EX-99.1 2 d417562dex991.htm EX-99.1 - INFORMATION STATEMENT EX-99.1 - Information Statement
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Exhibit 99.1

 

CONSOL Energy Inc.

1000 CONSOL Energy Drive, Canonsburg, PA 15317-6506

T (724) 485-4000

www.consolenergy.com

   LOGO

Dear CONSOL Stockholders:

In December 2016, we announced our intention to separate CONSOL Energy Inc. (ParentCo) into two independent, publicly traded companies: a coal company and a natural gas exploration and production (E&P) company. This separation provides current stockholders ownership in two leading and focused companies, each positioned to capitalize on distinct opportunities for growth and profitability, and has been approved by our Board of Directors. The coal company will include our Pennsylvania Mining Complex (PAMC), our ownership interest in CNX Coal Resources LP (CNXC), our marine terminal at the Baltimore Port, our undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins and certain related coal assets and liabilities (collectively, the Coal Business). The Coal Business is held by CONSOL Mining Corporation (CoalCo), which is currently a wholly owned subsidiary of ParentCo. The E&P company will include developed and undeveloped oil and gas properties, both leased and owned in fee, located primarily in Appalachia (Pennsylvania, West Virginia, Ohio and Virginia), with a primary focus in the continued development of Marcellus Shale acreage and the delineation and development of Utica Shale acreage, along with certain water services and land resource management services (collectively, the Gas Business). The Gas Business is held through subsidiaries of ParentCo separate from CoalCo.

Management believes that the separation and spin-off of the Coal Business will:

 

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improve business and operational decision-making and strategic and management focus for each respective business;

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improve each company’s ability to attract, retain and incentivize employees;

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improve the Gas Business’s access to capital, while eliminating competition for capital among the two businesses; and

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by creating an independent equity structure for each business, improve the understanding of each business in the capital and investor markets, lead to a stronger, more focused investor base for each business, allow each company to use its stock as consideration for acquisitions and enhance the value of its equity-based compensation programs, thereby enabling each business to more fully realize its value.

To implement the separation, ParentCo currently plans to distribute all of the outstanding shares of CoalCo common stock on a pro rata basis to ParentCo stockholders. Each ParentCo stockholder will receive             share(s) of CoalCo common stock for every              share(s) of ParentCo common stock held by such stockholder of record as of the close of business on                     , 2017, the record date, in a distribution that is intended to qualify as generally tax-free to the ParentCo stockholders for U.S. federal income tax purposes, except with respect to any cash received in lieu of fractional shares. No fractional shares of CoalCo common stock will be issued. If you would otherwise have been entitled to receive a fractional share of common stock in the distribution, you will receive the net cash proceeds of the sale of such fractional share instead.

In conjunction with the separation, CoalCo will apply for authorization to list its common stock on the New York Stock Exchange under the symbol “            ”. Upon completion of the separation, each ParentCo stockholder as of the record date will continue to own shares of ParentCo and will own a pro rata share of the outstanding shares of common stock of CoalCo. The CoalCo common stock will be issued in book-entry form only, which means that no physical share certificates will be issued. No vote of ParentCo stockholders is required for the distribution.

You do not need to take any action to receive shares of CoalCo common stock to which you are entitled as a ParentCo stockholder, and you do not need to pay any consideration or surrender or exchange your ParentCo common stock. I invite you to read the enclosed information statement, which describes the spin-off in detail and provides other important business and financial information about CoalCo.

We believe the separation provides tremendous opportunities for our businesses and our stockholders, as we work to continue to build long-term shareholder value. Thank you for your continued support of CONSOL Energy and your future support of CoalCo.

Very truly yours,

Nicholas J. DeIuliis

President and Chief Executive Officer


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CONSOL Mining Corporation

1000 CONSOL Energy Drive, Canonsburg, PA 15317-6506

T (724) 485-4000

Dear Future CONSOL Mining Corporation Stockholder:

I am excited to welcome you as a future stockholder of CONSOL Mining Corporation (CoalCo), a U.S.-based coal company focused on safely and compliantly producing and selling high-quality bituminous coal from the Northern Appalachian Basin. Our company and its predecessors have been successfully mining coal, primarily in Northern Appalachia, since 1864. We have established ourselves as a leading coal producer in the eastern United States due to our demonstrated ability to efficiently produce and deliver large volumes of high-quality coal with a low cost structure, the strategic location of our mines, our unique marketing strategy, and the industry experience of our management team.

CoalCo will own and operate the Pennsylvania Mining Complex (PAMC), which consists of three underground mines - Bailey, Enlow Fork, and Harvey - and related infrastructure. The PAMC has an annual production capacity of 28.5 million tons, and it controls approximately 767 million tons of proven and probable reserves (as of December 31, 2016). Coal from the PAMC can be sold domestically or abroad, as either high-Btu thermal coal or high-volatile crossover metallurgical coal. The complex includes five longwalls and 15-17 continuous miner sections, which allow us to mine large quantities of coal while maintaining a very competitive cost structure. In addition, CoalCo will own and operate the CNX Marine Terminal, which is located on 200 acres in the Port of Baltimore and gives us access to the seaborne markets for exporting thermal and metallurgical coal. The terminal has a throughput capacity of 15 million tons per year, and it is the only coal marine terminal on the East Coast to be served by two rail lines – Norfolk Southern and CSX Transportation. Our management team has decades of experience in developing, operating, and expanding large-scale coal mining operations using the latest technology. Over the last several years, we have created a diversified portfolio of top-performing, environmentally-controlled, rail-served power plant customers in our core market areas in the eastern United States, while also opportunistically participating in the export and crossover metallurgical markets and employing a flexible operating strategy focused on delivering strong cash flows.

The assets of CoalCo, and the team that operates them, have consistently generated significant amounts of free cash flow and have withstood the recent volatility in the coal markets. The separation of CoalCo from ParentCo provides a new opportunity in that CoalCo will now be able to capitalize on its own free cash flow generation and strategic vision to build value for the CoalCo shareholders. Management intends to accomplish this by judiciously selecting from several options, including capitalizing on organic growth opportunities that exist within PAMC and the 1.6 billion tons of additional greenfield reserves that we control, pursuing acquisitions or other business arrangements that complement our operations and expertise, returning capital to our shareholders through dividends or share repurchases, or repaying any outstanding indebtedness. The separation from the combined E&P and coal entity will enable the CoalCo management team to foster its strategic goals and enhance value per share.

In connection with the separation, CoalCo will be renamed CONSOL Energy Inc., and we intend to list CoalCo’s common stock on the New York Stock Exchange under the symbol “            ”.

As we prepare to become a standalone company, we look to build upon our rich heritage, ready to seize the future and excel.

Sincerely,

James Brock

Chief Executive Officer


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the U.S. Securities and Exchange Commission under the U.S. Securities Exchange Act of 1934, as amended, but has not yet become effective.

 

Preliminary and Subject to Completion, dated October 16, 2017

INFORMATION STATEMENT

CONSOL Mining Corporation

 

 

This information statement is being furnished to the holders of common stock of CONSOL Energy Inc. (ParentCo) in connection with the distribution by ParentCo to its stockholders of all of the outstanding shares of common stock of CONSOL Mining Corporation (CoalCo or We). CoalCo is a wholly owned subsidiary of ParentCo that was formed to hold and operate ParentCo’s Pennsylvania Mining Operations (PAMC) and certain related coal assets, including ParentCo’s ownership interest in CNX Coal Resources LP (CNXC), which owns a 25% stake in PAMC, ParentCo’s terminal operations at the Port of Baltimore (the CNX Marine Terminal), undeveloped coal reserves and certain related coal assets and liabilities (collectively, the Coal Business). The Coal Business focuses primarily on the extraction, preparation and sale of coal in the Appalachian Basin. To implement the separation, ParentCo currently plans to distribute all of the outstanding shares of CoalCo common stock on a pro rata basis to ParentCo stockholders in a distribution that is intended to qualify as generally tax-free to the ParentCo stockholders for United States (U.S.) federal income tax purposes, except with respect to any cash received in lieu of fractional shares. We refer to the pro rata distribution of our common stock as the “distribution.”

The distribution is subject to certain conditions, as described in this information statement. You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local and non-U.S. tax laws.

For every              share(s) of common stock of ParentCo held of record by you as of the close of business on                     , 2017, the record date for the distribution, you will receive             share(s) of CoalCo common stock. You will receive cash in lieu of any fractional shares of CoalCo common stock that you would have received after application of the above ratio. We expect the shares of CoalCo common stock to be distributed by ParentCo to you on                     , 2017. We refer to the date of the distribution of CoalCo common stock as the “distribution date.” Until the separation occurs, CoalCo will be a wholly owned subsidiary of ParentCo and consequently, ParentCo will have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the distribution and the distribution date.

No vote of ParentCo stockholders is required to effect the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send ParentCo a proxy, in connection with the distribution. You do not need to pay any consideration, exchange or surrender your existing shares of ParentCo common stock or take any other action to receive your shares of CoalCo common stock.

CoalCo was organized as a Delaware corporation on June 21, 2017. ParentCo currently owns all of the outstanding equity of CoalCo. Accordingly, there is no current trading market for CoalCo common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution. We expect “regular-way” trading of CoalCo common stock to begin on the first trading day following the distribution date. As discussed under “The Separation and Distribution—Trading Between the Record Date and the Distribution Date,” if you sell your ParentCo common stock in the “regular-way” market after the record date and before the distribution date, you also will be selling your right to receive shares of CoalCo common stock in connection with the separation and distribution. CoalCo will change its name to CONSOL Energy Inc., and intends to have its common stock authorized for listing on the New York Stock Exchange (the NYSE) under the symbol “            ”. ParentCo will be renamed “CNX Resources Corporation” and will retain its current stock symbol “CNX” in connection with the separation.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 1.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

References in this information statement to specific codes, legislation or other statutory enactments are to be deemed as references to those codes, legislation or other statutory enactments, as amended from time to time.

The date of this information statement is            , 2017.

This information statement was first made available to ParentCo stockholders on or about             , 2017.


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

     iii  

INFORMATION STATEMENT SUMMARY

     x  

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

     xxvii  

RISK FACTORS

     1  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     28  

THE SEPARATION AND DISTRIBUTION

     31  

DIVIDEND POLICY

     39  

CAPITALIZATION

     39  

SELECTED HISTORICAL COMBINED FINANCIAL DATA

     40  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

     42  

BUSINESS

     48  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     71  

MANAGEMENT

     98  

BOARD OF DIRECTORS FOLLOWING THE SEPARATION

     99  

DIRECTOR COMPENSATION

     107  

COMPENSATION DISCUSSION AND ANALYSIS

     108  

EXECUTIVE COMPENSATION

     121  

COALCO INCENTIVE ARRANGEMENTS AND PLANS

     147  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     151  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     161  

DESCRIPTION OF MATERIAL INDEBTEDNESS

     165  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     167  

DESCRIPTION OF COALCO CAPITAL STOCK

     168  

WHERE YOU CAN FIND MORE INFORMATION

     172  

APPENDIX A NON-GAAP RECONCILIATION

     A-1  

INDEX TO FINANCIAL STATEMENTS

     F-1  


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Presentation of Information

Unless the context otherwise requires:

 

   

The information included in this information statement about CoalCo, including the Combined Financial Statements of CoalCo, which primarily comprise the assets and liabilities of ParentCo’s Pennsylvania Mining Complex (PAMC) and certain related coal assets, including ParentCo’s ownership interest in CNX Coal Resources LP (CNXC), which owns a 25% stake in PAMC, ParentCo’s terminal operations at the Port of Baltimore (the CNX Marine Terminal), undeveloped coal reserves and certain other coal-related assets and liabilities (collectively, the Coal Business), assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution.

 

   

References in this information statement to the “Pennsylvania Mining Complex” or “PAMC” refers to coal mines, coal reserves and related assets and operations, located primarily in southwestern Pennsylvania and owned 75% by ParentCo and 25% by CNXC.

 

   

References in this information statement to “CoalCo,” “we,” “our,” “us,” “our company” and “the company” refer to CONSOL Mining Corporation, a Delaware corporation and its subsidiaries, after giving effect to the separation and distribution.

 

   

References in this information statement to “ParentCo” refer to CONSOL Energy Inc., a Delaware corporation, and its consolidated subsidiaries, including CoalCo and the Coal Business prior to completion of the separation.

 

   

References in this information statement to “GasCo” refer to ParentCo after the completion of the separation and the distribution, in connection with which ParentCo will change its name to CNX Resources Corporation, and at which time its business will comprise the oil and natural gas exploration and production (E&P) business, focused on Appalachian area natural gas and liquids activity, including production, gathering, processing and acquisition of natural gas properties in the Appalachian Basin (collectively the Gas Business).

 

   

References in this information statement to the “separation” refer to the separation of the Coal Business from ParentCo’s other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, CoalCo, to hold the assets and liabilities associated with the Coal Business after the distribution.

 

   

References in this information statement to the “distribution” refer to the distribution of CoalCo’s issued and outstanding shares of common stock to ParentCo stockholders as of the close of business on the record date for the distribution.

 

   

References in this information statement to CoalCo’s per share data assume a distribution ratio of             share(s) of CoalCo common stock for every              share(s) of ParentCo common stock.

 

   

References in this information statement to CoalCo’s historical assets, liabilities, products, businesses or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Coal Business as the business was conducted as part of ParentCo prior to the completion of the separation.

 

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Industry Information

Unless indicated otherwise, the information concerning our industry contained in this information statement is based on CoalCo’s general knowledge of and expectations concerning the industry. CoalCo’s market position, market share and industry market size are based on estimates using CoalCo’s internal data and estimates, based on data from various industry analyses, our internal research and adjustments and assumptions. Industry publications and surveys generally state that the information contained therein has been obtained from sources that are believed to be reliable. While we have not been able to independently verify data from industry analyses, we believe based on management’s knowledge that such information is sufficient and reliable for purposes of its inclusion within this information statement. Further, CoalCo’s estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions.

 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is CoalCo and why is ParentCo separating CoalCo’s business and distributing CoalCo stock?   

CoalCo, currently a wholly owned subsidiary of ParentCo, was formed on June 21, 2017 to own and operate ParentCo’s Coal Business. The separation of CoalCo from ParentCo and the distribution of CoalCo common stock are intended, among other things, to (1) result in improved business and operational decision-making and greater strategic and management focus for each respective business; (2) improve each company’s ability to attract, retain and incentivize employees; (3) improve access to capital for each business while eliminating competition for capital; and (4) create an independent equity structure for each business, resulting in an improved understanding of each business in the capital and investor markets, and a stronger, more focused investor base for each business. We believe that the separation will allow each business to more fully realize its value, and each company to use its stock as consideration for acquisitions and enhance the value of its equity-based compensation programs. ParentCo expects that the separation will result in enhanced long-term performance of each business for the reasons discussed in the sections entitled “The Separation and Distribution—Reasons for the Separation.”

Why am I receiving this document?   

ParentCo is delivering this document to you because you hold shares of ParentCo common stock. If you are a holder of shares of ParentCo common stock as of the close of business on             , 2017, the record date of the distribution, you will be entitled to receive                      share(s) of CoalCo common stock for every              share(s) of ParentCo common stock that you hold at the close of business on such date, resulting in a distribution of all of the outstanding shares of CoalCo common stock (without accounting for cash to be issued in lieu of fractional shares). This document will help you understand how the separation and distribution will affect your post-separation ownership in GasCo and CoalCo.

How will the separation of CoalCo from ParentCo work?   

As part of the separation, and prior to the distribution, ParentCo and its subsidiaries expect to complete an internal restructuring in order to transfer to CoalCo the assets and liabilities associated with the Coal Business that CoalCo will own following the separation. To accomplish the separation, ParentCo will, following the internal restructuring, distribute to its stockholders all of our common stock. Following the separation, the number of shares of ParentCo common stock you own will not change as a result of the separation.

What is the record date for the distribution?   

The record date for the distribution will be             , 2017.

When will the distribution occur?   

We expect that the shares of CoalCo common stock will be distributed by ParentCo             at             , Eastern Time, on             , 2017, to holders of record of shares of ParentCo common stock at the close of business on             , 2017, the record date for the distribution.

 

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What do stockholders need to do to participate in the distribution?   

Stockholders of ParentCo as of the record date for the distribution will not be required to take any action to receive CoalCo common stock in the distribution, but you are urged to read this entire information statement carefully. No stockholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of ParentCo common stock, or take any other action to receive your shares of CoalCo common stock. Please do not send in your ParentCo stock certificates. The distribution will not affect the number of outstanding shares of ParentCo common stock or any rights of ParentCo stockholders, although it will affect the market value of each outstanding share of ParentCo common stock.

How will shares of CoalCo common stock be issued?   

You will receive shares of CoalCo common stock through the same channels that you currently use to hold or trade shares of ParentCo common stock, whether through a brokerage account, 401(k) plan or other channel. Receipt of CoalCo shares will be documented for you in the same manner that you typically receive stockholder updates, such as monthly broker statements and 401(k) statements.

  

If you own shares of ParentCo common stock as of the close of business on the record date for the distribution, including shares owned in certificate form, ParentCo, with the assistance of Computershare Trust Company, N.A. (Computershare), the distribution agent, will electronically distribute shares of CoalCo common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of CoalCo common stock, or your bank or brokerage firm will credit your account for the shares.

How many shares of CoalCo common stock will I receive in the distribution?   

ParentCo will distribute to you             share(s) of CoalCo common stock for every share(s) of ParentCo common stock held by you as of close of business on the record date for the distribution. Based on approximately             share(s) of ParentCo common stock outstanding as of             , 2017, and applying the distribution ratio (without accounting for cash to be issued in lieu of fractional shares), a total of approximately             shares of CoalCo common stock will be distributed to ParentCo’s stockholders. For additional information on the distribution, see “The Separation and Distribution.”

Will CoalCo issue fractional shares of its common stock in the distribution?   

No. CoalCo will not issue fractional shares of its common stock in the distribution. Fractional shares that ParentCo stockholders would otherwise have been entitled to receive will be aggregated and sold in the public market by Computershare. The net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those stockholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

 

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What are the conditions to the distribution?   

The distribution is subject to the satisfaction (or waiver by ParentCo in its sole discretion) of the following conditions, among others:

 

•    the U.S. Securities and Exchange Commission (the SEC) declaring effective the registration statement of which this information statement forms a part; there being no order suspending the effectiveness of the registration statement in effect; and no proceedings for such purposes having been instituted or threatened by the SEC;

 

•    the mailing of this information statement or a notice of Internet availability of this information statement to ParentCo stockholders;

 

•    the receipt by ParentCo of a private letter ruling from the Internal Revenue Service (the IRS) and one or more opinions of its tax advisors, in each case satisfactory to the ParentCo Board of Directors, regarding certain U.S. federal income tax matters relating to the separation and distribution, including, with respect to the opinion of Wachtell, Lipton, Rosen & Katz, to the effect that the distribution will be a transaction described in Section 355(a) of the Internal Revenue Code (the Code);;

 

•    the internal reorganization having been completed and the transfer of assets and liabilities of the Coal Business from ParentCo to CoalCo, and the transfer of certain assets and liabilities of the Gas Business from CoalCo to ParentCo, having been completed in accordance with the separation and distribution agreement;

 

•    the receipt of one or more opinions from an independent appraisal firm to the ParentCo Board of Directors as to the solvency of ParentCo and CoalCo after the completion of the distribution, in each case in a form and substance acceptable to the ParentCo Board of Directors in its sole and absolute discretion;

  

•    all actions necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rule and regulations thereunder having been taken or made and, where applicable, having become effective or been accepted;

 

•    the execution of certain agreements contemplated by the separation and distribution agreement;

 

•    no order, injunction or decree issued by any government authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, the distribution or any of the related transactions being in effect;

 

 

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•    the shares of CoalCo common stock to be distributed having been accepted for listing on the NYSE, subject to official notice of distribution;

 

•    CoalCo having entered into the financing arrangements described under “Description of Material Indebtedness” and ParentCo being satisfied in its sole and absolute discretion that, as of the effective time of the distribution, it will have no further liability under such arrangements;

  

 

•    ParentCo having received approximately $464 million in cash from CoalCo, subject to adjustment based on relevant financing fees; and

 

•    no other event or development existing or having occurred that, in the judgment of ParentCo’s Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and the other related transactions.

 

ParentCo and CoalCo cannot assure you that any or all of these conditions will be met, or that the separation will be consummated even if all of the conditions are met. ParentCo can decline at any time to go forward with the separation. In addition, ParentCo may waive any of the conditions to the distribution. For a complete discussion of all of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”

What is the expected date of completion of the separation?   

The completion and timing of the separation are dependent upon a number of conditions. We expect that the shares of CoalCo common stock will be distributed by ParentCo at             , Eastern Time, on             , 2017, to the holders of record of shares of ParentCo common stock at the close of business on             , 2017, the record date for the distribution. However, no assurance can be provided as to the timing of the separation or that all conditions to the distribution will be met, by             , 2017 or at all.

Will CoalCo and ParentCo be renamed in conjunction with the Separation?   

Yes. In connection with the separation, CoalCo will change its name to CONSOL Energy Inc. and will apply for authorization to list its common stock on the NYSE under the symbol “ ” . ParentCo will change its name to CNX Resources Corporation and will retain its current stock symbol “CNX” on the NYSE.

Can ParentCo decide to cancel the distribution of CoalCo common stock even if all the conditions have been met?   

Yes. Until the distribution has occurred, ParentCo has the right to terminate the distribution, even if all of the conditions are satisfied.

What if I want to sell my ParentCo common stock or my CoalCo common stock?   

You should consult with your financial advisors, such as your stockbroker, bank or tax advisor.

 

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What is “regular-way” and “ex-distribution” trading of ParentCo common stock?   

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, we expect that there will be two markets in ParentCo common stock: a “regular-way” market and an “ex-distribution” market. ParentCo common stock that trades in the “regular-way” market will trade with an entitlement to shares of CoalCo common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to CoalCo common stock distributed pursuant to the distribution. If you decide to sell any shares of ParentCo common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your ParentCo common stock with or without your entitlement to CoalCo common stock pursuant to the distribution.

Where will I be able to trade shares of CoalCo common stock?   

CoalCo intends to apply for authorization to list its common stock on the NYSE under the symbol “            ” . CoalCo anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to and through the distribution date, and that “regular-way” trading in CoalCo common stock will begin on the first trading day following the completion of the distribution. If trading begins on a “when-issued” basis, you may purchase or sell CoalCo common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. CoalCo cannot predict the trading prices for its common stock before, on or after the distribution date.

What will happen to the listing of ParentCo common stock?   

ParentCo common stock will continue to trade on the NYSE after the distribution under its current stock symbol “CNX”. ParentCo will be renamed CNX Resources Corporation upon completion of the separation and distribution.

Will the number of shares of ParentCo common stock that I own change as a result of the distribution?   

No. The number of shares of ParentCo common stock that you own will not change as a result of the distribution.

Will the distribution affect the market price of my ParentCo common stock?   

Yes. As a result of the distribution, ParentCo expects the trading price of shares of GasCo common stock immediately following the distribution to be different from the “regular-way” trading price of ParentCo shares immediately prior to the distribution because the trading price will no longer reflect the value of the Coal Business. There can be no assurance whether the aggregate market value of the GasCo common stock and the CoalCo common stock following the separation will be higher or lower than the market value of ParentCo common stock if the separation did not occur. This means, for example, that the combined trading prices of a share of GasCo common stock and share(s) of CoalCo common stock after the distribution may be equal to, greater than or less than the trading price of a share of ParentCo common stock before the distribution.

What are the material U.S. federal income tax consequences of the separation and the distribution?   

It is a condition to the distribution that ParentCo receive a private letter ruling from the IRS and one or more opinions of its tax advisors, in each case satisfactory to the ParentCo Board of

 

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Directors, regarding certain U.S. federal income tax matters relating to the separation and distribution, including, with respect to the opinion of Wachtell, Lipton, Rosen & Katz, to the effect that the distribution will be a transaction described in Section 355(a) of the Code. Accordingly, it is expected that you generally will not recognize any gain or loss, and no amount will be included in your income, upon your receipt of CoalCo common stock pursuant to the distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of a fractional share of CoalCo common stock.

  

You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

What will CoalCo’s relationship be with GasCo following the separation?   

Following the distribution, ParentCo stockholders will own all of the outstanding shares of CoalCo common stock, and CoalCo will be a separate company from ParentCo. CoalCo will enter into a separation and distribution agreement with ParentCo to effect the separation and to provide a framework for CoalCo’s relationship with GasCo after the separation, and will enter into certain other agreements, including but not limited to a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement and other agreements related to operations of CoalCo post-separation. These agreements will provide for the allocation between CoalCo and GasCo of the assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) of ParentCo and its subsidiaries attributable to periods prior to, at and after CoalCo’s separation from ParentCo and will govern the relationship between CoalCo and GasCo subsequent to the completion of the separation. For additional information regarding the separation and distribution agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”

Who will manage CoalCo after the separation?   

Led by James Brock, CoalCo’s management team will possess deep knowledge of, and extensive experience in, the coal industry generally. For more information regarding CoalCo’s directors and management, see “Management” and “Board of Directors Following the Separation.”

Are there risks associated with owning CoalCo common stock?   

Yes. Ownership of CoalCo common stock is subject to both general and specific risks relating to CoalCo’s business, the coal industry in which it operates, its ongoing contractual relationships with GasCo

 

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and its status as a separate, publicly traded company. Ownership of CoalCo common stock is also subject to risks relating to the separation. Certain of these risks are described in the “Risk Factors” section of this information statement, beginning on page 1. We encourage you to read that section carefully.

Does CoalCo plan to pay dividends?   

The declaration and payment of any dividends in the future by CoalCo with respect to the common stock will be subject to the sole discretion of our Board of Directors and will depend upon many factors. See “Dividend Policy.”

How will equity-based and other long-term incentive compensation awards held by ParentCo employees be affected as a result of the separation?   

The currently anticipated treatment of equity-based and other long-term incentive compensation awards that may be held by our named executives as of the time of separation is discussed under the section entitled, “The Separation and Distribution— Treatment of Equity-Based Compensation.” Additional information regarding the treatment of such awards is included in the Employee Matters Agreement, the form of which is filed as Exhibit 2.3.

Will CoalCo incur any indebtedness prior to or at the time of the distribution?   

Subject to market conditions and other factors, prior to or concurrent with the separation, CoalCo intends to secure new borrowings from third-party financing sources, a portion of which is anticipated to be distributed to GasCo. See “Description of Material Indebtedness” and “Risk Factors—Risks Related to Our Business.”

Who will be the distribution agent for the distribution and transfer agent and registrar for CoalCo common stock?   

The distribution agent, transfer agent and registrar for the CoalCo common stock will be Computershare Trust Company, N.A. For questions relating to the transfer or mechanics of the stock distribution, you should contact                     toll free at                     or non-toll free at                     .

Where can I find more information about ParentCo and CoalCo?   

Before the distribution, if you have any questions relating to ParentCo’s business performance, you should contact:

 

CONSOL Energy Inc.

1000 CONSOL Energy Drive

Canonsburg, PA 15317-6506

Attention: Investor Relations

 

After the distribution, CoalCo stockholders who have any questions relating to CoalCo’s business performance should contact CoalCo at:

 

CoalCo

[Address]

Attention: Investor Relations

 

The CoalCo investor website (www.                        .com) will be operational on or around             , 2017. The CoalCo website and the information contained therein or connected thereto are not incorporated into this information statement or the registration statement of which this information statement forms a part, or in any other filings with, or any information furnished or submitted to, the SEC.

 

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INFORMATION STATEMENT SUMMARY

The following is a summary of material information discussed in this information statement. This summary may not contain all the details concerning the separation or other information that may be important to you. To better understand the separation and distribution and CoalCo’s business and financial position, you should carefully review this entire information statement. Unless the context otherwise requires, the information included in this information statement about CoalCo, including the Combined Financial Statements of CoalCo, assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to “CoalCo,” “we,” “us,” “our,” “our company” and “the company” refer to CONSOL Mining Corporation, a Delaware corporation, and its subsidiaries. Unless the context otherwise requires, references in this information statement to “ParentCo” refer to CONSOL Energy Inc., a Delaware corporation, and its consolidated subsidiaries, including the Coal Business prior to completion of the separation and GasCo refers to the ParentCo entity and operations following the separation.

Unless the context otherwise requires, references in this information statement to our historical assets, liabilities, products, businesses or activities of our businesses are generally intended to refer to the historical assets, liabilities, products, businesses or activities of ParentCo’s Pennsylvania Mining Operations (PAMC), ParentCo’s ownership interest in CNX Coal Resources LP (CNXC) which owns a 25% stake in PAMC, the CNX Marine Terminal, and the undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins (the Greenfield Reserves), as such operations were conducted as part of ParentCo prior to completion of the separation.

Our Company

We are a leading, low-cost producer of high-quality bituminous coal from the Northern Appalachian Basin (NAPP) with excellent access to major U.S. and international coal markets and a highly experienced management team. Our company and its predecessors have been mining coal, primarily in NAPP, since 1864. We are a leading producer of high-Btu thermal coal in the NAPP and the eastern United States due to 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.

We have the capacity to produce up to 28.5 million tons per year of thermal and crossover metallurgical coal from our PAMC, which consists of three highly productive, well-capitalized underground mines in the Pittsburgh No. 8 coal seam and the largest coal preparation plant in the United States. Coal from the PAMC is valued because of its high energy content (as measured in British thermal units, or Btu, per pound), relatively low levels of sulfur and other impurities, and strong thermoplastic properties that enable it to be used in metallurgical as well as thermal applications. We take advantage of these desirable quality characteristics and our extensive logistical network, which is directly served by both the Norfolk Southern and CSX railroads, to aggressively market our product to a broad base of strategically-selected, top-performing power plant customers in the eastern United States.

We also capitalize on the operational synergies afforded by our wholly-owned CNX Marine Terminal in the Port of Baltimore to export our coal to thermal and metallurgical end-users in Europe, Asia, South America, and Canada. Our operations, including the PAMC and the CNX Marine Terminal, have consistently generated strong free cash flows. The PAMC controls 766.7 million tons of high-quality Pittsburgh seam reserves (as of December 31, 2016), enough to allow for approximately 27 years of full-capacity production. In addition, we own or control approximately 1.6 billion tons of Greenfield Reserves in the eastern United States that could provide us with a solid growth platform in the future. Our vision is to maximize cash flow generation through the safe, compliant, and efficient operation of this world-class core asset base, while strategically reducing debt, returning capital through share buybacks or dividends, and when prudent, allocating capital toward compelling growth opportunities.

 



 

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Our corporate structure and ownership interests are shown in the figure below. Our major assets include:

   

~90% economic ownership and full operational control of the PAMC, consisting of:

  o

75% undivided interest in the PAMC;

  o

~60% limited partner interest, a 1.7% general partner interest (reflecting 100% of the general partner units) and incentive distribution rights in CNX Coal Resources LP (referred to herein as CNXC), a growth-oriented master limited partnership formed in 2015 to manage and further develop our active coal operations in Pennsylvania, and which owns the remaining 25% stake in PAMC;

   

the CNX Marine Terminal; and

   

1.6 billion tons of Greenfield Reserves in NAPP, the Central Appalachian Basin (CAPP), and the Illinois Basin (ILB).

These assets and the diverse markets they serve provide robust flexibility for generating cash across a wide variety of demand and pricing scenarios. This flexibility begins with the low-cost structure and optionality afforded by our PAMC. The three mines at the PAMC, which include the Bailey, Enlow Fork, and Harvey mines, produce coal from the Pittsburgh No. 8 Coal Seam using longwall mining, a highly automated underground mining technique that produces large volumes of coal at lower costs compared to alternative mining methods. These three mines collectively operate five longwalls, and the production from all three mines is processed at a single, centralized preparation plant, which is connected via conveyor belts to each mine. The Bailey Central Preparation Plant, which can clean and process up to 8,200 raw tons of coal per hour, provides economies of scale while also maintaining the ability to segregate and blend coals based on quality. This infrastructure enables us to tailor our production levels and quality specifications to meet market demands. It also results in a highly productive, low-cost operation as compared to other NAPP coal mines. The PAMC was the most productive longwall operation in NAPP during 2015-2016, producing 6.77 tons of coal per employee hour, compared with an average of 4.94 tons per employee hour for all other currently-operating NAPP longwalls. As of June 30, 2017, productivity further increased to 7.43 tons of coal per employee hour, compared with an average of 5.24 tons per employee hour for all other currently-operating NAPP longwalls. Our high productivity helps drive a low cost structure, which according to Wood Mackenzie was in the first quartile

 



 

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among NAPP coal mines in 2016. Our efficiency strengthens our margins throughout the commodity cycle, and has allowed us to continue to generate positive margins even in challenging pricing environments.

 

LOGO

Coal from the PAMC is versatile in that it can be sold either domestically or abroad, in the thermal coal market or as a crossover product in the high-volatile metallurgical coal market. Domestically, we have a well-established and diverse blue chip customer base, the majority of which is comprised of domestic utility companies located across the eastern United States. In 2016, we shipped coal to 38 plants located in 18 eastern U.S. states. As of June 30, 2017, the PAMC is fully contracted for 2017. For 2018 and 2019, our contracted position as of October 9, 2017 is at 80% and 41%, respectively, assuming a 27 million ton coal sales volume. These committed and contracted sales positions represent the volumes that we currently expect our customers will take under our existing contracts in each of 2017 and 2018, given current market conditions. Certain of our sales contracts include provisions that allow our customers to nominate additional volumes at their option, to carry a portion of their committed tonnage over from one calendar year into a future year, or to increase or decrease their volume commitment for a given time period

 



 

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(e.g., year or quarter) within a specified tonnage range. Each of these provisions could have an impact within each contract, either positively or negatively, on the volume of coal that we are required to deliver under said contracts.

We also sell coal under both short-term and multi-year contracts (as well as in the spot market) that may contain base prices that are subject to pre-established price adjustments that reflect (i) variances in the quality characteristics of coal delivered to the customer beyond threshold quality characteristics specified in the applicable sales contract, (ii) the actual calorific value of coal delivered to the customer, and/or (iii) changes in electric power prices in the markets in which CoalCo’s customers operate, as adjusted for any factors set forth in the applicable contract. Such price adjustments, as well as “price reopener” or similar provisions in our multi-year coal sales contracts discussed above, may reduce the protection from coal price volatility traditionally provided by coal supply contracts. We believe our committed and contracted position is well-balanced in hedging against market downside risk while allowing us to continue to build out the customer portfolio strategically and opportunistically as the market evolves.

