CONSOL Energy Inc. 10-Q Summary
Reporting period: Quarter ended September 30, 2017; filed October 31, 2017. The supplied filing is for CONSOL Energy Inc., which expected to change its name to CNX Resources Corporation after the planned coal-business separation. It is not presented under the CNX Resources name.
Business context and financial results
CONSOL operated natural gas exploration and production (E&P) and Pennsylvania (PA) coal-mining businesses. Dollar figures below are in millions unless otherwise stated.
- Third quarter: Revenue and other income was $671, down from $746 in 2016. Natural gas, NGL and oil sales rose to $234 from $206, and coal sales rose to $279 from $268. The decline in total revenue primarily reflects commodity-derivative gains falling to $19 from $198.
- Continuing-operations pretax earnings were $1, versus $115 a year earlier; net loss attributable to CONSOL shareholders was $26, or $0.11 per diluted share, versus income of $25, or $0.11 per share. The 2016 quarter also included a $35 loss from discontinued operations.
- First nine months: Revenue and other income was $2,236, up from $1,564. Net income attributable to CONSOL shareholders was $104, or $0.45 per diluted share, compared with a $542 loss, or $2.36 per share, in 2016. The comparison reflects, among other items, 2016 discontinued-operations losses and stronger 2017 asset-sale gains.
- For the first nine months, E&P pretax earnings were $154 versus a $156 loss, and PA Mining pretax earnings were $132 versus $80. The 2017 E&P results included $142 of unrealized derivative gains, $165 of asset-sale gains and a $138 impairment charge.
Operating performance, cash flow and liquidity
- E&P, third quarter: Sales volume increased 4.8% to 101.0 Bcfe. Average realized price was $2.50/Mcfe and average costs were $2.26/Mcfe, for a $0.24/Mcfe margin. Production costs per Mcfe declined 4.2% year over year.
- PA Mining, third quarter: Sales rose 5.0% to 6.3 million tons. Average price was $44.16/ton, while costs increased 4.3% to $37.32/ton; the margin declined to $6.84/ton from $8.51. Management cited mine permitting and geological issues, belt advancement and equipment-overhaul work.
- Cash flow, first nine months: Operating cash flow was $472, compared with $388 in 2016; investing activities provided $12 versus $221, and financing activities used $259 versus $602. Capital expenditures were $451, while proceeds from asset sales were $427. Cash increased to $286 from $60 at year-end 2016.
- Debt and liquidity: Long-term debt was $2,501 and capital-lease obligations were $42 at September 30. The company had no borrowings under its $2.0 billion secured revolving facility and $1.686 billion of unused capacity after letters of credit. Cash plus current assets totaled $805 against current liabilities of $860; the disclosed covenant current ratio, which includes revolver availability and has specified exclusions, was 3.09 to 1.00. Interest coverage was 5.46 to 1.00.
- CONSOL repurchased or redeemed portions of its notes during the period, including calling the remaining 2020 and 2021 notes and purchasing $119 of 2022 notes. Interest expense for the nine months declined to $129 from $145.
Outlook, material developments and risks
- Guidance maintained: 2017 E&P production of approximately 405–415 Bcfe and E&P capital expenditures of $620–$645; 2018 E&P production of 520–550 Bcfe. 2017 PA Mining sales guidance was approximately 26–27 million tons, with capital expenditures reduced to $92–$108.
- As of October 17, disclosed hedged gas volumes included 316.6 Bcf for 2017 and 333.3 Bcf for 2018. Management cautioned that hedges can limit participation in price increases and create other risks.
- The board approved the proposed separation of coal and E&P into separate public companies on October 30, 2017. The expected distribution date was November 28, subject to conditions and SEC effectiveness. The revolving-credit amendment provides for lender commitments to fall from $2.0 billion to $1.5 billion at separation, subject to pro forma leverage requirements.
- The board also approved a share-repurchase authorization increased to $450 million; approximately $81 million had been repurchased by October 30. The filing states that the program is discretionary and may be changed or discontinued.
- Unusual items include the $138 Knox Energy impairment, significant asset disposals and gains, derivative fair-value volatility, and separation-related transaction costs. A third-quarter coal contract buyout contributed $8 of other income.
- Risks include commodity-price volatility, operating and permitting conditions, environmental and mine-closure obligations, counterparty and transportation risks, and uncertainties around the separation. The filing reports class-action royalty litigation and retiree-benefit lawsuits; some losses are reasonably possible but not estimable. The company reported $960 of letters of credit, surety bonds and guarantees, and $1.242 billion of unconditional purchase obligations.
Important facts for investors to verify
- Reconcile reported earnings with derivative gains/losses, asset-sale gains and impairment charges; distinguish cash settlements from unrealized mark-to-market effects.
- Confirm the separation’s completion, final financing and leverage terms, distribution mechanics, and the resulting standalone capital structures.
- Track production, realized pricing and hedge coverage against guidance, as well as E&P and coal unit costs and the stated operational constraints.
- Review debt maturities, CNX Coal Resources LP borrowings, covenant headroom, and the liquidity impact of the credit-facility amendment and share repurchases.
- Monitor litigation, reclamation and other long-term obligations, guarantees, and purchase commitments; the filing says potential aggregate claims cannot be reasonably estimated.