CONSOL Energy Inc. (historical filing; not a CNX Resources Corp. filing)
Business context and reporting period. This unaudited Form 10-Q covers the three months ended March 31, 2010, with comparisons to Q1 2009. CONSOL Energy reported coal, natural gas, and other operations; CNX Gas was an 83.3%-owned subsidiary. The filing was signed May 4, 2010.
Financial performance and liquidity
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total revenue and other income | $1,240.1 million | $1,218.8 million |
| Earnings before income taxes | $142.2 million | $284.7 million |
| Net income attributable to CONSOL shareholders | $100.3 million | $195.8 million |
| Diluted EPS | $0.54 | $1.08 |
| Cash from operating activities | $174.1 million | $249.8 million |
| Capital expenditures | $265.3 million | $299.6 million |
- Revenue rose 1.7%, while pretax income fell 50.1% and attributable net income fell 48.8%. Approximate pretax margin declined to 11.5% from 23.4%; attributable net margin fell to 8.1% from 16.1%.
- Operating cash flow less capital expenditures was negative $91.2 million, compared with negative $49.8 million in Q1 2009.
- Cash and cash equivalents were $1.879 billion at March 31, versus $65.6 million at year-end 2009. The increase was largely funded by the March 31 common-stock issuance, which generated $1.829 billion net proceeds.
- Current assets were $2.993 billion and current liabilities $1.619 billion. Reported total equity was $3.987 billion, up from $2.024 billion at December 31, 2009, principally reflecting the stock issuance.
- At March 31, short-term notes payable were $566.2 million, securitization borrowings $50 million, and long-term debt including current portion and capital leases approximately $466.3 million. The parent revolver had $517 million drawn, with $220.7 million of capacity remaining after letters of credit; CNX Gas had $49.2 million drawn and $135.9 million of capacity remaining.
- Quarterly dividend was $0.10 per share, unchanged from Q1 2009. Interest coverage and leverage covenants were reported as comfortably within limits at quarter-end.
Material changes and notable items
- Higher coal and gas operating costs, lower average coal and gas prices, increased depreciation, and $46.6 million of acquisition and financing fees weighed on earnings. Higher gas production volumes and lower income-tax expense partly offset the decline.
- Steam coal sales were 13.1 million tons versus 14.8 million; average price was $54.72 per ton versus $56.45. Low-volatile metallurgical coal sales increased to 1.2 million tons from 0.5 million, while average price decreased to $105.56 from $148.60. The company also sold 0.8 million tons of high-volatile metallurgical coal, primarily into Asian steel markets.
- Produced gas sales volumes increased 8.6% to 23.9 Bcf, while average realized price declined to $7.26 per Mcf from $7.38. The company reported that hedges covered approximately 13.0 Bcf at an average $8.76 per Mcf.
- Management recorded $25 million of expense for an expected increase in Fola mine reclamation obligations; detailed plans and final costs were not yet available. The Jones Fork sale/litigation settlement resulted in an $11.6 million pretax loss.
- Natural-gas cash-flow hedges had a reported fair value asset of $169.0 million at quarter-end. The company expected $75.8 million of unrealized gains to be reclassified from other comprehensive income into earnings over the next year.
Outlook, transactions, and risks
- Management described improving steel demand and expected metallurgical coal conditions to strengthen in 2010. It also noted that thermal coal inventories, though drawn down by cold weather, remained above normal, and low gas prices could displace up to 30 million tons of coal-fired generation in 2010.
- For gas, management cited weak prices near $4 per Mcf and planned to add a second horizontal rig to the Marcellus program on June 1, 2010. It expected CNX Gas to benefit from low costs and rising production.
- After quarter-end, CONSOL closed a $2.75 billion senior-note offering on April 1, 2010, bearing 8.00% due 2017 and 8.25% due 2020. The Dominion Appalachian oil-and-gas acquisition closed April 30 for $3.475 billion. It included approximately 1 Tcfe of proved reserves and 1.45 million acres, including about 500,000 prospective net Marcellus acres. The filing warned that the new debt would increase future interest expense.
- CONSOL launched an offer on April 28 to acquire the CNX Gas shares it did not own for $38.25 per share; the potential purchase price was approximately $965 million. Completion was conditional, including a minimum tender threshold, and shareholder litigation challenged the offer.
- Management identified commodity prices, customer demand, gas-to-coal fuel switching, mine safety rules, permitting and environmental regulation, and acquisition integration as material uncertainties. Significant matters disclosed include potential mine-water treatment costs of $100 million or more and possible penalties, the Ryerson Park Dam claim, asbestos claims, and other mine-water and subsidence litigation. Management stated some outcomes could be material; several amounts or outcomes remained uncertain.
- Moody’s and S&P downgraded CONSOL’s corporate ratings in March 2010 and assigned negative outlooks, reflecting increased financing and credit risk.
Important facts for investors to verify
- Confirm the issuer: this filing is for CONSOL Energy Inc., not CNX Resources Corp.; assess the historical corporate relationship and any intended entity mapping.
- Reconcile the sharp earnings decline with the one-time acquisition costs, reclamation charge, Jones Fork loss, and underlying coal and gas prices, volumes, and unit costs.
- Assess post-acquisition debt, interest expense, liquidity, covenant headroom, and the status and terms of the proposed refinanced credit facilities.
- Verify completion and funding of the Dominion acquisition and the CNX Gas tender offer, including tender conditions, litigation, and final consideration.
- Track the costs and timing of Fola reclamation, the Dunkard Creek treatment plant and any penalties, and material litigation or environmental developments.
- Review cash-flow generation relative to capital spending and dividend commitments; quarter-end cash included substantial equity-offering proceeds and is not representative of recurring operating cash generation.