Going forward, we plan to continue to execute our sales strategy of targeting top-performing, environmentally-controlled, rail-served power plants in our core market areas in the eastern United States. Our top 15 domestic power plant customers in 2016, which accounted for 82% of our domestic power plant shipments that year, operated at a 15% higher capacity factor than other NAPP rail-served plants in 2016, and have consistently consumed more than 50 million tons of coal per year over the past five years. We have grown our share at these plants from 12% in 2011 to 32% in 2016, and we believe that we can continue to grow this share. Our customer plants consume coal from all four primary coal producing basins in the United States. However, we believe that we are favorably positioned to compete with producers from these basins primarily because of: (i) our significant transportation cost advantage compared to producers in the ILB and the Powder River Basin (PRB), which incur higher rail transportation rates to deliver coal to many of our core market areas in the eastern United States, (ii) our favorable operating environment compared to producers in CAPP, where production has been declining and is expected to continue to decline primarily due to the basin’s high cost production profile, reserve degradation and difficult permitting environment, and (iii) the attractive quality characteristics of our coal, which enable us to compete for demand from a broader range of coal-fired power plants as compared to (x) mining operations in basins that typically produce coal with a comparatively lower heat content, such as the ILB and PRB, (y) mining operations in basins that typically produce coal with a comparatively higher sulfur content, such as the ILB and most areas in NAPP, and (z) mining operations in basins that typically produce coal with a comparatively higher chlorine content, such as certain areas in the ILB.

The PAMC and our 100%-owned CNX Marine Terminal allow us to participate in the international thermal and metallurgical coal markets. The CNX Marine Terminal provides coal transshipments directly from rail cars to ocean-going vessels for both PAMC and third-party shippers, and is the only coal marine terminal on the East Coast served by two rail lines (Norfolk Southern and CSX). Located on 200 acres, the terminal has a throughput capacity of 15 million tons per year, as well as extensive blending capabilities and significant ground storage capacity of 1.1 million tons. In 2016, approximately 8.1 million tons of coal were shipped through the CNX Marine Terminal, with approximately 57% of that amount having been produced at our PAMC. The ability to serve both domestic and international markets with premium thermal and crossover metallurgical coal provides us with significant diversification and optionality, allowing us to pursue upside while helping to minimize both pricing and volume risk. Since 2014, our domestic thermal shipments from the PAMC have ranged from 17.3 to 22.8 million tons per year, our export thermal shipments have ranged from 2.1 to 4.4 million tons per year, and our export metallurgical shipments have ranged from 1.2 to 2.0 million tons per year. After accounting for PAMC tons, the CNX Marine Terminal still has significant surplus capacity that may be used to generate additional revenue by providing services to third parties.

Finally, the 1.6 billion tons of Greenfield Reserves that we control in NAPP, CAPP, and ILB, which are in addition to the substantial reserve base associated with PAMC, feature both thermal and metallurgical reserves.

 



 

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Included among these are approximately 591 million tons and 377 million tons of contiguous greenfield reserves associated with the River Mine and Mason Dixon Mine projects, respectively, which are among the last remaining greenfield Pittsburgh No. 8 coal seam projects in the Northern Appalachian region, along with 117 million tons, 26 million tons and 40 million tons of both low-volatile and high-volatile metallurgical coal reserves, associated with our Birch, Itmann and Martinka mines, respectively. Our Greenfield Reserves provide additional optionality for organic growth or monetization as market conditions allow.

Industry Overview and Market Outlook

Coal is an abundant and relatively inexpensive natural resource that continues to play a critical role in the electric power generation and steelmaking industries, both in the United States and globally. Coal quality largely depends upon rank (which correlates with heat content, with anthracite, bituminous, sub-bituminous and lignite coal representing the highest to lowest ranking, respectively), level of impurities (such as ash, sulfur, chlorine, and other non-hydrocarbon constituents), and the presence or absence of coking properties. Thermal coal, which is sometimes referred to as “steam” coal, is primarily used by electric utilities and independent power producers to generate electricity, while metallurgical coal, which is sometimes referred to as “coking” coal, is primarily used by steel companies to produce metallurgical coke for use in the steel making process. Coal is also used in certain other industrial processes, such as cement kilns, blast furnaces, and electric arc furnaces, as a source of energy or carbon.

Thermal coal consumption patterns are influenced by many factors, including the demand for electricity, power generation infrastructure, transportation costs, governmental and environmental regulations, and technological developments, as well as the location, availability and cost of other sources of energy such as natural gas, nuclear power, and renewable sources of electricity generation such as hydroelectric, wind, and solar power. Demand for metallurgical coal, on the other hand, is influenced primarily by the worldwide demand for steel. Thermal coal produced in NAPP, where the PAMC is located, is marketed primarily to electric utilities in the eastern United States, as they tend to prefer to source coal with higher heat content at the lowest all-in cost.

Coal accounts for approximately 89% of U.S. fossil energy reserves on a Btu basis, according to the National Mining Association. According to the 2017 BP Statistical Review published in June 2017 (the BP Statistical Review), worldwide proven coal reserves totaled approximately 1,139 billion metric tons at 2016 year end. The United States has the largest proven reserve base in the world with approximately 252 billion metric tons, or 22.1% of total world proven coal reserves. According to the BP Statistical Review, U.S. coal reserves represent over 380 years of domestic supply based on 2016 production rates.

Coal is a major contributor to the world’s energy supply. According to the BP Statistical Review, coal represented approximately 28% of the world’s primary energy consumption in 2016, including approximately 16% and 49% of the regional energy consumption of the United States and the Asia Pacific Region, respectively.

In the United States, in particular, thermal coal continues to be an abundant, low-cost resource. A substantial portion of the power generation infrastructure in the United States remains coal-fired. Although recent environmental regulations together with low-cost natural gas and the subsidized buildout of renewable energy sources have eroded coal’s predominant market share, thermal coal is expected to remain a core fuel for electricity generation. Coal’s share of the U.S. electric power generation mix fell from 39% in 2014 to 30% in 2016, largely as a result of the aforementioned factors and abnormally mild winter weather in 2015-2016, which put additional downward pressure on gas and power prices. However, the U.S. Energy Information Administration (EIA) projects in its 2017 Annual Energy Outlook that coal’s share of the generation mix will rebound from 30% to 32% in 2021, while gas’s share declines from 35% to 28%, driven largely by rising gas prices and the prospects of a more favorable policy stance under the current U.S. presidential administration. The expectation of rising gas prices is supported by EIA’s prediction that annual U.S. net exports of natural gas will grow by 4.6 Tcf from 2016-2021, and industrial demand for natural gas will grow by 0.8 Tcf, while production grows by just 4.4 Tcf.

 



 

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Globally, thermal coal demand from new generating capacity is expected to remain robust, particularly in the seaborne market. According to AME’s Q2 2017 Export Thermal Coal Strategic Market Study (AME Q2 2017 Thermal Coal Study), global seaborne thermal coal demand is forecast to grow at a CAGR of 2.6% between 2016 and 2030, slowing from the 4.4% CAGR witnessed between 2007 and 2016. Although China’s government has communicated an intention to reduce its economy’s carbon intensity through greater energy efficiency and a more diversified energy mix, this is offset by India’s seaborne thermal coal demand, which is forecasted to grow at a CAGR of 4.5% between 2016 and 2030 due to robust infrastructure development and industrialization. AME expects India to be the largest source of demand for seaborne thermal coal by 2030 at approximately 20% of total global demand, as compared to approximately 15% in 2016. Moreover, electrification in other rapidly growing Southeast Asian countries is expected to serve as an additional strong source of future thermal coal demand due to coal’s cost-competitiveness relative to other fuels. As a result, according to the AME Q2 2017 Thermal Coal Study, thermal coal’s share of total primary energy demand globally is expected to remain relatively constant through 2030 at approximately 29%. As the long-term global demand for thermal coal in the Asia Pacific region continues to rise, however, use of low-quality thermal coal in those markets is expected to become increasingly less desirable as consumers continue to push for higher efficiencies and lower emissions. This interplay is expected to benefit U.S. coal exports, and we believe that it will especially benefit exports of coal from NAPP because of its high Btu content and its favorable access to export infrastructure.

In the seaborne metallurgical coal markets, on the other hand, persistent oversupply in recent years began to subside in 2016 due to a number of international developments impacting both demand and supply. Most importantly, in China, the combination of a stimulus package released by the Chinese government in early 2016 and supply side reforms restricting domestic coal mines to 276 days of operations (down from 330 days) resulted in a sharp increase in Chinese imports of metallurgical coal. According to AME’s Q2 2017 Export Metallurgical Coal Strategic Market Study (AME Q2 2017 Met Coal Study), Chinese imports of metallurgical coal increased 25% in 2016 compared to 2015 to reach 60.0 million metric tons. Coupled with weather-related production issues in Australia, hard coking coal prices reached the highest levels since 2011.

Coking coal prices have receded somewhat since their recent spike as supply has begun to return to the market from China and Australia. Nevertheless, the market is expected to remain well supported on the back of an expected growth in global demand for seaborne metallurgical coal from 2016 to 2030 at a CAGR of approximately 3.2%, according to AME’s Q2 2017 Met Coal Study. This trend is underpinned by the robust growth expected out of India, at a CAGR of approximately 7.8% from 2016-2030 according to AME, making the country the largest importer of metallurgical coal by 2023. Due to the strategic location and quality of its coal reserves, we believe NAPP coal is among the best-suited in the U.S. to take advantage of this expected uptick in global seaborne metallurgical coal demand.

Our Core Strengths

We believe we are well-positioned to successfully execute our business strategies because of the following competitive strengths:

Focus on free cash flow generation supported by industry-leading margins and optimized production levels

We intend to continue our focus on maintaining high margins by optimizing production from our high-quality reserves and leveraging our extensive logistics infrastructure and broad market reach. The PAMC’s low-cost structure, high-quality product, favorable access to rail and port infrastructure, and diverse base of end-use customers allow it to move large volumes of coal at positive cash margins throughout a variety of market conditions. For example, despite challenging domestic market conditions in 2016, which caused total U.S. coal production to fall by 19% year-on-year, PAMC managed to grow production by 8%. For the year ended December 31, 2016, the PAMC generated an average cash margin per ton of $15.22 compared to the median cash margin per ton of $9.97 generated by other coal companies for domestic bituminous thermal coal operations,

 



 

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based on management review of publicly available data for the year ended December 31, 2016. Through our recent capital investment program, we have optimized our mining operations and logistics infrastructure to sustainably drive down our cash operating costs. Furthermore, our significant portfolio of multi-year, committed and priced contracts with our longstanding customer base will enhance our ability to sustain high margins in varied commodity price environments. We believe that these factors will help enable us to maintain higher margins per ton on average than our competitors and better position us to maintain profitability throughout commodity price cycles.

Extensive, High-Quality Reserve Base

The PAMC has extensive high-quality reserves of bituminous coal. We mine our reserves from the Pittsburgh No. 8 Coal Seam, which is a large contiguous formation of uniform, high-Btu coal that is ideal for high productivity, low-cost longwall operations. As of December 31, 2016, the PAMC included 766.7 million tons of proven and probable coal reserves that are sufficient to support at least 27 years of full-capacity production. The advantageous qualities of our coal enable us to compete for demand from a broader range of coal-fired power plants compared to mining operations in basins that typically produce coal with a comparatively lower heat content (ILB and PRB), higher sulfur content (ILB and most areas in NAPP) and higher chlorine content (certain areas of ILB). Our remaining reserves have an average as-received gross heat content of 12,970 Btu/lb (on an as-received basis), while production from the PRB, ILB, CAPP, and the rest of NAPP averages approximately 8,700 Btu/lb, 11,400 Btu/lb, 12,200 Btu/lb, and 12,000 Btu/lb, respectively (based on the average quality reported by EIA for U.S. power plant deliveries for the three years ended October 31, 2016). Moreover, our remaining reserves have an average sulfur content of 2.38% (on an as-received basis), while production from the Illinois Basin averages ~2.9% sulfur and production from the rest of NAPP averages ~3.1% sulfur (again based on EIA power plant delivery data for the three years ended October 31, 2016). With our high Btu content and low-cost structure, our 2016 total costs averaged $1.32 per mmBtu, which is lower than any monthly average Louisiana Henry Hub natural gas spot price during the past 20+ years, and provides a strong foundation for competing against natural gas even after accounting for differences in delivered costs and power plant efficiencies. In addition to the substantial reserve base associated with the PAMC, our 1.6 billion tons of Greenfield Reserves in NAPP, CAPP, and ILB feature both thermal and metallurgical reserves and provide additional optionality for organic growth or monetization as market conditions allow.

World-Class, Well-Capitalized, Low-Cost Longwall Mining Complex

Since 2006, we have invested over $2.0 billion at the PAMC ($1.4 billion of which has been invested in the past five years) to develop technologically advanced, large-scale longwall mining operations and related production and logistics infrastructure. We also have permanently sealed off 80 square miles of already-mined area, reducing the active areas of the mine to just 24.4 square miles and significantly limiting the area that we must ventilate and maintain. As a result, the PAMC is the most productive and efficient coal mining complex in NAPP, averaging 6.77 tons of coal production per employee hour in 2015-2016, compared to 4.94 tons of coal production per employee hour for other currently-operating NAPP longwall mines. As of June 30, 2017, productivity further increased to 7.43 tons of coal per employee hour, compared with an average of 5.24 tons per employee hour for all other currently-operating NAPP longwalls. We believe our substantial capital investment in the PAMC will enable us to maintain high production volumes, low operating costs and a strong safety and environmental compliance record, which we believe are key to supporting stable financial performance and cash flows throughout business and commodity price cycles. As a result, we expect to be able to mine the remaining 27+ years of reserves at the PAMC with only maintenance-of-production levels of capital expenditure.

Strategically Located Mining Operations with Advanced Distribution Capabilities and Excellent Access to Key Logistics Infrastructure

Our logistics infrastructure and proximity to coal-fired power plants in the eastern United States provide us with operational and marketing flexibility, reduce the cost to deliver coal to our core markets, and allow us to realize higher netback prices. We believe that we have a significant transportation cost advantage compared to many of

 



 

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our competitors, particularly producers in the ILB and PRB, for deliveries to customers in our core markets and to East Coast ports for international shipping. For example, based on publicly available data and internal estimates, we believe that the transportation cost advantage from our mines compared to ILB mines (not accounting for Btu differences) is approximately $3 to $8 per ton for coal delivered to foreign consumers in Europe and India, $4 to $8 per ton for coal delivered to domestic customers in the Carolinas, and an even more pronounced cost advantage for coal delivered to domestic customers in the mid-Atlantic states. Our ability to accommodate multiple unit trains at the Bailey Central Preparation Plant, which includes a dual-batch loadout facility capable of loading up to 9,000 tons of clean coal per hour and 19.3 miles of track with three sidings, allows for the seamless transition of locomotives from empty inbound trains to fully loaded outbound trains at our facility. Furthermore, the PAMC has among the best access to export infrastructure in the United States. Through our 100%-owned CNX Marine Terminal, served by both the Norfolk Southern and CSX railroads, we are able to participate in the world’s seaborne coal markets with premium thermal and crossover metallurgical coal, providing tremendous optionality.

Strong, Well-Established Customer Base Supporting Contractual Volumes

We have a well-established and diverse blue chip customer base, comprised primarily of domestic electric-power-producing companies located in the eastern United States. We have had success entering into multi-year coal sales agreements with our customers due to our longstanding relationships, reliability of production and delivery, competitive pricing and high coal quality. About 90% of our sales in 2016 were to customers that were in our 2015 portfolio, and each of our top 15 domestic power plant customers in 2016 have been in our portfolio for at least three consecutive years. In addition, to mitigate our exposure with respect to coal-fired power plant retirements, we have strategically developed our customer base to include power plants that are economically positioned to continue operating for the foreseeable future and that are equipped with state-of-the-art environmental controls. In 2016, approximately 4% of our total sales were to domestic power plant customers that have announced plans to retire between 2017 and 2023. Moreover, none of our top 15 customer plants, which accounted for 82% of our domestic power plant shipments in 2016, have announced plans to retire. These top 15 plants operated at a 15% higher capacity factor than other NAPP rail-served plants in 2016, highlighting their economic competitiveness even in a challenging power market. In addition to our robust domestic customer base, we also have favorable access to seaborne coal markets through a long-standing commercial and contractual relationship with a leading coal trading and brokering company, Xcoal Energy & Resources, that maintains a broad market presence with foreign coal consumers. We have consistently exported 3.4 to 5.6 million tons of PAMC coal to the seaborne thermal and crossover metallurgical markets in each of the past 5+ years, which represents approximately 20% of annual sales volume.

Highly Experienced Management Team and Operating Team

Our management and operating teams have (i) significant expertise owning, developing and managing complex thermal and metallurgical coal mining operations, (ii) valuable relationships with customers, railroads and other participants across the coal industry, (iii) technical wherewithal and demonstrated success in developing new applications and customers for our coal products, in both the thermal and metallurgical markets, and (iv) a proven track record of successfully building, enhancing and managing coal assets in a reliable and cost-effective manner throughout all parts of the commodity cycle. We intend to leverage these qualities to continue to successfully develop our coal mining assets while efficiently and flexibly managing our operations to maximize operating cash flow.

 



 

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Our Strategy

Our strategy is to safely and compliantly operate our assets to increase shareholder value through the execution of our strategic objectives:

Selectively pursue growth opportunities that maximize shareholder value by capitalizing on synergies with our assets and expertise

We plan to judiciously direct the cash generated by our operations toward those opportunities that present the greatest potential for value creation to our shareholders, particularly those that take advantage of synergies with our asset base and/or with the expertise of our management team. To effectuate this, we plan to regularly and rigorously evaluate opportunities both for organic growth and for acquisitions, joint ventures, and other business arrangements in the coal industry and related industries that complement our core operations. In addition, our ownership interest in CNXC provides us with a unique vehicle for generating cash and raising capital, through the potential future drop down of assets into CNXC, which if utilized will allow us to generate cash to assist in the execution of our growth strategy. Both the PAMC and our Greenfield Reserves present the potential for organic growth projects if long-term market conditions are favorable. For example, we are currently evaluating a project to improve the recovery and processing of fine coal from the Bailey Central Preparation Plant, which has the potential to add up to 1.5 million tons per year of additional clean coal production without additional mining of raw tons. Moreover, the Harvey Mine’s existing infrastructure, including its bottom development, slope belt, and material handling system, is able to support an additional permanent longwall mining system with moderate additional capital investment in mining equipment. Such an investment would further increase the annual production capacity of the PAMC by 5 million tons. Our Greenfield Reserves associated with the Mason Dixon and River Mine projects present additional organic growth opportunities in NAPP, and our Greenfield Reserves associated with the Itmann Mine, Martinka Mine, and Birch Mine provide actionable organic growth opportunities in the metallurgical coal space, should market conditions warrant. Our management team is well-qualified to evaluate organic and external growth opportunities. We intend to prudently use our interest in CNXC to benefit our growth strategy, and plan to carefully weigh any capital investment decisions against alternate uses of the cash to help ensure we are delivering the most value to our shareholders.

Continue to grow our share at top-performing rail-served power plants in our core market areas, while opportunistically pursuing export and crossover metallurgical opportunities

We plan to seek to minimize our market risk and maximize realizations by continuing to focus on selling coal to strategically-selected, top-performing, rail-served power plants located in our core market areas in the eastern United States. Our top 15 power plant customers in 2016 have consistently consumed more than 50 million tons of coal per year in each of the past five years, have operated at a greater capacity factor than other NAPP rail-served plants, and have not announced plans to retire. We have grown our share at these plants from 12% in 2011 to 32% in 2016, and we believe we can continue to grow this share by displacing less competitive supply from NAPP, CAPP, and other basins. We also plan to continue to work on identifying and penetrating new customer plants that we believe are aligned with our strategic objectives and would be a good fit for our coal. To this end, we tested PAMC coal at five new customer plants in 2016. While the majority of our production is directed toward our established base of domestic power plant customers, many of which are secured through annual or multi-year contracts, we also plan to continue to flexibly and opportunistically place a smaller portion of our production in shorter-term opportunities in the export and crossover metallurgical markets. These markets provide us with pricing upside when markets are strong and with volume stability when markets are weak. As of June 30, 2017, the PAMC is fully contracted for 2017. For 2018 and 2019, our contracted position as of October 9, 2017 is at 80% and 41%, respectively, assuming a 27 million ton coal sales volume. We believe our committed and contracted position is well-balanced in hedging against market downside risk while allowing us to continue to build out our portfolio strategically and opportunistically as the market evolves.

 



 

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Drive operational excellence through safety, compliance, and continuous improvement

We intend to continue focusing on our core values of safety, compliance and continuous improvement. We operate some of the most productive, lowest-cost underground mines in the coal industry, while simultaneously setting some of the industry’s highest standards for safety and compliance. From 2013 through 2016, our Mine Safety and Health Administration (MSHA) reportable incident rate was approximately 42% lower than the national average underground bituminous coal mine incident rate. Furthermore, our MSHA significant and substantial (S&S) citation rate per 100 inspection hours was approximately 23.5% lower than the industry’s average MSHA S&S citation rate over the twelve-month period ended June 30, 2017. We believe that our focus on safety and compliance promotes greater reliability in our operations, which fosters long-term customer relationships and lower operating costs that support higher margins. Consistent with our core value of continuous improvement, we have improved our productivity from 5.69 tons per employee hour in 2014 to 7.52 tons per employee hour in 2016, and have reduced our cash costs of coal sold per ton by 22.6% over this same period. We intend to continue to grow the economic competiveness of our operations by proactively identifying, pursuing, and implementing efficiency improvements and new technologies that can drive down unit costs without compromising safety or compliance.

Ability to Grow Cash Flow through Drop-Downs into CNXC

Our controlling ownership interest in CNX Coal Resources LP provides us with a unique vehicle for generating cash and raising capital to pursue our growth strategy. Over time we may drop down assets into CNXC. We believe that such drop-downs, if utilized, would allow us to grow CNXC’s ability to make distributions and potentially increase the value of the common units, preferred units and incentive distribution rights of CNXC that we hold. Furthermore, the cash generated from these drop-downs could help us to accelerate the execution of our growth strategy. Finally, we believe that our different classes of securities (C-Corp and MLP) provide us with multiple options for accessing capital markets and taking advantage of the best available cost of capital at any given point in time. We believe this is a unique advantage for us compared to other companies in the coal industry.

Risks Associated with Our Business

An investment in our company is subject to a number of risks, including risks relating to our business, risks related to the separation and risks related to our common stock. Set forth below is a high-level summary of some, but not all, of these risks. Please read the information in the section captioned “Risk Factors,” beginning on page 1 of this information statement, for a more thorough description of these and other risks.

Risks Related to Our Business

 

   

Deterioration in the global economic conditions in any of the industries in which our customers operate, foreign currency fluctuations, a worldwide financial downturn, or negative credit market conditions may have a materially adverse effect on our liquidity, results of operations, business and financial condition that we cannot predict.

 

   

Volatility of coal prices, which can fluctuate widely based upon a number of factors beyond our control including oversupply, weather and the price and availability of alternative fuels.

 

   

Risks related to our customer contracts, including failure to extend, renew or obtain new contracts, the terms of such contracts, and our ability to collect payments under the contracts, all of which could adversely affect CoalCo profitability.

 

   

The multiple sources of competition that our business faces, both within the coal industry itself, and also as it relates to alternative fuel sources, can negatively impact our financial results and results of operations.

 



 

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Our required compliance and adherence to various environmental, safety and other governmental regulations and requirements impacts our business, and failure to obtain, maintain and renew governmental permits and approvals and effectuate other required governmental compliance may adversely affect our operations and our profitability.

Risks Related to the Separation

 

   

Our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

   

We may not achieve some or all of the expected benefits of the separation, and the separation may materially adversely affect our business.

 

   

Our plan to separate into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.

 

   

The combined post-separation value of              share(s) of GasCo common stock and             share(s) of CoalCo common stock may not equal or exceed the pre-distribution value of              share(s) of ParentCo common stock.

 

   

In connection with our separation from ParentCo, ParentCo will indemnify us for certain liabilities and we will indemnify ParentCo for certain liabilities. If we are required to pay under these indemnities to ParentCo, our financial results could be negatively impacted. The ParentCo indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which ParentCo will be allocated responsibility, and ParentCo may not be able to satisfy its indemnification obligations in the future.

 

   

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ParentCo, CoalCo and ParentCo stockholders could be subject to significant tax liabilities and, in certain circumstances, CoalCo could be required to indemnify ParentCo for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

 

   

We may not be able to engage in certain corporate transactions after the separation.

 

   

The transfer to us of certain contracts and other assets may require the consents of, or provide other rights to, third parties. If such consents are not obtained, we may not be entitled to the benefit of such contracts and other assets, which could increase our expenses or otherwise harm our business and financial performance.

Risks Related to Our Common Stock

 

   

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and, following the separation, our stock price may fluctuate significantly.

 

   

A significant number of shares of our common stock may be sold following the distribution which may cause our stock price to decline.

 

   

We cannot guarantee the timing, amount or payment of dividends on our common stock.

 

   

Provisions contained in our amended and restated certificate of incorporation and amended and restated bylaws could discourage a takeover attempt, which may reduce or eliminate the likelihood of a change of control transaction and, therefore, the ability of our stockholders to sell their shares for a premium.

 



 

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Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which will limit our stockholders’ ability to obtain an alternative judicial forum for disputes with us or our directors, officers, employees or agents.

The Separation and Distribution

In December 2016, ParentCo announced its intention to separate its Coal Business from its Gas Business. The separation will occur by means of a pro rata distribution to the ParentCo stockholders of all of the common stock of CoalCo.

CoalCo was formed on June 21, 2017 to hold ParentCo’s PAMC operations, CNX Marine Terminal, ParentCo’s ownership interest in CNXC, the Greenfield Reserves and certain other coal related assets and liabilities. Following the separation, CoalCo will hold the assets and liabilities of ParentCo relating to those businesses and assets and the direct and indirect subsidiary entities that currently operate the Coal Business, subject to certain exceptions. After the separation, GasCo will hold ParentCo’s E&P division and related businesses, including those assets and liabilities of ParentCo and its direct and indirect subsidiary entities that currently operate the Gas Business, subject to certain exceptions.

Following the distribution, CoalCo will be a separate company from GasCo.

On                     , 2017, the ParentCo Board of Directors approved the distribution of CoalCo’s common stock on the basis of             share(s) of CoalCo common stock for every              share(s) of ParentCo common stock held as of the close of business on                 , 2017, the record date for the distribution.

Internal Reorganization

We are currently a wholly owned subsidiary of ParentCo. In connection with the separation, ParentCo will transfer to us employees, operations, assets and liabilities associated with ParentCo’s Coal Business and certain other current and former businesses and activities of ParentCo.

ParentCo has taken and, prior to the distribution, will continue to implement a series of internal reorganization transactions to facilitate the transfers of entities and the related assets and liabilities described above from ParentCo and its subsidiaries to CoalCo. To the extent that any transfer of entities, employees, operations or assets or assumption of liabilities contemplated in connection with the separation and distribution has not been consummated on or prior to the distribution date, the parties will cooperate with each other to effect such transfers or assumptions in the manner set forth below under “Certain Relationships and Related Party Transactions—Agreements with GasCo—Separation Agreement.”

References in this information statement to the “contribution” refer to the transfer to CoalCo of the entities and related employees, operations, assets and liabilities of ParentCo’s Coal Business and certain other current and former businesses and activities of ParentCo.

In connection with the separation, CoalCo will make a cash payment of approximately $464 million (subject to adjustment based on relevant financing fees) to ParentCo. This payment will be funded by the proceeds of a secured notes offering, along with borrowings under new term loan facilities CoalCo expects to enter into in connection with the separation. CoalCo also expects to enter into a new revolving credit facility with borrowing capacity of $300 million.

CoalCo’s Post-Separation Relationship with GasCo

CoalCo will enter into a separation and distribution agreement with ParentCo (the separation agreement). In connection with the separation, we will enter into various agreements to effect the separation, and enter into other agreements, or amend or continue under existing agreements that may be in place, to provide a framework for

 



 

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our relationship with GasCo after the separation, including a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement, licensing agreements and other agreements related to operations of CoalCo post-separation. These agreements will provide for the allocation between CoalCo and GasCo of ParentCo’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from ParentCo and will govern certain relationships between us and GasCo after the separation.

For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.” For additional information regarding the internal reorganization, see the section entitled, “The Separation and Distribution—Internal Reorganization.”

Reasons for the Separation

The ParentCo Board of Directors believes that separating its Coal Business from its Gas Business is in the best interests of ParentCo and its stockholders for a number of reasons, including:

 

 

Management Focus and Strategic Decision Making. The separation will position each company to pursue a more focused, industry-specific strategy, will create additional operational flexibility for each company and will enable the management teams of each company to focus on strengthening its core business, operations and other needs, and pursue distinct and targeted opportunities for long-term growth and profitability.

 

 

Allocation of Financial Resources and Access to Capital. The separation will permit each company to efficiently allocate its capital to meet the unique needs of its own business, which will allow each company to intensify its focus on its distinct business priorities. The separation will also facilitate each business having a more appropriate capital structure aligned with its target capital levels and those of its peers, and is expected to increase access to capital by each company.

 

   

Employee Retention and Incentivizing. The separation will result in each business being better positioned to recruit and retain executives and other employees with expertise that is more directly applicable to the needs of its business. Similarly, the Company believes that its efforts to drive financial and operational goals by aligning incentive programs with specific goals applicable to each business are frustrated by its continued operation of two distinct lines of business. As a result of the separation, each business will be able to articulate more defined talent requirements for potential employees, and both recruiters and applicants are expected to have a clearer understanding of the prerequisites and opportunities associated with each business. Additionally, each business will be able to communicate specifically and clearly the goals of incentive programs and how such programs are specifically tailored to and aligned with the financial and operational strategic objectives of each business in connection with recruiting and retaining employees.

 

   

Enhanced Investor Understanding, Corporate Acquisition Currencies and Equity-Based Compensation. The separation brought about by the distribution will improve understanding of each business in the capital markets and allow for a stronger, more focused investor base for each business. Moreover, the separation will create two independent equity structures, enabling each business to use its own business-focused stock as consideration in acquisitions and equity compensation programs and creating a more efficient and valuable transaction currency and compensation tool.

 



 

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The ParentCo Board of Directors also considered a number of potentially negative factors in evaluating the separation, including:

 

   

Risk of Failure to Achieve Anticipated Benefits of the Separation. We may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating our business; and following the separation, we may be more susceptible to market fluctuations, including fluctuations in coal prices, and other adverse events than if we were still a part of ParentCo because our business will be less diversified than ParentCo’s business prior to the completion of the separation.

 

   

Increased Administrative Costs. We will incur substantial costs in connection with the separation and the transition to being a standalone public company, which may include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring key senior management personnel who are new to CoalCo, tax costs and costs to separate information systems. Due to our smaller scale as a standalone company, our cost of performing such functions could be higher than the amounts reflected in our historical financial statements, which would cause our profitability to decrease.

 

   

Limitations on Strategic Transactions. Under the terms of the tax matters agreement that we will enter into with ParentCo, we will be restricted from taking certain actions that could cause the distribution or certain related transactions to fail to qualify as tax-free transactions under applicable law. These restrictions may limit for a period of time our ability to pursue certain strategic transactions and equity issuances or engage in other transactions that might increase the value of our business.

 

   

Uncertainty Regarding Stock Prices. We cannot predict the effect of the separation on the trading prices of CoalCo or GasCo common stock or know with certainty whether the combined market value of                      share(s) of our common stock and one share of GasCo common stock will be less than, equal to or greater than the market value of one share of ParentCo common stock prior to the distribution.

In determining to pursue the separation, the ParentCo Board of Directors concluded the potential benefits of the separation outweighed the foregoing factors. See the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Description of Indebtedness

As discussed above, we intend to incur new borrowings from third-party financing sources, a portion of which we anticipate will be transferred to ParentCo. In addition, CoalCo intends to retain those 5.75% Maryland Economic Development Corporation Port Facilities Refunding Revenue Bonds (MEDCO) due September 2025, for which the principal amount as of September 30, 2017 was $103 million, and for which GasCo will remain as a guarantor with CoalCo providing indemnification with respect to such guarantee. For more information, see “Description of Material Indebtedness.”

Recent developments

CoalCo management has prepared the preliminary estimated financial information for the quarter ended September 30, 2017, presented below, which reflects assumptions and estimates based only on information available to management as of the date of this information statement. The estimated financial information was prepared in good faith on a consistent basis with prior periods. However, we have not completed our financial

 



 

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closing procedures for the quarter ended September 30, 2017 and our actual results could be materially different from our estimates. In addition, no independent public accounting firm has performed any procedures with respect to the financial information for the quarter ended September 30, 2017, nor have they expressed any opinion or other form of assurance with respect to the estimated ranges presented above or their achievability. During the course of the preparation of our combined financial statements and related notes as of and for the quarter ended September 30, 2017, we or our auditors may identify items that would require us to make material adjustments to the preliminary estimates. Therefore, actual results may differ materially from the current expectations expressed below. These estimates should not be viewed as a substitute for full interim financial statements prepared in accordance with GAAP.

Third quarter financial information

Based upon information available as of the date of this information statement, we currently estimate for the quarter ended September 30, 2017:

 

   

Total Revenues in the range of $310 million to $360 million.

 

   

PAMC Sales Tons of between 6.0 million Tons and 6.6 million Tons, compared to PAMC Sales Tons for quarter ended September 30, 2016 of 6.0 million Tons.

 

   

Average Cost of Coal Sold Per Ton of between $37.25 per ton and $37.29 per ton, compared to Average Cost of Coal Sold Per Ton for quarter ended September 30, 2016 of $35.79 per ton.

 

   

Average Sales Price Per Ton Sold of between $44.00 per ton and $44.30 per ton, compared to Average Sales Price Per Ton Sold for quarter ended September 30, 2016 of $44.30 per ton.

 

   

PAMC Capital Expenditures of between $24 million and $30 million, compared to PAMC Capital Expenditures for quarter ended September 30, 2016 of $12 million.

 

   

Net Income. Net Income of between $5 million and $11 million.

 

   

EBITDA*. EBITDA* of between $58 million and $68 million.

 

   

Adjusted EBITDA*. Adjusted EBITDA of between $63 million and $74 million.

 

   

Bank Adjusted EBITDA*. Bank Adjusted EBITDA between $51 million and $61 million.

*EBITDA, “Adjusted EBITDA” and “Bank Adjusted EBITDA” are “non-GAAP financial measures,” that is, financial measures that either exclude or include amounts that are not excluded or included in the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). For an explanation of these measures and a reconciliation of these non-GAAP financial measure to the most directly comparable GAAP financial measure, see “Reconciliation of non-GAAP financial measures.”

