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2: EX-10.6 Material Contract HTML 50K
3: EX-10.7 Material Contract HTML 50K
4: EX-10.8 Material Contract HTML 47K
5: EX-31.1 Certification -- §302 - SOA'02 HTML 31K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 31K
7: EX-32.1 Certification -- §906 - SOA'02 HTML 27K
8: EX-32.2 Certification -- §906 - SOA'02 HTML 27K
15: R1 Cover Page HTML 86K
16: R2 Consolidated Statements of Income HTML 133K
17: R3 Consolidated Statements of Comprehensive Income HTML 49K
18: R4 Consolidated Statements of Comprehensive Income HTML 30K
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19: R5 Consolidated Balance Sheets HTML 167K
20: R6 Consolidated Balance Sheets (Parentheticals) HTML 41K
21: R7 Consolidated Statements of Stockholders' Equity HTML 83K
22: R8 Consolidated Statements of Cash Flows HTML 141K
23: R9 Basis of Presentation HTML 59K
24: R10 Earnings Per Share HTML 107K
25: R11 Revenue From Contracts With Customers HTML 84K
26: R12 Income Taxes HTML 34K
27: R13 Property, Plant and Equipment HTML 49K
28: R14 Goodwill and Other Intangible Assets HTML 48K
29: R15 Revolving Credit Facilities HTML 41K
30: R16 Other Accrued Liabilities HTML 48K
31: R17 Long-Term Debt HTML 78K
32: R18 Commitments and Contingent Liabilities HTML 84K
33: R19 Derivative Instruments HTML 138K
34: R20 Fair Value of Financial Instruments HTML 63K
35: R21 Variable Interest Entities HTML 121K
36: R22 Segment Information HTML 532K
37: R23 Stock Repurchase HTML 28K
38: R24 Recent Accounting Pronouncements HTML 35K
39: R25 Subsequent Events HTML 31K
40: R26 Recent Accounting Pronouncements (Policies) HTML 28K
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49: R35 Derivative Instruments (Tables) HTML 173K
50: R36 Fair Value of Financial Instruments (Tables) HTML 61K
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52: R38 Segment Information (Tables) HTML 533K
53: R39 Basis of Presentation - Schedule of Cash and HTML 38K
Restricted Cash (Details)
54: R40 Basis of Presentation - Schedule of Receivables HTML 38K
(Details)
55: R41 Earnings Per Share - Anti-Dilutive Options and HTML 39K
Units Excluded from Earnings Per Share (Details)
56: R42 Earnings Per Share - Share-based Compensation HTML 39K
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57: R43 Earnings Per Share - Narrative (Details) HTML 43K
58: R44 Earnings Per Share - Earnings Per Share (Details) HTML 66K
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60: R46 Revenue From Contracts With Customers - HTML 56K
Disaggregation of Revenue (Details)
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Performance Obligation (Details)
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64: R50 Property, Plant, and Equipment - Narrative HTML 30K
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65: R51 Goodwill and Other Intangible Assets - Narrative HTML 65K
(Details)
66: R52 Goodwill and Other Intangible Assets - Schedule of HTML 31K
Goodwill (Details)
67: R53 Goodwill and Other Intangible Assets - Carrying HTML 32K
Amount and Accumulated Amortization of Intangible
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69: R55 Other Accrued Liabilities (Details) HTML 53K
70: R56 Long-Term Debt - Schedule of Long-Term Debt HTML 80K
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71: R57 Long-Term Debt - Narrative (Details) HTML 115K
72: R58 Long-Term Debt - Schedule of Convertible Debt HTML 42K
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73: R59 Long-Term Debt - Schedule Of Interest (Details) HTML 37K
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Commitment Expiration Per Period (Details)
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Derivative Instruments (Details)
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Instruments (Details)
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Instruments on the Consolidated Statement of
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Instruments Measured at Fair Value on a Recurring
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Disclosures (Details)
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Information, (Loss) Earnings Before Income Tax
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Information, Total Assets (Details)
91: R77 Stock Repurchase (Details) HTML 35K
92: R78 Subsequent Events (Details) HTML 41K
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Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Emerging Growth Company i☐If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The following are certain terms and abbreviations commonly used in the oil and gas industry and included within this Form 10-Q:
Bbl - One stock tank barrel, or 42 U.S. gallons liquid volume, used in reference to oil or other liquid hydrocarbons.
Bcf - One billion cubic feet of natural gas.
Bcfe - One billion cubic feet of natural gas equivalents, with one barrel of oil being equivalent to 6,000 cubic feet of gas.
Btu - One British Thermal Unit.
BBtu - Onebillion
British Thermal Units.
Mbbls - One thousand barrels of oil or other liquid hydrocarbons.
Mcf - One thousand cubic feet of natural gas.
Mcfe - One thousand cubic feet of natural gas equivalents, with one barrel of oil being equivalent to 6,000 cubic feet of gas.
MMbtu - One million British Thermal Units.
MMcfe - One million cubic feet of natural gas equivalents, with one barrel of oil being equivalent to 6,000 cubic feet of gas.
Tcfe - One trillion cubic feet of natural gas equivalents, with one barrel of oil being equivalent to 6,000 cubic feet of gas.
NGL
- Natural gas liquids - those hydrocarbons in natural gas that are separated from the gas as liquids through the process.
net - “net” natural gas or “net” acres are determined by adding the fractional ownership working interests the Company has in gross wells or acres.
TIL - turn-in-line; a well turned to sales.
blending - process of mixing dry and damp gas in order to meet downstream pipeline specifications.
lease operating expense - costs of operating wells and equipment on a producing lease, many of which are recurring. Includes items such as water disposals, repairs and maintenance, equipment rental,
and operating supplies, among others.
proved reserves - quantities of oil, natural gas, and NGL which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.
proved developed reserves (PDPs) - proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.
proved
undeveloped reserves (PUDs) - proved reserves that can be estimated with reasonable certainty to be recovered from new wells on undrilled proved acreage or from existing wells where a relatively major expenditure is required for completion.
reservoir - a porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.
development well - a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
exploratory well - a well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another
reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well or a stratigraphic test well.
gob well - a well drilled or vent hole converted to a well which produces or is capable of producing coalbed methane or other natural gas from a distressed zone created above and below a mined-out coal seam by any prior full seam extraction of the coal.
service well - a well drilled or completed for the purpose of supporting production in an existing field. Specific purposes of service wells include, among other things, gas injection, water injection and salt-water disposal.
play - a proven geological formation that contains commercial amounts of hydrocarbons.
royalty interest
- the land owner’s share of oil or gas production, historically 1/8.
throughput - the volume of natural gas transported or passing through a pipeline, plant, terminal, or other facility during a particular period.
transportation, gathering and compression - cost incurred related to transporting natural gas to the ultimate point of sale. These costs also include costs related to physically preparing natural gas, natural gas liquids and condensate for ultimate sale which include costs related to processing, compressing, dehydrating and fractionating, among others.
working interest - an interest that gives the owner the right to drill, produce and conduct operating activities on a property and receive a share of any production.
wet
gas - natural gas that contains significant heavy hydrocarbons, such as propane, butane and other liquid hydrocarbons.
Common Stock, $.01 Par Value; 500,000,000 Shares Authorized, 187,431,492 Issued and Outstanding at June 30, 2020; 186,642,962 Issued and Outstanding at December 31, 2019
i1,878
i1,870
Capital
in Excess of Par Value
i2,261,729
i2,199,605
Preferred
Stock, 15,000,000 shares authorized, None issued and outstanding
i—
i—
Retained
Earnings
i1,495,197
i1,971,676
Accumulated
Other Comprehensive Loss
(i12,382)
(i12,605)
Total
CNX Resources Stockholders’ Equity
i3,746,422
i4,160,546
Noncontrolling
Interest
i820,532
i801,763
TOTAL
STOCKHOLDERS' EQUITY
i4,566,954
i4,962,309
TOTAL
LIABILITIES AND EQUITY
$
i8,319,684
$
i9,060,806
The
accompanying notes are an integral part of these financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1—iBASIS
OF PRESENTATION:
The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for future periods.
The Consolidated Balance Sheet at December 31,
2019 has been derived from the Audited Consolidated Financial Statements at that date but does not include all the notes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and related notes for the year ended December 31, 2019 included in CNX Resources Corporation's ("CNX,""CNX Resources," the "Company,""we,""us," or "our") Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) on February 10, 2020.
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
Cash, Cash Equivalents,
and Restricted Cash
ii
The following table provides a reconciliation of cash, cash equivalents, and restricted cash to amounts shown in the statement
of cash flows:
Consists of cash that the Company is contractually obligated to maintain in accordance with the terms of the Cardinal States Gathering LLC and CSG Holdings II LLC Credit Agreement dated March 13, 2020 (See Note 9 - Long-Term Debt for more information).
Receivables
On January 1, 2020, CNX adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. CNX adopted Topic 326 using the prospective transition method.
Prior to adopting Topic 326, CNX reserved for specific accounts receivable when it was probable that all or a part of an outstanding balance would not be collected, such as customer bankruptcies. Collectability was determined based on terms of sale, credit status of customers and various other circumstances. CNX regularly reviewed collectability and established or adjusted the allowance as necessary using the specific identification method. Account balances were charged off against
the allowance after all means of collection had been exhausted and the potential for recovery was considered remote. Reserves for uncollectable amounts were not material in the periods presented.
Under Topic 326, management records an allowance for credit losses related to the collectability of third-party customers receivables using the historical aging of the customer receivable balance. The collectability is determined based on past events, including historical experience, customer credit rating, as well as current market conditions. CNX monitors customer ratings
11
and collectability on an on-going basis. Account balances will be charged
off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. iThe allowance for credit losses are as follows:
Basic earnings per share is computed by dividing net income attributable to CNX shareholders by the weighted average shares outstanding during the reporting period. Diluted earnings per share is computed similarly to basic earnings per share, except that the weighted average shares outstanding are increased to include, if dilutive, additional shares from stock options, performance stock options, restricted stock units, performance share units, and shares issuable upon conversion of the Convertible
Notes. The number of additional shares is calculated by assuming that outstanding stock options and performance share options were exercised, that outstanding restricted stock units and performance share units were released, and that the proceeds from such activities were used to acquire shares of common stock at the average market price during the reporting period. CNX Midstream Partners LP's ("CNXM") dilutive units did not have a material impact on the Company's earnings per share calculations for the three or six months ended June 30, 2020 or June 30, 2019.
i
The
table below sets forth the share-based awards that have been excluded from the computation of diluted earnings per share because their effect would be antidilutive:
Additionally,
the ii32,242,975/
shares underlying CNX's Convertible Notes (See Note 10 - Long-Term Debt) are not considered in the calculation of diluted net loss per share for the three and six months ended June 30, 2020 as these Notes were not convertible as ofJune 30, 2020. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, and therefore will use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable.
i
The
table below sets forth the share-based awards that have been exercised or released:
Pursuant
to the terms of the change in control severance agreements of certain employees and CNX officers, outstanding equity awards held by such employees vest upon a stockholder (or stockholder group) becoming the beneficial owner of more than i25% of the Company's outstanding common stock. During the three months ended June 30, 2019, Southeastern Asset Management, Inc. and its affiliates ("SEAM") acquired
shares of CNX's common stock in the open market which resulted in SEAM's aggregate share ownership exceeding more the i25% of CNX's common stock outstanding. This transaction, as such, constituted a change in control event under the severance agreements, resulting in the accelerated vesting of i473,126
restricted stock units and i903,100 performance share units held by the aforementioned employees that were issued prior to 2019. Those affected employees and officers each consented to waive the change in control vesting provision included in the change in control severance agreements with respect to their restricted stock unit and performance share unit awards that were issued during 2019. The accelerated vesting resulted in $ii19,654/
of additional long-term equity-based compensation expense for the three and six months ended June 30, 2019, and is included in Selling, General and Administrative Costs in the Consolidated Statements of Income. The performance share unit awards that vested continue to be subject to the attainment of performance goals as determined by the Compensation Committee of CNX's Board of Directors after the end of the applicable performance period.
i
The
computations for basic and diluted (loss) earnings per share are as follows:
Less:
Net Income Attributable to Non-Controlling Interest
i15,263
i30,217
i39,126
i52,904
Net
(Loss) Income Attributable to CNX Resources Shareholders
$
(i145,749)
$
i162,477
$
(i474,835)
$
i75,140
Weighted-Average
Shares of Common Stock Outstanding
i187,316,463
i191,524,289
i187,117,412
i194,483,555
Effect
of Diluted Shares*
i—
i1,256,443
i—
i1,507,800
Weighted-Average
Diluted Shares of Common Stock Outstanding
i187,316,463
i192,780,732
i187,117,412
i195,991,355
(Loss)
Earnings per Share:
Basic
$
(i0.78)
$
i0.85
$
(i2.54)
$
i0.39
Diluted
$
(i0.78)
$
i0.84
$
(i2.54)
$
i0.38
/
*During
periods in which the Company incurs a net loss, diluted weighted average shares outstanding are equal to basic weighted average shares outstanding because the effect of all equity awards is antidilutive.
Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company has elected to exclude all taxes from the measurement of transaction price.
For natural gas, NGL and oil, and purchased gas revenue, the Company generally considers the delivery of each unit (MMBtu
or Bbl) to be a separate performance obligation that is satisfied upon delivery. Payment terms for these contracts typically require payment within i25 days of the end of the calendar month in which the hydrocarbons are delivered. A significant number of these contracts contain variable consideration because the payment terms refer to market prices at future delivery dates. In these situations, the
Company has not identified a standalone selling price because the terms of the variable payments relate specifically to the Company’s efforts to satisfy the performance obligations. A portion of the contracts contain fixed consideration (i.e. fixed price contracts or contracts with a fixed differential to NYMEX or index prices). The fixed consideration is allocated to each performance obligation on a relative standalone selling price basis, which requires judgment from management. For these contracts, the
Company generally concludes that the fixed price or fixed differentials in the contracts are representative of the standalone selling price. Revenue associated with natural gas, NGL and oil as presented on the accompanying Consolidated Statements of Income represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling natural gas, NGL and oil on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis.
13
Midstream
revenue consists of revenues generated from natural gas gathering activities. The gas gathering services are interruptible in nature and include charges for the volume of gas actually gathered and do not guarantee access to the system. Volumetric based fees are based on actual volumes gathered. The Company generally considers the interruptible gathering of each unit (MMBtu) of natural gas as a separate performance obligation. Payment terms for these contracts typically require payment within i25
days of the end of the calendar month in which the hydrocarbons are gathered.
Disaggregation of Revenue
i
The following table is a disaggregation of revenue by major source:
CNX invoices its customers once a performance obligation has been satisfied, at which point payment is unconditional. Accordingly, CNX's contracts with customers do not give rise to contract assets or liabilities under ASC 606. The Company
has no contract assets recognized from the costs to obtain or fulfill a contract with a customer. The opening and closing balances of the Company’s receivables related to contracts with customers were $i133,480
and $i69,174, respectively, as of June 30, 2020.
Transaction Price Allocated to Remaining Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been
satisfied. However, the guidance provides certain practical expedients that limit this requirement, including when variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a series.
A significant portion of CNX's natural gas, NGL and oil and purchased gas revenue is short-term in nature with a contract term of one year or less. For those contracts, CNX has utilized the practical expedient in ASC 606-10-50-14 exempting the Company from disclosure of the transaction price allocated to remaining
performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
For revenue associated with contract terms greater than one year, a significant portion of the consideration in those contracts is variable in nature and the Company allocates the variable consideration in its contract entirely to each specific performance obligation to which it relates. Therefore, any remaining
variable consideration in the transaction price is allocated entirely to wholly unsatisfied performance obligations. As such, the Company has not disclosed the value of unsatisfied performance obligations pursuant to the practical expedient.
For revenue associated with contract terms greater than one year with a fixed price component, the aggregate amount of the transaction price allocated to remaining performance obligations was $i137,995
as of June 30, 2020. The Company expects
14
to recognize net revenue of $i46,189 in the next 12 months and $i45,754
over the following 12 months, with the remainder recognized thereafter.
For revenue associated with CNX's midstream contracts, which also have terms greater than one year, the interruptible gathering of each unit of natural gas represents a separate performance obligation; therefore, future volumes are wholly unsatisfied, and disclosure of the transaction price allocated to remaining performance obligations is not required.
Prior-Period Performance Obligations
CNX records revenue in the month production is delivered to the purchaser. However, settlement statements for certain natural gas and NGL revenue may not be received for
30 to 90 days after the date production is delivered, and as a result, the Company is required to estimate the amount of production delivered to the purchaser and the price that will be received for the sale of the product. CNX records the differences between the estimate and the actual amounts received in the month that payment is received from the purchaser. The Company has existing internal controls for its revenue estimation process and the related accruals, and any identified differences between its revenue estimates and the actual revenue received historically have not been significant. For the three and six months ended June 30, 2020 and 2019, revenue recognized in the current reporting period
related to performance obligations satisfied in a prior reporting period was not material.
NOTE 4—iINCOME TAXES:
The effective tax rates for the three and six months ended June 30, 2020 were i18.0%
and i29.4%, respectively. The effective tax rates for the three and six months ended June 30, 2019 were i17.5%
and i18.6%, respectively. The effective tax rate for the three and six months ended June 30, 2020 and 2019 differ from the U.S. federal statutory rate of 21% primarily due to the impact of noncontrolling interest, equity compensation and state taxes.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic
Security Act (the "Act") which, among other things, removed the 80% taxable income limitation for utilization of net operating losses generated in tax years 2018 through 2020, allowing for 5-year net operating loss carrybacks, increased the adjusted taxable income limitation for the disallowance of interest expense from 30% to 50%, and provided for refunds of any remaining alternative minimum tax (“AMT”) credits. As a result of the Act, the Company recorded AMT refunds of $i102,482
in Recoverable Income Taxes in the Consolidated Balance Sheets in anticipation of the AMT refund being received in 2020. The impact of other tax implications of the Act on the financial statements and related disclosures are immaterial.
In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12 - Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability
not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU will be applied using different approaches depending on what the specific amendment relates to and, for public entities, are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company early adopted ASU 2019-12 as of January 1, 2020.
The
total amount of uncertain tax positions at June 30, 2020 and December 31, 2019 was $i33,243 and $i31,516,
respectively. If these uncertain tax positions were recognized, approximately $ii33,243/
would affect CNX's effective tax rate at June 30, 2020 and December 31, 2019. The increase in the unrecognized tax benefits during the six months ended June 30, 2020 is due to additional tax credits to be claimed on the 2019 federal income tax return.
CNX recognizes accrued interest and penalties related to uncertain tax positions in interest expense and income tax expense, respectively. As of June 30, 2020 and December 31, 2019, CNX had iino/
accrued liabilities for interest and penalties related to uncertain tax positions.
CNX and its subsidiaries file federal income tax returns with the United States and tax returns within various state jurisdictions. With few exceptions, the Company is no longer subject to United States federal, state, local, or non-U.S. income tax examinations by tax authorities for the years before 2016. The Company expects the Internal Revenue Service and the Joint Committee on Taxation to conclude its audit of tax years 2016 through 2017 during 2020.
Less:
Accumulated Depreciation, Depletion and Amortization
i3,730,232
i3,435,431
Total
Property, Plant and Equipment - Net
$
i7,083,803
$
i7,136,575
/
Impairment
of Proved Property
CNX performs a quantitative impairment test whenever events or changes in circumstances indicate that an asset group's carrying amount may not be recoverable, over proved properties using the published forward prices, timing, methods and other assumptions consistent with historical periods. When indicators of impairment are present, tests require that the Company first compare expected future undiscounted cash flows by asset group to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required, which is determined based on discounted cash flow techniques using significant assumptions including projected revenues, future commodity
prices, and a market-specific weighted average cost of capital which are affected by expectations about future market and economic conditions.
During the six months ended June 30, 2020, CNX recognized certain indicators of impairment specific to our Southwest Pennsylvania (SWPA) CBM asset group and determined that carrying value of that asset group was not recoverable. The fair value of the asset group was estimated by using level 3 inputs which consisted of discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, an impairment of $i61,849
was recognized and is included in Impairment of Exploration and Production Properties in the Consolidated Statements of Income. The impairment was related to an economic decision to temporarily idle certain wells and the related processing facility during the first quarter.
NOTE 6—iGOODWILL AND OTHER INTANGIBLE ASSETS:
In
December 2017, CNX Gas entered into a purchase agreement with Noble Energy, pursuant to which CNX Gas acquired Noble’s i50% membership interest in CNX Gathering (then named "CONE Gathering LLC"), for a cash purchase price of $i305,000
(the "Midstream Acquisition").
Prior to the Midstream Acquisition, the Company accounted for its i50% interest in CNX Gathering as an equity method investment as the Company had the ability to exercise significant influence, but not control, over the operating and financial policies of the midstream operations.
In conjunction with the Midstream Acquisition, the Company obtained a controlling interest in CNX Gathering and control over the Partnership. Accordingly, the Midstream Acquisition was accounted for as a business combination using the acquisition method of accounting pursuant to ASC Topic 805, Business Combinations, or ASC 805. ASC 805 requires that, in circumstances where a business combination is achieved in stages (or step acquisition), previously held equity interests are remeasured at fair value. The fair value assigned to the previously held equity interest in CNX Gathering and CNXM was $i799,033
and was determined using the income approach, based on a discounted cash flow methodology.
As part of the allocation of purchase price and in connection with the fair value of consideration transferred at closing on January 3, 2018, CNX recorded $i796,359 of goodwill and $i128,781
of other intangible assets which are comprised of customer relationships.
16
Impairment of Goodwill
All goodwill is attributed to the Midstream reportable segment. Goodwill is evaluated for impairment at least annually and whenever events or changes in circumstance indicate that the fair value of a reporting unit is less than its carrying amount. In connection with the evaluation of goodwill for impairment, CNX may first consider qualitative factors to assess whether there are indicators that
it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. If after assessing such factors or circumstances, CNX determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then a quantitative assessment is not required. If CNX chooses to bypass the qualitative assessment, or if it chooses to perform a qualitative assessment but is unable to qualitatively conclude that no impairment has occurred, then CNX will perform a quantitative assessment. If the estimated fair value of a reporting unit is less than its carrying value, an impairment charge is recognized for the excess of the reporting unit's carrying value over its fair value. The Company uses a combination of the income approach (generally a discounted cash flow method) and market approach (which may include the guideline public
company method and/or the guideline transaction method) to estimate the fair value of a reporting unit.
