CNX Coal Resources LP. Analyst and Investor Day December 2016

Transcription

1 CNX Coal Resources LP Analyst and Investor Day December

2 Cautionary Statements Various statements in this presentation, including those that express a belief, expectation or intention, may be considered forward-looking statements under federal securities laws including Section 21E of the Securities Exchange Act of 1934 (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," 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 presentation, if any, speak only as of the date of this presentation; 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, 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; 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 the other factors discussed in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2015, as well as any subsequent report on Form 10-Q that we file with the SEC. This presentation does not constitute an offer to sell or a solicitation of offers to buy securities of CONSOL Energy Inc. or CNX Coal Resources LP. This presentation also contains information about the Partnership s adjusted EBITDA and distributable cash flow, which are measures that are not derived in accordance with U.S. generally accepted accounting principles ( GAAP ). Adjusted EBITDA and distributable cash flow exclude some, but not all, items that affect net income or net cash, which are the most directly comparable GAAP measures. We believe that these measures are important to understanding the Partnership s financial and operational performance. Adjusted EBITDA and distributable cash flow should not be considered an alternative to net income, net cash or any other measure of financial performance or liquidity presented in accordance with GAAP. In addition, our presentation of these non-gaap measures may vary from the presentations of similarly titled measures of other companies. Reconciliations of adjusted EBITDA and distributable cash flow to net income and net cash, the most directly comparable GAAP financial measure, can be found in our Quarterly Report on Form 10-Q for the period ended September 30, 2016 and in this presentation. In addition, this presentation also contains information about the Partnership s cost of coal sold, which is also a measure not derived in accordance with GAAP. Cost of coal sold excludes some, but not all, items that affect total costs, the most comparable GAAP measure. We believe that these measures are important to understanding the Partnership s financial and operational performance. Cost of coal sold should not be considered an alternative to total costs or any other measure of financial or operational performance in accordance with GAAP, and our presentation of this non-gaap may vary from the presentations of similarly titled measures of other companies. Reconciliations of cost of coal sold to total costs, the most directly comparable GAAP financial measure, can be found in our Quarterly Report on Form 10-Q for the period ended September 30, 2016 and in this presentation.

3 CNX Coal Resources LP Overview Growth-oriented master limited partnership formed by CONSOL Energy Inc. (NYSE:CNX) (market capitalization: $4.8 billion (1) ) in 2015 to manage and further develop all of its active thermal coal operations in Pennsylvania. Assets include a 25% undivided interest in, and operational control over, CONSOL Energy s Pennsylvania mining complex (PAMC) First drop down of 5% interest concluded in September 2016 Growth strategy is focused on acquiring the remaining 75% interest in the PAMC Initial Public Offering June 2015 at $15/unit Current market capitalization: $524 million (1) Net debt outstanding: $202 million as of September 30, 2016 Current ownership structure of limited partner units Sponsor owns 12.7 million LP units and 4.0 million Class A preferred convertible units (60.1% limited partner equivalent interest) 5.0 million private placement LP units (18.1% interest) owned by Greenlight Capital 5.6 million LP units (20.1% interest) held by public holders Completed the first post-ipo drop-down representing an expected 25% growth in adjusted EBITDA (1) Priced as of COB November 30, For CNXC, assumes the conversion of preferred units to common units 2

4 Offering Timeline CNXC Investment Proposition Focus on Safety, Compliance and Continuous Improvement Cash Flows Supported by Multi-Year Contracts Operate some of the industry's safest underground mines; 42% lower Mine Safety and Health Administration ( MSHA ) incident rate vs. national average Underground training academy dedicated to training miners and improving their safety performance and regulatory compliance Seek to minimize direct commodity exposure through multi-year sales contracts; contracted position at 100%, 94% and 60% for 2016, 2017 and 2018 expected sales volumes Well-established credit-worthy customer base comprised primarily of power producing companies in the eastern U.S. willing to commit to multi-year contracts Strong Sponsor Access to significant pool of management talent, deep industry knowledge and strong commercial relationships Economically incentivized to grow CNXC through ownership of IDRs and LP units as well as 75% retained interest in the PA mining complex Experienced Management Team Quality Reserve Base with Substantial Capital Investment Strategically Located Operations with Access to Key Infrastructure Low-cost Highly Productive Operations Advanced Distribution with Cutting Edge Loadout Technology Significant expertise owning, developing and managing complex coal mining operations Proven track record of successfully building coal assets in a reliable and cost-effective manner Extensive high-quality contiguous reserves of high-btu bituminous coal in Pittsburgh No. 8 Coal Seam are ideal for high productivity, low-cost longwall operations Advantageous coal quality with relatively higher heat content, lower sulfur content and lower chlorine content compared to Illinois Basin coals. Logistics infrastructure and proximity to coal-fired power plants allow operational and marketing flexibility Significant transportation cost advantage compared to many of our competitors. Direct access to domestic customers and Baltimore Marine Terminal through Norfolk Southern and CSX rail lines Maintained strong YTD 2016 cash margins compared to the peer group while maintaining sales volume even as peers reduced production by 14-26% Recent capital investment has optimized our mining operations and logistics infrastructure to maintain low operating costs Dual-batch facility that operates 24/7 and loads up to 9,000 tons of coal per hour and ten unit trains per day Strong relationship with Norfolk Southern and CSX rail lines - investing significant capex to increase rail takeaway Solid distribution yield supported by world class asset base 3

