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. Merger As previously disclosed, onOctober 22, 2020 , the Partnership, our general partner, our sponsor and a wholly owned subsidiary of our sponsor and its wholly-owned subsidiary ("Merger Sub") entered into a definitive merger agreement (the "Merger Agreement") pursuant to which Merger Sub will merge with and into the Partnership, with the Partnership surviving as an indirect, wholly owned subsidiary of our sponsor (the "Merger"). Under the terms of the Merger Agreement, at the effective time of the Merger, (i) each outstanding common unit other than common units owned by our sponsor and its subsidiaries will be converted into the right to receive, subject to adjustment as described in the Merger Agreement, 0.73 shares of common stock of our sponsor (the "Merger Consideration"); and (ii) each of the outstanding phantom units and any other awards relating to a common unit issued under a Partnership equity incentive plan, whether vested or not vested, will become fully vested and will be automatically converted into the right to receive, with respect to each common unit subject thereto, the Merger Consideration (plus any accrued but unpaid amounts in relation to distribution equivalent rights). Except for the Partnership's incentive distribution rights, which will be automatically canceled immediately prior to the effective time of the Merger for no consideration, the common units owned by our sponsor and its subsidiaries immediately prior to the effective time of the Merger will remain outstanding as limited partner interests in the surviving entity. In aggregate, our sponsor will issue approximately 8.0 million of its shares of common stock as Merger Consideration, representing approximately 22.2% of the total CONSOL Energy shares that will be outstanding on a pro forma basis. Subject to customary approvals and conditions, the transaction is expected to close in the first quarter of 2021. The transaction is subject to majority approval by our common unitholders, approval by our sponsor's stockholders and the effectiveness of a registration statement related to the issuance of the new CONSOL Energy shares to our common unitholders. Pursuant to a support agreement entered into in connection with the transaction, our sponsor has agreed to vote all of our common units it owns in favor of the transaction. Our sponsor currently owns approximately 60.7% of our outstanding common units. In connection with the closing of the transaction, our common units will cease to be publicly traded and the incentive distribution rights in the Partnership will be eliminated. 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 ofMarch 2020 . To date, several employees have tested positive for COVID-19. However, our sponsor has not experienced a localized outbreak, which we believe is attributable, in part, to the health and safety procedures put in place by our sponsor. This has also allowed our sponsor to continue operating without production curtailment due to positive employee cases. 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 untilPennsylvania's phased reopening which began in the second quarter of 2020. The coal demand decline that began in the first quarter hit its lowest point inMay 2020 , and has improved through the third quarter of 2020. In response to the decline in demand for our coal, our sponsor idled four of the five longwalls for periods of time beginning in the second quarter of 2020. As demand improved, our sponsor restarted longwalls and ultimately ran four of the five longwalls for the majority of the third quarter of 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 reinstated 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 will continue to negatively impact our results of operations, cash flows and financial condition. 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. 20
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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 in Pennsylvania . Our primary
strategy for growing our business is to increase operating efficiencies to
maximize realizations and make acquisitions that increase our distributable cash
flow. At September 30, 2020 , the Partnership's assets include a 25% undivided
interest in, and operational control over, CONSOL Energy'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
eastern United 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 the Northern
Appalachian Basin and the eastern United 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 sold; (ii) cost of coal sold, a non-GAAP financial measure; (iii) cash cost of coal sold, a non-GAAP financial measure; (iv) average margin per ton sold, an operating ratio derived from non-GAAP financial measures; (v) average cash margin per ton sold, an operating ratio derived from non-GAAP financial measures; (vi) adjusted EBITDA, a non-GAAP financial measure; and (vii) distributable cash flow, a non-GAAP financial measure. Cost of coal sold, cash cost of coal sold, average margin per ton sold, average cash margin per ton sold, 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 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, 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.
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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 Nine Months Ended September
September 30, 30,
2020 2019 2020 2019
Total Costs $ 54,843 $ 70,411 $ 163,728 $ 216,558
Freight Expense (3,227 ) (900 ) (4,785 ) (3,529 )
Selling, General and Administrative
Expenses (2,879 ) (2,840 ) (9,285 ) (10,353 )
Interest Expense, Net (2,520 ) (1,587 ) (6,929 ) (4,495 )
Other Costs (Non-Production) (1,403 ) (983 ) (11,726 ) (4,154 )
Depreciation, Depletion and Amortization
(Non-Production) (897 ) (519 ) (5,541 ) (1,605 )
Cost of Coal Sold $ 43,917 $ 63,582 $ 125,462 $ 192,422
Depreciation, Depletion and Amortization
(Production) (11,408 ) (10,567 ) (30,212 ) (32,034 )
Cash Cost of Coal Sold $ 32,509 $ 53,015 $ 95,250 $ 160,388
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 each 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.
