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Rating Action:

Moody's affirms CONSOL's B1 CFR; lowers SGL to SGL-3; outlook negative

06 Mar 2020

New York, March 06, 2020 -- Moody's Investors Service, ("Moody's") affirmed CONSOL Energy Inc.'s B1 Corporate Family Rating ("CFR"), B1-PD Probability of Default Rating, Ba3 senior secured ratings, and its B2 senior secured notes rating. The Speculative Grade Liquidity Rating was lowered to SGL-3 from SGL-2. Moody's also revised the rating outlook to negative to reflect expectations for reduced earnings and cash flow generation in 2020 and potential for further contraction in 2021.

"CONSOL Energy will need to move aggressively to preserve credit quality in a very challenging environment for thermal coal producers," said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for CONSOL Energy, Inc.

The following rating actions were taken:

Affirmations:

..Issuer: CONSOL Energy Inc.

.... Corporate Family Rating, Affirmed B1

.... Probability of Default Rating, Affirmed B1-PD

....Senior Secured Bank Credit Facility, Affirmed Ba3 (LGD3)

....Senior Secured Regular Bond/Debenture, Affirmed B2 (LGD5, from LGD4)

Downgrades:

..Issuer: CONSOL Energy Inc.

.... Speculative Grade Liquidity Rating, Downgraded to SGL-3 from SGL-2

Outlook Actions:

..Issuer: CONSOL Energy Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

Moody's expects a very challenging year for the thermal coal industry in 2020. Domestic demand for thermal coal is challenged in the near term by a mild winter season and historically low natural gas prices, which has reduced volumes with the company's traditional customers and intensified competition in the region. The export market for thermal coal weakened significantly in 2019 and remains weak in 2020, which, combined with weaker volumes from domestic customers, has further intensified competition in Northern Appalachia and depressed pricing by redirecting coal back into the domestic market. CONSOL responded aggressively over the past few years by placing domestic volumes under contract and developing export customers in new markets -- such as India. However, Moody's expects that export thermal coal pricing will remain near the lower bound of our medium term sensitivity range of $60-90 per metric ton (Newcastle) and realized prices from European customers (e.g., API2) will be weaker in the near-term.

Moody's expects that CONSOL's management-adjusted EBITDA will fall to about $275-325 million (from $406 million in 2019) -- despite a heavily-contracted position for 2020. Based on management's guidance for 2020, CONSOL expects to produce 24.5-26.5 million tons of thermal coal at a cash cost of $30-31.50/short ton and sell it for an average realized price of $43-45/short ton. Moody's forecast, which incorporates slightly more conservative operating assumptions, takes into consideration that the company's operating track record is solid and the vast majority of coal is under contract in 2020. Based on cash interest in the range of $60 million and management's guidance for $125-145 million of capital spending, Moody's expects retained cash flow (funds from operations minus dividends) will fall meaningfully and the company will generate about $50 million of free cash flow in 2020. Credit metrics likely will soften but remain solid for the rating, including estimated pro forma adjusted leverage of 2.5-3.0x, including an adjustment for the 25% ownership interest of the PAMC by CONSOL Coal Resources ("CCR") and our standard analytical adjustments.

Moody's also believes that investor concerns about the coal industry's ESG profile are intensifying and coal producers will be increasingly challenged by intensifying access to capital issues in the early 2020s. An increasing portion of the global investment community is reducing or eliminating exposure to the coal industry with greater emphasis on moving away from thermal coal. The aggregate impact on the credit quality of the coal industry is that debt capital will become more expensive over this horizon, particularly in the public bond markets, and other business requirements, such as surety bonds, which together will lead to much more focus on individual coal producers' ability to fund their operations and articulate clearly their approach to addressing environmental, social, and governance considerations -- including reducing net debt in the near-to-medium term. CONSOL reported about $725 million of debt and $527 million of surety bonds to support reclamation-related items at 31 December 2019.

CONSOL's B1 CFR is supported by the company's solid contract position. Management estimates that 95% of expected production volume is contracted for 2020 and 43% for 2021 - assuming the midpoint volume guidance (25.5 million tons). CONSOL's business position is also enhanced by their low-cost longwall mines, relatively stable customer base, and good access to export markets for both thermal and metallurgical coals. Despite the company's good business position, CONSOL is fairly concentrated compared to other coal companies with reliance on a single mining complex with three active coal mines for the majority of its earnings and cash flow. CONSOL also has meaningful legacy liabilities consistent with many rated coal companies, though it has reduced this position significantly following the sale of certain assets and managing cash servicing costs.

The negative outlook reflects expectations for weaker cash flow generation in 2020. An upgrade is not likely given the ongoing secular decline in demand for US thermal coal, inherent volatility in the global metallurgical coal industry, and intensifying ESG concerns. However, a material increase in scale and diversity, combined with expectations for positive free cash flow generation in a stressed pricing environment, could also have positive rating implications. Moody's could downgrade the rating with expectations for adjusted financial leverage above 3.5x (Debt/EBITDA), negative free cash flow, substantive deterioration in liquidity, or further intensification of ESG concerns that call into question the company's ability to handle upcoming financing requirements.

The SGL-3 reflects adequate liquidity to support operations over the next 12-18 months. The company had $80 million of cash on the balance sheet and $330 million of availability under a $400 million revolving credit facility due 2023. Availability under the revolving credit facility is reduced by $70 million of letters of credit to support various obligations. The credit agreement also contains financial maintenance covenants, including Net Debt/EBITDA, Gross First Lien Debt/EBITDA, and Fixed Charge Coverage ratio tests. Moody's expects that the company will remain in compliance with these covenants in the near-term, but the cushion of compliance will narrow in the second half of 2020 and increase vulnerability to a scenario where cash costs escalate unexpectedly due to unforeseen mining-related issues at the PAMC. A combination of weaker cash flow generation, revolving credit representing a meaningful portion of overall liquidity, and a narrowing cushion of compliance under financial maintenance covenants are the key factors that prompted a downgrade in the SGL to SGL-3. The SGL analysis does not take into consideration potential covenant-related waivers or amendments.

Environmental, social, and governance factors have a material impact on CONSOL's credit quality. The company is exposed to ESG issues typical for a company in the coal mining industry, including increasing global demand for renewable energy that is detrimental to demand for coal, especially in the United States and Western Europe. From an environmental perspective the coal mining sector is also viewed as: (i) very high risk for air pollution and carbon regulations; (ii) high risk for soil and water pollution, land use restrictions, and natural and man-made hazards; and (iii) moderate risk for water shortages. Social issues include factors such as community relations, operational track record, and health and safety issues associated with coal mining, such as black lung disease. CONSOL is highly exposed to thermal coal. Moody's believes that thermal coal carries greater ESG-related risks than metallurgical coal. Specific risks for CONSOL Energy include meaningful exposure to thermal coal and potential negative political actions in areas served by the company. CONSOL's actions and commentary since becoming an independent company have been more oriented toward debt reduction that many other coal companies, including a reduction in balance sheet debt by nearly 30% since late 2017.

CONSOL Energy Corporation is a leading global pure-play coal producer operating the Pennsylvania Mining Complex ("PAMC") located in the Northern Appalachia coal basin. The company generated $1.4 billion in revenues in 2019.

The principal methodology used in these ratings was Mining published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Benjamin Nelson
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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