CONSOL Energy Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good morning, and welcome to the CONSOL Energy Fourth Quarter 2020 Earnings Call. All participants will be in a listen-only mode. After this presentation, there will be an opportunity to ask questions. Please note that, this event is being recorded. I would like to turn the conference over to Mr. Nathan Tucker, Director of Finance and Investor Relations. Please go ahead.

[Nathan Tucker:]

Thank you, Nick, and good morning, everyone. Welcome to CONSOL Energy's Fourth Quarter 2020 Earnings Conference Call. Any forward-looking statements or comments we make about future expectations are subject to some risks, which we have outlined in our press releases and our SEC filings and are considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We do not undertake any obligations of updating any forward-looking statements for future events or otherwise. We will also be discussing certain non-GAAP financial measures, which are defined and reconciled to comparable GAAP financial measures in our press releases and furnished to the SEC on Form 8-K. You can also find additional information regarding the companies on our websites www.consolenergy.com.

[Jimmy Brock:]

Thank you, Nate, and good morning, everyone. Let me start by stating the obvious. 2020 was an extremely difficult year, as the demand for our product was first reduced due to a warmer-than-normal winter and this was then further exacerbated by the unprecedented decline in global energy demand and the disruption of international supply chains, due to the COVID-19 pandemic. However, I am very pleased with our resolve as the team remains extremely proactive and we managed to achieve many milestones and advance our strategic objectives even in the midst of a very challenging situation. We moved early in 2020 to amend our credit agreement and secured covenant relaxations with our banks, implemented multiple cost and CapEx reduction targets, executed several transactional opportunities to bolster our liquidity and capped off the year by completing the CCR merger with overwhelming shareholder support. We made net payments of $67 million on our outstanding debt in 2020, despite the reduced earnings versus 2019. Finally, we generated $53 million of free cash flow in 2020, which we believe is a tremendous accomplishment in the midst of the global pandemic. I'm extremely proud of the execution of our team, as we navigated through the pandemic in 2020, and we believe we've set ourselves up for success as we head into 2021 and beyond. Let me now provide you with a brief recap of 2020, and how it positions us for success going forward. First, on the ESG front, I am proud to announce that the Metallurgical Coal Producer Association awarded us the 2020 Excellent and Mining Award for the best completed refuse field at one of our legacy operations. This highlights our environmental commitment to the communities we operate in. We also won the West Virginia Mountaineer Guardian Safety Award for our underground operations at the Itmann mine.

[Mitesh Thakkar:]

Thank you Jimmy, and good morning everyone. Let me start with an update on our liability management efforts in the context of our capital allocation strategy. I will then review our financial results for 2020 and introduce our 2021 guidance. Over the past year, our financial priority has been very clear, to maintain strong liquidity, reduce our outstanding debt and improve the risk profile of our balance sheet. We have remained laser focused on the strategy and have achieved multiple milestones throughout 2020. We started the year by recognizing a need to reduce discretionary spending to help maintain strong liquidity. We reduced PAMC CapEx by more than 50% compared to 2019 levels, deferred the majority of our growth CapEx at the Itmann metallurgical coal mine and allocated those dollars to debt reduction. We moved early in the year to work with our banking partners to amend our credit agreement and secure eight quarters of covenant relaxation. This brought us a lot of time to execute several value enhancing transactions throughout the year, while we maintain strong liquidity levels. We also negotiated an ability to repurchase our second-lien notes, without a leverage test and strategically captured the discounts offered in the marketplace. For the year of 2020, we deployed $32 million of capital to retire approximately $54 million in face value of our second lien notes at a weighted average discount to par of approximately 41%. This turned out to be an excellent use of capital for us, as our second lien prices have rallied back to over $89, compared to our weighted average buyback price in 2020 of approximately $59. This represents an annual return of approximately 27%, if held-to-maturity through 2025 and an annual interest expense reduction of approximately $6 million. We believe these below par repurchases were credit positive and liquidity enhancing in the long run. In aggregate, we spent approximately $86 million in 2020, towards our outstanding debt reduction before accounting for a net $19 million in proceeds from equipment financing. We also successfully tapped alternative sources of capital in 2020 by taking advantage of a strong equipment financing market and raised $60 million of new capital in the year at a weighted average interest rate of 6%.