Nine Months Ended September
Three Months Ended September 30, 30,
2020 2019 2020 2019
Total Coal Revenue $ 46,016 $ 75,385 $ 135,386 $ 246,166
Operating and Other Costs 33,912 53,998 106,976 164,542
Less: Other Costs (Non-Production) (1,403 ) (983 ) (11,726 ) (4,154 )
Cash Cost of Coal Sold 32,509 53,015 95,250 160,388
Add: Depreciation, Depletion and
Amortization 12,305 11,086 35,753 33,639
Less: Depreciation, Depletion and
Amortization (Non-Production) (897 ) (519 ) (5,541 ) (1,605 )
Cost of Coal Sold $ 43,917 $ 63,582 $ 125,462 $ 192,422
Total Tons Sold 1,135 1,618 3,197 5,145
Average Revenue per Ton Sold $ 40.55 $ 46.59 $ 42.35 $ 47.84
Average Cash Cost of Coal Sold per Ton 28.64 32.78 29.88 31.16
Add: Depreciation, Depletion and
Amortization Costs per Ton Sold 10.06 6.51 9.37 6.23
Average Cost of Coal Sold per Ton $ 38.70 $ 39.29
1.85 7.30 3.10 10.45
Add: Total Depreciation, Depletion and
Amortization Costs per Ton Sold 10.06 6.51 9.37 6.23
Average Cash Margin per Ton Sold $ 11.91 $ 13.81 $ 12.47 $ 16.68
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.
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Table of Contents
The following table presents a reconciliation of adjusted EBITDA to net (loss)
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 (loss) 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 September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net (Loss) Income $ (5,529 ) $ 6,970 $ (13,219 ) $ 36,577
Plus:
Interest Expense, Net 2,520 1,587 6,929 4,495
Depreciation, Depletion and Amortization 12,305 11,086 35,753 33,639
Unit-Based Compensation 75 344 308 1,082
Adjusted EBITDA $ 9,371 $ 19,987 $ 29,771 $ 75,793
Less:
Cash Interest 2,255 1,832 6,579 5,522
Estimated Maintenance Capital Expenditures 8,692 8,937 25,987 26,946
Distributable Cash Flow $ (1,576 ) $
9,218
Net Cash Provided by Operating Activities$ 10,814 $ 20,427 $ 34,130 $ 67,505 Plus: Interest Expense, Net 2,520 1,587 6,929 4,495 Other, Including Working Capital (3,963 ) (2,027 ) (11,288 ) 3,793 Adjusted EBITDA $ 9,371$ 19,987 $ 29,771 $ 75,793 Less: Cash Interest 2,255 1,832 6,579 5,522 Estimated Maintenance Capital Expenditures 8,692 8,937 25,987 26,946 Distributable Cash Flow$ (1,576 ) $ 9,218$ (2,795 ) $ 43,325 23
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Table of Contents Results of Operations
Three Months Ended
Total net loss was ($5,529 ) for the three months endedSeptember 30, 2020 compared to net income of$6,970 for the three months endedSeptember 30, 2019 . Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table. For the Three Months Ended September 30, 2020 2019 Variance Revenue: Coal Revenue$ 46,016 $ 75,385 $ (29,369 ) Freight Revenue 3,227 900 2,327 Other Income 71 1,096 (1,025 ) Total Revenue and Other Income 49,314 77,381 (28,067 ) Cost of Coal Sold: Operating Costs 32,509 53,015 (20,506 ) Depreciation, Depletion and Amortization 11,408 10,567 841 Total Cost of Coal Sold 43,917 63,582 (19,665 ) Other Costs: Other Costs 1,403 983 420 Depreciation, Depletion and Amortization 897 519 378 Total Other Costs 2,300 1,502 798 Freight Expense 3,227 900 2,327
Selling, General and Administrative Expenses 2,879 2,840
39
Interest Expense, Net 2,520 1,587 933
Total Costs 54,843 70,411 (15,568 )
Net (Loss) Income $ (5,529 ) $ 6,970 $ (12,499 )
Adjusted EBITDA $ 9,371 $ 19,987 $ (10,616 )
Distributable Cash Flow $ (1,576 ) $ 9,218 $ (10,794 )
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Table of Contents Coal Production
The table below presents total tons produced from the
Three Months Ended September 30,
Mine 2020 2019 Variance
Bailey 453 695 (242 )
Enlow Fork 359 597 (238 )
Harvey 323 331 (8 )
Total 1,135 1,623 (488 )
Coal production was 1,135 tons for the three months ended September 30, 2020
compared to 1,623 tons for the three months ended September 30, 2019 . Coal
production decreased 488 tons primarily due to a reduced operating schedule in
light of the decline in global demand due to the COVID-19 pandemic. For the
majority of the third quarter of 2020, we ran four of the five longwalls at the
Pennsylvania Mining Complex .
