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CEIX Consol Energy

Filed: 5 Nov 20, 7:00am
 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________

 

FORM 10-Q

__________________________________________________

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                     

 

Commission file number: 001-38147

__________________________________________________

CONSOL Energy Inc. 

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-1954058

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1000 CONSOL Energy Drive, Suite 100

Canonsburg, PA 15317-6506

(724) 416-8300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

__________________________________________________

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value

CEIX

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☒    No   ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ☒    Accelerated filer  ☐    Non-accelerated filer  ☐    Smaller reporting company  ☐    Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐   No  ☒

 

CONSOL Energy Inc. had 26,036,362 shares of common stock, $0.01 par value, outstanding at October 28, 2020.

 

 

 

 

 
 

 

TABLE OF CONTENTS

 

 

Part I. Financial Information

Page

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019

4

 

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

5

 

Consolidated Balance Sheets at September 30, 2020 and December 31, 2019

6

 

Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019

8

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

9

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

Item 4.

Controls and Procedures

59

 

 

 

 

Part II. Other Information

 

 

 

 

Item 1.

Legal Proceedings

59

 

 

 

Item 1A.

Risk Factors

59

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

62

 

 

 

Item 4.

Mine Safety Disclosures

62

   
Item 5.Other Information62

 

 

 

Item 6.

Exhibits

64

 

 

 

 

Signatures

65

 

 

 

 

IMPORTANT DEFINITIONS REFERENCED IN THIS QUARTERLY REPORT

Unless the context otherwise requires:

 

 

“CONSOL Energy,” “we,” “our,” “us,” “our Company” and “the Company” refer to CONSOL Energy Inc. and its subsidiaries;

 

 

“Btu” means one British Thermal unit;

 

 “CCR Merger” means the proposed merger of CCR into a wholly-owned subsidiary of CONSOL Energy pursuant to the Merger Agreement and as a result of which CCR will become an indirect, wholly-owned subsidiary of CONSOL Energy;
   
 

“Coal Business” refers to all of our interest in the Pennsylvania Mining Complex (PAMC) and certain related coal assets, including: (i) our interest in the Partnership, which owns a 25% undivided interest in the PAMC; (ii) the CONSOL Marine Terminal; (iii) development of the Itmann Mine; and (iv) undeveloped coal reserves (Greenfield Reserves) located in the Northern Appalachian, Central Appalachian and Illinois basins and certain related coal assets and liabilities;

 

 

“CONSOL Marine Terminal” refers to the terminal operations located at the Port of Baltimore;

 

 

“distribution” refers to the pro rata distribution of the Company's issued and outstanding shares of common stock to its former parent's stockholders on November 29, 2017;

 

 

“former parent” refers to CNX Resources Corporation and its consolidated subsidiaries;

 

 

“General Partner” refers to CONSOL Coal Resources GP LLC, a Delaware limited liability company;

 

 

“Greenfield Reserves” means those undeveloped reserves owned by the Company in the Northern Appalachian, Central Appalachian and Illinois basins that are not associated with the Pennsylvania Mining Complex or the Itmann Mine project;

 

 “Merger Agreement” means that certain Agreement and Plan of Merger by and among CONSOL Energy, Transformer LP Holdings, Inc., a Delaware corporation, Transformer Merger Sub LLC, a Delaware limited liability company, CCR and the General Partner dated as of October 22, 2020;
   
 

“Partnership” or “CCR” refers to a Delaware limited partnership that holds a 25% undivided interest in, and is the sole operator of, the Pennsylvania Mining Complex;

 

 

“Pennsylvania Mining Complex” or “PAMC” refers to the Bailey, Enlow Fork and Harvey coal mines, coal reserves and related assets and operations, located primarily in southwestern Pennsylvania and owned 75% by the Company and 25% by the Partnership; and

 

 

“separation” refers to the separation of the Coal Business from our former parent’s other businesses on November 28, 2017, and the creation, as a result of the distribution, of an independent, publicly-traded company (the Company) to hold the assets and liabilities associated with the Coal Business after the distribution.

 

 

PART I : FINANCIAL INFORMATION

 

ITEM 1.    FINANCIAL STATEMENTS

 

 

CONSOL ENERGY INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(unaudited)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

Revenue and Other Income:

 

2020

  

2019

  

2020

  

2019

 

Coal Revenue

 $184,375  $301,542  $542,140  $984,665 

Terminal Revenue

  17,008   16,303   49,407   50,829 

Freight Revenue

  12,909   3,599   19,141   14,115 

Miscellaneous Other Income

  21,001   11,188   71,107   36,674 

Gain on Sale of Assets

  7,926   714   15,241   1,986 

Total Revenue and Other Income

  243,219   333,346   697,036   1,088,269 

Costs and Expenses:

                

Operating and Other Costs

  153,031   234,849   481,712   718,410 

Depreciation, Depletion and Amortization

  54,959   54,370   156,057   151,245 

Freight Expense

  12,909   3,599   19,141   14,115 

Selling, General and Administrative Costs

  11,117   14,690   39,726   52,901 

(Gain) Loss on Debt Extinguishment

  (1,078)  801   (17,911)  25,444 

Interest Expense, net

  15,723   15,598   46,116   50,240 

Total Costs and Expenses

  246,661   323,907   724,841   1,012,355 

(Loss) Earnings Before Income Tax

  (3,442)  9,439   (27,805)  75,914 

Income Tax Expense (Benefit)

  5,918   2,415   143   (243)

Net (Loss) Income

  (9,360)  7,024   (27,948)  76,157 

Less: Net (Loss) Income Attributable to Noncontrolling Interest

  (2,136)  2,684   (5,108)  14,102 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(7,224) $4,340  $(22,840) $62,055 
                 

(Loss) Earnings per Share:

                

Total Basic (Loss) Earnings per Share

 $(0.28) $0.16  $(0.88) $2.27 

Total Dilutive (Loss) Earnings per Share

 $(0.28) $0.16  $(0.88) $2.26 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

CONSOL ENERGY INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(unaudited)

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net (Loss) Income

 $(9,360) $7,024  $(27,948) $76,157 
                 

Other Comprehensive Income:

                

Actuarially Determined Long-Term Liability Adjustments (Net of tax: ($1,214), ($780), ($3,642), ($2,342))

  3,624   2,457   10,872   7,376 

Unrecognized Gain (Loss) on Derivatives:

                

Unrealized Gain (Loss) on Cash Flow Hedges (Net of tax: ($127), $83, $810, $167)

  377   (261)  (2,408)  (525)

Other Comprehensive Income

  4,001   2,196   8,464   6,851 
                 

Comprehensive (Loss) Income

 $(5,359) $9,220  $(19,484) $83,008 
                 

Less: Comprehensive (Loss) Income Attributable to Noncontrolling Interest

  (2,121)  2,681   (5,063)  14,097 
                 

Comprehensive (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(3,238) $6,539  $(14,421) $68,911 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

CONSOL ENERGY INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

  

(Unaudited)

     
  

September 30,

  

December 31,

 
  

2020

  

2019

 

ASSETS

        

Current Assets:

        

Cash and Cash Equivalents

 $22,284  $80,293 

Accounts and Notes Receivable

        

Trade Receivables, net

  120,548   131,688 

Other Receivables, net

  24,748   40,984 

Inventories

  56,577   54,131 

Prepaid Expenses and Other Assets

  27,139   30,933 

Total Current Assets

  251,296   338,029 

Property, Plant and Equipment:

        

Property, Plant and Equipment

  5,126,703   5,008,180 

Less - Accumulated Depreciation, Depletion and Amortization

  3,043,463   2,916,015 

Total Property, Plant and Equipment—Net

  2,083,240   2,092,165 

Other Assets:

        

Deferred Income Taxes

  101,639   103,505 

Right of Use Asset - Operating Leases

  58,106   72,632 

Other, net

  60,557   87,471 

Total Other Assets

  220,302   263,608 

TOTAL ASSETS

 $2,554,838  $2,693,802 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CONSOL ENERGY INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

  

(Unaudited)

     
  

September 30,

  

December 31,

 
  

2020

  

2019

 

LIABILITIES AND EQUITY

        

Current Liabilities:

        

Accounts Payable

 $72,263  $106,223 

Current Portion of Long-Term Debt

  68,954   50,272 

Other Accrued Liabilities

  247,395   235,769 

Total Current Liabilities

  388,612   392,264 

Long-Term Debt:

        

Long-Term Debt

  587,020   653,802 

Finance Lease Obligations

  21,146   9,036 

Total Long-Term Debt

  608,166   662,838 

Deferred Credits and Other Liabilities:

        

Postretirement Benefits Other Than Pensions

  421,705   432,496 

Pneumoconiosis Benefits

  201,066   202,142 

Asset Retirement Obligations

  229,346   250,211 

Workers’ Compensation

  61,525   61,194 

Salary Retirement

  33,454   49,930 

Operating Lease Liability

  41,623   55,413 

Other

  16,613   14,919 

Total Deferred Credits and Other Liabilities

  1,005,332   1,066,305 

TOTAL LIABILITIES

  2,002,110   2,121,407 
         

Stockholders' Equity:

        

Common Stock, $0.01 Par Value; 62,500,000 Shares Authorized, 26,034,211 Issued and Outstanding at September 30, 2020; 25,932,618 Issued and Outstanding at December 31, 2019

  260   259 

Capital in Excess of Par Value

  532,360   523,762 

Retained Earnings

  233,765   259,903 

Accumulated Other Comprehensive Loss

  (340,306)  (348,725)

Total CONSOL Energy Inc. Stockholders' Equity

  426,079   435,199 

Noncontrolling Interest

  126,649   137,196 

TOTAL EQUITY

  552,728   572,395 

TOTAL LIABILITIES AND EQUITY

 $2,554,838  $2,693,802 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

CONSOL ENERGY INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars in thousands)

 

  

Common Stock

  

Capital in Excess of Par Value

  

Retained Earnings

  

Accumulated Other Comprehensive (Loss) Income

  

Total CONSOL Energy Inc. Stockholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

December 31, 2019

 $259  $523,762  $259,903  $(348,725) $435,199  $137,196  $572,395 

(Unaudited)

                            

Net Income

  0   0   2,367   0   2,367   108   2,475 

Actuarially Determined Long-Term Liability Adjustments (Net of $1,214 Tax)

  0   0   0   3,609   3,609   15   3,624 

Interest Rate Hedge (Net of ($933) Tax)

  0   0   0   (2,773)  (2,773)  0   (2,773)

Comprehensive Income

  0   0   2,367   836   3,203   123   3,326 

Adoption of ASU 2016-13 (Net of ($1,109) Tax)

  0   0   (3,298)  0   (3,298)  0   (3,298)

Issuance of Common Stock

  1   (1)  0   0   0   0   0 

Amortization of Stock-Based Compensation Awards

  0   4,856   0   0   4,856   158   5,014 

Shares/Units Withheld for Taxes

  0   (555)  0   0   (555)  (217)  (772)

Distributions to Noncontrolling Interest

  0   0   0   0   0   (5,575)  (5,575)

March 31, 2020

 $260  $528,062  $258,972  $(347,889) $439,405  $131,685  $571,090 

(Unaudited)

                            

Net Loss

  0   0   (17,983)  0   (17,983)  (3,080)  (21,063)

Actuarially Determined Long-Term Liability Adjustments (Net of $1,214 Tax)

  0   0   0   3,609   3,609   15   3,624 

Interest Rate Hedge (Net of ($4) Tax)

  0   0   0   (12)  (12)  0   (12)

Comprehensive (Loss) Income

  0   0   (17,983)  3,597   (14,386)  (3,065)  (17,451)

Amortization of Stock-Based Compensation Awards

  0   2,162   0   0   2,162   74   2,236 

June 30, 2020

 $260  $530,224  $240,989  $(344,292) $427,181  $128,694  $555,875 
(Unaudited)                            
Net Loss  0   0   (7,224)  0   (7,224)  (2,136)  (9,360)
Actuarially Determined Long-Term Liability Adjustments (Net of $1,214 Tax)  0   0   0   3,609   3,609   15   3,624 
Interest Rate Hedge (Net of $127 Tax)  0   0   0   377   377   0   377 
Comprehensive (Loss) Income  0   0   (7,224)  3,986   (3,238)  (2,121)  (5,359)
Amortization of Stock-Based Compensation Awards  0   2,136   0   0   2,136   76   2,212 
September 30, 2020 $260  $532,360  $233,765  $(340,306) $426,079  $126,649  $552,728 

 

 

  

Common Stock

  

Capital in Excess of Par Value

  

Retained Earnings

  

Accumulated Other Comprehensive (Loss) Income

  

Total CONSOL Energy Inc. Stockholders' Equity

  

Noncontrolling Interest

  

Total Equity

 

December 31, 2018

 $274  $550,995  $182,148  $(323,482) $409,935  $141,676  $551,611 

(Unaudited)

                            

Net Income

  0   0   14,435   0   14,435   5,868   20,303 

Actuarially Determined Long-Term Liability Adjustments (Net of $781 Tax)

  0   0   0   2,461   2,461   (1)  2,460 

Comprehensive Income

  0   0   14,435   2,461   16,896   5,867   22,763 

Issuance of Common Stock

  2   (2)  0   0   0   0   0 

Amortization of Stock-Based Compensation Awards

  0   7,053   0   0   7,053   397   7,450 

Shares/Units Withheld for Taxes

  0   (3,863)  0   0   (3,863)  (880)  (4,743)

Distributions to Noncontrolling Interest

  0   0   0   0   0   (5,559)  (5,559)

March 31, 2019

 $276  $554,183  $196,583  $(321,021) $430,021  $141,501  $571,522 

(Unaudited)

                            

Net Income

  0   0   43,280   0   43,280   5,550   48,830 

Actuarially Determined Long-Term Liability Adjustments (Net of $781 Tax)

  0   0   0   2,460   2,460   (1)  2,459 
Interest Rate Hedge (Net of ($84) Tax)  0   0   0   (264)  (264)  0   (264)

Comprehensive Income

  0   0   43,280   2,196   45,476   5,549   51,025 

Repurchases of Common Stock (351,443 shares)

  (3)  (7,053)  (2,494)  0   (9,550)  0   (9,550)

Purchases of CCR Units (6,884 units)

  0   (28)  0   0   (28)  (91)  (119)

Amortization of Stock-Based Compensation Awards

  0   2,584   0   0   2,584   341   2,925 

Distributions to Noncontrolling Interest

  0   0   0   0   0   (5,560)  (5,560)

June 30, 2019

 $273  $549,686  $237,369  $(318,825) $468,503  $141,740  $610,243 
(Unaudited)                            
Net Income  0   0   4,340   0   4,340   2,684   7,024 
Actuarially Determined Long-Term Liability Adjustments (Net of $780 Tax)  0   0   0   2,460   2,460   (3)  2,457 
Interest Rate Hedge (Net of ($83) Tax)  0   0   0   (261)  (261)  0   (261)
Comprehensive Income  0   0   4,340   2,199   6,539   2,681   9,220 
Repurchases of Common Stock (1,366,054 shares)  (14)  (27,417)  4,248   0   (23,183)  0   (23,183)
Purchases of CCR Units (19,413 units)  0   (1)  0   0   (1)  (249)  (250)
Amortization of Stock-Based Compensation Awards  0   2,630   0   0   2,630   344   2,974 
Shares/Units Withheld for Taxes  0   (2)  0   0   (2)  0   (2)
Distributions to Noncontrolling Interest  0   0   0   0   0   (5,555)  (5,555)
September 30, 2019 $259  $524,896  $245,957  $(316,626) $454,486  $138,961  $593,447 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

CONSOL ENERGY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

  

Nine Months Ended

 
  

September 30,

 
  

2020

  

2019

 

Cash Flows from Operating Activities:

        

Net (Loss) Income

 $(27,948) $76,157 

Adjustments to Reconcile Net (Loss) Income to Net Cash Provided by Operating Activities:

        

Depreciation, Depletion and Amortization

  156,057   151,245 

Gain on Sale of Assets

  (15,241)  (1,986)

Stock/Unit-Based Compensation

  9,462   13,349 

Amortization of Debt Issuance Costs

  5,301   4,953 

(Gain) Loss on Debt Extinguishment

  (17,911)  25,444 

Deferred Income Taxes

  143   (16,402)

Equity in Earnings of Affiliates

  1,147   0 

Changes in Operating Assets:

        

Accounts and Notes Receivable

  25,197   (10,002)

Inventories

  (2,446)  (193)

Prepaid Expenses and Other Assets

  5,880   (3,009)

Changes in Other Assets

  (16,902)  14,332 

Changes in Operating Liabilities:

        

Accounts Payable

  (29,746)  (10,233)

Other Operating Liabilities

  (1,645)  3,204 

Changes in Other Liabilities

  (28,960)  (23,676)

Net Cash Provided by Operating Activities

  62,388   223,183 

Cash Flows from Investing Activities:

        

Capital Expenditures

  (65,955)  (131,475)

Proceeds from Sales of Assets

  8,779   2,015 
Other Investing Activity  (229)  0 

Net Cash Used in Investing Activities

  (57,405)  (129,460)

Cash Flows from Financing Activities:

        

Proceeds from Finance Lease Obligations

  16,293   0 

Payments on Finance Lease Obligations

  (18,732)  (13,784)

Proceeds from Term Loan A

  0   26,250 

Payments on Term Loan A

  (16,250)  (7,500)

Payments on Term Loan B

  (2,063)  (123,750)

Payments on Second Lien Notes

  (26,365)  (35,048)
Proceeds from Asset-Backed Financing  0   3,757 

Payments on Asset-Backed Financing

  (526)  0 
Purchases of CCR Units  0   (369)
Repurchases of Common Stock  0   (31,318)

Distributions to Noncontrolling Interest

  (5,575)  (16,674)

Shares/Units Withheld for Taxes

  (772)  (4,745)

Debt-Related Financing Fees

  (9,002)  (20,628)

Net Cash Used in Financing Activities

  (62,992)  (223,809)

Net Decrease in Cash and Cash Equivalents and Restricted Cash

  (58,009)  (130,086)

Cash and Cash Equivalents and Restricted Cash at Beginning of Period

  80,293   264,935 

Cash and Cash Equivalents and Restricted Cash at End of Period

 $22,284  $134,849 
         

Non-Cash Investing and Financing Activities:

        

Finance Lease

 $17,335  $0 

Other Equipment Financing

 $13,123  $3,834 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

CONSOL ENERGY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars in thousands, except per share data)

 

NOTE 1—BASIS OF PRESENTATION:

 

Basis of Presentation

 

The accompanying Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for future periods.

 

The Consolidated Balance Sheet at December 31, 2019 has been derived from the Audited Consolidated Financial Statements at that date but does not include all disclosures required by GAAP. This Form 10-Q report should be read in conjunction with CONSOL Energy Inc.'s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Basis of Consolidation

 

The Consolidated Financial Statements include the accounts of CONSOL Energy Inc. and its wholly-owned and majority-owned and/or controlled subsidiaries. The portion of these entities that is not owned by the Company is presented as non-controlling interest. All significant intercompany transactions and accounts have been eliminated in consolidation.

 

Recent Accounting Pronouncements

 

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04 - Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This Update also provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. Management has elected to apply this Update subsequent to March 12, 2020. Management is currently evaluating the impact of this guidance, but does not expect this update to have a material impact on the Company's financial statements.

 

In January 2020, the FASB issued ASU 2020-01 - Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this Update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Management does not expect this update to have a material impact on the Company's financial statements.

 

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In December 2019, the FASB issued ASU 2019-12 - Income Taxes (Topic 740) to reduce the complexity of accounting for income taxes while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in Update 2019-12 will remove the following exceptions: (1) the exception to the incremental approach for intra-period tax allocation; (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in Update 2019-12 will also simplify the accounting for income taxes in the areas of franchise tax, step up in the tax basis of goodwill associated with a business combination, allocation of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements, and presentation of the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The Update adds minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. These changes will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Management does not expect this update to have a material impact on the Company's financial statements.

 

In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by GAAP. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. These changes will be effective for fiscal years ending after December 15, 2020, including interim periods within those fiscal years. Management does not expect this update to have a material impact on the Company’s financial statements.

 

Earnings per Share

 

Basic earnings per share are computed by dividing net (loss) income attributable to CONSOL Energy Inc. shareholders by the weighted average shares outstanding during the reporting period. Dilutive earnings per share are computed similarly to basic earnings per share, except that the weighted average shares outstanding are increased to include additional shares from restricted stock units and performance share units, if dilutive. The number of additional shares is calculated by assuming that outstanding restricted stock units and performance share units were released, and that the proceeds from such activities were used to acquire shares of common stock at the average market price during the reporting period. 

 

The table below sets forth the share-based awards that have been excluded from the computation of diluted earnings per share because their effect would be anti-dilutive:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Anti-Dilutive Restricted Stock Units

  1,561,852   418,924   1,361,077   166,650 

Anti-Dilutive Performance Share Units

  29,062   56,399   32,736   0 
   1,590,914   475,323   1,393,813   166,650 

 

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The computations for basic and dilutive earnings per share are as follows:

 

  

Three Months Ended

  

Nine Months Ended

 

Dollars in thousands, except per share data

 

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Numerator:

                

Net (Loss) Income

 $(9,360) $7,024  $(27,948) $76,157 

Less: Net (Loss) Income Attributable to Noncontrolling Interest

  (2,136)  2,684   (5,108)  14,102 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(7,224) $4,340  $(22,840) $62,055 
                 

Denominator:

                

Weighted-average shares of common stock outstanding

  26,034,198   26,835,297   26,017,546   27,285,511 

Effect of dilutive shares*

  0   181,693   0   195,332 

Weighted-average diluted shares of common stock outstanding

  26,034,198   27,016,990   26,017,546   27,480,843 
                 

(Loss) Earnings per Share:

                

Basic

 $(0.28) $0.16  $(0.88) $2.27 

Dilutive

 $(0.28) $0.16  $(0.88) $2.26 

*During periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all equity awards is anti-dilutive.

 

As of September 30, 2020, CONSOL Energy has 500,000 shares of preferred stock, none of which are issued or outstanding.

 

 

NOTE 2—MAJOR TRANSACTIONS

 

On September 16, 2020, CONSOL entered into a settlement transaction with (i) Murray Energy Holdings Co., Murray Energy Corporation, and their direct and indirect subsidiaries (such entities that are debtors in possession in Murray Energy Holdings Co.’s jointly administered Chapter 11 cases, the “Debtors”), (ii) ACNR Holdings, Inc. (together with its direct and indirect subsidiaries, “Murray NewCo”) to fully and finally resolve the disputes raised in the CONSOL Adversary Case and any and all other disputes, controversies, or causes of action between and among them related to (a) the Debtors’ rejection of the 2013 stock purchase agreement (“SPA”) and CONSOL’s waiver of any objection thereto; (b) the Debtors’ assumption and assignment to Murray NewCo (or its designated direct or indirect subsidiaries) and payment of certain cure and other amounts relating to the First Overriding Royalty Agreement, as amended, the Second Overriding Royalty Agreement, as amended, the Water Treatment Cost Sharing Agreement, as amended, and the Master Entry Driver Lease Agreement; (c) the Debtors’ assumption and assignment to Murray NewCo (or its designated direct or indirect subsidiaries) of the Cooperation and Safety Agreement, the Surface Use Agreement, the Substation and Power Line Agreement, the Substation and Power Line Rights-of-Way, the McMillian Assignment, the Partial Powerline Assignment, the 2013 Well Plugging Consent Order and Agreement, and the 2020 Well Plugging Agreement; (d) the Debtors’ and CONSOL’s continued cooperation about certain matters consistent with historical practice, including (i) with respect to each parties’ payment obligations related to certain claims relating to certain worker’s compensation, Black Lung, and long-term disability and (ii) with respect to easements and boundaries as set forth in the 2013 SPA and the Closing Land Letter Agreement; (e) the Debtors’ assumption of, and CONSOL’s payment of certain amounts relating to, the Split Leases; (f) CONSOL’s transfer to Murray NewCo (or its designated direct or indirect subsidiaries), and Murray NewCo’s (or its designated direct or indirect subsidiaries’) payment for, certain coalbed methane wells, gas wells, and land; (g) the usage by CONSOL of the power structure of Murray NewCo (or its designated direct or indirect subsidiaries) on agreed upon terms and the Debtors’ and Murray NewCo’s release of the alleged claim for CONSOL’s prior usage; (h) CONSOL’s dismissal of CONSOL Energy Inc. v Murray Energy Holdings Co., et al., Adversary Case 2:20-ap-02036, with prejudice, which dismissal will be contingent upon (1) the Debtors’ assumption and assignment to Murray NewCo (or its designated direct or indirect subsidiaries) of the Assumed CONSOL Agreements and (2) the Debtors’ compliance with the terms of the CONSOL Term Sheets and other agreements consistent with these transactions; and (i) certain other terms and conditions consistent with the foregoing. The foregoing agreements and compromises, which have been memorialized in definitive documentation, shall be treated as a single, integrated transaction. The effect of the agreements, as amended, in the normal course of business resulted in CONSOL recognizing (a) Miscellaneous Other Income of $18,561 related to the Sale of Certain Coal Lease Contracts and other income, (b) Gain on Sale of Assets of $6,230 related to the sale of certain gas wells and equipment, and (c) a reduction of Operating and Other Costs of $1,940 as a result of expense rebates offset with various cure costs, all of which are included in the Consolidated Statement of Income for the three months ended September 30, 2020. As of September 30, 2020, the various transactions between the parties resulted in $8,088 of Other Receivables, net, and $21,326 of Other Assets, net, included in the Consolidated Balance Sheet. As of December 31, 2019, various transactions between the parties resulted in $13,567 of Other Receivables, net, included in the Consolidated Balance Sheet. See Note 14 - Commitments and Contingent Liabilities with respect to additional information relating to certain liabilities of the Company under the Coal Act (as defined below).

