Core Natural Resources, Inc. quarterly report, Q3 FY2017

Business context and reporting period

This is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, filed December 13, 2017. The filing identifies the registrant as CONSOL Energy Inc., not Core Natural Resources, Inc. The statements are historical predecessor results for ParentCo’s coal business; they do not reflect the November 28, 2017 separation that made CONSOL an independent public company.

The coal business comprised the Pennsylvania Mining Complex (PAMC), the CONSOL Marine Terminal, undeveloped coal reserves and related activities. PAMC mines and markets thermal and crossover metallurgical coal. The filing cautions that historical results may not represent standalone performance, including because public-company and standalone operating costs may rise.

Financial performance and position

Amounts below are in millions of dollars except per-ton data. Figures may not sum due to rounding.

• Q3 revenue increased about 13.5%; nine-month revenue increased about 24.3%. Nine-month coal sales rose to $899.4 million from $744.4 million.
• Q3 earnings before tax were $12.3 million versus $4.7 million; nine-month earnings before tax were $130.0 million versus $27.3 million.
• For the first nine months, PAMC sold 19.9 million tons versus 17.5 million. Average sales price was $45.26 per ton versus $42.60; average margin per ton was $9.75 versus $8.07.
• Q3 PAMC average margin per ton declined to $6.84 from $8.51. Average price was nearly flat at $44.16 versus $44.30, while total cost per ton rose to $37.32 from $35.79.
• Nine-month operating cash flow was nearly unchanged year over year despite much higher net income. Capital expenditures were $51.0 million; investing cash outflow was $33.1 million and financing cash outflow was $148.2 million. Cash declined by $9.6 million to $3.7 million.
• At September 30, total assets were $2.59 billion, total liabilities $1.79 billion and equity $797.0 million. Current assets were $191.9 million against current liabilities of $362.8 million. Reported debt and capital lease obligations were approximately $306 million; cash was $3.7 million.
• Major long-term liabilities included postretirement benefits of $649.6 million, asset retirement obligations of $227.1 million, pneumoconiosis benefits of $106.8 million and workers’ compensation of $64.9 million.

Changes, outlook and significant matters

• Nine-month coal sales benefited from greater volumes and higher prices, reflecting stronger domestic demand and tighter international thermal and metallurgical coal markets. In Q3, higher volume was partly offset by mild summer weather and weaker domestic power prices.
• Q3 PAMC costs were pressured by belt and equipment work, Bailey Mine permitting-related expenses and adverse geology at Enlow Fork. Nine-month costs also reflected higher production and development mining, partly offset by a 4% productivity improvement.
• Q3 results included an $8.4 million customer contract buyout. Nine-month results also included a $13.0 million net gain on asset sales, primarily from coal rights. These are unusual items to consider when assessing recurring earnings.
• The Bailey longwall was temporarily idled during the permit review, then relocated to a permitted panel and resumed operations in the first week of October 2017. The company said it added unscheduled shifts to mitigate production effects. The underlying permit review remained a risk.
• Management reported 2017 sales fully contracted and, as of October 9, 2017, 2018 and 2019 contracted positions of 80% and 41%, respectively, assuming 27 million tons of sales. The filing provides no formal earnings or cash-flow guidance.
• After the spin-off, the company entered into $100 million of Term Loan A, $400 million of Term Loan B and $300 million of 11% second-lien notes; it also obtained a $300 million secured revolver and a $100 million receivables facility, both reported undrawn at the filing date. Gross proceeds from the term loans and notes were reported as $792 million, including the Term Loan B issuance discount. The company paid $425 million to ParentCo and used proceeds for fees, refinancing and working capital. Its new facilities carry leverage and fixed-charge covenants, and the second-lien notes mature in 2025.
• The Partnership drew $201 million under a new intercompany facility to refinance its former revolving debt. CONSOL may lend the Partnership up to $275 million under that facility.
• Legal matters include retiree-benefit lawsuits seeking reinstatement of health coverage. Recorded accruals were described as immaterial, but the company said potential aggregate future losses could be material and could not be reasonably estimated. ParentCo-provided guarantees, letters of credit and surety bonds totaled $724.6 million; no related liability was recorded, and management expected them to expire without funding.
• Management stated that post-separation SG&A could rise and that standalone liquidity would depend on cash generation and financing access. Historical cash management and some allocated costs were provided through ParentCo.

Important facts for investors to verify

• Confirm the registrant identity and the effects of the November 28 separation; this filing’s financial statements are predecessor results and exclude the new post-spin capital structure.
• Review the debt agreements, interest costs, amortization, collateral, covenants and liquidity after the $425 million payment to ParentCo; assess whether operating cash flow can cover obligations and investment needs.
• Track Bailey Mine permit developments, production recovery and any continuing operational or environmental restrictions.
• Assess the sustainability of coal prices, volumes and per-ton margins, customer concentration, and the contracted sales position beyond 2017.
• Evaluate the effect of standalone costs, transition-service arrangements and employee-benefit obligations on future earnings and cash flow.
• Monitor the retiree-benefit litigation, environmental and reclamation obligations, and the potential exposure represented by guarantees and surety commitments.