Pittsburgh-based gas and coal producer CONSOL Energy (NYSE: CNX) on April 26 reported a net loss from continuing operations of $50 million for the first quarter, and a net loss attributable to CONSOL Energy shareholders of $98 million.
“CONSOL continues to focus on executing its free cash flow plan,” said Nicholas J. DeIuliis, president and CEO. “Through continuing to reduce unit costs, benefiting from capital efficiency improvements, and selectively monetizing assets, CONSOL generated $449 million of free cash flow, which includes $35 million of organic free cash flow from continuing operations when excluding the recent sale of the Buchanan Mine. Our free cash flow plan has further strengthened our liquidity position and balance sheet, while positioning us for future success.”
During the first quarter, CONSOL Energy announced the sale of the Buchanan longwall mine in southwest Virginia, along with certain other metallurgical coal reserves. The total transaction value was approximately $460 million: $425 million in cash, including $403 million of cash received at closing and $22 million of cash held in an escrow account for up to two years; $23 million in net accounts receivable/payables that CONSOL will receive following the close of the transaction; and $12 million associated with legacy liabilities that the buyer assumed.
In addition, for Buchanan Mine coal sold outside the U.S. and Canada during the five years following closing, the buyer agreed to pay CONSOL Energy a royalty of 20% of any excess of the gross sales price per ton over the following amounts: year one, $75 per ton; year two, $78.75 per ton; year three, $82.69 per ton; year four, $86.82 per ton; and year five, $91.16 per ton. This earn-out provision provides CONSOL the opportunity to capture future upside if metallurgical coal prices recover.
Following the end of the first quarter, CONSOL used the cash proceeds from the Buchanan sale to pay down its revolving debt in an effort to increase liquidity and further de-lever the company. CONSOL Energy estimated the full year 2016 EBITDA contribution associated with the Buchanan Mine, net of the carrying costs of the other metallurgical coal assets included in the transaction, to be approximately $20 million-$25 million.
“The Buchanan sale is significant for a number of reasons,” said DeIuliis. “Not only does this divestiture support our corporate strategy, it also brought forward substantial value, at a premium multiple valuation. That said, this transaction was a win-win for both us and the buyer, who will benefit from this premier mine becoming their flagship operation. For CONSOL, the sale of Buchanan marks another large step towards executing our strategy of becoming a pure-play E&P company.”
On April 20, 2016, the company’s lending group reaffirmed the bank facility’s $2.0 billion borrowing base. “The reaffirmation marks another step to further maintain our already strong liquidity position,” commented David M. Khani, executive vice president and CFO. “We appreciate the support of our lenders who have recognized how we have differentiated ourselves through our strong asset base and organic free cash flow plan.”
CONSOL Energy’s total Coal Division sold 5.7 million tons from continuing operations in the 2016 first quarter, compared to 7.0 million tons during the year-earlier quarter.
During the first quarter of 2016, the Pennsylvania Operations total unit costs were $33.16 per ton, compared to $42.62 per ton in the year-earlier quarter, despite sales tons declining by approximately 18% over the same period.
As reported by affiliate CNX Coal Resources LP (CNXC) in its first quarter 2016 earnings press release, dated April 25: “In January 2016, we returned to running our mines on a more consistent schedule to achieve productivity improvements, despite running the risk of potentially selling some lower-priced tons in the export markets. Our strategy worked as expected, leading to improved mine consistency and better 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 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 costs 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 a slight improvement in coal shipments in the second quarter coupled with a slight increase in cost of coal sold, compared to the first quarter, due to four expected longwall moves.”
During the quarter, CONSOL’s active coal operations generated $89 million of cash from continuing operations before capital expenditures.
Excluding the discontinued Virginia Operation’s (the Buchanan Mine) 1.1 million tons sold in the first quarter, CONSOL now expects annual 2016 consolidated total Coal Division sales to be approximately 23.9 million-27.4 million tons, which includes 2016 estimated consolidated total sales for Pennsylvania Operations of 22.5 million-25.5 million tons.
CONSOL Energy expects 2016 total consolidated Coal Division capital expenditures to now be between $105 million-$125 million, which includes Pennsylvania Operations capital expenditures of $90 million-$100 million. The Coal Division’s reduction in capital expenditures were driven primarily from the deferral of spending associated with the coal refuse disposal area for one year, due to existing capacity and timing needed for construction. On a normalized basis, the Coal Division expects maintenance of production capital of $5-$6 per ton.