Core Natural Resources, Inc. (CNR) Earnings Call Transcript & Summary

Good morning, and welcome to CONSOL Energy's Fourth Quarter and Full Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Nathan Tucker, Director of Finance and Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to CONSOL Energy's Fourth Quarter and Full Fiscal Year 2022 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 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 release and furnished to the SEC on Form 8-K, which is also posted on our website. Additionally, we expect to file our 10-K for the year ended December 31, 2022, with the SEC this Friday, February 10. 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 Chief Executive Officer; Mitesh Thakkar, our President and Chief Financial Officer; Dan Connell, our Senior Vice President of Strategy; and Bob Braithwaite, our Senior Vice President of Marketing and Sales. In his prepared remarks, Jimmy will provide a recap of our fourth quarter and full year 2022 achievements and a detailed discussion of our operations and sales. Mitesh will then provide an update on our balance sheet management, financial performance and 2023 outlook. In his closing comments, Jimmy will lay out our key priorities for 2023. After the prepared remarks, there will be a Q&A session, which Dan and Bob will also participate. With that, let me turn it over to Jimmy.

Thank you, Nate, and good morning, everyone. Let me start by congratulating Mitesh on being named the new President of CONSOL Energy as part of our long-term succession planning. I have worked very closely with Mitesh since he joined us during the formation of CONSOL Coal Resources LP, and MLP, we took public in 2015. Since then, he has been an integral part of our team and I've had the opportunity to observe him grow and take on more responsibility. In addition to his continued role as our Chief Financial Officer, he will also oversee our marketing, business development, and environmental and sustainability efforts. I have the utmost confidence in his ability to take on an expanded role in the company and he is well suited for the task. Furthermore, the Board has asked and I have accepted to extend my employment term by an additional year through December 2024 to ensure our long-term succession plan. Moving on to our financial and operating performance. CONSOL Energy finished 2022 as a record year in its history as an independent public company on multiple fronts, including one of the key metrics we measure ourselves against free cash flow generation. As a result, we've advanced some of our key strategic initiatives during the year. First, our strong free cash flow generation allowed us to meaningfully accelerate progress toward our debt reduction goal and we made debt payments of nearly $300 million in 2022. Second, our free cash flow in conjunction with our robust contract book bolstered our ability to initiate an enhanced shareholder return program during 2022, even while we were still at work, reducing our outstanding debt levels. We paid multiple dividends during 2022 and resumed share repurchases at the end of the year. Third, our strong free cash flow enhanced our ability to reinvest in our business. During the fourth quarter, we restarted the fifth longwall at the PMC and shipped the first train of low-vol metallurgical coal from our Itmann mining complex. Let's now discuss our operational performance. On the safety front, our Bailey preparation plant and CONSOL Marine terminal each had zero employee recordable incidents during the full year of 2022. The PMC finished the year with a total recordable incident rate of 1.72, which was approximately 63% below the national average for underground coal mines. Coal production at the Pennsylvania Mining Complex came in at 6.1 million tons in Q4 '22, an increase compared to 5.6 million tons in the prior year period. Production improved this quarter compared to Q4 '21 due to the restart of the fifth longwall in mid-December 2022 and the absence of geological challenges, which we encountered in October of 2021. From a productivity standpoint, measured as tons per employee hour, the PAMC ended the year on a strong note and improved by 16% in Q4 '22 compared to Q3 '22 as we move past the geological challenges we faced in the third quarter. The complex ended the year with production of 23.9 million tons. On the cost front, our PAMC average cash cost of coal sold per ton for Q4 '22 was $34.89 compared to $30.81 in Q4 '21, but this was a reduction of nearly $5 per ton compared to Q3 '22, when we saw increased costs due to operational and geological challenges. The delta compared to the prior year period was due to ongoing development costs associated with the fifth longwall and continued inflationary pressures on supplies, maintenance, contract labor and power cost at our operations. This brings our full year 2022 average cash cost of coal sold to $34.56 per ton. The CONSOL Marine Terminal had a throughput volume of 3.6 million tons during Q4 '22. Terminal revenues for the quarter came in at $20.9 million with CMT operating cash cost of $6.4 million. For 2022, the terminal had a very strong operational performance, finishing the year with 13.7 million throughput tons. Terminal revenue for 2022 came in at $78.9 million, which was by far the highest level in CONSOL marine terminal history. CMT finished the year with adjusted EBITDA of $52.3 million, marking its first year above $50 million and the fifth consecutive year above $40 million. Now let's discuss our Itmann project. After accomplishing several milestones in the second half of 2022, the ramp-up to full run rate production at Itmann has been delayed due to multiple factors including supply chain bottlenecks, equipment delivery delays, geological inconsistencies and staffing challenges. We expect these issues to be transitory and we have recently made several changes that will help us achieve our goals. In the immediate term, the mine is focusing on fully staffing and optimizing 2 CM super sections before focusing on the third CM super section. Moving further into 2023, we expect the ramp up to full run rate production to occur around midyear. The Itmann preparation plant was commissioned in the third quarter of 2022, having been purchased, disassembled, relocated and reconstruction on our site in just over a year's time. We shipped 9 trains of coal from the plant in Q4 '22 and sold slightly more than 200,000 tons of Itmann and third-party coal in aggregate during 2022. The Itmann product has been successfully marketed to both domestic and export customers. As we ramp up production and achieve consistency from our operations, our focus will shift to securing new business with strategic partners. On the marketing front, the demand for our PMC product remained robust in the fourth quarter of 2022. We sold 6.2 million tons of PMC coal at an average realized coal revenue per ton sold of $75.92 in Q4 of '22 compared to 5.6 million tons at $51.27 in the year ago period. This significant per ton increase was driven by the ongoing improvement in the coal markets over the past year, due to persistent coal supply shortages leading to increased commodity pricing. Henry Hub natural gas spot prices averaged $5.55 per million Btu in Q4 '22, a 17% increase compared to the prior year period. PJM West day-ahead power prices finished the quarter at $68.73 per megawatt hour versus $54.39 in Q4 of '21. Despite these quarter-over-quarter improvements, we have seen significant volatility in the energy markets beginning in late 2022 and continuing to the start of 2023. Natural gas spot prices were north of $6 per million Btu at the start of December, but retreated more than 40% by the end of the month. A very similar trend played out in the international API2 market, which retreated almost 30% throughout December of 2022. These markets each further declined by 20% and 29%, respectively, through the month of January 2023 as warmer than normal weather has grew up much of the U.S. and Europe, leading to increased gas storage levels and coal inventories. Fundamentally, we believe that the supply of high Btu coal is still constrained and the demand for our product remains strong for the foreseeable future. In fact, the International Energy Agency recently estimated that annual global coal demand eclipsed the 8 billion metric ton mark for the first time in 2022 and expect demand to remain around this level through 2025. In the shorter term, the majority of our sales books for 2023 is committed, and we have a very solid contracted position for 2024. This gives us the ability to be patient as we work to fill out our sales book and maximize value for 2024 and beyond. Despite some of the recent volatility, our sales team opportunistically increased our forward sale position by more than 8 million tons through 2025. We now have 23.9 million tons contracted for 2023 and 12.5 million tons contracted for 2024. With that, I will turn the call over to Mitesh to provide our financial update.

