CONSOL Energy Inc. Common Stock

Good morning, ladies and gentlemen, and welcome to the CIX Third Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, November 5th of 2024. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us. Welcome to Consol Energy's third quarter 2024 earnings conference call. Any forward-looking statements or comments we make about future events are subject to risks, certain of which we have outlined in our press release and in 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 obligation 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 2024 third quarter press release, furnished to the SEC on Form 8-K, which is also posted on our website. Additionally, we filed our 10-Q for the quarter-ended September 30, 2024, with the SEC this morning. You can find additional information regarding the company on our website, www.consolenergy.com, which also includes a supplemental slide deck that was posted this morning. On the call with me today are Jimmy Brock, our Chairman and Chief Executive Officer, Mitesh Jakar, our President and Chief Financial Officer, and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will highlight our third quarter achievements and strong operational results. Mitesh will then provide an update on our coal markets, financial performance, and our most recent liability management initiative before providing an update on our 2024 outlook. In its closing comments, Jimmy will provide an update on the proposed merger with Arch Resources and lay out our key priorities for the remainder of the year as we prepare to head into 2025. There will be a Q&A session following our prepared remarks in which Bob will also participate. With that, let me turn it over to Jimmy.

Thank you, Nate, and good morning, everyone. I am very pleased to report that Consol Energy had a very strong financial and operational performance in the third quarter, despite a planned long-law move and a planned summer maintenance shutdown. As we worked to turn the page from the Francis Scott Key Bridge collapse and its effect on our Consol Marine Terminal, the PAMC achieved its highest ever third quarter sales and production tonnage level. Additionally, due in part to the strong production volumes, The PMC achieved its lowest cash cost of coal sold per ton level since the first quarter of 2023. These results are a testament to the resiliency of our operations and desirability of our product. On the operations front, beginning with our safety performance, our Bailey Preparation Plant and Ipman Preparation Plant each had zero employee recordable incidents during the third quarter of 2024. Our coal operations finished the quarter with a total recordable incident rate well below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 7.2 million tons in Q3-24 compared to 6.1 million tons in the prior year period. The mines operated well during the quarter and completed the planned longwall move very timely, safely, and efficiently which contributed to the strong production performance compared to Q3-23. Our PMC average cash cost of coal sold per ton for Q3-24 was $35.85 compared to $38.36 in Q3-23, mainly due to improved production tonnage as well as reduced contractor and purchase servicing costs. We finished our last planned long-law move of 2024 in the third quarter for the PMC. Moving on to the Ipman Mining Complex. During the third quarter of 2024, sales from the complex, including third-party tons, were 152,000 tons, compared to 164,000 tons in Q2-24. This slight impairment was due to ongoing equipment delivery delays with a major supplier and adverse geological conditions, both of which limited our production in the quarter. We continued to deal with abnormally long lead times on both new and rebuilt section equipment during Q3-24. However, the first of four miners was received in October, and we currently expect the remaining three to be delivered shortly, possibly by the end of this year. These continuous miner units are expected to increase the overall productivity of the mine. While we waited for these machines, the Ipman mine operated two of its three continuous miner sections as supersections during the third quarter of 2024, and despite being limited in the number of sections we could run, long-term mains development progressed. Toward the end of September, the Ipman mine began retreat mining, which we expect will improve our efficiency and productivity. Furthermore, at the end of October, a deep cut plan was approved by MSHA for two of the three continuous minor sections, which will also improve the overall efficiency of the mine. Moving to the Consol Marine Terminal. Rebounding from the Francis Scott Key Bridge collapse that limited our export capacity for much of the second quarter, the CMT shipped 4.7 million tons during the third quarter of 2024, compared to 4.3 million tons in the prior year quarter. For Q3-24, terminal revenues came in at $23.7 million, and CMT operating cash costs were $6.9 million. Accordingly, CMT adjusted EBITDA finished at $15.9 million, compared to $14.9 million in the prior year period. With that, let me turn the call over to Mattes to provide the marketing and financial updates.

