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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 abbreviations of certain measurement terms 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.
proved reserves - quantities of oil, natural gas, and NGLs 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.
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, 186,586,751 Issued and Outstanding at September 30, 2019; 198,663,342 Issued and Outstanding at December 31, 2018
i1,870
i1,990
Capital
in Excess of Par Value
i2,197,783
i2,264,063
Preferred
Stock, 15,000,000 shares authorized, None issued and outstanding
i—
i—
Retained
Earnings
i2,243,104
i2,071,809
Accumulated
Other Comprehensive Loss
(i7,778
)
(i7,904
)
Total
CNX Resources Stockholders’ Equity
i4,434,979
i4,329,958
Noncontrolling
Interest
i786,839
i751,785
TOTAL
STOCKHOLDERS' EQUITY
i5,221,818
i5,081,743
TOTAL
LIABILITIES AND EQUITY
$
i9,286,258
$
i8,592,170
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 nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for future periods.
The Consolidated Balance Sheet at December 31, 2018 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, 2018 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 7, 2019.
Certain amounts in prior periods have been reclassified to conform to the current period presentation.
The Consolidated Balance Sheet at September 30, 2019 reflects the full consolidation of CNX Gathering LLC's assets and liabilities
as a result of the acquisition by CNX Gas Company LLC ("CNX Gas"), an indirect wholly owned subsidiary of CNX, of NBL Midstream, LLC's ("Noble") i50% interest in CNX Gathering LLC on January 3, 2018 (See Note 5 - Acquisitions and Dispositions for more information).
NOTE
2—iEARNINGS PER SHARE:
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 are computed similarly to basic earnings per share, except that the weighted average shares outstanding are increased to include additional shares from stock options, performance stock options, restricted stock units and performance share units, if dilutive. 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 nine months ended September 30, 2019, the three months ended September 30, 2018, or the period from January
3, 2018 through September 30, 2018.
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:
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 nine months ended September 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 than 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 2019 restricted stock unit and performance share unit awards.
The accelerated vesting resulted in $i19,654 of additional long-term equity-based compensation expense for the nine months ended September 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 earnings per share are as follows:
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, NGLs 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, NGLs 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, NGLs 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.
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.
12
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 Accounting Standards Codification (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 $i252,424
and $i96,997, respectively, as of September 30, 2019.
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, NGLs 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 $i155,567
as of September 30, 2019. The Company expects to recognize net revenue of $i43,538 in the next 12 months and $i47,076
over the following 12 months, with the remainder recognized thereafter.
For revenue associated with our 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.
13
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 amount 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 nine
months ended September 30, 2019 and 2018, revenue recognized in the current reporting period related to performance obligations satisfied in a prior reporting period was not material.
NOTE 5—iACQUISITIONS AND DISPOSITIONS:
On
August 31, 2018, CNX closed on the sale of substantially all of its Ohio Utica Joint Venture Assets in the wet gas Utica Shale areas of Belmont, Guernsey, Harrison, and Noble Counties, which included approximately 26,000 net undeveloped acres. The net cash proceeds of $i381,214 are included in Proceeds
from Asset Sales in the Consolidated Statements of Cash Flows and the net gain on the transaction of $i130,849 is included in the Gain on Asset Sales and Abandonments in the Consolidated Statements of Income.
OnMay
2, 2018, CNX closed on an Asset Exchange Agreement (the “AEA”) with HG Energy II Appalachia, LLC (“HG Energy”), pursuant to which, among other things, HG Energy (i) paid to CNX approximately $i7,000 and (ii) assigned to CNX certain undeveloped Marcellus and Utica acreage in Southwest Pennsylvania, in exchange for CNX (x) assigning its interest in certain non-core midstream assets and surface acreage to HG Energy and (y) releasing certain HG Energy oil and gas acreage from dedication under a gathering agreement that is
partially held, indirectly, by CNX.In connection with the transaction, CNX also agreed to certain transactions with CNXM, including the amendment of the existing gas gathering agreement between CNX and CNXM to increase the existing well commitment by an additional iforty wells. The net gain on the sale was $i286
and is included in the Gain on Asset Sales and Abandonments line of the Consolidated Statements of Income.
As a result of the AEA, CNX determined that the carrying value of a portion of the customer relationship intangible assets that were acquired in connection with the Midstream Acquisition discussed below (see also Note 8 - Goodwill and Other Intangible Assets) exceeded their fair value, and recognized an impairment of approximately $i18,650
which is included in the Impairment of Other Intangible Assets line of the Consolidated Statements of Income.
On March 30, 2018, CNX Gas completed the sale of substantially all of its shallow oil and gas assets and certain Coalbed Methane (CBM) assets in Pennsylvania and West Virginia for $i89,296
in cash consideration. In connection with the sale, the buyer assumed approximately $i196,514 of asset retirement obligations. The net gain on the sale was $i4,432
and is included in Gain on Asset Sales and Abandonments in the Consolidated Statements of Income for the nine months ended September 30, 2018.
On December 14, 2017, CNX Gas entered into a purchase agreement with Noble, pursuant to which CNX Gas acquired Noble’s i50%
membership interest in CONE Gathering LLC ("CNX Gathering"), for a cash purchase price of $i305,000 and the mutual release of all outstanding claims (the "Midstream Acquisition"). CNX Gathering owns a i100%
membership interest in CONE Midstream GP LLC (the "general partner"), which is the general partner of CONE Midstream Partners LP ("CNXM" or the "Partnership"), which is a publicly traded master limited partnership formed in May 2014 by CNX Gas and Noble. In conjunction with the Midstream Acquisition, which closed on January 3, 2018, the general partner, the Partnership and CONE Gathering LLC changed their names to CNX Midstream GP LLC, CNX Midstream Partners LP, and CNX Gathering LLC, respectively.
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, through CNX Gathering's ownership of the general partner, control over the Partnership. Accordingly, the Midstream Acquisition has been 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 and any difference between the fair value and the carrying value of the equity interest held be recognized as a gain or loss on the statement of income.
The fair value assigned to the previously held equity interest in CNX Gathering and CNXM for purposes of calculating the gain or loss was $i799,033
and was determined using the income approach, based on a discounted cash flow methodology. The
14
resulting gain on remeasurement to fair value of the previously held equity interest in CNX Gathering and CNXM of $i623,663
is included in Gain on Previously Held Equity Interest in the Consolidated Statements of Income.
The fair value of the previously held equity interests was based on inputs that are not observable in the market and therefore represent Level 3 inputs (See Note 15 - Fair Value of Financial Instruments). The fair value was measured using valuation techniques that convert future cash flows into a single discounted amount. Significant inputs to the valuation included estimates of: (i) gathering volumes; (ii) future operating costs; and (iii) a market-based weighted average cost of capital. These inputs required significant judgments and estimates by management.
The fair value of midstream facilities and equipment, generally consisting of pipeline systems and compression stations, were estimated
using the cost approach. Significant unobservable inputs in the valuation include management's assumptions about the replacement costs for similar assets, the relative age of the acquired assets and any potential economic or functional obsolescence associated with the acquired assets. As a result, the fair value estimates of the midstream facilities and equipment represents a Level 3 fair value measurement.
As part of the purchase price allocation, the Company identified intangible assets for customer relationships with third-party customers. The fair value of the identified intangible assets was determined using the income approach, which requires a forecast of the expected future cash flows generated and an estimated market-based weighted average cost of capital. Significant unobservable
inputs in the valuation include future revenue estimates, future cost assumptions, and estimated customer retention rates. As a result, the fair value estimate of the identified intangible assets represents a Level 3 fair value measurement.
The noncontrolling interest in the acquired business is comprised of the limited partner units in CNXM, which were not acquired by the Company. The CNXM limited partner units are actively traded on the New York Stock Exchange and were valued based on observable market prices as of the transaction date and therefore represent a Level 1 fair value measurement.
Allocation of Purchase Price (Midstream Acquisition)
The
following table summarizes the purchase price and the amounts of identified assets acquired and liabilities assumed based on the fair value as of January 3, 2018, with any excess of the purchase price over the fair value of the identified net assets acquired recorded as goodwill. The purchase price allocation was finalized as of December 31, 2018.
i
Fair
Value of Consideration Transferred:
Amount
Cash Consideration
$
i305,000
CNX
Gathering Cash on Hand at January 3, 2018 Distributed to Noble
i2,620
Fair Value of Previously Held Equity Interest
i799,033
Total
Estimated Fair Value of Consideration Transferred
$
i1,106,653
/
15
The
following is a summary of the fair values of the net assets acquired:
The effective tax rates for the three and nine months ended September 30, 2019 were i25.4%
and i22.3%, respectively. The effective tax rate for the nine months ended September 30, 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.
The effective tax rates for the three and nine
months ended September 30, 2018 were i27.9% and i24.1%,
respectively. The effective rate for the nine months ended September 30, 2018 differs from the U.S. federal statutory rate of 21% primarily due to increases for both state income taxes and state valuation allowances, offset by the benefit derived from the filing of a Federal 10-year net operating loss (“NOL”) carryback as well as non-controlling interest.
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act (the "Act") which, among other things, lowered the U.S. Federal corporate income tax rate from 35% to 21%, repealed the corporate alternative minimum tax ("AMT"), and provided for a refund of previously accrued corporate AMT credits. As of December 31, 2018, the
Company reclassified $i102,482 from Deferred Income Taxes to Recoverable Income Taxes in the Consolidated Balance Sheets in anticipation of the AMT refund that is also included in the Recoverable Income Taxes line of the Consolidated Statements of Cash Flows in the nine months ended September 30, 2019.
The
total amount of uncertain tax positions at each of September 30, 2019 and December 31, 2018 was $i31,516. If these uncertain tax positions were recognized, approximately $i31,516
would affect CNX's effective tax rate. There were no changes in unrecognized tax benefits during the three and nine months ended September 30, 2019.