5 Operations 4

6 Overview of Pennsylvania Mining Complex Pennsylvania mining complex consists of three like-new underground mines and related infrastructure with high-btu bituminous coal (791.4 million tons proven and probable (1) ) PA mining complex million tons reserves / 28.5 million tons annual capacity (1) Train loadout facility (up to 9,000 tons per hour) with dual rail access with Norfolk Southern and CSX PA Mining Complex High-Btu bituminous thermal coal is primarily sold to utility companies in the eastern United States: ~13,000 Btus per pound average gross heat content and 2.4% average sulfur content over the life of the reserves Five longwalls and continuous mining sections Access to seaborne markets through CONSOL-owned Baltimore Marine Terminal for exporting thermal and metallurgical coal Baltimore Terminal Active Complex Port/Dock 2015 PA Mining Complex Customers Over $2.0 billion invested in Harvey Mine, new slopes, overland conveyor belts, equipment, and plant upgrades since 2008 Mine Total Recoverable Reserves (tons) Average AR Gross Heat Content (Btu/lb) Average AR Sulfur Content Annual Production Capacity (tons) Production (tons) Bailey (1) , % Enlow Fork (1) , % Harvey (1) , % Total , % Illinois Basin (2) 11, % Other NAPP (2) 12, % Other Coal MLPs (2,3) 11, % We couldn't fine the original artwork _Graphic.ai NY0086JT so we had to ungroup it and make the edits. (1) For the period ending and as of December 31, (2) Source: EIA. Represents average power plant deliveries for the twelve months ending February 29, (3) Includes Northern Appalachian and Illinois Basin production from ARLP, FELP, RHNO, and WMLP. Note: Data shown on a 100% basis for the PA Mining Complex. CNXC owns a 25% interest in the complex. 5

7 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Cost of coal sold ($/ton) Productivity (tons/employee-hour) Operational Initiatives Driving Cost Improvement Operational initiatives such as improving productivity, vendor concessions, reduced staffing levels, refocused incentive plans, and realignment of employee benefits helped achieve ~19% improvement in cost of coal sold since 2Q15 (quarter prior to the IPO) Spot market/export sales improved mine consistency and provided economies of scale during the volatile 1H16 Improvement in productivity, as measured by tons per employee-hour, is one of the key drivers of significant cost improvements ~19% Improvement Q15 3Q15 4Q15 1Q16 2Q16 3Q Quarterly productivity TTM Average Productivity Structurally repositioned mines to benefit as demand and pricing recovers 6

8 Marketing 7

9 Solid Contracted Position With Exposure to Improving Coal Markets Contracted position improves sales volume visibility and reduces pricing volatility Well-established, credit-worthy customer base comprised primarily of utility companies in the eastern United States willing to commit to multi-year contracts Maintaining exposure to further recovery in coal prices in 2017 through (a) 6% unsold position, (b) 5-10% unpriced/collared position and (c) 15-20% linked to power prices (netback contracts) For 2018, approximately 40% of our coal is unsold and additional 15-20% is unpriced/collared Contracted Volume (1) Major Customers Include: 100% 94% 60% 2016E 2017E 2018E Secured multi-year commitments with key power plants in the upper Midwest and Southeast markets, which historically have been thought of as the domain of other coal basins (1) Contracted percentages based on the projected sales volume for 2016 and at 6.5 million ton annual run rate thereafter. Some of our contracts contain fixed prices with preestablished price adjustments based on (i) variances in the quality characteristics of coal delivered to the customer beyond threshold quality characteristics specified in the applicable sales contract, (ii) the actual calorific value of coal delivered to the customer, and/or (iii) fluctuations in the power market. 8

