ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, the following discussion of the financial condition and results of operations of our Partnership reflect a 25% undivided interest in the assets, liabilities and results of operations of the Pennsylvania Mining Complex. As used in the following discussion of the financial condition and results of operations of our Partnership, the terms “we,” “our,” “us,” or like terms refer to the Partnership with respect to its 25% undivided interest in the Pennsylvania Mining Complex’s combined assets, liabilities revenues and costs. All amounts except per unit or per ton are displayed in thousands.
Overview
We are a growth-oriented master limited partnership formed by CONSOL Energy in 2015 to manage and further develop all of its thermal coal operations in Pennsylvania. At June 30, 2017, the Partnership's assets include a 25% undivided interest in, and operational control over, CONSOL Energy's Pennsylvania Mining Complex, which consists of three underground mines and related infrastructure that produce high-Btu bituminous thermal coal that is sold primarily to electric utilities in the eastern United States, our core market. We believe that our ability to efficiently produce and deliver large volumes of high-quality coal at competitive prices, the strategic location of our mines, the industry experience of our management team position us as a leading producer of high-Btu thermal coal in the Northern Appalachian Basin and the eastern United States. CONSOL Energy's strategy is to increase shareholder value through the development and growth of its existing natural gas assets, selective acquisition of natural gas and natural gas liquid acreage leases within its footprint, and through its participation in global coal markets. Ultimately, CONSOL Energy's intent is to separate the Gas Exploration and Production division and the Coal division, including CONSOL Energy's remaining ownership in Pennsylvania Mining Complex. With that in mind, on July 11, 2017 a registration statement on Form 10 was filed with the U.S. Securities and Exchange Commission.
On September 30, 2016, the Partnership and its wholly owned subsidiary, CNX Thermal Holdings, entered into a Contribution Agreement (the “Contribution Agreement”) with CONSOL Energy, CPCC and Conrhein and together with CPCC, (the “Contributing Parties”), under which CNX Thermal Holdings completed the PA Mining Acquisition to acquire an undivided 6.25% of the Contributing Parties’ right, title and interest in and to the Pennsylvania Mining Complex (which represents an aggregate 5% undivided interest in and to the Pennsylvania Mining Complex). The PA Mining Acquisition was a transaction between entities under common control; therefore, the Partnership recorded the assets and liabilities of the acquired 5% of Pennsylvania Mining Complex at their carrying amounts on CONSOL Energy's financial statements at the date of the transaction. The difference between CONSOL Energy’s net carrying amount and the total consideration paid to CONSOL Energy was recorded as a capital transaction with CONSOL Energy, which resulted in a reduction in partners’ capital. The Partnership recast its historical consolidated financial statements to retrospectively reflect ownership of the additional 5% (a total 25%) interest in Pennsylvania Mining Complex as if the business was owned for all periods presented; however, the consolidated financial statements are not necessarily indicative of the results of operations that would have occurred if the Partnership had owned it during the periods reported.
How We Evaluate Our Operations
Our management team uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability. The metrics include: (i) coal production, sales volumes and average sales price; (ii) cost of coal sold, a non-GAAP financial measure; (iii) average cash margin per ton, an operating ratio derived from non-GAAP financial measures, (iv) adjusted EBITDA, a non-GAAP financial measure; and (v) distributable cash flow, a non-GAAP financial measure.
Cost of coal sold, average cash margin per ton, adjusted EBITDA and distributable cash flow normalize the volatility contained within comparable GAAP measures, by adjusting certain non-operating or non-cash transactions. 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 to make distributions to our partners;
• 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.
The non-GAAP financial measures should not be considered an alternative to total costs, 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 net income or net cash, and these measures 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.
Reconciliation of Non-GAAP Financial Measures
We evaluate our cost of coal sold on a cost per ton basis. Our cost of coal sold per ton represents our costs of coal sold divided by the tons of coal we sell. 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 per ton includes items such as direct operating costs, royalty and production taxes, direct administration, and depreciation, depletion and amortization costs. Our costs exclude any indirect costs such as general and administrative costs and other costs not directly attributable to the production of coal. The GAAP measure most directly comparable to cost of coal sold is total costs.
We define average cash margin per ton as average coal revenue per ton, net of average cost of coal sold per ton, less depreciation, depletion and amortization. The GAAP measure most directly comparable to average cash margin per ton sold is total coal revenue.
We define adjusted EBITDA as (i) net income (loss) before net interest expense, depreciation, depletion and amortization, as adjusted for (ii) certain non-cash items, such as long-term incentive awards including phantom units under the CNX Coal Resources LP 2015 Long-Term Incentive Plan ("Unit Based Compensation"). The GAAP measure most directly comparable to adjusted EBITDA is net income.
