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 thePennsylvania Mining Complex . As used in the following discussion and analysis of the financial condition and results of operations of our Partnership, the terms "we," "our," "us," or like terms refer to the Partnership with respect to its 25% undivided interest in thePennsylvania Mining Complex's combined assets, liabilities, revenues and costs. All amounts discussed in this section are in thousands, except for per unit or per ton amounts, unless otherwise indicated. COVID-19 Update The Partnership is monitoring the impact of the COVID-19 pandemic and has taken, and will continue to take, steps to mitigate the potential risks and impact on the Partnership. The health and safety of our sponsor's employees is paramount. In response to two of our sponsor's employees testing positive for COVID-19, our sponsor temporarily curtailed production at theBailey Mine for two weeks at the end of March. Second quarter production at theBailey Mine began onApril 13th . Our sponsor continues to monitor the health and safety of its employees closely in order to limit potential risks to its employees, contractors, family members, and the community. We are considered a critical infrastructure company by theU.S. Department of Homeland Security . As a result, we were exempt fromPennsylvania GovernorTom Wolf's executive order, issued inMarch 2020 , closing all businesses that are not life sustaining. The coal demand decline that began in the first quarter continued through the second quarter and into the third quarter of 2020, driven by the widespread lockdowns caused by COVID-19. In response to the decline in demand for our coal, our sponsor announced onApril 14, 2020 that it temporarily idled production at the Enlow Fork mine, and temporarily idled production at the Bailey mine onMay 2, 2020 . Limited production began again at theBailey Mine onJune 8, 2020 . This decline in coal demand has negatively impacted our operational, sales, and financial performance year-to-date, and we expect that this negative impact will continue as the pandemic continues. While some of the government-imposed shutdowns of nonessential business inthe United States and abroad have been phased out, there is a possibility that such shutdowns may be reimposed 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 shutdowns 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. Due to the current level of uncertainty over the economic and operational impacts of COVID-19, the Partnership withdrew its previously announced operational and financial guidance for 2020 in the first quarter. The Partnership will continue to take the appropriate steps to mitigate the impacts of COVID-19 on the Partnership's operations, liquidity and financial condition. 19
--------------------------------------------------------------------------------
Table of Contents Overview We are a master limited partnership formed in 2015 to manage and further develop all of our sponsor's active coal operations inPennsylvania . Our primary strategy for growing our business is to increase operating efficiencies to maximize realizations and make acquisitions that increase our distributable cash flow. AtJune 30, 2020 , the Partnership's assets include a 25% undivided interest in, and operational control over, CONSOLEnergy's Pennsylvania Mining Complex , which consists of three underground mines and related infrastructure that produce high-Btu coal that is sold primarily to electric utilities in the easternUnited States . We believe that 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 position us as a leading producer of high-Btu thermal coal in theNorthern Appalachian Basin and the easternUnited States .
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.
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 and cash 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.
