Boosted in 2012 by sales of undeveloped coal properties, CONSOL Energy (NYSE: CNX) on Jan. 31 reported net income for the fourth quarter of $150m, compared to $196m from the year-earlier quarter.
Net income for all of 2012 was $388m, compared to $632m for 2011.
CONSOL’s fourth quarter earnings included two discrete items. The company recorded a pre-tax charge of $13m for a voluntary severance program for certain active salaried corporate and operation support employees and realized a pre-tax gain of $90m on the sale of assets.
“CONSOL Energy continued to re-balance its world class portfolio of assets in 2012,” said Chairman and CEO J. Brett Harvey, “while successfully managing our coal and gas businesses through a very challenging environment. In our Coal Division for 2012, we worked with our domestic thermal coal customers and the railroads throughout the year to keep contracted shipments flowing despite weak markets. We carefully managed both thermal and metallurgical coal production to avoid building inventory. Our 100%-owned Baltimore Terminal saw near-record shipments, as CONSOL was able to continue to participate in the growth of world coal markets. CONSOL executed well in a tough macro environment characterized by a tepid economy and unusually warm winter weather.”
During 2012, CONSOL sold non-revenue producing assets for $350m. Assets sold included coal reserves and/or resources from Central Appalachia, the Powder River Basin (including CX Ranch and a share of Youngs Creek), and western Canada (left over from its days as a partner with Luscar). CONSOL said it expects to continue to sell assets in 2013.
“When investors step back for a minute and consider that in the past two years, CONSOL Energy has earned over $1 billion in net income and generated $2.3 billion in operating cash flow,” said Harvey, “I think they’ll realize that we’ve executed at a level — in both good and challenging times — that few, if any, of our peers in the energy industry can match. This is why I believe that CONSOL Energy deserves to be a core holding for energy investors.”
CONSOL noted in its earnings slide presentation that the new BMX mine, which is basically a longwall mine developed off of and to the northeast of the Bailey longwall mine in southwest Pennsylvania, is due in production in the first quarter of 2014. This mine would be the company’s lowest-cost operation and would produce extra Pittsburgh-seam coal.
Coal sales volumes and prices lower in the fourth quarter
Total company sales revenue was $1.2bn. This was lower than the $1.4bn from the year-ago quarter, which was the highest ever achieved by CONSOL in a fourth quarter. The decrease was due to lower coal sales volumes of 500,000 tons, as well as lower average sales prices for the company’s low-vol and high-vol coal categories, at $129 and $68 per ton, FOB mine, respectively. Thermal coal average sales prices, meanwhile, increased to $63 per ton.
Coal margins, across all of the company’s sales, were $18.20 per ton, a decrease of $0.68 per ton from the year-earlier quarter. Lower sales volumes and slightly smaller coal margins drove a decrease in Adjusted EBITDA, a non-GAAP financial measure, and cash flow from operations. Adjusted EBITDA in the fourth quarter was $419m, down from $440m in the year-earlier quarter. Cash flow from operations was $198m, versus $275m. Capital expenditures were $423m in the current quarter, compared to $385m for the December 2011 quarter.
Overall costs per coal ton sold in the 2012 fourth quarter were $48.21, or a decrease of $4.43 from the $52.64 in the fourth quarter of 2011. This is the lowest quarterly cost per ton for any quarter of 2012. Cost containment has been a major focus for CONSOL in 2012, as the company has sought to maintain overall margins in the face of weaker prices for its metallurgical coals.
Costs per ton sold for low-vol coal (produced at the Buchanan longwall mine in Virginia) were $2.86 higher than the prior year’s quarter, due to inventory valuation changes. Price-related royalties and production taxes declined significantly. All other cost categories showed meaningful declines, except for DD&A, which was higher due to increased capital investment and lower volumes.
Costs per ton sold for high-vol coal were $8.23 lower than the prior year’s quarter, as a result of fewer maintenance and repair projects. Additionally, the higher-cost Fola mining operation in West Virginia was idle during the just-ended quarter.
Costs per ton sold for thermal coal were $3.92 lower than the prior year’s quarter, as the higher-cost Fola operation was idle. Additionally, the mines producing high-vol coal had lower straight-time and overtime expenses, lower supply costs, and fewer maintenance and repair projects.
