Filing summary
Entity and period: The supplied filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2010, filed February 10, 2011. This does not match the request metadata naming CNX Resources Corp. and “2010 Q4”; the filing reports CONSOL Energy’s full-year results, with quarterly data also included.
Business context
CONSOL was a diversified coal and natural gas producer and energy-services provider. Its coal business served power generators and steelmakers; its gas business included coalbed methane, conventional production, and Marcellus development. The filing reports approximately 62.4 million tons of coal produced and 127.9 billion cubic feet of gas produced in 2010. A major strategic shift was the April 2010 acquisition of Dominion’s Appalachian oil and gas business for approximately $3.47 billion, followed by the purchase of the remaining CNX Gas shares.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue and other income | $5.236 billion | $4.622 billion |
| Earnings before income taxes | $467.9 million | $788.3 million |
| Net income attributable to CONSOL shareholders | $346.8 million | $539.7 million |
| Diluted EPS | $1.60 | $2.95 |
| EBITDA (non-GAAP) | $1.221 billion | $1.224 billion |
| Operating cash flow | $1.131 billion | $1.060 billion |
| Capital expenditures | $1.154 billion | $920.1 million |
Revenue rose about 13%, while pretax earnings fell about 41% and shareholder net income fell about 36%. The filing attributes pressure to acquisition-related interest and fees, weaker gas pricing and margins, higher costs, and other unusual charges; EBITDA was broadly flat. Coal’s average realized price per ton sold increased to $61.33 from $58.70, while average costs rose to $45.44 from $43.13. Coal margin per ton increased slightly to $15.89 from $15.57. Gas production grew to 127.9 Bcf from 94.4 Bcf, but average realized price including hedges fell to $5.83/Mcf from $6.68/Mcf; average cost rose to $3.90/Mcf from $3.44/Mcf, reducing reported unit margin to $1.93/Mcf from $3.24/Mcf.
Investing cash outflow was $5.544 billion, largely reflecting the Dominion acquisition, the CNX Gas minority-interest buyout, and capital spending. Financing provided $4.380 billion, including proceeds from $1.83 billion of equity issuance and $2.75 billion of notes. Cash ended the year at $32.8 million. Working capital was negative $549.8 million, with current assets of $1.115 billion and current liabilities of $1.665 billion. Total debt was approximately $3.695 billion, including $3.211 billion of long-term debt and $484 million of short-term borrowings and securitization borrowings. The company reported about $1.1 billion of unused capacity under its principal revolving facility. The quarterly dividend was $0.10 per share, or $0.40 for the year.
For the fourth quarter of 2010, the filing reports sales of $1.308 billion, net income attributable to shareholders of $104.5 million, and diluted EPS of $0.46. Comparable fourth-quarter 2009 figures were $1.159 billion of sales, $143.2 million of attributable net income, and $0.77 diluted EPS.
Material changes and outlook
- Dominion added approximately 1 Tcfe of proved reserves and 1.46 million net acres; the acquired business contributed $133.9 million of revenue and a $5.4 million net loss after its May 1, 2010 inclusion in results. CONSOL also acquired the remaining CNX Gas interest for approximately $991 million.
- Gas proved reserves increased to 3.732 Tcfe from 1.911 Tcfe, principally reflecting acquisitions, revisions, and extensions. Coal reserves were 4.401 billion tons versus 4.520 billion tons.
- Management expected stronger 2011 metallurgical-coal demand and improving steam-coal demand, while warning that natural gas remained oversupplied. It identified Marcellus acreage development and delineation as a key 2011 gas objective. No consolidated earnings or production guidance is clearly provided in the filing.
- As of January 2011, hedges covered approximately 69.2 Bcf of 2011 gas production at a weighted average $5.29/Mcf, 26.4 Bcf in 2012 at $6.02/Mcf, and 7.5 Bcf in each of 2013 and 2014 at $5.08/Mcf and $5.30/Mcf, respectively. Hedges limit exposure to falling prices but may constrain gains if prices rise.
Risks, contingencies, and unusual items
- Acquisition financing materially increased interest expense: $205.0 million in 2010 versus $31.4 million in 2009. The company also recorded $65.4 million of acquisition and financing fees. Debt covenants, refinancing needs, and the $250 million 7.875% notes due in March 2012 are important considerations.
- Environmental permitting, water quality rules, and mine-water treatment create potential operating and capital burdens. A planned West Virginia treatment facility was estimated at $110–$120 million, with completion targeted for 2013; management also forecast $62.4 million of 2011 environmental-control capital expenditures.
- Reclamation and mine-closing obligations totaled approximately $670.9 million. A revised Fola mine plan increased reclamation liability by about $80.5 million. The filing also describes a $20.3 million restricted-cash deposit for the contested Ryerson Dam matter and a 2010 settlement of Buchanan Mine water litigation.
- Postretirement benefits were a substantial unfunded obligation: the balance-sheet liability was approximately $3.08 billion. The UMWA 1974 Pension Trust was reported as seriously endangered and about 76% funded; required additional contributions could affect results. The labor agreement was due to expire December 31, 2011.
- Health-care legislation affected black-lung liability; the filing describes an approximately $46 million increase from legal changes, partly offset by assumption revisions. Fairmont Supply faced approximately 22,500 asbestos claims; management’s recorded estimate was described as immaterial, but future payments could be material.
- Mine safety disclosures report one 2010 fatality, one imminent-danger order, and nine flagrant-violation penalties for the year. The company said it was contesting citations and assessments.
- Management and the auditor reported effective internal control over financial reporting and the financial-statement audit received an unqualified opinion. However, the Dominion acquisition business was excluded from the 2010 internal-control effectiveness assessment.
Most important facts for investors to verify
- Confirm the intended issuer and period: this is CONSOL Energy’s 2010 annual filing, not a filing identified as CNX Resources or a stand-alone Q4 report.
- Review acquisition integration, acquired-asset performance, reserve assumptions, and the financing impact on interest expense, leverage, and per-share results.
- Check available revolver capacity, covenant headroom, near-term maturities, and the effect of planned investment and dividends on liquidity.
- Assess the cost, timing, and permitting status of mine-water treatment and reclamation projects, alongside pension, retiree-health, and litigation exposures.
- Compare management’s 2011 coal and gas market expectations with realized prices, production, costs, and the protection and limitations of outstanding hedges.