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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM i 10-Q
__________________________________________________
(Mark
One)
|
| |
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
OR
|
| |
i ☐ | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
__________________________________________________
i CONSOL
Coal Resources LP
(Exact name of registrant as specified in its charter)
|
| | |
i Delaware | | i 47-3445032 |
(State
or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
i 1000 CONSOL Energy Drive, i Suite
100
( i 724) i 416-8300
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________________________
Securities
registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
i Common Units representing limited partner interests | i CCR | i New
York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ i Accelerated filer ☒
Non-accelerated filer ☐ Smaller Reporting Company i ☒ Emerging Growth Company i ☒
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act i ☒ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No
☒ CONSOL Coal Resources LP had i 27,690,251 common units and a 1.7% general partner interest outstanding at April 22, 2020.
|
| | |
| | Page |
| Part I. Financial Information | |
| | |
Item 1. | Financial
Statements | |
| | |
| Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019 | |
| | |
| Consolidated Statement of Partners’ Capital for the three months ended March 31, 2020 and 2019 | |
| | |
| Notes to the Consolidated Financial Statements | |
| | |
Item 2. | | |
| | |
Item 4. | | |
| | |
| Part
II. Other Information | |
| | |
Item 1. | | |
| | |
Item 1A. | | |
| | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| | |
Item
4. | | |
| | |
Item 6. | | |
| | |
| | |
Significant
Relationships and Other Terms Referenced in this Quarterly Report
| |
• | “CONSOL Coal Resources LP,” the “Partnership,” “we,” “our,” “us” and similar terms refer to CONSOL Coal Resources LP, a Delaware limited partnership, and its subsidiaries, with common units listed for trading on the New York Stock Exchange under the ticker “CCR”; |
| |
• | “Affiliated
Company Credit Agreement” refers to an agreement entered into on November 28, 2017 among the Partnership and certain of its subsidiaries (collectively, the “Credit Parties”), CONSOL Energy, as lender and administrative agent, and PNC Bank, National Association, as collateral agent (“PNC”), as amended by Amendment No. 1 to Affiliated Company Credit Agreement, dated March 28, 2019. The Affiliated Company Credit Agreement provides for a revolving credit facility in an aggregate principal amount of up to $275 million to be provided by CONSOL Energy, as lender; |
| |
• | “common
units” refer to the limited partner interests in CONSOL Coal Resources LP. The holders of common units are entitled to participate in partnership distributions and are entitled to exercise the rights or privileges of limited partners under the Partnership Agreement. The common units are listed on the New York Stock Exchange under the symbol “CCR”; |
| |
• | “CONSOL Coal Finance” refers to CONSOL Coal Finance Corporation, a Delaware corporation and a direct, wholly owned subsidiary of the Partnership; |
| |
• | “CONSOL
Energy” and our “sponsor” refer to CONSOL Energy Inc., a Delaware corporation and the parent of our general partner, and its subsidiaries other than our general partner, us and our subsidiaries; |
| |
• | “CONSOL Operating” refers to CONSOL Operating LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of the Partnership; |
| |
• | “CONSOL
Thermal Holdings” refers to CONSOL Thermal Holdings LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of CONSOL Operating; CONSOL Thermal Holdings owns a 25% undivided interest in the assets, liabilities, revenues and expenses comprising the Pennsylvania Mining Complex; |
| |
• | “CPCC” refers to CONSOL Pennsylvania Coal Company LLC, a Delaware limited liability company and a wholly owned subsidiary of CONSOL Energy; |
| |
• | “general
partner” refers to CONSOL Coal Resources GP LLC, a Delaware limited liability company and our general partner; |
| |
• | “Omnibus Agreement” refers to the Omnibus Agreement dated July 7, 2015, as replaced by the First Amended and Restated Omnibus Agreement dated as of September 30, 2016, and as amended by the First Amendment to the First Amended and Restated Omnibus Agreement, dated November 28, 2017; |
| |
• | “Partnership
Agreement” refers to the Third Amended and Restated Partnership Agreement dated as of November 28, 2017; |
| |
• | “Pennsylvania Mining Complex” refers to the Bailey, Enlow Fork, and Harvey coal mines, coal reserves and related assets and operations, located primarily in southwestern Pennsylvania. The Pennsylvania Mining Complex is owned 75% by our sponsor and its subsidiaries and 25% by CONSOL Thermal Holdings; |
| |
• | “SEC”
refers to the United States Securities and Exchange Commission; and |
| |
• | “subordinated units” refer to limited partner interests in CONSOL Coal Resources LP having the rights and obligations specified with respect to subordinated units in the Partnership Agreement. On August 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. As of the date of this Quarterly Report on Form 10-Q, there are no outstanding subordinated units. |
PART
I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOL COAL RESOURCES LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except unit data)
(unaudited)
|
| | | | | | | |
| |
| 2020 | | 2019 |
Coal Revenue | $ | i 63,863 |
| | $ | i 83,126 |
|
Freight
Revenue | i 787 |
| | i 1,665 |
|
Other
Income | i 2,718 |
| | i 1,316 |
|
Total
Revenue and Other Income | i 67,368 |
| | i 86,107 |
|
| | | |
Operating
and Other Costs 1 | i 48,288 |
| | i 52,094 |
|
Depreciation,
Depletion and Amortization | i 11,928 |
| | i 11,217 |
|
Freight
Expense | i 787 |
| | i 1,665 |
|
Selling,
General and Administrative Expenses 2 | i 4,046 |
| | i 4,560 |
|
Interest
Expense, Net 3 | i 2,155 |
| | i 1,351 |
|
Total
Costs | i 67,204 |
| | i 70,887 |
|
Net
Income | $ | i 164 |
| | $ | i 15,220 |
|
|
|
| |
|
|
Less:
General Partner Interest in Net Income | i 3 |
| | i 257 |
|
Limited
Partner Interest in Net Income | $ | i 161 |
| | $ | i 14,963 |
|
| | | |
Net
Income per Limited Partner Unit - Basic | $ | i 0.01 |
| | $ | i 0.54 |
|
Net
Income per Limited Partner Unit - Diluted | $ | i 0.01 |
| | $ | i 0.54 |
|
| | | |
Limited
Partner Units Outstanding - Basic | i 27,665,008 |
| | i 27,589,172 |
|
Limited
Partner Units Outstanding - Diluted | i 27,685,284 |
| | i 27,645,697 |
|
| | | |
Cash
Distributions Declared per Unit 4 | $ | i — |
| | $ | i 0.5125 |
|
4 Represents the cash distributions declared related to the period presented. See Note 15 - Subsequent Events.
The
accompanying notes are an integral part of these consolidated financial statements.
