CNX Coal Resources LP (CNXC) has reported financial and operating results for the quarter ended 31 March 2016 (1Q16).
During 1Q16, CNXC generated distributable cash flow of US$4.4 million and distribution coverage of 0.36x. The company’s cash distribution was US$0.5125 per unit and net income totalled US$2.5 million. Adjusted EBITDA was reported to be US$13.1 million.
CNXC has reported it has achieved its lowest cost of coal sales in last six years.
For its 20% undivided interest in the Pennsylvania mining complex, CNXCC sold 1.1 million short t of coal during the first quarter of 2016. Total production declined to 1.1 million short t compared to 1.3 million short t produced in the same quarter of 2015 as CNXCC aligned production with market conditions.
During the first quarter, CNXCC sold approximately 0.3 million short t of coal in export market compared to 0.4 million short t in same quarter of 2015.
The company indicated its overall sales were impacted by weak winter burn and reduced coal generation weighing on the timing of shipments. Its total unit costs for coal sold in the quarter were US$33.16/short t, compared to US$42.62/short t in the year-earlier quarter. CNXC reported that the improved cost performance was driven by improved productivity, reduced staffing levels and realignment of employee benefits, offset by lower production due to inconsistent shipment schedules.
“The CNXCC team delivered excellent operational performance during the first quarter of 2016 and helped offset declining cash margins in the face of challenging coal markets and further deterioration in coal prices.” said Jimmy Brock, Chief Executive Officer of CNXC Coal Resources GP LLC (the General Partner).Brock continued: “Specifically, the cash cost per ton in the first quarter was the lowest since first quarter of 2009, despite the inconsistent customer shipments that we noted in January. Our performance not only highlights the ability of the Pennsylvania mining complex to adapt in a challenging commodity price environment, but also to remain competitive as the US coal market continues to reshape. As expected, the first quarter of 2016 began with abnormally low shipment volumes in January and February. However, we saw some improvements in March, which allowed us to have near-record production at some of our longwalls. Our cost structure allowed us to continue to remain profitable in spite of less than favourable pricing during the quarter.”
In January 2016, CNXC returned to running its mines on a more consistent schedule to achieve productivity improvements, even if it resulted in some lower-priced sales in the export markets. The company believe its strategy worked as expected, leading to improved mine consistency and improving margins as the quarter advanced, with exports being able to absorb surplus mine production.
During 1Q16, CNXCC also made several operational adjustments including idling of one longwall, reducing staffing levels and realigning employee benefits. The company reported that all of these steps resulted in a more consistent operating schedule at the mines, reduced labor cost and improved productivity. Productivity for the first quarter, as measured by tons per employee-hour, improved by 14% compared to the year-ago period, despite the reduced number of longwalls in operation.
Brock indicated that in terms of the safety and compliance side, there was mix results. “While we were able to reduce the severity of the incidents compared to the same period last year, there was an increase in the number of recordable incidents. We continue to remain focused on our core values of safety and compliance and continue our efforts to improve on both of these key measures.”
For the rest of 2016, CNXC indicated it expects a gradual recovery in shipments at some of its customers as they normalise their inventories while competing with low natural gas prices. CNXC pointed towards this resulting in potentially selling some coal in the spot market, which could weigh on its realisations due to the changing customer mix.
According to the most recent estimates published by the EIA in its short-term energy outlook, US coal demand declined approximately 15%, while industry-wide coal production declined almost 31% in the first quarter of 2016 compared to year-earlier quarter. CNXC believe that given a normal summer, this decline in industry-wide production may help normalise inventory and set the stage for a recovery in coal prices. In the interim, the company intends to carry on focusing on building its contract book and running our mines as safely and efficiently as possible. To that extent and including its expectations of carryover tons from 2016, CNXCC has solid contractual sales positions for 2017 and 2018 of 70% and 52%, respectively, based on a 5.2 million short t production run rate.
Looking forward, CNXCC expects slight improvement in the coal shipments in the second quarter coupled with a slight increase in cost of coal sold, compared to the first quarter, due to four scheduled longwall moves.
Based on its current expectations, CNXCC is providing the following updated 2016 outlook for coal sales, adjusted EBITDA and maintenance capital expenditures: