Business context and reporting period
This is CONSOL Energy Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011, filed August 4, 2011. Although the request identifies CNX Resources Corp., the filing itself is for CONSOL Energy Inc. The company’s principal businesses were coal and natural gas.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue and other income | $1.588 billion | $1.289 billion | $3.053 billion | $2.529 billion |
| Income before taxes | $98.8 million | $96.1 million | $349.9 million | $238.3 million |
| Net income attributable to shareholders | $77.4 million | $66.7 million | $269.5 million | $166.9 million |
| Diluted earnings per share | $0.34 | $0.29 | $1.18 | $0.81 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $795.5 million | $505.8 million |
Amounts are rounded. Approximate net margin on total revenue and other income was 4.9% for Q2 2011 versus 5.2% in Q2 2010, and 8.8% for the first half of 2011 versus 6.6% in the first half of 2010. First-half capital expenditures were $585.4 million, implying operating cash flow less capital expenditures of approximately $210 million; this is a simple calculation, not a company-reported non-GAAP measure.
At June 30, 2011, cash was $26.5 million; current assets were $1.151 billion and current liabilities $1.544 billion. Total debt and borrowings were approximately $3.539 billion, including $3.208 billion of debt, $260.8 million of CNX Gas credit-facility borrowings and $70 million under the receivables securitization facility. The company had $1.233 billion of unused capacity on its $1.5 billion revolver and CNX Gas had $669 million available on its $1.0 billion revolver. The company’s leverage ratio was 2.42x, against a 4.75x maximum covenant; its interest coverage ratio was 4.90x, against a 2.50x minimum.
Material changes versus the prior comparable period
- First-half coal segment pretax earnings rose to $450.8 million from $230.6 million. Average coal selling price increased 17.2% to $70.62 per ton; average cost increased 6.9% to $49.35 per ton. Export sales increased to 6.0 million tons from 4.1 million.
- First-half gas segment pretax earnings declined to $52.4 million from $127.9 million. Production increased to 73.4 Bcf from 55.9 Bcf, but average realized price fell 23.7% to $5.00/Mcf, compressing the reported average margin to $1.18/Mcf from $2.80/Mcf.
- Q2 net income improved despite a $115.5 million Mine 84 abandonment charge and a $16.1 million loss on debt extinguishment. The abandonment charge reduced net income by approximately $75.1 million, or $0.33 per share.
- First-half operating cash flow increased by $289.6 million year over year. Investing cash outflow was substantially lower than in 2010, when the Dominion acquisition and purchase of CNX Gas noncontrolling interests required major cash payments.
Outlook, management commentary, risks and unusual items
- Management described thermal and metallurgical coal demand as firm, citing resilient international thermal demand and strong metallurgical demand amid constrained supply. It expected U.S. natural gas markets to return to equilibrium in one to two years and viewed longer-term gas demand prospects favorably. No formal earnings or production guidance was provided in the supplied filing text.
- Mine 84 was permanently closed; management cited resource reallocation toward more profitable coal operations and Marcellus drilling and expected annual pretax cash savings of approximately $18 million. The 2011 union labor agreement runs through 2016; management projected incremental contract costs averaging about 3.5% per ton per year versus 2010 operating costs at represented operations.
- Environmental requirements remain a significant cost and execution risk. A mine-water treatment plant and related facilities in Northern West Virginia may cost approximately $200 million. Marcellus wastewater disposal and delays in stream-crossing permits were also discussed.
- Legal and regulatory contingencies include the Ryerson Dam dispute, asbestos claims, royalty and gas-ownership litigation, and a Buchanan Mine water-storage lawsuit seeking up to $300 million. The company stated that estimates for pending claims could ultimately be material, although it had not recorded a liability for the Buchanan lawsuit. It held $20.3 million of restricted cash related to the Ryerson Dam matter.
- Other risks include commodity-price and operating-cost volatility, environmental and mine-safety regulation, labor and benefit costs, reserve replacement, financing access, and exposure to long-term employee benefits. The company reported no mine fatalities in the first half of 2011. Its natural-gas swaps had a net fair-value asset of approximately $70.9 million; a hypothetical 10% gas-price change was estimated to affect future derivative earnings by $46.7 million in either direction.
Important facts for investors to verify
- Confirm the registrant identity: this filing is for CONSOL Energy Inc., not CNX Resources Corp.
- Review whether stronger coal pricing and volumes can offset higher operating, benefit, maintenance and capital costs, and whether lower gas prices continue to pressure gas earnings.
- Track the Mine 84 closure savings against the $115.5 million charge and assess the timing and full cost of the Northern West Virginia water-treatment commitments.
- Assess liquidity and covenant headroom alongside substantial debt, scheduled interest payments, employee-benefit obligations and the availability of revolving credit.
- Monitor the listed litigation and environmental matters, including whether any new developments require accruals or could materially affect cash flows.