[Jimmy Brock:]

Thank you, Mitesh. Before we move on to the Q&A session, let me take this opportunity to lay out some of our priorities for 2021. First and foremost, our strategy has always prioritized a strong balance sheet and 2021 will be no different. Access to capital for coal companies has been shrinking over the past several years and we anticipate this trend will only worsen. Therefore, we will continue to prioritize our main objective of reducing our absolute debt levels by the time our Term Loan B matures in 2024. Second, despite the improving coal market dynamics, we expect a continued need to strike a balance between maintaining adequate levels of liquidity and making further progress toward our debt reduction goals. As such, we are remaining laser focused on continuing to drive down costs at our operations and corporate levels through efficiencies and a focus on reducing discretionary spending. This is also evident in our CapEx guidance range that Mitesh discussed, which is only modestly above 2020 levels and remains within our targeted $4 to $5 per ton range. Third, we expect to continue to pursue our targeted growth and diversification strategy as we move into 2021 and beyond. We remain excited by the tremendous potential that each of our current endeavors could bring whether it's our partnership with CFOAM, Ohio University and Engineered Profiles in the colder product space, where we've begun to see positive R&D breakthroughs our partnership with OMNIS Bailey LLC on our OMNIS project, which is well underway with construction of its first commercial module to convert our Bailey Preparation Plant waste coal slurry stream into a salable products or our DOE selected coal first project that is evaluating the possibility of constructing an advanced coal-based power plant of the future in the vicinity of our Pennsylvania mining complex. While we are still in the early stages of the majority of these projects we believe they provide an exciting opportunity for us to help define the future of our industry. However, our most important growth and diversification vehicle remains our Itmann Metallurgical Coal project in Southern West Virginia. Although, we pulled back spending in 2020 to focus on our liquidity and debt priorities, we remain extremely excited and committed to this project. We will continue to progress with development mining where we are operating a single section one-ship per day at minimal cost, while at the same time continuing to evaluate all options associated with ramping the project back up. We believe this project provides a solid pathway for organic growth and diversification. Finally, I would be remiss if I didn't mention the importance of completing the CCR merger at the end of 2020. This transaction improves our financial flexibility as we move forward and will afford us the ability to fully implement our strategic goals now that our shareholders are fully aligned. We would like to thank all of our shareholders for their overwhelming support in approving the transaction. Before handing the call over, I want to end by thanking our entire workforce from our operations team to our corporate staff for their hard work and dedication over the past year. 2020 was a challenge on many fronts. Together, we navigated the COVID-19 pandemic from the unprecedented demand destruction our industry face to the new social distancing measures to our corporate staff working remotely for much of the year, which we are continuing to do. We had to learn, grow and adapt throughout the year. I can't thank our employees enough for their professionalism and willingness to quickly pivot as needed. With that, I will hand the call back over to Nate for further instructions.

[Nathan Tucker:]

Thank you, Jimmy. We will now move to the Q&A session of the call. Nick, can you please provide the instruction to the callers?

[Operator:]

We’ll now begin the question-and-answer session. First question is from Lucas Pipes, B. Riley Securities. Please go ahead.

[Lucas Pipes:]

Hey. Good morning, everyone.

[Jimmy Brock:]

Good morning, Lucas.

[Mitesh Thakkar:]

Good morning, Lucas.

[Lucas Pipes:]

Jimmy, I think, you mentioned part of the answer to my question in your last comments there and it's about optimal capital structure. Can you, kind of, remind everyone what's the goal? Is it by 2024 no debt at all or a minimal amount of debt? Clearly, debt financing has become more challenging for coal companies. So would appreciate your thoughts on that? Thank you.

[Mitesh Thakkar:]

Yes. Lucas, I'll take that one. So for how challenging 2020 was, we did reduce our debt by $56 million. So my goal is like looking forward at least do that in 2021 if not more. I think longer term where we want to get to is we have two pieces of what I would call it as non-amortizing -- significantly non-amortizing debt which is Term Loan B and second lien. We would like to get that to one piece by the refinancing so we don't have much of an uphill battle. Remember our Term Loan A has a mandatory amortization. So that will amortize in due course. You saw we made significant payments on our Term Loan A in 2020. I think about $23 million. So we are hoping by end of 2023 Term Loan A would be over. And on Term Loan B and second lien I would get down to like probably one piece of paper when it comes to refinancing and that too at a smaller size hopefully.

