Filing summary: CONSOL Energy Inc. Form 10-Q, quarter ended September 30, 2012
Entity note: The supplied filing is for CONSOL Energy Inc., not CNX Resources Corp. Investors should verify that this is the intended issuer. Financial amounts below are in U.S. dollars; millions are used unless stated otherwise.
Business context and reporting period
CONSOL Energy reported results for the three and nine months ended September 30, 2012, with comparisons to the same 2011 periods. Its principal businesses were coal and natural gas, alongside industrial supply and transportation activities. Management described weak thermal and metallurgical coal markets, while natural gas prices improved during the quarter.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue and other income | $1,160.1 | $1,521.7 | $4,041.3 | $4,575.0 |
| Income (loss) before tax | $(31.4) | $200.4 | $298.9 | $550.3 |
| Net income attributable to CONSOL shareholders | $(11.4) | $167.3 | $238.6 | $436.9 |
| Diluted earnings (loss) per share | $(0.05) | $0.73 | $1.04 | $1.91 |
| Operating cash flow | Not separately provided | Not separately provided | $530.2 | $1,252.4 |
Q3 total costs were $1,191.5 million, exceeding revenue and other income; the company recorded a $19.9 million income-tax benefit. Nine-month income tax expense was $60.4 million, with a 20.2% effective tax rate. The filing does not provide a consolidated operating-margin measure in the supplied text.
- Coal: Q3 coal segment pretax earnings fell to $4 million from $269 million. Produced coal sales were 12.3 million tons versus 14.7 million; average price per ton declined 12.1% to $67.31, while average cost per ton rose 2.7% to $55.84. Nine-month coal segment pretax earnings were $419 million versus $719 million.
- Gas: Q3 gas segment pretax earnings were $12 million, versus no significant contribution in the prior-year quarter. Production was 39.5 Bcf versus 40.4 Bcf, and average sales price declined 14.8% to $4.19 per Mcf. Nine-month gas segment pretax earnings were $25 million versus $53 million; production was 114.5 Bcf versus 113.8 Bcf.
- Cash and liquidity: Cash was $231.0 million at September 30, down from $375.7 million at year-end 2011. Current assets were $1,710.5 million and current liabilities $1,333.7 million. Nine-month investing cash use was $586.8 million, including $1,152.0 million of capital expenditures; financing cash use was $88.2 million. Cash declined $144.8 million over the period.
- Debt: Balance-sheet long-term debt was $3,127.3 million, with $22.1 million current debt and $51.7 million of long-term capital lease obligations. The company reported no borrowings under its $1.5 billion parent revolving facility or CNX Gas’s $1.0 billion facility; reported available capacity was approximately $1.4 billion and $930 million, respectively, after letters of credit. The receivables facility also had no borrowings and about $39 million capacity available.
- Capital returns and equity: Total equity was $3,796.9 million, up from $3,610.9 million at December 31, 2011. Dividends paid were $0.125 per share quarterly, or $0.375 per share for the first nine months, compared with $0.100 and $0.300, respectively, in 2011.
Material changes versus prior comparable periods
- Q3 shifted from $167.3 million of shareholder net income to an $11.4 million loss. Nine-month shareholder net income declined 45% to $238.6 million.
- Coal weakness was driven by lower metallurgical prices and volumes, reduced demand, and a major conveyor failure. Q3 average coal selling price fell and cost per ton rose; low-volatile metallurgical coal earnings were particularly affected.
- The July 2012 Bailey Preparation Plant conveyor failure disrupted production and shipments. Management estimated Q3 net income would have been about $53 million higher absent the incident, before any insurance or construction-contract indemnity proceeds.
- Nine-month operating cash flow fell by $722 million, while capital expenditures rose by $155 million to $1.152 billion. Asset-sale proceeds included significant 2012 divestitures, including the Northern Powder River Basin assets.
- Reported nine-month other income included a $150.7 million gain on the Northern Powder River Basin sale; other 2012 asset sales also generated gains. These items partly offset weaker underlying operating results.
Guidance, management commentary, risks and unusual items
- Outlook: Management expected 2012 net gas production of 157–159 Bcf and Q4 production of approximately 42.5–44.5 Bcf. Coal sales estimates were 55.9 million tons for 2012, 56.7 million for 2013 and 61.8 million for 2014. These are estimates, not guarantees; management cautioned that market and operating uncertainty warrants considering a range around them.
- Coal operations: Buchanan Mine was expected to restart the week of November 5, 2012, while Amonate was likely to remain idled for the rest of 2012. Fola operations were idled, reducing estimated annual production by about 800,000 tons; extended mine vacation periods reduced estimated annual production by about 300,000 tons. A subsequent October 30 WARN notice announced plans to idle Miller Creek surface operations, affecting approximately 145 employees, due to permit delays.
- Gas hedges and joint ventures: Natural gas swap contracts covered 169 Bcf through 2015; their September 30 fair value was a net asset of approximately $133.7 million. Noble’s drilling carry was suspended under the agreement’s gas-price condition, and both Noble and Hess carry amounts were subject to possible reductions from unresolved title-defect reviews.
- Capital and commitments: The company expected 2012 pension contributions of approximately $110 million. It reported $2.89 billion of unconditional purchase obligations and $1.67 billion of guarantees, letters of credit and surety bonds; management believed the guarantees would expire without being funded. A mine-water treatment project was estimated to cost approximately $200 million and was required to enter service by May 2013.
- Risks and contingencies: Management cited coal and gas price weakness, demand and customer concentration, operational disruptions, permitting delays, environmental regulation, safety requirements and labor costs. The filing describes numerous legal and environmental matters. One shareholder litigation claim had a potential loss estimated by the company at up to $221 million if liability were imposed; other claims include coal royalty disputes and environmental matters. The filing states aggregate asserted claims exceed recorded accruals by approximately $1.10 billion, although many claims are not probable or cannot be reasonably estimated.
- Benefits and unusual items: A salaried retiree medical-plan amendment reduced the related OPEB liability by $80.6 million and lowered expected 2012 expense. The Bailey conveyor incident, asset-sale gains, mine idlings, and reduced metallurgical coal pricing materially shaped reported results.
Most important facts for investors to verify
- Confirm the intended issuer: this document identifies CONSOL Energy Inc., not CNX Resources Corp.
- Assess whether coal prices, sales volumes, mine idlings and the conveyor disruption continue to pressure coal earnings and cash flow.
- Check realization of management’s coal-sales and gas-production estimates, including restart and permitting assumptions.
- Separate recurring operating performance from asset-sale gains and other unusual items when evaluating earnings.
- Monitor liquidity, capital spending, debt service, pension funding and the large contractual obligations and environmental commitments.
- Track Noble and Hess carry obligations, title-defect reviews, gas-price hedge exposure, and developments in significant litigation and regulatory matters.