Good morning and welcome to the CEIX and CCR transaction 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. Please note that this event is being recorded. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead, sir.
Thank you, Chuck, and good morning, everyone. Welcome to Core Natural Resources and Core Coal Resources Transaction Conference Call. On the call, we will be discussing the details of the transaction, and we have posted a supplemental slide deck to both of our websites that we'll be referencing on this call. You can also find additional information regarding the companies on our websites, www.corenaturalresources.com and www.ccrlp.com. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press release and in our previous SEC filings. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. Today's call will also include non-GAAP financial measures. These measures should be read in combination with our GAAP metrics, and certain non-GAAP financial measures are provided in the supplemental slide deck posted to both of our websites.
You should read our full disclosures for a discussion of those items. On the call with me today are Jimmy Brock, our Chief Executive Officer, and Mitesh Thakkar, our Chief Financial Officer. We will begin the call with prepared remarks from both Jimmy and Mitesh. We will then open up the call for a Q&A session with the management team. With that, let me turn it over to our CEO, Jimmy Brock.
Thank you, Nate, and good morning, everyone. We are very pleased to announce this morning that CONSOL Energy Inc will acquire all outstanding publicly owned units of CONSOL Core Resources LP. The idea is to create one entity that is stronger and more flexible than the two separate entities we have today. A single public vehicle will now have full 100% exposure to our world-class Pennsylvania mining complex and Core Marine terminal. CCR unit holders and CNR shareholders will now be fully aligned and will enjoy the full benefits of all our growth initiatives, which includes the Itmann Metallurgical Coal Project in West Virginia and our investments in technologies focused on alternative uses of coal. We believe the transaction that we announced this morning is beneficial to all stakeholders of CNR and CCR. Now, let me move to the supplemental slide deck that was posted on our website this morning.
I'll first start on slide three, which walks through an overview of the transaction. Under this agreement, each non-affiliated common unit holder of CCR will receive 0.73 shares of CEIX common stock upon completion of the merger, which is anticipated to close in the first quarter of 2021. This exchange ratio implies an approximate at-market acquisition with a 2.1% premium to the 20-day VWAP as of October 22nd, 2020. We do not anticipate adding any debt as part of this transaction. 100% consideration to CCR common unit holders will be in the form of CEIX shares, and CCR's affiliate loan is expected to be eliminated. In terms of voting requirements, shareholders of CEIX will be required to approve this transaction by a majority of the votes cast at the shareholder meeting called to approve the transaction.
On the CCR side, we will seek a written consent from CCR unit holders representing a majority of all outstanding units, and CEIX, which owns 60.7% of the units, has agreed to provide its support for the transactions. Let me now turn the call over to Mitesh to walk through some of the benefits of the transactions in more detail.
Thank you, Jimmy, and good morning, everyone. Slide four lays out some of the major benefits of this transaction. The first one is corporate structure simplification, which streamlines financial reporting and creates additional transparency for investors and analysts. As Jimmy highlighted previously, a single public vehicle will now have full 100% exposure to our world-class Pennsylvania mining complex and Core Marine terminal. A consolidated shareholder base will now be fully aligned and will enjoy the full benefits of all of our growth initiatives. On the financial side, we expect to see immediate improvement in our credit metrics, enhanced access to capital markets, and reduced risk for our equity holders. More importantly, it also accelerates our ability to initiate capital returns, which are currently restricted given the leverage test of two times on our balance sheet.
In the process, we also expect to generate approximately $3 million in annual synergies as we eliminate dual company reporting and filing costs, and our employees are now solely focused on one combined entity. In summary, this deal unlocks significant value for all our stakeholders through improved financial flexibility and transparency. Moving to slide number five, you can see that this transaction has multiple immediate benefits from a financial standpoint. First, on a pro forma basis, by consolidating CCR's EBITDA generation, our bank EBITDA increases approximately 26%. This is important because it provides an immediate deleveraging to CEIX . As you can see, based on June 30 financials, our leverage improves by 0.6 turns. The more headroom we create on our covenants, the more favorably we are viewed by our creditors, rating agencies, and other capital providers.
