CNX Coal Resources LP (NYSE: CNXC), which co-owns three longwall mines in Pennsylvania with sponsor CONSOL Energy (NYSE: CNX), on April 25 reported first quarter net income of $2.5 million and adjusted EBITDA of $13.1 million.
“The CNXC team delivered excellent operational performance during the first quarter of 2016 and helped offset declining cash margins in the face of challenging coal markets and further deterioration in coal prices,” said Jimmy Brock, Chief Executive Officer of CNX Coal Resources GP LLC. “Specifically, the cash cost per ton in the first quarter was the lowest since first quarter of 2009, despite the inconsistent customer shipments that we noted in January. Our performance not only highlights the ability of the Pennsylvania mining complex to adapt in a challenging commodity price environment, but also to remain competitive as the U.S. coal market continues to reshape.
“As expected, the first quarter of 2016 began with abnormally low shipment volumes in January and February. However, we saw some improvements in March, which allowed us to have near-record production at some of our longwalls. Our cost structure allowed us to continue to remain profitable in spite of less than favorable pricing during the quarter.”
Sales & Marketing
Despite the challenging coal market and high customer inventories, the marketing team was successful in improving overall coal shipments throughout the quarter. As expected, some customer deliveries have been slower than usual but the marketing team continues to work with those accounts.
In the first quarter of 2016, CNX Coal Resources successfully tested Bailey mine coal at two new customer plants and is in active negotiations for additional term business. During the first quarter of 2016, it sold 1.1 million tons to 39 different end users domestically and internationally. For the remainder of 2016, it continues to expect a gradual recovery in shipments at some of the customers as they normalize their inventories while competing with low natural gas prices. This could result in the company selling some coal in the spot market, which could weigh on realizations due to the changing customer mix.
According to the most recent estimates published by the U.S. Energy Information Administration in its short term energy outlook, U.S. coal demand declined approximately 15%, while industry-wide coal production declined almost 31% in the first quarter of 2016 compared to year-earlier quarter. The company believes that given a normal summer, this decline in industry-wide production may help normalize inventory and set the stage for a recovery in coal prices. In the interim, it will continue to focus on building our contract book and running its mines as safely and efficiently as possible. To that extent and including expectations of carryover tons from 2016, CNXC has solid contractual sales positions for 2017 and 2018 of 70% and 52%, respectively, based on a 5.2 million ton production run rate.
CNXC has named Jim McCaffrey to lead the Coal Sales & Marketing team. McCaffrey will have sole responsibility for the coal sales and marketing for the Pennsylvania mining complex. McCaffrey has led the marketing efforts for coal from the Pennsylvania mining complex since 2009. He joined CONSOL Energy in 1976 and spent 27 years in operations before transitioning to the corporate coal sales and marketing team in 2003.
Operational Update and Outlook
In January 2016, CNXC said it returned to running its mines on a more consistent schedule to achieve productivity improvements, even if it resulted in some lower-priced sales in the export markets. “Our strategy worked as expected, leading to improved mine consistency and improving margins as the quarter advanced, with exports being able to absorb surplus mine production. During the first quarter of 2016, CNXC also made several operational adjustments including idling of one longwall, reducing staffing levels and realigning employee benefits. All of these steps resulted in a more consistent operating schedule at the mines, reduced labor cost and improved productivity. Productivity for the first quarter, as measured by tons per employee-hour, improved by 14% compared to the year-ago period, despite the reduced number of longwalls in operation. Looking forward, CNXC expects slight improvement in the coal shipments in the second quarter coupled with a slight increase in cost of coal sold, compared to the first quarter, due to four scheduled longwall moves.”
First Quarter Summary
For its 20% undivided interest in the Pennsylvania mining complex, CNXC sold 1.1 million tons of coal during the first quarter of 2016. Total production declined to 1.1 million tons compared to 1.3 million tons produced in the same quarter of 2015 as CNXC aligned production with market conditions.
During the first quarter, CNXC sold approximately 0.3 million tons of coal in export market compared to 0.4 million tons in same quarter of 2015.
As previously announced overall sales were impacted by weak winter burn and reduced coal generation weighing on the timing of shipments.
Total unit costs for coal sold in the quarter were $33.16 per ton, compared to $42.62 per ton in the year-earlier quarter. The improved cost performance was driven by improved productivity, reduced staffing levels and realignment of employee benefits, offset by lower production due to inconsistent shipment schedules.
Guidance and Outlook
Based on its current expectations, CNXC updated its 2016 outlook for coal sales, adjusted EBITDA and maintenance capital expenditures.
- Coal sales of 4.5 million-5.1 million tons
- Adjusted EBITDA of $59-$69 million
- Maintenance capital expenditures of $18 million-$20 million
CNX Coal Resources is a growth-oriented master limited partnership recently formed by CONSOL Energy to manage and further develop all of CONSOL’s active thermal coal operations in Pennsylvania. Its initial assets include a 20% undivided interest in, and operational control over, CONSOL’s Pennsylvania mining complex, which consists of three underground mines (Bailey, Enlow Fork and Harvey) and related infrastructure.