Coal Operations
Coal revenue and cost components on a per-unit basis for the three months ended
September 30, 2020 and 2019 are detailed in the table below. 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 September 30,
2020 2019 Variance
Total Tons Sold 1,135 1,618 (483 )
Average Revenue per Ton Sold $ 40.55 $
46.59
Average Cash Cost of Coal Sold per Ton (1)$ 28.64 $ 32.78 $ (4.14 ) Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost) 10.06 6.51 3.55 Average Cost of Coal Sold per Ton$ 38.70 $ 39.29 $ (0.59 ) Average Margin per Ton Sold (1)$ 1.85 $ 7.30 $ (5.45 ) Add: Depreciation, Depletion and Amortization Costs per Ton Sold 10.06 6.51 3.55 Average Cash Margin per Ton Sold (1)$ 11.91 $ 13.81 $ (1.90 )
(1) Average cash cost of coal sold per ton, 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$46,016 for the three months endedSeptember 30, 2020 compared to$75,385 for the three months endedSeptember 30, 2019 . Total tons sold decreased in the period-to-period comparison as a result of lingering effects of the unprecedented contraction inUnited States and global economic activity due to the COVID-19 pandemic. Additionally, lower natural gas prices as compared to the prior year quarter have contributed to electric generation trending toward gas, rather than coal, as a fuel source. Freight revenue 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$3,227 for the three months endedSeptember 30, 2020 compared to$900 for the three months endedSeptember 30, 2019 . The$2,327 increase was due to increased shipments to customers where we were contractually obligated to provide transportation services. 25
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Other income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income was$71 for the three months endedSeptember 30, 2020 compared to$1,096 for the three months endedSeptember 30, 2019 . The$1,025 decrease was primarily due to sales of externally purchased coal to blend and resell and customer contract buyouts in the three months endedSeptember 30, 2019 , none of which occurred during the three months endedSeptember 30, 2020 . Cost of Coal Sold Cost of coal sold is comprised of operating costs related to produced tons sold, along with changes in both 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$43,917 for the three months endedSeptember 30, 2020 , or$19,665 lower than the$63,582 for the three months endedSeptember 30, 2019 . Average cost of coal sold per ton was$38.70 per ton for the three months endedSeptember 30, 2020 , compared to$39.29 per ton for the three months endedSeptember 30, 2019 . The decrease in the total cost of coal sold was primarily driven by the reduction in production volume and reduced operating days, as the Partnership sought to match production with demand and limit discretionary spending. 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, such as idle mine costs, coal reserve holding costs and purchased coal costs. Total other costs remained materially consistent in the period-to-period comparison.
Selling, General, and Administrative 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$9,371 for the three months endedSeptember 30, 2020 compared to$19,987 for the three months endedSeptember 30, 2019 . The$10,616 decrease was primarily a result of a$8,863 reduction in coal revenue, net of a decrease in operating costs, and a decrease in non-production related income, as discussed above. Distributable Cash Flow Distributable cash flow was ($1,576 ) for the three months endedSeptember 30, 2020 compared to$9,218 for the three months endedSeptember 30, 2019 . The$10,794 decrease was primarily attributable to a$10,616 decrease in Adjusted EBITDA, as discussed above. 26
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Nine Months Ended
Total net loss was ($13,219 ) for the nine months endedSeptember 30, 2020 compared to net income of$36,577 for the nine months endedSeptember 30, 2019 . Our results of operations for each of these periods are presented in the table below. Variances are discussed following the table. For the Nine Months Ended September 30, 2020 2019 Variance Revenue: Coal Revenue$ 135,386 $ 246,166 $ (110,780 ) Freight Revenue 4,785 3,529 1,256 Other Income 10,338 3,440 6,898 Total Revenue and Other Income 150,509 253,135 (102,626 ) Cost of Coal Sold: Operating Costs 95,250 160,388 (65,138 ) Depreciation, Depletion and Amortization 30,212 32,034 (1,822 ) Total Cost of Coal Sold 125,462 192,422 (66,960 ) Other Costs: Other Costs 11,726 4,154 7,572 Depreciation, Depletion and Amortization 5,541 1,605 3,936 Total Other Costs 17,267 5,759 11,508 Freight Expense 4,785 3,529 1,256
Selling, General and Administrative Expenses 9,285 10,353
(1,068 ) Interest Expense, Net 6,929 4,495 2,434 Total Costs 163,728 216,558 (52,830 ) Net (Loss) Income$ (13,219 ) $ 36,577 $ (49,796 ) Adjusted EBITDA$ 29,771 $ 75,793 $ (46,022 ) Distributable Cash Flow$ (2,795 ) $ 43,325 $ (46,120 ) 27
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Table of Contents Coal Production
The table below presents total tons produced from the
Nine Months Ended September 30,
Mine 2020 2019 Variance
Bailey 1,405 2,239 (834 )
Enlow Fork 1,014 1,919 (905 )
Harvey 805 983 (178 )
Total 3,224 5,141 (1,917 )
Coal production was 3,224 tons for the nine months ended September 30, 2020
compared to 5,141 tons for the nine months ended September 30, 2019 . Coal
production decreased 1,917 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 nine months ended
September 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.
