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CONSOL Coal announces financial results

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World Coal,

On 7 February, CONSOL Coal Resources LP (CCR) reported financial and operating results for the quarter and year ended 31 December 2018.

"I am extremely proud to announce our 2018 fourth quarter results, as it was another strong quarter to cap-off a year of many achievements," said Jimmy Brock, Chief Executive Officer of CONSOL Coal Resources GP LLC.

"The quarter marked a milestone for CCR, as we completed our first calendar year under our new coal-focused parent. In 2018, we produced and sold more coal than in any other year throughout the PAMC's 35 year history. I am also pleased to announce that we have made significant improvement during 2018 on the safety front as well. Our total recordable incident rate for full year 2018 has improved by 13.5% and our total number of exceptions improved by 12.1% compared to the same period last year. We continue to remain laser-focused on having zero life-altering injuries.

"Over the past year, we generated a strong distribution coverage of 1.3x and reduced leverage on our balance sheet by 0.6x to 1.4x. While investors across the MLP space are questioning the sustainability of distributions due to levered balance sheets of various publicly-traded partnerships, we believe that CCR is well-positioned given its strong coverage ratio and balance sheet. Looking forward to 2019, we expect to continue running our mines at or around record-levels, maintaining sufficient distribution coverage, and opportunistically considering growth and efficiency improvement opportunities."

Sales and marketing

The company’s sales and marketing team sold 1.7 million t of coal during the fourth quarter of 2018 at an average revenue per tonne of US$49.81, compared to 1.6 million t at an average revenue per tonne of US$46.36 in the year-ago period. This brings CCR’s full year (FY) 2018 sales to 6.9 million t, which is at the high-end of its guidance range. It also represents a record sales volume year for CCR and its third consecutive year of sales volume growth. This growth was achieved due to improved demand for its products, as well as its ability to ramp up production and capture that demand improvement. The average revenue per tonne for the fourth quarter benefited from stronger pricing on the company’s export sales and domestic netback contracts compared to the year-ago period.

During the quarter, CCR’s domestic customers demonstrated a strong demand for coal, driven by higher natural gas prices and depleted coal inventories following stronger than forecasted burn throughout the year. According to the U.S. Energy Information Administration (EIA), total coal inventories at domestic power plants stood at approximately 104 million t at the end of November 2018, down by approximately 27% from the same period a year ago, and the lowest end-of-November total inventory tonnage level since 1997. Furthermore, the company believes that inventories at several of CCR’s key customers' Northern Appalachian rail-served power plants are below normal, and absent any meaningful weather-related demand decline, it expects to ship all it can produce during 2019 as its customers will continue to seek additional coal to replenish their depleted stockpiles. Taking advantage of this sustained demand, CCR has contracted greater than 95% in 2019, 53% in 2020 and 28% in 2021, assuming a base annual production rate of 6.75 million t. This contracted position includes a mix of sales to CCR’s top domestic customers and to the thermal and metallurgical export markets, maintaining its diversified market exposure. With its solid 2019 contracted position, CCR’s primary focus is now on maximising margins for any remaining 2019 sales and continuing to build on its contract portfolio.

Internationally, coal price volatility increased significantly during the quarter with API 2 prompt-month prices fluctuating between US$86/t and US$102/t. Overall, API 2 prompt-month prices declined by approximately 13% during the fourth quarter of 2018, driven by rising global trade tensions and a general decline in energy-related commodities. However, CCR has not seen and do not expect to see any slowdown in near-term export demand for its product. Furthermore, it is currently shipping its coal under a previously disclosed priced contract, which insulates CCR from the ongoing volatility in export pricing as well. There continues to be a significant arbitrage opportunity between coal, natural gas and oil prices on a delivered mmBtu basis in many key global markets. CCR believes that with limited coal supply growth throughout the world, it will continue to have an increasing role in the coal export markets.

Operations summary

CCR achieved record production of 6.9 million t in 2018, eclipsing the previous record of 6.5 million t set in 2017 and marking the third consecutive year of production growth. During 2018, the PAMC ran at approximately 97% capacity utilisation, highlighting the desirability of our product. Additionally, CCR’s Bailey and Harvey mines each set individual production records during the year. Bailey's 3.2 million t surpasses its previous record set in 2014, while Harvey's 1.2 million t exceeds its previous record set in 2017. PAMC production for the full year benefited from strong demand for our products in the domestic and export markets, improving productivity, initial benefits from automation projects, and improving geological conditions at the Enlow Fork mine.

CCR shipped 1.7 million t of coal during the fourth quarter of 2018, compared to 1.6 million t in the year-ago quarter. The improvement in coal sales volume was driven by strong production and continued robust demand from our customers. Total coal revenue increased by US$14.9 million to US$86.9 million, primarily driven by a US$3.45 higher average revenue per tonne sold. CCR’s average revenue per tonne increased to US$49.81 from US$46.36 in the year-ago quarter, due to stronger pricing on its export sales and domestic netback contracts.

CCR’s total costs during the fourth quarter were US$72.7 million compared to US$67.5 million in the year-ago period. Average cash cost of coal sold per ton for the fourth quarter was US$30.54 compared to US$27.30 in the year-ago quarter. The increase was due to reduced subsidence expense and lower mine maintenance spending in the prior period. For FY 2018, CCR’s total costs were US$290.6 million compared to US$282.3 million in the prior year. 2018 average cash cost of coal sold per tonne was US$29.29 compared to US$29.02 for FY 2017, an increase of less than 1%. Average cash margin per tonne sold for the fourth quarter of 2018 expanded by US$0.21, to US$19.27/t compared to the year-ago period, driven by higher average revenue per tonne, offset by higher average cash cost of coal sold per tonne.

Quarterly distribution

During the fourth quarter of 2018, CCR generated net cash provided by operating activities of US$30.2 million and distributable cash flow of US$18.5 million, yielding a distribution coverage ratio of 1.3x1. Based on its strong distribution coverage ratio during the quarter, revenue visibility in 2019, and current outlook for the coal markets, the board of directors of the general partner has elected to pay a cash distribution of US$0.5125 per unit to all limited partner unitholders and the holder of the general partner interest. As previously announced on 25 January 2019, the distribution to all unitholders of the partnership will be made on 15 February 2019, to such holders of record at the close of business on 7 February 2019.

2019 guidance and outlook

Based on CCR’s current contracted position, estimated prices and production plans, it is providing the following financial and operating performance guidance for 2019.

  • Coal sales volumes - 6.70 - 6.95 million t.
  • Coal average revenue per tonne - US$47.70 - 49.70.
  • Cash cost of coal sold per tonne - US$30.40 - 31.40.
  • Adjusted EBITDA - US$92 - 115 million.
  • Capital expenditures - US$34 - 38 million.

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