During the first quarter of 2020, the Company identified indicators of impairment in the form of deteriorating macroeconomic conditions, and the decline in the observable market value of CNXM securities both in relation to the COVID-19 pandemic and the overall decline in the MLP market space. Management concluded that these factors presented indications that the fair value of the midstream reporting unit was more likely than not below the reporting unit’s carrying value. CNX bypassed the qualitative assessment and performed a quantitative test that utilized a combination of the income and market approaches as described above to estimate the fair value of the Midstream reporting unit. As a result of this assessment,
CNX concluded that the carrying value exceeded its estimated fair value, and a corresponding impairment of $i473,045 was recorded, which was included in Impairment of Goodwill in the accompanying Consolidated Statements of Income. Any additional adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges relating to the Midstream reporting unit.
In estimating the fair value
of the midstream reporting unit, the Company used the income approach’s discounted cash flow method, which applies significant inputs not observable in the public market (Level 3), including estimates and assumptions related to the use of an appropriate discount rate, future throughput volumes, operating costs and capital spending, discounted to present value using an industry rate adjusted for company-specific risk, which management feels reflects the overall level of inherent risk of the reporting unit. These assumptions are affected by expectations about future market, industry and economic conditions. Cash flow projections were derived from board approved budgeted amounts, a five-year operating forecast and an estimate of future cash flows. Subsequent cash flows were developed using growth or contraction rates that management believes are reasonably likely to occur. The
Company used the market approach’s comparable company method. The comparable company method evaluates the value of a company using metrics of other businesses of similar size and industry.
The estimates of future cash flows are subjective in nature and are subject to impacts from business risks as described in “Item 1A. Risk Factors” in CNX's 2019 Annual Report on Form 10-K as filed with the SEC on February 10, 2020 ("2019 Form 10-K"). The fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management’s estimates of future financial results. Although CNX believes the estimates and assumptions used in estimating the fair value are reasonable and appropriate, different assumptions and estimates could materially impact the estimated
fair value. Future results could differ from our current estimates and assumptions.
i
Changes in the carrying amount of goodwill consist of the following activity:
The
customer relationship intangible asset is being amortized on a straight-line basis over approximately i17 years. Amortization expense related to other intangible assets was $ii1,638/
for the three months ended June 30, 2020 and 2019, and $ii3,276/
for the six months ended June 30, 2020 and 2019. The estimated annual amortization expense is expected to approximate $iiiii6,552////
per year for each of the next five years.
NOTE 7—iREVOLVING CREDIT FACILITIES:
CNX Resources Corporation (CNX)
In April 2019, CNX amended its senior secured revolving credit facility ("Credit Facility") and extended its maturity to April 2024. The lenders' commitments remained
unchanged at $i2,100,000, with an accordion feature that allows the Company to increase commitments to $i3,000,000.
In addition, the Cumulative Credit Basket for dividends and distributions was replaced with a basket for dividends and distributions subject to a pro forma net leverage ratio of at least i3.00 to 1.00 and availability under the Credit Facility of at least i15%
of the aggregate commitments. In April 2020, as part of the semi-annual borrowing base redetermination, both the lenders' commitments and borrowing base decreased to $i1,900,000, and the $i650,000
letters of credit aggregate sub-limit remained unchanged. The amount of balance sheet cash that CNX may have on hand is also limited to $i150,000 when loans under the credit agreement are outstanding, subject to certain exceptions. If the aggregate principal amount of the existing i5.875%
Senior Notes due in April 2022 and certain other publicly traded debt securities outstanding i91 days prior to the earliest maturity of such debt (the "Springing Maturity Date") is greater than $i500,000,
then the Credit Facility will mature on the Springing Maturity Date.
Under the terms of the redetermined agreement, borrowings under the revolving credit facility will bear interest at CNX's option at either:
•the base rate, which is the highest of (i) the federal funds open rate plus i0.50%, (ii) PNC Bank, N.A.’s prime rate, or (iii) the one-month LIBOR rate plus i1.0%,
in each case, plus a margin ranging from i0.75% to i1.75%; or
•the LIBOR rate,
which is the LIBOR rate plus a margin ranging from i1.75% to i2.75%.
The
CNX Credit Facility is secured by substantially all of the assets of CNX and certain of its subsidiaries (excluding the Excluded Subsidiaries, which includes Cardinal States Gathering LLC, CNX Midstream GP LLC and CNXM and their respective subsidiaries). Fees and interest rate spreads are based on the percentage of facility utilization, measured quarterly. Availability under the Credit Facility is limited to a borrowing base, which is determined by the lenders' syndication agent and approved by the required number of lenders in good faith by calculating a value of CNX's proved natural gas reserves.
The CNX Credit
Facility contains a number of affirmative and negative covenants including those that, except in certain circumstances, limit the Company and the subsidiary guarantors' ability to create, incur, assume or suffer to exist indebtedness, create or permit to exist liens on properties, dispose of assets, make investments, purchase or redeem CNX common stock, pay dividends, merge with another corporation or amend the senior unsecured notes. The Company must also mortgage i85%
of the value of its proved reserves and i85% of the value of its proved developed producing reserves, in each case, which are included in the borrowing base, maintain applicable deposit, securities and commodities accounts with the lenders or affiliates thereof, and enter into control agreements with respect to such applicable accounts.
The CNX Credit Facility contains customary events of default, including, but not limited to, a cross-default to certain other
debt, breaches of representations and warranties, change of control events and breaches of covenants.
The CNX Credit Facility also requires that CNX maintain a maximum net leverage ratio of no greater than i4.00 to 1.00, which is calculated as the ratio of debt less cash on hand to consolidated EBITDA, measured quarterly. CNX must also maintain a minimum current ratio of no less than i1.00
to 1.00, which is calculated as the ratio of current assets, plus revolver
18
availability, to current liabilities, excluding borrowings under the revolver, measured quarterly. The calculation of all of the ratios exclude CNXM. CNX was in compliance with all financial covenants as of June 30, 2020.
At June 30, 2020, the CNX Credit Facility had $i550,000
of borrowings outstanding and $i204,839 of letters of credit outstanding, leaving $i1,145,161 of unused capacity. At December 31,
2019, the CNX Credit Facility had $i661,000 of borrowings outstanding and $i204,726 of letters of credit outstanding, leaving $i1,234,274
of unused capacity.
CNX Midstream Partners LP (CNXM)
In April 2019, CNXM amended its senior secured revolving credit facility and extended its maturity to April 2024. The lenders’ commitments remained unchanged at $i600,000, with an accordion feature that allows CNXM to increase the available borrowings by up to an additional $i250,000
under certain terms and conditions. Among other things, the revolving credit facility now includes (i) the addition of a restricted payment basket permitting cash repurchases of Incentive Distribution Rights (IDRs) subject to a pro forma secured leverage ratio of i3.00 to 1.00, a pro forma total leverage ratio of i4.00
to 1.00 and pro forma availability of i20% of commitments and (ii) a restricted payment basket for the repurchase of LP units not to exceed Available Cash (as defined in the partnership agreement) in any quarter, of up to $i150,000
per year and up to $i200,000 during the life of the facility.
Under the terms of the amended agreement, borrowings under the revolving credit facility will bear interest at CNXM's option at either:
•the base rate, which is the highest of (i) the federal funds open rate plus i0.50%,
(ii) PNC Bank, N.A.’s prime rate, or (iii) the one-month LIBOR rate plus i1.0%, in each case, plus a margin ranging from i0.50% to i1.50%; or
•the LIBOR rate, plus a margin ranging from i1.50% to i2.50%.
Fees
and interest rate spreads under the CNXM credit facility are based on the total leverage ratio, measured quarterly. The CNXM credit facility includes the ability to issue letters of credit up to $i100,000 in the aggregate.
The CNXM revolving credit facility contains a number of affirmative and negative covenants that include, among others, covenants that, except in certain circumstances, restrict the ability of CNXM, its subsidiary guarantors and certain of its non-guarantor,
non-wholly-owned subsidiaries, except in certain circumstances, to: (i) create, incur, assume or suffer to exist indebtedness; (ii) create or permit to exist liens on their properties; (iii) prepay certain indebtedness unless there is no default or event of default under the revolving facility; (iv) make or pay any dividends or distributions in excess of certain amounts; (v) merge with or into another person, liquidate or dissolve; or acquire all or substantially all of the assets of any going concern or going line of business or acquire all or a substantial portion of another person’s assets; (vi) make particular investments and loans; (vii) sell, transfer, convey, assign or dispose of its assets or properties other than in the ordinary course of business and other select instances; (viii) deal with any affiliate except in the ordinary course of business on terms no less favorable
to CNXM than it would otherwise receive in an arm’s length transaction; and (ix) amend in any material manner its certificate of incorporation, bylaws, or other organizational documents without giving prior notice to the lenders and, in some cases, obtaining the consent of the lenders.
In addition, CNXM is obligated to maintain at the end of each fiscal quarter (w) for so long as at least $i150,000
of the CNXM senior notes are outstanding, a maximum total leverage ratio of no greater than i5.25 to 1.00 (which increases to no greater than i5.50 to 1.00
during qualifying acquisition periods); (x) if less than $i150,000 of the CNXM senior notes are outstanding, a maximum total leverage ratio of no greater than i4.75 to
1.00 (which increases to no greater than i5.25 to 1.00 during qualifying acquisition periods); (y) a maximum secured leverage ratio of no greater than i3.50
to 1.00 and (z) a minimum interest coverage ratio of no less than i2.50 to 1.00. CNXM was in compliance with all financial covenants as of June 30, 2020.
The CNXM revolving credit facility also contains customary events of default, including, but not limited to, a cross-default to certain other debt, breaches of representations and warranties, change of control events and breaches of covenants. The obligations under the revolving credit facility are secured
by substantially all of the assets of CNXM and its wholly-owned subsidiaries. CNX is not a guarantor under the CNXM revolving credit facility.
At June 30, 2020, the CNXM credit facility had $i319,000 of borrowings outstanding and $i30
of letters of credit outstanding, leaving $i280,970 of unused capacity. At December 31, 2019, the CNXM credit facility had $i311,750
of borrowings outstanding, leaving $i288,250 of unused capacity.
Convertible
Senior Notes due May 2026 at 2.25% (Principal of $345,000 less Unamortized Discount and Issuance Costs of $115,420)
i229,580
i—
Cardinal
States Gathering Company Credit Facility maturing in March 2028 (Principal of $122,517 less Unamortized Discount of $1,204)
i121,313
i—
CSG
Holdings II LLC Credit Facility maturing in December 2026 (Principal of $48,815 less Unamortized Discount of $478)
i48,337
i—
Less:
Unamortized Debt Issuance Costs
i14,493
i8,990
i2,563,198
i2,754,443
Less:
Amounts Due in One Year
i22,430
i—
Long-Term
Debt
$
i2,540,768
$
i2,754,443
*CNX
is not a guarantor of CNXM's i6.50% senior notes due in March 2026 or CNXM's senior secured revolving credit facility.
/
In April 2020, CNX issued $i345,000
in aggregate principal amount of i2.25% convertible senior notes due May 2026 (the "Convertible Notes") in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, including $i45,000
aggregate principal amount of Convertible Notes issued pursuant to the exercise in full of the initial purchasers’ option to purchase additional Convertible Notes. The Convertible Notes were issued pursuant to an indenture and are senior, unsecured obligations of the Company. The Convertible Notes bear interest at a fixed rate of i2.25% per annum, payable semi-annually in arrears on May 1 and
November 1 of each year, commencing on November 1, 2020. Proceeds from the issuance of the Convertible Notes totaled $i334,650, net of initial purchaser discounts and issuance costs.
The initial conversion rate is i77.8816
shares of CNX's common stock per $1,000 principal amount of Convertible Notes, which represents an initial conversion price of approximately $i12.84 per share, subject to adjustment upon the occurrence of specified events. The Convertible Notes will mature on May 1, 2026, unless earlier repurchased, redeemed or converted. Before February 1, 2026, note holders will have the right to convert their Notes only upon the occurrence of the following events:
•during
any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on June 30, 2020, if the Last Reported Sale Price per share of Common Stock exceeds one hundred and thirty percent (i130%) of the Conversion Price for each of at least twenty (i20)
Trading Days (whether or not consecutive) during the
20
thirty (i30) consecutive Trading Days ending on, and including, the last Trading Day of the immediately preceding calendar quarter.
•during the five (i5)
consecutive Business Days immediately after any ten (i10) consecutive trading day period (such ten (i10)
consecutive Trading Day period, the “Measurement Period”) if the trading Price per $1,000 principal amount of Notes, as determined following a request by a Holder in accordance with the procedures set forth below, for each trading day of the Measurement Period was less than ninety eight percent (i98%) of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.
•if
we call any or all of the Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
•upon the occurrence of certain specified corporate events as set forth in the indenture governing the Convertible Notes.
From and after February 1, 2026, note holders may convert their Convertible Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date.
Upon conversion, the
Company may satisfy its conversion obligation by paying and/or delivering, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, in the manner and subject to the terms and conditions provided in the indenture governing the Convertible Notes. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the indenture governing the Convertible Notes. In addition, following certain corporate
events, as described in the indenture governing the Convertible Notes, that occur prior to the maturity date, the Company will increase the conversion rate, in certain circumstances, for a holder who elects to convert its Convertible Notes in connection with such a corporate event.
The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The
Company’s current intent is to settle the principle amount of the Convertible Notes in cash upon conversion.
If certain corporate events that constitute a “Fundamental Change” (as defined in the indenture governing the Convertible Notes) occur, then noteholders may require the Company to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain
de-listing events with respect to the Company’s common stock. During the three and six months ended June 30, 2020, the conditions allowing holders of the Convertible Notes to exercise their conversion right were not met and as of June 30, 2020, the notes were not convertible. The Convertible Notes are therefore are classified as long-term debt at June 30, 2020.
In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The fair value was based on
market data available for publicly traded, senior, unsecured corporate bonds with similar maturity. Assumptions used in the estimate represent what market participants would use in pricing the equity component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The carrying amount of the equity component representing the Conversion Option was determined by deducting the fair value of the liability component from the proceeds received upon issuance of the Convertible Notes. The equity component was recorded in Capital in Excess of Par Value in the Consolidated Statement of Stockholders Equity and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Convertible Notes over the liability component and the debt issuance costs are amortized to interest expense over the contractual term of the Notes using the effective interest
method.
In accounting for the debt issuance costs of $i10,350 related to the Convertible Notes, the Company allocated the total amount incurred to the liability and equity components using the same proportions as the proceeds of the Notes. Issuance costs attributable to the liability component were $i7,024
and will be amortized to interest expense using the effective interest method over the contractual term of the Convertible Notes. Issuance costs attributable to the equity component were $i3,326 and were netted with the equity component in Capital in Excess of Par Value in the Consolidated Statement of Stockholders Equity and are not subject to amortization.
As of June 30, 2020, the if-converted value of the Notes did not exceed the outstanding
principal amount.
21
i
The net carrying amount of the liability and equity components of the Notes was as follows:
In
connection with the offering of the Notes, the Company entered into privately negotiated capped call transactions with certain counterparties, (the “Capped Calls”). The Capped Calls each have an initial strike price of $i12.84 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have an initial cap price of $i18.19
per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, the aggregate number of shares of the Company’s common stock that initially underlie the Notes, and are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap, based on the cap price of the Capped Call Transactions. The conditions that cause adjustments to the initial strike price of the Capped Calls mirror the conditions that result in corresponding adjustments for the Notes.
For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $i35,673 incurred in connection with the Capped Calls was recorded as a reduction to Capital in Excess of Par Value. The impact of the Capped Calls related to stockholders’ equity has been included in Capital in Excess of Par Value in
the Consolidated Statement of Stockholders Equity and includes taxes in the amount of $i9,322, for a net impact of $i26,351.
During the three and six months ended June 30, 2020, CNX purchased and retired $i409,625 and $i480,959,
respectively, of its outstanding i5.875% senior notes due in April 2022. As part of these transactions, a loss of $i344 and a gain of $i10,919 were
included in Loss (Gain) on Debt Extinguishment in the Consolidated Statements of Income during the three and six months ended June 30, 2020, respectively. During the six months ended June 30, 2019, CNX purchased and retired $i400,000 of its outstanding i5.875%
senior notes due in April 2022. As part of this transaction, a loss of $i7,614 was included in Loss (Gain) on Debt Extinguishment in the Consolidated Statements of Income, which includes an adjustment to the final settlement amount of $i77
that was included in Loss (Gain) on Debt Extinguishment in the Consolidated Statements of Income during the three months ended June 30, 2019.
During the six months ended June 30, 2020, CNX's wholly-owned subsidiary Cardinal States Gathering Company LLC ("Cardinal States") entered into a $i125,000 non-revolving credit facility agreement (the
"Cardinal States Facility"). The Cardinal States Facility matures in 2028, has an interest rate of 3-month LIBOR + 475 basis points and includes an excess cash flow sweep in an amount required to achieve a quarterly targeted debt balance. The facility is secured by substantially all of the Cardinal States assets, requires a minimum level of hedging of the variable interest rate exposure and is non-recourse to CNX.
Additionally, during the six months ended June 30, 2020, CNX's wholly-owned subsidiary CSG Holdings II LLC (CSG Holdings) entered into a $i50,000
non-revolving credit facility agreement (the "CSG Holdings Facility"). The CSG Holdings Facility matures in 2026, has interest rate of 3-month LIBOR + 675 basis points and includes a full excess cash sweep. The facility is secured by substantially all of the CSG Holding assets, requires a minimum level of hedging of the variable interest rate exposure and is non-recourse to CNX.
22
During the six months ended June 30, 2019, CNX completed a private offering of $i500,000
of i7.25% senior notes due in March 2027. The notes are guaranteed by most of CNX's subsidiaries but do not include CNXM's general partner or CNXM.
NOTE 10—iCOMMITMENTS
AND CONTINGENT LIABILITIES:
CNX and its subsidiaries are subject to various lawsuits and claims with respect to such matters as personal injury, royalty accounting, damage to property, climate change, governmental regulations including environmental violations and remediation, employment and contract disputes and other claims and actions arising out of the normal course of business. CNX accrues the estimated loss for these lawsuits and claims when the loss is probable and can be estimated. The Company's current estimated accruals related to these pending claims, individually and in the aggregate, are immaterial to the financial position, results of operations
or cash flows of CNX. It is possible that the aggregate loss in the future with respect to these lawsuits and claims could ultimately be material to the financial position, results of operations or cash flows of CNX; however, such amounts cannot be reasonably estimated.
The 1992 Coal Industry Retiree Health Benefit Act (“Coal Act”), in Section 9711, requires coal companies that were providing health benefits to United Mine Workers of America (“UMWA”) retirees as of February 1993 to continue providing health benefits to such individuals, in substantially the same coverages, for as long as the last signatory operator remains in business. Section 9711 also requires any “related person” to be joint and severally liable for the provision of these health benefits. On May 1, 2020, the court in the Murray Energy Corporation (“Murray”) bankruptcy proceedings
approved a settlement agreement between Murray and the UMWA that transferred to the UMWA 1992 Benefit Plan the Coal Act liabilities for retirees in Murray’s Section 9711 plan. The retirees transferred by Murray to the 1992 Benefit Plan include approximately i2,159 retirees allegedly traced to the December 2013 sale by CONSOL Energy Inc. to Murray Energy of the following possible last signatory operators: Consolidation Coal Company, McElroy Coal Company, Southern Ohio Coal Company, Central Ohio Coal Company, Keystone Coal Mining Corp., and Eight-Four
Coal Mining Company (the “Sold Subsidiaries”). On May 2, 2020, the Trustees of the UMWA 1992 Benefit Plan sued CNX Resources Corporation and CONSOL Energy Inc. (“CONSOL”) in federal court contending that the Sold Subsidiaries were last signatory operators and that CNX and CEIX are related persons to the Sold Subsidiaries and, as such, CNX and CONSOL are jointly and severally liable for the Coal Act health benefits allegedly owed to the eligible retirees traced to the Sold Subsidiaries. The 1992 Plan seeks, among other relief, a declaration that
the CNX and CONSOL are obligated to enroll the eligible retirees attributed to the Sold Subsidiaries in a Section 9711 Plan; that CNX and CONSOL are liable to post the security required by Section 9712; and, that CNX and CONSOL are liable to pay per beneficiary premiums until the eligible retirees are enrolled in a Section 9711 plan, and other fees, costs and disbursements under the Coal Act. We disagree with the suit filed by the UMWA 1992 Plan, have filed a Motion to Dismiss and intend to defend this action. Further, under the Separation and Distribution Agreement that was entered into at the time we spun our coal business in 2017, CONSOL agreed to indemnify CNX for all coal-related liabilities, including this lawsuit.
iAt
June 30, 2020, CNX has provided the following financial guarantees, unconditional purchase obligations, and letters of credit to certain third-parties as described by major category in the following tables. These amounts represent the maximum potential of total future payments that the Company could be required to make under these instruments. These amounts have not been reduced for potential recoveries under recourse or collateralization provisions. Generally, recoveries under reclamation bonds would be limited to the extent of the work performed at the time of the default. No amounts related to these unconditional purchase obligations and letters of credit are recorded as liabilities in the financial statements. CNX management believes that the commitments in the following table will expire without being funded, and therefore will
not have a material adverse effect on financial condition.
23
Amount
of Commitment Expiration Per Period
Total Amounts Committed
Less Than 1 Year
1-3 Years
3-5 Years
Beyond 5 Years
Letters of Credit:
Firm
Transportation
$
i197,919
$
i167,897
$
i30,022
$
i—
$
i—
Other
i6,950
i6,950
i—
i—
i—
Total
Letters of Credit
i204,869
i174,847
i30,022
i—
i—
Surety
Bonds:
Employee-Related
i2,600
i2,600
i—
i—
i—
Environmental
i12,262
i12,203
i59
i—
i—
Financial
Guarantees
i81,670
i81,670
i—
i—
i—
Other
i9,275
i7,766
i1,509
i—
i—
Total
Surety Bonds
i105,807
i104,239
i1,568
i—
i—
Total
Commitments
$
i310,676
$
i279,086
$
i31,590
$
i—
$
i—
Excluded
from the above table are commitments and guarantees entered into in conjunction with the spin-off of the Company's coal business in November 2017. Although CONSOL Energy has agreed to indemnify CNX to the extent that CNX would be called upon to pay any of these liabilities, there is no assurance that CONSOL Energy will satisfy its obligations to indemnify CNX in the event that CNX is so called upon. (See Part II, Item 1A – Risk Factors for additional information).
CNX enters into long-term unconditional purchase obligations to procure major equipment purchases, natural gas firm transportation, gas drilling services and other operating goods and services. These purchase obligations are not recorded in the Consolidated Balance Sheets. iAs
of June 30, 2020, the purchase obligations for each of the next five years and beyond are as follows:
Obligations Due
Amount
Less than 1 year
$
i243,817
1
- 3 years
i441,947
3 - 5 years
i373,821
More
than 5 years
i976,664
Total Purchase Obligations
$
i2,036,249
NOTE
11—iDERIVATIVE INSTRUMENTS:
CNX enters into interest rate swap agreements to manage its exposure to interest rate volatility. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. The change in fair value of the interest rate swap agreements are accounted for on a mark-to-market basis with the changes in fair value recorded in current period earnings.