CONSOL COAL RESOURCES LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(unaudited)
|
| | | | | | | |
| |
| 2020 | | 2019 |
Net Income | $ | i 164 |
| | $ | i 15,220 |
|
| | | |
Recognized
Net Actuarial Loss (Gain) | i 39 |
| | ( i 3 | ) |
Other
Comprehensive Income (Loss) | i 39 |
| | ( i 3 | ) |
| | | |
Comprehensive
Income | $ | i 203 |
| | $ | i 15,217 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
CONSOL COAL RESOURCES LP
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
| | | | | | | |
| (unaudited) | | |
| | | |
ASSETS | | | |
Current Assets: | | | |
Cash | $ | i 223 |
| | $ | i 543 |
|
Trade
Receivables, net of allowance | i 28,145 |
| | i 32,769 |
|
Other
Receivables | i 2,224 |
| | i 1,572 |
|
Inventories | i 13,786 |
| | i 12,653 |
|
Prepaid
Expenses | i 4,371 |
| | i 5,746 |
|
Total
Current Assets | i 48,749 |
| | i 53,283 |
|
Property,
Plant and Equipment: | | | |
Property, Plant and Equipment | i 993,820 |
| | i 984,898 |
|
Less—Accumulated
Depreciation, Depletion and Amortization | i 582,942 |
| | i 571,238 |
|
Total
Property, Plant and Equipment—Net | i 410,878 |
| | i 413,660 |
|
Other
Assets: | | | |
Right of Use Asset—Operating Leases | i 14,519 |
| | i 15,695 |
|
Other
Assets | i 13,441 |
| | i 13,456 |
|
Total
Other Assets | i 27,960 |
| | i 29,151 |
|
TOTAL
ASSETS | $ | i 487,587 |
| | $ | i 496,094 |
|
|
| | | | | | | |
LIABILITIES
AND PARTNERS’ CAPITAL | | | |
Current Liabilities: | | | |
Accounts Payable | $ | i 19,172 |
| | $ | i 22,805 |
|
Accounts
Payable—Related Party | i 4,279 |
| | i 1,419 |
|
Current
Portion of Long-Term Debt | i 8,912 |
| | i 5,252 |
|
Other
Accrued Liabilities | i 39,584 |
| | i 39,455 |
|
Total
Current Liabilities | i 71,947 |
| | i 68,931 |
|
Long-Term
Debt: | | | |
Affiliated Company Credit Agreement—Related Party | i 180,600 |
| | i 180,925 |
|
Finance
Lease Obligations | i 5,075 |
| | i 1,645 |
|
Total
Long-Term Debt | i 185,675 |
| | i 182,570 |
|
Other
Liabilities: | | | |
Pneumoconiosis Benefits | i 6,269 |
| | i 6,028 |
|
Workers’ Compensation | i 3,648 |
| | i 3,611 |
|
Asset
Retirement Obligations | i 10,968 |
| | i 10,801 |
|
Operating
Lease Liability | i 10,936 |
| | i 11,507 |
|
Other | i 823 |
| | i 785 |
|
Total
Other Liabilities | i 32,644 |
| | i 32,732 |
|
TOTAL
LIABILITIES | i 290,266 |
| | i 284,233 |
|
Partners’ Capital: | | | |
| i 175,032 |
| | i 189,367 |
|
General
Partner Interest | i 11,671 |
| | i 11,915 |
|
Accumulated
Other Comprehensive Income | i 10,618 |
| | i 10,579 |
|
Total
Partners’ Capital | i 197,321 |
| | i 211,861 |
|
TOTAL
LIABILITIES AND PARTNERS’ CAPITAL | $ | i 487,587 |
| | $ | i 496,094 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
CONSOL COAL RESOURCES LP
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Limited
Partners | | | | | | |
| Common | | Subordinated | | General Partner | | Accumulated
Other Comprehensive Income | | Total |
| $ | i 189,367 |
| | $ | i — |
| | $ | i 11,915 |
| | $ | i 10,579 |
| | $ | i 211,861 |
|
(unaudited) | | | | | | | | | |
Net
Income | i 161 |
| | — |
| | i 3 |
| | — |
| | i 164 |
|
Unitholder
Distributions | ( i 14,191 | ) | | — |
| | ( i 243 | ) | | — |
| | ( i 14,434 | ) |
Unit-Based
Compensation | i 159 |
| | — |
| | — |
| | — |
| | i 159 |
|
Units
Withheld for Taxes | ( i 217 | ) | | — |
| | — |
| | — |
| | ( i 217 | ) |
Adoption
of ASU 2016-013 | ( i 247 | ) | | — |
| | ( i 4 | ) | | — |
| | ( i 251 | ) |
Actuarially
Determined Long-Term Liability Adjustments | — |
| | — |
| | — |
| | i 39 |
| | i 39 |
|
| $ | i 175,032 |
| | $ | i — |
| | $ | i 11,671 |
| | $ | i 10,618 |
| | $ | i 197,321 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Limited
Partners | | | | | | |
| Common | | Subordinated | | General Partner | | Accumulated
Other Comprehensive Income (Loss) | | Total |
| $ | i 212,122 |
| | $ | ( i 11,421 | ) | | $ | i 12,119 |
| | $ | i 11,920 |
| | $ | i 224,740 |
|
(unaudited) | | | | | | | | | |
Net
Income | i 8,676 |
| | i 6,287 |
| | i 257 |
| | — |
| | i 15,220 |
|
Unitholder
Distributions | ( i 8,211 | ) | | ( i 5,951 | ) | | ( i 243 | ) | | — |
| | ( i 14,405 | ) |
Unit-Based
Compensation | i 397 |
| | — |
| | — |
| | — |
| | i 397 |
|
Units
Withheld for Taxes | ( i 880 | ) | | — |
| | — |
| | — |
| | ( i 880 | ) |
Actuarially
Determined Long-Term Liability Adjustments | — |
| | — |
| | — |
| | ( i 3 | ) | | ( i 3 | ) |
| $ | i 212,104 |
| | $ | ( i 11,085 | ) | | $ | i 12,133 |
| | $ | i 11,917 |
| | $ | i 225,069 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
CONSOL COAL RESOURCES LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
|
| | | | | | | |
| |
| 2020 | | 2019 |
Cash Flows from Operating Activities: | | | |
Net Income | $ | i 164 |
| | $ | i 15,220 |
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating Activities: | | | |
Depreciation, Depletion and Amortization | i 11,928 |
| | i 11,217 |
|
Gain
on Sale of Assets | i — |
| | ( i 5 | ) |
Unit-Based
Compensation | i 159 |
| | i 397 |
|
Changes
in Operating Assets: | | | |
Trade and Other Receivables | i 3,721 |
| | ( i 6,588 | ) |
Inventories | ( i 1,133 | ) | | ( i 1,579 | ) |
Prepaid
Expenses | i 1,375 |
| | i 476 |
|
Changes
in Other Assets | i 15 |
| | i 718 |
|
Changes
in Operating Liabilities: | | | |
Accounts Payable | ( i 3,343 | ) | | i 185 |
|
Accounts
Payable—Related Party | i 2,860 |
| | i 2,171 |
|
Other
Operating Liabilities | i 1,876 |
| | i 2,811 |
|
Changes
in Other Liabilities | ( i 845 | ) | | i 195 |
|
Net
Cash Provided by Operating Activities | i 16,777 |
| | i 25,218 |
|
Cash
Flows from Investing Activities: | | | |
Capital Expenditures | ( i 5,173 | ) | | ( i 8,093 | ) |
Net
Cash Used in Investing Activities | ( i 5,173 | ) | | ( i 8,093 | ) |
Cash
Flows from Financing Activities: | | | |
Proceeds from Finance Lease Obligations | i 4,073 |
| | i — |
|
Payments
on Finance Lease Obligations | ( i 1,021 | ) | | ( i 938 | ) |
Net
Payments on Related Party Long-Term Notes | ( i 325 | ) | | ( i 1,500 | ) |
Payments
for Unitholder Distributions | ( i 14,434 | ) | | ( i 14,405 | ) |
Units
Withheld for Taxes | ( i 217 | ) | | ( i 880 | ) |
Net
Cash Used in Financing Activities | ( i 11,924 | ) | | ( i 17,723 | ) |
Net
Decrease in Cash | ( i 320 | ) | | ( i 598 | ) |
Cash
at Beginning of Period | i 543 |
| | i 1,003 |
|
Cash
at End of Period | $ | i 223 |
| | $ | i 405 |
|
| | | |
Non-Cash
Investing and Financing Activities: | | | |
Finance Lease | $ | i 1,756 |
| | $ | i — |
|
Longwall
Shield Rebuild | $ | i 2,282 |
| | $ | i — |
|
The
accompanying notes are an integral part of these consolidated financial statements.
