November 5, 2019 - CONSOL Energy Inc. (NYSE: CEIX) today reported financial and operating results for the period ended September 30, 2019.
Third Quarter 20191 Highlights and Other Updates Include:
"The third quarter is typically our weakest quarter of the year; however, I am pleased to announce that the PAMC delivered record third quarter production this year," said Jimmy Brock, President and Chief Executive Officer of CONSOL Energy Inc. "This strong performance was underscored by our contracted position and the continued desirability of our product, which the capital markets failed to recognize. Furthermore, we were able to grow our total revenue by 3% this quarter compared to the year-ago period, despite major coal price indices suffering double-digit declines."
"This has been an increasingly tough year for our industry as both the commodity markets and capital markets have been challenging. The good news is that we have positioned ourselves to weather this storm. On the capital markets front, we completed our debt refinancing earlier in the year, reduced our leverage, increased our liquidity and expanded our financial flexibility. On the revenue front, we moved early to contract our coal and are now 82% contracted for 2020 at attractive prices compared to the current market. This gives our operations team good visibility as we plan our production schedule heading into 2020. On the balance sheet front, our contracted position and operational consistency also allow us to continue to opportunistically buy back our undervalued debt and equity securities."
Pennsylvania Mining Complex Review and Outlook
PAMC Sales and Marketing
Our marketing team shipped 6.5 million tons of coal during the third quarter of 2019 at an average revenue per ton of $46.59, compared to 6.2 million tons at an average revenue per ton of $47.21 in the year-ago period. Our coal revenue improved by $6.7 million compared to the year-ago period, despite a 20% lower average PJM West day-ahead power price, a 42% lower average API 2 prompt month coal price and a 19% lower average Henry Hub natural gas spot price in the third quarter of 2019 versus the third quarter of 2018. This revenue improvement was largely driven by a modest increase in sales volume and our robust contracted position, which significantly reduced variability in our average revenue per ton.
During the quarter, we were successful in securing additional coal sales contracts for 2020 and 2021, bringing our contracted positions to 82% and 36%, respectively, assuming a 27 million ton annual run rate. Additionally, in the second quarter of 2019, one of our longwalls transitioned to a new lower sulfur region of the reserves with improved mining conditions. We believe the resulting improvement in coal quality should help to increase the domestic and export marketability of the PAMC product, including access to new markets.
According to the U.S. Energy Information Administration, inventories at domestic utilities stood at approximately 111 million tons at the end of August, which is slightly higher compared to 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 third quarter, highlighting the quality and resilience of our customer base.
On the export front, API 2 spot prices for thermal coal delivered to Europe have been volatile throughout 2019. After a 44% decline in the first half of 2019, API 2 prompt month prices rebounded by 23% during the third quarter 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. It is also important to note that the forward curve for API 2 is in contango and currently sits around $70 per ton in 2021.
Supply rationalization is another positive trend we are seeing in the marketplace. Globally, several unhedged coal producers are scaling back their thermal coal output. We are also noticing similar trends on the metallurgical coal front, where producers are idling high-cost operations or slowing expansion projects due to recent softer prices and declining access to capital. As we head into 2020, we will remain market-driven and operate our mines in line with our contracted position and opportunities to capture market share.
The PAMC achieved a record-high third quarter production of 6.5 million tons, which compares to 6.4 million tons in the year-ago quarter. The increase in coal production was largely due to the impact of one fewer longwall move in the third quarter of 2019 versus the prior year period. During the current quarter, our operations team overcame several non-typical challenges including a roof fall and equipment breakdowns. These geological and equipment-related issues resulted in higher mine maintenance and project expenses. Accordingly, we saw slight cost increases compared to year-ago levels. The Company's total costs during the third quarter were $323.9 million compared to $315.9 million in the year-ago quarter. Average cash cost of coal sold per ton2 was $32.78 compared to $30.88 in the year-ago quarter.
