Business context and reporting period
This summary covers the quarterly report for the three and nine months ended September 30, 2014, filed November 4, 2014. The filing identifies the registrant as CONSOL Energy Inc., not CNX Resources Corp.; confirm the intended issuer. CONSOL operated Exploration and Production (E&P) and Coal divisions. Its 2013 sale of five West Virginia longwall mines was presented as discontinued operations.
Financial performance and liquidity
Amounts below are in U.S. dollars; income-statement and cash-flow figures are in millions unless stated otherwise.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue and other income | $884.6 | $803.3 | $2,791.1 | $2,474.5 |
| Pre-tax income (loss) | $(3.0) | $(3.3) | $103.4 | $30.2 |
| Income (loss) from continuing operations | $(1.6) | $(72.2) | $95.1 | $(67.3) |
| Net income (loss) attributable to shareholders | $(1.6) | $(63.7) | $89.4 | $(77.7) |
| Diluted EPS | $(0.01) | $(0.28) | $0.39 | $(0.34) |
| Operating cash flow | Not separately presented for the quarter | $850.2 | $589.0 | |
| Capital expenditures | Not separately presented for the quarter | $1,174.6 | $1,021.1 |
- Q3 E&P production was 64.9 Bcfe, up from 46.1 Bcfe. E&P pre-tax earnings were $37.7 million, versus a $1.9 million loss. Average E&P sales price was $3.97/Mcfe and average costs were $3.12/Mcfe, for a $0.85/Mcfe margin; the prior-year margin was $0.97/Mcfe.
- Q3 Coal pre-tax earnings were $52.3 million, down from $64.4 million. Company-produced coal sales were 7.8 million tons versus 6.9 million. Average sales price fell 8.7% to $62.32/ton, while costs declined 1.5% to $49.93/ton; margin narrowed to $12.39/ton from $17.53.
- For the first nine months, E&P pre-tax earnings rose to $138.6 million from a $7.1 million loss; Coal pre-tax earnings increased to $279.1 million from $269.8 million. Overall nine-month improvement also reflects lower income-tax expense and the prior-year comparison.
- Nine-month operating cash flow exceeded capital spending by approximately $324 million before other investing and financing flows. Cash declined $101.9 million from year-end to $225.6 million.
- At September 30, current assets were $1.325 billion and current liabilities $1.247 billion. Long-term debt was $3.236 billion, with total debt and capital leases of about $3.3 billion. The $2.0 billion revolver had no borrowings and $1.735 billion of unused capacity after letters of credit; the receivables facility also had no borrowings and about $21 million unused capacity. Reported covenant ratios were 5.26x interest coverage and 2.33x current ratio.
- Quarterly dividend was $0.0625 per share; $0.1875 per share was paid in the first nine months.
Material changes versus the prior comparable period
- Q3 shareholder loss narrowed substantially from 2013, when a large income-tax expense drove the continuing-operations loss. For the nine-month comparison, CONSOL moved from a shareholder loss to profit; the 2014 effective tax rate was 8.3%, versus 323.0% in 2013, reflecting depletion-related benefits and discrete tax items.
- Natural gas, NGL and oil sales increased with higher volumes, particularly Marcellus production and liquids, but Q3 average E&P realized price and unit margin declined. Management attributed pricing pressure to lower gas market prices and a smaller hedging benefit; gathering and processing costs also rose.
- Coal sales volumes rose, but prices and unit margins weakened amid lower metallurgical coal prices and the roll-off of higher-priced thermal contracts. Low-vol metallurgical earnings fell particularly sharply year to date.
- CONSOL issued 5.875% senior notes due 2022 and used proceeds to repurchase higher-coupon 2017 and 2020 notes. Debt-extinguishment losses were $21.0 million in Q3 and $95.3 million year to date.
- Cash operating flows increased year over year, while capital expenditures also rose, principally with increased gas drilling and completion activity.
Outlook, management commentary, risks and unusual items
- Management expected Q4 2014 gas production of 70–75 Bcfe, implying full-year production of 235–240 Bcfe, and forecast 30% annual gas-production growth in both 2015 and 2016. As of October 31, the Noble Energy drilling carry was suspended pending Henry Hub prices above $4/MMBtu for three consecutive months.
- As of October 14, disclosed gas hedges covered 159.9 Bcf for 2014, 82.6 Bcf for 2015 and 75.3 Bcf for 2016, at average prices of $4.58, $4.07 and $4.17/Mcf, respectively. Management said it added no hedges during Q3. Falling gas prices and Appalachian basis pressure remained concerns.
- 2014 coal sales guidance was 32.3–32.7 million tons; 2015 guidance was 31–35 million tons. Management raised the low end of 2014 low-vol guidance slightly and said 2015 low-vol guidance assumed pricing would improve. Guidance excludes some affiliate volumes and unpriced sales; open-tonnage pricing was not forecast.
- Management said current firm transportation capacity was adequate for the rest of 2014 and supported most of its three-year growth plan. A Nexus pipeline agreement was expected to enter service in late 2017. Wet-gas processing commitments were expected to cover projected needs for two years; ethane marketing depended on multiple outlets and negotiations.
- Benefit-plan changes were significant: a pension freeze for certain employees was scheduled for January 1, 2015, with an additional 3% 401(k) contribution for affected employees. OPEB amendments eliminated future retiree medical and life benefits for active employees; approximately $46.3 million in transition payments were made or accrued. The amendments generated a $35.6 million curtailment gain, alongside related cash costs and remeasurement effects.
- Potential legal and operational exposures include environmental, mine-closure, employee-benefit and other claims. The filing states that specified lawsuits with express or estimable claims exceeded accrued amounts by approximately $388.2 million, while the aggregate possible future loss could not be reasonably estimated. It also disclosed $1.465 billion in letters of credit, surety bonds and guarantees, and $1.329 billion in unconditional purchase obligations; management expected guarantees to expire without funding.
- Subsequent to quarter-end, asset sales generated approximately $71 million cash and a $12 million note receivable; the stated expected gain was about $14 million.
Important facts for investors to verify
- Confirm issuer identity: the supplied filing is for CONSOL Energy Inc., although the request names CNX Resources Corp.
- Reconcile reported revenue and other income with operating sales, segment results and nonrecurring income items; assess the sustainability of earnings and the unusually low effective tax rate.
- Track gas production growth, realized prices, hedge settlements, basis differentials, gathering/transportation costs and the Noble carry suspension condition.
- Monitor coal contract pricing, especially low-vol metallurgical coal, and the proportion of future sales that is firm and priced.
- Review refinancing costs, debt maturities, covenant headroom, capital spending and cash conversion, together with the large contractual commitments and contingent exposures.
- Assess the financial and employee consequences of pension and OPEB plan changes, including transition payments and potential further pension settlement charges.