Business Context and Reporting Period
The supplied filing is CONSOL Energy Inc.’s Form 10-K for the fiscal year ended December 31, 2013—not a filing identified as CNX Resources Corp. The company operated natural-gas and coal businesses, primarily in Appalachia. Results include the West Virginia mines sold to Murray Energy as discontinued operations.
Financial and Operating Performance
- Revenue: Continuing-operations operating revenues were $3.121 billion, down 4.9% from $3.282 billion in 2012. Total revenue and other income was $3.300 billion, compared with $3.678 billion.
- Profit: Income from continuing operations fell to $79 million from $318 million. Net income attributable to shareholders rose to $660 million from $388 million, largely because discontinued operations included a $1.035 billion pretax gain on the Murray Energy sale. Discontinued-operations income was $580 million.
- Cash flow and investment: Operating cash flow was $659 million, down from $728 million. Capital expenditures were $1.496 billion. Investing activities used $202 million, while financing activities used $151 million. Year-end cash was $327 million, versus $22 million.
- Margins: Gas average sales price including hedges was $4.30 per Mcfe and average costs were $3.51, for a $0.79 margin versus $0.85 in 2012. Continuing coal average sales price was $69.34 per ton and cost of goods sold $50.78, for an $18.56 margin versus $23.77.
- Debt and liquidity: Debt and capital lease obligations totaled approximately $3.175 billion. The company had no borrowings under its $1.0 billion revolving credit facility and $793 million of unused capacity after letters of credit. It also reported $49 million of unused capacity under its receivables facility and $912 million under CNX Gas’s facility. The company reported no defaults in 2013.
- Production and reserves: Gas production was 172.4 Bcfe, up 10%; proved gas reserves were 5.731 Tcfe, up from 3.993 Tcfe. Continuing coal production was 28.5 million tons, versus 27.2 million.
Material Changes Versus 2012
- Gas revenue increased, supported by higher volumes and prices, but the gas division shifted to a $2 million pretax loss from $39 million of pretax earnings. Marcellus production grew 58%; CBM production fell 6%.
- Coal division pretax earnings fell to $337 million from $592 million. Average sales price declined 10.8% and the per-ton margin declined 21.9%, with weaker metallurgical coal pricing a key factor.
- On December 5, CONSOL sold five West Virginia mines and related businesses to Murray Energy for $850 million in stated cash proceeds; financial-statement proceeds were $825 million net of transaction fees and subject to working-capital adjustments. Murray assumed substantial employee-benefit and other liabilities. CONSOL retained certain obligations and guarantees.
- Annual dividends declared fell to $0.375 per share from $0.625. Management announced a 2014 regular quarterly dividend of $0.0625 per share, reflecting an increased emphasis on growth investment.
Outlook, Risks, and Unusual Items
- 2014 guidance: Gas production of 215–235 Bcfe and gas capital investment of $1.110 billion; coal production of 30.1–32.1 million tons and coal capital investment of $390 million. Management expected 30% annual gas production growth in 2015 and 2016. BMX Mine was expected to begin longwall production in the first quarter of 2014.
- The 2014 capital budget was $1.5 billion overall. Management expected about $220 million of Marcellus drilling carry if Henry Hub prices met the contractual threshold; the carry was suspended at filing. Utica capital guidance reflected an expected $115 million partner drilling carry.
- Significant one-time items included the Murray Energy disposal gain; a $39.5 million pension settlement expense; $23.1 million of conceded Marcellus title defects; and a $19.2 million company share of a CNX Gas shareholder settlement.
- Key risks include volatile gas and coal prices, Appalachian gas basis pressure, lower metallurgical coal prices, customer concentration, transportation and permitting constraints, environmental and mine-safety regulation, and reserve-estimation uncertainty. Two gas joint ventures constrain operating flexibility and depend on partner performance and drilling activity.
- CONSOL’s maximum estimated exposure under guarantees associated with Murray Energy was approximately $404 million. The filing also reports about $601 million of reclamation, mine-closing, and gas-well-closing liabilities; approximately 6,900 asbestos-related claims at Fairmont Supply; and pending gas royalty and other litigation. Potential aggregate litigation losses beyond accrued amounts were not clearly estimable.
- Management said cash from operations, asset sales, and borrowing capacity should fund working capital, planned capital spending, debt service, and anticipated dividends, while noting dependence on future operating performance and market conditions. The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the issuer and period: the source is CONSOL Energy Inc.’s 2013 annual Form 10-K, not a CNX Resources Corp. filing or a standalone fourth-quarter report.
- Separate recurring continuing-operations performance from the discontinued-operations gain; assess earnings and cash flow without treating the sale gain as recurring.
- Review the Murray Energy transaction’s final proceeds and adjustments, assumed liabilities, retained obligations, and guarantee exposure.
- Check actual 2014 production, capital spending, BMX start-up, and whether joint-venture drilling carries resumed or were received as expected.
- Assess debt maturities, covenant and dividend restrictions, available liquidity after letters of credit, and the sustainability of the reduced dividend.
- Monitor metallurgical coal pricing, gas hedge settlements and basis differentials, customer concentration, title issues, litigation, and environmental and reclamation liabilities.