May 8, 2019 - CONSOL Coal Resources LP (NYSE: CCR) today reported financial and operating results for the quarter ended March 31, 2019.
First Quarter 2019 Results
Highlights of the CCR first quarter 2019 results include:
"After a very strong finish to 2018, I am pleased to report that the CCR team continues to perform consistently well despite the fluctuations we've seen in the commodity markets we serve," said Jimmy Brock, Chief Executive Officer of CONSOL Coal Resources GP LLC, the general partner of the Partnership. "We continue to deliver consistent distribution levels to our unitholders while reducing risk through prudent balance sheet management. This quarter, we not only reduced our net leverage ratio, but with the support of our sponsor, we extended the maturity date of our Affiliated Company Credit Agreement through 2024. This extension provides us continued access to low-cost liquidity, which is becoming scarce in the master limited partnership space for companies of our size.
On the safety front, the PAMC employees improved their safety performance by 70% compared to the same period in 2018. The central preparation plant continued its strong safety performance with an incident-free quarter."
Sales & Marketing
Our marketing team sold 1.7 million tons of coal during the first quarter of 2019 at an average revenue per ton of $49.38, compared to 1.7 million tons at an average revenue per ton of $52.98 in the year-ago period. The average revenue per ton was impacted by a reduction in revenues on our netback contracts due to lower PJM West power prices and volumes, partially offset by improvements in our domestic non-netback and export revenues. During the first quarter, average PJM West power prices declined approximately 33% compared to the year-ago period, but our average revenue per ton across the portfolio was only impacted by approximately 7%. This highlights the importance of our well-diversified contract portfolio, thoughtful contracting strategy, and guidance process that already included weaker PJM forward prices compared to the prior year. This also showcases the strength of our marketing process in continuing to high-grade our contract portfolio over time, enabling us to deliver a more stable and consistent earnings profile even in volatile commodity price environments.
On the domestic front, despite a decline in weather-driven heating demand, our domestic customer base and contracted position remained solid, as customers focused on rebuilding their very low inventories. According to the Energy Information Administration, coal inventories at domestic power plants stood at approximately 99 million tons at the end of February, representing a drawdown of more than 18% from year-ago levels and the lowest levels since 2005. We believe that inventories at several of our key customers' Northern Appalachian (NAPP) rail-served power plants have increased slightly to around 30 days of burn compared to 20 days in the second half of 2018, which remain near the lower end of what we estimate is a typical target of 30-45 days. According to industry estimates, Appalachian E&P capital budgets for 2019 are about 14% below 2018 levels, and rising demand should create near-term downside protection in natural gas prices during the refill season. As gas production growth abates and headwinds continue to surround the construction of the Atlantic Coast and Mountain Valley pipelines, we believe there could be a positive surprise in gas prices that could play out into the power markets as we head towards peak summer and winter demand periods.
Internationally, thermal coal prices have come under pressure since the beginning of 2019 due to pullback in global LNG prices and other factors such as weak weather-related demand in Japan and Korea and softening demand in Europe due in part to an influx of Russian coal. We are already beginning to see an export supply response from several countries that should help to stabilize API2 and Newcastle prices. We believe the recent market behavior is consistent with normal cycle trends exacerbated by transient items. We believe longer-term coal pricing will be driven by continued growth of coal-fired generation capacity build out in Asia, limited investments in coal supply, and tightening supply-demand fundamentals for LNG in 2021. According to our analysis of data from IHS Markit, 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 seaborne thermal coal demand, particularly for high-Btu NAPP coal.
Meanwhile, in the near term through 2020, our export shipment volumes and price are supported by the export deal we signed in early 2018. As mentioned in previous earnings releases, our export contract has firm volume with firm pricing commitments through June 2019 and firm volume with collared pricing (average floor above $45.52 per ton) from July 2019 to June 2020. Accordingly, this contract serves as a bridge that allows us to weather the volatility of temporary pricing dislocations in seaborne thermal coal markets.
Export Contract Extended Through 2020
Recently, we amended our previously disclosed export contract, extending it from July 1, 2020 through December 31, 2020. This adds an additional 0.91 million tons to 2020, taking our contracted position to 71% and protecting CCR from the downward pressure that has been experienced in the API2 market while allowing for participation in potential upside as well. The collar levels are consistent with the original contract, and we anticipate the tons to breakout as 68% thermal and 32% crossover metallurgical coal.
CCR is currently 95%+ contracted for 2019, 71% contracted for 2020, and 31% contracted for 2021 assuming annual production of 6.75 million tons. We are currently in active negotiations with both domestic and international customers, and we expect to achieve our targeted contracted position for 2020 before the end of this year.
CCR achieved a first quarter production of 1.7 million tons, which compares to 1.7 million tons in the first quarter of 2018. During the quarter, coal production increased slightly due to increased production at the Enlow Fork mine, as geological conditions improved compared to the same period in 2018, and at the Harvey mine. This was partially offset by reduced production at the Bailey mine, resulting from a longwall move and other operational delays.
Total costs during the first quarter were $70.9 million compared to $72.5 million in the year-ago quarter. Average cash cost of coal sold per ton1 was $29.71compared to $29.21 in the year-ago quarter. The impairment was largely driven by an increase in project expenses and gas well plugging activities, partially offset by reduced lease/rental expense. Since the fourth quarter of 2017, we have seen modest inflation in the cost of supplies that contain steel and other commodities for which prices are strengthening, as well as in the cost of contract labor. We have been successful in managing these cost pressures and keeping our overall cost increase under our targeted 5% annual limit through productivity gains and automation, as we have discussed in previous earnings calls. Total coal revenue during the first quarter was $83.1 million compared to $87.8 million in the year-ago quarter. Average cash margin per ton sold1 for the first quarter of 2019 decreased by $4.10, or 17%, to $19.67 per ton compared to the year-ago period, driven by lower average revenue per ton due to lower revenue from our netback contracts and slightly higher operating costs.
During the first quarter of 2019, CCR generated net cash provided by operating activities of $25.2 million and distributable cash flow1 of $17.3 million, yielding a distribution coverage ratio1 of 1.2x. During the quarter, our net cash provided by operating activities was impacted by lower net income and an increase in working capital. Our distribution coverage ratio calculation is based on estimated maintenance capital expenditures of $9.0 million, while our actual cash maintenance capital expenditures for the first quarter were $8.1 million. Based on our current outlook for the coal markets and a year-to-date distribution coverage ratio1 of 1.2x, 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 April 25, 2019, the distribution to all unitholders of the Partnership will be made on May 15, 2019, to such holders of record at the close of business on May 7, 2019.
2019 Guidance and Outlook
Based on our year-to-date results, current contracted position, estimated prices and production plans, we are maintaining our financial and operating performance guidance for 2019.
1 "adjusted EBITDA", "distribution coverage ratio", "distributable cash flow", "total cost of coal sold", "average cash cost of coal sold per ton", "average cash margin per ton sold" and "net leverage ratio" are non-GAAP financial measures, which are reconciled to the most directly comparable GAAP financial measures immediately below the caption "Reconciliation of Non-GAAP Financial Measures".
2 CCR is unable to provide a reconciliation of adjusted EBITDA guidance to net income or cash cost of coal sold per ton guidance to total costs, the most comparable financial measures calculated in accordance with GAAP, due to the unknown effect, timing and potential significance of certain income statement items.