In
March 2020, CNX entered into interest rate swap related to $i175,000 of borrowings under the Cardinal States Facility and CSG Holdings Facility (See Note 9 - Long-Term Debt). In order to manage exposure to interest rate volatility, each respective entity entered into an interest rate swap for the full outstanding principal amounts inclusive of a put option at 25 basis points. The underlying notional for each swap and put option reduces over time based upon an expected amortization profile for each respective credit facility. In addition, CSG Holdings entered into a call option
commencing March 31, 2023.
In June 2019, CNX entered into an interest rate swap agreement related to $i160,000 of borrowings under CNX’s Credit Facility (See Note 7 - Revolving Credit Facilities) which has the economic effect of modifying the variable-interest obligation into a fixed-interest obligation over a three-year period. In March 2020, this swap was blended and extended via a new interest rate swap, effective
April 3, 2020, into a new four-year interest rate swap inclusive of a put option at izero basis points. Also executed in March 2020 was a new four-year $i250,000
interest rate swap inclusive of a put option at izero basis points, effective April 3, 2020. Consistent with the previous interest rate swap agreement, the $i250,000
interest rate swap was entered into to manage CNX's exposure to interest rate volatility.
CNX enters into financial derivative instruments (over-the-counter swaps) to manage its exposure to commodity price volatility. Typically, CNX “sells” swaps under which it receives a fixed price from counterparties and pays a floating market
24
price. During the second quarter of 2020, CNX purchased, rather than sold, financial swaps for the period May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties.Swaps purchased have the effect
of reducing total hedged volumes for the period of the swap. Natural gas commodity hedges are accounted for on a mark-to-market basis with changes in fair value recorded in current period earnings.
CNX is exposed to credit risk in the event of non-performance by counterparties. The creditworthiness of counterparties is subject to continuing review. The Company has not experienced any issues of non-performance by derivative counterparties.
None of the Company's counterparty master agreements currently require CNX to post collateral for any of its positions. However, as stated in the counterparty master agreements, if CNX's obligations
with one of its counterparties cease to be secured on the same basis as similar obligations with the other lenders under the credit facility, CNX would have to post collateral for instruments in a liability position in excess of defined thresholds. All of the Company's derivative instruments are subject to master netting arrangements with our counterparties. CNX recognizes all financial derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets on a gross basis.
Each of the Company's counterparty master agreements allows, in the event of default, the ability to elect early termination of outstanding contracts.
If early termination is elected, CNX and the applicable counterparty would net settle all open hedge positions.
i
The total notional amounts of CNX's derivative instruments were as follows:
June
30,
December 31,
Forecasted to
2020
2019
Settle Through
Natural Gas Commodity Swaps (Bcf)
i1,248.5
*
i1,460.6
2025
Natural
Gas Basis Swaps (Bcf)
i1,179.4
*
i1,290.4
2025
Interest
Rate Swaps
$
i581,218
$
i160,000
2028
*Net
of purchased natural gas commodity swaps and natural gas basis swaps of i21.9 Bcf and i12.7 Bcf, respectively.
/
25
ii
The
gross fair value of CNX's derivative instruments was as follows:
Cash Received (Paid) in Settlement of Commodity Derivative Instruments:
Natural
Gas:
Commodity Swaps
$
i153,149
$
i18,567
$
i310,728
$
(i8,383)
Basis
Swaps
(i10,893)
(i7,895)
(i17,311)
(i22,327)
Total
Cash Received (Paid) in Settlement of Commodity Derivative Instruments
i142,256
i10,672
i293,417
(i30,710)
Unrealized
(Loss) Gain on Commodity Derivative Instruments:
Natural Gas:
Commodity Swaps
(i182,119)
i226,845
(i181,573)
i176,084
Basis
Swaps
(i23,440)
(i15,936)
(i60,005)
(i119,169)
Total
Unrealized (Loss) Gain on Commodity Derivative Instruments
(i205,559)
i210,909
(i241,578)
i56,915
(Loss)
Gain on Commodity Derivative Instruments:
Natural Gas:
Commodity Swaps
(i28,970)
i245,412
i129,155
i167,701
Basis
Swaps
(i34,333)
(i23,831)
(i77,316)
(i141,496)
Total
(Loss) Gain on Commodity Derivative Instruments
$
(i63,303)
$
i221,581
$
i51,839
$
i26,205
/
During
the three and six months ended June 30, 2020, cash of $i536 and $i592, respectively, was paid in settlement of interest rate swaps.
An unrealized loss of $i3,598 and $i14,237
was recognized during the three and six months ended June 30, 2020, respectively, resulting in a total loss on interest rate swaps of $i4,134 and $i14,829,
respectively, which is included in Interest Expense in the Consolidated Statements of Income.
Cash Received in Settlement of Commodity Derivative Instruments for the three and six months ended June 30, 2020 includes $i29,015 related to the monetization and termination of approximately i39 million
MMBtus of NYMEX natural gas hedges and a similar quantity of financial basis hedges that were to settle at various times from May through November of 2020. Net proceeds received from the monetization are classified as operating cash flows in the Consolidated Statements of Cash Flows.
Cash Received in Settlement of Commodity Derivative Instruments for the six months ended June 30, 2020, in addition to the amount discussed above, also includes $i54,982
related to the monetization of certain NYMEX commodity swaps. The monetization resulted from reducing the contract swap prices of certain 2022, 2023, and 2024 NYMEX natural gas swap contracts. The notional quantities of the contracts were not changed by the monetization.Net proceeds received from the monetization are classified as operating cash flows in the Consolidated Statements of Cash Flows.
The Company also enters into fixed price natural gas sales agreements that are satisfied
by physical delivery. These physical commodity contracts qualify for the normal purchases and normal sales exception and are not subject to derivative instrument accounting.
27
NOTE 12—iFAIR
VALUE OF FINANCIAL INSTRUMENTS:
CNX determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair values are based on assumptions that market participants would use when pricing an asset or liability, including assumptions about risk and the risks inherent in valuation techniques and the inputs to valuations. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources (including NYMEX forward curves, LIBOR-based discount rates and basis forward curves), while unobservable inputs reflect the
Company's own assumptions of what market participants would use.
The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - The fair value of the assets and liabilities included in Level 2 are based on standard industry income approach models that use significant observable inputs, including NYMEX forward curves, LIBOR-based discount rates and basis forward curves.
Level 3 - Unobservable inputs significant to the fair value measurement supported by little or no market activity.
In those cases when the inputs used to measure fair value meet the definition of more than one level of the fair value hierarchy, the lowest
level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.
i
The financial instrument measured at fair value on a recurring basis is summarized below:
Cash
and cash equivalents represent highly-liquid instruments and constitute Level 1 fair value measurements. Certain of the Company’s debt is actively traded on a public market and, as a result, constitute Level 1 fair value measurements. The portion of the Company’s debt obligations that is not actively traded is valued through reference to the applicable underlying benchmark rate and, as a result, constitute Level 2 fair value measurements.
28
NOTE
13—iVARIABLE INTEREST ENTITIES:
The Company determined CNXM to be a variable interest entity. The Company has the power through its ownership and control of CNXM's general partner (CNX Midstream GP LLC) to direct the activities that most significantly impact CNXM's economic performance. In addition, through its
limited partner interest in CNXM, the Company has the obligation to absorb the losses of CNXM and the right to receive benefits in accordance with such interests. As the Company has a controlling financial interest and is the primary beneficiary of CNXM, the Company consolidates CNXM.
The risks associated with the operations of CNXM are discussed in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 10, 2020 and its other periodic reports filed thereafter.
On
July 26, 2020, CNX entered into an Agreement and Plan of Merger (the “Merger Agreement”). See Note 17 - Subsequent Event for more information.
On January 29, 2020, CNX and CNXM executed definitive agreements to eliminate CNXM's incentive distribution rights, or IDRs, held by its general partner and to convert the i2.0%
general partner interest in CNXM into a non-economic general partnership interest (collectively, the "IDR Elimination Transaction").
CNX received the following consideration under the IDR Elimination Transaction in exchange for the cancellation of the IDRs and conversion of the i2.0% general partner interest:
•i26
million CNXM common units;
•i3 million new CNXM Class B units, which will not receive or accrue distributions until January 1, 2022 at which time they will automatically convert into CNXM common units on a one-for-one basis; and
As a result of the IDR Elimination Transaction, CNX owns i47.7
million CNXM common units, or approximately i53%, of the outstanding limited partner interests in CNXM, excluding the CNXM Class B units. Prior to the IDR Elimination Transaction, the Company owned approximately i34%
of the outstanding limited partner interest and i100% of the general partner interest. Upon conversion of the CNXM Class B units to CNXM common units on January 1, 2022, CNX's ownership will increase to i50.7
million CNXM common units, or approximately i54.6% of the outstanding limited partner interest in CNXM on a proforma basis.
i
The
following table presents amounts included in the Company's Consolidated Balance Sheets that were for the use or obligation of CNXM:
General
and Administrative Expense - Related Party
i2,748
i4,027
i5,605
i7,994
General
and Administrative Expense - Third Party
i1,585
i1,364
i4,350
i2,900
Loss
on Asset Sales and Abandonments
i1,663
i—
i1,652
i7,229
Depreciation
Expense
i8,209
i5,860
i15,787
i11,510
Interest
Expense
i8,617
i7,685
i17,410
i15,024
Total
Expense
i33,238
i31,638
i67,644
i68,881
Net
Income
$
i32,800
$
i46,463
$
i78,590
$
i81,439
Net
Cash Provided by Operating Activities
$
i45,495
$
i74,753
$
i85,618
$
i124,666
Net
Cash Used in Investing Activities
$
(i14,297)
$
(i104,310)
$
(i46,956)
$
(i182,867)
Net
Cash (Used in) Provided by Financing Activities
$
(i35,444)
$
i41,164
$
(i37,704)
$
i65,912
At
June 30, 2020 and December 31, 2019, excluding amounts related to the IDR Elimination Transaction, CNX had a net payable of $i14,453 and $i16,362
respectively, due to CNX Gathering and CNXM, primarily for accrued but unpaid gathering services.
30
NOTE 14—iSEGMENT INFORMATION:
CNX consists of itwo principal business divisions: Exploration and Production (E&P)
and Midstream. The principal activity of the E&P Division, which includes ifour reportable segments, is to produce pipeline quality natural gas for sale primarily to gas wholesalers. The E&P Division's reportable segments are Marcellus Shale, Utica Shale, Coalbed Methane, and Other Gas. The Other Gas Segment is primarily related to shallow oil and gas production which is not significant to the Company. It also includes the
Company's purchased gas activities, unrealized gain or loss on commodity derivative instruments, realized gain on commodity derivative instruments that were monetized prior to their settlement dates, exploration and production related other costs, impairments of exploration and production properties, as well as various other operating activities assigned to the E&P Division but not allocated to each individual segment.
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets of CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division
are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM. CNX owns and controls i100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company consolidates CNXM. The Midstream Division is comprised of a single Midstream segment.
The Company's unallocated expenses include other
income/expense, gain on asset sales related to non-core assets, gain/loss on debt extinguishment and income taxes.
In the preparation of the following information, intersegment sales have been recorded at amounts approximating market prices. Operating profit for each segment is based on sales less identifiable operating and non-operating expenses. Assets are reflected at the division level for E&P and are not allocated between each individual E&P segment. These assets are not allocated to each individual segment due to the diverse asset base controlled by CNX, whereby each individual asset may service more than one segment within the division. An allocation of such asset base would not be meaningful or representative on a segment by segment basis.
31
i
Industry
segment results for the three months ended June 30, 2020:
Marcellus Shale
Utica
Shale
Coalbed Methane
Other Gas
Total E&P
Midstream
Unallocated
Intercompany Eliminations
Consolidated
Natural Gas, NGL and Oil Revenue
$
i123,480
$
i29,147
$
i22,929
$
i220
$
i175,776
$
i—
$
i—
$
i—
$
i175,776
(A)
Purchased
Gas Revenue
i—
i—
i—
i20,424
i20,424
i—
i—
i—
i20,424
Midstream
Revenue
i—
i—
i—
i—
i—
i66,149
i—
(i53,958)
i12,191
Gain
(Loss) on Commodity Derivative Instruments
i79,006
i21,257
i13,005
(i176,571)
(i63,303)
i—
i—
i—
(i63,303)
(B)
Other
Operating Income
i—
i—
i—
i4,248
i4,248
i—
i—
(i495)
i3,753
(C)
Total
Revenue and Other Operating Income
$
i202,486
$
i50,404
$
i35,934
$
(i151,679)
$
i137,145
$
i66,149
$
i—
$
(i54,453)
$
i148,841
Total
Operating Expense
$
i144,857
$
i42,876
$
i29,420
$
i74,617
$
i291,770
$
i25,195
$
i—
$
(i54,453)
$
i262,512
(D)
Earnings
(Loss) Before Income Tax
$
i57,629
$
i7,528
$
i6,514
$
(i263,934)
$
(i192,263)
$
i30,296
$
i2,835
$
i—
$
(i159,132)
Segment
Assets
$
i6,584,989
$
i1,754,639
$
i134,047
$
(i153,991)
$
i8,319,684
(E)
Depreciation,
Depletion and Amortization
$
i102,901
$
i10,644
$
i—
$
i—
$
i113,545
Capital
Expenditures
$
i120,474
$
i14,378
$
i—
$
i—
$
i134,852
(A) Included
in Total Natural Gas, NGL and Oil Revenue are sales of $i33,711 to Direct Energy Business Marketing LLC, which comprises over 10% of revenue from contracts with external customers for the period.
(B) Included in Other Gas is a realized gain on commodity derivative instruments of $i29,015
related to the monetization of hedges (see Note 11 - Derivative Instruments for more information).
(C) Includes equity in loss of unconsolidated affiliates of $i1,259 for Total E&P.
(D) Included in Marcellus and Utica are $i51,903
and $i2,055, respectively, of intercompany gathering fees.
(E) Includes investments in unconsolidated equity affiliates of $i15,159
for Total E&P.
Industry segment results for the three months ended June 30, 2019:
Marcellus Shale
Utica
Shale
Coalbed Methane
Other Gas
Total E&P
Midstream
Unallocated
Intercompany Eliminations
Consolidated
Natural Gas, NGL and Oil Revenue
$
i237,257
$
i65,213
$
i39,638
$
i757
$
i342,865
$
i—
$
i—
$
i—
$
i342,865
(F)
Purchased
Gas Revenue
i—
i—
i—
i18,768
i18,768
i—
i—
i—
i18,768
Midstream
Revenue
i—
i—
i—
i—
i—
i78,450
i—
(i59,555)
i18,895
Gain
on Commodity Derivative Instruments
i6,831
i2,747
i1,085
i210,918
i221,581
i—
i—
i—
i221,581
Other
Operating Income
i—
i—
i—
i3,038
i3,038
i—
i—
(i115)
i2,923
(G)
Total
Revenue and Other Operating Income
$
i244,088
$
i67,960
$
i40,723
$
i233,481
$
i586,252
$
i78,450
$
i—
$
(i59,670)
$
i605,032
Total
Operating Expense
$
i193,707
$
i50,019
$
i33,120
$
i88,673
$
i365,519
$
i25,955
$
i—
$
(i59,670)
$
i331,804
(H)
Earnings
Before Income Tax
$
i50,381
$
i17,941
$
i7,603
$
i112,335
$
i188,260
$
i44,414
$
i811
$
i—
$
i233,485
Segment
Assets
$
i6,887,043
$
i2,116,492
$
i146,203
$
(i3,041)
$
i9,146,697
(I)
Depreciation,
Depletion and Amortization
$
i120,705
$
i8,294
$
i—
$
i—
$
i128,999
Capital
Expenditures
$
i224,684
$
i104,543
$
i—
$
i—
$
i329,227
(F) Included
in Total Natural Gas, NGL and Oil Revenue are sales of $i48,476 to Direct Energy Business Marketing LLC, which comprises over 10% of revenue from contracts with external customers for the period.
(G) Includes equity in earnings of unconsolidated affiliates of $i527
for Total E&P.
(H) Included in Marcellus and Utica are $i59,014 and $i541, respectively, of intercompany gathering fees.
(I) Includes
investments in unconsolidated equity affiliates of $i17,637 for Total E&P.
/
32
Industry segment results
for the six months ended June 30, 2020:
Marcellus Shale
Utica
Shale
Coalbed Methane
Other Gas
Total E&P
Midstream
Unallocated
Intercompany Eliminations
Consolidated
Natural Gas, NGL and Oil Revenue
$
i302,524
$
i70,597
$
i53,652
$
i497
$
i427,270
$
i—
$
i—
$
i—
$
i427,270
(A)
Purchased
Gas Revenue
i—
i—
i—
i46,783
i46,783
i—
i—
i—
i46,783
Midstream
Revenue
i—
i—
i—
i—
i—
i146,490
i—
(i115,893)
i30,597
Gain
(Loss) on Commodity Derivative Instruments
i147,458
i39,257
i22,692
(i157,568)
i51,839
i—
i—
i—
i51,839
(B)
Other
Operating Income
i—
i—
i—
i9,714
i9,714
i—
i—
(i1,003)
i8,711
(C)
Total
Revenue and Other Operating Income
$
i449,982
$
i109,854
$
i76,344
$
(i100,574)
$
i535,606
$
i146,490
$
i—
$
(i116,896)
$
i565,200
Total
Operating Expense
$
i328,029
$
i91,693
$
i63,674
$
i213,202
$
i696,598
$
i526,109
$
i—
$
(i116,896)
$
i1,105,811
(D)
Earnings
(Loss) Before Income Tax
$
i121,953
$
i18,161
$
i12,670
$
(i391,600)
$
(i238,816)
$
(i399,248)
$
i21,127
$
i—
$
(i616,937)
Segment
Assets
$
i6,584,989
$
i1,754,639
$
i134,047
$
(i153,991)
$
i8,319,684
(E)
Depreciation,
Depletion and Amortization
$
i222,053
$
i20,656
$
i—
$
i—
$
i242,709
Capital
Expenditures
$
i239,867
$
i47,034
$
i—
$
i—
$
i286,901
(A) Included
in Total Natural Gas, NGL and Oil Revenue are sales of $i79,367 to Direct Energy Business Marketing LLC, which comprises over 10% of revenue from contracts with external customers for the period.
(B) Included in Other Gas is a realized gain on commodity derivative instruments of $i83,997
related to the monetization of hedges (see Note 11 - Derivative Instruments for more information).
(C) Includes equity in loss of unconsolidated affiliates of $i1,421 for Total E&P.
(D) Included in Marcellus and Utica are $i111,079
and $i4,814 , respectively, of intercompany gathering fees. Included in Midstream is a goodwill impairment charge of $i473,045 (See Note 6 - Goodwill and Other Intangible
Assets for more information).
(E) Includes investments in unconsolidated equity affiliates of i15,159 for Total E&P.
Industry segment results for the six months ended June 30, 2019:
Marcellus Shale
Utica
Shale
Coalbed Methane
Other Gas
Total E&P
Midstream
Unallocated
Intercompany Eliminations
Consolidated
Natural Gas, NGL and Oil Revenue
$
i530,514
$
i158,164
$
i89,473
$
i660
$
i778,811
$
i—
$
i—
$
i—
$
i778,811
(F)
Purchased
Gas Revenue
i—
i—
i—
i34,989
i34,989
i—
i—
i—
i34,989
Midstream
Revenue
i—
i—
i—
i—
i—
i151,019
i—
(i113,681)
i37,338
(Loss)
Gain on Commodity Derivative Instruments
(i20,627)
(i6,854)
(i3,217)
i56,903
i26,205
i—
i—
i—
i26,205
Other
Operating Income
i—
i—
i—
i6,296
i6,296
i—
i—
(i176)
i6,120
(G)
Total
Revenue and Other Operating Income
$
i509,887
$
i151,310
$
i86,256
$
i98,848
$
i846,301
$
i151,019
$
i—
$
(i113,857)
$
i883,463
Total
Operating Expense
$
i372,575
$
i101,365
$
i65,754
$
i163,877
$
i703,571
$
i50,919
$
i—
$
(i113,857)
$
i640,633
(H)
Earnings
(Loss) Before Income Tax
$
i137,312
$
i49,945
$
i20,502
$
(i125,929)
$
i81,830
$
i76,998
$
(i1,553)
$
i—
$
i157,275
Segment
Assets
$
i6,887,043
$
i2,116,492
$
i146,203
$
(i3,041)
$
i9,146,697
(I)
Depreciation,
Depletion and Amortization
$
i237,780
$
i16,379
$
i—
$
i—
$
i254,159
Capital
Expenditures
$
i448,475
$
i179,890
$
i—
$
i—
$
i628,365
(F) Included
in Total Natural Gas, NGL and Oil Revenue are sales of $i116,245 to Direct Energy Business Marketing LLC and $i94,447 to NJR Energy Services Company, each of which comprises over 10% of revenue from contracts
with external customers for the period.
(G) Includes equity in earnings of unconsolidated affiliates of $i1,030 for Total E&P.
(H) Included in Marcellus and Utica are $i112,476
and $i1,205 , respectively, of intercompany gathering fees.
(I) Includes investments in unconsolidated equity affiliates of $i17,637
for Total E&P.
33
Reconciliation of Segment Information to Consolidated Amounts:
Segment Assets for Total Reportable Business Segments:
E&P
$
i6,584,989
$
i6,887,043
Midstream
i1,754,639
i2,116,492
Intercompany
Eliminations
(i153,991)
(i3,041)
Items
Excluded from Segment Assets:
Cash and Cash Equivalents
i19,607
i32,611
Recoverable
Income Taxes
i114,440
i113,592
Total
Consolidated Assets
$
i8,319,684
$
i9,146,697
/
NOTE
15—iSTOCK REPURCHASE:
Since the October 30, 2017 inception of the current stock repurchase program, CNX's Board of Directors has approved in total a $i750,000
stock repurchase program, which is not subject to an expiration date. The repurchases may be affected from time-to-time through open market purchases, privately negotiated transactions, Rule 10b5-1 plans, accelerated stock repurchases, block trades, derivative contracts or otherwise in compliance with Rule 10b-18. The timing of any repurchases will be based on a number of factors, including available liquidity, the Company's stock price, the Company's financial outlook, and alternative investment options. The stock repurchase program does not obligate the Company to repurchase any dollar amount or number of shares and the
Board may modify, suspend, or discontinue its authorization of the program at any time. The Board of Directors will continue to evaluate the size of the stock repurchase program based on CNX's free cash flow position, leverage ratio, and capital plans. During the six months ended June 30, 2019, i11,929,487 shares were repurchased and retired at an average price of $i9.01
per share for a total cost of $i107,780. There were ino shares repurchased and retired during the
six months ended June 30, 2020.