 

 

NOTE 3—REVENUE:

 

The following table disaggregates CONSOL Energy's revenue from contracts with customers to depict how the nature, amount, timing and uncertainty of the Company's revenues and cash flows are affected by economic factors:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

  

September 30, 2020

  

September 30, 2019

 

Coal Revenue

 $184,375  $301,542  $542,140  $984,665 

Terminal Revenue

  17,008   16,303   49,407   50,829 

Freight Revenue

  12,909   3,599   19,141   14,115 

Total Revenue from Contracts with Customers

 $214,292  $321,444  $610,688  $1,049,609 

 

Coal Revenue

 

CONSOL Energy's coal revenue is generally recognized when title passes to the customer and the price is fixed and determinable. Generally, title passes when coal is loaded at the central preparation facility and, on occasion, at terminal locations or other customer destinations. The Company's coal contract revenue per ton is fixed and determinable and adjusted for nominal quality adjustments. Some coal contracts also contain positive electric power price-related adjustments, which represent market-driven price adjustments, wherein no additional value is exchanged, in addition to a fixed base price per ton. The Company’s coal contracts generally do not allow for retroactive adjustments to pricing after title to the coal has passed. The Company's coal supply contracts and other sales and operating revenue contracts vary in length from short-term to long-term contracts and do not typically have significant financing components.

 

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The estimated transaction price from each of the Company's contracts is based on the total amount of consideration to which the Company expects to be entitled under the contract. Included in the transaction price for certain coal supply contracts is the impact of variable consideration, including quality price adjustments, handling services, per ton price fluctuations based on certain coal sales price indices and anticipated payments in lieu of shipments. The estimated transaction price for each contract is allocated to the Company's performance obligations based on relative stand-alone selling prices determined at contract inception. The Company has determined that each ton of coal represents a separate and distinct performance obligation. Some of the Company's contracts span multiple years and have annual pricing modifications, based upon market-driven or inflationary adjustments, where no additional value is exchanged. Management believes that the invoice price is the most appropriate rate at which to recognize revenue.

 

While CONSOL Energy does, from time to time, experience costs of obtaining coal customer contracts with amortization periods greater than one year, those costs are generally immaterial to the Company's net (loss) income. At September 30, 2020 and December 31, 2019, the Company did not have any capitalized costs to obtain customer contracts on its Consolidated Balance Sheets. As of and for the three and nine months ended September 30, 2020 and 2019, the Company has not recognized any amortization of previously existing capitalized costs of obtaining customer contracts. Further, the Company has not recognized any coal revenue in the current period that is not a result of current period performance.

 

Terminal Revenue

 

Terminal revenues are attributable to the Company's CONSOL Marine Terminal and include revenues earned from providing receipt and unloading of coal from rail cars, transporting coal from the receipt point to temporary storage or stockpile facilities located at the Terminal, stockpiling, blending, weighing, sampling, redelivery, and loading of coal onto vessels. Revenues for these services are generally earned on a rateable basis, and performance obligations are considered fulfilled as the services are performed.

    

The CONSOL Marine Terminal does not normally experience material costs of obtaining customer contracts with amortization periods greater than one year. At September 30, 2020 and December 31, 2019, the Company did not have any capitalized costs to obtain customer contracts on its Consolidated Balance Sheets. As of and for the three and nine months ended September 30, 2020 and 2019, the Company has not recognized any amortization of previously existing capitalized costs of obtaining Terminal customer contracts. Further, the Company has not recognized any revenue in the current period that is not a result of current period performance.

 

Freight Revenue

 

Some of CONSOL Energy's coal contracts require that the Company sell its coal at locations other than its central preparation plant. The cost to transport the Company's coal to the ultimate sales point is passed through to the Company's customers and CONSOL Energy recognizes the freight revenue equal to the transportation costs when title of the coal passes to the customer.

 

Contract Balances

 

Contract assets are recorded separately from trade receivables in the Company's Consolidated Balance Sheets and are reclassified to trade receivables as title passes to the customer and the Company's right to consideration becomes unconditional. Payments for coal shipments are typically due within two to four weeks from the invoice date. CONSOL Energy typically does not have material contract assets that are stated separately from trade receivables since the Company's performance obligations are satisfied as control of the goods or services passes to the customer, thereby granting the Company an unconditional right to receive consideration. Contract liabilities relate to consideration received in advance of the satisfaction of the Company's performance obligations. Contract liabilities are recognized as revenue at the point in time when control of the good passes to the customer, or over time when services are provided.

 

 

NOTE 4—MISCELLANEOUS OTHER INCOME:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Contract Buyout

 $0  $1,193  $40,969  $3,583 
Sale of Certain Coal Lease Contracts  17,847   0   17,847   0 

Royalty Income - Non-Operated Coal

  2,241   4,976   9,638   16,863 

Rental Income

  255   625   1,077   1,923 

Property Easements and Option Income

  19   100   495   1,529 

Interest Income

  76   755   442   2,399 

Purchased Coal Sales

  0   3,136   0   9,052 

Other

  563   403   639   1,325 

Miscellaneous Other Income

 $21,001  $11,188  $71,107  $36,674 

 

Contract buyout income was primarily the result of partial contract buyouts that involved negotiations to reduce coal quantities of several customer contracts in exchange for payment of certain fees to the Company, and do not impact forward contract terms.

 

The sale of certain coal lease contracts was in connection with one of several transactions completed in the three months ended September 30, 2020 related to the Company's non-operating surface and mineral assets outside of the Pennsylvania Mining Complex.

 

Royalty income represents earned revenue related to overriding royalty agreements or coal reserve leases between the Company and third-party operators.

 

Purchased coal sales include earned revenue related to coal purchased externally by the Company to blend and resell in order to fulfill various contracts.

 

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NOTE 5—COMPONENTS OF PENSION AND OTHER POST-EMPLOYMENT BENEFIT (OPEB) PLANS NET PERIODIC BENEFIT COSTS:

 

The components of Net Periodic Benefit (Credit) Cost are as follows:

 

  

Pension Benefits

  

Other Post-Employment Benefits

 
  

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

 

Service Cost

 $296  $987  $887  $2,963  $0  $0  $0  $0 

Interest Cost

  5,044   6,275   15,132   18,825   3,199   4,580   9,597   13,740 

Expected Return on Plan Assets

  (10,455)  (10,114)  (31,365)  (30,343)  0   0   0   0 

Amortization of Prior Service Credits

  0   (92)  0   (275)  (601)  (601)  (1,804)  (1,804)

Amortization of Actuarial Loss

  1,730   1,490   5,191   4,469   2,319   2,315   6,958   6,946 

Net Periodic Benefit (Credit) Cost

 $(3,385) $(1,454) $(10,155) $(4,361) $4,917  $6,294  $14,751  $18,882 

 

(Credits) expenses related to pension and other post-employment benefits are reflected in Operating and Other Costs in the Consolidated Statements of Income.

 

 

NOTE 6—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS:

 

The components of Net Periodic Benefit Cost are as follows:

 

  

CWP

  

Workers' Compensation

 
  

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

  

2020

  

2019

 

Service Cost

 $1,150  $948  $3,452  $2,844  $1,569  $1,421  $4,707  $4,264 

Interest Cost

  1,552   1,750   4,655   5,250   461   646   1,383   1,939 

Amortization of Actuarial Loss (Gain)

  1,401   254   4,203   762   (122)  (193)  (366)  (580)

State Administrative Fees and Insurance Bond Premiums

  0   0   0   0   583   510   1,665   1,671 

Net Periodic Benefit Cost

 $4,103  $2,952  $12,310  $8,856  $2,491  $2,384  $7,389  $7,294 

 

 

NOTE 7—INCOME TAXES:

 

The Company has evaluated the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was signed into law by the President of the United States in March 2020. The CARES Act has various income tax related provisions, including temporary net operating loss carryback and limitation measures, a relaxation of the limitation on interest deductions, the postponement of statutory filing dates, and a technical correction of the 2017 Tax Cuts and Jobs Act related to qualified improvement property.

 

The Company's year-to-date tax rate is based on its estimated full year effective tax rate. The effective tax rate for the nine months ended September 30, 2020 differs from the U.S. federal statutory rate of 21%, primarily due to the income tax benefit for excess percentage depletion, offset by the impact of discrete tax expense related to equity compensation and the unfavorable impact on percentage depletion related to the additional interest deduction available under the CARES Act and the final regulations on interest limitation regulations (“163j regulations”) issued by the Treasury Department. The CARES Act increased the amount of deductible interest from 30% of adjusted taxable income to 50% for tax years 2019 and 2020, which generates current cash tax benefit, but also reduces the base of earnings upon which percentage depletion was computed. The final 163j regulations also allowed the Company to deduct additional interest expense, but also reduce the base of earnings upon which percentage depletion was computed. The effective tax rate for the nine months ended September 30, 2020 was (0.6%), composed of tax expense of 21.8% from operations and discrete tax items of $902 related to equity compensation, $1,139 related to the effect of the CARES Act, and $3,059 related to the effect of the final 163j regulations, as noted above.

 

The effective tax rate for the nine months ended September 30, 2019 was (0.3)%, composed of a tax expense of 0.2% from operations and a discrete tax benefit of (0.5)% primarily related to equity compensation. The effective tax rate for the nine months ended September 30, 2019 differs from the U.S. federal statutory rate of 21%, primarily due to the income tax benefit for excess percentage depletion.

 

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The Company utilizes the “more likely than not” standard in recognizing a tax benefit in its financial statements. For the nine months ended September 30, 2020 and the year ended December 31, 2019, the Company did not have any unrecognized tax benefits. If accrual for interest or penalties is required, it is the Company's policy to include these as a component of income tax expense (benefit).

 

The Company is subject to taxation in the United States and its various states, as well as Canada and its various provinces. Under the provisions of the tax matters agreement entered into between the Company and its former parent on November 28, 2017 (the “TMA”), certain subsidiaries of the Company are subject to examination for tax years for the period January 1, 2016 through tax year December 31, 2019 for certain state and foreign returns. Further, the Company is subject to examination for the period November 28, 2017 through the tax year December 31, 2019 for federal and certain state returns.

 

 

NOTE 8—CREDIT LOSSES:

 

Effective January 1, 2020, the Company adopted ASU 2016-013, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using a modified retrospective approach. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade and other receivables. The amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under previous accounting guidance. The Company recorded a cumulative-effect adjustment to retained earnings in the amount of $3,298, net of $1,109 of income taxes, for expected credit losses on financial assets at the adoption date.

 

The following table illustrates the impact of ASC 326.

 

  

January 1, 2020

 
  As Reported Under ASC 326  Pre-ASC 326 Adoption  Impact of ASC 326 Adoption 
             

Trade Receivables

 $3,051  $2,100  $951 

Other Receivables

  3,372   711   2,661 

Other Assets

  795   0   795 

Allowance for Credit Losses on Receivables

 $7,218  $2,811  $4,407 

 

The Company is exposed to credit losses primarily through sales of products and services. The Company's expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade and other accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on an aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company's monitoring activities include timely account reconciliations, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions.

 

Balances are written off when determined to be uncollectible. The Company considered the current and expected future economic and market conditions surrounding the novel coronavirus (COVID-19) pandemic and determined that the estimate of credit losses was not significantly impacted.

 

Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes to the assessment of anticipated payment, changes in economic conditions, current industry trends in the markets the Company serves, and changes in the financial health of the Company's counterparties.

 

15

 

The following table provides a roll-forward of the allowance for credit losses by portfolio segment that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.

 

  

Trade Receivables

  

Other Receivables

  

Other Assets

 
             

Beginning Balance, January 1, 2020

 $2,100  $711  $0 

Adoption of ASU 2016-13, cumulative-effect adjustment to retained earnings

  951   2,661   795 

Provision for expected credit losses

  1,823   1,120   851 

Ending Balance, September 30, 2020

 $4,874  $4,492  $1,646 

 

 

NOTE 9—INVENTORIES:

 

Inventory components consist of the following:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Coal

 $6,640  $2,484 

Supplies

  49,937   51,647 

Total Inventories

 $56,577  $54,131 

 

Inventories are stated at the lower of cost or net realizable value. The cost of coal inventories is determined by the first-in, first-out (“FIFO”) method. Coal inventory costs include labor, supplies, equipment costs, operating overhead, depreciation, depletion, amortization and other related costs. The cost of supplies inventory is determined by the average cost method and includes operating and maintenance supplies to be used in the Company's coal operations.

 

 

NOTE 10—ACCOUNTS RECEIVABLE SECURITIZATION:

 

CONSOL Energy and certain of its U.S. subsidiaries are parties to a trade accounts receivable securitization facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. In March 2020, the securitization facility was amended to, among other things, extend the maturity date from August 30, 2021 to March 27, 2023.

 

Pursuant to the securitization facility, CONSOL Thermal Holdings LLC sells current and future trade receivables to CONSOL Pennsylvania Coal Company LLC. CONSOL Marine Terminals LLC and CONSOL Pennsylvania Coal Company LLC sell and/or contribute current and future trade receivables (including receivables sold to CONSOL Pennsylvania Coal Company LLC by CONSOL Thermal Holdings LLC) to CONSOL Funding LLC (the “SPV”). The SPV, in turn, pledges its interests in the receivables to PNC Bank, which either makes loans or issues letters of credit on behalf of the SPV. The maximum amount of advances and letters of credit outstanding under the securitization facility may not exceed $100 million.

 

Loans under the securitization facility accrue interest at a reserve-adjusted LIBOR market index rate equal to the one-month Eurodollar rate. Loans and letters of credit under the securitization facility also accrue a program fee and a letter of credit participation fee, respectively, ranging from 2.00% to 2.50% per annum depending on the total net leverage ratio of CONSOL Energy. In addition, the SPV paid certain structuring fees to PNC Capital Markets LLC and will pay other customary fees to the lenders, including a fee on unused commitments equal to 0.60% per annum.

 

At September 30, 2020, the Company's eligible accounts receivable yielded $30,660 of borrowing capacity. At September 30, 2020, the facility had 0 outstanding borrowings and $30,100 of letters of credit outstanding, leaving available borrowing capacity of $560. At December 31, 2019, the Company's eligible accounts receivable yielded $41,282 of borrowing capacity. At December 31, 2019, the facility had 0 outstanding borrowings and $41,211 of letters of credit outstanding, leaving available borrowing capacity of $71. Costs associated with the receivables facility totaled $249 and $882 for the three and nine months ended September 30, 2020, respectively, and $344 and $1,095 for the three and nine months ended September 30, 2019, respectively. These costs have been recorded as financing fees which are included in Operating and Other Costs in the Consolidated Statements of Income. The Company has not derecognized any receivables due to its continued involvement in the collections efforts.

 

16

 

 

NOTE 11—PROPERTY, PLANT AND EQUIPMENT:

 

Property, plant and equipment consists of the following:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Plant and Equipment

 $3,131,792  $3,028,514 

Coal Properties and Surface Lands

  874,439   872,909 

Airshafts

  449,863   437,003 

Mine Development

  343,960   342,706 

Advance Mining Royalties

  326,649   327,048 

Total Property, Plant and Equipment

  5,126,703   5,008,180 

Less: Accumulated Depreciation, Depletion and Amortization

  3,043,463   2,916,015 

Total Property, Plant and Equipment, Net

 $2,083,240  $2,092,165 

 

Coal reserves are controlled either through fee ownership or by lease. The duration of the leases vary; however, the lease terms are generally extended automatically to the exhaustion of economically recoverable reserves, as long as active mining continues. Coal interests held by lease provide the same rights as fee ownership for mineral extraction and are legally considered real property interests.

 

As of September 30, 2020 and December 31, 2019, property, plant and equipment includes gross assets under finance leases of $85,908 and $52,729, respectively. Accumulated amortization for finance leases was $49,453 and $31,373 at September 30, 2020 and December 31, 2019, respectively. Amortization expense for assets under finance leases approximated $6,178 and $3,919 for the three months ended September 30, 2020 and 2019 and $16,680 and $11,753 for the nine months ended September 30, 2020 and 2019, respectively, and is included in Depreciation, Depletion and Amortization in the accompanying Consolidated Statements of Income.

 

 

NOTE 12—OTHER ACCRUED LIABILITIES:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Subsidence Liability

 $89,917  $90,645 

Accrued Payroll and Benefits

  20,444   21,102 

Accrued Equipment Obligations

  10,097   0 

Accrued Interest

  9,576   6,281 

Other

  22,004   21,034 

Current Portion of Long-Term Liabilities:

        

Postretirement Benefits Other than Pensions

  30,410   31,833 

Asset Retirement Obligations

  22,057   21,741 

Operating Lease Liability

  20,020   19,479 

Pneumoconiosis Benefits

  12,092   12,331 

Workers' Compensation

  10,778   11,323 

Total Other Accrued Liabilities

 $247,395  $235,769 

 

17

 

 

NOTE 13—LONG-TERM DEBT:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 

Debt:

        

Term Loan B due in September 2024 (Principal of $270,875 and $272,938 less Unamortized Discount of $1,000 and $1,187, 4.65% and 6.30% Weighted Average Interest Rate, respectively)

 $269,875  $271,751 

11.00% Senior Secured Second Lien Notes due November 2025

  176,452   221,628 

MEDCO Revenue Bonds in Series due September 2025 at 5.75%

  102,865   102,865 

Term Loan A due in March 2023 (5.50% and 5.55% Weighted Average Interest Rate, respectively)

  72,500   88,750 

Other Asset-Backed Financing Arrangements

  21,885   9,289 

Advance Royalty Commitments (10.78% Weighted Average Interest Rate)

  1,895   1,895 

Less: Unamortized Debt Issuance Costs

  10,759   10,323 
   634,713   685,855 

Less: Amounts Due in One Year*

  47,693   32,053 

Long-Term Debt

 $587,020  $653,802 

 

* Excludes current portion of Finance Lease Obligations of $21,261 and $18,219 at September 30, 2020 and December 31, 2019, respectively.

 

In November 2017, CONSOL Energy entered into a revolving credit facility with commitments up to $300 million (the “Revolving Credit Facility”), a Term Loan A Facility of up to $100 million (the “TLA Facility”) and a Term Loan B Facility of up to $400 million (the “TLB Facility”, and together with the Revolving Credit Facility and the TLA Facility, the “Senior Secured Credit Facilities”). On March 28, 2019, the Company amended the Senior Secured Credit Facilities to increase the borrowing commitment of the Revolving Credit Facility to $400 million and reallocate the principal amounts outstanding under the TLA Facility and TLB Facility. On June 5, 2020, the Company amended the Senior Secured Credit Facilities (the “amendment”) to provide eight quarters of financial covenant relaxation, effect an increase in the rate at which borrowings under the Revolving Credit Facility and the TLA Facility bear interest, and add an anti-cash hoarding provision. Borrowings under the Company's Senior Secured Credit Facilities bear interest at a floating rate which can be, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an alternate base rate plus an applicable margin. The applicable margin for the Revolving Credit Facility and TLA Facility depends on the total net leverage ratio, whereas the applicable margin for the TLB Facility is fixed. The amendment increased the applicable margin by 50 basis points on both the Revolving Credit Facility and the TLA Facility. The maturity date of the Revolving Credit and TLA Facilities is March 28, 2023. The TLB Facility's maturity date is September 28, 2024. Obligations under the Senior Secured Credit Facilities (Term Loan B and Term Loan A, together with the Revolving Credit Facility, on which there were 0 outstanding borrowings at September 30, 2020) are guaranteed by (i) all owners of the 75% undivided economic interest in the PAMC held by the Company, (ii) any other members of the Company’s group that own any portion of the collateral securing the Revolving Credit Facility, and (iii) subject to certain customary exceptions and agreed materiality thresholds, all other existing or future direct or indirect wholly-owned restricted subsidiaries of the Company (excluding the Partnership and its wholly-owned subsidiaries). The obligations are secured by, subject to certain exceptions (including a limitation of pledges of equity interests in certain subsidiaries and certain thresholds with respect to real property), a first-priority lien on (i) the Company’s 75% undivided economic interest in the PAMC, (ii) the limited partner units of the Partnership held by the Company, (iii) the equity interests in CONSOL Coal Resources GP LLC held by the Company (iv) the CONSOL Marine Terminal and (v) the 1.5 billion tons of Greenfield Reserves.

 

The Senior Secured Credit Facilities contain a number of customary affirmative covenants. In addition, the Senior Secured Credit Facilities contain a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, restricted payments, and prepayments of junior indebtedness. The amendment added additional conditions to be met for the covenants relating to investments in joint ventures, general investments, share repurchases, dividends, and repurchases of Second Lien Notes. The additional conditions require 0 outstanding borrowings and no more than $200 million of outstanding letters of credit on the Revolving Credit Facility. Further restrictions apply to investments in joint ventures, share repurchases and dividends that require the total net leverage ratio shall not be greater than 2.00 to 1.00.

 

18

 

The Revolving Credit Facility and TLA Facility also include covenants relating to (i) a maximum first lien gross leverage ratio, (ii) a maximum total net leverage ratio, and (iii) a minimum fixed charge coverage ratio.  The maximum first lien gross leverage ratio is calculated as the ratio of Consolidated First Lien Debt to Consolidated EBITDA, excluding the Partnership. Consolidated EBITDA, as used in the covenant calculation, excludes non-cash compensation expenses, non-recurring transaction expenses, extraordinary gains and losses, gains and losses on discontinued operations, non-cash charges related to legacy employee liabilities and gains and losses on debt extinguishment, and includes cash distributions received from the Partnership and subtracts cash payments related to legacy employee liabilities. The maximum total net leverage ratio is calculated as the ratio of Consolidated Indebtedness, minus Cash on Hand, to Consolidated EBITDA, excluding the Partnership. The minimum fixed charge coverage ratio is calculated as the ratio of Consolidated EBITDA to Consolidated Fixed Charges, excluding the Partnership. Consolidated Fixed Charges, as used in the covenant calculation, include cash interest payments, cash payments for income taxes, scheduled debt repayments, dividends paid, and Maintenance Capital Expenditures. The amendment revised the financial covenants applicable to the Revolving Credit Facility and TLA Facility relating to the maximum first lien gross leverage ratio, maximum total net leverage ratio and minimum fixed charge coverage ratio, so that for the fiscal quarters ending June 30, 2020 through March 31, 2021, the maximum first lien gross leverage ratio shall be 2.50 to 1.00, the maximum total net leverage ratio shall be 3.75 to 1.00, and the minimum fixed charge coverage ratio shall be 1.00 to 1.00; for the fiscal quarters ending June 30, 2021 through September 30, 2021, the maximum first lien gross leverage ratio shall be 2.25 to 1.00 and the maximum total net leverage ratio shall be 3.50 to 1.00; for the fiscal quarters ending June 30, 2021 through March 31, 2022, the minimum fixed charge coverage ratio shall be 1.05 to 1.00; for the fiscal quarters ending December 31, 2021 through March 31, 2022, the maximum first lien gross leverage ratio shall be 2.00 to 1.00 and the maximum total net leverage ratio shall be 3.25 to 1.00; and for the fiscal quarters ending on or after June 30, 2022, the maximum first lien gross leverage ratio shall be 1.75 to 1.00, the maximum total net leverage ratio shall be 2.75 to 1.00 and the minimum fixed charge coverage ratio shall be 1.10 to 1.00. The maximum first lien gross leverage ratio was 2.04 to 1.00 at September 30, 2020. The maximum total net leverage ratio was 3.38 to 1.00 at September 30, 2020. The minimum fixed charge coverage ratio was 1.33 to 1.00 at September 30, 2020. The Company was in compliance with all of its debt covenants as of September 30, 2020. The Company is continuing to actively monitor the effects of the ongoing COVID-19 pandemic on its liquidity. 

