Business context and reporting period
The filing is an unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The registrant named on the filing is CONSOL Energy Inc., not CNX Resources Corp.; investors should verify the entity and filing intended. CONSOL reported coal and natural gas operations, with Coal and Gas as its principal divisions.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue and other income | $1,216.7m | $1,454.5m | $2,506.3m | $2,881.3m |
| Pre-tax earnings | $1.8m | $211.7m | $0.5m | $330.2m |
| Net income (loss) attributable to shareholders | $(12.5)m | $152.7m | $(14.1)m | $249.9m |
| Diluted EPS | $(0.05) | $0.67 | $(0.06) | $1.09 |
| Operating cash flow | Not presented quarterly in the supplied cash flow statement | $393.4m | $367.9m |
- Six-month capital expenditures were $758.0m, resulting in operating cash flow less capital expenditures of approximately negative $364.6m. Investing cash outflow was $465.1m; financing provided $121.8m. Cash increased $50.1m to $71.9m.
- At June 30, total assets were $12.75bn, total liabilities $8.73bn, and equity $4.03bn. Current assets of $1.47bn were slightly below current liabilities of $1.49bn.
- Long-term debt, including capital leases, was $3.17bn; short-term notes payable were $173m and securitization borrowings were $40.7m. CNX Gas had $173m drawn on its $1bn facility; the parent’s $1.5bn revolving facility had no borrowings. Reported unused capacity was about $1.4bn at the parent and $757m at CNX Gas, subject to letters of credit and facility terms.
- Interest expense was $54.5m in Q2 and $107.9m for the first half. Six-month dividends paid were $28.6m; the quarterly dividend was $0.125 per share.
Material changes versus comparable periods
- Revenue and other income fell year over year, while earnings swung to losses. A major driver was lower asset-sale gains: first-half 2012 included substantial proceeds and gains from non-producing asset dispositions; 2013 included a $24.7m Potomac coal-reserve gain.
- Coal division pre-tax earnings fell to $65m in Q2 from $257m and to $158m for the first half from $420m. First-half coal sales from company mines declined to 29.0m tons from 29.6m; average selling price fell to $63.17/ton from $67.37, while cost per ton also declined to $51.25 from $53.36.
- Gas division pre-tax results were a $5m loss in both Q2 and first-half 2013, versus Q2 earnings of $1m and first-half earnings of $13m in 2012. First-half gas production rose to 77.8 Bcf from 75.0 Bcf, but average unit costs increased faster than prices; the Marcellus segment improved with production growth.
- First-half operating cash flow increased by $25m, despite sharply lower net income, reflecting changes including lower gains on asset sales and working-capital movements. Capital spending increased $44m; gas capital expenditures rose substantially as Marcellus/Utica development and acreage spending expanded.
Outlook, commentary, risks and unusual items
- Management forecast 2013 coal sales of 55.5–57.5 million tons; Q3 2013 sales of 13.4–13.9 million tons. Estimated 2013 net gas production was 170–175 Bcfe, with Q3 production of 43–45 Bcfe. BMX Mine capital investment was expected to total $710m, higher than the prior estimate.
- Management described natural-gas prices as above 2012 levels but weakening in June; thermal coal was supported by stronger gas prices and disciplined production, while global metallurgical coal remained oversupplied and prices were under pressure. CONSOL planned to reduce metallurgical coal output and increase thermal output.
- Unusual first-half items included a $38.4m pre-tax expense from the Blacksville No. 2 Mine fire (production restarted May 20; insurance recovery was uncertain), $32.2m of pension settlement expense, and a $20.2m expected company share of a proposed CNX Gas shareholder-litigation settlement, subject to court approval.
- Other notable transactions included longwall-shield sale-leasebacks generating about $203m in proceeds across three mines, with five-year operating leases, and a $46.3m up-front payment for airport-area oil and gas rights subject to a drilling deadline and title issues. The company also settled the Ryerson Park Dam matter for $36m, partly credited against lease bonus and royalty payments.
- Key risks include coal and gas price and demand volatility; environmental and safety regulation; mine disruptions; pension and other employee-benefit obligations; litigation and royalty claims; and title defects affecting joint-venture acreage and drilling carries. Noble asserted Marcellus title defects with an indicated carry value of about $481m; CONSOL said it expected to resolve most favorably, but conceded some defects. The company noted additional pension settlement charges in 2013 were reasonably possible and could be material.
- Natural-gas swaps covered 197.7 Bcf at June 30, 2013 and were scheduled to settle through 2016. Management stated that it expected operating cash flow and borrowing capacity to cover working capital, planned spending, debt service, dividends and letters of credit, while noting dependence on future operating performance.
Most important facts for investors to verify
- Confirm whether this CONSOL Energy filing is the intended filing for the requested CNX Resources Corp.
- Assess the drivers and repeatability of the sharp earnings decline, including prior-year asset-sale gains, the mine-fire charge, pension settlement expense and unusually high effective tax rate caused by very low pre-tax income and discrete tax items.
- Compare guidance with subsequent actual coal sales, gas production, BMX spending and capital expenditures; assess whether cash generation can fund the investment program.
- Track credit-facility availability, covenant headroom, debt service, letters of credit, and liquidity after factoring in contractual purchase and transportation commitments.
- Monitor resolution and cash impact of the CNX Gas shareholder settlement, royalty and title litigation, Marcellus title defects, and any additional pension charges or fire-insurance recovery.