34
NOTE 16—iRECENT ACCOUNTING PRONOUNCEMENTS:
iIn
March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with
transitioning away from reference rates that are expected to be discontinued. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is still evaluating the effect of adopting this guidance.
In March 2020, the FASB issued ASU 2020-03 - Codification Improvements to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the CECL standard (see Note 1 - Basis of Presentation for more information). The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies
and providing clarifications. The amendments in this ASU have different effective dates. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
NOTE 17—iSUBSEQUENT EVENTS:
On July
26, 2020, CNX entered into an Agreement and Plan of Merger (the “Merger Agreement”) with CNXM, CNX Midstream GP LLC (the “General Partner”) and CNX Resources Holding LLC., a wholly owned subsidiary of CNX (“Merger Sub”), pursuant to which Merger Sub will merge with and into CNXM with CNXM surviving as an indirect wholly owned subsidiary of CNX (the “Merger”). Under the terms of the Merger Agreement, at the effective time of the Merger, each outstanding common unit of CNXM not owned by CNX and its subsidiaries will be converted into the right to receive i0.88 shares
of CNX’s common stock.
Except for the Class B units of CNXM, which will automatically be canceled immediately prior to the effective time of the Merger for no consideration in accordance with CNXM’s partnership agreement, the interests in CNXM owned by CNX and its subsidiaries will remain outstanding as limited partner interests in the surviving entity. The General Partner will continue to own the non-economic general partner interest in the surviving entity.
Completion of the Merger is subject to certain customary conditions, including, among others: (i) the receipt of the Written Consent (as defined below); (ii) there being no law or injunction prohibiting consummation of the transactions contemplated under the
Merger Agreement; (iii) the effectiveness of a registration statement on Form S-4 relating to the shares of CNX common stock to be issued pursuant to the Merger Agreement; (iv) approval for listing on the NYSE of the shares of CNX common stock to be issued pursuant to the Merger Agreement; (v) subject to specified materiality standards, the accuracy of certain representations and warranties of the other party; and (vi) compliance by the other party in all material respects with its covenants.
In connection with execution of the Merger Agreement, CNXM and two indirect wholly owned subsidiaries (the “Subsidiaries”) of CNX, entered into a Support Agreement, dated as of July
26, 2020 (the “Support Agreement”), pursuant to which the Subsidiaries have agreed to deliver a written consent (the “Written Consent”), covering all of the CNXM common units beneficially owned by them, approving the Merger. The Merger Agreement and any other matters necessary for consummation of the Merger and the other transactions contemplated in the Merger Agreement.
Upon completion of the Merger, CNXM’s common units will no longer be publicly traded. Subject to the satisfaction or waiver of the conditions described above, the Merger is expected to close in the fourth quarter of 2020.
In July 2020, the Company issued a notice of partial redemption
to holders of its outstanding i5.875% senior notes due in April 2022 (the “2022 Notes”), pursuant to which, on August 14, 2020, the Company will redeem $i50,000
of the 2022 Notes at an average price equal to i100.0% of the principal amount thereof.
35
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information provided below supplements, but does not form part of, CNX's financial statements. This discussion contains forward-looking statements that are based on the current views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from any such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information
on items that could impact future operating performance or financial condition, please see “Part II. Item 1A. Risk Factors” and the section entitled “Forward-Looking Statements” and the “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2019, which we filed with the SEC on February 10, 2020. CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
General
CNX continues to monitor the current and potential impacts of the coronavirus COVID-19 ("COVID-19") pandemic on all aspects of our business and geographies, including how it has impacted, and may in the future, impact our operations,
financial results, liquidity, contractors, customers, employees and vendors. The Company also continues to monitor a number of factors that may cause actual results of operations to differ from our historical results or current expectations. These factors include: the impact of the COVID-19 pandemic and the related global economic downturn, the historically low natural gas and natural gas liquids prices and ramifications of the crude oil price war between the Organization of Petroleum Exporting Countries ("OPEC")/Saudi Arabia and Russia that began in the first quarter of 2020. These and other factors could affect the Company’s operations, earnings and cash flows for any period and could cause such results to not be comparable to those of the same period in previous years. The results presented
in this Form 10-Q are not necessarily indicative of future operating results.
While CNX did not incur significant disruptions to operations during the three or six months ended June 30, 2020 as a direct result of the COVID-19 pandemic, CNX is unable to predict the impact that the COVID-19 pandemic will have on us, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties. These uncertainties include the volatility and severity of the virus, the duration of the outbreak, the availability of a vaccine, governmental or other actions taken to combat the virus (which could include limitations on our operations or the operations of our customers and vendors), and the effect that the COVID-19 pandemic will have on the demand for natural gas and natural
gas liquids. The continued health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions is vital to our operations and cannot currently be predicted. Further, the continuing impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, CNX cannot predict the impact that COVID-19 will have on our customers, vendors and contractors; however, any material effect on these parties could adversely impact CNX. For instance, in the short term, CNX is starting to see a reduction in overall service and materials costs, due to oversupply of those services and costs, since industrial production has waned. However, if services providers to our industry are forced into bankruptcy or otherwise consolidate due to weakening economic conditions, demand
could outpace supply in the long-term and cause these costs to increase. The situation surrounding COVID-19 remains fluid and unpredictable, and CNX is actively managing our response in collaboration with our contractors, customers, employees and vendors and assessing potential impacts to our financial position and operating results, as well as any adverse developments that could impact our business.
CNX has also taken, and is continuing to take, proactive steps to manage any disruption in our business caused by COVID-19. For instance, even though our operations were not required to close, CNX was an early adopter in employing a work-from-home system, even before any government mandate on non-essential businesses was enacted. CNX increased its technology platform, infrastructure and security to allow for a work-from-home environment ahead of the actual need, and therefore, once the hypothetical
became a reality, we believe CNX was ahead of many companies in this respect. CNX has also deployed additional safety protocols at our field sites in order to keep our employees and contractors safe and to keep our operations running without material disruption. As CNX office employees begin to return to work, CNX has implemented certain additional safety measures and protocols in order to maintain the safety of those employees as well.
For further information regarding the impact of COVID-19 see Risk factors in Item 1A of this Form 10-Q.
36
Marketing
Update:
The markets for natural gas, NGL, and crude oil remain volatile, and prices may continue to fluctuate in response to, among other things: Geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of OPEC, and global events, such as the ongoing COVID-19 pandemic. Overall, 2020 NYMEX oil prices have moved downward due in part to concerns about COVID-19 and its impact on near-term worldwide oil demand and due to the increase in oil production by certain members of OPEC. This oversupply of oil and weak demand have caused a domestic oversupply of NGLs and, when combined with current export constraints, NGL prices have been driven to historic lows, although some improvement was seen in the second quarter of 2020 at Mont Belvieu. While OPEC agreed in April of 2020 to cut production, downward pressure on liquids
prices has continued and could continue for the foreseeable future, particularly given concerns over available storage capacity for crude oil and other refinery inputs including condensate, C5+ and butane, that could again result in temporary reductions in CNX’s wet gas production. During the six months ended June 30, 2020, sales of natural gas liquids comprised six percent of CNX’s revenue from external customers.
Continued strength in natural gas production, along with reduced heating demand for natural gas as a result of relatively mild winter temperatures throughout most of the United States, accounted for relatively higher inventory levels. Despite an April 12 agreement by the OPEC and its allies to reduce global production by approximately 10%, the economic slowdown and global stay-at-home orders continue to suppress demand for
natural gas. The U.S. Energy Information Administration’s (“EIA”) Short-Term Energy Outlook for April 2020 as well as July’s Outlook cite heightened uncertainty because of the economic slowdown, particularly industrial gas demand and changes in energy markets’ supply and demand dynamics.
For the second quarter of 2020 and 2019, CNX's average sales price for natural gas, NGLs, oil, and condensate, including the impact of cash settlements from hedging, was $2.52 per Mcfe and $2.63 per Mcfe, respectively. The average realized price for all liquids for the second quarter of 2020 was $8.73 per barrel compared to $19.14 per barrel in the 2019 quarter.
CNX's weighted average differential from NYMEX in the second quarter of 2020 was negative $0.29 per MMBtu. CNX's average sales price for natural gas before
hedging decreased 15.8% to $1.54 per Mcf compared with the average sales price of $1.83 per Mcf in the first quarter of 2020. This decrease results from a lower Henry Hub price offset in part by improved basis pricing. Including the impact of cash settlements from hedging and excluding cash from the April 2020 hedge monetization, CNX's average sales price for natural gas was $0.03 per Mcf, or 1.2%, lower than the three months ended March 31, 2020, and $0.02 per Mcf, or 0.8%, lower than the three months ended June 30, 2019.
During the second quarter of 2020, CNX sold 114.5 Bcfe of produced natural gas, a decrease of 14.9% from the 134.5 Bcfe sold in the year-earlier quarter, primarily due to decreases in Marcellus Shale and Utica Shale volumes. The decrease in volumes was due to the temporary
shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. Additionally, two new pads of dry gas turn-in-lines from April and May were temporarily shut-in May and June due to low natural gas prices. Total quarterly production costs decreased to $1.92 per Mcfe, compared to the year-earlier quarter of $2.07 per Mcfe, driven primarily by decreases in lease operating expenses and transportation, gathering and compression. Capital expenditures decreased to $135 million in the second quarter of 2020, compared to $329 million of spend in the second quarter of 2019.
Hedging Activity:
Total hedged natural gas production in the 2020 third quarter is 88.9(1) Bcf. The annual gas hedge position is shown in the table
below:
2020
2021
Volumes Hedged (Bcf), as of 7/8/20
437.4(1)(2)
454.1
1Net
of purchased swaps.
2Includes actual settlements of 254.0 Bcf.
CNX's hedged gas volumes include a combination of NYMEX financial hedges, index (NYMEX and basis) financial hedges, and physical fixed price sales. In addition, to protect the NYMEX hedge volumes from basis exposure, CNX enters into basis-only financial hedges and physical sales with fixed basis at certain sales points.
In March 2020, CNX monetized and repriced a portion of its 2022, 2023, and 2024 NYMEX natural gas hedge portfolio generating $55.0 million of net proceeds, which were included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the six months ended June 30, 2020. Notional
quantities were not affected by the restructuring. The remaining 2022 swap contracts with a notional quantity of 113.2 million MMBtus and a weighted average
37
price of $2.80 per MMBtu were repriced to a contract price of $2.40 per MMBtu, 2023 swap contracts with a notional quantity of 51.1 million MMBtus and a weighted average price of $2.69 per MMBtu were repriced to a contract
price of $2.48 per MMBtu, and 2024 swap contracts with a notional quantity of 19.2 million MMBtus and a weighted average price of $2.62 per MMBtu were repriced to a contract price of $2.54 per MMBtu. The net proceeds from the monetization were used to reduce the Company’s absolute debt.
In April 2020, CNX monetized and terminated approximately 39 million MMBtus of NYMEX natural gas hedges and a similar quantity of financial basis hedges that were to settle at various times from May through November of 2020. In connection with these monetizations, CNX received $29 million of net proceeds, which are included in (Loss) Gain
on Commodity Derivative Instruments in the Consolidated Statements of Income for the three and six months ended June 30, 2020. In addition, during the second quarter of 2020, CNX purchased financial swaps for May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties. These transactions provided CNX with additional flexibility to move production to higher price periods while immediately taking the monetization proceeds.
Recent Business Developments:
On July 26, 2020, CNX entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with CNXM, CNX Midstream GP LLC (the “General Partner”) and CNX Resources Holdings LLC, a wholly owned subsidiary of CNX (“Merger Sub”), pursuant to which Merger Sub will merge with and into CNXM with CNXM surviving as an indirect wholly owned subsidiary of CNX (the “Merger”). Under the terms of the Merger Agreement, at the effective time of the Merger, each outstanding common unit of CNXM not owned by CNX and its subsidiaries will be converted into the right to receive 0.88 shares of CNX’s common stock.
Except for the Class B units of CNXM, which will automatically be canceled immediately prior to the effective time of the Merger for no consideration in accordance with CNXM’s partnership agreement, the interests in CNXM owned by CNX and its subsidiaries
will remain outstanding as limited partner interests in the surviving entity. The General Partner will continue to own the non-economic general partner interest in the surviving entity.
Completion of the Merger is subject to certain customary conditions, including, among others: (i) the receipt of the Written Consent (as defined below); (ii) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (iii) the effectiveness of a registration statement on Form S-4 relating to the shares of CNX common stock to be issued pursuant to the Merger Agreement; (iv) approval for listing on the NYSE of the shares of CNX common stock to be issued pursuant to the Merger Agreement; (v) subject to specified materiality standards, the accuracy of certain representations and warranties of the other party; and (vi) compliance by the other party
in all material respects with its covenants.
In connection with execution of the Merger Agreement, CNXM and two indirect wholly owned subsidiaries (the “Subsidiaries”) of CNX, entered into a Support Agreement, dated as of July 26, 2020 (the “Support Agreement”), pursuant to which the Subsidiaries have agreed to deliver a written consent (the “Written Consent”), covering all of the CNXM common units beneficially owned by them, approving the Merger. The Merger Agreement and any other matters necessary for consummation of the Merger and the other
transactions contemplated in the Merger Agreement.
Upon completion of the Merger, CNXM’s common units will no longer be publicly traded. Subject to the satisfaction or waiver of the conditions described above, the Merger is expected to close in the fourth quarter of 2020.
Net (Loss) Income Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to CNX Resources shareholders of $146 million, or a loss per diluted share of $0.78, for the three months ended June 30, 2020, compared to net income attributable to CNX Resources shareholders of $162 million, or earnings per diluted share of $0.84, for the three months ended June 30,
2019.
For the Three Months Ended June 30,
(Dollars in thousands)
2020
2019
Variance
Net
(Loss) Income
$
(130,486)
$
192,694
$
(323,180)
Less: Net Income Attributable to Noncontrolling Interest
15,263
30,217
(14,954)
Net
(Loss) Income Attributable to CNX Resources Shareholders
$
(145,749)
$
162,477
$
(308,226)
CNX consists of two principal business divisions: Exploration and Production (E&P) and Midstream. The operating results of the Company's reportable divisions were as follows for the three months
ended June 30, 2020 and 2019:
The
principal activity of the E&P Division is to produce pipeline quality natural gas for sale primarily to gas wholesalers. The E&P Division's reportable segments are Marcellus Shale, Utica Shale, Coalbed Methane, and Other Gas.
CNX's E&P Division had a loss before income tax of $192 million for the three months ended June 30, 2020, compared to earnings before income tax of $188 million for the three months ended June 30, 2019. Included in the loss for the three months ended June 30, 2020 was an unrealized loss on commodity derivative instruments of $205 million. Included in the earnings for the three months ended June 30, 2019 was an unrealized gain on commodity derivative instruments
of $211 million.
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets, through CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM. CNX's Midstream Division had earnings before income tax of $30 million for the three months ended June 30, 2020, compared to earnings before income tax of $44 million for the three months ended June 30,
2019.
40
E&P Division Summary
Sales volumes, average sales prices (including the effects
of settled derivative instruments and excluding monetization), and average costs for the E&P Division were as follows:
Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)*
$
1.03
$
0.08
$
0.95
1,187.5
%
Average
Sales Price - NGL (per Mcfe)**
$
1.31
$
3.06
$
(1.75)
(57.2)
%
Average Sales Price - Oil (per Mcfe)**
$
5.15
$
8.42
$
(3.27)
(38.8)
%
Average
Sales Price - Condensate (per Mcfe)**
$
4.20
$
7.56
$
(3.36)
(44.4)
%
Average
Sales Price (per Mcfe)
$
2.52
$
2.63
$
(0.11)
(4.2)
%
Lease Operating Expense (per Mcfe)
0.09
0.15
(0.06)
(40.0)
%
Production,
Ad Valorem, and Other Fees (per Mcfe)
0.05
0.05
—
—
%
Transportation, Gathering and Compression (per Mcfe)
0.91
0.98
(0.07)
(7.1)
%
Depreciation,
Depletion and Amortization (DD&A) (per Mcfe)
0.87
0.89
(0.02)
(2.2)
%
Average Costs (per Mcfe)
$
1.92
$
2.07
$
(0.15)
(7.2)
%
Average
Margin (per Mcfe)
$
0.60
$
0.56
$
0.04
7.1
%
* Excluding $29 million gain from hedge monetization
**NGL 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, NGL, condensate, and natural gas prices.
Natural gas, NGL, and oil revenue was $176 million for the three months ended June 30, 2020, compared to $343 million for the three months ended June 30, 2019. The decrease was primarily due to the 4.2% decrease in the average sales price driven by lower natural gas and NGL prices.
The decrease in average sales price was primarily the result of the $0.97 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas. There was also a $0.04 per Mcfe decrease in the uplift from NGL and condensate sales volumes when excluding the
impact of hedging. Both decreases were offset, in-part, by the $0.95 per Mcf increase in the realized gain on commodity derivative instruments related to the Company's hedging program.
Changes in the average costs per Mcfe were primarily related to the following items:
•Lease operating expense decreased on a per unit basis primarily due to a decrease in water disposal costs in the period-to-period comparison due to an increased reuse of produced water in well completions in the current period.
•Transportation, gathering, and compression expense decreased on a per unit basis primarily due to lower processing costs due to a drier production mix and a decrease in firm
transportation due to lower gas sales volumes.
41
The following table presents a breakout of net liquid and natural gas sales information and settled derivative information to assist in the understanding of the Company’s natural gas production and sales portfolio
and information regarding settled commodity derivatives:
For the Three Months Ended June 30,
in
thousands (unless noted)
2020
2019
Variance
Percent Change
LIQUIDS
NGL:
Sales
Volume (MMcfe)
4,741
7,855
(3,114)
(39.6)
%
Sales Volume (Mbbls)
790
1,309
(519)
(39.6)
%
Gross
Price ($/Bbl)
$
7.86
$
18.36
$
(10.50)
(57.2)
%
Gross Revenue
$
6,226
$
24,025
$
(17,799)
(74.1)
%
Oil:
Sales
Volume (MMcfe)
50
10
40
400.0
%
Sales Volume (Mbbls)
8
2
6
300.0
%
Gross
Price ($/Bbl)
$
30.90
$
50.52
$
(19.62)
(38.8)
%
Gross Revenue
$
259
$
89
$
170
191.0
%
Condensate:
Sales
Volume (MMcfe)
186
222
(36)
(16.2)
%
Sales Volume (Mbbls)
31
37
(6)
(16.2)
%
Gross
Price ($/Bbl)
$
25.20
$
45.36
$
(20.16)
(44.4)
%
Gross Revenue
$
781
$
1,680
$
(899)
(53.5)
%
GAS
Sales
Volume (MMcf)
109,527
126,378
(16,851)
(13.3)
%
Sales Price ($/Mcf)
$
1.54
$
2.51
$
(0.97)
(38.6)
%
Gross
Revenue
$
168,510
$
317,071
$
(148,561)
(46.9)
%
Hedging
Impact ($/Mcf)
$
1.03
$
0.08
$
0.95
1,187.5
%
Gain on Commodity Derivative Instruments - Cash Settlement*
113,241
10,672
102,569
961.1
%
*
Excluding gain from hedge monetization
Selling, General and Administrative ("SG&A") - Total Company
SG&A costs include costs such as overhead, including employee labor and benefit costs, short-term incentive compensation, costs of maintaining our headquarters, audit and other professional fees, and legal compliance expenses. SG&A costs also include non-cash long-term equity-based compensation expense.
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
SG&A
Long-Term Equity-Based Compensation
(Non-Cash)
$
2
$
24
$
(22)
(91.7)
%
Salaries and Wages
7
10
(3)
(30.0)
%
Short-Term
Incentive Compensation
3
3
—
—
%
Other
11
12
(1)
(8.3)
%
Total
SG&A
$
23
$
49
$
(26)
(53.1)
%
•Long-term equity-based compensation decreased $22 million in the period-to-period comparison
due to a change in control event that occurred in the second quarter of 2019 and resulted in the acceleration of vesting of certain restricted stock units and performance share units held by certain employees. See Note 2 - Earnings Per Share in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•Salaries and Wages decreased $3 million due to an overall reduction in employees and employee related costs.
42
Unallocated Expense
Certain
costs and expenses, such as other expense (income), gain on asset sales related to non-core assets, (gain) loss on debt extinguishment and income taxes are unallocated expenses and therefore are excluded from the per unit costs above as well as segment reporting. Below is a summary of these costs and expenses:
Other Expense (Income)
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Other Income
Right of Way Sales
$
1
$
3
$
(2)
(66.7)
%
Royalty
Income
—
1
(1)
(100.0)
%
Other
—
1
(1)
(100.0)
%
Total
Other Income
$
1
$
5
$
(4)
(80.0)
%
Other
Expense
Professional Services
$
2
$
1
$
1
100.0
%
Bank
Fees
3
2
1
50.0
%
Corporate Expense
1
1
—
—
%
Total
Other Expense
$
6
$
4
$
2
50.0
%
Total
Other Expense (Income)
$
5
$
(1)
$
6
600.0
%
Gain on Asset Sales and Abandonments, net
A
gain on asset sales of $8 million related to the sale of various non-core assets was recognized in the three months ended June 30, 2020 compared to a nominal gain in the three months ended June 30, 2019.
Also refer to the discussion of Loss on Asset Sales and Abandonmentscontained in the section "Total Midstream Division Analysis"of this Form 10-Q for additional items that are not part of Unallocated Expense.
Loss (Gain) Loss on Debt Extinguishment
A nominal loss on debt extinguishment was recognized in each of the three
months ended June 30, 2020 and 2019. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Income Taxes
The effective income tax rate was 18.0% for the three months ended June 30, 2020 compared to 17.5% for the three months ended June 30, 2019. The effective rate for the three months ended June 30, 2020 and 2019 differs from the U.S. Federal statutory rate of 21% primarily due to the impact of noncontrolling interest,
equity compensation and state income taxes.
See Note 4 - Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
For the Three Months Ended June 30,
(in
millions)
2020
2019
Variance
Percent Change
Total Company (Loss) Earnings Before Income Tax
$
(159)
$
233
$
(392)
(168.2)
%
Income
Tax (Benefit) Expense
$
(29)
$
41
$
(70)
(170.7)
%
Effective Income Tax Rate
18.0
%
17.5
%
0.5
%
43
TOTAL
E&P DIVISION ANALYSIS for the three months ended June 30, 2020 compared to the three months ended June 30, 2019:
The E&P division had a loss before income tax of $192 million for the three months ended June 30, 2020 compared to earnings before income tax of $188 million for the three months ended June 30, 2019. Variances by individual operating segment are discussed below.
