Business context and reporting period
The supplied filing is CONSOL Energy Inc.’s audited Form 10-K for the fiscal year ended December 31, 2009, filed February 9, 2010. It is not a standalone fourth-quarter filing, and the registrant named in the filing is CONSOL Energy Inc., not CNX Resources Corp. The company operated coal, natural gas and related energy-services businesses; it owned 83.3% of CNX Gas.
CONSOL reported 2009 coal production of 59.4 million tons and gas production of 94.4 billion cubic feet. Its coal reserves were approximately 4.5 billion tons, and CNX Gas reported 1.91 trillion cubic feet equivalent of proved gas reserves.
Financial and operating performance
- Revenue and earnings: Total revenue and other income was $4.62 billion, down 0.7% from $4.65 billion in 2008. Net income attributable to CONSOL shareholders was $539.7 million, up 22.0% from $442.5 million; diluted EPS was $2.95 versus $2.40. Net margin on revenue and other income was approximately 11.7%.
- Fourth quarter: Supplemental quarterly information reports 2009 Q4 sales of $1.159 billion and shareholder-attributable net income of $143.2 million, or $0.80 diluted EPS. In Q4 2008, the corresponding figures were $1.150 billion, $176.3 million and $0.97.
- Cash flow and investment: Operating cash flow was $945.5 million, compared with $1.03 billion in 2008. Investing activities used $845.3 million, including $920.1 million of capital expenditures; financing activities used $173.0 million. Operating cash flow less capital expenditures was approximately $25 million.
- Margins and costs: Reported EBIT was $786.5 million and EBITDA was $1.224 billion. Coal average production cost increased to $44.87 per ton from $41.08; average sales price rose to $58.28 from $48.77. Gas average sales price including financial settlements fell to $6.68 per thousand cubic feet from $8.99, while average gas cost fell to $3.44 from $3.67.
- Debt and liquidity: Cash was $65.6 million and working capital was negative $487.6 million. Short-term notes were $472.9 million; long-term debt, including its current portion, was approximately $468.3 million. The main $1 billion revolving facility had $415 million drawn, $268 million of letters of credit and about $317 million available. The company reported a 0.87:1 leverage ratio and no defaults.
- Dividends: The company paid $0.40 per share in 2009, or $72.3 million in total. The board declared a further $0.10-per-share dividend in January 2010.
Material changes versus the prior comparable period
- Coal tons sold declined to 58.1 million from 66.2 million. Thermal coal revenue increased as the average price per thermal ton rose 31.5% to $57.11, despite lower volume.
- Metallurgical coal sales weakened: tons sold fell 20.7% to 2.3 million and average price declined 29.4% to $96.68 per ton. Management attributed this to weak steel demand and deferred pricing.
- Produced gas sales volume increased 24.3% to 93.6 billion cubic feet, but the average sales price fell 25.7% to $6.72 per thousand cubic feet. Hedging supported the reported average realized gas price.
- Capital expenditures declined from $1.062 billion to $920 million, mainly because of reduced gas drilling investment, partly offset by coal projects and Marcellus activity. Operating cash flow also fell, including due to receivables-facility repayments, coal inventory growth and the absence of the prior-year Buchanan insurance proceeds.
- 2008 results included $50 million of Buchanan Mine business-interruption proceeds and approximately $56 million of black-lung excise tax refunds; these unusual items did not recur at comparable levels in 2009.
Outlook, commentary, risks and contingencies
- Outlook: Management anticipated a gradual economic recovery in 2010, improving steel and energy demand, and a possible normalization of thermal-coal inventories by mid-year. It estimated that coal generation could displace up to 30 million tons of gas-fired generation in 2010 and targeted 500,000 tons of Northern Appalachian high-volatile coking coal sales to Asian markets. These are management expectations, not guarantees; the filing gives no consolidated earnings or production guidance.
- Projects and environmental spending: The Shoemaker belt system began operating in January 2010; the Bailey belt project was expected to finish by the end of March 2010. CONSOL expected $39 million of 2010 environmental-control capital expenditures. A West Virginia order requires future chloride-discharge compliance, and the company said advanced water-treatment facilities might be needed.
- Material risks: The filing highlights commodity-price and demand volatility, customer concentration and contract renewals, transportation and pipeline constraints, mine safety and operating interruptions, regulatory and permitting delays, greenhouse-gas and other environmental rules, reserve-estimation uncertainty, and pension and postretirement funding exposure. Gas swaps covered expected production through 2012; management cautioned that hedges can limit gains from higher prices and carry counterparty risk.
- Contingencies and obligations: The filing describes investigations following the Dunkard Creek fish kill and disputes involving water discharges, subsidence, coal deliveries, gas rights and antitrust allegations. It also reports approximately 22,500 asbestos claims against a subsidiary; management considered current estimates immaterial but said future payments could be material. Recorded postretirement medical and life obligations were about $2.8 billion, and reclamation, mine-closure and gas-well-closing obligations were approximately $533 million. The filing identifies possible additional multi-employer pension contributions.
- Reporting controls: The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and period: this is CONSOL Energy Inc.’s full-year 2009 10-K, not a CNX Resources Corp. Q4 filing.
- Review the full financial statements and notes for debt maturities, borrowing availability, working-capital pressures and the accounting treatment of the receivables securitization facility, which management expected to be reclassified as secured borrowing in 2010.
- Assess whether coal and gas prices, volumes, costs and hedge settlements support the reported earnings improvement, and distinguish recurring performance from 2008 insurance and tax-refund items.
- Track permitting, chloride-treatment requirements, the Dunkard Creek investigation and the status and potential exposure of material legal proceedings.
- Evaluate the funding and cash-flow implications of postretirement benefits, pension plans, mine closure and reclamation obligations, and required financial assurances.
- Compare management’s 2010 market expectations and Asian coking-coal sales target with subsequent results; the filing does not provide formal consolidated earnings guidance.