20--------------------------------------------------------------------------------
Table of Contents
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.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Total Costs $ 41,681 $ 75,260 $ 108,885 $ 146,147
Freight Expense (771 ) (964 ) (1,558 ) (2,629 )
Selling, General and Administrative
Expenses (2,360 ) (2,953 ) (6,406 ) (7,513 )
Interest Expense, Net (2,254 ) (1,557 ) (4,409 ) (2,908 )
Other Costs (Non-Production) (9,881 ) (907 ) (10,321 ) (3,171 )
Depreciation, Depletion and Amortization
(Non-Production) (4,112 ) (509 ) (4,645 ) (1,086 )
Cost of Coal Sold $ 22,303 $ 68,370 $ 81,546 $ 128,840
Depreciation, Depletion and Amortization
(Production) (7,408 ) (10,827 ) (18,803 ) (21,467 )
Cash Cost of Coal Sold $ 14,895 $ 57,543 $ 62,743 $ 107,373
We define average cash margin per ton sold as average coal revenue per ton sold,
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
sold to total coal revenue, the most directly comparable GAAP financial measure,
on a historical basis, for each of the periods indicated.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Total Coal Revenue $ 25,507 $ 87,655 $ 89,370 $ 170,781
Operating and Other Costs 24,776 58,450 73,064 110,544
Less: Other Costs (Non-Production) (9,881 ) (907 ) (10,321 ) (3,171 )
Cash Cost of Coal Sold 14,895 57,543 62,743 107,373
Add: Depreciation, Depletion and
Amortization 11,520 11,336 23,448 22,553
Less: Depreciation, Depletion and
Amortization (Non-Production) (4,112 ) (509 ) (4,645 ) (1,086 )
Cost of Coal Sold $ 22,303 $ 68,370 $ 81,546 $ 128,840
Total Tons Sold 582 1,844 2,062 3,527
Average Revenue per Ton Sold $ 43.82 $ 47.53 $ 43.34 $ 48.41
Average Cash Cost of Coal Sold per Ton 25.90 31.07 30.55 30.42
Add: Depreciation, Depletion and
Amortization Costs per Ton Sold 12.42 6.00 9.00 6.10
Average Cost of Coal Sold per Ton
5.50 10.46 3.79 11.89
Add: Total Depreciation, Depletion and
Amortization Costs per Ton Sold 12.42 6.00 9.00 6.10
Average Cash Margin per Ton Sold $ 17.92 $ 16.46 $ 12.79 $ 17.99
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
CONSOL Coal Resources LP 2015 Long-Term Incentive Plan ("Unit-Based
Compensation"). The GAAP measure most directly comparable to adjusted EBITDA is
net income.
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.
21--------------------------------------------------------------------------------
Table of Contents
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.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net (Loss) Income $ (7,854 ) $ 14,387 $ (7,690 ) $ 29,607
Plus:
Interest Expense, Net 2,254 1,557 4,409 2,908
Depreciation, Depletion and Amortization 11,520 11,336 23,448 22,553
Unit-Based Compensation 74 341 233 738
Adjusted EBITDA $ 5,994 $ 27,621 $ 20,400 $ 55,806
Less:
Cash Interest 2,237 1,815 4,324 3,690
Estimated Maintenance Capital Expenditures 8,423 9,028 17,295 18,009
Distributable Cash Flow $ (4,666 ) $
16,778
Net Cash Provided by Operating Activities$ 6,539 $ 21,860 $ 23,316 $ 47,078 Plus: Interest Expense, Net 2,254 1,557 4,409 2,908 Other, Including Working Capital (2,799 ) 4,204 (7,325 ) 5,820 Adjusted EBITDA$ 5,994 $ 27,621 $ 20,400 $ 55,806 Less: Cash Interest 2,237 1,815 4,324 3,690 Estimated Maintenance Capital Expenditures 8,423 9,028 17,295 18,009 Distributable Cash Flow$ (4,666 ) $ 16,778 $ (1,219 ) $ 34,107 22
--------------------------------------------------------------------------------
Table of Contents Results of Operations
Three Months Ended
Total net (loss) income was ($7,854 ) for the three months endedJune 30, 2020 compared to$14,387 for the three months endedJune 30, 2019 . Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table. For the Three Months Ended June 30, 2020 2019 Variance Revenue: Coal Revenue$ 25,507 $ 87,655 $ (62,148 ) Freight Revenue 771 964 (193 ) Other Income 7,549 1,028 6,521 Total Revenue and Other Income 33,827 89,647 (55,820 ) Cost of Coal Sold: Operating Costs 14,895 57,543 (42,648 ) Depreciation, Depletion and Amortization 7,408 10,827 (3,419 ) Total Cost of Coal Sold 22,303 68,370 (46,067 ) Other Costs: Other Costs 9,881 907 8,974
Depreciation, Depletion and Amortization 4,112 509
3,603 Total Other Costs 13,993 1,416 12,577 Freight Expense 771 964 (193 ) Selling, General and Administrative Expenses 2,360 2,953 (593 ) Interest Expense, Net 2,254 1,557 697 Total Costs 41,681 75,260 (33,579 ) Net (Loss) Income$ (7,854 ) $ 14,387 $ (22,241 ) Adjusted EBITDA$ 5,994 $ 27,621 $ (21,627 ) Distributable Cash Flow$ (4,666 ) $ 16,778 $ (21,444 ) 23