We define distributable cash flow as (i) net income (loss) before net interest expense, depreciation, depletion and amortization, as adjusted for (ii) certain non-cash items, such as Unit Based Compensation, less net cash interest paid and estimated maintenance capital expenditures, which is defined as those forecasted average capital expenditures required to maintain, over the long-term, the operating capacity of our capital assets. These estimated capital expenditures do not reflect the actual cash capital incurred in the period presented. Distributable cash flow will not reflect changes in working capital balances. The GAAP measures most directly comparable to distributable cash flow are net income and net cash provided by operating activities.
The following table presents a reconciliation of cost of coal sold to total costs, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total Costs
|
$
|
70,998
|
|
|
$
|
63,310
|
|
|
$
|
140,212
|
|
|
$
|
119,292
|
|
Freight Expense
|
(4,441
|
)
|
|
(2,797
|
)
|
|
(7,511
|
)
|
|
(6,066
|
)
|
Selling, General and Administrative Expenses
|
(3,652
|
)
|
|
(1,969
|
)
|
|
(6,935
|
)
|
|
(3,897
|
)
|
Interest Expense
|
(2,396
|
)
|
|
(2,076
|
)
|
|
(4,853
|
)
|
|
(4,054
|
)
|
Other Costs (Non-Production)
|
(934
|
)
|
|
(2,564
|
)
|
|
(2,427
|
)
|
|
(6,196
|
)
|
Depreciation, Depletion and Amortization (Non-Production)
|
(550
|
)
|
|
(749
|
)
|
|
(1,100
|
)
|
|
(2,307
|
)
|
Cost of Coal Sold
|
$
|
59,025
|
|
|
$
|
53,155
|
|
|
$
|
117,386
|
|
|
$
|
96,772
|
|
The following table presents a reconciliation of average cash margin per ton for each of the periods indicated (in thousands, except per ton information).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total Coal Revenue
|
$
|
75,927
|
|
|
$
|
62,640
|
|
|
$
|
155,039
|
|
|
$
|
119,181
|
|
Operating and Other Costs
|
50,232
|
|
|
46,046
|
|
|
100,115
|
|
|
84,536
|
|
Depreciation, Depletion and Amortization
|
10,277
|
|
|
10,422
|
|
|
20,798
|
|
|
20,739
|
|
Less: Other Costs (Non-Production)
|
(934
|
)
|
|
(2,564
|
)
|
|
(2,427
|
)
|
|
(6,196
|
)
|
Less: Depreciation, Depletion and Amortization (Non-Production)
|
(550
|
)
|
|
(749
|
)
|
|
(1,100
|
)
|
|
(2,307
|
)
|
Total Cost of Coal Sold
|
$
|
59,025
|
|
|
$
|
53,155
|
|
|
$
|
117,386
|
|
|
$
|
96,772
|
|
Total Tons Sold
|
1,697
|
|
|
1,543
|
|
|
3,387
|
|
|
2,858
|
|
Average Sales Price Per Ton Sold
|
$
|
44.75
|
|
|
$
|
40.61
|
|
|
$
|
45.77
|
|
|
$
|
41.70
|
|
Average Cost Per Ton Sold
|
34.79
|
|
|
34.46
|
|
|
34.65
|
|
|
33.86
|
|
Average Margin Per Ton Sold
|
9.96
|
|
|
6.15
|
|
|
11.12
|
|
|
7.84
|
|
Add: Total Depreciation, Depletion and Amortization Costs Per Ton Sold
|
5.71
|
|
|
6.50
|
|
|
5.74
|
|
|
6.47
|
|
Average Cash Margin Per Ton Sold
|
$
|
15.67
|
|
|
$
|
12.65
|
|
|
$
|
16.86
|
|
|
$
|
14.31
|
|
The following table presents a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated. The table also presents a reconciliation of distributable cash flow to net income and operating cash flows, the most directly comparable GAAP financial measures, on a historical basis for each of the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net Income
|
$
|
11,474
|
|
|
$
|
3,907
|
|
|
$
|
25,540
|
|
|
$
|
7,723
|
|
Plus:
|
|
|
|
|
|
|
|
Interest Expense
|
2,396
|
|
|
2,076
|
|
|
4,853
|
|
|
4,054
|
|
Depreciation, Depletion and Amortization
|
10,277
|
|
|
10,422
|
|
|
20,798
|
|
|
20,739
|
|
Unit Based Compensation
|
841
|
|
|
307
|
|
|
1,707
|
|
|
615
|
|
Adjusted EBITDA
