $27.2 million in capital expenditures. As a result, CEIX generated $24.2 million in organic free cash flow. Our cash flow from operations included a modest working capital improvement of $2.1 million. Now, let me update you on CCR.

This morning, CCR reported net income of $0.2 million, adjusted EBITDA of $14.4 million, and distributable cash flow of $3.5 million for the Q1. This compares to $15.2 million, $28.2 million, and $17.3 million, respectively, in the year-ago quarter. In 1Q20, CCR generated $16.8 million in net cash from operating activities, which includes $4.5 million improvement in working capital. After accounting for $5.2 million in capital expenditures, $14.4 million in distribution payments, and proceeds from the shielded lease financing transactions, we were able to hold our outstanding debt on the intercompany loan with CEIX flat compared to year-end 2019. Nonetheless, due to the reduction in the trailing 12-month EBITDA, CCR finished the quarter with a net leverage ratio of 2.2 times. Now, let me move on to providing some color on what we expect for the remainder of 2020.

We typically provide you with quantitative guidance around our sales, revenue, cost, and EBITDA expectations. However, given the difficulty in forecasting the duration and uncertainty of the COVID-19 pandemic and the resulting economic slowdown and energy demand decline, our 2020 guidance remained suspended for the quarter. As we gain more visibility around demand recovery, we expect to resume some quantitative guidance. In the meantime, let me provide some color that could help analysts and investors from a modeling standpoint. On the production side, the mines are ready to run, but we will remain sales-driven. Even though we have 25-plus million tons contracted for 2020, the timing of shipments and the magnitude of contract buyouts will dictate the ultimate sales and production volumes. This is very painful for us. However, we recognize our customers are suffering as well, and we are working with them to ensure that we support each other.

From our side, the compromise could involve deferring some volumes and extending some payment terms. From the customer side, it could mean buying out contracts or adding additional volumes in the future. As a result of this constantly evolving landscape, we have currently idled some of our longwalls and expect frequent changes to our Q2 operating schedule. The management team also took significant steps to reduce the overall cost structure of the business in order to help offset the recent demand decline brought on by the COVID-19 pandemic. First, we adjusted our operating schedule to reduce output to better align our production with customer demand, including making the decision in mid-April to temporarily idle our higher-cost and Enlow Fork mine. Second, we embarked on several cost reduction initiatives that, in aggregate, could help us achieve approximately $100 million in cash preservation in 2020 compared to 2019.

These include, number one, $8-$10 million in cash SG&A savings by canceling annual merit increases, suspended planned hiring, and cash incentive compensation. Number two, $45-$50 million in capital expenditure reductions, mostly due to reduction in maintenance capital expenditure at the Pennsylvania Mining Complex. Number three, $7-$10 million in cash interest expense savings at CEIX due to debt extinguishment. Number four, $30-$40 million cash savings due to reduced income taxes and payroll tax deferrals. Number five, $5.6 million on a consolidated level and $14.4 million at the CCR level every quarter the distribution suspension stays in place. These cash preservation initiatives will provide us with the flexibility to opportunistically take advantage of the decline in the prices of our outstanding public debt.

Finally, the board members of CEIX have also agreed to temporarily defer their cash compensation to support the cash preservation efforts of the company. Lastly, from a market perspective, although the COVID-19-driven economic slowdown has significantly reduced global energy demand, we are already beginning to see supply responses. First, with the oil pricing and supply reductions arising from the new OPEC+ deal, Wood Mackenzie is now estimating that total non-OPEC supply may decline by as much as 4 million barrels per day, 3 million of which would come from the continental U.S., particularly in the Permian Basin. That's important because a significant oil supply reduction in the Permian also means a significant reduction in associated gas production. Furthermore, lower oil and natural gas prices are negatively affecting the financials of E&P companies and forcing a reduction in the size of their capital budgets.

Industry observers are now estimating that E&P capital expenditures will decline by as much as 40%-45% in 2020. As a result of this reduced investment pace, industry experts are now projecting natural gas prices to rise above $3 per MMBtu in 2021, which we believe will make coal more attractive to our power plant customers. In fact, IHS Markit now expects that U.S. coal consumption could return to 2019 levels in 2021. This translates into approximately $125 million in demand recovery due to an increase in natural gas prices driving gas-to-coal switching in 2021. In the coal industry, domestic supply rationalization was already happening in 2019, and we expect that to accelerate in 2020. Internationally, as Jimmy mentioned, 36% of global seaborne supply is at risk of curtailments at current pricing levels.

Putting it all together, these developments could bode very well for us as we begin filling out the remainder of our 2021 contract book in the coming months. With that, let me turn it back to Jimmy to make some final comments.

James Brock (CEO)

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 the remainder of 2020 and address some of the uncertainty we are facing in the current economic climate. First and foremost, I want to commend our employees for their dedication, hard work, and willingness to adapt in these unprecedented times. We have adjusted procedures and protocols in order to keep everyone safe and prevent any unnecessary exposure to the coronavirus. We've enhanced cleaning and disinfecting practices at the mines, both on the surface and underground.

We've also implemented additional social distancing measures, staggered shifts, reduced elevator capacities, and mandatory temperature checks at all mine entrance locations. Our corporate staff has been working remotely for well over a month now. I couldn't be prouder of our employees and their willingness to embrace these adjustments without hesitation. I want to thank them for continuing to place safety above all else. For 2020, while we navigate this ever-changing landscape due to the uncertainty surrounding the COVID-19 pandemic, our main strategy of prioritizing a strong balance sheet will remain as we seek to delever, reduce our interest expense, and continue to take advantage of the dislocations in the prices of our debt securities. The reason our capital allocation strategy has been so effective is its consistency. Our priorities remain constant despite any fluctuations in commodity markets.

By consistently targeting the highest rate of return projects, we are always reevaluating and willing to pivot in a new direction as the world around us changes. We prove this with our willingness to delay our Itmann growth project to prioritize the guaranteed high rate of returns associated with our second lien repurchases. Mitesh and his team will continue to remain laser-focused on bolstering liquidity, improving financial flexibility, and reducing our overall debt. Jim McCaffrey and his team will continue to work closely with our customers to manage their shipments and inventory levels, and Eric and his team will continue to manage their cost structure and operating schedules to best align them with demand and preserve margins. Additionally, we are pulling multiple levers to preserve cash flow in this economic downturn.

We have been able to reduce our capital spending requirements in 2020 thanks to our willingness to keep our mines well-capitalized in strong markets. We are working on reducing our operating cost structure at the mines through delaying discretionary spending and adjusting our operating schedules according to demand. We have also implemented significant cost-saving measures at the corporate level as well. Finally, although there is a lot of uncertainty in the marketplace and nothing is guaranteed, we are currently 98% contracted for 2020, assuming a 26 million ton run rate. We have also contracted more than 10 million export tons in 2020 after Xcoal increased the volume of tons to be acquired under its supply contract with us.

In summary, our key priorities for the remainder of 2020 are: one, to ensure the health and safety of our workforce, their families, and the communities in which we operate amidst the ongoing COVID-19 pandemic. Two, to safely and compliantly produce our high-quality coal at the lowest possible cost. Three, to continue to work with our customers to ensure that the long-term nature of our relationships continue as we navigate this storm together. And fourth, to continue to improve our balance sheet and bolster our liquidity. Before I turn the call over, I want to touch on one last point. As you may have seen, we are continuing to work through the very complicated and complex Murray Energy bankruptcy. As we have stated before, we will vigorously defend our rights, our employees, the communities in which we live and work, and our stakeholders in these proceedings.

Mitesh Thakkar (Interim CFO)

However, we cannot comment on any ongoing litigation matters associated with these proceedings, and we will not be fielding any questions on the topic today. With that, I will hand the call back over to Nate for further instructions.

James Brock (CEO)

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

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then 2. We will pause for one moment to assemble our roster. Our first question today will come from Mark Levin with The Benchmark Company. Please proceed with your question.

Mark Levin (Analyst)

Thanks very much. Appreciate all the color. The first question is actually for Mitesh. Mitesh, you were reeling off all of those numbers in terms of SG&A savings and CapEx reduction. Is that relative to your 2019 actual or relative to the now suspended guidance? Just trying to benchmark how much we should adjust our model for those numbers.