CONSOL Marine Terminal (CMT) Review
For the third quarter of 2019, throughput volumes at CMT were 2.4 million tons, compared to 2.7 million tons in the year-ago period. Terminal revenues were largely in line compared to the year-ago quarter. For the third quarter, terminal revenues and cash operating costs were $16.3 million and $6.3 million, respectively, compared to $16.1 million and $7.4 million, respectively, in the year-ago period. CMT net income and CMT Adjusted EBITDA2 came in at $7.7 million and $9.9 million, respectively, in the third quarter of 2019 compared to $5.7 million and $8.3 million, respectively, in the year-ago period.
As announced last quarter, all permits needed for development of the mine site have been approved and issued. Excavation for mine site construction is now underway, and we are working to staff the mine in preparation for commencement of development mining in the first quarter of 2020.
Equipment procurement is still on schedule and is trending below our capital budget for the first section of the mine through the identification and purchase of rebuilt equipment.
Finally, engineering and environmental work is still underway to permit a new preparation plant and refuse facility at the former Itmann plant site. We are working with the appropriate parties to finalize the plant layout, rail infrastructure design and other agreements needed for the plant site, and we plan to proceed with submitting the remaining permit applications once these have been completed.
We continue to maintain our guidance outlook as we progress toward the mine start date. We will update our outlook accordingly at that time.
De-leveraging, Interest Rate Hedges, and Capital Returns
The strength of our business model is underpinned by our ability to generate free cash flow, which allows us to take advantage of our opportunity set to invest in areas where we can improve our returns. This quarter was no different as we took advantage of the decline in the prices of our financial securities and stepped up repurchases of our common stock and second lien bonds. Our goal is to always maintain a strong balance sheet with low leverage and strong liquidity, which enables us to execute our strategic goals and increase our capital returns while driving down our cost of capital.
Since November 2017, when we became an independent publicly-traded company, through the end of the second quarter of 2019, we have spent approximately $225 million repurchasing our debt (84%) and equity securities (16%). During the third quarter of 2019, we deployed an additional $47 million toward our term loans (9%), second lien notes (34%), finance leases (10%) and equity (47%).
Specifically, during the quarter, CEIX repurchased 1,366,054 of its common shares, or 5% of its shares outstanding, for $23.2 million at a weighted average price of $16.97 per share, as well as 19,413 common units of CCR for $0.2 million at a weighted average price of $12.88 per unit. On the debt front, CEIX spent $16.2 million (including premium), $3.8 million and $0.7 million toward the reduction of our Second Lien, Term Loan A and Term Loan B debts, respectively. CEIX also made principal payments of $4.7 million toward outstanding finance leases.
During the quarter, we also layered on interest rate hedges against an additional $50 million of our Term Loan B principal for 2020, 2021 and 2022. These hedges will effectively reduce our interest rates by an average of 80 basis points, compared to then-prevailing rates, which corresponds to a total interest expense reduction of approximately $1.2 million. Combined with the $100 million of Term Loan B interest rate hedges that were layered on during the second quarter of 2019, we expect a total interest expense reduction of approximately $2.8 million between 2020 and 2022.
2019 Guidance and Outlook
Based on our year-to-date results, current contracted position, estimated prices and production plans, we are maintaining our previously announced guidance ranges for 2019:
1The results reflect predecessor performance prior to November 29, 2017, and CONSOL Energy Inc. performance after that date.
2"Adjusted EBITDA", "Organic Free Cash Flow Net to CEIX Shareholders", "CMT Adjusted EBITDA" and "Net Leverage Ratio" are non-GAAP financial measures and "Average Cash Cost of Coal Sold per Ton" and "Average Cash Margin per Ton Sold" are operating ratios derived from non-GAAP financial measures, each of which are reconciled to the most directly comparable GAAP financial measures below, under the caption "Reconciliation of Non-GAAP Financial Measures".
3CEIX is unable to provide a reconciliation of Adjusted EBITDA guidance and CMT Adjusted EBITDA guidance to net income, the most comparable financial measure calculated in accordance with GAAP, nor a reconciliation of Average Cash Cost of Coal Sold per Ton guidance, an operating ratio derived from non-GAAP financial measures, due to the unknown effect, timing and potential significance of certain income statement items.