More importantly, this 0.6 turns reduction in the leverage ratio gives us a jumpstart to reach our near-term milestone of sub-2 times leverage ratio, which then unlocks several shareholder return opportunities for us. As a result, we are confident that our shareholders will support this transaction. Finally, this transaction is immediately accretive to our estimated 2021 organic free cash flow. By consolidating our cash flow streams, we expect a significant improvement in this metric on a pro forma basis. Let's now move on to slide number six, which summarizes a lot of the actions this management team has taken since the beginning of 2020 when we all faced, hopefully, a once-in-a-lifetime pandemic resulting in significant contraction of demand. We have taken a series of actions aimed at shoring up our balance sheet and financial position.
First, we executed opportunistic debt buybacks and captured significant discounts as our public debt traded below par earlier this year. This had an overall deleveraging effect on our balance sheet. Second, we amended our credit agreement and gained financial flexibility during this challenging macro environment, which allowed us to continue to access our revolving credit facility and maintain high levels of liquidity. Third, more recently, we completed a number of value-enhancing transactions that improved our EBITDA and cash generation in the second half of 2020. Finally, we continue to focus on capital and cost efficiency. We currently have no near-term debt maturities, and our liquidity position is very strong. In addition to these actions, we view this transaction as another major and important step toward further strengthening our financial flexibility and enhancing our position to create long-term value for our shareholders.
With that, I will turn the call back to Jimmy.
Thanks, Mitesh. Let's move to slide seven. This transaction strategically strengthens our production base, enables diversification, and reduces risk. It also simplifies our structure and strengthens our ability to implement different actions that will be strategically beneficiary for the company and create long-term value for our shareholders. Let me first be very clear. Our top priorities are to continue to delever the balance sheet and get on path toward returning capital to our shareholders. Once these goals are achieved, we expect to pursue growth in four different ways. We have highlighted our four targeted buckets of investment on prior earnings call, but I will provide a brief recap. First, efficiency and continuous improvement. These are relatively small-dollar value projects that either raise our production capacity or lower our operating cost at existing operations. Second, emerging technologies and alternative uses of coal.
Such projects will involve a new technology or an innovative use of coal. Think of these as more of an R&D type project that will have long gestational periods. These projects will have attractive risk-reward potential, so we plan to make small initial investments in multiple projects. If one of them achieves its full potential, it could be a game changer. Third, organic growth projects and expansions of our core mining business. These projects are well aligned with our skill set, carry low technological risk, and are expected to become meaningful contributors when completed, such as our Itmann Metallurgical Coal Project. Finally, possible acquisitions or other strategic transactions. We regularly evaluate these types of potential transactions on an ongoing basis.
We expect to continue to focus on these four different buckets within our capital allocation strategy with an aim towards improving our operating profile, enabling portfolio diversification, and growing our business. Finally, let's move to slide eight. We expect this transaction to close in Q1 of 2021. There are a number of steps that will be required to close the transactions, which you can see on the left-hand side of this page. We believe Core Natural Resources shareholders will see the strong strategic and financial benefits of this merger and will be supportive of the deal. As Mitesh mentioned, CEIX owns approximately 60.7% of the limited partner interest in CCR and has agreed to deliver a written consent approving the transaction. We do not expect that the requirement that a majority of CCR unit holders approve the deal will be a barrier to closing the transaction.
Before we move on to the Q&A session, let me recap our rationale for the merger and the benefits associated with it. This agreement simplifies Core Natural Resources' corporate structure, increases our public float and trading liquidity, and enhances our access to capital markets. It improves our financial flexibility and strengthens our position to further deleverage the balance sheet. By collapsing CEIX and CCR into one company, we have increased deleveraging, free cash flow generation, and trading liquidity, all of which are crucial for success given the headwinds our sector faces. We truly believe that we are stronger together than we are as the two separate companies you know today. With that, I'll hand the call back over to Nate for further instructions.
Thank you, Jimmy. We will now move to the Q&A session of our call. Chuck, could you please provide the instruction to our callers?
Yes, sir. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Mark Levin with The Benchmark Company. Please go ahead.