Thank you, Jimmy, and good morning, everyone. First, let me provide an update on our balance sheet management and capital allocation progress before discussing our financial results and 2023 outlook. We continue to make considerable progress on our stated financial priorities in the quarter. During 4Q '22, we generated $116 million of free cash flow, 70% of which was deployed towards continuing to reduce our gross debt levels. As such, we made total debt repayments of $292 million in 2022, and our gross debt level at year-end was $318 million. In fact, since CEIX went public, we have reduced our net debt by 86% or $647 million, which translates to more than $18 per share of equity value creation based on our current shares outstanding. Since year-end, we reduced our gross debt by an additional $50 million by making discretionary payments in January 2023 of $25 million each towards our Term Loan B and second lien notes that were not included in our fourth quarter results. Furthermore, at the beginning of February, we submitted an additional redemption notice for $25 million of our second lien notes, which will be redeemed during 1Q '23. These 3 paydowns, both an aggregate of $75 million will bring our gross debt level to approximately $300 million. We remain committed to the ongoing strengthening of our balance sheet and now expect to fully retire our term Loan B and second lien notes this year. During 4Q '22, we slightly increased our unrestricted cash balance, finishing the year with $273 million, which led to a significant liquidity position of $572 million. On the shareholder return front, we are pleased to announce this morning that the Board of Directors elected to issue a dividend of $1.10 per share, which marks our third dividend since announcing our enhanced shareholder return program and the third consecutive quarter, increasing the per share amount. This payment will total roughly $39 million or approximately 34% of our 4Q '22 free cash flow and will be made on February 28th to all shareholders of record as of February 17th. During the fourth quarter, we also restarted our share repurchase program after a hiatus of approximately 3 years as we work to improve our balance sheet and infused capital on our organic growth projects. Now with most of the capital spending complete on our Itmann project, the fifth longwall back up and running at the PAMC significant reduction in our outstanding debt and a strong contracted position, the management team and Board of Directors believe that share buybacks provide another attractive avenue to create additional value for our shareholders. So far, we have opportunistically repurchased 124,000 shares of our common stock in December for $8 million at a weighted average price of $64.18 per share. We are also happy to announce this morning an increase to our enhanced shareholder return program, which will become effective immediately in 1Q '23. We now plan to return a range of approximately 35% to 50% of quarterly free cash flows in the form of share repurchase and/or dividends, which are subject to the discretion of the Board of Directors. As mentioned previously, we also expect to continue to allocate a significant portion of our free cash flow toward additional debt reduction with the goal of retiring our Term Loan B and second lien notes this year. Once this goal is achieved, we will consider further increasing the percentage of free cash flow allocated towards shareholder returns. Now let me recap our fourth quarter and full year 2022 financial results. This morning, we reported a strong fourth quarter '22 financial performance with net income of $193 million or $5.39 per diluted share; by far, our highest quarterly earnings per share level since becoming an independent public company in 2017. Additionally, we finished 4Q '22 with adjusted EBITDA of $240 million and generated $116 million of free cash flow. For the full year 2022, we reported net income of $467 million or $13.07 per diluted share, adjusted EBITDA of $807 million and incurred CapEx of $172 million. CEIX finished the year with free cash flow of $501 million, marking our highest annual free cash flow level in the last 5 years and the fifth consecutive year of positive free cash flow generation since becoming an independent public company. We finished 2022 with a net leverage ratio near to 0. Now let me provide our outlook for 2023. On the guidance front, for the PAMC, we are expecting our 2023 sales volume to be improved by approximately 8% at the midpoint compared to a 2022 level due to the availability of our first longwall. As such, we are providing a 2023 PAMC coal sales volume range of 25 million to 27 million tonnes. The upper boundary reflects our past ability to produce at a 27-plus million tonne pace with 5 operational longwalls at the complex, which includes mining at a high-efficiency factor, effective coordination with our transportation partner and potentially strong spot market demand. The lower boundary considers the potential for unforeseen supply chain or operational challenges. The lower end also reflects our ability to run to the market if there is unexpected weakness due to weather or unforeseen events. The good news is that all our longwall mines are currently running well, and we are 90-plus percent contracted at the midpoint of our guidance range. On the pricing front, we expect our average realized coal revenue per ton to be in the $78 to $84 range. Relative to 2022 levels, this range reflects our strong contracted position and allows for upward or downward movement in API2 and PJM West power prices as well as the potential to further optimize our sales portfolio. Our guidance is based on [ CAL 23 ] PJM West power price expectation of $49.58 per megawatt hour at the midpoint, and the sensitivity for every dollar per megawatt chain in PJM West power prices is approximately $0.10 per ton on our entire portfolio. For comparison, the average PJM West power price in 2022 was approximately $73 per megawatt hour. Additionally, the midpoint of our guidance assumes an API2 benchmark price of $165 per metric ton. We expect our 2023 PAMC average cash cost of coal sold to be $34 to $36 per ton. We are expecting our cash cost to be similar to 2022 on a per tonne basis at the midpoint despite incremental volume given the potential for ongoing inflationary pressures on certain goods and services. We begin to see some relief in cost pressures in the fourth quarter and our supply chain and operations team constantly focused on identifying ways to minimize our cash spend. The bottom end of our cost guidance captures the potential for deflation in key commodities, including power prices as well as fixed cost leverage at the higher end of the volume guidance. Conversely, the top end accounts for reduced tonnage on an improved commodity market, which would be a net benefit to our cash margins, but a headwind to our power and supply costs. At the Itmann complex for the time being, we are limiting our guidance until we get the mine fully staffed and ramped up to full run rate production. As such, we are currently providing a 2023 production guidance range of 400,000 to 600,000 tonnes from our Itmann mine, which is dependent on the timing of the ramp up. Once the Itmann mine achieve these milestone, we intend to provide more detailed Itmann complex guidance similar to what we provide for the Pennsylvania mining complex. Lastly, on the capital expenditure front we are providing a range of $160 million to $185 million for 2023. This range reflects some 2022 capital spending moving into 2023. Keep in mind that we started 2022 with a top end CapEx expectation of nearly $200 million but only spent $172 million in the year. As we highlighted throughout last year supply chain bottlenecks have delayed equipment deliveries and extended lead times which has pushed certain planned expenditures from 2022 into 2023. Throughout last year and during our budget planning cycle we have been very diligent in adjusting our rebuild and life cycle management timing to better align with these longer lead times. We also expect to further our Greenhouse gas emissions reductions efforts and have approximately $10 million in the budget for this effort in 2023. With that let me turn it back to Jimmy to touch on our key priorities for 2023.