--------------------------------------------------------------------------------
Table of Contents Coal Production
The table below presents total tons produced from the
Three Months Ended June 30,
Mine 2020 2019 Variance
Bailey 251 807 (556 )
Enlow Fork 61 615 (554 )
Harvey 284 384 (100 )
Total 596 1,806 (1,210 )
Coal production was 596 tons for the three months ended June 30, 2020 compared
to 1,806 tons for the three months ended June 30, 2019 . Coal production
decreased 1,210 tons primarily due to the temporary idling of longwalls at the
Bailey and Enlow Fork mines in response to the decline in global demand due to
the COVID-19 pandemic. The widespread government-imposed shutdowns in various
parts of the world significantly reduced electricity consumption and, therefore,
demand for the Partnership's coal.
Coal Operations
Coal revenue and cost components on a per-unit basis for the three months ended
June 30, 2020 and 2019 are detailed in the table below. Our operations also
include various costs such as selling, general and administrative, freight and
other costs not included in our unit cost analysis because these costs are not
directly associated with coal production.
Three Months Ended June 30,
2020 2019 Variance
Total Tons Sold 582 1,844 (1,262 )
Average Revenue per Ton Sold $ 43.82 $
47.53
Average Cash Cost of Coal Sold per Ton (1)$ 25.90 $ 31.07 $ (5.17 ) Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost) 12.42 6.00 6.42 Average Cost of Coal Sold per Ton$ 38.32 $ 37.07 $ 1.25 Average Margin per Ton Sold$ 5.50 $ 10.46 $ (4.96 ) Add: Depreciation, Depletion and Amortization Costs per Ton Sold 12.42 6.00 6.42 Average Cash Margin per Ton Sold (1)$ 17.92 $ 16.46 $ 1.46
(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$25,507 for the three months endedJune 30, 2020 compared to$87,655 for the three months endedJune 30, 2019 . Total tons sold decreased in the period-to-period comparison in response to weakened customer demand due to the COVID-19 pandemic and, in response, the widespread government-imposed shutdowns, which have significantly reduced electricity consumption and, therefore, demand for the Partnership's coal. The decrease in customer demand resulted in lower pricing received on our sales contracts. 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$771 for the three months endedJune 30, 2020 compared to$964 for the three months endedJune 30, 2019 . The$193 decrease was due to decreased shipments to customers where we were contractually obligated to provide transportation services. 24
--------------------------------------------------------------------------------
Table of Contents
Other income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income was$7,549 for the three months endedJune 30, 2020 compared to$1,028 for the three months endedJune 30, 2019 . The$6,521 increase was primarily the result of additional customer contract buyouts in the three months endedJune 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 the coal quantities several customers were previously committed to purchase under the contracts in exchange for payment of certain fees to us, 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 volumes and carrying values of coal inventory. The cost of coal sold 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$22,303 for the three months endedJune 30, 2020 , or$46,067 lower than the$68,370 for the three months endedJune 30, 2019 . Average cost of coal sold per ton was$38.32 per ton for the three months endedJune 30, 2020 , compared to$37.07 per ton for the three months endedJune 30, 2019 . The decrease in the total cost of coal sold was primarily driven by decreased production activity during the three months endedJune 30, 2020 , in response to weakened commodity markets. On a per-unit basis, the decreased production resulted in an overall increase in the average cost of coal sold per ton. 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 increased$12,577 for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The increase was primarily attributable to$11,532 in costs related to the temporary idling of the Bailey andEnlow Fork mines due to the impact of COVID-19 on demand for the Partnership's coal.