|
$
|
24,988
|
|
|
$
|
16,712
|
|
|
$
|
52,898
|
|
|
$
|
33,131
|
|
Less:
|
|
|
|
|
|
|
|
Cash Interest
|
2,539
|
|
|
1,789
|
|
|
4,700
|
|
|
3,756
|
|
PA Mining Acquisition Adjusted EBITDA
1
|
—
|
|
|
3,368
|
|
|
—
|
|
|
6,733
|
|
Distributions to Preferred Units
|
1,851
|
|
|
—
|
|
|
3,702
|
|
|
—
|
|
Estimated Maintenance Capital Expenditures
|
8,976
|
|
|
6,752
|
|
|
17,965
|
|
|
13,452
|
|
Distributable Cash Flow
|
$
|
11,622
|
|
|
$
|
4,803
|
|
|
$
|
26,531
|
|
|
$
|
9,190
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
$
|
23,092
|
|
|
$
|
21,320
|
|
|
$
|
40,754
|
|
|
$
|
24,831
|
|
Plus:
|
|
|
|
|
|
|
|
Interest Expense
|
2,396
|
|
|
2,076
|
|
|
4,853
|
|
|
4,054
|
|
Other, Including Working Capital
|
(500
|
)
|
|
(6,684
|
)
|
|
7,291
|
|
|
4,246
|
|
Adjusted EBITDA
|
$
|
24,988
|
|
|
$
|
16,712
|
|
|
$
|
52,898
|
|
|
$
|
33,131
|
|
Less:
|
|
|
|
|
|
|
|
Cash Interest
|
2,539
|
|
|
1,789
|
|
|
4,700
|
|
|
3,756
|
|
PA Mining Acquisition Adjusted EBITDA
1
|
—
|
|
|
3,368
|
|
|
—
|
|
|
6,733
|
|
Distributions to Preferred Units
|
1,851
|
|
|
—
|
|
|
3,702
|
|
|
—
|
|
Estimated Maintenance Capital Expenditures
|
8,976
|
|
|
6,752
|
|
|
17,965
|
|
|
13,452
|
|
Distributable Cash Flow
|
$
|
11,622
|
|
|
$
|
4,803
|
|
|
$
|
26,531
|
|
|
$
|
9,190
|
|
1
PA Mining Acquisition Adjusted EBITDA relates to the amount of Adjusted EBITDA acquired with the PA Mining Acquisition recasted for all periods presented.
Results of Operations
Three Months Ended June 30, 2017
Compared with the
Three Months Ended June 30, 2016
Total net income was
$11,474
for the
three
months ended
June 30, 2017
compared to
$3,907
for the
three
months ended
June 30, 2016
. Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
June 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
Coal Revenue
|
$
|
75,927
|
|
|
$
|
62,640
|
|
|
$
|
13,287
|
|
Freight Revenue
|
4,441
|
|
|
2,797
|
|
|
1,644
|
|
Other Income
|
2,104
|
|
|
1,780
|
|
|
324
|
|
Total Revenue and Other Income
|
82,472
|
|
|
67,217
|
|
|
15,255
|
|
Cost of Coal Sold:
|
|
|
|
|
|
Operating Costs
|
49,298
|
|
|
43,482
|
|
|
5,816
|
|
Depreciation, Depletion and Amortization
|
9,727
|
|
|
9,673
|
|
|
54
|
|
Total Cost of Coal Sold
|
59,025
|
|
|
53,155
|
|
|
5,870
|
|
Other Costs:
|
|
|
|
|
|
Other Costs
|
934
|
|
|
2,564
|
|
|
(1,630
|
)
|
Depreciation, Depletion and Amortization
|
550
|
|
|
749
|
|
|
(199
|
)
|
Total Other Costs
|
1,484
|
|
|
3,313
|
|
|
(1,829
|
)
|
Freight Expense
|
4,441
|
|
|
2,797
|
|
|
1,644
|
|
Selling, General and Administrative Expenses
|
3,652
|
|
|
1,969
|
|
|
1,683
|
|
Interest Expense
|
2,396
|
|
|
2,076
|
|
|
320
|
|
Total Costs
|
70,998
|
|
|
63,310
|
|
|
7,688
|
|
Net Income
|
$
|
11,474
|
|
|
$
|
3,907
|
|
|
$
|
7,567
|
|
Adjusted EBITDA
|
$
|
24,988
|
|
|
$
|
16,712
|
|
|
$
|
8,276
|
|
Distributable Cash Flow
|
$
|
11,622
|
|
|
$
|
4,803
|
|
|
$
|
6,819
|
|
Coal Production Rates
The table below presents total tons produced from the Pennsylvania Mining Complex on our 25% undivided interest basis for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
Mine
|
|
2017
|
|
2016
|
|
Variance
|
Bailey
|
|
785
|
|
|
680
|
|
|
105
|
|
Enlow Fork
|
|
631
|
|
|
611
|
|
|
20
|
|
Harvey
|
|
287
|
|
|
198
|
|
|
89
|
|
Total
|
|
1,703
|
|
|
1,489
|
|
|
214
|
|
Coal production was
1,703
tons for the
three
months ended
June 30, 2017
compared to
1,489
tons for the
three
months ended
June 30, 2016
. The Partnership's coal production
increase
d
214
tons to satisfy market demand.
