CONSOL Energy Announces Results for the Second Quarter 2019
August 6, 2019 - CONSOL Energy Inc. (NYSE: CEIX) today reported financial and operating results for the period ended June 30, 2019.
Second Quarter 20191 Highlights and Other Updates Include:
- GAAP net income of $48.8 million;
- Total GAAP dilutive earnings per share of $1.56;
- Net cash provided by operations for 2Q19 and year-to-date of $83.6 million and $165.8 million, respectively;
- Adjusted EBITDA2 of $112.9 million;
- Organic free cash flow net to CEIX shareholders2 for 2Q19 and year-to-date of $29.3 million and $71.7 million, respectively;
- Reduced total debt by $21.4 million;
- Repurchased approximately 1.2% of outstanding CEIX common shares for $9.6 million;
- Increased repurchase authorization to $200 million from $175 million;
- Cash and cash equivalents of $155.7 million or 21.2% of market capitalization as of June 30, 2019;
- Total net leverage ratio2 of 1.7x on June 30, 2019 per bank method; and
- Increased 2020 contracted coal sales volume to 80%.
"While commodity markets have been under pressure since the beginning of 2019, I am pleased to announce that the CONSOL team continues to deliver strong operating and financial performance," said Jimmy Brock, President and Chief Executive Officer of CONSOL Energy Inc. "Our results for the first half of 2019 demonstrate the effectiveness of our strategy, which is based on a stable customer base, consistent operations and financial sustainability. For the second quarter, on the marketing front, even while PJM West power prices and prompt export thermal coal prices declined by more than 25% compared to the year-ago period, we were less affected due to our contracted portfolio position and stable customer base. On the operational front, we had another robust production quarter providing consistent shipments to our customers. On the financial front, the decline in market value of our equity and debt securities provided an attractive opportunity for us to deploy more than 100% of our organic free cash flow net to CEIX shareholders generated during the quarter towards de-leveraging and improving shareholder value. We will continue to take advantage of such dislocations in the marketplace to deploy our strong cash position.
On the safety front, our Pennsylvania Mining Complex (PAMC) employees improved their safety performance, as measured by number of incidents, by 30% compared to the same period in 2018. The central preparation plant and CONSOL Marine Terminal continued their strong safety performance with an incident-free quarter."
Pennsylvania Mining Complex Review and Outlook
PAMC Sales and Marketing
Our marketing team shipped 7.4 million tons of coal during the second quarter of 2019 at an average revenue per ton of $47.53, compared to 7.8 million tons at an average revenue per ton of $47.34 in the year-ago period. Despite the ongoing headwinds across the coal space due to softening export fundamentals, low natural gas prices, and a decline in weather-driven demand, demand for our coal remained robust. Average revenue per ton benefited from an increase in prices we receive for our export coal. This was partially offset by a decline in average revenue per ton on our power price-linked netback contracts as around-the-clock PJM West power prices averaged approximately 27% lower compared to the year-ago period. This stability in our average revenue per ton compared to the year-ago period despite declining PJM West power prices, lower spot prices for export coal, and lower domestic natural gas prices is a testament to our differentiated contracting strategy, strong customer base and world-class assets.
During the quarter, we were successful in securing additional contracts for 2020 and 2021 coal sales bringing our contracted positions to 80% and 34%, respectively, assuming a 27 million ton annual run rate. During the second quarter, one of our longwalls also transitioned to a lower sulfur region of the mine plan at PAMC. We believe this will provide us with additional quality improvements that should help to increase the domestic and export marketability of the PAMC product, including access to newer markets.
According to the U.S. Energy Information Administration, inventories at domestic utilities stood at approximately 115 million tons at the end of May, down by more than 10% from year-ago levels. While low natural gas and power prices weighed on broader coal demand, we continued to ship all the coal we produced during the second quarter, highlighting the quality and resilience of our customer base. Looking forward, as mines and railroads return from their annual maintenance shutdown period, we expect demand for our domestic contracted tonnage to remain steady. With summer weather now upon most of the nation and the National Oceanic and Atmospheric Administration predicting warmer-than-normal conditions through the fall across the coasts, we expect that cooling demand will help support electricity demand, which will continue to keep coal stockpiles at relatively low levels.