Selling, General, and Administrative Expense
Selling, general, and administrative expenses remained materially consistent in the period-to-period comparison.
Interest Expense Interest expense, which primarily relates to obligations under our Affiliated Company Credit Agreement, remained materially consistent in the period-to-period comparison. Adjusted EBITDA Adjusted EBITDA was$5,994 for the three months endedJune 30, 2020 compared to$27,621 for the three months endedJune 30, 2019 . The$21,627 decrease was primarily a result of a$19,500 decrease in the cash margin and an increase in non-production related costs, partially offset by higher non-production related income, as discussed above. Distributable Cash Flow Distributable cash flow was ($4,666 ) for the three months endedJune 30, 2020 compared to$16,778 for the three months endedJune 30, 2019 . The$21,444 decrease was primarily attributable to a$21,627 decrease in Adjusted EBITDA, as discussed above. 25
--------------------------------------------------------------------------------
Table of Contents
Six Months Ended
Total net (loss) income was
For the Six Months Ended
June 30,
2020 2019 Variance
Revenue:
Coal Revenue $ 89,370 $ 170,781 $ (81,411 )
Freight Revenue 1,558 2,629 (1,071 )
Other Income 10,267 2,344 7,923
Total Revenue and Other Income 101,195 175,754 (74,559 )
Cost of Coal Sold:
Operating Costs 62,743 107,373 (44,630 )
Depreciation, Depletion and Amortization 18,803 21,467 (2,664 )
Total Cost of Coal Sold 81,546 128,840 (47,294 )
Other Costs:
Other Costs 10,321 3,171 7,150
Depreciation, Depletion and Amortization 4,645 1,086 3,559
Total Other Costs 14,966 4,257 10,709
Freight Expense 1,558 2,629 (1,071 )
Selling, General and Administrative Expenses 6,406 7,513 (1,107 )
Interest Expense, Net 4,409 2,908 1,501
Total Costs 108,885 146,147 (37,262 )
Net (Loss) Income $ (7,690 ) $ 29,607 $ (37,297 )
Adjusted EBITDA $ 20,400 $ 55,806 $ (35,406 )
Distributable Cash Flow $ (1,219 ) $ 34,107 $ (35,326 )
26--------------------------------------------------------------------------------
Table of Contents Coal Production
The table below presents total tons produced from the
Six Months Ended June 30,
Mine 2020 2019 Variance
Bailey 953 1,543 (590 )
Enlow Fork 654 1,323 (669 )
Harvey 483 652 (169 )
Total 2,090 3,518 (1,428 )
Coal production was 2,090 tons for the six months ended June 30, 2020 compared
to 3,518 tons for the six months ended June 30, 2019 . Coal production decreased
1,428 tons 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
shutdowns, which have significantly reduced electricity consumption and,
therefore, demand for the Partnership's coal.
Coal Operations
Coal revenue and cost components on a per-unit basis for the six months ended
June 30, 2020 and 2019 are detailed in the table below. Our operations also
include various costs such as selling, general and administrative, freight and
other costs not included in our unit cost analysis because these costs are not
directly associated with coal production.