Thank you, Mitesh. As we embark on 2023, we have a few key areas of focus that we believe will further strengthen our company. First, we are laser-focused on ramping up the Itmann Mine to full run rate production by midyear 2023. The Itmann complex has now moved from the project team to our operations team. We have our key operations and management personnel dedicated to supporting the Itmann team and their staffing and ramp-up efforts. We are very thankful for the hard work and persistence from our Itmann team members. Now that they have switched to operations mode, we expect them to diligently work through the recent challenges and delays to ultimately deliver operational consistency. Second, our sales team remains opportunistic in its approach and remains focused on layering new business for 2023 and beyond as well as continuing to optimize our contract book. We believe that one of CONSOL's strategic advantages is our ability to lock in contract duration, which allows us to generate positive free cash flow in all parts of the cycle and provides us the ability to benefit from strong markets for years to come. Third, reducing the debt on our balance sheet remains a major focus. We expect to hit our initial goal of a $300 million gross debt level in Q1 of '23 and then continue toward fully return our Term Loan B and second lien notes. We anticipate achieving these goals around mid-2023 as we simultaneously enhance shareholder returns, including dividends and share buybacks. This continued debt reduction sets the company up for long-term success and facilitates additional avenues for growth and diversification. Finally, we are committed to increasing our free cash flow allocation to shareholder returns as our debt levels decline. As promised, we increased our shareholder return percentage due to our expectations of achieving our $300 million gross debt goal this quarter. Once our term loan B and second lien notes are retired, we expect to consider a further increase to our shareholder return allocation. We are very pleased with our results and execution in 2022, which was a record year for us in a lot of ways, and we will remain even more excited about the future. I want to personally thank all our employees for their dedication and hard work, which drove these exceptional results safely and compliantly. I am extremely proud of this team and CONSOL Energy. With that, I will hand the call back over to Nate.