Mitesh Thakkar (Interim CFO)

Sure. Thank you, Mark. Those are all relative to 2019 actuals.

Okay. Fair enough. Very helpful. And then second question relates to the export business. So you guys are shooting to sell about 10 million tons or have 10 million tons under contract. What's the risk to that number? And then maybe more specifically, you guys ship a lot of tons to India. If you can maybe talk about what the environment is like in India with the lockdown and how much of a risk that would present.

James McCaffrey (SVP and CCO)

Hi, Mark. It's Jim. How are you?

Mark Levin (Analyst)

I'm doing well. Thank you, Jim.

James McCaffrey (SVP and CCO)

I'm going to do my best to answer your questions, but please keep in mind that visibility is not very clear, and we're reforecasting constantly. But in India, as you know, they had a lockdown. A lot of the people left their working areas to go to their home bases again. The lockdown is supposed to be totally lifted by May 18th. We expect businesses to get back going in gear. But a lot of demand destruction has taken place in India as well, and the three large West Coast terminals are all relatively full with approximately 18 million tons. We still expect demand to be very strong in India. When we look at our Q1, we had shipped about 1.7 million tons to India, which was about 28% of our total sales.

That's up from previous years. Our sales are up some, and we continue to expect demand. As the shutdown ends, we're moving into monsoon season. So as we exit monsoon, we expect to see some return in volume.

Mark Levin (Analyst)

Okay. Then, Jim, maybe in 2021, you guys mentioned you've got 40-some-odd% contracted. In 2021, I realize netback contracts can change things, and shifting tons from 20 to 21 can change things. As it stands right now, and you look at what's contracted for next year, 2021, should we anticipate a big price per ton reduction, a modest one, flat? I mean, how would one think about approximating what the 2021 book could look like, maybe just assuming normal weather?

James McCaffrey (SVP and CCO)

Mark, we're in negotiations for business for 2021 right now, so I don't want to discuss price too much. But in general, the public's forwards are way too low and unsustainable. You see where we're at today. We can maintain level or improve. Mitesh talked about the gas situation changing. We think that'll be a big benefit to our netback tons. So I would think we can hold the course or improve.

Mitesh Thakkar (Interim CFO)

And one big factor on that, Mark, will be how quick these businesses get back open and the demand starts to increase because that's what we all need. That'll help price. And then if natural gas prices end up north of $3 an MMBtu, as many are predicting, that should help the price as well. But there's some work to do as far as the inventories, and there's a lot of uncertainty right now. So we'll have to see how all of that goes in the future.

Mark Levin (Analyst)

No, that makes sense. My last question, as you think about, and maybe this is for Mitesh, if you think about debt pay down versus maintaining a certain amount of liquidity, how do you toe that balance? Is there a liquidity target that you have a minimum level? Obviously, you've been active in repurchasing debt, but I was just trying to figure out how to calibrate what you're comfortable with in terms of maintaining a minimum amount of liquidity.

Mitesh Thakkar (Interim CFO)

Sure. Mark, as you pointed out, it's a balance, right? And that's why we mentioned earlier in the call that we are not going to be super aggressive on anything. We are going to make sure that at all the times we have an adequate amount of liquidity. I'm comfortable where our liquidity sits today.

Now, if the market conditions improve and we start seeing businesses open up, we could potentially deploy some more cash. But we'll have to make sure that at all times we have a significant amount of liquidity. We are also looking at other sources of financing, one of which we have executed in the Q1. So if there are opportunities like that where essentially you are borrowing low-cost capital and taking advantage of market dislocations and retiring high-cost capital, we'll look at those opportunities as well. So free cash flow generation, the good thing is the business generates free cash flow. And as long as that continues, we can deploy some amount of cash taking advantage of market dislocations.

Mark Levin (Analyst)

Great. Fantastic. Thanks for the time this morning.

James McCaffrey (SVP and CCO)

Thanks, Mark.

Thanks, Mark.

Operator (participant)

Our next question comes from Lucas Pipes of B. Riley FBR. Please proceed with your question.