10 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Average Capacity Factor (weighted by capacity) Customer Capacity Factors Top 15 PAMC Customer Plants* Other NAPP-Served Plants** 80% 75% 70% 65% 60% 55% 50% 45% 40% 35% Anomalously Warm Winter Low Natural Gas Prices Imbalanced Coal Inventories Strong Coal Burn Summer % Month-Year *Based on 2016 YTD tons shipped; top 15 customer plants accounted for 84% of PAMC domestic power plant shipments. **Includes all other currently operating plants that took delivery of NAPP coal in January-September Source: EIA, Velocity, CNXC internal analysis. Our Top 15 customer plants (~84% of our domestic shipments) have on average dispatched at 5 percentage points higher capacity factor than other NAPP-served plants 9

11 Jan-15 Apr-15 Jul-15 Oct-15 Feb-16 May-16 Aug-16 Dec-16 Forward Coal Price ($/ton) Forward Gas Price ($/mmbtu) Coal Prices vs. Gas Prices $70 $65 $ NAPP 12,900 Btu / 3.8 lb SO NAPP 12,900 Btu / 3.8 lb SO NYMEX Gas 2018 NYMEX Gas $4.40 $3.90 $55 $50 $45 Gas-implied equilibrium price $3.40 $2.90 $40 $35 $30 Inventory imbalance Strong burn / inventory drawdown $2.40 $1.90 Source: Velocity, NYMEX ClearPort, Coaldesk Strong summer burn helped to accelerate the upward correction in forward domestic coal prices toward expected market equilibrium prices. We expect additional upside if gas prices continue to strengthen above $3/mmBtu 10

12 Coal Share of Monthly Generation (%) Effect of Gas Price on Coal Generation A 1% increase in coal s share of generation equates to a million ton / year increase in U.S. electric power sector coal demand Right-sizing of coal supply under current market conditions will help set the stage for coal prices to rebound with uptick in gas prices Coal Share of U.S. Generation vs. Natural Gas Price Ranges (January 2013 September 2016) 46% 42% 38% 34% 30% Range Average 26% Source: EIA 22% < $2.00 $2.00-$2.50 $2.50-$3.00 $3.00-$3.50 $3.50-$4.00 $4.00-$4.50 > $4.50 Monthly Average Natural Gas Price ($/mmbtu, Henry Hub Spot) Improving natural gas prices should help improve coal generation and coal prices 11

13 Jul-15 Sep-15 Nov-15 Feb-16 Apr-16 Jul-16 Sep-16 Nov-16 % of Total Sales Change in Price from July 1, 2015 Significant Opportunities in Improving Export Markets Strong committed sales base for 2017 allows us to be more selective in placing remaining tons in opportunities that maximize FOB mine realizations Exports, in spite of showing significant volatility, has provided the most upside recently Historically, exports (steam and crossover met) averaged approximately 20% of our annual sales volume 2018 sales position lends itself to meaningful participation in export markets Historic and Projected Exports Coal Price Trends in Key Markets 30% 25% 20% Historic Projected 50% 40% 30% 20% 10% NAPP Low-Sulfur Rail Coal (CY 2017) API 2 Coal - Europe (CY 2017) Global Coking Coal Benchmark (Prompt Quarter) Henry Hub Gas (CY 2017) +115% +12% 15% 10% 0% -10% -20% 0% -2% 5% -30% 0% E 2017E 2018E -40% -50% The current sales book provides significant export optionality in We continue to strive to identify and capture the best opportunities to maximize FOB mine realizations 12

14 Recent Market Signals We recently secured 340k tons of crossover high-vol metallurgical sales for 2017 (on a 25% PAMC basis), and are actively pursuing additional opportunities as metallurgical prices continue to rally Export thermal markets have improved in both Europe and India, with the API2 and API4 markers both up ~20% between June 30 and November 30 MSHA data indicate continued supply-side discipline in the U.S., with NAPP production during Q1-Q down 16% vs. the same period last year U.S. power plant coal stockpiles stood at 158 mm tons at the end of September, down significantly from 194 mm tons at the end of April, and about 4 mm tons below year-ago (September 2015) levels Forward gas prices have continued to show strength, with the Henry Hub future for CY 2017 trading at an average value of $3.13/mmBtu during June-November Gas basis differentials have shrunk significantly in the Marcellus region more recently. We expect that this will help contribute to increased power prices and additional coal burn CNXC s portfolio continues to improve as we take advantage of strengthening fundamentals in the domestic and export markets for thermal and metallurgical coal Source: EIA, Velocity, CNXC internal analysis. 13

