Core Natural Resources, Inc. quarterly report, Q2 FY2022

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Core Natural Resources, Inc. — filing identity note

The supplied filing is CONSOL Energy Inc.’s Form 10-Q for the quarter ended June 30, 2022, not a filing by Core Natural Resources, Inc. The summary below reflects the registrant named in the filing.

Business context and reporting period

CONSOL Energy is a coal producer and exporter operating the Pennsylvania Mining Complex (PAMC) and CONSOL Marine Terminal, with the Itmann Mine in development. This unaudited filing covers the three and six months ended June 30, 2022, compared with the same 2021 periods. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.

Financial and operating performance

  • Second-quarter revenue and earnings: Total revenue and other income was $544.6 million, versus $287.2 million in Q2 2021. Net income was $126.3 million, versus $4.2 million; diluted EPS was $3.54, versus $0.12.
  • First-half performance: Total revenue and other income was $903.1 million, versus $629.3 million. Net income was $121.8 million, versus $30.6 million; diluted EPS was $3.42, versus $0.87.
  • Adjusted EBITDA: A non-GAAP measure, it was $216.3 million in Q2, versus $84.4 million, and $385.6 million for the first half, versus $191.1 million.
  • Coal and terminal activity: Q2 PAMC sales were 6.2 million tons, compared with 5.9 million; first-half sales were 12.7 million tons in both periods. Q2 coal revenue was $532.7 million, versus $259.8 million. Terminal revenue was $21.8 million, versus $17.4 million; terminal throughput was 3.8 million tons in both quarters.
  • Coal pricing and costs: PAMC average realized coal revenue per ton, after derivative settlements, was $72.18 in Q2, versus $44.02. Average cash cost per ton rose to $34.81 from $28.02. The resulting non-GAAP cash margin per ton was $37.37, versus $16.00. For the first half, realized revenue per ton was $65.73 versus $42.60, and cash cost per ton was $32.30 versus $26.09.
  • Commodity derivatives: The company reported net derivative losses of $68.4 million in Q2 and $256.5 million in the first half. First-half settlements produced a $160.2 million loss; the company also recorded a $96.3 million unrealized mark-to-market loss. These items materially affect reported results and comparisons.
  • Cash flow and capital spending: First-half operating cash flow was $346.6 million, compared with $172.6 million. Investing cash outflow was $70.1 million, including $76.1 million of capital expenditures, versus $57.5 million of capex. Simple operating cash flow less capex was approximately $270.5 million; this is a calculation, not a company-reported free-cash-flow measure.
  • Liquidity and debt: At June 30, cash and cash equivalents were $261.6 million; the company reported total liquidity of approximately $504 million, including $242 million of unused revolving-credit capacity. Total debt and finance lease obligations were approximately $511 million, including current amounts. The company made $115.9 million of debt repayments during Q2; first-half debt repayments and note retirements reduced outstanding obligations.
  • Margins and balance sheet: The filing does not provide a consolidated GAAP operating-margin figure in the supplied text. Total assets were $2.72 billion, total liabilities $1.92 billion, and stockholders’ equity $797.6 million at June 30, 2022.

Material changes versus the prior comparable periods

  • Coal prices and demand increased substantially, supported by tight global supply, higher power and natural-gas prices, lower reported U.S. utility stockpiles, and overseas demand amid the Russia-Ukraine conflict. PAMC Q2 production increased year over year, although first-half production declined slightly and sales volumes were flat.
  • Operating costs increased: management attributed higher PAMC cash cost per ton mainly to inflation, repair and maintenance, the early termination of a fixed power contract after a supplier bankruptcy, and work on a fifth longwall. Transportation constraints and demurrage also weighed on operations.
  • First-half net income and adjusted EBITDA increased materially, while derivative losses also rose sharply. Revenue growth therefore should be assessed alongside derivative settlements, mark-to-market movements, and the higher operating cost base.
  • Interest expense fell year over year as the company reduced debt. Cash used in financing shifted to $162.0 million from $22.5 million provided in the first half of 2021, principally reflecting higher debt repayments and the absence of the prior-year $75 million bond proceeds.

Outlook, management commentary, risks, and unusual items

  • 2022 guidance: PAMC sales volume of 24–25 million tons; average realized coal revenue of $64–$67 per ton; average cash cost of $32–$34 per ton; capital expenditures of $160–$185 million, including Itmann development; and Itmann production of 0.3–0.5 million tons. The per-ton measures are non-GAAP, and the company did not provide a GAAP reconciliation because certain items were not known.
  • Projects and capital returns: The Itmann preparation plant was expected to be completed in Q3 2022; full operations were expected to support about 900,000 tons annually, with additional third-party processing capacity. In August, the board approved a program targeting returns of approximately 35% of quarterly free cash flow through dividends and/or repurchases, subject to board discretion, and announced a $1.00-per-share Q2 special dividend, payable August 24, 2022. The repurchase authorization was increased to $600 million and extended through December 31, 2024.
  • Credit facilities: In July 2022, after quarter-end, the revolving facility was amended and extended. Commitments were increased by $260 million, with availability under the existing $400 million facility maintained through March 2023; thereafter the limit was to be $260 million through July 2026. The receivables securitization facility was extended to July 2025, with a $100 million maximum capacity.
  • Covenants: At June 30, the company reported first-lien gross leverage of 0.38x, total net leverage of 0.46x, and fixed-charge coverage of 2.51x, and stated it was compliant with its financial covenants.
  • Risks and contingencies: Management cited coal-price and demand volatility, inflation, rail and logistics disruption, COVID-19 uncertainty, customer concentration and credit risk, insurance and surety-market constraints, environmental and regulatory exposure, and limited access to capital related to industry ESG pressures. The Russia-Ukraine conflict had not caused a material negative impact as of the filing date, but its effects remained uncertain.
  • Legal and off-balance-sheet exposures: Pending retiree-benefit litigation includes the Fitzwater/Casey matters and a Coal Act dispute; management reported no ruling in the former cases and said estimated accruals for pending claims were immaterial, while future aggregate losses could be material but could not be reasonably estimated. Letters of credit and surety bonds totaled approximately $810 million in stated maximum commitments; the company said these were not recorded as liabilities and did not expect a material adverse effect.
  • Other notable items: The company recorded a $3.7 million first-half loss on debt extinguishment, largely associated with accelerated debt payments and note repurchases. It also disclosed a $9 million fixed-rate PEDFA bond issue bearing 9% initial interest, subject to mandatory purchase in 2028, and LIBOR transition risk for facilities before the July amendments.

Important facts for investors to verify

  • Confirm the intended registrant: the supplied 10-Q is for CONSOL Energy Inc., despite the request metadata naming Core Natural Resources, Inc.
  • Review the size, timing, and accounting treatment of derivative settlements and unrealized losses, and how they affect realized revenue and reported earnings.
  • Track whether 2022 sales, realized-price, cash-cost, capex, and Itmann production guidance was achieved, especially given inflation, transportation constraints, and project timing.
  • Check the post-quarter credit-facility amendments, actual borrowing availability after March 2023, and the effect of floating-rate debt and the LIBOR-to-SOFR transition.
  • Assess debt reduction alongside the announced shareholder-return policy, special dividend, repurchase authorization, and applicable covenant and indenture restrictions.
  • Monitor retiree-benefit litigation, reclamation and environmental obligations, and the potential funding or renewal requirements associated with guarantees, letters of credit, and surety bonds.