Lucas Pipes (Analyst)

Hey, good morning, everyone. I hope you're all doing well and staying safe. I wanted to follow up a little bit on that last question from Mark. In terms of the potential for things to get worse, I understand that it seems to be improving. Natural gas prices are up and such, but within the coal markets, of course, there are a lot of inventory. So if things don't come back here over the next three, six months, nine months, and the market stays oversupplied, what should we expect from you in terms of being able to respond to this market environment, both from an operational as well as from a cash liquidity perspective?

James McCaffrey (SVP and CCO)

Thank you. Well, from an operational standpoint, Lucas, we've always said that we will run to the market, and that's currently what we're doing today.

So it used to be a weekly thing. Now it's a daily thing that we actually sit down and look at what our forecasts are for the day, for the week, and then we adjust accordingly. That's one of our strong suits with the Pennsylvania Mining Complex is the optionality we have with the complex, whereas we can run one longwall or we can run five longwalls, but it will be dependent upon what the market. Good news for us is we don't have ground storage, so we don't have a lot of inventory to work through. And as long as we stay in communication with our tier one railroads, then we can move that coal out. So it's a matter of what coal shipments do we have for that week and what's the quality. That'll pretty much determine which longwall we need to run.

And then it's all about cost. It's about managing cash and running the lowest cost operation you can. So from an operation standpoint, we'll continue to look at ways to take out cost, and then we'll run to whatever the market requirements are for that week or that day.

Mitesh Thakkar (Interim CFO)

On the financial side, Lucas, like I was talking to Mark, I was answering Mark's question. We would like to remain flexible. The good thing is we refinanced our debt last year, so we don't have any immediate maturities. We got an attractive interest rate here. So the way I would think about it is without compromising liquidity, as long as we are able to carry out some of the transactions.

And as you can see, our board is supportive of this strategy as well as the approved increase in authorization will allow us to be opportunistic in the marketplace.

James McCaffrey (SVP and CCO)

And then on the market side, Lucas, some of our customers have flexibility built into their contract, and we expect that most of those will fully use their flexibility that they're allowed. But at some point, they can't move all their tons into 2021. So they have to take and burn tons in 2020, or they have to buy us out of the tons. And in the Q1, we have already stated that we had 10.8 million tons of buyouts, $10.8 million of buyouts, which represents about 550,000 tons. So we would much prefer to mine, ship, and burn those tons than we would just get a buyout. But it does give us the ability to continue to bring cash into the business.

Lucas Pipes (Analyst)

No, that's very helpful.I appreciate all the cover there. A follow-up on cash management and balance sheet management. Great to see that increased authorization from the board on the debt repurchase side. And I wondered if you could maybe speak to the cadence of potential additional buybacks. Obviously, a great way to be level with the balance sheet here given what the market is doing. Thank you.

Mitesh Thakkar (Interim CFO)

Lucas, it is hard in this market to give you the exact numbers on how we are going to execute that. Again, like I said, it depends on where the market is and how much cash is coming in the door. I mean, if Jim McCaffrey brings in more cash in the door, you will see that pace increase.

And we'll make sure that we don't compromise liquidity in this market. So the board authorization is for two years as it sits today, an additional two years. But as you have seen in the past, that if we are executing it faster, we have added to that authorization if need be. But like I said, it's hard to give you a very accurate cadence without knowing what the market has in store for us next week, next month.

James McCaffrey (SVP and CCO)

Simply put, Lucas, it's our capital allocation process. We'll stay with that. We have the flexibility to repurchase shares or pay back debt, and it'll always be on the highest rate of return.

Lucas Pipes (Analyst)

That's very helpful. And I really appreciate the color and continue to best of luck.

Mitesh Thakkar (Interim CFO)

Thank you.

James McCaffrey (SVP and CCO)

Thanks, Lucas.

Operator (participant)

As a reminder, if you wish to ask a question, please press star, then one on your touch-tone phone. Our next question comes from Michael Dudas of Vertical Research Partners. Please proceed with your question.

Michael Dudas (Analyst)

Good morning, gentlemen. Good morning. Hi, Mike. First question, just clarification on the Xcoal announcement relative to the tonnage to the Dominican Republic. That 1.8 million tons, that's all going to be sourced by you guys. And is that for this year? Is that an annual basis or spread out? How's that work through?