Thank you Jimmy and good morning everyone. Let me start with an update on the marketing front and our contracting progress. During 3Q24, we sold 6.8 million tons of PAMC coal at an average coal revenue per ton sold of $64.28 compared to 6.1 million tons at $70.34 in the year-ago period. In the domestic market, Low natural gas prices and an inventory overhang from warm winter weather have weighed on the ability of power plants to consume and procure additional coal throughout much of 2024. However, more recently, PJM West's day ahead power prices increased more than 20% in the third quarter compared to Q24. According to EVA, Northern Appalachian coal bond increased by approximately 30% over the same time period. Looking ahead, there are signs of further optimism. Domestic power demand growth is expected to accelerate due to data center build-outs and EV growth. This has led to additional potential delays in coal plant retirements. Duke Energy in Vienna recently announced a plan to delay the retirement of multiple units by several years to 2038. This is a positive development, indicating a changing sentiment towards baseload power in the U.S. In September, McKenzie and Company increased its forecast for U.S. data center energy consumption in 2030 by 50% compared to its forecast from just a year ago. With this backdrop, we have been able to layer in several multi-year contracts in the domestic market during the course of this year. On the international front, throughout the third quarter, which is typically the shorter season, API 2 prices remained resilient and averaged approximately $115 per metric ton. European coal demand has recently picked back up, and buyers are securing cargoes ahead of the winter. Moving to Asia, Indian demand for NAP coal has softened due to prolonged monsoon season and lower pet coal prices. However, demand for our crossover metallurgical product has been robust this year, particularly in China and Southeast Asia, and due to the optionality of our PMC product, we elected to move more tons into this market during the third quarter. We shipped a total of 1.1 million tons into the crossover met market during 3Q24, which was by far our highest ever quarterly level into that market. Our product blends very well with high-quality cooking cores out of Australia, and the lifting of the ban on these cores into China has helped us significantly increase sales into this market. This quarter once again highlighted the strategic value of our high-quality product with the optionality to serve many different end-use markets and our ability to quickly pivot among them. Looking ahead internationally, we continue to see an improving outlook for coal demand. For instance, the International Energy Agency recently published its annual World Energy Outlook. Within this report, the IEA has issued an upward revision to its projected coal consumption in 2030 by 6% compared to its report from last year. Moving on to the contracting front, we remain near fully contracted in 2024 based on the midpoint of our production guidance. Throughout 3Q24, we've elected to take a prudent and patient approach when adding to our contracting book due to the recent weakness in petco prices and the prolonged monsoon season in India which have caused many of our industrial customers to become more short-term focused. However, demand has remained strong in our industrial markets, and we expect to increase our book further as we close out the year. During 3Q24, we increased our contracted position to approximately 18 million tons in 2025. Now let me provide a quick recap of our financial results before providing an update on our insurance claim and some exciting news on continued liability management efforts. This morning, we reported impressive third quarter 2024 operational and financial performances. We achieved net income of 96 million, or $3.22 for dilutive share, and adjusted EBITDA of 179 million. Accordingly, we generated 122 million of free cash flow, which was higher than the free cash flow generated in the first half of 2024. During 3Q24, we made debt repayments of $2 million, spent 39 million in capital expenditures, and paid a dividend totaling $7 million to our shareholders. Consistent with the capital return framework outlined in the merger agreement with Arch Resources, we announced a $0.25 per share dividend, which will be payable on November 26, 2024. Due to the temporary closure of the Port of Baltimore in 2Q24, our second quarter results were significantly impacted, and as such, we have been hard at work with our insurance adjusters to calculate a potential business interruption claim related to the incident. As of mid-October, we submitted a formal claim and we hope to reach final settlement by the end of 2024. Now let's move on to our most recent liability management initiative. In early October, we finalized agreements with the Pennsylvania DEP to establish a global water treatment trust fund. As what we believe to be an industry-first In terms of scope and magnitude, the fund will provide an alternative financial assurance mechanism for all our legacy perpetual water treatment liabilities located in Pennsylvania, which consists of 22 total facilities or approximately two-thirds of the legacy mining operations managed by Kinsaw. The water trust establishes a long-term mechanism to pay for these liabilities over time and in turn will reduce our exposure to surety bonds and collateral requirements. The PA facilities account for approximately 83% of all surety bonds tied to our legacy environmental liabilities and approximately 40% of our legacy related asset retirement obligations. We have agreed to a minimum $2 million annual contribution until the fund reaches $74 million based on initial valuation, including earnings. As the cash value of the fund grows over time, surety bonds will be reduced and released by the PADEP. For comparison, Our PA water treatment surety bond footprint is approximately $120 million and will eventually be all released. As part of the agreement, CEIX has agreed to make an initial contribution into the fund of approximately $12 million, $2 million of which was paid in October with the balance due within 90 days of close, subject to certain bonds being released by the PADEP. This initial contribution will fully fund 12 of the 22 facilities and result in a total surety bond reduction of approximately $58 million in aggregate. This voluntary effort puts a proactive legacy liability management approach into action and underscores our commitment to environmental stewardship. Now let me provide a quick update on our outlook for 2024. On the pricing front, given our strong performance at the PAMC in 3Q24, we are tightening the range and increasing the midpoint of our PAMC average coal revenue per ton sold to an updated range of $64.50 to $66. On the cost front, due to the improved operational performance in 3Q24, we lowered the top end of our PAMC average cash cost of coal sold per ton guidance by $1 per ton to a range of $37.50 to $38.50. Additionally, we are moving up the bottom end of our PAMC sales volume guidance range by half a million tons to an updated range of 25 to 26 million tons, reflecting our strong 3Q24 operational performance. For our Ickman mining complex, we are lowering our sales volume guidance range by 100,000 tons to a range of 600 to 800,000 tons due to the slower than anticipated operational ramp-up at the complex. We remain optimistic about our ability to achieve the full ramp-up once the remaining section equipment arrives, and we are encouraged by the commencement of retreat mining and the approval of the deep cut plan for multiple sections in the mine. Lastly, on the capital expenditures front, we are maintaining our previous range. With that, let me turn it back to Jimmy.