 

The TLB Facility also includes a financial covenant that requires the Company to repay a certain amount of its borrowings under the TLB Facility within ten business days after the date it files its Form 10-K with the Securities and Exchange Commission if the Company has excess cash flow (as defined in the credit agreement for the Senior Secured Credit Facilities) during the year covered by the applicable Form 10-K. During the nine months ended September 30, 2019, CONSOL Energy made the required repayment of approximately $110 million based on the amount of the Company's excess cash flow as of December 31, 2018. For fiscal year 2018, such repayment was equal to 75% of the Company's excess cash flow less any voluntary prepayments of its borrowings under the TLB Facility made by the Company during 2018. For all subsequent fiscal years, the required repayment is equal to a certain percentage of the Company’s excess cash flow for such year, ranging from 0% to 75% depending on the Company’s total net leverage ratio, less the amount of certain voluntary prepayments made by the Company, if any, under the TLB Facility during such fiscal year. Based on the Company's excess cash flow calculation, no repayment was required with respect to the year ended December 31, 2019. The amount of excess cash flow is a covenant feature only applicable as of the Company's year-end and will be calculated as of December 31, 2020.

 

At September 30, 2020, the Revolving Credit Facility had 0 borrowings outstanding and $99,126 of letters of credit outstanding, leaving $300,874 of unused capacity. At December 31, 2019, the Revolving Credit Facility had 0 borrowings outstanding and $69,588 of letters of credit outstanding, leaving $330,412 of unused capacity. From time to time, CONSOL Energy is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies' statutes and regulations. CONSOL Energy sometimes uses letters of credit to satisfy these requirements and these letters of credit reduce the Company's borrowing facility capacity.

 

In November 2017, CONSOL Energy issued $300 million in aggregate principal amount of 11.00% Senior Secured Second Lien Notes due 2025 (the “Second Lien Notes”) pursuant to an indenture (the “Indenture”) dated as of November 13, 2017, by and between the Company and UMB Bank, N.A., a national banking association, as trustee and collateral trustee (the “Trustee”). On November 28, 2017, certain subsidiaries of the Company executed a supplement to the Indenture and became party to the Indenture as a guarantor (the “Guarantors”). The Second Lien Notes are secured by second priority liens on substantially all of the assets of the Company and the Guarantors that are pledged and on a first-priority basis as collateral securing the Company’s obligations under the Senior Secured Credit Facilities (described above), subject to certain exceptions under the Indenture. The Indenture contains covenants that will limit the ability of the Company and the Guarantors, to (i) incur, assume or guarantee additional indebtedness or issue preferred stock; (ii) create liens to secure indebtedness; (iii) declare or pay dividends on the Company’s common stock, redeem stock or make other distributions to the Company’s stockholders; (iv) make investments; (v) restrict dividends, loans or other asset transfers from the Company’s restricted subsidiaries; (vi) merge or consolidate, or sell, transfer, lease or dispose of substantially all of the Company’s assets; (vii) sell or otherwise dispose of certain assets, including equity interests in subsidiaries; (viii) enter into transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications. If the Second Lien Notes achieve an investment grade rating from both Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. and no default under the Indenture exists, many of the foregoing covenants will terminate and cease to apply.

 

19

 

During the nine months ended September 30, 2020, the Company repurchased $45,176 of its outstanding 11.00% Senior Secured Second Lien Notes due in 2025. During the nine months ended September 30, 2019, the Company made a required repayment of approximately $110 million on the TLB Facility (discussed above) and amended the Senior Secured Credit Facilities. The Company also repurchased $35,048 of its outstanding 11.00% Senior Secured Second Lien Notes due in 2025 during the nine months ended September 30, 2019. As part of these transactions, $1,078 and $17,911 was included in Gain on Debt Extinguishment on the Consolidated Statements of Income for the three and nine months ended September 30, 2020, respectively, and $801 and $25,444 was included in Loss on Debt Extinguishment on the Consolidated Statements of Income for the three and nine months ended September 30, 2019, respectively.

 

The Company is a borrower under two asset-backed financing arrangements related to certain equipment. The equipment, which has an approximate value of $21,885, fully collateralizes the loans. As of September 30, 2020, a total of $18,894 matures in December 2020 and $2,991 matures in September 2024. The loans had a weighted average interest rate of 4.30% and 5.07% at September 30, 2020 and December 31, 2019, respectively.

 

During the year ended December 31, 2019, the Company entered into interest rate swaps, which effectively converted $150,000 of the TLB Facility's floating interest rate to a fixed interest rate for the twelve months ending December 31, 2020 and 2021, and $50,000 of the TLB Facility's floating interest rate to a fixed interest rate for the twelve months ending December 31, 2022. The interest rate swaps qualify for cash flow hedge accounting treatment and as such, the change in the fair value of the interest rate swaps is recorded on the Company's Consolidated Balance Sheets as an asset or liability. The effective portion of the gains or losses is reported as a component of accumulated other comprehensive loss and the ineffective portion is reported in earnings. At September 30, 2020 and December 31, 2019, the interest rate swap contracts were reflected in the Consolidated Balance Sheets at their fair value of $3,373 and $154, respectively, which is recorded in Other Accrued Liabilities and Other Liabilities. The fair value of the interest rate swaps reflected an unrealized loss of $2,408 (net of $810 tax) at September 30, 2020. The unrealized loss is included on the Consolidated Statements of Stockholders' Equity as part of accumulated other comprehensive loss, as well as on the Consolidated Statements of Comprehensive Income as unrealized loss on cash flow hedges. Some of the Company's interest rate swaps reached their effective date in the nine months ended September 30, 2020. As such, a loss of $1,005 was recognized in interest expense in the Consolidated Statements of Income for the nine months ended September 30, 2020. During 2020, notional amounts of $150,000 will become effective. Based on the fair value of the Company's cash flow hedges at September 30, 2020, the Company expects expense of approximately $2,069 to be reclassified into earnings in the next 12 months.

 

20

 

 

NOTE 14—COMMITMENTS AND CONTINGENT LIABILITIES:

 

The Company and its former parent entered into a separation and distribution agreement on November 28, 2017 that implemented the legal and structural separation of the Company from its former parent. The separation and distribution agreement also identified the assets of the Coal Business that were transferred to the Company and the liabilities and contracts related to the Coal Business that were assumed by the Company as part of the separation and distribution, and provides post-closing indemnification obligations and procedures between the Company and its former parent relating to the liabilities of the Coal Business that the Company assumed.

 

The Company is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes and other claims and actions arising out of the normal course of business. The Company accrues the estimated loss for these lawsuits and claims when the loss is probable and reasonably estimable. The Company’s estimated accruals related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of the Company as of September 30, 2020. It is possible that the aggregate loss in the future with respect to these lawsuits and claims could ultimately be material to the Company’s financial position, results of operations or cash flows; however, such amounts cannot be reasonably estimated. The amount claimed against the Company as of September 30, 2020 is disclosed below when an amount is expressly stated in the lawsuit or claim, which is not often the case.

 

Fitzwater Litigation: Three nonunion retired coal miners have sued Fola Coal Company LLC, Consolidation Coal Company (“CCC”) and CONSOL of Kentucky Inc. (“COK”) (as well as the Company's former parent) in West Virginia Federal Court alleging ERISA violations in the termination of retiree health care benefits. The Plaintiffs contend they relied to their detriment on oral statements and promises of “lifetime health benefits” allegedly made by various members of management during Plaintiffs’ employment and that they were allegedly denied access to Summary Plan Documents that clearly reserved the right to modify or terminate the Retiree Health and Welfare Plan subject to Plaintiffs’ claims. Pursuant to Plaintiffs’ amended complaint filed on April 24, 2017, Plaintiffs request that retiree health benefits be reinstated and seek to represent a class of all nonunion retirees who were associated with AMVEST and COK areas of operation. On October 15, 2019, Plaintiffs’ supplemental motion for class certification was denied on all counts. On July 15, 2020, Plaintiffs filed an interlocutory appeal with the Fourth Circuit Court of Appeals on the Order denying class certification. The Fourth Circuit denied Plaintiffs' appeal on August 14, 2020. On October 1, 2020, the District Court entered a pretrial order setting the trial date for November 16, 2020. The Company believes it has a meritorious defense and intends to vigorously defend this suit.

 

Casey Litigation: A class action lawsuit was filed on August 23, 2017 on behalf of two nonunion retired coal miners against CCC, COK, CONSOL Buchanan Mining Co., LLC and Kurt Salvatori in West Virginia Federal Court alleging ERISA violations in the termination of retiree health care benefits. Filed by the same lawyers who filed the Fitzwater litigation, and raising nearly identical claims, the Plaintiffs contend they relied to their detriment on oral promises of “lifetime health benefits” allegedly made by various members of management during Plaintiffs’ employment and that they were not provided with copies of Summary Plan Documents clearly reserving to the Company the right to modify or terminate the Retiree Health and Welfare Plan. Plaintiffs request that retiree health benefits be reinstated for them and their dependents and seek to represent a class of all nonunion retirees of any subsidiary of the Company's former parent that operated or employed individuals in McDowell or Mercer Counties, West Virginia, or Buchanan or Tazewell Counties, Virginia whose retiree welfare benefits were terminated. On December 1, 2017, the trial court judge in Fitzwater signed an order to consolidate Fitzwater with Casey. The Casey complaint was amended on March 1, 2018 to add new plaintiffs, add defendant CONSOL Pennsylvania Coal Company, LLC and eliminate defendant CONSOL Buchanan Mining Co., LLC in an attempt to expand the class of retirees. On October 15, 2019, Plaintiffs’ supplemental motion for class certification was denied on all counts. On July 15, 2020, Plaintiffs filed an interlocutory appeal with the Fourth Circuit Court of Appeals on the Order denying class certification. The Fourth Circuit denied Plaintiffs' appeal on August 14, 2020. On October 1, 2020, the District Court entered a pretrial order setting the trial date for November 16, 2020. The Company believes it has a meritorious defense and intends to vigorously defend this suit.

 

United Mine Workers of America 1992 Benefit Plan Litigation: In 2013, Murray Energy and its subsidiaries (“Murray”) entered into a stock purchase agreement (the “Murray sale agreement”) with the Company's former parent pursuant to which Murray acquired the stock of CCC and certain subsidiaries and certain other assets and liabilities. At the time of sale, the liabilities included certain retiree medical liabilities under the Coal Industry Retiree Health Benefits Act of 1992 (“Coal Act”) and certain federal black lung liabilities under the Black Lung Benefits Act (“BLBA”). Based upon information available, the Company estimates that the annual servicing costs of these liabilities are approximately $10 million to $20 million per year for the next ten years. The annual servicing cost would decline each year since the beneficiaries of the Coal Act consist principally of miners who retired prior to 1994. Murray filed for Chapter 11 bankruptcy in October 2019. As part of the ongoing bankruptcy proceedings, Murray entered into a settlement with the United Mine Workers of America 1992 Benefit Plan (“1992 Plan”) to transfer retirees in the Murray Energy Section 9711 Plan into the 1992 Plan, which the bankruptcy court approved on April 30, 2020. The 1992 Plan recently filed an action in the United States District Court for the District of Columbia asking the court to make a determination whether the Company's former parent or the Company has any continuing retiree medical liabilities under the Coal Act. The Murray sale agreement includes indemnification by Murray with respect to the Coal Act and BLBA liabilities. In addition, the Company had agreed to indemnify its former parent relative to certain pre-separation liabilities. As of September 16, 2020, the Company has entered into a settlement agreement with Murray, and has withdrawn its claims in bankruptcy. See Note 2 - Major Transactions for a discussion of this settlement agreement. The Company will continue to vigorously defend any claims that attempt to transfer any of such liabilities directly or indirectly to the Company, including raising all applicable defenses against the 1992 Plan’s suit and those of any other party.

 

Other Matters: Various Company subsidiaries are defendants in certain other legal proceedings arising out of the conduct of the Coal Business prior to the separation and distribution, and the Company is also a defendant in other legal proceedings following the separation and distribution. In the opinion of management, based upon an investigation of these matters and discussion with legal counsel, the ultimate outcome of such other legal proceedings, individually and in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.

 

21

 

As part of the separation and distribution, the Company assumed various financial obligations relating to the Coal Business and agreed to reimburse its former parent for certain financial guarantees relating to the Coal Business that its former parent retained following the separation and distribution. Employee-related financial guarantees have primarily been provided to support the United Mine Workers’ of America’s 1992 Benefit Plan and federal black lung and various state workers’ compensation self-insurance programs. Environmental financial guarantees have primarily been provided to support various performance bonds related to reclamation and other environmental issues. Other financial guarantees have been extended to support sales contracts, insurance policies, legal matters, full and timely payments of mining equipment leases, and various other items necessary in the normal course of business.

 

The following is a summary, as of September 30, 2020, of the financial guarantees, unconditional purchase obligations and letters of credit to certain third parties. These amounts represent the maximum potential of total future payments that the Company could be required to make under these instruments, or under the separation and distribution agreement to the extent retained by the Company's former parent on behalf of the Coal Business. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credit are recorded as liabilities in the financial statements. The Company’s management believes that these guarantees will expire without being funded, and therefore, the commitments will not have a material adverse effect on the Company’s financial condition.

 

  

Amount of Commitment Expiration per Period

 
  Total Amounts Committed  

Less Than 1 Year

  

1-3 Years

  

3-5 Years

  

Beyond 5 Years

 

Letters of Credit:

                    

Employee-Related

 $75,846  $52,929  $22,917  $0  $0 

Environmental

  398   398   0   0   0 

Other

  52,982   47,504   5,478   0   0 

Total Letters of Credit

  129,226   100,831   28,395   0   0 

Surety Bonds:

                    

Employee-Related

  86,024   50,524   35,500   0   0 

Environmental

  576,584   555,300   21,284   0   0 

Other

  4,789   4,584   205   0   0 

Total Surety Bonds

  667,397   610,408   56,989   0   0 

Guarantees:

                    

Other

  10,704   6,636   3,438   398   232 

Total Guarantees

  10,704   6,636   3,438   398   232 

Total Commitments

 $807,327  $717,875  $88,822  $398  $232 

 

Included in the above table are commitments and guarantees entered into in conjunction with the sale of Consolidation Coal Company and certain of its subsidiaries, which contain all five of its longwall coal mines in West Virginia and its river operations, to a third party. As part of the separation and distribution, the Company's former parent agreed to indemnify the Company and the Company agreed to indemnify its former parent in each case with respect to guarantees of certain equipment lease obligations that were assumed by the third party. In the event that the third party would default on the obligations defined in the agreements, the Company would be required to perform under the guarantees. As of September 30, 2020, the Company has not been required to perform under these guarantees. The equipment lease obligations are collateralized by the underlying assets. The current maximum estimated exposure under these guarantees as of September 30, 2020 and December 31, 2019 is believed to be approximately $16,000 and $20,000, respectively. At September 30, 2020 and December 31, 2019, the fair value of these guarantees was $259 and $482, respectively, and is included in Other Accrued Liabilities on the Consolidated Balance Sheets. The fair value of certain of the guarantees was determined using the Company’s risk-adjusted interest rate. Significant increases or decreases in the risk-adjusted interest rates may result in a significantly higher or lower fair value measurement. No other amounts related to financial guarantees and letters of credit are recorded as liabilities in the financial statements. Significant judgment is required in determining the fair value of these guarantees. The guarantees of the leases are classified within Level 3 of the fair value hierarchy.

 

The Company regularly evaluates the likelihood of default for all guarantees based on an expected loss analysis and records the fair value, if any, of its guarantees as an obligation in the consolidated financial statements.

 

22

 

 

NOTE 15—FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

CONSOL Energy determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources (including LIBOR-based discount rates), while unobservable inputs reflect the Company’s own assumptions of what market participants would use.

 

The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.

 

Level One - Quoted prices for identical instruments in active markets.

 

Level Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models that use significant observable inputs, including LIBOR-based discount rates.

 

Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity. The significant unobservable inputs used in the fair value measurement of the Company’s third-party guarantees are the credit risk of the third-party and the third-party surety bond markets. A significant increase or decrease in these values, in isolation, would have a directionally similar effect resulting in higher or lower fair value measurement of the Company’s Level 3 guarantees.

 

In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.

 

The financial instruments measured at fair value on a recurring basis are summarized below:

 

  

Fair Value Measurements at

  

Fair Value Measurements at

 
  

September 30, 2020

  

December 31, 2019

 

Description

 

Level 1

  

Level 2

  

Level 3

  

Level 1

  

Level 2

  

Level 3

 

Lease Guarantees

 $0  $0  $(259) $0  $0  $(482)

Derivatives (1)

 $0  $(3,373) $0  $0  $(154) $0 

 

(1) Interest rate swaps are valued based on observable market swap rates and are classified within Level 2 of the fair value hierarchy.

 

The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:

 

Long-term debt: The fair value of long-term debt is measured using unadjusted quoted market prices or estimated using discounted cash flow analyses. The discounted cash flow analyses are based on current market rates for instruments with similar cash flows.

 

The carrying amounts and fair values of financial instruments for which the fair value option was not elected are as follows:

 

  

September 30, 2020

  

December 31, 2019

 
  

Carrying

  

Fair

  

Carrying

  

Fair

 
  

Amount

  

Value

  

Amount

  

Value

 

Long-Term Debt

 $645,472  $491,465  $696,178  $642,018 

 

Certain of the Company’s debt is actively traded on a public market and, as a result, constitutes Level 1 fair value measurements. The portion of the Company’s debt obligations that is not actively traded is valued through reference to the applicable underlying benchmark rate and, as a result, constitutes Level 2 fair value measurements.

 

23

 

 

NOTE 16—SEGMENT INFORMATION:

 

CONSOL Energy Inc. consists of one reportable segment: the Pennsylvania Mining Complex, which includes the Bailey Mine, the Enlow Fork Mine, the Harvey Mine and the Central Preparation Plant. The principal activities of the PAMC are mining, preparation and marketing of thermal coal, sold primarily to power generators. It also includes selling, general and administrative activities, as well as various other activities assigned to the PAMC.

 

CONSOL Energy’s Other division includes revenue and expenses from various corporate and diversified business activities that are not allocated to the PAMC division. The diversified business activities include the CONSOL Marine Terminal, development of the Itmann Mine, the Greenfield Reserves, closed and idle mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities, none of which are individually significant to the Company.

 

Industry segment results for the three months ended September 30, 2020 are:

 

  

PAMC

  

Other

  Adjustments and Eliminations  

Consolidated

  

Coal Revenue

 $184,066  $309  $0  $184,375 

(A)

Terminal Revenue

  0   17,008   0   17,008  

Freight Revenue

  12,909   0   0   12,909  

Total Revenue from Contracts with Customers

 $196,975  $17,317  $0  $214,292  

(Loss) Earnings Before Income Tax

 $(6,930) $3,488  $0  $(3,442) 

Segment Assets

 $1,878,350  $676,488  $0  $2,554,838  

Depreciation, Depletion and Amortization

 $49,944  $5,015  $0  $54,959  

Capital Expenditures

 $15,733  $3,775  $0  $19,508  

 

Industry segment results for the three months ended September 30, 2019 are:

 

  

PAMC

  

Other

  Adjustments and Eliminations  

Consolidated

  

Coal Revenue

 $301,542  $0  $0  $301,542 

(A)

Terminal Revenue

  0   16,303   0   16,303  

Freight Revenue

  3,599   0   0   3,599  

Total Revenue from Contracts with Customers

 $305,141  $16,303  $0  $321,444  

Earnings (Loss) Before Income Tax

 $30,546  $(21,107) $0  $9,439  

Segment Assets

 $2,014,381  $708,854  $0  $2,723,235  

Depreciation, Depletion and Amortization

 $45,829  $8,541  $0  $54,370  

Capital Expenditures

 $45,232  $3,289  $0  $48,521  

 

24

 

Industry segment results for the nine months ended September 30, 2020 are:

 

  

PAMC

  

Other

  

Adjustments and Eliminations

  

Consolidated

  

Coal Revenue

 $541,545  $595  $0  $542,140 

(A)

Terminal Revenue

  0   49,407   0   49,407  

Freight Revenue

  19,141   0   0   19,141  

Total Revenue from Contracts with Customers

 $560,686  $50,002  $0  $610,688  

Loss Before Income Tax

 $(18,405) $(9,400) $0  $(27,805) 

Segment Assets

 $1,878,350  $676,488  $0  $2,554,838  

Depreciation, Depletion and Amortization

 $145,154  $10,903  $0  $156,057  

Capital Expenditures

 $52,687  $13,268  $0  $65,955  

 

Industry segment results for the nine months ended September 30, 2019 are:

 

  

PAMC

  

Other

  

Adjustments and Eliminations

  

Consolidated

  

Coal Revenue

 $984,665  $0  $0  $984,665 

(A)

Terminal Revenue

  0   50,829   0   50,829  

Freight Revenue

  14,115   0   0   14,115  

Total Revenue from Contracts with Customers

 $998,780  $50,829  $0  $1,049,609  

Earnings (Loss) Before Income Tax

 $156,029  $(80,115) $0  $75,914  

Segment Assets

 $2,014,381  $708,854  $0  $2,723,235  

Depreciation, Depletion and Amortization

 $136,124  $15,121  $0  $151,245  

Capital Expenditures

 $117,417  $14,058  $0  $131,475  

 

 

(A)

For the three and nine months ended September 30, 2020 and 2019, the PAMC segment had revenues from the following customers, each comprising over 10% of the Company’s total sales:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Customer A

 $45,818  $49,772  $94,647  $180,014 

Customer C

 $36,888  $63,526  $86,631  $158,903 

Customer B

  *  $95,953  $141,993  $358,882 

* Revenues from this customer during the three months ended September 30, 2020 were less than 10% of the Company's total sales.

 

25

 

Reconciliation of Segment Information to Consolidated Amounts:

 

Total Assets:

 

  

September 30,

 
  

2020

  

2019

 

Segment Assets for Total Reportable Business Segments

 $1,878,350  $2,014,381 

Segment Assets for All Other Business Segments

  542,189   512,738 

Items Excluded from Segment Assets:

        

Cash and Other Investments

  32,660   104,344 

Deferred Tax Assets

  101,639   91,772 

Total Consolidated Assets

 $2,554,838  $2,723,235 

 

 

NOTE 17—ADDITIONAL INFORMATION WITH RESPECT TO UNRESTRICTED SUBSIDIARIES:

 

Under the terms of the Indenture and Senior Secured Credit Facilities, CONSOL Energy has designated certain of its subsidiaries as “Unrestricted Subsidiaries”. The current Unrestricted Subsidiaries are the Partnership and its subsidiaries and the SPV. CONSOL Energy is required under the terms of the Indenture and the Senior Secured Credit Facilities to present additional information that reflects the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Company's Unrestricted Subsidiaries for the periods presented. This additional information is below.

