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Feb. 12, 2021, 4:24 p.m. EST

10-K: CONSOL ENERGY INC.

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(EDGAR Online via COMTEX) -- ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Merger with CONSOL Coal Resources LP

On December 30, 2020, we completed the acquisition of all of the outstanding common units of CONSOL Coal Resources, and CONSOL Coal Resources became our indirect wholly-owned subsidiary (see Note 2 - Major Transactions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). In connection with the closing of the CCR Merger, we issued approximately 8.0 million shares of our common stock to acquire the approximately 10.9 million common units of CCR held by third-party CCR investors at a fixed exchange ratio of 0.73 shares of CEIX common stock for each CCR unit, for total implied consideration of $51.7 million.

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, the Company has experienced a few localized outbreaks, but due to the health and safety procedures put in place by the Company, we have been able to continue operating without production curtailment. 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 fourth 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 and for the entire fourth 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. However, we saw steady improvement in the demand for our coal throughout the third and fourth quarters of 2020.

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 as COVID-19 continues to spread rapidly. 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, the pace and effectiveness of vaccination efforts 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.

2020 Highlights:

Coal shipments recovered to 5.9 million tons in Q4 2020, compared to 4.5 million tons in Q3 2020 and 2.3 million tons in Q2 2020.

Continued to take advantage of strong equipment financing market by raising $60 million of new capital during 2020 at a weighted average interest rate of 6%.

Outlook for 2021:

We expect that the PAMC will sell approximately 22 million to 24 million tons in 2021.

For 2021 and 2022, our contracted position, as of February 9, 2021, is at 18.2 million tons and 5.6 million tons, respectively.

We are planning to make capital expenditures during 2021 in the range of $100 million to $125 million, excluding any spending on the Itmann project.

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;

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.

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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).







                                                                Years Ended December 31,
                                                          2020            2019            2018
        Total Costs and Expenses                       $ 1,030,885     $ 1,332,806     $ 1,344,402
        Freight Expense                                    (39,990 )       (19,667 )       (43,572 )
        Selling, General and Administrative Costs          (72,706 )       (67,111 )       (65,346 )
        Gain (Loss) on Debt Extinguishment                  21,352         (24,455 )        (3,922 )
        Interest Expense, net                              (61,186 )       (66,464 )       (83,848 )
        Other Costs (Non-Production)                      (124,739 )      (101,900 )      (135,081 )
        Depreciation, Depletion and Amortization
        (Non-Production)                                   (39,668 )       (32,388 )       (30,961 )
        Cost of Coal Sold                              $   713,948     $ 1,020,821     $   981,672
        Depreciation, Depletion and Amortization
        (Production)                                      (171,092 )      (174,709 )      (170,303 )
        Cash Cost of Coal Sold                         $   542,856     $   846,112     $   811,369
        


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).







                                                                Years Ended December 31,
                                                          2020            2019            2018
        Total Coal Revenue (PAMC Segment)              $   771,363     $ 1,288,529     $ 1,364,292
        Operating and Other Costs                          667,595         948,012         946,450
        Less: Other Costs (Non-Production)                (124,739 )      (101,900 )      (135,081 )
        Total Cash Cost of Coal Sold                       542,856         846,112         811,369
        Add: Depreciation, Depletion and
        Amortization                                       210,760         207,097         201,264
        Less: Depreciation, Depletion and
        Amortization (Non-Production)                      (39,668 )       (32,388 )       (30,961 )
        Total Cost of Coal Sold                        $   713,948     $ 1,020,821     $   981,672
        Total Tons Sold (in millions)                         18.7            27.3            27.7
        Average Revenue per Ton Sold                   $     41.31     $     47.17     $     49.28
        Average Cash Cost of Coal Sold per Ton               29.12           30.97           29.29
        Depreciation, Depletion and Amortization
        Costs per Ton Sold                                    9.12            6.40            6.17
        Average Cost of Coal Sold per Ton                    38.24           37.37           35.46
        Average Margin per Ton Sold                           3.07            9.80           13.82
        Add: Depreciation, Depletion and
        Amortization Costs per Ton Sold                       9.12            6.40            6.17
        Average Cash Margin per Ton Sold               $     12.19     $     16.20     $     19.99
        


We define adjusted EBITDA as (i) net income (loss) plus income taxes, net interest expense and depreciation, depletion and amortization, as adjusted for

