CONSOL COAL RESOURCES LP Unless otherwise indicated, the following discussion and analysis of the
financial condition and results of operations of our Partnership reflect a 25%
undivided interest in the assets, liabilities and results of operations of the
Overview
We are a master limited partnership formed in 2015 to manage and further develop
all of our sponsor's active coal operations in
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 cash margin per ton, an operating ratio derived from non-GAAP financial measures; (v) adjusted EBITDA, a non-GAAP financial measure; and (vi) distributable cash flow, a non-GAAP financial measure.
Cost of coal sold, cash cost of coal sold, average cash margin per ton, adjusted EBITDA and distributable cash flow 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 to make
distributions to our partners;
• 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, total coal revenue, 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 net income or net cash, 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, 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 GAAP measure most directly comparable to cost of coal sold is total costs. The cash cost of coal sold includes cost of coal sold less depreciation, depletion and amortization cost on production assets. The GAAP measure most directly comparable to cash cost of coal sold is total costs.
The following table presents a reconciliation of cost of coal sold and cash cost of coal sold to total costs, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
Years Ended December 31,
2019 2018
Total Costs $ 287,377 $ 290,609
Freight Expense (4,917 ) (10,893 )
Selling, General and Administrative Expenses (12,874 ) (13,931 )
Interest Expense, Net (6,604 ) (6,667 )
Other Costs (Non-Production) (5,650 ) (11,534 )
Depreciation, Depletion and Amortization (Non-Production) (2,130 ) (2,166 ) Cost of Coal Sold
$ 255,202 $ 245,418 Depreciation, Depletion and Amortization (Production) (43,677 ) (42,576 ) Cash Cost of Coal Sold$ 211,525 $ 202,842
We define average cash margin per ton as average coal revenue per ton, net of average cash cost of coal sold per ton. The GAAP measure most directly comparable to average cash margin per ton sold is total coal revenue.
The following table presents a reconciliation of average cash margin per ton to coal revenue, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated.
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Years Ended December 31,
2019 2018
Total Coal Revenue $ 322,132 $ 341,073
Operating and Other Costs 217,175 214,376
Less: Other Costs (Non-Production) (5,650 ) (11,534 )
Cash Cost of Coal Sold 211,525 202,842
Add: Depreciation, Depletion and Amortization 45,807 44,742
Less: Depreciation, Depletion and Amortization (Non-Production) (2,130 ) (2,166 ) Cost of Coal Sold
$ 255,202 $ 245,418 Total Tons Sold 6,829 6,920 Average Revenue per Ton Sold$ 47.17 $ 49.28 Average Cash Cost of Coal Sold per Ton 30.97 29.29 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 6.40 6.17 Average Cost of Coal Sold per Ton 37.37 35.46 Average Margin per Ton Sold 9.80 13.82 Add: Depreciation, Depletion and Amortization Costs per Ton Sold 6.40 6.17 Average Cash Margin per Ton Sold$ 16.20 $ 19.99
We define adjusted EBITDA as (i) net income (loss) before net interest expense,
depreciation, depletion and amortization, as adjusted for (ii) certain non-cash
items, such as long-term incentive awards including phantom units under the
We define distributable cash flow as (i) net income before net interest expense,
depreciation, depletion and amortization, as adjusted for (ii) certain non-cash
items, such as Unit-Based Compensation, less net cash interest paid and
estimated maintenance capital expenditures, which is defined as those forecasted
average capital expenditures required to maintain, over the long-term, the
operating capacity of our capital assets. These estimated capital expenditures
do not reflect the actual cash capital incurred in the period presented.
Distributable cash flow will not reflect changes in working capital balances.
The GAAP measures most directly comparable to distributable cash flow are net
income and net cash provided by operating activities. We define distribution
coverage ratio as a ratio of the distributable cash flow to the distributions,
which is the
The following table presents a reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, on a historical basis for each of the periods indicated. The table also presents a reconciliation of distributable cash flow to net income and operating cash flows, the most directly comparable GAAP financial measures, on a historical basis for each of the periods indicated.
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Years Ended December 31,
2019 2018
Net Income $ 45,551 $ 66,566
Plus:
Interest Expense, Net 6,604 6,667
Depreciation, Depletion and Amortization 45,807 44,742
Unit-Based Compensation 1,409 1,842
Adjusted EBITDA $ 99,371 $ 119,817 Less:
Cash Interest 7,473 7,217 Estimated Maintenance Capital Expenditures 35,911 35,949 Distributable Cash Flow$ 55,987 $ 76,651 Net Cash Provided by Operating Activities$ 81,125 $ 125,379
Plus:
Interest Expense, Net 6,604 6,667 Other, Including Working Capital 11,642 (12,229 ) Adjusted EBITDA$ 99,371 $ 119,817
Less:
Cash Interest 7,473 7,217 Estimated Maintenance Capital Expenditures 35,911 35,949 Distributable Cash Flow$ 55,987 $ 76,651 Minimum Distributions$ 57,619 $ 57,392 Distribution Coverage Ratio 1.0 1.3 52
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Results of Operations
Year Ended
Total net income was$45,551 for the year endedDecember 31, 2019 compared to$66,566 for the year endedDecember 31, 2018 . Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table. For the Years Ended December 31, 2019 2018 Variance Revenue: Coal Revenue$ 322,132 $ 341,073 $ (18,941 ) Freight Revenue 4,917 10,893 (5,976 ) Other Income 5,879 5,209 670 Total Revenue and Other Income 332,928 357,175 (24,247 ) Cost of Coal Sold: Operating Costs 211,525 202,842 8,683
Depreciation, Depletion and Amortization 43,677 42,576 1,101 Total Cost of Coal Sold
255,202 245,418 9,784
Other Costs:
Other Costs 5,650 11,534 (5,884 )
Depreciation, Depletion and Amortization 2,130 2,166 (36 ) Total Other Costs
7,780 13,700 (5,920 )
Freight Expense 4,917 10,893 (5,976 )
Selling, General and Administrative Expenses 12,874 13,931 (1,057 )
Interest Expense, Net 6,604 6,667 (63 )
Total Costs 287,377 290,609 (3,232 )
Net Income $ 45,551 $ 66,566 $ (21,015 )
Adjusted EBITDA $ 99,371 $ 119,817 $ (20,446 )
Distributable Cash Flow $ 55,987 $ 76,651 $ (20,664 )
Distribution Coverage Ratio 1.0 1.3 (0.3 )
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Coal Production Rates
The table below presents total tons produced from the
Years Ended December 31,
Mine 2019 2018 Variance
Bailey 3,054 3,184 (130 )
Enlow Fork 2,511 2,469 42
Harvey 1,256 1,245 11
Total 6,821 6,898 (77 )
Coal production was 6,821 tons for the year ended
Coal revenue and cost components on a per unit basis for the years ended
For the Years Ended December 31,
2019 2018 Variance
Total Tons Sold 6,829 6,920 (91 )
Average Revenue per Ton Sold $ 47.17 $ 49.28 $ (2.11 )
Average Cash Cost of Coal Sold per Ton (1) $ 30.97 $ 29.29 $ 1.68 Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost)
6.40 6.17 0.23
Average Cost of Coal Sold per Ton $ 37.37 $ 35.46 $ 1.91
Average Margin per Ton Sold (1) $ 9.80 $ 13.82 $ (4.02 ) Add: Depreciation, Depletion and Amortization Costs per Ton Sold
6.40 6.17 0.23
Average Cash Margin per Ton Sold (1) $ 16.20 $ 19.99 $ (3.79 ) (1) Average cash cost of coal sold per ton, average margin per ton sold and average cash margin per ton sold are each an operating ratio 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.
Revenue and Other Income
Coal revenue was
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 for which we contractually provide transportation services. Freight
revenue is completely offset in freight expense. Freight revenue and freight
expense were both
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Other income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income remained materially consistent in the period-to-period comparison.
Cost of Coal Sold
Cost of coal sold is comprised of operating costs related to produced tons sold,
along with changes in both volumes and carrying values of coal inventory. The
cost of coal sold per ton includes items such as direct operating costs,
royalties and production taxes, direct administration expenses, and
depreciation, depletion and amortization costs on production assets. Total cost
of coal sold was
Total Other Costs
Total other costs are comprised of various costs that are not allocated to each
individual mine and therefore are not included in unit costs. Total other costs
decreased
Selling, General and Administrative Expense
Selling, General and Administrative expenses were
Interest Expense
Interest expense, which primarily relates to obligations under our Affiliated Company Credit Agreement, remained materially consistent in the year-to-year comparison.
Adjusted EBITDA
Adjusted EBITDA was
Distributable Cash Flow
Distributable cash flow was
Capital Resources and Liquidity
Liquidity and Financing Arrangements
Our ongoing sources of liquidity include cash generated from operations,
borrowings under our Affiliated Company Credit Agreement, and, if necessary, the
ability to issue additional equity or debt securities (either directly or
indirectly). We believe that cash generated from these sources will be
sufficient to meet our short-term working capital requirements and our long-term
capital expenditure requirements. The Partnership filed a universal shelf
registration on Form S-3 (333-215962) on
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We believe our strong contracted position, consistent cost control measures and liquidity will allow us to fund our 2020 capital and operating expenses. As further described below, we experienced longer delays in collections of accounts receivable in 2019. If these delays continue or become longer, we may have less cash flow from operations. As we move into 2020, we will continue to monitor the creditworthiness of our customers.
We started a capital construction project on the coarse refuse disposal area
project in 2017, which is expected to continue through 2021. Our 2020 capital
needs, including the coarse refuse disposal area project, are expected to be
between
We expect to generate adequate cash flows and liquidity to meet reasonable increases in the cost of supplies that are passed on from our suppliers. We will also continue to seek alternate sources of supplies and replacement material to offset any unexpected increase in the cost of supplies.
Uncertainty in the financial markets brings additional potential risks to the
Partnership. These risks include declines in the Partnership's stock price, less
availability and higher costs of additional credit, potential counterparty
defaults, and commercial bank failures. Financial market disruptions may impact
the Partnership's collection of trade receivables. As a result, the Partnership
regularly monitors the creditworthiness of its customers and counterparties and
manages credit exposure through payment terms, credit limits, prepayments and
security. Given the state of the current global coal market, as well as the
impact of trade tariffs, the Partnership has experienced slowing of collections
within its customer group. The Partnership does not believe that this represents
an abnormal business risk, and expects this trend to reverse in 2020 given the
passage of the 'Phase I' trade agreement with
Our Partnership Agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon financing under the Affiliated Company Credit Agreement and the issuance of debt and equity securities to fund our acquisitions and expansion capital expenditures, if any.
On
Affiliated Company Credit Agreement
On
Interest on outstanding obligations under our Affiliated Company Credit Agreement accrues at a fixed rate ranging from 3.75% to 4.75% depending on the total net leverage ratio. The unused portion of our Affiliated Company Credit Agreement is subject to a commitment fee of 0.50% per annum.
As of
The Affiliated Company Credit Agreement contains certain covenants and
conditions that, among other things, limit the Partnership's ability to: (i)
incur or guarantee additional debt; (ii) make cash distributions (subject to
certain limited exceptions); provided that we will be able to make cash
distributions of available cash to partners so long as no event of default is
continuing or would result therefrom; (iii) incur certain liens or permit them
to exist; (iv) make particular investments and loans; provided that we will be
able to increase our ownership percentage of our undivided interest in the
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For example, the Partnership is obligated to maintain at the end of each fiscal
quarter (a) maximum first lien gross leverage ratio of 2.75 to 1.00 and (b) a
maximum total net leverage ratio of 3.25 to 1.00, each of which will be
calculated on a consolidated basis for the Partnership and its restricted
subsidiaries at the end of each fiscal quarter. At
Receivables Financing Agreement
On
Pursuant to the Securitization, (i)
Loans under the Securitization will 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 will 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
The SPV's assets and credit are not available to satisfy the debts and
obligations owed to the creditors of CONSOL Energy,
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.
As of
For the Years Ended December 31,
2019 2018 Variance
Cash flows provided by operating activities
$ (37,171 ) $ (30,973 ) $ (6,198 ) Cash used in financing activities$ (44,414 ) $ (94,936 ) $ 50,522 57
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Year Ended
Cash provided by operating activities decreased
Cash flows used in investing activities increased
For the Years Ended December 31,
2019 2018 Variance
Building and Infrastructure $ 16,223 $ 11,196 $ 5,027
Equipment Purchases and Rebuilds 10,671 9,437 1,234
Refuse Storage Area 7,931 8,572 (641 )
Other 2,352 1,938 414
Total Capital Expenditures $ 37,177 $ 31,143 $ 6,034 Cash flows used in financing activities decreased
We do not maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that have or are reasonably likely to have a material current or future effect on our 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 Audited Consolidated Financial Statements of this Form 10-K. Critical Accounting Policies
Critical accounting policies are those that are important to our financial condition and require management's most difficult, subjective or complex judgments. Different amounts would be reported under different operating conditions or under alternative assumptions. We have evaluated the accounting policies used in the preparation of the accompanying financial statements and related notes thereto and believe those policies are reasonable and appropriate.
We apply those accounting policies that we believe best reflect the underlying business and economic events, consistent with GAAP. Our more critical accounting policies include those related to the following items, but refer to Note 1 (Significant Accounting Policies) of the audited consolidated financial statements included elsewhere in this report for a complete listing of our accounting policies.
Asset Retirement Obligations
The Surface Mining Control and Reclamation Act established operational, reclamation and closure standards for all aspects of surface mining as well as most aspects of deep mining. Accounting for asset retirement obligations requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. Asset retirement obligations primarily relate to the reclamation of land upon mine closure, the treatment of mine water discharge where necessary, and the plugging of gas wells acquired for mining purposes. Changes in the assumptions used to calculate the liabilities can have a significant effect on the asset retirement obligations. We accrue for the costs of current mine disturbance and final mine and gas well closure, including the cost of treating mine water discharge where
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necessary. Estimates of our total asset retirement obligations, which are based
upon permit requirements and our engineering expertise related to these
requirements, including the current portion, were
The Partnership believes that the accounting estimates related to asset retirement obligations are "critical accounting estimates" because the Partnership must assess the expected amount and timing of asset retirement obligations. In addition, the Partnership must determine the estimated present value of future liabilities. Future results of operations for any particular quarterly or annual period could be materially affected by changes in the Partnership's assumptions.
Recoverable Coal Reserve Values
There are numerous uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our recoverable coal reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff. Some of the factors and assumptions which impact economically recoverable coal reserve estimates include:
• geological conditions;
• historical production from the area compared with production from other
producing areas;
• the assumed effects of regulations and taxes by governmental agencies;
• assumptions governing future prices; and
• future operating costs.
Each of these factors may in fact vary considerably from the assumptions used in estimating recoverable coal reserves. For these reasons, estimates of the economically recoverable quantities of coal attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to our recoverable coal reserves will likely vary from estimates, and these variances may be material.
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