 

Income Statement for the Three Months Ended September 30, 2020 (unaudited):

 

  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

Revenue and Other Income:

            

Coal Revenue

 $138,359  $46,016  $184,375 

Terminal Revenue

  17,008   0   17,008 

Freight Revenue

  9,682   3,227   12,909 

Miscellaneous Other Income

  11,454   9,547   21,001 

Gain on Sale of Assets

  7,867   59   7,926 

Total Revenue and Other Income

  184,370   58,849   243,219 

Costs and Expenses:

            

Operating and Other Costs

  118,857   34,174   153,031 

Depreciation, Depletion and Amortization

  33,070   21,889   54,959 

Freight Expense

  9,682   3,227   12,909 

Selling, General and Administrative Costs

  8,238   2,879   11,117 
Gain on Debt Extinguishment  (1,078)  0   (1,078)

Interest Expense, net

  13,203   2,520   15,723 

Total Costs and Expenses

  181,972   64,689   246,661 

Earnings (Loss) Before Income Tax

  2,398   (5,840)  (3,442)

Income Tax Expense

  5,918   0   5,918 

Net Loss

  (3,520)  (5,840)  (9,360)

Less: Net Loss Attributable to Noncontrolling Interest

  (2,136)  0   (2,136)

Net Loss Attributable to CONSOL Energy Inc. Shareholders

 $(1,384) $(5,840) $(7,224)

 

26

 

Balance Sheet at September 30, 2020 (unaudited):

            
             
  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

ASSETS

            

Current Assets:

            

Cash and Cash Equivalents

 $21,636  $648  $22,284 

Accounts and Notes Receivable

            

Trade Receivables, net

  0   120,548   120,548 

Other Receivables, net

  23,786   962   24,748 

Inventories

  43,399   13,178   56,577 

Prepaid Expenses and Other Assets

  23,053   4,086   27,139 

Total Current Assets

  111,874   139,422   251,296 

Property, Plant and Equipment:

            

Property, Plant and Equipment

  4,109,220   1,017,483   5,126,703 

Less-Accumulated Depreciation, Depletion and Amortization

  2,437,152   606,311   3,043,463 

Total Property, Plant and Equipment - Net

  1,672,068   411,172   2,083,240 

Other Assets:

            

Deferred Income Taxes

  101,639   0   101,639 

Right of Use Asset - Operating Leases

  45,936   12,170   58,106 

Other, net

  57,920   2,637   60,557 

Total Other Assets

  205,495   14,807   220,302 

TOTAL ASSETS

 $1,989,437  $565,401  $2,554,838 

LIABILITIES AND EQUITY

            

Current Liabilities:

            

Accounts Payable

 $51,277  $20,986  $72,263 

Accounts (Recoverable) Payable - Related Parties

  (8,035)  8,035   0 

Current Portion of Long-Term Debt

  59,703   9,251   68,954 

Other Accrued Liabilities

  209,132   38,263   247,395 

Total Current Liabilities

  312,077   76,535   388,612 

Long-Term Debt:

            
Long-Term Debt, Related Party  (174,685)  174,685   0 

Long-Term Debt

  587,020   0   587,020 

Finance Lease Obligations

  15,948   5,198   21,146 

Total Long-Term Debt

  428,283   179,883   608,166 

Deferred Credits and Other Liabilities:

            

Postretirement Benefits Other Than Pensions

  421,705   0   421,705 

Pneumoconiosis Benefits

  194,312   6,754   201,066 

Asset Retirement Obligations

  218,031   11,315   229,346 

Workers' Compensation

  57,527   3,998   61,525 

Salary Retirement

  33,454   0   33,454 

Operating Lease Liability

  33,445   8,178   41,623 

Other

  15,726   887   16,613 

Total Deferred Credits and Other Liabilities

  974,200   31,132   1,005,332 

TOTAL LIABILITIES

  1,714,560   287,550   2,002,110 

Total CONSOL Energy Inc. Stockholders’ Equity

  148,228   277,851   426,079 

Noncontrolling Interest

  126,649   0   126,649 

TOTAL LIABILITIES AND EQUITY

 $1,989,437  $565,401  $2,554,838 

 

27

 

Income Statement for the Three Months Ended September 30, 2019 (unaudited):

 

  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

Revenue and Other Income:

            

Coal Revenue

 $226,157  $75,385  $301,542 

Terminal Revenue

  16,303   0   16,303 

Freight Revenue

  2,699   900   3,599 

Miscellaneous Other Income

  391   10,797   11,188 

Gain on Sale of Assets

  714   0   714 

Total Revenue and Other Income

  246,264   87,082   333,346 

Costs and Expenses:

            

Operating and Other Costs

  180,487   54,362   234,849 

Depreciation, Depletion and Amortization

  43,284   11,086   54,370 

Freight Expense

  2,699   900   3,599 

Selling, General and Administrative Costs

  11,850   2,840   14,690 

Loss on Debt Extinguishment

  801   0   801 

Interest Expense, net

  14,011   1,587   15,598 

Total Costs and Expenses

  253,132   70,775   323,907 

(Loss) Earnings Before Income Tax

  (6,868)  16,307   9,439 

Income Tax Expense

  2,415   0   2,415 

Net (Loss) Income

  (9,283)  16,307   7,024 

Less: Net Income Attributable to Noncontrolling Interest

  2,684   0   2,684 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(11,967) $16,307  $4,340 

 

28

 

Balance Sheet at December 31, 2019:

            
             
  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

ASSETS

            

Current Assets:

            

Cash and Cash Equivalents

 $79,717  $576  $80,293 

Accounts and Notes Receivable

            

Trade Receivables, net

  0   131,688   131,688 

Other Receivables, net

  39,412   1,572   40,984 

Inventories

  41,478   12,653   54,131 

Prepaid Expenses and Other Assets

  25,181   5,752   30,933 

Total Current Assets

  185,788   152,241   338,029 

Property, Plant and Equipment:

            

Property, Plant and Equipment

  4,023,282   984,898   5,008,180 

Less-Accumulated Depreciation, Depletion and Amortization

  2,344,777   571,238   2,916,015 

Total Property, Plant and Equipment - Net

  1,678,505   413,660   2,092,165 

Other Assets:

            

Deferred Income Taxes

  103,505   0   103,505 

Right of Use Asset - Operating Leases

  56,937   15,695   72,632 

Other, net

  74,015   13,456   87,471 

Total Other Assets

  234,457   29,151   263,608 

TOTAL ASSETS

 $2,098,750  $595,052  $2,693,802 

LIABILITIES AND EQUITY

            

Current Liabilities:

            

Accounts Payable

 $79,140  $27,083  $106,223 

Accounts (Recoverable) Payable - Related Parties

  (1,419)  1,419   0 

Current Portion of Long-Term Debt

  45,020   5,252   50,272 

Other Accrued Liabilities

  196,314   39,455   235,769 

Total Current Liabilities

  319,055   73,209   392,264 

Long-Term Debt:

            
Long-Term Debt, Related Party  (148,156)  148,156   0 

Long-Term Debt

  653,802   0   653,802 

Finance Lease Obligations

  7,391   1,645   9,036 

Total Long-Term Debt

  513,037   149,801   662,838 

Deferred Credits and Other Liabilities:

            

Postretirement Benefits Other Than Pensions

  432,496   0   432,496 

Pneumoconiosis Benefits

  196,114   6,028   202,142 

Asset Retirement Obligations

  239,410   10,801   250,211 

Workers' Compensation

  57,583   3,611   61,194 

Salary Retirement

  49,930   0   49,930 

Operating Lease Liability

  43,906   11,507   55,413 

Other

  14,134   785   14,919 

Total Deferred Credits and Other Liabilities

  1,033,573   32,732   1,066,305 

TOTAL LIABILITIES

  1,865,665   255,742   2,121,407 

Total CONSOL Energy Inc. Stockholders’ Equity

  95,889   339,310   435,199 

Noncontrolling Interest

  137,196   0   137,196 

TOTAL LIABILITIES AND EQUITY

 $2,098,750  $595,052  $2,693,802 

 

 

29

 

Income Statement for the Nine Months Ended September 30, 2020 (unaudited):

 

  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

Revenue and Other Income:

            

Coal Revenue

 $406,754  $135,386  $542,140 

Terminal Revenue

  49,407   0   49,407 

Freight Revenue

  14,356   4,785   19,141 

Miscellaneous Other Income

  32,119   38,988   71,107 

Gain on Sale of Assets

  15,182   59   15,241 

Total Revenue and Other Income

  517,818   179,218   697,036 

Costs and Expenses:

            

Operating and Other Costs

  373,774   107,938   481,712 

Depreciation, Depletion and Amortization

  110,720   45,337   156,057 

Freight Expense

  14,356   4,785   19,141 

Selling, General and Administrative Costs

  30,441   9,285   39,726 

Gain on Debt Extinguishment

  (17,911)  0   (17,911)

Interest Expense, net

  39,187   6,929   46,116 

Total Costs and Expenses

  550,567   174,274   724,841 

(Loss) Earnings Before Income Tax

  (32,749)  4,944   (27,805)

Income Tax Expense

  143   0   143 

Net (Loss) Income

  (32,892)  4,944   (27,948)

Less: Net Loss Attributable to Noncontrolling Interest

  (5,108)  0   (5,108)

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(27,784) $4,944  $(22,840)

 

 

Income Statement for the Nine Months Ended September 30, 2019 (unaudited):

 

  

Company and

         
  

Restricted

  

Unrestricted

     
  

Subsidiaries

  

Subsidiaries

  

Consolidated

 

Revenue and Other Income:

            

Coal Revenue

 $738,499  $246,166  $984,665 

Terminal Revenue

  50,829   0   50,829 

Freight Revenue

  10,586   3,529   14,115 

Miscellaneous Other Income

  4,528   32,146   36,674 

Gain (Loss) on Sale of Assets

  1,991   (5)  1,986 

Total Revenue and Other Income

  806,433   281,836   1,088,269 

Costs and Expenses:

            

Operating and Other Costs

  552,671   165,739   718,410 

Depreciation, Depletion and Amortization

  117,606   33,639   151,245 

Freight Expense

  10,586   3,529   14,115 

Selling, General and Administrative Costs

  42,548   10,353   52,901 

Loss on Debt Extinguishment

  25,444   0   25,444 

Interest Expense, net

  45,745   4,495   50,240 

Total Costs and Expenses

  794,600   217,755   1,012,355 

Earnings Before Income Tax

  11,833   64,081   75,914 

Income Tax Benefit

  (243)  0   (243)

Net Income

  12,076   64,081   76,157 

Less: Net Income Attributable to Noncontrolling Interest

  14,102   0   14,102 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 $(2,026) $64,081  $62,055 

 

30

 

 

NOTE 18—RELATED PARTY TRANSACTIONS:

 

Transactions with the Company's Former Parent (2017)

 

Transition Services Agreements

 

The Company entered into a transition services agreement (“TSA”) and certain other agreements in connection with the separation and distribution agreement with its former parent to cover certain continued corporate services provided by the Company and its former parent to each other following the completion of the separation and distribution. In connection with the separation and distribution, the Company began to set up its own corporate functions, and pursuant to the TSA, the Company's former parent provided various corporate support services, including certain accounting, human resources, information technology, office and building, risk, security, tax and treasury, building security and tax services, as well as certain regulatory compliance services required during the period in which the Company remained a majority-owned subsidiary of its former parent. The TSA expired in February 2019. The charges associated with these services were not material during the three and nine months ended September 30, 2019, and were consistent with expenses that the Company's former parent had historically allocated or incurred with respect to such services.

 

Former Parent Receivables and Payables

 

The Company had a receivable from its former parent of $6,791 at December 31, 2019, which was recorded in Other Receivables on the Consolidated Balance Sheets. The balance of this receivable was collected during the nine months ended September 30, 2020. This receivable relates to reimbursements per the terms of the separation and distribution agreement.

 

CONSOL Coal Resources LP

 

CONSOL Energy, certain of its subsidiaries and the Partnership are party to an Omnibus Agreement, dated September 30, 2016, as amended on November 28, 2017 (the “Omnibus Agreement”). Under the Omnibus Agreement, CONSOL Energy provides the Partnership with certain services in exchange for payments by the Partnership for those services.

 

On November 28, 2017, the Company entered into an Affiliated Company Credit Agreement with the Partnership and certain of its subsidiaries (the “Partnership Credit Parties”), as amended on June 5, 2020 (as amended, the “Affiliated Company Credit Agreement”), under which the Company provides as lender a revolving credit facility in an aggregate principal amount of up to $275 million to the Partnership Credit Parties. In connection with the completion of the separation, the Partnership drew an initial $201 million, the net proceeds of which were used to repay outstanding amounts under CCR's $400 million senior secured revolving credit facility with certain lenders and PNC Bank, National Association, as administrative agent (the “Original CCR Credit Facility”), to provide working capital for the Partnership following the separation and for other general corporate purposes. The Original CCR Credit Facility was then terminated.

 

On June 5, 2020, the Company amended the Affiliated Company Credit Agreement to provide eight quarters of financial covenant relaxation, effected a 50 basis points increase in the rate at which borrowings under the Affiliated Company Credit Agreement bear interest, and added additional conditions to be met for the covenants relating to general investments, investments in unrestricted subsidiaries, and distributions to equity holders of the Partnership. The Affiliated Company Credit Agreement has a maturity date of December 28, 2024. Interest accrues at a rate ranging from 4.25% to 5.25%, subject to the Partnership's net leverage ratio. For the three months ended September 30, 2020 and 2019, $2,428 and $2,003 of interest was incurred under the Affiliated Company Credit Agreement, respectively. For the nine months ended September 30, 2020 and 2019, $6,705 and $5,770 of interest was incurred under the Affiliated Company Credit Agreement, respectively. The collateral obligations under the Affiliated Company Credit Agreement generally mirror the Original CCR Credit Facility, as does the list of entities that will act as guarantors thereunder. The Affiliated Company Credit Agreement is subject to financial covenants relating to a maximum first lien gross leverage ratio and a maximum total net leverage ratio, which will be calculated on a consolidated basis for the Partnership and its restricted subsidiaries at the end of each fiscal quarter. The Partnership was in compliance with each of these financial covenants at September 30, 2020. The Affiliated Company Credit Agreement also contains a number of customary affirmative covenants and negative covenants, including limitations on the ability of the Partnership to incur additional indebtedness, grant liens, and make investments, acquisitions, dispositions, restricted payments, and prepayments of junior indebtedness (subject to certain limited exceptions).

 

CCR is a party to a number of other agreements with CONSOL Energy, or its subsidiaries, that are described in detail in the section titled “Agreements with Affiliates” in Item 13 of CCR’s Form 10-K filed on February 14, 2020.

 

In August 2019, upon payment of the cash distribution with respect to the quarter ended June 30, 2019, the financial requirements for the conversion of all CCR subordinated units were satisfied. As a result, all 11,611,067 of the CCR subordinated units owned entirely by CONSOL Energy Inc. were converted into CCR common units on a one-for-one basis. The conversion did not impact the amount of the cash distribution paid or the total number of CCR's outstanding units representing limited partner interests.

 

See Note 20 - Subsequent Events for a discussion of the CCR Merger.

 

31

 

Charges for services from the Company to CCR include the following:

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Operating and Other Costs

 $1,006  $838  $2,715  $2,368 

Selling, General and Administrative Costs

  1,770   1,902   6,427   6,932 

Total Services from CONSOL Energy

 $2,776  $2,740  $9,142  $9,300 

 

Operating and Other Costs include pension service costs and insurance expenses. Selling, General and Administrative Costs include charges for incentive compensation, an annual administrative support fee and reimbursement for the provision of certain management and operating services provided by the Company.

 

At September 30, 2020 and December 31, 2019, CCR had a net payable to the Company in the amount of $8,035 and $1,419, respectively. This payable includes reimbursements for business expenses, executive fees, stock-based compensation and other items under the Omnibus Agreement.

 

In May 2019, CONSOL Energy Inc.'s Board of Directors approved an expansion of the stock, unit and debt repurchase program (see Note 19 - Stock, Unit and Debt Repurchases). The program expansion allows the Company to use up to $50 million of the program to purchase CCR's outstanding common units in the open market. None of the Partnership's common units were purchased under this program during the three and nine months ended September 30, 2020. During the three and nine months ended September 30, 2019, 19,413 and 26,297 of the Partnership's common units were purchased under this program at an average price of $12.88 and $14.05 per unit, respectively. 

 

 

NOTE 19—STOCK, UNIT AND DEBT REPURCHASES:

 

In December 2017, CONSOL Energy’s Board of Directors approved a program to repurchase, from time to time, the Company’s outstanding shares of common stock or its 11.00% Senior Secured Second Lien Notes due 2025, in an aggregate amount of up to $50 million through the period ending June 30, 2019. The program was subsequently amended by CONSOL Energy’s Board of Directors in July 2018 to allow up to $100 million of repurchases of the Company’s common stock or its 11.00% Senior Secured Second Lien Notes due 2025, subject to certain limitations in the Company’s current credit agreement and the TMA. The Company’s Board of Directors also authorized the Company to use up to $25 million of the program to purchase CONSOL Coal Resources LP’s outstanding common units in the open market. In May 2019, CONSOL Energy's Board of Directors approved an expansion of the program in the amount of $75 million, bringing the aggregate limit of the program to $175 million. The May 2019 expansion also increased the aggregate limit of the amount of CCR's common units that can be purchased under the program to $50 million, which is consistent with the Company's credit facility covenants that prohibit the Company from using more than $50 million for the purchase of CCR's outstanding common units. The Company's Board of Directors also approved extending the termination date of the program from June 30, 2019 to June 30, 2020. In July 2019, CONSOL Energy's Board of Directors approved an expansion of the program in the amount of $25 million, bringing the aggregate limit of the Company's stock, unit and debt repurchase program to $200 million. In May 2020, CONSOL Energy's Board of Directors approved an expansion of the program in the amount of $70 million, bringing the aggregate limit of the Company's stock, unit and debt repurchase program to $270 million. The Company's Board of Directors also approved extending the termination date of the program from June 30, 2020 to June 30, 2022.

 

Under the terms of the program, CONSOL Energy is permitted to make repurchases in the open market, in privately negotiated transactions, accelerated repurchase programs or in structured share repurchase programs. CONSOL Energy is also authorized to enter into one or more 10b5-1 plans with respect to any of the repurchases. Any repurchases of common stock, notes or units are to be funded from available cash on hand or short-term borrowings. The program does not obligate CONSOL Energy to acquire any particular amount of its common stock, notes or units, and can be modified or suspended at any time at the Company’s discretion. The program is conducted in compliance with applicable legal requirements and within the limits imposed by any credit agreement, receivables purchase agreement, indenture, or the TMA, and is subject to market conditions and other factors.

 

During the nine months ended September 30, 2020 and 2019, the Company repurchased approximately $45,176 and $35,048 of its 11.00% Senior Secured Second Lien Notes due 2025, respectively. NaN common shares were repurchased and 0 common Partnership units were purchased under this program during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company repurchased and retired 1,717,497 shares of the Company's common stock at an average price of $19.06 per share and 26,297 of the Partnership's common units were purchased at an average price of $14.05 per unit.

 

 

NOTE 20—Subsequent Events :

 

On October 23, 2020, CONSOL Energy, together with CCR, announced they have entered into a definitive merger agreement pursuant to which CONSOL Energy will acquire all of the outstanding CCR common units other than any CCR common units currently owned by CONSOL Energy and its subsidiaries (each, a “Public Common Unit”) in an all-stock transaction valued at approximately $34.4 million. On the closing of the transactions contemplated under the Merger Agreement, the Company will acquire all of the approximately 10.9 million outstanding Public Common Units at a fixed exchange ratio of 0.73 shares of CONSOL Energy common stock for each Public Common Unit. This exchange ratio represents a 2.1% premium to the volume weighted average exchange ratio during the 20 trading days ended October 22, 2020. In aggregate, CONSOL Energy will issue approximately 8.0 million shares in connection with the proposed transaction, representing approximately 22.2% of the total CONSOL Energy shares that will be outstanding on a pro forma basis after completion of the CCR Merger.

 

The transaction terms were negotiated, reviewed and approved by the conflicts committee of the board of directors of CCR’s general partner and the board of directors of CCR’s general partner. The CCR conflicts committee is composed of the independent members of the board of directors of CCR’s general partner. CONSOL Energy’s board of directors also approved the Merger Agreement and the transactions contemplated thereby, including the CCR Merger and the issuance of CONSOL Energy common stock as the merger consideration, and has resolved to submit the approval of the issuance of the CONSOL Energy common stock in connection with the proposed transactions to a vote of the holders of CONSOL Energy common stock.

 

Subject to customary approvals and conditions, the transaction is expected to close in the first quarter of 2021. The transaction is subject to the approval by the holders of at least a majority of the outstanding CCR common units, approval by a majority of the votes cast by CONSOL Energy’s stockholders and the effectiveness of a registration statement related to the issuance of the new CONSOL Energy shares to CCR’s common unitholders. Pursuant to a support agreement entered into in connection with the transaction, CONSOL Energy has agreed to vote all of the CCR common units that it owns in favor of the proposed transaction. CONSOL Energy currently owns approximately 60.7% of the outstanding CCR common units.

 

In connection with the closing of the transaction, CCR’s common units will cease to be publicly traded and the incentive distribution rights in CCR will be eliminated.

 

32

 
 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in conjunction with the Consolidated Financial Statements and corresponding notes included elsewhere in this Form 10-Q. In addition, this Form 10-Q report should be read in conjunction with the Consolidated Financial Statements for the three-year period ended December 31, 2019 included in CONSOL Energy Inc.'s Form 10-K, filed on February 14, 2020. This MD&A contains forward-looking statements and the matters discussed in these forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see “Risk Factors” and “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

All amounts discussed are in millions of U.S. dollars, unless otherwise indicated.

 

CCR Merger

 

As previously disclosed, on October 22, 2020, CONSOL Energy, the Partnership, the General Partner, a wholly-owned subsidiary of CONSOL Energy and one of its wholly-owned subsidiaries (“Merger Sub”) entered into a definitive merger agreement (the “Merger Agreement”) pursuant to which Merger Sub will merge with and into the Partnership, with the Partnership surviving as our indirect, wholly-owned subsidiary (the “CCR Merger”). Under the terms of the Merger Agreement, at the effective time of the CCR Merger, (i) each outstanding CCR common unit other than common units owned by CONSOL Energy and its subsidiaries will be converted into the right to receive, subject to adjustment as described in the Merger Agreement, 0.73 shares of CONSOL Energy Inc. common stock (the “Merger Consideration”); and (ii) each of the outstanding phantom units and any other awards relating to a common unit issued under a Partnership equity incentive plan, whether vested or not vested, will become fully vested and will be automatically converted into the right to receive, with respect to each common unit subject thereto, the Merger Consideration (plus any accrued but unpaid amounts in relation to distribution equivalent rights). Except for the Partnership's incentive distribution rights, which will be automatically canceled immediately prior to the effective time of the CCR Merger for no consideration, the common units owned by CONSOL Energy and its subsidiaries immediately prior to the effective time of the CCR Merger will remain outstanding as limited partner interests in the surviving entity.

 

In aggregate, CONSOL Energy will issue approximately 8.0 million shares of its common stock as Merger Consideration, representing approximately 22.2% of the total CONSOL Energy shares that will be outstanding on a pro forma basis.

 

Subject to customary approvals and conditions, the transaction is expected to close in the first quarter of 2021. The transaction is subject to approval by our stockholders, majority approval by the CCR common unitholders and the effectiveness of a registration statement related to the issuance of the new CONSOL Energy shares to CCR's common unitholders. Pursuant to a support agreement entered into in connection with the transaction, CONSOL Energy agreed to vote all of the common units it owns in favor of the transaction. CONSOL Energy currently owns approximately 60.7% of CCR's outstanding common units.

 

COVID-19 Update

 

The Company is monitoring the impact of the COVID-19 pandemic (“COVID-19”) and has taken, and will continue to take, steps to mitigate the potential risks and impact on the Company and its employees. The health and safety of our employees is paramount.  In response to two employees testing positive for COVID-19, the Company temporarily curtailed production at the Bailey Mine for two weeks at the end of March. To date, several employees have tested positive for COVID-19. However, the Company has not experienced a localized outbreak, which we believe is attributable, in part, to the health and safety procedures put in place by the Company. This has also allowed the Company to continue operating without production curtailment due to positive employee cases. The Company continues to monitor the health and safety of its employees closely in order to limit potential risks to our employees, contractors, family members and the community.

 

We are considered a critical infrastructure company by the U.S. Department of Homeland Security. As a result, we were exempt from Pennsylvania Governor Tom Wolf's executive order, issued in March 2020, closing all businesses that are not life sustaining until Pennsylvania's phased reopening, which began in the second quarter of 2020. The unprecedented decline in coal demand that began in the first quarter hit its lowest point in May 2020, and has improved through the third quarter. In response to the decline in demand for our coal as a result of COVID-19, we idled four of our five longwalls for periods of time beginning in the second quarter. As demand improved, we restarted longwalls and ultimately ran four of the five longwalls for the majority of the third quarter. This decline in coal demand has negatively impacted our operational, sales and financial performances year-to-date and we expect that this negative impact will continue as the pandemic continues.

 

While some government-imposed shut-downs of non-essential businesses in the United States and abroad have been phased out, there is a possibility that such shut-downs may be reinstated after being lifted if COVID-19 experiences a resurgence. We expect that depressed domestic and international demand for our coal will continue for so long as there are widespread, government-imposed shut-downs of business activity. Depressed demand for our coal may also result from a general recession or reduction in overall business activity caused by COVID-19. Additionally, some of our customers have already attempted, and may in the future attempt, to invoke force majeure or similar provisions in the contracts they have in place with us in order to avoid taking possession of and paying us for our coal that they are contractually obligated to purchase. Sustained decrease in demand for our coal and the failure of our customers to purchase coal from us that they are obligated to purchase pursuant to existing contracts would have a material adverse effect on our results of operations and financial condition. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. We expect this will continue to negatively impact our results of operations, cash flows and financial condition. The Company will continue to take steps it believes are appropriate to mitigate the impacts of COVID-19 on its operations, liquidity and financial condition.