16
CNX recognizes accrued interest related to uncertain tax positions in interest expense. As of September 30, 2019 and December 31, 2018, CNX had ino
accrued liabilities for interest related to uncertain tax positions.
CNX recognizes penalties accrued related to uncertain tax positions in its income tax expense. As of September 30, 2019 and December 31, 2018, CNX had no accrued liabilities for tax 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 to conclude its audit of tax years 2016 through 2017 in the second quarter of 2020.
Less:
Accumulated Depreciation, Depletion and Amortization
i2,981,723
i2,624,984
Total
Property, Plant and Equipment - Net
$
i7,530,575
$
i6,942,444
/
NOTE
8—iGOODWILL AND OTHER INTANGIBLE ASSETS:
In connection with the Midstream Acquisition that closed on January 3, 2018 (See Note 5 - Acquisitions and Dispositions for more information), CNX recorded $i796,359
of goodwill and $i128,781 of other intangible assets which are comprised of customer relationships.
All goodwill is attributed to the Midstream reportable segment.
i
The
carrying amount and accumulated amortization of other intangible assets consist of the following:
During
the second quarter of 2018, CNX determined that the carrying value of a portion of the customer relationship intangible assets exceeded their fair value as a result of an Asset Exchange Agreement with HG Energy. Accordingly, CNX recognized an impairment on this intangible asset of $i18,650. There were ino
such impairments in the current period.
The customer relationship intangible asset is being amortized on a straight-line basis over approximately i17 years. Amortization expense related to other intangible assets for the three and nine months ended September 30, 2019 was $i1,638
and $i4,915, respectively. Amortization expense related to other intangible assets was $i1,638 and $i5,293
for the three and nine months ended September 30, 2018, respectively. The estimated annual amortization expense is expected to approximate $i6,552 per year for each of the next five years.
17
NOTE
9—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 the commitments to $i3,000,000. The borrowing base was reaffirmed at $i2,100,000,
including a $i650,000 letters of credit aggregate sub-limit. 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. 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. In October 2019, as part of the semi-annual borrowing base redetermination the lenders' increased CNX's borrowing base to $i2,300,000.
Under the terms of the amended 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 i0.25% to i1.25%; or
•the LIBOR rate, which is the LIBOR rate plus a margin ranging from i1.25% to i2.25%.
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 CNX Midstream GP LLC and its 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 and amend the senior unsecured notes. The Company must also mortgage i80%
of the value of its proved reserves and i80% 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 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 September 30, 2019.
At
September 30, 2019, the CNX Credit Facility had $i613,200 of borrowings outstanding and $i199,066
of letters of credit outstanding, leaving $i1,287,734 of unused capacity. At December 31, 2018, the CNX Credit Facility had $i612,000
of borrowings outstanding and $i198,396 of letters of credit outstanding, leaving $i1,289,604
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.
18
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 September 30, 2019.
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 revolving credit facility.
At September 30,
2019, the CNXM credit facility had $i246,000 of borrowings outstanding. CNXM had the maximum amount of revolving credit available for borrowing at September 30, 2019, or $i354,000.
At December 31, 2018, the CNXM credit facility had $i84,000 of borrowings outstanding.
During
the nine months ended September 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.
During the nine months ended September 30, 2019, CNX purchased $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 on Debt Extinguishment in the Consolidated Statements of Income.
During the nine months ended September 30, 2018, CNXM completed a private offering of $i400,000 of i6.50%senior notes due in March 2026 less $i6,000 of unamortized bond discount. CNX is not a guarantor of CNXM's i6.50%senior notes due in March 2026 or CNXM's senior secured revolving credit facility.
During the nine months ended September 30, 2018, CNX purchased $i391,375 of its outstanding i5.875%
senior notes due in April 2022. As part of this transaction, a loss of $i15,635 was included in Loss on Debt Extinguishment in the Consolidated Statements of Income.
During the three and nine months ended September 30,
2018, CNX purchased $i200,000 and $i500,000,
respectively, of its outstanding i8.00% senior notes due in April 2023. As part of these transactions, a loss of $i15,385
and $i38,798, respectively, was included in Loss on Debt Extinguishment in the Consolidated Statements of Income.
NOTE 12—iiLEASES:/
On
January 1, 2019, the Company adopted Accounting Standard Update (ASU) 2016-02, and all related amendments, using the transition method, which allows for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. CNX elected the transition relief package of practical expedients by applying previous accounting conclusions under ASC 840 to all leases that existed prior to the transition date. As a result, CNX did not reassess 1) whether existing or expired contracts contain leases, 2) lease classification for any existing or expired leases or 3) whether lease origination costs qualified as initial direct costs. Additionally, the
Company elected the short-term practical expedient for all asset classes by establishing an accounting policy to exclude leases with a term of i12 months or less. CNX will not separate lease components from non-lease components for any asset class. Lastly, CNX adopted the easement practical expedient, which allows the Company to apply ASC 842 prospectively to land easements after the adoption date. Easements that existed or expired prior to the adoption date that were not previously assessed under ASC 840 will
not be reassessed.
CNX's leasing activities primarily consist of operating and finance leases for electric fracturing equipment, natural gas drilling rigs, CNX's corporate headquarters as well as field offices, a natural gas gathering pipeline and commercial vehicles. Some leases include options to renew ranging from a period of i1 to i10
years, which are not recognized as part of the lease right-of-use (ROU) assets or liabilities as they are not reasonably certain to be exercised.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of CNX's leases do not provide an implicit rate, an incremental borrowing rate is used to determine the present value of lease payments.
*Amounts
recognized on the balance sheet for natural gas drilling rigs are measured using the rates that would be paid if the rigs were idle, as this represents the minimum payment that could be made under the contract. Variable lease cost represents amounts paid for natural gas drilling rigs above this minimum when the rigs are in use. Amounts recognized on the balance sheet for electric fracturing equipment are measured using minimum pumping hours under the contract; however, pumping hours may exceed the minimum and vary period to period. Any such amounts paid related to pumping hours in excess of the minimum represent variable lease cost.
/
i
Amounts
recognized in the Consolidated Balance Sheet are as follows:
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.
i
At September 30, 2019, 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.
22
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
$
i198,316
$
i80,244
$
i118,072
$
i—
$
i—
Other
i750
i750
i—
i—
i—
Total
Letters of Credit
i199,066
i80,994
i118,072
i—
i—
Surety
Bonds:
Employee-Related
i1,850
i—
i1,850
i—
i—
Environmental
i11,283
i11,073
i210
i—
i—
Financial
Guarantees
i81,670
i26,400
i55,270
i—
i—
Other
i9,306
i8,433
i873
i—
i—
Total
Surety Bonds
i104,109
i45,906
i58,203
i—
i—
Total
Commitments
$
i303,175
$
i126,900
$
i176,275
$
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 (See CNX's 2018 Annual Report on Form 10-K as filed with the SEC on February 7, 2019 for further information). 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.
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 September 30, 2019, the purchase obligations for each of the next five years and beyond were as follows:
Obligations Due
Amount
Less
than 1 year
$
i252,535
1 - 3 years
i489,023
3
- 5 years
i412,960
More than 5 years
i1,113,008
Total
Purchase Obligations
$
i2,267,526
NOTE
14—iDERIVATIVE INSTRUMENTS:
In June 2019, CNX entered into an interest rate swap agreement to manage its exposure to interest rate volatility. The interest rate swap agreement relates to $i160,000
of borrowings under CNX’s senior secured revolving credit facility (See Note 9 - Revolving Credit Facilities) and has the economic effect of modifying the variable-interest obligation into a fixed-interest obligation over a three-year period.
The change in fair value of the interest rate swap agreement is accounted for on a mark-to-market basis with changes in fair value recorded in current period earnings. The fair value at September 30, 2019 and the corresponding change in fair value from inception through September 30, 2019 was nominal.
CNX enters into financial derivative instruments to manage
its exposure to commodity price volatility. These 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.
23
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 production of CNX's derivative instruments were as follows:
September
30,
December 31,
Forecasted to
2019
2018
Settle Through
Natural Gas Commodity Swaps (Bcf)
i1,502.4
i1,484.4
2024
Natural
Gas Basis Swaps (Bcf)
i1,240.5
i1,056.6
2024
/
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
$
i61,441
$
i6,916
$
i53,058
$
i23,540
Basis
Swaps
(i4,400
)
(i4,091
)
(i26,727
)
(i21,022
)
Total
Cash Received in Settlement of Commodity Derivative Instruments
i57,041
i2,825
i26,331
i2,518
Unrealized
Gain (Loss) on Commodity Derivative Instruments:
Natural Gas:
Commodity
Swaps
i126,617
i27,749
i302,701
i76,999
Basis
Swaps
i30,255
(i12,569
)
(i88,914
)
(i765
)
Total
Unrealized Gain on Commodity Derivative Instruments
i156,872
i15,180
i213,787
i76,234
Gain
(Loss) on Commodity Derivative Instruments:
Natural Gas:
Commodity
Swaps
i188,058
i34,665
i355,759
i100,539
Basis
Swaps
i25,855
(i16,660
)
(i115,641
)
(i21,787
)
Total
Gain on Commodity Derivative Instruments
$
i213,913
$
i18,005
$
i240,118
$
i78,752
/
24
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.
NOTE 15—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.
NOTE 16—iVARIABLE
INTEREST ENTITIES:
The Company determined CNXM, of which the Company owns an approximately i34%
limited partner interest and i100% of the general partner interest, to be a variable interest entity. As a result of the Midstream Acquisition (see Note 5 - Acquisitions and Dispositions), the Company has the power through the
Company's 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 and incentive distribution rights, or IDRs, 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 consolidated CNXM commencing January 3, 2018.
The risks associated with
the operations of CNXM are discussed in its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 7, 2019 and its other periodic reports filed after that date.
