CONSOL Energy (CNX)

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET

Executives

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J. Harvey - Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of CNX Gas Corporation and Chief Executive Officer of CNX Gas Corporation

William Lyons - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Brandon Elliott - Vice President of Investor and Public Relations

Nicholas DeIuliis - President

Robert Pusateri - Executive Vice President of Energy Sales & Transportation Services and Executive Vice President of Energy Sales & Transportation Services for CNX Gas Corporation

Analysts

Brandon Blossman - Tudor, Pickering, Holt & Co. Securities, Inc.

Mitesh Thakkar - FBR Capital Markets & Co.

John Bridges - JP Morgan Chase & Co

Holly Stewart

David Katz - JP Morgan Chase & Co

James Rollyson - Raymond James & Associates, Inc.

Shneur Gershuni - UBS Investment Bank

Andre Benjamin - Goldman Sachs Group Inc.

David Lipschitz - Credit Agricole Securities (USA) Inc.

Richard Garchitorena - Crédit Suisse AG

Brian Gamble - Simmons & Company International

Meredith Bandy - BMO Capital Markets Canada

Jeremy Sussman - Brean Murray, Carret & Co., LLC

Mark Levin - BB&T Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to CONSOL Energy's Second Quarter 2011 Earnings Conference Call. As a reminder, today's call is being recorded. I would now like to turn the conference call over to the Vice President of Investor Relations, Brandon Elliott. Please go ahead.

Brandon Elliott

Thanks, John. I would like to welcome everyone to CONSOL Energy's Second Quarter Conference Call. We have in the room today Brett Harvey, our Chairman and CEO; Nick Deluliis, our President; Bill Lyons, our Chief Financial Officer; and Bob Pusateri, our Executive Vice President of Sales and Marketing. Dan Zajdel and I are here representing our IR team.

Today, we will be discussing our second quarter results. Obviously, any forward-looking statements we make or comments about future expectations are subject to the business risks we have laid out for you in our press release today, as well as in our previous SEC filings.

With that said, we will start the call today with Bill Lyons. Bill?

William Lyons

Thank you, Brandon. CONSOL Energy had another excellent quarter from both a market and operation standpoint that translated into strong financial results. Before I get into the numbers, there are 2 events in the quarter that I would like to highlight. The first event is that in June, we reached a new collective bargaining agreement with United Mine Workers of America. This agreement, which runs through December 31 of 2016, will extend the period of labor stability by another 5.5 years.

December 31, 2016, will mark a total of 23 consecutive years of uninterrupted service by our represented employees. We believe the agreement to be a manifestation of the strong partnership we have with our 2,900 represented employees to safely provide a reliable supply of critical energy to the nation and the world. We expect our labor costs to increase by about 3.5% per year over each of the next 5 years.

In the past, some have viewed CONSOL in a disadvantaged light because our reserves whereby higher sulfur content and we had a significant represented workforce. As our sales volumes and realizations for the quarter will attest sulfur content has not been a significant issue due to the installation of scrubbers and other pollution control technologies. The high-quality and high Btu content of our coals are recognized on 4 continents.

We also hold the premise that our commitment to safety and compliance has helped us to better partner with the union to achieve labor stability.

When you look at the global labor disruption that are present in the mining industry today, we believe that the stability of our workforce, and as both represented and non-represented employees, is a competitive advantage.

The second issue I want to address before my financial review of the quarter is the decision to permanently close Mine 84. We were incurring approximately $18 million of annual cash cost to maintain the underground infrastructure of the mine. A noncash $115 million charge we took for the infrastructure abandonment is actually cash-accretive since we will save the $18 million per year in cash maintenance expenditures. And since this is only in infrastructure abandonment, we still retain the valuable reserves in the area that will be available for future development when this market develops.

Let me now go to the quarterly financial statement. Total revenue for the second quarter of 2011 was $1.588 billion, up 20% to 23% year-over-year. This represents the company's fifth consecutive quarter of record revenues. CONSOL Energy generated $360 million of operating cash flow and $472 million of adjusted EBITDA.

The primary economic driver for these results was the $21.56 margin per ton across all tons in the Coal Division. CONSOL Energy reported GAAP net income of $77 million or $0.34 per diluted share for the second quarter of 2011 compared to $67 million or $0.29 per diluted share for the second quarter of 2010.

GAAP net income was lower than our operating results would've suggested because of 4 discreet items: The closing of Mine 84 with $115 million charge and a charge associated with the early extinguishment of debt for $60 million. Additionally, we saw an increase in OPEB of $14 million, as well as the contract buyout for $5 million. Now this contract buyout will result in $10 million of additional earnings when we sell this coal in future quarters.

Now after adjusting for these items, we earned $174 million in the quarter or $0.76 per diluted share.

The higher-than-expected coal sales of 16.4 million tons, combined with a $7 increase in average margin per ton, were the primary drivers of this increase in profitability. Our cost per ton increased by $5.79 compared to the second quarter of 2010. Cost discipline is important. Cost need to be referenced to driving profitability.

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