CoalCo management believes that each of these non-GAAP financial measures provide meaningful supplemental information that enhances management’s, investors’ and prospective lenders’ ability to evaluate the Company’s operating results and ability to repay its obligations. However, these non-GAAP financial measures are not intended to be used in isolation and should not be considered a substitute for any other performance measure determined in accordance with GAAP. Readers are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool, including that other companies may calculate similar non-GAAP financial measures differently than as defined in these materials, limiting their usefulness as a comparative tool. CoalCo compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. CoalCo further compensates for the

 



 

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limitations of its use of non-GAAP financial measures by presenting comparable GAAP measures. Readers are encouraged to review the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures contained herein.

EBITDA is defined as earnings before deducting net interest expense (interest expense less interest income), income taxes and depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA after adjusting for the discrete items listed below. Bank Adjusted EBITDA is defined as Adjusted EBITDA less between $7 million and $11 million of CNXC EBITDA net of cash distributions attributable to the Company, less between $5 million and $2 million of payments on long term employee liabilities net of expense provision.

Although EBITDA, Adjusted EBITDA and Bank Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, management believes that they are useful to an investor in evaluating the Company because they are widely used to evaluate a company’s operating performance. The Company excludes stock-based compensation from Adjusted EBITDA because it does not believe it accurately reflects the actual operating expense incurred during the relevant period and may vary widely from period to period irrespective of operating results. Investors should not view these metrics as a substitute for measures of performance that are calculated in accordance with generally accepted accounting principles. In addition, because all companies do not calculate EBITDA or Adjusted EBITDA uniformly, the presentation here may not be comparable to similarly titled measures of other companies.

Reconciliation of EBITDA and Adjusted EBITDA to financial net income is as follows (dollars in 000), with Bank Adjusted EBITDA set forth following the table in narrative form:

 

Dollars in millions    Three Months Ended
September 30, 2017
 
     Low      High  

Net Income (Loss)

   $ 5      $ 11  

Add: Interest Expense

     3        4  

Less: Interest Income

             

Add: Income Taxes

     4        5  

Earnings Before Interest & Taxes (EBIT)

     12        20  

Add: Depreciation, Depletion & Amortization

     46        48  

Earnings Before Interest, Taxes and DD&A (EBITDA) from Continuing Operations

   $ 58      $ 68  

Total Pre-tax Adjustments

     5        6  

Adjusted EBITDA

   $ 63      $ 74  

Less: Adjusted EBITDA Attributable to Noncontrolling Interest

     6        9  

Adjusted EBITDA Attributable to CONSOL Mining Corporation Shareholder

   $ 57      $ 65  

Bank Adjusted EBITDA is calculated as Adjusted EBITDA less between $7 million and $11 million of CNXC EBITDA net of cash distributions attributable to the Company, less between $5 million and $2 million of payments on long term employee liabilities net of expense provision.

Corporate Information

CoalCo was incorporated in Delaware on June 21, 2017 for the purpose of holding ParentCo’s Coal Business in connection with the separation and distribution described herein. Prior to the transfer of these businesses to us by ParentCo, which will occur prior to the distribution, CoalCo will have no operations. The address of our principal executive offices will be 1000 CONSOL Energy Drive, Canonsburg, PA 15317-6506. Our telephone number after the distribution will be             . We will maintain an Internet site at www.                             .com. Our website and the information contained therein or connected thereto are not incorporated into this

 



 

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information statement or the registration statement of which this information statement forms a part, or in any other filings with, or any information furnished or submitted to, the SEC.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to ParentCo stockholders who will receive shares of CoalCo common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of CoalCo’s securities. The information contained in this information statement is believed by CoalCo to be accurate as of the date set forth on its cover. Changes may occur after that date and neither ParentCo nor CoalCo will update the information except as may be required in the normal course of their respective disclosure obligations and practices.

 



 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA

COMBINED FINANCIAL DATA

The following summary financial data reflects the combined operations of CoalCo. We derived the summary combined income statement data for the years ended December 31, 2016, 2015 and 2014, and summary combined balance sheet data as of December 31, 2016 and 2015, as set forth below, from our audited Combined Financial Statements, which are included in the “Index to Financial Statements” section of this information statement. We derived the summary combined income statement data for the six months ended June 30, 2017 and 2016, and summary combined balance sheet data as of June 30, 2017, as set forth below, from our unaudited Combined Financial Statements, included elsewhere in this information statement. The historical results do not necessarily indicate the results expected for any future period.

The summary unaudited pro forma condensed combined financial data for the year ended December 31, 2016 and for the six months ended June 30, 2017 has been prepared to reflect the separation, including the incurrence of indebtedness of approximately $850 million. The Unaudited Pro Forma Condensed Combined Statements of Income presented for the year ended December 31, 2016 and the six months ended June 30, 2017, assumes the separation occurred on January 1, 2016. The Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2017 assumes the separation occurred on June 30, 2017. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances.

The Unaudited Pro Forma Condensed Combined Financial Statements are not necessarily indicative of our results of operations or financial condition had the distribution and its anticipated post-separation capital structure been completed on the dates assumed. They may not reflect the results of operations or financial condition that would have resulted had we been operating as an independent, publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operations or financial condition.

You should read this summary financial data together with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Capitalization,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and accompanying notes included elsewhere in this information statement.

 



 

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    As of and for the Six months
ended June 30
    As of and for the year ended December 31,  
    Pro
forma
2017
(Unaudited)
    2017
(Unaudited)
    2016
(Unaudited)
    Pro
forma
2016
(Unaudited)
    2016     2015     2014  

Revenue and Other Income:

             

Coal Sales

  $ 620,155     $ 620,155     $ 476,726     $ 1,065,582     $ 1,065,582     $ 1,289,036     $ 1,616,874  

Other Outside Sales

    27,742       27,742       15,767       31,464       31,464       30,967       41,255  

Freight Revenue

    30,045       30,045       24,557       46,468       46,468       20,499       23,133  

Miscellaneous Other Income

    26,356       32,794       36,133       72,814       82,120       68,193       123,604  

Gain on Sale of Assets

    13,536       13,536       3,904       5,228       5,228       13,025       26,312  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue and Other Income

    717,834       724,272       557,087       1,221,556       1,230,862       1,421,720       1,831,178  

Costs and Expenses:

             

Operating and Other Costs

    452,120       452,876       407,446       876,013       877,177       699,594       1,110,332  
Depreciation, Depletion and Amortization     78,503       78,261       77,976       178,561       178,122       195,337       206,684  

Freight Expense

    30,045       30,045       24,557       46,468       46,468       20,499       23,133  
Selling, General, and Administrative Costs     37,417       37,417       18,020       50,044       50,027       55,720       78,724  

Interest Expense

    38,643       7,966       6,496       76,305       14,053       7,544           —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Costs and Expenses

    636,728       606,565       534,495       1,227,391       1,165,847       978,694       1,418,873  

Earnings Before Income Tax

    81,106       117,707       22,592       (5,835)       65,015       443,026       412,305  

Income Tax Expense (Benefit)

    6,206       19,017       (193)       (10,231)       14,565       125,605       121,353  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

    74,900       98,690       22,785       4,396       50,450       317,421       290,952  
Less: Net Income Attributable to Noncontrolling Interest     9,777       9,777       2,293       8,954       8,954       10,410             —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net Income Attributable to CONSOL Mining Corporation Shareholder   $ 65,123     $ 88,913     $ 20,492     $ (4,558)     $ 41,496     $ 307,011     $ 290,952  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Balance Sheet Data (at period end):              
Property, plant and equipment, net   $ 2,102,833     $ 2,118,394     $ 2,253,662       $ 2,180,270     $ 2,325,181     $ 2,529,657  
Total assets   $ 2,783,961     $ 2,626,610     $ 2,758,170       $ 2,687,434     $ 2,867,733     $ 3,092,374  
Total equity   $ 338,335     $ 826,297     $ 854,981       $ 800,124     $ 1,061,839     $ 1,246,192  
Cash Flow Statement Data:              
Net cash provided by operating activities     $ 104,027     $ 95,070       $ 329,107     $ 291,693     $ 543,519  
Net cash used in investing activities     $ (6,244)      $ (22,621)        $ (45,758)      $ (130,274)      $ (127,810)   
Net cash used in financing activities     $ (104,355)      $ (70,038)        $ (276,677)      $ (154,917)      $ (415,839)   
Coal Reserves, Production and Sales Data:              
Recoverable reserves (at period end)(1)       2,347,445,054       2,579,430,075         2,361,166,000       2,590,819,000             —  
Coal tons produced       13,720,946       11,388,925         24,665,589       22,790,165       26,065,985  
Coal tons sold       13,548,745       11,431,269         24,603,559       22,873,470       26,132,593  
Average sales price per ton     $ 45.77     $ 41.70       $ 43.31     $ 56.36     $ 61.88  
Average costs per ton sold     $ 34.64     $ 33.86       $ 34.35     $ 41.78     $ 43.63  

Other Data:

             

Capital Expenditures

    $ 23,229     $ 27,206       $ 53,600     $ 143,053     $ 348,846  

 

(1)

Includes third-party recoverable assigned coal reserves of 34.6 million tons for the six months ended June 30, 2017 and for the year ended December 31, 2016. Includes third-party recoverable assigned coal reserves of 88.8 million tons for the six months ended June 30, 2016 and for the year ended December 31, 2015. Recoverable reserves have not been disclosed as of December 31, 2014 due to the impact of prior discontinued operations in that period.

 



 

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EBITDA is defined as earnings before deducting net interest expense (interest expense less interest income), income taxes and depreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA after adjusting for the discrete items listed below. Although EBITDA and Adjusted EBITDA are not measures of performance calculated in accordance with GAAP, management believes that they are useful to an investor in evaluating CONSOL Energy because they are widely used to evaluate a company’s operating performance. CoalCo excludes stock-based compensation from Adjusted EBITDA because it does not believe it accurately reflects the actual operating expense incurred during the relevant period and may vary widely from period to period irrespective of operating results. Readers should not view these metrics as a substitute for measures of performance that are calculated in accordance with generally accepted accounting principles. In addition, because all companies do not calculate EBITDA or Adjusted EBITDA uniformly, the presentation here may not be comparable to similarly titled measures of other companies.

 

     For the six months
ended June 30,
     For the year ended December 31,  
     Pro
forma
2017
     2017      2016      Pro
forma
2016
     2016      2015      2014  

Other Financial Information:

                    

Capital Expenditures

   $      $ 23,229      $ 27,206      $      $ 53,600      $ 143,053      $ 348,846  

EBITDA(1)

     188,475        194,157        104,771        240,077        248,236        635,497        618,989  

Adjusted EBITDA(1)

     197,240        202,922        123,831        273,982        282,141        423,232        637,821  

 

(1)

EBITDA and Adjusted EBITDA are non-GAAP financial measures. For a definition of EBITDA and Adjusted EBITDA and reconciliations to our most directly comparable financial measures calculated in accordance with GAAP, please see “—Reconciliation of non-GAAP financial measures.”

Reconciliation of non-GAAP financial measures

EBIT, EBITDA and Adjusted EBITDA

The following table presents a reconciliation of non-GAAP financial measures, EBIT, EBITDA and Adjusted EBITDA, which we use in the analysis of our business. A reconcilement of EBIT, EBITDA and Adjusted EBITDA to financial net income is as follows:

 

    For the six months
ended June 30,
    For the year ended December 31,  
    Pro
forma
2017
    2017     2016     Pro
forma
2016
    2016     2015     2014  

Other Financial Information:

             

Net income (loss) attributable to CONSOL Mining Corporation

  $ 65,123     $ 88,913     $ 20,492     $ (4,558   $ 41,496     $ 307,011     $ 290,952  

Add: Interest expense

    38,643       7,966       6,496       76,305       14,053       7,544        

Add: Income taxes

    6,206       19,017       (193     (10,231     14,565       125,605       121,353  

Earnings Before Interest & Taxes (EBIT)

    109,972       115,896       26,795       61,516       70,114       440,160       412,305  

Add: Depreciation, depletion and amortization

    78,503       78,261       77,976       178,561       178,122       195,337       206,684  

Earnings Before Interest, taxes and DD&A (EBITDA) from continuing operations

    188,475       194,157       104,771       240,077       248,236       635,497       618,989  

Stock-Based Compensation

    8,765       8,765       5,364       11,710       11,710       8,406       19,860  

Transaction fees[(1)]

              12,302    

Pension settlement[(2)]

        13,696       22,195       22,195       19,053       24,310  

Gains on sale of assets[(3)]

              (7,551     (25,338

OPEB Plan Changes

              (244,475  

Total pre-tax adjustments

    8,765       8,765       19,060       33,905       33,905       (212,265     18,832  

Adjusted earnings before interest, taxes and DD&A (Adjusted EBITDA) from continuing operations

    197,240       202,922       123,831       273,982       282,141       423,232       637,821  

 

[(1)

Represents legal and professional fees related to                     .

(2)

Pension settlement expenses                     .

(3)

Represents the total gain we experienced as a result of our asset sales not in the normal course of operations.]

 



 

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CoalCo management believes that these non-GAAP financial measures provide meaningful supplemental information that enhances management’s, investors’ and prospective lenders’ ability to evaluate the Company’s operating results and ability to repay its obligations. However, these non-GAAP financial measures are not intended to be used in isolation and should not be considered a substitute for any other performance measure determined in accordance with GAAP. Readers are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool, including that other companies may calculate similar non-GAAP financial measures differently than as defined in these materials, limiting their usefulness as a comparative tool. CoalCo compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. CoalCo further compensates for the limitations of its use of non-GAAP financial measures by presenting comparable GAAP measures. Readers are encouraged to review the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures contained herein.

 



 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating us and our common stock. The risk factors generally have been separated into three groups: risks related to our business, risks related to the separation and risks related to our common stock and the securities market.

Any of the following risks could materially and adversely affect our financial condition, results of operations or cash flows. Our operations could be affected by various risks, many of which are beyond our control. Based on current information, we believe that the following list identifies the most significant risk factors that could affect our financial condition, results of operations or cash flows. There may be additional risks and uncertainties that adversely affect our financial condition, results of operations or cash flows in the future that are not presently known, are not currently believed to be material, or are not identified below because they are common to all businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. For more information, see “Cautionary Statement Concerning Forward-Looking Statements.”

Risks Related to Our Business

Deterioration in the global economic conditions in any of the industries in which our customers operate, or a worldwide financial downturn, or negative credit market conditions may have a materially adverse effect on our liquidity, results of operations, business and financial condition that we cannot predict.

Economic conditions in a number of industries in which our customers operate, such as electric power generation and steel-making, substantially deteriorated in recent years and reduced the demand for coal. The general economic challenges for some of our customers continued in 2016 and the outlook is uncertain. In addition, liquidity is essential to our business and developing our assets. Renewed or continued weakness in the economic conditions of any of the industries we serve or are served by our customers could adversely affect our business, financial condition, results of operation and liquidity in a number of ways. For example:

 

   

demand for electricity in the United States is impacted by industrial production, which if weakened would negatively impact the revenues, margins and profitability of our coal business;

 

   

the tightening of credit or lack of credit availability to our customers could adversely affect our ability to collect our trade receivables;

 

   

our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital for our business including for exploration and/or development of our coal reserves; and

 

   

a decline in our creditworthiness, which may require us to post letters of credit, cash collateral, or surety bonds to secure certain obligations, all of which would have an adverse effect on our liquidity.

Prices for coal are volatile and can fluctuate widely based upon a number of factors beyond our control including oversupply relative to the demand available for our products, weather and the price and availability of alternative fuels. An extended decline in the prices we receive for our coal will adversely affect our business, operating results, financial condition and cash flows.

Our financial results are significantly affected by the prices we receive for our coal. In addition, demand can fluctuate widely due to a number of matters beyond our control, including:

 

   

changes in the consumption pattern of industrial consumers, electricity generators and residential users of electricity;

 

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weather conditions in our markets which affect the demand for thermal coal (for example, the unusually warm 2015 - 2016 winter left utilities with large coal stockpiles and depressed the demand for thermal coal);

 

   

with respect to thermal coal, the price and availability of natural gas and the price and supply of imported liquefied natural gas;

 

   

technological advances affecting energy consumption;

 

   

the costs, availability and capacity of transportation infrastructure;

 

   

international developments impacting supply of metallurgical coal, including supply side reforms promulgated in China, and continued expected growth in demand for seaborne metallurgical coal in India; and

 

   

the impact of domestic and foreign governmental laws and regulations, including environmental and climate change regulations and regulations affecting the coal mining industry and coal-fired power plants, and delays in the receipt of, failure to receive, failure to maintain or revocation of necessary governmental permits.

The coal industry also faces concerns with respect to oversupply from time to time. For example, U.S. coal exports decreased by 32% during the first half of 2016 compared with the first half of 2015, as global supply exceeded demand for both thermal and metallurgical coal. Our average sales price per ton sold in 2016 declined 23% from 2015 due to imbalanced supply and demand, and a substantial or extended decline in the prices we receive for our coal could adversely affect our business, results of operations, financial condition, cash flows and liquidity.

Foreign currency fluctuations could adversely affect the competitiveness of our coal abroad.

We compete in international markets against coal produced in other countries. Coal is sold internationally in U.S. dollars and, as a result, general economic conditions in foreign markets and changes in foreign currency exchange rates may provide our foreign competitors with a competitive advantage. As a result, mining costs in competing producing countries may be reduced in U.S. dollar terms based on currency exchange rates, providing an advantage to foreign coal producers. If our competitors’ currencies decline against the U.S. dollar or against our foreign customers’ local currencies, those competitors may be able to continue to offer lower prices for coal to our customers. Furthermore, if the currencies of our overseas customers were to significantly decline in value in comparison to the U.S. dollar, those customers may seek decreased prices for the coal we sell to them. Consequently, currency fluctuations could adversely affect the competitiveness of our products in international markets, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

If our coal customers do not extend existing contracts or do not enter into new multi-year coal sales contracts on favorable terms, profitability of CoalCo’s operations could be adversely affected.

During the year ended December 31, 2016, approximately 65% of the coal CoalCo produced was sold under multi-year sales contracts. If a substantial portion of our multi-year sales contracts are modified or terminated, if force majeure is exercised, or if we are unable to replace or extend the contracts or new contracts are priced at lower levels, our profitability would be adversely affected. The profitability of our multi-year sales coal supply contracts depends on a variety of factors, which vary from contract to contract and fluctuate during the contract term, including our production costs and other factors. Price changes, if any, provided in long-term supply contracts may not reflect our cost increases, and therefore, increases in our costs may reduce our profit margins. In addition, during periods of declining market prices, provisions in our long-term coal contracts for adjustment or renegotiation of prices and other provisions may increase our exposure to short-term coal price and electric power price volatility. As a result, we may not be able to obtain long-term agreements at favorable prices compared to either market conditions, as they may change from time to time, or our cost structure, which may reduce our profitability.

 

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The loss of, or significant reduction in, purchases by our largest coal customers or the failure of any of our customers to buy and pay for coal they committed to purchase could adversely affect our business, financial condition, results of operation and cash flows.

For the year ended December 31, 2016, we derived over 10% of our coal sales revenue from two coal customers individually and approximately 40% of our total sales revenue were derived from our four largest coal customers. At December 31, 2016, we had approximately nine coal supply agreements with these top two customers that expire at various times from 2017 to 2018. There are inherent risks whenever a significant percentage of total revenues are concentrated with a limited number of customers. Revenues from our largest customers may fluctuate from time to time based on numerous factors, including market conditions, which may be outside of our control. If any of our largest customers experience declining revenues due to market, economic or competitive conditions, we could be pressured to reduce the prices that we charge for our coal, which could have an adverse effect on our margins, profitability, cash flows and financial position. In addition, if any customers were to significantly reduce their purchases of coal from us, including by failing to buy and pay for coal they committed to purchase in sales contracts, our business, financial condition, results of operations and cash flows could be adversely affected.

Our ability to collect payments from our customers could be impaired if their creditworthiness declines or if they fail to honor their contracts with us.

Our ability to receive payment for coal sold and delivered depends on the continued creditworthiness of our customers. Many utilities have sold their power plants to non-regulated affiliates or third parties that may be less creditworthy, thereby increasing the risk we bear with respect to payment default. These new power plant owners may have credit ratings that are below investment grade. In addition, some of our customers have been adversely affected by the current economic downturn, which may impact their ability to fulfill their contractual obligations. Competition with other coal suppliers could force us to extend credit to customers and on terms that could increase the risk we bear with respect to payment default. We also have a contract to supply coal to an energy trading and brokering customer under which that customer sells coal to end users. If the creditworthiness of our energy trading and brokering customer declines, we may not be able to collect payment for all coal sold and delivered to this customer. If the creditworthiness of our customers declines significantly, our business could be adversely affected. In addition, if customers refuse to accept shipments of our coal for which they have an existing contractual obligation, our revenues will decrease and we may have to reduce production at our mines until our customers’ contractual obligations are honored. Our inability to collect payment from counterparties to our sales contracts may have a materially adverse effect on our business, financial condition, results of operations and cash flows.

Our inability to acquire additional coal reserves that are economically recoverable may have a material adverse effect on our future profitability.

Our profitability depends substantially on our ability to mine, in a cost-effective manner, coal reserves that possess the quality characteristics that our customers desire. Because our reserves decline as we mine our coal, our future profitability depends upon our ability to acquire additional coal reserves that are economically recoverable to replace the reserves we produce. If we fail to acquire or develop sufficient additional reserves over the long term to replace the reserves depleted by our production, our existing reserves will eventually be depleted, which may have a material adverse effect on our business, financial condition, results of operations and cash flows.

Decreases in demand for electricity and changes in coal consumption patterns of U.S. electric power generators could adversely affect our business.

Our business is closely linked to domestic demand for electricity, and any changes in coal consumption by U.S. electric power generators would likely impact our business over the long term. According to the EIA, in

 

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2016, the domestic electric power sector accounted for approximately 92% of total U.S. coal consumption. In 2016, the PAMC sold approximately 76% of its coal to U.S. electric power generators, and we have multi-year contracts in place with these electric power generators for a significant portion of our future production. The amount of coal consumed by the electric power generation industry is affected by, among other things:

 

   

general economic conditions, particularly those affecting industrial electric power demand, such as a downturn in the U.S. economy and financial markets;

   

overall demand for electricity;

   

indirect competition from alternative fuel sources for power generation, such as natural gas, fuel oil, nuclear, hydroelectric, wind and solar power, and the location, availability, quality and price of those alternative fuel sources;

   

environmental and other governmental regulations, including those impacting coal-fired power plants; and

   

energy conservation efforts and related governmental policies.

For example, the relatively recent low price of natural gas has resulted, in some instances, in domestic electric power generators increasing natural gas consumption while decreasing coal consumption. Federal and state mandates for increased use of electricity derived from renewable energy sources could affect demand for our coal. Such mandates, combined with other incentives to use renewable energy sources, such as tax credits, could make alternative fuel sources more competitive with coal. A decrease in coal consumption by the electric power generation industry could adversely affect the price of coal, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

According to the EIA, although electricity demand fell in only three years between 1950 and 2007, it declined in five of the eight years between 2008 and 2015. The largest drop in electricity demand occurred in 2009, primarily as the result of the steep economic downturn from late 2007 through 2009, which led to a large drop in electricity sales in the industrial sector. Other factors, such as efficiency improvements associated with new appliance standards in the buildings sectors and overall improvement in the efficiency of technologies powered by electricity, have slowed electricity demand growth and may contribute to slower growth in the future, even as the U.S. economy continues its recovery. Further decreases in the demand for electricity, such as decreases that could be caused by a worsening of current economic conditions, a prolonged economic recession or other similar events, could have a material adverse effect on the demand for coal and on our business over the long term.

Changes in the coal industry that affect our customers, such as those caused by decreased electricity demand and increased competition, could also adversely affect our business. Indirect competition from natural gas-fired plants that are relatively less expensive to construct and less difficult to permit has the most potential to displace a significant amount of coal-fired electric power generation in the near term, particularly from older, less efficient coal-fired powered generators. For example, according to the EIA, installed U.S. natural gas-fired net summer generating capacity increased by about 7 gigawatt from 2014-2015, while installed coal-fired net summer generating capacity decreased by about 19 gigawatt over the same period. In addition, uncertainty caused by federal and state regulations could cause coal customers to be uncertain of their coal requirements in future years, which could adversely affect our ability to sell coal to our customers under multi-year sales contracts.

The availability and reliability of transportation facilities and fluctuations in transportation costs could affect the demand for our coal, and any significant damage to our CNX Marine Terminal facility that impacts its use could impair our ability to supply coal to our customers.

Transportation logistics play an important role in allowing us to supply coal to our customers. Any significant delays, interruptions or other limitations on the ability to transport our coal could negatively affect our operations. Our coal is transported from our mining complex by rail, truck or a combination of these methods. To

 

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reach markets and end customers, our coal may also be transported by barge or by ocean vessels loaded at terminals, including our CNX Marine Terminal. Disruption of transportation services because of weather-related problems, strikes, lock-outs, terrorism, governmental regulation, third-party action or other events could temporarily impair our ability to supply coal to customers and adversely affect our profitability. In addition, transportation costs represent a significant portion of the delivered cost of coal and, as a result, the cost of delivery is a critical factor in a customers’ purchasing decision. Increases in transportation costs, including increases resulting from emission control requirements and fluctuation in the price of diesel fuel and demurrage, could make our coal less competitive. Any disruption of the transportation services we use or increase in transportation costs could have a materially adverse effect on our business, financial condition, results of operations and cash flows. Disruption in shipment levels over longer periods of time at the CNX Marine Terminal could cause our customers to look to other sources for their coal needs, negatively affecting our revenues and results of operations.

Competition within the coal industry may adversely affect our ability to sell our products. Increased competition or a loss of our competitive position could adversely affect our sales of, or our prices for, our coal products, which could impair our profitability.

We compete with other coal producers primarily on the basis of price, coal quality, transportation costs and reliability. We compete with coal producers in various regions of the United States and with some foreign coal producers for domestic sales primarily to electric power generators. Demand for our thermal coal by our principal electric power generator customers is affected by the delivered price of competing coals, other fuel supplies and alternative generating sources, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric and wind power. The domestic coal industry has experienced consolidation in recent years, including consolidation among some of our major competitors. In addition, substantial overcapacity exists in the coal industry and most large coal companies have filed bankruptcy proceedings which could enable them to lower their production costs and thereby reduce the price for their coal. We cannot assure you that the result of current or further consolidation in the coal industry or current or future bankruptcy proceedings of our coal competitors will not adversely affect our competitive position. We also compete with both domestic and foreign coal producers for sales in international markets. We sell coal to foreign electricity generators, which sales are significantly affected by international demand and competition. Potential changes to international trade agreements, trade concessions or other political and economic arrangements may benefit coal producers operating in countries other than the United States. We cannot assure you that we will be able to compete on the basis of price or other factors with companies that in the future may benefit from favorable foreign trade policies or other arrangements.

Any reduction in our ability to compete in coal markets could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The characteristics of coal may make it costly for electric power generators and other coal users to comply with various environmental standards regarding the emissions of impurities released when coal is burned which could cause utilities to replace coal-fired power plants with alternative fuels. In addition, various incentives have been proposed to encourage the generation of electricity from renewable energy sources. A reduction in the use of coal for electric power generation could decrease the volume of our domestic coal sales and adversely affect our results of operations.

Coal contains impurities, including sulfur, mercury, chlorine and other elements or compounds, many of which are released into the air along with fine particulate matter and carbon dioxide when it is burned. Complying with regulations on these emissions can be costly for electric power generators. For example, in order to meet the federal Clean Air Act limits for sulfur dioxide emissions from electric power plants, coal users will need to install scrubbers, use sulfur dioxide emission allowances (some of which they may purchase) or switch to other fuels. Each option has limitations. Lower sulfur coal may be more costly to purchase on an energy basis than higher sulfur coal depending on mining and transportation costs. The cost of installing scrubbers is significant and emission allowances may become more expensive as their availability declines. Switching to

 

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other fuels may require expensive modification of existing plants. Because higher sulfur coal currently accounts for a significant portion of our sales, the extent to which electric power generators switch to alternative fuel could materially affect us. Recent Environmental Protection Agency (EPA) rulemaking proceedings requiring additional reductions in permissible emission levels of impurities by coal-fired plants will likely make it more costly to operate coal-fired electric power plants and may make coal a less attractive fuel alternative for electric power generation in the future. Examples are (i) implementation of the Cross-State Air Pollution Rule (CSAPR) to require reductions of seasonal nitrogen oxides (NOX) emissions from power plants in the eastern United States to address ozone pollution; and (ii) the Utility Maximum Achievable Control Technology (Utility MACT) rule, better known as the Mercury and Air Toxics Standard (MATS) rule, which included more stringent new source performance standards (NSPS) for particulate matter (PM), mercury, sulfur dioxide (SO2) and nitrogen oxides (NOX), for new and existing coal-fired power plants. The rule was rejected by the U.S. Supreme Court on June 29, 2015 and sent back to the D.C. Circuit Court to determine whether to remand and allow the EPA to address the rule’s deficiencies or to vacate and nullify the rule; nevertheless most coal-fired electric power generators have already taken steps to comply with the rule. On April 18, 2017 the EPA asked the Court to delay arguments over MATs to allow the Trump Administration time to fully review the findings.

Apart from actual and potential regulation of emissions, water use, waste water discharge, and solid waste management from coal-fired plants, state and federal mandates for increased use of electricity from renewable energy sources could have an impact on the market for our coal. Several states have enacted legislative mandates requiring electricity suppliers to use renewable energy sources to generate a certain percentage of power. There have been numerous proposals to establish a similar uniform, national standard although none of these proposals have been enacted to date. Possible advances in technologies and incentives, such as tax credits, to enhance the economics of renewable energy sources could make these sources more competitive with coal. Any reductions in the amount of coal consumed by domestic electric power generators as a result of current or new standards for the emission of impurities or incentives to switch to alternative fuels or renewable energy sources could reduce the demand for our coal, thereby reducing our revenues and adversely affecting our business and results of operations.

Regulation of greenhouse gas emissions may increase our operating costs and reduce the value of our coal assets and such regulation, as well as uncertainty concerning such regulation could adversely impact the market for coal, as well as for our securities.

While climate change legislation in the U.S. is unlikely in the next several years, the issue of global climate change continues to attract considerable public and scientific attention with widespread concern about the impacts of human activity, especially the emissions of greenhouse gases (GHGs) such as carbon dioxide and methane. Combustion of fossil fuels, such as the coal we produce, results in the creation of carbon dioxide emissions into the atmosphere by coal end-users, such as coal-fired electric power generation plants. Numerous proposals have been made and are likely to continue to be made at the international, national, regional and state levels of government that are intended to limit emissions of GHGs. Several states have already adopted measures requiring reduction of GHGs within state boundaries. Other states have elected to participate in voluntary regional cap-and-trade programs like the Regional Greenhouse Gas Initiative (RGGI) in the northeastern U.S.

The Obama Administration laid out the Climate Action Plan to limit emissions of carbon dioxide (CO2) from coal-fired and natural gas-fired power plants. The EPA proposed numerous regulatory actions to address CO2, including New Source Performance Standards (NSPS) for CO2 from both new power plants and existing and modified/reconstructed power plants. The agency’s Clean Power Plan (CPP) Rule, which went into effect on December 22, 2015, set state-specific rate-based goals for CO2 emissions from existing fossil fuel-fired electric generating units, and created emission guidelines for states to follow in developing plans to address greenhouse gas emissions from existing fossil fuel-fired electric generating units. Numerous petitions challenging the CPP Rule were consolidated into one case, West Virginia v. EPA. While the litigation is still ongoing at the circuit court level, a mid-litigation application to the Supreme Court resulted in a stay of the CPP Rule. On September 27, 2016, an en banc panel of the U.S. Court of Appeals for the D.C. Circuit heard oral

 

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arguments in the case. The decision, originally expected in early 2017, has been stayed as a result of a March 28, 2017 executive order directing the EPA to begin the process of reviewing and possibly rescinding the CPP Rule. The EPA filed a motion and the motion was granted by the U.S. Court of Appeals for the D.C. Circuit requesting the stay while the EPA conducts their review of the CPP Rule. If the review does not result in any rule changes, the U.S. Court of Appeals for the D.C. Circuit will rule on the legality of the CPP Rule.

The current Administration’s executive order promoting energy independence and economic growth issued on March 28, 2017 requires the review of existing regulations that potentially burden the development or use of domestically produced energy resources. The review of existing regulations may not result in any changes and any changes made to existing regulations may not produce the intended favorable results desired by the new Administration. The executive order also directed the Council on Environmental Quality to rescind its final guidance entitled, “Final Guidance for Federal Departments and Agencies on Consideration of Greenhouse Gas Emissions and the Effects of Climate Change in National Environmental Policy Act (NEPA) Reviews.” The guidance previously directed agencies to consider proposed actions and their effects on climate change (GHG emissions would have been a key indicator being assessed under any NEPA review). Such review considerations may have created additional delays or costs in any NEPA review processes for energy producers and generators and may have prevented the acquisition of any necessary federal approvals for energy producers and generators.

Internationally, the Kyoto Protocol, which set binding emission targets for developed countries (which was not ratified by the United States) was nominally extended past its expiration date of December 2012 with a requirement for a new legal construct to be put into place by 2015. In December 2015, the United Nations Climate Change Conference was held and an agreement was reached between the countries participating in the conference, including the United States, to limit global warming to less than 2 degrees Celsius (3.6° Fahrenheit) compared to pre-industrial levels. This agreement, known as the Paris Agreement, calls for zero net anthropogenic greenhouse gas emission to be reached during the second half of the 21st century. Each party is to prepare a plan on its contributions to reach this goal; each plan is to be filed in a publicly available registry. The Paris Agreement does not create any binding obligations for nations to limit their GHG emissions but rather includes pledges to voluntarily limit or reduce future emissions. Although the United States became a party to the Paris Agreement in April 2016, the current Administration subsequently terminated its participation in June 2017. However, the Paris Agreement stipulates that participating countries must wait four years before withdrawing from the agreement.

Additionally, coalbed methane must be expelled from our underground coal mines for mining safety reasons and is vented into the atmosphere when the coal is mined. Coalbed methane has a greater GHG effect than carbon dioxide. If regulation of GHG emissions does not exempt the release of coalbed methane, we may have to further reduce our methane emissions, pay higher taxes, incur costs to purchase credits that permit us to continue operations as they now exist at our underground coal mines or perhaps curtail coal production. In 2010 the EPA declined a petition to regulate methane emissions from coal mines, and on May 13, 2014 the U.S. Court of Appeals upheld the EPA’s denial of the petition. The current Administration’s stated stance of unburdening domestic energy production will make it more unlikely that coalbed methane will be regulated in a manner that adds higher costs to producers in the short- term.

