CNX Resources Corp quarterly report, Q1 FY2012

Business context and reporting period

The supplied filing is CONSOL Energy Inc.’s unaudited Form 10-Q for the three months ended March 31, 2012—not a filing under the name CNX Resources Corp. CONSOL operated coal and natural gas businesses, including thermal and metallurgical coal, coalbed methane, and shale gas. Unless noted otherwise, financial amounts below are in U.S. dollars.

Financial performance and position

• Total revenue fell 2.6%; net income fell 49.4%. Net margin was approximately 6.8%, compared with 13.1% a year earlier.
• Operating cash flow less capital expenditures was negative $77.0 million, versus positive $180.5 million in Q1 2011.
• Cash was $287.3 million at March 31, down from $375.7 million at year-end. Current assets were $1.87 billion and current liabilities $1.40 billion (current ratio approximately 1.33).
• Debt and capital lease obligations totaled approximately $3.20 billion, substantially unchanged from year-end. The company reported no borrowings under its $1.5 billion parent revolver or $1.0 billion CNX Gas revolver; available capacity was approximately $1.40 billion and $930 million, respectively, after letters of credit. The receivables facility also had no borrowings, with approximately $39 million capacity after letters of credit.
• The effective income tax rate was 18.0%, versus 23.5%. Dividends paid were $0.125 per share, up from $0.10.

Material changes versus the prior comparable period

• Coal division pretax earnings declined to approximately $163 million from $299 million. Coal sales from company mines fell to 15.1 million tons from 16.4 million. Average coal price rose 1.3%, but average cost per ton rose 20.2%, compressing the average margin to $14.46 from $22.76.
• Gas division pretax earnings fell to approximately $12 million from $24 million. Production increased to 37.7 Bcf from 35.9 Bcf, but average gas price declined 13.6%; gas margin per thousand cubic feet fell to $0.90 from $1.42.
• Quarterly cash generation weakened while capital spending increased, principally reflecting lower earnings and higher coal/other investment. Gas capital spending declined year over year.
• Other comprehensive income included an $80.6 million reduction in the salaried retiree medical liability following a plan amendment and remeasurement; the net-of-tax adjustment increased OCI by about $50.3 million.

Outlook, management commentary, risks and unusual items

• Management attributed weaker demand and pricing to a warm winter, lower electricity demand, abundant natural gas supply, and elevated utility coal inventories. It also cited weaker metallurgical coal pricing and increased operating costs.
• Company forecast 2012 coal sales of 58.9–60.9 million tons and net gas production of 157–159 Bcf; Q2 gas production was expected at about 37–38 Bcf. Management expected the Blacksville and Buchanan longwalls to restart May 1, 2012. These are forecasts, not reported results.
• Management planned 22 gross Utica wells and 39 gross wells in the liquids-rich Marcellus area during 2012. It noted that low gas prices and unusually high storage could continue to pressure gas prices.
• Q1 included an $11.3 million gain on the sale of the Burning Star No. 4 property. Pennsylvania’s new Act 13 imposed an approximately $4 million retroactive well impact fee. An April 2012 agreement to sell Elk Creek reserves was expected to generate about $25 million proceeds and a $10 million gain; it falls after the quarter.
• Risks include coal and gas price and demand volatility, environmental and safety regulation, costs and delays, labor and input-cost pressures, joint-venture carry obligations, and substantial reclamation, employee-benefit and legal exposures. A Northern West Virginia mine-water treatment project was estimated at approximately $200 million, with service required by May 2013.
• The filing disclosed numerous legal matters. Management said accrued amounts for pending claims were immaterial overall, but acknowledged that aggregate future losses could be material and were not reasonably estimable. Certain expressly stated claims have substantial potential ranges; the company disputes or is defending them.
• Management expected approximately $110 million of pension contributions in 2012. The filing also disclosed $3.10 billion of long-term purchase obligations and $1.62 billion of guarantees, letters of credit and surety-related commitments; these are not equivalent to recognized debt or probable cash outflows.

Important facts for investors to verify

1. Confirm issuer identity and continuity: the supplied filing names CONSOL Energy Inc., while the request names CNX Resources Corp.
2. Assess whether coal and gas prices, sales volumes, and unit costs support the company’s production and coal-sales forecasts.
3. Review liquidity and funding needs against negative Q1 cash flow after capital expenditures, debt service, planned capital spending, and benefit contributions.
4. Track longwall restart timing, joint-venture drilling carries, and the conditions or limits attached to those commitments.
5. Evaluate environmental compliance spending, Act 13 fees, reclamation obligations, and the outcomes and potential exposure of significant litigation.
6. Check whether the retiree-benefit plan change, hedges, asset-sale gains, and other one-time items affect comparisons with recurring operating performance.