 

Our Business

 

We are a leading, low-cost producer of high-quality bituminous coal, focused on the extraction and preparation of coal in the Appalachian Basin due to our ability to efficiently produce and deliver large volumes of high-quality coal at competitive prices, the strategic location of our mines and the industry experience of our management team.

 

Coal from the PAMC is valued because of its high energy content (as measured in Btu per pound), relatively low levels of sulfur and other impurities, and strong thermoplastic properties that enable it to be used in metallurgical as well as thermal applications. We take advantage of these desirable quality characteristics and our extensive logistical network, which is directly served by both the Norfolk Southern and CSX railroads, to aggressively market our product to a broad base of strategically selected, top-performing power plant customers in the eastern United States. We also capitalize on the operational synergies afforded by the CONSOL Marine Terminal to export our coal to thermal and metallurgical end-users in Europe, Asia, South America, and Africa, as well as Canada.

 

 

Our operations, including the PAMC and the CONSOL Marine Terminal, have consistently generated strong cash flows. As of December 31, 2019, the PAMC controls 669.4 million tons of high-quality Pittsburgh seam reserves, enough to allow for approximately 23.5 years of full-capacity production. In addition, we own or control approximately 1.5 billion tons of Greenfield Reserves located in the Northern Appalachian (“NAPP”), the Central Appalachian (“CAPP”) and the Illinois Basins (“ILB”), which we believe provide future growth and monetization opportunities. Our vision is to maximize cash flow generation through the safe, compliant, and efficient operation of this core asset base, while strategically reducing debt, returning capital through share buybacks or dividends, and, when prudent, allocating capital toward compelling growth opportunities.

 

Our core businesses consist of our:

 

 

Pennsylvania Mining Complex: The PAMC, which includes the Bailey Mine, the Enlow Fork Mine, the Harvey Mine and the Central Preparation Plant, has extensive high-quality coal reserves. We mine our reserves from the Pittsburgh No. 8 Coal Seam, which is a large contiguous formation of high-Btu coal that is ideal for high productivity, low-cost longwall operations. The design of the PAMC is optimized to produce large quantities of coal on a cost-efficient basis. We are able to sustain high production volumes at comparatively low operating costs due to, among other things, our technologically advanced longwall mining systems, logistics infrastructure and safety. All of the PAMC mines utilize longwall mining, which is a highly automated underground mining technique that produces large volumes of coal at lower costs compared to other underground mining methods. We own a 75% undivided interest in the PAMC, and the remaining 25% is owned by CCR, as discussed below.

 

CCR Ownership: CONSOL Energy owns, directly or indirectly, through CCR's general partner, 61.4% of the partnership, which is comprised of a 1.7% general partner interest and a 59.7% limited partner interest. At September 30, 2020, CCR's assets included a 25% undivided interest in, and full operational control over, the PAMC. See Note 20 - Subsequent Events.

 

CONSOL Marine Terminal: Through our subsidiary CONSOL Marine Terminals LLC, we provide coal export terminal services through the Port of Baltimore. The terminal can either store coal or load coal directly into vessels from rail cars. It is also the only major east coast United States coal terminal served by two railroads, Norfolk Southern Corporation and CSX Transportation Inc.

 

Itmann Mine: Construction of the Itmann Mine, located in Wyoming County, West Virginia, began in the second half of 2019 and development mining began in April 2020. Full production from the mine is expected upon completion of a new preparation plant, and the pace of construction is dependent upon conditions in the coal sales market. When fully operational, the Company anticipates approximately 900 thousand tons per year of high-quality, low-vol coking coal capacity.

 

Greenfield Reserves: We own approximately 1.5 billion tons of high-quality, undeveloped coal reserves located in NAPP, CAPP and the ILB.

 

These low-cost assets and the diverse markets they serve provide us opportunities to generate cash across a wide variety of demand and pricing scenarios. The three mines at the PAMC, which include the Bailey, Enlow Fork and Harvey mines, produce coal from the Pittsburgh No. 8 Coal Seam using longwall mining, a highly automated underground mining technique that produces large volumes of coal at lower costs compared to alternative mining methods. These three mines collectively operate five longwalls, and the production from all three mines is processed at a single, centralized preparation plant, which is connected via conveyor belts to each mine. The Central Preparation Plant, which can clean and process up to 8,200 raw tons of coal per hour, provides economies of scale while also maintaining the ability to segregate and blend coal based on quality. This infrastructure enables us to tailor our production levels and quality specifications to meet market demands. It also results in a highly productive, low-cost operation as compared to other NAPP coal mines. In 2019, the PAMC operated three of the top four most productive longwall mines in NAPP. For the year ending December 31, 2019, productivity averaged 7.10 tons of coal per employee hour, compared with an average of 5.28 tons per employee hour for all other currently-operating NAPP longwalls. Our high productivity helps drive a low-cost structure. Our efficiency strengthens our margins throughout the commodity cycle, and has allowed us to continue to generate positive margins even in challenging pricing environments.

 

Coal from the PAMC is versatile in that it can be sold either domestically or abroad, in the thermal coal market or as a crossover product in the high-volatile metallurgical coal market. We have a well-established and diverse customer base, comprised primarily of domestic electric-power-producing companies located in the eastern United States. During the third quarter of 2020, we were successful in securing additional coal sales contracts, bringing our contracted position to 13.2 million tons for 2021. We remain fully contracted for 2020 and expect to ship all that we produce in the fourth quarter of 2020. However, we face significant uncertainties given the ongoing economic slowdown due to the COVID-19 pandemic-related shutdowns. Similar to the first half of 2020, we will continue to collaborate with our customers to manage the contractual obligations we both have, which could result in some additional 2020 contracted volumes being bought out or deferred. 

 

 

Q3 2020 Highlights:

 

 Executed multiple transactional opportunities to improve financial flexibility;
 

Resumed repurchases of second lien debt;

 Coal sales volume rebounded to 4.5 million tons compared to 2.3 million tons in the second quarter of 2020;
 Coal demand recovery is expected to continue into the fourth quarter of 2020, with volumes expected to be higher compared to the third quarter of 2020;
 

No borrowings on revolving credit facility; and

 Operating protocols in place for COVID-19-related response, focused on enhanced sanitation, social distancing measures and mitigating the risk of spread.

 

How We Evaluate Our Operations

 

Our management team uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability. The metrics include: (i) coal production, sales volumes and average revenue per ton; (ii) cost of coal sold, a non-GAAP financial measure; (iii) cash cost of coal sold, a non-GAAP financial measure; (iv) average margin per ton sold, an operating ratio derived from non-GAAP financial measures; and (v) average cash margin per ton sold, an operating ratio derived from non-GAAP financial measures.

 

Cost of coal sold, cash cost of coal sold, average margin per ton sold and average cash margin per ton sold normalize the volatility contained within comparable GAAP measures by adjusting certain non-operating or non-cash transactions. Each of these non-GAAP metrics are used as supplemental financial measures by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:

 

 

our operating performance as compared to the operating performance of other companies in the coal industry, without regard to financing methods, historical cost basis or capital structure;

 

the ability of our assets to generate sufficient cash flow;

 

our ability to incur and service debt and fund capital expenditures;

 

the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities; and

 

the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.

 

These non-GAAP financial measures should not be considered an alternative to total costs, net income, operating cash flow or any other measure of financial performance or liquidity presented in accordance with GAAP. These measures exclude some, but not all, items that affect measures presented in accordance with GAAP, and these measures and the way we calculate them may vary from those of other companies. As a result, the items presented below may not be comparable to similarly titled measures of other companies.

 

Reconciliation of Non-GAAP Financial Measures

 

We evaluate our cost of coal sold and cash cost of coal sold on an aggregate basis. We define cost of coal sold as operating and other production costs related to produced tons sold, along with changes in coal inventory, both in volumes and carrying values. The cost of coal sold includes items such as direct operating costs, royalty and production taxes, direct administration costs, and depreciation, depletion and amortization costs on production assets. Our costs exclude any indirect costs, such as selling, general and administrative costs, freight expenses, interest expenses, depreciation, depletion and amortization costs on non-production assets and other costs not directly attributable to the production of coal. The cash cost of coal sold includes cost of coal sold less depreciation, depletion and amortization costs on production assets. The GAAP measure most directly comparable to cost of coal sold and cash cost of coal sold is total costs and expenses.

 

 

The following table presents a reconciliation of cost of coal sold and cash cost of coal sold to total costs and expenses, the most directly comparable GAAP financial measure, on a historical basis, for each of the periods indicated (in thousands).

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Total Costs and Expenses

 $246,661  $323,907  $724,841  $1,012,355 

Freight Expense

  (12,909)  (3,599)  (19,141)  (14,115)

Selling, General and Administrative Costs

  (11,117)  (14,690)  (39,726)  (52,901)

Gain (Loss) on Debt Extinguishment

  1,078   (801)  17,911   (25,444)

Interest Expense, net

  (15,723)  (15,598)  (46,116)  (50,240)

Other Costs (Non-Production)

  (22,994)  (22,786)  (100,707)  (76,856)

Depreciation, Depletion and Amortization (Non-Production)

  (9,327)  (12,105)  (35,211)  (23,111)

Cost of Coal Sold

 $175,669  $254,328  $501,851  $769,688 

Depreciation, Depletion and Amortization (Production)

  (45,632)  (42,265)  (120,846)  (128,134)

Cash Cost of Coal Sold

 $130,037  $212,063  $381,005  $641,554 

 

We define average margin per ton sold as average revenue per ton sold, net of average cost of coal sold per ton. We define average cash margin per ton sold as average revenue per ton sold, net of average cash cost of coal sold per ton. The GAAP measure most directly comparable to average margin per ton sold and average cash margin per ton sold is total coal revenue.

 

The following table presents a reconciliation of average margin per ton sold and average cash margin per ton sold to total coal revenue, the most directly comparable GAAP financial measure, on a historical basis, for each of the periods indicated (in thousands, except per ton information).

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Total Coal Revenue (PAMC Segment)

 $184,066  $301,542  $541,545  $984,665 

Operating and Other Costs

  153,031   234,849   481,712   718,410 

Less: Other Costs (Non-Production)

  (22,994)  (22,786)  (100,707)  (76,856)

Total Cash Cost of Coal Sold

  130,037   212,063   381,005   641,554 

Add: Depreciation, Depletion and Amortization

  54,959   54,370   156,057   151,245 

Less: Depreciation, Depletion and Amortization (Non-Production)

  (9,327)  (12,105)  (35,211)  (23,111)

Total Cost of Coal Sold

 $175,669  $254,328  $501,851  $769,688 

Total Tons Sold (in millions)

  4.5   6.5   12.8   20.6 

Average Revenue per Ton Sold

 $40.55  $46.59  $42.35  $47.84 

Average Cash Cost of Coal Sold per Ton

  28.64   32.78   29.88   31.16 

Depreciation, Depletion and Amortization Costs per Ton Sold

  10.06   6.51   9.37   6.23 

Average Cost of Coal Sold per Ton

  38.70   39.29   39.25   37.39 

Average Margin per Ton Sold

  1.85   7.30   3.10   10.45 

Add: Depreciation, Depletion and Amortization Costs per Ton Sold

  10.06   6.51   9.37   6.23 

Average Cash Margin per Ton Sold

 $11.91  $13.81  $12.47  $16.68 

 

 

Results of Operations

 

Three Months Ended September 30, 2020 Compared with the Three Months Ended September 30, 2019

 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 

CONSOL Energy reported a net loss attributable to CONSOL Energy Inc. shareholders of $7 million for the three months ended September 30, 2020, compared to net income attributable to CONSOL Energy Inc. shareholders of $4 million for the three months ended September 30, 2019.

 

CONSOL Energy consists of the Pennsylvania Mining Complex, as well as various corporate and other business activities that are not allocated to the PAMC. The other business activities include the CONSOL Marine Terminal, development of the Itmann Mine, the Greenfield Reserves, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.

 

PAMC ANALYSIS:

 

The PAMC division's principal activities consist of mining, preparation and marketing of thermal coal, sold primarily to power generators. The division also includes selling, general and administrative costs, as well as various other activities assigned to the PAMC division, but not included in the cost components on a per unit basis.

 

The PAMC division had a loss before income tax of $7 million for the three months ended September 30, 2020, compared to earnings before income tax of $31 million for the three months ended September 30, 2019. Variances are discussed below.

 

  

Three Months Ended

 
  

September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Revenue:

            

Coal Revenue

 $184  $302  $(118)

Freight Revenue

  13   4   9 

Miscellaneous Other Income

     4   (4)

Total Revenue and Other Income

  197   310   (113)

Cost of Coal Sold:

            

Operating Costs

  130   212   (82)

Depreciation, Depletion and Amortization

  46   42   4 

Total Cost of Coal Sold

  176   254   (78)

Other Costs:

            

Other Costs

  2   3   (1)

Depreciation, Depletion and Amortization

  4   4    

Total Other Costs

  6   7   (1)

Freight Expense

  13   4   9 

Selling, General and Administrative Costs

  9   14   (5)

Total Costs and Expenses

  204   279   (75)

(Loss) Earnings Before Income Tax

 $(7) $31  $(38)

 

 

Coal Production

 

The table below presents total tons produced (in thousands) from the Pennsylvania Mining Complex for the periods indicated:

 

  

Three Months Ended September 30,

 

Mine

 

2020

  

2019

  

Variance

 

Bailey

  1,808   2,782   (974)

Enlow Fork

  1,436   2,384   (948)

Harvey

  1,291   1,326   (35)

Total

  4,535   6,492   (1,957)

 

Coal production was 4.5 million tons for the three months ended September 30, 2020, compared to 6.5 million tons for the three months ended September 30, 2019. The PAMC division's coal production decreased primarily due to a reduced operating schedule in light of the decline in global demand due to the COVID-19 pandemic. For the majority of the current quarter, the PAMC ran four of its five longwalls.

 

Coal Operations

 

The PAMC division's coal revenue and cost components on a per unit basis for the three months ended September 30, 2020 and 2019 are detailed in the table below. The PAMC division's operations also include various costs such as selling, general and administrative, freight and other costs not included in the unit cost analysis because these costs are not directly associated with coal production.

 

  

Three Months Ended September 30,

 
  

2020

  

2019

  

Variance

 

Total Tons Sold (in millions)

  4.5   6.5   (2.0)

Average Revenue per Ton Sold

 $40.55  $46.59  $(6.04)
             

Average Cash Cost of Coal Sold per Ton (1)

 $28.64  $32.78  $(4.14)

Depreciation, Depletion and Amortization Costs per Ton Sold (Non-Cash Cost)

  10.06   6.51   3.55 

Average Cost of Coal Sold per Ton (1)

 $38.70  $39.29  $(0.59)

Average Margin per Ton Sold (1)

 $1.85  $7.30  $(5.45)

Add: Depreciation, Depletion and Amortization Costs per Ton Sold

  10.06   6.51   3.55 

Average Cash Margin per Ton Sold (1)

 $11.91  $13.81  $(1.90)

 

(1) Average cash cost of coal sold per ton and average cost of coal sold per ton are non-GAAP measures, and average margin per ton sold and average cash margin per ton sold are operating ratios derived from non-GAAP measures. See “How We Evaluate Our Operations - Reconciliation of Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

 

Coal Revenue

 

Coal revenue was $184 million for the three months ended September 30, 2020, compared to $302 million for the three months ended September 30, 2019. Total tons sold decreased in the period-to-period comparison as a result of lingering effects of the unprecedented contraction in United States and global economic activity due to the COVID-19 pandemic. Additionally, lower natural gas prices as compared to the prior year quarter have contributed to electric generation trending toward gas, rather than coal, as a fuel source.

 

Freight Revenue and Freight Expense

 

Freight revenue is the amount billed to customers for transportation costs incurred. This revenue is based on the weight of coal shipped, negotiated freight rates and method of transportation, primarily rail, used by the customers to which the Company contractually provides transportation services. Freight revenue is completely offset by freight expense. Freight revenue and freight expense were both $13 million for the three months ended September 30, 2020, compared to $4 million for the three months ended September 30, 2019. The $9 million increase was due to increased shipments to customers where the Company was contractually obligated to provide transportation services.

 

 

Miscellaneous Other Income

 

The $4 million decrease in miscellaneous other income was primarily due to sales of externally purchased coal to blend and resell and customer contract buyouts in the three months ended September 30, 2019, none of which occurred during the three months ended September 30, 2020. 

 

Cost of Coal Sold

 

Cost of coal sold is comprised of operating costs related to produced tons sold, along with changes in both the volumes and carrying values of coal inventory. The costs of coal sold include items such as direct operating costs, royalties and production taxes, direct administration costs and depreciation, depletion, and amortization costs on production assets. Total cost of coal sold was $176 million for the three months ended September 30, 2020, or $78 million lower than the $254 million for the three months ended September 30, 2019. Average cost of coal sold per ton was $38.70 for the three months ended September 30, 2020, compared to $39.29 for the three months ended September 30, 2019. The decrease in the total cost of coal sold was primarily driven by the reduction in production volume and reduced operating days, as the Company sought to match production with demand and limit discretionary spending. 

 

Other Costs

 

Other costs include items that are assigned to the PAMC division but are not included in unit costs, such as idle mine costs, coal reserve holding costs and purchased coal costs. Total other costs remained materially consistent in the period-to-period comparison. 

 

Selling, General, and Administrative Costs

 

The amount of selling, general and administrative costs related to the PAMC division was $9 million for the three months ended September 30, 2020, compared to $14 million for the three months ended September 30, 2019. The $5 million decrease in the period-to-period comparison was primarily related to several initiatives launched by management to reduce costs, including compensation reductions, curtailment of discretionary expenses and headcount management.

 

 

OTHER ANALYSIS:

 

The other division includes revenue and expenses from various corporate and diversified business activities that are not allocated to the PAMC division. The diversified business activities include the CONSOL Marine Terminal, development of the Itmann Mine, the Greenfield Reserves, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.

 

Other business activities had earnings before income tax of $4 million for the three months ended September 30, 2020, compared to a loss before income tax of $22 million for the three months ended September 30, 2019. Variances are discussed below.

 

  

Three Months Ended

 
  

September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Revenue:

            

Terminal Revenue

 $17  $16  $1 
Miscellaneous Other Income  21   7   14 

Gain on Sale of Assets

  8   1   7 

Total Revenue and Other Income

  46   24   22 

Other Costs and Expenses:

            

Operating and Other Costs

  20   20    

Depreciation, Depletion and Amortization

  5   8   (3)

Selling, General and Administrative Costs

  2   1   1 

(Gain) Loss on Debt Extinguishment

  (1)  1   (2)

Interest Expense, net

  16   16    

Total Other Costs and Expenses

  42   46   (4)

Earnings (Loss) Before Income Tax

 $4  $(22) $26 

 

Terminal Revenue

 

Terminal revenue consists of sales from the CONSOL Marine Terminal, which is located in the Port of Baltimore, Maryland and provides access to international coal markets. CONSOL Marine Terminal revenue was $17 million for the three months ended September 30, 2020, compared to $16 million for the three months ended September 30, 2019. The $1 million increase in the period-to-period comparison was primarily attributable to an increase in revenues associated with throughput tons and services not covered by the Company's take-or-pay contract.

 

Miscellaneous Other Income 

 

Miscellaneous other income was $21 million for the three months ended September 30, 2020, compared to $7 million for the three months ended September 30, 2019. The change is due to the following items:

 

  

Three Months Ended September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 
Sale of Certain Coal Lease Contracts $18  $  $18 

Royalty Income - Non-Operated Coal

  2   5   (3)

Interest Income

     1   (1)

Rental Income

     1   (1)
Other Income  1      1 

Total Miscellaneous Other Income

 $21  $7  $14 

 

 The increase in income resulting from the sale of certain coal lease contracts is attributable to one of several transactions completed in the three months ended September 30, 2020 related to the Company's non-operating surface and mineral assets outside of the PAMC. These transactions helped to enhance the Company's liquidity and improve its financial flexibility. See Note 2 - Major Transactions in the Notes to the Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.

 

 

Gain on Sale of Assets

 

Gain on sale of assets increased $7 million in the period-to-period comparison primarily due to the sale of various gas wells and the related equipment during the three months ended September 30, 2020.

 

Operating and Other Costs

 

Operating and other costs were $20 million for the three months ended September 30, 2020, compared to $20 million for the three months ended September 30, 2019. Operating and other costs remained materially consistent in the period-to-period comparison.

 

  

Three Months Ended September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Terminal Operating Costs

 $5  $6  $(1)

Employee-Related Legacy Liability Expense

  7   9   (2)

Coal Reserve Holding Costs

  2   1   1 

Closed Mines

  1   1    

Other

  5   3   2 

Total Operating and Other Costs

 $20  $20  $ 

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization decreased $3 million in the period-to-period comparison due to current quarter adjustments to the Company's asset retirement obligations based on current projected cash outflows.

 

Selling, General and Administrative Costs

 

Selling, general and administrative costs are allocated to the Company's Other division based on a percentage of resources utilized, a percentage of total revenue and a percentage of total projected capital expenditures. The increase of $1 million is a result of increases in the portion of selling, general and administrative expenses allocated to the Other division due to an increase of resources utilized at the CONSOL Marine Terminal, the Itmann Mine, closed mines and in other business development activities as compared to the prior quarter.

 

(Gain) Loss on Debt Extinguishment

 

Gain on debt extinguishment of $1 million was recognized in the three months ended September 30, 2020 due to the open market repurchases of the Company's 11.00% Senior Secured Second Lien Notes due 2025. Loss on debt extinguishment of $1 million was recognized in the three months ended September 30, 2019 due to the open market repurchases of the Company's 11.00% Senior Secured Second Lien Notes due 2025. 

 

Interest Expense, net

 

Interest expense, net of amounts capitalized, is comprised of interest on the Company's Senior Secured Credit Facilities, the 11.00% Senior Secured Second Lien Notes due 2025 and the 5.75% MEDCO Revenue Bonds. Interest expense, net of amounts capitalized, remained materially consistent in the period-to-period comparison.

 

 

Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019

 

Net (Loss) Income Attributable to CONSOL Energy Inc. Shareholders

 

CONSOL Energy reported a net loss attributable to CONSOL Energy Inc. shareholders of $23 million for the nine months ended September 30, 2020, compared to net income attributable to CONSOL Energy Inc. shareholders of $62 million for the nine months ended September 30, 2019.

 

CONSOL Energy consists of the Pennsylvania Mining Complex, as well as various corporate and other business activities that are not allocated to the PAMC. The other business activities include the CONSOL Marine Terminal, development of the Itmann Mine, the Greenfield Reserves, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.

 

PAMC ANALYSIS:

 

The PAMC division's principal activities consist of mining, preparation and marketing of thermal coal, sold primarily to power generators. The division also includes selling, general and administrative costs, as well as various other activities assigned to the PAMC division, but not included in the cost components on a per unit basis.

 

The PAMC division had a loss before income tax of $18 million for the nine months ended September 30, 2020, compared to earnings before income tax of $156 million for the nine months ended September 30, 2019. Variances are discussed below.

 

  

Nine Months Ended

 
  

September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Revenue:

            

Coal Revenue

 $542  $985  $(443)

Freight Revenue

  19   14   5 

Miscellaneous Other Income

  41   14   27 

Total Revenue and Other Income

  602   1,013   (411)

Cost of Coal Sold:

            

Operating Costs

  381   642   (261)

Depreciation, Depletion and Amortization

  121   128   (7)

Total Cost of Coal Sold

  502   770   (268)

Other Costs:

            

Other Costs

  43   15   28 

Depreciation, Depletion and Amortization

  24   8   16 

Total Other Costs

  67   23   44 

Freight Expense

  19   14   5 

Selling, General and Administrative Costs

  31   50   (19)
Interest Expense, net  1      1 

Total Costs and Expenses

  620   857   (237)

(Loss) Earnings Before Income Tax

 $(18) $156  $(174)

 

 

Coal Production

 

The table below presents total tons produced (in thousands) from the Pennsylvania Mining Complex for the periods indicated:

 

  

Nine Months Ended September 30,

 

Mine

 

2020

  

2019

  

Variance

 

Bailey

  5,619   8,955   (3,336)

Enlow Fork

  4,054   7,676   (3,622)

Harvey

  3,222   3,933   (711)

Total

  12,895   20,564   (7,669)

 

Coal production was 12.9 million tons for the nine months ended September 30, 2020, compared to 20.6 million tons for the nine months ended September 30, 2019. The PAMC division's coal production decreased primarily due to the temporary idling of longwalls at the Bailey and Enlow Fork mines. This was mainly in response to weakened customer demand as a result of a warmer than normal winter, followed by a decline in global demand due to the COVID-19 pandemic and, in response, the widespread government-imposed shut-downs, which have significantly reduced electricity consumption and, therefore, demand for the Company's coal.