Coal Operations
Coal revenue and cost components on a per unit basis for the
three
months ended
June 30, 2017
and
2016
were as indicated in the table below. Our operations also include various costs such as selling, general and administrative, freight and other costs not included in our unit cost analysis because these costs are not directly associated with coal production.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2017
|
|
2016
|
|
Variance
|
Total Tons Sold (in thousands)
|
1,697
|
|
|
1,543
|
|
|
154
|
|
Average Sales Price Per Ton Sold
|
$
|
44.75
|
|
|
$
|
40.61
|
|
|
$
|
4.14
|
|
|
|
|
|
|
|
|
Operating Costs Per Ton Sold (Cash Cost)
|
$
|
29.08
|
|
|
$
|
27.96
|
|
|
$
|
1.12
|
|
Depreciation, Depletion and Amortization Per Ton Sold (Non-Cash Cost)
|
5.71
|
|
|
6.50
|
|
|
(0.79
|
)
|
Total Costs Per Ton Sold
|
$
|
34.79
|
|
|
$
|
34.46
|
|
|
$
|
0.33
|
|
Average Margin Per Ton Sold
|
$
|
9.96
|
|
|
$
|
6.15
|
|
|
$
|
3.81
|
|
Add: Depreciation, Depletion and Amortization Costs Per Ton Sold
|
5.71
|
|
|
6.50
|
|
|
(0.79
|
)
|
Average Cash Margin Per Ton Sold (1)
|
$
|
15.67
|
|
|
$
|
12.65
|
|
|
$
|
3.02
|
|
(1) Average cash margin per ton is an operating ratio derived from non-GAAP measures.
Revenue and Other Income
Coal revenue was
$75,927
for the
three
months ended
June 30, 2017
compared to
$62,640
for the
three
months ended
June 30, 2016
. The
$13,287
increase
was attributable to a
154
ton
increase
in tons sold and a
$4.14
per ton
higher
average sales price. The increase in tons sold was primarily due to increased demand from our domestic power plant customers, in part due to higher natural gas prices and more normal power plant coal inventory levels versus the year-ago period. The higher average sales price per ton sold in the 2017 period was primarily the result of a tighter supply-demand balance in the international thermal and crossover metallurgical coal markets that we serve. The API 2 index (the benchmark price reference for coal imported into northwest Europe) was up more than 50% in the second quarter of 2017 compared to the second quarter of 2016, and the global coking coal prices were up by an even greater percentage in the period-to-period comparison.
Freight revenue, which is completely offset in freight expense, is the amount billed to customers based on the weight of coal shipped and negotiated freight rates for rail transportation. Freight revenue
increased
$1,644
in the period-to-period comparison due to
increased
shipments to customers where we were contractually obligated to provide transportation services.
Other income is comprised of income generated by the Partnership not in the ordinary course of business. Other income
increased
$324
in the period-to-period comparison primarily due to a gain related to an agreement to avoid mining approximately 85 acres of reserves as well as sales of externally purchased coal in 2017 for blending purposes only. These increases in other income were offset, in part, by a contract buyout that occurred in the prior year.
Cost of Coal Sold
Cost of coal sold is comprised of operating costs related to produced tons sold, along with changes in both volumes and carrying values of coal inventory. The costs of coal sold per ton include items such as direct operating costs, royalty and production taxes, direct administration expenses, and depreciation, depletion, and amortization costs. Total cost of coal sold was
$59,025
for the
three
months ended
June 30, 2017
, or
$5,870
higher
than the
$53,155
for the
three
months ended
June 30, 2016
. Total costs per ton sold were
$34.79
per ton for the
three
months ended
June 30, 2017
compared to
$34.46
per ton for the
three
months ended
June 30, 2016
. The
increase
in the cost of coal sold was primarily driven by an increase in production tons to meet market demand. In addition, the average cost per ton sold increased due to additional costs related to an increase in development mining footage, offset in part by a 7% improvement in productivity for the
three
months, as measured by tons per employee-hour, as compared to the year-ago period.
Total Other Costs
Total other costs is comprised of various costs that are not allocated to each individual mine and therefore are not included in unit costs. Total other costs
decreased
$1,829
for the
three
months ended
June 30, 2017
compared to the
three
months ended
June 30, 2016
. The
decrease
is primarily attributable to $847 of costs in the prior year related to temporarily idling one of the longwalls at the Pennsylvania Mining Complex to optimize the production schedule, and prior year costs of $668 related to discretionary 401(k) contribution accruals. In addition, accrued litigation contingency decreased $928 in the period-to-period comparison due to settling and estimating various litigation issues, none of which are material. These were offset, in part, by an increase of $478 in the period-to-period comparison related to the cost of purchased coal sold for blending purposes only.
Selling, General, and Administrative Expense
Selling, general, and administrative expenses
increased
$1,683
period-to-period, primarily due to an increase in short term incentive compensation paid to employees based on the results of operations achieved at our mines. In the prior year, the short term incentive compensation plan had been suspended in response to the poor market conditions that existed in the period. Legal and consulting fees have also increased in the current period due to various transactions throughout both periods, none of which were individually material.
Interest Expense
Interest expense, which primarily relates to obligations under our revolving credit facility,
increased
$320
in the period-to-period comparison primarily due to rising interest rates.