15 Financial 14

16 CNXC Ownership Structure CNXC 25% Undivided Interest in Pennsylvania Mining Complex (Bailey, Enlow Fork and Harvey mines) CNXC owns a 25% undivided interest in and operational control over CONSOL Energy s Pennsylvania mining complex CONSOL Energy retains a 75% undivided interest in the Pennsylvania mining complex and owns 100% of CNXC s general partner, as well as the incentive distribution rights CONSOL Energy Inc. ( CONSOL Energy ) NYSE: CNX 1,050,000 Common Units 11,611,067 Subordinated Units 3,956,496 Class A Preferred Convertible Units 75% undivided ownership interest 60.1% limited partner interest 100% ownership interest CNX Coal Resources GP LLC ( our general partner ) General Partner Interest Incentive Distribution Rights 1.7% general partner interest Economically incentivized to grow CNXC CNX Coal Resources LP (the Partnership ) NYSE: CNXC 38.2% limited partner interest Public and Private Placement 10,568,456 Common Units CONSOL Energy granted CNXC a right of first offer to acquire the remaining 75% undivided interest 100% ownership interest CNX Coal Resources Operating LLC 100% ownership interest Certain other Sponsor ROFO assets CNX Thermal Coal Company LLC Majority of units owned by our Sponsor are subordinated 25% undivided ownership interest and management and control rights Pennsylvania mining complex Sponsor is strategically aligned with CNXC and incentivized to support growth and enhance the value of the MLP 15

17 Common Unit Distribution Support Mechanism Treatment of common and subordinated units during the subordination period: Common Units Subordinated Units Ownership Primarily public CONSOL Energy Inc Units outstanding ~11.6 million ~11.6 million MQD (1) $ per unit $ per unit Aggregate annualized MQD ~$23.8 million ~$23.8 million Priority of distribution Yes No Accrue arrearage if short paid (below MQD) Yes No Distribution declared for 3Q16 $ per unit $ per unit Subordination period (2) generally extends until distributions of available cash from operating surplus have equaled or exceeded $2.05/unit annualized for at least three years for all unitholders and GP interest Subordinated units will be converted to common units at the completion of subordination period Class A convertible preferred units have priority over other unit classes The current ownership structure is beneficial to common unitholders given the priority of distributions over subordinated units owned by CONSOL Energy (1) MQD = Minimum Quarterly Distribution of $0.5125/unit or $2.05/unit annualized (2) For the full definition of subordination period, please refer to our registration statement filed on form S-1 16

18 Guidance and Outlook Organic Growth in 2017 Reaffirming 2016 guidance and outlook 2017 guidance compared to 2016 guidance at the midpoint: coal sales to grow 8% adjusted EBITDA to grow 28% average revenue per ton to improve 5-10% 2017 Guidance Low High Coal sales million tons Adjusted EBITDA $ million $90 $110 Maintenance capital expenditures $ million $30 $36 cost of coal sales per ton expected to remain flat to up low single digit 2018 sales volume expected to be in the million ton range Sold position improves to 94% in 2017 and 60% in 2018 at the midpoint of the guidance range Opportunities to capture further upside through unpriced/collared and netback contracts After reducing and deferring some capital spending in 2016, we expect capex to normalize in the approximately $5 per ton range for 2017 and beyond Expected future drop-downs not included in current guidance and should provide further accretion opportunities 2017 should provide organic volume and margin growth based on current market view Note: CNX Coal Resources LP is unable to provide a reconciliation of adjusted EBITDA guidance to net income, the most comparable financial measure calculated in accordance with GAAP, due to the unknown effect, timing and potential significance of certain income statement items. 17