Thank you, Mitesh. Let me now provide an update on the proposed merger with Arch Resources. Both teams continue to work very hard toward achieving approval. The waiting period under the Hart-Scott-Rodino Act expired on October 11, and we also obtained final clearance of the proposed merger from Brazil, Poland, and China, with the last required approval received in October, satisfying all antitrust regulatory closing conditions for the transaction. With respect to the SEC review, The Form S-4 was filed on October 1st, and Consol and Arts Resources are working toward obtaining shareholder approval for the proposed merger. We still anticipate closing to occur by the end of Q125. For the remainder of 2024, we will be focused on a few key areas that we believe will set us up for success moving forward. First and foremost, we are very excited about the proposed merger with Arts Resources. and are looking forward to the potential formation of core natural resources. We believe these two companies would be stronger together and could achieve more as one entity than either could stand alone. Our major priorities are obtaining shareholder approval, developing a roadmap geared toward executing a timely transition, and realizing full synergy values as quickly as possible. There is no doubt that a lot of coordination and effort will be required on both sides. but I have full confidence that these two teams can come together seamlessly and be ready to hit the ground running on day one. Second, we will continue to focus on running our operations as safely and efficiently as possible. The operations ran very smoothly during the third quarter, and we are set up to run well in the fourth quarter given zero long haul moves. Third, despite a long haul move in the third quarter, we achieved a reduced cash cost of COSO per ton compared to multiple prior quarters. We will continue to focus our efforts on managing our spending levels and reducing the impact of the inflationary pressures we've faced over the past several years. Finally, we are prioritizing filling out our sales book in 2025 and beyond. We are taking a patient approach, particularly in the export industrial market, as low petco prices are contrasting against durable API2 prices. However, many believe petcoke prices are at or near the floor. The benefit of our product is that its ability to sell into many different end-use markets, which allows us to play the art. This year is a great example where our product is highly desired in the crossover met market. As of October 31st, our year-to-date 2024 crossover sales have already surpassed our highest annual sales tonnage level into that market in our history. As I often do, let me finish by recognizing our employees. This quarter was again a testament to their hard work and dedication. Despite the curveball thrown at us with the bridge collapse in the Port of Baltimore, the team hit the ground running in the third quarter with strong operational performances on multiple fronts. The Consol team, in tandem with the arts resource team, continues to work diligently toward a successful and timely closing of the proposed merger and developing a smooth transition plan for core natural resources. I am very grateful for their hard work and extremely excited to formally combine two great teams in the coming months. With that, I will hand the call back over to Nate for final instructions.

Thank you, Jimmy. We will now move to the Q&A session of our call. At this time, I'd like to ask our operator to please provide the instructions to our callers.

Thank you.

I would like to remind everyone, if you would like to ask the question, please press star followed by the number one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask the question. and we'll pause for just a moment to allow everyone to signal for questions. Our first question comes from the line of Lucas Pipes from B Reilly Securities. Please go ahead.

Thank you very much, operator. Good morning, everyone. My first question is on the contract book for 2025, and apologies if I missed that, but could you provide a breakdown of the 18 million tons in terms of market exposure? And then also kind of average price as of today with the indices stand. And then for the uncontracted tons, what markets are you targeting? And then lastly, on the commercial side, could you speak a little bit to domestic contracting. How many years out are utilities looking for coal and what sort of prices are you able to lock in on that front? Thank you very much.