[Lucas Pipes:]

Got it. Understood. Thank you for that. And then on the volume side, I appreciate the guidance here for 2021. I was hoping you could maybe expand on, kind of, how you think about marginal economics for CONSOL specifically? So kind of -- when I look at the cost curve you're at the very low end. So are you seeding market share? Are you just responding to loss of demand around you in North America? Could you -- could it maybe still make sense to ramp up production in response to strong export volumes, but really just kind of appreciate additional color on that specifically again how we should think about marginal economics in the context of your volumes? Thank you.

[Jimmy Brock:]

Yes. Well the guidance that we're given for the 22 million to 24 million tons is what we know now and what we see in the future. Obviously, if the markets come back very strong and there's a need for more tonnage, we would have the opportunity to put that five longwall back into operation that we have. But what we found that and this exercise you always tell people that severely downturn in the markets Island coal mines it's very tough to do, but out of that comes some opportunities. So the one thing that we've seen in this is that we were able to reduce our costs significantly enough. And if we can continue to do that, you don't have the capital expense of that five longwall, you don't have some other OpEx expense associated with that and you can run the other four really hard to where you only lose, I think we mentioned the 3 million to 4 million tons of production volume. But at the same time, you can increase that cash margin significant enough then it should make -- get us in the same kind of ballpark of where we were. Because at the end of the day, it really doesn't matter about the volumes it's all about the cash margins that we can create. So we're constantly evaluating those and trying to do it. Now I will say that it also helps when you do bring on additional volume, if it's at the right price and at the right cost structure. So those are things that we'll continue to monitor, we'll continue to look at. If the marketing team comes to us with a real strong sale, we see that in Q4 something then we'd start ramping back up if we need to. But our goal moving forward is going to be to run these 4 longwalls as hard as we can as cheap as we can and create the highest margins we can for the coal we produce.

[Lucas Pipes:]

That's helpful color. Thank you, Jimmy. And then last one for me for now is on the export side encouraging comments you shared with us. First part of the question in your contracted volumes for 2021, are there export volumes embedded in that? And then secondly, where would you see exports in the current price environment for 2021? Thank you.

[Bob Braithwaite:]

Lucas, I'll take that. Today, we have just south of about 5 million tons booked in the export market of the 18.2 million that we mentioned in our call today. My expectation is with this cold weather upon us now natural gas prices where they're at, we will see a spot market for domestic coal in 2021. But I will say that so long as these export markets remain strong and pricing remains strong, I see us taking majority of that coal to the export market that we have left to sell. And as you know, we are the only ones in the game here that can pivot back and forth with the ownership of our terminal in Baltimore. Again, a little foggy right now of exactly where those tons we place, but we do feel very confident moving forward that the 24 million ton guidance that we gave at the upper end is achievable and the prices today on the export side are slightly better than what the published marks are for our domestic product. And I think you probably have seen that most of the publications now for our product are in the low 40s. So the export market is realizing higher prices today. And if that continues, we'll continue to look to place those tons into that market.

[Lucas Pipes:]

Very helpful. Appreciate all the color everyone and continued best of luck.

[Jimmy Brock:]

Thanks, Lucas.

[Bob Braithwaite:]

Thank you, Lucas.

[Operator:]

Thank you. Next question is from Nathan Martin of The Benchmark Company. Please, go ahead.

[Nathan Martin:]

Hey, good morning guys, congrats again on completing the CCR transaction and continuing to lower your costs. Lucas kind of touched on my question. So appreciate the color there Bob on the breakdown of your exports versus domestic in both your contracted tons and your full year sales guidance. And just maybe if I can dig in a little bit more as it relates to the export business. Again API2 prices as you guys called out whenever that $70 mark last month, pet coke prices remain high. Can you guys comment maybe, -- I think Bob you mentioned, export prices are maybe a little bit high in the low-40s of what we're seeing. I mean, can you kind of calculate or give any comment on, how you calculate the netbacks, when you're looking at those extra markets both API2 versus pet coke?

