Filing summary
Issuer identity: The supplied filing is CONSOL Energy Inc.’s Form 10-Q, not a filing under the name CNX Resources Corp. The summary below describes the filing actually provided. Reporting period ended September 30, 2013; filed November 1, 2013. Financial statement amounts are in millions of dollars unless otherwise noted.
Business context and reporting period
CONSOL operated coal and natural gas businesses, with additional industrial supply and transportation activities. Its coal operations included thermal and metallurgical coal; gas growth was concentrated in the Marcellus. The filing compares the third quarter and first nine months of 2013 with the same 2012 periods.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue and other income | $1,231 | $1,160 | $3,738 | $4,041 |
| Pretax income (loss) | $11 | $(31) | $11 | $299 |
| Income tax expense (benefit) | $75 | $(20) | $90 | $60 |
| Net income (loss) attributable to shareholders | $(64) | $(11) | $(78) | $239 |
| Diluted earnings (loss) per share | $(0.28) | $(0.05) | $(0.34) | $1.04 |
| Cash from operating activities | Not separately provided | Not separately provided | $589 | $530 |
- Revenue and segment trends: Q3 revenue and other income increased about 6%, while the nine-month total decreased about 8%. Nine-month outside sales fell to $3,512 million from $3,585 million. Coal earnings before tax were $245 million versus $427 million for the nine months; gas reported a $7 million loss versus $25 million of earnings.
- Profit drivers and margins: Q3 coal sales volume rose, but average coal selling price per ton fell 9% to $61.26 and the reported margin per ton declined 6% to $10.80. Gas production grew to 46.1 Bcf in Q3 from 39.5 Bcf, supported by Marcellus growth; gas margin per Mcf rose to $0.97 from $0.81. For nine months, the Marcellus segment’s pretax contribution increased to $53 million from $14 million.
- Tax: Effective tax rates were unusually high—705.7% for Q3 and 809.9% for the nine months—because pretax earnings were low and the company recorded discrete charges, principally a $111 million excess-depletion tax charge for the nine-month period, plus tax charges tied to asset-sale gains. These rates are not representative of a normal earnings level.
- Cash flow and investment: Nine-month capital expenditures were $1,196 million, producing operating cash flow less capital expenditures of approximately negative $607 million before asset-sale proceeds and other investing items. Investing cash outflow was $559 million. Asset-sale proceeds were $598 million; financing cash outflow was $30 million. Cash ended at $21 million, versus $22 million at year-end 2012.
- Balance sheet and debt: Total assets were $12,737 million and equity $3,957 million at September 30. Long-term debt was $3,124 million; including capital leases, current debt, $47 million of CNX Gas revolver borrowings and $44 million under the receivables facility, total borrowings and lease obligations were approximately $3.3 billion. Current assets of $1,183 million were below current liabilities of $1,574 million. CONSOL’s $1.5 billion revolver had no borrowings and $1.396 billion of available capacity; CNX Gas had $883 million available under its $1.0 billion facility.
Material changes versus prior comparable periods
- Nine-month net income attributable to shareholders swung from $239 million of income to a $78 million loss. Revenue and other income declined, largely reflecting lower prior-year asset-sale gains and lower freight revenue; coal earnings also fell.
- Q3 pretax results improved from a $31 million loss to $11 million of income, but shareholder net loss widened to $64 million, principally because of the $75 million tax expense.
- Marcellus gas sales expanded substantially: Q3 sales volume increased 72% and nine-month volume increased 60% year over year. Conversely, coal prices—especially low-volatile metallurgical coal—remained under pressure.
- Capital spending rose to $1,196 million from $1,152 million, driven mainly by gas drilling and acreage investment, despite lower coal capital expenditures.
Outlook, management commentary, risks and unusual items
- Guidance: Management expected 2013 coal production of 56.7–57.1 million tons and Q4 production of 13.6–14.0 million tons. Expected Q4 gas production was 46–48 Bcfe, implying 2013 production of 170–172 Bcfe. 2014 gas production guidance was 210–225 Bcfe, with 25%–30% annual growth thereafter through 2016. Coal sales estimates were 57.0–57.4 million tons for 2013 and 30.1 million tons for 2014; 2014–15 guidance excludes mines proposed for sale.
- Proposed coal-business sale: On October 25, 2013, CONSOL agreed to sell five West Virginia longwall mines and River and Dock Operations to a Murray Energy subsidiary for $850 million cash, with assumption of specified employee, environmental and other liabilities. Closing was expected in Q4 2013; the final gain was not yet determined. Management also said the regular quarterly dividend would be reduced to $0.0625 per share after closing.
- Other unusual items: Pension settlement accounting added $38.5 million of nine-month pretax expense. A March 2013 fire at Blacksville No. 2 caused $38.6 million of nine-month pretax expense; the mine restarted May 20, and further insurance recovery was uncertain. Marcellus title-defect write-offs were $21.8 million for the nine months. The company recorded a $19.2 million expected share of a CNX Gas shareholder litigation settlement, approved in August and paid in October.
- Market and regulatory risks: Management cited volatile gas and coal prices, weaker metallurgical coal markets, regulatory pressure on coal-fired generation, environmental and safety requirements, permitting delays, mining disruptions, and gas transportation costs. The filing described a pending Bailey mine permit issue that could materially affect forecast production if a mine-plan change were required.
- Legal and commitments: Hale and Addison royalty class actions were certified; CONSOL intended to appeal and defend them. The filing said aggregate expressly stated or estimable claims exceeded accruals by approximately $792 million, while potential total losses could not be reasonably estimated. Financial guarantees and letters of credit totaled $1,104 million; unconditional purchase obligations totaled $1,255 million. Management believed guarantees would expire without funding.
- Hedges: Natural-gas cash-flow swaps covered 216.5 Bcf through 2016. At September 30, their gross fair value was a $107 million asset and a $5 million liability; the filing estimated a 10% gas-price move would change future derivative earnings by approximately $52 million in either direction.
Most important facts for investors to verify
- Confirm issuer identity and security: this source is CONSOL Energy Inc.’s filing, despite the request naming CNX Resources Corp.
- Track the Murray Energy sale’s closing, actual cash proceeds, liabilities transferred, final gain, and resulting post-sale operating profile.
- Assess the sustainability of cash generation against capital spending, low cash on hand, debt service, and the stated dividend reduction.
- Reconcile the unusually high tax expense and excess-depletion charge, and distinguish recurring earnings from asset-sale gains and other unusual items.
- Monitor coal pricing and production guidance, Marcellus growth and related transportation costs, title defects, litigation outcomes, regulatory exposure, and the Blacksville fire’s final insurance recovery.