(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, 2021 included in CONSOL Energy Inc.'s Form 10-K, filed on February 11, 2022. 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.
February 24, 2022 marked a significant escalation in the Russia-Ukraine war. The extent and duration of the military conflict involving Russia and Ukraine, resulting sanctions and future market or supply disruptions in the region, are impossible to predict, but could be significant and may have a severe adverse effect on the region. Globally, various governments have banned imports from Russia including commodities such as oil, natural gas and coal. These events have caused volatility in the aforementioned commodity markets. This volatility, including market expectations of potential changes in coal prices and inflationary pressures on steel products, may significantly affect market prices and overall demand for our coal and the cost of supplies and equipment, as well as the prices of, and demand for, competing sources of energy for our electric power plant customers, like natural gas. Although we have not experienced a material adverse impact from the war and the resulting sanctions as of the date of this report, we are closely monitoring the potential effects on the market.
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.
Additionally, 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, largely driven by government-imposed shutdowns of non-essential businesses. 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. While many government-imposed shutdowns of non-essential businesses in the United States and abroad have been phased out, in significant population centers in the People's Republic of China lock-down orders have been re-imposed and there is a possibility that such shut-downs may be reinstated elsewhere. Depressed demand for our coal may also result from a general recession or reduction in overall business activity caused by COVID-19.
Over the past year, the general business environment has improved, resulting in higher demand for our product as government-imposed shutdowns 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.
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.
Our most significant assets are the PAMC and the CONSOL Marine Terminal. 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 power generation 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 and logistical advantages afforded by the CONSOL Marine Terminal, which is likewise served by both the Norfolk Southern and CSX railroads, to export our coal to industrial, power generation and metallurgical end-users globally.
We are also expanding our presence in the metallurgical coal market through the development of our Itmann Mine in West Virginia, which we expect to be fully operational following the relocation and recommissioning of a recently purchased preparation plant, which is planned for completion during the second half of 2022.
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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, 2021, the PAMC controls 612.1 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 1.4 billion tons of Greenfield Reserves and Resources 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 relocation and recommissioning of a recently purchased preparation plant, 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 preparation plant being recommissioned will also 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, 2021, productivity averaged 8.15 tons of coal per employee hour, compared with an average of 5.70 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.
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Q1 2022 Highlights:
Coal shipments of 6.5 million tons.
Outlook for 2022:
We expect that the PAMC will sell approximately 23 million to 25 million tons in fiscal year 2022. We expect PAMC average realized coal revenue per ton sold, an operating ratio
(1) Average realized coal revenue per ton sold and average cash cost of coal sold per ton are operating ratios derived from non-GAAP financial measures. 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 and sales volumes; (ii) realized coal revenue, a non-GAAP financial measure;
Realized coal revenue, average realized coal revenue per ton sold, 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. We believe realized coal revenue and average realized coal revenue per ton sold provide useful information to investors because they better reflect our earnings by including the settled costs (or gains) of our coal-related derivatives for the period. 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 March 31, 2022 2021 Total Costs and Expenses $ 366,501 $ 310,562 Less: Freight Expense (38,389 ) (27,013 ) Less: Selling, General and Administrative Costs (37,149 ) (23,964 ) Less: (Loss) Gain on Debt Extinguishment (2,122 ) 683 Less: Interest Expense, net (14,352 ) (15,261 ) Less: Other Costs (Non-Production) (23,434 ) (18,246 ) Less: Depreciation, Depletion and Amortization (Non-Production) (7,869 ) (7,883 ) Cost of Coal Sold $ 243,186 $ 218,878 Less: Depreciation, Depletion and Amortization (Production) (48,085 ) (52,014 ) Cash Cost of Coal Sold $ 195,101 $ 166,864 Total Tons Sold (in millions) 6.5 6.9 Average Cost of Coal Sold per Ton $ 37.48 $ 31.85 Less: Depreciation, Depletion and Amortization Costs per Ton Sold 7.57 7.41 Average Cash Cost of Coal Sold per Ton $ 29.91 $ 24.44
We evaluate our average realized coal revenue per ton sold, average margin per ton sold and average cash margin per ton sold on a per-ton basis. We define average realized coal revenue per ton sold as total coal revenue, net of settlements of commodity derivatives divided by tons sold. We define average margin per ton sold as average realized coal revenue per ton sold, net of average cost of coal sold per ton. We define average cash margin per ton sold as average realized coal revenue per ton sold, net of average cash cost of coal sold per ton. The GAAP measure most directly comparable to average realized coal revenue per ton sold, average margin per ton sold and average cash margin per ton sold is total coal revenue.