Note:
Included in the table above is a related party transportation, gathering and compression charge of $54 million that is offset in the Midstream Division in Midstream Revenue - Related Party. Of this charge, $52 million related to Marcellus and $2 million related to Utica. See Note 14 - Segment Information in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-Q for additional information.
44
MARCELLUS
SEGMENT
The Marcellus segment had earnings before income tax of $58 million for the three months ended June 30, 2020 compared to earnings before income tax of $50 million for the three months ended June 30, 2019.
Gain
on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
1.05
$
0.08
$
0.97
1212.5
%
Average Sales Price - NGL (per Mcfe)*
$
1.30
$
3.06
$
(1.76)
(57.5)
%
Average
Sales Price - Condensate (per Mcfe)*
$
2.74
$
7.52
$
(4.78)
(63.6)
%
Total Average Marcellus
Sales Price (per Mcfe)
$
2.53
$
2.64
$
(0.11)
(4.2)
%
Average Marcellus Lease Operating Expenses (per Mcfe)
0.06
0.12
(0.06)
(50.0)
%
Average
Marcellus Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.04
—
—
%
Average Marcellus Transportation, Gathering and Compression Costs (per Mcfe)
1.07
1.24
(0.17)
(13.7)
%
Average
Marcellus Depreciation, Depletion and Amortization Costs (per Mcfe)
0.64
0.69
(0.05)
(7.2)
%
Total Average Marcellus Costs (per Mcfe)
$
1.81
$
2.09
$
(0.28)
(13.4)
%
Average
Margin for Marcellus (per Mcfe)
$
0.72
$
0.55
$
0.17
30.9
%
* 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 NGL, condensate, and natural gas prices.
The
Marcellus segment had natural gas, NGL and oil revenue of $123 million for the three months ended June 30, 2020 compared to $237 million for the three months ended June 30, 2019. The $114 million decrease was primarily due to a 38.2% decrease in the average sale price for natural gas and a 57.5% decrease in the average sale price of NGLs, along with a 13.3% decrease in total Marcellus sales volumes. The decrease in volumes was due to the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. Additionally, two new pads of dry gas turn-in-lines from April and May were temporarily shut-in during May and June due to low natural gas prices.
The decrease in the total average Marcellus sales price was primarily due
to a $0.96 per Mcf decrease in the average sales price for natural gas and a $1.76 per Mcfe decrease in the average NGL sales price, offset in part by a $0.97 per Mcf increase in the realized gain on commodity derivative instruments resulting from the Company's hedging program. The notional amounts associated with these financial hedges represented approximately 81.1 Bcf of the Company's produced Marcellus gas sales volumes for the three months ended June 30, 2020 at an average gain of $0.97 per Mcf. For the three months ended June 30, 2019, these financial hedges represented approximately 61.9 Bcf at an average gain of $0.11 per Mcf.
Total
operating costs and expenses for the Marcellus segment were $144 million for the three months ended June 30, 2020 compared to $194 million for the three months ended June 30, 2019. The decrease in total dollars and decrease in unit costs for the Marcellus segment were due to the following items:
•Marcellus lease operating expenses were $5 million for the three months ended June 30, 2020 compared to $11 million for the three months ended June 30, 2019. The decrease in total dollars and in unit costs was primarily due to a decrease in water disposal costs in the current period due to an increase in the reuse of produced water in well completions activity.
•Marcellus
transportation, gathering and compression costs were $86 million for the three months ended June 30, 2020 compared to $114 million for the three months ended June 30, 2019. The decrease in total dollars was primarily related to lower processing costs due to a drier production mix and a decrease in firm transportation due to lower gas sales volumes. The decrease in unit costs was driven by the drier production mix.
45
•Depreciation, depletion and amortization costs attributable to the Marcellus segment were $50 million for the three months ended June 30, 2020 compared
to $65 million for the three months ended June 30, 2019. These amounts included depletion on a unit of production basis of $0.62 per Mcfe and $0.69 per Mcfe, respectively. The decrease in units of production depreciation, depletion and amortization rate in the current period is the result of positive reserve revisions within our core development area and lower costs reserves added in our core development area from the 2019 development program. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
UTICA SEGMENT
The Utica segment had earnings before
income tax of $8 million for the three months ended June 30, 2020 compared to earnings before income tax of $18 million for the three months ended June 30, 2019.
Gain
on Commodity Derivative Instruments - Cash Settlement- Gas (per Mcf)
$
1.00
$
0.10
$
0.90
900.0
%
Average Sales Price - Condensate (per Mcfe)*
$
6.48
$
—
$
6.48
100.0
%
Total
Average Utica Sales Price (per Mcfe)
$
2.37
$
2.44
$
(0.07)
(2.9)
%
Average Utica Lease Operating Expenses (per Mcfe)
0.06
0.15
(0.09)
(60.0)
%
Average
Utica Production, Ad Valorem, and Other Fees (per Mcfe)
0.06
0.05
0.01
20.0
%
Average Utica Transportation, Gathering and Compression Costs (per Mcfe)
0.40
0.27
0.13
48.1
%
Average
Utica Depreciation, Depletion and Amortization Costs (per Mcfe)
1.50
1.33
0.17
12.8
%
Total Average Utica Costs (per Mcfe)
$
2.02
$
1.80
$
0.22
12.2
%
Average
Margin for Utica (per Mcfe)
$
0.35
$
0.64
$
(0.29)
(45.3)
%
* Condensate is 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 condensate and natural gas prices.
The
Utica segment had natural gas revenue of $29 million for the three months ended June 30, 2020 compared to $66 million for the three months ended June 30, 2019. The $37 million decrease was due to the 24.2% decrease in total Utica sales volumes and a 42.3% decrease in the average sales price for natural gas. The decrease in total Utica sales volumes was primarily due to normal production declines.
The decrease in total average Utica sales price was due to a $0.99 per Mcf decrease in average gas sales price. This was offset in part by a $0.90 per Mcf increase in the realized gain on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 21.9 Bcf of the
Company's produced Utica gas sales volumes for the three months ended June 30, 2020 at an average gain of 0.97 per Mcf. For the three months ended June 30, 2019, these financial hedges represented approximately 19.3 Bcf at an average gain of $0.14 per Mcf.
Total operating costs and expenses for the Utica segment were $42 million for the three months ended June 30, 2020 compared to $50 million for the three months ended June 30, 2019. The decrease in total dollars and increase in unit costs for the Utica segment were due to the following items:
•Utica lease operating expense was
$1 million for the three months ended June 30, 2020 compared to $4 million for the three months ended June 30, 2019. The decrease in total dollars was primarily due to a decrease in water disposal costs due to lower production volumes, an increase in reuse of produced water in well completions and a reduction in well operating costs due to the overall decrease in Utica volumes. The decrease in unit costs was driven by the decrease in total dollars.
46
•Utica transportation, gathering and compression costs remained consistent at $8 million for both the three months ended June 30,
2020 and 2019. The $0.13 per Mcfe increase in unit costs was driven by an increase in utilization of firm transportation contracts for Ohio production in 2020.
•Depreciation, depletion and amortization costs attributable to the Utica segment were $32 million for the three months ended June 30, 2020 compared to $36 million for the three months ended June 30, 2019. These amounts included depletion on a unit of production basis of $1.49 per Mcfe and $1.18 per Mcfe, respectively. The increase in the units of production depreciation, depletion and amortization rate was due to negative reserve revisions in the current period
and higher cost reserves added from the 2019 development program. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of $7 million for the three months ended June 30, 2020 compared to earnings before income tax of $8 million for the three months ended June 30, 2019.
Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.99
$
0.08
$
0.91
1137.5
%
Total
Average CBM Sales Price (per Mcf)
$
2.74
$
2.93
$
(0.19)
(6.5)
%
Average CBM Lease Operating Expenses (per Mcf)
0.31
0.32
(0.01)
(3.1)
%
Average
CBM Production, Ad Valorem, and Other Fees (per Mcf)
0.09
0.13
(0.04)
(30.8)
%
Average CBM Transportation, Gathering and Compression Costs (per Mcf)
0.65
0.71
(0.06)
(8.5)
%
Average
CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.19
1.22
(0.03)
(2.5)
%
Total Average CBM Costs (per Mcf)
$
2.24
$
2.38
$
(0.14)
(5.9)
%
Average
Margin for CBM (per Mcf)
$
0.50
$
0.55
$
(0.05)
(9.1)
%
The CBM segment had natural gas revenue of $23 million for the three months ended June 30, 2020 compared to $40 million for the three months ended June 30,
2019. The $17 million decrease was due to the 5.8% decrease in total CBM sales volumes and the 38.6% decrease in the average sales price for natural gas. The decrease in CBM sales volumes was primarily due to normal production declines.
The total average CBM sales price decreased $0.19 per Mcf due to a $1.10 per Mcf decrease in average gas sales price, offset in part by a $0.91 per Mcf increase in the gain on commodity derivative instruments resulting from the Company's hedging program. The notional amounts associated with these financial hedges represented approximately 13.5 Bcf of the Company's produced CBM sales volumes for the three months ended June 30, 2020
at an average gain of $0.96 per Mcf. For the three months ended June 30, 2019, these financial hedges represented approximately 9.5 Bcf at an average gain of $0.11 per Mcf.
Total operating costs and expenses for the CBM segment were $29 million for the three months ended June 30, 2020 compared to $33 million for the three months ended June 30, 2019. The decrease in total dollars and decrease in unit costs for the CBM segment were due to the following items:
•CBM lease operating expense remained consistent at $4 million for both the three months ended June 30, 2020 and 2019.
The decrease in unit costs was driven by the decrease in employee costs allocated to the CBM segment.
•CBM transportation, gathering and compression costs were $9 million for the three months ended June 30, 2020 compared to $10 million for the three months ended June 30, 2019. The decrease in total dollars as well as the decrease in unit costs were primarily related to decreases in electrical power expense, compressor rentals and operations labor, offset in part by an increase in non-routine repairs.
47
•Depreciation,
depletion and amortization costs attributable to the CBM segment were at $15 million for the three months ended June 30, 2020 compared to $17 million for the three months ended June 30, 2019. These amounts included depletion on a unit of production basis of $0.67 per Mcfe and $0.70 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate was due to positive reserve revisions. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
OTHER GAS SEGMENT
The
Other Gas segment had a loss before income tax of $265 million for the three months ended June 30, 2020 compared to earnings before income tax of $112 million for the three months ended June 30, 2019.
The
Other Gas segment includes activity not assigned to the Marcellus, Utica, or CBM segments. This segment also includes unrealized gain or loss on commodity derivative instruments, realized gain on commodity derivative instruments that were monetized prior to their settlement dates, purchased gas activity, exploration and production related other costs and other operational activity not assigned to a specific segment.
There was nominal natural gas revenue related to the Other Gas segment for the three months ended June 30, 2020 and June 30, 2019. Total operating costs and expenses related to these other gas sales volumes were $3 million for the three months ended June 30, 2020 compared to $1 million for the three months ended June 30,
2019.
Gain or Loss on Commodity Derivative Instruments and Monetization
For the three months ended June 30, 2020, the Other Gas segment recognized an unrealized loss on commodity derivative instruments of $205 million as well as cash settlements received of $29 million for commodity derivative instruments that were monetized prior to their settlement dates. For the three months ended June 30, 2019, the Other Gas segment recognized an unrealized gain on commodity derivative instruments of $211 million. The unrealized loss/gain on commodity derivative instruments represents changes in the fair value of all of the Company's
existing commodity hedges on a mark-to-market basis.
In April 2020, CNX monetized and terminated approximately 39 million MMBtus of NYMEX natural gas hedges and a similar quantity of financial basis hedges that were to settle at various times from May through November of 2020. In connection with these monetizations, CNX received $29 million of net proceeds, which are included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the three months ended June 30, 2020. In addition, during the second quarter of 2020, CNX purchased financial swaps for May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties. These transactions provided CNX with additional flexibility to move production to higher price periods while immediately
taking the monetization proceeds.
Purchased Gas
Purchased gas volumes represent volumes of gas purchased at market prices from third-parties and then resold in order to fulfill contracts with certain customers and to balance supply. Purchased gas revenues were $20 million for the three months ended June 30, 2020 compared to $19 million for the three months ended June 30, 2019. Purchased gas costs were $20 million for the three months ended June 30, 2020 compared to $19 million for the three months ended June 30, 2019.
The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease in averages sales price.
Other operating income was $4 million for the three months ended June 30, 2020 compared to $3 million for the three months ended June 30, 2019. The $1 million increase was due to the following items:
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Water Income
$
2
$
—
$
2
100.0
%
Gathering
Income
3
2
1
50.0
%
Equity in (Loss) Earnings of Affiliates
(1)
1
(2)
(200.0)
%
Total
Other Operating Income
$
4
$
3
$
1
33.3
%
•Water income increased $2 million due to increased sales of freshwater to third-parties for hydraulic fracturing in the 2020 period and revenue for accepting deliveries of produced water from third-parties for reuse in the
Company's hydraulic fracturing.
Exploration and Production Related Other Costs
Exploration and production related other costs were $3 million for the three months ended June 30, 2020 compared to $5 million for the three months ended June 30, 2019. The $2 million decrease was due to the following items:
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Lease Expiration Costs
$
2
$
3
$
(1)
(33.3)
%
Land
Rentals
1
2
(1)
(50.0)
%
Total Exploration and Production Related Other Costs
$
3
$
5
$
(2)
(40.0)
%
Other
Operating Expense
Other operating expense was $28 million for the three months ended June 30, 2020 compared to $18 million for the three months ended June 30, 2019. The $10 million increase was due to the following items:
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Unutilized Firm Transportation and Processing Fees
$
21
$
14
$
7
50.0
%
Idle
Equipment and Service Charges
3
3
—
—
%
Insurance Expense
1
1
—
—
%
Other
3
—
3
100.0
%
Total
Other Operating Expense
$
28
$
18
$
10
55.6
%
•Unutilized firm transportation and processing fees represent pipeline transportation capacity obtained to enable gas production to flow uninterrupted as sales volumes increase, as well as additional processing capacity for NGLs.
The increase of $7 million in the period-to-period comparison was primarily due to previously acquired capacity which was not utilized during the current period to transport the Company's flowing production production or to process the Company’s wet natural gas production. The increase in unutilized capacity results in part from the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. In some instances, the Company may have the opportunity to realize more favorable net pricing by strategically choosing to sell natural gas into a market or to a customer that does not require the use of the
Company’s own firm transportation capacity. Such sales would increase unutilized firm transportation expense. The Company attempts to minimize this expense by releasing (selling) unutilized firm transportation capacity to other parties when possible and when beneficial. The revenue received when this capacity is released (sold) is included in Gathering Income in Total Other Operating Income above. There were no unutilized fees related to the Midstream Division during the three months ended June 30, 2020 or 2019.
49
Selling,
General and Administrative
SG&A costs represent direct charges for the management and operation of CNX's E&P division. SG&A costs were $19 million for the three months ended June 30, 2020 compared to $44 million for the three months ended June 30, 2019. Refer to the discussion of total company SG&A costs contained in the section "Net (Loss) Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Interest Expense
Interest expense of $37 million was recognized in the three months ended June 30,
2020 compared to $32 million in the three months ended June 30, 2019. The $5 million increase was primarily due to the addition of $345 million of convertible senior notes due 2026 during the three months ended June 30, 2020 and of the $125 million Cardinal States Facility and $50 million CSG Holdings Facility during the three months ended March 31, 2020. Realized and unrealized losses on interest rate swap agreements also contributed to the increase. These increases were offset in part by the purchase of $71 million of the outstanding 5.875% senior notes due in April 2022 during the three months ended March 31, 2020, as well as lower borrowings on the CNX credit facility. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in
Item 1 of this Form 10-Q for additional information.
TOTAL MIDSTREAM DIVISION ANALYSIS for the three months ended June 30, 2020 compared to the three months ended June 30, 2019:
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets of CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus
Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM.
Prior to the IDR Elimination Transaction, CNX Gathering held all of the interests in CNX Midstream GP LLC, which held both the general partner and limited partner interests in CNXM. CNX has owned and controlled 100% of CNX Gathering LLC, since January 2018 making CNXM a single-sponsor master limited partnership and thus the Company consolidates CNXM.
For
the Three Months Ended June 30,
(in millions)
2020
2019
Variance
Midstream Revenue - Related Party
$
54
$
60
$
(6)
Midstream
Revenue - Third Party
12
18
(6)
Total Revenue
$
66
$
78
$
(12)
Transportation,
Gathering and Compression
$
10
$
13
$
(3)
Depreciation, Depletion and Amortization
11
8
3
Selling,
General, and Administrative Costs
4
5
(1)
Total Operating Costs and Expenses
25
26
(1)
Loss
on Asset Sales and Abandonments, net
2
—
2
Interest Expense
9
8
1
Total
Midstream Division Costs
36
34
2
Earnings Before Income Tax
$
30
$
44
$
(14)
Midstream
Revenue
Midstream revenue consists of revenue related to volumes gathered on behalf of CNX and other third-party natural gas producers. CNXM charges a higher fee for natural gas that is shipped on its wet system compared to gas shipped through its dry system. CNXM revenue can also be impacted by the relative mix of gathered volumes by area, which may vary depending upon delivery point and may change dynamically depending on commodity prices at time of shipment. Total Midstream revenue decreased $12 million primarily due to a 49.0% decrease in gathered volumes of wet gas, offset in part by an increase of 18.0% in gathered volumes of dry gas in the period-to-period comparison. The decrease in wet gas volumes was the result of temporary production curtailments by related party and third party customers. This decrease was offset in part by well turn-in-line activity that occurred over the
past twelve months.
50
The table below summarizes volumes gathered by gas type:
(*) Classification as dry or
wet is based upon the shipping destination of the related volumes. Because CNXM's customers have the option to ship a portion of their natural gas to destinations associated with either our wet system or our dry system, due to any number of factors, volumes may be classified as “wet” in one period and as “dry” in the comparative period.
(**) Includes condensate handling and third-party volumes under high-pressure short-haul agreements.
Transportation, Gathering and Compression
Transportation, Gathering and Compression costs were $10 million for the three months ended June 30, 2020 compared to $13 million for the three months ended June 30, 2019, and are comprised
of items directly related to the cost of gathering natural gas at the wellhead and transporting it to interstate pipelines or other local sales points. These costs include items such as electrically-powered compression, compressor rental, repairs and maintenance, supplies, treating and contract services.
Selling, General and Administrative Expense
SG&A expense is comprised of direct charges for the management and operation of CNXM assets. SG&A costs were $4 million for the three months ended June 30, 2020 compared to $5 million for the three months ended June 30, 2019. Refer to
the discussion of total Company SG&A costs contained in the section "Net (Loss) Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Depreciation, Depletion and Amortization Expense
Depreciation expense is recognized on gathering and other equipment on a straight-line basis, with useful lives ranging from 25 years to 40 years.
Loss on Asset Sales and Abandonments, net
During the three months ended June 30, 2020, due to ongoing assessments of projects that generate the highest
returns on invested capital, CNXM abandoned the construction of a pipeline project that was designed to support additional production within certain operating areas, as well as land right-of-ways, resulting in a loss of $2 million that is included in (Gain) Loss on Assets Sales and Abandonments, net in the Consolidated Statements of Income. No such transactions occurred in the prior period.
Interest Expense
Interest expense is comprised of interest on the outstanding balance under CNXM's senior notes due 2026 and its revolving credit facility. Interest expense was $9 million for the three months ended June 30, 2020 compared to $8 million for the three months ended June 30, 2019.
Net (Loss) Income Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to CNX Resources shareholders of $475 million, or a loss per diluted share of $2.54, for the six months ended June 30, 2020, compared to net income attributable to CNX Resources shareholders of $75 million, or earnings per diluted share of $0.38, for the six months ended June 30, 2019.
For
the Six Months Ended June 30,
(Dollars in thousands)
2020
2019
Variance
Net (Loss) Income
$
(435,709)
$
128,044
$
(563,753)
Less:
Net Income Attributable to Noncontrolling Interest
39,126
52,904
(13,778)
Net (Loss) Income Attributable to CNX Resources Shareholders
$
(474,835)
$
75,140
$
(549,975)
CNX
consists of two principal business divisions: Exploration and Production (E&P) and Midstream. The operating results of the Company's reportable divisions were as follows for the six months ended June 30, 2020 and 2019:
The
principal activity of the E&P Division is to produce pipeline quality natural gas for sale primarily to gas wholesalers. The E&P Division's reportable segments are Marcellus Shale, Utica Shale, Coalbed Methane, and Other Gas.
CNX's E&P Division had a loss before income tax of $239 million for the six months ended June 30, 2020, compared to earnings before income tax of $82 million for the six months ended June 30, 2019. Included in the loss for the six months ended June 30, 2020 was a $62 million non-cash impairment charge related to exploration and production properties and an unrealized loss on commodity derivative instruments of $241 million. Included in the earnings for the six months ended June 30,
2019 was an unrealized gain on commodity derivative instruments of $57 million.
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets, through CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM. CNX's Midstream Division had a loss before income tax of $399 million for the six months ended June 30, 2020, compared to earnings before income
tax of $77 million for the six months ended June 30, 2019. Included in the loss for the six months ended June 30, 2020 was a $473 million non-cash impairment charge related to goodwill. No such impairments occurred in the six months ended June 30, 2019.
53
E&P Division Summary
Sales volumes, average sales
prices (including the effects of settled derivative instruments and excluding monetization), and average costs for the E&P Division were as follows:
Gain
(Loss) on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)*
$
0.89
$
(0.12)
$
1.01
841.7
%
Average Sales Price - NGL (per Mcfe)**
$
1.97
$
3.70
$
(1.73)
(46.8)
%
Average
Sales Price - Oil (per Mcfe)**
$
6.77
$
7.63
$
(0.86)
(11.3)
%
Average Sales Price - Condensate (per Mcfe)**
$
5.49
$
6.91
$
(1.42)
(20.5)
%
Average
Sales Price (per Mcfe)
$
2.56
$
2.80
$
(0.24)
(8.6)
%
Lease Operating Expense (per Mcfe)
0.08
0.14
(0.06)
(42.9)
%
Production,
Ad Valorem, and Other Fees (per Mcfe)
0.04
0.05
(0.01)
(20.0)
%
Transportation, Gathering and Compression (per Mcfe)
0.95
0.95
—
—
%
Depreciation,
Depletion and Amortization (DD&A) (per Mcfe)
0.88
0.89
(0.01)
(1.1)
%
Average Costs (per Mcfe)
$
1.95
$
2.03
$
(0.08)
(3.9)
%
Average
Margin (per Mcfe)
$
0.61
$
0.77
$
(0.16)
(20.8)
%
* Excluding gain from hedge monetization
**NGL 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, NGL, condensate, and natural gas prices.
Natural gas, NGL, and oil revenue was $427 million for the six months ended June 30, 2020, compared to $779 million for the six months ended June 30, 2019. The decrease was primarily due to the 8.6% decrease in the average sales price driven by lower natural gas and NGL prices and a 7.0% decrease in sales volumes.