25
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
i3,573
i3,060
i11,567
i10,292
General
and Administrative Expense - Third Party
i1,236
i1,771
i4,136
i6,639
Loss
on Asset Sales and Abandonments
i—
i—
i7,229
i2,501
Depreciation
Expense
i6,184
i5,306
i17,694
i16,605
Interest
Expense
i7,601
i7,255
i22,625
i16,863
Total
Expense
i30,311
i27,393
i99,192
i88,289
Net
Income
$
i43,665
$
i33,575
$
i125,104
$
i97,562
Net
Cash Provided by Operating Activities
$
i51,014
$
i35,666
$
i175,680
$
i131,207
Net
Cash Used in Investing Activities
$
(i68,289
)
$
(i44,241
)
$
(i251,156
)
$
(i79,366
)
Net
Cash Provided by (Used in) Financing Activities
$
i7,333
$
i8,818
$
i73,245
$
(i54,085
)
/
In
March 2018, CNXM closed on its acquisition of CNX's remaining i95% interest in the gathering system and related assets commonly referred to as the Shirley-Penns System, in exchange for cash consideration in the amount of $i265,000.
CNXM funded the cash consideration with proceeds from the issuance of its i6.50% senior notes due 2026 (See Note 11 - Long-Term Debt).
At September 30, 2019 and December 31, 2018,
CNX had a net payable of $i14,085 and $i12,202
respectively, due to CNX Gathering and CNXM, primarily for accrued but unpaid gathering services.
26
NOTE 17—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 due to the sale of substantially all of CNX's shallow oil and gas assets in the 2018 period (See Note 5 - Acquisitions and Dispositions for more information). It also includes the Company's purchased gas activities, unrealized gain or loss on commodity derivative instruments, exploration and production related other costs, 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. As a result of the Midstream Acquisition (See Note 5 - Acquisitions and Dispositions for more information), CNX owns and controls 100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM on January
3, 2018.
The Company's unallocated expenses include other expense, gain on asset sales related to non-core assets, gain on previously held equity interest, loss on debt extinguishment, impairment of other intangible assets 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.
Included
in Total Natural Gas, NGLs and Oil Revenue are sales of $i39,092 to Direct Energy Business Marketing LLC, which comprises over 10% of revenue from contracts with external customers for the period.
(B)
Includes
equity in earnings of unconsolidated affiliates of $i673 for Total E&P.
(C)
Includes investments in unconsolidated equity affiliates of $i17,110
for Total E&P.
Included
in Total Natural Gas, NGLs and Oil Revenue are sales of $i42,901 to NJR Energy Services Company, which comprises over 10% of revenue from contracts with external customers for the period.
(E)
Includes equity in
earnings of unconsolidated affiliates of $i1,241 for Total E&P.
(F)
Includes investments in unconsolidated equity affiliates of $i19,488
for Total E&P.
Included
in Total Natural Gas, NGLs and Oil Revenue are sales of $i155,337 to Direct Energy Business Marketing LLC and $i114,440
to NJR Energy Services Company, each of which comprise over 10% of revenue from contracts with external customers for the period.
(B)
Includes equity in earnings of unconsolidated affiliates of $i1,703
for Total E&P.
(C)
Includes investments in unconsolidated equity affiliates of $i17,110 for Total E&P.
Included
in Total Natural Gas, NGLs and Oil Revenue are sales of $i158,746 to NJR Energy Services Company, which comprises over 10% of revenue from contracts with external customers for the period.
(E)
Includes equity in earnings
of unconsolidated affiliates of $i4,688 for Total E&P.
(F)
Includes investments in unconsolidated equity affiliates of $i19,488
for Total E&P.
29
Reconciliation of Segment Information to Consolidated Amounts:
Segment Assets for Total Reportable Business Segments:
E&P
$
i7,087,782
$
i6,256,132
Midstream
i2,178,073
i1,883,134
Intercompany
Eliminations
i3,735
(i12,926
)
Items
Excluded from Segment Assets:
Cash and Cash Equivalents
i5,484
i42,672
Recoverable
Income Taxes
i11,184
i40,024
Total
Consolidated Assets
$
i9,286,258
$
i8,209,036
/
30
NOTE
18—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 nine months ended September 30, 2019, i12,929,487 shares were repurchased and retired at an average price of $i8.91
per share for a total cost of $i115,477.
NOTE 19—iRECENT
ACCOUNTING PRONOUNCEMENTS:
i
In May 2019, the FASB issued ASU 2019-05 - Financial Instruments - Credit Losses (Topic 326), which provides optional targeted transition relief to entities adopting ASU 2016-13. ASU 2016-13 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 will be 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. ASU 2019-05 provides the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. The amendments in this ASU will be applied using the modified-retrospective approach and, for public entities, are effective for fiscal years beginning after December 15, 2019 and interim periods within those annual periods. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company's financial statements.
31
ITEM
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
During the third quarter of 2019, CNX sold 128.3 Bcfe of produced natural gas, an increase of 7.8% from the 119.0 Bcfe sold in the year-earlier quarter, primarily due to an increase in Marcellus Shale volumes. The increase was offset, in part, by a decrease in Utica Shale volumes due to the sale of substantially all of CNX's Ohio Utica joint venture ("JV") assets in the third quarter of 2018. Total
quarterly production costs increased to $1.99 per Mcfe, compared to the year-earlier quarter of $1.97 per Mcfe, driven primarily by increases in transportation, gathering and compression, offset, in part, by reductions in depreciation, depletion and amortization and lease operating expense. Capital expenditures increased to $336 million in the third quarter of 2019, compared to $297 million of spend in the third quarter of 2018.
Marketing Update:
For the third quarter of 2019, CNX's average sales price for natural gas, natural gas liquids (NGLs), oil, and condensate was $2.51 per Mcfe. The average realized price
for all liquids for the third quarter of 2019 was $14.26 per barrel.
CNX's weighted average differential from NYMEX in the third quarter of 2019 was negative $0.33 per MMBtu. CNX's average sales price for natural gas before hedging decreased 18.7% to $2.04 per Mcf compared with the average sales price of $2.51 per Mcf in the second quarter of 2019. This decrease resulted primarily from a lower Henry Hub price reflecting current general market conditions coupled with a wider differential. Including the impact of cash settlements from hedging, CNX's average sales price for natural gas was $0.08 per Mcf, or 3.1%, lower than the three months ended June 30, 2019, and $0.23 per Mcf, or 8.4%, lower
than the three months ended September 30, 2018.
CNX Guidance:
CNX updates 2019 production volumes to 530-540 Bcfe, compared to the previous guidance of 510-530 Bcfe. CNX updates 2020 production volumes to 535-565 Bcfe, compared to the previous guidance of 570-595 Bcfe. The updated 2020 guidance equates to an approximately 3% increase over 2019's updated midpoint.
Third quarter 2019 capital expenditure came in lower than expected, and the company is reducing its full-year
2019 capital guidance, while increasing production volumes. For 2020, the company is reducing its full-year capital guidance and production volumes, primarily due to plan changes and associated timing.
For 2019 and 2020 combined, the company expects to spend approximately $80 million less capital than previously announced, resulting in 17.5 Bcfe less production in 2020, after accounting for 15 Bcfe of production accelerated from 2020 into 2019.
Total hedged natural gas production in the 2019 fourth quarter is 115.7 Bcf. The annual gas hedge position is shown in the table below:
2019
2020
Volumes
Hedged (Bcf), as of 10/9/19
405.2*
489.6
*Includes actual settlements of 312.5 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.
Net Income Attributable to CNX Resources Shareholders
CNX reported net income attributable to CNX Resources shareholders of $116 million, or earnings per diluted share of $0.61, for the three months ended September 30,
2019, compared to net income attributable to CNX Resources shareholders of $125 million, or earnings per diluted share of $0.59, for the three months ended September 30, 2018.
For the Three Months Ended September 30,
(Dollars
in thousands)
2019
2018
Variance
Net Income
$
143,960
$
146,756
$
(2,796
)
Less:
Net Income Attributable to Noncontrolling Interest
28,422
21,727
6,695
Net Income Attributable to CNX Resources Shareholders
$
115,538
$
125,029
$
(9,491
)
CNX
consists of two principal business divisions: Exploration and Production (E&P) and Midstream.
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 earnings before income tax of $151 million for the three months ended September 30, 2019, compared to earnings before income tax of $54
million for the three months ended September 30, 2018. Included in the earnings for the three months ended September 30, 2019 and 2018 were unrealized gains on commodity derivative instruments of $157 million and $15 million, respectively.
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.
As a result of the Midstream Acquisition (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q), CNX owns and controls 100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM on January 3, 2018. Prior
to the acquisition, CNX accounted for its interests in CNX Gathering and CNXM as an equity-method investment.
CNX's Midstream Division had earnings before income tax of $42 million for the three months ended September 30, 2019, compared to earnings before income tax of $31 million for the three months ended September 30, 2018.
E&P Division Summary
Sales volumes, average sales price (including the effects of settled
derivative instruments), and average costs for the E&P Division were as follows:
Transportation,
Gathering and Compression (per Mcfe)
0.97
0.84
0.13
15.5
%
Depreciation, Depletion and Amortization (DD&A) (per Mcfe)
0.86
0.93
(0.07
)
(7.5
)%
Average
Costs (per Mcfe)
1.99
1.97
0.02
1.0
%
Average Margin (per Mcfe)
$
0.52
$
0.95
$
(0.43
)
(45.3
)%
33
Natural
gas, NGLs, and oil revenue was $265 million for the three months ended September 30, 2019, compared to $345 million for the three months ended September 30, 2018. The decrease was primarily due to the decrease in in natural gas and NGL pricing offset, in-part by the 7.8% increase in total sales volumes.
The decrease in average sales price per Mcfe was the result of the $0.67 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 $0.16 per Mcfe decrease in the uplift from NGLs and condensate sales volumes. Both decreases were offset, in-part by a $0.44 per Mcf increase in the realized gain on commodity derivative instruments related to the Company's hedging program during the current period.
