CNX Resources Corp. (filing registrant: CONSOL Energy Inc.) — 2010 Third-Quarter 10-Q
The supplied filing is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2010, filed November 1, 2010. It is not filed under the name CNX Resources Corp. CONSOL operated coal and gas businesses; CNX Gas became wholly owned during the period.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. The nine-month period includes Dominion’s results from May 1, 2010; comparisons are therefore affected by acquisitions and financing.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue and other income | $1,349.3 | $1,094.5 | $3,878.7 | $3,383.8 |
| Net income attributable to CONSOL shareholders | $75.4 | $87.4 | $242.3 | $396.5 |
| Diluted EPS | $0.33 | $0.48 | $1.13 | $2.17 |
| Cash from operations | Not provided by quarter | Not provided by quarter | $878.9 | $728.2 |
- Q3 pretax income was $91.1 million versus $128.5 million; nine-month pretax income was $329.5 million versus $586.5 million. Q3 net margin was approximately 5.6% versus 8.5%; nine-month net margin approximately 6.6% versus 12.3%, using reported net income and revenue plus other income.
- Coal average sales price and costs per ton for active operations were $63.71 and $48.88 in Q3, respectively, versus $58.85 and $46.49 a year earlier. Gas average sales price and costs per Mcf were $5.72 and $4.08 versus $6.25 and $3.44.
- Nine-month capital expenditures were $821.9 million. Investing cash use totaled $5,255.3 million, primarily reflecting the $3,474.2 million Dominion acquisition and $991.0 million purchase of CNX Gas minority shares. Financing cash inflow was $4,326.4 million; cash ended at $15.6 million, down from $65.6 million at year-end 2009.
- At September 30, total assets were $11,721.8 million, current assets $1,000.8 million and current liabilities $1,539.9 million, implying negative working capital of approximately $539.1 million. Long-term debt was $3,140.8 million on the balance sheet, plus $213.9 million short-term notes, $200.0 million securitization borrowings and $57.3 million capital lease obligations.
- Revolving facilities had $1,096.0 million of available capacity at CONSOL and $607.2 million at CNX Gas, after borrowings and letters of credit. The facilities’ reported covenant ratios were within stated limits. The quarterly dividend was $0.10 per share; $0.30 per share was paid in the first nine months.
Material changes and unusual items
- CONSOL acquired Dominion’s Appalachian oil and gas business for approximately $3.474 billion, including about 1 Tcfe of proved reserves and 1.46 million net acres, approximately 500,000 of which were prospective Marcellus acreage. The acquired business contributed $53.5 million of Q3 revenue and a $3.4 million Q3 net loss. Preliminary acquisition accounting remained subject to adjustment.
- CONSOL acquired the remaining CNX Gas shares for approximately $991 million, making it wholly owned. A March equity offering raised $1.829 billion net; $2.75 billion of senior notes were issued at 8.00% due 2017 and 8.25% due 2020. These transactions increased share count and interest expense. Acquisition and financing fees totaled $64.4 million for the first nine months.
- Q3 earnings declined despite higher revenue, reflecting substantially higher interest expense, operating costs and other items. Nine-month earnings also included $80.2 million of Fola reclamation expense, $13.6 million for abandonment of a developed Mine 84 area, and a $25 million Buchanan water-discharge settlement expense. The Jones Fork sale settlement generated a further $10.5 million expense in the first quarter.
- New federal black-lung provisions increased the CWP liability by $45.7 million, partly offset by a $47.7 million decrease from revised actuarial assumptions; the combined remeasurement reduced the liability by $2.0 million.
Outlook, commentary and risks
- Management anticipated strong metallurgical coal markets through 2011, citing steel demand, Chinese growth and tight high-quality coal supply. It saw improving thermal coal prospects due to lower inventories and industrial demand, while noting permitting and regulatory pressures could constrain Central Appalachian production.
- Management described U.S. natural gas markets as oversupplied, weighing on prices, but expected demand improvement and suggested shale drilling could slow from late 2011 as producers adjust to prices. No formal earnings or production guidance was stated in the supplied filing text.
- Management expected cash from operations and borrowing capacity to cover working capital, planned capital spending (excluding major acquisitions), scheduled debt service and dividends, subject to operating performance and industry and market conditions. It expected 2010 pension trust contributions of about $71.6 million; other postemployment, CWP and workers’ compensation claims were expected to be paid as due.
- Environmental exposure includes a planned advanced mine-water treatment plant, pipelines and landfill for chloride compliance, with costs potentially reaching or exceeding $200 million by 2013; a consent decree and potential civil penalties were still under negotiation. Fola reclamation costs and increasingly stringent permitting, safety, water and emissions rules could also affect costs and operations.
- Contingencies include the Ryerson Park Dam claim (claimed damages of $58 million), approximately 22,500 asbestos claims against Fairmont Supply, Superfund remediation at Ward Transformer, and litigation concerning the CNX Gas tender offer, coalbed methane rights and coal deliveries. Management said current estimates for pending claims were generally immaterial, but acknowledged certain outcomes could be material.
- The filing reported one fatality at the Loveridge mine in Q3. It also cited the new MSHA rock-dust standard and the possibility of increased inspection and compliance costs. Management identified coal and gas prices, acquisition integration, labor, safety, permitting, environmental rules, reserve replacement, water management, litigation, hedging and financing access among principal risks.
Most important facts for investors to verify
- Confirm issuer and security identity: this is a CONSOL Energy Inc. filing, and the supplied text does not establish it as a filing by CNX Resources Corp.
- Review Dominion’s final purchase-price allocation, post-acquisition operating contribution, reserve assumptions and Marcellus development performance.
- Assess whether operating cash generation can support the acquisition-related debt, interest expense, capital program and dividends, given low cash and negative working capital.
- Track coal and gas realized prices, hedge volumes and prices, unit costs, and the sustainability of the strong metallurgical coal market.
- Monitor the mine-water treatment project and other environmental, reclamation, black-lung and litigation exposures, including potential costs not yet reliably estimable.