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.

[Operator Instructions] And our first question here will come from Lucas Pipes with B. Riley Securities.

Jimmy, I want to turn to -- Mitesh, I want to turn to the balance sheet for my first question. It sounds to me like you're looking at $190 million of gross debt as a kind of near-term target, a little bit more conservative from the $300 million gross debt target previously. What caused that? And is that the right interpretation $190 million? Or maybe did I miss anything?

Thank you, Lucas. I think from a gross debt perspective, the way we think about it is we originally had a target of $300 million. We have today said we are going to retire all our term loan B and second lien. So if you look at the announcement that we made this morning about additional debt reduction for the month of January, we are sitting with about $39 million on Term Loan B and $74 million on the second lien. So combined, both of those is just over $100 million. I think when those 2 are retired, you're going to be just north of $200 million. So you are in the ballpark. And really, what makes up those just over $200 million is about $103 million of our Baltimore bonds and $75 million of our PEDFA bonds. Those -- both of them are tactical securities, as you know. And then the equipment leases, which at the end of the quarter, our forecast is going to be around $34 million.

That's helpful. And thought here is just to be a little bit more conservative given kind of broader capital market conditions.

Yes. So the Term Loan B and second lien both have near-term maturities, as you know. When I say near term second lien and a little bit further than the term loan B. Term Loan B is maturing next year. And the idea is we want to get away from more interest rate sensitive debt, but also right now, both of these securities at the end of Q1 are going to be under $50 million. So they're not what you would call like necessarily appropriately sized. I mean, this will allow us to create some bandwidth in future if we want to do something and raise some debt if capital market conditions or we can do just 1 ticket or something a little bit larger, if at all, we want to do it, but it's mostly cleanup stuff.