Apart from governmental regulation, investment banks based both domestically and internationally have announced that they have adopted climate change guidelines for lenders. The guidelines require the evaluation of carbon risks in the financing of electric power generation plants which may make it more difficult for utilities to obtain financing for coal-fired plants.

Adoption of comprehensive legislation or regulation focusing on GHG emission reductions for the United States or other countries where we sell coal, or the inability of utilities to obtain financing in connection with coal-fired plants, may make it more costly to operate fossil fuel fired (especially coal-fired) electric power generation plants and make fossil fuels less attractive for electric utility power plants in the future. Depending on

 

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the nature of the regulation or legislation, natural gas-fueled power generation could become more economically attractive than coal-fueled power generation. Apart from actual regulation, uncertainty over the extent of regulation of GHG emissions may inhibit utilities from investing in the building of new coal-fired plants to replace older plants or investing in the upgrading of existing coal-fired plants. Any reduction or substantial delay in the amount of coal consumed by domestic electric power generators as a result of actual or potential regulation of greenhouse gas emissions could decrease demand for our fossil fuels, thereby reducing our revenues and materially and adversely affecting our business and results of operations. Our customers may also have to invest in carbon dioxide capture and storage technologies in order to burn coal and comply with future GHG emission standards.

In addition, there have also been efforts in recent years affecting the investment community, including investment advisers, sovereign wealth funds, public pension funds, universities and other groups, promoting the divestment of fossil fuel equities and also pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. The impact of such efforts may adversely affect the demand for and price of securities issued by us, and impact our access to the capital and financial markets.

Environmental regulations introduce uncertainty that could adversely impact the market for coal with potential short and long-term liabilities.

The Federal Endangered Species Act (ESA) and similar state laws protect species endangered or threatened with extinction. Protection of endangered and threatened species may cause us to modify mining plans, or develop and implement species-specific protection and enhancement plans to avoid or minimize impacts to endangered species or their habitats. A number of species indigenous to the areas where we operate are protected under the ESA.

CoalCo utilizes certain pipelines in connection with its coal businesses. Mitigation permits from the Army Corps of Engineers (ACOE) are typically required for certain impacts these pipelines cause to streams and wetlands. On June 29, 2015, the EPA promulgated a proposed rule called “Definition of ‘Waters of the United States’ (WoUS) Under the Clean Water Act.” The rule expanded the scope of the CWA to include previously non-jurisdictional streams, wetlands, and waters, making these areas jurisdictional inter-coastal waters of the U.S. On August 27, 2015, the District Court of North Dakota blocked implementation of the rule in 13 states prior to the rule’s effective date of August 28, 2015. On October 9, 2015, the Court of Appeals for the Sixth Circuit blocked implementation of the rule nationwide. The U.S. Supreme Court will now decide which court has jurisdiction - federal appeals court or district courts. A decision is expected sometime in mid-2017. Meanwhile, the current Administration is working to rescind and replace the rulemaking that would re-establish the 1986 rule and implement the 2008 guidance, which is less onerous than the currently litigated rule.

Management and regulation of point source discharges covered under the National Pollutant Discharge Eliminations System (NPDES) of the CWA have undergone recent changes and proposed changes at both the state and federal level that have the potential to affect the long-term treatment and discharge of water from coal mines. CWA section 304(b) requires EPA to annually review and, if appropriate, revise Effluent Guidelines. States are required by the CWA to conduct a comprehensive review of the state water quality standards every three years (the Triennial Review). On December 23, 2016 EPA published a draft Field-Based Methods for Developing Aquatic Life Criteria for Specific Conductivity, which could impact NPDES permits with conductivity limits. However, this draft document is also under review pursuant to Executive Order 13783.

Our coal mining operations are subject to operating risks, which could increase our operating expenses and decrease our production levels which could adversely affect our results of operations. Our coal operations are also subject to hazards and any losses or liabilities we suffer from hazards which occur in our operations may not be fully covered by our insurance policies.

Our coal mining operations are underground mines. Underground mining and related processing activities present inherent risks of injury to persons and damage to property and equipment. Our mines are

 

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subject to a number of operating risks that could disrupt operations, decrease production and increase the cost of mining at particular mines for varying lengths of time thereby adversely affecting our operating results. In addition, if an operating risk occurs in our mining operations, we may not be able to produce sufficient amounts of coal to deliver under our multi-year coal contracts. Our inability to satisfy contractual obligations could result in our customers initiating claims against us or canceling their contracts. The operating risks that may have a significant impact on our coal operations include:

 

   

variations in thickness of the layer, or seam, of coal;

 

   

adverse geological conditions, including amounts of rock and other natural materials intruding into the coal that could affect the stability of the roof and the side walls of the mine - for example, unit costs were negatively impacted in 2016 due to adverse geological conditions at Enlow Fork Mine, primarily related to sandstone intrusions, which resulted in reduced coal production at that mine;

 

   

environmental hazards;

 

   

equipment failures or unexpected maintenance problems;

 

   

fires or explosions, including as a result of methane, coal, coal dust or other explosive materials and/or other accidents;

 

   

inclement or hazardous weather conditions and natural disasters or other force majeure events;

 

   

seismic activities, ground failures, rock bursts or structural cave-ins or slides;

 

   

delays in moving our longwall equipment;

 

   

railroad derailments;

 

   

security breaches or terroristic acts; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

The occurrence of any of these risks at our coal mining operations could adversely affect our ability to conduct coal mining operations or result in substantial loss to us as a result of claims for:

 

   

personal injury or loss of life;

 

   

damage to and destruction of property, natural resources and equipment, including our coal properties and our coal production or transportation facilities;

 

   

pollution and other environmental damage to our properties or the properties of others;

 

   

potential legal liability and monetary losses;

 

   

regulatory investigations and penalties;

 

   

suspension of our operations; and

 

   

repair and remediation costs.

In addition, the occurrence of any of these events in our coal mining operations which prevents our delivery of coal to a customer and which is not excusable as a force majeure event under our coal sales agreement, could result in economic penalties, suspension or cancellation of shipments or ultimately termination of the coal sales agreement.

Although we maintain insurance for a number of risks and hazards, we may not be insured or fully insured against the losses or liabilities that could arise from a significant accident in our coal operations. We may

 

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elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. Moreover, a significant mine accident could potentially cause a mine shutdown. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may not be able to obtain equipment, parts and raw materials in a timely manner, in sufficient quantities or at reasonable costs to support our coal mining operations.

Coal mining consumes large quantities of commodities including steel, copper, rubber products and liquid fuels and requires the use of capital equipment. Some commodities, such as steel, are needed to comply with roof control plans required by regulation. The prices we pay for commodities and capital equipment are strongly impacted by the global market. A rapid or significant increase in the costs of commodities or capital equipment we use in our operations could impact our mining operations costs because we may have a limited ability to negotiate lower prices, and, in some cases, may not have a ready substitute.

We use equipment in our coal mining and transportation operations such as continuous mining units, conveyors, shuttle cars, rail cars, locomotives, roof bolters, shearers and shields. We procure this equipment from a concentrated group of suppliers, and obtaining this equipment often involves long lead times. Occasionally, demand for such equipment by mining companies can be high and some types of equipment may be in short supply. Delays in receiving or shortages of this equipment, as well as the raw materials used in the manufacturing of supplies and mining equipment, which, in some cases, do not have ready substitutes, or the cancellation of our supply contracts under which we obtain equipment and other consumables, could limit our ability to obtain these supplies or equipment. In addition, if any of our suppliers experiences an adverse event, or decides to no longer do business with us, we may be unable to obtain sufficient equipment and raw materials in a timely manner or at a reasonable price to allow us to meet our production goals and our revenues may be adversely impacted. We use considerable quantities of steel in the mining process. If the price of steel or other materials increases substantially or if the value of the U.S. dollar declines relative to foreign currencies with respect to certain imported supplies or other products, our operating expenses could increase. Any of the foregoing events could materially and adversely impact our business, financial condition, results of operations or cash flows.

For mining operations, CoalCo must obtain, maintain, and renew governmental permits and approvals which if we cannot obtain in a timely manner would reduce our production, cash flow and results of operations.

The pace with which the government issues permits needed for new operations and for on-going operations to continue coal mining has negatively impacted expected production. Any such delays, as well as any denial of a coal mining permit, could reduce our production, cash flows and results of operations. See “Business- Legal and Environmental Proceedings- Environmental Proceedings” for disclosure regarding the factual determinations underlying the decision by the Pennsylvania Department of Environmental Protection in September of 2017 to withhold a prior permit submission for continued longwall mining in the 4L panel at the Bailey Mine, and the impact that the determination has had on our operations to date, and may have on our operations in the future.

Existing and future government laws, regulations and other legal requirements relating to protection of the environment, and others that govern our business may increase our costs of doing business for coal and may restrict our coal operations.

We are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local authorities, as well as foreign authorities relating to protection of the environment. These include those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, groundwater quality and availability, threatened and endangered plant and wildlife protection, reclamation and restoration of mining properties after

 

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mining is completed, the installation of various safety equipment in our mines, remediation of impacts of surface subsidence from underground mining, and work practices related to employee health and safety. Complying with these requirements, including the terms of our permits, has had, and will continue to have, a significant effect on our costs of operations and competitive position.

In addition, there is the possibility that we could incur substantial costs as a result of violations under environmental laws. Any additional laws, regulations and other legal requirements enacted or adopted by federal, state and local authorities, as well as foreign authorities or new interpretations of existing legal requirements by regulatory bodies relating to the protection of the environment could further affect our costs of operations and competitive position. The Clean Water Act is being used by opponents of mountain top removal mining as a means to challenge permits and bring citizen suits to make coal mining more expensive. At CoalCo’s subsidiary Fola Coal Company, LLC, six citizen suits have been filed challenging water discharge permits. Two of those suits were settled in 2014, and a federal court has issued liability rulings in three of the other matters.

Our mines are subject to stringent federal and state safety regulations that increase our cost of doing business at active operations and may place restrictions on our methods of operation. In addition, government inspectors under certain circumstances, have the ability to order our operations to be shutdown based on safety considerations.

The Federal Coal Mine Safety and Health Act (MSHA) and Mine Improvement and New Emergency Response (MINER) Act impose stringent health and safety standards on mining operations. Regulations that have been adopted are comprehensive and affect numerous aspects of mining operations, including training of mine personnel, mining procedures, the equipment used in mine emergency procedures and other matters. Most states in which we operate have programs for mine safety and health regulation and enforcement. The various requirements mandated by law or regulation can place restrictions on our methods of operations, and potentially lead to fees and civil penalties for the violation of such requirements, creating a significant effect on operating costs and productivity. In addition, government inspectors under certain circumstances, have the ability to order our operation to be shutdown based on safety considerations. If an incident were to occur at one of our coal mines, it could be shut down for an extended period of time and our reputation with our customers could be materially damaged.

Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in liabilities to us.

Our operations currently use hazardous materials and generate limited quantities of hazardous wastes from time to time. Drainage flowing from or caused by mining activities can be acidic with elevated levels of dissolved metals, a condition referred to as “acid mine drainage.” We could become subject to claims for toxic torts, natural resource damages and other damages, as well as for the investigation and clean-up of soil, surface water, groundwater, and other media. Such claims may arise, for example, out of conditions at sites that we currently own or operate, as well as at sites that we previously owned or operated, or may acquire. Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or for the entire share.

We maintain coal refuse areas and slurry impoundments at a number of our coal mining complexes. Such areas and impoundments are subject to extensive regulation. Structural failure of a slurry impoundment or coal refuse area could result in extensive damage to the environment and natural resources, such as bodies of water that the coal slurry reaches, as well as liability for related personal injuries and property damages, and injuries to wildlife. Some of our impoundments overlie mined out areas, which can pose a heightened risk of failure and of damages arising out of failure. If one of our impoundments were to fail, we could be subject to claims for the resulting environmental contamination and associated liability, as well as for fines and penalties. Our coal refuse areas and slurry impoundments are designed, constructed, and inspected by our company and by regulatory authorities according to stringent environmental and safety standards.

 

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We have reclamation, mine closing obligations and gas well plugging obligations. If the assumptions underlying our accruals are inaccurate, we could be required to expend greater amounts than anticipated.

The Surface Mining Control and Reclamation Act as well as various state laws establish operational, reclamation and closure standards for all our coal mining operations and require us, under certain circumstances, to plug natural gas wells. We accrue for the costs of current mine disturbance, gas well plugging and of final mine closure, including the cost of treating mine water discharge where necessary. Estimates of our total reclamation, mine-closing and degasification and well plugging liabilities, which are based upon permit requirements and our experience, were approximately $257 million at June 30, 2017. The amounts recorded are dependent upon a number of variables, including the estimated future closure costs, estimated proved reserves, assumptions involving profit margins, inflation rates, and the assumed credit-adjusted risk-free interest rates. If these accruals are insufficient or our liability in a particular year is greater than currently anticipated, our future operating results could be adversely affected.

Most states where we operate require us to post bonds for the full cost of coal mine reclamation (full cost bonding). West Virginia is not a full cost bonding state. West Virginia has an alternative bond system (ABS) for coal mine reclamation which consists of (i) individual site bonds posted by the permittee that are less than the full estimated reclamation cost plus (ii) a bond pool (Special Reclamation Fund) funded by a per ton fee on coal mined in the State which is used to supplement the site specific bonds if needed in the event of bond forfeiture.

Pennsylvania is expanding its full cost bonding program to cover all coal mine bonding, further increasing the amount of surety bonds we must seek in order to permit its mining activities. We have been able to post surety bonds with the states to secure our reclamation obligations. If our creditworthiness declines, states may seek to require us to post letters of credit or cash collateral to secure those obligations, or we may be unable to obtain surety bonds, in which case we would be required to post letters of credit. Additionally, the sureties that post bonds on our behalf may require us to post security in order to secure the obligations underlying these bonds. Posting letters of credit in place of surety bonds or posting security to support these surety bonds would have an adverse effect on our liquidity.

We face uncertainties in estimating our economically recoverable coal reserves, and inaccuracies in our estimates could result in lower than expected revenues, higher than expected costs and decreased profitability.

Coal reserves are economically recoverable when the price at which they are expected to be sold exceeds their expected cost of production and selling. We base our coal reserve information on geologic data, coal ownership information and current and proposed mine plans. These estimates are periodically updated to reflect past coal production, new drilling information and other geologic or mining data. Similar to natural gas reserves, there are uncertainties inherent in estimating quantities and values of economically recoverable coal reserves, including many factors beyond our control. As a result, estimates of economically recoverable coal reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff. Some of the factors and assumptions which impact economically recoverable coal reserve estimates include:

 

   

geologic conditions;

 

   

historical production from the area compared with production from other producing areas;

 

   

the assumed effects of regulations and taxes by governmental agencies;

 

   

our ability to obtain, maintain and renew all required permits;

 

   

future improvements in mining technology;

 

   

assumptions governing future prices; and

 

   

future operating costs, including the cost of materials and capital expenditures.

 

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In addition, we hold substantial coal reserves in areas containing Marcellus Shale and other shales. These areas are currently the subject of substantial exploration for oil and natural gas, particularly by horizontal drilling. If a natural gas well is in the path of our mining for coal, we may not be able to mine through the well unless we purchase it. Although in the past we have purchased vertical wells, the cost of purchasing a producing horizontal well could be substantially greater. Horizontal wells with multiple laterals extending from the well pad may access larger natural gas reserves than a vertical well which could result in higher costs. In future years, the cost associated with purchasing natural gas wells which are in the path of our coal mining may make mining through those wells uneconomical thereby effectively causing a loss of significant portions of our coal reserves.

Each of the factors which impacts reserve estimation may in fact vary considerably from the assumptions used in estimating the reserves. For these reasons, estimates of coal reserves may vary substantially. Actual production, revenues and expenditures with respect to our coal reserves will likely vary from estimates, and these variances may be material. As a result, our estimates may not accurately reflect our actual coal reserves.

Defects may exist in our chain of title for our undeveloped coal reserves where we have not done a thorough chain of title examination of our undeveloped coal reserves. We may incur additional costs and delays to mine coal because we have to acquire additional property rights to perfect our title to coal rights. If we fail to acquire additional property rights to perfect our title to coal rights, we may have to reduce our estimated reserves.

Title to most of our owned or leased properties and mineral rights is not usually verified until we make a commitment to mine a property, which may not occur until after we have obtained necessary permits and completed exploration of the property. In some cases, we rely on title information or representations and warranties provided by our lessors or grantor’s. Our right to mine certain of our reserves has in the past been, and may again in the future be, adversely affected if defects in title, boundaries or other rights necessary for mining exist or if a lease expires. Any challenge to our title or leasehold interests could delay the mining of the property and could ultimately result in the loss of some or all of our interest in the property. From time to time we also may be in default with respect to leases for properties on which we have mining operations. In such events, we may have to close down or significantly alter the sequence of such mining operations which may adversely affect our future coal production and future revenues. If we mine on property that we do not own or lease, we could incur liability for such mining and be subject to regulatory sanction and penalties.

In order to obtain, maintain or renew leases or mining contracts to conduct our mining operations on property where these defects exist, we may in the future have to incur unanticipated costs. In addition, we may not be able to successfully negotiate new leases or mining contracts for properties containing additional reserves, or maintain our leasehold interests in properties where we have not commenced mining operations during the term of the lease. As a result, our results of operations, business and financial condition may be materially adversely affected.

CoalCo and its subsidiaries are subject to various legal proceedings, which may have an adverse effect on our business.

We are party to a number of legal proceedings in the normal course of business activities. Defending these actions, especially purported class actions, can be costly, and can distract management. There is the potential that the costs of defending litigation in an individual matter or the aggregation of many matters could have an adverse effect on our cash flows, results of operations or financial position. See “Business—Legal and Environmental Proceedings” for further discussion of pending legal proceedings.

 

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We have obligations for long-term employee benefits for which we accrue based upon assumptions which, if inaccurate, could result in our being required to expense greater amounts than anticipated.

We provide various long-term employee benefits to inactive and retired employees. We accrue amounts for these obligations. At June 30, 2017, the current and non-current portions of these obligations included:

 

   

postretirement medical and life insurance ($694 million);

 

   

coal workers’ pneumoconiosis benefits ($117 million);

 

   

pension benefits ($73 million); and

 

   

workers’ compensation ($77 million).

However, if our assumptions are inaccurate, we could be required to expend greater amounts than anticipated. Salary retirement benefits are funded in accordance with Employer Retirement Income Security Act of 1974 (ERISA) regulations. The other obligations are unfunded. In addition, the federal government and several states in which we operate consider changes in workers’ compensation and black lung laws from time to time. Such changes, if enacted, could increase our benefit expense and our collateral requirements.

A failure by Murray Energy to satisfy the liabilities it assumed from ParentCo, perform its obligations under various agreements, the performance of which by Murray Energy ParentCo guaranteed, or under various agreements with ParentCo, could require us to indemnify GasCo, which could materially adversely affect our results of operations, financial position and cash flows.

In 2013, Murray Energy and its subsidiaries (Murray Energy) acquired approximately $2.4 billion of liabilities which had been reflected on ParentCo books. The consolidated balance sheet liabilities at the time of sale were comprised of approximately $2.1 billion of other postemployment benefits (OPEB) and other liabilities. In addition to these assumed liabilities, Murray Energy acquired or assumed certain ParentCo payment obligations, performance guarantees, equipment leases or subleases. The current maximum estimated exposure under the Murray Energy guarantees as of June 30, 2017 was believed to be approximately $39 million. The leases and subleases entered into with Murray Energy relate to approximately $39 million of equipment. Murray Energy is primarily liable for the acquired retiree medical liabilities under the Coal Industry Retiree Health Benefits Act of 1992, referred to herein as the Coal Act, but ParentCo remains secondarily liable. At the time of the sale, the Coal Act liabilities Murray Energy acquired were approximately $307 million and it was estimated that the servicing cost for these liabilities would be approximately $26 million for 2017, and would decline thereafter since the beneficiaries consist principally of miners who retired prior to 1994. Any failure by Murray Energy to satisfy these assumed liabilities or perform under these agreements could result in substantial claims against ParentCo by third-parties. On November 12, 2013, in connection with the transaction with ParentCo, Moody’s assigned Murray Energy a family credit rating of B3 (speculative and subject to high credit risk) and its secured second lien notes due 2021 a rating of Caa1 (poor standing and subject to very high credit risk). Since the 2013 transaction, Murray Energy’s credit ratings have been downgraded by Moody’s. In June 2017, Moody’s upgraded Murray Energy to a family credit rating of B3 and the rating on its secured second lien notes to Caa2 with a stable outlook. As part of the separation and distribution CoalCo has agreed to indemnify GasCo as it relates to certain of these obligations. If Murray Energy fails to satisfy these assumed liabilities, payment obligations or Coal Act liabilities and we are called upon to perform our indemnity obligation to GasCo, our results of operations, financial position and cash flows could be materially adversely affected.

Terrorist attacks or a cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.

We have become increasingly dependent upon digital technologies, including information systems, infrastructure and cloud applications and services, to operate our businesses, to process and record financial and

 

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operating data, communicate with our employees and business partners, as well as other activities related to our businesses. Strategic targets, such as energy-related assets, may be at greater risk of future physical attacks by terrorists or cyber attacks than other targets in the United States. Deliberate attacks on our assets, or security breaches in our systems or infrastructure, or the systems or infrastructure of third-parties, or the cloud could lead to corruption or loss of our proprietary data and potentially sensitive data, delays in production or delivery, difficulty in completing and settling transactions, challenges in maintaining our books and records, environmental damage, communication interruptions, other operational disruptions and third-party liability. Our insurance may not protect us against such occurrences. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations. Further, as cyber incidents continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber incidents.

Our sales of thermal coal are from three mines at one location in Pennsylvania, making us vulnerable to risks associated with operating in a single geographic area.

Our sales of thermal coal, as well as our thermal coal reserves, are from our Bailey Mine, Enlow Fork Mine and Harvey Mine located in Greene County, Pennsylvania. In addition, we also rely upon one coal processing plant and rail load facility, located in Enon, Pennsylvania for shipping coal from all of these mines. Any disruption in the functioning of this coal processing plant and rail load-out facility such as the structural failure at our above ground conveyor system or in transportation in this area could significantly reduce our sales of thermal coal and adversely affect our results of operation and financial condition.

Certain provisions in our multi-year coal sales contracts may provide limited protection during adverse economic conditions, may result in economic penalties to us or permit the customer to terminate the contract.

Price adjustment, “price reopener” and other similar provisions in our multi-year coal sales contracts may reduce the protection from coal price volatility traditionally provided by coal supply contracts. Price reopener provisions are present in several of our multi-year coal sales contracts. These price reopener provisions may automatically set a new price based on prevailing market price or, in some instances, require the parties to agree on a new price, sometimes within a specified range of prices. In a limited number of agreements, failure of the parties to agree on a price under a price reopener provision can lead to termination of the contract. Any adjustment or renegotiations leading to a significantly lower contract price could adversely affect our profitability.

Most of our coal sales agreements contain provisions requiring us to deliver coal within certain ranges for specific coal quality characteristics such as heat content, sulfur, ash, moisture, volatile matter, grindability, ash fusion temperature and size consist. Failure to meet these conditions could result in penalties or rejection of the coal at the election of the customer. Our coal sales contracts also typically contain force majeure provisions allowing for the suspension of performance by either party for the duration of specified events. Force majeure events include, but are not limited to, floods, earthquakes, storms, fire, faults in the coal seam or other geologic conditions, other natural catastrophes, wars, terrorist acts, civil disturbances or disobedience, strikes, railroad transportation delays caused by a force majeure event and actions or restraints by court order and governmental authority or arbitration award. Depending on the language of the contract, some contracts may terminate upon continuance of an event of force majeure that extends for a period greater than three to twelve months and some contracts may obligate us to perform notwithstanding what would typically be a force majeure event.

Our ability to operate our business effectively could be impaired if we fail to attract and retain skilled personnel, or if a meaningful segment of our employees become unionized.

Our ability to operate our business and implement our strategies depends, in part, on our continued ability to attract and retain the skilled personnel necessary to conduct our business. Efficient coal mining using

 

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modern techniques and equipment requires skilled laborers in multiple disciplines such as electricians, equipment operators, mechanics, engineers and welders, among others. Although we have not historically encountered shortages for these types of skilled labor, competition in the future may increase for such positions, especially as it relates to needs of other industries with respect to these positions, including oil and gas. If we experience shortages of skilled labor in the future, our labor and overall productivity or costs could be materially adversely affected. In the future, we may utilize a greater number of external contractors for portions of our operations. The costs of these contractors have historically been higher than that of our employed laborers. If our labor and contractor prices increase, or if we experience materially increased health and benefit costs with respect to our employees, our results of operations could be materially adversely affected.

None of our employees who conduct mining operations at the PAMC are currently represented by a labor union or covered under a collective bargaining agreement, although many employers in our industry have employees who belong to a union. It is possible that our employees who conduct mining operations at the PAMC may join or seek recognition to form a labor union, or we may be required to become a labor agreement signatory. If some or all of the employees who conduct mining operations at the PAMC were to become unionized, it could adversely affect productivity, increase labor costs and increase the risk of work stoppages at our mines. If a work stoppage were to occur, it could interfere with operations at the PAMC and have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions. In addition, the mere fact that a portion of our labor force could be unionized may harm our reputation in the eyes of some investors and thereby negatively affect our share price.

The majority of our common units in CNX Coal Resources LP are subordinated to other common units and we may not receive distributions from CNX Coal Resources LP.

As of June 30, 2017, we held 11.6 million subordinated units (representing a 41.8 percent limited partnership interest) in CNXC. The balance of our CNXC limited partnership interests are held in the form of preferred and common units. On October 2, 2017, ParentCo provided a conversion notice to CNXC with respect to all Class A Units owned by it, and thereafter caused all such Class A Units to convert, on a 1-to-1 ratio, into common units representing limited partner interests in CNXC. Subordinated units are not entitled to any distribution from CNXC unless CNXC makes a minimum quarterly distribution of at least $0.4678 per Class A Preferred Unit and $0.5125 per common unit. CNXC made minimum distributions per subordinated unit equal to the distribution per common unit for five of the six quarters since CNXC’s IPO. CNXC did not meet the requirement for a subordinated unit distribution with respect to fiscal quarter ended June 30, 2016 and we did not receive a distribution per subordinated unit, however, CNXC was able to make minimum distributions per subordinated unit equal to the distribution per common unit with respect to the fiscal quarter ended September 30, 2016 and declared minimum distributions per subordinated unit equal to the distribution per common unit with respect to the fiscal quarter ended December 31, 2016. We cannot assure you that CNXC will continue to be able to make or will make the required minimum quarterly distribution on its preferred and common units or that we will receive any future distributions on our subordinated units. Failure by CNXC to make distributions to us on our subordinated units could adversely affect our liquidity.

Risks Related to the Separation

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from ParentCo.

We believe that, as an independent, publicly traded company, we will continue to, among other things, focus our financial and operational resources on our specific business, growth profile and strategic priorities, design and implement corporate strategies and policies targeted to our operational focus and strategic priorities, guide our processes and infrastructure to focus on our core strengths, implement and maintain a capital structure designed to meet our specific needs and more effectively respond to industry dynamics. However, we may be unable to achieve some or all of these benefits. For example, in order to position ourselves for the separation, we

 

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are undertaking a series of strategic, structural and process realignment and restructuring actions within our operations. These actions may not provide the benefits we currently expect, and could lead to disruption of our operations, loss of, or inability to recruit, key personnel needed to operate and grow our business following the separation, weakening of our internal standards, controls or procedures and impairment of our key customer and supplier relationships. In addition, completion of the proposed separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our financial condition, results of operations and cash flows could be materially and adversely affected.

The combined market value of GasCo and our shares after the spin-off may not equal or exceed the market value of ParentCo shares prior to the spin-off.

We cannot assure you that the combined trading prices of GasCo common stock and our common stock after the spin-off, as adjusted for any changes in the combined capitalization of these companies, will be equal to or greater than the market price of ParentCo common stock prior to the spin-off. Until the market has fully evaluated the Gas Business of GasCo without the Coal Business, the price at which GasCo common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated our company, the price at which our common stock trades may fluctuate significantly.

We may be unable to complete, on a timely or cost-effective basis, the changes necessary to operate as an independent company.

Although many components of operation as an independent company are well established as a result of CNXC’s historic existence, there remains a number of business and organization changes that will be required to complete our transition to a new standalone public company. We expect these changes, which may include staffing adjustments, new hires and reassignment of responsibilities, adoption of new processes, systems and controls, and transitioning services provided by ParentCo to internally provided services, to continue for the foreseeable future.

Following the separation and distribution, ParentCo will have no obligation to provide us with assistance other than the transition services outlined in the transition services agreement, along with such other arrangements as have otherwise been contractually agreed to as outlined in the other agreements described under “Certain Relationships and Related Party Transactions—Agreements with GasCo.” These services do not include every service we have received from ParentCo in the past, and ParentCo is only obligated to provide these services for limited periods from the distribution date. Accordingly, following the separation and distribution, we will need to provide internally or obtain from unaffiliated third parties the services we currently receive from ParentCo. These services include information technology, tax, legal, insurance and other administrative activities, the effective and appropriate performance of which is critical to our operations. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from ParentCo. In particular, ParentCo’s information technology networks and systems are complex, and duplicating these networks and systems will be challenging. Because our business previously operated in part as a component of the wider ParentCo organization, we may be unable to successfully establish the infrastructure or implement the changes necessary to operate independently, or we may incur additional costs that could adversely affect our business. Additionally, while we have developed certain internal controls and procedures, such internal controls and procedures have not yet been fully implemented in connection with our operations as a standalone company. The process of implementing our internal controls could require significant attention from management and we cannot be certain that we will successfully implement and maintain adequate controls over our financial processes and reporting in the future. Difficulties encountered in their implementation could harm our results of operations or cause us to fail to meet our reporting obligations. If we fail to obtain the quality of administrative services necessary to operate effectively or incur greater costs in obtaining these services, our financial condition, results of operations and cash flow may be materially and adversely affected.

 

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Our historical combined and pro forma condensed combined financial data are not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

The historical and pro forma financial data we have included in this information statement may not reflect what our financial condition, results of operations and cash flows would have been had we been an independent, publicly traded company during the periods presented or what our financial condition, results of operations and cash flows will be in the future when we are an independent company. This is primarily because:

 

   

Prior to our separation, our business was operated by ParentCo as part of its broader corporate organization, rather than as an independent, publicly traded company.

 

   

Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, historically have been satisfied as part of the company-wide cash management practices of ParentCo. While our business historically has generated sufficient cash to finance our working capital and other cash requirements, following the separation and distribution, we will no longer have access to ParentCo’s cash pool. Without the opportunity to obtain financing from ParentCo, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities or other arrangements.

 

   

We will enter into transactions with ParentCo that did not exist prior to the separation, and modify certain existing arrangements between CNXC and ParentCo. For more information, see “Certain Relationships and Related Party Transactions—Agreements with GasCo.”

 

   

Other significant changes may occur in our cost structure, management, financing, tax profile and business operations as a result of our operating as a company separate from ParentCo.

The pro forma financial data included in this information statement is based on the best information available, which in part includes a number of estimates and assumptions. These estimates and assumptions may prove not to be accurate, and accordingly, our pro forma financial data should not be assumed to be indicative of what our financial condition, results of operations or cash flows actually would have been as a stand-alone company or to be a reliable indicator of what our financial condition or results of operations actually may be in the future.

For more information about our past financial performance and the basis of presentation of our financial statements, see “Selected Historical Condensed Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Statements” and our Annual Combined Financial Statements and the notes thereto.

As an independent, publicly traded company, we may not enjoy the same benefits that we did as part of ParentCo.

There is a risk that, by separating from ParentCo, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current ParentCo organizational structure. As part of ParentCo, we have been able to enjoy certain benefits from ParentCo’s operating diversity, purchasing power and opportunities to pursue integrated strategies with ParentCo’s other businesses. As an independent, publicly traded company, we will not have similar diversity or integration opportunities and may not have similar purchasing power or access to capital markets. Additionally, as part of ParentCo, we have been able to leverage the ParentCo historical market reputation and performance and brand identity to recruit and retain key personnel to run our business. As an independent, publicly traded company, we will not have the same historical market reputation and performance or brand identity as ParentCo and it may be more difficult for us to recruit or retain such key personnel.

 

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We will incur significant costs in connection with the separation and distribution, as well as costs associated with operating as an independent, publicly traded company, which may adversely affect our financial condition, results of operations and cash flows.

Prior to the distribution, we will make a cash payment of approximately $464 million (subject to adjustment based on relevant financing fees) to ParentCo, funded primarily by third-party indebtedness incurred by us prior to the separation and distribution. We will be subject to ongoing interest and principal payments during the term of this indebtedness. Following the separation, we expect to incur and pay non-recurring transition, financing and other expenses. These transaction-related expenses are currently expected to total approximately $            . We also expect to incur certain ongoing costs associated with operating as an independent, publicly traded company and extra costs related to the creation of an IT function and reporting systems. We expect to spend an appropriate amount of capital to relocate and/or augment some of our infrastructure and creating our new IT systems. The ongoing costs of the separation may adversely impact our financial condition, results of operations and cash flows. For more information regarding the separation and our anticipated costs to operate as an independent, publicly traded company, see “The Separation and Distribution.”

The terms of our separation from ParentCo, the related agreements and other transactions with ParentCo were determined by ParentCo and thus may be less favorable to us than the terms we could have obtained from an unaffiliated third party.

Prior to the completion of the distribution, we will enter into various agreements or amend certain of the existing agreements in place between ParentCo and CNXC to complete the separation of our business from ParentCo and govern our ongoing relationships, including, among others, a transition services agreement, a tax matters agreement, an employee matters agreement, an intellectual property matters agreement and other agreements related to operations of CoalCo post-separation.

Under a transition services agreements, ParentCo will continue to provide various interim corporate support services to us and we will provide various interim support services to ParentCo. Under the transition services agreement for operations, we will be providing support services for ParentCo’s continuing operations through the term of the existing contracts. The separation agreement will provide for, among other things, our responsibility for liabilities relating to our business and the responsibility of ParentCo for liabilities unrelated to our business. Among other things, the separation agreement will contain indemnification obligations and ongoing commitments of us and ParentCo designed to make our company financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the separation. If we are required to indemnify ParentCo under the circumstances set forth in the separation agreement, we may be subject to substantial liabilities.

