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CONSOL Energy reports on finances, offers updates

By Bob Downing Published: January 31, 2014

From COMSOL Energy:

PITTSBURGH, Jan. 31, 2014 /PRNewswire/ -- CONSOL Energy Inc. (NYSE: CNX) reported pre-tax income for the quarter ended December 31, 2013 of $16 million. Net income from continuing operations was $147 million as a result of an income tax benefit of $131 million arising out of a reversal of prior quarters' tax provisions. When added to income from discontinued operations, net of tax, of $591 million, CONSOL Energy reported net income of $738 million, or $3.20 per diluted share, in the just-ended quarter, compared to $150 million, or $0.65 per diluted share from the year-earlier quarter.

Fourth Quarter 2013 Results

(in millions)

Pre-Tax Income

$

16

 

Income Taxes

$

131

 

Income from Continuing Ops

$

147

 
   

Income from Discontinued Ops, net of tax

$

591

 
   

Net Income

$

738

 
                 

 

After adjusting for several discrete items not found in security analysts' models, which are listed in the EBITDA reconciliation table, adjusted pre-tax income1 in the 2013 fourth quarter, a non-GAAP financial measure, was $2 million.

Adjusted EBITDA1, which is a non-GAAP financial measure, was $179 million for the quarter ended December 31, 2013, compared to $224 million in the year-earlier quarter.

CONSOL's Gas Division achieved record quarterly production of 48.5 Bcfe. Unit margins were $0.71 per Mcfe, or a decrease of $0.32 from the year-earlier quarter of $1.03 per Mcfe. The margin contraction was due to realized prices being $0.18 lower and unit costs being $0.14 higher. Overall natural gas production was up 16%, quarter-over-quarter, aided by the 56% growth in the Marcellus Shale component. CONSOL recently increased its 2014 natural gas production guidance range to 215 - 235 Bcfe. For 2015 and 2016, CONSOL has announced annual production guidance increases of 30%.

"Despite overachieving on many items we could control, CONSOL Energy saw 2013 fourth quarter unit margin contraction in both its gas and coal divisions," commented J. Brett Harvey, chairman and CEO. "Profitability was especially hampered by lower realized prices for the company's premium low-vol coal production from Buchanan Mine."

The low-vol coal category saw meaningful margin contraction, quarter-over-quarter, as a nearly $47 reduction in per ton pricing overwhelmed a nearly $3 per ton improvement in costs. The high-vol category saw over a $9 per ton margin contraction, while the much larger thermal category saw a nearly $5 per ton reduction in margin. Details follow in the coal division table, which reflects production and sales from continuing operations. CONSOL's retained mines have margins higher than those that were sold.

CONSOL Energy's liquidity at year-end 2013 remained strong at $2.1 billion, including $327 million in cash. Cash was bolstered by the $850 million received in early December from the sale of five mines. Fourth quarter 2013 capital investments from continued operations were $483 million, of which $300 million were in natural gas-related projects.

Cash flow from operations in the quarter was $70 million, as compared to $198 million in the year-earlier quarter.

"Looking to 2014, CONSOL is poised to increase its gas production by 30% and its coal production by 5 million tons, on an annual basis, when the BMX Mine in Southwestern Pennsylvania opens late in the first quarter," continued Mr. Harvey. "Higher natural gas and coal production, coupled with our stated $65 million reduction in annual administrative costs, should aid profitability, even in the face of continued weak coal pricing. Cold winter weather is strengthening 2014 gas prices, and — if sustained — could result in CONSOL Energy receiving a drilling carry from its Marcellus Shale joint venture partner as early as March. Continued cold weather and a rebounding domestic economy could begin to provide support for higher thermal coal prices, too."

CONSOL continues to make progress in unlocking the value of its gas midstream assets. The two paths under consideration continue to be an MLP or sale. The company has been weighing the competing interests of valuation, liquidity, and maintenance of strategic control. The relative importance of these interests has changed recently. The sale of CONSOL's five West Virginia coal mines greatly improved the company's liquidity and significantly de-levered the balance sheet. Also, Marcellus Shale volumes are up 56%, quarter-over-quarter, and for 2014 are expected to be approximately 85% higher than 2013. Demonstrated natural gas production growth and an annual gas production target of 30% have de-risked future midstream growth and reduced the importance of minimum volume commitments to potential acquirers. We expect a NAV-accretive transaction in 2014, and will identify a path of sale or MLP in the first half of the year.