The decrease in average sales price was primarily the result of the $1.17 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas. There was also a $0.02 per Mcfe decrease in the uplift from NGL and condensate sales volumes
when excluding the impact of hedging. Both decreases were offset, in-part, by the $1.01 per Mcf increase in the realized gain (loss) on commodity derivative instruments related to the Company's hedging program.
Changes in the average costs per Mcfe were primarily related to the following items:
•Lease operating expense decreased on a per unit basis primarily due to a decrease in water disposal costs in the period-to-period comparison due to an increased reuse of produced water in well completions in the current period.
54
The
following table presents a breakout of net liquid and natural gas sales information and settled derivative information to assist in the understanding of the Company’s natural gas production and sales portfolio and information regarding settled commodity derivatives:
For
the Six Months Ended June 30,
in thousands (unless noted)
2020
2019
Variance
Percent Change
LIQUIDS
NGL:
Sales
Volume (MMcfe)
13,042
14,536
(1,494)
(10.3)
%
Sales Volume (Mbbls)
2,174
2,423
(249)
(10.3)
%
Gross
Price ($/Bbl)
$
11.82
$
22.20
$
(10.38)
(46.8)
%
Gross Revenue
$
25,638
$
53,790
$
(28,152)
(52.3)
%
Oil:
Sales
Volume (MMcfe)
124
34
90
264.7
%
Sales Volume (Mbbls)
21
6
15
250.0
%
Gross
Price ($/Bbl)
$
40.62
$
45.78
$
(5.16)
(11.3)
%
Gross Revenue
$
842
$
256
$
586
228.9
%
Condensate:
Sales
Volume (MMcfe)
489
580
(91)
(15.7)
%
Sales Volume (Mbbls)
81
97
(16)
(16.5)
%
Gross
Price ($/Bbl)
$
32.94
$
41.46
$
(8.52)
(20.5)
%
Gross Revenue
$
2,682
$
4,007
$
(1,325)
(33.1)
%
GAS
Sales
Volume (MMcf)
235,212
252,316
(17,104)
(6.8)
%
Sales Price ($/Mcf)
$
1.69
$
2.86
$
(1.17)
(40.9)
%
Gross
Revenue
$
398,108
$
720,758
$
(322,650)
(44.8)
%
Hedging
Impact ($/Mcf)
$
0.89
$
(0.12)
$
1.01
841.7
%
Gain (Loss) on Commodity Derivative Instruments - Cash Settlement*
209,419
(30,710)
240,129
781.9
%
*
Excluding gain from hedge monetization
Selling, General and Administrative ("SG&A") - Total Company
SG&A costs include costs such as overhead, including employee labor and benefit costs, short-term incentive compensation, costs of maintaining our headquarters, audit and other professional fees, and legal compliance expenses. SG&A costs also include non-cash long-term equity-based compensation expense.
For
the Six Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
SG&A
Long-Term Equity-Based
Compensation (Non-Cash)
$
9
$
35
$
(26)
(74.3)
%
Salaries and Wages
15
21
(6)
(28.6)
%
Short-Term
Incentive Compensation
5
7
(2)
(28.6)
%
Other
24
22
2
9.1
%
Total
SG&A
$
53
$
85
$
(32)
(37.6)
%
•Long-term equity-based compensation decreased $26 million in the period-to-period comparison due to a change in control event that occurred in the 2019 period and resulted in the acceleration of vesting of certain restricted stock units and
performance share units held by certain employees. See Note 2 - Earnings Per Share in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•Salaries and Wages decreased $6 million due to an overall reduction in employees and employee related costs.
•Short-term incentive compensation decreased $2 million due to lower projected payouts in the current period.
55
Unallocated Expense
Certain
costs and expenses, such as other expense (income), gain on asset sales related to non-core assets, (gain) loss on debt extinguishment and income taxes are unallocated expenses and therefore are excluded from the per unit costs above as well as segment reporting. Below is a summary of these costs and expenses:
Other Expense (Income)
For
the Six Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Other Income
Royalty Income
$
—
$
4
$
(4)
(100.0)
%
Right
of Way Sales
1
4
(3)
(75.0)
%
Interest Income
—
1
(1)
(100.0)
%
Other
2
1
1
100.0
%
Total
Other Income
$
3
$
10
$
(7)
(70.0)
%
Other
Expense
Professional Services
$
5
$
1
$
4
400.0
%
Bank Fees
6
6
—
—
%
Other
Corporate Expense
2
2
—
—
%
Total Other Expense
$
13
$
9
$
4
44.4
%
Total
Other Expense (Income)
$
10
$
(1)
$
11
1,100.0
%
Gain on Asset Sales and Abandonments, net
A gain on asset sales of $20 million related to the sale of various non-core assets was recognized in the six months ended June 30,
2020 compared to a gain of $5 million in the six months ended June 30, 2019.
Also refer to the discussion of Loss on Asset Sales and Abandonmentscontained in the section "Total Midstream Division Analysis"of this Form 10-Q for additional items that are not part of Unallocated Expense.
Loss (Gain) on Debt Extinguishment
A gain on debt extinguishment of $11 million was recognized in the six months ended June 30, 2020 compared to a loss on debt extinguishment of $8 million in the six months ended June 30,
2019. During the six months ended June 30, 2020, CNX purchased $481 million of its 5.875% Senior notes due in April 2022 at an average price equal to 97.5% of the principal amount. During the six months end June 30, 2019 CNX purchased $400 million of its 5.875% Senior notes due in April 2022 at an average price equal to 101.5% of the principal amount. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Income Taxes
The effective income tax rate was 29.4% for the six months ended June 30, 2020 compared to 18.6% for the six months ended June 30,
2019. The effective rate for the six months ended June 30, 2020 and 2019 differs from the U.S. Federal statutory rate of 21% primarily due to the impact of noncontrolling interest, equity compensation and state income taxes.
See Note 4 - Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
For
the Six Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Total Company (Loss) Earnings Before Income Tax
$
(617)
$
157
$
(774)
(493.0)
%
Income
Tax (Benefit) Expense
$
(181)
$
29
$
(210)
(724.1)
%
Effective Income Tax Rate
29.4
%
18.6
%
10.8
%
56
TOTAL
E&P DIVISION ANALYSIS for the six months ended June 30, 2020 compared to the six months ended June 30, 2019:
The E&P division had a loss before income tax of $239 million for the six months ended June 30, 2020 compared to earnings before income tax of $82 million for the six months ended June 30, 2019. Variances by individual operating segment are discussed below.
Impairment
of Exploration and Production Properties
—
—
—
62
62
—
—
—
62
62
Exploration
and Production Related Other Costs
—
—
—
7
7
—
—
—
(1)
(1)
Purchased
Gas Costs
—
—
—
45
45
—
—
—
10
10
Other
Operating Expense
—
—
—
47
47
—
—
—
6
6
Selling,
General and Administrative Costs
—
—
—
44
44
—
—
—
(30)
(30)
Total
Operating Costs and Expenses
328
92
64
212
696
(45)
(9)
(1)
48
(7)
Interest
Expense
—
—
—
78
78
—
—
—
17
17
Total
E&P Division Costs
328
92
64
290
774
(45)
(9)
(1)
65
10
Earnings
(Loss) Before Income Tax
$
122
$
18
$
13
$
(392)
$
(239)
$
(15)
$
(32)
$
(8)
$
(266)
$
(321)
Note:
Included in the table above is a related party transportation, gathering and compression charge of $116 million that is offset in the Midstream Division in Midstream Revenue - Related Party. Of this charge, $111 million related to Marcellus and $5 million related to Utica. See Note 14 - Segment Information in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-Q for additional information.
57
MARCELLUS SEGMENT
The Marcellus segment had earnings before income tax of $122 million for the six months ended June 30,
2020 compared to earnings before income tax of $137 million for the six months ended June 30, 2019.
Gain
(Loss) on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.91
$
(0.12)
$
1.03
858.3
%
Average Sales Price - NGL (per Mcfe)*
$
1.96
$
3.70
$
(1.74)
(47.0)
%
Average
Sales Price - Oil (per Mcfe)*
$
6.70
$
—
$
6.70
100.0
%
Average Sales Price - Condensate (per Mcfe)*
$
5.16
$
6.88
$
(1.72)
(25.0)
%
Total
Average Marcellus Sales Price (per Mcfe)
$
2.55
$
2.82
$
(0.27)
(9.6)
%
Average Marcellus Lease Operating Expenses (per Mcfe)
0.05
0.11
(0.06)
(54.5)
%
Average
Marcellus Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.04
—
—
%
Average Marcellus Transportation, Gathering and Compression Costs (per Mcfe)
1.13
1.21
(0.08)
(6.6)
%
Average
Marcellus Depreciation, Depletion and Amortization Costs (per Mcfe)
0.64
0.70
(0.06)
(8.6)
%
Total Average Marcellus Costs (per Mcfe)
$
1.86
$
2.06
$
(0.20)
(9.7)
%
Average
Margin for Marcellus (per Mcfe)
$
0.69
$
0.76
$
(0.07)
(9.2)
%
* 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, which is not indicative of the relationship of oil, NGL, condensate, and natural gas prices.
The
Marcellus segment had natural gas, NGL and oil revenue of $303 million for the six months ended June 30, 2020 compared to $531 million for the six months ended June 30, 2019. The $228 million decrease was due primarily to a 41.1% decrease in the average sale price for natural gas and a 47.0% decrease in the average sales price of NGLs.
The 2.6% decrease in total Marcellus sales volumes is due to the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. Additionally, two new pads of dry gas turn-in-lines from April and May were temporarily shut-in May and June due to low natural gas prices.
The decrease in the total average
Marcellus sales price was primarily due to a $1.17 per Mcf decrease in the average sales price for natural gas and a $1.74 per Mcfe decrease in the average NGL sales price, offset in part by a $1.03 per Mcf increase in the realized gain (loss) on commodity derivative instruments resulting from the Company's hedging program. The notional amounts associated with these financial hedges represented approximately 163.7 Bcf of the Company's produced Marcellus gas sales volumes for the six months ended June 30, 2020 at an average gain of $0.90 per Mcf. For the six months ended June 30, 2019, these financial hedges represented approximately 117.2 Bcf at an average loss of $0.18 per Mcf.
Total
operating costs and expenses for the Marcellus segment were $328 million for the six months ended June 30, 2020 compared to $373 million for the six months ended June 30, 2019. The decrease in total dollars and decrease in unit costs for the Marcellus segment were due to the following items:
•Marcellus lease operating expenses were $10 million for the six months ended June 30, 2020 compared to $21 million for the six months ended June 30, 2019. The decrease in total dollars was primarily due to a decrease in water disposal costs in the current period resulting from an increase in the reuse of produced water in well completions activity. The decrease in unit costs
was driven by the decrease in total dollars, along with the 2.6% decrease in total Marcellus sales volumes.
58
•Marcellus transportation, gathering and compression costs were $200 million for the six months ended June 30, 2020 compared to $218 million for the six months ended June 30, 2019. The decrease in total dollars was primarily related to lower processing costs due to a drier production mix. The decrease in unit costs was driven by the decreased total dollars described above.
•Depreciation,
depletion and amortization costs attributable to the Marcellus segment were $112 million for the six months ended June 30, 2020 compared to $127 million for the six months ended June 30, 2019. These amounts included depletion on a unit of production basis of $0.61 per Mcfe and $0.69 per Mcfe, respectively. The decrease in units of production depreciation, depletion and amortization rate in the current period are the result of positive reserve revisions within our core development area and lower costs reserves added in our core development area from the 2019 development program. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
UTICA
SEGMENT
The Utica segment had earnings before income tax of $18 million for the six months ended June 30, 2020 compared to earnings before income tax of $50 million for the six months ended June 30, 2019.
Gain
(Loss) on Commodity Derivative Instruments - Cash Settlement- Gas (per Mcf)
$
0.85
$
(0.12)
$
0.97
808.3
%
Average Sales Price - NGLs (per Mcfe)*
$
2.50
$
—
$
2.50
100.0
%
Average
Sales Price - Condensate (per Mcfe)*
$
6.89
$
—
$
6.89
100.0
%
Total Average Utica Sales
Price (per Mcfe)
$
2.38
$
2.58
$
(0.20)
(7.8)
%
Average Utica Lease Operating Expenses (per Mcfe)
0.07
0.15
(0.08)
(53.3)
%
Average
Utica Production, Ad Valorem, and Other Fees (per Mcfe)
0.06
0.05
0.01
20.0
%
Average Utica Transportation, Gathering and Compression Costs (per Mcfe)
0.38
0.28
0.10
35.7
%
Average
Utica Depreciation, Depletion and Amortization Costs (per Mcfe)
1.48
1.25
0.23
18.4
%
Total Average Utica Costs (per Mcfe)
$
1.99
$
1.73
$
0.26
15.0
%
Average
Margin for Utica (per Mcfe)
$
0.39
$
0.85
$
(0.46)
(54.1)
%
* 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 NGL, condensate, and natural gas prices.
The
Utica segment had natural gas revenue of $71 million for the six months ended June 30, 2020 compared to $158 million for the six months ended June 30, 2019. The $87 million decrease was due to the 21.2% decrease in total Utica sales volumes and a 43.7% decrease in the average sales price for natural gas. The decrease in total Utica sales volumes was primarily due to normal production declines.
The decrease in total average Utica sales price was due to a $1.18 per Mcf decrease in average gas sales price. This was offset in part by a $0.97 per Mcf increase in the realized gain (loss) on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 43.6 Bcf of the
Company's produced Utica gas sales volumes for the six months ended June 30, 2020 at an average gain of $0.90 per Mcf. For the six months ended June 30, 2019, these financial hedges represented approximately 38.9 Bcf at an average loss of $0.18 per Mcf.
Total operating costs and expenses for the Utica segment were $92 million for the six months ended June 30, 2020 compared to $101 million for the six months ended June 30, 2019. The decrease in total dollars and increase in unit costs for the Utica segment were due to the following items:
59
•Utica
lease operating expense was $3 million for the six months ended June 30, 2020 compared to $9 million for the six months ended June 30, 2019. The decrease in total dollars was primarily due to a decrease in water disposal costs and a reduction in well operating costs due to lower production volumes, as well as an increase in the reuse of produced water. The decrease in unit costs was driven by the decrease in total dollars.
•Utica transportation, gathering and compression costs were $18 million for the six months ended June 30, 2020 compared to $16 million for the six months ended June 30, 2019. The increases in total dollars and unit costs was driven by an increase
in utilization of firm transportation contracts for Ohio production in 2020 and annual rate escalations from third-party providers.
•Depreciation, depletion and amortization costs attributable to the Utica segment were $68 million for the six months ended June 30, 2020 compared to $73 million for the six months ended June 30, 2019. These amounts included depletion on a unit of production basis of $1.49 per Mcfe and $1.18 per Mcfe, respectively. The increase in the units of production depreciation, depletion and amortization rate was due to negative reserve revisions in the current period and higher cost reserves added from the 2019 development program. The remaining depreciation,
depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of $13 million for the six months ended June 30, 2020 compared to earnings before income tax of $21 million for the six months ended June 30, 2019.
Gain (Loss) on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.86
$
(0.11)
$
0.97
881.8
%
Total
Average CBM Sales Price (per Mcf)
$
2.90
$
3.13
$
(0.23)
(7.3)
%
Average CBM Lease Operating Expenses (per Mcf)
0.29
0.31
(0.02)
(6.5)
%
Average
CBM Production, Ad Valorem, and Other Fees (per Mcf)
0.10
0.14
(0.04)
(28.6)
%
Average CBM Transportation, Gathering and Compression Costs (per Mcf)
0.74
0.70
0.04
5.7
%
Average
CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.29
1.24
0.05
4.0
%
Total Average CBM Costs (per Mcf)
$
2.42
$
2.39
$
0.03
1.3
%
Average
Margin for CBM (per Mcf)
$
0.48
$
0.74
$
(0.26)
(35.1)
%
The CBM segment had natural gas revenue of $54 million for the six months ended June 30, 2020 compared to $89 million for the six months ended June 30, 2019.
The $35 million decrease was due to the 4.7% decrease in total CBM sales volumes and the 37.0% decrease in the average sales price for natural gas. The decrease in CBM sales volumes was primarily due to normal production declines.
The total average CBM sales price decreased $0.23 per Mcf due to a $1.20 per Mcf decrease in average gas sales price, offset in part by a $0.97 per Mcf increase in the gain (loss) on commodity derivative instruments resulting from the Company's hedging program. The notional amounts associated with these financial hedges represented approximately 25.2 Bcf of the Company's produced CBM sales volumes for the six months ended June 30, 2020 at
an average gain of $0.90 per Mcf. For the six months ended June 30, 2019, these financial hedges represented approximately 18.3 Bcf at an average loss of $0.18 per Mcf.
Total operating costs and expenses for the CBM segment were $64 million for the six months ended June 30, 2020 compared to $65 million for the six months ended June 30, 2019. The decrease in total dollars and increase in unit costs for the CBM segment were due to the following items:
60
•CBM
lease operating expense was $8 million for the six months ended June 30, 2020 compared to $9 million for the six months ended June 30, 2019. The decrease in total dollars was due to a decrease in water disposal costs as well as a decrease in repairs and maintenance. The decrease in unit costs was driven by the decrease in total dollars.
•CBM transportation, gathering and compression costs remained consistent at $19 million for both the six months ended June 30, 2020 and 2019. The $0.04 per Mcf increase in unit costs was driven by the overall decrease in CBM volumes.
•Depreciation,
depletion and amortization costs attributable to the CBM segment were at $34 million for the six months ended June 30, 2020 compared to $33 million for the six months ended June 30, 2019. These amounts included depletion on a unit of production basis of $0.69 per Mcfe and $0.70 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate was due to reduced production, offset in part by negative reserve revisions. The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
OTHER GAS SEGMENT
The
Other Gas segment had a loss before income tax of $392 million for the six months ended June 30, 2020 compared to a loss before income tax of $126 million for the six months ended June 30, 2019.
The
Other Gas segment includes activity not assigned to the Marcellus, Utica, or CBM segments. This segment also includes unrealized gain or loss on commodity derivative instruments, realized gain on commodity derivative instruments that were partially monetized prior to their settlement dates, purchased gas activity, impairment of exploration and production properties, exploration and production related other costs and other operational activity not assigned to a specific segment.
There was nominal natural gas revenue related to the Other Gas segment for the six months ended June 30, 2020 and June 30, 2019. Total operating costs and expenses related to these other gas sales volumes were $3 million for both the six months ended June 30, 2020
and 2019.
Gain or Loss on Commodity Derivative Instruments and Monetization
For the six months ended June 30, 2020, the Other Gas segment recognized an unrealized loss on commodity derivative instruments of $241 million as well as cash settlements received of $84 million for commodity derivative instruments that were partially monetized prior to their settlement dates. For the six months ended June 30, 2019, the Other Gas segment recognized an unrealized gain on commodity derivative instruments of $57 million. The unrealized gain/loss on commodity derivative instruments represents changes in the fair value of all of the
Company's existing commodity hedges on a mark-to-market basis.
In March 2020, CNX monetized and repriced a portion of its 2022, 2023, and 2024 NYMEX natural gas hedge portfolio generating $55 million of net proceeds, which are included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the six months ended June 30, 2020. Notional quantities were not affected by the restructuring. The remaining 2022 swap contracts with a notional quantity of 113.2 million MMBtu and a weighted average price of $2.80 per MMBtu were repriced to a contract price of $2.40 per MMBtu, 2023 swap contracts
with a notional quantity of 51.1 million MMBtu and a weighted average price of $2.69 per MMBtu were repriced to a contract price of $2.48 per MMBtu, and 2024 swap contracts with a notional quantity of 19.2 million MMBtu and a weighted average price of $2.62 per MMBtu were repriced to a contract price of $2.54 per MMBtu. The net proceeds from the monetization was used to reduce the Company's absolute debt.
In April 2020, CNX monetized and terminated approximately 39 million MMBtus of NYMEX natural gas hedges and a similar quantity
of financial basis hedges that were to settle at various times from May through November of 2020. In connection with these monetizations, CNX received $29 million of net proceeds, which are included in (Loss) Gain on Commodity Derivative Instruments in the Consolidated Statements of Income for the six months ended June 30, 2020. In addition, during the second quarter of 2020, CNX purchased financial swaps for May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties. These moves gave CNX additional flexibility to move production to higher price periods while immediately taking the monetization proceeds.
61
Purchased
Gas
Purchased gas volumes represent volumes of gas purchased at market prices from third-parties and then resold in order to fulfill contracts with certain customers and to balance supply. Purchased gas revenues were $47 million for the six months ended June 30, 2020 compared to $35 million for the six months ended June 30, 2019. Purchased gas costs were $45 million for the six months ended June 30, 2020 compared to $35 million for the six months ended June 30, 2019. The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease
in averages sales price.
Other operating income was $9 million for the six months ended June 30, 2020 compared to $6 million
for the six months ended June 30, 2019. The $3 million increase was due to the following items:
For the Six Months Ended June 30,
(in
millions)
2020
2019
Variance
Percent Change
Water Income
$
4
$
—
$
4
100.0
%
Gathering
Income
6
5
1
20.0
%
Equity in (Loss) Earnings of Affiliates
(1)
1
(2)
(200.0)
%
Total
Other Operating Income
$
9
$
6
$
3
50.0
%
•Water income increased $4 million due to increased sales of freshwater to third-parties for hydraulic fracturing in the 2020 period and revenue for accepting deliveries of produced water from third-parties for reuse in the
Company's hydraulic fracturing.
Impairment of Exploration and Production Properties
During the six months ended June 30, 2020, CNX recognized certain indicators of impairments specific to our Southwest Pennsylvania (SWPA) CBM asset group and determined that carrying value of that asset group was not recoverable. The fair value of the asset group was estimated by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, an impairment of $62 million was recognized and is included in Impairment of Exploration and Production Properties in the Consolidated Statements of Income. The impairment was related to an economic decision to temporarily idle certain
wells and the related processing facility during the first quarter.
