CNX Resources Corp quarterly report, Q2 FY2012

Business context and reporting period

Unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 1, 2012. The filing identifies the registrant as CONSOL Energy Inc., a coal and natural-gas producer—not CNX Resources Corp. Investors should verify the issuer mapping in the request metadata.

Financial performance

Q2 coal operating margin averaged $13.54 per ton, down from $22.20; natural-gas margin averaged $0.64 per thousand cubic feet, down from $1.50. Coal division pretax earnings increased to $252 million from $152 million in Q2, while gas division pretax earnings fell to $1 million from $28 million. For the first half, coal pretax earnings were $415 million versus $451 million and gas pretax earnings were $13 million versus $52 million.

At June 30, cash was $200.2 million, current assets $1.681 billion, and current liabilities $1.273 billion. Total debt including current maturities and capital leases was approximately $3.196 billion. No borrowings were outstanding on the parent or CNX Gas revolving credit facilities; available capacity was approximately $1.400 billion and $930 million, respectively. The receivables facility had no borrowings and about $39 million of unused capacity after letters of credit. Parent leverage covenant ratio was 1.92x (maximum 4.75x); interest coverage was 6.29x (minimum 2.50x).

Material changes versus comparable periods

• Q2 total revenue and other income declined about 8%; first-half total revenue and other income declined about 6%. Coal and gas sales were pressured by lower volumes and/or prices.
• Q2 earnings benefited substantially from asset-sale gains included in other income: $150.7 million on Northern Powder River Basin assets and approximately $22.5 million combined on Elk Creek and Burning Star properties. The Northern Powder River Basin sale generated $169.5 million cash proceeds and retained an 8% royalty interest.
• First-half operating cash flow fell $427.5 million year over year, while capital expenditures increased $129.0 million. Investing cash use was $484.0 million, partly offset by $252.2 million of asset-sale proceeds; cash declined $175.5 million to $200.2 million.
• Coal average price per ton was lower and unit costs higher in the first half: $67.36 versus $70.62 price, and $53.34 versus $48.14 costs. First-half gas average price declined 17.6% to $4.12 per thousand cubic feet.
• Dividend paid increased to $0.125 per share quarterly from $0.10; first-half dividends were $56.8 million versus $45.3 million.

Outlook, management commentary, risks and unusual items

• Management forecast 2012 net gas production of 157–159 Bcf and Q3 production of approximately 40–42 Bcf. Coal sales estimates were 59.4 million tons in 2012, 57.6 million in 2013, and 62.0 million in 2014; open-tonnage pricing was not forecast due to negotiations.
• Weak coal and gas prices, elevated utility coal stocks, low gas prices, reduced coal-fired generation, softer international metallurgical coal demand, and economic uncertainty were cited as near-term pressures. Management described longer-term demand fundamentals for coal and gas as supportive.
• Production actions included extended mine vacation periods expected to reduce annual output by 300,000 tons and planned Fola layoffs/idling expected to reduce annual output by approximately 800,000 tons. Fola surface operations had been idled; underground production was expected to continue until the planned layoffs.
• Management expected cash from operations and borrowing capacity to meet working-capital needs, planned capital spending, debt service, dividends and letter-of-credit requirements, subject to operating performance and market conditions. A $110 million 2012 pension contribution was expected.
• Regulatory and environmental exposures include an estimated $200 million mine-water treatment project due in service by May 2013, potential effects of proposed mining and power-plant rules, Pennsylvania gas-well impact fees, and increased West Virginia reclamation fees. A potential Bailey East mine-plan change could materially affect forecast 2015 production.
• The filing reports $1.605 billion of letters of credit, surety bonds and guarantees, and $2.982 billion of unconditional purchase obligations. Management expected guarantees to expire without funding. Contractual-obligation estimates also include substantial employee and closure liabilities.
• Legal matters include the Ryerson Dam claim, for which the company estimated a possible loss range of $9–$30 million if liable, and CNX Gas shareholder litigation with potential loss estimated up to $221 million but no accrual. Management stated that accruals for pending claims were immaterial overall, while acknowledging future aggregate loss could be material and not reasonably estimable.
• Natural-gas swaps had a reported net fair-value asset of about $220 million in MD&A (the note presents $222.9 million gross assets and $2.9 million liabilities). A hypothetical 10% gas-price decline would increase future derivative earnings by $35.0 million; a 10% increase would reduce them by $35.4 million.
• A salaried retiree medical plan amendment reduced the OPEB liability by $80.6 million, with a $50.3 million after-tax benefit recorded in other comprehensive income. It was expected to reduce 2012 OPEB expense by an additional $6.3 million for the remaining six months.

Investor verification priorities

1. Confirm that this CONSOL Energy 10-Q is the intended filing for CNX Resources Corp., given the registrant-name mismatch.
2. Separate recurring operating performance from the $150.7 million Northern Powder River Basin gain and other asset-sale gains when assessing earnings and cash generation.
3. Track coal and gas realized prices, unit costs, production guidance, mine idling effects, and unsold/open-tonnage exposure.
4. Reconcile the large year-over-year decline in operating cash flow with capital spending, asset-sale proceeds, and remaining liquidity.
5. Assess the timing and funding of debt maturities, pension contributions, mine closure obligations, environmental spending, guarantees and purchase commitments.
6. Monitor significant legal and regulatory matters, particularly the Bailey East permit issue, Fola reclamation exposure, and potential shareholder-litigation loss.