 

Coal Operations

 

The PAMC division's coal revenue and cost components on a per unit basis for the nine months ended September 30, 2020 and 2019 are detailed in the table below. The PAMC division's operations also include various costs such as selling, general and administrative, freight and other costs not included in the unit cost analysis because these costs are not directly associated with coal production.

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

Variance

 

Total Tons Sold (in millions)

  12.8   20.6   (7.8)

Average Revenue per Ton Sold

 $42.35  $47.84  $(5.49)
             

Average Cash Cost of Coal Sold per Ton (1)

 $29.88  $31.16  $(1.28)

Depreciation, Depletion and Amortization Costs per Ton Sold (Non-Cash Cost)

  9.37   6.23   3.14 

Average Cost of Coal Sold per Ton (1)

 $39.25  $37.39  $1.86 

Average Margin per Ton Sold (1)

 $3.10  $10.45  $(7.35)

Add: Depreciation, Depletion and Amortization Costs per Ton Sold

  9.37   6.23   3.14 

Average Cash Margin per Ton Sold (1)

 $12.47  $16.68  $(4.21)

 

(1) Average cash cost of coal sold per ton and average cost of coal sold per ton are non-GAAP measures, and average margin per ton sold and average cash margin per ton sold are operating ratios derived from non-GAAP measures. See “How We Evaluate Our Operations - Reconciliation of Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to the most directly comparable GAAP measures.

 

Coal Revenue

 

Coal revenue was $542 million for the nine months ended September 30, 2020, compared to $985 million for the nine months ended September 30, 2019. Total tons sold decreased in the period-to-period comparison in response to weakened customer demand due to a warmer than normal winter followed by the COVID-19 pandemic, each of which have reduced electricity consumption and, therefore, demand for the Company's coal. Additionally, lower natural gas prices as compared to the prior year quarter have contributed to electric generation trending toward gas, rather than coal, as a fuel source. The decrease in customer demand and the overall decline in electric power markets also resulted in lower pricing received on the Company's sales contracts.

 

Freight Revenue and Freight Expense

 

Freight revenue is the amount billed to customers for transportation costs incurred. This revenue is based on the weight of coal shipped, negotiated freight rates and method of transportation, primarily rail, used by the customers to which the Company contractually provides transportation services. Freight revenue is completely offset by freight expense. Freight revenue and freight expense were both $19 million for the nine months ended September 30, 2020, compared to $14 million for the nine months ended September 30, 2019. The $5 million increase was due to increased shipments to customers where the Company was contractually obligated to provide transportation services.

 

 

Miscellaneous Other Income

 

Miscellaneous other income was $41 million for the nine months ended September 30, 2020, compared to $14 million for the nine months ended September 30, 2019. The $27 million increase was primarily the result of additional customer contract buyouts in the nine months ended September 30, 2020, offset, in part, by a decrease in sales of externally purchased coal to blend and resell. These partial contract buyouts involved negotiations to reduce coal quantities of several customer contracts in exchange for payment of certain fees to the Company, and do not impact forward contract terms.

 

Cost of Coal Sold

 

Cost of coal sold is comprised of operating costs related to produced tons sold, along with changes in both the volumes and carrying values of coal inventory. The costs of coal sold include items such as direct operating costs, royalties and production taxes, direct administration costs and depreciation, depletion, and amortization costs on production assets. Total cost of coal sold was $502 million for the nine months ended September 30, 2020, or $268 million lower than the $770 million for the nine months ended September 30, 2019. Average cost of coal sold per ton was $39.25 for the nine months ended September 30, 2020, compared to $37.39 for the nine months ended September 30, 2019. The decrease in the total cost of coal sold was primarily driven by decreased production activity during the nine months ended September 30, 2020, mainly in response to weakened market demand. On a per unit basis, the decreased production resulted in an overall increase in the average cost of coal sold per ton.

 

Other Costs

 

Other costs include items that are assigned to the PAMC division but are not included in unit costs, such as idle mine costs, coal reserve holding costs and purchased coal costs. Total other costs increased $44 million in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily attributable to the temporary idling of longwalls at the Bailey and Enlow Fork mines due to the COVID-19 pandemic and, in response, the widespread government-imposed shutdowns, which have significantly reduced electricity consumption and power prices and, therefore, demand for the Company's coal.

 

Selling, General, and Administrative Costs

 

The amount of selling, general and administrative costs related to the PAMC division was $31 million for the nine months ended September 30, 2020, compared to $50 million for the nine months ended September 30, 2019. The $19 million decrease in the period-to-period comparison was primarily related to reduced expense under the Company's Performance Incentive Plan, as well as several initiatives launched by management to reduce costs, including compensation reductions, curtailment of discretionary expenses and headcount management.

 

Interest Expense, net

 

Interest expense, net of amounts capitalized, primarily relates to obligations under various finance leases entered into during the nine months ended September 30, 2020. No such transactions occurred during the nine months ended September 30, 2019.

 

 

OTHER ANALYSIS:

 

The other division includes revenue and expenses from various corporate and diversified business activities that are not allocated to the PAMC division. The diversified business activities include the CONSOL Marine Terminal, development of the Itmann Mine, the Greenfield Reserves, closed mine activities, selling, general and administrative activities, interest expense and income taxes, as well as various other non-operated activities.

 

Other business activities had a loss before income tax of $10 million for the nine months ended September 30, 2020, compared to a loss before income tax of $80 million for the nine months ended September 30, 2019. Variances are discussed below.

 

  

Nine Months Ended

 
  

September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Revenue:

            

Terminal Revenue

 $49  $51  $(2)
Miscellaneous Other Income  31   22   9 

Gain on Sale of Assets

  15   2   13 

Total Revenue and Other Income

  95   75   20 

Other Costs and Expenses:

            

Operating and Other Costs

  58   62   (4)

Depreciation, Depletion and Amortization

  11   15   (4)

Selling, General and Administrative Costs

  9   3   6 

(Gain) Loss on Debt Extinguishment

  (18)  25   (43)

Interest Expense, net

  45   50   (5)

Total Other Costs and Expenses

  105   155   (50)

Loss Before Income Tax

 $(10) $(80) $70 

 

Terminal Revenue

 

Terminal revenue consists of sales from the CONSOL Marine Terminal, which is located in the Port of Baltimore, Maryland and provides access to international coal markets. CONSOL Marine Terminal revenue was $49 million for the nine months ended September 30, 2020, compared to $51 million for the nine months ended September 30, 2019. The $2 million decrease in the period-to-period comparison was primarily attributable to a decrease in revenues associated with throughput tons and services not covered by the Company's take-or-pay contract.

 

Miscellaneous Other Income 

 

Miscellaneous other income was $31 million for the nine months ended September 30, 2020, compared to $22 million for the nine months ended September 30, 2019. The change is due to the following items:

 

  

Nine Months Ended September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 
Sale of Certain Coal Lease Contracts $18  $  $18 

Royalty Income - Non-Operated Coal

  10   17   (7)

Property Easements and Option Income

     1   (1)
Rental Income  1   2   (1)

Interest Income

     2   (2)
Other Income  2      2 

Total Miscellaneous Other Income

 $31  $22  $9 

 

  The increase in income resulting from the sale of certain coal lease contracts is attributable to one of several transactions completed in the nine months ended September 30, 2020 related to the Company's non-operating surface and mineral assets outside of the PAMC. These transactions helped to enhance the Company's liquidity and improve its financial flexibility. See Note 2 - Major Transactions in the Notes to the Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.

 

  Royalty Income - Non-Operated Coal decreased in the period-to-period comparison due to a decline in the revenues earned as a result of less operating activity by third-party companies mining in reserves to which we have a royalty claim.

 

 

Gain on Sale of Assets

 

Gain on sale of assets increased $13 million in the period-to-period comparison primarily due to the sale of various gas wells and the related equipment during the nine months ended September 30, 2020.

 

Operating and Other Costs

 

Operating and other costs were $58 million for the nine months ended September 30, 2020, compared to $62 million for the nine months ended September 30, 2019. Operating and other costs decreased in the period-to-period comparison due to the following items:

 

  

Nine Months Ended September 30,

 

(in millions)

 

2020

  

2019

  

Variance

 

Terminal Operating Costs

 $14  $17  $(3)

Employee-Related Legacy Liability Expense

  19   28   (9)

Coal Reserve Holding Costs

  4   3   1 
Lease Rental Expense  1   1    

Closed Mines

  3   2   1 

Litigation Expense

  4   4    
Bank Fees  1   1    

Other

  12   6   6 

Total Operating and Other Costs

 $58  $62  $(4)

 

  Employee-Related Legacy Liability Expense decreased $9 million in the period-to-period comparison primarily due to modifications made to the actuarial calculation of net periodic benefit cost at the beginning of each year mainly due to decreases in discount rates.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization decreased $4 million in the period-to-period comparison due to current quarter adjustments to the Company's asset retirement obligations based on current projected cash outflows.

 

Selling, General and Administrative Costs

 

Selling, general and administrative costs are allocated to the Company's Other division based on a percentage of resources utilized, a percentage of total revenue and a percentage of total projected capital expenditures. The increase of $6 million is a result of increases in the portion of selling, general and administrative expenses allocated to the Other division due to an increase of resources utilized at the CONSOL Marine Terminal, the Itmann Mine, closed mines and in other business development activities as compared to the prior year. 

 

(Gain) Loss on Debt Extinguishment

 

Gain on debt extinguishment of $18 million was recognized in the nine months ended September 30, 2020 due to the open market repurchases of the Company's 11.00% Senior Secured Second Lien Notes due 2025, which traded well below par value.

 

Loss on debt extinguishment of $25 million was recognized in the nine months ended September 30, 2019 due to the open market repurchases of the Company's 11.00% Senior Secured Second Lien Notes due 2025, the $110 million required repayment on the Term Loan B Facility, and the refinancing of the Company's Revolving Credit Facility, Term Loan A Facility and Term Loan B Facility. See Note 13 - Long-Term Debt in the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information.

 

Interest Expense, net

 

Interest expense, net of amounts capitalized, is comprised of interest on the Company's Senior Secured Credit Facilities, the 11.00% Senior Secured Second Lien Notes due 2025 and the 5.75% MEDCO Revenue Bonds. Interest expense, net of amounts capitalized, decreased $5 million in the period-to-period comparison, primarily related to the $110 million required repayment on the Term Loan B Facility, as well as the refinancing of the Company's Revolving Credit Facility, Term Loan A Facility and Term Loan B Facility, both of which occurred during the first quarter of 2019. The decrease is also attributable to repurchases of the Company's 11.00% Senior Secured Second Lien Notes due 2025 during the nine months ended September 30, 2020 and 2019, totaling approximately $45 million and $35 million, respectively (see Note 19 - Stock, Unit and Debt Repurchases in the Notes to the Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information).

 

 

Liquidity and Capital Resources

 

CONSOL Energy's potential sources of liquidity include cash generated from operations, cash on hand, borrowings under the revolving credit facility and securitization facility (which are discussed below), and, if necessary, the ability to issue additional equity or debt securities. The Company believes that cash generated from these sources should be sufficient to meet its short-term working capital requirements, long-term capital expenditure requirements, and debt servicing obligations, as well as to provide required letters of credit.

 

The demand for coal experienced unprecedented decline toward the end of the first quarter of 2020, which continued through the third quarter of 2020, driven by widespread government-imposed lockdowns caused by the COVID-19 pandemic. This decline in coal demand has negatively impacted our operational, sales and financial performances year-to-date and we expect that this negative impact will continue as the pandemic continues. However, we saw steady improvement in the demand for our coal throughout the third quarter of 2020. During the quarter, the Company made repayments of $7 million, $6 million, $2 million and $1 million on its finance leases, Term Loan A Facility, 11.00% Senior Secured Second Lien Notes and Term Loan B Facility, respectively. As of September 30, 2020, our total liquidity was $323 million, including $22 million of cash and cash equivalents. As of September 30, 2020, our $400 million revolving credit facility has no borrowings and is currently only used for providing letters of credit with $99 million issued.

 

While some government-imposed shut-downs of non-essential businesses in the United States and abroad have been phased out, there is a possibility that such shut-downs may be reinstated if COVID-19 experiences a resurgence. We expect that depressed demand for our coal will continue for so long as there is a widespread, government-imposed shut-down of business activity. Depressed demand for our coal may also result from a general recession or reduction in overall business activity caused by COVID-19. Additionally, some of our customers have already attempted, and may in the future attempt, to invoke force majeure or similar provisions in the contracts they have in place with us in order to avoid taking possession of and paying us for our coal that they are contractually obligated to purchase. Sustained decrease in demand for our coal and the failure of our customers to purchase coal from us that they are obligated to purchase pursuant to existing contracts would have a material adverse effect on our results of operations and financial condition. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. We expect this matter to negatively impact our results of operations, cash flows and financial condition. The Company will continue to take the appropriate steps to mitigate the impact on the Company's operations, liquidity and financial condition.

 

During the first quarter, the Company withdrew its previously announced operational and financial guidance for 2020. Given the ongoing uncertainty associated with the COVID-19 pandemic-driven economic slowdown, and due to the difficulty in forecasting the duration of this economic slowdown, the Company's 2020 guidance remains suspended. Cost containment and capital expenditure reductions remain the focus as volume opportunities remain limited in the near term. 

 

In March 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) into law. The CARES Act has various liquidity boosting provisions that affect the Company related to income taxes and employee taxes. The Company has evaluated the various provisions, particularly the increased amount of deductible interest from 30% of adjusted taxable income to 50% for tax years 2019 and 2020. This is expected to reduce the Company's cash burden for 2019 and 2020, resulting in additional free cash flow. In addition to a decrease in the cash paid for income taxes, the Company has deferred the payment of its portion of Social Security payroll taxes in accordance with the provisions of the CARES Act. Also, for the nine months ended September 30, 2020, the Company is entitled to approximately $2 million in payroll retention credits in accordance with the provisions of the CARES Act. These sources of cash flow will aid in reducing uncertainty over the economic and operational impacts of COVID-19.

 

The Company expects to maintain adequate liquidity through its operating cash flow and revolving credit facility to fund its working capital and capital expenditures requirements. The Company's cash flow from operations in 2020 is supported by its contracted position and ongoing cost and capital control measures. While the Company has been experiencing some delays in collections of accounts receivable since the second half of 2019, the COVID-related decline in demand has impacted some of our customers, resulting in continued delays in collections. This trend improved slightly during the third quarter of 2020, although global demand for coal remained challenging. However, if these delays continue or increase, the Company may have less cash flow from operations and may have less borrowing capacity under its securitization facility (under which borrowing capacity is based on certain current accounts receivable).

 

The Company started a capital construction project on the coarse refuse disposal area in 2017, which is expected to continue through 2021. The Company began construction of the Itmann Mine in the second half of 2019. Given the ongoing uncertainty in the marketplace, COVID-related demand decline and other corporate priorities, the Company has chosen to slow the spending on construction of the Itmann Mine.

 

 

Uncertainty in the financial markets brings additional potential risks to CONSOL Energy. These risks include the ability to raise capital in the equity markets due to declines in the Company's stock price, less availability and higher costs of additional credit, potential counterparty defaults, and commercial bank failures. Financial market disruptions may impact the Company's collection of trade receivables. As a result, CONSOL Energy regularly monitors the creditworthiness of its customers and counterparties and manages credit exposure through payment terms, credit limits, prepayments and security.

 

Over the past year, the insurance markets have been increasingly challenging, particularly for coal companies. We have experienced rising premiums, reduced coverage and fewer providers willing to underwrite policies and surety bonds. Terms have generally become more unfavorable, including the amount of collateral required to secure surety bonds. Further cost burdens on our ability to maintain adequate insurance and bond coverage may adversely impact our operations, financial position and liquidity. 

 

The Company owns an undivided interest in 75% of the PAMC and the Partnership owns the remaining undivided 25% interest of the PAMC. As of September 30, 2020, the Company had a 61.4% economic ownership interest in the Partnership through its various holdings of the general partner and limited partnership interests of the Partnership.

 

The Company is continuing to actively monitor the effects of the ongoing COVID-19 pandemic on its liquidity and capital resources. As disclosed previously and above, we took several steps during the first three quarters of 2020 to reinforce our liquidity. From a coal shipment perspective, the decline in coal demand seemed to have hit its lowest point in May 2020, and has since shown some modest improvement. However, if the demand for our coal continues to decrease, this could adversely affect our liquidity in future quarters. Our Revolving Credit Facility, Term Loan A Facility, Term Loan B Facility, Securitization Facility and the Indenture entered into in connection with our 11.00% Senior Secured Second Lien Notes due 2025 (collectively, the “Credit Facilities”) contain certain financial covenants. Events resulting from the effects of COVID-19 may negatively impact our liquidity and, as a result, our ability to comply with these covenants, which were amended during the second quarter of 2020. These events could lead us to seek further amendments or waivers from our lenders, limit access to or require accelerated repayment of amounts borrowed under the Credit Facilities, or require us to pursue alternative financing. We have no assurance that any such alternative financing, if required, could be obtained at terms acceptable to us, or at all, as a result of the effects of COVID-19 on capital markets at such time.

 

Cash Flows (in millions)

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

Change

 

Cash Provided by Operating Activities

 $62  $223  $(161)

Cash Used in Investing Activities

 $(57) $(129) $72 

Cash Used in Financing Activities

 $(63) $(224) $161 

 

Cash provided by operating activities decreased $161 million in the period-to-period comparison, primarily due to a $104 million decrease in net (loss) income, a $43 million change in (gain) loss on debt extinguishment and other working capital changes that occurred throughout both periods.

 

Cash used in investing activities decreased $72 million in the period-to-period comparison. Capital expenditures decreased primarily as a result of cost control measures put into place in response to the COVID-19 pandemic and the overall decline in coal markets.

 

  

Nine Months Ended September 30,

 
  

2020

  

2019

  

Change

 

Building and Infrastructure

 $31  $50  $(19)

Equipment Purchases and Rebuilds

  21   44   (23)

Refuse Storage Area

  12   25   (13)

IS&T Infrastructure

  1   5   (4)

Other

  1   7   (6)

Total Capital Expenditures

 $66  $131  $(65)

 

Cash used in financing activities decreased $161 million in the period-to-period comparison. During the nine months ended September 30, 2020, total payments of $45 million were made on the Company's Term Loan A Facility, Term Loan B Facility and 11.00% Senior Secured Second Lien Notes. The Company also received proceeds of approximately $16 million related to a finance leasing arrangement in the nine months ended September 30, 2020. In connection with the June 2020 amendment of the Company's credit facility, approximately $8 million of financing-related fees and charges were paid in the nine months ended September 30, 2020.

 

During the nine months ended September 30, 2019, total payments of $166 million were made on the Company's Term Loan B Facility, 11.00% Senior Secured Second Lien Notes and the Term Loan A Facility, which included the required excess cash flow repayment of $110 million on the Term Loan B Facility (see Note 13 - Long-Term Debt for additional information). The Company received additional proceeds on its Term Loan A Facility in the amount of $26 million as a result of the debt refinancing that occurred during the nine months ended September 30, 2019. In connection with the debt refinancing, approximately $18 million of financing-related fees and charges were paid in the nine months ended September 30, 2019. Also during the nine months ended September 30, 2019, CONSOL Energy shares were repurchased and CONSOL Coal Resources LP units were purchased, totaling $32 million.

 

 

Senior Secured Credit Facilities

 

In November 2017, the Company entered into a revolving credit facility with commitments up to $300 million (the “Revolving Credit Facility”), a Term Loan A Facility of up to $100 million (the “TLA Facility”) and a Term Loan B Facility of up to $400 million (the “TLB Facility”, and together with the Revolving Credit Facility and the TLA Facility, the “Senior Secured Credit Facilities”). On March 28, 2019, the Company amended the Senior Secured Credit Facilities to increase the borrowing commitment of the Revolving Credit Facility to $400 million and reallocate the principal amounts outstanding under the TLA Facility and TLB Facility. On June 5, 2020, the Company amended the Senior Secured Credit Facilities (the “amendment”) to provide eight quarters of financial covenant relaxation, effect an increase in the rate at which borrowings under the Revolving Credit Facility and the TLA Facility bear interest, and add an anti-cash hoarding provision. Borrowings under the Company's Senior Secured Credit Facilities bear interest at a floating rate which can be, at the Company's option, either (i) LIBOR plus an applicable margin or (ii) an alternate base rate plus an applicable margin. The applicable margin for the Revolving Credit Facility and TLA Facility depends on the total net leverage ratio, whereas the applicable margin for the TLB Facility is fixed. The amendment increased the applicable margin by 50 basis points on both the Revolving Credit Facility and the TLA Facility. The maturity date of the Revolving Credit and TLA Facilities is March 28, 2023. The TLB Facility's maturity date is September 28, 2024. In June 2019, the TLA Facility began amortizing in equal quarterly installments of (i) 3.75% of the original principal amount thereof, for four consecutive quarterly installments commencing with the quarter ended June 30, 2019, (ii) 6.25% of the original principal amount thereof for the subsequent eight quarterly installments commencing with the quarter ended June 30, 2020 and (iii) 8.75% of the original principal amount thereof for the quarterly installments thereafter, with the remaining balance due at final maturity. In June 2019, the TLB Facility began amortizing in equal quarterly installments in an amount equal to 0.25% per annum of the amended principal amount thereof, with the remaining balance due at final maturity.

 

Obligations under the Senior Secured Credit Facilities are guaranteed by (i) all owners of the 75% undivided economic interest in the PAMC held by the Company, (ii) any other members of the Company’s group that own any portion of the collateral securing the Revolving Credit Facility, and (iii) subject to certain customary exceptions and agreed materiality thresholds, all other existing or future direct or indirect wholly-owned restricted subsidiaries of the Company (excluding the Partnership and its wholly-owned subsidiaries). The obligations are secured by, subject to certain exceptions (including a limitation of pledges of equity interests in certain subsidiaries and certain thresholds with respect to real property), a first-priority lien on (i) the Company’s 75% undivided economic interest in the Pennsylvania Mining Complex, (ii) the limited partner units of the Partnership held by the Company, (iii) the equity interests in CONSOL Coal Resources GP LLC held by the Company (iv) the CONSOL Marine Terminal and (v) the 1.5 billion tons of Greenfield Reserves. The Senior Secured Credit Facilities contain a number of customary affirmative covenants. In addition, the Senior Secured Credit Facilities contain a number of negative covenants, including (subject to certain exceptions) limitations on (among other things): indebtedness, liens, investments, acquisitions, dispositions, restricted payments, and prepayments of junior indebtedness. The amendment added additional conditions to be met for the covenants relating to investments in joint ventures, general investments, share repurchases, dividends, and repurchases of the Second Lien Notes. The additional conditions require no outstanding borrowings and no more than $200 million of outstanding letters of credit on the Revolving Credit Facility. Further restrictions apply to investments in joint ventures, share repurchases and dividends that require the total net leverage ratio shall not be greater than 2.00 to 1.00.

