CONSOL Energy (CEIX) - 2020 Q4 - Annual Report

Part I Item 1. Business CONSOL Energy is a low-cost producer of high-quality bituminous coal in the Appalachian Basin with core operations in mining, marine terminal services, and metallurgical coal development General Overview and Strategy The company operates key assets including the PAMC and CONSOL Marine Terminal, focusing on low-cost production, metallurgical coal growth, and innovative coal-to-product diversification - The company's core businesses are the Pennsylvania Mining Complex (PAMC), the CONSOL Marine Terminal, and the developing Itmann Mine, expected to produce 900 thousand tons per year of low-vol coking coal[29][30][31] - On December 30, 2020, the company completed the acquisition of all outstanding common units of CONSOL Coal Resources, making it an indirect wholly-owned subsidiary[34] - The company's long-term strategy involves diversifying its revenue stream to reduce exposure to thermal coal by increasing contributions from the CONSOL Marine Terminal, metallurgical coal, and other carbon products[36] - CONSOL is pursuing innovative uses of coal, including a 25% equity stake in CFOAM Corp for high-performance carbon foam products and a partnership to develop a refinery for waste coal slurry[39] - As of February 9, 2021, the company's contracted sales position is 18.2 million tons for 2021 and 5.6 million tons for 2022[42] Competitive Strengths The company's competitive advantages include its high-margin operations, extensive reserve base, low-cost longwall mining, strategic logistics, and a strong, established customer base - The Pennsylvania Mining Complex (PAMC) has 657.9 million tons of high-quality recoverable coal reserves, sufficient for over 20 years of production[46] - The PAMC is the most productive longwall mining complex in the Northern Appalachian Basin (NAPP), with a production rate of 7.21 tons per employee hour in 2020, compared to the NAPP average of 4.90[48] - The company has a significant transportation cost advantage over Illinois Basin (ILB) producers, estimated at $4 to $7 per ton for coal delivered to Europe and India[50] - The company's top ten domestic power plant customers, accounting for 74% of its domestic shipments in 2020, have no announced retirement plans for the next five years, and CONSOL has grown its market share at these plants from 11% in 2012 to 27% in 2020[51] Coal Operations and Reserves As of year-end 2020, the company controlled 2.2 billion tons of recoverable coal reserves, primarily thermal coal located at the Pennsylvania Mining Complex and the developing Itmann Mine PAMC Recoverable Coal Reserves (Millions of Tons, as of 12/31/2020) | Mine/Complex | Assigned Operating | Accessible | Total | | :--- | :--- | :--- | :--- | | Bailey | 69.2 | 39.0 | 108.2 | | Enlow Fork | 67.4 | 254.3 | 321.7 | | Harvey | 37.9 | 190.1 | 228.0 | | Total PAMC | 174.5 | 483.4 | 657.9 | Itmann Mine Recoverable Coal Reserves (Millions of Tons, as of 12/31/2020) | Reserve Class | Proven | Probable | Total | | :--- | :--- | :--- | :--- | | Assigned Operating | 4.2 | 1.4 | 5.6 | | Accessible | 5.8 | 9.2 | 15.0 | | Total Itmann | 10.0 | 10.6 | 20.6 | Total Recoverable Coal Reserves by Type (Millions of Tons, as of 12/31/2020) | Type | Tons | Percent of Total | | :--- | :--- | :--- | | Metallurgical | 81.3 | 3.7% | | Thermal | 2,084.4 | 96.3% | | Total | 2,165.7 | 100.0% | Production, Marketing, and Sales In 2020, coal production and sales prices declined due to weakened demand, with sales concentrated among a few key customers and significant volume shipped through the CONSOL Marine Terminal Coal Production (in millions of tons) | Mine | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Bailey | 8.7 | 12.2 | 12.7 | | Enlow Fork | 5.7 | 10.0 | 9.9 | | Harvey | 4.4 | 5.0 | 5.0 | | Total | 18.8 | 27.3 | 27.6 | PAMC Sales Performance | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Tons Sold (millions) | 18.7 | 27.3 | 27.7 | | Avg. Sales Price/Ton | $41.31 | $47.17 | $49.28 | - In 2020, three customers each comprised over 10% of coal sales, aggregating to approximately 55% of total sales[99] - The CONSOL Marine Terminal shipped 10.1 million tons of coal in 2020, with approximately 77% of the tonnage produced by the PAMC, and has a potential maximum throughput of 15 million tons annually[107] Laws and Regulations The company's operations face significant costs and potential demand reduction due to extensive environmental, health, and safety regulations, including those related to air, water, and climate change - The company's operations and its customers are heavily regulated under the Clean Air Act (CAA), which governs emissions from coal combustion[122][123] - Global climate change initiatives and regulations targeting greenhouse gas (GHG) emissions are expected to decrease the utilization of coal-fired power plants and reduce demand for coal[132] - The Surface