1The terms "Adjusted Pre-Tax Income" and "Adjusted EBITDA" are non-GAAP financial measures, which are defined and reconciled to the GAAP Pre-Tax Income and GAAP net income below, under the caption "Non-GAAP Financial Measures."

Gas Division Results:

The table below summarizes the quarterly comparison of key metrics for the Gas Division:

GAS DIVISION RESULTS Quarter-to-Quarter Comparison

 
   

Quarter

 

Quarter

   

Ended

 

Ended

   

December 31,

2013

 

December 31,

2012

Sales - Gas

 

$

170.6

   

$

143.5

 

Hedging Impact - Gas

 

18.8

   

34.5

 

Sales - Oil

 

3.4

   

2.5

 

Sales - NGLs

 

11.3

   

4.8

 

Sales - Condensate

 

2.5

   

0.6

 

Total Sales Revenue ($ MM)

 

$

206.6

   

$

185.9

 
         

Net Income Attributable to CONSOL Energy Shareholders

 

$

1.9

   

$

9.4

 

Net Cash Provided By (Used In) Operating Activities ($ MM)

 

$

57.3

   

$

(57.0)

 

Total Period Production (Bcfe)

 

48.5

   

41.8

 

Average Daily Production (MMcfe)

 

527.0

   

454.7

 

Capital Expenditures ($ MM)

 

$

299.5

   

$

124.4

 
                         

 

CONSOL's gas division production in the quarter came from the following categories:

   

Quarter

 

Quarter

   
   

Ended

 

Ended

   
   

December 31,

2013

 

December 31,

2012

 

% Increase/
(Decrease)

GAS

           

Marcellus Sales Volumes (Bcf)

 

18.2

   

11.9

   

52.9

%

CBM Sales Volumes (Bcf)

 

20.3

   

21.4

   

(5.1)

%

Shallow Oil and Gas Sales Volumes (Bcf)

 

7.2

   

7.2

   

%

Other Sales Volumes (Bcf)

 

1.3

   

0.6

   

116.7

%

             

LIQUIDS*

           

NGLs Sales Volumes (Bcfe)

 

1.1

   

0.5

   

120.0

%

Oil Sales Volumes (Bcfe)

 

0.2

   

0.2

   

%

Condensate Sales Volumes (Bcfe)

 

0.2

   

-

   

100.0

%

             

TOTAL

 

48.5

   

41.8

   

16.0

%

                         

Production results are net of royalties. *NGLs, Oil, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas.

 

PRICE AND COST DATA PER MCFE Quarter-to-Quarter Comparison

The company experienced decreased profitability within the Gas Division when compared with the quarter ended December 31, 2012. The average sales price decreased by $0.18 per Mcfe, while units cost increased by $0.14. On the cost side, $0.06 per Mcfe was related to additional liquids being processed. Total depreciation, depletion, and amortization increased by a combined $0.05 per Mcfe, as more production from higher-cost segments was in the mix. Higher volumes, conversely, spread fixed pipeline costs more broadly.

All-in unit costs in the Marcellus Shale were $3.01 per Mcfe in the just-ended quarter, or an increase of $0.18 from the $2.83 per Mcfe in the year-earlier quarter. Thirteen cents of the increase was caused by additional liquids processing, with nearly all of the remainder of the increase due to the mix of volumes flowing under various agreements.

   

Quarter

 

Quarter

   

Ended

 

Ended

(Per Mcfe)

 

December 31,

2013

 

December 31,

2012

Average Sales Price - Gas

 

$

3.63

   

$

3.49

 

Hedging Impact - Gas

 

$

0.40

   

$

0.84

 

Average Sales Price - Oil*

 

$

15.63

   

$

16.12

 

Average Sales Price - NGLs*

 

$

10.09

   

$

8.76

 

Average Sales Price - Condensate*

 

$

12.81

   

$

12.96

 
         
         

Average Sales Price - Total Company

 

$

4.26

   

$

4.44

 

Costs - Production

       

Lifting

 

$

0.53

   

$

0.52

 

