Business context and reporting period
CONSOL Energy Inc. (the registrant named in this filing; the request identifies CNX Resources Corp.) reported for the three months ended March 31, 2015, compared with the first quarter of 2014. The company operated natural gas exploration and production and coal businesses. This is an unaudited Form 10-Q.
Key financial metrics
Amounts below are USD millions except per-share data, volumes, and unit prices.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue and other income | $889.6 | $969.2 |
| Earnings before income tax | $53.4 | $130.2 |
| Net income | $79.0 | $116.0 |
| Diluted EPS | $0.34 | $0.50 |
| Cash from operating activities | $228.4 | $336.1 |
| Cash used in investing activities | $(319.9) | $(335.5) |
| Cash and cash equivalents, period end | $5.3 | $177.0 at Dec. 31, 2014 |
Total assets were $11.78 billion and stockholders’ equity $5.30 billion at March 31. Long-term debt was $2.56 billion; short-term revolver borrowings were $760.5 million, and securitization borrowings were $32.7 million. Capital lease obligations totaled $38.9 million. The filing reports covenant ratios of 4.72x interest coverage, 1.60x current ratio, and 3.33x total leverage. Revolver availability was $1.025 billion, including the effect of outstanding letters of credit.
E&P average sales price was $3.56/Mcfe versus $5.52; average costs were $3.05/Mcfe versus $3.63, leaving a $0.51/Mcfe margin versus $1.89. Coal average selling price was $60.23/ton versus $66.20; cost was $43.34/ton versus $45.14, with margin of $16.89 versus $21.06. E&P production was 71.6 Bcfe, up from 48.4 Bcfe.
Material changes versus prior period
- Revenue and other income declined 8%; net income fell $37 million. Lower gas and coal prices weighed on results, partly offset by higher gas volumes, cost reductions, and hedge gains.
- Natural gas, NGL, and oil sales revenue was $254.6 million versus $266.3 million. E&P volumes sold rose 48%, while average realized price fell 35.5%.
- Coal sales revenue fell to $496.7 million from $534.7 million. Coal tons sold from company mines increased to 8.2 million from 8.0 million, but average price per ton declined 9%.
- Operating cash flow decreased $107.7 million. Capital expenditures were $294.0 million, down from $451.0 million; operating cash flow was below capital expenditures.
- The company refinanced debt in March: issued $500 million of 8.00% notes due 2023 and used proceeds plus revolver borrowings to repurchase portions of 2020 and 2021 notes. The transaction generated a $67.7 million debt-extinguishment loss.
- Cash declined substantially amid debt repayment and refinancing activity. The company also repurchased 2.21 million shares for $71.7 million, at an average $32.37 per share.
Outlook, commentary, risks, and unusual items
- Management maintained 2015 gas production guidance of 300–310 Bcfe, described as approximately 30% growth over 2014, and expected 20% growth in 2016. Q2 2015 gas production guidance was 71–75 Bcfe.
- 2015 coal sales guidance was 30.5–33.0 million tons; 2016 guidance was also 30.5–33.0 million tons. Management cited planned longwall moves, miner vacation days, and shaft repairs as constraints on Q2 sales.
- At April 9, hedged gas volumes were 121.2 Bcf for 2015 at an average $4.05/Mcf and 110.9 Bcf for 2016 at $3.97/Mcf. Management said available and committed firm transportation capacity was expected to rise to about 1.7 Bcf/day as projects are completed.
- Derivative accounting changed after the company de-designated all cash-flow hedges at year-end 2014. Q1 included a $60.0 million unrealized commodity-derivative gain; the filing reports a net derivative asset of $223 million. A 10% increase in future gas prices would reduce future pre-tax derivative earnings by $56 million, according to the sensitivity analysis.
- The effective tax rate was negative 47.9%, primarily reflecting a $59.3 million tax benefit for excess percentage depletion.
- Liquidity risks include low period-end cash, reliance on borrowings, commodity-price volatility, and substantial contractual obligations. Legal and environmental matters include royalty disputes and a proposed Clean Water Act consent decree; the company said related accruals were immaterial, while noting aggregate future litigation losses could be material but were not reasonably estimable.
- Other exposures include coal-demand and environmental regulation risks, operating and geological disruptions, pension and post-employment obligations, and guarantees and purchase commitments. Total disclosed guarantees, letters of credit, and surety bonds were about $1.22 billion; purchase obligations were about $1.40 billion.
- The company said it expected cash from operations, asset sales, and borrowing capacity to cover working capital, planned capital expenditures, debt service, dividends, and required letters of credit, subject to operating performance and market conditions. It also disclosed that a thermal-coal MLP offering could lead to reducing or eliminating the regular dividend.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for CONSOL Energy Inc., not a registrant identified as CNX Resources Corp.
- Assess how much reported earnings depended on the $60.0 million unrealized derivative gain and the unusually favorable depletion-related tax benefit.
- Review near-term liquidity, revolver usage and availability, covenant headroom, and the effect of the debt refinancing on interest costs and maturities.
- Track realization of gas and coal production and sales guidance, contracted volumes, realized prices, and capital spending against cash generation.
- Monitor the outcome and potential cost of the disclosed legal, environmental, reclamation, employee-benefit, and guarantee exposures, and any effect of the proposed coal MLP on dividends.