Business context and reporting period
Entity discrepancy: The request identifies CNX Resources Corp., but the supplied Form 10-Q is for CONSOL Energy Inc. and subsidiaries. It covers the quarter and nine months ended September 30, 2015; interim financial statements are unaudited.
CONSOL operated Exploration and Production (E&P) and Coal divisions. The filing describes a company exposed to weak natural gas and coal prices, while expanding gas production and reducing costs.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue and other income | $813.9m | $884.6m | $2,352.5m | $2,791.1m |
| Net income (loss) attributable to CONSOL shareholders | $119.0m | ($1.6m) | ($405.3m) | $89.4m |
| Diluted EPS | $0.52 | ($0.01) | ($1.77) | $0.39 |
| Operating cash flow | — | $404.3m | $850.2m | |
| Capital expenditures | — | $895.2m | $1,174.6m |
Q3 2015 earnings included a $99.1m unrealized commodity-derivative gain and a $48.1m gain on asset sales, as well as significant benefit-plan accounting effects. Nine-month results included an $828.9m E&P property impairment. Operating cash flow less capital expenditures was approximately negative $490.9m for the first nine months.
- Q3 E&P: Record production of 86.1 Bcfe, up 33% year over year. Average realized sales price was $2.35/Mcfe versus costs of $2.63/Mcfe, a negative $0.28/Mcfe margin.
- Q3 Coal: 7.2m tons sold, down from 7.8m; average sales price was $56.34/ton and cost of goods sold was $43.39/ton. Coal division pretax earnings were $193m versus $54m.
- Liquidity and debt at September 30: Cash was $83.0m. Short-term revolver borrowings were $945m, with $774.5m of unused capacity after letters of credit. Long-term debt was $2,739.3m, including CNX Coal Resources LP borrowings; long-term debt and capital leases totaled $2,776.7m. The credit facility’s covenant ratios were 4.86x interest coverage and 1.96x current ratio, against minimums of 2.50x and 1.00x. Total leverage ratio was 3.86x.
- Equity and dividends: Total equity was $4.888bn, down from $5.329bn at year-end 2014. The regular quarterly dividend was reduced to $0.01 per share beginning in Q3.
Changes, outlook and significant items
- Nine-month revenue fell about 16%; Q3 revenue fell about 8%. Lower commodity prices and lower coal volumes were partly offset by higher gas production. The nine-month shareholder loss contrasted with prior-year profit, primarily because of the E&P impairment and lower commodity realizations.
- Management raised 2015 gas production guidance to 325–330 Bcfe, implying approximately 39% growth over 2014; Q4 guidance was 92–97 Bcfe. It expected approximately 20% gas production growth in 2016. Management cited efficiency gains, lower service costs and further expected reductions in capital intensity and unit costs.
- As of October 9, gas hedges covered approximately 53% of midpoint 2015 production and 57% of 2016 production. Reported average hedge prices varied by hedge type; the filing’s hedge tables should be reviewed for detail.
- Management described thermal and metallurgical coal markets as challenged. Pennsylvania Operations sold 5.7m tons in Q3 and had 18.9m 2016 tons committed as of October 26; the company expected additional sales to raise 2016 commitments above 90% by year-end. 2015 unit-cost guidance was $40–$43/ton for Pennsylvania and $50–$55/ton for Virginia and Other Operations.
- Unusual items included the $828.9m E&P impairment, the $48.1m gain from selling CONSOL’s 49% interest in Western Allegheny Energy, and pension/OPEB plan amendments that materially affected reported costs and income. The company also completed the CNX Coal Resources LP IPO and issued $500m of 8.00% notes due 2023 while repurchasing portions of older notes.
- The senior secured facility was undergoing borrowing-base redetermination, expected to be completed in November 2015. Management said cash from operations, asset sales and borrowing capacity should meet expected needs, but results and access to funding depend on commodity markets and other factors.
- Disclosed risks include commodity-price declines, coal demand and regulatory uncertainty, transportation constraints, reserve and operating risks, environmental and mine-closure obligations, debt and covenant limits, and litigation. The company reported pending royalty/class-action and environmental matters; accrued amounts were described as immaterial, but aggregate future losses could be material and were not reasonably estimable. Total disclosed guarantees, letters of credit and surety bonds were about $1.100bn, and purchase obligations about $1.230bn.
- Management concluded disclosure controls were effective as of September 30, 2015, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied filing is CONSOL Energy Inc., not CNX Resources Corp.
- Assess the quality and repeatability of Q3 earnings, separating unrealized hedge gains, asset-sale gains and pension/OPEB effects from operating performance.
- Review the impairment assumptions and commodity-price sensitivity, along with the effect of low realized gas and coal prices on unit margins and cash generation.
- Monitor revolver borrowing-base redetermination, available liquidity, leverage and covenant headroom; verify the debt figures and treatment of CNX Coal Resources LP debt.
- Test whether gas production, hedge coverage and coal contract commitments support management’s 2015–2016 outlook, and review the risks in coal pricing and customer contracts.
- Evaluate the potential cash and financial impact of disclosed litigation, environmental obligations, employee-benefit liabilities and off-balance-sheet commitments.