Ad Valorem, Severance and Other Taxes

 

0.18

   

0.17

 

DD&A

 

1.20

   

1.12

 

Total Production Costs

 

$

1.91

   

$

1.81

 

Costs - Gathering

       

Operating Costs

 

$

0.60

   

$

0.51

 

Transportation

 

0.58

   

0.62

 

DD&A

 

0.16

   

0.19

 

Total Gathering Costs

 

$

1.34

   

$

1.32

 
         

Gas Direct Administrative Selling & Other

 

$

0.30

   

$

0.28

 
         

Total Costs

 

$

3.55

   

$

3.41

 
         

Margin

 

$

0.71

   

$

1.03

 
                         

*Oil, NGLs, and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.

 

Note: Costs The line item "gas direct administrative, selling, & other" excludes general administration, incentive compensation, and other corporate expenses.

 

Gas Marketing and Transportation Update:

Fourth quarter 2013 average dry gas prices, including the impact of our hedging program and net of basis, averaged $4.03/Mcf. CONSOL's expansion into wet gas production areas provided a liquids value uplift of $0.23/Mcfe bringing our overall average sales price to $4.26/Mcfe. Our NGL liquids volumes were 120% higher than in the 2012 fourth quarter. The continued growth of our wet gas production volumes will increase the uplift on our future average sales prices.

CONSOL Energy continues to develop a diversified portfolio of firm capacity options to support our three-year production growth plan. We are benefited by the strategic location of our primary production areas in Southwest Pennsylvania, Northern West Virginia, and Eastern Ohio. These areas are served by a large concentration of major pipelines that provide us with the capacity to move our production to the major gas markets.

The company currently has a total of 1.3 Bcf per day of effective firm transportation capacity. This is comprised of 0.8 Bcf per day of firm capacity on existing pipelines, contracted volumes of 0.3 Bcf per day on several pipeline projects that will be completed over the next several years, and an additional 0.2 Bcf per day of long-term firm sales with a major customer that has their own firm capacity. Our firm capacity portfolio will support all of the CY 2014 production and the majority of our projected volumes for the three-year plan. We are in active negotiations with several pipelines to extend our firm capacity coverage for the longer term. The average cost for the existing and committed firm capacity is approximately $0.23 per MMBtu.

In addition to firm capacity, we have developed a processing portfolio to support the projected volumes from our wet production areas. We have agreements to support the processing of over 115 MMcf/d of gross gas volumes growing to more than 380 MMcf/d in the next twelve months. These commitments are sufficient to cover our processing requirements for the next two years. We will continue to layer in processing capacity to support the liquids development plan.

Coal Division Results:

Coal production in the quarter consisted of 1.2 million tons of low-vol, 0.6 million tons of high-vol, and 5.3 million tons of thermal, for a total of 7.1 million tons.

Of the thermal coal production, 4.8 million tons were from Northern Appalachia and 0.5 million tons were from Central Appalachia.

During the fourth quarter of 2013, CONSOL's total coal inventory decreased by 47,000 tons to 582,000 tons. Thermal coal inventory decreased by 104,000 tons to 421,000 tons, while low-vol coal inventory increased by 57,000 tons, to 161,000 tons.

COAL DIVISION RESULTS BY PRODUCT CATEGORY - Quarter-To-Quarter Comparison

 
   

Low-Vol

 

Low-Vol

 

High-Vol

 

High-Vol

 

Thermal

 

Thermal

   

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

Quarter

   

Ended

 

Ended

 

Ended

 

Ended

 

Ended

 

Ended

   

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

 

December 31,

   

2013

 

2012

 

2013

 

2012

 

2013

 

2012

                         

Beginning Inventory (millions of tons)

 

0.1

   

0.4

   

   

   

0.5

   

1.0

 

Coal Production (millions of tons)

 

1.2

   

0.7

   

0.6

   

0.6

   

5.3

   

5.3

 

Ending Inventory (millions of tons)

 

0.2

   

0.3

   

   

   

0.4

   

0.6

 

Sales - Company Produced (millions of tons)

 

1.1

   

0.8

   

0.6

   

0.6

   

5.5

   

5.7

 
                         

Sales Per Ton

 

$

81.84

   

$

128.79

   

$

58.88

   

$

69.51

   