CONSOL produced 14.3 million tons in the fourth quarter, broken down as 0.7 million tons apiece for low-vol met and high-vol met, plus 12.9 million tons of thermal coal. That is against 15.2 million tons of total production in the fourth quarter of 2011, broken down as 1.4 million tons of low-vol met, 1.2 million tons of high-vol met and 12.6 million tons of thermal coal.
In all of 2012, CONSOL sold 56.5 million tons, with sales of 3.7 million low-vol met tons, 3.6 million high-vol met tons, 49.2 million thermal tons and 10.3 million export tons.
Coal Marketing Update
- Low-Vol: Since November 2012, demand for low-vol coal has improved modestly in Asia, South America, Europe, and domestically. After a period of de-stocking in China, CONSOL said customers have re-entered the market to purchase capesize vessels of low-vol coal through the 2013 first quarter. For the Brazilian steel industry, recent changes in monetary, fiscal and tax policies have resulted in improved steel mill utilization. Although economic conditions throughout Europe are challenging, several blast furnaces have re-started operations. These revived blast furnaces have sustained the European demand for Buchanan low-vol coal. Strategically, CONSOL is attempting to diversify its customer base to include more domestic customers. CONSOL has succeeded in obtaining two new domestic customers in 2013.
- High-Vol: CONSOL said its high-vol coal, mostly out of its Pittsburgh seam mines, has been penetrating new end-markets in both the U.S. and internationally. New test cargoes to steel mills in the U.S. and Brazil present opportunities for increased sales, while existing customers have re-affirmed interest to increase their blend of high-vol coal. In the Asian market, CONSOL’s high-vol coal is benefiting from that China’s re-stocking and fiscal stimulus. Shipments of high-vol coal to China resumed in November 2012 and are scheduled to continue through the end of 2013 first quarter. If demand continues, consistent shipments could occur throughout the remainder of 2013, the company noted.
- U.S. Thermal: Under CONSOL’s base case, the company’s Northern Appalachian (NAPP) thermal coal out of several Pittsburgh-seam longwall mines is 100% sold for 2013. However, surge capacity exists to supply incremental volumes if additional demand materializes. Because the early winter has been mild, current PJM-area generator stockpiles are slightly above their five-year average. Normal winter weather has started and CONSOL expects PJM-area generator stockpiles to decline accordingly. Customer demand for contracted coal has been steady.
- Export Thermal: CONSOL expects to continue to broaden its end-markets for its NAPP thermal coal and participate in the growth in world markets. The market for CONSOL’s NAPP thermal coal in Europe remains stable from high natural gas prices, a carbon market which facilitates the use of coal, and uncertainties related to the future of government subsidies for renewable energy. During the 2012 fourth quarter, new markets were established for CONSOL’s Pittsburgh #8 seam thermal coal with customers in the Caribbean Region and in South America. The Asian markets are exhibiting signs of increased demand and pricing. CONSOL expects India to import at least 30 million tons of incremental thermal coal in 2013 based on normal power and domestic production shortages. CONSOL’s high-Btu Pittsburgh seam thermal coal has been successfully used by power producers in India during 2012. For 2013, CONSOL Energy expects 5 million-10 million tons of its coal, across all sales categories, will be exported.
In its sales forecast, CONSOL said it expects to sell 14 million tons of coal in the first quarter of this year, 56.3 million tons in 2013, 61.6 million tons in 2014 and 63.8 million tons in 2015. That it broken down as:
- Low-vol met: 0.9 million tons in the first quarter of 2013, 3.9 million tons in all of 2013, 5 million tons in 2014 and 5.1 million tons in 2015;
- High-vol met: 1.1 million tons in the first quarter of this year, 1.8 million tons in all of 2013 (note that most of that is in the first quarter alone), 4.8 million tons in 2014 and 6.3 million tons in 2015.
- Thermal coal: 11.9 million tons in the first quarter of 2013, 50.1 million tons in all of 2013, 51.1 million tons in 2014 and 51.7 million tons in 2015.
As of Dec. 31, 2011, CONSOL had 12 bituminous coal mining complexes in four states and reports proven and probable coal reserves of 4.5 billion tons. It is also a leading Eastern U.S. gas producer, with proved reserves of 3.5 trillion cubic feet.