[Bob Braithwaite:]

Yes. I mean, we can provide that information to you. Obviously, there's a rail component and a vessel component involved in that. So some of that's confidential. But I would just simply say that, a mid-$60, FOBT number basically gets you to that point. I will say that, we were opportunistic when the API2 market did achieve the $70 mark here earlier in January. We took advantage of that. And we secured two cargos to Europe, for delivery in the second quarter. And make note that that will be the -- this is the first -- these are the first cargos that we secured to Europe, since November of 2019, so, again, very excited about that. And then, as far as most of our coal going to India, that goes into the retail market specifically, but also now with pet coke prices at four-year highs. We're now sending some coal into the cement market as well. And also with the improvement in pet coke prices, it actually brought us new opportunities to cement plants across the globe. So we are diversifying our export business now as well, outside of our traditional markets, in India and Europe, which is very encouraging. But when you look at the India pricing, I will say, it's higher than the number, I just quoted you in the mid-60s. So, again, to give you a flavor, you're looking at the low to mid-40 type number at those levels.

[Nathan Martin:]

Got it. Got it. Thanks Bob. I appreciate all the color there. And then, just maybe kind of shifting gears real quick, going back to the Itmann project, Jimmy you called out, you think that, still kind of remains your best growth project going forward. Just curious, what it would take for you guys to decide to start committing more capital to that project and move forward there?

[Jimmy Brock:]

Yes. As we see the markets continue to improve, particularly on the met side. One thing that we could do quickly there is, we can double our production just by adding another shift on, that we have there now. So we're running the one shift. We already have the equipment in place and everything else. But looking at the bigger picture, we're still evaluating several options that would get that facility up and running, where we want it to be running at those production levels that would be somewhat significant. We've given -- we'll be running three sections at full production. We think we can produce somewhere between 800,000 and 900,000 tons, once it's ramped up. Obviously, there are some things that we've got to do. And we're evaluating those right now. But stay tuned on that front, I would think, possibly later this year, we'll have some clarification on that. But Itmann is a very exciting project for us. It's a great quality of coal. We think we can put it in the marketplace. And we're just evaluating how we do that at the lowest capital cost. And there's, three or four moving parts there, that we should have some clarification on pretty soon.

[Nathan Martin:]

Got it. Thank you guys for your time and talk again soon.

[Jimmy Brock:]

Thank you as well.

[Operator:]

Thank you. Next question is Fritz von Carp of Capital. Please go ahead.

[Unidentified Analyst:]

Yes. Hi Good morning guys.

[Jimmy Brock:]

Good morning.

[Unidentified Analyst:]

Just a couple of questions on the 2021 guidance is, -- and I realized there's still uncertainty out in the world that, we don't know. But as I sort of up the numbers together, and I'm looking mainly at free cash flow, it looks like it could be a little more than in 2020 and that would -- I mean, there's been a really strong strengthening trend in the export market. It's up, as I understand typically a high-margin market for you guys, when that window is open. And so -- I mean it doesn't -- if that just -- the high end of the guidance, as I understood you saying is just, like if that -- where we are now doesn't deteriorate, not even if it were to continue in the direction it's been going. So I mean are my numbers basically in the ballpark to say that the cash flow could be up somewhat from 20 or perhaps somewhat better than that, if the international market continues to strengthen?

[Mitesh Thakkar:]

Yes. So Fritz, unfortunately we don't provide cash flow guidance, but some of the moving parts I think that you should definitely keep in mind, as obviously we are guiding to a higher production level and higher sales level. Our pricing, as given the comments from Bob here, could potentially be higher as well. The offset to that would be -- we might not have the same kind of transactional opportunities that we had in the past, but we are optimistic about our free cash flow generation capabilities. And as I mentioned earlier, we are looking forward to make sure that we continue to strengthen our balance sheet.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Thank you. The next question comes from Brian Kennedy at Wells Fargo. Please go ahead.