Sure. It's Bob Lucas. Good morning. You know, as we mentioned, we're about 18 million tons contracted for 2025. That's an improvement about three and a half million tons since the last quarter. About 900,000 tons of that was domestic contracts. I will tell you that we've been successful in securing You know, prices, I'll tell you, that are at or above what the published marks are out there today. I believe those marks are, you know, in the low to mid-50s, so we have been successful in concluding deals, you know, above those marks. The balance for 2.6 million tons was into the export market. I will tell you, it's been a mixture of some into India, but mainly into the crossover market into China. This year, you know, China's been a bright spot for us, as Mitesh mentioned on the call. We'll probably move somewhere in the neighborhood of 2.5 to 3.5 million tons into China all told this year. So we expect that to continue as well into next year. So right now for the breakdown of 25, we have 2.5 million tons linked to power indices, 7.8 domestic. All those would be under a fixed price arrangement. And then 7.7 are into the export market, of which 5.1 million are indexed I will tell you they also have ceilings and floors on all 5.1 million. And sitting here today, based on $115 API 2 price, what we're modeling in for next year, we're looking at our average price at 18 million tons, roughly in the low 60s. In terms of the additional volume for next year to close out our book, we still see potential to sell more crossover coal not only into Asia but also into Brazil, and then we're also seeing You know, pet coke prices come off the floor right now. We've seen as low as $50 FOB golf prices. I think today they're closer to $53, $54, and we're expecting those to continue to increase as Diwali festivals end, monsoon season subsides, and construction activities resume into India. So balance of the volume left to sell, I'd say most of that will go into the export market, but we're also seeing some domestic opportunities as well, and When you ask about the domestic opportunities long term, we are seeing customers go out as far as 2028. We are in negotiations today for volumes.

Bob, that was a very comprehensive answer. Thank you for all that detail. My second question is on the cost side. A number of your peers are noting cost disinflation, surely some sales sensitive drivers behind that amongst operational changes, but could you speak to what you're seeing on the cost side? To what extent might you be able to participate in some of this disinflation that we've witnessed this earnings season so far?

Well, I think when you look at cost, there's a lot of variables. For us, we are starting to see some deflation, actually, in some of the consumables that we use to mine with. But it's something that we keep a constant watch on and try to look for ways to improve it. Obviously, for us, this quarter, a big part of our cost was the production tonnage that we mined. You know, that always helps lower it. And then secondly, we continue to work on procurement powers as we can with all of our suppliers.

Okay. I really appreciate all the color. Jimmy and team, keep up the great work. Thank you.

Thanks, Lucas.

Our next question comes from the line of Nathan Martin from Benchmark Company. Please go ahead.

Thanks, Operator. Good morning, everyone.

Good morning, Nate.

Maybe quickly to start on the insurance claim due to the Key Bridge collapse. You guys noted hoping to reach a final settlement there by the end of the year. Could we get some more thoughts on that? How much do you project the ultimate settlement could be for?

So, Nate, as you can imagine, our team has been putting together a lot of information for our insurance companies to present a claim. We did submit a claim of about $60-plus million for the business interruption associated with the Francis Kottke bridge collapse. I don't want to speculate on the final recovery and stuff like that. We expect that number to hold.

And we'll see where it goes from there. Okay, Mitesh. Thank you for that.

Maybe shifting over to the remainder of this year, first of all, with the new price per ton guidance, what API 2 price does that assume now?

We're assuming $115. And to be honest, Nate, the sensitivity is very low. For every dollar, you're looking at 3 to 4 cents across the entire portfolio. But for Q4, we're assuming $115. Okay, Bob.

Appreciate that. And then maybe just looking at year-to-date production, I think production kind of outpaced sales by about 600,000 tons or so, if my math is correct. I'm assuming some of that is just a lag. But looking at the levels so far, notwithstanding that fourth quarter does have some vacation periods, And what would it take to kind of get you maybe towards the higher end of your four-year guidance range? Is that feasible?

Yeah, I mean, the inventory build, as you know, we don't have really inventory on site. Most of that inventory was at the terminal or en route to the terminal. I will say that our transportation partners have been doing a really good job for us in terms of getting our product moved to Baltimore. A lot of that inventory is already gone sitting here today. So it's simply just a timing issue. of when vessels come and when trains arrive. And again, if you look at what we did just in the third quarter alone, Consul moved over 4.2 million tons into the export market. We expect to do probably that, if not higher, in Q4 as well. So, again, it's just a timing thing, and I would expect that inventory to really reduce here in the fourth quarter.