Mining Control and Reclamation Act (SMCRA) requires the company to obtain surety bonds for long-term reclamation obligations, with $564 million in surety bonds posted as of December 31, 2020[152] - Under federal black lung benefits legislation, the company contributes to a trust fund via an excise tax on coal production, which was up to $1.10 per ton for deep mined coal through 2021[165] Item 1A. Risk Factors The company faces substantial business, operational, and financial risks including volatile coal prices, pandemic impacts, customer concentration, regulatory pressures, and stock price volatility Risks Related to Our Business The company's business is subject to risks from volatile coal prices, reduced demand from COVID-19, high customer concentration, and the long-term decline in coal use by power generators - The COVID-19 pandemic caused an unprecedented decline in coal demand in 2020 due to lockdowns and reduced electricity consumption, negatively impacting performance[181][183] - The company has significant customer concentration, with three domestic customers accounting for approximately 55% of coal sales in fiscal year 2020[196] - Regulations addressing climate change and greenhouse gas emissions may increase operating costs, reduce asset values, and adversely impact the market for coal[219][222] - Substantially all mining operations are conducted at the single Pennsylvania Mining Complex, making the company vulnerable to risks associated with operating in a single geographic area[237][238] Risks Related to Our Common Stock and the Securities Market Investors face risks including significant stock price volatility, no guarantee of future dividends, potential ownership dilution, and anti-takeover provisions that could depress the stock price - The market price of the company's common stock may fluctuate significantly due to factors such as earnings results, analyst estimates, and overall market conditions[307] - The payment of future dividends is not guaranteed and is subject to the discretion of the board of directors, financial conditions, and debt covenants[312] - The company's charter and Delaware law contain provisions intended to deter coercive takeovers, which could delay a change in control and potentially decrease the stock's trading price[318][319] - The certificate of incorporation designates Delaware state courts as the exclusive forum for certain stockholder lawsuits, which could limit a stockholder's ability to bring a claim elsewhere[324][325] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[327] Item 2. Properties The company's material properties include its mining operations, the CONSOL Marine Terminal in Baltimore, and its principal executive offices in Canonsburg, Pennsylvania - The company's primary properties consist of its mining operations, the CONSOL Marine Terminal in Baltimore, and its principal executive offices in Canonsburg, PA[329] Item 3. Legal Proceedings The company is involved in various legal proceedings incidental to its business but reports no material litigation at this time - The company is not currently subject to any material litigation, with details on commitments and contingent liabilities provided in Note 22 of the financial statements[330] Item 4. Mine Safety and Health Administration Safety Data Information regarding mine safety violations and other regulatory matters as required by the Dodd-Frank Act is included in Exhibit 95 of this annual report - Mine safety data required by Section 1503(a) of the Dodd-Frank Act is included in Exhibit 95 to this annual report[331] Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (NYSE: CEIX) performance has underperformed the S&P 500, and while a repurchase program is active, dividend payments are restricted by debt covenants - The company's common stock is listed on the New York Stock Exchange under the symbol "CEIX"[333] - The company has a stock, unit, and debt repurchase program authorized up to $270 million through June 30, 2022, with approximately $91.4 million remaining available as of February 12, 2021[339] - The ability to pay dividends is at the discretion of the Board of Directors and is limited by covenants in its debt agreements tied to the company's total net leverage ratio[340] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The COVID-19 pandemic significantly impacted 2020 financial performance, leading to a net loss of $10 million, reduced sales volumes, and lower coal prices Results of Operations The company reported a net loss of $10 million in 2020, a sharp decline from a $76 million net income in 2019, driven by lower coal sales volume and prices PAMC Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | Variance | | :--- | :--- | :--- | :--- | | Tons Sold (millions) | 18.7 | 27.3 | (8.6) | | Avg. Revenue per Ton | $41.31 | $47.17 | ($5.86) | | Avg. Cost of Coal Sold per Ton | $38.24 | $37.37 | $0.87 | | Avg. Cash