Business context and reporting period
The supplied filing is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016, covering its Exploration and Production (E&P) and Pennsylvania Mining Operations businesses. Although the request identifies CNX Resources Corp., the filing’s registrant is CONSOL Energy Inc.; verify the intended issuer and corporate-name continuity.
Unless otherwise stated, financial statement amounts below are in millions of dollars. The filing reclassified the Buchanan Mine and Fola and Miller Creek complexes as discontinued operations and recast prior-period presentation accordingly.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue and other income | $745.6 | $720.9 | $1,564.4 | $2,027.4 |
| Income (loss) from continuing operations | $62.6 | $129.3 | $(214.8) | $(395.6) |
| Net income (loss) attributable to CONSOL shareholders | $25.3 | $119.0 | $(542.1) | $(405.3) |
| Diluted earnings (loss) per share | $0.11 | $0.52 | $(2.36) | $(1.77) |
| Cash provided by operating activities | Not separately presented for the quarter | $386.6 | $404.3 | |
| Capital expenditures | Not separately presented for the quarter | $179.4 | $864.3 |
- Q3 total revenue and other income included a $198.2 million commodity-derivative gain (versus $143.6 million a year earlier). Nine-month derivative gains were $53.9 million, versus $251.1 million. These mark-to-market-sensitive gains affect reported earnings.
- Q3 E&P production reached 96.4 Bcfe, up 12%; average E&P sales price was $2.54/Mcfe and average costs were $2.36/Mcfe. Management reported E&P unit cash costs of $1.31/Mcfe, compared with $1.49/Mcfe a year earlier.
- Q3 PA Mining Operations sold 6.0 million tons, up from 5.7 million. Average realized price fell 22.3% to $44.30/ton; costs fell 11.1% to $35.79/ton, leaving an $8.51/ton margin versus $16.73/ton. Division pretax earnings were $35 million, down from $132 million.
- At September 30, cash was $80.2 million; current assets were $514.9 million and current liabilities $1,070.2 million. The company reported $354 million drawn on its $2 billion revolving facility, $323.8 million of letters of credit, and $1,322.2 million unused capacity. Its covenant current ratio was 2.73x and interest coverage ratio 3.99x.
- Reported long-term debt was $2,734.0 million, plus $29.8 million of long-term capital leases; short-term notes payable were $354 million. Debt and lease balances, as presented, should be distinguished from CNX Coal Resources LP’s separate borrowings included in consolidated figures.
- Operating cash flow was $386.6 million; investing cash flow was positive $221.3 million, including $366.3 million from discontinued investing activities. Financing used $600.2 million, largely reflecting $598 million of short-term borrowing repayments. Cash increased $7.7 million from year-end 2015.
Material changes versus comparable periods
- Q3 shareholder earnings declined to $25.3 million from $119.0 million, with lower continuing-operations income and a larger discontinued-operations loss. The nine-month shareholder loss widened to $542.1 million from $405.3 million, principally reflecting $322.7 million of discontinued-operations losses in 2016.
- Q3 natural gas, NGL and oil sales increased to $205.9 million from $157.5 million, while coal sales declined to $267.7 million from $323.2 million. For the first nine months, natural gas, NGL and oil sales rose modestly to $555.1 million, while coal sales dropped to $744.4 million from $1,026.6 million.
- The nine-month E&P loss from continuing operations improved substantially versus 2015, which included an $828.9 million E&P property impairment. No comparable impairment was recorded in 2016. Conversely, 2016 had an $355.7 million impairment of the Fola and Miller Creek assets held for sale, in addition to sale losses.
- Capital expenditures were substantially lower year over year, reflecting reduced E&P drilling and lower mining spending. Operating cash flow decreased by $17.6 million.
Outlook, management commentary, risks and unusual items
- Management’s E&P guidance stated 2016 production of 380–385 Bcfe. However, the nearby hedging table lists 2016 total yearly production of 390–395 Bcfe; the filing text does not clearly reconcile these figures. 2017 production was listed as undetermined.
- 2016 PA Mining Operations sales guidance was revised to approximately 23.6–24.4 million tons, from a prior range of 22.5–25.5 million. PA Mining capital spending guidance was reduced to $60–$76 million; normalized maintenance capital was estimated at $5–$6 per ton.
- Management cited improving E&P production and lower unit costs, expanded ethane recovery and sales through Mariner East, and better mining productivity. Two rigs resumed drilling in Monroe County, Ohio; two dry Utica wells averaged about 8,600 feet of lateral length and $180 per lateral foot.
- As of October 13, 2016, the company reported 264.5 Bcf of 2016 NYMEX-plus-basis gas hedges at an average $3.03/Mcf, with approximately $801 million of protected 2016 revenue. Hedges reduce downside exposure but may limit benefit from higher prices. A hypothetical 10% increase in future gas prices would reduce future derivative earnings by $196 million, according to the filing.
- In 2016, CONSOL sold Buchanan Mine assets and the Fola and Miller Creek complexes. The latter sale generated a $53.1 million net loss excluding the related impairment; the buyer assumed specified closure and reclamation liabilities, while CONSOL agreed to additional installment payments. CNX Coal Resources also acquired an additional 5% interest in the Pennsylvania Mining Complex for $21.5 million cash and $67.3 million of preferred units.
- After quarter-end, CNX Gas entered an agreement with Noble Energy to end their joint development arrangement, divide the relevant gas assets, and provide CONSOL approximately $205 million cash at closing, subject to adjustments. The filing describes the agreement date inconsistently in different sections (October 28 and October 29, 2016).
- The quarterly dividend was suspended following the Buchanan sale; the only 2016 year-to-date dividend was $0.01 per share. The filing reports a 4.35x total leverage ratio and describes credit-facility and note-indenture restrictions on dividends.
- Risks include volatile gas and coal prices, hedging exposure, borrowing-base and covenant constraints, substantial transportation commitments, environmental and mine-closure liabilities, customer and operating risks, and joint-venture dependencies. A Clean Water Act consent decree imposed a $3 million penalty and compliance requirements. The filing also describes pending royalty and mine-void litigation; aggregate potential losses cannot be reasonably estimated, and stated claims exceed recorded accruals by approximately $642.9 million.
- Management said existing cash generation, asset-sale proceeds and borrowing capacity should meet working-capital, capital-spending and debt-service needs, but stressed dependence on future operating performance and market conditions. It reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q names CONSOL Energy Inc., not CNX Resources Corp.
- Reconcile the 2016 E&P production guidance of 380–385 Bcfe with the table’s 390–395 Bcfe figure and confirm the applicable production definition.
- Assess earnings quality by separating cash hedge settlements from unrealized derivative gains and losses, and discontinued-operation impairment and disposal charges.
- Review liquidity and covenant headroom, including revolver availability after letters of credit, the reported 4.35x leverage ratio, and dividend restrictions.
- Confirm closing and cash proceeds, remaining payment obligations, and liability transfers for divestitures and the Noble Energy exchange agreement.
- Evaluate coal pricing, customer deferrals, transportation commitments, and the uncertain outcomes of disclosed litigation and environmental obligations.