Exploration and Production Related Other Costs
Exploration and production related other costs were $7 million for the six months ended June 30, 2020 compared to $8 million for the six months ended June 30, 2019. The $1 million decrease was due to the following items:
For
the Six Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Land Rentals
$
1
$
3
$
(2)
(66.7)
%
Lease
Expiration Costs
4
5
(1)
(20.0)
%
Permitting Expense
2
—
2
100.0
%
Total
Exploration and Production Related Other Costs
$
7
$
8
$
(1)
(12.5)
%
62
Other
Operating Expense
Other operating expense was $47 million for the six months ended June 30, 2020 compared to $41 million for the six months ended June 30, 2019. The $6 million increase was due to the following items:
For
the Six Months Ended June 30,
(in millions)
2020
2019
Variance
Percent Change
Unutilized Firm Transportation and Processing Fees
$
34
$
28
$
6
21.4
%
Water
Expense
1
—
1
100.0
%
Insurance Expense
1
1
—
—
%
Idle
Equipment and Service Charges
6
8
(2)
(25.0)
%
Other
5
4
1
25.0
%
Total
Other Operating Expense
$
47
$
41
$
6
14.6
%
•Unutilized firm transportation and processing fees represent pipeline transportation capacity obtained to enable gas production to flow uninterrupted as sales volumes increase, as well as additional processing capacity for NGLs.
The increase of $6 million in the period-to-period comparison was primarily due to previously acquired capacity which was not utilized during the current period to transport the Company's flowing production or to process the Company’s wet natural gas production. The increase in unutilized capacity results in part from the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. In some instances, the Company may have the opportunity to realize more favorable net pricing by strategically choosing to sell natural gas into a market or to a customer that does not require the use of the
Company’s own firm transportation capacity. Such sales would increase unutilized firm transportation expense. The Company attempts to minimize this expense by releasing (selling) unutilized firm transportation capacity to other parties when possible and when beneficial. The revenue received when this capacity is released (sold) is included in Gathering Income in Total Other Operating Income above. There were no unutilized fees related to the Midstream Division during the six months ended June 30, 2020 or 2019.
Selling, General and Administrative
SG&A costs represent direct charges for the management and operation of CNX's E&P division. SG&A costs were
$44 million for the six months ended June 30, 2020 compared to $74 million for the six months ended June 30, 2019. Refer to the discussion of total company SG&A costs contained in the section "Net (Loss) Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Interest Expense
Interest expense of $78 million was recognized in the six months ended June 30, 2020 compared to $61 million in the six months ended June 30, 2019. The $17 million increase was primarily due to realized and unrealized
losses on interest rate swap agreements during the six months ended June 30, 2020. The addition of $345 million of convertible senior notes due 2026, the addition of the $125 million Cardinal States Facility and the $50 million CSG Holdings Facility all in the current period also contributed to the increase. These increases were offset in part by the purchase of $400 million of the outstanding 5.875% senior notes due in April 2022 during the three months ended March 31, 2019 and the purchase of $71 million during the three months ended March 31, 2020, as well as lower borrowings on the CNX credit facility. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
63
TOTAL
MIDSTREAM DIVISION ANALYSIS for the six months ended June 30, 2020 compared to the six months ended June 30, 2019:
CNX's Midstream Division's principal activity is the ownership, operation, development and acquisition of natural gas gathering and other midstream energy assets of CNX Gathering and CNXM, which provide natural gas gathering services for the Company's produced gas, as well as for other independent third-parties in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia. Excluded from the Midstream Division are the gathering assets and operations of CNX that have not been contributed to CNX Gathering and CNXM.
Prior
to the IDR Elimination Transaction, CNX Gathering held all of the interests in CNX Midstream GP LLC, which held both the general partner and limited partner interests in CNXM. CNX has owned and controlled 100% of CNX Gathering LLC, since January 2018 making CNXM a single-sponsor master limited partnership and thus the Company consolidates CNXM.
For the Six Months Ended June 30,
(in
millions)
2020
2019
Variance
Midstream Revenue - Related Party
$
117
$
114
$
3
Midstream Revenue - Third Party
30
37
(7)
Total
Revenue
$
147
$
151
$
(4)
Transportation, Gathering and Compression
$
23
$
24
$
(1)
Depreciation,
Depletion and Amortization
21
16
5
Impairment of Goodwill
473
—
473
Selling, General, and Administrative Costs
9
11
(2)
Total
Operating Costs and Expenses
526
51
475
Other Expense
1
1
—
Loss on Asset Sales and Abandonments, net
2
7
(5)
Interest
Expense
17
15
2
Total Midstream Division Costs
546
74
472
(Loss) Earnings Before Income Tax
$
(399)
$
77
$
(476)
Midstream
Revenue
Midstream revenue consists of revenue related to volumes gathered on behalf of CNX and other third-party natural gas producers. CNXM charges a higher fee for natural gas that is shipped on its wet system compared to gas shipped through its dry system. CNXM revenue can also be impacted by the relative mix of gathered volumes by area, which may vary depending upon delivery point and may change dynamically depending on commodity prices at time of shipment. Total Midstream revenue decreased $4 million primarily due to a 32.2% decrease in gathered volumes of wet gas, offset in part by an increase of 25.1% in gathered volumes of dry gas in the period-to-period comparison. The decrease was the result of temporary production curtailments by related party and third party customers that reduced the wet gas gathering revenue. This decrease was offset in part by well turn-in-line activity
that occurred over the past twelve months.
The table below summarizes volumes gathered by gas type:
(*) Classification as dry or wet is based upon the shipping destination of the related volumes. Because CNXM's customers have the option to ship a portion of their natural gas to destinations associated with either our wet system or our dry system, due to any number of factors, volumes may be classified as “wet” in one period and as “dry” in the comparative period.
(**) Includes condensate handling and third-party volumes under high-pressure short-haul agreements.
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Transportation,
Gathering and Compression
Transportation, Gathering and Compression costs were $23 million for the six months ended June 30, 2020 compared to $24 million for the six months ended June 30, 2019, and are comprised of items directly related to the cost of gathering natural gas at the wellhead and transporting it to interstate pipelines or other local sales points. These costs include items such as electrically-powered compression, compressor rental, repairs and maintenance, supplies, treating and contract services.
Selling, General and Administrative Expense
SG&A
expense is comprised of direct charges for the management and operation of CNXM assets. SG&A costs were $9 million for the six months ended June 30, 2020 compared to $11 million for the six months ended June 30, 2019. Refer to the discussion of total Company SG&A costs contained in the section "Net (Loss) Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Depreciation, Depletion and Amortization Expense
Depreciation expense is recognized on gathering and other equipment on a straight-line basis, with useful lives ranging from 25 years to 40 years.
Impairment
of Goodwill
In connection with the Midstream Acquisition that closed on January 3, 2018, CNX recorded $796 million of goodwill.
Goodwill is tested for impairment annually during the fourth quarter, or more frequently if recent events or prevailing conditions indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount using the qualitative assessment, a quantitative impairment test is performed. From time to time, CNX may also bypass the qualitative assessment and proceed directly to the quantitative impairment test.
In
connection with CNX's assessment of goodwill in the first quarter of 2020 in relation to the deteriorating macroeconomic conditions, and the decline in the observable market value of CNXM securities both in relation to the COVID-19 pandemic and the overall decline in the MLP market space, CNX bypassed the qualitative assessment and performed a quantitative test that utilized a combination of the income and market approaches to estimate the fair value of the Midstream reporting unit. As a result of this assessment, CNX concluded that the carrying value exceed its estimated fair value, and as a result, an impairment of $473 million was included in Impairment of Goodwill in the Consolidated Statement of Income. No such impairment occurred in the prior period. See Note 6 - Goodwill and Other Intangible Assets in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Loss
on Asset Sales and Abandonments, net
During the six months ended June 30, 2020, due to ongoing assessments of projects that generate the highest returns on invested capital, CNXM abandoned the construction of a pipeline project that was designed to support additional production within certain operating areas, as well as land right-of-ways, resulting in a loss of $2 million that is included in (Gain) Loss on Assets Sales and Abandonments, net in the Consolidated Statements of Income.
During the six months ended June 30, 2019, CNXM abandoned the construction of a compressor station that was designed to support additional production within certain areas of their "Anchor Systems," incurring a loss of
$7 million that is included in (Gain) Loss on Asset Sales and Abandonments, net in the Consolidated Statements of Income.
Interest Expense
Interest expense is comprised of interest on the outstanding balance under CNXM's senior notes due 2026 and its revolving credit facility. Interest expense was $17 million for the six months ended June 30, 2020 compared to $15 million for the six months ended June 30, 2019. The increase in the period-to-period comparison was due to additional borrowings on the revolving credit facility.
65
Liquidity
and Capital Resources
CNX generally has satisfied its working capital requirements and funded its capital expenditures and debt service obligations with cash generated from operations and proceeds from borrowings. CNX currently believes that cash generated from operations, asset sales and the Company's borrowing capacity will be sufficient to meet the Company's working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments and to provide required letters of credit for the next fiscal year. Nevertheless, the ability of CNX
to satisfy its working capital requirements, to service its debt obligations, to fund planned capital expenditures, or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the natural gas industry and other financial and business factors, including the current COVID 19 pandemic, some of which are beyond CNX’s control.
From time to time, CNX is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies' statutes and regulations. CNX sometimes uses letters of credit to satisfy these requirements and these letters of credit reduce the Company's borrowing facility capacity.
CNX
continuously reviews its liquidity and capital resources. If market conditions were to change, for instance due to the significant decline in oil prices or uncertainty created by the COVID-19 pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced.
As of June 30, 2020, CNX was in compliance with all of its debt covenants. After considering the current and potential effect of the significant decline in oil prices, current and expected future natural gas prices, and uncertainty created by the COVID-19 pandemic on its operations, CNX currently expects to remain in compliance with its debt covenants.
In order to manage the market risk exposure of volatile natural gas prices in the future, CNX enters into
various physical natural gas supply transactions with both gas marketers and end users for terms varying in length. CNX has also entered into various natural gas swap and option transactions, which exist parallel to the underlying physical transactions. The fair value of these contracts was a net asset of $164 million at June 30, 2020 and a net asset of $406 million at December 31, 2019. The Company has not experienced any issues of non-performance by derivative counterparties.
CNX frequently evaluates potential acquisitions. CNX has funded acquisitions with cash generated from operations and a variety of other sources, depending on the size of the
transaction, including debt and equity financing. There can be no assurance that additional capital resources, including debt and equity financing, will be available to CNX on terms which CNX finds acceptable, or at all.
Cash
flows from operating activities changed in the period-to-period comparison primarily due to the following items:
•Net income decreased $564 million in the period-to-period comparison.
•Adjustments to reconcile net income to cash provided by operating activities primarily consisted of a $473 million impairment of goodwill, a $62 million impairment of exploration and production properties, a $155 million change in deferred income taxes, a $298 million net change in commodity derivative instruments, a $25 million decrease in stock-based compensation expense, a $21 million increase in gain on asset sales and abandonments, and a $19 million increase in the gain on debt extinguishment.
Cash flows from investing activities
changed in the period-to-period comparison primarily due to the following items:
•Capital expenditures decreased $341 million in the period-to-period comparison primarily due to decreased expenditures in the Utica and Marcellus Shale segments resulting from decreased drilling and completions activity. CNXM's capital expenditures decreased due primarily to the substantial build out that was completed during 2019.
•Proceeds from asset sales increased $19 million mainly due to increased surface sales and oil and gas assignment sales in the six months ended June 30, 2020.
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Cash
flows from financing activities changed in the period-to-period comparison primarily due to the following items:
•During the six months ended June 30, 2020, CNX paid $469 million to purchase $481 million of senior notes due in 2022 at 97.5% of the principal amount. During the six months ended June 30, 2019, CNX paid $406 million to purchase $400 million of the senior notes due in 2022 at 101.5% of the principal amount. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•In the six months ended June 30, 2020, there were $7 million of net proceeds from
the CNXM credit facility compared to $124 million of net proceeds during the six months ended June 30, 2019.
•In the six months ended June 30, 2020, there were $111 million of net payments on the CNX credit facility compared to $18 million of net proceeds during the six months ended June 30, 2019.
•During the six months ended June 30, 2019, CNX received proceeds of $500 million from the issuance of senior notes due in 2027. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•In
the six months ended June 30, 2020 there were $170 million of net proceeds from the Cardinal States Gathering LLC and CSG Holdings II LLC non-revolving credit facilities. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•During the six months ended June 20, 2020, CNX received proceeds of $335 million from the issuance of convertible senior notes due in 2026. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•During the six months ended June 20, 2020, CNX paid $36 million for capped call transactions
related to the issuance of the convertible debt as mentioned above. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•In the six months ended June 30, 2019, CNX repurchased $110 million of its common stock on the open market compared to no purchases in the six months ended June 30, 2020.
•Debt issuance and financing fees increased $2 million primarily due to the fees associated with the borrowings on the Cardinal States Gathering LLC and CSG Holdings II LLC non-revolving credit facilities as well as the issuance of the convertible senior notes.
The
following is a summary of the Company's significant contractual obligations at June 30, 2020 (in thousands):
Payments
due by Year
Less Than 1 Year
1-3 Years
3-5 Years
More Than 5 Years
Total
Purchase
Order Firm Commitments
$
806
$
1,293
$
—
$
—
$
2,099
Gas Firm Transportation and Processing
243,011
440,654
373,821
976,664
2,034,150
Long-Term
Debt
22,430
461,095
915,430
1,178,736
2,577,691
Interest on Long-Term Debt
124,723
221,675
165,167
111,933
623,498
Finance
Lease Obligations
7,295
3,857
368
—
11,520
Interest on Finance Lease Obligations
525
111
27
—
663
Operating
Lease Obligations
52,110
48,154
7,283
24,264
131,811
Interest on Operating Lease Obligations
4,588
4,475
2,802
4,131
15,996
Long-Term
Liabilities—Employee Related (a)
1,840
3,950
4,538
31,574
41,902
Other Long-Term Liabilities (b)
216,603
15,875
14,250
32,418
279,146
Total
Contractual Obligations (c)
$
673,931
$
1,201,139
$
1,483,686
$
2,359,720
$
5,718,476
_________________________
(a)Employee
related long-term liabilities include salaried retirement contributions and work-related injuries and illnesses.
(b)Other long-term liabilities include royalties and other long-term liability costs.
(c)The significant obligation table does not include obligations to taxing authorities due to the uncertainty surrounding the ultimate settlement of amounts and timing of these obligations.
67
Debt
At
June 30, 2020, CNX had total long-term debt of $2,578 million, including the current portion of long-term debt of $22 million and excluding unamortized debt issuance costs. This long-term debt consisted of:
•An aggregate principal amount of $550 million in outstanding borrowings under the CNX Revolving Credit Facility.
•An aggregate principal amount of $500 million of 7.25% senior notes due in March 2027. Interest on the notes is payable March 14 and September 14 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM or CSG Holdings III LLC (or its subsidiaries).
•An
aggregate principal amount of $413 million of 5.875% senior notes due in April 2022 plus a nominal unamortized bond premium. Interest on the notes is payable April 15 and October 15 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner) or CSG Holdings III LLC (or its subsidiaries).
•An aggregate principal amount of $400 million of 6.50% senior notes due in March 2026 issued by CNXM, less $4 million of unamortized bond discount. Interest on the notes is payable March 15 and September 15 of each year. Payment of
the principal and interest on the notes is guaranteed by certain of CNXM's subsidiaries. CNX is not a guarantor of these notes.
•An aggregate principal amount of $345 million of 2.25% senior notes due in May 2026, unless earlier redeemed, repurchased, or converted, less $115 million of unamortized bond discount and issuance costs. Interest on the notes is payable May 1 and November 1 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner) or CSG Holdings III LLC (or its subsidiaries).
•An
aggregate principal amount of $319 million in outstanding borrowings under the CNXM revolver. CNX is not a guarantor of CNXM's revolving credit facility.
•Cardinal States Gathering Company Credit Facility of $123 million less $1 million of unamortized discount. Interest and a portion of the obligation are paid quarterly.
•CSG Holdings II LLC Credit Facility of $49 million less $1 million unamortized discount. Interest and a portion of the obligation are paid quarterly.
Total Equity and Dividends
CNX had total equity of $4,567 million at June 30,
2020 compared to $4,962 million at December 31, 2019. See the Consolidated Statements of Stockholders' Equity in Item 1 of this Form 10-Q for additional details.
The declaration and payment of dividends by CNX is subject to the discretion of CNX's Board of Directors, and no assurance can be given that CNX will pay dividends in the future. CNX's Board of Directors determines whether dividends will be paid quarterly. CNX suspended its quarterly dividend in March 2016 to further reflect the Company's increased emphasis on growth. The determination to pay dividends in the future will depend upon, among other things, general business conditions, CNX's financial results, contractual and legal restrictions regarding the payment of dividends by CNX, planned investments by CNX, and such other factors
as the Board of Directors deems relevant. The Company's Credit Facility limits CNX's ability to pay dividends in excess of an annual rate of $0.10 per share when the Company's net leverage ratio exceeds 3.00 to 1.00 and is subject to availability under the Credit Facility of at least 15% of the aggregate commitments. The net leverage ratio was 2.38 to 1.00 at June 30, 2020. The Credit Facility does not permit dividend payments in the event of default. The indentures to the 5.875% senior notes due in April 2022 and the 7.25% senior notes due in March 2027 limit dividends to $0.50 per share annually unless several conditions are met. These conditions include no
defaults, ability to incur additional debt and other payment limitations under the indentures. There were no defaults in the six months ended June 30, 2020.
On July 27, 2020 the Board of Directors of CNX Midstream GP LLC, the general partner of CNX Midstream Partners LP, announced the declaration of a cash distribution of $0.50 per unit with respect to the second quarter of 2020. The distribution will be made on August 14, 2020 to unitholders of record as of the close of business on August 7, 2020.
Off-Balance
Sheet Transactions
CNX does not maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the Notes to the Unaudited Consolidated Financial Statements. CNX uses a combination of surety bonds, corporate guarantees and letters of credit to secure the Company's financial obligations for employee-related, environmental, performance and various other items which are not reflected in the Consolidated
Balance Sheet at June 30, 2020. Management believes these items will expire without being funded. See Note 10 - Commitments and Contingent
68
Liabilities in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional details of the various financial guarantees that have been issued by CNX.
Critical Accounting Policies (Interim Update)
Convertible Senior Notes
The
Convertible Senior Notes due May 2026 ("Convertible Notes") are accounted for in accordance with FASB ASC Subtopic 470-20, Debt with Conversion and Other Options. Pursuant to ASC Subtopic 470-20, issuers of certain convertible debt instruments, such as the Convertible Notes, that have a net settlement feature and may be settled wholly or partially in cash upon conversion are required to separately account for the liability (debt) and equity (conversion option) components of the instrument. The carrying amount of the liability component of the instrument is computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of
the Convertible Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the Convertible Notes, the allocation of issuance costs incurred between the liability and equity components was based on their relative values.
Forward-Looking Statements
We are including the following cautionary statement in this Quarterly Report on Form 10-Q to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of us. With the exception of historical matters,
the matters discussed in this Quarterly Report on Form 10-Q are forward-looking statements (as defined in Section 21E of the Exchange Act) that involve risks and uncertainties that could cause actual results to differ materially from projected results. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future production, revenues, income and capital spending. When we use the words “believe,”“intend,”“expect,”“may,”“should,”“anticipate,”“could,”“estimate,”“plan,”“predict,”“project,”"will," or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. When we describe a strategy that involves risks or uncertainties,
we are making forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
•prices for natural gas and natural gas liquids are volatile
and can fluctuate widely based upon a number of factors beyond our control including oversupply relative to the demand for our products, weather and the price and availability of alternative fuels;
•our dependence on gathering, processing and transportation facilities and other midstream facilities owned by CNX Midstream Partners LP (NYSE: CNXM) (CNXM) and others;
•uncertainties in estimating our economically recoverable natural gas reserves, and inaccuracies in our estimates;
•the high-risk nature of drilling, developing and operating natural gas wells;
•our identified drilling locations are scheduled out over multiple years, making them susceptible to uncertainties that could materially alter
the occurrence or timing of their development or drilling;
•challenges associated with strategic determinations, including the allocation of capital and other resources to strategic opportunities;
•the substantial capital expenditures required for our development and exploration projects, as well as CNXM’s midstream system development;
•the impact of potential, as well as any adopted, environmental regulations, including those relating to greenhouse gas emissions;
•environmental regulations can increase costs and introduce uncertainty that could adversely impact the market for natural gas with potential short and long-term liabilities;
•decreases
in the availability of, or increases in the price of, required personnel, services, equipment, parts and raw materials in sufficient quantities or at reasonable costs to support our operations;
69
•if natural gas prices decrease or drilling efforts are unsuccessful, we may be required to record write-downs of our proved natural gas properties;
•the availability of storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane;
•changes in assumptions impacting management’s estimates of future financial results as well as other
assumptions such as movement in our stock price, weighted-average cost of capital, terminal growth rates and industry multiples, could cause goodwill and other intangible assets we hold to become impaired and result in material non-cash charges to earnings;
•a loss of our competitive position because of the competitive nature of the natural gas industry, consolidation within the industry or overcapacity in the industry adversely affecting our ability to sell our products and midstream services;
•deterioration in the economic conditions in any of the industries in which our customers operate, a domestic or worldwide financial downturn, or negative credit market conditions;
•the impact of outbreaks of communicable diseases such as the novel highly transmissible and
pathogenic coronavirus (“COVID-19”) on business activity, the Company’s operations and national and global economic conditions, generally;
•hedging activities may prevent us from benefiting from price increases and may expose us to other risks;
•existing and future government laws, regulations and other legal requirements and judicial decisions that govern our business may increase our costs of doing business and may restrict our operations;
•significant costs and liabilities may be incurred as a result of pipeline operations and related increase in the regulation of gas gathering pipelines;
•our
ability to find adequate water sources for our use in shale gas drilling and production operations, or our ability to dispose of, transport or recycle water used or removed in connection with our gas operations at a reasonable cost and within applicable environmental rules;
•failure to successfully estimate the rate of decline or existing reserves or to find or acquire economically recoverable natural gas reserves to replace our current natural gas reserves;
•risks associated with our current long-term debt obligations;
•a decrease in our borrowing base, which could decrease for a variety of reasons including lower natural gas prices, declines in natural gas proved reserves, asset sales and lending requirements or regulations;
•changes
in federal or state income tax laws;
•cyber-incidents could have a material adverse effect on our business, financial condition or results of operations;
•construction of new gathering, compression, dehydration, treating or other midstream assets by CNXM may not result in revenue increases and may be subject to regulatory, environmental, political, legal and economic risks;
•our success depends on key members of our management and our ability to attract and retain experienced technical and other professional personnel;
•terrorist activities could materially adversely affect our business and results of operations;
•we may operate
a portion of our business with one or more joint venture partners or in circumstances where we are not the operator, which may restrict our operational and corporate flexibility and we may not realize the benefits we expect to realize from a joint venture;
•acquisitions and divestitures, we anticipate may not occur or produce anticipated benefits;
•the outcomes of various legal proceedings, including those which are more fully described in our reports filed under the Exchange Act;
•there is no guarantee that we will continue to repurchase shares of our common stock under our current or any future share repurchase program at levels undertaken previously or at all;
•negative public perception regarding
our industry could have an adverse effect on our operations;
•CONSOL Energy may not be able to satisfy its indemnification obligations in the future and such indemnities may not be sufficient to hold us harmless from the full amount of liabilities for which CONSOL Energy will be allocated responsibility;
•Risks associated with our issuance of Convertible Notes, including the potential impact that the Convertible Notes may have on our reported financial results, potential dilution, our ability to raise funds to repurchase the Convertible Notes, and that provisions of the Convertible Notes could delay or prevent a beneficial takeover of the Company;
•the potential impact of the capped
call transaction undertaken in tandem with the Convertible Note issuance, including counterparty risk;
•the possibility that the market price of the Company's common stock will fluctuate prior to the completion of the Merger causing the value of the merger consideration to change;
•the risk that a condition to the closing of the Merger may not be satisfied on a timely basis, if at all;
•the timing of the completion of the Merger;
70
•the
substantial transaction-related costs that may be incurred by the Company and the Partnership in connection with the Merger;
•the possibility that the Company and the Partnership may, under certain specified circumstances, be responsible for the other party's expenses;
•the possibility that Company and the Partnership may be the targets of securities class actions and derivative lawsuits;
•the limited duties the partnership agreement places on the General Partner for actions taken by the General Partner;
•the risk that certain
officers and directors of the Company and the General Partner have interests in the Merger that are different from, or in addition to, the interests they may have as the Partnership's unitholders or the Company's stockholders, respectively;
•the possibility that financial projections by the Company and the Partnership may not prove to be reflective of actual future results; and
•certain other factors addressed in this report.
