(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in conjunction with the Consolidated Financial Statements and corresponding notes included elsewhere in this Form 10-Q. In addition, this Form 10-Q report should be read in conjunction with the Consolidated Financial Statements for the three-year period ended December 31, 2020 included in CONSOL Energy Inc.'s Form 10-K, filed on February 12, 2021. This MD&A contains forward-looking statements and the matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see "Risk Factors" and "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.
All amounts discussed are in millions of U.S. dollars, unless otherwise indicated.
The Company is monitoring the impact of the COVID-19 pandemic ("COVID-19") and has taken, and will continue to take, steps to mitigate the potential risks and impact on the Company and its employees. The health and safety of our employees is paramount. In response to two employees testing positive for COVID-19, the Company temporarily curtailed production at the Bailey Mine for two weeks at the end of March 2020. To date, the Company has experienced a few localized outbreaks, but due, in part, to the health and safety procedures put in place by the Company, we have been able to continue operating without production curtailment. The Company continues to monitor the health and safety of its employees closely in order to limit potential risks to our employees, contractors, family members and the community.
We are considered a critical infrastructure company by the U.S. Department of Homeland Security. As a result, we were exempt from Pennsylvania Governor Tom Wolf's executive order, issued in March 2020, closing all businesses that are not life sustaining until Pennsylvania's phased reopening, which began in the second quarter of 2020. COVID-19 led to an unprecedented decline in coal demand that began in the first quarter of 2020 hit its lowest point in May 2020 and has improved through the first quarter of 2021.
While some government-imposed shut-downs of non-essential businesses in the United States and abroad have been phased out, there is a possibility that such shut-downs may be reinstated after being lifted as COVID-19 continues to spread. Depressed demand for our coal may also result from a general recession or reduction in overall business activity caused by COVID-19. Additionally, some of our customers have already attempted, and may in the future attempt, to invoke force majeure or similar provisions in the contracts they have in place with us in order to avoid taking possession of and paying us for our coal that they are contractually obligated to purchase. A decrease in demand for our coal and the failure of our customers to purchase coal from us that they are obligated to purchase pursuant to existing contracts would have a material adverse effect on our results of operations and financial condition. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak, the pace and effectiveness of vaccination efforts and the effectiveness of actions globally to contain or mitigate its effects. We expect this could continue to negatively impact our results of operations, cash flows and financial condition. The Company will continue to take steps it believes are appropriate to mitigate the impacts of COVID-19 on its operations, liquidity and financial condition.
We are a leading, low-cost producer of high-quality bituminous coal, focused on the extraction and preparation of coal in the Appalachian Basin due to our ability to efficiently produce and deliver large volumes of high-quality coal at competitive prices, the strategic location of our mines and the industry experience of our management team.
Coal from the PAMC is valued because of its high energy content (as measured in Btu per pound), relatively low levels of sulfur and other impurities, and strong thermoplastic properties that enable it to be used in metallurgical as well as thermal applications. We take advantage of these desirable quality characteristics and our extensive logistical network, which is directly served by both the Norfolk Southern and CSX railroads, to aggressively market our product to a broad base of strategically selected, top-performing power plant customers in the eastern United States. We also capitalize on the operational synergies afforded by the CONSOL Marine Terminal to export our coal to industrial, power generation and metallurgical end-users globally.
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Our operations, including the PAMC and the CONSOL Marine Terminal, have consistently generated strong cash flows, even through the COVID-19 pandemic. As of December 31, 2020, the PAMC controls 657.9 million tons of high-quality Pittsburgh seam reserves, enough to allow for more than 20 years of full-capacity production. In addition, we own or control approximately 1.5 billion tons of Greenfield Reserves located in the Northern Appalachian ("NAPP"), the Central Appalachian ("CAPP") and the Illinois Basins ("ILB"), which we believe provide future growth and monetization opportunities. Our vision is to maximize cash flow generation through the safe, compliant, and efficient operation of this core asset base, while strategically reducing debt, returning capital through share buybacks or dividends, and, when prudent, allocating capital toward compelling growth and diversification opportunities.
Our core businesses consist of our:
Pennsylvania Mining Complex: The PAMC, which includes the Bailey Mine, the Enlow Fork Mine, the Harvey Mine and the Central Preparation Plant, has extensive high-quality coal reserves. We mine our reserves from the Pittsburgh No. 8 Coal Seam, which is a large contiguous formation of high-Btu coal that is ideal for high productivity, low-cost longwall operations. The design of the PAMC is optimized to produce large quantities of coal on a cost-efficient basis. We can sustain high production volumes at comparatively low operating costs due to, among other things, our technologically advanced longwall mining systems, logistics infrastructure and safety. All our mines at the PAMC utilize longwall mining, which is a highly automated underground mining technique that produces large volumes of coal at lower costs compared to other underground mining methods.