James McCaffrey (SVP and CCO)

We expect it'll all be sourced from us. The 1.8 million is really 1.8 million metric, Mike. We weren't totally clear on that. And it'll be done in three four-month trimesters starting in May. So it's really for a year starting in May.

Michael Dudas (Analyst)

Okay. Terrific. That's helpful. Secondly, the amount of customer buyout you saw in the quarter, I'm just getting a sense of how do you think things are going to trough as we start to end the lockdowns and recover and see load factors improve? Do you sense that your existing customer base will keep that pace of buyouts because of the lockdown, or will that maybe start to subside as things get back to normal? And as you're talking to your customers, I know you're looking daily and weekly on your nominations. Any insight from them? Any sense of where that flows respective of where gas price or power price might be?

James McCaffrey (SVP and CCO)

As far as the pace of buyouts, Mike, we will have some buyouts in the Q2. We certainly hope that's the peak. As I said earlier, our intent is not to have our customers buy out.

Our intent is to deliver and have the product burnt. In terms of gas, our customers are just starting to feel their way through that now as more and more reports come out about the loss of auxiliary gas and the fact that it looks like the gas curves are getting stronger for the end of the year and for 2021. So I can't say that we've had a lot of dialogue on that. We've had some. It's something that we're working on very hard right now. We're talking to our customers on a weekly basis, sometimes more often, and we are working on things for 2021.

Michael Dudas (Analyst)

I appreciate that, Jimmy. Or Jim, my final question would be on this moving this topic further, looking at competitive environment, domestic coal producers, some large ones, as you know, are in some difficult financial positions.

Are customers more concerned about that? Do you get a sense there could be potential for share gains? And how significant do you think the production response? Certainly, it's probably going to be ahead of when demand picks up for gas and certainly coal. It seems pretty powder dry out there in the eastern coal fields. And can that certainly help as you timing your export loadings and your loadings into 2021 and beyond? Thank you.

James McCaffrey (SVP and CCO)

Well, for us, Mike, Mitesh said this in his remarks. I mean, our mines are ready to go. They're fully capitalized. They're fully developed.

To ramp up production, we don't have to go in there and do anything special, whereas someone that might be in bankruptcy or someone that had to work hard just to hold cash together may have sacrificed some development speed, may have sacrificed some spending that needed to be done on really needed maintenance. So we find that we're in position to move quickly as the market improves. And that's what we intend to do. I've read a lot of studies. There's a lot of debate about where coal is going to be this year and next year, but some people think that we could have anywhere from 125 million to 170 million tons recovery in 2021. And we'll be ready for it. I'm not sure the whole industry will be.

Michael Dudas (Analyst)

I agree, Jim. Thanks for your thought, gentlemen. Good luck.

Operator (participant)

Our next question will come from Matthew Fields with Bank of America. Please proceed with your question.

Matthew Fields (Analyst)

Hey, everyone. Just a couple more housekeeping follow-ups from me. Have you purchased any more second lien bonds in the 40-some-odd days since March 31? We have not yet. And just to remind everyone that we do have a restriction on our second lien, which is tied to our leverage ratio. So right now, we are not buying our second lien debt. Okay. Thank you. And then the CapEx guidance, you said that it was the reductions, correct me if I'm wrong, $45 million-$50 million lower CapEx, but that's from a 2019 level. So is that like $120 million-$125 million guidance for 2020 now?

Mitesh Thakkar (Interim CFO)

Again, we are not providing guidance. So I'll not give you the range, but you are in the neighborhood. Remember, this is a constant work in progress. We are looking at everything. Think of that initial steps.

Matthew Fields (Analyst)

Okay. Then you mentioned that the Enlow Fork mine was the higher-cost mine in your comments that you decided to idle. Can you give us an idea of the cash cost per ton for Enlow Forkcompared to your other two in the PAMC?

James McCaffrey (SVP and CCO)

Matt, we don't talk about our individual mines, but in terms of cost structure, we run PAMC as a complex. As you know, Enlow Fork is going through a high subsidence year. It started in 2019. We have often talked about this on the call that because of subsidence, their cost is a little bit skewed in this year.