Although forward-looking statements reflect our good faith beliefs at the time
they are made, they involve known and unknown risks, uncertainties and other factors. For more information concerning factors that could cause actual results to differ materially from those conveyed in the forward-looking statements, including, among others, that our business plans may change as circumstances warrant, please refer to the “Risk Factors” and “Forward-Looking Statements” sections of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Commission on February 10, 2020 and subsequent Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.
ITEM
3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in operations, CNX is exposed to financial, market, political and economic risks. The following discussion provides additional detail regarding CNX's exposure to the risks of changing commodity prices, interest rates and foreign exchange rates.
CNX is exposed to market price risk in the normal course of selling natural gas and liquids. CNX uses fixed-price contracts, options and derivative commodity instruments (over-the-counter swaps) to minimize exposure to market price volatility in the sale of natural gas. Under our risk management policy, it is not our intent to engage in derivative activities
for speculative purposes. Typically, CNX “sells” swaps under which it receives a fixed price from counterparties and pays a floating market price. During the second quarter of 2020, CNX purchased, rather than sold, financial swaps for the period May through November of 2020 under which CNX will pay a fixed price to and receive a floating price from its hedge counterparties.
CNX has established risk management policies and procedures to strengthen the internal control environment of the marketing of commodities produced from its asset base. All of the derivative instruments without other risk assessment procedures are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility and cover underlying exposures. The Company's market risk strategy incorporates
fundamental risk management tools to assess market price risk and establish a framework in which management can maintain a portfolio of transactions within pre-defined risk parameters.
CNX believes that the use of derivative instruments, along with our risk assessment procedures and internal controls, mitigates our exposure to material risks. The use of derivative instruments without other risk assessment procedures could materially affect the Company's results of operations depending on market prices; however, we believe that use of these instruments will not have a material adverse effect on our financial position or liquidity due to our risk assessment procedures and internal controls.
For a summary of accounting
policies related to derivative instruments, see Note 1—Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of CNX's 2019 Annual Report on Form 10-K.
At June 30, 2020 and December 31, 2019, our open gas derivative instruments were in a net asset position with a fair value of $164 million and $406 million, respectively. A sensitivity analysis has been performed to determine the incremental effect on future earnings related to open derivative instruments at June 30, 2020 and December 31, 2019. A hypothetical 10 percent increase in future natural gas prices would have decreased the fair value by $361 million and $383 million at June 30,
2020 and December 31, 2019, respectively. A hypothetical 10 percent decrease in future natural gas prices would have increased the fair value by $339 million and $402 million at June 30, 2020 and December 31, 2019, respectively.
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CNX's interest expense is sensitive to changes in the general level of interest rates in the United States. The Company uses derivative instruments to manage risk related to interest rates. At June 30, 2020 and December 31,
2019, CNX had $1,544 million and $1,797 million, respectively, aggregate principal amount of debt outstanding under fixed-rate instruments, including unamortized debt issuance costs of $7 million and $9 million, respectively. At June 30, 2020 and December 31, 2019, CNX had $1,031 million and $973 million, respectively, of debt outstanding under variable-rate instruments, including unamortized debt issuance costs of $8 million at June 30, 2020. CNX’s primary exposure to market risk for changes in interest rates relates to our Credit Facility, under which there were $550 million of borrowings at June 30, 2020 and $661 million at December 31, 2019, CNXM's revolving credit facility, under which there were $319 million of
borrowings at June 30, 2020 and $312 million at December 31, 2019, and the Cardinal States Gathering LLC and CSG Holdings II LLC Credit Agreements, under which there were $171 million of borrowings at June 30, 2020. A hypothetical 100 basis-point increase in the average rate for CNX's variable-rate instruments would decrease pre-tax future earnings as of June 30, 2020 and December 31, 2019 by $10 million on an annualized basis.
All of the Company’s transactions are denominated in U.S. dollars and, as a result, it does not have material exposure to currency
exchange-rate risks.
Natural Gas Hedging Volumes
As of July 8, 2020, our hedged volumes for the periods indicated are as follows:
For
the Three Months Ended
March 31,
June 30,
September 30,
December 31,
Total Year
2020 Fixed Price Volumes*
Hedged
Bcf
N/A
N/A
105.2
120.8
226.0
Weighted Average Hedge Price per Mcf
N/A
N/A
$
2.47
$
2.56
$
2.52
2021
Fixed Price Volumes
Hedged Bcf
118.8
111.2
112.5
111.6
454.1
Weighted
Average Hedge Price per Mcf
$
2.54
$
2.42
$
2.42
$
2.45
$
2.46
2022 Fixed Price Volumes
Hedged
Bcf
84.7
82.1
83.0
80.3
330.1
Weighted Average Hedge Price per Mcf
$
2.38
$
2.30
$
2.30
$
2.28
$
2.32
2023
Fixed Price Volumes
Hedged Bcf
48.4
48.9
49.5
49.5
196.3
Weighted
Average Hedge Price per Mcf
$
2.28
$
2.24
$
2.24
$
2.26
$
2.26
2024 Fixed Price Volumes
Hedged
Bcf
45.8
42.9
43.4
43.4
175.5
Weighted Average Hedge Price per Mcf
$
2.37
$
2.30
$
2.30
$
2.30
$
2.32
2025
Fixed Price Volumes
Hedged Bcf
15.3
15.5
15.7
15.7
62.2
Weighted
Average Hedge Price per Mcf
$
2.08
$
2.08
$
2.08
$
2.08
$
2.08
*Excludes purchased swaps. The
Company's purchased swaps are as follows:
**Quarterly volumes do not add
to annual volumes inasmuch as a discrete condition in individual quarters, where basis hedge volumes exceed NYMEX hedge volumes, does not exist for the year taken as a whole.
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ITEM 4.CONTROLS AND PROCEDURES
Disclosure controls and procedures. CNX, under the supervision and with the participation
of its management, including CNX’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, CNX’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2020 to ensure that information required to be disclosed by CNX in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms, and includes controls and procedures designed to ensure that information required to be disclosed by CNX in such reports is accumulated and communicated to CNX’s management, including CNX’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal controls over financial reporting. There were no changes in the Company's internal controls over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART II: OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The first paragraph of Note 10—Commitments and Contingent Liabilities in the Notes to the Unaudited Consolidated Financial Statements included in Item 1 of this Form 10-Q is incorporated herein by reference.
Environmental Proceedings
From
time to time, CNX and the Pennsylvania Department of Environmental Protection ("PA DEP") enter into agreements regarding notices of violation issued by the PA DEP. With respect to the subsurface pressure anomaly experienced at one of our Utica wells in January 2019, CNX and the PA DEP are negotiating a consent order and agreement, which we expect to be immaterial to CNX’s financial statements.
ITEM 1A. RISK FACTORS
CNX is also subject to additional risks and hazards due to the nature of the business activities it conducts. For a discussion of these risks, see “Item 1A. Risk Factors” in CNX's 2019 Annual Report on Form 10-K as filed with the SEC on February 10,
2020 ("2019 Form 10-K"). The risks described in the 2019 Form 10-K could materially and adversely affect CNX's business, financial condition, cash flows, and results of operations. Other than as set forth below, there have been no additional material changes to the risks described in the 2019 Form 10-K. CNX may experience additional risks and uncertainties not currently known; or, as a result of developments occurring in the future, conditions that are currently deemed to be immaterial may also materially and adversely affect CNX's business, financial condition, cash flows, and results of operations.
Events beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.
The recent outbreak of the coronavirus pandemic (COVID-19) has affected, and
may materially and adversely affect, our business, operating and financial results and liquidity. The severity, magnitude and duration of the current COVID-19 outbreak remains uncertain, but continues to be rapidly changing and hard to predict. While the full impact of this virus and the long-term worldwide reaction to it and impact from it remains unknown at this time, government reaction to the pandemic and restrictions and limitations applied by the government as a result, continued widespread growth in infections, travel restrictions, quarantines, or site closures as a result of the virus could, among other things, impact the ability of our employees and contractors to perform their duties, cause increased technology and security risk due to extended and company-wide telecommuting, lead to disruptions in our supply chain (including necessary contractors), lead to a disruption in our resource acquisition or permitting activities and cause disruption in our relationship
with our customers. Additionally, the COVID-19 outbreak has significantly impacted economic activity and markets around the world, and COVID-19 or another similar outbreak could negatively impact our business in numerous ways, including, but not limited to, the following:
•our revenue may be reduced if the outbreak results in an economic downturn or recession, as many experts predict, to the extent it leads to a prolonged decrease in the demand for natural gas and liquefied natural gas ("LNG") and, to a lesser extent, NGLs and oil;
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•our operations may be disrupted or impaired, thus lowering our
production level, if a significant portion of our employees or contractors are unable to work due to illness or if our field operations are suspended or temporarily shut-down or restricted due to control measures designed to contain the outbreak;
•the operations of our midstream service providers, on whom we rely for the transmission, gathering and processing of a significant portion of our produced natural gas, NGLs and oil, may be disrupted or suspended in response to containing the outbreak, and/or the difficult economic environment may lead to the bankruptcy or closing of the facilities and infrastructure of our midstream service providers, which may result in substantial discounts in the prices we receive for our produced natural gas, NGLs and oil or result in the shut-in of producing wells or the delay or discontinuance of development plans for our properties; and
•the
disruption and instability in the financial markets and the uncertainty in the general business environment may affect our ability to find attractive asset monetization opportunities and successfully execute our plan to deleverage our business on the timeframe previously anticipated or at all; for example, the market value of the assets to be monetized may be reduced and the financial condition or prospects of prospective purchasers and other counterparties, and such parties’ access to financing on acceptable terms, may be adversely affected.
In addition, the COVID-19 pandemic has increased volatility and caused negative pressure in the capital and credit markets. As a result, we may experience difficulty accessing the capital or financing needed to fund our exploration and production operations, which have substantial capital requirements, or refinance our upcoming maturities on satisfactory
terms or at all. We typically fund our capital expenditures with existing cash and cash generated by operations (which is subject to a number of variables, including many beyond our control) and, to the extent our capital expenditures exceed our cash resources, from borrowings under our revolving credit facility and other external sources of capital, we could be required to curtail our operations and the development of our properties, which in turn could lead to a decline in our reserves and production, and could adversely affect our business, results of operations and financial position.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December
31, 2019, such as those relating to our financial performance and debt obligations. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments that we are not able to predict, including the length of time that the pandemic continues, its effect on the demand for natural gas, LNG, NGLs and oil, the response of the overall economy and the financial markets as well as the effect of governmental actions taken in response to the pandemic. Any of these outcomes could have a material adverse effect on our business, operations, financial results and liquidity.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
Under
Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet at the issuance date and the value of the equity component would be treated as debt discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we will be required to record non-cash interest expense through the amortization of the excess of the face amount over the carrying amount of the expected life of the Convertible Notes. We will report
larger net losses (or lower net income) in our financial results because ASC 470-20 will require interest to include both the amortization of the debt discount and the instrument’s cash coupon interest rate, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash may be accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of such Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of such Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share
purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are included in the denominator for purposes of calculating diluted earnings per share. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable or otherwise elect not to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share could be adversely affected.
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The capped call transactions may affect the value of the Convertible Notes and our common
stock.
In connection with the pricing of the Convertible Notes, we entered into capped call transactions with certain financial institutions. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the Convertible Notes and/or offset any potential cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap.
In connection with establishing their initial hedges of the capped call transactions, these financial institutions or their respective affiliates purchased shares of our common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly
after the pricing of the Convertible Notes. These financial institutions or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Notes and prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes). This activity could also cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Notes.
The potential effect, if any, of these transactions and activities on the price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at this time. Any of these activities could adversely
affect the value of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions are financial institutions or affiliates of financial institutions, and we will be subject to the risk that they might default under the capped call transactions. Our exposure to the credit risk of the counterparties will not be secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If a counterparty becomes subject to insolvency proceedings, with respect to such option counterparty’s obligations under the relevant capped call transaction, we will become an unsecured creditor in those proceedings with a claim equal
to our exposure at that time under our transactions with that counterparty. Our exposure will depend on many factors, but, generally, the increase in our exposure will be positively correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by a counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any counterparty.
Conversion of the Convertible Notes may dilute the ownership interest of existing stockholders, including holders who had previously converted their Convertible Notes, or may otherwise depress the price of our common stock.
The conversion of some or all of the Convertible Notes
will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon conversion of any of the Convertible Notes and the potential dilution is not reduced or offset by the capped call transactions we entered into. The Convertible Notes may become convertible at the option of holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.
We may be unable to raise the funds
necessary to repurchase the Convertible Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the Convertible Notes or pay cash upon their conversion.
Noteholders may, subject to a limited exception, require us to repurchase their Convertible Notes following a fundamental change at a cash repurchase price generally equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Convertible Notes or pay the cash amounts due upon conversion. In
addition, applicable law, regulatory authorities and the agreements governing our other indebtedness, may restrict our ability to repurchase the Convertible Notes or pay the cash amounts due upon conversion. Our inability to satisfy our obligations under the Convertible Notes could harm our reputation and affect the trading price of our common stock.
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Our failure to repurchase the Convertible Notes or to pay the cash amounts due upon conversion when required will constitute a default under the indenture. A default under the indenture
or the occurrence of the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Convertible Notes.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert their Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation
by delivering solely common stock (other than paying cash in lieu of delivering any fractional shares), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
Provisions of our Convertible Notes could delay or prevent an otherwise beneficial takeover of us.
Certain provisions of our Convertible Notes and the indenture governing the Convertible Notes could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a “fundamental change” (as defined in the indenture),
then noteholders will have the right to require us to repurchase their Convertible Notes for cash. In addition, if a takeover constitutes a “make-whole fundamental change” (as defined in the indenture), then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Convertible Notes and the indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us, including in a transaction that noteholders or holders of our common stock may view as favorable.
In connection with the separation of our coal business, CONSOL Energy has agreed to indemnify us for certain liabilities, and we have agreed to
indemnify CONSOL Energy for certain liabilities. If we are required to pay under these indemnities to CONSOL Energy, our financial results could be negatively impacted. The CONSOL Energy indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which CONSOL Energy has been allocated responsibility, and CONSOL Energy may not be able to satisfy its indemnification obligations in the future.
Pursuant to the Separation and Distribution Agreement and certain other agreements with CONSOL Energy, CNX and CONSOL Energy have agreed to indemnify the other for certain liabilities in each case for uncapped amounts.
We remain liable as a guarantor on certain liabilities that were assumed by CONSOL Energy in connection with the separation. The estimated value of these guarantees was
approximately $175 million as of June 30, 2020. Although CONSOL Energy agreed to indemnify us to the extent that we are called upon to pay any of these liabilities, there is no assurance that CONSOL Energy will satisfy its obligations to indemnify us in these situations.
For example, we could be liable for liabilities assumed by Murray Energy and its subsidiaries (Murray Energy) in connection with the disposition of certain mines to Murray Energy in 2013 in the event that both Murray Energy and CONSOL Energy are unable to satisfy those liabilities.
Indemnities that CNX may be required to provide CONSOL Energy are not subject to any cap, may be significant and could
negatively impact our business. Third-parties could also seek to hold us responsible for any of the liabilities that CONSOL Energy has agreed to retain, including in respect of certain statutory obligations related to, among others, health and environmental matters. For example, see disclosure in Note 10 Commitments and Contingent Liabilities in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for information regarding a lawsuit filed by the UMWA 1992 Benefit Plan against CNX and CONSOL Energy in May 2020.
Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnity from CONSOL Energy may not be sufficient to protect us against the full amount of such liabilities, and CONSOL
Energy may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from CONSOL Energy any amounts for which we are held liable, CNX may be temporarily required to bear such losses. Each of these risks could negatively affect our business, results of operations and financial condition.
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The Merger is subject to conditions, including some conditions that may not be satisfied on a timely basis, if at all. Failure to complete the Merger, or significant delays in completing the Merger, could negatively affect each party’s future business and financial results and the trading prices of our common stock and the Partnership’s common units.
The
completion of the Merger is subject to a number of conditions. The completion of the Merger is not assured and is subject to risks. The Merger Agreement contains conditions, some of which are beyond the parties’ control, that, if not satisfied or waived, may prevent, delay or otherwise result in the Merger not occurring.
If the Merger is not completed, or if there are significant delays in completing the Merger, CNX’s and the Partnership’s future business and financial results and the trading prices of our common stock and the Partnership’s common units could be negatively affected, and each of the parties will be subject to several risks, including the following:
•the parties may be liable for fees or expenses up to $3.5 million to one another under the terms and conditions of the Merger
Agreement;
•there may be negative reactions from the financial markets due to the fact that current prices of our common stock and the Partnership’s common units may reflect a market assumption that the Merger will be completed; and
•the attention of our management will have been diverted to the Merger rather than their own operations and pursuit of other opportunities that could have been beneficial to their respective businesses.
Because the exchange ratio is fixed and because the market price of our common stock will fluctuate prior to the completion of the Merger, the Partnership’s common unitholders cannot be sure of the market value of the CNX common stock they will receive as merger consideration relative to the value of the Partnership’s common
units they exchange.
The market value of the consideration that the Partnership’s common unitholders will receive in the Merger will depend on the trading price of our common stock at the closing of the Merger. The exchange ratio that determines the number of shares of our common stock that the Partnership’s common unitholders will receive in the Merger is fixed at 0.88 shares of our common stock for each of the Partnership’s common unit. This means that there is no mechanism contained in the Merger Agreement that would adjust the number of shares of our common stock that the Partnership’s common unitholders will receive based on any decreases or increases in the trading price of our common stock. Stock or unit price changes may result from a variety of factors (many of which are beyond our and the Partnership’s control), including:
•changes
in our or the Partnership’s business, operations and prospects;
•changes in market assessments of our or the Partnership’s business, operations and prospects;
•changes in market assessments of the likelihood that the Merger will be completed;
•interest rates, commodity prices, general market, industry and economic conditions and other factors generally affecting the price of our common stock or the Partnership’s common units; and
•federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and the Partnership operate.
If the price of our common stock at the closing of the
Merger is less than the price of our common stock on the date that the Merger Agreement was signed, then the market value of the merger consideration will be less than contemplated at the time the Merger Agreement was signed.
The date the Partnership’s common unitholders will receive the merger consideration depends on the completion date of the Merger, which is uncertain.
Completing the Merger is subject to several conditions, not all of which are controllable by us or the Partnership. Accordingly, the date on which common unitholders will receive merger consideration depends on the completion date of the Merger, which is uncertain and subject to several other closing conditions.
We and the Partnership may incur substantial transaction-related
costs in connection with the Merger.
We and the Partnership expect to incur substantial expenses in connection with completing the Merger, including fees paid to legal, financial and accounting advisors, filing fees, proxy solicitation costs and printing costs. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time.
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Certain executive officers and directors of CNX Midstream GP LLC and CNX have interests in the Merger that are different from, or in addition to, the interests they may have as the Partnership’s common unitholders
or our stockholders, respectively, which could have influenced their decision to support or approve the Merger.
Certain executive officers and directors of CNX Midstream GP LLC own equity interests in us, receive fees and other compensation from us and will have rights to ongoing indemnification and insurance coverage by the surviving company that give them interests in the Merger that may be different from, or be in addition to, interests of an unaffiliated unitholder of the Partnership.
Additionally, certain of our executive officers and directors beneficially own Partnership common units and will receive the applicable merger consideration upon completion of the Merger, receive fees and other compensation from us and are entitled to indemnification arrangements with us that give them interests in the Merger that
may be different from, or be in addition to, interests a holder of our common stock may have as an CNX stockholder.
Financial projections by us and the Partnership may not prove to be reflective of actual future results.
In connection with the Merger, we and the Partnership prepared and considered, among other things, internal financial forecasts for CNX and the Partnership, respectively. These forecasts speak only as of the date made and will not be updated. These financial projections were not provided with a view to public disclosure, are subject to significant economic, competitive, industry and other uncertainties and may not be achieved in full, at all or within projected time frames. In addition, the failure of businesses to achieve projected results could have a material adverse effect on our share price and financial
position following the Merger.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no issuer purchases of equity securities in the second quarter of fiscal year 2020. Since the October 30, 2017 inception of the current stock repurchases, CNX's Board of Directors has approved up to $750 million of repurchases, which is not subject to an expiration date. As of June 30, 2020, approximately $148.5 million remained available under the stock repurchase program. The stock repurchase program does not obligate the Company to repurchase
any dollar amount or number of shares and the Board may modify, suspend, or discontinue its authorization of the program at any time. See Note 15 - Stock Repurchase in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for more information.
See Part III. Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" included in CNX Resources Corporation's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 10, 2020 for information relating to CNX's equity compensation plans.
XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