And, Nate, on the production end of it, you know, as we said on the call, we don't have any longwall moves during the fourth quarter. However, we do have plans shut down for the holidays, some at Thanksgiving and that week at Christmas. But it depends, same as always. It's how the trains move and how well we can produce at the mine. But we don't see anything in our way in Q4. We'll see how that goes. You could always have unexpected geology. But we run to the market and run as best we can.

Appreciate those thoughts, guys. All very helpful. I think I'll just leave it there. Best of luck in the fourth quarter. Thank you.

Again, if you would like to ask the question, please press star and then the number one on your telephone keypad. Our next question comes from the line of Michael Dudas from Vertical Research. Please go ahead.

Good morning, gentlemen. Good morning, Michael. Good morning, Michael.

A couple things. First, terrific production numbers, Q3. Maybe to remind us of what the capacity of the three operations and assuming longwall moles and how it is, etc., When things are running really well and the market's really good, what's the capacity achievement or readability for the MAC complex as you move forward in the next couple of years?

We use 26 million tons as our base, but when you're looking at capacity, if everything goes well as it did in Q3, 28.5 million is what we publicly stated as capacity for the Pennsylvania mining complex.

Mike, if you look at 2018 and 2019, we have demonstrated we can produce over 27 million tons during those two years when the market was very supportive.

Excellent. I appreciate that. Secondly, maybe for Bob, I know it's a little tough to decipher, but maybe looking to your customers in India or in Asia, you know, separating out the weather issues and holidays and such, Do you get the sense, at least the people thinking about later this year into next year, pace of demand, economic activity? Are you anticipating a much stronger market, assuming that co-price will normalize as you move forward, as you're looking to get that mix set up for the rest of 2025?

We do, Mike. And I'll tell you, there's certainly not a lack of demand. It's just right now, it's hard to... come to terms on how to price the coal. You know, when you look at what we did a couple years ago, we priced a lot of coal against API 2. That mechanism doesn't work per se for coal into India today. So, the demand is there and I think it's going to remain. It's just the volatility in the markets is what's causing us to kind of be patient right now in terms of locking in the balance of the volume. I feel very confident in our ability to, again, ship and sell our base production level of 26 million tons. It might be more on a spot basis if we can't come to terms on how to price it.

Understood. Do you think API 2 pricing just feels generally pretty stagnant or kind of flat? What could make it break one way or the other?

I mean, I think winter weather certainly is going to... be a determining factor there. I will also tell you that we've contracted over 400,000 tons last quarter into Europe. We're starting to see certainly some desire. Inventories are low. I think there still is concern about LNG supply into Europe as well. I think if they do experience just a normal winter, you'll see a resurgence in demand and you'll see them come back to the market for U.S. coals.

Finally, maybe, you know, it's been an exciting or at least wondrous time for electricity generation expectations in the U.S. and with the numbers that PAGM put out a few months ago on the capacity, etc. Maybe share how your customers are kind of processing all this as they're moving over the next several years and such an inordinate demand for hyperscale AI and 24-7 uninterruptible power. and how that could impact your customer base that you've been dealing with for decades and such, and how that may firm up maybe into the future, maybe not.

Yeah, I'll start, Mike. So I think you hit on it. I mean, the demand for electricity growth continues to grow, and people are seeing more, and how they're going to get it is what's becoming questionable. So I think you've seen a lot of these coal-fired utilities who have announced delaying their retirements and some are now not even given a date. So there is a concern of where they're going to get it. And I've seen some reports to where they think the reliability of the grid is kind of stable now. But keep in mind, most of that reliability, if you look at the graph, is coming from intermittent sources, primarily wind and solar. So I believe people are starting to get concerned about the reliability of the grid. Hence, that's why we're seeing some of these contractual things that Bobby's been able to do extend out to, you know, year 2028. So as that demand continues to grow, and if it even grows at half the pace that everyone's expecting, then I think you'll see these coal-fired plants run at least at a higher capacity and may even extend their retirements even further.

And Mike, just to put things in perspective, this is not just a long-term thing. Things are happening in a shorter term as well. There was an analysis by SNL if you look at 2025 to 2027. I think the amount of coal plants that were supposed to retire when the analysis was done in late 2023 was around 34 gigawatt, and now that number stands at around 29 and change, so it's about 13% lower, just between 2025 and 2027 forecast.

Quite encouraging. Thanks for your thoughts, gentlemen. Thanks, Mike.

No question at this time.

Mr. Tucker, please go ahead.

Thank you. We'd like to thank you all for your participation this morning and for your support of Consol Energy. We hope we answered your questions, and we look forward to seeing you on our next call. Thank you.

Thanks, everyone.

This concludes today's conference call. You may now disconnect. Thank you, everyone.