For a description of these agreements and the other agreements that we will enter into with ParentCo, please read “Certain Relationships and Related Party Transactions.”

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our shares.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence

 

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in our reported financial information, which would likely have a negative effect on the trading price of our shares.

Some contracts and other assets which will need to be transferred or assigned from ParentCo or its affiliates to CoalCo in connection with CoalCo’s separation from ParentCo may require the consent or involvement of a third party. If such consent is not given, CoalCo may not be entitled to the benefit of such contracts and other assets in the future, which could negatively impact CoalCo’s financial condition, results of operations and cash flows.

The separation agreement provides that in connection with CoalCo’s separation from ParentCo, a number of contracts with third-parties and other assets are to be transferred or assigned from ParentCo or its affiliates to CoalCo. However, the transfer or assignment of certain of these contracts or assets require providing guarantees or the consent of a third party to such a transfer or assignment. Similarly, in some circumstances, CoalCo and another business unit of ParentCo are joint beneficiaries of contracts, and CoalCo will need to enter into a new agreement with the third-party to replicate the existing contract or assign the portion of the existing contract related to CoalCo’s business. It is possible that some parties may use the requirement of a guarantee or consent or the fact that the separation is occurring to seek more favorable contractual terms from CoalCo or to seek to terminate the contract. If CoalCo is unable to provide a guarantee or obtain such consents on commercially reasonable and satisfactory terms or if the contracts are terminated, CoalCo may be unable to obtain some of the benefits, assets and contractual commitments which are intended to be allocated to CoalCo as part of CoalCo’s separation from ParentCo. The failure to timely complete the assignment of existing contracts or assets, or the negotiation of new arrangements, or a termination of any of those arrangements, could negatively impact CoalCo’s financial condition, results of operations and cash flows. In addition, where CoalCo does not intend to provide a guarantee or obtain consent from third party counterparties based on CoalCo’s belief that no guarantee or consent is required, the third party counterparties may challenge a transfer of assets on the basis that the terms of the applicable commercial arrangements require that a guarantee be provided or the third party counterparty’s consent. CoalCo may incur substantial litigation and other costs in connection with any such claims and, if CoalCo does not prevail, CoalCo’s ability to use these assets could be adversely impacted.

Our customers, prospective customers, suppliers or other companies with whom we conduct business may need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them.

Some of our customers, prospective customers, suppliers or other companies with whom we conduct business may need assurances that our financial stability on a stand-alone basis is sufficient to satisfy their requirements for doing or continuing to do business with them, and may require us to provide additional credit support, such as letters of credit or other financial guarantees. Any failure of parties to be satisfied with our financial stability could have a material adverse effect on our financial condition, results of operations, liquidity and cash flows.

In connection with our separation we will assume, and indemnify ParentCo for, certain liabilities. If we are required to make payments pursuant to these indemnities to ParentCo, we may need to divert cash to meet those obligations and our financial condition, results of operations and cash flows could be negatively impacted. In addition, ParentCo may indemnify us for certain liabilities. ParentCo’s indemnity may not be sufficient to insure us against the full amount of liabilities for which it will be allocated responsibility, and ParentCo may not be able to satisfy its indemnification obligations in the future.

Pursuant to the terms of the separation agreement and certain other agreements to be entered into as part of the separation, we will agree to assume, and indemnify ParentCo for, certain liabilities for uncapped amounts, which may include, among other items, associated defense costs, settlement amounts and judgments. For additional detail regarding these indemnification obligations, please see the section of this information statement entitled “Certain Relationships and Related Party Transactions—Agreements with GasCo.” Although

 

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such obligations are not currently quantifiable, such potential payments pursuant to these indemnities could be significant, and could negatively impact our financial condition, results of operations and cash flows, particularly indemnities relating to our actions that could impact the tax-free nature of the contribution, the distribution and certain related transactions, which are set forth in detail in the tax matters agreement and separation agreement, as well as the risk factor below entitled “If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ParentCo, CoalCo and ParentCo stockholders could be subject to significant tax liabilities and, in certain circumstances, CoalCo could be required to indemnify ParentCo for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement”. Third parties could also seek to hold us responsible for liabilities of ParentCo’s business. GasCo will agree to indemnify us for such liabilities, but such indemnity from GasCo may not be sufficient to protect us against the full amount of such liabilities, and GasCo may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from GasCo any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our financial condition, results of operations and cash flows.

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ParentCo, CoalCo and ParentCo stockholders could be subject to significant tax liabilities and, in certain circumstances, CoalCo could be required to indemnify ParentCo for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

It is a condition to the distribution that ParentCo receives a private letter ruling from the IRS and one or more opinions of its tax advisors, in each case satisfactory to the ParentCo Board of Directors, regarding certain U.S. federal income tax matters relating to the separation and the distribution, including, with respect to the opinion of Wachtell, Lipton, Rosen & Katz, to the effect that the distribution will be a transaction described in Section 355(a) of the Code. The IRS private letter ruling and the opinion(s) of tax advisors will be based upon and rely on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings of ParentCo and CoalCo, including those relating to the past and future conduct of ParentCo and CoalCo. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if ParentCo or CoalCo breaches any of its representations or covenants contained in any of the separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion(s) of tax advisors, the IRS private letter ruling and/or opinion(s) of tax advisors may be invalid and the conclusions reached therein could be jeopardized.

Notwithstanding receipt of the IRS private letter ruling and the opinion(s) of tax advisors, the IRS could determine that the distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions, or undertakings upon which the IRS private letter ruling or the opinion(s) of tax advisors were based are false or have been violated. In addition, neither the IRS private letter ruling nor the opinion(s) of tax advisors will address all of the issues that are relevant to determining whether the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and the opinion(s) of tax advisors represent the judgment of such tax advisors and are not binding on the IRS or any court, and the IRS or a court may disagree with the conclusions in the opinion(s) of tax advisors. Accordingly, notwithstanding receipt by ParentCo of the IRS private letter and the opinion(s) of tax advisors, there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, ParentCo, CoalCo and ParentCo stockholders could be subject to significant U.S. federal income tax liability.

If the distribution, together with related transactions, fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, ParentCo would recognize taxable gain as if it had sold the CoalCo common

 

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stock in a taxable sale for its fair market value (unless ParentCo and CoalCo jointly make an election under Section 336(e) of the Code with respect to the distribution, in which case, in general, (i) the ParentCo group would recognize taxable gain as if CoalCo had sold all of its assets in a taxable sale in exchange for an amount equal to the fair market value of the CoalCo common stock and the assumption of all CoalCo’s liabilities and (ii) CoalCo would obtain a related step up in the basis of its assets) and, if the distribution fails to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Section 355, in general, for U.S. federal income tax purposes, ParentCo stockholders who receive CoalCo shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. For more information, see “Material U.S. Federal Income Tax Consequences.”

Under the tax matters agreement that ParentCo will enter into with CoalCo, CoalCo may be required to indemnify ParentCo against any additional taxes and related amounts resulting from (i) an acquisition of all or a portion of the equity securities or assets of CoalCo, whether by merger or otherwise (and regardless of whether CoalCo participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by CoalCo or (iii) any of CoalCo’s representations, covenants or undertakings contained in any of the separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion(s) of tax advisors being incorrect or violated. Any such indemnity obligations could be material. For a more detailed discussion, see “Certain Relationships and Related Party Transactions—Agreements with GasCo—Tax Matters Agreement.”

We may not be able to engage in desirable strategic or capital-raising transactions after the separation.

Under current law, a spin-off can be rendered taxable as a result of certain post-spin-off acquisitions of shares or assets of the spun-off corporation. For example, a spin-off may result in taxable gain to the parent corporation under Section 355(e) of the Code if the spin-off were later deemed to be part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, shares representing a 50% or greater interest (by vote or value) in the spun-off corporation. To preserve the tax-free treatment of the separation and the distribution for U.S. federal income tax purposes, and in addition to CoalCo’s indemnity obligation described above, the tax matters agreement will restrict CoalCo, for the two-year period following the separation, except in specific circumstances, from:

 

   

entering into any transaction pursuant to which all or a portion of the shares of CoalCo common stock would be acquired, whether by merger or otherwise;

 

   

issuing equity securities beyond certain thresholds;

 

   

repurchasing shares of CoalCo capital stock other than in certain open-market transactions; and

 

   

ceasing to actively conduct certain of its businesses.

The tax matters agreement will also prohibit CoalCo from taking or failing to take any other action that would prevent the distribution and certain related transactions from qualifying as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. These restrictions may limit our ability to pursue certain strategic transactions, equity issuances or repurchases or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. For more information, see “Certain Relationships and Related Party Transactions—Agreements with GasCo—Tax Matters Agreement.”

After the distribution, certain of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in GasCo.

Although no CoalCo directors or officers will serve at both companies following the separation and distribution, certain of our directors and executive officers may own shares of GasCo common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. This

 

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ownership in both companies may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for GasCo and us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between GasCo and us regarding the terms of the agreements governing the internal reorganization, the distribution and the relationship thereafter between the companies, including with respect to the indemnification of certain matters. For more information on certain procedures we will institute with regard to such matters, see “Certain Relationships and Related Party Transactions—Procedures for Approval of Related Person Transactions.”

Until the distribution occurs, ParentCo has the sole discretion to change the terms of the distribution in ways which may be unfavorable to CoalCo.

Until the distribution occurs, ParentCo will have the sole and absolute discretion to determine and change the terms of the distribution, including the establishment of the record date and distribution date. These changes could be unfavorable to CoalCo. In addition, ParentCo may decide at any time not to proceed with the separation.

No vote of ParentCo stockholders is required in connection with the distribution. As a result, if the distribution occurs and you do not want to receive CoalCo common stock in the distribution, your sole recourse will be to divest yourself of your ParentCo common stock prior to the record date.

No vote of ParentCo stockholders is required in connection with the distribution. Accordingly, if the distribution occurs and you do not want to receive CoalCo common stock in the distribution, your only recourse will be to divest yourself of your ParentCo common stock prior to the record date for the distribution.

As a public company, we will be required to publish more detailed information about our business, operations and financial performance which will be available for our customers, competitors and other third parties.

Historically, information about our business and operations was presented as part of the broader ParentCo corporate organization. As an independent, publicly traded company, we will be required to publicly provide more detailed information about our business and operations, including financial information, as a stand-alone company. This information will be accessible to our customers, suppliers and competitors, each of which may factor the new information into their commercial dealings with us or in the markets in which we operate. The use of such information by third parties in the marketplace could have an adverse effect on us and our results of operations, including our relative level of profitability.

The separation and distribution and related internal reorganization transactions may expose CoalCo to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements.

If CoalCo files for bankruptcy or is otherwise determined or deemed to be insolvent under federal bankruptcy laws, a court could deem the separation and distribution or certain internal reorganization transactions undertaken by ParentCo in connection with the separation to be a fraudulent conveyance or transfer. Fraudulent conveyances or transfers are defined to include transfers made or obligations incurred with the actual intent to hinder, delay or defraud current or future creditors or transfers made or obligations incurred for less than reasonably equivalent value when the debtor was insolvent, or that rendered the debtor insolvent, inadequately capitalized or unable to pay its debts as they become due. A court could void the transactions or impose substantial liabilities upon CoalCo, which could adversely affect CoalCo’s financial condition and its results of operations. Among other things, the court could require CoalCo stockholders to return to ParentCo some or all of the shares of CoalCo common stock issued in the separation and distribution, or require CoalCo to fund liabilities of other companies involved in the reorganization transactions for the benefit of creditors.

 

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The distribution of CoalCo common stock is also subject to review under state corporate distribution statutes. Under the Delaware General Corporation Law (the DGCL), a corporation may only pay dividends to its stockholders either (i) out of its surplus (net assets minus capital) or (ii) if there is no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Although ParentCo intends to make the distribution of CoalCo common stock entirely out of surplus, CoalCo cannot assure you that a court will not later determine that some or all of the distribution to ParentCo stockholders was unlawful.

Risks Related to Our Common Stock and the Securities Market

We cannot be certain that an active trading market for our common stock will develop or be sustained after the distribution, and following the distribution, our stock price may fluctuate significantly.

A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the last trading day prior to the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the distribution. If an active trading market does not develop for our stock, you may have difficulty selling your shares at an attractive price, or at all. In addition, we cannot predict the price at which shares of our common stock may trade after the distribution.

Similarly, ParentCo cannot predict the effect of the distribution on the trading prices of its common stock. After the distribution, ParentCo common stock will continue to be listed and traded on the NYSE. Subject to the consummation of the distribution, we expect our common stock to be listed and traded on the NYSE under the symbol “            ”. The combined trading prices of ParentCo common stock and our common stock after the distribution, as adjusted for any changes in the combined capitalization of these companies, may not be equal to or greater than the trading price of ParentCo common stock prior to the distribution. Until the market has fully evaluated the remaining business of ParentCo without our business, and fully evaluated us, the price at which ParentCo’s or our common stock trade may fluctuate significantly.

The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

   

our business profile and market capitalization may not fit the investment objectives of ParentCo’s current stockholders, causing a shift in our initial investor base, and our common stock may not be included in some indices in which ParentCo common stock is included, causing certain holders to be mandated to sell their shares of our common stock;

 

   

our quarterly or annual earnings, or those of other companies in our industry;

 

   

the failure of securities analysts to cover our common stock after the distribution;

 

   

actual or anticipated fluctuations in our operating results;

 

   

changes in earnings estimates by securities analysts or our ability to meet those estimates or our earnings guidance;

 

   

the operating and stock price performance of other comparable companies;

 

   

overall market fluctuations and domestic and worldwide economic conditions; and

 

   

other factors described in these “Risk Factors” and elsewhere in this information statement.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of either or both classes of our common stock. As a result of these factors, holders of our common stock may not be able to resell their shares at or above the initial market price following the separation or may not be able to resell them at all. In addition, price volatility with our common stock may be greater if trading volume is low.

 

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If securities analysts do not publish research or reports about our company, or issue unfavorable commentary about us or downgrade our shares, the price of our shares could decline.

The trading market for our shares will depend in part on the research and reports that third-party securities analysts publish about our company and our industry. Because our ordinary shares will initially be distributed to the public through the spin-off, there will not be a marketing effort relating to the initial distribution of our shares of the type that would typically be part of an initial public offering of shares. We may be unable or slow to attract research coverage and if one or more analysts cease coverage of our company, we could lose visibility in the market. In addition, one or more of these analysts could use estimation or valuation methods that we do not agree with, downgrade our shares or issue other negative commentary about our company or our industry. As a result of one or more of these factors, the trading price of our shares could decline.

A future sale of a substantial number of shares of our common stock may cause our stock price to decline.

Any sales of substantial amounts of shares of our common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution, we expect that we will have an aggregate of approximately                      shares of our common stock issued and outstanding. These shares will be freely tradable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the Securities Act), unless the shares are owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.

We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers would be in the market at that time.

We cannot guarantee the timing, amount, or payment of dividends on our common stock in the future.

The payment and amount of any future dividend will be subject to the sole discretion of our post-distribution, independent board of directors and will depend upon many factors, including our financial condition and prospects, our capital requirements and access to capital markets, covenants associated with certain of our debt obligations, legal requirements and other factors that our board of directors may deem relevant, and there can be no assurance that we will continue to pay a dividend in the future.

There may be substantial changes in CoalCo’s stockholder base.

Many investors holding ParentCo common stock may hold that stock because of a decision to invest in a company with Parent’s profile. Following the distribution, the shares of CoalCo common stock held by those investors will represent an investment in a company with a different profile. This may not be aligned with a holder’s investment strategy and may cause the holder to sell the shares. As a result, CoalCo’s stock price may decline or experience volatility as CoalCo’s stockholder base changes.

Your percentage of ownership in us may be diluted in the future.

Your percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including, without limitation, equity awards that we may be granting to our directors, officers and employees. Such issuances may have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

Certain CoalCo employees will have rights to purchase or receive shares of CoalCo common stock after the separation as a result of the conversion of their ParentCo stock options, restricted stock units and performance share units to CoalCo stock options, restricted stock units and performance share units. The

 

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conversion of these ParentCo awards into CoalCo awards is described in further detail in the section entitled “The Separation and Distribution—Treatment of Equity-Based Compensation.” As of the date of this information statement, the exact number of share units of CoalCo common stock that will be subject to the converted CoalCo stock options, restricted stock units and performance share units is not determinable; and therefore it is not possible to determine the extent to which your percentage ownership in CoalCo could be diluted as a result of the conversion. It is anticipated that the compensation committee of the board of directors of CoalCo will grant additional equity awards to CoalCo employees and directors after the distribution, from time to time, under CoalCo’s compensation and employee benefit plans. These additional awards will have a dilutive effect on CoalCo’s earnings per share, which could adversely affect the market price of CoalCo’s common stock.

In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of our common stock. For more information, see “Description of CoalCo Capital Stock.”

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.

CoalCo’s amended and restated certificate of incorporation and amended and restated by-laws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with CoalCo’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

   

the inability of our stockholders to act by written consent unless such written consent is unanimous;

 

   

the inability of our stockholders to call special meetings;

 

   

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

 

   

the right of our board of directors to issue preferred stock without stockholder approval;

 

   

the fact that our board of directors will initially be divided into three classes; and

 

   

the ability of our directors, and not stockholders, to fill vacancies (including those resulting from an enlargement of our board of directors) on our board of directors.

In addition, following the distribution, we will be subject to Section 203 of the DGCL. Section 203 provides that, subject to limited exceptions, persons that (without prior board approval) acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or its affiliate becomes the holder of more than 15% of the corporation’s outstanding voting stock.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us

 

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immune from takeovers. However, these provisions could have the effect of delaying, deferring or preventing a change in control or the removal of existing management, of deterring potential acquirers from making an offer to our stockholders and of limiting any opportunity to realize premiums over prevailing market prices for our common stock in connection therewith. This could be the case notwithstanding that a majority of our stockholders might benefit from such a change in control or offer.

In addition, an acquisition or further issuance of CoalCo’s stock could trigger the application of Section 355(e) of the Code, causing the distribution to be taxable to ParentCo. For a discussion of Section 355(e) of the Code, see “Material U.S. Federal Income Tax Consequences.” Under the tax matters agreement, CoalCo would be required to indemnify ParentCo for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.

Our certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain an alternative judicial forum for disputes with us or our directors, officers, employees or agents.

Our certificate of incorporation will provide that unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders;

 

   

any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our bylaws;

 

   

any action asserting a claim that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; or

 

   

any action asserting an internal corporate claim as defined in Section 115 of the DGCL.

Any person or entity purchasing or otherwise holding any interest in shares of our capital stock will be deemed to have notice of, and consented to, the provisions of our certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials ParentCo and CoalCo have filed or will file with the SEC contain or incorporate by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” or other words of similar meaning. All statements that reflect CoalCo’s expectations, assumptions, or projections about the future other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding the separation and distribution, including the timing and expected benefits thereof; forecasts concerning global demand for coal, changes in coal prices and our ability to develop our existing coal reserves and successfully execute our mining plans, competition and growth opportunities for coal, and other applications; targeted financial results or operating performance; and statements about CoalCo’s strategies, outlook, and business and financial prospects. These statements reflect beliefs and assumptions that are based on CoalCo’s perception of historical trends, current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. Forward-looking statements are subject to a number of known and unknown risks, uncertainties, and other factors and are not guarantees of future performance. Actual results, performance, or outcomes may differ materially from those expressed in or implied by those forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others:

 

   

whether the separation is completed, as expected or at all, and the timing of the separation and the distribution;

 

   

whether the conditions to the distribution are satisfied;

 

   

whether the operational, strategic and other benefits of the separation can be achieved;

 

   

whether the costs and expenses of the separation can be controlled within expectations;

 

   

deterioration in economic conditions in any of the industries in which our customers operate may decrease demand for our products, impair our ability to collect customer receivables and impair our ability to access capital;

 

   

volatility and wide fluctuation in coal prices based upon a number of factors beyond our control including oversupply relative to the demand available for our products, weather and the price and availability of alternative fuels;

 

   

an extended decline in the prices we receive for our coal affecting our operating results and cash flows;

 

   

foreign currency fluctuations that could adversely affect the competitiveness of our coal abroad;

 

   

our customers extending existing contracts or entering into new long-term contracts for coal on favorable terms;

 

   

our reliance on major customers;

 

   

our inability to collect payments from customers if their creditworthiness declines or if they fail to honor their contracts;

 

   

our inability to acquire additional coal reserves;

 

   

the availability and reliability of transportation facilities and other systems, disruption of rail, barge, gathering, processing and transportation facilities and other systems that deliver our coal to market and fluctuations in transportation costs;

 

   

a loss of our competitive position because of the competitive nature of coal industries, or a loss of our competitive position because of overcapacity in these industries impairing our profitability;

 

   

coal users switching to other fuels in order to comply with various environmental standards related to coal combustion emissions;

 

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the impact of potential, as well as any adopted environmental regulations including any relating to greenhouse gas emissions on our operating costs as well as on the market for natural coal and for our securities;

 

   

the risks inherent in coal operations, including our reliance upon third party contractors, being subject to unexpected disruptions, including geological conditions, equipment failure, delays in moving out longwall equipment, railroad derailments, security breaches or terroristic acts and other hazards, timing of completion of significant construction or repair of equipment, fires, explosions, seismic activities, accidents and weather conditions which could impact financial results;

 

   

decreases in the availability of, or increases in, the price of commodities or capital equipment used in our coal mining operations;

 

   

obtaining, maintaining and renewing governmental permits and approvals for our coal operations;

 

   

the effects of government regulation on the discharge into the water or air, and the disposal and clean-up of, hazardous substances and wastes generated during our coal operations;

 

   

the effects of stringent federal and state employee health and safety regulations, including the ability of regulators to shut down our operations;

 

   

the potential for liabilities arising from environmental contamination or alleged environmental contamination in connection with our past or current coal operations;

 

   

the effects of mine closing, reclamation and certain other liabilities;

 

   

defects in our chain of title for our undeveloped reserves or failure to acquire additional property to perfect our title to coal rights;

 

   

uncertainties in estimating our economically recoverable coal reserves;

 

   

the outcomes of various legal proceedings, including those which are more fully described herein;

 

   

exposure to employee-related long-term liabilities;

 

   

failure by Murray Energy to satisfy liabilities it acquired from ParentCo, or failure to perform its obligations under various arrangements, which ParentCo guaranteed and for which we have indemnification obligations to ParentCo;

 

   

information theft, data corruption, operational disruption and/or financial loss resulting from a terrorist attack or cyber incident;

 

   

operating in a single geographic area;

 

   

certain provisions in our multi-year coal sales contracts may provide limited protection during adverse economic conditions, and may result in economic penalties or permit the customer to terminate the contract;

 

   

the majority of our common units in CNX Coal Resources LP are subordinated, and we may not receive distributions from CNX Coal Resources LP;

 

   

the potential failure to retain and attract skilled personnel of CoalCo;

 

   

the impact of the separation and the distribution and risks relating to CoalCo’s ability to operate effectively as an independent, publicly-traded company, including various costs associated with operation, and any difficulties associated with enhancing our accounting systems and internal controls and complying with financial reporting requirements;

 

   

unfavorable terms in our separation from ParentCo, related agreements and other transactions and CoalCo’s agreement to provide certain indemnification to ParentCo following the separation;

 

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any failure of CoalCo’s customers, prospective customers, suppliers or other companies with whom CoalCo conducts business to be satisfied with CoalCo’s financial stability, or CoalCo’s failure to obtain any consents that may be required under existing contracts and other arrangements with third parties;

 

   

a determination by the IRS that the distribution or certain related transactions should be treated as a taxable transaction;

 

   

CoalCo’s ability to engage in desirable strategic or capital-raising transactions after the separation;

 

   

the existence of any actual or potential conflicts of interest of CoalCo’s directors or officers because of their equity ownership in GasCo;

 

   

exposure to potential liabilities arising out of state and federal fraudulent conveyance laws and legal dividend requirements as a result of the separation and related transactions;

 

   

uncertainty with respect to CoalCo common stock, including as to whether an active trading market will develop for CoalCo common stock, potential stock price volatility and future dilution;

 

   

the existence of certain anti-takeover provisions in our governance documents, which could prevent or delay an acquisition of CoalCo and negatively impact the trading price of CoalCo common stock; and

 

   

other unforeseen factors.

The above list of factors is not exhaustive or necessarily in order of importance. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements include those discussed under “Risk Factors” in this information statement and in our publicly filed documents referred to in “Where You Can Find More Information.” CoalCo disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

 

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THE SEPARATION AND DISTRIBUTION

Overview

In December 2016, ParentCo announced its intention to separate its Coal Business from its Gas Business. The separation will occur by means of a pro rata distribution to ParentCo stockholders of all of the common stock of CoalCo, which was formed to hold ParentCo’s Pennsylvania Mining Operations (PAMC) and certain related coal assets, including ParentCo’s ownership interest in CNXC, which owns a 25% stake in PAMC, the CNX Marine Terminal, the Greenfield Reserves and certain other related coal assets and liabilities (collectively, the Coal Business). The number of shares of ParentCo common stock you own will not change as a result of the separation.

In connection with such distribution, we expect that:

 

   

ParentCo will complete an internal reorganization, which we refer to as the “internal reorganization,” as a result of which CoalCo will become the parent company of the ParentCo operations comprising, and the entities that will conduct, the Coal Business;

 

   

CoalCo will change its name to CONSOL Energy Inc. and ParentCo will change its name to CNX Resources Corporation; and

 

   

CoalCo will incur approximately $850 million of indebtedness from third-party financing sources, as described further in “Description of Material Indebtedness,” a portion of which we anticipate will be distributed by CoalCo to GasCo. In addition, CoalCo intends to retain those MEDCO 5.75% revenue bonds due September 2025, for which the principal amount as of September 30, 2017 was $103 million, and for which GasCo will remain as a guarantor with CoalCo providing indemnification with respect to such guarantee.

On                 , 2017, the ParentCo Board of Directors approved the distribution of all of CoalCo’s common stock to holders of ParentCo common stock as of the close of business on                 , 2017, the record date for the distribution. At             , Eastern Time, on                 , 2017, the distribution date, each ParentCo stockholder will receive share(s) of CoalCo common stock for every share(s) of ParentCo common stock held at the close of business on the record date for the distribution, as described below. ParentCo stockholders will receive cash in lieu of any fractional shares of CoalCo common stock that they would have received after application of this ratio.

Upon completion of the separation, each ParentCo stockholder as of the record date will continue to own shares of ParentCo and will own a proportionate share of the outstanding shares of common stock of CoalCo. You will not be required to make any payment, surrender or exchange your ParentCo common stock or take any other action to receive your shares of CoalCo common stock in the distribution. The distribution of CoalCo common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “Conditions to the Distribution” below.

Reasons for the Separation

The ParentCo Board of Directors believes that separating its Coal Business from its Gas Business is in the best interests of ParentCo and its stockholders for a number of reasons, including:

 

   

Management Focus and Strategic Decision Making. The separation will position each company to pursue a more focused, industry-specific strategy, will create additional operational flexibility and will enable the management teams of each company to focus on strengthening its core business, operations and other needs, and pursue distinct and targeted opportunities for long-term growth and profitability.

 

   

Allocation of Financial Resources and Access to Capital. The separation will permit each company to efficiently allocate its capital to meet the unique needs of its own business, which will allow each

 

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company to intensify its focus on its distinct business priorities. The separation will also facilitate each business having a more appropriate capital structure aligned with its target capital levels and those of its peers, and is expected to increase access to capital.

 

   

Employee Retention and Incentivizing. The separation will result in each business being better positioned to recruit and retain executives and other employees with expertise that is more directly applicable to the needs of its business. Similarly, the Company believes that its efforts to drive financial and operational goals by aligning incentive programs with specific goals applicable to each business are frustrated by its continued operation of two distinct lines of business. As a result of the separation, each business will be able to articulate more defined talent requirements for potential employees, and both recruiters and applicants are expected to have a clearer understanding of the prerequisites and opportunities associated with each business. Additionally, each business will be able to communicate specifically and clearly the goals of incentive programs and how such programs are specifically tailored to and aligned with the financial and operational strategic objectives of each business in connection with recruiting and retaining employees.

 

   

Enhanced Investor Understanding, Corporate Acquisition Currencies and Equity-Based Compensation. The separation brought about by the distribution will improve understanding of each business in the capital markets and allow for a stronger, more focused investor base for each business. Moreover, the separation will create two independent equity structures, enabling each business to use its own business-focused stock as consideration in acquisitions and equity compensation programs and creating a more efficient and valuable transaction currency and compensation tool.

The ParentCo Board of Directors also considered a number of potentially negative factors in evaluating the separation, including:

 

   

Risk of Failure to Achieve Anticipated Benefits of the Separation. We may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating our business; and following the separation, we may be more susceptible to market fluctuations, including fluctuations in coal prices, and other adverse events than if we were still a part of ParentCo because our business will be less diversified than ParentCo’s business prior to the completion of the separation.

 

   

Increased Administrative Costs. We will incur substantial costs in connection with the separation and the transition to being a standalone public company, which may include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring key senior management personnel who are new to CoalCo, tax costs and costs to separate information systems. Due to our smaller scale as a standalone company, our cost of performing such functions could be higher than the amounts reflected in our historical financial statements, which would cause our profitability to decrease.

 

   

Limitations on Strategic Transactions. Under the terms of the tax matters agreement that we will enter into with ParentCo, we will be restricted from taking certain actions that could cause the distribution or certain related transactions to fail to qualify as tax-free transactions under applicable law. These restrictions may limit for a period of time our ability to pursue certain strategic transactions and equity issuances or engage in other transactions that might increase the value of our business.

 

   

Uncertainty Regarding Stock Prices. We cannot predict the effect of the separation on the trading prices of CoalCo or GasCo common stock or know with certainty whether the combined market value of share(s) of our common stock and              share(s) of GasCo common stock will be less than, equal to or greater than the market value of              share(s) of ParentCo common stock prior to the distribution.

 

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In determining to pursue the separation, the ParentCo Board of Directors concluded the potential benefits of the separation outweighed the foregoing factors. See the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Formation of CoalCo

CoalCo was formed in Delaware on June 21, 2017 for the purpose of holding ParentCo’s Coal Business. As part of the plan to separate the Coal Business from the remainder of its businesses, in connection with the internal reorganization, ParentCo plans to transfer, or otherwise ensure the transfer of, the equity interests of certain entities, including CNXC, that are expected to operate the Coal Business and the assets and liabilities of the Coal Business to CoalCo prior to the distribution.

When and How You Will Receive the Distribution

With the assistance of Computershare Trust Company, N.A., the distribution agent for the distribution (the distribution agent or Computershare), ParentCo expects to distribute CoalCo common stock at             , Eastern Time, on                 , 2017, the distribution date, to all holders of outstanding ParentCo common stock as of the close of business on                 , 2017, the record date for the distribution. Computershare, which currently serves as the transfer agent and registrar for ParentCo common stock, will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for CoalCo common stock.

If you own ParentCo common stock as of the close of business on the record date for the distribution, CoalCo common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, Computershare will then mail you a direct registration account statement that reflects your shares of CoalCo common stock. If you hold your ParentCo shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the CoalCo shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to stockholders, as is the case in this distribution. If you sell ParentCo common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of CoalCo common stock in the distribution.

Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your ParentCo common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of CoalCo common stock that have been registered in book-entry form in your name.

Most ParentCo stockholders hold their common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm is said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your ParentCo common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the CoalCo common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

Transferability of Shares You Receive

Shares of CoalCo common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares of common stock received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include certain of our executive officers, directors or principal stockholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of our common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

 

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Number of Shares of CoalCo Common Stock You Will Receive

For every             share(s) of ParentCo common stock that you own at the close of business on                 , 2017, the record date for the distribution, you will receive             share(s) of CoalCo common stock on the distribution date. ParentCo will not distribute any fractional shares of CoalCo common stock to its stockholders. Instead, if you are a registered holder, Computershare will aggregate fractional shares of common stock into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. The distribution agent, in its sole discretion, without any influence by ParentCo or CoalCo, will determine when, how, and through which broker-dealer and at what price to sell the whole shares of common stock. Any broker-dealer used by the distribution agent will not be an affiliate of either ParentCo or CoalCo and the distribution agent is not an affiliate of either ParentCo or CoalCo. Neither CoalCo nor ParentCo will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

The net cash proceeds of these sales of fractional shares will be taxable for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the distribution. If you hold physical certificates for shares of ParentCo common stock and are the registered holder, you will receive a check from the distribution agent in an amount equal to your pro rata share of the net cash proceeds of the sales. We estimate that it will take approximately two weeks from the distribution date for the distribution agent to complete the distributions of the net cash proceeds. If you hold your shares of ParentCo common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the net cash proceeds of the sales and will electronically credit your account for your share of such proceeds.

Treatment of Equity-Based Compensation

In connection with the separation, equity-based awards granted by ParentCo prior to the separation are expected to be treated as described below, except as otherwise set forth in “Compensation Discussion and Analysis – Subsequent Events” with respect to certain unvested equity awards of Messrs. Brock and Salvatori and certain other employees of CoalCo. As of the separation, these awards will be held by (i) current employees of CoalCo and its subsidiaries (CoalCo Employees), (ii) current employees of GasCo and its subsidiaries (GasCo Employees), (iii) certain former employees classified as former employees of either CoalCo or GasCo for purposes of post-separation compensation and benefits matters (Former Employees), and (iv) nonemployee directors of GasCo (GasCo Nonemployee Directors) and nonemployee directors of CoalCo (CoalCo Nonemployee Directors).

Stock Options

Stock Options Held by GasCo Employees, CoalCo Employees, GasCo Nonemployee Directors, CoalCo Nonemployee Directors and Former Employees. Each outstanding award of ParentCo stock options will continue to relate to GasCo common stock following the separation, provided that the exercise price of, and number of shares subject to, each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo stock option award, subject to rounding. The adjusted GasCo stock option award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award prior to the separation.

Restricted Share Units (RSUs)

RSUs Held by CoalCo Employees and CoalCo Nonemployee Directors. Outstanding RSU awards originally granted in 2015 and held by CoalCo employees who have been designated as Grades 14 and lower will

 

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automatically vest three days prior to the record date, assuming approval from the compensation committee of ParentCo (the ParentCo Compensation Committee). All other outstanding RSU awards originally granted in 2015 and held by CoalCo Employees or CoalCo Nonemployee Directors will be converted into RSU awards with respect to CoalCo common stock. The number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award prior to the separation. Any outstanding ParentCo RSU awards that contain early vesting provisions originally based on ParentCo common stock reaching a predetermined price will be equitably adjusted based on CoalCo’s stock price following the separation.

