(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. 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. 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.
Over the past several quarters, the general business environment has improved, resulting in higher demand for our product as government-imposed shut-downs and other COVID-19-related restrictions have been eased. However, imbalances in the global supply chain coupled with inflationary pressures have had both positive and negative impacts to our operations. The extent to which COVID-19 may impact our business depends on future developments, which are highly uncertain and unpredictable, including Presidential mandates, federal and state regulations, new information concerning the severity of COVID-19 variants, 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 impact our results of operations, cash flows and financial condition. The Company will continue to take steps it believes are appropriate to mitigate the negative impacts of COVID-19 on its operations, liquidity and financial condition.
Additionally, while many 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. Depressed demand for our coal may also result from a general recession or reduction in overall business activity caused by COVID-19. 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 and hit its lowest point in May 2020.
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. We are also expanding into the metallurgical coal market through the development of our Itmann Mine in West Virginia, which we expect to be fully operational following construction of a preparation plant near the mine site, which is planned for completion during the second half of 2022.
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, industrial and 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 throughout 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 following the recommission and relocation of a recently purchased preparation plant near the mine site, which is planned for completion during the second half of 2022. When fully operational, the Company anticipates approximately 900 thousand product tons per year of high-quality, low-vol coking coal production from the Itmann Mine, with an anticipated mine life of 20+ years. The Company has also expanded the capacity of the preparation plant being recommissioned to include a highly efficient rail loadout and the capability for processing up to an additional 750 thousand to 1 million third-party product tons annually. This third-party processing revenue is expected to provide an additional avenue of growth for the Company.
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 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. To our knowledge, 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. Our marketing team sold 5.4 million tons of coal during the third quarter of 2021 at an average revenue per ton of $47.46, compared to 4.5 million tons at an average revenue per ton of $40.55 in the year-ago period. Demand for our product has remained robust and was improved compared to the prior-year quarter, which was impacted by the COVID-19 demand decline in early 2020.
In the domestic market, the pricing environment continued to significantly improve during the third quarter of 2021 due to higher natural gas prices, constrained coal supply and economic recovery. The higher natural gas prices have led to a larger percentage of generation coming from coal-fired power plants, and as such, we believe that coal inventories are on the decline and will continue to decline if alternative fuel costs remain elevated. Consistent with these trends, the majority of our domestic customer stockpiles are below target levels for this time of year. As such, we have seen domestic customer demand increase and have remained opportunistic in securing additional coal sales contracts for 2022 and 2023, bringing our contracted positions for those years to 20.2 million and 5.8 million tons, respectively.
On the export front, seaborne thermal coal markets continued to strengthen throughout the third quarter of 2021. API2 spot prices continued to move substantially higher in the third quarter of 2021, ending the third quarter of 2021 improved 193% compared to the third quarter of 2020.
Q3 2021 Highlights:
Coal shipments of 5.4 million tons.
Guidance and Outlook for 2021:
We expect that the PAMC will sell approximately 23.5 million to 24.5 million tons.
(1) Average cash cost of coal sold per ton is a non-GAAP financial measure. 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 cash cost of coal sold per ton, 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.
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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. Cost of coal sold excludes 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. We define average cash cost of coal sold per ton as cash cost of coal sold divided by tons sold. The GAAP measure most directly comparable to cost of coal sold, cash cost of coal sold and average cash cost of coal sold per ton is total costs and expenses.
