CONSOL Energy Inc. (10-Q) — quarter ended September 30, 2011
The supplied filing is for CONSOL Energy Inc. (the historical registrant), not a filing under the name CNX Resources Corp. It reports unaudited results for the three and nine months ended September 30, 2011, compared with the same 2010 periods. The company operated coal and natural gas businesses; year-over-year comparisons are affected by the 2010 Dominion and CNX Gas acquisitions.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue and other income | $1,521.7m | $1,349.3m | $4,575.0m | $3,878.7m |
| Net income attributable to CONSOL shareholders | $167.3m | $75.4m | $436.9m | $242.3m |
| Diluted EPS | $0.73 | $0.33 | $1.91 | $1.13 |
| Operating cash flow | Not separately reported | Not separately reported | $1,252.4m | $878.9m |
| Capital expenditures | Not separately reported | Not separately reported | $997.5m | $821.9m |
- Third-quarter revenue rose about 13% and shareholder net income more than doubled. For the first nine months, revenue increased about 18% and shareholder net income increased about 80%.
- Coal drove the improvement: coal segment pretax earnings were $268m for Q3 versus $118m, and $719m for the nine months versus $349m. Gas segment pretax earnings were approximately nil for Q3 versus $35m, and $53m for the nine months versus $163m.
- For Q3, average coal selling price and cost were $76.60 and $55.91 per ton, respectively, yielding a reported $20.69 per-ton margin; corresponding gas figures were $4.92 and $3.93 per thousand cubic feet, for a $0.99 margin. Nine-month coal price/cost/margin were $72.48/$51.39/$21.09 per ton; gas figures were $4.97/$3.86/$1.11 per thousand cubic feet.
- Cash and equivalents were $472.5m at September 30, up from $32.8m at year-end 2010. Current assets were $1.902bn and current liabilities $1.303bn. Nine-month investing cash use was $231.3m, compared with $5.255bn in 2010, which included major acquisitions; financing used $581.4m versus $4.326bn provided in 2010.
- Balance-sheet debt was approximately $3.199bn including current maturities, versus $3.211bn at year-end 2010. No borrowings were outstanding under either revolving facility. CONSOL had about $1.235bn available on its $1.5bn facility; CNX Gas had about $930m available on its $1.0bn facility. Total equity was $3.427bn.
- Interest expense was $58.9m in Q3 and $190.0m for the nine months. The effective tax rate was 16.5% for Q3 and 20.6% year to date, with tax depletion and discrete tax adjustments affecting the rates.
Material changes and unusual items
- Coal results benefited from stronger metallurgical pricing and export demand. Q3 produced coal sales were 14.8m tons versus 15.4m; nine-month sales were 47.5m versus 46.2m. Q3 gas production increased to 40.4 Bcf from 35.8 Bcf, but lower realized prices compressed gas margins.
- In June, CONSOL decided to abandon Mine 84. The company recorded a $115.8m pretax charge for the first nine months (after-tax impact $75.3m, or $0.33 per diluted share) and expects about $18m in annual pretax cash savings.
- The September 30 Noble transaction sold a 50% interest in specified Marcellus assets. CONSOL received $519m cash and recorded notes receivable of $312m due in 2012 and $296m due in 2013, plus a commitment for Noble to fund one-third of certain drilling and completion costs, subject to limits and conditions. The financial statements report a $64.4m loss on the transaction; MD&A describes the loss as approximately $58m, a difference investors should reconcile.
- CONSOL also received $193m for overriding royalty interests sold to Antero and formed the 50/50 CONE Gathering joint venture with Noble. Management reported a $41.2m net gain on the Antero transaction and a $6.4m gain related to CONE.
- After quarter-end, CONSOL sold a 50% interest in nearly 200,000 Utica acres to Hess for approximately $594m in total consideration, including about $60m paid at closing and roughly $534m in drilling carry, subject to development. The company estimated a $52.7m gain for Q4.
- Debt actions included issuing $250m of 6.375% notes due 2021 and redeeming $250m of 7.875% notes due 2012, incurring a $16.1m extinguishment loss. The company also recorded $14.9m in Q3 consent-solicitation and financing fees.
Outlook, risks and contingencies
- Management forecast 2011 net gas production of 150–152 Bcf, including approximately 36–38 Bcf in Q4. Coal guidance was 62.0–62.6m tons for 2011; 2012 estimated sales were 59.5–61.5m tons. Management said 2011 thermal coal was sold out and approximately 84% of 2012 thermal tons were sold, at a reported average price of $62.37 per ton.
- Management cited robust international coal demand and tight metallurgical supply, while noting that low natural gas prices constrain domestic coal demand. A return to normal weather, weaker global growth, the European debt crisis, and regulatory changes could adversely affect demand and results. No earnings guidance was provided.
- Environmental compliance includes a planned Northern West Virginia mine-water treatment plant estimated to cost about $200m, with compliance work scheduled by 2013. Proposed or changing mining, emissions, water-discharge and hydraulic-fracturing rules could raise costs, delay projects or restrict operations.
- Reported postretirement benefit liabilities were $3.094bn. A post-quarter notice classified the UMWA 1974 Pension Plan as “seriously endangered”; the filing states that the company’s contribution terms under its labor agreement run through 2016, but multi-employer plan risks remain relevant.
- Some lawsuits and claims are unaccrued because losses were not considered probable or could not be estimated. Disclosed matters include a possible $9m–$30m range for the Ryerson Dam dispute, up to $221m in CNX Gas shareholder litigation, and a claim seeking up to $300m in the C. L. Ritter matter. The filing says aggregate expressly stated claims exceed recorded accruals by about $230m; actual aggregate exposure cannot be reasonably estimated. A $20.3m restricted-cash deposit relates to the dam dispute.
- At September 30, total commitments included $2.817bn of unconditional purchase obligations and $1.555bn of letters of credit, surety bonds and guarantees. Contractual obligations were reported at $13.094bn, including long-term employee-related and other liabilities. Management believed guarantees would expire without funding, but that outcome is not assured.
- The board announced after quarter-end a 25% increase in the regular annual dividend to $0.50 per share. Payment remains subject to board discretion and debt-agreement restrictions.
Important facts for investors to verify
- Reconcile the $64.4m Noble transaction loss in the financial statements with the approximately $58m cited in MD&A, and assess collection of the $608m in notes receivable.
- Track whether Noble and Hess meet drilling-carry commitments, including applicable limits, conditions and, for Noble, the disclosed natural-gas-price suspension provision.
- Compare actual coal and gas volumes, realized prices and costs with management’s 2011–2013 sales guidance and 2011 gas-production forecast.
- Monitor Mine 84’s expected savings, the cost and timing of water-treatment projects, and developments in environmental and hydraulic-fracturing regulation.
- Review litigation developments, pension-plan funding status, and the timing and potential cash demands of the company’s large contractual commitments.
- Distinguish recurring operating performance from asset-sale gains and losses, Mine 84 abandonment, debt-extinguishment costs, and acquisition-related comparability effects.