19 Benchmarking vs. Peers Solid 2017 Contracted Position (1) Debt/TTM EBITDA (3) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 94% 79% 77% 78% 71% ARLP ARCH CLD HNRG 7.0x 6.0x 5.0x 4.0x 3.0x 2.0x 1.0x.0x 2.7x 6.7x 5.9x 4.5x 3.0x 1.1x ARLP HNRG CLD WLB FELP EV/2017E EBITDA (2) Current Yield (%) (4) 10.0x Annualized Distribution Unit Price Yield 8.1x 7.7x 25.0 $ % 8.0x 7.3x 10.8% 6.4x 6.0x 20.0 $ % 6.0x 5.3x 8.7% 7.4% 7.8% 8% 15.0 $ x 6% 10.0 $6.10 $6.57 4% 2.0x 5.0 $2.05 $1.76 2% $0.53 $0.96 $0.00.0x % 0% WLB CLD ARLP HNRG FELP WMLP ARLP AMLP FELP (1) For peers, percentage is based on 2016 total sales volume and 2017 contracted position, where 2017 sales guidance not available. (source: respective company documents and CNXC analysis) (2) EBITDA, Net debt and EV based on company data or FactSet data as of November 30, EBITDA based on mean of select Wall Street Research when guidance not available. ARLP on GP-adjusted basis. CNXC 2017 EBITDA excludes the benefit of any potential drop down included in analyst estimates. (3) TTM EBITDA based on FactSet data as of November 30, (4) Current yield calculation based on COB November 30,

20 Roadmap to Unitholder Returns Optimize Cost Structure Expand Coal Margins Improve Coverage Ratio Increase Contracted Position Cash Flow Growth Improved Cost of Capital Pursue Accretive Drop-downs/ Acquisitions Broaden Institutional Appeal 19

21 Appendix 20

22 Significant Focus on Safety, Compliance and Continuous Improvement Continued focus on core values of safety, compliance and continuous improvement Operate some of the industry s safest underground mines MSHA incident rate ~42% lower than national average rate (1) MSHA significant and substantial citation rate ~16% lower than the industry average rate (2) Promotes greater reliability in operations, lower operating costs and long-term customer relationships Underground Training Academy CONSOL constructed the first underground training academy in the United States dedicated to training miners and improving their safety performance and regulatory compliance Strong Safety Record (PA mining complex) Incident Rate Industry Average S&S Citation Rate PA Operations Technical Services Experienced staff provide technical services to assist customers in the new, expanded, and continued use of our coal We continue to focus on our core values of safety, compliance and continuous improvement (1) Based on incident rates for September 2016 period. Source: MSHA (2) For the Nov 1, 2015-October 31, 2016 period ; National industry rate for significant & substantial citations & orders per 100 inspection hours. Source: MSHA 21

23 PA Mining Complex (5) Marion County (1) Monongalia County (1) Federal (1) Emerald (1) Harrison County (1) Mountain View (1) Leer (1) Marshall County (2) Cumberland (1) Ohio County (1) Tunnel Ridge (1) Century (1) Powhatan (1) Production (million tons) Sulfur (% as received) Not All NAPP Longwalls Are Created Equal Production - PA Mining Complex 2015 Production - Other Longwalls 2015 Sulfur Closed in 2015 Announced Closing in Dec Higher Sulfur Near End of Reserve Life Mine Mouth Operations Primarily Met Coal Producer Serve River Markets PA Mining Complex is uniquely positioned among NAPP longwall producers to provide a sustained supply of high-quality coal to rail-served power plants in the eastern U.S. Source: EIA 923, MSHA; Number of longwalls indicated in parentheses. 22

24 Retired Capacity (MW) Impact of Power Plant Pollution Control Regulations Traditional Pollutants MATS compliance deadlines occurred in April 2015 (primary) and April 2016 (one-year extension) Additional retirements in the near-term driven primarily by low natural gas prices and other environmental regulations (e.g., Regional Haze Rule, Coal Combustion Residuals Rule, Effluent Limitation Guidelines, state rules) Remaining fleet will be clean, modern and efficient, with capacity to increase coal burn relative to 2015 Greenhouse Gases (i.e., CO 2 ) The Carbon Pollution Standard for new plants, 111(b), will severely hinder the construction of new coal-fired power plants for 10 or more years The Clean Power Plan, 111(d), was finalized by EPA in August 2015, but faces an uncertain future Designed to reduce GHG emissions from existing plants beginning in 2022 The Supreme Court stayed implementation of the Clean Power Plan on February 9, 2016, pending judicial review U.S. Coal Unit Retirements and Fuel Conversions 25,000 20,000 15,000 10,000 5, : 55 GW 64% Eastern Bit : 19 GW 49% Eastern Bit All Coal Types Eastern Bituminous (Pri Fuel) Under any scenario, the most efficient, cleanest coal plants are positioned to survive; these are the ones we are targeting Source: CNXC internal analysis. Our Strategy: Focus domestic steam sales on clean, modern and efficient plants in our core market area. Push into former CAPP market, and take advantage of crossover and export opportunities 23

25 Q&A 24