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Signature Sponsor
February 6, 2018 - Highlights of the CEIX fourth quarter 20171 results include:
Management Comments
"The fourth quarter of 2017 marked an important milestone in the history of our company," said Jimmy Brock, Chief Executive Officer of CONSOL Energy Inc. "We became an independent publicly traded company when CNX Resources Corporation completed the separation of its gas exploration and production business and its coal business into two public companies on November 28, 2017. Our new company is a pure-play coal company trading on the New York Stock Exchange under the ticker CEIX and combines a world-class coal mining complex located in Pennsylvania, a strategic coal export terminal and an abundance of undeveloped reserves. Although we are a new public company, our legacy of high productivity, safety and compliance go back 150+ years when the energy industry in the US was in nascent stage. Today, our assets are not only top-tier coal assets, but they can also compete very effectively against natural gas. Over the past several years, we have adjusted our cost structure to improve our competitiveness in a changing energy landscape and positioned ourselves to take advantage of evolving opportunities, such as the recent rebound in export thermal markets, the international demand for crossover metallurgical coal, and the uptick in power markets that has been observed so far this winter. Our near term priorities are consistent operational performance to generate free cash flow and deploy it towards deleveraging our balance sheet, share repurchases, and opportunistic growth, with the ultimate goal of boosting returns to shareholders."
Pennsylvania Mining Complex (PAMC) Review and Outlook
PAMC Sales and Marketing
Our Sales and Marketing team sold 6.2 million tons of coal during the quarter, bringing full-year (FY) 2017 sales of PAMC coal to 26.1 million tons. This represented PAMC's second consecutive year of sales volume growth, an increase of 6% from 2016 and 14% from 2015. We achieved this growth in spite of mild peak season weather earlier in 2017, as well as geological, permitting, and logistical challenges that we expect to ease going forward and provide us with additional volume in 2018. FY 2017 average revenue per ton was up 5% versus FY 2016, driven largely by improved market conditions and pricing in the thermal and crossover metallurgical export markets we serve.
The fourth quarter of 2017 saw continued strengthening trends in both the domestic and export markets. On the domestic front, PJM West day-ahead power prices averaged almost $3.50/MWh, or 12%, higher during the fourth quarter than during the third quarter, driving an uptick in average revenue per ton under our netback contracts. Overall, our domestic average revenue per ton was up by more than 5% compared to the third quarter, and by nearly 4% versus the year-ago quarter. More importantly, power plants have continued to exercise discipline in managing their coal inventory levels. The latest report from the U.S. Energy Information Administration shows that power plant coal stockpiles were down by approximately 27 million tons (or about 16%) at the end of November 2017 compared to the end of November 2016, and many of our top domestic customers in the Northern Appalachian (NAPP) rail market reported coal inventories below target levels as of the end of January 2018. We believe that these more balanced inventory levels will help improve domestic coal demand in 2018.
Export average revenue per ton sold in the fourth quarter of 2017 was improved by an even greater amount than domestic average revenue per ton sold, when compared with the trailing and year-ago quarters, as demand and pricing remained strong in both the thermal and metallurgical coal markets. This strength has been driven by a number of factors, perhaps the most noteworthy during the fourth quarter being low coal stockpiles and restrictions on pet coke in India, which helped to drive an increase in demand for NAPP coal in particular. Continued pull from Asia has taken some traditional supply away from the Atlantic market as well, and helped to bolster further gains in Atlantic seaborne pricing, with the prompt month API 2 index pricing (for thermal coal delivered into northern Europe) averaging 8% higher during the fourth quarter compared to the third quarter.
Contracting Progress Through 2020
We capitalized on the uptick in demand and pricing for NAPP coal in 2017 to carry out significant portfolio building for future years. We are now greater than 95% contracted for 2018, 70% contracted for 2019, and 24% contracted for 2020 assuming an annual production rate of approximately 27 million tons going forward. This contracted position includes a mix of sales to our top domestic customers, to the export thermal market, and to the export metallurgical market, maintaining our diversified market exposure and providing a solid revenue base for meeting our financial objectives.
Against the strong export backdrop highlighted before, we succeeded in concluding a multi-year contract for a significant piece of our coal export sales volume for the second quarter of 2018 through the first quarter of 2020. The newly contracted export volumes consist of approximately 70% thermal coal and 30% crossover metallurgical coal sales. Approximately 50% of this volume is already priced, and the remaining 50% is contracted and collared. The contract not only demonstrates the global attractiveness of our high-quality and versatile coal assets but also highlights our ability to monetize the logistical synergies of our assets across the supply chain.
