Black lung profits at CONSOL Energy…

November 4, 2010

Public Domain: Documerica: Ex-coal Miner Now Black Lung Victim (NARA/EPA)

Here at footnoted, we don’t spend a lot of time thinking about black lung disease, the all-too-descriptive and debilitating affliction of miners who spend years inhaling coal dust (and which may even be on the rise). But we certainly don’t expect to see it contributing to a mining company’s bottom line.

Yet that’s exactly what we found happening last quarter at CONSOL Energy (CNX), a coal and methane-gas producer, to the tune of $1.3 million, according to the 10-Q it filed this week. The reason lies in part with the quirks of accounting, and in part with the Canonsburg, Pennsylvania, company’s own assumptions.

Coal companies can pretty much count on paying black-lung benefits to workers and former employees for years into the future — which, in the accounting world, creates an obligation in the financial statements. As a result, black lung disease (aka coal workers’ pneumoconiosis) gets treated very much like a pension or retiree-health obligation.

CONSOL makes benefit payments as they come due, amounting to about $27 million so far this year, but it accrues an obligation on its financial statements for future payments, and — much like with a pension plan — that obligation affects income based in part on the assumptions the company has made about the size of, and changes in, future payments. Overall, CONSOL was carrying an obligation of $195 million at the end of 2009, according to the company’s 10-K for the year.

Well, this year, CONSOL re-evaluated its black lung obligations, and came away concluding that things were looking better:

“Based on historical company data and available industry data, with emphasis on recent history, certain assumptions were revised at the remeasurement date. Most notably, the expected number of claims, prior to the law change, was reduced to more appropriately reflect CONSOL Energy’s historical experience.”

All in all, the remeasurement let CONSOL reduce its black-lung obligations by $47.7 million, cutting expense in the third quarter by $3.5 million.

This comes at the same time that the company is warning about increased costs and obligations from spring’s health-care reform legislation. The company says the new law will speed up black-lung claims for a couple of reasons. One, it creates “a legal presumption that miners are entitled to benefits if they have worked at least 15 years in coal mines and suffer from totally disabling lung disease” (seems like a reasonable bet to us), and two, when a miner receiving black-lung benefits dies, the law sends payments to their survivors automatically, “regardless of cause of the miner’s death.”

Those changes drive up the company’s liability by $45.7 million, CONSOL says — just a hair under the amount by which the remeasurement reduced it, conveniently enough — and increases expense by $2.2 million for the quarter.

The net effect, once all the various factors are netted out: CONSOL’s black-lung benefits contributed $1.3 million to income, compared to $378 million in expense in the same quarter last year, according to the table on p. 13 of its 10-Q. Nor is it the first time CONSOL has recorded black-lung income, judging from last year’s 10-K: It booked $4.6 million in 2008 and $3.1 million in 2007.

All this is just on paper, of course — when it comes to cash out the door, paid to coal miners with debilitating lung disease, the benefits are a very real cost of doing business.

Image source: National Archives via pingnews on Flickr

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