RSUs Held by GasCo Employees, GasCo Nonemployee Directors and Former Employees (CoalCo and GasCo). Each outstanding RSU award held by a GasCo Employee, GasCo Nonemployee Director, CoalCo Nonemployee Director and/or Former Employee will continue to relate to GasCo common stock following the separation, provided that the number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award prior to the separation. Any outstanding ParentCo RSU awards that contain early vesting provisions originally based on ParentCo common stock reaching a predetermined price will be equitably adjusted based on GasCo’s stock price following the separation.

Performance Share Units (PSUs)

PSUs Held by CoalCo Employees. Each outstanding ParentCo PSU Award held by a CoalCo Employee will be converted into a PSU Award with respect to CoalCo common stock following the separation. The number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award, subject to rounding. Further, the relevant performance conditions applicable for the vesting of any such PSU Award (i) will be equitably adjusted following the separation to address the impact of the separation on said conditions for 2017 and (ii) for annual periods after 2017 will be adjusted to reflect CoalCo performance measurements. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award prior to the separation.

PSUs Held by GasCo Employees and Former Employees. Each outstanding PSU award held by a GasCo Employee or Former Employee will relate to GasCo common stock following the separation, provided that the number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award, subject to rounding. Further, the relevant performance conditions applicable for the vesting of any such PSU Award (i) may be equitably adjusted to address the impact of the separation on said conditions and (ii) for annual periods after 2017, may be adjusted to reflect GasCo performance metrics. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award prior to the separation.

Internal Reorganization

As part of the separation, and prior to the distribution, ParentCo and its subsidiaries expect to complete an internal reorganization in order to transfer to CoalCo the Coal Business that it will hold following the separation. Among other things and subject to limited exceptions, the internal reorganization is expected to result in CoalCo owning, directly or indirectly, the operations comprising, and the entities that conduct, the Coal Business.

The internal reorganization is expected to include various restructuring transactions pursuant to which (i) the operations, assets and liabilities of ParentCo and its subsidiaries used to conduct the Coal Business will be separated from the operations, assets and liabilities of ParentCo and its subsidiaries used to conduct the Gas Business and (ii) such Coal Business operations, assets and liabilities and investments will be contributed, transferred, or otherwise allocated to CoalCo or one of its direct or indirect subsidiaries. Such restructuring

 

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transactions may take the form of asset transfers, mergers, demergers, divisions, conversions, dividends, contributions and similar transactions, and may involve the formation of new domestic subsidiaries to own and operate the Coal Business or the Gas Business.

As part of this internal reorganization, ParentCo will contribute to CoalCo certain assets, including equity interests in entities that are expected to conduct the Coal Business.

Following the completion of the internal reorganization and immediately prior to the distribution, CoalCo will be the parent company of the entities that will conduct the Coal Business, and ParentCo (through subsidiaries other than CoalCo and its subsidiaries) will remain the parent company of the entities that are expected to conduct the Gas Business.

Results of the Distribution

After the distribution, CoalCo will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on                 , 2017, the record date for the distribution, and will reflect any exercise of ParentCo options or vesting of other equity-based awards between the date the ParentCo Board of Directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding shares of ParentCo common stock or any rights of ParentCo stockholders. ParentCo will not distribute any fractional shares of CoalCo common stock.

We will enter into a separation agreement and other related agreements with ParentCo, and amend or modify, or otherwise retain unchanged, currently existing agreements between ParentCo and CNXC, before the distribution to effect the separation and provide a framework for our relationship with GasCo after the separation. These agreements will provide for the allocation between GasCo and CoalCo of ParentCo’s assets, liabilities and obligations (including employee benefits, intellectual property, and tax-related assets and liabilities) attributable to periods prior to CoalCo’s separation from ParentCo and will govern the relationship between GasCo and CoalCo after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for CoalCo Common Stock

There is currently no public trading market for CoalCo common stock. CoalCo intends to apply to list its common stock on the NYSE under the symbol “            ”. CoalCo has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

We cannot predict the price at which CoalCo common stock will trade after the distribution. In fact, the combined trading prices, after the distribution, of the shares of CoalCo common stock that each ParentCo stockholder will receive in the distribution and the ParentCo common stock held at the record date for the distribution may not equal the “regular-way” trading price of the ParentCo common stock immediately prior to the distribution. The price at which CoalCo common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for CoalCo common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to Our Common Stock and the Securities Market.”

Incurrence of Debt

CoalCo intends to incur certain indebtedness prior to or concurrent with the separation. Subject to market conditions and other factors, prior to or concurrent with the separation, CoalCo intends to secure new borrowings from third-party financing sources, a portion of which we anticipate will be distributed to GasCo. In addition, CoalCo intends to retain those MEDCO 5.75% revenue bonds due September 2025, for which the principal amount as of September 30, 2017 was $103 million, and for which GasCo will remain as a guarantor with CoalCo

 

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providing indemnification with respect to such guarantee. ParentCo’s existing senior unsecured notes are expected to remain an obligation of GasCo after the separation, except to the extent that GasCo uses funds received by it from CoalCo to repay existing indebtedness. For more information, see “Description of Material Indebtedness.”

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date for the distribution and continuing up to and including through the distribution date, ParentCo expects that there will be two markets in ParentCo common stock: a “regular-way” market and an “ex-distribution” market. ParentCo common stock that trades on the “regular-way” market will trade with an entitlement to CoalCo common stock distributed in the distribution. ParentCo common stock that trades on the “ex-distribution” market will trade without an entitlement to CoalCo common stock distributed in the distribution. Therefore, if you sell shares of ParentCo common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive shares of CoalCo common stock in the distribution. If you own ParentCo common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of CoalCo common stock that you are entitled to receive pursuant to your ownership of shares of ParentCo common stock as of the record date.

Furthermore, beginning on or shortly before the record date for the distribution and continuing up to and including the distribution date, CoalCo expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for CoalCo common stock that will be distributed to holders of ParentCo common stock on the distribution date. If you owned ParentCo common stock at the close of business on the record date for the distribution, you would be entitled to CoalCo common stock distributed pursuant to the distribution. You may trade this entitlement to shares of CoalCo common stock, without trading the ParentCo common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to CoalCo common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

The distribution will be effective at             , Eastern Time, on                 , 2017, which is the distribution date, provided that the conditions set forth in the separation agreement have been satisfied (or waived by ParentCo in its sole and absolute discretion), including, among others:

 

   

the SEC declaring effective the registration statement of which this information statement forms a part; there being no order suspending the effectiveness of the registration statement in effect; and no proceedings for such purposes having been instituted or threatened by the SEC;

 

   

the mailing of a notice of Internet availability of this information statement or this information statement to ParentCo stockholders;

 

   

the receipt by ParentCo of a private letter ruling from the IRS and one or more opinions of its tax advisors, in each case satisfactory to the ParentCo Board of Directors, regarding certain U.S. federal income tax matters relating to the separation and distribution, including, with respect to the opinion of Wachtell, Lipton, Rosen & Katz, to the effect that the distribution will be a transaction described in Section 355(a) of the Code;

 

   

the internal reorganization having been completed and the transfer of assets and liabilities of the Coal Business from ParentCo to CoalCo, and the transfer of assets and liabilities of the Gas Business from CoalCo to ParentCo, having been completed in accordance with the separation and distribution agreement;

 

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the receipt of one or more opinions from an independent appraisal firm to the ParentCo Board of Directors as to the solvency of ParentCo and CoalCo after the completion of the distribution, in each case in a form and substance acceptable to the ParentCo Board of Directors in its sole and absolute discretion;

 

   

all actions necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rule and regulations thereunder having been taken or made and, where applicable, having become effective or been accepted;

 

   

the execution of certain agreements contemplated by the separation and distribution agreement;

 

   

no order, injunction or decree issued by any government authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, the distribution or any of the related transactions being in effect;

 

   

the shares of CoalCo common stock to be distributed each having been accepted for listing on the NYSE, subject to official notice of distribution;

 

   

CoalCo having entered into the financing arrangements described under “Description of Material Indebtedness” and ParentCo being satisfied in its sole and absolute discretion that, as of the effective time of the distribution, it will have no further liability under such arrangements;

 

   

ParentCo having received approximately $464 million in cash from CoalCo, subject to adjustment based on relevant financing fees; and

 

   

no other event or development existing or having occurred that, in the judgment of ParentCo’s Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and the other related transactions.

ParentCo will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution and the distribution date, and the distribution ratio for CoalCo common stock. ParentCo will also have sole and absolute discretion to waive any of the conditions to the distribution. ParentCo does not intend to notify its stockholders of any modifications to the terms of the separation or distribution that, in the judgment of its Board of Directors, are not material. For example, the ParentCo Board of Directors might consider material such matters as significant changes to the distribution ratio and the assets to be contributed or the liabilities to be assumed in the separation. To the extent that the ParentCo Board of Directors determines that any modifications by ParentCo materially change the material terms of the distribution, ParentCo will notify ParentCo stockholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K or circulating a supplement to this information statement.

 

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DIVIDEND POLICY

The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of CoalCo’s Board of Directors. The Board of Directors’ decision regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in any existing debt facilities, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends.

CAPITALIZATION

The following table sets forth our capitalization as of                 , 2017 on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in our unaudited pro forma financial information. The information below is preliminary and is not necessarily indicative of what our capitalization would have been had the separation, distribution and related financing transactions been completed as of                 , 2017. In addition, it is not indicative of our future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Condensed Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and notes included in the “Index to Financial Statements” section of this information statement.

 

     As of June 30, 2017
     Actual   Pro Forma  
     (Unaudited)
     (in Thousands)

Cash

    

Cash and cash equivalents

   $ 6,739     $                   
  

 

 

 

 

 

 

 

Capitalization:

    

Debt Outstanding

    

Long-term debt, including amount due within one year

   $ 305,191     $  
  

 

 

 

 

 

 

 

Equity

    

Common stock, par value $0.01 per share

   $ --     $  

Additional paid-in capital

    

Parent net investment

     1,077,558    

Accumulated other comprehensive loss

     (393,471  
  

 

 

 

 

 

 

 

Total parent net investment and other comprehensive loss

     684,087    
  

 

 

 

 

 

 

 

Noncontrolling interest

     142,210    
  

 

 

 

 

 

 

 

Total equity

     826,297    
  

 

 

 

 

 

 

 

Total capitalization

   $ 1,131,488     $  
  

 

 

 

 

 

 

 

CoalCo has not yet finalized its post-distribution capitalization. Further pro forma financial information reflecting CoalCo’s post-distribution capitalization may be included in an amendment to this information statement.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

The following table presents the selected historical combined financial data for CoalCo, which we derived from our unaudited Combined Financial Statements and our audited Combined Financial Statements, which are included in the “Index to Financial Statements” section of this information statement.

The historical results do not necessarily indicate the results expected for any future period. To ensure a full understanding, you should read the selected historical combined financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included elsewhere in this information statement.

 

    Six Months
Ended June 30,
    Year Ended December 31,  
    2017     2016     2016     2015     2014     2013     2012  
(dollars in thousands)                                          

Statement of Income

Information:

Coal Sales

  $ 620,155     $ 476,726     $ 1,065,582     $ 1,289,036     $ 1,616,874     $ 1,357,319     $ 1,323,679  

Other Outside Sales:

    27,742       15,767       31,464       30,967       41,255       43,364       57,345  

Freight Revenue

    30,045       24,557       46,468       20,499       23,133       17,778       50,901  

Miscellaneous Other Income

    32,794       36,133       82,120       68,193       123,604       61,034       62,533  

Gain on Sale of Assets

    13,536       3,904       5,228       13,025       26,312       46,404       29,655  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue and Other Income

    724,272       557,087       1,230,862       1,421,720       1,831,178       1,525,899       1,524,113  

Net Income:

    98,690       22,785       50,450       317,421       290,952       313,773       367,959  

Net Income Attributable to CONSOL Mining Corporation Shareholder

    88,913       20,492       41,496       307,011       290,952       313,773       367,959  

Balance Sheet Data (at period end):

         

Total assets

  $ 2,626,610     $ 2,758,170     $ 2,687,434     $ 2,867,733     $ 3,092,374     $ 3,156,312     $ 3,104,767  

Total long-term debt

  $ 301,548     $ 299,629     $ 313,639     $ 286,526     $ 110,199     $ 108,332     $ 109,272  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The Unaudited Pro Forma Condensed Combined Financial Statements presented below have been derived from CoalCo’s historical combined financial statements included in this information statement. While the historical combined financial statements reflect the past financial results of the Coal Business, these pro forma statements give effect to the separation of that business into an independent, publicly traded company, as described under “Summary—The Separation and Distribution.”

The Unaudited Pro Forma Statements of Income for the year ended December 31, 2016 and the six months ended June 30, 2017 have been prepared as though the spin-off occurred on January 1, 2016. The Unaudited Pro Forma Condensed Combined Balance Sheet at June 30, 2017 has been prepared as though the spin-off occurred on June 30, 2017. The Unaudited Pro Forma Condensed Combined Financial Statements are for illustrative purposes only, and do not reflect what our financial position and results of operations would have been had the separation occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations.

The unaudited pro forma adjustments are based on available information and assumptions our management believes are reasonable; however, such adjustments are estimates and may not prove to be accurate. The

 

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Unaudited Pro Forma Condensed Combined Financial Statements have been derived from our historical combined financial statements included in this information statement and include certain adjustments to give effect to events that are (i) directly attributable to the spin-off and related transaction agreements, (ii) factually supportable, and (iii) with respect to the statements of income, expected to have a continuing impact on CoalCo.

The pro forma adjustments to reflect the separation include:

 

   

The tax-free distribution, for U.S. federal income tax purposes, of shares of our common stock to ParentCo stockholders, based on the distribution of              share(s) of our common stock for every              ParentCo common shares outstanding as of the record date for the distribution, and the resulting elimination of CoalCo’s historical parent net investment;

 

   

the effect of our anticipated post-separation capital structure, which includes the issuance of approximately $850 million of additional indebtedness as described in this information statement;

 

   

the distribution of $464 million to ParentCo;

 

   

the transfers of certain corporate and other assets and liabilities between us and ParentCo; and

 

   

the impact of, and transactions contemplated by, the separation and distribution agreement, including the transition services agreement, tax matters agreement, employee matters agreement, intellectual property matters agreement and other agreements between us and ParentCo and the provisions contained therein.

Historically, ParentCo has charged its operating subsidiaries for various corporate costs incurred in the operation of the business. These costs may not be representative, either positively or negatively, of the future costs we will incur as an independent, public company. Effective with the separation, we will assume responsibility for all corporate functions and related costs. Certain of these activities will continue to be performed by ParentCo under a transition service agreement for a limited period of time. We will incur incremental costs as an independent public company, including costs to replace services previously provided by ParentCo, as well as other stand-alone costs. Due to the scope and complexity of these activities, the amount and timing of these incremental costs could vary and, therefore, are not included as adjustments within the Unaudited Pro Forma Condensed Combined Financial Statements.

As part of our transition to being a stand-alone public company we will incur separation costs related to the following:

 

   

finance, tax and other professional costs pertaining to the spin-off and establishing us as a stand-alone public company;

 

   

costs to separate our information systems from ParentCo; and

 

   

other separation costs.

We have not adjusted the accompanying unaudited pro forma condensed combined statements of income for these estimated separation costs as the costs are not expected to have an ongoing effect on our operating results.

Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and the timing of incurrence could change.

As a result of the spin-off, we will become subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. We will be required to establish procedures and practices as a standalone public company in order to comply with our obligations under those laws and the related rules and regulations. Any change in costs or expenses associated with operating as a standalone company would constitute projected amounts based on estimates and, therefore, are not factually supportable; as such, the Unaudited Pro Forma Condensed Combined Financial Statements have not been adjusted for any such estimated changes.

 

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The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with our historical combined financial statements, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The Unaudited Pro Forma Condensed Combined Financial Statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Cautionary Statement Concerning Forward-Looking Statements” included elsewhere in this information statement.

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

SIX MONTHS ENDED JUNE 30, 2017

(Dollars in Thousands)

 

    Historical
Predecessor
    Pro Forma Adjustments           Total
Pro Forma
       
      Financing
Adjustments
          Spin-Off
Adjustments
               

Revenue and Other Income:

             

Coal Sales

  $     620,155     $     —       $       $     620,155    

Other Outside Sales

    27,742                       27,742    

Freight Revenue

    30,045                       30,045    

Miscellaneous Other Income

    32,794                   (6,438     (b)       26,356    

Gain on Sale of Assets

    13,536                       13,536    
 

 

 

   

 

 

     

 

 

     

 

 

   

Total Revenue and Other Income

    724,272               (6,438       717,834    

Costs and Expenses:

             

Operating and Other Costs

    452,876               (756     (b)       452,120    

Depreciation, Depletion and Amortization

    78,261               242       (b)       78,503    

Freight Expense

    30,045                       30,045    

Selling, General, and Administrative Costs

    37,417                       37,417    

Interest Expense

    7,966       30,677       (g)               38,643    
 

 

 

   

 

 

     

 

 

     

 

 

   

Total Costs And Expenses

    606,565       30,677         (514       636,728    

Earnings Before Income Tax

    117,707       (30,677       (5,924       81,106    

Income Tax

    19,017       (10,737     (h)       (2,074     (h)       6,206    
 

 

 

   

 

 

     

 

 

     

 

 

   

Net Income

    98,690       (19,940       (3,850       74,900    

Less: Net Income Attributable to Noncontrolling Interest

    9,777                       9,777    
 

 

 

   

 

 

     

 

 

     

 

 

   
Net Income Attributable to CONSOL Mining Corporation Shareholder   $ 88,913     $     (19,940     $ (3,850     $ 65,123    
 

 

 

   

 

 

     

 

 

     

 

 

   

Net Income per Share:

             

Basic

                (i

Diluted

                (i

Weighted Average Shares Outstanding:

             

Basic

                (i

Diluted

                (i

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2016

(Dollars in Thousands)

 

            Pro Forma Adjustments               
     Historical
Predecessor
     Financing
Adjustments
           Spin-Off
Adjustments
           Total
Pro Forma
 

Revenue and Other Income:

               

Coal Sales

   $     1,065,582      $     —        $        $     1,065,582  

Other Outside Sales

     31,464                          31,464  

Freight Revenue

     46,468                          46,468  

Miscellaneous Other Income

     82,120                     (9,306     (b)        72,814  

Gain on Sale of Assets

     5,228                          5,228  
  

 

 

    

 

 

      

 

 

      

 

 

 

Total Revenue and Other Income

     1,230,862                 (9,306        1,221,556  

Costs and Expenses:

               

Operating and Other Costs

     877,177                 (1,164     (b)        876,013  

Depreciation, Depletion and Amortization

     178,122                 439       (b)        178,561  

Freight Expense

     46,468                          46,468  

Selling, General, and Administrative Costs

     50,027                 17       (b)        50,044  

Interest Expense

     14,053        62,252       (g)                 76,305  
  

 

 

    

 

 

      

 

 

      

 

 

 

Total Costs And Expenses

     1,165,847        62,252          (708        1,227,391  

Earnings Before Income Tax

     65,015        (62,252        (8,598        (5,835

Income Tax

     14,565        (21,788     (h)        (3,008     (h)        (10,231
  

 

 

    

 

 

      

 

 

      

 

 

 

Net Income

     50,450        (40,464        (5,590        4,396  

Less: Net Income Attributable to Noncontrolling Interest

     8,954                          8,954  
  

 

 

    

 

 

      

 

 

      

 

 

 

Net Income Attributable to CONSOL Mining Corporation Shareholder

   $ 41,496      $ (40,464      $ (5,590      $ (4,558
  

 

 

    

 

 

      

 

 

      

 

 

 

Net Income per Share:

               

Basic

                       (i) 

Diluted

                       (i) 

Weighted Average Shares Outstanding:

               

Basic

                       (i) 

Diluted

                       (i) 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

AS OF JUNE 30, 2017

(Dollars in Thousands)

 

    Historical
Predecessor
    Pro Forma Adjustments   Total
Pro Forma
 
      Financing
Adjustments
        Spin-Off
Adjustments
       

ASSETS

           

Current Assets:

           

Cash and Cash Equivalents

  $ 6,739     $ 163,000     (a)   $ 1     (b)   $ 169,740  
          (d)  

Trade Accounts Receivable

    107,028                       107,028  

Other Receivables

    17,445               (1,095   (b)     16,350  

Other Receivables - Related Party

    32                       32  

Inventories

    60,286                       60,286  

Prepaid Expenses

    12,364               (44   (b)     12,320  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Assets

    203,894       163,000         (1,138       365,756  

Property, Plant and Equipment:

           

Property, Plant and Equipment

    4,613,940               (11,626   (b)     4,602,314  

Less—Accumulated Depreciation, Depletion and Amortization

    2,495,546               3,935     (b)     2,499,481  
 

 

 

       

 

 

     

 

 

 

Total Property, Plant and Equipment—Net

    2,118,394               (15,561       2,102,833  

Other Assets:

           

Other Assets

    111,759       7,000     (a)     4,050     (b)     122,809  

Deferred Tax Asset

    192,563               (f)     192,563  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Other Assets

    304,322       7,000         4,050         315,372  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL ASSETS

  $ 2,626,610     $ 170,000       $ (12,649     $ 2,783,961  
 

 

 

   

 

 

     

 

 

     

 

 

 

LIABILITIES AND EQUITY

           

Current Liabilities:

           

Accounts Payable

  $ 72,263     $       $ 327     (b)   $ 72,590  

Current Portion of Long-Term Debt

    3,643           (a)     54     (b)     3,697  

Other Accrued Liabilities

    283,393               2,349     (b)     291,430  
          5,688     (c)  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Current Liabilities

    359,299               8,418         367,717  

Long-Term Debt:

           

Long-Term Debt

    291,344       636,708     (a)             928,052  

Capital Lease Obligations

    10,204               48     (b)     10,252  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Long-Term Debt

    301,548       636,708         48         938,304  

Deferred Credits and Other Liabilities:

           

Postretirement Benefits Other Than Pensions

    652,206                       652,206  

Pneumoconiosis Benefits

    107,321                       107,321  

Asset Retirement Obligations

    228,576               139     (b)     228,715  

Workers’ Compensation

    64,689                       64,689  

Salary Retirement

    72,529                       72,529  

Other

    14,145                       14,145  
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Deferred Credits and Other Liabilities

    1,139,466               139         1,139,605  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL LIABILITIES

    1,800,313       636,708         8,605         2,445,626  

Equity:

           

Common stock, par value $0.01 per share

                  (e)      

Additional paid-in capital

                  (e)      

Parent Net Investment

    1,077,558       (466,708   (a)     (15,566   (b)     589,596  
          (5,688   (c)  
          (d)  
          (e)  
          (f)  

Accumulated Other Comprehensive Income

    (393,471                     (393,471
 

 

 

   

 

 

     

 

 

     

 

 

 

Total Parent Net Investment and Other Comprehensive Income

    684,087       (466,708       (21,254       196,125  

Noncontrolling Interest

    142,210                       142,210  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL EQUITY

    826,297       (466,708       (21,254       338,335  
 

 

 

   

 

 

     

 

 

     

 

 

 

TOTAL LIABILITIES AND EQUITY

  $ 2,626,610     $ 170,000       $ (12,649     $ 2,783,961  
 

 

 

   

 

 

     

 

 

     

 

 

 

 

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Note 1: Basis of Pro Forma Presentation

In December 2016, ParentCo announced its intention to separate into two independent, publicly traded companies: a coal company and a natural gas exploration and production (E&P) company. The coal company will include our PAMC, our ownership interest in CNXC, our marine terminal at the Port of Baltimore, our undeveloped coal reserves located in the Northern Appalachian, Central Appalachian and Illinois basins and certain related coal assets and liabilities (collectively, the Coal Business). CoalCo was formed in Delaware on June 21, 2017 for the purpose of holding ParentCo’s Coal Business. The spin-off transaction, which is expected to be tax-free to ParentCo stockholders, will be effected through a pro rata distribution of our stock to existing ParentCo stockholders. Immediately following the distribution, ParentCo stockholders will own 100 percent of the outstanding shares of our common stock. After the spin-off, we will operate as an independent, publicly traded company. Unless otherwise indicated or except where the context otherwise requires, references to “we,” “us” or “our” refer to CONSOL Mining Corporation, which will be renamed CONSOL Energy Inc., in connection with the separation. ParentCo will be renamed CNX Resources Corporation in connection with the separation.

In connection with the spin-off, among other things, we intend to consummate the financing transactions as described in more detail in Note 2: The Spin-Off Transactions, below.

The Unaudited Pro Forma Condensed Combined Financial Statements are based on our historical combined financial statements, which are included elsewhere in this information statement, and have been prepared to reflect the spin-off and related transactions. The unaudited pro forma adjustments are based on preliminary estimates, accounting judgments and currently available information and assumptions that management believes are reasonable. These adjustments are included only to the extent they are directly attributable to the spinoff and related transactions and the appropriate information is known and factually supportable.

Note 2: The Spin-Off Transactions

The Spin-Off

In connection with the spin-off, ParentCo will undergo an internal reorganization so as to facilitate, at the time of the separation, the transfer to us of certain employees, operations, assets and liabilities associated with ParentCo’s coal operations and certain other current and former businesses and activities of ParentCo. In addition, at the time of separation we will transfer certain assets and liabilities to ParentCo mainly related to certain royalties, receivables and promissory notes that will not be conveyed to CoalCo in connection with the separation.

Financing Transactions

In connection with the spin-off, we expect to complete certain financing transactions on or prior to the completion of the spin-off, including the repayment of certain existing indebtedness (Financing Transactions).

 

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The following tables summarize the anticipated sources and expected uses of proceeds in connection with the Financing Transactions, as if they had occurred as of June 30, 2017. The actual amounts set forth in the table and in the accompanying footnotes are subject to adjustment and may differ at the time of the consummation of the Financing Transactions depending on several factors, including, among others, fluctuations in indebtedness between June 30, 2017 and the actual closing dates of the Financing Transactions, payments of accrued interest subsequent to June 30, 2017, and differences from our estimated fees and expenses.

 

Sources

   Amount 
(in thousands)
    

Uses

   Amount 
(in thousands)
 

New TLA Facility

   $ 100,000     

Repay CNXC Revolver

   $ 190,000  

New TLB Facility

     400,000     

Cash transfer to ParentCo

     464,000  

New Notes

     350,000     

Fees, costs and expenses

  
     

Cash to balance sheet

     196,000  
  

 

 

       

 

 

 

Total Sources

   $ 850,000      Total Uses    $ 850,000  
  

 

 

       

 

 

 

Note 3: Pro Forma Adjustments

(a) To reflect the entrance into the following debt agreements in connection with the spin-off:

(i) $100 million Term Loan A Facility (TLA Facility) with a 4 year maturity;

(ii) $400 million Term Loan B Facility (TLB Facility) with a 5 year maturity;

(iii) $300 million revolving credit facility (Revolving Credit Facility) with a 4 year maturity; and

(iv) $350 million second lien secured notes (Notes) with an 8 year maturity.

(b) In connection with the spin-off, ParentCo will transfer certain corporate and other assets and liabilities to us, including certain property, plant and equipment, and certain guarantees of ParentCo. In addition, we will transfer certain assets and liabilities to ParentCo mainly related to certain surface acres, royalties, receivables, accrued property taxes and promissory notes that will not be conveyed to or retained by CoalCo in connection with the separation. The revenues and expenses associated with the transfer of these assets and liabilities between CoalCo and ParentCo have been adjusted on the Unaudited Pro Forma Condensed Combined Financial Statements.

The separation and distribution, tax matters, transition services, employee matters and indemnification agreements have not been finalized, and the pro forma statements will be revised in future amendments to reflect the impact of those agreements, to the extent they are deemed material.

(c) Reflects the accrual of $5.7 million of transaction costs attributable to the separation and distribution transaction that are not already included in accrued expenses as of June 30, 2017. These are factually supportable because such amounts are based on reliable, documented evidence such as invoices for costs incurred to date and estimates from third-parties for additional costs to be incurred in connection with the spin-off. Such costs are non-recurring in nature and directly related to the separation and, therefore, are reflected as a reduction to equity and not included in the unaudited pro forma condensed combined statements of income.

(d) To reflect the transfer of $464 million to ParentCo with the proceeds from the debt agreements discussed in (a).

(e) Reflects the elimination of net parent investment as a result of the anticipated post-separation capital structure. Upon the separation and distribution date, net parent investment will be eliminated and the newly issued equity will be allocated between common stock and additional paid-in-capital based on the number of shares of CoalCo common stock outstanding at the distribution date.

(f) Represents the tax effect of temporary differences between the tax basis of assets and liabilities of various corporate and other assets and liabilities to be transferred to / from CoalCo and their reported amounts in the combined financial statements.

 

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(g) To reflect the adjustment to interest expense, including the amortization of deferred financing fees associated with the new indebtedness to be entered into in connection with the closing of the spin-off and related transactions.

 

     For the
Six Months Ended
June 30, 2017
    For the
Year Ended
December 31, 2016
 

Elimination of historical interest expense – CNXC Revolver

   $ (4,961   $ (9,023
  

 

 

   

 

 

 

Commitment fees on Revolving Credit Facility

     750       1,500  

Interest on TLA Facility (1)

     2,875       5,750  

Interest on TLB Facility (1)

     13,500       27,000  

Interest on Notes

     15,313       30,625  

Amortization of deferred financing fees – TLA Facility

     875       1,750  

Amortization of deferred financing fees – TLB Facility

     700       1,400  

Amortization of deferred financing fees – Notes

     750       1,500  

Amortization of deferred financing fees – Revolving Credit Facility

     875       1,750  
  

 

 

   

 

 

 

Total pro forma interest expense

   $ 30,677     $ 62,252  
  

 

 

   

 

 

 

 

(1)

The adjustments to record interest expense for the six months ended June 30, 2017 and the year ended December 31, 2016 are estimated based off the terms of the debt agreements described in Note 3(a) above. For each 0.125% change in estimated interest rates on the variable rate debt, interest expense would increase or decrease by approximately $0.3 million and $0.6 million for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively.

(h) Reflects the associated income tax benefit (expense) for all of the adjustments noted above. The income tax provision was based on the estimated statutory tax rate of 35% for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively. We expect our effective rate in future years, however, to vary from these estimated statutory rates.

(i) The calculation of pro forma basic and diluted earnings per share and pro forma weighted-average shares outstanding for the period presented are based on the weighted-average number of shares of CoalCo outstanding for the six months ended June 30, 2017 and the year ended December 31, 2016, adjusted for the assumed distribution ratio of              share(s) of CoalCo common stock for every              share(s) of ParentCo common stock outstanding. This calculation may not be indicative of the dilutive effect that will actually result from CoalCo stock-based awards issued in connection with the adjustment of outstanding ParentCo stock-based awards or the grant of new stock-based awards. The number of dilutive shares of CoalCo common stock underlying CoalCo stock-based awards issued in connection with the adjustment of outstanding ParentCo stock-based awards will not be determined until after the distribution date.

 

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BUSINESS

All dollar amounts discussed in this section are in millions of U.S. dollars, except for per unit amounts, and unless otherwise indicated. This section discusses CoalCo’s business assuming the completion of all of the transactions described in this information statement, including the separation.

Our Company

CoalCo (CoalCo or the company) is a leading, low-cost producer of high-quality bituminous coal, focused on the extraction and preparation of coal in the Appalachian Basin. Our predecessors have been mining coal, primarily in the Appalachian Basin, since 1864. We are a leading producer of high-Btu thermal coal in the Northern Appalachian Basin and the eastern United States due to 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.

Coal from the PAMC is valued because of its high energy content (as measured in Btu per pound), relatively low levels of sulfur and other impurities, and strong thermoplastic properties that enable it to be used in metallurgical as well as thermal applications. We take advantage of these desirable quality characteristics and out extensive logistical network, which is directly served by both the Norfolk Southern and CSC railroads, to aggressively market our product to a broad base of strategically-selected, top-performing power plant customers in the eastern United States. We also capitalize on the operational synergies afforded by the CNX Marine Terminal to export our coal to thermal and metallurgical end-users in Europe, Asia, South America and Canada.

Our operations, including the PAMC and the CNX Marine Terminal, have consistently generated strong cash flows. As of December 31, 2016, the PAMC controls 766.7 million tons of high-quality Pittsburgh seam reserves, enough to allow for approximately 27 years of full-capacity production. In addition, we own or control approximately 1.6 billion tons in the form of greenfield reserves located in the NAPP, the CAPP and the ILB, which we believe could provide a solid growth platform in the future. CoalCo’s vision is to maximize cash flow generation through the safe, compliant and efficient operation of this core asset base, while strategically reducing debt, returning capital through share buybacks or dividends, and, when prudent, allocating capital toward compelling growth opportunities.

Our core businesses consist of our:

 

   

Pennsylvania Mining Operations: The PAMC, which includes the Bailey Mine, the Enlow Fork Mine and the Harvey Mine, has extensive high-quality coal reserves. We mine our reserves from the Pittsburgh No. 8 Coal Seam, which is a large contiguous formation of uniform, high-Btu thermal coal that is ideal for high productivity, low-cost longwall operations. The design of the PAMC is optimized to produce large quantities of coal on a cost-efficient basis. We are able to sustain high production volumes at comparatively low operating costs due to, among other things, the technologically advanced longwall mining systems, logistics infrastructure and safety. All of our mines utilize longwall mining, which is a highly automated underground mining technique that produces large volumes of coal at lower costs compared to other underground mining methods. We own a 75% undivided interest in PAMC, with the remaining 25% being owned by CNXC, as discussed below.

 

   

CNXC Ownership: Approximately 60% LP ownership and 100% GP ownership interest in CNX Coal Resources LP (CNXC), a growth-oriented master limited partnership formed by ParentCo to manage and further develop its active coal operations in Pennsylvania. At December 31, 2016, CNXC’s assets included a 25% undivided interest in, and full operational control over, PAMC.

 

   

CNX Marine Terminal: Through our subsidiary CNX Marine Terminal Inc. we provide coal export terminal services through the Port of Baltimore. The terminal can either store coal or load coal directly into vessels from rail cars. It is also one of the few terminals in the United States served by two railroads, Norfolk Southern Corporation and CSX Transportation Inc.

 

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Undeveloped Reserves: Ownership of approximately 1.6 billion tons of high-quality, undeveloped coal reserves located in the Northern Appalachian (NAPP), Central Appalachian (CAPP) and Illinois basins.

A map showing the location of CoalCo’s significant properties is below:

 

LOGO

CoalCo defines itself through its core values which are:

 

   

Safety,

 

   

Compliance, and

 

   

Continuous Improvement.