CONSOL Marine Terminal: Through our subsidiary CONSOL Marine Terminals LLC, we provide coal export terminal services through the Port of Baltimore. The terminal can either store coal or load coal directly into vessels from rail cars. It is also the only major east coast United States coal terminal served by two railroads, Norfolk Southern Corporation and CSX Transportation Inc.
Itmann Mine: Construction of the Itmann Mine, located in Wyoming County, West Virginia, began in the second half of 2019; development mining began in April 2020, and full production is expected upon the completion of a new preparation plant. When fully operational, the Company anticipates approximately 900 thousand tons per year of high-quality, low-vol coking coal capacity.
These low-cost assets and the diverse markets they serve provide us opportunities to generate cash across a wide variety of demand and pricing scenarios. The three mines at the PAMC, which include the Bailey, Enlow Fork and Harvey mines, produce coal from the Pittsburgh No. 8 Coal Seam using longwall mining, a highly automated underground mining technique that produces large volumes of coal at lower costs compared to alternative mining methods. These three mines typically operate four to five longwalls, and the production from all three mines is processed at a single, centralized preparation plant, which is connected via conveyor belts to each mine. The Central Preparation Plant, which can clean and process up to 8,200 raw tons of coal per hour, provides economies of scale while also maintaining the ability to segregate and blend coal based on quality. This infrastructure enables us to tailor our production levels and quality specifications to meet market demands. It also results in a highly productive, low-cost operation as compared to other NAPP coal mines. The PAMC is the most productive and efficient coal mining complex in NAPP. For the year ending December 31, 2020, productivity averaged 7.21 tons of coal per employee hour, compared with an average of 4.90 tons per employee hour for all other currently-operating NAPP longwalls. Our high productivity helps drive a low-cost structure. Our efficiency strengthens our margins throughout the commodity cycle and has allowed us to continue to generate positive margins even in challenging pricing environments.
Coal from the PAMC is versatile in that it can be sold either domestically or abroad, in industrial applications and power generation or as a crossover product in the high-volatile metallurgical coal market. During the first quarter of 2021, we were successful in securing additional coal sales contracts, bringing our contracted position to 20.5 million tons for 2021 and 5.6 million tons for 2022.
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Q1 2021 Highlights:
Coal shipments improve to 6.9 million tons, the highest level since the second quarter of 2019.
Outlook for 2021:
We expect that the PAMC will sell approximately 22 million to 24 million tons.
(1) CONSOL Energy is unable to provide a reconciliation of this guidance to any measures calculated in accordance with GAAP due to the unknown effect, timing and potential significance of certain income statement items.
How We Evaluate Our Operations
Our management team uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability. The metrics include: (i) coal production, sales volumes and average revenue per ton; (ii) cost of coal sold, a non-GAAP financial measure; (iii) cash cost of coal sold, a non-GAAP financial measure;
Cost of coal sold, cash cost of coal sold, average margin per ton sold and average cash margin per ton sold normalize the volatility contained within comparable GAAP measures by adjusting certain non-operating or non-cash transactions. We believe that adjusted EBITDA provides a helpful measure of comparing our operating performance with the performance of other companies that have different financing, capital structures and tax rates than ours. Each of these non-GAAP metrics are used as supplemental financial measures by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;
the ability of our assets to generate sufficient cash flow;
our ability to incur and service debt and fund capital expenditures;
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities; and
the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.
These non-GAAP financial measures should not be considered an alternative to total costs, total coal revenue, net income, operating cash flow or any other measure of financial performance or liquidity presented in accordance with GAAP. These measures exclude some, but not all, items that affect measures presented in accordance with GAAP, and these measures and the way we calculate them may vary from those of other companies. As a result, the items presented below may not be comparable to similarly titled measures of other companies.
Reconciliation of Non-GAAP Financial Measures
We evaluate our cost of coal sold and cash cost of coal sold on an aggregate basis. We define cost of coal sold as operating and other production costs related to produced tons sold, along with changes in coal inventory, both in volumes and carrying values. The cost of coal sold includes items such as direct operating costs, royalty and production taxes, direct administration costs, and depreciation, depletion and amortization costs on production assets. Our costs exclude any indirect costs, such as selling, general and administrative costs, freight expenses, interest expenses, depreciation, depletion and amortization costs on non-production assets and other costs not directly attributable to the production of coal. The cash cost of coal sold includes cost of coal sold less depreciation, depletion and amortization costs on production assets. The GAAP measure most directly comparable to cost of coal sold and cash cost of coal sold is total costs and expenses.
