CNX Resources Corp annual report, FY2016

Business context and reporting period

The filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. The supplied filing identifies CONSOL Energy, rather than CNX Resources Corp., as the registrant. CONSOL operated Appalachian natural-gas exploration and production (E&P), Pennsylvania coal mining, and related services. Its stated strategy was to grow E&P, monetize assets, and ultimately separate the gas and coal businesses.

Financial and operating performance

CONSOL reported $2.026 billion in total revenue and other income in its income statement; this presentation includes items such as derivative gains or losses and other income and is not the same measure as operating revenues from continuing operations above. Cash from investing activities was $487 million, mainly reflecting asset-sale proceeds, while financing activities used $969 million, including repayment of $952 million of revolver borrowings. Cash declined by $12 million during the year.

Gas production rose 20% to 394.4 Bcfe. Average E&P sales price, including cash derivative settlements, was $2.63/Mcfe, down from $2.81; average E&P cost fell to $2.32/Mcfe from $2.62, lifting the reported average margin to $0.31/Mcfe from $0.19. Coal sales volumes increased 7.4% to 24.6 million tons, but average realized price fell 23.2% to $43.31/ton. Coal cost declined 17.8% to $34.35/ton, and average margin narrowed to $8.96/ton from $14.58.

Changes, unusual items, and outlook

• Shareholder net loss widened, with $303 million of losses from discontinued operations, including impairments and sale losses associated with divested coal assets. CONSOL sold the Buchanan Mine and related assets in March for $403 million of cash proceeds, and sold the Miller Creek and Fola complexes in August, paying $28 million at closing and agreeing to further payments.
• The Noble Energy Marcellus joint venture was terminated effective October 1, 2016; the parties separated operating areas, and CONSOL received approximately $213 million. The exchange was accounted for as a mineral conveyance, with no gain or loss recorded.
• Unrealized commodity-derivative losses were $386 million in 2016, compared with unrealized gains of $197 million in 2015. Total loss on commodity derivatives reported in the income statement was $141 million in 2016, versus a $393 million gain in 2015. Derivative fair value was a net liability of $188 million at year-end.
• Management attributed better E&P unit costs to higher volumes, a production mix shift toward Marcellus and dry Utica gas, and cost reductions. Coal profitability was pressured by market pricing, although operating costs per ton fell following mine scheduling, staffing, vendor, and benefit changes. CONSOL recorded a $167 million valuation allowance against alternative minimum tax credits and $283 million of total deferred-tax-asset valuation allowances at year-end.
• For 2017, management expected gas production of approximately 415 Bcfe, E&P capital expenditures of $555 million, coal production of approximately 26 million tons, and coal capital expenditures of $135 million. The filing also projected gas production of approximately 485 Bcfe in 2018. These are forward-looking estimates, not guarantees.

Debt, liquidity, risks, and contingencies

At year-end, disclosed total long-term debt and capital lease obligations were approximately $2.802 billion, including $201 million borrowed by CNX Coal Resources LP, for which CONSOL was not a guarantor. CONSOL had no borrowings under its $2.0 billion secured revolver, $326 million of letters of credit outstanding, and approximately $1.674 billion of unused capacity. Covenant-defined interest coverage was 3.49x and the adjusted current ratio was 2.59x; the reported leverage ratio was 4.53x. The company reported no defaults. Its quarterly dividend was suspended after the Buchanan sale; 2016 dividends declared were $0.01 per share.

Material risks include volatile gas and coal prices, Appalachian pipeline and transportation constraints, customer and coal-contract concentration, hedging exposure, permit and environmental requirements, mine and well operating hazards, reserve-estimation and title uncertainty, and the ability to maintain financing and surety support. The filing reports approximately $474 million of mine-closing and gas-well-closing obligations, substantial employee-benefit liabilities, and approximately $1.05 billion of letters of credit, surety bonds, and guarantees. Management said it expected the guarantees to expire without funding, but litigation outcomes and other contingent losses could be material and some potential losses could not be reasonably estimated. The filing also identifies CONSOL’s guarantees relating to obligations assumed by Murray Energy as a risk.

Investor verification priorities

• Confirm the issuer and security being analyzed: this supplied 10-K is for CONSOL Energy Inc., despite the request metadata naming CNX Resources Corp.
• Review the audited statements and discontinued-operations note to distinguish recurring operations from asset-sale losses, impairments, and other nonrecurring items.
• Assess hedge fair values, settlement cash flows, hedge volumes and prices, and sensitivity to changes in gas prices; accounting gains and losses may differ from realized cash effects.
• Verify revolver availability, borrowing-base redetermination, covenant headroom, debt maturities, and obligations related to CNX Coal Resources and guarantees.
• Track delivery against 2017 production and capital-spending expectations, coal pricing and volumes, and the planned separation or monetization of businesses.
• Review reserve assumptions and the substantial proved-undeveloped component, reclamation and employee-benefit estimates, customer concentration, and the status and potential exposure of material litigation.