$

64.66

   

$

69.18

 
                         

Beginning Inventory Cost Per Ton

 

$

65.42

   

$

87.32

   

$

   

$

   

$

53.04

   

$

51.13

 
                         

Total Direct Costs Per Ton

 

$

42.37

   

$

36.73

   

$

29.08

   

$

29.36

   

$

29.34

   

$

27.41

 

Royalty/Production Taxes Per Ton

 

5.36

   

6.80

   

2.35

   

1.45

   

2.64

   

2.96

 

Direct Services to Operations Per Ton

 

7.06

   

7.27

   

5.93

   

5.14

   

6.69

   

6.73

 

Retirement and Disability Per Ton

 

4.85

   

6.43

   

2.49

   

3.53

   

2.52

   

3.08

 

DD&A Per Ton

 

9.12

   

10.80

   

5.50

   

7.05

   

5.23

   

5.82

 

Total Production Costs

 

$

68.76

   

$

68.03

   

$

45.35

   

$

46.53

   

$

46.42

   

$

46.00

 
                         

Ending Inventory Cost Per Ton

 

$

(65.68)

   

$

(86.38)

   

$

   

$

   

$

(50.82)

   

$

(50.89)

 
                         

Total Cost Per Ton Sold

 

$

68.89

   

$

71.72

   

$

45.35

   

$

46.53

   

$

46.72

   

$

46.35

 

Average Margin Per Ton Sold

 

$

12.95

   

$

57.07

   

$

13.53

   

$

22.98

   

$

17.94

   

$

22.83

 

Addback: DD&A Per Ton

 

$

9.12

   

$

10.80

   

$

5.50

   

$

7.05

   

$

5.23

   

$

5.82

 

Average Margin Per Ton, before DD&A

 

$

22.07

   

$

67.87

   

$

19.03

   

$

30.03

   

$

23.17

   

$

28.65

 

Cash Flow before Cap. Ex and DD&A ($MM)

 

$

24

   

$

54

   

$

11

   

$

18

   

$

127

   

$

163

 
                                                                         

Sales and production tons exclude CONSOL Energy's portion from equity affiliates and discontinued operations. Direct Costs per Ton include items such as labor and benefits, supplies, power, preparation costs, project expenses and gas well plugging costs. Direct Services to Operations Per Ton include items such as subsidence costs, direct administrative, selling expenses, permitting and compliance and asset retirement obligations. Retirement and Disability Per Ton Sold includes charges for pension, retiree medical and other employee related long-term liabilities. Sales tons times Average Margin Per Ton, before DD&A is meant to approximate the amount of cash generated for the low-vol, high-vol, and thermal coal categories. This cash generation will be offset by maintenance of production (MOP) capital expenditures. Table may not sum due to rounding.

 

Coal Marketing Update:

Low Vol: During the fourth quarter, 1.1 million tons of low-vol coking coal from Buchanan Mine was sold to domestic and international customers. New sales opportunities were realized in China, Poland, and in the U.S. Buchanan's competitive cost position enabled CONSOL to exceed the fourth quarter and 2013 production and sales forecast. During the fourth quarter, CONSOL was successful in securing two new deals with U.S. customers for 2014. Buchanan Coal is currently being tested at two plants in the U.S. which is expected to lead to new sales opportunities.

High Vol: During the fourth quarter, 0.6 million tons of its Bailey high-vol coking coal was sold to customers in Korea, Brazil, and the U.S. Bailey coal remains in demand as its versatility allows it to compete as high vol, PCI and high-Btu thermal coal. CONSOL will continue to create and evaluate new sales opportunities that provide the best returns for the portfolio.

Thermal: CONSOL's customer demand remained steady for contracted coal in the fourth quarter. Sales have been completed to ten different customers for 2.5 million tons in Q4 for 2014. For 2014 tons, CONSOL is currently active in negotiations for both domestic business and, in collaboration with third party marketers, on the export front. This has resulted in the successful development of new thermal and metallurgical markets in India.

CONSOL Energy 2014 - 2016 Guidance

First quarter gas production, net to CONSOL, is expected to be approximately 47 – 49 Bcfe, while annual 2014 production is expected to be 215 – 235 Bcfe.

CONSOL Energy expects its 2015 and 2016 annual gas production to grow by 30%.