Okay. And then turning to the commercial side. Could you share some details as to the price of the tons that were sold incrementally during the quarter for both 2023 and 2024. And then specifically for 2024, you have 12-plus million tons contracted to date, roughly what's the split between domestic and export? And what would be the price of those 2024 commitments.

Sure, Lucas. I'll take that. We've increased our sold position, as you know, this morning by 2.1 million tons for 2023. Last quarter, if you recall, we said our pricing was in the upper 70s based on the power forwards of that date. If you go back and look, power was at 60 -- around $68, API2 prices were around $200. So fast forward today, we said our midpoint of the guidance is based on $49.58 and $165 for API2. That basically would imply that our portfolio dropped about $5 quarter-on-quarter just based on powered API2. However, I can tell you that our pricing of the 23.9 has actually improved. So when you take a look at that and you model that, you'll notice that the pricing that we sold -- the tons that we sold incrementally the 2.1 is certainly north of $100 per ton. Then on your second question, on the 2024 volume of 12.5 million tons, about 2.5 million are linked to power, 3.2 million are currently sold into the export market and 6.6 million are domestic and fixed price.

All right. Any sense on the average price for 2024, did I miss that?

We're not providing guidance today for 2024. However, I would tell you that it's sitting between our 2022 and 2023 pricing right now.

Our next question will come from Nathan Martin with the Benchmark Group.

Bob, could I actually get a similar breakdown for 2023 tons that you just gave Lucas for '24? In other words, how many tons are fixed versus how many tons are open to fluctuations in index pricing, whether that's PJM West or API2?

Sure. We have -- again, we have 2.5 million in 2023. That's linked to power. We have 8.2 million right now slotted for export or contracted, I should say, for export. Of that 8.2 million, we have about 5 million that are linked to API2 prices. And then of that 5 million, 3 million of those have ceiling and floor prices incorporated in the contracts. And then the balance of 13.2 million is domestic and fixed price.

Very helpful, Bob. I appreciate that. I guess sticking with API2 for a second, what -- with the pullback we've seen, what did netbacks look like at today's prices? Is that are still open for you guys, would also be helpful to get any kind of sensitivity there? I know you said you're assuming a $165 price in your pricing guidance of '23. And then you also mentioned your long-term export contract with the collars for the year. Any color on where the netbacks are relative to the floor and ceiling on those times?

Sure. I think we've mentioned in the past that the coal that we sell into Europe, when you look at an API2 price use somewhere around 65% to 70% of that price, and that gets you back to an FOB mine price, and that, again, takes into account discounts, quality adjustments along with freight. So when you're looking at a $140 API2 price, you're talking somewhere in that $90 range back to the mine. And again, that's really specific to coal that we're selling into Europe. As far as sensitivity is concerned, I will tell you, it's not linear because we do have different floors and ceilings across several contracts. But a good estimate is for every dollar change in API2 prices, our overall portfolio change is approximately $0.10. So it has a very similar sensitivity to our power price as well. But again, that depends on loading months of vessels, most of our contracts are priced based on the monthly average of the API2 price of the month of it loading. But as we do with our netback sensitivities, we'll continue to refine this as well every quarter.

That's very helpful, Bob. I appreciate that. And then on the domestic side, we've also seen rather nat price weaken as well given the mild start to the winter season. How are utilities from a stockpile perspective at this point that you guys can see? Is there any possibility of deferrals as they move forward through the year? Or is it still a little early to think about that?

Yes. I think it's early, Nate. There certainly has been an increase in natural gas production since the end of last year. But I really think the biggest issue here is really demand, right? I don't believe that there's that much of a supply response from the coal side right now. And I personally believe that coal supply remains tight, and I expect that to continue as we head into summer. Right now, inventories across domestic customers are at comfortable levels. However, that can change very quickly as we start seeing demand out of -- out of the U.S. and Europe for that matter. And I'll also tell you that many of our customers were sitting at less than 20 days of inventory heading into winter. As mentioned, this past month certainly afforded many to continue to build what I would call healthy levels. However, we do have several customers that are still telling us that they likely will have some spot needs in the back half of the year, so very positive there.