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The following table presents a reconciliation of cost of coal sold and cash cost of coal sold to total costs and expenses, the most directly comparable GAAP financial measure, on a historical basis, for each of the periods indicated (in thousands).
Three Months Ended March 31, 2021 2020 Total Costs and Expenses $ 310,562 $ 286,873 Freight Expense (27,013 ) (3,147 ) Selling, General and Administrative Costs (23,964 ) (17,670 ) Gain on Debt Extinguishment 683 16,833 Interest Expense, net (15,261 ) (15,671 ) Other Costs (Non-Production) (18,246 ) (20,882 ) Depreciation, Depletion and Amortization (Non-Production) (7,883 ) (9,363 ) Cost of Coal Sold $ 218,878 $ 236,973 Depreciation, Depletion and Amortization (Production) (52,014 ) (45,580 ) Cash Cost of Coal Sold $ 166,864 $ 191,393
We define average margin per ton sold as average revenue per ton sold, net of average cost of coal sold per ton. We define average cash margin per ton sold as average revenue per ton sold, net of average cash cost of coal sold per ton. The GAAP measure most directly comparable to average margin per ton sold and average cash margin per ton sold is total coal revenue.
The following table presents a reconciliation of average margin per ton sold and average cash margin per ton sold to total coal revenue, the most directly comparable GAAP financial measure, on a historical basis, for each of the periods indicated (in thousands, except per ton information).
Three Months Ended March 31, 2021 2020 Total Coal Revenue (PAMC Segment) $ 284,465 $ 255,452 Operating and Other Costs 185,110 212,275 Less: Other Costs (Non-Production) (18,246 ) (20,882 ) Total Cash Cost of Coal Sold 166,864 191,393 Add: Depreciation, Depletion and Amortization 59,897 54,943 Less: Depreciation, Depletion and Amortization (Non-Production) (7,883 ) (9,363 ) Total Cost of Coal Sold $ 218,878 $ 236,973 Total Tons Sold (in millions) 6.9 5.9 Average Revenue per Ton Sold $ 41.39 $ 43.16 Average Cash Cost of Coal Sold per Ton 24.44 32.41 Depreciation, Depletion and Amortization Costs per Ton Sold 7.41 7.63 Average Cost of Coal Sold per Ton 31.85 40.04 Average Margin per Ton Sold 9.54 3.12 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 7.41 7.63 Average Cash Margin per Ton Sold $ 16.95 $ 10.75
We define adjusted EBITDA as (i) net income (loss) plus income taxes, net interest expense and depreciation, depletion and amortization, as adjusted for
Three Months Ended March 31, 2021 CONSOL PA Mining Marine Dollars in thousands Complex Terminal Other Total Company Net Income (Loss) $ 42,450 $ 9,149 $ (25,195 ) $ 26,404 Add: Income Tax Expense - - 5,185 5,185 Add: Interest Expense, net 642 1,537 13,082 15,261 Less: Interest Income - - (858 ) (858 ) Earnings (Loss) Before Interest & Taxes (EBIT) 43,092 10,686 (7,786 ) 45,992 Add: Depreciation, Depletion & Amortization 54,781 1,214 3,902 59,897 Earnings (Loss) Before Interest, Taxes and DD&A (EBITDA) $ 97,873 $ 11,900 $ (3,884 ) $ 105,889 Adjustments: Stock-Based Compensation $ 1,312 $ 61 $ 136 $ 1,509 Gain on Debt Extinguishment - - (683 ) (683 ) Total Pre-tax Adjustments 1,312 61 (547 ) 826 Adjusted EBITDA $ 99,185 $ 11,961 $ (4,431 ) $ 106,715
Three Months Ended March 31, 2020 CONSOL PA Mining Marine Dollars in thousands Complex Terminal Other Total Company Net Income (Loss) $ 10,875 $ 7,510 $ (15,910 ) $ 2,475 Add: Income Tax Expense - - 1,908 1,908 Add: Interest Expense, net - 1,544 14,127 15,671 Less: Interest Income - - (244 ) (244 ) Earnings (Loss) Before Interest & Taxes (EBIT) 10,875 9,054 (119 ) 19,810 Add: Depreciation, Depletion & Amortization 48,418 1,257 5,268 54,943 Earnings Before Interest, Taxes and DD&A (EBITDA) $ 59,293 $ 10,311 $ 5,149 $ 74,753 Adjustments: Stock/Unit-Based Compensation $ 4,286 $ 243 $ 485 $ 5,014 Gain on Debt Extinguishment - - (16,833 ) (16,833 ) Total Pre-tax Adjustments 4,286 243 (16,348 ) (11,819 ) Adjusted EBITDA $ 63,579 $ 10,554 $ (11,199 ) $ 62,934
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Results of Operations
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
Net Income Attributable to CONSOL Energy Inc. Shareholders
CONSOL Energy reported net income attributable to CONSOL Energy Inc. shareholders of $26 million for the three months ended March 31, 2021, compared to $2 million for the three months ended March 31, 2020.