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                                                                For the Year Ended December 31, 2020
                                                                      CONSOL
                                                    PA Mining         Marine
        Dollars in thousands                         Complex         Terminal         Other        Total Company
        Net Income (Loss)                          $    16,185     $     32,537     $ (61,936 )   $       (13,214 )
        Add: Income Tax Expense                              -                -         3,972               3,972
        Add: Interest Expense, net                       1,236            6,166        53,784              61,186
        Less: Interest Income                              (10 )              -        (1,220 )            (1,230 )
        Earnings (Loss) Before Interest & Taxes
        (EBIT)                                          17,411           38,703        (5,400 )            50,714
        Add: Depreciation, Depletion &
        Amortization                                   198,272            5,095         7,393             210,760
        Earnings Before Interest, Taxes and DD&A
        (EBITDA)                                   $   215,683     $     43,798     $   1,993     $       261,474
        Adjustments:
        Stock/Unit-Based Compensation              $     9,905     $        558     $   1,116     $        11,579
        CCR Merger Fees                                  2,623                -         7,199               9,822
        Gain on Debt Extinguishment                          -                -       (21,352 )           (21,352 )
        Total Pre-tax Adjustments                       12,528              558       (13,037 )                49
        Adjusted EBITDA                            $   228,211     $     44,356     $ (11,044 )   $       261,523
        








                                                                For the Year Ended December 31, 2019
                                                                      CONSOL
                                                    PA Mining         Marine
        Dollars in thousands                         Complex         Terminal         Other         Total Company
        Net Income (Loss)                          $   197,112     $     33,758     $ (137,312 )   $        93,558
        Add: Income Tax Expense                              -                -          4,539               4,539
        Add: Interest Expense, net                           -            6,088         60,376              66,464
        Less: Interest Income                                -                -         (2,937 )            (2,937 )
        Earnings (Loss) Before Interest & Taxes
        (EBIT)                                         197,112           39,846        (75,334 )           161,624
        Add: Depreciation, Depletion &
        Amortization                                   185,616            4,078         17,403             207,097
        Earnings (Loss) Before Interest, Taxes
        and DD&A (EBITDA)                          $   382,728     $     43,924     $  (57,931 )   $       368,721
        Adjustments:
        Stock/Unit-Based Compensation              $    11,626     $        567     $      567     $        12,760
        Loss on Debt Extinguishment                          -                -         24,455              24,455
        Total Pre-tax Adjustments                       11,626              567         25,022              37,215
        Adjusted EBITDA                            $   394,354     $     44,491     $  (32,909 )   $       405,936
        








                                                                For the Year Ended December 31, 2018
                                                                      CONSOL
                                                    PA Mining         Marine
        Dollars in thousands                         Complex         Terminal         Other         Total Company
        Net Income (Loss)                          $   291,605     $     30,647     $ (143,467 )   $       178,785
        Add: Income Tax Expense                              -                -          8,828               8,828
        Add: Interest Expense, net                           -            6,052         77,796              83,848
        Less: Interest Income                                -                -         (2,146 )            (2,146 )
        Earnings (Loss) Before Interest & Taxes
        (EBIT)                                         291,605           36,699        (58,989 )           269,315
        Add: Depreciation, Depletion &
        Amortization                                   178,969            3,782         18,513             201,264
        Earnings (Loss) Before Interest, Taxes
        and DD&A (EBITDA)                          $   470,574     $     40,481     $  (40,476 )   $       470,579
        Adjustments:
        Stock/Unit-Based Compensation              $     9,395     $        420     $      420     $        10,235
        Loss on Debt Extinguishment                          -                -          3,922               3,922
        Total Pre-tax Adjustments                        9,395              420          4,342              14,157
        Adjusted EBITDA                            $   479,969     $     40,901     $  (36,134 )   $       484,736
        


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Results of Operations: Year Ended December 31, 2020 Compared with the Year Ended December 31, 2019

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

CONSOL Energy reported net loss attributable to CONSOL Energy Inc. shareholders of $10 million for the year ended December 31, 2020, compared to net income attributable to CONSOL Energy Inc. shareholders of $76 million for the year ended December 31, 2019.

CONSOL Energy consists of the Pennsylvania Mining Complex and the CONSOL Marine Terminal, as well as various corporate and other business activities that are not allocated to the PAMC or the CONSOL Marine Terminal. The other business activities include the 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.

PAMC ANALYSIS:

The PAMC division's principal activities consist of mining, preparation and marketing of thermal coal. 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 earnings before income tax of $17 million for the year ended December 31, 2020, compared to earnings before income tax of $197 million for the year ended December 31, 2019. Variances are discussed below.







                                                          For the Years Ended December 31,
        (in millions)                                 2020              2019            Variance
        Revenue:
        Coal Revenue                                $     771       $      1,289       $     (518 )
        Freight Revenue                                    40                 20               20
        Miscellaneous Other Income                         84                 23               61
        Total Revenue and Other Income                    895              1,332             (437 )
        Cost of Coal Sold:
        Operating Costs                                   543                846             (303 )
        Depreciation, Depletion and Amortization          171                175               (4 )
        Total Cost of Coal Sold                           714              1,021             (307 )
        Other Costs:
        Other Costs                                        44                 20               24
        Depreciation, Depletion and Amortization           27                 11               16
        Total Other Costs                                  71                 31               40
        Freight Expense                                    40                 20               20
        Selling, General and Administrative Costs          53                 63              (10 )
        Total Costs and Expenses                          878              1,135             (257 )
        Earnings Before Income Tax                  $      17       $        197       $     (180 )
        


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        Coal Production
        The table below presents total tons produced (in thousands) from the
        Pennsylvania Mining Complex for the periods indicated:
                      For the Years Ended December 31,
        Mine        2020              2019         Variance
        Bailey         8,669            12,218        (3,549 )
        Enlow          5,691            10,043        (4,352 )
        Harvey         4,410             5,024          (614 )
        Total         18,770            27,285        (8,515 )
        


Coal production was 18.8 million tons for the year ended December 31, 2020, compared to 27.3 million tons for the year ended December 31, 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 global demand destruction due to the COVID-19 pandemic and, in response, the widespread government-imposed shut-downs, which 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
        these periods were as follows:
                                                               For the Years Ended December 31,
                                                           2020               2019           Variance
        Total Tons Sold (in millions)                          18.7               27.3             (8.6 )
        Average Revenue per Ton Sold                   $      41.31       $      47.17     $      (5.86 )
        Average Cash Cost of Coal Sold per Ton (1)     $      29.12       $      30.97     $      (1.85 )
        Depreciation, Depletion and Amortization
        Costs per Ton Sold (Non-Cash Cost)                     9.12               6.40             2.72
        Average Cost of Coal Sold per Ton (1)          $      38.24       $      37.37     $       0.87
        Average Margin per Ton Sold (1)                $       3.07       $       9.80     $      (6.73 )
        Add: Depreciation, Depletion and
        Amortization Costs per Ton Sold                        9.12               6.40             2.72
        Average Cash Margin per Ton Sold (1)           $      12.19       $      16.20     $      (4.01 )
        


(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 $771 million for the year ended December 31, 2020, compared to $1,289 million for the year ended December 31, 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 reduced electricity consumption and, therefore, demand for the Company's coal. Additionally, lower natural gas prices as compared to the prior year contributed to electric generation trending toward gas, rather than coal, as a fuel source. The decrease in overall demand, including in both the domestic and export markets the Company serves, 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 $40 million for the year ended December 31, 2020, compared to $20 million for the year ended December 31, 2019. The $20 million increase was due to increased shipments to customers where the Company was contractually obligated to provide transportation services.

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Miscellaneous Other Income

Miscellaneous other income was $84 million for the year ended December 31, 2020, compared to $23 million for the year ended December 31, 2019. The $61 million increase was primarily the result of the sale of certain mining rights and additional customer contract buyouts in the year ended December 31, 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 $714 million for the year ended December 31, 2020, or $307 million lower than the $1,021 million for the year ended December 31, 2019. Average cost of coal sold per ton was $38.24 for the year ended December 31, 2020, compared to $37.37 for the year ended December 31, 2019. The decrease in the total cost of coal sold was primarily driven by decreased production activity during the year ended December 31, 2020, mainly in response to weakened market demand, while 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 $40 million in the year ended December 31, 2020 compared to the year ended December 31, 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 significantly reduced electricity consumption and industrial activity 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 $53 million for the year ended December 31, 2020, compared to $63 . . .

Feb 12, 2021

COMTEX_380764238/2041/2021-02-12T16:24:19

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