CONSOL COAL RESOURCES LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per unit amounts)
NOTE 1— i BASIS
OF PRESENTATION:
i
The accompanying unaudited Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
For
the three months ended March 31, 2020 and 2019, the unaudited Consolidated Financial Statements include the accounts of CONSOL Operating and CONSOL Thermal Holdings, wholly owned and controlled subsidiaries.
The Partnership is a master limited partnership formed on March 16, 2015 to manage and further develop all of our sponsor's active coal operations in Pennsylvania. As of March 31, 2020, the Partnership's
assets are comprised of a i 25% undivided interest in, and operational control over, the Pennsylvania Mining Complex. The Partnership's common units trade on the New York Stock Exchange under the ticker symbol “CCR.”
i Recent
Accounting Pronouncements:
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04 Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this Update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The Update also provides optional expedients and exceptions for applying generally accepted accounting principles (“GAAP”) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update are effective for all entities
as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic, the amendments in this Update must be applied prospectively for all eligible contract modifications for that Topic or
Industry Subtopic. Management has elected to apply this Update subsequent to March 12, 2020. Management is currently evaluating the impact of this guidance, but does not expect this update to have a material impact on the Partnership's financial statements.
In August 2018, the FASB issued ASU 2018-15 - Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40) to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments in Update 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements of capitalizing implementation costs incurred to develop or obtain internal-use software. These changes will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance was adopted during the three months ended March 31, 2020 and did not have a material impact on the Partnership's financial statements.
In August 2018, the FASB issued ASU 2018-14 - Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by GAAP. The amendments modify the disclosure requirements for employers that sponsor defined benefit pension
or other postretirement plans. These changes will be effective for fiscal years ending after December 15, 2020, including interim periods within those fiscal years. Management is currently evaluating the impact this guidance may have on the Partnership's financial statements.
In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820) to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by GAAP. The amendments modify the disclosure requirements on fair value measurements, including the consideration of costs and benefits. These changes will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This
guidance was adopted during the three months ended March 31, 2020 and did not have a material impact on the Partnership's financial statements.
NOTE 2— i REVENUE:
i
|
| | | | | | | |
| | | |
Coal Revenue | $ | i 63,863 |
| | $ | i 83,126 |
|
Freight
Revenue | i 787 |
| | i 1,665 |
|
| $ | i 64,650 |
| | $ | i 84,791 |
|
/
i Our
revenue is generally recognized when title passes to the customer and the price is fixed and determinable. We have determined that each ton of coal represents a separate and distinct performance obligation. Our coal supply contracts and other sales and operating revenue contracts vary in length from short-term to long-term contracts and do not typically have significant financing components.
The estimated transaction price from each of our contracts is based on the total amount of consideration to which we
expect to be entitled under the contract. Included in the transaction price for certain coal supply contracts is the impact of variable consideration, including quality price adjustments, handling services, per-ton price fluctuations based on certain coal sales price indices and anticipated payments in lieu of shipments. The estimated transaction price for each contract is allocated to our performance obligations based on relative standalone selling prices determined at contract inception.
Coal Revenue
Revenues
are generally recognized when title passes to the customers and the price is fixed and determinable. Generally, title passes when coal is loaded at the central preparation facility and, on occasion, at terminal locations or other customer destinations. Our coal contract revenue per ton is fixed and determinable and adjusted for nominal quality adjustments. Some coal contracts also contain positive electric power price-related adjustments, which represent market-driven price adjustments, wherein there is no additional value exchanged, in addition to a fixed base price per ton. The Partnership's coal contracts generally do not allow for retroactive adjustments to pricing after title to the coal has
passed.
Some of our contracts span multiple years and have annual pricing modification provisions, based upon market-driven or inflationary adjustments, where no additional value is exchanged. Management believes that the invoice price is the most appropriate rate at which to recognize revenue.
While we do, from time to time, experience costs of obtaining coal customer contracts with amortization periods greater than one year, those costs are generally immaterial to our net income. As of and for the three months ended March 31,
2020 and March 31, 2019, we do not have any capitalized costs to obtain customer contracts on our balance sheet nor have we recognized any amortization of previously existing capitalized costs of obtaining customer contracts. Further, the Partnership has not recognized any revenue in the current period from performance obligations satisfied (or partially satisfied) in previous periods.
Freight Revenue
Some of our coal contracts
require that we sell our coal at locations other than our central preparation plant. The cost to transport our coal to the ultimate sales point is passed through to our customers and we recognize the freight revenue equal to the transportation cost when title of the coal passes to the customer.
Contract assets are recorded separately from trade receivables in the Partnership's unaudited Consolidated Balance Sheets and are reclassified to trade receivables as title passes to the customer and the Partnership's right to consideration becomes unconditional. Payments for coal shipments
are typically due within two to four weeks of the invoice date. The Partnership typically does not have material contract assets that are stated separately from trade receivables as the Partnership's performance obligations are satisfied as control of the goods or services passes to the customer, thereby granting the Partnership an unconditional right to receive consideration. Contract liabilities relate to consideration received in advance of the satisfaction of the Partnership's performance obligations. Contract liabilities are recognized as revenue at the point in time when control of the good or service passes to the customer.
NOTE
3— i NET INCOME PER LIMITED PARTNER AND GENERAL PARTNER INTEREST:
The Partnership allocates net income among our general partner and limited partners using the two-class method in accordance with applicable authoritative accounting guidance. Under the two-class method, we allocate our net income to our limited partners and our general partner in accordance with the terms of our Partnership Agreement. We also allocate any earnings in excess of distributions to our limited partners and our general partner in accordance with the terms of our Partnership Agreement. We allocate
any distributions in excess of earnings for the period to our general partner and our limited partners based on their respective proportionate ownership interests in us, after taking into account distributions to be paid with respect to the incentive distribution rights, as set forth in the Partnership Agreement.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as awards under the long-term incentive plan, were exercised, settled or converted into common units. When it is determined that potential common units resulting from an award subject to performance or market conditions should be included in the diluted net income per limited partner unit calculation, the impact is reflected by applying the treasury stock method.
On August
16, 2019, all i 11,611,067 subordinated units were converted into common units on a i one-for-one
basis. For purposes of calculating net income per common and subordinated unit, the conversion of the subordinated units is deemed to have occurred on July 1, 2019. 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. Upon payment of the cash distribution for the second quarter of 2019, the financial requirements for the conversion of all subordinated units were satisfied.
i The
following table illustrates the Partnership’s calculation of net income per unit for common and subordinated partner units: |
| | | | | | | |
| |
| 2020 | | 2019 |
Net Income | $ | i 164 |
| | $ | i 15,220 |
|
Less:
General Partner Interest in Net Income | i 3 |
| | i 257 |
|
Net
Income Allocable to Limited Partner Units | $ | i 161 |
| | $ | i 14,963 |
|
| | | |
Limited
Partner Interest in Net Income - Common Units | $ | i 161 |
| | $ | i 8,676 |
|
Limited
Partner Interest in Net Income - Subordinated Units | i — |
| | i 6,287 |
|
Limited
Partner Interest in Net Income - Basic & Diluted | $ | i 161 |
| | $ | i 14,963 |
|
| | | |
Weighted
Average Limited Partner Units Outstanding - Basic | i 27,665,008 |
| | i 27,589,172 |
|
| | | |
Weighted
Average Limited Partner Units Outstanding - Diluted | i 27,685,284 |
| | i 27,645,697 |
|
| | | |
Net
Income Per Limited Partner Unit - Basic | | | |
Common Units | $ | i 0.01 |
| | $ | i 0.54 |
|
Subordinated
Units | $ | i — |
| | $ | i 0.54 |
|
Net
Income Per Limited Partner Unit - Basic | $ | i 0.01 |
| | $ | i 0.54 |
|
| | | |
Net
Income Per Limited Partner Unit - Diluted | | | |
Common Units | $ | i 0.01 |
| | $ | i 0.54 |
|
Subordinated
Units | $ | i — |
| | $ | i 0.54 |
|
Net
Income Per Limited Partner Unit - Diluted | $ | i 0.01 |
| | $ | i 0.54 |
|
/ There
were i no phantom units excluded from the computation of the diluted earnings per unit, because their effect would be anti-dilutive for the three months ended March 31, 2020 and 2019.