 

The Revolving Credit Facility and TLA Facility also include financial covenants, including (i) a maximum first lien gross leverage ratio, (ii) a maximum total net leverage ratio, and (iii) a minimum fixed charge coverage ratio. The maximum first lien gross leverage ratio is calculated as the ratio of Consolidated First Lien Debt to Consolidated EBITDA, excluding the Partnership. Consolidated EBITDA, as used in the covenant calculation, excludes non-cash compensation expenses, non-recurring transaction expenses, extraordinary gains and losses, gains and losses on discontinued operations, non-cash charges related to legacy employee liabilities and gains and losses on debt extinguishment, and includes cash distributions received from the Partnership and subtracts cash payments related to legacy employee liabilities. The maximum total net leverage ratio is calculated as the ratio of Consolidated Indebtedness, minus Cash on Hand, to Consolidated EBITDA, excluding the Partnership. The minimum fixed charge coverage ratio is calculated as the ratio of Consolidated EBITDA to Consolidated Fixed Charges, excluding the Partnership. Consolidated Fixed Charges, as used in the covenant calculation, include cash interest payments, cash payments for income taxes, scheduled debt repayments, dividends paid, and Maintenance Capital Expenditures. The amendment revised the financial covenants applicable to the Revolving Credit Facility and TLA Facility relating to the maximum first lien gross leverage ratio, maximum total net leverage ratio and minimum fixed charge coverage ratio, so that for the fiscal quarters ending June 30, 2020 through March 31, 2021, the maximum first lien gross leverage ratio shall be 2.50 to 1.00, the maximum total net leverage ratio shall be 3.75 to 1.00, and the minimum fixed charge coverage ratio shall be 1.00 to 1.00; for the fiscal quarters ending June 30, 2021 through September 30, 2021, the maximum first lien gross leverage ratio shall be 2.25 to 1.00 and the maximum total net leverage ratio shall be 3.50 to 1.00; for the fiscal quarters ending June 30, 2021 through March 31, 2022, the minimum fixed charge coverage ratio shall be 1.05 to 1.00; for the fiscal quarters ending December 31, 2021 through March 31, 2022, the maximum first lien gross leverage ratio shall be 2.00 to 1.00 and the maximum total net leverage ratio shall be 3.25 to 1.00; and for the fiscal quarters ending on or after June 30, 2022, the maximum first lien gross leverage ratio shall be 1.75 to 1.00, the maximum total net leverage ratio shall be 2.75 to 1.00 and the minimum fixed charge coverage ratio shall be 1.10 to 1.00. The maximum first lien gross leverage ratio was 2.04 to 1.00 at September 30, 2020. The maximum total net leverage ratio was 3.38 to 1.00 at September 30, 2020. The minimum fixed charge coverage ratio was 1.33 to 1.00 at September 30, 2020. The Company was in compliance with all of its debt covenants as of September 30, 2020.

 

 

The TLB Facility also includes a financial covenant that requires the Company to repay a certain amount of its borrowings under the TLB Facility within ten business days after the date it files its Form 10-K with the Securities and Exchange Commission (“SEC”) if the Company has excess cash flow (as defined in the credit agreement for the Senior Secured Credit Facilities) during the year covered by the applicable Form 10-K. During the nine months ended September 30, 2019, CONSOL Energy made the required repayment of approximately $110 million based on the amount of the Company's excess cash flow as of December 31, 2018. For fiscal year 2018, such repayment was equal to 75% of the Company’s excess cash flow less any voluntary prepayments of its borrowings under the TLB Facility made by the Company during 2018. For all subsequent fiscal years, the required repayment is equal to a certain percentage of the Company’s excess cash flow for such year, ranging from 0% to 75% depending on the Company’s total net leverage ratio, less the amount of certain voluntary prepayments made by the Company, if any, under the TLB Facility during such fiscal year. Based on the Company's excess cash flow calculation, no repayment was required with respect to the year ended December 31, 2019. The amount of excess cash flow is a covenant feature only applicable as of the Company's year-end and will be calculated as of December 31, 2020.

 

During the year ended December 31, 2019, the Company entered into interest rate swaps, which effectively converted $150 million of the TLB Facility's floating interest rate to a fixed interest rate for the twelve months ending December 31, 2020 and 2021, and $50 million of the TLB Facility's floating interest rate to a fixed interest rate for the twelve months ending December 31, 2022.

 

The Senior Secured Credit Facilities contain customary events of default, including with respect to a failure to make payments when due, cross-default and cross-judgment default and certain bankruptcy and insolvency events.

 

At September 30, 2020, the Revolving Credit Facility had no borrowings outstanding and $99 million of letters of credit outstanding, leaving $301 million of unused capacity. From time to time, CONSOL Energy is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies' statutes and regulations. CONSOL Energy sometimes uses letters of credit to satisfy these requirements and these letters of credit reduce the Company's borrowing facility capacity.

 

Securitization Facility

 

On November 30, 2017, (1)(i) CONSOL Marine Terminals LLC, as an originator of receivables, (ii) CONSOL Pennsylvania Coal Company LLC (“CONSOL Pennsylvania”), as an originator of receivables and as initial servicer of the receivables for itself and the other originators (collectively, the “Originators”), each a wholly-owned subsidiary of CONSOL Energy, and (iii) CONSOL Funding LLC (the “SPV”), a Delaware special purpose entity and wholly-owned subsidiary of CONSOL Energy, as buyer, entered into a Purchase and Sale Agreement (the “Purchase and Sale Agreement”) and (2)(i) CONSOL Thermal Holdings LLC, an indirect, wholly-owned subsidiary of the Partnership, as sub-originator (the “Sub-Originator”), and (ii) CONSOL Pennsylvania, as buyer and as initial servicer of the receivables for itself and the Sub-Originator, entered into a Sub-Originator Sale Agreement (the “Sub-Originator PSA”). In addition, on November 30, 2017, the SPV entered into a Receivables Financing Agreement (the “Receivables Financing Agreement”) by and among (i) the SPV, as borrower, (ii) CONSOL Pennsylvania, as initial servicer, (iii) PNC Bank, as administrative agent, LC Bank and lender, and (iv) the additional persons from time to time party thereto as lenders. Together, the Purchase and Sale Agreement, the Sub-Originator PSA and the Receivables Financing Agreement establish the primary terms and conditions of an accounts receivable securitization program (the “Securitization”). In March 2020, the securitization facility was amended to, among other things, extend the maturity date from August 30, 2021 to March 27, 2023.

 

Pursuant to the Securitization, (i) the Sub-Originator sells current and future trade receivables to CONSOL Pennsylvania and (ii) the Originators sell and/or contribute current and future trade receivables (including receivables sold to CONSOL Pennsylvania by the Sub-Originator) to the SPV and the SPV, in turn, pledges its interests in the receivables to PNC Bank, which either makes loans or issues letters of credit on behalf of the SPV. The maximum amount of advances and letters of credit outstanding under the Securitization may not exceed $100 million.

 

Loans under the Securitization accrue interest at a reserve-adjusted LIBOR market index rate equal to the one-month Eurodollar rate. Loans and letters of credit under the Securitization also accrue a program fee and a letter of credit participation fee, respectively, ranging from 2.00% to 2.50% per annum depending on the total net leverage ratio of CONSOL Energy. In addition, the SPV paid certain structuring fees to PNC Capital Markets LLC and will pay other customary fees to the lenders, including a fee on unused commitments equal to 0.60% per annum.

 

 

The SPV’s assets and credit are not available to satisfy the debts and obligations owed to the creditors of CONSOL Energy, the Sub-Originator or any of the Originators. The Sub-Originator, the Originators and CONSOL Pennsylvania as servicer are independently liable for their own customary representations, warranties, covenants and indemnities. In addition, CONSOL Energy has guaranteed the performance of the obligations of the Sub-Originator, the Originators and CONSOL Pennsylvania as servicer, and will guarantee the obligations of any additional originators or successor servicer that may become party to the Securitization. However, neither CONSOL Energy nor its affiliates will guarantee collectability of receivables or the creditworthiness of obligors thereunder.

 

The agreements comprising the Securitization contain various customary representations and warranties, covenants and default provisions which provide for the termination and acceleration of the commitments and loans under the Securitization in certain circumstances including, but not limited to, failure to make payments when due, breach of representation, warranty or covenant, certain insolvency events or failure to maintain the security interest in the trade receivables, and defaults under other material indebtedness.

 

At September 30, 2020, eligible accounts receivable totaled approximately $31 million. At September 30, 2020, the facility had no outstanding borrowings and $30 million of letters of credit outstanding, leaving $1 million of unused capacity. Costs associated with the receivables facility totaled $249 thousand for the three months ended September 30, 2020. These costs have been recorded as financing fees which are included in Operating and Other Costs in the Consolidated Statements of Income. The Company has not derecognized any receivables due to its continued involvement in the collections efforts.

 

11.00% Senior Secured Second Lien Notes due 2025

 

On November 13, 2017, the Company issued $300 million in aggregate principal amount of 11.00% Senior Secured Second Lien Notes due 2025 (the “Second Lien Notes”) pursuant to an indenture (the “Indenture”) dated as of November 13, 2017, by and between the Company and UMB Bank, N.A., a national banking association, as trustee and collateral trustee (the “Trustee”). On November 28, 2017, certain subsidiaries of the Company executed a supplement to the Indenture and became party to the Indenture as a guarantor (the “Guarantors”). The Second Lien Notes are secured by second priority liens on substantially all of the assets of the Company and the Guarantors that are pledged and on a first-priority basis as collateral securing the Company’s obligations under the Senior Secured Credit Facilities (described above), subject to certain exceptions under the Indenture.

 

On or after November 15, 2021, the Company may redeem all or part of the Second Lien Notes at the redemption prices set forth below, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the rights of holders of the Second Lien Notes on the relevant record date to receive interest due on the relevant interest payment date), beginning on November 15 of the years indicated:

 

Year

 

Percentage

 

2021

 105.50% 

2022

 102.75% 

2023 and thereafter

 100.00% 

 

Prior to November 15, 2020, the Company may on one or more occasions redeem up to 35% of the principal amount of the Second Lien Notes with an amount of cash not greater than the amount of the net cash proceeds from one or more equity offerings at a redemption price equal to 111.00% of the principal amount of the Second Lien Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the date of redemption, as long as at least 65% of the aggregate principal amount of the Second Lien Notes originally issued on the issue date (excluding Second Lien Notes held by the Company and its subsidiaries) remains outstanding after each such redemption and the redemption occurs within less than 180 days after the date of the closing of the equity offering.

 

At any time or from time to time prior to November 15, 2021, the Company may also redeem all or a part of the Second Lien Notes, at a redemption price equal to 100% of the principal amount thereof plus the Applicable Premium, as defined in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the redemption date (subject to the rights of holders of the Second Lien Notes on the relevant record date to receive interest due on the relevant interest payment date).

 

 

The Indenture contains covenants that will limit the ability of the Company and the Guarantors, to (i) incur, assume or guarantee additional indebtedness or issue preferred stock; (ii) create liens to secure indebtedness; (iii) declare or pay dividends on the Company’s common stock, redeem stock or make other distributions to the Company’s stockholders; (iv) make investments; (v) restrict dividends, loans or other asset transfers from the Company’s restricted subsidiaries; (vi) merge or consolidate, or sell, transfer, lease or dispose of substantially all of the Company’s assets; (vii) sell or otherwise dispose of certain assets, including equity interests in subsidiaries; (viii) enter into transactions with affiliates; and (ix) create unrestricted subsidiaries. These covenants are subject to important exceptions and qualifications. If the Second Lien Notes achieve an investment grade rating from both Standard & Poor’s Ratings Services and Moody’s Investors Service, Inc. and no default under the Indenture exists, many of the foregoing covenants will terminate and cease to apply. The Indenture also contains customary events of default, including (i) default for 30 days in the payment when due of interest on the Notes; (ii) default in payment when due of principal or premium, if any, on the Notes at maturity, upon redemption or otherwise; (iii) covenant defaults; (iv) cross-defaults to certain indebtedness, and (v) certain events of bankruptcy or insolvency with respect to the Company or any of the Guarantors. If an event of default occurs and is continuing, the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Second Lien Notes may declare all the Notes to be due and payable immediately. If an event of default arises from certain events of bankruptcy or insolvency, with respect to the Company, any restricted subsidiary of the Company that is a significant subsidiary or any group of restricted subsidiaries of the Company that, taken together, would constitute a significant subsidiary, all outstanding Second Lien Notes will become due and payable immediately without further action or notice.

 

If the Company experiences certain kinds of changes of control, holders of the Second Lien Notes will be entitled to require the Company to repurchase all or any part of that holder’s Second Lien Notes pursuant to an offer on the terms set forth in the Indenture. The Company will offer to make a cash payment equal to 101% of the aggregate principal amount of the Second Lien Notes repurchased plus accrued and unpaid interest on the Second Lien Notes repurchased to, but not including, the date of purchase, subject to the rights of holders of the Notes on the relevant record date to receive interest due on the relevant interest payment date.

 

The Second Lien Notes were issued in a private offering that is exempt from the registration requirements of the Securities Act, to qualified institutional buyers in accordance with Rule 144A and to persons outside of the United States pursuant to Regulation S under the Securities Act.

 

Affiliated Company Credit Agreement with Partnership

 

On November 28, 2017, the Company also entered into an Affiliated Company Credit Agreement with the Partnership and certain of its subsidiaries (the “Partnership Credit Parties”) under which the Company provides as lender a revolving credit facility in an aggregate principal amount of up to $275 million to the Partnership Credit Parties. In connection with the completion of the separation, the Partnership drew an initial $201 million, the net proceeds of which were used to repay the Original CCR Credit Facility and to provide working capital for the Partnership following the separation and for other general corporate purposes.

 

On June 5, 2020, the Company amended the Affiliated Company Credit Agreement to provide eight quarters of financial covenant relaxation, effected a 50 basis points increase in the rate at which borrowings under the Affiliated Company Credit Agreement bear interest, and added additional conditions to be met for the covenants relating to general investments, investments in unrestricted subsidiaries, and distributions to equity holders of the Partnership. The Affiliated Company Credit Agreement has a maturity date of December 28, 2024. The collateral obligations under the Affiliated Company Credit Agreement generally mirror the Original CCR Credit Facility, as does the list of entities that will act as guarantors thereunder. The Affiliated Company Credit Agreement is subject to financial covenants relating to a maximum first lien gross leverage ratio and a maximum total net leverage ratio, which will be calculated on a consolidated basis for the Partnership and its restricted subsidiaries at the end of each fiscal quarter. The Partnership was in compliance with each of these financial covenants at September 30, 2020. The Affiliated Company Credit Agreement also contains a number of customary affirmative covenants and negative covenants, including limitations on the ability of the Partnership to incur additional indebtedness, grant liens, and make investments, acquisitions, dispositions, restricted payments, and prepayments of junior indebtedness (subject to certain limited exceptions).

 

See Note 20 - Subsequent Events in the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for a discussion of the CCR Merger.

 

 

Contractual Obligations

 

CONSOL Energy is required to make future payments under various contracts. CONSOL Energy also has commitments to fund its pension plans, provide payments for other postretirement benefit plans, and fund capital projects. There have been no material changes to these contractual obligations outside the ordinary course of business since March 31, 2020.

 

Debt

 

At September 30, 2020, CONSOL Energy had total long-term debt and finance lease obligations of $688 million outstanding, including the current portion of long-term debt of $69 million. This long-term debt consisted of:

 

 

An aggregate principal amount of $271 million in connection with the Term Loan B (TLB) Facility, due in September 2024, less $1 million of unamortized discount. Borrowings under the TLB Facility bear interest at a floating rate.

 

An aggregate principal amount of $176 million of 11.00% Senior Secured Second Lien Notes due in November 2025. Interest on the notes is payable May 15 and November 15 of each year.

 

An aggregate principal amount of $73 million in connection with the Term Loan A (TLA) Facility, due in March 2023. Borrowings under the TLA Facility bear interest at a floating rate.

 

An aggregate principal amount of $103 million of industrial revenue bonds which were issued to finance the Baltimore port facility, bear interest at 5.75% per annum and mature in September 2025. Interest on the industrial revenue bonds is payable March 1 and September 1 of each year. Payment of the principal and interest on the notes is guaranteed by CONSOL Energy.

 

An aggregate principal amount of $22 million in connection with asset-backed financing. Approximately $19 million is due in December 2020 at a weighted average interest rate of 4.30%, and approximately $3 million is due in September 2024 at an interest rate of 3.61%.

 

Advance royalty commitments of $2 million with a weighted average interest rate of 10.78% per annum.

 

An aggregate principal amount of $42 million of finance leases with a weighted average interest rate of 5.38% per annum.

 

At September 30, 2020, CONSOL Energy had no borrowings outstanding and approximately $99 million of letters of credit outstanding under the $400 million senior secured Revolving Credit Facility. At September 30, 2020, CONSOL Energy had no borrowings outstanding and approximately $30 million of letters of credit outstanding under the $100 million Securitization Facility.

 

 

Stock, Unit and Debt Repurchases

 

In December 2017, CONSOL Energy’s Board of Directors approved a program to repurchase, from time to time, the Company's outstanding shares of common stock or its 11.00% Senior Secured Second Lien Notes due 2025, in an aggregate amount of up to $50 million through the period ending June 30, 2019. The program was subsequently amended by CONSOL Energy's Board of Directors in July 2018 to allow up to $100 million of repurchases of the Company's common stock or its 11.00% Senior Secured Second Lien Notes due 2025, subject to certain limitations in the Company's current credit agreement and that certain tax matters agreement entered into by and between the Company and its former parent on November 28, 2017 (the “TMA”). The Company's Board of Directors also authorized the Company to use up to $25 million of the program to purchase CONSOL Coal Resources LP's outstanding common units in the open market. In May 2019, CONSOL Energy's Board of Directors approved an expansion of the program in the amount of $75 million, bringing the aggregate limit of the program to $175 million. The May 2019 expansion also increased the aggregate limit of the amount of CONSOL Coal Resources LP's common units that can be purchased under the program to $50 million, which is consistent with the Company's credit facility covenants that prohibit the Company from using more than $50 million for the purchase of CONSOL Coal Resources LP's outstanding common units. The Company's Board of Directors also approved extending the termination date of the program from June 30, 2019 to June 30, 2020. In July 2019, CONSOL Energy's Board of Directors approved an expansion of the program in the amount of $25 million, bringing the aggregate limit of the program to $200 million. On May 8, 2020, CONSOL Energy's Board of Directors approved an expansion of the stock, unit and debt repurchase program. The aggregate amount of the program's expansion was $70 million, bringing the total amount of the Company's stock, unit and debt repurchase program to $270 million. The Company's Board of Directors also approved extending the termination date of the program from June 30, 2020 to June 30, 2022. 

 

Under the terms of the program, CONSOL Energy is permitted to make repurchases in the open market, in privately negotiated transactions, accelerated repurchase programs or in structured share repurchase programs. CONSOL Energy is also authorized to enter into one or more 10b5-1 plans with respect to any of the repurchases. Any repurchases of common stock, notes or units are to be funded from available cash on hand or short-term borrowings. The program does not obligate CONSOL Energy to acquire any particular amount of its common stock, notes or units, and can be modified or suspended at any time at the Company’s discretion. The program is conducted in compliance with applicable legal requirements and within the limits imposed by any credit agreement, receivables purchase agreement, indenture or the TMA and is subject to market conditions and other factors.

 

During the nine months ended September 30, 2020, the Company spent approximately $26 million to retire $45 million of its 11.00% Senior Secured Second Lien Notes due 2025, which continued to trade well below par value. No common shares were repurchased and no common Partnership units were purchased under this program during the nine months ended September 30, 2020.

 

Total Equity and Dividends

 

Total equity attributable to CONSOL Energy was $553 million at September 30, 2020 and $572 million at December 31, 2019. See the Consolidated Statements of Stockholders' Equity in Item 1 of this Form 10-Q for additional details.

 

The declaration and payment of dividends by CONSOL Energy is subject to the discretion of CONSOL Energy's Board of Directors, and no assurance can be given that CONSOL Energy will pay dividends in the future. The determination to pay dividends in the future will depend upon, among other things, general business conditions, CONSOL Energy's financial results, contractual and legal restrictions regarding the payment of dividends by CONSOL Energy, planned investments by CONSOL Energy and such other factors as the Board of Directors deems relevant. The Company's Senior Secured Credit Facilities limit CONSOL Energy's ability to pay dividends up to $25 million annually, which increases to $50 million annually when the Company's total net leverage ratio is less than 1.50 to 1.00 and subject to an aggregate amount up to a cumulative credit calculation set forth in the facilities, with additional conditions of no outstanding borrowings and no more than $200 million of outstanding letters of credit on the Revolving Credit Facility, and the total net leverage ratio shall not be greater than 2.00 to 1.00. The total net leverage ratio was 3.38 to 1.00 and the cumulative credit was approximately $15 million at September 30, 2020. The cumulative credit starts with $50 million and builds with excess cash flow commencing in 2018. The calculation of the total net leverage ratio excludes the Partnership. The Senior Secured Credit Facilities do not permit dividend payments in the event of default. The Indenture to the 11.00% Senior Secured Second Lien Notes limits dividends when the Company's total net leverage ratio exceeds 2.00 to 1.00 and subject to an amount not to exceed an annual rate of 4.0% of the quoted public market value per share of such common stock at the time of the declaration. The Indenture does not permit dividend payments in the event of default.

 

In connection with the separation, the Partnership entered into an intercompany loan arrangement with the Company with an initial outstanding balance of $201 million. The Partnership used the initial loan to repay outstanding borrowings under the prior revolving credit facility, which was then terminated. The intercompany loan arrangement limits the Partnership's ability to pay distributions to its unitholders (including the Company) when the Partnership's first lien gross leverage ratio exceeds 2.00 to 1.00.

 

 

Upon payment of the cash distribution with respect to the quarter ended June 30, 2019, the financial requirements for the conversion of all CCR subordinated units were satisfied. As a result, on August 16, 2019, all 11,611,067 subordinated units, owned entirely by CONSOL Energy Inc., were converted into common units on a one-for-one basis. The conversion did not impact the amount of the cash distribution paid or the total number of CCR's outstanding units representing limited partner interests.

 

On April 23, 2020, the Board of Directors of CCR's general partner made the decision to temporarily suspend the quarterly cash distributions to all of CCR's unitholders due to the ongoing uncertainty in the commodity markets driven by the COVID-19 pandemic-related demand decline. On July 28, 2020, the Board of Directors of CCR's general partner made the decision to continue the suspension of the quarterly cash distribution. Accordingly, CCR will focus on deleveraging its balance sheet by conserving cash, boosting liquidity and reducing its outstanding debt.

 

Off-Balance Sheet Arrangements

 

CONSOL Energy does not maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on CONSOL Energy’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the Notes to the Consolidated Financial Statements of this Form 10-Q. CONSOL Energy participates in the United Mine Workers of America (the “UMWA”) Combined Benefit Fund and the UMWA 1992 Benefit Plan which generally accepted accounting principles recognize on a pay-as-you-go basis. These benefit arrangements may result in additional liabilities that are not recognized on the Consolidated Balance Sheet at September 30, 2020. The various multi-employer benefit plans are discussed in Note 16—Other Employee Benefit Plans in the Notes to the Consolidated Financial Statements in Item 8 of the December 31, 2019 Form 10-K. CONSOL Energy's total contributions under the Coal Industry Retiree Health Benefit Act of 1992 were $1,373 and $1,556 for the three months ended September 30, 2020 and 2019, respectively. CONSOL Energy's total contributions under the Coal Industry Retiree Health Benefit Act of 1992 were $4,110 and $4,662 for the nine months ended September 30, 2020 and 2019, respectively. Based on available information at December 31, 2019, CONSOL Energy's obligation for the UMWA Combined Benefit Fund and 1992 Benefit Plan is estimated to be approximately $62,295. CONSOL Energy also uses a combination of surety bonds, corporate guarantees and letters of credit to secure its financial obligations for employee-related, environmental, performance and various other items which are not reflected on the Consolidated Balance Sheet at September 30, 2020. Management believes these items will expire without being funded. See Note 14—Commitments and Contingent Liabilities in the Notes to the Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional details of the various financial guarantees that have been issued by CONSOL Energy.