Nine Months Ended September 30,
2020 2019 Variance
Total Tons Sold 3,197 5,145 (1,948 )
Average Revenue per Ton Sold $ 42.35 $
47.84
Average Cash Cost of Coal Sold per Ton (1)$ 29.88 $ 31.16 $ (1.28 ) Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost) 9.37 6.23 3.14 Average Cost of Coal Sold per Ton$ 39.25 $ 37.39 $ 1.86 Average Margin per Ton Sold (1)$ 3.10 $ 10.45 $ (7.35 ) Add: Depreciation, Depletion and Amortization Costs per Ton Sold 9.37 6.23 3.14 Average Cash Margin per Ton Sold (1)$ 12.47 $ 16.68 $ (4.21 )
(1) Average cash cost of coal sold per ton, 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$135,386 for the nine months endedSeptember 30, 2020 compared to$246,166 for the nine months endedSeptember 30, 2019 . Total tons sold decreased in the period-to-period comparison in response to weakened customer demand due to a warmer-than-normal winter followed by the COVID-19 pandemic, each of which have reduced electricity consumption and, therefore, demand for the Partnership's coal. Additionally, lower natural gas prices as compared to the prior year quarter have contributed to electric generation trending toward gas, rather than coal, as a fuel source. The decrease in customer demand and the overall decline in electric power markets also resulted in lower pricing received on 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$4,785 for the nine months endedSeptember 30, 2020 compared to$3,529 for the nine months endedSeptember 30, 2019 . The$1,256 increase was due to increased shipments to customers where we were contractually obligated to provide transportation services. 28
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Other income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income was$10,338 for the nine months endedSeptember 30, 2020 compared to$3,440 for the nine months endedSeptember 30, 2019 . The$6,898 increase was primarily the result of additional customer contract buyouts in the nine months endedSeptember 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$125,462 for the nine months endedSeptember 30, 2020 , or$66,960 lower than the$192,422 for the nine months endedSeptember 30, 2019 . Average cost of coal sold per ton was$39.25 per ton for the nine months endedSeptember 30, 2020 , compared to$37.39 per ton for the nine months endedSeptember 30, 2019 . The decrease in the total cost of coal sold was primarily driven by decreased production activity during the nine months endedSeptember 30, 2020 in response to weakened market demand. On a per-unit basis, the decreased production resulted in an overall increase in the average cost of coal sold per ton. 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$11,508 for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily attributable to 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$1,068 for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 primarily due to several initiatives launched by management to reduce costs, including compensation reductions, curtailment of discretionary expenses, and headcount management. Interest Expense Interest expense, which primarily relates to obligations under our Affiliated Company Credit Agreement, increased$2,434 due to less interest capitalized and an increase in interest incurred due to an increase in the average interest rate in the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Adjusted EBITDA Adjusted EBITDA was$29,771 for the nine months endedSeptember 30, 2020 compared to$75,793 for the nine months endedSeptember 30, 2019 . The$46,022 decrease was primarily a result of a$45,642 reduction in coal revenue, net of a decrease in operating costs, and an increase in non-production related costs, partially offset by higher non-production related income, as discussed above. Distributable Cash Flow Distributable cash flow was$(2,795) for the nine months endedSeptember 30, 2020 compared to$43,325 for the nine months endedSeptember 30, 2019 . The$46,120 decrease was primarily attributable to a$46,022 decrease in Adjusted EBITDA, as discussed above. 29
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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 coal demand decline that began in the first quarter of 2020 hit its lowest point inMay 2020 , and has improved through the third quarter of 2020. In response to the decline in demand for our coal, our sponsor idled four of the five longwalls for periods of time beginning in the second quarter of 2020. As demand improved, our sponsor restarted longwalls and ultimately ran four of the five longwalls for the majority of the third quarter of 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 reinstated if COVID-19 experiences a resurgence. We expect that depressed demand for our coal will continue for so long as there is a widespread, government-imposed 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.
