Core Natural Resources, Inc. (then CONSOL Energy Inc.) — Q2 2020 Form 10-Q
Entity and period: The supplied filing is CONSOL Energy Inc.’s unaudited quarterly report for the three and six months ended June 30, 2020. It does not identify the registrant as Core Natural Resources, Inc.
Business context and financial results
The company’s principal business was Appalachian coal production, centered on its 75% interest in the Pennsylvania Mining Complex (PAMC); it also operated the CONSOL Marine Terminal and was developing the Itmann Mine. Unless noted otherwise, figures below are in millions of U.S. dollars.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Coal revenue | $102.3 | $350.6 | $357.8 | $683.1 |
| Total revenue and other income | $162.6 | $384.3 | $453.8 | $754.9 |
| Net income (loss) attributable to CONSOL shareholders | $(18.0) | $43.3 | $(15.6) | $57.7 |
| Basic earnings (loss) per share | $(0.69) | $1.57 | $(0.60) | $2.10 |
| Cash from operating activities | Not presented quarterly | $46.7 | $165.8 | |
| Capital expenditures | Not presented quarterly | $46.4 | $83.0 |
Q2 customer-contract revenue (coal, terminal and freight) was $121.3 million versus $371.2 million. Total revenue and other income includes items beyond customer-contract revenue, notably contract-buyout income. Q2 contract buyouts contributed $30.1 million; first-half buyouts contributed $41.0 million.
- PAMC production fell to 2.4 million tons in Q2 from 7.2 million; first-half production was 8.4 million versus 14.1 million. First-half tons sold declined to 8.2 million from 14.1 million.
- Average revenue per ton sold was $43.82 in Q2 and $43.34 for the first half, versus $47.53 and $48.41, respectively, in 2019. First-half average cash margin per ton was $12.79, down from $17.99.
- Q2 cost of coal sold was $38.32 per ton versus $37.07 a year earlier. Lower production reduced total costs but raised unit costs; management also cited lower selling prices and mine-idling costs.
- First-half interest expense was $30.4 million versus $34.6 million. The company recorded a $16.8 million gain on debt extinguishment in the first half of 2020, compared with a $24.6 million loss in 2019.
Liquidity, debt and balance sheet
- At June 30, 2020, cash was $33.0 million, down from $80.3 million at year-end 2019. Total assets were $2.57 billion and total liabilities were $2.01 billion.
- Management reported total liquidity of $346 million, including cash. The $400 million revolving facility had no borrowings and $87.7 million of letters of credit, leaving $312.3 million unused. The receivables facility had no borrowings, $21.8 million of letters of credit and only $1.2 million of available capacity.
- Balance-sheet current and long-term debt and finance-lease obligations totaled approximately $685.8 million. The filing’s MD&A separately describes approximately $698 million of total long-term debt and finance-lease obligations; the figures use different presentations.
- The June 5 credit amendment relaxed financial covenants for eight quarters and raised applicable margins on the revolving and Term Loan A facilities by 50 basis points. At June 30, reported covenant ratios were 1.97x first-lien gross leverage, 3.19x total net leverage and 1.15x fixed-charge coverage; the company said it was in compliance.
- First-half operating cash flow fell to $46.7 million from $165.8 million. Investing cash outflow was $45.8 million and financing cash outflow was $48.2 million; cash and restricted cash decreased $47.3 million.
Changes, outlook, risks and unusual items
- COVID-19 demand shock: Management attributed lower shipments, prices and production to the pandemic, lockdowns and a warmer-than-normal winter. Enlow Fork was temporarily idled in April; Bailey was idled in May and limited production resumed June 8. The company said shipments appeared to have bottomed in May, but warned that further demand declines could harm liquidity and covenant compliance.
- The company withdrew its previously announced 2020 operating and financial guidance in Q1 and provided no replacement guidance. It emphasized cost containment and lower capital spending; Itmann Mine construction was slowed. Development mining began at Itmann in April, but full production depends on completion of a preparation plant and market conditions.
- Management said the company was fully contracted for 2020 and approximately 49% contracted for 2021, assuming a 26-million-ton annual production rate. It warned that additional contract buyouts or deferrals were possible, and that customers might invoke force majeure provisions.
- During the first half, the company spent approximately $26 million to retire $43.2 million principal amount of its 11% second-lien notes, recognizing the $16.8 million gain. The board expanded the repurchase authorization to $270 million and extended it to June 2022; no common shares were repurchased in Q2.
- CONSOL Coal Resources suspended quarterly distributions in April and continued the suspension in July, prioritizing cash conservation and debt reduction.
- Potentially significant contingencies include litigation over retiree health benefits and a claim concerning possible Coal Act liabilities following Murray Energy’s bankruptcy. The company estimated annual servicing costs of $10–20 million for certain Coal Act and black-lung liabilities over the next ten years, while disputing responsibility. Management said accrued pending-claim amounts were immaterial but future aggregate losses could be material and were not estimable.
- Maximum disclosed letters of credit, surety bonds and other guarantees/commitments totaled $748.2 million; these amounts were not recorded as liabilities, and management believed the guarantees would expire without funding. The filing also lists significant environmental, employee-benefit, reclamation, customer-concentration, coal-price and financing risks.
Investor verification priorities
- Confirm the issuer and corporate-name mapping: this filing is for CONSOL Energy Inc., not a registrant named Core Natural Resources, Inc.
- Track coal demand, shipment volumes, realized prices, mine restarts and any customer contract buyouts, deferrals or force-majeure claims.
- Reconcile the reported liquidity and debt figures across balance-sheet carrying values, facility availability, letters of credit and management’s separate debt presentation.
- Monitor covenant headroom, the staged covenant thresholds, cash collections and the impact of any further demand weakness on liquidity.
- Assess the status and potential exposure of retiree-benefit litigation, Murray-related liabilities, reclamation obligations and the $748.2 million of off-balance-sheet commitments.