Changes in the average costs per Mcfe were primarily related to the following items:
•
Transportation, gathering, and compression expense increased on a per unit basis primarily
due to an increase in CNXM gathering fees related to an increase in our Marcellus production and an increase in firm transportation expense, primarily as a result of new contracts that give CNX the ability to move and sell natural gas outside of the Appalachian basin. The decrease in production from CNX's lower cost dry Utica volumes also contributed to the increase on a per unit basis.
•
Lease operating expense decreased on a per unit basis primarily due to a reduction in the number of employees and the associated costs in the period-to-period comparison.
•
Depreciation,
depletion, and amortization expense decreased on a per unit basis primarily due to a reduction in Marcellus rates as a result of an increase in the Company's associated reserves.
The following table presents a breakout of net liquid and natural gas sales information to assist in the understanding of the Company’s natural gas production and sales portfolio.
For
the Three Months Ended September 30,
in thousands (unless noted)
2019
2018
Variance
Percent Change
LIQUIDS
NGLs:
Sales
Volume (MMcfe)
8,019
9,972
(1,953
)
(19.6
)%
Sales Volume (Mbbls)
1,337
1,662
(325
)
(19.6
)%
Gross
Price ($/Bbl)
$
13.68
$
28.08
$
(14.40
)
(51.3
)%
Gross
Revenue
$
18,305
$
46,663
$
(28,358
)
(60.8
)%
Oil:
Sales
Volume (MMcfe)
9
72
(63
)
(87.5
)%
Sales Volume (Mbbls)
2
12
(10
)
(83.3
)%
Gross
Price ($/Bbl)
$
56.64
$
63.00
$
(6.36
)
(10.1
)%
Gross
Revenue
$
92
$
759
$
(667
)
(87.9
)%
Condensate:
Sales
Volume (MMcfe)
67
351
(284
)
(80.9
)%
Sales Volume (Mbbls)
11
58
(47
)
(81.0
)%
Gross
Price ($/Bbl)
$
75.54
$
58.56
$
16.98
29.0
%
Gross
Revenue
$
839
$
3,426
$
(2,587
)
(75.5
)%
GAS
Sales
Volume (MMcf)
120,208
108,565
11,643
10.7
%
Sales Price ($/Mcf)
$
2.04
$
2.71
$
(0.67
)
(24.7
)%
Gross
Revenue
$
245,815
$
293,864
$
(48,049
)
(16.4
)%
Hedging
Impact ($/Mcf)
$
0.47
$
0.03
$
0.44
1,466.7
%
Gain
on Commodity Derivative Instruments - Cash Settlement
57,041
2,825
54,216
1,919.2
%
34
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 September 30,
(in millions)
2019
2018
Variance
Percent
Change
SG&A
Short-Term
Incentive Compensation
$
2
$
6
$
(4
)
(66.7
)%
Long-Term
Equity-Based Compensation (Non-Cash)
2
5
(3
)
(60.0
)%
Salaries and Wages
10
9
1
11.1
%
Other
10
12
(2
)
(16.7
)%
Total
SG&A
$
24
$
32
$
(8
)
(25.0
)%
•
Short-term
incentive compensation decreased $4 million due to lower projected payouts in the current period.
Unallocated Expense
Certain costs and expenses, such as other expense, gain on asset sales and abandonments related to non-core assets, 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
For
the Three Months Ended September 30,
(in millions)
2019
2018
Variance
Percent
Change
Other Income
Royalty
Income
$
—
$
2
$
(2
)
(100.0
)%
Right
of Way Sales
—
1
(1
)
(100.0
)%
Interest Income
1
—
1
100.0
%
Other
—
1
(1
)
(100.0
)%
Total
Other Income
$
1
$
4
$
(3
)
(75.0
)%
Other
Expense
Professional Services
$
1
$
1
$
—
—
%
Bank
Fees
3
3
—
—
%
Other Corporate Expense
—
1
(1
)
(100.0
)%
Total
Other Expense
$
4
$
5
$
(1
)
(20.0
)%
Total
Other Expense
$
3
$
1
$
2
200.0
%
Gain
on Asset Sales and Abandonments
A gain on asset sales of $3 million related to non-core assets was recognized in the three months ended September 30, 2019 compared to a gain of $134 million in the three months ended September 30, 2018, primarily related to the Ohio Utica JV asset sale. See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Loss on Debt Extinguishment
Loss
on debt extinguishment of $15 million was recognized in the three months ended September 30, 2018 due to the $200 million redemption of the 8.00% Senior notes due in April 2023 at an average price equal to 106.0% of the principal amount. No such transactions occurred in the current period. See Note 11 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
35
Income
Taxes
The effective income tax rate was 25.4% for the three months ended September 30, 2019 compared to 27.9% for the three months ended September 30, 2018. The effective rate for the three months ended September 30, 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. The effective rate for the three
months ended September 30, 2018 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 6 - Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
The E&P division had earnings before income tax of $151 million for the three months ended September 30, 2019 compared to earnings before income tax of $54 million for the three
months ended September 30, 2018. Variances by individual E&P segment are discussed below.
The Marcellus segment had earnings before income tax of $41 million for the three months ended September 30, 2019 compared to earnings before income tax of $64 million for the three months ended September 30, 2018.
Gain
on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.48
$
0.03
$
0.45
1,500.0
%
Average
Sales Price - NGLs (per Mcfe)*
$
2.28
$
4.80
$
(2.52
)
(52.5
)%
Average
Sales Price - Condensate (per Mcfe)*
$
14.09
$
9.66
$
4.43
45.9
%
Total
Average Marcellus Sales Price (per Mcfe)
$
2.49
$
2.96
$
(0.47
)
(15.9
)%
Average
Marcellus Lease Operating Expenses (per Mcfe)
0.07
0.10
(0.03
)
(30.0
)%
Average Marcellus Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.05
(0.01
)
(20.0
)%
Average
Marcellus Transportation, Gathering and Compression Costs (per Mcfe)
1.22
1.10
0.12
10.9
%
Average Marcellus Depreciation, Depletion and Amortization
Costs (per Mcfe)
0.69
0.80
(0.11
)
(13.8
)%
Total Average Marcellus Costs (per Mcfe)
$
2.02
$
2.05
$
(0.03
)
(1.5
)%
Average
Margin for Marcellus (per Mcfe)
$
0.47
$
0.91
$
(0.44
)
(48.4
)%
*
NGLs and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.
The Marcellus segment had natural gas, NGLs and oil revenue of $179 million for the three months ended September 30, 2019 compared to $207 million for the three months ended September 30, 2018. The $28 million decrease
was primarily due to the 24.1%decrease in the average gas sales price and the 52.5%decrease in the average NGL sales price, offset in part by the 23.7%increase in total Marcellus sales volumes. The increase in sales volumes was primarily due to additional wells being turned in-line throughout 2018 and the first nine months of 2019 as part of the Company's ongoing drilling and completions program.
The decrease in the total average
Marcellus sales price was primarily due to a $0.64 per Mcf decrease in the average gas sales price and a $2.52 per Mcfe decrease in the average NGL sales price, offset in part by a $0.45 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 68.7 Bcf of the Company's produced Marcellus gas
sales volumes for the three months ended September 30, 2019 at an average gain of $0.56 per Mcf. For the three months ended September 30, 2018, these financial hedges represented approximately 53.9 Bcf at an average gain of $0.03 per Mcf. There was a $0.25 per Mcfe decrease in the uplift from NGLs and condensate sales volumes when excluding the impact of hedging.
Total
operating costs and expenses for the Marcellus segment were $176 million for the three months ended September 30, 2019 compared to $145 million for the three months ended September 30, 2018. The increase in total dollars and decrease in unit costs for the Marcellus segment were due to the following items:
•Marcellus lease operating expense was $6
million for the three months ended September 30, 2019 compared to $7 million for the three months ended September 30, 2018. The decrease in unit costs was driven by the decreased total dollars, along with the 23.7%increase in total Marcellus sales volumes.
•Marcellus production, ad valorem, and other fees were consistent at $3
million for the three months ended September 30, 2019 and September 30, 2018. The decrease in unit costs was driven by the 23.7%increase in total Marcellus sales volumes and the 24.1%decrease in the average gas sales price.
38
•Marcellus
transportation, gathering and compression costs were $106 million for the three months ended September 30, 2019 compared to $77 million for the three months ended September 30, 2018. The increase in total dollars was primarily related to the increase in production which resulted in an increase in both CNX Midstream fees as well as an increase in utilized firm transportation expense. The increase in firm transportation total dollars was also related to new contracts
that give CNX the ability to move and sell natural gas outside of the Appalachian basin. The increase in unit costs was driven by the increased total dollars described above.
•Depreciation, depletion and amortization costs attributable to the Marcellus segment were $61 million for the three months ended September 30, 2019 compared to $58 million for the three months ended September 30, 2018. These
amounts included depletion on a unit of production basis of $0.68 per Mcfe and $0.79 per Mcfe, respectively. The decrease in units of production depreciation, depletion and amortization rate is the result of positive reserve revisions within our core development area. 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 three months ended September 30, 2019 compared to earnings before income tax of $41 million for the three months ended September 30, 2018.
Gain
on Commodity Derivative Instruments - Cash Settlement- Gas (per Mcf)
$
0.47
$
—
$
0.47
100.0
%
Average
Sales Price - NGLs (per Mcfe)*
$
—
$
4.00
$
(4.00
)
(100.0
)%
Average
Sales Price - Condensate (per Mcfe)*
$
—
$
10.01
$
(10.01
)
(100.0
)%
Total
Average Utica Sales Price (per Mcfe)
$
2.34
$
2.62
$
(0.28
)
(10.7
)%
Average
Utica Lease Operating Expenses (per Mcfe)
0.15
0.14
0.01
7.1
%
Average Utica Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.07
(0.03
)
(42.9
)%
Average
Utica Transportation, Gathering and Compression Costs (per Mcfe)
0.29
0.35
(0.06
)
(17.1
)%
Average Utica Depreciation, Depletion and Amortization Costs (per
Mcfe)
1.18
0.83
0.35
42.2
%
Total Average Utica Costs (per Mcfe)
$
1.66
$
1.39
$
0.27
19.4
%
Average
Margin for Utica (per Mcfe)
$
0.68
$
1.23
$
(0.55
)
(44.7
)%
*NGLs
and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.