And that is the primary reason where unless we figure out a way to lower the cost structure at Enlow or the market demand recovers, we'll be very careful on how that mine is brought back online.

And just to add to that a little bit, Matthew, Enlow Fork, you've heard us talk about it many times before, the geological conditions they have. And this is primarily up in the north. Enlow Fork will be moving to our new eastern reserves, and we'll be out of that high subsidence area up there. We only lack two short panels, and we'll be moved out of there next year in 2021. So we expect the cost to more normalize to our other operations in the mining complex, but we have to get out of the north side before we get over there. And that's the reason for the higher cost.

I mean, they have the same operating mentality and equipment. It's just some of the conditions they have haven't allowed them to be very cost-effective there.

Mitesh Thakkar (Interim CFO)

And also add that this is also shipment-driven, right? So if we get back to our normal pace of shipments, the idea is not here to say that Enlow Fork doesn't make money in the current environment at our current contracted price. It is when the shipments fall off, you automatically scale back production. And when you're scaling back production, you're scaling back at your higher-cost mines. This is not saying that Enlow Fork cannot make money at our current prices. Our shipment level is temporarily low because of COVID-19-related demand decline.

Matthew Fields (Analyst)

Okay. I understand. Thanks for all the help and clarifications on that.

Operator (participant)

As a final reminder, if you wish to ask a question, please press star, then one. Our next question will come from Nick Jarmoszuk with Stifel. Please proceed with your question.

Nick Jarmoszuk (Managing Director)

Hi. Good morning. Question on the CCR-CEIX relationship. Will or has there been any discussion regarding CCR addressing the principal due to CEIX?

James McCaffrey (SVP and CCO)

Repeat that question, Nick.

Nick Jarmoszuk (Managing Director)

I'm basically wondering, is CCR going to be chipping away at the principal due to CEIX?

James McCaffrey (SVP and CCO)

Generally speaking, CCR, as you saw, the leverage ratio ticked up. And because of the market uncertainty, we suspended the distribution. To the extent any cash that doesn't get distributed and CCR generates that cash, it is prudent for CCR to pay down the debt that will save some interest expense for CCR.

Nick Jarmoszuk (Managing Director)

Okay. And okay. Question for you on the natural gas price. So you were talking about $3 or $3 outlook for 2021 could increase coal burn. Now, how do you think about it? What's the magic number you guys need to start seeing some gas or coal switching for your customers? Is it $3, or is it a little higher, a little lower?

James McCaffrey (SVP and CCO)

Well, first of all, where are you shipping it? First of all, any increase in the gas price helps improve our burn and our netback pricing mines. We've said before that our netback price has a base price that is equivalent to around $25 in the PJM. Above that, we get an energy market adjustment. And that energy market adjustment adds up to 20 cents across the entire portfolio for every dollar of improvement in the PJM. Now, we're looking at the forwards today, and the forwards are taking a big jump in July to above $25, and they're showing growth to above $30 by the end of the year.

So we think that that's going to make a better second half for the netback deals and for next year. But any improvement in the gas market benefits. Nick, I would say that we find most of our customers model their plus or minus on gas around 250 to 275. So that's a good number to model at.

Nick Jarmoszuk (Managing Director)

Okay. All right. And then last question just regarding the export contracts that are coming up at the end of this year. Any updates regarding the discussions there?

James McCaffrey (SVP and CCO)

There's discussions. That contract runs through December this year, and we have started some light discussions on that. We expect to get heavy into that a little bit later in the year when we get some certainty coming back to us once we get out of this pandemic situation.

Nick Jarmoszuk (Managing Director)

Okay. That's great. Thank you.

James McCaffrey (SVP and CCO)

Thank you.

Mitesh Thakkar (Interim CFO)

This concludes our Q&A session. I would now like to turn the conference back over to Nathan Tucker for any closing remarks.

Nathan Tucker (Manager of Finance and Investor Relations)

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

James McCaffrey (SVP and CCO)

Thank you, everyone.

Mitesh Thakkar (Interim CFO)

Thanks, everybody.

James Brock (CEO)

Thanks, guys.

Operator (participant)

The conference is now concluded. Thank you very much for attending today's presentation. You may now disconnect.