[Brian Kennedy:]

Hey, guys. Thanks for taking my question. I really appreciate the guidance on 2021 for the Pennsylvania Mining Complex. I was wondering if you guys would potentially provide some more color on where you see terminal revenues going and the cost structure there. And then, if you potentially see opportunities for more asset sales, or if that's kind of done at this point for now? Thanks in advance.

[Dan Connell:]

Yes. And this is Dan. I'll take the terminal part of the question, to get started. So, we have had a major take-or-pay contract in place at the terminal for the past few years. This year we have a little bit different of a contracting structure. But, fundamentally, nothing has changed. Jimmy said in the past, we really use our terminal for three main purposes

[Mitesh Thakkar:]

I'll take the transactional opportunities question. Like in the past we always look at our portfolio and see where there is a possibility of bringing the value forward. Last year was a good year for us, where we were able to deliver on several items. I'll tell you, we are not done yet, but it is fair to assume that it's not probably going to be as big as last year for now. But we are working on several things which could materialize over the course of the years. I think there are several things in pipelines on that aspect as well.

[Brian Kennedy:]

Awesome. Thank you both. And then, just one more question, kind of, shifting gears a little bit. You guys had a muni deal that was supposed to come to market late last year; do you have any update on what is going on with that? Or just any color you can add would be greatly appreciated.

[Mitesh Thakkar:]

So, Brian, during our regular course of business, we look at several financing opportunities at any given point in time. Our goal is to figure out what makes sense for the business, what gives us improvement on -- liquidity improvement on balance sheet. So we look at several items during any given time and year. Sometimes they play out. Sometimes they don't. I mean, our second lien debt throughout most of last year was trading at a very depressed level. So there were some real headwinds to any potential financing. That is not the case anymore. We could look at other things this year and see what makes sense. I think that's all I can say on that matter. We'll continue to explore other sources of financing like we always have. There are several opportunities that we can work on.

[Brian Kennedy:]

Understand. Thank you so much Mitesh. Appreciate it.

[Mitesh Thakkar:]

Thank you.

[Operator:]

Next question is from Lin Chen of Eight . Please go ahead.

[Unidentified Analyst:]

Hey, good morning. Thanks for taking my question. I have two questions. First one is for your 2022 volume of contract of 5.6 million tons, can you talk a little bit about is the price similar to 2021, or what you see the price there?

[Bob Braithwaite:]

Yes. We don't really talk about pricing. Obviously we didn't disclose that, but I would say it's in slight contango to what we currently are seeing for 2021.

[Unidentified Analyst:]

Got it. And also when I look at the cash cost to serve your legacy liability, I think for fourth quarter, the cost was about $17 million or so for fourth quarter, should I think that a good run rate for 2021 annual cost?

[Mitesh Thakkar:]

Lin, are you talking about the legacy liabilities like employee legacy liabilities that we typically report on?

[Unidentified Analyst:]

Yes, yes. I think like -- your like statement you report like cash payment for legacy employee facility that, yes, yes, that's right.

[Mitesh Thakkar:]

Yes. So just so you know for the full year 2020, I mean quarters could be lumpy. So I would give you a full year perspective. For the full year of 2020, our cash servicing cost for legacy liabilities including asset retirement obligations was about $65 million. It's also on the slide deck that we have posted online. We do believe that over a long time, our legacy liability cost is going to continue to come down. And as you can say -- as you can see just for the employee portion of it our actual cost for 2019 was $61 million it was down to like $51 million in 2020. We expect it to continue to decline. I think the 2024 guidance for just the employee portion of the legacy liability that is in the slide is about $49 million. So does that answer your question?

[Unidentified Analyst:]

Yes, great. Thank you. I didn't see the slides. I guess there's more detail there. Appreciate. Thank you.

[Mitesh Thakkar:]

No worries. We didn't make any reference to it on the script, but that was a good question.

[Unidentified Analyst:]

Thank you. Bye.

[Operator:]

This concludes our question-and-answer session. I'd now like to turn the conference back over to Mr. Nathan Tucker for closing remarks. Please go ahead.

[Nathan Tucker:]

Thank you Nick. We appreciate everyone's time this morning and thank you for your interest in and support of CEIX. Hopefully we were able to answer most of your questions today, and we look forward to our next quarterly earnings call. Thanks everybody.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.