PAMC Operations Review
On the operational front, the PAMC achieved a record production of 26.1 million tons in 2017 compared to 24.7 million tons in 2016 and surpassing the previous record set in 2014. Furthermore, our Harvey mine produced a record-setting 4.8 million tons of coal in 2017, surpassing its previous high mark set in 2015. The overall performance at PAMC is even more encouraging when you consider that our Enlow Fork mine experienced challenging geological conditions for the better part of the second half of 2017, and one of the Bailey longwalls was idled for one month due to the permit issue we disclosed in September.
The PAMC produced and sold 6.2 million tons during the fourth quarter of 2017, compared to 7.1 million tons in the year-ago quarter. The reduced production compared to the year-ago period was primarily driven by planned longwall moves, the previously disclosed permitting issue at Bailey, inconsistent mining conditions at Enlow Fork and rail/logistics issues during the month of December. Although total coal revenue decreased by $32.9 million to $288.3 million, our operating and other costs improved by $41.3 million to $170.7 million versus the fourth quarter of 2016. Average cash margin per ton sold for the fourth quarter of 2017 expanded by $2.21, or 13%, to $19.06 per ton compared to the year-ago period, driven by higher average revenue per ton and lower cash cost of coal sold. Our average revenue per ton increased to $46.36 from $45.05 in the year-ago quarter due largely to higher average revenue per ton on export shipments and higher netback prices on certain contracts compared to the year-ago period. Our cash cost of coal sold per ton was improved versus the year-ago quarter due to reduced subsidence expense and lower power/utility-related spending.
CONSOL Marine Terminal Review
Taking advantage of the improvement in the export markets, we exported a record 8.3 million tons of PAMC coal in 2017, compared to 5.4 million tons in 2016. These favorable export conditions benefited not only PAMC, but also our wholly-owned CONSOL Marine Terminal in Baltimore. The terminal exported 4.1 million tons of thermal, metallurgical, and anthracite coal in the fourth quarter for PAMC and third-parties, bringing its annual total for 2017 to a record 14.3 million tons. This represents an improvement of 77% versus 2016, and was driven by both our own export sales volume growth and by our push to maximize the capacity of the terminal through third-party business. For the full year ended December 31, 2017, terminal revenue and operating and other costs of CONSOL Marine Terminal were $60.1 million and $20.5 million compared to $31.5 million and $18.0 million in the year-ago period.
Reduction in Legacy Liabilities
Over the last few years, our Employee Benefits group has actively managed our legacy liabilities. Despite falling discount rates and a $44.0 million increase in our Coal Workers' Pneumoconiosis liability, our overall legacy liability decreased $113.9 million from December 31, 2016 to December 31, 2017. Our Employee Benefits group has made certain purely administrative changes in the way we deliver medical and prescription drug benefits to Medicare-eligible retirees covered under OPEB that have resulted in a reduction in benefits cost without impacting the level of benefits delivered to the beneficiaries. Our OPEB liability was reduced to $591.6 million on December 31, 2017 from $700.1 million on December 31, 2016. These changes are also expected to reduce our annual cash spend by approximately $3 million. The administrative changes include a move to become self-insured on the prescription drug side to take full advantage of subsidies/rebates offered under Medicare and a move to become fully-insured on the medical side to take advantage of economies of scale by being included in our insurance provider's larger pool. We continue to proactively review the administration and structure of our retiree healthcare coverage as changes occur within Medicare and the healthcare industry as a whole. The covered employees and retirees continue to enjoy excellent healthcare coverage.
Benefits Under New Tax Law
On December 22, 2017, the President of the United States signed the "Tax Cuts and Jobs Act of 2017", Public Law no. 115-97. This Act is comprehensive tax legislation that, among other things, reduces the U.S. corporate income tax rate from 35% to 21% and eliminates the Corporate Alternative Minimum Tax for tax years beginning after December 31, 2017. As a result of this act, the Company recognized a one-time non-cash expense of approximately $59 million primarily due to the remeasurement of the deferred tax asset at the lower rate. We anticipate an annual effective tax rate in the range of 10% to 15% starting with the tax year beginning January 1, 2018.
Monetizing Non-Core Assets
Our asset monetization program is currently focused on bringing some of the value forward from approximately 1.6 billion tons of undeveloped reserves in our portfolio of assets. To that extent, during the fourth quarter of 2017, we were able to monetize approximately 45 million tons of reserves in the Illinois Basin. We received a $6 million cash payment during the fourth quarter. Furthermore, we expect to receive additional payments linked to the revenue generated as the associated coal is mined over the next several years. The management team continues to seek additional opportunities to bring the value of our undeveloped reserves forward.
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-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 ~735 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. |
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