CONSOL Energy's business consists of the Pennsylvania Mining Complex and the CONSOL Marine Terminal segments, as well as various corporate and other business activities that are not allocated to the PAMC or the CONSOL Marine Terminal segments. The other business activities include the development of the Itmann Mine, the Greenfield Reserves, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.
The PAMC division's principal activities consist of mining, preparation and marketing of thermal coal, sold primarily to industrial end-users, power generators and metallurgical end-users. The division also includes selling, general and administrative costs, as well as various other activities assigned to the PAMC division, but not included in the cost components on a per unit basis.
The PAMC division had earnings before income tax of $42 million for the three months ended March 31, 2021, compared to earnings before income tax of $11 million for the three months ended March 31, 2020. Variances are discussed below.
Three Months Ended March 31, (in millions) 2021 2020 Variance Revenue: Coal Revenue $ 284 $ 255 $ 29 Freight Revenue 27 3 24 Gain on Sale of Assets 1 - 1 Miscellaneous Other Income - 11 (11 ) Total Revenue and Other Income 312 269 43 Cost of Coal Sold: Operating Costs 167 191 (24 ) Depreciation, Depletion and Amortization 52 46 6 Total Cost of Coal Sold 219 237 (18 ) Other Costs: Other Costs 1 1 - Depreciation, Depletion and Amortization 3 3 - Total Other Costs 4 4 - Freight Expense 27 3 24 Selling, General and Administrative Costs 19 14 5 Interest Expense, net 1 - 1 Total Costs and Expenses 270 258 12 Earnings Before Income Tax $ 42 $ 11 $ 31
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Coal Production The table below presents total tons produced (in thousands) from the Pennsylvania Mining Complex for the periods indicated: Three Months Ended March 31, Mine 2021 2020 Variance Bailey 3,779 2,804 975 Enlow Fork 1,996 2,375 (379 ) Harvey 1,244 795 449 Total 7,019 5,974 1,045
Coal production was 7.0 million tons for the three months ended March 31, 2021, compared to 6.0 million tons for the three months ended March 31, 2020. Coal production increased at the Bailey and Harvey mines primarily due to improved demand for the Company's coal. This increase was offset, in part, by a decrease in coal production at the Enlow Fork mine due to operating only one of its two longwalls for the majority of the three months ended March 31, 2021. Overall demand for the Company's coal during the three months ended March 31, 2020 was impacted by the COVID-19 pandemic. However, demand has steadily improved since the low point in the second quarter of 2020. The first quarter of 2021 contained no longwall moves, which allowed the Company to match production with demand.
The PAMC division's coal revenue and cost components on a per unit basis for the three months ended March 31, 2021 and 2020 are detailed in the table below. The PAMC division's operations also include various costs such as selling, general and administrative, freight and other costs not included in the unit cost analysis because these costs are not directly associated with coal production.
Three Months Ended March 31, 2021 2020 Variance Total Tons Sold (in millions) 6.9 5.9 1.0 Average Revenue per Ton Sold $ 41.39 $ 43.16 $ (1.77 ) Average Cash Cost of Coal Sold per Ton (1) $ 24.44 $ 32.41 $ (7.97 ) Depreciation, Depletion and Amortization Costs per Ton Sold (Non-Cash Cost) 7.41 7.63 (0.22 ) Average Cost of Coal Sold per Ton (1) $ 31.85 $ 40.04 $ (8.19 ) Average Margin per Ton Sold (1) $ 9.54 $ 3.12 $ 6.42 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 7.41 7.63 (0.22 ) Average Cash Margin per Ton Sold (1) $ 16.95 $ 10.75 $ 6.20
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May 04, 2021
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