Filing summary
Entity and period: The supplied filing is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2011. This does not match the request metadata naming CNX Resources Corp.; verify the intended issuer. Unless otherwise noted, financial amounts below are in U.S. dollars.
Financial performance and position
- Revenue and earnings: Revenue and other income were $1.465 billion, up 18% from $1.240 billion. Net income attributable to CONSOL shareholders was $192.1 million, versus $100.3 million; diluted EPS was $0.84, versus $0.54. Pretax margin was approximately 17.1% and attributable net margin approximately 13.1%, calculated from reported figures.
- Segment performance: Coal segment pretax earnings rose to $298.7 million from $113.1 million, driven by higher coal prices and volumes. Gas segment pretax earnings fell to $24.2 million from $73.7 million, reflecting lower gas prices despite increased production.
- Cash flow: Operating cash flow was $435.2 million, compared with $174.1 million. Capital expenditures were $254.8 million, making operating cash flow less capital expenditures approximately $180.5 million. Investing cash outflow was $253.0 million; financing cash outflow was $87.3 million. Cash increased to $127.7 million from $32.8 million.
- Liquidity and debt: Current assets were $1.234 billion and current liabilities $1.636 billion (current ratio approximately 0.75). At quarter-end, the company reported $170.5 million of short-term borrowings, $275.0 million of current long-term debt, and $3.184 billion of long-term debt, including capital leases. Its $1.5 billion credit facility had no borrowings and approximately $1.235 billion of available capacity after letters of credit; CNX Gas had $170.5 million drawn and $459.3 million available under its separate facility.
- Other obligations: Total liabilities were $9.102 billion. Postretirement benefits other than pensions were $3.080 billion. The company reported $1.609 billion of letters of credit, surety bonds and guarantees, and $829.7 million of purchase obligations.
Material changes versus the prior-year quarter
- Coal pricing and sales improved: average price across active coal operations rose 14% to $68.20 per ton, while average cost rose 2.9% to $44.83 per ton. Coal sales from CONSOL mines increased to 16.5 million tons from 15.1 million.
- Gas production increased to 35.9 billion cubic feet from 24.0 billion, substantially reflecting the Dominion acquisition completed in April 2010. Average gas sales price declined 31.9% to $4.93 per thousand cubic feet; gas segment pretax earnings consequently decreased.
- Interest expense rose to $66.5 million from $8.1 million, primarily because of debt issued to finance the Dominion acquisition. Conversely, the prior-year quarter included $46.6 million of acquisition and financing fees, absent in 2011.
- Weighted-average basic shares increased to 226.4 million from 181.7 million, also affecting year-over-year per-share comparisons.
Outlook, risks and unusual items
- Management said coal demand was strong and expected U.S. gas markets to return to equilibrium in one to two years, while noting current gas oversupply and weak prices. The filing provides no specific earnings or production guidance.
- After quarter-end, CONSOL redeemed $250 million of 7.875% notes due 2012 using proceeds from $250 million of 6.375% notes due 2021. The redemption cost was approximately $268 million, including a make-whole premium; management estimated a roughly $16 million extinguishment loss. Credit facilities were also amended to lower pricing and extend maturities to 2016; CNX Gas’s facility availability increased to $1.0 billion.
- Environmental compliance may require an advanced mine-water treatment plant costing approximately $200 million or more. Management also cited permitting delays, rising commodity and operating costs, weak gas prices and possible idle-rig charges. The UMWA labor agreement expires December 31, 2011; negotiations could affect production and cash flows.
- Management was assessing alternatives for Mine 84, with a possible significant non-cash charge. Litigation and regulatory matters include the Ryerson Dam dispute, numerous asbestos claims, royalty and gas-ownership suits, and a Virginia case seeking up to $300 million; the company had not accrued a liability for the latter. The company also reported substantial environmental-remediation estimates and other contingencies.
- Natural-gas swaps had a reported net fair-value asset of approximately $51.9 million; a hypothetical 10% gas-price decrease would increase future derivative-related earnings by $68.7 million, with a corresponding decrease under a 10% price increase. Hedging may also limit benefit from rising prices.
- Management stated that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether CONSOL Energy Inc., rather than CNX Resources Corp., is the intended issuer for this summary.
- The sustainability of coal prices, sales volumes and margins, and the impact of lower gas prices on production economics and cash flow.
- Debt, interest costs, covenant headroom and the effects of the April refinancing and redemption, including the expected extinguishment loss.
- Expected cash costs and timing for mine-water treatment, environmental remediation, employee-benefit obligations and other contingent claims.
- Actual capital spending, liquidity needs, labor negotiations, Mine 84 decisions and any subsequent changes to management’s outlook.