The Utica segment had natural gas, NGLs and oil revenue of $50 million for the three months ended September 30, 2019 compared to $88 million for the three months ended September 30, 2018. The $38 million decrease
was primarily due to the 20.2%decrease in total Utica sales volumes, along with the 26.5%decrease in the average gas sales price. The decrease in total Utica sales volumes was primarily due to the sale of substantially all of CNX's Ohio Utica JV assets in the third quarter of 2018 as well as normal production declines in the remaining dry Utica wells.
The decrease in total average Utica sales price was primarily due to a $0.67 per Mcf decrease in the average gas sales price, offset in part by a $0.47
per Mcf increase in the realized gain on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 21.6 Bcf of the Company's produced Utica gas sales volumes for the three months ended September 30, 2019 at an average gain of $0.58 per Mcf. For the three months ended September 30, 2018, these financial hedges represented
approximately 23.1 Bcf at an average gain of $0.04 per Mcf. Additionally, there was a $0.08 per
39
Mcfe decrease in the uplift from NGLs and condensate sales volumes when excluding the impact of hedging due to the sale of the previously-mentioned JV assets in the third quarter of 2018, which consisted primarily of wet gas production.
Total operating costs and expenses for the Utica segment
were $45 million for the three months ended September 30, 2019 compared to $47 million for the three months ended September 30, 2018. 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 $4 million for the three months
ended September 30, 2019 compared to $5 million for the three months ended September 30, 2018. The decrease in total dollars was primarily due to a reduction in repairs and maintenance costs due to the sale of the Ohio JV assets in 2018, along with a reduction in the number of employees and the associated costs in the period-to-period comparison. The increase in unit costs was driven by the decrease in production volumes.
•Utica transportation,
gathering and compression costs were $8 million for the three months ended September 30, 2019 compared to $12 million for the three months ended September 30, 2018. The $4 million decrease in total dollars and $0.06 per Mcfe decrease in unit costs were both due to the overall decrease in Utica volumes as well as the shift to lower cost dry Utica production.
•Depreciation,
depletion and amortization costs attributable to the Utica segment were $32 million for the three months ended September 30, 2019 compared to $28 million for the three months ended September 30, 2018. These amounts included depletion on a unit of production basis of $1.17 per Mcfe and $0.83 per Mcfe, respectively. The increase in the units of production depreciation, depletion and amortization rate was due to negative reserve revisions, an increase in capital expenditures and a higher depreciation, depletion
and amortization rate on deep dry Utica wells compared to the lower capital cost Utica wells which were part of the Ohio JV asset sale in 2018. 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 $9 million for the three months ended September 30, 2019 compared to earnings
before income tax of $10 million for the three months ended September 30, 2018.
Gain
on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.43
$
0.04
$
0.39
975.0
%
Total
Average CBM Sales Price (per Mcf)
$
2.95
$
3.33
$
(0.38
)
(11.4
)%
Average
CBM Lease Operating Expenses (per Mcf)
0.28
0.32
(0.04
)
(12.5
)%
Average CBM Production, Ad Valorem, and Other Fees (per Mcf)
0.10
0.12
(0.02
)
(16.7
)%
Average
CBM Transportation, Gathering and Compression Costs (per Mcf)
0.71
0.77
(0.06
)
(7.8
)%
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.24
1.47
(0.23
)
(15.6
)%
Total
Average CBM Costs (per Mcf)
$
2.33
$
2.68
$
(0.35
)
(13.1
)%
Average
Margin for CBM (per Mcf)
$
0.62
$
0.65
$
(0.03
)
(4.6
)%
The
CBM segment had natural gas revenue of $36 million for the three months ended September 30, 2019 compared to $48 million for the three months ended September 30, 2018. The $12 million decrease was primarily due to the 4.1%decrease in total CBM sales volumes and the 23.4%decrease in the average gas sales price. The decrease
in CBM sales volumes was primarily due to normal well declines.
The total average CBM sales price decreased $0.38 per Mcf due to a $0.77decrease in the average gas sales price, offset in part by a $0.39 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 11.3 Bcf of the
Company's produced CBM sales volumes for the three months ended September 30, 2019 at an average gain of $0.53 per Mcf. For the three months ended September 30, 2018, these financial hedges represented approximately 11.7 Bcf at an average gain of $0.03 per Mcf.
40
Total
operating costs and expenses for the CBM segment were $33 million for the three months ended September 30, 2019 compared to $39 million for the three months ended September 30, 2018. The decrease in total dollars and decrease in unit costs for the CBM segment were due to the following items:
•CBM lease operating expense was $4 million for the three
months ended September 30, 2019 compared to $5 million for the three months ended September 30, 2018. The $1 million decrease was primarily due to reductions in contractor services and a decrease in repairs and maintenance costs. The decrease in unit costs was also due to the decrease in total dollars.
•CBM transportation, gathering and compression costs were $10
million for the three months ended September 30, 2019 compared to $11 million for the three months ended September 30, 2018. The $1 million decrease in total dollars as well as the $0.06 per Mcf decrease in unit costs were primarily related to a decrease in electrical power expense as well as a decrease in contractor services.
•Depreciation, depletion
and amortization costs attributable to the CBM segment were $17 million for the three months ended September 30, 2019 compared to $21 million for the three months ended September 30, 2018. These amounts included depletion on a unit of production basis of $0.68 per Mcfe and $0.70 per Mcfe, respectively. 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 earnings before income tax of $83 million for the three months ended September 30, 2019 compared to a loss before income tax of $61 million for the three months ended September 30, 2018.
*Oil
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 oil and natural gas prices.
The Other Gas segment includes activity not assigned to the Marcellus, Utica, or CBM segments. This segment also includes purchased gas activity, unrealized gain on commodity derivative instruments, exploration and production related other costs and other operational activity not assigned to a specific segment.
Other Gas sales volumes are primarily related to shallow oil and gas production. CNX sold substantially all of these assets on March 30, 2018 (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated
Financial Statements in Item 1 of this Form 10-Q for additional information). There was nominal natural gas and oil revenue related to the Other Gas segment for both the three months ended September 30, 2019 and 2018. Total operating costs and expenses related to these other gas sales volumes were $2 million for the three months ended September 30, 2019 compared to $4 million for the three months ended September 30, 2018.
The
Other Gas segment recognized an unrealized gain on commodity derivative instruments of $157 million for the three months ended September 30, 2019 compared to $15 million for the three months ended September 30, 2018. The unrealized 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.
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 $29 million for the three months ended September 30, 2019 compared to $11 million for the three months ended September 30, 2018. Purchased gas costs were $27
million for the three months ended September 30, 2019 compared to $11 million for the three months ended September 30, 2018. The period-to-period increase in purchased gas revenue was due to the increase in purchased gas sales volumes, offset in part by a decrease in the average sales price.
Other operating income was $4 million for the three months ended September 30, 2019 compared to $3 million for the three months ended September 30, 2018. The $1 million increase was due to the following items:
For
the Three Months Ended September 30,
(in millions)
2019
2018
Variance
Percent Change
Equity in Earnings of Affiliates
$
1
$
1
$
—
—
%
Gathering
Income
2
2
—
—
%
Other
1
—
1
100.0
%
Total
Other Operating Income
$
4
$
3
$
1
33.3
%
Exploration
and Production Related Other Costs
Exploration and production related other costs were $6 million for the three months ended September 30, 2019 compared to $3 million for the three months ended September 30, 2018. The $3 million increase was due to the following items:
For
the Three Months Ended September 30,
(in millions)
2019
2018
Variance
Percent
Change
Seismic Activity
$
5
$
—
$
5
100.0
%
Lease
Expiration Costs
1
1
—
—
%
Land Rentals
—
1
(1
)
(100.0
)%
Other
—
1
(1
)
(100.0
)%
Total
Exploration and Production Other Costs
$
6
$
3
$
3
100.0
%
•
Seismic
activity increased in the period-to-period comparison due to additional geophysical research in the current period related to the Utica segment.
Other Operating Expense
Other operating expense was $21 million for the three months ended September 30, 2019 compared to $18 million for the three months ended September 30, 2018. The $3 million increase
was due to the following items:
Unutilized
Firm Transportation and Processing Fees
$
15
$
11
$
4
36.4
%
Insurance
Expense
1
—
1
100.0
%
Consulting and Professional Services
—
1
(1
)
(100.0
)%
Litigation
Expense
—
2
(2
)
(100.0
)%
Other
5
4
1
25.0
%
Total
Other Operating Expense
$
21
$
18
$
3
16.7
%
•
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 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. The Company attempts to minimize this expense by releasing (selling) unutilized firm transportation capacity to other parties when possible and when beneficial. The
42
revenue
received when this capacity is released (sold) is included in Gathering Income in Total Other Operating Income above.
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 $20 million for the three months ended September 30, 2019 compared to $27 million for the three months ended September 30, 2018. Refer to the
discussion of total company SG&A costs contained in the section "Net Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Interest Expense
Interest expense of $31 million was recognized in the three months ended September 30, 2019 compared to $29 million in the three months ended September 30, 2018. The $2
million increase was primarily due to additional borrowings on the CNX credit facility, offset, in part, by the reduction in higher-cost long-term debt resulting from the $500 million purchase, in the 2018 period, of the outstanding 8.00% senior notes due in April 2023, $200 million of which was purchased during the three months ended September 30, 2018. See Note 11 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
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.
On January 3, 2018, CNX completed the Midstream Acquisition (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). CNX Gathering holds all of the interests in CNX Midstream GP LLC, which holds the general partner interest and incentive distribution rights in CNXM. As a result of this transaction, CNX owns and controls 100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM on January 3, 2018.