Six Months Ended June 30,
2020 2019 Variance
Total Tons Sold 2,062 3,527 (1,465 )
Average Revenue per Ton Sold $ 43.34 $ 48.41
Average Cash Cost of Coal Sold per Ton (1)
$ 0.13 Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost) 9.00 6.10 2.90 Average Cost of Coal Sold per Ton$ 39.55 $ 36.52 $ 3.03 Average Margin per Ton Sold$ 3.79 $ 11.89 $ (8.10 ) Add: Depreciation, Depletion and Amortization Costs per Ton Sold 9.00 6.10 2.90 Average Cash Margin per Ton Sold (1)$ 12.79 $ 17.99 $ (5.20 )
(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$89,370 for the six months endedJune 30, 2020 compared to$170,781 for the six months endedJune 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 and, in response, the widespread government-imposed shutdowns, which have significantly reduced electricity consumption and, therefore, demand for the Partnership's coal. The decrease in customer demand resulted in lower pricing received on our sales contracts. 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$1,558 for the six months endedJune 30, 2020 compared to$2,629 for the six months endedJune 30, 2019 . The$1,071 decrease was due to decreased shipments to customers where we were contractually obligated to provide transportation services. 27
--------------------------------------------------------------------------------
Table of Contents
Other income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income was$10,267 for the six months endedJune 30, 2020 compared to$2,344 for the six months endedJune 30, 2019 . The$7,923 increase was primarily the result of additional customer contract buyouts in the six months endedJune 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 the coal quantities several customers were previously committed to purchase under the contracts in exchange for payment of certain fees to us, 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 volumes and carrying values of coal inventory. The cost of coal sold 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$81,546 for the six months endedJune 30, 2020 , or$47,294 lower than the$128,840 for the six months endedJune 30, 2019 . Average cost of coal sold per ton was$39.55 per ton for the six months endedJune 30, 2020 , compared to$36.52 per ton for the six months endedJune 30, 2019 . The decrease in the total cost of coal sold was primarily driven by decreased production activity during the six months endedJune 30, 2020 in response to weakened commodity markets. On a per-unit basis, the decreased production resulted in an overall increase in the average cost of coal sold per ton. 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 increased$10,709 for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . The increase was primarily attributable to$11,532 in costs related to the temporary idling of the Bailey andEnlow 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 Partnership's coal.
Selling, General, and Administrative Expense
Selling, general, and administrative expenses decreased
Interest Expense Interest expense, which primarily relates to obligations under our Affiliated Company Credit Agreement increased$1,501 primarily due to less interest capitalized in the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Adjusted EBITDA Adjusted EBITDA was$20,400 for the six months endedJune 30, 2020 compared to$55,806 for the six months endedJune 30, 2019 . The$35,406 decrease was primarily a result of a$36,781 decrease in the cash margin and an increase in non-production related costs, partially offset by higher non-production related income, as discussed above. Distributable Cash Flow
Distributable cash flow was
28
--------------------------------------------------------------------------------
Table of Contents
Capital Resources and Liquidity
Liquidity and Financing Arrangements
Our ongoing potential 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 should be sufficient to meet our short-term working capital requirements and our long-term capital expenditure requirements. The demand for coal experienced unprecedented decline towards the end of the first quarter of 2020, and continued through the second quarter and into the third quarter of 2020, driven by the widespread government-imposed lockdowns caused by the COVID-19 pandemic, which has drastically reduced electricity usage, and therefore, demand for our coal. This decline in coal demand has negatively impacted our operational, sales and financial performance year-to-date and we expect that this negative impact will continue as the pandemic continues. While some of the government-imposed shutdowns of nonessential business inthe United States and abroad have been phased out, there is a possibility that such shutdowns may be reimposed 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 shutdown 