CNX Resources Corp. (filed as CONSOL Energy Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. The supplied filing identifies the registrant as CONSOL Energy Inc., not CNX Resources Corp. Dollar amounts below are in millions unless otherwise stated.
Business context and key financial metrics
The company operated Exploration and Production (E&P) and Coal divisions, alongside other businesses. Results reflect continued growth in Marcellus gas and a post-divestiture business mix following the December 2013 sale of five West Virginia coal mines.
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Revenue and other income | $969.2 | $842.9 | Up 15.0% |
| Income (loss) from continuing operations | $121.7 | $(3.7) | Turned profitable |
| Net income (loss) attributable to shareholders | $116.0 | $(1.6) | Diluted EPS $0.50 vs. $(0.01) |
| Operating cash flow | $336.1 | $268.3 | Up $67.8 |
| Capital expenditures | $451.0 | $349.8 | Up $101.2 |
| Cash and cash equivalents, quarter-end | $314.1 | $327.4 at Dec. 31, 2013 | Down $13.3 during quarter |
| Total assets | $11,584.5 | $11,393.7 at Dec. 31, 2013 | Up $190.8 |
| Total liabilities | $6,492.2 | $6,387.4 at Dec. 31, 2013 | Up $104.8 |
Cash from operations less capital expenditures was negative $114.9 million. The filing reports total long-term debt and capital-lease obligations of approximately $3.173 billion; cash was $314.1 million. Current assets were $1.459 billion and current liabilities $1.170 billion. The company had no borrowings under either of its $1.0 billion secured revolving credit facilities: unused capacity was $832 million at CONSOL Energy and $905 million at CNX Gas, after letters of credit.
E&P production was 48.4 Bcfe, up from 39.2 Bcfe. Average E&P sales price rose 28.4% to $5.52/Mcfe; average costs increased 2.8% to $3.63/Mcfe, lifting the reported unit margin to $1.89 from $0.77. Coal sales from company mines were 8.0 million tons versus 7.5 million; average sales price fell 8.3% to $66.20/ton while average cost fell 11.7% to $45.14/ton, leaving the reported margin essentially flat at $21.06/ton.
Material changes versus the prior period
- Higher gas prices and production drove E&P earnings before tax to $79.7 million from a loss of $0.6 million. Marcellus sales volumes increased 93.5%; total E&P sales volumes rose 23.4%.
- Coal division earnings before tax increased to $107.2 million from $99.7 million. Thermal coal improved, while low-volatile metallurgical coal earnings fell sharply amid weaker prices and lower shipments.
- Coal sales revenue declined to $534.7 million from $547.9 million. Average low-volatile metallurgical price fell 25.2% to $76.80/ton; the company said global metallurgical market weakness affected pricing.
- Net income benefited from a lower effective tax rate (6.5% versus 19.3%), including tax benefits related to percentage depletion and resolution of the IRS audit of 2008–2009 returns. Q1 2013 included a $27.1 million pension settlement expense and a $20 million company share of a CNX Gas shareholder settlement, neither repeated in Q1 2014.
- Investing cash use increased, primarily because capital expenditures rose. The company also received $125.5 million of asset-sale proceeds, including proceeds from a BMX Mine longwall-shield sale-leaseback.
Guidance, outlook, risks and unusual items
- Gas outlook: Q2 2014 production expected at approximately 50–52 Bcfe; full-year 2014 guidance remained 215–235 Bcfe. Management projected 30% annual production growth in both 2015 and 2016. As of April 9, 2014, disclosed hedge volumes/prices were 159.9 Bcf at $4.58/Mcf for 2014, 79.4 Bcf at $4.06/Mcf for 2015, and 72.0 Bcf at $4.16/Mcf for 2016. Management said it would use a base hedging formula with possible opportunistic additions and did not expect to hedge more than 80% of estimated annual production.
- Coal outlook: 2014 estimated total coal sales were 31–33 million tons; 2015 estimate was 33.6 million. Management lowered 2014 low-volatile metallurgical guidance because of pricing deterioration, but raised thermal guidance after a strong start and expected inventory rebuilding to support demand. These estimates are subject to market and operating uncertainty; open-tonnage prices were not forecast.
- Management cited winter-related low coal and gas inventories as possible support for demand and pricing into 2014–2015, but this outlook is exposed to commodity prices, customer demand, weather, transportation and processing capacity, and production execution.
- On April 16, 2014, after quarter-end, the company issued $1.6 billion of 5.875% senior notes due 2022. Proceeds were intended primarily to tender for and redeem the 8.00% notes due 2017, with any remainder directed to other senior debt.
- Key contingencies include royalty and land-right litigation, including certified class actions involving Virginia gas royalties; the filing describes accruals for certain matters as immaterial but says aggregate future loss could be material and cannot be reasonably estimated. It also reports approximately $1.558 billion of letters of credit, surety bonds and guarantees, and $1.560 billion of purchase obligations. Management expects guarantees to expire without funding, but this is not assured.
- Other significant risks include coal-market and regulatory exposure, natural-gas and coal price volatility, reserve-estimation uncertainty, joint-venture partner performance, substantial debt and contractual commitments, employee-benefit obligations, and environmental, safety and permitting requirements. Management stated disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for CONSOL Energy Inc., despite the request metadata naming CNX Resources Corp.
- Review the basis and sustainability of the turnaround in earnings, especially commodity prices, production growth, hedging effects, tax benefits and prior-year unusual charges.
- Track capital spending against operating cash flow, liquidity, and the stated 2014–2016 production and coal-sales guidance.
- Assess the April 2014 debt refinancing’s final tender/redemption amounts, resulting debt balance, interest expense and covenant implications.
- Monitor metallurgical coal pricing and volumes, Virginia royalty litigation and other contingencies, and the scale and timing of contractual obligations and financial assurances.
- Reconcile the filing’s separately stated leverage measures: the senior-secured leverage covenant was 0.00:1, while the dividend discussion cites a 4.62:1 leverage ratio; the text does not clearly explain the difference in those measures.