For
the Three Months Ended September 30,
(in millions)
2019
2018
Variance
Midstream Revenue - Related Party
$
56
$
41
$
15
Midstream
Revenue - Third Party
19
20
(1
)
Total Revenue
$
75
$
61
$
14
Transportation,
Gathering and Compression
$
12
$
10
$
2
Depreciation, Depletion and Amortization
9
8
1
Selling,
General, and Administrative Costs
4
5
(1
)
Total Operating Costs and Expenses
25
23
2
Interest
Expense
8
7
1
Total Midstream Division Costs
33
30
3
Earnings
Before Income Tax
$
42
$
31
$
11
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.
43
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 $12 million for the three months ended September 30, 2019 compared to $10 million for the three months ended September 30, 2018, 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 September 30,
2019 compared to $5 million for the three months ended September 30, 2018. Refer to the discussion of total Company SG&A costs contained in the section "Net 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.
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 $8 million for the three months ended September 30, 2019 compared to $7 million for the three months ended September 30, 2018.
Net Income Attributable to CNX Resources Shareholders
CNX reported net income attributable to CNX Resources shareholders of $191 million, or earnings per diluted share of $1.01, for the nine months ended September 30,
2019, compared to net income attributable to CNX Resources shareholders of $695 million, or earnings per diluted share of $3.18, for the nine months ended September 30, 2018.
For the Nine Months Ended September 30,
(Dollars
in thousands)
2019
2018
Variance
Net Income
$
272,004
$
753,696
$
(481,692
)
Less:
Net Income Attributable to Noncontrolling Interest
81,325
59,090
22,235
Net Income Attributable to CNX Resources Shareholders
$
190,679
$
694,606
$
(503,927
)
CNX
consists of two principal business divisions: Exploration and Production (E&P) and Midstream.
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 earnings before income tax of $233 million for the nine months ended September 30, 2019, compared to earnings before income tax of $196
million for the nine months ended September 30, 2018. Included in the earnings for the nine months ended September 30, 2019 and 2018 were unrealized gains on commodity derivative instruments of $214 million and $76 million, respectively.
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.
As a result of the Midstream Acquisition (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q), CNX owns and controls 100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM on January 3, 2018. The resulting
gain on remeasurement to fair value of the previously held equity interest in CNX Gathering and CNXM of $624 million was included in the Gain on Previously Held Equity Interest line of the Consolidated Statements of Income in the 2018 period and was part of CNX's unallocated expenses. No such transactions occurred in the current period. Prior to the acquisition, CNX accounted for its interests in CNX Gathering and CNXM as an equity-method investment.
CNX's Midstream Division had earnings before income tax of $119 million for the nine months ended September 30, 2019, compared to earnings before income tax of $95 million
for the period from January 3, 2018 through September 30, 2018.
E&P Division Summary
Sales volumes, average sales price (including the effects of settled derivative instruments), and average costs for the E&P Division were as follows:
Transportation,
Gathering and Compression (per Mcfe)
0.96
0.84
0.12
14.3
%
Depreciation, Depletion and Amortization (DD&A) (per Mcfe)
0.87
0.90
(0.03
)
(3.3
)%
Average
Costs (per Mcfe)
2.01
2.02
(0.01
)
(0.5
)%
Average Margin (per Mcfe)
$
0.69
$
0.91
$
(0.22
)
(24.2
)%
45
Excluding
the effects of settled derivative instruments, natural gas, NGLs, and oil revenue was $1,044 million for the nine months ended September 30, 2019, compared to $1,085 million for the nine months ended September 30, 2018. The decrease was primarily due to a decrease in natural gas and NGL pricing, offset in-part by a 6.7% increase in total sales volumes.
The decrease in average sales price per Mcfe was the result of the $0.15
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 $0.13 per Mcfe decrease in the uplift from NGLs and condensate sales volumes. Both decreases were offset, in-part by the $0.06 per Mcf increase in the realized gain on commodity derivative instruments related to the Company's hedging program during the current period.
Changes in the average costs per Mcfe were primarily related to the following items:
•
Lease operating expense decreased
on a per unit basis primarily due to a decrease in water disposal costs in the period-to-period comparison due to an increase in the reuse of produced water in well completions in the current period, and also due to the sale of the majority of CNX's shallow oil and gas assets and the sale of substantially all of CNX's Ohio Utica JV assets in 2018.
•
Transportation, gathering, and compression expense increased on a per unit basis primarily due to an increase in CNXM gathering fees related to an increase in our Marcellus production and an increase in firm transportation expense, primarily as a result of new contracts that give CNX the ability to move and
sell natural gas outside of the Appalachian basin. The decrease in production from CNX's lower cost dry Utica volumes as well as the third quarter 2018 sale of CNX's Ohio JV assets also contributed to the increase on a per unit basis.
The following table presents a breakout of net liquid and natural gas sales information to assist in the understanding of the Company’s natural gas production and sales portfolio.
For
the Nine Months Ended September 30,
in thousands (unless noted)
2019
2018
Variance
Percent Change
LIQUIDS
NGLs:
Sales
Volume (MMcfe)
22,556
29,445
(6,889
)
(23.4
)%
Sales Volume (Mbbls)
3,759
4,908
(1,149
)
(23.4
)%
Gross
Price ($/Bbl)
$
19.20
$
27.96
$
(8.76
)
(31.3
)%
Gross
Revenue
$
72,095
$
137,104
$
(65,009
)
(47.4
)%
Oil:
Sales
Volume (MMcfe)
43
236
(193
)
(81.8
)%
Sales Volume (Mbbls)
7
39
(32
)
(82.1
)%
Gross
Price ($/Bbl)
$
48.24
$
58.98
$
(10.74
)
(18.2
)%
Gross
Revenue
$
347
$
2,317
$
(1,970
)
(85.0
)%
Condensate:
Sales
Volume (MMcfe)
647
1,670
(1,023
)
(61.3
)%
Sales Volume (Mbbls)
108
278
(170
)
(61.2
)%
Gross
Price ($/Bbl)
$
44.94
$
53.64
$
(8.70
)
(16.2
)%
Gross
Revenue
$
4,846
$
14,925
$
(10,079
)
(67.5
)%
GAS
Sales
Volume (MMcf)
372,524
339,679
32,845
9.7
%
Sales Price ($/Mcf)
$
2.59
$
2.74
$
(0.15
)
(5.5
)%
Gross
Revenue
$
966,574
$
930,505
$
36,069
3.9
%
Hedging
Impact ($/Mcf)
$
0.07
$
0.01
$
0.06
600.0
%
Gain
on Commodity Derivative Instruments - Cash Settlement
26,331
2,518
23,813
945.7
%
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.
46
For
the Nine Months Ended September 30,
(in millions)
2019
2018
Variance
Percent
Change
SG&A
Long-Term
Equity-Based Compensation (Non-Cash)
$
37
$
16
$
21
131.3
%
Salaries
and Wages
31
30
1
3.3
%
Short-Term Incentive Compensation
9
17
(8
)
(47.1
)%
Other
32
36
(4
)
(11.1
)%
Total
SG&A
$
109
$
99
$
10
10.1
%
•
Long-term
equity-based compensation increased $21 million in the period-to-period comparison due to the Company incurring an additional $20 million of long-term equity-based compensation (non-cash) expense during the nine months ended September 30, 2019. The additional expense was a result of the acceleration of vesting of certain restricted stock units and performance share units held by certain employees related to a change in control event (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).
•
Short-term
incentive compensation decreased $8 million due to lower projected payouts in the current period.
Unallocated Expense
Certain costs and expenses, such as other expense (income), gain on asset sales and abandonments related to non-core assets, gain on previously held equity interest, loss on debt extinguishment, impairment of other intangible assets 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 Nine Months Ended September 30,
(in millions)
2019
2018
Variance
Percent
Change
Other Income
Royalty
Income
$
4
$
12
$
(8
)
(66.7
)%
Right
of Way Sales
4
5
(1
)
(20.0
)%
Interest Income
2
—
2
100.0
%
Other
—
5
(5
)
(100.0
)%
Total
Other Income
$
10
$
22
$
(12
)
(54.5
)%
Other
Expense
Professional Services
$
2
$
6
$
(4
)
(66.7
)%
Bank
Fees
9
8
1
12.5
%
Other Corporate Expense
2
3
(1
)
(33.3
)%
Total
Other Expense
$
13
$
17
$
(4
)
(23.5
)%
Total
Other Expense (Income)
$
3
$
(5
)
$
8
(160.0
)%
Gain
on Asset Sales and Abandonments
A gain on asset sales of $8 million related to non-core assets was recognized in the nine months ended September 30, 2019 compared to a gain of $147 million in the nine months ended September 30, 2018, primarily due to the sale of substantially all of CNX's Ohio Utica JV assets. See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Also
refer to the discussion of Loss (Gain) 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.
47
Gain on Previously Held Equity Interest
CNX recognized a gain on previously held equity interest of $624 million
in the nine months ended September 30, 2018 due to the Midstream Acquisition in January 2018. No such transactions occurred in the current period. See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Loss on Debt Extinguishment
Loss on debt extinguishment of $8 million was recognized in the nine months ended September 30, 2019 compared to a loss on debt
extinguishment of $54 million in the nine months ended September 30, 2018. During the nine months ended September 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. During the nine months end September 30, 2018 CNX purchased $391 million
of its 5.875% Senior notes due in April 2022 at an average price equal to 103.8% of the principal amount and redeemed the $500 million 8.00% Senior notes due in April 2023 at an average price equal to 106.0% of the principal amount. See Note 11 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Impairment of Other Intangible Assets
Intangible assets are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.
An impairment loss would be recognized when the carrying amount of the asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recorded would be the excess of the asset's carrying value over its fair value.
In connection with the AEA with HG Energy (See Note 5 - Acquisition and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information) that occurred during the nine months ended September 30, 2018, CNX determined that the carrying value of the other intangible asset - customer relationships exceeded its fair value, and an impairment of $19
million was included in Impairment of Other Intangible Assets in the Consolidated Statement of Income. No such transactions occurred in the current period.
Income Taxes
The effective income tax rate was 22.3% for the nine months ended September 30, 2019 compared to 24.1% for the nine months ended September 30, 2018. The effective rate for the nine months
ended September 30, 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. The effective rate for the nine months ended September 30, 2018 differs from the U.S. federal statutory 21% primarily due to a benefit from the filing of a Federal 10-year net operating loss (“NOL”) carryback which resulted in the Company being able to utilize previously valued tax attributes at a tax rate differential of 14%, as well as non-controlling interest. The benefits were offset by increases for both state income taxes and state valuation allowances.
See
Note 6 - Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
The E&P division had earnings before income tax of $233 million for the nine months ended September 30, 2019 compared to earnings before income tax of $196 million for the nine
months ended September 30, 2018. Variances by individual E&P segment are discussed below.
The Marcellus segment had earnings before income tax of $178 million for the nine months ended September 30, 2019 compared to earnings before income tax of $156 million for the nine months ended September 30, 2018.
Gain
on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.07
$
0.01
$
0.06
600.0
%
Average
Sales Price - NGLs (per Mcfe)*
$
3.20
$
4.67
$
(1.47
)
(31.5
)%
Average
Sales Price - Condensate (per Mcfe)*
$
7.43
$
8.91
$
(1.48
)
(16.6
)%
Total
Average Marcellus Sales Price (per Mcfe)
$
2.71
$
2.94
$
(0.23
)
(7.8
)%
Average
Marcellus Lease Operating Expenses (per Mcfe)
0.10
0.17
(0.07
)
(41.2
)%
Average Marcellus Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.06
(0.02
)
(33.3
)%
Average
Marcellus Transportation, Gathering and Compression Costs (per Mcfe)
1.21
1.13
0.08
7.1
%
Average Marcellus Depreciation, Depletion and Amortization
Costs (per Mcfe)
0.70
0.81
(0.11
)
(13.6
)%
Total Average Marcellus Costs (per Mcfe)
$
2.05
$
2.17
$
(0.12
)
(5.5
)%
Average
Margin for Marcellus (per Mcfe)
$
0.66
$
0.77
$
(0.11
)
(14.3
)%
*
NGLs and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.
The Marcellus segment had natural gas, NGLs and oil revenue of $709 million for the nine months ended September 30, 2019 compared to $591 million for the nine months ended September 30, 2018. The $118 million increase
was due to a 33.4%increase in total Marcellus sales volumes. The increase in sales volumes was primarily due to additional wells being turned in-line throughout 2018 and the first nine months of 2019 as part of the Company's ongoing drilling and completions program.
The decrease in the total average Marcellus sales price was primarily due to an $0.08 per Mcf decrease in the average sales price for natural gas and a $1.47 per Mcfe decrease in the average NGL sales price, offset
in part by a $0.06 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 185.9 Bcf of the Company's produced Marcellus gas sales volumes for the nine months ended September 30, 2019 at an average gain of $0.10 per Mcf. For the nine months
ended September 30, 2018, these financial hedges represented approximately 148.9 Bcf at an average gain of $0.01 per Mcf.
Total operating costs and expenses for the Marcellus segment were $549 million for the nine months ended September 30, 2019 compared to $436 million for the nine months ended September 30,
2018. The increase in total dollars and decrease in unit costs for the Marcellus segment were due to the following items:
•Marcellus lease operating expenses were $27 million for the nine months ended September 30, 2019 compared to $34 million for the nine months ended September 30, 2018. The decrease in total dollars 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, as well as a reduction in employee costs. The decrease in unit costs was driven by the decrease in total dollars, along with the 33.4%increase in total Marcellus sales volumes.
•Marcellus production, ad valorem, and other fees were $11 million for the nine months ended September 30, 2019 compared to $13
million for the nine months ended September 30, 2018. The decrease in total dollars was primarily related to a decrease in CNX's severance tax liability due to the production mix by state and lower natural gas prices. The decrease in unit costs was driven by the decreased total dollars, along with the 33.4%increase in total Marcellus sales volumes.
50
•Marcellus
transportation, gathering and compression costs were $325 million for the nine months ended September 30, 2019 compared to $228 million for the nine months ended September 30, 2018. The increase in total dollars was primarily related to the increase in production which resulted in an increase in both CNX Midstream fees as well as an increase in utilized firm transportation expense. The increase in firm transportation total dollars was also related to new contracts,
which began during the 2019 period, that give CNX the ability to move and sell natural gas outside of the Appalachian basin. These increases were offset by lower processing costs from a drier production mix. The increase in unit costs was driven by the increased total dollars described above.
•Depreciation, depletion and amortization costs attributable to the Marcellus segment were $186 million for the nine months ended September 30, 2019 compared to $161 million for the nine months ended September 30,
2018. These amounts included depletion on a unit of production basis of $0.68 per Mcfe and $0.79 per Mcfe, respectively. The decrease in units of production depreciation, depletion and amortization rate is the result of positive reserve revisions within our core development area in the current period. 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 $68 million for the nine months ended September 30, 2019 compared to earnings before income tax of $144 million for the nine months ended September 30, 2018.
Gain
on Commodity Derivative Instruments - Cash Settlement- Gas (per Mcf)
$
0.07
$
0.01
$
0.06
600.0
%
Average
Sales Price - NGLs (per Mcfe)*
$
—
$
4.60
$
(4.60
)
(100.0
)%
Average
Sales Price - Condensate (per Mcfe)*
$
—
$
9.03
$
(9.03
)
(100.0
)%
Total
Average Utica Sales Price (per Mcfe)
$
2.50
$
2.73
$
(0.23
)
(8.4
)%
Average
Utica Lease Operating Expenses (per Mcfe)
0.15
0.22
(0.07
)
(31.8
)%
Average Utica Production, Ad Valorem, and Other Fees (per Mcfe)
0.04
0.04
—
—
%
Average
Utica Transportation, Gathering and Compression Costs (per Mcfe)
0.28
0.37
(0.09
)
(24.3
)%
Average Utica Depreciation, Depletion and Amortization Costs (per
Mcfe)
1.23
0.90
0.33
36.7
%
Total Average Utica Costs (per Mcfe)
$
1.70
$
1.53
$
0.17
11.1
%
Average
Margin for Utica (per Mcfe)
$
0.80
$
1.20
$
(0.40
)
(33.3
)%
*NGLs
and Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil, NGLs, condensate, and natural gas prices.
The Utica segment had natural gas, NGLs and oil revenue of $208 million for the nine months ended September 30, 2019 compared to $326 million for the nine months ended September 30, 2018. The $118 million decrease
was due to the 28.7%decrease in total Utica sales volumes and a 6.9%decrease in the average sales price for natural gas. The decrease in total Utica sales volumes was primarily due to the sale of substantially all of CNX's Ohio Utica JV assets in the third quarter of 2018 as well as normal production declines in the remaining dry Utica wells.
The decrease in total average Utica sales price was primarily due to a $0.18 per Mcf decrease in average gas sales price. Additionally, there was a $0.11
per Mcfe decrease in the uplift from NGLs and condensate sales volumes when excluding the impact of hedging due to the sale of the previously mentioned Ohio JV assets in the third quarter of 2018 which consisted primarily of wet Utica production. The decreases were partially offset by a $0.06 per Mcf increase in the realized gain on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 60.6 Bcf of the
51
Company's produced Utica gas sales volumes for the nine months ended
September 30, 2019 at an average gain of $0.10 per Mcf. For the nine months ended September 30, 2018, these financial hedges represented approximately 78.7 Bcf at an average gain of $0.01 per Mcf.
Total operating costs and expenses for the Utica segment were $146 million for the nine months ended September 30,
2019 compared to $183 million for the nine months ended September 30, 2018. 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 $13 million for the nine months ended September 30, 2019 compared to $26 million for the nine
months ended September 30, 2018. 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 described above. The decrease in unit costs was driven by the decrease in total dollars.
•Utica transportation, gathering and compression costs were $24 million for the nine months ended September 30,
2019 compared to $44 million for the nine months ended September 30, 2018. The $20 million decrease in total dollars and $0.09 per Mcfe decrease in unit costs were both due to the overall decrease in Utica volumes as well as the shift to lower cost dry Utica production.
•Depreciation, depletion and amortization costs attributable to the Utica segment were $105 million for the nine months
ended September 30, 2019 compared to $108 million for the nine months ended September 30, 2018. These amounts included depletion on a unit of production basis of $1.17 per Mcfe and $0.90 per Mcfe, respectively. The increase in the units of production depreciation, depletion and amortization rate was due to negative reserve revisions, an increase in capital expenditures and a higher depreciation, depletion and amortization rate on deep dry Utica wells compared to the lower capital cost Utica wells which were part of the Ohio JV asset sale in 2018. 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 $29 million for the nine months ended September 30, 2019 compared to earnings before income tax of $35 million for the nine months ended September 30,
2018.
Gain
on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$
0.07
$
0.01
$
0.06
600.0
%
Total
Average CBM Sales Price (per Mcf)
$
3.07
$
3.37
$
(0.30
)
(8.9
)%
Average
CBM Lease Operating Expenses (per Mcf)
0.30
0.37
(0.07
)
(18.9
)%
Average CBM Production, Ad Valorem, and Other Fees (per Mcf)
0.13
0.12
0.01
8.3
%
Average
CBM Transportation, Gathering and Compression Costs (per Mcf)
0.70
0.82
(0.12
)
(14.6
)%
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.24
1.29
(0.05
)
(3.9
)%
Total
Average CBM Costs (per Mcf)
$
2.37
$
2.60
$
(0.23
)
(8.8
)%
Average
Margin for CBM (per Mcf)
$
0.70
$
0.77
$
(0.07
)
(9.1
)%
The
CBM segment had natural gas revenue of $125 million for the nine months ended September 30, 2019 compared to $153 million for the nine months ended September 30, 2018. The $28 million decrease was due to the 8.1%decrease in total CBM sales volumes and the 11.0%decrease in the average gas sales price. The decrease in CBM sales
volumes was primarily due to normal well declines, as well as the sale of certain CBM assets that were sold along with the majority of CNX's shallow oil and gas assets in 2018 (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information).