NOTE
4— i CREDIT LOSSES:
Effective January 1, 2020, the Partnership adopted ASU 2016-013, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using a modified retrospective approach. This ASU replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade and other receivables. The
amendment requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due, which were not considered under previous accounting guidance. The Partnership recorded a cumulative-effect adjustment to decrease retained earnings in the amount of $ i 251 for expected credit losses on financial assets at the adoption date.
i The
following table illustrates the impact of ASC 326.
|
| | | | | | | | | | | |
| |
| As Reported Under ASC 326 | | Pre-ASC 326 Adoption | | Impact
of ASC 326 Adoption |
| | | | | |
Trade Receivables | $ | i 763 |
| | $ | i 525 |
| | $ | i 238 |
|
Other
Receivables | i 32 |
| | i 19 |
| | i 13 |
|
Allowance
for Credit Losses on Receivables | $ | i 795 |
| | $ | i 544 |
| | $ | i 251 |
|
/
The
Partnership is exposed to credit losses primarily through sales of products and services. The Partnership's expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers' trade and other accounts receivables. Due to the short-term nature of such receivables, the estimate of the amount of accounts receivable that may not be collected is based on an aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Partnership's monitoring activities include timely account reconciliations, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions.
Balances
are written off when determined to be uncollectible. The Partnership considered the current and expected future economic and market conditions surrounding the novel coronavirus (“COVID-19”) pandemic and determined that the estimate of credit losses was not significantly impacted.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes to the assessment of anticipated payment, changes in economic conditions, current industry trends in the markets the Partnership serves, and changes in the financial health of the Partnership's counterparties.
i The
following table provides a roll-forward of the allowance for credit losses by portfolio segment that is deducted from the amortized cost basis of accounts receivable to present the net amount expected to be collected.
|
| | | | | | | |
| Trade Receivables | | Other Receivables |
| | | |
| $ | i 525 |
| | $ | i 19 |
|
Adoption
of ASU 2016-13, cumulative-effect adjustment to retained earnings | i 238 |
| | i 13 |
|
Provision
for expected credit losses | ( i 161 | ) | | i 2 |
|
| $ | i 602 |
| | $ | i 34 |
|
/
NOTE
5— i INVENTORIES:
i |
| | | | | | | |
| | | |
Coal | $ | i 1,155 |
| | $ | i 621 |
|
Supplies | i 12,631 |
| | i 12,032 |
|
Total
Inventories | $ | i 13,786 |
| | $ | i 12,653 |
|
/
Inventories
are stated at the lower of cost or net realizable value. The cost of coal inventories is determined by the first-in, first-out (FIFO) method. Coal inventory costs include labor, supplies, equipment costs, operating overhead, depreciation, depletion and amortization, and other related costs. The cost of supplies inventory is determined by the average cost method and includes operating and maintenance supplies to be used in our coal operations.
NOTE 6— i PROPERTY,
PLANT AND EQUIPMENT:
i
|
| | | | | | | |
| | | |
Coal and Other Plant and Equipment | $ | i 673,652 |
| | $ | i 666,560 |
|
Coal
Properties and Surface Lands | i 126,465 |
| | i 126,294 |
|
Airshafts | i 108,399 |
| | i 106,750 |
|
Mine
Development | i 81,538 |
| | i 81,538 |
|
Advance
Mining Royalties | i 3,766 |
| | i 3,756 |
|
Total
Property, Plant and Equipment | i 993,820 |
| | i 984,898 |
|
Less:
Accumulated Depreciation, Depletion and Amortization | i 582,942 |
| | i 571,238 |
|
Total
Property, Plant and Equipment, Net | $ | i 410,878 |
| | $ | i 413,660 |
|
/
Coal
reserves are controlled either through fee ownership or by lease. The duration of the leases varies; however, the lease terms generally are extended automatically to the exhaustion of economically recoverable coal reserves, as long as active mining continues. Coal interests held by lease provide the same rights as fee ownership for mineral extraction and are legally considered real property interests.
As of March 31, 2020 and December 31, 2019, property, plant and equipment includes gross assets under finance lease of $ i 18,272
and $ i 12,596, respectively. Accumulated amortization for finance leases was $ i 8,968
and $ i 7,351 at March 31, 2020 and December 31, 2019, respectively. Amortization expense for assets under finance leases approximated $ i 1,230
and $ i 967 for the three months ended March 31, 2020 and March 31, 2019, respectively, and is included in Depreciation, Depletion and Amortization in the accompanying unaudited Consolidated Statements of Operations.
NOTE
7— i OTHER ACCRUED LIABILITIES:
i
|
| | | | | | | |
| | | |
Subsidence Liability | $ | i 24,006 |
| | $ | i 22,661 |
|
Accrued
Payroll and Benefits | i 3,242 |
| | i 4,460 |
|
Accrued
Interest (Related Party) | i 2,674 |
| | i 2,541 |
|
Accrued
Other Taxes | i 1,137 |
| | i 921 |
|
Other | i 1,337 |
| | i 1,383 |
|
Current
Portion of Long-Term Liabilities: | | | |
Operating Lease Liability | i 4,442 |
| | i 4,753 |
|
Workers’
Compensation | i 1,430 |
| | i 1,423 |
|
Asset
Retirement Obligations | i 954 |
| | i 954 |
|
Pneumoconiosis
Benefits | i 207 |
| | i 201 |
|
Long-Term
Disability | i 155 |
| | i 158 |
|
Total
Other Accrued Liabilities | $ | i 39,584 |
| | $ | i 39,455 |
|
/ NOTE
8— i LONG-TERM DEBT:
i
|
| | | | | | | |
| | | |
| $ | i 180,600 |
| | $ | i 180,925 |
|
Other
Asset-Backed Financing Maturing in December 2020, 5.83% and 5.96% Weighted Average Interest Rate at March 31, 2020 and December 31, 2019, respectively | i 3,725 |
| | i 1,443 |
|
| i 184,325 |
| | i 182,368 |
|
Less:
Amounts Due in One Year* | i 3,725 |
| | i 1,443 |
|
Long-Term
Debt | $ | i 180,600 |
| | $ | i 180,925 |
|
/
Affiliated Company Credit Agreement
On November 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. On March 28, 2019, the Affiliated Company Credit Agreement was amended to extend the maturity date from February
27, 2023 to December 28, 2024. The Affiliated Company Credit Agreement provides for a revolving credit facility in an aggregate principal amount of up to $ i 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 $ i 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 i 3.75%
to i 4.75%, depending on the total net leverage ratio. The unused portion of our Affiliated Company Credit Agreement is subject to a commitment fee of i 0.50%
per annum. The Partnership had available capacity under the Affiliated Company Credit Agreement of $ i 94,400 and $ i 94,075
as of March 31, 2020 and December 31, 2019, respectively.
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 (subject to certain limited
exceptions); provided that we will be able to make cash distributions of available cash to partners so long as 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 the Pennsylvania Mining Complex and make investments in the Pennsylvania 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.
For example, the Partnership is obligated to maintain at the end of each fiscal quarter (a) maximum first lien gross leverage ratio of i 2.75
to 1.00 and (b) a maximum total net leverage ratio of i 3.25 to 1.00, each of which will be calculated on a consolidated basis for the Partnership and its restricted subsidiaries
at the end of each fiscal quarter. At March 31, 2020, the Partnership was in compliance with its financial covenants with a first lien gross leverage ratio of i 2.21
to 1.00 and a total net leverage ratio of i 2.21 to 1.00.