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 have been experiencing some delays in collections of
trade receivables since the second half of 2019. The COVID-related decline in
demand has impacted some of our customers, resulting in continued delays in
collections. This trend improved slightly during the third quarter of 2020,
although global demand for coal remained challenging. However, if these delays
continue or increase, 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.
Uncertainty in the financial markets brings additional potential risks to the
Partnership. These risks include the ability to raise capital in the equity
markets due to 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.
Over the past year, the insurance markets have been increasingly
challenging, particularly for coal companies. We have experienced rising
premiums, reduced coverage and fewer providers willing to underwrite policies
and surety bonds. Terms have generally become more unfavorable, including the
amount of collateral required to secure surety bonds. Further cost burdens on
our ability to maintain adequate insurance and bond coverage may adversely
impact our operations, financial position and liquidity.
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, on April 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 on October 29, 2020 , the Board of Directors decided to
uphold this suspension. While the Partnership did generate cash flow from
operations during the nine months ended September 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.
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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 three quarters of 2020 to reinforce our liquidity. From a shipment perspective, the decrease in demand for our coal in 2020 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 ofSeptember 30, 2020 , the Partnership had$174,685 of borrowings outstanding under the Affiliated Company Credit Agreement, leaving$100,315 of unused capacity. Interest on outstanding borrowings under the Affiliated Company Credit Agreement atSeptember 30, 2020 was accrued at a rate of 5.00%. 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. AtSeptember 30, 2020 , the Partnership was in compliance with its financial covenants with a first lien gross leverage ratio at 3.41 to 1.00 and a total net leverage ratio at 3.40 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 . 31
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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 ofSeptember 30, 2020 , the Partnership, throughCONSOL Thermal Holdings , sold$25,785 of trade receivables to CPCC. The Partnership has not derecognized the receivables due to its continued involvement in the collections efforts. Cash Flows Nine Months Ended September 30, 2020 2019 Variance
Cash flows provided by operating activities
$ (33,375 ) Cash used in investing activities$ (13,087 ) $ (29,350 ) $ 16,263 Cash used in financing activities$ (20,961 ) $ (28,547 ) $ 7,586
Nine Months Ended
Cash provided by operating activities decreased$33,375 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$16,263 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. 32
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Nine Months Ended September 30,
2020 2019 Variance
Building and Infrastructure $ 6,357 $ 12,091 $ (5,734 )
Equipment Purchases and Rebuilds 3,296 8,689 (5,393 )
Refuse Storage Area 3,081 6,346 (3,265 )
Other 438 2,228 (1,790 )
Total Capital Expenditures $ 13,172 $ 29,354 $ (16,182 )
Cash flows used in financing activities decreased $7,586 in the nine months
ended September 30, 2020 compared to the nine months ended September 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
$28,780 decrease to cash used in financing activities. In addition, the decrease
was due to $4,073 of proceeds received in the nine months ended September 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 $24,640 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 pending merger is subject to conditions, including certain conditions that
may not be satisfied or completed on a timely basis, if at all;
the number of shares of CONSOL Energy common stock that our unitholders may
• receive in the pending merger between CONSOL Energy and us is based on a fixed
exchange ratio and will not be adjusted in the event of any change in the
price of either shares of CONSOL Energy common stock or our common units;
• our unitholders will have a reduced ownership after the pending merger and
will not have contractual rights to receive distributions or dividends;
we will incur substantial transaction-related costs in connection with the
• pending merger, and if the merger does not close, we will not benefit from
these expenses;
we and CONSOL Energy may be targets of securities class action and derivative
• lawsuits, which could result in substantial costs and may delay or prevent the
completion of the pending merger;
directors and executive officers of our general partner have certain interests
• in the pending merger that are different from those of our unitholders
generally;
the shares of CONSOL Energy common stock to be received by our unitholders as
• a result of the merger have different rights than our common units and may be
affected by factors different from those affecting the common units of the
Partnership;
• 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;
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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
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