Great. Thanks. Congratulations on the transaction. A couple of quick questions. Maybe you can remind me. It sounds like pro forma leverage, 3.2 down to 2.6x . Is the key kind of leverage ratio from here 2x , Mitesh? If it is, once you get to 2x , what does that mean? How will you approach managing liquidity going forward versus, let's say, buying back second liens? Maybe you can just sort of address where we go from here for the covenant ratio. I think you mentioned on the last call asset sales. Clearly, that's additive as well. If 2x is the right number, how quickly can asset sales get you there, help get you there?
Thank you, Mark. Let me start and be very clear about it, right? Our near-term focus is absolutely deleveraging, right? This transaction jumpstarts us on that path. As you know, we have not stated our ultimate target on the leverage ratio, but you're right. Two times is what I would call it as a next milestone. Our credit amendment has put in several restrictions on us. At times, you have to think about from a capital allocation standpoint what makes most sense. When you think about today, for example, our second lien, we have been very public about it, makes most sense. We look at our second lien, our term loan B when it comes to debt reduction. Those are our two main focus areas. Obviously, second lien has a bigger discount. It is a little bit further maturity and junior debt, but has a bigger discount.
Beyond that, once you see our second lien move towards more like a par value or our term loan B moves towards more like a par value and we achieve our deleveraging goals, you will see us focus more on shareholder returns, such as whether it's dividends, share buybacks, whatever makes sense at that point in time. We have a capital allocation strategy that we have talked about, but you are right. Two times is the next milestone for us.
Great. I apologize if you guys already spoke to this, but going back to slide five and the third graph on the right-hand side, 2021 estimated organic free cash flow going from $50 million to $80 million pro forma. Can you maybe walk us through how you got to that $80 million number?
Sure, Mark. Really, if you think about our organic free cash flow, the way we think about organic free cash flow is essentially cash flow from operations or net cash provided by operations less the capital expenditures. It does not include any debt repayment or any financing activities. When you look at what we have as a standalone forecast and then you add in the impact of this merger, that is the addition that you get by adding the CCR portion of that to the mix here. Does that answer your question?
Yeah. I was actually trying to drill down into more specifics. Obviously, that number has some assumptions built into it, whether it's coal production, price per ton, cost per ton, kind of the key three drivers to get you to EBITDA. I was just kind of wondering what was embedded from that perspective to get you to that organic free cash flow number. That's what I was after.
Okay. I think what we'll do is we'll share more perspectives on those metrics on our upcoming earnings calls and future disclosures. I think, generally speaking, it is fair to assume that these numbers do not include us going back to full productive capacity that we have done in 2018 and 2019. It's not as low as where we are today. When I say today, I mean including the early part of this year. From a production perspective, it is somewhere between where 2020 is going to shake out and where our productive capacity is. In pricing, we are looking at Henry Hub Futures when we created this forecast. That's driving a lot of that pricing inputs. We'll provide more specific numbers in our future disclosures, but that's how we are thinking about it right now, just to help you get some perspective around it.
Got it. Would you call this a conservative forecast or something that involves more of a market uptick? Obviously, gas is kind of pushing three, and the market looks a little bit better for 2021 than it does for 2020. Would you call this sort of a conservative forecast or more of a we think the market's really going to recover next year forecast?
Mark, I would say there's still a lot of volatility in the markets out there. There's still a lot of things that have to be worked through. I would say this is kind of what we believe today. So it's kind of it's still pretty volatile in the marketplace. I wouldn't say it's conservative. I wouldn't say it's aggressive. I think it's our best estimate we have today.
Okay. That's fair. Final question for me. Does this change anything related to Itmann and potentially accelerating that development, or you're just looking at the met market as a whole and that remains kind of down the list, particularly as it relates to deleveraging?
Mark, I will answer. It does not really change anything at this point. As we have mentioned several times on the call, this is a deleveraging project for us that certainly should provide more capital for us moving forward. We will use the same capital allocation process we have always used. I mean, the highest rate of return will get the capital dollars.
We are still excited about Itmann. I was actually down there underground earlier this week and pretty excited about the project. Still think it's going to be a great project. It's just kind of slowed down a little bit due to the environment we're in.
Makes a lot of sense. Thanks, guys, and congratulations on the transaction.
Thanks, Mark.
Thank you, Mark.
Our next question will come from Matt Fields with Bank of America. Please go ahead.