 

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the federal securities laws. With the exception of historical matters, the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that involve risks and uncertainties that could cause actual results and outcomes to differ materially from results expressed in or implied by our forward-looking statements. 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 “anticipate,” “believe,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” 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 Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. 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, the following:

 

 the number of shares of CEIX common stock that the holders of CCR common units may receive in the pending merger between CEIX and CCR (the CCR Merger) is based on a fixed exchange ratio and will not be adjusted in the event of any change in the price of either shares of CEIX common stock or CCR common units; 
 the CCR Merger is subject to conditions, including certain conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete the CCR Merger could have a material and adverse effect on us and, even if completed, the CCR Merger may not achieve some or all of the anticipated benefits;
 we may incur transaction-related costs in connection with the proposed CCR Merger; 
 we are subject to provisions under the Merger Agreement that, in specified circumstances, could require us to pay a termination fee and to be responsible for CCR's expenses;
 financial projections relating to the combined company after the CCR Merger may not be achieved;
 CEIX and CCR may be targets of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the completion of the CCR Merger;
 CEIX and CCR may not achieve the net benefits from the CCR Merger in the near term;
 the CCR Merger may not be accretive to operating earnings and may cause dilution to CEIX's earnings per share, which may negatively affect the market price of CEIX common stock;
 following the merger, approximately 22.0% of the total voting power of CEIX common stock will be owned by CCR common unitholders and, as a result, CEIX's current shareholders may experience significant dilution;
 

the effects the COVID-19 pandemic has on our business and results of operations and on the global economy;

 

a restructuring of liabilities of Murray Energy as a result of its bankruptcy may result in the Company becoming responsible for certain liabilities that Murray Energy assumed from our former parent in 2013;

 

deterioration in economic conditions in any of the industries in which our customers operate may decrease demand for our products, impair our ability to collect customer receivables and impair our ability to access capital;

 

 

 

volatility and wide fluctuation in coal prices based upon a number of factors beyond our control including oversupply relative to the demand available for our products, weather and the price and availability of alternative fuels;

 

an extended decline in the prices we receive for our coal affecting our operating results and cash flows;

 

significant downtime of our equipment or inability to obtain equipment, parts or raw materials;

 

decreases in the availability of, or increases in the price of, commodities or capital equipment used in our coal mining operations;

 

our customers extending existing contracts or entering into new long-term contracts for coal on favorable terms;

 

our reliance on major customers;

 

our inability to collect payments from customers if their creditworthiness declines or if they fail to honor their contracts;

 

our inability to acquire additional coal reserves that are economically recoverable;

 

decreases in demand and changes in coal consumption patterns of electric power generators;

 

the availability and reliability of transportation facilities and other systems, disruption of rail, barge, processing and transportation facilities and other systems that deliver our coal to market and fluctuations in transportation costs;

 

a loss of our competitive position because of the competitive nature of coal industries, or a loss of our competitive position because of overcapacity in these industries impairing our profitability;

 

foreign currency fluctuations that could adversely affect the competitiveness of our coal abroad;

 

recent action and the possibility of future action on trade made by U.S. and foreign governments;

 

the risks related to the fact that a significant portion of our production is sold in international markets;

 

coal users switching to other fuels in order to comply with various environmental standards related to coal combustion emissions;

 

the impact of potential, as well as any adopted, regulations to address climate change, including any relating to greenhouse gas emissions, on our operating costs as well as on the market for coal;

 

the effects of litigation seeking to hold energy companies accountable for the effects of climate change;

 

the effects of government regulation on the discharge into the water or air, and the disposal and clean-up of, hazardous substances and wastes generated during our coal operations;

 

the risks inherent in coal operations, including being subject to unexpected disruptions caused by adverse geological conditions, equipment failures, delays in moving out longwall equipment, railroad derailments, security breaches or terroristic acts and other hazards, delays in the completion of significant construction or repair of equipment, fires, explosions, seismic activities, accidents and weather conditions;

 

failure to obtain or renew surety bonds on acceptable terms, which could affect our ability to secure reclamation and coal lease obligations;

 

failure to obtain adequate insurance coverages;

 

operating in a single geographic area;

 

the effects of coordinating our operations with oil and natural gas drillers and distributors operating on our land;

 

our inability to obtain financing for capital expenditures on satisfactory terms;

 

 

 

the effects of receiving low sustainability scores which potentially results in the exclusion of our securities from consideration by certain investment funds and a negative perception by investors;

 

the effect of new or existing tariffs and other trade measures;

 

our inability to find suitable acquisition targets or integrating the operations of future acquisitions into our operations;

 

obtaining, maintaining and renewing governmental permits and approvals for our coal operations;

 

the effects of stringent federal and state employee health and safety regulations, including the ability of regulators to shut down our operations;

 

the potential for liabilities arising from environmental contamination or alleged environmental contamination in connection with our past or current coal operations;

 

the effects of asset retirement obligations and certain other liabilities;

 

uncertainties in estimating our economically recoverable coal reserves;

 

the outcomes of various legal proceedings, including those which are more fully described herein;

 

defects in our chain of title for our undeveloped reserves or failure to acquire additional property to perfect our title to coal rights;

 

exposure to employee-related long-term liabilities;

 

the risk of our debt agreements, our debt and changes in interest rates affecting our operating results and cash flows;

 

the effects of hedging transactions on our cash flow;

 

the effect of our affiliated company credit agreement on our cash flows;

 

failure by one or more of the third parties to satisfy certain liabilities it acquired from our former parent, or failure to perform its obligations under various arrangements, which our former parent guaranteed and for which we have indemnification obligations to our former parent;

 

information theft, data corruption, operational disruption and/or financial loss resulting from a terrorist attack or cyber incident;

 

certain provisions in our multi-year coal sales contracts may provide limited protection during adverse economic conditions, and may result in economic penalties or permit the customer to terminate the contract;

 

the potential failure to retain and attract qualified personnel of the Company and a possible increased reliance on third party contractors as a result;

 

we may not receive distributions from the Partnership;

 

failure to maintain effective internal controls over financial reporting;

 

certain risks related to our separation from our former parent;

 

a determination by the Internal Revenue Service that the distribution or certain related transactions should be treated as a taxable transaction;

 

uncertainty with respect to the Company’s common stock, potential stock price volatility and future dilution;

 

the consequences of a lack of or negative commentary about us published by securities analysts and media;

 

uncertainty regarding the timing of any dividends we may declare;

 

uncertainty as to whether we will repurchase shares of our common stock or outstanding debt securities;

 

restrictions on the ability to acquire us in our certificate of incorporation, bylaws and Delaware law and the resulting effects on the trading price of our common stock;

 

inability of stockholders to bring legal action against us in any forum other than the state courts of Delaware; and

 

other unforeseen factors.

 

The above list of factors is not exhaustive or necessarily in order of importance. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements include those discussed under “Risk Factors” elsewhere in this report. The Company disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

For quantitative and qualitative disclosures about market risk, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes to the Company's exposures to market risk since December 31, 2019.

 

 

ITEM 4.    CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

CONSOL Energy, under the supervision and with the participation of its management, including CONSOL Energy's principal executive officer and principal financial officer, evaluated the effectiveness of the Company's “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, CONSOL Energy's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2020 to ensure that information required to be disclosed by CONSOL Energy in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and includes controls and procedures designed to ensure that information required to be disclosed by CONSOL Energy in such reports is accumulated and communicated to CONSOL Energy's management, including CONSOL Energy's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls over Financial Reporting

 

During the fiscal quarter covered by this Quarterly Report on Form 10-Q, there were no changes in the Company's internal controls over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

 

PART II: OTHER INFORMATION

 

ITEM 1.    LEGAL PROCEEDINGS

 

Our operations are subject to a variety of risks and disputes normally incidental to our business. As a result, we may, at any given time, be a defendant in various legal proceedings and litigation arising in the ordinary course of business. However, we are not currently subject to any material litigation. Refer to Note 14 - Commitments and Contingent Liabilities in the Notes to the Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q, incorporated herein by this reference.

 

ITEM 1A.    RISK FACTORS

 

In addition to the other information set forth in this quarterly report, you should carefully consider the factors described in “Part 1 - Item 1A. Risk Factors” of CONSOL Energy's 2019 Form 10-K, as updated by any subsequent Form 10-Qs and the risk factors set forth below. These described risks are not the only risks the Company faces. Additional risks and uncertainties not currently known to CONSOL Energy or that the Company currently deems to be immaterial also may materially adversely affect CONSOL Energy's business, financial condition and/or operating results.

 

Risks Related to the Merger of CEIX and CCR

 

The number of shares of CEIX common stock that the holders of CCR common units may receive in the pending merger between CEIX and CCR (the CCR Merger) is based on a fixed exchange ratio and will not be adjusted in the event of any change in the price of either shares of CEIX common stock or CCR common units.

 

On October 22, 2020, CEIX, Transformer LP Holdings Inc., a Delaware corporation and a wholly-owned subsidiary of CEIX (Holdings), Transformer Merger Sub LLC, a Delaware limited liability company and a wholly-owned subsidiary of Holdings (Merger Sub), CCR and the General Partner entered into an Agreement and Plan of Merger (the Merger Agreement), pursuant to which Merger Sub will merge with and into CCR, with CCR surviving as an indirect, wholly-owned subsidiary of CEIX (the CCR Merger).

 

Under the terms of the Merger Agreement, at the effective time of the CCR Merger, (i) each outstanding common unit representing a limited partner interest in CCR (each, a “CCR Common Unit”) other than CCR Common Units owned by CEIX and its subsidiaries (each, a “Public Common Unit”) will be converted into the right to receive, subject to adjustment as described in the Merger Agreement, 0.73 shares of common stock, par value $0.01 per share, of CEIX (the “CEIX Common Stock” and the shares of CEIX Common Stock to be issued in the Merger, the “Merger Consideration”); and (ii) each of the outstanding phantom units and any other awards relating to a CCR Common Unit issued under a CCR Long-Term Incentive Plan (as defined in the Merger Agreement), whether vested or not vested, will become fully vested and will be automatically converted into the right to receive, with respect to each CCR Common Unit subject thereto, the Merger Consideration (plus any accrued but unpaid amounts in relation to distribution equivalent rights). Except for the incentive distribution rights representing limited partner interests in CCR, which will be automatically canceled immediately prior to the effective time of the Merger for no consideration in accordance with the Third Amended and Restated Agreement of Limited Partnership of CCR, dated November 28, 2017 (the “CCR Agreement”), the limited partner interests in CCR owned by CEIX and its subsidiaries immediately prior to the effective time of the Merger will remain outstanding as limited partner interests in the surviving entity. The economic general partner interest in CCR will be converted into a non-economic general partner interest in the surviving entity, and the General Partner will continue as the sole general partner of the surviving entity.

 

The market value of the merger consideration that CCR unitholders will receive in the CCR Merger will depend on the trading price of CEIX common stock. The exchange ratio set forth in the CCR Merger Agreement that specifies the number of shares of CEIX common stock that CCR unitholders will receive as consideration in the CCR Merger is fixed at 0.73. This means that there is no mechanism contained in the CCR Merger Agreement that would adjust the number of shares of CEIX common stock that CCR unitholders will receive as the Merger Consideration based on any decreases or increases in the trading price of CEIX common stock. Stock price changes may result from a variety of factors (many of which are beyond CEIX's or CCR's control), including:

 

 changes in CEIX's and CCR's business, operations and prospects or market assessments thereof;
 

interest rates, general market, industry and economic conditions and other factors generally affecting the price of CEIX common stock; and

 

federal, state and local legislation, governmental regulation and legal developments in the businesses and industry in which CEIX and CCR operate.

 

Because the CCR Merger will be completed after the special meeting of holders of CEIX common stock, at the time of the meeting, CCR unitholders will not know the exact market value of CEIX common stock that they will receive upon completion of the CCR Merger. If the price of CEIX common stock at the closing of the CCR Merger is less than the price of CEIX common stock on the date on which the CCR Merger Agreement was signed, then the market value of the Merger Consideration received by CCR unitholders will be less than contemplated at the time the CCR Merger Agreement was signed.

 

 

The CCR Merger is subject to conditions, including certain conditions that may not be satisfied or completed on a timely basis, if at all. Failure to complete the CCR Merger could have a material and adverse effect on us and, even if completed, the CCR Merger may not achieve some or all of the anticipated benefits.

 

Completion of the CCR Merger is subject to certain customary conditions, including, among others: (i) approval of the CEIX Stock Issuance by a majority of votes cast at a special meeting of holders of shares of CEIX Common Stock; (ii) approval by a majority of the outstanding CCR Common Units; (iii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (iv) the effectiveness of a registration statement on Form S-4 relating to the shares of CEIX Common Stock to be issued as Merger Consideration; (v) approval for listing on the New York Stock Exchange of the shares of CEIX Common Stock to be issued as Merger Consideration; (vi) subject to specified materiality standards, the accuracy of certain representations and warranties of each party; and (vii) compliance by each party in all material respects with its covenants. These and other conditions to the closing of the CCR Merger may not be fulfilled in a timely manner or at all, and, accordingly, the CCR Merger may be delayed or may not be completed.

 

If the CCR Merger is not completed, CEIX's ongoing businesses or the price of CEIX Common Stock or the price of CCR Common Units (of which CEIX owns approximately 60.7 percent) may be adversely affected and, without realizing any of the benefits of having completed the CCR Merger, we will be subject to a number of risks, including the following:

 

 we will be required to pay our costs relating to the CCR Merger, such as legal, accounting and financial advisory expenses or under certain circumstances to pay a termination fee to CCR, whether or not the CCR Merger is completed;
 

time and resources committed by our management to matters relating to the CCR Merger could otherwise have been devoted to pursuing other beneficial opportunities; and

 

the market price of CEIX Common Stock or CCR Common Units could decline to the extent that the current market price reflects a market assumption that the CCR Merger will be completed.

 

In addition, even if completed, there can be no assurance that the CCR Merger will deliver the benefits anticipated by us.

 

We and CCR may incur transaction-related costs in connection with the proposed CCR Merger.

 

We and CCR each expect to incur a number of non-recurring transaction-related costs associated with completing the proposed CCR Merger. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees, proxy solicitation costs and printing costs. Many of the expenses that will be incurred are, by their nature, difficult to estimate accurately at the present time.

 

We are subject to provisions under the Merger Agreement that, in specified circumstances, could require us to pay a termination fee and to be responsible for CCR's expenses.

 

The Merger Agreement provides for certain termination rights for both CEIX and CCR. The Merger Agreement provides that upon termination of the Merger Agreement under certain circumstances, CEIX will be obligated to reimburse CCR for its expenses in an amount not to exceed $3.5 million. The Merger Agreement also provides that upon termination of the Merger Agreement under certain circumstances, CCR will be obligated to reimburse CEIX for its expenses in an amount not to exceed $3.5 million.

 

Financial projections relating to the combined company after the CCR Merger may not be achieved.

 

In connection with the proposed CCR Merger, we and CCR have prepared and considered, among other things, internal financial forecasts for CEIX and CCR, respectively. These forecasts speak only as of the date made and will not be updated. These financial projections were not provided with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, at all or within projected time frames. In addition, the failure of our businesses to achieve projected results could have a material adverse effect on our share price and financial position.

 

 

CEIX and CCR may be targets of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the completion of the CCR Merger.

 

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into merger agreements, in an effort to enjoin the relevant merger or seek monetary relief. If CEIX or CCR are subject to such lawsuits related to the CCR Merger Agreement or the CCR Merger, even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. CEIX and CCR cannot predict the outcome of these lawsuits, or others, nor can either company predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation surrounding the CCR Merger could delay or prevent its consummation. In addition, the costs of defending the litigation, even if resolved in CEIX's or CCR's favor, could be substantial and such litigation could distract CEIX and CCR from pursuing the consummation of the CCR Merger and other potentially beneficial business opportunities.

 

CEIX and CCR will incur substantial transaction-related costs in connection with the CCR Merger, including fees paid to legal, financial and accounting advisors, filing fees and printing costs. If the CCR Merger does not occur, the companies will not benefit from these expenses. In addition, CEIX and CCR may not achieve the net benefits from the CCR Merger in the near term.

 

CEIX and CCR expect to incur a number of non-recurring transaction-related costs associated with completing the CCR Merger. These fees and costs will be substantial. Non-recurring transaction costs include, but are not limited to, fees paid to legal, financial and accounting advisors, filing fees and printing costs. If the CCR Merger does not occur, neither CEIX nor CCR will benefit from these expenses.

 

The CCR Merger may not be accretive to operating earnings and may cause dilution to CEIX's earnings per share, which may negatively affect the market price of CEIX common stock.

 

CEIX currently anticipates that the CCR Merger will be initially dilutive to its forecasted earnings per share on a standalone basis. This expectation is based on preliminary estimates, which may materially change. CEIX may also have additional transaction and integration-related costs, may fail to realize all of the benefits anticipated in the CCR Merger or be subject to other factors that affect preliminary estimates or its ability to realize operational efficiencies. Any of these factors could cause a decrease in CEIX's earnings per share or decrease or delay the expected effect of the CCR Merger and contribute to a decrease in the price of CEIX common stock.

 

Following the merger, approximately 22.0% of the total voting power of CEIX common stock will be owned by CCR common unitholders. As a result, CEIX's current shareholders may experience significant dilution.

 

Following the merger, approximately 22.0% of the total voting power of CEIX common stock will be owned by CCR common unitholders. As a result, CEIX's current shareholders may experience significant dilution. In addition, in the future, CEIX may issue common stock to raise cash for its projects, operations, acquisitions or other purposes and may also acquire interests in other companies by using a combination of cash and CEIX common stock or just CEIX common stock.

 

Any of these events may dilute the ownership interests of the current holders of CEIX common stock, reduce CEIX's earnings per share and have an adverse effect on the price of CEIX common stock. The issuance of these new shares and the sale of additional shares from time to time could have the effect of depressing the market value for CEIX common stock. The increase in the number of shares of CEIX common stock outstanding, and any resulting dilution, may cause holders to sell shares of CEIX common stock or may create the perception that such sales may occur, either of which may adversely affect the market for, and the market value of, CEIX's common stock.

 

 

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no repurchases of the Company's equity securities during the three months ended September 30, 2020. Since the December 2017 inception of the Company's current stock, unit and debt repurchase program, CONSOL Energy Inc.'s Board of Directors has approved a $270 million stock, unit and debt repurchase program, which terminates on June 30, 2022. As of November 5, 2020, approximately $96.3 million remained available under the stock, unit and debt repurchase program. The program does not obligate CONSOL Energy to acquire any particular amount of its common stock, notes or units, and can be modified or suspended at any time at the Company’s discretion. See Note 19 - Stock, Unit and Debt Repurchases in the Notes to the Consolidated Financial Statements in Item 1 of this Form 10-Q for more information.

 

Limitation Upon Payment of Dividends

The Indenture and the Senior Secured Credit Facilities include certain covenants limiting the Company's ability to declare and pay dividends.

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.

 

ITEM 5.    OTHER INFORMATION

 

 Approval of Change in Control Severance Agreement

 

On November 4, 2020, the Company and Mitesh Thakkar, the Company’s Chief Financial Officer, entered into a new Change in Control Severance Agreement (the “New CIC Agreement”). The New CIC Agreement supersedes and replaces in its entirety that certain Change in Control Severance Agreement entered into by and between the Company and Mr. Thakkar on January 3, 2020, as previously disclosed on the Company’s Form 8-K filed with the United States Securities and Exchange Commission on January 3, 2020 (the “Original CIC Agreement”).

 

The New CIC Agreement provides that Mr. Thakkar will receive a base salary in accordance with the Company’s normal payroll practices, that he will be eligible to receive an annual cash bonus in accordance with any of the Company’s applicable bonus plans or programs, that he will be able to participate in any long-term incentive compensation plan maintained by the Company and that he will be entitled to participate in all employee benefit and fringe benefit plans made available by the Company to its executives and key management. The New CIC Agreement further provides for both (i) non-change in control and (ii) change in control cash severance exclusively upon a termination of employment absent “cause,” subject to the following requirements. In the case of a change-in-control scenario, the New CIC Agreement is “double trigger” and Mr. Thakkar is only entitled to cash severance if, following, or in connection with, a change in control, his employment is terminated by the Company absent “cause” or if he resigns due to constructive or good reason termination within ninety days prior to the change-in-control or within two years following the change-in-control. Under the New CIC Agreement, Mr. Thakkar is entitled to receive:

 

 

his base salary through the date of termination and any annual bonus awarded in accordance with the Company's bonus program but not yet paid in both a change-in-control and non-change-in-control termination absent “cause”;

 

payment of any amounts earned, accrued or owing but not yet paid to Mr. Thakkar as of the date of termination, payable in a lump sum, and any benefits accrued or earned in accordance with the terms of any applicable benefit plans and programs of the Company or any of its affiliates in a non-change-in-control termination absent “cause”;

 

a lump sum payment equal to a 1x multiple of his base salary in a non-change-in-control or involuntary termination of employment absent “cause”;

 

a prorated payment of the executive's annual incentive compensation for the year in which the termination occurs in both a change-in-control and non-change-in-control termination absent “cause”;

 

accelerated vesting of any outstanding long-term incentive compensation upon the second trigger related to a change-in-control termination event; provided that any outstanding performance-based awards will be settled at the greater of target or actual performance (if ascertainable at the change-in-control) and prorated for service to the date of the change-in-control;

 

continued healthcare for 18 months for both a change-in-control and a non-change-in-control termination absent “cause”; and

 

outplacement assistance in the form of a cash payment equal to $25,000 in a change-in-control termination only.

 

62

 

The terms of the New CIC Agreement are materially consistent with the terms of the Original CIC Agreement except that the New CIC Agreement also provides for the following payments in a change-in-control termination absent “cause”:

 

 

a lump sum cash payment equal to a 2x multiple of his base salary plus a 2x multiple of his annual incentive pay in an involuntary termination of employment or constructive (or good reason) termination (the multiple for each of the base salary payment and the annual incentive pay payment under the Original CIC Agreement was 1.5x);

 

a cash lump sum payment equal to the total amount he would have received under the Company's 401(k) plan assuming he continued employment for a period of 18 months; and

 

payment of any amounts earned, accrued or owing but not yet paid to Mr. Thakkar as of the date of termination, payable in a lump sum, and any benefits accrued or earned in accordance with the terms of any applicable benefit plans and programs of the Company or any of its affiliates.

 

The New CIC Agreement also provides that in the event Mr. Thakkar’s employment is terminated for Cause, he shall only be entitled to receive: (i) his base salary through the date of termination, (ii) payment for all accrued but unused vacation through the date of termination and (iii) reimbursement for certain reimbursable expenses.

 

The New CIC Agreement also contains confidentiality, non-competition and non-solicitation obligations for Mr. Thakkar pursuant to which he has agreed not to compete with the Company or any of its affiliates for two years, or to solicit customers or employees for one year following a termination of employment.

 

No payments or benefits are provided under the New CIC Agreement unless Mr. Thakkar executes, and does not revoke, a written release of any and all claims (other than entitlements under the terms of the New CIC Agreement or which may not be released under applicable law.)

 

Approval of Changes in Timing of Payout under CONSOL Energy Inc. 2020 Short-Term Incentive Compensation (“STIC”)

 

On November 3, 2020, the Compensation Committee (the “Committee”) and the Board of Directors (the “Board”) of the Company authorized an amendment to the 2020 STIC Terms and Conditions, previously approved by the Committee and Board on February 4, 2020.

 

The 2020 STIC Terms and Conditions previously provided that all earned amounts would be paid in the first quarter of 2021 on or before March 15, 2021 after the Committee evaluates the Company’s performance against pre-established performance metrics for the 2020 performance year and then determines the extent to which applicable performance goals have been met.

 

The amendment to the 2020 STIC Terms and Conditions delegates authority to the Chief Executive Officer of the Company (“CEO”) to provide for a different payment schedule for individuals participating in the STIC (other than himself). Under the terms of the amendment, the CEO may (but is not obligated) to advance payment of a portion of the annual 2020 STIC payout due each named executive officer (other than the CEO), in an amount not to exceed fifty percent (50%) of the Company’s target performance for the 2020 year. Any advance payment may be made at any time on or before December 31, 2020. Any remaining portion of amounts earned under the 2020 STIC will be paid on or before March 15, 2021, the regularly scheduled payment date. 

 

 

ITEM 6.    EXHIBITS

 

Exhibits

Description

Method of Filing

 

 

 

2.1Agreement and Plan of Merger, dated as of October 22, 2020, by and among CONSOL Energy Inc., Transformer LP Holdings Inc., Transformer Merger Sub LLC, CONSOL Coal Resources LP and CONSOL Coal Resources GP LLCFiled as Exhibit 2.1 to Form 8-K (File No. 001-38147) filed on October 23, 2020
   
10.1Support Agreement, dated as of October 22, 2020, by and among CONSOL Energy Inc. and CONSOL Coal Resources LPFiled as Exhibit 10.1 to Form 8-K (File No. 001-38147) filed on October 23, 2020
   
10.2Letter Agreement between James J. McCaffrey and CONSOL Mining Company LLC*Filed as Exhibit 10.4 to Form 10-Q (File No. 001-38147) filed on August 10, 2020
   

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

 

 

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith

 

 

 

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

 

 

 

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed herewith

 

 

 

95

Mine Safety and Health Administration Safety Data

Filed herewith

 

 

 

101

Interactive Data File (Form 10-Q for the quarterly period ended September 30, 2020, furnished in Inline XBRL)

Filed herewith

 

 

 

104

Cover Page Interactive Data File (formatted as Inline XBRL)

Contained in Exhibit 101

 

*Indicates management contract or compensatory plan or arrangement

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 5th day of November, 2020.

 

  
    

 

CONSOL ENERGY INC.

 

 

 

 

 
    

 

By:

/s/ JAMES A. BROCK

 

 

 

James A. Brock

 

 

 

Director, Chief Executive Officer and President

(Principal Executive Officer)

 

 

 

 

 
    

 

By:

/s/ MITESHKUMAR B. THAKKAR

 

 

 

Miteshkumar B. Thakkar

 

 

 

Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 
    

 

By:

/s/ JOHN M. ROTHKA

 

 

 

John M. Rothka

 

 

 

Chief Accounting Officer
(Principal Accounting Officer)

 

 

 

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