Filing summary: CONSOL Energy Inc. Form 10-Q
Entity note: The supplied filing is for CONSOL Energy Inc., not CNX Resources Corp. It reports the quarter ended March 31, 2013; figures below are in U.S. dollars, generally converted from thousands to millions where appropriate.
Business context and reporting period
CONSOL Energy operated coal and natural gas businesses, with additional industrial supply and transportation activities. Results cover the three months ended March 31, 2013, compared with the first quarter of 2012. Management cautioned that interim results are not necessarily indicative of future periods.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue and other income | $1,289.6 million | $1,426.8 million; down about 9.6% |
| Income (loss) before taxes | $(1.3) million | $118.6 million |
| Net income (loss) attributable to CONSOL shareholders | $(1.6) million; $(0.01) per diluted share | $97.2 million; $0.42 per diluted share |
| Operating cash flow | $268.3 million | $229.5 million |
| Capital expenditures | $406.0 million | $306.4 million |
| Cash and cash equivalents | $25.1 million at March 31 | $21.9 million at December 31, 2012 |
| Total equity | $4.0 billion | $4.0 billion at December 31, 2012 |
Operating cash flow less capital expenditures was approximately negative $137.7 million. Net cash increased $3.2 million after investing and financing outflows. Current assets were $1.44 billion versus current liabilities of $1.35 billion. Long-term debt was $3.17 billion; including current debt and capital leases, debt and lease obligations totaled approximately $3.19 billion. The company had no borrowings on either revolving credit facility and reported approximately $1.4 billion of unused capacity on CONSOL’s facility and $930 million on CNX Gas’s facility. The securitization facility had $30.1 million drawn and $159.3 million of letters of credit outstanding.
Coal earnings before tax declined to $93.5 million from $162.5 million; gas reported a $0.6 million loss versus $12.5 million of earnings. Coal’s average sales price was $63.56 per ton and average cost of goods sold was $50.69 per ton, producing a $12.87 per-ton margin, down 11% year over year. Gas’s average sales price was $4.30 per thousand cubic feet and average cost was $3.53, for a $0.77 margin, down 13.5%. Gas production rose to 39.2 Bcf from 37.7 Bcf.
Material changes versus prior period
- Revenue fell by $137.1 million and shareholders’ results swung from $97.2 million of income to a $1.6 million loss. Lower coal revenue and weaker metallurgical coal prices were important factors; prior-year other income also included gains on asset sales.
- Coal earnings fell by about $69 million, with low-volatile metallurgical coal earnings down $24 million as its average selling price fell 38.8% to $102.69 per ton. Thermal coal earnings were approximately flat.
- Gas production and Marcellus sales increased with ongoing drilling, but higher gathering and other unit costs offset some gains. Marcellus segment earnings increased to $14 million from $3 million.
- Capital expenditures increased about $100 million, primarily due to gas investment, including Marcellus/Utica drilling and the airport acreage lease. Asset-sale proceeds also increased, including proceeds from two longwall-shield sale-leasebacks.
- Operating cash flow increased despite the earnings decline, supported in part by noncash add-backs and working-capital movements. No dividend was paid during Q1 2013, compared with $28.4 million in Q1 2012.
Outlook, management commentary, risks and unusual items
- Management forecast 2013 coal sales of 55.5–57.5 million tons and net gas production of 170–180 Bcf; Q2 gas production was expected at approximately 38–40 Bcf. Coal sales estimates for 2014 and 2015 were 62.6 million and 63.9 million tons, respectively. These were estimates, not guarantees.
- Management described coal and gas markets as affected by weather, commodity prices, global metallurgical coal oversupply, utility fuel switching and regulation. It cited continuing regulatory and environmental uncertainty, including MATS, proposed coal stream-protection rules, and permitting matters that could affect production.
- A $27.1 million pretax pension settlement charge followed lump-sum distributions exceeding the plan’s settlement threshold. Further settlement charges in 2013 were considered reasonably possible and could be material.
- A fire at the Blacksville No. 2 Mine led to a $15.2 million pretax expense; operations had not resumed by the filing date, and the timing of resumption and any insurance recovery were uncertain.
- The company conceded certain Noble joint-venture acreage title defects, recording a $6.3 million impact for the quarter. Noble had asserted defects involving approximately 93,000 gross acres and $610 million of allocated carry value; the company said it expected to resolve or cure most. Unresolved title defects could reduce drilling carries and increase CONSOL’s share of development costs. Separate Hess acreage title discussions were also ongoing.
- In April 2013, the company agreed to pay Pennsylvania $36 million to settle claims concerning Ryerson Park Dam and Lake, with related exchanges of rights and property. The settlement occurred after quarter-end.
- A settlement in principle of CNX Gas shareholder litigation provided for a total $42.7 million payment, of which CONSOL expected to pay $20.2 million; it remained subject to court approval and final documentation. The company also disclosed numerous other legal and environmental matters. It said pending claims’ aggregate stated or estimable demands exceeded accrued amounts by approximately $845 million, while noting that future aggregate loss could be material but could not be reasonably estimated.
- Natural gas swaps covered 147.4 Bcf and were scheduled to settle through 2015. A 10% gas-price movement was estimated to change future derivative earnings by approximately $23.5 million in the opposite direction. Management stated that operating cash and borrowing capacity were expected to meet working-capital needs, planned capital spending and debt service, subject to market and operating conditions.
Most important facts for investors to verify
- Confirm the issuer and security: this source is CONSOL Energy Inc., whereas the request identifies CNX Resources Corp.
- Review the drivers and persistence of the earnings decline, especially coal pricing, segment costs and the unusually large pension and mine-fire charges.
- Track whether forecast coal sales and gas production are achieved, and whether planned capital spending converts into profitable production and cash flow.
- Monitor pension settlement charges, the Blacksville mine restart and potential insurance proceeds, and the $36 million Ryerson settlement’s cash and asset-rights effects.
- Follow Noble and Hess title-defect resolutions, associated drilling-carry reductions, litigation outcomes and environmental obligations.
- Check liquidity, facility availability, covenant headroom and dividend capacity as capital expenditures and contractual commitments continue.