CNX Resources Corp annual report, FY2012

Business context and reporting period

The supplied filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed February 7, 2013. It is an annual report, not a standalone fourth-quarter filing. The request identifies CNX Resources Corp.; that company name does not match the registrant named in this filing. CONSOL produced coal and natural gas, alongside energy-related services.

Key financial and operating metrics

Coal production was 56.0 million tons, down from 62.0 million; average sales price was $67.11 per ton, down 7.1%, while cost of goods sold per ton rose 3.7% to $52.56. The reported overall coal margin was $14.55 per ton versus $21.56. Gas production increased 1.8% to 156.3 Bcfe, but average realized price including hedge settlements fell 13.9% to $4.22/Mcf. Gas segment earnings before tax fell to $39 million from $130 million; coal segment earnings before tax fell to $656 million from $933 million.

At year-end, long-term debt and capital leases were $3.175 billion; cash was low, though the company reported $1.4 billion of unused capacity under its secured revolver and $930 million under the CNX Gas revolver. The $200 million receivables facility had $38 million borrowed and $162 million committed to letters of credit, leaving no unused capacity. The main revolver had no borrowings and $100 million of letters of credit. The filing reports a 2.50x leverage ratio and 5.31x interest-coverage ratio under the main facility.

Material changes versus the prior year

• Total revenue and other income declined 11%; shareholder net income declined 39%; and operating cash flow declined 52%.
• Coal performance weakened amid lower metallurgical coal prices and shipments, reduced domestic thermal demand, mine idlings, and the Bailey preparation-plant conveyor failure. Coal average selling price fell while unit costs rose.
• Gas output grew modestly, led by Marcellus production, but lower commodity prices reduced gas revenue and earnings. The company’s average gas price before hedges was $3.01/Mcf versus $4.27 in 2011.
• Other income included $282 million of asset-sale gains, compared with $46 million in 2011. Cash proceeds from asset sales totaled $647 million; these gains supported reported results but were not recurring operating earnings.
• Gas proved reserves increased to 3.99 Tcfe from 3.48 Tcfe, while the after-tax standardized measure of discounted future net cash flows fell to $736 million from $1.747 billion, primarily reflecting lower pricing assumptions.

Outlook, risks and unusual items

For 2013, management forecast coal production of 56.3 million tons and gas production of approximately 170–180 Bcf. Planned capital expenditures were $1.290–$1.505 billion, with expected asset-sale proceeds of $455–$640 million and net investment of $835–$865 million. Gas spending was directed mainly to Marcellus and Utica development. The BMX mine was expected to begin production in early 2014 and add about 5 million annual tons. Management said it would adjust investment plans as conditions warranted.

• The Bailey conveyor failure disrupted production for about three weeks; management estimated 2012 net income would have been $53 million higher absent the incident. CONSOL had received $2.3 million of business-interruption proceeds and said further recovery was uncertain.
• Environmental and permitting exposure includes a Northern West Virginia water-treatment project estimated at approximately $200 million, with completion required by May 2013, and significant uncertainty around future coal and gas regulations and permits.
• Long-term benefit obligations include approximately $3.0 billion of postretirement benefits, $224.9 million of salaried retirement benefits, $184.1 million of black-lung benefits and $179.6 million of workers’ compensation. The UMWA 1974 multi-employer pension plan was underfunded and classified as seriously endangered; potential future contributions or withdrawal liability could be material.
• Fairmont Supply faced approximately 6,900 asbestos claims and had no insurance coverage for them. Management said future payments could be material, although the amount was not clear in the filing.
• Other matters include the Ryerson Dam dispute, several royalty and title cases, and a possible 2013 pension settlement charge that management said could be material. The filing describes a potential loss range of $9–$30 million for the dam matter if liability is established.
• Natural-gas hedges covered about 69.1 Bcf in 2013 at an average $4.66/Mcf, 58.8 Bcf in 2014 at $4.87, and 40.6 Bcf in 2015 at $4.10. Hedges reduce downside exposure but also limit participation in price increases.

Management stated that operating cash flow, asset sales and borrowing capacity were expected to meet working-capital needs, planned capital spending, debt service and dividends, subject to commodity markets and other operating conditions. The company paid $0.625 per share in 2012 dividends. The auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective disclosure controls.

Most important facts for investors to verify

1. Confirm the issuer identity: this filing is for CONSOL Energy Inc., not CNX Resources Corp., and covers the full 2012 fiscal year rather than Q4 alone.
2. Reconcile recurring operating performance with the $282 million of asset-sale gains and assess how much of 2012 earnings and cash generation depended on dispositions.
3. Review the full cash-flow statement and financing needs: operating cash flow fell sharply as capital expenditures exceeded it, while year-end cash was $21.9 million.
4. Check debt maturities, covenant definitions and committed liquidity, including the fully utilized receivables facility and letters of credit.
5. Assess exposure to coal and gas prices, customer concentration, hedge counterparties, and the assumptions behind reserves and the standardized measure.
6. Track completion and cost of the water-treatment project, permitting outcomes, litigation, pension funding and other long-term obligations.