Margin per Ton | $12.19 | $16.20 | ($4.01) | - The decrease in 2020 coal revenue was driven by lower sales volume and pricing due to a warm winter and the COVID-19 pandemic[369] - The CONSOL Marine Terminal's earnings before income tax were stable year-over-year at $33M in 2020 due to take-or-pay arrangements that mitigated reduced throughput[377][378] - Comparing 2019 to 2018, coal revenue decreased by $75 million primarily due to a $2.11 lower average sales price per ton[403] Liquidity and Capital Resources As of year-end 2020, the company maintained total liquidity of $326 million and had total long-term debt and finance lease obligations of $666 million Cash Flow Summary (in millions) | Cash Flow Activity | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Operating Activities | $129 | $245 | ($116) | | Investing Activities | ($76) | ($173) | $97 | | Financing Activities | ($82) | ($257) | $175 | - As of December 31, 2020, total liquidity was $326 million, including $51 million of cash and $274 million of unused revolver capacity[440][460] - Total long-term debt and finance lease obligations were $666 million at December 31, 2020[472] - In June 2020, the company amended its Senior Secured Credit Facilities to provide eight quarters of financial covenant relaxation in response to market conditions[452] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management judgment, particularly for Asset Retirement Obligations, Income Taxes, and Recoverable Coal Reserves - Asset Retirement Obligations, estimated at approximately $249 million at December 31, 2020, are a critical estimate for mine closure and reclamation[427] - Accounting for income taxes is a critical policy, requiring management to assess the realizability of deferred tax assets and judge uncertain tax positions[431][434] - Estimating economically recoverable coal reserves is inherently uncertain and involves numerous factors beyond the company's control[435] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from coal commodity prices, interest rates on its variable-rate debt, and foreign exchange rate fluctuations - The company's primary market risks are commodity price risk (coal), interest rate risk, and foreign exchange rate risk[493] - The company's primary exposure to interest rate risk relates to its senior secured credit facilities; a hypothetical 100 basis-point increase in the average interest rate would decrease pre-tax earnings by $2 million[496][498] - Although all transactions are in U.S. dollars, currency fluctuations can adversely affect the competitiveness of the company's coal in international markets[499] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and supplementary data for the fiscal years ended December 31, 2020, 2019, and 2018 Consolidated Statement of Income Highlights (in thousands) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Total Revenue and Other Income | $1,021,643 | $1,430,903 | $1,532,015 | | Total Costs and Expenses | $1,030,885 | $1,332,806 | $1,344,402 | | Net (Loss) Income | ($13,214) | $93,558 | $178,785 | | Net (Loss) Income Attributable to CEIX | ($9,755) | $76,001 | $152,976 | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $292,941 | $338,029 | | Total Assets | $2,523,366 | $2,693,802 | | Total Current Liabilities | $368,470 | $392,264 | | Total Long-Term Debt | $603,061 | $662,838 | | Total Liabilities | $1,969,847 | $2,121,407 | | Total Equity | $553,519 | $572,395 | Consolidated Statement of Cash Flows Highlights (in thousands) | Line Item | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $129,331 | $244,566 | $413,525 | | Net Cash Used in Investing Activities | ($76,334) | ($172,541) | ($153,646) | | Net Cash Used in Financing Activities | ($82,440) | ($256,667) | ($148,923) | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[756] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of December 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[757] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2020, based on the COSO framework[761] - There were no material changes in the company's internal controls over financial reporting during the period[763] Item 9B. Other Information The Board of Directors approved an amendment to the CEO's employment agreement, providing for two separate $1 million cash retention payments - An amendment to CEO James A. Brock's employment agreement was approved on February 3, 2021, providing for two cash retention payments of $1,000,000 each[773][774] Part III Items 10-14 Required information for Items 10 through 14 is incorporated by reference from the company's 2021 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's Proxy Statement for the 2021 Annual Meeting of Shareholders[778][780][781][782][783] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report - This section provides an index of all financial statements, schedules, and exhibits filed with the Form 10-K[785][786]