On the export front, API2 spot prices for export thermal coal declined by approximately 44% during the first six months of 2019. Our revenues were largely unaffected due to our previously disclosed export contract, which runs through December 2020 and has fixed volumes with collared prices, that nets us a floor price per ton above $45.52. While spot export prices remain depressed, we continue to see strong demand from Asia. As mentioned in our previous release, approximately 111 GW of new coal-fired capacity is under construction globally for commissioning between 2019-2024. Furthermore, an additional 300 GW of new coal-fired capacity is in the planning stages. We believe this bodes well for sea-borne thermal coal demand, particularly for high-Btu NAPP coal, and we will remain opportunistic in our contracting strategy to maintain a stable earnings profile at the PAMC for our shareholders.
The PAMC achieved a second quarter production of 7.2 million tons, which compares to 7.7 million tons in the second quarter of 2018. The decline in coal production was due to the impact of an additional longwall move in 2Q19 and slower start-up of the longwall after the move. At our Harvey mine, we set a new quarterly production record of 1.54 million tons.
The Company's total costs during the second quarter were $337.3 million compared to $359.5 million in the year-ago quarter. Average cash cost of coal sold per ton2 was $31.07 compared to $26.99 in the year-ago quarter. The cost per ton impairment was largely driven by lower fixed cost leverage, higher mine maintenance costs and higher project expenses. Since the fourth quarter of 2017, we have seen inflation in the cost of supplies that contain steel and other commodities. However, with the decline in steel prices, we expect to see some relief as some of our supply contracts reset. We have been successful in managing these cost pressures and keeping our overall cost increases within our annual guidance range.
CONSOL Marine Terminal (CMT) Review
For the second quarter of 2019, throughput volumes at CMT were 3.7 million tons, compared to 3.5 million tons in the year-ago period. Terminal revenues were largely in line compared to the year-ago quarter. For the second quarter, terminal revenues and operating costs were $16.7 million and $5.0 million, respectively, compared to $16.7 million and $6.0 million, respectively, in the year-ago period. CMT Adjusted EBITDA2 came in at $11.3 million compared to the year-ago period of $10.5 million.
Following the announcement of our Itmann project last quarter, we have hired an experienced General Manager with a strong safety record to complete the implementation of the project and eventually lead the operations team as the project enters the production phase. He brings 28 years of coal mining experience in the Central Appalachian region, most recently managing three room and pillar coal mines and a coal preparation facility.
We are also on track in procuring mine equipment, and we are trending below our capital budget for the first section of the mine through the identification and purchase of rebuilt equipment.
Finally, all permits needed for development of the mine were received in June and July, allowing mine site preparation and construction to begin during Q3. Engineering and environmental work is also underway to permit a new preparation plant and refuse facility at the former Itmann plant site, and a schedule has been developed for submitting the required permit applications throughout 2019.
De-leveraging, Interest Rate Hedges, and Capital Returns
During the second quarter of 2019, CEIX generated free cash flow of $35.8 million2. Coupled with $2.4 million of balance sheet cash reduction, CEIX deployed $37.8 million of cash toward de-leveraging (59.7%) and capital returns to its shareholders (25.6%) after accounting for distributions to the non-controlling unitholders of CONSOL Coal Resources LP (14.7%). During the quarter, we saw the best risk-weighted value in our 2nd Lien notes and CEIX common shares and accordingly deployed most of our discretionary capital on those securities. CONSOL's Board of Directors continue to see share repurchases as a very effective tool to improve shareholder value and has increased its previously authorized repurchase program to an aggregate amount of up to $200 million from $175 million.
We also layered on interest rate hedges against $100 million of our Term Loan B principal for 2020 and 2021 to effectively reduce interest rates by an average 80 bps, compared to the then-prevailing rates, which corresponds to a total interest expense reduction of approximately $1.6 million.
Specifically during the quarter, CEIX spent $13.5 million (including premium), $3.8 million and $0.7 million toward reduction of our Second Lien, Term Loan A and Term Loan B debts, respectively. CEIX also made principal payments of $4.6 million towards outstanding capital leases. On the equity front, CEIX repurchased 351,443 of its common shares for $9.6 million at a weighted average price of $27.18 per share and 6,884 common units of CCR for $0.1 million at a weighted average price of $17.35 per unit.
2019 Guidance and Outlook
Based on our year-to-date results, current contracted position, estimated prices and production plans, please find below our financial and operating performance guidance for 2019:
- Coal sales volumes (100% PAMC) - 26.8-27.8 million tons
- Coal average revenue per ton sold - $47-$48
- Average cash cost of coal sold per ton2,3 - $30.40-$31.40
- CMT Adjusted EBITDA3 - $42-$45 million
- Adjusted EBITDA3 (incl. 100% PAMC) - $390-$420 million
- Effective tax rate - less than 5%
- Capital expenditures (incl. 100% PAMC) - $155-$185 million