CNX Resources Corp. (filing registrant: CONSOL Energy Inc.) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 6, 2015. The supplied filing identifies the registrant as CONSOL Energy Inc., not CNX Resources Corp. This is an annual report, not a standalone fourth-quarter filing.
Business context
CONSOL Energy operated two principal businesses: Appalachian oil and gas exploration and production (E&P), and coal mining. It also provided gathering, terminal, water and land services. Following the December 2013 sale of five West Virginia mines and related businesses to Murray Energy, the 2014 results reflect a smaller continuing coal business alongside rapidly expanding shale gas operations.
Financial and operating results
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenues from continuing operations | $3.476 billion | $3.121 billion |
| Income from continuing operations | $168.8 million | $79.3 million |
| Net income attributable to shareholders | $163.1 million | $660.4 million |
| Diluted earnings per share | $0.70 | $2.87 |
| Cash flow from operating activities | $936.8 million | $658.8 million |
| Capital expenditures | $1.493 billion | $1.496 billion |
| Cash and cash equivalents at year-end | $177.0 million | $327.4 million |
| Total debt and capital lease obligations | $3.289 billion | $3.175 billion |
- Revenue from continuing operations rose approximately 11%. Continuing-operations income more than doubled, while total shareholder net income fell sharply because 2013 included a large gain from the Murray Energy divestiture.
- Gas production reached 235.7 Bcfe, up 37%; Marcellus production was 111.7 Bcfe, up 93%. The average gas sales price including financial settlements was $4.37/Mcfe, versus $4.30; average gas costs fell to $3.31/Mcfe from $3.51.
- Coal production from continuing operations increased to 32.2 million tons from 28.5 million. Average coal sales price declined to $63.03/ton from $69.34, while costs fell to $46.91/ton from $50.78. Coal segment pretax earnings increased to $411 million from $348 million.
- E&P segment pretax earnings were $190 million, compared with a $2 million loss in 2013. Operating margin figures are reported by product/segment; the filing does not provide a clear consolidated operating-margin measure.
- Cash from operations increased, but investing activities used $1.041 billion and financing activities used $45.8 million. Cash declined by $150.4 million during the year. Current assets were $1.166 billion against current liabilities of $1.148 billion.
- At year-end, the $2.0 billion revolving credit facility had no borrowings and $1.756 billion of unused capacity after letters of credit. The company reported covenant interest coverage of 4.90x and a covenant current ratio of 2.42x.
Material changes and unusual items
- 2013 shareholder earnings included $579.8 million of discontinued-operations income, principally the gain on the sale of Consolidation Coal Company and related subsidiaries. The sale generated about $825 million in cash proceeds and a reported pretax gain of about $1.035 billion. This makes headline net income comparisons misleading without separating continuing operations.
- 2014 included a $95.3 million loss on extinguishment of debt after the company refinanced and repurchased higher-coupon notes. It also recorded $43.6 million of gains on asset sales and $30 million of income from a coal contract buyout.
- In September, CONE Midstream Partners completed its IPO; CONSOL received approximately $204 million in distributions from the offering. Asset-sale proceeds and other portfolio transactions also supported funding and liquidity.
- The board authorized up to $250 million of share repurchases over two years; no purchases had been made through year-end. Quarterly dividends in 2014 totaled $0.25 per share, down from $0.375 in 2013.
Outlook, commentary and risks
- Management guided to 2015 gas production of 300–310 Bcfe, approximately 30% growth at the midpoint, and continued 30% annual gas production growth in 2016. The 2015 E&P capital budget was approximately $1.0 billion.
- 2015 coal production guidance was 30.5–33.0 million tons, with $220 million of coal and other capital investment, including $160 million for maintenance.
- Management was pursuing a thermal-coal MLP and a separate metallurgical-coal subsidiary IPO of up to 20% of that entity. Timing and completion were subject to market conditions and board approval; no registration statements had been filed. The company said an MLP IPO could lead to reducing or eliminating its regular dividend.
- Commodity exposure was significant: gas prices and Appalachian basis differentials weakened late in 2014, while metallurgical coal prices faced prolonged oversupply and declines. Hedges covered approximately 121.2 Bcf of expected 2015 gas production at an average $4.05/Mcf and 94.7 Bcf of 2016 production at $4.11/Mcf.
- Key risks include commodity-price and regional basis volatility, reliance on major coal customers and transportation infrastructure, environmental and mine-safety regulation, permitting delays, reserve and title uncertainty, and large reclamation, employee-benefit and other long-term obligations. The company estimated approximately $576 million of reclamation, mine-closing and gas-well-closing obligations.
- Noble Energy’s Marcellus drilling carry was suspended again from November 1, 2014 after gas prices fell below the contractual threshold, increasing CONSOL’s share of near-term drilling costs. A fatality at a third-party midstream site led CONSOL to shut in certain Utica-area pads; the company estimated 2.7 Bcfe of lost 2014 production.
- CONSOL reported $261 million of maximum estimated exposure under guarantees related to Murray Energy arrangements. It also disclosed ongoing royalty and property litigation; accrued amounts were described as immaterial, but aggregate potential losses could not be reasonably estimated.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-K is for CONSOL Energy Inc.; reconcile this with the request naming CNX Resources Corp.
- Assess continuing-operations earnings and cash generation separately from the 2013 discontinued-operation sale gain and 2014 debt-extinguishment and asset-sale items.
- Check actual production, realized prices, regional basis differentials, hedge settlements and capital spending against the 2015–2016 growth targets.
- Track debt service, covenant headroom, liquidity, refinancing needs and the renewal or terms of the accounts-receivable facility, which was scheduled to expire in March 2015.
- Verify progress and economics of proposed coal IPOs, potential dividend changes, and the effects of coal-market conditions and environmental requirements.
- Review Murray Energy guarantee exposure, joint-venture carry obligations, material litigation, and assumptions underlying reserves and long-term liabilities.