Adjusted EBITDA
Adjusted EBITDA was
$24,988
for the
three
months ended
June 30, 2017
compared to
$16,712
for the
three
months ended
June 30, 2016
. The
$8,276
increase
was primarily a result of a
$4.14
per ton
increase
in the average sales price per ton, offset, in part, by a
$1.12
increase
in the cash cost of coal sales per ton which resulted in a net
$5,125
increase
in Adjusted EBITDA. An increase of
154
tons of additional sales also resulted in an increase in Adjusted EBITDA of
$1,948
. The remaining variance is due to changes in other income and other costs as discussed above and various other transactions throughout both periods, none of which are individually material.
Distributable Cash Flow
Distributable cash flow was
$11,622
for the
three
months ended
June 30, 2017
compared to
$4,803
for the
three
months ended
June 30, 2016
. The
$6,819
increase
was attributed to a
$8,276
increase
in Adjusted EBITDA as discussed above, and a
$3,368
decrease
in the PA Mining Acquisition Adjusted EBITDA. These increases were offset, in part, by a $
1,851
increase
in distributions to holders of the Class A Preferred Units and an
increase
of $
2,224
in Estimated Maintenance Capital Expenditures. The remaining variance was due to various transactions throughout both periods, none of which are individually material.
Six Months Ended June 30, 2017
Compared with the
Six Months Ended June 30, 2016
Total net income was $
25,540
for the
six
months ended
June 30, 2017
compared to $
7,723
for the
six
months ended
June 30, 2016
. Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
|
|
June 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
(in thousands)
|
Revenue:
|
|
|
|
|
|
Coal Revenue
|
$
|
155,039
|
|
|
$
|
119,181
|
|
|
$
|
35,858
|
|
Freight Revenue
|
7,511
|
|
|
6,066
|
|
|
1,445
|
|
Other Income
|
3,202
|
|
|
1,768
|
|
|
1,434
|
|
Total Revenue and Other Income
|
165,752
|
|
|
127,015
|
|
|
38,737
|
|
Cost of Coal Sold:
|
|
|
|
|
|
Operating Costs
|
97,688
|
|
|
78,340
|
|
|
19,348
|
|
Depreciation, Depletion and Amortization
|
19,698
|
|
|
18,432
|
|
|
1,266
|
|
Total Cost of Coal Sold
|
117,386
|
|
|
96,772
|
|
|
20,614
|
|
Other Costs:
|
|
|
|
|
|
Other Costs
|
2,427
|
|
|
6,196
|
|
|
(3,769
|
)
|
Depreciation, Depletion and Amortization
|
1,100
|
|
|
2,307
|
|
|
(1,207
|
)
|
Total Other Costs
|
3,527
|
|
|
8,503
|
|
|
(4,976
|
)
|
Freight Expense
|
7,511
|
|
|
6,066
|
|
|
1,445
|
|
Selling, General and Administrative Expenses
|
6,935
|
|
|
3,897
|
|
|
3,038
|
|
Interest Expense
|
4,853
|
|
|
4,054
|
|
|
799
|
|
Total Costs
|
140,212
|
|
|
119,292
|
|
|
20,920
|
|
Net Income
|
$
|
25,540
|
|
|
$
|
7,723
|
|
|
$
|
17,817
|
|
Adjusted EBITDA
|
$
|
52,898
|
|
|
$
|
33,131
|
|
|
$
|
19,767
|
|
Distributable Cash Flow
|
$
|
26,531
|
|
|
$
|
9,190
|
|
|
$
|
17,341
|
|
Coal Production Rates
The table below presents total tons produced from the Pennsylvania Mining Complex on our 25% undivided interest basis for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Mine
|
|
2017
|
|
2016
|
|
Variance
|
Bailey
|
|
1,559
|
|
|
1,381
|
|
|
178
|
|
Enlow Fork
|
|
1,306
|
|
|
1,240
|
|
|
66
|
|
Harvey
|
|
565
|
|
|
226
|
|
|
339
|
|
Total
|
|
3,430
|
|
|
2,847
|
|
|
583
|
|
Coal production was
3,430
tons for the
six
months ended
June 30, 2017
compared to
2,847
tons for the
six
months ended
June 30, 2016
. The Partnership's coal production
increased
583
tons to satisfy market demand.