Hey, guys. I wanted to reask a part of Mark's question about that organic free cash flow, how you get incremental $30 million of free cash flow from this simplification transaction. I understand $3 million of sort of duplicative costs going away, but how do you get an incremental $30 million? I mean, free cash flow is free cash flow regardless of who owns the stock, right? How do you unlock $30 million of free cash flow incrementally from this?
Matt, the way to think about it from a CEIX perspective as a standalone entity versus a consolidated entity including CCR, the $80 million is a consolidated number and $50 million is a standalone number. It's just as simple as that.
The $50 million, you're just taking away a percentage of the free cash flow?
CCR share.
Okay. All right. So you're not actually going to be able to generate $30 million more. It's just the $50 million was adjusted.
Correct.
Okay. Okay. I think that answers that. Thank you.
Our next question will come from Lucas Pipes with B. Riley Securities. Please go ahead.
Hey, good morning, everyone. Good to see this transaction. I have two quick questions. The first one is just in terms of the closing requirements, the vote for CCR, can you tell me more about the mechanics there and what level of approval is necessary?
On the CCR vote, we do not have a super majority of the minority requirement. As we said, we own 60.7%, CEIX does. There will be a written consent approving the transaction from that.
Okay. Okay. So just to confirm, a simple majority is sufficient or something more than that?
From a CCR perspective, we entered into a support agreement with CEIX of 60.7% limited partnership units. I think that satisfies that requirement. From a CEIX perspective, there is going to be a simple majority.
Correct. Yeah. Okay. That's helpful. Then back to this free cash flow, I understand the change there that you outlined. In terms of the committed tons and priced tons for 2021, just given now that the number is out there, can you speak to roughly what you have priced for next year? Thank you.
Lucas, we are probably going to announce our earnings here in the next 10 days. I would suggest let's wait for that. We'll have more disclosure at that point.
Okay. Great. Thanks for your time and good to see this transaction.
Thanks, Lucas.
Thank you very much, Lucas.
Our next question will come from Michael Dudas with Vertical Research Partners. Please go ahead.
Good morning, gentlemen. Thanks for all the information this morning and best of luck with this. I'm assuming this transaction has been analyzed or thought about over the past several years from the board of Core Natural Resources and management. What limited it from happening prior? Is this just the optimal time given where the position of Core Natural Resources is right now? Is it a relative valuation? The simplification, which you went through and explained very clearly. Do you want to get a little concept of how it came about and how in the past you had looked at this type of transaction, why it has not happened maybe till today?
Michael, you're right. We have always considered several transactions in the past. We have considered CEIX simplification amongst those transactions as well. As you know, things change. Over the last several years, since we became a public company, we had two separate entities which served different purposes. As the MLP market evolved, the relevance of CCR as a separate entity continued to shrink. Access to capital became challenging for both the MLPs and the coal space. From that perspective, as you think about it today, we have two separate entities with smaller market caps. We believe the time is right where these two entities come together as a much stronger entity and accelerate shareholder returns and get the deleveraging benefits and improve their access to capital. I think it hits all those three items that I mentioned.
Simplifications make much more sense today than it made before.
Yeah. I'll add, I think, Mitesh Thakkar, the MLPs have kind of been out of favor in the marketplace here since the corporate tax structure has changed a little bit and took away some of those benefits that an MLP provided. We have looked at this several times. We've talked to different people about it. CCR was a great company when it was able to generate one coverage ratios and was paying dividends. Unit holders were happy. We were happy generating plenty of free cash flow to do that. As things became more challenging, particularly the first part of this year with the onset of the coronavirus and things started to deteriorate away in the marketplace, we looked at our pro forma basis and where we are and the macro environment around us.
This provided an opportunity to do it, that we can combine these two companies together, combine the synergies, and be a much stronger company going forward that should create value for CCR unit holders as well as CEIX once combined.
Yeah. Your arguments are valid and well supported. Thanks, gentlemen. We'll talk to you in a couple of weeks.
Thank you.
Thank you, Michael.
This concludes our question and answer session. I would like to turn the conference back over to Nathan Thakkar for any closing remarks. Please go ahead, sir.
Thank you, Chuck. We appreciate everyone's time this morning, and thank you for joining us. As a reminder, we will announce our third quarter results on November 5th. We look forward to speaking with everyone then. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.