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Signature Sponsor
November 1, 2018 - CONSOL Coal Resources LP (NYSE: CCR) today reported financial and operating results for the quarter ended September 30, 2018.
Third Quarter 2018 Results
Highlights of the CCR third quarter 2018 results include:
Management Comments
"I am pleased to announce that the PAMC delivered the best third quarter production in its history even with an expected and seasonally slow production quarter due to an above average number of planned longwall moves," said Jimmy Brock, Chief Executive Officer of CONSOL Coal Resources GP LLC, the general partner of the Partnership. "As a result of the strong operational performance that we have had year-to-date, combined with our expectations of robust production in the fourth quarter and continued strength in coal demand, we are increasing the midpoint of our sales and EBITDA guidance ranges."
"We completed our third year as a publicly-owned master limited partnership in July 2018 and I am pleased with our performance so far and the way we have managed the Partnership through the ups and downs of the commodity cycle. The Partnership is much stronger today than at any point in our history as an independent public company with a resilient balance sheet and sound distribution coverage for our unitholders. As we head into 2019, I remain optimistic about the demand outlook given improving coal prices, low inventory levels of coal at the power producers, low natural gas storage levels and our solid contracted position."
Sales & Marketing
Our marketing team sold 1.6 million tons of coal during the third quarter of 2018 at an average revenue per ton of $47.21 compared to 1.6 million tons at an average revenue per ton of $44.16 in the year-ago period. The average revenue per ton benefited from stronger pricing on our export sales and our domestic netback contracts. More importantly, our marketing team is taking advantage of the improving coal forward curves in the domestic and export markets and contracting new business for the years 2019-2021.
On the domestic front, customer inventories remain below normal. According to the U.S. Energy Information Administration (EIA), total coal inventories at domestic power plants stood at approximately 110 million tons at the end of August 2018, down by approximately 26% from the same period a year ago, the lowest level since March 2006. Furthermore, we believe that inventories at several of our key customers' Northern Appalachian rail-served power plants continue to average around 20 days of burn heading into winter compared to the typical 30-40 days. While domestic coal consumption has declined year-over-year as a result of coal plant retirements and other factors, global demand for coal has grown, driving strong export volumes. In its recently published Short Term Energy Outlook, the EIA expects 2018 U.S. thermal coal exports to increase by 21% to 50.4 million tons from 41.7 million tons in 2017. The EIA also estimates that, during the first three quarters of 2018, coal production in the U.S. has declined by 2.7% compared to the first three quarters of 2017. Rising thermal coal exports and declining production have significantly tightened the domestic market in several basins, including Northern Appalachia.
The EIA also expects U.S. dry natural gas production will average a record 82.7 Bcf/d in 2018, an 11% increase from 2017. However, storage levels remain at a multi-year low heading into winter. This, coupled with rising U.S. power demand, sets up a potentially interesting scenario for power producers to navigate in the coming months. Natural gas storage levels are 20% below year-ago levels and storage levels have not kept pace with the growing gas market. The limited gas storage and pipeline infrastructure in certain areas of the U.S. continues to create the potential for bottlenecks in gas deliverability, similar to those experienced this past winter. Moreover, while renewable generating capacity is growing, lack of consistency and deliverability during peak demand periods continues to preserve the need for baseload generation. As a result of this macro backdrop, utilities are actively procuring coal and showing renewed interest in longer-term contracts.
CCR is currently 90% contracted for 2019 and 44% contracted for 2020, assuming annual production of 6.75 million tons. We presently are in active negotiations with both domestic and international customers, and we expect to achieve our targeted contract position for 2019 before the end of this year.
Internationally, we continue to see improving commodity pricing dynamics. API 2 prompt-month prices improved by approximately 3% during the third quarter 2018 to over $100 per metric ton, driven by a hot, dry summer in Europe which reduced wind and hydro power output. Furthermore, power prices in the major European electricity markets are up by 20-50% year-to-date and wholesale gas prices hit 10-year highs. We also continue to see strong demand from India as its power plant coal stockpiles in August 2018 fell 30% to the lowest level since early December 2017. There remains a large arbitrage between coal, natural gas, and oil prices on an MMBtu basis with rising global demand that we believe should drive thermal coal prices even higher. Meanwhile, a multi-year lack of coal investment continues to put pressure on global coal supply and coal quality, adding support to this expectation. Forward API 2 prices for 2019 improved by approximately 10% during the third quarter 2018 and we have seen improvement in the back end of the coal forward curve relative to the prompt month, reflecting the industry's optimism for sustainable coal fundamentals. We expect that this phenomenon improves our ability to enter into multi-year contracts in the international market.
Operations Summary
CCR achieved third quarter production of 1.6 million tons, which compares to 1.5 million tons in the third quarter of 2017. It was the strongest third quarter production on record for the PAMC. During the quarter, we benefited from increased production at the Enlow Fork mine, as geological conditions improved modestly compared to 2017. This was partially offset by reduced production resulting from three longwall moves at the mining complex (compared to 1-2 moves typically per quarter) and the annual miners' vacation period in July.
CCR shipped 1.6 million tons of coal during the third quarter, compared to 1.6 million tons in the year-ago quarter. Demand from our customers remained robust and the railroads performed well. Total coal revenue for the third quarter improved $3.9 million compared to the year-ago quarter to $73.7 million, primarily driven by a $3.05 higher average sales price per ton sold. Our average revenue per ton increased to $47.21 from $44.16 in the year-ago quarter, as export pricing and domestic netback pricing improved by $11.36 per ton and $1.25 per ton, respectively.
Total costs during the third quarter were $66.7 million compared to $74.7 million in the year-ago quarter. Average cash cost of coal sold per ton1 was $30.88 compared to $30.94 in the year-ago quarter. This improvement was largely driven by a $1.34 per ton reduction in lease/rental expense, partially offset by higher mine maintenance and supply costs. Since the fourth quarter of 2017, we have seen modest inflation in the cost of supplies that contain steel and other strengthening commodities as well as in the cost of contract labor. Year-to-date, we have been able to successfully offset these inflationary pressures through productivity gains, initial benefits from our automation investments and a reduction in lease expense. We continue to keep a close watch on macro-driven cost increases and strive to offset them through productivity gains. Average cash margin per ton sold1 for the third quarter of 2018 expanded by $3.11, or 24%, to $16.33 per ton compared to the year-ago period, driven by higher average revenue per ton and relatively flat operating costs.
Quarterly Distribution
During the third quarter of 2018, CCR generated net cash provided by operating activities of $16.9 million and distributable cash flow1 of $10.7 million, yielding a distribution coverage ratio of 0.7x1. During the quarter, our net cash provided by operating activities was impacted by an increase in working capital of approximately $3.3 million. Our distribution coverage ratio calculation is based on estimated maintenance capital expenditures of $8.9 million, while our actual cash maintenance capital expenditures for the third quarter were $8.1 million. Based on our current outlook for the coal markets and a strong year-to-date distribution coverage ratio of 1.4x1, the board of directors of the general partner has elected to pay a cash distribution of $0.5125 per unit to all limited partner unitholders and the holder of the general partner interest. As previously announced on October 25, 2018, the distribution to all unitholders of the Partnership will be made on November 15, 2018, to such holders of record at the close of business on November 8, 2018.
2018 Guidance and Outlook
Based on our strong year-to-date results, robust coal demand and production expectations, we are adjusting several items of our financial and operating performance guidance for 2018.
To read the full press release with financial figures, click here. |
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