Coal Operations
Coal revenue and cost components on a per unit basis for the
six
months ended
June 30, 2017
and
2016
were as indicated in the table below. Our operations also include various costs such as selling, general and administrative, freight and other costs not included in our unit cost analysis because these costs are not directly associated with coal production.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Variance
|
Total Tons Sold (in thousands)
|
3,387
|
|
|
2,858
|
|
|
529
|
|
Average Sales Price Per Ton Sold
|
$
|
45.77
|
|
|
$
|
41.70
|
|
|
$
|
4.07
|
|
|
|
|
|
|
|
Operating Costs Per Ton Sold (Cash Cost)
|
$
|
28.91
|
|
|
$
|
27.39
|
|
|
$
|
1.52
|
|
Depreciation, Depletion and Amortization Per Ton Sold (Non-Cash Cost)
|
5.74
|
|
|
6.47
|
|
|
(0.73
|
)
|
Total Costs Per Ton Sold
|
$
|
34.65
|
|
|
$
|
33.86
|
|
|
$
|
0.79
|
|
Average Margin Per Ton Sold
|
$
|
11.12
|
|
|
$
|
7.84
|
|
|
$
|
3.28
|
|
Add: Depreciation, Depletion and Amortization Costs Per Ton Sold
|
5.74
|
|
|
6.47
|
|
|
(0.73
|
)
|
Average Cash Margin Per Ton Sold (1)
|
$
|
16.86
|
|
|
$
|
14.31
|
|
|
$
|
2.55
|
|
(1) Average cash margin per ton is an operating ratio derived from non-GAAP measures.
Revenue and Other Income
Coal revenue was
$155,039
for the
six
months ended
June 30, 2017
compared to
$119,181
for the
six
months ended
June 30, 2016
. The
$35,858
increase
was attributable to a
529
ton
increase
in tons sold and a
$4.07
per ton
higher
average sales price. The
increase
in tons sold was primarily due to increased demand from our domestic power plant customers, in part due to higher natural gas prices and more normal power plant coal inventory levels versus the year-ago period. The
higher
average sales price per ton sold in the 2017 period was primarily the result of a tighter supply-demand balance in the international thermal and crossover metallurgical coal markets that we serve. The API 2 index (the benchmark price reference for coal imported into northwest Europe) was up more than 60% in the first half of 2017 compared to the first half of 2016, and the global coking coal prices were up by an even greater percentage in the period-to-period comparison.
Freight revenue, which is completely offset in freight expense, is the amount billed to customers based on the weight of coal shipped and negotiated freight rates for rail transportation. Freight revenue
increased
$1,445
in the period-to-period comparison due to
increased
shipments to customers where we were contractually obligated to provide transportation services.
Other income is comprised of income generated by the Partnership not in the ordinary course of business. Other income
increased
$1,434
in the period-to-period comparison primarily due to a gain related to an agreement to avoid mining approximately 85 acres of reserves as well as sales of externally purchased coal in 2017 for blending purposes only, offset by a contract buyout that occurred in the prior year.
Cost of Coal Sold
Cost of coal sold is comprised of operating costs related to produced tons sold, along with changes in both volumes and carrying values of coal inventory. The costs of coal sold per ton include items such as direct operating costs, royalty and production taxes, direct administration expenses, and depreciation, depletion, and amortization costs. Total cost of coal sold was
$117,386
for the
six
months ended
June 30, 2017
, or
$20,614
higher
than the
$96,772
for the
six
months ended
June 30, 2016
. Total costs per ton sold were
$34.65
per ton for the
six
months ended
June 30, 2017
compared to
$33.86
per ton for the
six
months ended
June 30, 2016
. The
increase
in the cost of coal sold was primarily driven by an increase in production tons to meet market demand. In addition, the average cost per ton sold increased due to additional costs related to an increase in development mining footage, offset in part by a 7% improvement in productivity for the
six
months, as measured by tons per employee-hour, as compared to the year-ago period.
Total Other Costs
Total other costs is comprised of various costs that are not allocated to each individual mine and therefore are not included in unit costs. Total other costs
decreased
$4,976
for the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
. The
decrease
is primarily attributable to $4,517 of costs in the prior year related to temporarily idling one of the longwalls at the Pennsylvania Mining Complex to optimize the production schedule and $668 related to discretionary 401(k) contribution accruals. In addition, the accrued litigation contingency decreased $908 in the period-to-period comparison due to settling and estimating various litigation issues, none of which are material. These were offset, in part, by an increase of $1,329 in the period-to-period comparison related to the cost of purchased coal sold for blending purposes only.
Selling, General, and Administrative Expense
Selling, general, and administrative expenses
increased
$3,038
period-to-period, due to an increase in short term incentive compensation paid to employees based on the results of operations achieved at our mines. In the prior year, the short term incentive compensation plan was suspended in response to the poor market conditions that existed. Legal and consulting fees also increased in the period-to-period comparison due to various transactions throughout both periods, none of which were individually material.
Interest Expense
Interest expense, which primarily relates to obligations under our revolving credit facility,
increased
$799
in the period-to-period comparison primarily due to rising interest rates.
Adjusted EBITDA
Adjusted EBITDA was
$52,898
for the
six
months ended
June 30, 2017
compared to
$33,131
for the
six
months ended
June 30, 2016
. The
$19,767
increase
was primarily a result of
$4.07
per ton
increase
in the average sales price per ton, offset in part, by a
$1.52
increase
in the cash cost of coal sales per ton, which resulted in a net
$8,637
increase
in Adjusted EBITDA. An increase of
529
tons of additional sales also resulted in an increase in Adjusted EBITDA of
$7,570
. The remaining variance is due to changes in other income and other costs as discussed above and various other transactions throughout both periods, none of which are individually material.
