Core Natural Resources, Inc. annual report, FY2019

Business context and reporting period

The supplied filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 14, 2020. It is not identified as a filing by Core Natural Resources, Inc.; the summary below reflects the CONSOL Energy filing provided. The report covers the full year, not only Q4, though it includes quarterly results.

CONSOL is a coal producer operating primarily through the Pennsylvania Mining Complex (PAMC), with a coal export terminal in Baltimore and the Itmann metallurgical coal mine under development. CONSOL owns 75% of the PAMC and has a 61.5% economic interest in CONSOL Coal Resources LP, which owns the other 25%.

Financial and operating highlights

Approximate net margin was 6.5% in 2019 versus 11.7% in 2018, using total revenue and other income. PAMC coal sales were 27.3 million tons versus 27.7 million; average price fell to $47.17 per ton from $49.28, while average cost rose to $37.37 from $35.46. Average cash margin per ton declined to $16.20 from $19.99. The filing reports 2019 net income attributable to shareholders of $76.0 million; the fourth-quarter figure was $13.9 million, with diluted EPS of $0.54.

Operating cash flow declined mainly due to lower earnings, slower customer collections compared with 2018, and other working-capital movements. Approximate operating cash flow less capital expenditures was $74.8 million, down from $267.8 million in 2018; this is a simple calculation, not a company-reported free-cash-flow measure.

At December 31, 2019, the company had no borrowings under its $400 million revolver, with about $330 million of unused capacity after letters of credit. The $100 million receivables facility had no borrowings but only about $71,000 available, reflecting eligible receivables and outstanding letters of credit. The company reported covenant compliance; leverage ratios were 1.19x first-lien gross and 1.93x total net, against respective limits of 2.00x and 3.00x at year-end. The minimum fixed-charge coverage ratio was 1.36x versus a 1.10x minimum.

Material changes versus prior comparable period

• Coal revenue fell $75 million, primarily from lower average realized prices and slightly lower sales volumes; lower domestic netback contract pricing was partly offset by stronger export pricing.
• Cost of coal sold increased $40 million. Management cited equipment rebuilds and longwall overhauls, a roof fall, equipment breakdowns, higher mine maintenance and project expenses, and higher subsidence expense.
• Operating cash flow fell substantially, reflecting weaker earnings and slower receivable collections. Trade receivables, net of allowance, rose to $131.7 million from $87.6 million.
• Debt repayment and refinancing reduced interest expense by $17.4 million, but a $24.5 million debt-extinguishment loss was recorded in 2019, versus $3.9 million in 2018. The company made a required $110 million Term Loan B excess-cash-flow repayment based on 2018 cash flow.
• CONSOL repurchased 1.72 million of its shares at an average $19.06 per share and approximately $52.6 million of its 11% second-lien notes. Year-end cash declined despite debt reduction and repurchases.
• The CONSOL Marine Terminal reported record annual revenue of $67.4 million. PAMC production was 27.3 million tons; Harvey set a production record, while Bailey output decreased due partly to an additional longwall move and operational delays.

Outlook, management commentary, risks and unusual items

For 2020, management expected PAMC sales of approximately 24.5–26.5 million tons and capital expenditures of $125–$145 million. As of February 11, 2020, contracted positions were 95% for 2020 and 43% for 2021, assuming annual sales at the midpoint of guidance. Management expected adequate operating cash flow and liquidity, while noting that slower customer collections could reduce cash flow and receivables-facility capacity.

Itmann construction began in the second half of 2019. Full production was expected in 2021, with anticipated capacity of about 900,000 tons per year of low-volatile coking coal. In December 2019, CONSOL acquired a 25% equity stake in CFOAM Corp., a coal-derived carbon-foam business.

Key risks include coal price and demand volatility; substitution by natural gas and renewables; climate and environmental regulation; customer concentration (three customers represented about 70% of coal sales); reliance on a single mining complex and preparation plant; transportation and equipment disruptions; permitting and reclamation obligations; and exposure to variable-rate debt. The filing reports approximately $272 million of asset-retirement obligations and $527 million of reclamation surety bonds. It also identifies significant employee-benefit obligations, including postretirement medical, pneumoconiosis, pension and workers’ compensation liabilities.

Management disclosed delayed customer collections and said it expected the trend to reverse in 2020, partly in anticipation of the U.S.-China “Phase I” trade agreement. That expectation is forward-looking and not assured. The filing states that pending claims were not expected to have a material effect, while noting that aggregate future losses could ultimately be material but were not reasonably estimable. It also describes climate-related litigation naming the company, including a City of Baltimore action. Ernst & Young issued unqualified opinions on the financial statements and internal controls; asset-retirement obligations for closed mines were identified as a critical audit matter.

Important facts for investors to verify

• Confirm the issuer: the supplied 10-K is for CONSOL Energy Inc. (ticker CEIX), not Core Natural Resources, Inc.
• Track realized coal prices, unit costs, cash margin per ton, production reliability, and actual sales against the 2020 guidance.
• Monitor receivable aging, customer credit quality, and whether collections improved after year-end, especially given customer concentration.
• Review debt maturities, floating-rate exposure, covenant headroom, and liquidity available after letters of credit and other financial assurances.
• Assess execution, cost, permitting and schedule risks for Itmann and other capital projects, and the sustainability of reclamation and employee-benefit estimates.
• Distinguish reported earnings from cash generation: 2019 included a substantial debt-extinguishment loss, while cash flow was also affected by working capital and capital spending.