These values are the foundation of CoalCo’s identity and are the basis for how management defines continued success. We believe CoalCo’s rich resource base, coupled with these core values, allows management to create value for the long-term. The U.S. Energy Information Administration (EIA) projects in its 2017 annual Energy Outlook that coal’s share of the U.S. electric power generation mix will rebound from 30% in 2016 to 32% in 2021, driven largely by rising gas prices and the prospects of a more favorable policy stance under the current U.S. presidential administration. We believe that the use of coal will continue for many years as a principal fuel sources for electricity in the United States. Additionally, we believe that as worldwide economies grow, the demand for electricity from fossil fuels will grow as well, resulting in expansion of worldwide demand for our coal.

CoalCo’s strategy is to increase stockholder value through the development and growth of its existing natural coal assets and participation in global coal markets.

CoalCo’s coal assets align with our long-term strategic objectives. Our current production, which includes the Bailey, Enlow Fork, and Harvey mines, can be sold domestically or abroad, as either thermal coal or high volatile

 

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metallurgical coal. These low-cost mines, with five longwalls, produce a high-Btu Pittsburgh-seam coal that is lower in sulfur than many Northern Appalachian coals. Our onsite logistics infrastructure at the preparation plant includes a dual-batch train loadout facility capable of loading up to 9,000 tons of coal per hour and 19.3 miles of track linked to separate Class I rail lines owned by Norfolk Southern and CSX, which enables us to simultaneously accommodate multiple unit trains and significantly increases our efficiency in meeting our customers’ transportation needs. Our ability to accommodate multiple unit trains allows for the seamless transition of locomotives from empty inbound trains to fully loaded outbound trains at our facility. These mines and their logistics infrastructure, along with our 100%-owned CNX Marine Terminal, which is served by both Norfolk Southern and CSX, will allow CoalCo to participate in the world’s thermal and metallurgical coal markets. The ability to serve both domestic and international markets with premium thermal and crossover metallurgical coal provides tremendous optionality.

Our Competitive Strengths

We believe we are well-positioned to successfully execute our business strategies because of the following competitive strengths:

Focus on free cash flow generation supported by industry-leading margins and optimized production levels

We intend to continue our focus on maintaining high margins by optimizing production from our high-quality reserves and leveraging our extensive logistics infrastructure and broad market reach. The PAMC’s low-cost structure, high-quality product, favorable access to rail and port infrastructure, and diverse base of end-use customers allow it to move large volumes of coal at positive cash margins throughout a variety of market conditions. For example, despite challenging domestic market conditions in 2016, which caused total U.S. coal production to fall by 19% year-on-year, PAMC managed to grow production by 8%. For the year ended December 31, 2016, the PAMC generated an average cash margin per ton of $15.22 compared to the median cash margin per ton of $9.97 generated by other coal companies for domestic bituminous thermal coal operations, based on management review of publicly available data for the year ended December 31, 2016. Through our recent capital investment program, we have optimized our mining operations and logistics infrastructure to sustainably drive down our cash operating costs. Furthermore, our significant portfolio of multi-year, committed and priced contracts with our longstanding customer base will enhance our ability to sustain high margins in varied commodity price environments. We believe that these factors will help enable us to maintain higher margins per ton on average than our competitors and better position us to maintain profitability throughout commodity price cycles.

Extensive, High-Quality Reserve Base

The PAMC has extensive high-quality reserves of bituminous coal. We mine our reserves from the Pittsburgh No. 8 Coal Seam, which is a large contiguous formation of uniform, high-Btu coal that is ideal for high productivity, low-cost longwall operations. As of December 31, 2016, the PAMC included 766.7 million tons of proven and probable coal reserves that are sufficient to support at least 27 years of full-capacity production. The advantageous qualities of our coal enable us to compete for demand from a broader range of coal-fired power plants compared to mining operations in basins that typically produce coal with a comparatively lower heat content (ILB and PRB), higher sulfur content (ILB and most areas in NAPP) and higher chlorine content (certain areas of ILB). Our remaining reserves have an average as-received gross heat content of 12,970 Btu/lb (on an as-received basis), while production from the PRB, ILB, CAPP, and the rest of NAPP averages approximately 8,700 Btu/lb, 11,400 Btu/lb, 12,200 Btu/lb, and 12,000 Btu/lb, respectively (based on the average quality reported by EIA for U.S. power plant deliveries for the three years ended October 31, 2016). Moreover, our remaining reserves have an average sulfur content of 2.38% (on an as-received basis), while production from the Illinois Basin averages ~2.9% sulfur and production from the rest of NAPP averages ~3.1% sulfur (again based on EIA power plant delivery data for the three years ended October 31, 2016). With our high Btu content and low-cost structure, our 2016 total costs averaged $1.32 per mmBtu, which is lower than any monthly average Louisiana

 

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Henry Hub natural gas spot price during the past 20+ years, and provides a strong foundation for competing against natural gas even after accounting for differences in delivered costs and power plant efficiencies. In addition to the substantial reserve base associated with the PAMC, our 1.6 billion tons of Greenfield Reserves in NAPP, CAPP, and ILB feature both thermal and metallurgical reserves and provide additional optionality for organic growth or monetization as market conditions allow.

World-Class, Well-Capitalized, Low-Cost Longwall Mining Complex

Since 2006, we have invested over $2.0 billion at the PAMC ($1.4 billion of which has been invested in the past five years) to develop technologically advanced, large-scale longwall mining operations and related production and logistics infrastructure. We also have permanently sealed off 80 square miles of already-mined area, reducing the active areas of the mine to just 24.4 square miles and significantly limiting the area that we must ventilate and maintain. As a result, the PAMC is the most productive and efficient coal mining complex in NAPP, averaging 6.77 tons of coal production per employee hour in 2015-2016, compared to 4.94 tons of coal production per employee hour for other currently-operating NAPP longwall mines. As of June 30, 2017, productivity further increased to 7.43 tons of coal per employee hour, compared with an average of 5.24 tons per employee hour for all other currently-operating NAPP longwalls. We believe our substantial capital investment in the PAMC will enable us to maintain high production volumes, low operating costs and a strong safety and environmental compliance record, which we believe are key to supporting stable financial performance and cash flows throughout business and commodity price cycles. As a result, we expect to be able to mine the remaining 27+ years of reserves at the PAMC with only maintenance-of-production levels of capital expenditure.

Strategically Located Mining Operations with Advanced Distribution Capabilities and Excellent Access to Key Logistics Infrastructure

Our logistics infrastructure and proximity to coal-fired power plants in the eastern United States provide us with operational and marketing flexibility, reduce the cost to deliver coal to our core markets, and allow us to realize higher netback prices. We believe that we have a significant transportation cost advantage compared to many of our competitors, particularly producers in the ILB and PRB, for deliveries to customers in our core markets and to East Coast ports for international shipping. For example, based on publicly available data and internal estimates, we believe that the transportation cost advantage from our mines compared to ILB mines (not accounting for Btu differences) is approximately $3 to $8 per ton for coal delivered to foreign consumers in Europe and India, $4 to $8 per ton for coal delivered to domestic customers in the Carolinas, and an even more pronounced cost advantage for coal delivered to domestic customers in the mid-Atlantic states. Our ability to accommodate multiple unit trains at the Bailey Central Preparation Plant, which includes a dual-batch loadout facility capable of loading up to 9,000 tons of clean coal per hour and 19.3 miles of track with three sidings, allows for the seamless transition of locomotives from empty inbound trains to fully loaded outbound trains at our facility. Furthermore, the PAMC has among the best access to export infrastructure in the United States. Through our 100%-owned CNX Marine Terminal, served by both the Norfolk Southern and CSX railroads, we are able to participate in the world’s seaborne coal markets with premium thermal and crossover metallurgical coal, providing tremendous optionality.

Strong, Well-Established Customer Base Supporting Contractual Volumes

We have a well-established and diverse blue chip customer base, comprised primarily of domestic electric-power-producing companies located in the eastern United States. We have had success entering into multi-year coal sales agreements with our customers due to our longstanding relationships, reliability of production and delivery, competitive pricing and high coal quality. About 90% of our sales in 2016 were to customers that were in our 2015 portfolio, and each of our top 15 domestic power plant customers in 2016 have been in our portfolio for at least three consecutive years. In addition, to mitigate our exposure with respect to coal-fired power plant retirements, we have strategically developed our customer base to include power plants that are economically positioned to continue operating for the foreseeable future and that are equipped with state-of-the-art environmental controls. In 2016, approximately 4% of our total sales were to domestic power plant customers that have announced plans to retire between 2017 and 2023. Moreover, none of our top 15 customer plants,

 

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which accounted for 82% of our domestic power plant shipments in 2016, have announced plans to retire. These top 15 plants operated at a 15% higher capacity factor than other NAPP rail-served plants in 2016, highlighting their economic competitiveness even in a challenging power market. Since 2011, the Company has increased its market share at the Company’s top 15 customer plans from 12% to 32%. In addition to our robust domestic customer base, we also have favorable access to seaborne coal markets through our long-standing commercial relationship with a leading coal trading and brokering company that maintains a broad market presence with foreign coal consumers. We have consistently exported 3.4 to 5.6 million tons of PAMC coal to the seaborne thermal and crossover metallurgical markets in each year since 2011, which represents approximately 20% of annual sales volume.

Highly Experienced Management Team and Operating Team

Our management and operating teams have (i) significant expertise owning, developing and managing complex thermal and metallurgical coal mining operations, (ii) valuable relationships with customers, railroads and other participants across the coal industry, (iii) technical wherewithal and demonstrated success in developing new applications and customers for our coal products, in both the thermal and metallurgical markets, and (iv) a proven track record of successfully building, enhancing and managing coal assets in a reliable and cost-effective manner throughout all parts of the commodity cycle. We intend to leverage these qualities to continue to successfully develop our coal mining assets while efficiently and flexibly managing our operations to maximize operating cash flow.

Our Strategy

Our strategy is to safely and compliantly operate our assets to increase shareholder value through the execution of our strategic objectives:

Selectively pursue growth opportunities that maximize shareholder value by capitalizing on synergies with our assets and expertise

We plan to judiciously direct the cash generated by our operations toward those opportunities that present the greatest potential for value creation to our shareholders, particularly those that take advantage of synergies with our asset base and/or with the expertise of our management team. To effectuate this, we plan to regularly and rigorously evaluate opportunities both for organic growth and for acquisitions, joint ventures, and other business arrangements in the coal industry and related industries that complement our core operations. In addition, our ownership interest in CNXC provides us with a unique vehicle for generating cash and raising capital, through the potential future drop down of assets into CNXC, which if utilized will allow us to generate cash to assist in the execution of our growth strategy. Both the PAMC and our Greenfield Reserves present the potential for organic growth projects if long-term market conditions are favorable. For example, we are currently evaluating a project to improve the recovery and processing of fine coal from the Bailey Central Preparation Plant, which has the potential to add up to 1.5 million tons per year of additional clean coal production without additional mining of raw tons. Moreover, the Harvey Mine’s existing infrastructure, including its bottom development, slope belt, and material handling system, is able to support an additional permanent longwall mining system with moderate additional capital investment in mining equipment. Such an investment would further increase the annual production capacity of the PAMC by 5 million tons. Our Greenfield Reserves associated with the Mason Dixon and River Mine projects present additional organic growth opportunities in NAPP, and our Greenfield Reserves associated with the Itmann Mine, Martinka Mine, and Birch Mine provide actionable organic growth opportunities in the metallurgical coal space, should market conditions warrant. Our management team has extensive experience in developing, operating and marketing a wide variety of coal assets previously owned by ParentCo, and is well-qualified to evaluate organic and external growth opportunities. We intend to prudently use our interest in CNXC to benefit our growth strategy, and plan to carefully weigh any capital investment decisions against alternate uses of the cash to help ensure we are delivering the most value to our shareholders.

 

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Continue to grow our share at top-performing rail-served power plants in our core market areas, while opportunistically pursuing export and crossover metallurgical opportunities

We plan to seek to minimize our market risk and maximize realizations by continuing to focus on selling coal to strategically-selected, top-performing, rail-served power plants located in our core market areas in the eastern United States. Our top 15 power plant customers in 2016 have consistently consumed more than 50 million tons of coal per year in each of the past five years, have operated at a greater capacity factor than other NAPP rail-served plants, and have not announced plans to retire. We have grown our share at these plants from 12% in 2011 to 32% in 2016, and we believe we can continue to grow this share by displacing less competitive supply from NAPP, CAPP, and other basins. We also plan to continue to work on identifying and penetrating new customer plants that we believe are aligned with our strategic objectives and would be a good fit for our coal. To this end, we tested PAMC coal at five new customer plants in 2016. While the majority of our production is directed toward our established base of domestic power plant customers, many of which are secured through annual or multi-year contracts, we also plan to continue to flexibly and opportunistically place a smaller portion of our production in shorter-term opportunities in the export and crossover metallurgical markets. These markets provide us with pricing upside when markets are strong and with volume stability when markets are weak. As of June 30, 2017, the PAMC is fully contracted for 2017. For 2018 and 2019, our contracted position as of October 9, 2017 is at 80% and 41%, respectively, assuming a 27 million ton coal sales volume. We believe our committed and contracted position is well-balanced in hedging against market downside risk while allowing us to continue to build out our portfolio strategically and opportunistically as the market evolves.

Drive operational excellence through safety, compliance, and continuous improvement

We intend to continue focusing on our core values of safety, compliance and continuous improvement. We operate some of the most productive, lowest-cost underground mines in the coal industry, while simultaneously setting some of the industry’s highest standards for safety and compliance. From 2013 through 2016, our Mine Safety and Health Administration (MSHA) reportable incident rate was approximately 42% lower than the national average underground bituminous coal mine incident rate. Furthermore, our MSHA significant and substantial (S&S) citation rate per 100 inspection hours was approximately 23.5% lower than the industry’s average MSHA S&S citation rate over the twelve-month period ended June 30, 2017. We believe that our focus on safety and compliance promotes greater reliability in our operations, which fosters long-term customer relationships and lower operating costs that support higher margins. Consistent with our core value of continuous improvement, we have improved our productivity from 5.69 tons per employee hour in 2014 to 7.52 tons per employee hour in 2016, and have reduced our cash costs of coal sold per ton by 22.6% over this same period. We intend to continue to grow the economic competiveness of our operations by proactively identifying, pursuing, and implementing efficiency improvements and new technologies that can drive down unit costs without compromising safety or compliance.

Ability to Grow Cash Flow through Drop-Downs into CNXC

Our controlling ownership interest in CNX Coal Resources LP provides us with a unique vehicle for generating cash and raising capital to pursue our growth strategy. Over time we may drop down assets into CNXC. We believe that such drop-downs, if utilized, would allow us to grow CNXC’s ability to make distributions and potentially increase the value of the units and incentive distribution rights of CNXC that we hold. Furthermore, the cash generated from these drop-downs could help us to accelerate the execution of our growth strategy. Finally, we believe that our different classes of securities (C-Corp and MLP) provide us with multiple options for accessing capital markets and taking advantage of the best available cost of capital at any given point in time. We believe this is a unique advantage for us compared to other companies in the coal industry.

 

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Detail Coal Operations.

Coal Reserves.

At December 31, 2016, CoalCo had an estimated 2.4 billion tons of proven and probable coal reserves. As of December 31, 2016, the PAMC included 766.7 million tons of proven and probable coal reserves that are sufficient to support at least 27 years of full-capacity production. Reserves are the portion of the proven and probable tonnage that meet CoalCo’s economic criteria regarding mining height, preparation plant recovery, depth of overburden and stripping ratio. Generally, these reserves would be commercially mineable at year-end price and cost levels. Spacing of points of observation for confidence levels in reserve calculations is based on guidelines in U.S. Geological Survey Circular 891 (Coal Resource Classification System of the U.S. Geological Survey). Our estimates for proved reserves have the highest degree of geologic assurance. Estimates for proved reserves are based on points of observation that are equal to or less than 0.5 miles apart. Estimates for probable reserves have a moderate degree of geologic assurance and are computed from points of observation that are between 0.5 to 1.5 miles apart. An exception is made concerning spacing of observation points with respect to our Pittsburgh coal seam reserves. Because of the well-known continuity of this seam, spacing requirements are 3,000 feet or less for proved reserves and between 3,000 and 8,000 feet for probable reserves.

CoalCo’s estimates of proven and probable coal reserves do not rely on isolated points of observation. Small pods of reserves based on a single observation point are not considered; continuity between observation points over a large area is necessary for proved or probable reserves. Estimates of the Company’s coal reserves have historically been calculated both by internal geologists and engineers employed by ParentCo, and independent third parties. Reserve estimates and evaluation processes are periodically audited by independent third parties to ensure accuracy. CoalCo’s proven and probable coal reserves fall within the range of commercially marketed coals in the United States. The marketability of coal depends on its value-in-use for a particular application, and this is affected by coal quality, such as sulfur content, ash and heating value. Modern power plant boiler design aspects can compensate for coal quality differences that occur. Therefore, any of CoalCo’s coals can be marketed for the electric power generation industry.

CoalCo’s proven and probable coal reserves include 87.0 million tons of undeveloped reserves that are classified as high-vol, mid-vol, or low-vol metallurgical coal. Additionally, the growth in worldwide demand for metallurgical coal allows some of our proven and probable coal reserves, currently classified as thermal coals but that possess certain qualities, to be sold as metallurgical coal. The extent to which we can sell thermal coals as crossover metallurgical coals depends upon a number of factors, including the quality characteristics of the reserve, the specific quality requirements and constraints of the end-use customer, and market conditions (which affect whether customers are compelled to substitute lower-quality crossover coals for higher-quality metallurgical coals in their blends to realize economic benefits). The addition of this cross-over market adds additional assurance to CoalCo that all of its proven and probable coal reserves are commercially marketable.

CoalCo assigns coal reserves to our mining complex. The amount of coal we assign to the mining complex generally is sufficient to support mining through the duration of our current mining permit. Under federal law, we must renew our mining permits every five years. All assigned reserves have their required permits or governmental approvals, or there is a high probability that these approvals will be secured. In addition, our mining complex may have access to additional reserves that have not yet been assigned. We refer to these reserves as accessible. Accessible reserves are proven and probable coal reserves that can be accessed by an existing mining complex, utilizing the existing infrastructure of the complex to mine and to process the coal in this area. Mining an accessible reserve does not require additional capital spending beyond that required to extend or to continue the normal progression of the mine, such as the sinking of airshafts or the construction of portal facilities.

Some reserves may be accessible by more than one mine because of the proximity of many of our mines to one another. In the table below, the accessible reserves indicated for a mine are based on our review of current mining plans and reflect our best judgment as to which mine is most likely to utilize the reserve. Assigned and

 

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unassigned coal reserves are proven and probable coal reserves which are either owned or leased. The leases have terms extending up to 30 years and generally provide for renewal through the anticipated life of the associated mine. These renewals are exercisable by the payment of minimum royalties. Under current mining plans, assigned reserves reported will be mined out within the period of existing leases or within the time period of probable lease renewal periods.

Mining Complexes

Bailey Mine. The Bailey mine is the first mine that CONSOL Energy developed at the Pennsylvania mining complex. As of December 31, 2016, the Bailey mine’s assigned and accessible reserve base contained an aggregate of 259.7 million tons of clean recoverable proven and probable coal with an average as-received gross heat content of approximately 12,900 Btus per pound and an approximate average pounds of SO2 per million British thermal units (mmBtu) of 4.1. While operating two longwalls, the production capacity of the Bailey mine is 11.5 million tons of coal per year. Construction of the slope and initial air shaft began in 1982. The slope development reached the coal seam at a depth of approximately 600 feet and, following development of the slope bottom, commercial coal production began in 1984. Longwall mining production commenced in 1985, and the second longwall was placed into operation in 1987. In 2010, a new slope and overland belt system was commissioned, which allowed a large percentage of the Bailey mine to be sealed off. For the years ended December 31, 2016, 2015 and 2014, the Bailey mine produced 12.1, 10.2 and 12.3 million tons of coal, respectively. The Bailey mine uses approximately seven continuous mining units to develop the mains and gate roads for its longwall panels. The longwalls have a panel width (or face length) of approximately 1,500 feet, a panel length of approximately 12,000 feet and a seam height of approximately 7.5 feet.

Enlow Fork Mine. The Enlow Fork mine is located directly north of the Bailey mine. As of December 31, 2016, the Enlow Fork mine’s assigned and accessible reserve base contained an aggregate of 306.5 million tons of clean recoverable proven and probable coal with an average as-received gross heat content of approximately 13,000 Btus per pound and an approximate average lb SO2/mmBtu of 3.5. While operating two longwalls, the production capacity of the Enlow Fork mine is 11.5 million tons of coal per year. Initial underground development was started from the Bailey mine while the Enlow Fork slope was being constructed. Once the slope bottom was developed and the slope belt became operational, seals were constructed to separate the two mines. Following development of the slope bottom, commercial coal production began in 1989. Longwall mining production commenced in 1991 with the second longwall coming online in 1992. In 2014, a new slope and overland belt system was commissioned and a substantial portion of the Enlow Fork mine was sealed. For the years ended December 31, 2016, 2015 and 2014, the Enlow Fork mine produced 9.6, 9.0 and 10.6 million tons of coal, respectively. The Enlow Fork mine uses approximately seven continuous mining units to develop the mains and gate roads for its longwall panels. The longwalls have a panel width (or face length) of approximately 1,500 feet, a panel length of approximately 12,000 feet and a seam height of approximately 7.8 feet.

Harvey Mine. The Harvey mine is located directly east of the Bailey and Enlow Fork mines. As of December 31, 2016, the Harvey mine’s assigned and accessible reserve base contained an aggregate of 200.5 million tons of clean recoverable proven and probable coal with an average as-received gross heat content of approximately 12,900 Btus per pound and an approximate average lb SO2/mmBtu of 3.4. While operating one longwall, the production capacity of the Harvey mine is 5.5 million tons of coal per year. Similar to the Enlow Fork mine, the Harvey mine was developed off of the Bailey mine’s slope bottom. Once the slope for the Harvey mine was placed into operation, seals were built to separate the two mines, and the original slope was dedicated solely to the Harvey mine, which eliminated the need to make significant capital expenditures to develop, among other things, a new slope, air shaft and portal facility. Development of the Harvey mine began in 2009, and construction of the supporting surface facilities commenced in 2011. Longwall mining production commenced in March 2014. For the years ended December 31, 2016, 2015 and 2014, the Harvey mine produced 3.0, 3.6 and 3.2 million tons of coal, respectively. The Harvey mine uses approximately four continuous mining units to develop the mains and gate roads for its longwall panels. The longwall has a panel width (or face length) of approximately 1,500 feet, a panel length of approximately 15,000 feet and a seam height of approximately 6.3

 

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feet. The Harvey mine’s existing infrastructure, including its bottom development, slope belt and material handling system, has the capacity to add one incremental permanent longwall mining system with additional mine development and capital investment.

The following table provides the location of CoalCo’s active mining complexes and the coal reserves associated with each operation.

 

Proven and Probable Assigned and Accessible Coal Reserves as of December 31, 2016 and 2015
    Preparation
Facility
Location
  Reserve
Class
  Coal
Seam
  Average
Seam
Thickness
(feet)
  As Received Heat
Value(1)
(Btu/lb)
  Recoverable Reserves(2)
              Owned
(%)
  Leased
(%)
  Tons in
Millions

Mine/
Reserve

          Typical   Range       12/31/2016   12/31/2015

ASSIGNED–OPERATING

PA Mining Operations

Bailey

  Enon, PA   Assigned Operating   Pittsburgh   7.5   12,950   12,860 –

13,030

  43%   57%   89.0   101.1
    Accessible   Pittsburgh   7.5   12,910   12,700 –

13,170

  78%   22%   170.7   170.7

Harvey

  Enon, PA   Assigned Operating   Pittsburgh   6.3   13,040   12,920 –

13,160

  86%   14%   20.4   23.4
    Accessible   Pittsburgh   7.6   12,900   12,840 –

13,130

  99%   1%   180.1   180.1

Enlow Fork

  Enon, PA   Assigned Operating   Pittsburgh   7.8   12,980   12,820 –

13,190

  99%   1%   31.2   10.9
    Accessible   Pittsburgh   7.6   13,040   12,780 –

13,180

  76%   24%   275.3   305.3
                 

 

 

 

Total Assigned Operating and Accessible

  766.7   791.5
                 

 

 

 

                 

 

 

 

 

(1)

The heat values shown for Assigned Operating reserves are based on the 2016 actual quality and five-year forecasted quality for each mine/reserve, assuming that the coal is washed to an extent consistent with normal full-capacity operation of the complex’s preparation plant. Actual quality is based on laboratory analysis of samples collected from coal shipments delivered in 2016. Forecasted quality is derived from exploration sample analysis results, which have been adjusted to account for anticipated moisture and for the effects of mining and coal preparation. The heat values shown for Accessible Reserves are based on as received, dry values obtained from drill hole analyses, adjusted for moisture, and prorated by the associated Assigned Operating product values to account for similar mining and processing methods.

 

(2)

Recoverable reserves are calculated based on the area in which mineable coal exists, coal seam thickness, and average density determined by laboratory testing of drill core samples. This calculation is adjusted to account for coal that will not be recovered during mining and for losses that occur if the coal is processed after mining. Reserves tons are reported on an as-received basis, based on the anticipated product moisture. Reserves are reported only for those coal seams that are controlled by ownership or leases.

 

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The following table sets forth our unassigned proven and probable coal reserves by region:

 

CoalCo Unassigned Recoverable Coal Reserves as of December 31, 2016 and 2015  
            Recoverable Reserves(2)      Recoverable
Reserves
(Tons in
Millions)
12/31/2015
 

Coal Producing Region

   As Received Heat
Value(1) (Btu/lb)
     Owned
(%)
     Leased
(%)
     Tons in
Millions
12/31/2016
    

Northern Appalachia (Pennsylvania, Ohio, Northern West Virginia) (3)

     11,400 – 13,400         85%         15%         1,054.0         1,054.4   

Central Appalachia (Virginia, Southern West Virginia)

     12,400 – 14,100         77%         23%         157.2         260.0   

Illinois Basin (Illinois, Western Kentucky, Indiana)

     11,600 – 12,000         79%         21%         348.7         396.1   
           

 

 

    

 

 

 

Total

        83%         17%             1,559.9             1,710.5   
           

 

 

    

 

 

 
           

 

 

    

 

 

 

 

(1)

The heat value (gross calorific values) estimates for Northern Appalachian and Central Appalachian Unassigned coal reserves include adjustments for moisture that may be added during mining or processing as well as for dilution by rock lying above or below the coal seam. The heat value estimates for the Illinois Basin Unassigned reserves are based primarily on exploration drill core data that may not include adjustments for moisture added during mining or processing, or for dilution by rock lying above or below the coal seam.

 

(2)

Recoverable reserves are calculated based on the area in which mineable coal exists, coal seam thickness, and average density determined by laboratory testing of drill core samples. This calculation is adjusted to account for coal that will not be recovered during mining and for losses that occur if the coal is processed after mining. Reserve calculations do not include adjustment for moisture that may be added during mining or processing, nor do the calculations include adjustments for dilution from rock lying above or below the coal seam. Reserves are reported only for those coal seams that are controlled by ownership or leases.

 

(3)

140.8 Million tons of the Northern Appalachia leased tons are controlled by Consolidation Coal Company, a former subsidiary of ParentCo that was sold in December 2013. As of filing these tons are still controlled by Consolidation Coal Company but are shown in CoalCo’s reserves due to a binding agreement that these tons will be released to CoalCo following consent of the lessor.

 

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The following table classifies CoalCo coals by rank, projected sulfur dioxide emissions and heating value (Btu per pound). The table also classifies bituminous coals as high, medium and low volatile which is based on fixed carbon and volatile matter.

 

 CoalCo Proven and Probable Recoverable Coal Reserves

By Product (In Millions of Tons) as of December 31, 2016

 
     £ 1.20 lbs.     > 1.20 £ 2.50 lbs.     > 2.50 lbs.              
     S02/MMBtu     S02/MMBtu     S02/MMBtu              
     Low     Med     High     Low     Med     High     Low     Med     High           Percent
By
 

By Region

   Btu     Btu     Btu     Btu     Btu     Btu     Btu     Btu     Btu     Total     Product  

Metallurgical(1):

                  

High Vol A Bituminous

     —        —        —        —        —        39.6        —        —        —        39.6        1.7%   

Med Vol Bituminous

     —        5.1        —        —        —        —        —        —        —        5.1        0.2%   

Low Vol Bituminous

     —        —        16.0        —        —        26.3        —        —        —        42.3        1.8%   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Metallurgical

     —        5.1        16.0        —        —        65.9        —        —        —        87.0        3.7%   

Thermal(1):

                  

High Vol A Bituminous

     —        46.0        —        6.1        65.4        12.9        44.5        1,134.4        611.7        1,921.0        81.4%   

High Vol B Bituminous

     —        —        —        —        101.1        —        —        139.3        —        240.4        10.3%   

High Vol C Bituminous

     —        —        —        —        —        —        108.3        —        —        108.3        4.6%   

Low Vol Bituminous

     —        —        —        —        —        —        —        —        4.5        4.5        0.2%   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Thermal

     —        46.0        —        6.1        166.5        12.9        152.8        1,273.7        616.2        2,274.2        96.3%   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     —         51.1         16.0         6.1         166.5         78.8         152.8         1,273.7         616.2         2,361.2        100.0%   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of Total

         —     2.2 %       0.7 %       0.3 %       7.1 %       3.2 %       6.5 %       53.9 %       26.1 %       100.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

(1)

143.3 Million tons for the Mason Dixon Project are controlled by Consolidation Coal Company, a former subsidiary of ParentCo that was sold in December 2013. As of this filing, these tons are still controlled by Consolidation Coal Company but are shown in CoalCo’s reserves due to a binding agreement that these tons will be released upon consent of the lessor.

Title to coal properties that we lease or purchase and the boundaries of these properties are verified by law firms retained by us at the time we lease or acquire the properties. Consistent with industry practice, abstracts and title reports are reviewed and updated approximately five years prior to planned development or mining of the property. If defects in title or boundaries of undeveloped reserves are discovered in the future, control of and the right to mine reserves could be adversely affected.

The following table sets forth, with respect to properties that we lease to other coal operators, the total royalty tonnage, acreage leased and the amount of income (net of related expenses) we received from royalty payments for the years ended December 31, 2016, 2015 and 2014.

 

Year

   Total
Royalty
Tonnage
(in thousands)
   Total
Coal
Acreage
Leased
   Total
Royalty
Income
(in thousands)
2016    3,530     213,371     $9,684 
2015    7,459     235,066     $14,914 
2014    10,230     281,894     $18,460 

Royalty tonnage leased to third parties is not included in the amounts of produced tons that we report. Proven and probable reserves do not include reserves attributable to properties that we lease to third parties.

Production

In the year ended December 31, 2016, 100% of CoalCo’s production came from underground mines equipped with longwall mining systems. CoalCo employs longwall mining systems in our underground mines where the geology is favorable and reserves are sufficient. Underground longwall systems are highly mechanized, capital

 

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intensive operations. Mines using longwall systems have a low variable cost structure compared with other types of mines and can achieve high productivity levels compared with those of other underground mining methods. Because CoalCo has substantial reserves readily suitable to these operations, CoalCo believes that these longwall mines can increase capacity at a low incremental cost.

The following table shows the production, in millions of tons, for CoalCo’s mines for the years ended December 31, 2016, 2015 and 2014, the location of each mine, the type of mine, the type of equipment used at each mine, method of transportation and the year each mine was established or acquired by us.

 

       Preparation                           Tons Produced      Year  
       Facility      Mine      Mining             (in millions)      Established  

Mine

     Location      Type      Equipment      Transportation      2016      2015      2014      or Acquired  

PA Mining Operations

                          

Bailey

 

     Enon, PA        U        LW/CM        R R/B        12.1         10.2         12.3         1984   

Enlow Fork

 

     Enon, PA        U        LW/CM        R R/B        9.6         9.0         10.6         1990   

Harvey(1)

 

     Enon, PA        U        LW/CM        R R/B        3.0         3.6         3.2         2014   
                 

 

 

    

 

 

    

 

 

    

Total

 

     24.7         22.8         26.1      
                 

 

 

    

 

 

    

 

 

    

 

 

S

 

  

Surface

U

 

  

Underground

LW

 

  

Longwall

CM

 

  

Continuous Miner

S/L

 

  

Stripping Shovel and Front End Loaders

R

 

  

Rail

R/B

 

  

Rail to Barge

T

 

  

Truck

(1)

 

  

Completed development work and was placed in service in March 2014. Normalized for a full-year of production, tons produced for the Harvey mine in 2014 would have totaled an estimated 4.6 million tons, and tons produced across all three mines would have totaled an estimated 27.5 million tons.

Coal Marketing and Sales

The following table sets forth the Company produced tons sold and average sales price for the period indicated:

 

     Years Ended December 31,  
     2016      2015      2014  

Company Produced Tons Sold (in millions)

     24.6         22.9         26.1   

Average Sales Price Per Ton Sold

   $             43.31       $             56.36       $             61.88   

We sell coal produced by our mines and additional coal that is purchased by us for resale from other producers. We maintain United States sales offices in Philadelphia and Pittsburgh. In addition, we sell coal through agents and to brokers and unaffiliated trading companies. Approximately 75% of our 2016 coal sales were made to U.S. electric generators, 22% of our 2016 coal sales were priced on export markets and 3% of our coal sales were made to other domestic customers. We had sales to over 35 customers from our 2016 coal operations. During 2016, two customers each comprised over 10% of our coal sales, and the top four coal customers accounted for over 40% of our coal sales. Annual metallurgical coal revenues for the past three years ranged from $58.3 million to $74.7 million.

Coal Contracts and Pricing

We sell coal to an established customer base through opportunities as a result of strong business relationships, or through a formalized bidding process. Contract volumes range from a single shipment to multi-year agreements for millions of tons of coal. The average contract term is between one to three years. As a normal course of

 

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business, efforts are made to renew or extend contracts scheduled to expire. Although there are no guarantees, we generally have been successful in renewing or extending contracts in the past. For the year ended December 31, 2016, over 65% of all the coal we produced was sold under contracts with terms of one year or more.

CoalCo expects total Consolidated PA Mining Operations annual sales to be approximately 25.6-27.6 million tons for 2017 and 27.0 million tons for 2018. Coal pricing for contracts with terms of one year or less are generally fixed. Coal pricing for multiple-year agreements generally provide the opportunity to periodically adjust the contract prices through pricing mechanisms consisting of one or more of the following:

 

   

Fixed price contracts with pre-established prices;

 

   

Periodically negotiated prices that reflect market conditions at the time;

 

   

Price restricted to an agreed-upon percentage increase or decrease;

 

   

Base-price-plus-escalation methods which allow for periodic price adjustments based on inflation indices, or other negotiated indices; or

 

   

Netback pricing.