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. Due to the current level of uncertainty over the economic and operational impacts of COVID-19, the Partnership will continue to take the appropriate steps to mitigate the impact of COVID-19 on the Partnership's operations, liquidity and financial condition. During the first quarter, the Partnership withdrew its previously announced operational and financial guidance for 2020. OnApril 14, 2020 we announced our temporary idling of theEnlow Fork Mine due to the weakness in coal demand and economic slowdown related to the pandemic. The temporary idling of theBailey Mine was announced onMay 2, 2020 , and limited production began again at theBailey Mine onJune 8, 2020 . Cost containment and capital expenditure reductions remains the focus as volume opportunities remain limited in the near term. We believe that the recent credit amendment to our affiliate loan facility with CONSOL Energy, as discussed below, allows us to maintain access to our primary source of liquidity. From an operational standpoint, our contracted position has partially insulated us from the ongoing volatility in the spot market and management has embarked on several cost control measures to partially offset the decline in revenue. We experienced some delays in collections of trade receivables in 2019. The COVID-related decline in demand has impacted some of our customers, resulting in continued delays in collections. We expect that this trend will improve as global demand for coal improves over the coming months. However, if these delays continue or increase, we may have less cash flow from operations. We started a capital construction project on the coarse refuse disposal area in 2017, which is expected to continue through 2021. We have taken steps to reduce other capital expenditures and explore alternative sources of capital, including closing on the refinancing of a shield rebuild using a finance lease transaction in the first quarter of 2020, which generated cash proceeds of$4.1 million . Uncertainty in the financial markets brings additional potential risks to the Partnership. These risks include declines in the Partnership's unit 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. Our Partnership Agreement requires that we distribute all of our available cash, if any, to our unitholders. In determining our available cash, in accordance with our Partnership Agreement, our general partner determines the amount of cash reserves needed to properly conduct our business in subsequent quarters. 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. Due to the ongoing uncertainty in the commodity markets, driven by the COVID-19 pandemic-related demand decline, onApril 23, 2020 , the Board of Directors of our general partner made the decision to temporarily suspend the quarterly distribution to all of our unitholders and onJuly 29, 2020 , the Board of Directors decided to uphold this suspension. While the Partnership did generate cash flow from operations during the six months endedJune 30, 2020 , the ongoing decline in Adjusted EBITDA has impaired our leverage ratio, and the cushion against the financial covenants contained in our credit facilities has been reduced. Accordingly, we will focus on deleveraging our balance sheet by conserving cash, boosting liquidity and reducing our outstanding debt. 29
--------------------------------------------------------------------------------
Table of Contents
OnJuly 25, 2019 , the Board of Directors of our general partner announced that upon payment of the cash distribution with respect to the quarter endedJune 30, 2019 , the financial requirements for the conversion of all subordinated units had been satisfied. As a result, onAugust 16, 2019 , all 11,611,067 subordinated units, which were 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 the Partnership's outstanding units representing limited partner interests. The Partnership 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 half of 2020 to reinforce our liquidity. From a shipment perspective, the decrease in demand for our coal as a result of the COVID-19 pandemic hit its lowest point to date in May and has since shown some modest improvement. However, continued reduced demand for our coal could materially and adversely affect our liquidity in future quarters. Our Affiliated Company Credit Agreement and Securitization Facility (collectively, the "Credit Facilities") contain certain financial covenants. Although theJune 2020 amendment loosens these covenants, events resulting from the effects of COVID-19 may nevertheless negatively impact our liquidity and, as a result, our ability to comply with these covenants, which could lead us to seek an additional amendment 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.