The following table presents a reconciliation of average realized coal revenue per ton sold, 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, 2022 2021 Total Coal Revenue (PAMC Segment) $ 472,960 $ 284,465 Add: Settlements of Commodity Derivatives (86,252 ) - Total Realized Coal Revenue 386,708 284,465 Operating and Other Costs 218,535 185,110 Less: Other Costs (Non-Production) (23,434 ) (18,246 ) Total Cash Cost of Coal Sold 195,101 166,864 Add: Depreciation, Depletion and Amortization 55,954 59,897 Less: Depreciation, Depletion and Amortization (Non-Production) (7,869 ) (7,883 ) Total Cost of Coal Sold $ 243,186 $ 218,878 Total Tons Sold (in millions) 6.5 6.9 Average Realized Coal Revenue per Ton Sold $ 59.60 $ 41.39 Average Cash Cost of Coal Sold per Ton 29.91 24.44 Depreciation, Depletion and Amortization Costs per Ton Sold 7.57 7.41 Average Cost of Coal Sold per Ton 37.48 31.85 Average Margin per Ton Sold 22.12 9.54 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 7.57 7.41 Average Cash Margin per Ton Sold $ 29.69 $ 16.95
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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
The following tables present a reconciliation of adjusted EBITDA to net income
Three Months Ended March 31, 2022 CONSOL Marine PAMC Terminal Other Total Company Net Income (Loss) $ 2,097 $ 11,613 $ (18,160 ) $ (4,450 ) Less: Income Tax Benefit - - (3,522 ) (3,522 ) Add: Interest Expense, net 189 1,531 12,632 14,352 Less: Interest Income (415 ) - (914 ) (1,329 ) Earnings (Loss) Before Interest & Taxes (EBIT) 1,871 13,144 (9,964 ) 5,051 Add: Depreciation, Depletion & Amortization 50,956 1,165 3,833 55,954 Earnings (Loss) Before Interest, Taxes and DD&A (EBITDA) $ 52,827 $ 14,309 $ (6,131 ) $ 61,005 Adjustments: Stock-Based Compensation $ 3,529 $ 168 $ 504 $ 4,201 Loss on Debt Extinguishment - - 2,122 2,122 Unrealized Mark-to-Market Loss on Commodity Derivative Instruments 101,902 - - 101,902 Total Pre-tax Adjustments 105,431 168 2,626 108,225 Adjusted EBITDA $ 158,258 $ 14,477 $ (3,505 ) $ 169,230
Three Months Ended March 31, 2021 CONSOL Marine PAMC 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
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Results of Operations: Three Months Ended March 31, 2022 Compared with the Three Months Ended March 31, 2021
Net (Loss) Income
CONSOL Energy reported a net loss of $4 million for the three months ended March 31, 2022, compared to net income of $26 million for the three months ended March 31, 2021. CONSOL Energy reported an adjusted EBITDA of $169 million for the three months ended March 31, 2022, compared to an adjusted EBITDA of $107 million for the three months ended March 31, 2021. The significant contributors to adjusted EBITDA are realized coal revenue and cash cost of coal sold, which are discussed below.
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 and Resources, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.
The PAMC segment's principal activities consist of mining, preparation and marketing of bituminous coal, sold primarily to power generators, industrial end-users and metallurgical end-users. The segment also includes selling, general and administrative costs, as well as various other activities assigned to the PAMC segment, but not included in the cost components on a per unit basis.
The PAMC segment had net income of $2 million for the three months ended March 31, 2022, compared to net income of $42 million for the three months ended March 31, 2021. The PAMC segment had adjusted EBITDA of $158 million for the three months ended March 31, 2022, compared to adjusted EBITDA of $99 million for the three months ended March 31, 2021. Included in the 2022 adjusted EBITDA were settlements of commodity derivatives at a loss of $86 million (see Note 14 - Derivatives in the Notes to the Unaudited Consolidated Financial Statements in . . .
May 03, 2022
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