Distributable Cash Flow
Distributable cash flow was
$26,531
for the
six
months ended
June 30, 2017
compared to
$9,190
for the
six
months ended
June 30, 2016
. The
$17,341
increase
was attributed to a
$19,767
increase
in Adjusted EBITDA as discussed above and a
$6,733
decrease
in the PA Mining Acquisition Adjusted EBITDA, offset, in part by a
$3,702
increase
in distributions to holders of the Class A Preferred Units, and an increase of $4,513 in Estimated Maintenance Capital Expenditures. The remaining variance was due to various transactions throughout both periods, none of which are individually material.
Capital Resources and Liquidity
Liquidity and Financing Arrangements
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and, if necessary, the issuance of additional equity or debt securities. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements and our long-term capital expenditure requirements and to make quarterly cash distributions as declared by the board of directors of our general partner. The partnership filed a universal shelf registration on Form S-3 (333-215962) on March 10, 2017, which was declared effective by the SEC on March 14, 2017, with the SEC for an aggregate amount of $750,000 to provide the Partnership with additional flexibility to access capital markets quickly.
Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures, if any.
On July 27, 2017, the Board of Directors of our general partner declared a cash distribution to the Partnership's unitholders for the quarter ended
June 30, 2017
of
$0.5125
per common and subordinated unit and
$0.4678
per Class A Preferred Unit. The cash distribution will be paid on August 15, 2017 to the unitholders of record at the close of business on August 7, 2017.
Revolving Credit Facility
Obligations under our
$400,000
senior secured revolving credit facility, with certain lenders and PNC Bank N.A., as administrative agent, are guaranteed by our subsidiaries (the “guarantor subsidiaries”) and are secured by substantially all of our and our subsidiaries’ assets pursuant to a security agreement and various mortgages. CONSOL Energy is not a guarantor of our obligations under our revolving credit facility.
The unused portion of our revolving credit facility is subject to a commitment fee of 0.50% per annum. Interest on outstanding indebtedness under our revolving credit facility accrues, at our option, at a rate based on either:
|
|
•
|
The highest of (i) PNC Bank N.A.’s prime rate, (ii) the federal funds open rate plus 0.50%, and (iii) the one-month LIBOR rate plus 1.0%, in each case, plus a margin ranging from 1.50% to 2.50% depending on the total leverage ratio; or
|
|
|
•
|
the LIBOR rate plus a margin ranging from 2.50% to 3.50% depending on the total leverage ratio.
|
As of
June 30, 2017
, the revolving credit facility had
$190,000
of borrowings outstanding, leaving
$210,000
of unused capacity, which is subject to a quarterly maximum total leverage ratio covenant described below. Interest on outstanding borrowings under the revolving credit facility at
June 30, 2017
was accrued at
4.17%
based on a weighted average LIBOR rate of
1.17%
, plus a weighted average margin of
3.00%
.
Our revolving credit facility matures on July 7, 2020 and requires compliance with conditions precedent that must be satisfied prior to any borrowing as well as ongoing compliance with certain affirmative and negative covenants.
Affirmative covenants include, among others, requirements relating to: (i) the preservation of existence; (ii) the payment of obligations, including taxes; (iii) the maintenance of properties and equipment, insurance and books and records; (iv) compliance with laws and material contracts; (v) use of proceeds; (vi) the subordination of intercompany loans; (vii) compliance with anti-terrorism, anti-money laundering, anti-corruption and sanctions laws; and (viii) collateral.
Negative covenants include, among others, restrictions on our and our guarantor subsidiaries’ ability to: (i) create, incur, assume or suffer to exist indebtedness; (ii) create or permit to exist liens on their properties; (iii) make or pay any dividends or distributions;
provided
that we will be able to make cash distributions of available cash to partners so long as no event of default is continuing or would result therefrom; (iv) merge with or into another person, liquidate or dissolve, acquire all or substantially all of the assets of any going concern or going line of business or acquire all or a substantial portion of another person’s assets; (v) make particular investments and loans;
provided
that we will be able to increase our ownership percentage of our undivided interest in the Pennsylvania Mining Complex and make investments in the Pennsylvania Mining Complex in accordance with our ratable ownership; (vi) sell, transfer, convey, assign or dispose of our assets or properties other than in the ordinary course of business and other select instances; (vii) deal with any affiliate except in the ordinary course of business on
terms no less favorable to us than we would otherwise receive in an arm’s length transaction; (viii) amend organizational documents or any documentation governing certain material debt; and (ix) amend, waive or grant a consent under any material contract. In addition, we are obligated to maintain at the end of each fiscal quarter (x) a minimum interest coverage ratio of at least 3.00 to 1.00 and (y) a maximum total leverage ratio of no greater than 3.50 to 1.00 (or 4.00 to 1.00 for two fiscal quarters after consummation of a material acquisition). At
June 30, 2017
, the interest coverage ratio was
10.91
to
1.00
and the total leverage ratio was
1.89
to
1.00
.