Affiliated Company Credit Agreement
OnNovember 28, 2017 , the Partnership and the other Credit Parties entered into the Affiliated Company Credit Agreement by and among the Credit Parties, CONSOL Energy, as lender and administrative agent, and PNC, as collateral agent. OnJune 5, 2020 , the Partnership 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 theAffiliated 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 ofDecember 28, 2024 . The Affiliated Company Credit Agreement provides for a revolving credit facility in an aggregate principal amount of up to$275,000 to be provided by CONSOL Energy, as lender. In connection with the Partnership's entry into the Affiliated Company Credit Agreement, the Partnership made an initial draw of$200,583 , the net proceeds of which were used to repay the amounts outstanding under the Partnership's prior credit facility. Additional drawings under the Affiliated Company Credit Agreement are available for general partnership purposes. The obligations under the Affiliated Company Credit Agreement are guaranteed by the Partnership's subsidiaries and secured by substantially all of the assets of the Partnership and its subsidiaries pursuant to the security agreement and various mortgages. Interest on outstanding obligations under our Affiliated Company Credit Agreement accrues at a fixed rate ranging from 4.25% to 5.25%, 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; provided that we will be able to make cash distributions of available cash to partners so long as the Partnership's first lien gross leverage ratio shall not be greater than 2.00 to 1.00, the fixed charge coverage ratio shall be not less than 1.00 to 1.00, and 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 thePennsylvania Mining Complex and make investments in thePennsylvania Mining Complex in accordance with our ratable ownership; (v) enter into certain types of transactions with affiliates; (vi) merge or consolidate with another company; and (vii) transfer, sell or otherwise dispose of assets. The Partnership is also subject to covenants that require the Partnership to maintain certain financial ratios, each of which will be calculated on a consolidated basis for the Partnership and its restricted subsidiaries at the end of each fiscal quarter. The amendment revised the financial covenants in the Affiliated Company Credit Agreement, so that for the fiscal quarters endingJune 30, 2020 throughMarch 31, 2021 , the maximum first lien gross leverage ratio shall be 3.75 to 1.00 and the maximum total net leverage ratio shall be 4.00 to 1.00; for the fiscal quarters endingJune 30, 2021 throughSeptember 30, 2021 , the maximum first lien gross leverage ratio shall be 3.50 to 1.00 and the maximum total net leverage ratio shall be 3.75 to 1.00; for the fiscal quarters endingDecember 31, 2021 throughMarch 31, 2022 , the maximum first lien gross leverage ratio shall be 3.00 to 1.00 and the maximum total net leverage ratio shall be 3.50 to 1.00; and for the fiscal quarters ending on or afterJune 30, 2022 , the maximum first lien gross leverage ratio shall be 2.75 to 1.00 and the maximum total net leverage ratio shall be 3.25 to 1.00. AtJune 30, 2020 , the Partnership was in compliance with its financial covenants with a first lien gross leverage ratio at 2.93 to 1.00 and a total net leverage ratio at 2.93 to 1.00.
Receivables Financing Agreement
OnNovember 30, 2017 , (i)CONSOL Marine Terminals LLC , as an originator of receivables, (ii) CPCC, 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"), as buyer, entered into a Purchase and Sale Agreement (the "Purchase and Sale Agreement"). Concurrently, (i)CONSOL Thermal Holdings , as sub-originator, and (ii) CPCC, as buyer and as initial servicer of the receivables for itself andCONSOL Thermal Holdings , entered into a Sub-Originator Agreement (the "Sub-Originator PSA"). In addition, on that date, the SPV entered into a Receivables Financing Agreement (the "Receivables Financing Agreement") by and among (i) the SPV, as borrower, (ii) CPCC, as initial servicer, (iii) PNC, 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"). InMarch 2020 , the Securitization was amended, among other things, to extend the scheduled termination date toMarch 27, 2023 . 30
--------------------------------------------------------------------------------
Table of Contents
Pursuant to the Securitization, (i)CONSOL Thermal Holdings will sell current and future trade receivables to CPCC and (ii) the Originators will sell and/or contribute current and future trade receivables (including receivables sold to CPCC byCONSOL Thermal Holdings ) to the SPV and the SPV will, in turn, pledge its interests in the receivables to PNC, which will either make loans or issue letters of credit on behalf of the SPV. The maximum amount of advances and letters of credit outstanding under the Securitization may not exceed$100,000 . 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 toPNC 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,CONSOL Thermal Holdings or any of the Originators.CONSOL Thermal Holdings , the Originators and CPCC 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 ofCONSOL Thermal Holdings , the Originators and CPCC 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.