Total hedged natural gas production in the 2014 first quarter is 31.9 Bcf, at an average price of $4.61 per Mcf. CONSOL has begun to implement a dual-track approach to its gas hedging. The company will continue to use a formulaic approach to a base of hedges, but could layer-in additional opportunistic hedges to capture value from price spikes. CONSOL does not expect to hedge more than 80% of its estimated natural gas production for any given year. The annual gas hedge position for three years is shown in the table below:

GAS DIVISION GUIDANCE

 
   

2014

 

2015

 

2016

Total Yearly Production (Bcfe)

 

215-235

 

30%

 

30%

Volumes Hedged (Bcf),as of 1/21/14

 

129.3

 

78.6

 

71.3

Average Hedge Price ($/Mcf)

 

$4.61

 

$4.10

 

$4.20

 
 

COAL DIVISION GUIDANCE

 
   

Q1 2014

 

2014

 

2015

Est. Total Coal Sales

 

7.2 - 7.6

   

30.1 - 32.1

   

34.0

 

Tonnage: Firm

 

6.9

   

23.8

   

12.2

 

Price: Sold (firm)

 

$

64.75

   

$

65.35

   

$

69.23

 

Est. Low-Vol Met Sales

 

1.1 - 1.2

   

4.2 - 4.7

   

4.9

 

Tonnage: Firm

 

0.8

   

1.7

   

0.8

 

Est. High-Vol Met Sales

 

0.7+

   

2.3+

   

2.4

 

Tonnage: Firm

 

0.6

   

0.9

   

0.3

 

Est. Thermal Sales

 

5.6+

   

23.8+

   

26.7

 

Tonnage: Firm

 

5.5

   

21.2

   

11.1

 
                                     

Note: While most of the data in the table are single point estimates, the inherent uncertainty of markets and mining operations means that investors should consider a reasonable range around these estimates. CONSOL has chosen not to forecast prices for open tonnage due to ongoing customer negotiations. Firm tonnage is tonnage that is both sold and priced, and excludes collared tons. CONSOL Energy has sold additional coal volumes that are not yet priced. Those volumes are excluded from this table. There are no collared tons in 2014. Collared tons in 2015 are 1.4 million tons, with a ceiling of $72.59 per ton and a floor of $48.59 per ton. Not included in the category breakdowns are the tons from equity affiliates Harrison Resources and Western Allegheny Energy (WAE). Harrison Resources has 0.1 million tons for Q1 2014, and 0.4 million tons for all of 2014 and 2015. WAE has 0.1 million tons for Q1 2014, and 0.5 million tons and 0.9 million tons for all of 2014, and 2015, respectively.

 

Liquidity

Total company liquidity as of December 31, 2013 was $2.1 billion, including cash of $327.4 million. CONSOL Energy received a cash inflow of $850 million on December 5. Major cash outflows subsequent to that were the repayment of funds drawn against its bank facility and revolver ($351 million) and the partial payment to Dominion for the leasing of the 90,000 acres ($91 million). Half of this payment will be repaid to CONSOL by its Marcellus Shale joint venture partner.

As of December 31, 2013, CONSOL Energy had $1.2 billion in total liquidity, which is comprised of $321.2 million of cash, $48.9 million available in its accounts receivable securitization facility and $793.0 million available to be borrowed under its $1.0 billion bank facility. CONSOL Energy's credit facility has no borrowings. Outstanding letters of credit are $207.0 million.

As of December 31, 2013, CNX Gas Corporation had $918.6 million in total liquidity, which is comprised of $6.2 million of cash and $912.4 million available to be borrowed under its $1.0 billion bank facility. CNX Gas' credit facility has no borrowings. Outstanding letters of credit are $87.6 million.

About

CONSOL Energy Inc. (NYSE: CNX) is a Pittsburgh-based producer of natural gas and coal. The company is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin. CONSOL Energy deploys an organic growth strategy focused on rapidly developing its resource base of 4.0 trillion cubic feet of proved natural gas reserves, while the company's premium coal assets are sold to electricity generators and steelmakers, both domestically and internationally. CONSOL Energy is a member of the Standard & Poor's 500 Equity Index and the Fortune 500. Additional information can be found at www.consolenergy.com.

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