Our revolving credit facility also contains events of default, including, but not limited to, cross-default to certain other debt, breaches of representations and warranties, change of control events and breaches of covenants.
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
(in thousands)
|
Cash flows provided by operating activities
|
$
|
40,754
|
|
|
$
|
24,831
|
|
|
$
|
15,923
|
|
Cash used in investing activities
|
$
|
(3,972
|
)
|
|
$
|
(6,482
|
)
|
|
$
|
2,510
|
|
Cash used in financing activities
|
$
|
(39,959
|
)
|
|
$
|
(15,920
|
)
|
|
$
|
(24,039
|
)
|
Six Months Ended
June 30, 2017
Compared with the
Six Months Ended
June 30, 2016
:
Cash flows provided by operating activities
increased
$15,923
in the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
primarily due to an
increase
in Adjusted EBITDA of $
19,767
in the period-to-period comparison, and the remaining variance relates to various changes in working capital.
Cash used in investing activities
decreased
$2,510
in the
six
months ended
June 30, 2017
compared to the
six
months ended
June 30, 2016
as a result of
decreased
capital expenditures of
$1,029
and
increased
proceeds from sale of assets of
$1,481
. The
decrease
in capital expenditures is due to the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
(in thousands)
|
Building and Infrastructure
|
$
|
3,184
|
|
|
$
|
3,987
|
|
|
$
|
(803
|
)
|
Equipment Purchases and Rebuilds
|
1,253
|
|
|
1,511
|
|
|
(258
|
)
|
Refuse Storage Area
|
667
|
|
|
270
|
|
|
397
|
|
Water Treatment Systems
|
66
|
|
|
142
|
|
|
(76
|
)
|
Other
|
302
|
|
|
591
|
|
|
(289
|
)
|
Total Capital Expenditures
|
$
|
5,472
|
|
|
$
|
6,501
|
|
|
$
|
(1,029
|
)
|
Cash flows used in financing activities increased by
$24,039
from
$15,920
for the
six
months ended
June 30, 2016
to
$39,959
for the
six
months ended
June 30, 2017
. The increase was primarily due to a
$24,000
difference in the Revolving Credit Facility activity in the period-to-period comparison, which was comprised of
$13,000
in borrowings during the
six
months ended
June 30, 2016
versus
$11,000
of payments during the
six
months ended
June 30, 2017
. The increase was also attributable to an
increase
in cash distributions of
$3,812
in the period-to-period comparison. This
increase
was due to cash distributions on Class A Preferred Units for the
six
months ended
June 30, 2017
. There were no Class A Preferred Units as of
June 30, 2016
. The remaining variance is due to various transactions throughout both periods, none of which are individually material.
Off-Balance Sheet Arrangements
We do not maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that have or are reasonably likely to have a material current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the Notes to the Unaudited Consolidated Financial Statements of this Form 10-Q.
Contractual Obligations
Our contractual obligations include the revolving credit facility, operating leases, capital leases, asset retirement obligations and other long-term liability commitments. Since
December 31, 2016
, there have been no material changes to our contractual obligations within the ordinary course of business.
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of us. With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. When we use the words "believe," "intend," "expect," "may," "should," "anticipate," "could," "estimate," "plan," "predict," "project," "will," or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe strategy that involves risks or uncertainties, we are making forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following: generation of sufficient distributable cash flow to support the payment of minimum quarterly distributions; changes in coal prices or the costs of mining or transporting coal; uncertainty in estimating economically recoverable coal reserves and replacement of reserves; our ability to develop our existing coal reserves and successfully execute our mining plans; changes in general economic conditions, both domestically and globally; competitive conditions within the coal industry; changes in the consumption patterns of coal-fired power plants and steelmakers and other factors affecting the demand for coal by coal-fired power plants and steelmakers; the availability and price of coal to the consumer compared to the price of alternative and competing fuels; competition from the same and alternative energy sources; energy efficiency and technology trends; our ability to successfully implement our business plan and strategy for growth; the price and availability of debt and equity financing; operating hazards and other risks incidental to coal mining; major equipment failures and difficulties in obtaining equipment, parts and raw materials; availability, reliability and costs of transporting coal; adverse or abnormal geologic conditions, which may be unforeseen; natural disasters, weather-related delays, casualty losses and other matters beyond our control; interest rates; labor availability, relations and other workforce factors; defaults by our sponsor under our operating agreement and employee services agreement; changes in availability and cost of capital; changes in our tax status; delays in the receipt of, failure to receive or revocation of necessary governmental permits; defects in title or loss of any leasehold interests with respect to our properties; the effect of existing and future laws and government regulations, including the enforcement and interpretation of environmental laws thereof; the effect of new or expanded greenhouse gas regulations; the effects of litigation; and other factors discussed in our 2016 Form 10-K under “Risk Factors,” as updated by any subsequent Form 10-Qs, which are on file at the Securities and Exchange Commission.