The volume of coal to be delivered is specified in each of our coal contracts. Although the volume to be delivered under the coal contracts is stipulated, the parties may vary the timing of the deliveries within specified limits. Coal contracts typically contain force majeure provisions allowing for the suspension of performance by either party for the duration of specified events. Force majeure events include, but are not limited to, unexpected significant geological conditions or natural disasters. Depending on the language of the contract, some contracts may terminate upon continuance of an event of force majeure that extends for a period greater than three to twelve months.

Of our 2016 sales tons, approximately 75% were sold to U.S. electric generators, 14% were priced on export thermal markets, 8% were priced on export metallurgical markets and 3% were sold to other domestic customers. In 2016 we derived greater than 10% of our total coal sales revenue from two customers: Duke Energy Corporation and GenOn Energy, Inc. As of December 31, 2016, we had approximately nine sales agreements with these customers that expire at various times between 2017 and 2018.

During the past three years, our average realization (sales price per ton sold) for coal produced from the PAMC decreased from $61.88/ton in 2014 to $56.36/ton in 2015 to $43.31/ton in 2016. However, our average realization has since rebounded from a low of $40.61/ton during the second quarter of 2016 to $46.80 during the first quarter of 2017. Pricing for our product depends strongly on conditions in the domestic thermal coal market, which accounted for at least 75% of our total sales volumes in each of 2014, 2015, and 2016.

The prices we are able to achieve in the domestic thermal market depend on a number of factors, including: (i) the supply-demand balance for Northern Appalachian coal, (ii) prices for other competing sources of energy used for electricity generation, such as natural gas, (iii) power prices in the regions we serve, (iv) prices for coals from other basins (including the Central Appalachian Basin, Illinois Basin, and Powder River Basin) that compete in these same regions, and (v) pricing under our longer-term contracts, which may have been entered into under different market conditions. For example, the 30% decrease in our average realization from 2014 to 2016 occurred during a period when Henry Hub spot natural gas prices decreased by 42%, from an average of $4.37/mmBtu in 2014 to an average of $2.52/mmBtu in 2016, putting pressure on power prices and on the demand for coal-fired electric power generation.

Moreover, abnormally mild weather during the winter of 2015-2016 disrupted the coal supply-demand balance and caused U.S. power plant coal inventories to swell, further pressuring domestic thermal pricing and demand. At the same time, imbalances in global supply and demand for coal caused substantial declines in pricing in the two other primary markets we serve – the export thermal market and the export metallurgical market – during the

 

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2014-2016 period. For example, prompt month API 2 index prices (the benchmark price reference for coal imported into northwest Europe) averaged about 32% lower during the first nine months of 2016 than they did during calendar year 2014, and quarterly global coking coal benchmark prices also averaged about 32% lower during the first nine months of 2016 than they did in calendar year 2014. Pricing in all three of our primary markets began to recover during the latter part of 2016, and by Q1 2017, both the API 2 and the global coking coal benchmark were above 2014 levels, and Henry Hub spot natural gas prices were up by just over $1/mmBtu vs. the year-ago quarter. This helped to drive the rebound in pricing for our coal noted above.

Distribution

Coal is transported from CoalCo’s mining operations to customers by railroad cars, trucks, vessels or a combination of these means of transportation. Most customers negotiate their own transportation rates and we employ transportation specialists who negotiate freight and equipment agreements with various transportation suppliers, including railroads, barge lines, terminal operators, ocean vessel brokers and trucking companies for certain customers.

Coal Competition

Both the domestic and international coal industries are highly competitive, with numerous producers selling into all markets that use coal. CoalCo competes against several other large producers and numerous small producers in the United States and overseas. Demand for our coal by our principal customers is affected by many factors including:

 

   

the price of competing coal and alternative fuel supplies, including nuclear, natural gas, oil and renewable energy sources, such as hydroelectric power, wind or solar;

 

   

environmental and government regulation;

 

   

coal quality;

 

   

transportation costs from the mine to the customer;

 

   

the reliability of fuel supply;

 

   

worldwide demand for steel;

 

   

natural disasters/weather; and

 

   

political changes in international governments.

Continued demand for CoalCo’s coal and the prices that CoalCo obtains are affected by demand for electricity, technological developments, environmental and governmental regulation, and the availability and price of competing coal and alternative fuel supplies. We sell coal to foreign electricity generators which are significantly affected by international demand and competition.

CNX Coal Resources LP

In July 2015, CNX Coal Resources LP (CNXC) closed its initial public offering of 5,000,000 common units representing limited partnership interests at a price to the public of $15.00 per unit. The underwriters in the CNXC initial public offering exercised an over-allotment option to purchase and resell 561,067 common units to the public at $15.00 per unit. CNXC’s general partner is CNX Coal Resources GP LLC (the CNXC GP), which upon separation and distribution will be a wholly owned subsidiary of CoalCo.

In September 2016, CNXC and its wholly owned subsidiary, CNX Thermal Holdings LLC (CNX Thermal), entered into a Contribution Agreement with CONSOL Energy, Consol Pennsylvania Coal Company LLC and

 

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Conrhein Coal Company (the Contributing Parties) under which CNX Thermal acquired an additional 5% undivided interest in and to the Pennsylvania Mine Complex, in exchange for (i) cash consideration in the amount of $21.5 and (ii) CNXC’s issuance of 3,956,496 Class A Preferred Units representing limited partner interests in CNXC at an issue price of $17.01 per Class A preferred Unit, or an aggregate $67.3 in equity consideration.

On October 2, 2017, ParentCo provided a conversion notice to CNXC with respect to all Class A Units owned by it, and thereafter caused all such Class A Units to convert, on a 1-to-1 ratio, into common units representing limited partner interests in CNXC.

Upon completion of the separation and distribution, CoalCo, or its subsidiaries, will hold all of ParentCo’s current ownership interest in CNXC, which consists of (i) 5,006,496 common units and 11,611,067 subordinated units (representing a 60.1 percent limited partnership interest), and (ii) 1.7% general partner interest and all incentive distribution rights (IDRs). Subordinated units are not entitled to any distribution from CNXC unless CNXC makes a minimum quarterly distribution of $0.4678 per Class A Preferred Unit and $0.5125 per common unit. CNXC made minimum distributions per subordinated unit equal to the distribution per common unit for five of the six quarters since CNXC’s IPO. CNXC did not meet the requirement for a subordinated unit distribution with respect to fiscal quarter ended June 30, 2016. IDRs entitle the holder to receive increasing percentages, up to a maximum of 48%, of the available cash CNXC distributes from operating surplus in excess of $0.5894 per unit per quarter. The maximum distribution of 48% does not include any distributions that the CNXC GP or its affiliates may receive on common units, subordinated units, preferred units or the CNXC GP interest that they own. CNXC has entered into various agreements with ParentCo and certain of its affiliates, which generally will be assumed by CoalCo as part of the separation and distribution.

Terminal Services

In 2016, approximately 8.1 million tons of coal were shipped through CoalCo’s subsidiary, CNX Marine Terminals Inc.‘s, exporting terminal in the Port of Baltimore. Approximately 57% of the tonnage shipped was produced by CoalCo’s PA Mining Operations. The terminal can either store coal or load coal directly into vessels from rail cars. It is also one of the few terminals in the United States served by two railroads, Norfolk Southern Corporation and CSX Transportation Inc. CNX Marine Terminal has significant storage capacity of 1.1 million tons with more than thirty acres of capacity for stockpiles. The facility possesses extensive blending capabilities, and has handled over 10 million tons of coal per year on average since 2010, with a potential maximum throughput capacity of 15 million tons annually. Since mid-2016 CNX Marine Terminal has been operated as a standalone business, rather than a captive entity of ParentCo.

Non-Core Coal Assets and Surface Properties

CoalCo owns significant coal assets that are not in our short or medium term development plans. We continually explore the monetization of these non-core assets by means of sale, lease, contribution to joint ventures, or a combination of the foregoing in order to bring the value of these assets forward for the benefit of our stockholders.

Employee and Labor Relations

At December 31, 2016, CoalCo would have had 1,661 employees.

Laws and Regulations

Overview

Our coal mining operations are subject to various types of federal, state and local laws and regulations. Regulations relating to our operations include permitting and other licensing requirements; reclamation and restoration of properties after coal mining operations are completed; storage, transportation and disposal of

 

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materials used or generated by mining operations; the calculation, reporting and disbursement of taxes; surface subsidence from underground mining; discharge of water from coal mining operations; air quality standards; protection of wetlands; endangered plant and wildlife protection; and employee health and safety. Numerous governmental permits and approvals under these laws and regulations are required for mining operations. Lastly, the electric power generation industry is subject to extensive regulation regarding the environmental impact of its power generation activities, which could affect demand for our coal products.

Compliance with these laws has substantially increased the cost of mining of coal for all coal producers. We post surety performance bonds or letters of credit pursuant to federal and state mining laws and regulations for the estimated costs of reclamation and mine closing, often including the cost of treating mine water discharge. We endeavor to conduct our mining operations in compliance with all applicable federal, state and local laws and regulations. However, because of extensive and comprehensive regulatory requirements against a backdrop of variable geologic and seasonal conditions, permit exceedances and violations during mining operations can and do occur. The possibility exists that new legislation or regulations may be adopted which would have a significant impact on our coal mining operations or our customers’ ability to use our coal and may require us or our customers to change their operations significantly or incur substantial costs.

CoalCo is committed to complying with all laws and regulations. This commitment is evident in CoalCo’s demonstrated cost and effort to abate and control pollution and/or contamination at its facilities. CoalCo made capital expenditures for environmental control facilities of approximately $0.6 million, $18.4 million, and $19.0 million in the years ended December 31, 2016, 2015 and 2014, respectively. CoalCo does not expect to have any capital expenditures in 2017 for environmental control facilities.

Environmental Laws

Clean Air Act and Related Regulations. The federal Clean Air Act (CAA) and corresponding state laws and regulations regulate air emissions primarily through permitting and/or emissions control requirements, which affects coal mining, coal handling, and processing. We are required to obtain pre-approval for construction or modification of certain facilities, to meet stringent air permit requirements, or to use specific equipment, technologies or best management practices to control emissions. The CAA indirectly and significantly affects the U.S. coal industry by extensively regulating the air emissions of coal-fired electric power generating plants operated by our customers. Coal contains impurities, such as sulfur, mercury and other constituents, many of which are released into the air when coal is burned. Carbon dioxide (CO2), a regulated GHG, is also emitted when coal is burned. Environmental regulations governing emissions from coal-fired electric generating plants increase the costs to operate and could affect demand for coal as a fuel source and affect the volume of our sales. Moreover, additional environmental regulations increase the likelihood that existing coal-fired electric generating plants will be decommissioned, including plants to which CoalCo sells coal to, and reduce the likelihood that new coal-fired plants will be built in the future.

In early 2012, the EPA promulgated or finalized several rules for New Source Performance Standards (NSPS) for coal- and oil- fired power plants which also have a negative effect on coal-generating facilities. The Utility Maximum Control Technology (UMACT) rule requires more stringent NSPS for particulate matter (PM), SO2 and nitrogen oxides (NOX) and the Mercury and Air Toxics Standards (MATS) rule requires new mercury and air toxic standards. In November 2012, the EPA published a notice of reconsideration of certain aspects of the UMACT and MATS rules. Following reconsideration in April 2013 and again in April 2014, the EPA promulgated final UMACT and MATS rules in November 2014 at which point the standards become applicable to new power plants. The final rules have higher emission limits, but the standards are still stringent and compliance with the rules is expensive.

The CAA requires the EPA to set National Ambient Air Quality Standards (NAAQS) for certain pollutants and the CAA identifies two types of NAAQS. Primary standards provide public health protection, including protecting the health of “sensitive” populations such as asthmatics, children, and the elderly. Secondary standards

 

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provide public welfare protection, including protection against decreased visibility and damage to animals, crops, vegetation, and buildings. On October 1, 2015, the EPA finalized the NAAQS for ozone pollution and reduced the limit to 70 parts per billion (ppb) from the previous 75 ppb standard. The final rule could have a large impact on the coal mining industry as states would be required to update their permitting standards to meet these potentially unachievable limits. Six states have now filed a petition for review in the Court of Appeals for the D.C. Circuit.

On July 6, 2011, the EPA finalized a rule known as the Cross-State Air Pollution Rule (CSAPR). CSAPR regulates cross-border emissions of criteria air pollutants such as SO2 and NOX, as well as byproducts, fine particulate matter (PM2.5) and ozone by requiring states to limit emissions from sources that “contribute significantly” to noncompliance with air quality standards for the criteria air pollutants. If the ambient levels of criteria air pollutants are above the thresholds set by the EPA, a region is considered to be in “nonattainment” for that pollutant and the EPA applies more stringent control standards for sources of air emissions located in the region. In April 2014, the Supreme Court reversed a decision of the D.C. Circuit Court of Appeals that vacated the rule. Following remand and briefing, in October 2014 the D.C. Circuit Court of appeals granted a motion to lift a stay of the rule and allow the EPA to modify the CSAPR compliance deadline by three-years, setting the stage for issuance of the proposed rule. Implementation of CSAPR phase 1 began in 2015, with phase 2 beginning in 2017. On September 7, 2016, the EPA finalized an update to the CSAPR for the 2008 ozone NAAQS by issuing the final CSAPR update.

On March 27, 2012, the EPA published its proposed NSPS for CO2 emissions from new coal-powered electric generating units. The proposed rule would have applied to new power plants and to existing plants that make major modifications. If the rule had been adopted as proposed, only new coal-fired power plants with CO2 capture and storage (CCS) could have met the proposed emission limits. Commercial scale CCS is not likely to be available in the near future, and if available, it may make coal-fired electric generation units uneconomical compared to new gas-fired electric generation units. On January 8, 2014, the EPA re-proposed NSPS for CO2 for new fossil fuel fired power plants and rescinded the rules that were proposed on April 12, 2012.

On September 20, 2013, the EPA issued a new proposal to control carbon emissions from new power plants. Under the CPP proposal, the EPA would establish separate NSPS for CO2 emissions for natural gas-fired turbines and coal-fired units. The proposed “Carbon Pollution Standard for New Power Plants” replaces the earlier proposal released by the EPA in 2012. On August 3, 2015, the EPA finalized the Carbon Pollution Standards to cut carbon emissions from new, modified and reconstructed power plants, which would have become effective on October 23, 2015.

On June 2, 2014, the EPA proposed additional CPP regulations to cut carbon emissions from existing power plants. Under this proposed rule, the EPA would create emission guidelines for states to follow in developing plans to address GHG emissions from existing fossil fuel-fired electric generating units. Specifically, the EPA is proposing state-specific rate-based goals for CO2 emissions from the power sector, as well as guidelines for states to follow in developing plans to achieve the state-specific goals.

On August 3, 2015, the EPA finalized the CPP Rule to cut carbon pollution from existing power plants, which would have become effective on December 22, 2015. Numerous petitions challenging the CPP Rule have been consolidated into one case, West Virginia v. EPA. While the litigation is still ongoing at the circuit court level, a mid-litigation application to the Supreme Court resulted in a stay of the CPP Rule. On September 27, 2016, an en banc panel of the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the case. The decision, originally expected in early 2017, has been stayed as a result of a March 28, 2017 executive order directing the EPA to begin the process of reviewing and possibly rescinding the CPP Rule. The EPA filed a motion and the motion was granted by the U.S. Court of Appeals for the D.C. Circuit requesting the stay while the EPA conducts their review of the CPP Rule. If the review does not result in any rule changes, the U.S. Court of Appeals for the D.C. Circuit will rule on the legality of the CPP Rule. On October 10, 2017, the EPA formally proposed repeal of the CPP, which relies on a re-interpretation of CAA 111(d), on which the CPP was originally premised.

 

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The current Administration’s executive order promoting energy independence and economic growth issued on March 28, 2017 requires the review of existing regulations that potentially burden the development or use of domestically produced energy resources. The review of existing regulations may not result in any changes and any changes made to existing regulations may not produce the intended favorable results desired by the new Administration. The executive order also directed the Council on Environmental Quality to rescind its final guidance entitled, “Final Guidance for Federal Departments and Agencies on Consideration of Greenhouse Gas Emissions and the Effects of Climate Change in National Environmental Policy Act Reviews.” The guidance previously directed agencies to consider proposed actions and their effects on climate change (GHG emissions would have been a key indicator being assessed under any NEPA review). Such review considerations may have created additional delays or costs in any NEPA review processes for energy producers and generators and may have prevented the acquisition of any necessary federal approvals for energy producers and generators.

Clean Water Act. The federal Clean Water Act (CWA) and corresponding state laws affect our coal operations by regulating discharges into surface waters. Permits requiring regular monitoring and compliance with effluent limitations and reporting requirements govern the discharge of pollutants into regulated waters. The CWA and corresponding state laws include requirements for: improvement of designated “impaired waters” (i.e., not meeting state water quality standards) through the use of effluent limitations; anti-degradation regulations which protect state designated “high quality/exceptional use” streams by restricting or prohibiting discharges; requirements to treat discharges from coal mining properties for non-traditional pollutants, such as chlorides, selenium and dissolved solids; requirements to minimize impacts and compensate for unavoidable impacts resulting from discharges of fill materials to regulated streams and wetlands; and requirements to dispose of produced wastes and other oil and gas wastes at approved disposal facilities. In addition, the Spill Prevention, Control and Countermeasure (SPCC) requirements of the CWA apply to all CoalCo operations that use or produce fluids and require the implementation of plans to address any spills and the installation of secondary containment around all storage tanks. These requirements may cause CoalCo to incur significant additional costs that could adversely affect our operating results, financial condition and cash flows.

CoalCo requires certain surface structures for its processing of coal, placement of refuse, and transportation of materials through pipelines and above-ground conveyance systems. On April 21, 2014 the EPA published a proposed rule called “Definition of ‘Waters of the United States’ (WoUS) Under the Clean Water Act.” The proposal would expand the scope of the CWA to include previously non-jurisdictional streams, wetlands, and waters, making these areas jurisdictional inter-coastal waters of the U.S. In February 2015 the EPA and ACOE issued a memorandum of understanding to withdraw the WoUS Interpretive Rule. The EPA published the latest version of the WoUS rule (the Clean Water Rule) on June 29, 2015, which was to become effective on August 28, 2015. However, on August 27, 2015, the District Court of North Dakota blocked implementation of the rule in 13 states. On October 9, 2015, the Court of Appeals for the Sixth Circuit blocked implementation of the rule nationwide. The U.S. Supreme Court will now decide which court has jurisdiction—federal appeals court or district courts. Oral arguments on the case have been scheduled for October 11, 2017. Meanwhile, the current Administration has announced that it is working to rescind and replace the rulemaking, reestablish the 1986 rule and implement the 2008 guidance, which is less onerous than the current rule being litigated.

Resource Conservation and Recovery Act. The federal Resource Conservation and Recovery Act (RCRA) and corresponding state laws and regulations affect coal mining by imposing requirements for the treatment, storage and disposal of hazardous wastes. Facilities at which hazardous wastes have been treated, stored or disposed of are subject to corrective action orders issued by the EPA that could adversely affect our financial results, financial condition and cash flows.

In 2010, the EPA proposed options for the regulation of Coal Combustion Residuals (CCRs) from the electric power sector as either hazardous waste or non-hazardous waste. On December 19, 2014, the EPA announced the first national regulations for the disposal of CCRs from electric utilities and independent power producers under RCRA. On April 17, 2015, the EPA finalized these regulations under the solid waste provisions (Subtitle D) of RCRA and not the hazardous waste provisions (Subtitle C) which became effective on October 19, 2015. The

 

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EPA affirms in the preamble to the final rule that “this rule does not apply to CCR placed in active or abandoned underground or surface mines.” Instead, “the U.S. Department of Interior (DOI) and the EPA will address the management of CCR in mine fills in a separate regulatory action(s).” On November 3, 2015, the EPA published the final rule Effluent Limitations Guidelines and Standards (ELG), revising the regulations for the Steam Electric Power Generating category which became effective on January 4, 2016. The rule sets the first federal limits on the levels of toxic metals in wastewater that can be discharged from power plants, based on technology improvements in the steam electric power industry over the last three decades. The combined effect of the CCR and ELG regulations has forced power generating companies to close existing ash ponds and will likely force the closure of certain older existing coal burning power plants that can’t comply with the new standards.

Surface Mining Control and Reclamation Act. The federal Surface Mining Control and Reclamation Act (SMCRA) establishes minimum national operational and reclamation standards for all surface mines, as well as most aspects of underground mines. SMCRA requires that comprehensive environmental protection and reclamation standards be met during the course of and following completion of mining activities. Permits for all mining operations must be obtained from the U.S. Office of Surface Mining (OSM) or, where state regulatory agencies have adopted federally approved state programs under SMCRA, the appropriate state regulatory authority. States that operate federally approved state programs may impose standards which are more stringent than the requirements of SMCRA and OSM’s regulations and in many instances have done so. Our active mining complexes are located in Pennsylvania which has primary jurisdiction for enforcement of SMCRA through its approved state program. In addition, SMCRA imposes a reclamation fee on all current mining operations, the proceeds of which are deposited in the Abandoned Mine Reclamation Fund (AML Fund), which is used to restore unreclaimed and abandoned mine lands mined before 1977. The current per ton fee is $0.28 per ton for surface mined coal and $0.12 per ton for underground mined coal. These fees are currently scheduled to be in effect until September 30, 2021.

Federal and state laws require bonds to secure our obligations to reclaim lands used for mining and to satisfy other miscellaneous obligations. These bonds are typically renewable on a yearly basis. Surety bond costs have increased while the market terms of surety bonds have generally become less favorable. It is possible that surety-bond issuers may refuse to renew bonds or may demand additional collateral. Any failure to maintain, or inability to acquire, surety bonds that are required by state and federal laws would have a material adverse effect on our ability to produce coal, which could adversely affect our business, financial condition, results of operations, liquidity and cash flows.

Excess Spoil, Coal Mine Waste, Diversions, and Buffer Zones for Perennial and Intermittent Streams. The OSM has issued final amendments to regulations concerning stream buffer zones, stream channel diversions, excess spoil, and coal mine waste to comply with an order issued by the U.S. District Court for the District of Columbia on February 20, 2014, which vacated the stream buffer zone rule that was published December 12, 2008. On July 27, 2015, the OSM published the proposed Stream Protection Rule (SPR). After much debate and thousands of comments, the final SPR was published by the OSM in the Federal Register on December 20, 2016. The final SPR requires the restoration of the physical form, hydrologic function, and ecological function of the segment of a perennial or intermittent stream that a permittee mines through. Additionally, it requires that the post-mining surface configuration of the reclaimed mine site include a drainage pattern, including ephemeral streams, similar to the pre-mining drainage pattern, with exceptions for stability, topographical changes, fish and wildlife habitat, etc. The rule also requires the establishment of a 100-foot-wide streamside vegetative corridor of native species (including riparian species, when appropriate) along each bank of any restored or permanently-diverted perennial, intermittent, or ephemeral stream. This rulemaking is highly anticipated to be subject to Legislative and Executive branch actions to overturn or significantly modify the rule.

Health and Safety Laws

Mine Safety. Legislative and regulatory changes have required us to purchase additional safety equipment, construct stronger seals to isolate mined out areas, and engage in additional training. We have also experienced

 

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more aggressive inspection protocols and with new regulations the amount of civil penalties has increased. The actions taken thus far by federal and state governments include requiring:

 

   

the caching of additional supplies of self-contained self-rescuer (SCSR) devices underground;

 

   

the purchase and installation of electronic communication and personal tracking devices underground;

 

   

the purchase and installation of proximity detection services on continuous miner machines;

 

   

the placement of refuge chambers, which are structures designed to provide refuge for groups of miners during a mine emergency when evacuation from the mine is not possible, which will provide breathable air for 96 hours;

 

   

the replacement of existing seals in worked-out areas of mines with stronger seals;

 

   

the purchase of new fire resistant conveyor belting underground;

 

   

additional training and testing that creates the need to hire additional employees;

 

   

more stringent rock dusting requirements; and

 

   

the purchase of personal dust monitors for collecting respirable dust samples from certain miners.

On October 2, 2015, the Mine Safety and Health Administration (MSHA) published proposed rules for underground coal mining operations concerning proximity detection systems for coal hauling machines and scoops. On January 15, 2015, MSHA published a final rule requiring underground coal mine operations to equip continuous mining machines, except full-face continuous mining machines, with proximity detection systems. The proximity detection system strengthens protection for miners by reducing the potential of pinning, crushing and striking hazards that result in accidents involving life-threatening injuries and death. The final rule became effective March 15, 2015 and included a phased in schedule for newly manufactured and in-service equipment. In 2010 MSHA rolled out the “End Black Lung, Act Now” initiative. As a result, MSHA implemented a new final rule on August 1, 2014 to lower miners’ exposure to respirable coal mine dust including using the new Personal Dust Monitor (PDM) technology. This final rule was implemented in three phases. The first phase began August 1, 2014 and utilizes the current gravimetric sampling device to take full shift dust samples from the current designated occupations and areas. It also requires additional record keeping and immediate corrective action in the event of overexposure. The second phase began February 1, 2016 and requires additional sampling for designated and other occupations using the new continuous personal dust monitor (CPDM) technology, which provides real time dust exposure information to the miner. The necessary CPDM equipment required to meet compliance with the new rule was ordered at a cost of $2 million. Dust Coordinators and Dust Technicians were also hired to meet the staffing demand to manage compliance with the new rule. The final phase of the rule was effective on August 1, 2016. when the current respirable dust standard was reduced from 2.0 to 1.5mg/m3 for designated occupations and from 1.0 to 0.5mg/m3 for Part 90 Miners.

Black Lung Legislation. Under federal black lung benefits legislation, each coal mine operator is required to make payments of black lung benefits or contributions to:

 

   

current and former coal miners totally disabled from black lung disease;

 

   

certain survivors of a coal miner who dies from black lung disease or pneumoconiosis; and

 

   

a trust fund for the payment of benefits and medical expenses to claimants whose last mine employment was before January 1, 1970, where no responsible coal mine operator has been identified

 

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for claims (where a coal miner’s last coal employment was after December 31, 1969), or where the responsible coal mine operator has defaulted on the payment of such benefits. The trust fund is funded by an excise tax on U.S. production of up to $1.10 per ton for deep mined coal and up to $0.55 per ton for surface-mined coal, neither amount to exceed 4.4% of the gross sales price.

The Patient Protection and Affordable Care Act (PPACA) made two changes to the Federal Black Lung Benefits Act. First, it provided changes to the legal criteria used to assess and award claims by creating a legal presumption that miners are entitled to benefits if they have worked at least 15 years in underground coal mines, or in similar conditions, and suffer from a totally disabling lung disease. To rebut this presumption, a coal company would have to prove that a miner did not have black lung or that the disease was not caused by the miner’s work. Second, it changed the law so black lung benefits will continue to be paid to dependent survivors when the miner passes away, regardless of the cause of the miner’s death. The changes will result in increased cost to CoalCo of complying with the Federal Black Lung Benefits Act. In addition to the federal legislation, we are also liable under various state statutes for black lung claims.

Other State and Local Laws

Ownership of Coal Rights. CoalCo acquires ownership or leasehold rights to coal properties prior to conducting operations on those properties. As is customary in the coal industry, we have generally conducted only a summary review of the title to coal rights that are not in our development plans, but which we believe we control. This summary review is conducted at the time of acquisition or as part of a review of our land records to determine control of coal rights. Given ParentCo’s long history as a coal producer, we believe we have a well-developed ownership position relating to our coal control. Prior to the commencement of development operations on coal properties, we conduct a thorough title examination and perform curative work with respect to significant defects. We generally will not commence operations on a property until we have cured any material title defects on such property. We are typically responsible for the cost of curing any title defects. We have completed title work on substantially all of our coal producing properties and believe that we have satisfactory title to our producing properties in accordance with standards generally accepted in the industry.

Available Information

CoalCo maintains a website at www.                    .com. CoalCo will makes available, free of charge, on this website our future annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the 1934 Act), as soon as reasonably practicable after such reports are available, electronically filed with, or furnished to the SEC, and are also available at the SEC’s website www.sec.gov. Apart from SEC filings, we also use our website to publish information which may be important to investors, such as presentations to analysts.

Legal and Environmental Proceedings

In the normal course of business, CoalCo and its subsidiaries are 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 business. CoalCo accrues the estimated loss for these lawsuits and claims when the loss is probable and can be estimated. CoalCo’s 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 CoalCo. 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 CoalCo; however, such amounts cannot be reasonably estimated. The amount claimed against CoalCo is disclosed below when an amount is expressly stated in the lawsuit or claim, which is not often the case.

 

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The following royalty, land rights and other lawsuits and claims include those for which a loss is reasonably possible, but not probable, and accordingly, an accrual may not have been recognized. These claims are influenced by many factors which prevent the estimation of a range of potential loss. These factors include, but are not limited to, generalized allegations of unspecified damages (such as improper deductions), discovery having not commenced or not having been completed, unavailability of expert reports on damages and non-monetary issues being tried.

Fitzwater Litigation. Three nonunion retired coal miners filed an amended complaint on April 24, 2017 against ParentCo, Fola Coal Company, LLC, CONSOL of Kentucky and Consolidation Coal Company in West Virginia Federal Court alleging ERISA violations in the termination of retiree health care benefits. The Plaintiffs contend they relied to their detriment on oral statements and promises of “lifetime health benefits” allegedly made by various members of management during Plaintiffs’ employment and that they were allegedly denied access to Summary Plan Documents that clearly reserved to the Company the right to modify or terminate the CONSOL Energy Inc. Retiree Health and Welfare Plan. Plaintiffs request that retiree health benefits be reinstated and seek to represent a class of all nonunion retirees of Fola Coal Company, LLC and CONSOL of Kentucky. The Company believes it has meritorious defense and intends to vigorously defend this suit.

Casey Litigation. The Company has become aware of (but not served with) a Complaint filed on August 23, 2017, on behalf of two nonunion retired coal miners against ParentCo, CONSOL Buchanan Mining Co., Inc. and Consolidation Coal Company in West Virginia Federal Court alleging ERISA violations in the termination of retiree health care benefits. Filed by the same lawyers who filed the Fitzwater litigation, and raising nearly identical claims, the plaintiffs contend they relied to their detriment on oral promises of “lifetime health benefits” allegedly made by various members of management during plaintiffs’ employment and that they were not provided with copies of Summary Plan Documents clearly reserving to the Company the right to modify or terminate the existing Retiree Health and Welfare Plan. Plaintiffs request that retiree health benefits be reinstated for them and their dependents and seek to represent a class of all nonunion retirees of any ParentCo subsidiary that operated or employed individuals in McDowell or Mercer Counties, West Virginia, or Buchanan or Tazewell Counties, Virginia whose retiree welfare benefits were terminated.

Virginia Mine Void Litigation. Four lawsuits naming Consolidation Coal Company, Island Creek Coal Company, CNX Gas Company, and/or ParentCo have recently concluded in favor of the companies. After the trial court granted summary judgment in favor of the defendants in two of the actions upon its finding that plaintiffs’ claims are barred by the applicable statutes of limitation, plaintiffs appealed both cases to the U.S. Court of Appeals for the Fourth Circuit. On March 9, 2017, the Fourth Circuit affirmed and entered judgment in favor of the defendants. Plaintiffs did not seek review by the U.S. Supreme Court and those judgments are now final. As a direct result of the Fourth Circuit action, Motions for Voluntary Dismissal were filed and granted by the court in both of the two remaining cases. On January 26, 2016, six mine void lawsuits that had twice before been filed and voluntarily dismissed were refiled for a third time in state court but have not been served. Because each had twice before been filed and voluntarily dismissed, and because the most recent refilings were not served within a one-year period, under these procedural circumstances these actions should no longer be viable under federal or Virginia state law. The complaints sought damages and injunctive relief in connection with the transfer of water from mining activities at Buchanan Mine into void spaces in inactive ICCC mines adjacent to the Buchanan operations, voids ostensibly underlying plaintiffs’ properties. While some of the plaintiffs claimed an ownership interest in the coal, others had some interest in one or more of the fee, surface, oil/gas or other mineral estates. The suits alleged the water storage precluded access to and damaged coal, impeded coalbed methane gas production and was made without compensation to the property owners. Plaintiffs sought recovery in tort, contract and trespass assumpsit (quasi-contract). The suits each sought damages between $50,000 and in excess of $100,000 plus punitive damages.

Environmental ProceedingsOn September 4, 2017, the Pennsylvania Department of Environmental Protection (DEP) provided notice that it required additional time to review the technical merits of a prior permit submission for continued longwall mining in the 4L panel at the Bailey Mine (the 4L Pending Permit), in light of a recent

 

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Environmental Hearing Board (EHB) decision, which is discussed further below. As a result, the longwall was idled at that time and workforce adjustments were made, pending further developments with the DEP and permit submission. This was the first time in the 35-year history of the Bailey Mine that a needed mining permit had not been received in a timely fashion.

As noted above, the DEP’s determination with respect to the 4L Pending Permit related to part of an August 2017 EHB decision that impacts the application of DEP-required stream mitigation techniques, specifically the installation of synthetic stream-channel liner systems. The EHB is the quasi-judicial agency that hears appeals of DEP permitting decisions. The EHB decision held, in part, that the requirement to install a stream-channel liner system constituted impermissible pollution under applicable environmental laws. That determination had direct and specific implications for the 4L Pending Permit with respect to undermining one particular stream, Polen Run, for which the DEP was proposing to require the installation of the stream-channel liner system as a mitigation measure. The DEP requested alternative mitigation measures for consideration, which ParentCo supplied. Due to the narrowly focused EHB decision, the DEP is carefully reviewing alternative approaches and continues to evaluate the requested data submitted in support of the 4L Pending Permit. Given the potential for a protracted review, ParentCo felt it prudent to temporarily idle the longwall and dismantle and relocate it to another panel where it held an operating permit.

To that end, on September 18, 2017, ParentCo issued a press release stating that the DEP was requiring additional time to evaluate the approval of the 4L Pending Permit and that, as a result of this ongoing evaluation, ParentCo determined to move the longwall to another permitted panel in order to resume operations. The longwall was moved and resumed operations the first week of October. Management has implemented several measures to mitigate the production impact from this delay, including working additional unscheduled shifts as compared to the previous five and a half day schedule. This operating schedule change is intended to allow ParentCo to meet customer needs.

ParentCo continues to work closely with the necessary agencies to obtain operating permits to allow for continuity of longwall mining operations. The PAMC operates five total longwalls, with many of the approved permits as far out as ten years in advance.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND