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Signature Sponsor
May 3, 2018 - CONSOL Energy Inc. (NYSE: CEIX) today reported financial and operating results for the quarter ended March 31, 2018.
Management Comments
"We delivered very strong operational and financial performance as we completed our first full quarter as an independent public company" said Jimmy Brock, Chief Executive Officer of CONSOL Energy Inc. "We outperformed most of our key guidance metrics and generated significant free cash flow, which gave us the confidence to accelerate de-leveraging as well as initiate modest stock buybacks earlier than expected. We strongly believe that our equity and debt are currently undervalued in the market place; therefore, we deployed some of our free cash flow to opportunistically repurchase portions of every category of our debt and equity that were issued or distributed in November 2017 as part of the spin-off process. We will remain return-driven in the deployment of our capital. On the operational front, the strong quarterly performance was driven by record production out of our Bailey mine and by improved coal prices in the domestic thermal coal markets. This quarter was a testament to our differentiated marketing strategy, which enables us to capture significant pricing upside during peak weather events while delivering consistent volume and pricing performance at other times. Our netback contracts provide asymmetric pricing opportunity that aligns us with the profitability of coal-fired generation in the dispatch curve. The volume consistency and potential for pricing upside associated with these contracts ties well to the low cost structure, scale, and longevity of our mining operations, and thus they are valuable components of our overall sales portfolio. It is also noteworthy that our revenue per ton on traditional domestic contracts was improved compared to the year-ago period as well. Finally, I am pleased to announce that we are increasing our full year adjusted EBITDA guidance to reflect the positive trends in the business. Our priorities for utilizing the improved earnings and cash flow are very clear: (a) de-risk the balance sheet, and (b) grow opportunistically, while improving shareholder returns."
Pennsylvania Mining Complex (PAMC) Review and Outlook
PAMC Sales and Marketing
Our Sales and Marketing team sold 6.6 million tons of coal during the first quarter of 2018 at an average revenue per ton of $52.98 compared to 6.8 million tons at an average revenue per ton of $46.80 in the year-ago period. The improvement was largely driven by greater-than-expected revenue on our netback contracts, which reflected strong PJM West power prices during the quarter. Our revenue per ton also benefited from improved pricing under our non-netback domestic contracts and from continued strength in the export markets. Offsetting these improvements were January winter weather-driven challenges that affected rail and port logistics and limited further upside to shipments.
On the domestic front, heating degree days during the quarter in the Middle Atlantic, South Atlantic, and East North Central regions we serve were approximately 11-23% greater than the year-ago period, but still approximately 3-7% below normal, based on preliminary data. Although the quarter as a whole was still slightly milder than average, the significant improvement in heating demand compared to the year-ago period translated into improved burn at our customers' power plants and helped to further draw down coal inventories. According to the U.S. Energy Information Administration (EIA), inventories at domestic utilities stood at approximately 121 million tons at the end of February, down by approximately 25% from year-ago levels. More importantly, we believe inventories at several of our key Northern Appalachian rail-served power plants now stand below 20 days. This gives us tremendous confidence in our ability to ship all of our contracted coal despite recent softness in natural gas prices. We are greater than 95% contracted for 2018 shipments and are 74% and 26% contracted for 2019 and 2020, respectively, assuming an annual production run rate of 27 million tons. We anticipate that our cost structure and differentiated marketing strategy will allow our customers to stay competitive with natural gas for the foreseeable future.
Furthermore, while Henry Hub spot prices averaged just $3.08/mmBtu during the quarter, the return to more normal winter temperatures helped to boost PJM West day-ahead power prices to an average of $45.31/MWh, marking the highest quarterly average price since the first quarter of 2015. This was due, in part, to the cold weather event in early January, but the month of March also turned in the third-highest monthly PJM West power price ($33.69/MWh) that has been observed in the last 32 months, even though Henry Hub spot prices averaged just $2.69/mmBtu in March. These improvements in power prices boosted average revenue per ton under our netback contracts, as noted above.
Overall, global coal demand growth continues to improve, tying to overall broadening and accelerating economic growth. On the export front, while demand in Europe has modestly softened, growth in India has more than compensated for this. Prior to 2017, our coal moving to India was primarily going into the industrial sector to the brick and cement industries; however, we are now beginning to penetrate into India's coal-fired power generation sector as well, which has created additional upside for our high calorific value coal. We also expect additional demand improvement from Turkey, pending easing sulfur restrictions. We are seeing improved demand growth around the globe in many more countries. This global demand growth, coupled with a supply side that has experienced minimal investment in recent years, is increasingly creating an imbalance in the international marketplace for coal. In our view, this has created an opportunity for the United States to become an essential piece of the seaborne market rather than a swing supplier.
Additional Details on Export Contract
As previously disclosed, against the strong export backdrop in the fourth quarter of 2017, we succeeded in concluding a multi-year contract for approximately 14 million tons of coal in the export markets with shipments beginning in the second quarter of 2018 and extending through the second quarter of 2020. The contracted volume is comprised of approximately 70% thermal coal and 30% crossover metallurgical coal. Coal prices in the first year of the contract are fixed at the mine and are captured in our current guidance for 2018. For the second year of the contract, the price of coal is collared with an average floor price that is greater than our 2017 average revenue per ton of $45.52. Furthermore, in conjunction with the coal sales agreement, we also entered into a full capacity take-or-pay agreement for the CONSOL Marine Terminal (CMT) with a fixed revenue of approximately $120 million for the same period. These contractual arrangements not only highlight the global attractiveness of our coal production and infrastructure assets but also are a testament to our ability to take advantage of market volatility and de-risk a substantial portion of our revenue at attractive prices.
PAMC Operations Review
PAMC achieved strong first quarter production of 6.7 million tons, which compares to 6.9 million tons in the first quarter of 2017. During the quarter, we benefited from strong production at the Bailey mine, partially offset by a longwall move at the Harvey mine and adverse geological conditions at the Enlow Fork mine. Our Bailey mine produced a record-setting 3.8 million tons in the first quarter, surpassing its previous high mark of 3.5 million tons set in the fourth quarter of 2016.
PAMC shipped 6.6 million tons during the first quarter, compared to 6.8 million tons in the year-ago quarter. While we experienced logistical challenges synchronizing rail and port availability, due to harsh January weather conditions, our Sales and Marketing team was successful in minimizing the overall impact. Total coal revenue for the first quarter came in at $351 million and improved by $34.6 million compared to the year-ago quarter, primarily driven by higher revenue per ton of coal sold. Our average revenue per ton increased to $52.98 from $46.80 in the year-ago quarter largely due to improved average revenue per ton on our netback contracts.
The Company's total costs during the first quarter were $333 million compared to $316 million in the year-ago quarter. However, total PAMC operating costs remained consistent quarter over quarter, increasing $1 million to $234 million in the first quarter from $233 million in the year-ago quarter. PAMC reported average cash cost of coal sold per ton2 of $29.21, compared to $28.75 in the year-ago quarter. This increase was essentially driven by higher royalties and production taxes. Average cash margin per ton sold2 for the first quarter of 2018 expanded by $5.72, or 32%, to $23.77 per ton compared to the year-ago period, driven by higher average revenue per ton.
For the quarter, other costs increased by $8.0 million compared to the year-ago quarter, including approximately $4.8 million in demurrage expense created by the above-mentioned rail and port logistical challenges as well as an increase in costs related to externally purchased coal for blending purposes.
CONSOL Marine Terminal Review
For the first quarter of 2018, throughput volumes out of CMT were 3.5 million tons compared to 3.1 million tons in the year-ago period. Even though throughput volumes were improved, we note that during several periods of significant snow events faced during the quarter, our throughput was impacted by frozen coal in the railcars limiting further upside. For the first quarter, terminal revenue and terminal operating costs were $15.2 million and $5.1 million, respectively, compared to $12.9 million and $5.0 million, respectively, in the year-ago period. Looking forward, we expect the terminal to benefit from the recently-executed export contract, which provides a firm and attractive revenue stream for the next two years.
Reducing Cash Costs and Improving Cost of Capital
During the first quarter, we took advantage of a strong leasing market and bought out one set of longwall shields at our Bailey mine from the operating lease agreement and refinanced it as a capital lease. This strategy allowed us to lower our overall cash spending even after accounting for the interest expense of the lease. In the month of April, we also executed an early buyout option on the Harvey longwall shields, terminated the operating lease and refinanced it as a capital lease. The financing rates on both of these leases are significantly below our weighted average cost of capital, and the transactions are immediately accretive to our cash flows. In aggregate, we expect an approximate $10.0 million reduction in 2018 cash spending as a result of these refinancings. Furthermore, the financing charges on these capital leases are fixed and insulate us from future increases in interest rates.
2018 Guidance and Outlook
Based on our current contracted position, coal market outlook and production forecasts, we are providing the following financial and operating performance targets for 2018:
CONSOL Energy Inc. (NYSE: CEIX) is a Canonsburg, Pennsylvania-based producer and exporter of high-Btu bituminous thermal and crossover metallurgical coal. It owns and operates some of the most productive longwall mining operations in the Northern Appalachian Basin. Our flagship operation is the Pennsylvania Mining Complex, which has the capacity to produce approximately 28.5 million tons of coal per year and is comprised of 3 large-scale underground mines: Bailey, Enlow Fork, and Harvey. The company also owns and operates the CONSOL Marine Terminal, which is located in the port of Baltimore and has a throughput capacity of approximately 15 million tons per year. In addition to the ~736 million reserve tons associated with the Pennsylvania Mining Complex, the company also controls approximately 1.6 billion tons of greenfield thermal and metallurgical coal reserves located in the major coal-producing basins of the eastern United States.
To read the full quarterly report with financial figures, please click here.
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