Other Asset-Backed Financing
As
of March 31, 2020 and December 31, 2019, the Partnership was a borrower under an asset-backed financing arrangement related to certain equipment. The equipment, which had an approximate value of $ i 3,725 and $ i 1,443,
respectively, fully collateralizes the loan. NOTE 9— i COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS:
The Partnership is obligated to CONSOL Energy for medical and disability benefits to certain CPCC employees and their dependents resulting
from occurrences of coal workers’ pneumoconiosis disease and is also obligated to CONSOL Energy to compensate certain individuals who are entitled benefits under workers’ compensation laws.
i |
| | | | | | | | | | | | | | | |
| CWP | | Workers’ Compensation |
| Three
Months Ended March 31, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
Service Cost | $ | i 254 |
| | $ | i 200 |
| | $ | i 386 |
| | $ | i 349 |
|
Interest
Cost | i 45 |
| | i 49 |
| | i 32 |
| | i 41 |
|
Amortization
of Actuarial Loss (Gain) | i 41 |
| | i 6 |
| | ( i 9 | ) | | ( i 12 | ) |
State
Administrative Fees and Insurance Bond Premiums | i — |
| | i — |
| | i 48 |
| | i 51 |
|
Net
Periodic Benefit Cost | $ | i 340 |
| | $ | i 255 |
| | $ | i 457 |
| | $ | i 429 |
|
/ NOTE
10— i FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Partnership determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent
in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources (including LIBOR-based discount rates), while unobservable inputs reflect the Partnership’s own assumptions of what market participants would use.
The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.
Level One - Quoted prices for identical instruments in active markets.
Level Two - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models
that use significant observable inputs, including LIBOR-based discount rates.
Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity. The significant unobservable inputs used in the fair value measurement of the Partnership’s third party guarantees are the credit risk of the third party and the third party surety bond markets.
In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest level input that is significant to the fair value measurement in its totality
determines the applicable level in the fair value hierarchy.
The following methods and assumptions were used to estimate the fair value for which the fair value option was not elected:
Long-term debt: The fair value of long-term debt is measured using unadjusted quoted market prices or estimated using discounted cash flow analyses. The discounted cash flow analyses are based on current market rates for instruments with similar cash flows.
i The
carrying amounts and fair values of financial instruments for which the fair value option was not elected are as follows:
|
| | | | | | | | | | | | | | | |
| | | |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Affiliated
Company Credit Agreement—Related Party | $ | i 180,600 |
| | $ | i 180,600 |
| | $ | i 180,925 |
| | $ | i 180,925 |
|
/ The
Partnership’s debt obligations are valued through reference to the applicable underlying benchmark rate and, as a result, constitute Level 2 fair value measurements.
NOTE 11— i COMMITMENTS AND CONTINGENT LIABILITIES:
The Partnership is subject to various lawsuits and claims with respect to such matters as personal injury,
wrongful death, damage to property, exposure to hazardous substances, governmental regulations (including environmental remediation), employment and contract disputes and other claims and actions arising out of the normal course of its business. We accrue the estimated loss for these lawsuits and claims when the loss is probable and can be estimated. Our current estimated accruals related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations or cash flows of the Partnership. It is possible that the aggregate loss in the future with respect to these lawsuits and claims could ultimately be material to the financial position, results of operations or cash flows of the Partnership; however, such amounts cannot be reasonably estimated.
At
March 31, 2020, the Partnership was contractually obligated to CONSOL Energy for financial guarantees and letters of credit to certain third parties which were issued by CONSOL Energy on behalf of the Partnership. The maximum potential total of future payments that we could be required to make under these instruments is $ i 99,660. The instruments are comprised of $ i 1,951
of letters of credit expiring within the next i three years, $ i 89,037
of environmental surety bonds expiring within the next i three years, and $ i 8,672
of employee-related and other surety bonds expiring within the next i three years. Employee-related financial guarantees have primarily been provided to support various state workers’ compensation and federal black lung self-insurance programs. Environmental financial guarantees have primarily been provided to support various performance bonds related to reclamation and other environmental issues. Other guarantees have been extended to support
insurance policies, legal matters, full and timely payments of mining equipment leases, and various other items necessary in the normal course of business. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these financial guarantees and letters of credit are recorded as liabilities on the financial statements. The Partnership’s management believes that these guarantees will expire without being funded, and therefore the commitments will not have a material adverse effect on the financial condition of the Partnership.
NOTE 12— i RECEIVABLES
FINANCING AGREEMENT
On November 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 and CONSOL 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”). In March 2020, the Securitization was amended, among other things, to extend the scheduled termination date to March 27, 2023.
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 by CONSOL 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 $ i 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 participation fee, respectively, ranging from i 2.00% to i 2.50%
per annum, depending on the total net leverage ratio of CONSOL Energy. In addition, the SPV paid certain structuring fees to PNC Capital Markets LLC and will pay other customary fees to the lenders, including a fee on unused commitments. 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 of CONSOL 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 Securitization contains 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 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 March 31, 2020 and December 31, 2019, respectively,
the Partnership, through CONSOL Thermal Holdings, had sold $ i 28,747 and $ i 33,294
of trade receivables to CPCC. The Partnership has not derecognized the receivables due to its continued involvement in the collections efforts. NOTE 13— i RELATED PARTY:
Omnibus Agreement
The
Partnership is a party to the Omnibus Agreement, dated September 30, 2016, as amended on November 28, 2017, with our sponsor and certain of its subsidiaries. Under the Omnibus Agreement, we are obligated to make certain payments to, and reimburse, CONSOL Energy for the provision of certain services in connection with our operations.
i Charges for services from
CONSOL Energy under the Omnibus Agreement include the following: |
| | | | | | | |
| |
| 2020 | | 2019 |
Operating and Other Costs | $ | i 853 |
| | $ | i 763 |
|
Selling,
General and Administrative Expenses | i 2,793 |
| | i 3,056 |
|
Total
Services from CONSOL Energy | $ | i 3,646 |
| | $ | i 3,819 |
|
/
At
March 31, 2020 and December 31, 2019, the Partnership had a net payable to CONSOL Energy in the amount of $ i 4,279 and $ i 1,419,
respectively. This payable includes reimbursements for business expenses, executive fees, stock-based compensation and other items under the Omnibus Agreement.
Affiliated Company Credit Agreement
As described in Note 8, the Partnership is also a party to the Affiliated Company Credit Agreement with CONSOL Energy.
For the three months ended March 31, 2020
and 2019, $ i 2,114 and $ i 1,796
of interest was incurred under the Affiliated Company Credit Agreement, respectively, of which $118 and $ i 445 was capitalized and included in Property, Plant and Equipment in the unaudited Consolidated Balance Sheets, respectively. Interest is calculated based upon a
fixed rate, determined quarterly, depending on the total net leverage ratio. For the three months ended March 31, 2020 and 2019, the average interest rate was i 4.00%
and i 3.75%, respectively. See Note 8 - Long-Term Debt for more information.
Repurchase Program
In May 2019, CONSOL Energy's Board of Directors approved an expansion of the stock,
unit and debt repurchase program. The program previously allowed CONSOL Energy to use up to $ i 25 million of the program to purchase the Partnership's outstanding common units in the open market. CONSOL Energy's Board of Directors approved changing the termination date of the program from June 30, 2019 to June 30, 2020. Also, in accordance with CONSOL Energy’s credit facility covenants,
the total amount that can be used for repurchases of the Partnership's outstanding common units was raised to $ i 50 million. i No
common units were purchased during the three months ended March 31, 2020 and 2019.
Conversion of Subordinated Units
In August 2019, upon payment of the cash distribution with respect to the quarter ended June 30, 2019, the financial requirements for the conversion of all the Partnership's subordinated units were satisfied. As a result, all i 11,611,067
subordinated units, owned entirely by CONSOL Energy Inc., were converted into common units on a i 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. NOTE 14— i LONG-TERM
INCENTIVE PLAN:
Under the CONSOL Coal Resources LP 2015 Long-Term Incentive Plan (the “LTIP”), our general partner may issue long-term equity-based awards to directors, officers and employees of our general partner or its affiliates, or to any consultants, affiliates of our general partner or other individuals who perform services for us. These awards are intended to compensate the recipients thereof based on the performance of our common units and their continued service during the vesting period, as well as to align their long-term interests with those of our unitholders. We are responsible for the cost of awards granted under the LTIP and all determinations with respect to awards to be made under the LTIP will be made by the board of directors of our general partner or any committee thereof that may be established for such purpose or by any delegate of the
board of directors or such committee, subject to applicable law, which we refer to as the plan administrator.
The LTIP limits the number of units that may be delivered pursuant to vested awards to i 2,300,000 common units, subject to proportionate adjustment
in the event of unit splits and similar events. Common units subject to awards that are canceled, forfeited, withheld to satisfy exercise prices or tax withholding obligations or otherwise terminated without delivery of the common units will be available for delivery pursuant to other awards. The Partnership recognizes forfeitures as they occur.
The general partner has granted equity-based phantom units that vest over a period of a recipient’s continued service with the Partnership. The phantom units will be paid in common units or an amount of cash equal to the fair market value of a unit based on the vesting date. The awards may accelerate upon a change in control of the Partnership. Compensation expense is recognized on a straight-line basis over the requisite service period, which is generally the vesting term. The Partnership recognized compensation expense of $ i 159
and $ i 397 for the three months ended March 31, 2020 and March 31, 2019, respectively, which is included in Selling, General
and Administrative Expense in the unaudited Consolidated Statements of Operations. As of March 31, 2020, there is $ i 259 of unearned compensation that will vest over a weighted average
period of i 0.87 years. The total fair value of phantom units vested during the three months ended March 31, 2020 and March 31,
2019 was $ i 820 and $ i 2,905,
respectively. i The following represents the nonvested phantom units and their corresponding weighted average grant date fair value:
|
| | | | | | |
| Number
of Units | | Weighted Average Grant Date Fair Value per Unit |
| i 78,345 |
| | $ | i 18.62 |
|
Granted | i 33,705 |
| | $ | i 8.90 |
|
Vested | ( i 78,173 | ) | | $ | i 18.62 |
|
Forfeited | ( i 172 | ) | | $ | i 18.95 |
|
| i 33,705 |
| | $ | i 8.90 |
|
NOTE
15— i SUBSEQUENT EVENTS:
On April 23, 2020, the Board of Directors of our general partner made the decision to temporarily suspend the quarterly distribution to all of the Partnership's unitholders due to the ongoing uncertainty in the commodity markets driven by the COVID-19 pandemic-related demand decline.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the Pennsylvania 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 the Pennsylvania 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 the Bailey Mine for two weeks at the end of March. 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 the U.S. Department
of Homeland Security. As a result, we are exempt from Pennsylvania Governor Tom Wolf's executive order closing all businesses that are not life sustaining. The coal demand decline that began in the first quarter is continuing into the second 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 on April 14, 2020 that it temporarily idled production at the Enlow Fork mine. 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.
It is not clear how long the government-imposed shutdowns of nonessential business in the United States and abroad will last, and there is a possibility that such shutdowns may
be reimposed after being lifted 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. 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. While we expect this matter to negatively impact our results of operations, cash flows and financial condition, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial
impact cannot be reasonably estimated at this time. 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.
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 March 31, 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; (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.
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.
|
| | | | | | | |
| |
| 2020 | | 2019 |
Total Costs | $ | 67,204 |
| | $ | 70,887 |
|
Freight
Expense | (787 | ) | | (1,665 | ) |
Selling, General and Administrative Expenses | (4,046 | ) | | (4,560 | ) |
Interest Expense, Net | (2,155 | ) | | (1,351 | ) |
Other
Costs (Non-Production) | (440 | ) | | (2,264 | ) |
Depreciation, Depletion and Amortization (Non-Production) | (533 | ) | | (577 | ) |
Cost of Coal Sold | $ | 59,243 |
| | $ | 60,470 |
|
Depreciation,
Depletion and Amortization (Production) | (11,395 | ) | | (10,640 | ) |
Cash Cost of Coal Sold | $ | 47,848 |
| | $ | 49,830 |
|
We
define average cash margin per ton as average coal revenue per ton, 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.
|
| | | | | | | |
| |
| 2020 | | 2019 |
Total Coal Revenue | $ | 63,863 |
| | $ | 83,126 |
|
Operating and Other Costs | 48,288 |
| | 52,094 |
|
Less:
Other Costs (Non-Production) | (440 | ) | | (2,264 | ) |
Cash Cost of Coal Sold | 47,848 |
| | 49,830 |
|
Add: Depreciation, Depletion and Amortization | 11,928 |
| | 11,217 |
|
Less:
Depreciation, Depletion and Amortization (Non-Production) | (533 | ) | | (577 | ) |
Cost of Coal Sold | $ | 59,243 |
| | $ | 60,470 |
|
Total
Tons Sold | 1,480 |
| | 1,683 |
|
Average Revenue per Ton Sold | $ | 43.16 |
| | $ | 49.38 |
|
Average
Cash Cost of Coal Sold per Ton | 32.41 |
| | 29.71 |
|
Add: Depreciation, Depletion and Amortization Costs per Ton Sold | 7.63 |
| | 6.21 |
|
Average Cost
of Coal Sold per Ton | $ | 40.04 |
| | $ | 35.92 |
|
Average Margin per Ton Sold | 3.12 |
| | 13.46 |
|
Add:
Total Depreciation, Depletion and Amortization Costs per Ton Sold | 7.63 |
| | 6.21 |
|
Average Cash Margin per Ton Sold | $ | 10.75 |
| | $ | 19.67 |
|
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. We define distribution coverage ratio as a ratio of the distributable cash flow to the distributions, which is the $0.5125 per quarter distribution for all limited partner units, including common and subordinated units, issued for the periods presented.
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.
|
| | | | | | | |
| |
| 2020 | | 2019 |
Net
Income | $ | 164 |
| | $ | 15,220 |
|
Plus: | | | |
Interest Expense, Net | 2,155 |
| | 1,351 |
|
Depreciation,
Depletion and Amortization | 11,928 |
| | 11,217 |
|
Unit-Based Compensation | 159 |
| | 397 |
|
Adjusted EBITDA | $ | 14,406 |
| | $ | 28,185 |
|
Less: | | | |
Cash
Interest | 2,046 |
| | 1,875 |
|
Estimated Maintenance Capital Expenditures | 8,872 |
| | 8,981 |
|
Distributable Cash Flow | $ | 3,488 |
| | $ | 17,329 |
|
| | | |
Net
Cash Provided by Operating Activities | $ | 16,777 |
| | $ | 25,218 |
|
Plus: | | | |
Interest Expense, Net | 2,155 |
| | 1,351 |
|
Other,
Including Working Capital | (4,526 | ) | | 1,616 |
|
Adjusted EBITDA | $ | 14,406 |
| | $ | 28,185 |
|
Less: | | | |
Cash
Interest | 2,046 |
| | 1,875 |
|
Estimated Maintenance Capital Expenditures | 8,872 |
| | 8,981 |
|
Distributable Cash Flow | $ | 3,488 |
| | $ | 17,329 |
|
Minimum
Quarterly Distributions | $ | 14,434 |
| | $ | 14,405 |
|
Distribution Coverage Ratio | 0.2 |
| | 1.2 |
|
Results
of Operations
Total net income was $164 for the three months ended March 31, 2020 compared to $15,220 for the three months ended March 31,
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 |
| |
| 2020 | | 2019 | | Variance |
Revenue: | | | | | |
Coal
Revenue | $ | 63,863 |
| | $ | 83,126 |
| | $ | (19,263 | ) |
Freight Revenue | 787 |
| | 1,665 |
| | (878 | ) |
Other
Income | 2,718 |
| | 1,316 |
| | 1,402 |
|
Total Revenue and Other Income | 67,368 |
| | 86,107 |
| | (18,739 | ) |
Cost
of Coal Sold: | | | | | |
Operating Costs | 47,848 |
| | 49,830 |
| | (1,982 | ) |
Depreciation,
Depletion and Amortization | 11,395 |
| | 10,640 |
| | 755 |
|
Total Cost of Coal Sold | 59,243 |
| | 60,470 |
| | (1,227 | ) |
Other
Costs: | | | | | |
Other Costs | 440 |
| | 2,264 |
| | (1,824 | ) |
Depreciation,
Depletion and Amortization | 533 |
| | 577 |
| | (44 | ) |
Total Other Costs | 973 |
| | 2,841 |
| | (1,868 | ) |
Freight
Expense | 787 |
| | 1,665 |
| | (878 | ) |
Selling, General and Administrative Expenses | 4,046 |
| | 4,560 |
| | (514 | ) |
Interest
Expense, Net | 2,155 |
| | 1,351 |
| | 804 |
|
Total Costs | 67,204 |
| | 70,887 |
| | (3,683 | ) |
Net
Income | $ | 164 |
| | $ | 15,220 |
| | $ | (15,056 | ) |
Adjusted EBITDA | $ | 14,406 |
| | $ | 28,185 |
| | $ | (13,779 | ) |
Distributable
Cash Flow | $ | 3,488 |
| | $ | 17,329 |
| | $ | (13,841 | ) |
Distribution Coverage Ratio | 0.2 |
| | 1.2 |
| | (1.0 | ) |
Coal
Production
The table below presents total tons produced from the Pennsylvania Mining Complex on our 25% undivided interest for the periods indicated: |
| | | | | | | | | |
| | Three Months Ended March 31, |
Mine | | 2020 | | 2019 | | Variance |
Bailey | | 701 |
| | 737 |
| | (36 | ) |
Enlow
Fork | | 594 |
| | 707 |
| | (113 | ) |
Harvey | | 198 |
| | 268 |
| | (70 | ) |
Total | | 1,493 |
| | 1,712 |
| | (219 | ) |
Coal
production was 1,493 tons for the three months ended March 31, 2020 compared to 1,712 tons for the three months ended March 31, 2019. Coal production decreased 219 tons 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 three months ended March 31, 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. |
| | | | | | | | | | | |
| |
| 2020 | | 2019 | | Variance |
Total Tons Sold | 1,480 |
| | 1,683 |
| | (203 | ) |
Average
Revenue per Ton Sold | $ | 43.16 |
| | $ | 49.38 |
| | $ | (6.22 | ) |
| | | | |
|
|
Average
Cash Cost of Coal Sold per Ton (1) | $ | 32.41 |
| | $ | 29.71 |
| | $ | 2.70 |
|
Depreciation, Depletion and Amortization per Ton Sold (Non-Cash Cost) | 7.63 |
| | 6.21 |
| | 1.42 |
|
Average
Cost of Coal Sold per Ton | $ | 40.04 |
| | $ | 35.92 |
| | $ | 4.12 |
|
Average Margin per Ton Sold | $ | 3.12 |
| | $ | 13.46 |
| | $ | (10.34 | ) |
Add:
Depreciation, Depletion and Amortization Costs per Ton Sold | 7.63 |
| | 6.21 |
| | 1.42 |
|
Average Cash Margin per Ton Sold (1) | $ | 10.75 |
| | $ | 19.67 |
| | $ | (8.92 | ) |
(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 $63,863 for the three months ended March 31, 2020 compared to $83,126 for the three
months ended March 31, 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 netback contracts and export sales.
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 $787 for the three months ended March 31, 2020 compared to $1,665 for the three months ended March 31, 2019. The $878 decrease was due to decreased shipments to customers where we were contractually obligated to provide transportation services.
Other
income is comprised of income generated by the Partnership relating to non-coal producing activities. Other income was $2,718 for the three months ended March 31, 2020 compared to $1,316 for the three months ended March 31, 2019. The $1,402 increase was primarily the result of additional customer contract buyouts in the three months ended March 31,
2020, offset, in part, by a decrease in sales of externally purchased coal to blend and resell. These contract buyouts involved the negotiation of early terminations of several customer contracts in exchange for payment of certain fees to us.
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 $59,243 for the three months ended March 31, 2020, or $1,227 lower than the $60,470 for the three months ended March 31, 2019. Average cost of coal sold per ton was $40.04 per ton for the three months ended March 31, 2020, compared to $35.92
per ton for the three months ended March 31, 2019. The decrease in the total cost of coal sold was primarily driven by a decrease in production-related expenses, as less coal was mined in response to weakened commodity markets. This was partially offset by an increase in subsidence expense, primarily due to the timing and nature of properties undermined. On a per unit basis, the decreased production and higher subsidence costs 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 decreased $1,868 for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily attributable to a reduction in costs related to externally purchased coal to blend and resell.
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 $14,406 for the three months ended March 31, 2020 compared to $28,185 for the three months ended March 31, 2019. The
$13,779 decrease was primarily a result of a $8.92 decrease in the average cash margin per ton sold, coupled with 203 fewer tons sold during the first quarter of 2020, which equated to a $17,281 decrease to adjusted EBITDA. This was partially offset by an increase in non-production related income and lower non-production related costs, as discussed above.
Distributable Cash Flow
Distributable cash flow was $3,488 for the three
months ended March 31, 2020 compared to $17,329 for the three months ended March 31, 2019. The $13,841 decrease was primarily attributable to a $13,779 decrease in Adjusted EBITDA, as discussed above.
Capital
Resources and Liquidity
Liquidity and Financing Arrangements
Our ongoing 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 will be sufficient to meet our short-term working capital requirements and our long-term capital expenditure requirements.
The demand for coal experienced unprecedented decline starting at the end of the quarter ended March 31, 2020 and the coal demand decline is continuing into the second 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. It is not clear how long the government-imposed shutdowns of nonessential business in the United States and abroad will last, and there is a possibility that such shutdowns may be reimposed after being lifted 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. 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. While we expect this matter to negatively impact our results of operations, cash flows and financial condition, the current level of uncertainty over the economic and operational impacts of COVID-19 means
the related financial impact cannot be reasonably estimated at this time. 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 has withdrawn its previously announced operational and financial guidance for 2020, and we recently announced our temporary idling of the Enlow Fork Mine, due to the weakness in coal demand and economic slowdown related to the pandemic. Cost containment and capital expenditure reductions remains the focus as volume opportunities remain limited in the near term.
We believe our strong contracted position, consistent cost control measures and liquidity will allow us to fund our 2020 capital and operating expenses. We experienced some delays in collections of trade receivables in 2019. If these delays continue
or increase, we may have less cash flow from operations. Collections showed some improvement during the first quarter of 2020. However, we will continue to monitor the creditworthiness of our customers.
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, which generated cash proceeds of $4.1 million. The interest rate on this transaction is approximately 5.6%.
