Coal Division Drives CONSOL to Record Revenue of $1.289 Billion
Thursday, July 29th, 2010
CONSOL Energy Inc. (NYSE: CNX), the leading diversified fuel producer in the Appalachian Basin, reported record revenue of $1.289 billion in the quarter ended June 30, 2010, or 20% higher than the revenue of $1.071 billion for the quarter ended June 30, 2009. The Coal Division contributed a record $1.002 billion towards the total, as compared to $841 million in the year-earlier quarter.
Adjusted EBITDA(1) was $350 million for the quarter ended June 30, 2010, or 18% higher than the $297 million reported in the year-earlier quarter.
Adjusted earnings(1) for the second quarter were $103 million, or $0.45 per dilutive share. During the quarter, CONSOL Energy incurred acquisition and financing fees ($18 million) and a charge for the settlement of the Yukon litigation ($15 million). Additionally, certain non-cash charges were accrued for a Fola Mine reclamation project ($28 million).
Despite achieving record revenue in the second quarter, adjusted earnings were lower than the $122 million for the year-earlier quarter because of increased interest expense associated with the acquisition of the Dominion Appalachian E&P assets. As CONSOL aggressively drills its largely undeveloped Marcellus Shale acreage, the company fully expects to achieve superior earnings in line with its expected rising revenues.
CONSOL Energy reported GAAP net income of $67 million, or $0.29 per dilutive share, in the quarter ended June 30, 2010. This compares to $113 million, or $0.62 per dilutive share, in the quarter ended June 30, 2009.
Every year in the second quarter, CONSOL Energy recalculates the present value of its expected reclamation liabilities. The GAAP net income for the quarter ended June 30, 2009 includes a $23 million (pre-tax) reduction in the present value of the reclamation liabilities, due to changes in engineering estimates of water quality and flows, as well as to changes in the discount rate.
Additionally, GAAP net income for the quarter ended June 30, 2010 was affected by a $14 million (pre-tax) increase in actuarial liabilities because of a lowering of the assumed discount rate at December 31, 2009.
Second Quarter 2010 Highlights:
* Reduced lost time incidents at our mines by 28%; maintained zero incidents at our gas fields.
* Record revenue of $1.289 billion.
* Grew quarterly gas production by 42% to a record 31.9 Bcf.
* Calculated EURs (expected ultimate recoveries) for 2010 Marcellus Shale wells that range from 5.5 to 9.9 Bcf per well.
* Entered into a 15-year firm transportation agreement for Marcellus Shale gas with Dominion Transmission for approximately 200 MMcf per day, beginning in late 2012.
* Loaded a record 43 vessels at Baltimore Terminal containing nearly 3.3 million tons.
* Completed face extension, to 1,500 feet, at Bailey Mine resulting in the widest panel ever mined in the history of CONSOL. Loveridge Mine also began mining a wider panel during the quarter.
Statement by CONSOL Energy Chairman, President, and CEO J. Brett Harvey on Results and Strategy:
CONSOL Energy just completed a transformative quarter with the $3.475 billion acquisition of Dominion’s Appalachian gas assets and the subsequent take-in of CNX Gas Corporation. With these two events, CONSOL Energy is now the largest gas producer in Appalachia, the largest coal producer in Appalachia, and therefore, the largest fossil fuel producer in Appalachia.
Our gas portfolio now includes low-cost, high-margin coalbed methane production, as well as a leading position in the Marcellus Shale, with over 750,000 acres. Nearly 500,000 of the Marcellus acres are held by production, while another 160,000 acres are owned outright by CONSOL. These attributes translate into a competitive advantage for CONSOL, because in most cases we only pay a one-eighth royalty on acreage held by production and no royalty on the acres that we own outright. Furthermore, if gas prices stay low, we don’t have to drill to hold acreage. While a few companies hold more Marcellus Shale acreage in total, we don’t believe that any company has as much acreage with these attributes.
Our tentative 2010 Marcellus Shale drilling results are nothing short of outstanding, with the details described later in this release.
With these results in hand, I have asked operations to further accelerate our development of the Marcellus Shale. When we released first quarter earnings, I spoke of CONSOL adding a second horizontal rig in July and taking an option on a third rig later in the year. We are now committed to having four horizontal rigs running by the end of 2010.
Our ability to accelerate our drilling in the second half of the year is due in part to the contribution of the Dominion staff, which was an important part of the transaction. As a result of this increased drilling, we now expect that CONSOL Energy will produce 127 Bcf in 2010 and 170 Bcf in 2011. This will put us on target to achieve our 2015 production goal of 350 Bcf.
We believe that we’ll be able to fund this growth in gas production with the cash generated from our gas and coal businesses and from our borrowing capacity.
Our coal portfolio consists of three products: low-vol met coal, high-vol met coal, and thermal coal.
* CONSOL Energy has the lowest-cost, highest-margin low-vol met coal business of any U.S. producer. CONSOL is #2 in low-vol met coal production.
* With marketing assistance from Xcoal, CONSOL literally created a new market category in the 2010 first quarter: high-vol met coal shipped to China. Through CONSOL’s wholly-owned Baltimore Terminal, CONSOL and Xcoal have a direct shipping route to the expanding Asian economies. We believe the 2.7 to 3 million tons of high-vol met coal that CONSOL expects to ship in 2010 will be more than any other U.S. producer.
* Further, CONSOL’s Northern App mines produce more low-cost, high-margin thermal coal than any Appalachian producer.
CONSOL continues permitting and development of its planned BMX (Bailey Mine Expansion) longwall mine in Western Pennsylvania. This mine would add the fifth longwall at CONSOL’s Bailey/Enlow Fork complex, which is currently the largest underground complex in the United States. A single development section is presently driving main entries and full production is expected to be 5 million tons per year beginning in late 2013. Potential customers include Asian and Brazilian steel mills, European generators, and domestic generators now burning Central App coal. Development costs will be lower than a green field mine because BMX will utilize existing infrastructure and preparation facilities at the complex.
CONSOL is also assessing options for monetizing non-operating Central App met coal reserves. CONSOL owns three separate tracts in Southern West Virginia and Southwestern Virginia: Amonate, Elk Creek, and Itmann. These properties have the potential to produce over 5 million tons annually of a mix of low-vol, medium-vol, and high-vol met coals within three years. At this production rate and a $150 per ton average price at the mines, over $350 million per year of EBITDA could be achieved. CONSOL is assessing monetization options that include joint-venturing, outright sale and possible sole development-operating of these properties. A decision is expected by year end.
All in all, as we ramp up our gas production and continue to execute in both coal and gas, we believe that the markets will better reflect the value of CONSOL Energy’s stock.