As of
Cash Flows
Six Months Ended June 30,
2020 2019 Variance
Cash flows provided by operating activities
$ (9,234 ) $ (18,042 ) $
8,808
Cash used in financing activities$ (14,523 ) $ (29,579 ) $ 15,056
Six Months Ended
Cash provided by operating activities decreased$23,762 in the period-to-period comparison, primarily due to a decrease in net income, partially offset by other working capital changes that occurred throughout both periods. Cash used in investing activities decreased$8,808 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. 31
--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30,
2020 2019 Variance
Building and Infrastructure $ 4,785 $ 7,959 $ (3,174 )
Equipment Purchases and Rebuilds 2,401 5,152 (2,751 )
Refuse Storage Area 1,736 3,317 (1,581 )
Other 317 1,618 (1,301 )
Total Capital Expenditures $ 9,239 $ 18,046 $ (8,807 )
Cash flows used in financing activities decreased $15,056 in the six months
ended June 30, 2020 compared to the six months ended June 30, 2019 . The decrease
was primarily due to the temporary suspension of the quarterly distribution
payment to all unitholders, as discussed above, which resulted in a $14,375
decrease to cash used in financing activities. In addition, the decrease was due
to $4,073 of proceeds received in the six months ended June 30, 2020 related to
a finance leasing arrangement, partially offset by higher discretionary payments
made under the Affiliated Company Credit Agreement. Net payments made under the
Affiliated Company Credit Agreement increased $3,365 in the period-to-period
comparison.
Off-Balance Sheet Arrangements
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 unaudited Consolidated Financial Statements in
this Form 10-Q.
FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Quarterly Report on
Form 10-Q to make applicable and take advantage of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of us. 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 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 "believe," "continue,"
"intend," "expect," "may," "should," "anticipate," "could," "estimate," "plan,"
"predict," "project," "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 effects the COVID-19 pandemic has on our business and results of
operations and the global economy;
• changes in coal prices or the costs of mining or transporting coal;
• uncertainty in estimating economically recoverable coal reserves and
replacement of reserves;
• our ability to develop our existing coal reserves, acquire additional reserves
and successfully execute our mining plans;
• defects in title or loss of any leasehold interests with respect to our
properties;
• changes in general economic conditions, both domestically and globally;
• competitive conditions within the coal industry;
• changes in the consumption patterns of coal-fired power plants and steelmakers
and other factors affecting the demand for coal by coal-fired power plants and
steelmakers;
• the availability and price of coal to the consumer compared to the price of
alternative and competing fuels;
• competition from the same and alternative energy sources;
• energy efficiency and technology trends;
• our ability to successfully implement our business plan;
• the price and availability of debt and equity financing;
32--------------------------------------------------------------------------------
Table of Contents • operating hazards and other risks incidental to coal mining;
• major equipment failures and difficulties in obtaining equipment, parts and
raw materials;
• availability, reliability and costs of transporting coal;
• adverse or abnormal geologic conditions, which may be unforeseen;
• natural disasters, weather-related delays, casualty losses and other matters
beyond our control;
• operating in a single geographic area;
• our reliance on a few major customers;
• labor availability, relations and other workforce factors;
• defaults by CONSOL Energy under our operating agreement, employee services
agreement and Affiliated Company Credit Agreement;
• restrictions in our Affiliated Company Credit Agreement that may adversely
affect our business;
• changes in our tax status;
• delays in the receipt of, failure to receive or revocation of necessary
governmental permits;
• the effect of existing and future laws and government regulations, including
the enforcement and interpretation of environmental laws thereof;
• the effect of new or expanded greenhouse gas regulations;
• 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 many 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;
• adverse effect of cybersecurity threats;
• failure to maintain effective internal controls over financial reporting;
• recent action and the possibility of future action on trade by
foreign governments;
• conflicts of interest that may cause our general partner or CONSOL Energy to
favor their own interest to our detriment;
• the requirement that we distribute all of our available cash; and
• other factors discussed in our 2019 Annual Report on Form 10-K under "Risk
Factors," as updated by any subsequent Quarterly Reports on Forms 10-Q, which
are on file at the
© Edgar Online, source