The following table presents a reconciliation of cost of coal sold, cash cost of coal sold and average cash cost of coal sold per ton to total costs and expenses, 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total Costs and Expenses $ 303,059 $ 246,661 $ 905,501 $ 724,841 Less: Freight Expense (19,348 ) (12,909 ) (72,371 ) (19,141 ) Less: Selling, General and Administrative Costs (22,476 ) (11,117 ) (68,982 ) (39,726 ) Less: (Loss) Gain on Debt Extinguishment (132 ) 1,078 657 17,911 Less: Interest Expense, net (16,045 ) (15,723 ) (47,493 ) (46,116 ) Less: Other Costs (Non-Production) (22,610 ) (22,994 ) (51,706 ) (100,707 ) Less: Depreciation, Depletion and Amortization (Non-Production) (7,976 ) (9,327 ) (20,894 ) (35,211 ) Cost of Coal Sold $ 214,472 $ 175,669 $ 644,712 $ 501,851 Less: Depreciation, Depletion and Amortization (Production) (48,001 ) (45,632 ) (147,179 ) (120,846 ) Cash Cost of Coal Sold $ 166,471 $ 130,037 $ 497,533 $ 381,005 Total Tons Sold (in millions) 5.4 4.5 18.1 12.8 Average Cost of Coal Sold per Ton $ 39.71 $ 38.70 $ 35.53 $ 39.25 Less: Depreciation, Depletion and Amortization Costs per Ton Sold 9.07 10.06 8.08 9.37 Average Cash Cost of Coal Sold per Ton $ 30.64 $ 28.64 $ 27.45 $ 29.88
We evaluate our average margin per ton sold and average cash margin per ton sold on a per-ton basis. 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total Coal Revenue (PAMC Segment) $ 256,326 $ 184,066 $ 799,274 $ 541,545 Operating and Other Costs 189,081 153,031 549,239 481,712 Less: Other Costs (Non-Production) (22,610 ) (22,994 ) (51,706 ) (100,707 ) Total Cash Cost of Coal Sold 166,471 130,037 497,533 381,005 Add: Depreciation, Depletion and Amortization 55,977 54,959 168,073 156,057 Less: Depreciation, Depletion and Amortization (Non-Production) (7,976 ) (9,327 ) (20,894 ) (35,211 ) Total Cost of Coal Sold $ 214,472 $ 175,669 $ 644,712 $ 501,851 Total Tons Sold (in millions) 5.4 4.5 18.1 12.8 Average Revenue per Ton Sold $ 47.46 $ 40.55 $ 44.05 $ 42.35 Average Cash Cost of Coal Sold per Ton 30.64 28.64 27.45 29.88 Depreciation, Depletion and Amortization Costs per Ton Sold 9.07 10.06 8.08 9.37 Average Cost of Coal Sold per Ton 39.71 38.70 35.53 39.25 Average Margin per Ton Sold 7.75 1.85 8.52 3.10 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 9.07 10.06 8.08 9.37 Average Cash Margin per Ton Sold $ 16.82 $ 11.91 $ 16.60 $ 12.47
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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 September 30, 2021 CONSOL PA Mining Marine Dollars in thousands Complex Terminal Other Total Company Net (Loss) Income $ (130,599 ) $ 4,506 $ 12,304 $ (113,789 ) Less: Income Tax Benefit - - (40,258 ) (40,258 ) Add: Interest Expense, net 305 1,535 14,205 16,045 Less: Interest Income - - (737 ) (737 ) (Loss) Earnings Before Interest & Taxes (EBIT) (130,294 ) 6,041 (14,486 ) (138,739 ) Add: Depreciation, Depletion & Amortization 50,837 1,202 3,938 55,977 (Loss) Earnings Before Interest, Taxes and DD&A (EBITDA) $ (79,457 ) $ 7,243 $ (10,548 ) $ (82,762 ) Adjustments: Stock-Based Compensation $ 1,643 $ 76 $ 169 $ 1,888 Loss on Debt Extinguishment - - 132 132 Unrealized Loss on Commodity Derivative Instruments 147,306 - - 147,306 Total Pre-tax Adjustments 148,949 76 301 149,326 Adjusted EBITDA $ 69,492 $ 7,319 $ (10,247 ) $ 66,564
Three Months Ended September 30, 2020 CONSOL PA Mining Marine Dollars in thousands Complex Terminal Other Total Company Net (Loss) Income $ (6,930 ) $ 8,411 $ (10,841 ) $ (9,360 ) Add: Income Tax Expense - - 5,918 5,918 Add: Interest Expense, net 367 1,541 13,815 15,723 Less: Interest Income - - (76 ) (76 ) (Loss) Earnings Before Interest & Taxes (EBIT) (6,563 ) 9,952 8,816 12,205 Add: Depreciation, Depletion & Amortization 49,944 1,283 3,732 54,959 Earnings Before Interest, Taxes and DD&A (EBITDA) $ 43,381 $ 11,235 $ 12,548 $ 67,164 Adjustments: Stock/Unit-Based Compensation $ 1,891 $ 107 $ 214 $ 2,212 Gain on Debt Extinguishment - - (1,078 ) (1,078 ) Total Pre-tax Adjustments 1,891 107 (864 ) 1,134 Adjusted EBITDA $ 45,272 $ 11,342 $ 11,684 $ 68,298
For the Nine Months Ended September 30, 2021 PA Mining CONSOL Marine Dollars in thousands Complex Terminal Other Total Company Net (Loss) Income $ (81,983 ) $ 21,836 $ (23,066 ) $ (83,213 ) Less: Income Tax Benefit - - (43,966 ) (43,966 ) Add: Interest Expense, net 1,425 4,608 41,460 47,493 Less: Interest Income (36 ) - (2,370 ) (2,406 ) (Loss) Earnings Before Interest & Taxes (EBIT) (80,594 ) 26,444 (27,942 ) (82,092 ) Add: Depreciation, Depletion & Amortization 155,787 3,616 8,670 168,073 Earnings (Loss) Before Interest, Taxes and DD&A (EBITDA) $ 75,193 $ 30,060 $ (19,272 ) $ 85,981 Adjustments: Stock/Unit-Based Compensation $ 4,007 $ 184 $ 416 $ 4,607 Gain on Debt Extinguishment - - (657 ) (657 ) Pension Settlement - - 22 22 Unrealized Loss on Commodity Derivative Instruments 167,743 - - 167,743 Total Pre-tax Adjustments 171,750 184 (219 ) 171,715 Adjusted EBITDA $ 246,943 $ 30,244 $ (19,491 ) $ 257,696
For the Nine Months Ended September 30, 2020 PA Mining CONSOL Marine Dollars in thousands Complex Terminal Other Total Company Net (Loss) Income $ (18,405 ) $ 23,671 $ (33,214 ) $ (27,948 ) Add: Income Tax Expense - - 143 143 Add: Interest Expense, net 894 4,627 40,595 46,116 Less: Interest Income - - (442 ) (442 ) . . .
Nov 02, 2021
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