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, 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. While the Partnership did generate cash flow from operations during the three months ended March 31, 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. As
we
get better visibility on customer demand in the next quarter, the Board of Directors of our general partner will determine an appropriate level for cash distributions.
On July 25, 2019, the Board of Directors of our general partner announced that upon payment of the cash distribution with respect to the quarter ended June 30, 2019, the financial requirements for the conversion of all subordinated units had been satisfied. As a result, on August 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 actively monitoring the effects of the ongoing COVID-19 pandemic on its liquidity and capital resources. We took several steps in the first quarter to buttress our liquidity. We expect that there will be a decrease in demand for our coal, which could affect our liquidity. Our Affiliated Company Credit Agreement and Securitization Facility (collectively, the “Credit Facilities”) contain certain financial covenants. Events resulting from the effects of COVID-19 may negatively impact our liquidity and, as a result, our ability to comply with these covenants, which could lead us to seek an 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
On November 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. On March 28, 2019, the Affiliated Company Credit Agreement was amended to extend the maturity date from February 27, 2023 to December 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 3.75% to 4.75% 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 March 31, 2020, the Partnership had $180,600 of borrowings outstanding under the Affiliated Company Credit Agreement, leaving $94,400
of unused capacity. Interest on outstanding borrowings under the Affiliated Company Credit Agreement at March 31, 2020 was accrued at a rate of 4.00%.
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 (subject to certain limited exceptions); provided that we will be able to make cash distributions of available cash to partners so long as 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 the Pennsylvania Mining Complex and make investments in the Pennsylvania 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. For example, the Partnership is obligated to maintain at the end of each fiscal quarter (a) maximum first lien gross leverage ratio of 2.75 to 1.00 and (b) a maximum total net leverage ratio of 3.25 to 1.00, each of which will be calculated on a consolidated basis for the Partnership and its restricted subsidiaries
at the end of each fiscal quarter. At March 31, 2020, the Partnership was in compliance with its financial covenants with a first lien gross leverage ratio at 2.21 to 1.00 and a total net leverage ratio at 2.21 to 1.00.
Receivables Financing Agreement
On November 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 and CONSOL 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”). In March 2020, the Securitization was amended, among other things, to extend the scheduled termination date to March 27, 2023.
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 by CONSOL 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 to PNC 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 of CONSOL 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 March 31, 2020, the Partnership, through CONSOL Thermal Holdings, sold $28,747 of trade receivables to CPCC. The Partnership has not derecognized the receivables due to its continued involvement in the collections efforts. Cash
Flows
|
| | | | | | | | | | | |
| |
| 2020 | | 2019 | | Variance |
Cash
flows provided by operating activities | $ | 16,777 |
| | $ | 25,218 |
| | $ | (8,441 | ) |
Cash used in investing activities | $ | (5,173 | ) | | $ | (8,093 | ) | | $ | 2,920 |
|
Cash
used in financing activities | $ | (11,924 | ) | | $ | (17,723 | ) | | $ | 5,799 |
|
Cash provided by operating activities decreased $8,441 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 $2,920 in the period-to-period comparison. Capital expenditures
decreased primarily due to a decrease in expenditures related to building and infrastructure, as well as a decrease in expenditures associated with the coarse refuse disposal area project. The table below represents the various items for which cash was used for investing purposes during the three months ended March 31, 2020 and 2019.
|
| | | | | | | | | | | |
| |
| 2020 | | 2019 | | Variance |
Building and Infrastructure | $ | 2,827 |
| | $ | 3,692 |
| | $ | (865 | ) |
Equipment
Purchases and Rebuilds | 1,326 |
| | 1,761 |
| | (435 | ) |
Refuse Storage Area | 821 |
| | 1,670 |
| | (849 | ) |
Other | 199 |
| | 970 |
| | (771 | ) |
Total
Capital Expenditures | $ | 5,173 |
| | $ | 8,093 |
| | $ | (2,920 | ) |
Cash flows used in financing activities decreased
$5,799 in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease was primarily due to $4,073 of proceeds received in the three months ended March 31, 2020 related to a finance leasing arrangement and lower discretionary payments made under the Affiliated Company Credit Agreement. Net payments made under the Affiliated Company Credit Agreement decreased $1,175
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; |
| |
• | 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 U.S. and 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 SEC. |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under the supervision and with the participation of the management of the Partnership’s general partner, including the Chief Executive Officer and the Interim Chief Financial Officer of the general partner, an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), was conducted as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Interim Chief Financial Officer of the Partnership’s general partner have concluded that the Partnership’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control
over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
PART
II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to paragraph one within Part 1, Item 1. Financial Statements, “Note 11. Commitments and Contingent Liabilities,” which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In
addition to the other information set forth in this quarterly report, including the risk factor below, you should carefully consider the factors discussed in “Part I - Item 1A. Risk Factors” of our 2019 Form 10-K, as updated by any subsequent Form 10-Qs. These described risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Our business, results of operations and financial condition may be adversely affected by the outbreak of the novel coronavirus (COVID-19)
The COVID-19 pandemic began to adversely impact our business and operations late in the first quarter of 2020 and is continuing to adversely
affect our business, operations and liquidity. The effects of the continuing pandemic and related governmental response could include extended disruptions to supply chains and capital markets, reduced labor availability and productivity and a prolonged reduction in demand for coal and overall global economic activity.
The demand for coal experienced unprecedented decline starting at the end of the quarter ended March 31, 2020 and the coal demand decline is continuing into the second 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. It is not clear how long the government-imposed shutdowns of nonessential business in the United States and abroad will last, and there is a possibility that such shutdowns may be reimposed after being lifted 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. 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 result of operations and financial condition. In addition, COVID-19 is present in Pennsylvania. On March 30, 2020, our sponsor announced that it temporarily curtailed production at the Bailey Mine for a two week period and undertook a precautionary deep cleaning of the facilities at the Bailey Mine after two of its employees working at such facility tested positive for COVID-19. Our sponsor may be forced to temporarily curtail production in its mines again if some of its employees test positive for COVID-19 in the future. Such temporary curtailment could have a significant impact on our production of coal.
The continued spread of COVID-19 has caused increased volatility in the global capital markets. Such volatility increases the cost of and decreases access to capital. If the Partnership
needs to access the capital markets to fund its operations, such capital could be prohibitively expensive, which could cause the Partnership to pursue alternative sources of funding for our operations and working capital. Finally, COVID-19 may cause some of our suppliers to fail to deliver the quantities of supplies we need or fail to deliver such supplies in a timely manner. The failure to receive any such critical supplies could inhibit our ability to operate our mines or otherwise run our business. Additionally, our ability to ship our coal domestically or abroad could be impaired by disruptions in our global transportation network resulting from the COVID-19 pandemic.
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. While we expect this matter to negatively impact our results of operations, cash flows and financial condition, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS
|
| | |
Exhibits | Description | Method
of Filing |
| | |
| Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 | |
| | |
| Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | |
| Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| | |
| Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| | |
| Mine Safety and Health Administration Safety Data. | |
| | |
101 | Interactive
Data File (Form 10-Q for the quarterly period ended March 31, 2020, furnished in XBRL). | |
| | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL) | Contained in Exhibit 101 |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| CONSOL Coal Resources LP |
| | | |
| By: | | CONSOL
Coal Resources GP LLC, its general partner |
| By: | | |
| | | |
| | | Chief
Executive Officer, Chairman of the Board and Director (Principal Executive Officer) |
| | | |
| By: | | CONSOL Coal Resources GP LLC, its general partner |
| By: | | |
| | | |
| | | Interim Chief Financial Officer (Principal Financial Officer) |
| | | |
| By: | | CONSOL
Coal Resources GP LLC, its general partner |
| By: | | |
| | | |
| | | Chief
Accounting Officer (Principal Accounting Officer) |