52
The total average CBM sales price decreased $0.30 per Mcf due to a $0.37decrease in average gas sales price, offset in part by a $0.06 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 29.6 Bcf of the Company's produced CBM sales volumes for the nine months ended September 30, 2019 at an average gain of $0.10 per Mcf. For the nine months ended September 30, 2018,
these financial hedges represented approximately 34.8 Bcf at an average gain of $0.01 per Mcf.
Total operating costs and expenses for the CBM segment were $99 million for the nine months ended September 30, 2019 compared to $118 million for the nine months ended September 30, 2018. The decrease in total dollars and decrease
in unit costs for the CBM segment were due to the following items:
•CBM lease operating expense was $13 million for the nine months ended September 30, 2019 compared to $17 million for the nine months ended September 30, 2018. The $4 million decrease was primarily due to reductions in contractor services, a decrease in repairs and maintenance costs, and a reduction in employee costs. The decrease
in unit costs was also due to the decrease in total dollars.
•CBM transportation, gathering and compression costs were $29 million for the nine months ended September 30, 2019 compared to $37 million for the nine months ended September 30, 2018. The $8 million decrease in total dollars as well as the $0.12
per Mcf decrease in unit costs were primarily related to a decrease in electrical power expense as well as a decrease in contractor services.
•Depreciation, depletion and amortization costs attributable to the CBM segment were $52 million for the nine months ended September 30, 2019 compared to $59 million for the nine months ended September 30, 2018. These amounts included depletion on a unit of production basis of $0.68
per Mcfe and $0.70 per Mcfe, respectively. 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 $42 million for the nine months ended September 30, 2019 compared to a loss before
income tax of $139 million for the nine months ended September 30, 2018.
*Oil 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 oil and natural gas prices.
The Other Gas segment includes activity not assigned to the Marcellus, Utica, or CBM segments. This segment also includes purchased gas activity, unrealized gain on commodity derivative instruments, exploration and production related other costs and other operational activity not assigned to a specific segment.
Other Gas sales volumes were primarily related to shallow oil and gas production. CNX sold substantially all of these assets on March 30, 2018 (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional
information). There was $2 million of natural gas and oil revenue related to the Other Gas segment for the nine months ended September 30, 2019 compared to $15 million for the nine months ended September 30, 2018. The decrease in natural gas and oil revenue was due to the asset sale. Total operating costs and expenses related to these other gas sales volumes were $5 million for the nine months ended September 30,
2019 compared to $17 million for the nine months ended September 30, 2018.
The Other Gas segment recognized an unrealized gain on commodity derivative instruments of $214 million as well as cash settlements paid of $1 million for the nine months ended September 30, 2019. For the nine months ended
September 30, 2018, the Other Gas segment recognized an unrealized gain on commodity derivative instruments of $76 million as well as cash settlements received of $1 million. The unrealized 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.
53
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 $64 million for the nine months ended September 30, 2019 compared to $39 million for the nine months ended September 30, 2018. Purchased gas costs were $62
million for the nine months ended September 30, 2019 compared to $37 million for the nine months ended September 30, 2018. 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 $10 million for the nine months ended September 30, 2019 compared to $22 million for the nine months ended September 30, 2018. The $12 million decrease was due to the following items:
For
the Nine Months Ended September 30,
(in millions)
2019
2018
Variance
Percent Change
Water Income
$
1
$
11
$
(10
)
(90.9
)%
Equity
in Earnings of Affiliates
2
4
(2
)
(50.0
)%
Gathering Income
7
7
—
—
%
Total
Other Operating Income
$
10
$
22
$
(12
)
(54.5
)%
•
Water
income decreased$10 million due to nominal sales of freshwater to third-parties for hydraulic fracturing in the 2019 period compared to the 2018 period.
Exploration and Production Related Other Costs
Exploration and production related other costs were $15 million for the nine months ended September 30, 2019 compared to $9 million for the nine months ended September 30,
2018. The $6 million increase was due to the following items:
For the Nine Months Ended September 30,
(in millions)
2019
2018
Variance
Percent
Change
Seismic
Activity
$
6
$
—
$
6
100.0
%
Lease
Expiration Costs
5
4
1
25.0
%
Land Rentals
2
3
(1
)
(33.3
)%
Other
2
2
—
—
%
Total
Exploration and Production Other Costs
$
15
$
9
$
6
66.7
%
•
Seismic
activity increased in the period-to-period comparison due to additional geophysical research in the current period related to the Utica segment.
54
Other Operating Expense
Other operating expense was $60 million for the nine months ended September 30, 2019 compared to $51 million for the nine months ended September 30,
2018. The $9 million increase was due to the following items:
Unutilized
Firm Transportation and Processing Fees
$
43
$
29
$
14
48.3
%
Idle
Equipment and Service Charges
8
5
3
60.0
%
Insurance Expense
2
2
—
—
%
Severance
Expense
1
1
—
—
%
Litigation Expense
—
3
(3
)
(100.0
)%
Water
Expense
1
5
(4
)
(80.0
)%
Other
5
6
(1
)
(16.7
)%
Total
Other Operating Expense
$
60
$
51
$
9
17.6
%
•
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 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. 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.
•
Idle
Equipment and Service Charges primarily relate to the temporary idling of some of the Company's natural gas drilling rigs as well as related equipment and other services that may be needed in the natural gas drilling and completions process. The increase of $3 million in the period-to-period comparison was primarily the result of the acceleration of five months of idle rig expense due to CNX terminating one of its drilling rig contacts early, as well as additional idle service expense related to the Shaw 1G Utica Shale well that occurred in the first quarter of 2019.
•
Water
Expense decreased $4 million due to the associated costs related to the sales of freshwater to third-parties for hydraulic fracturing in the 2018 period in Total Other Operating Income above. There were nominal sales in the 2019 period.
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 $95 million for the nine months ended September 30, 2019 compared to $82
million for the nine months ended September 30, 2018. Refer to the discussion of total company SG&A costs contained in the section "Net Income Attributable to CNX Resources Shareholders"of this Form 10-Q for a detailed cost explanation.
Interest Expense
Interest expense of $92 million was recognized in the nine months ended September 30, 2019 compared to $96
million in the nine months ended September 30, 2018. The $4 million decrease was primarily due to the reduction in higher cost long-term debt, resulting from the $500 million purchase of the outstanding 8.00% senior notes due in April 2023 and the $391 million purchase of the outstanding 5.875% senior notes due in April 2022 during the nine months ended September 30, 2018. Additionally, the Company purchased $400 million of its outstanding 5.875% senior notes due in April 2022 during the nine
months ended September 30, 2019. These decreases were partially offset by a completed private offering of $500 million of 7.25% senior notes due March 2027 during the nine months ended September 30, 2019, as well as additional borrowings on the CNX credit facility. See Note 11 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
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.
On January 3, 2018, CNX completed the Midstream Acquisition (See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). CNX Gathering holds all of the interests in CNX Midstream GP LLC, which holds the general partner interest and incentive distribution rights in CNXM. As a result of this transaction, CNX owns and controls 100% of CNX Gathering, making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM on January 3, 2018.
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.
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.
56
Transportation, Gathering and Compression
Transportation, Gathering and Compression costs were $36 million for both the nine months ended September 30,
2019 and the period January 3, 2018 through September 30, 2018, 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 $14 million for the nine months ended September 30, 2019 compared to $17 million for the period January 3, 2018 through September 30, 2018. Refer to the discussion of total Company SG&A costs contained in the section "Net 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 (Gain) on Asset Sales and Abandonments
During the nine months ended September 30, 2019, CNXM abandoned the construction of a compressor station that was designed to support additional production within certain areas of what is referred to as their "Anchor Systems," incurring a loss of $7 million that is included in Gain on Asset Sales and Abandonments in the Consolidated Statements of Income. CNXM continues to evaluate projects as CNX's and third-party
customer development plans change in order to optimize system design and to actively manage capital investments. During the period January 3, 2018 through September 30, 2018, CNXM sold property and equipment to an unrelated third-party for $6 million in cash proceeds resulting in a gain of $2 million.
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 $23 million for the nine
months ended September 30, 2019 compared to $17 million for the period January 3, 2018 through September 30, 2018.
57
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 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. 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, 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.
Uncertainty in the financial markets brings additional potential risks to CNX. These risks include declines in the Company's stock price, less availability and higher costs of additional credit, potential
counterparty defaults, and commercial bank failures. Financial market disruptions may impact the Company's collection of trade receivables. As a result, CNX regularly monitors the creditworthiness of its customers and counterparties and manages credit exposure through payment terms, credit limits, prepayments and security. CNX believes that its current group of customers is financially sound and represents no abnormal business risk.
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 $313 million at September 30, 2019 and a net asset of $99 million at December 31, 2018. 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 $482 million in the period-to-period comparison.
•
Adjustments to reconcile net income to cash provided by operating activities primarily consisted of a $181 million change in deferred income taxes, a $624 million decrease in gain on previously held equity interest, a $148 million decrease in gain on asset sales and abandonments, a $138 million net change in commodity derivative instruments, a $21 million increase in stock-based
compensation, a $19 million decrease in impairment of other intangible assets, and a $47 million decrease in the loss on debt extinguishment.
Cash flows from investing activities changed in the period-to-period comparison primarily due to the following items:
•
Capital expenditures increased $170 million in the period-to-period comparison primarily due to increased expenditures in the Utica and Marcellus Shale plays resulting from increased drilling and completions activity as well as additional water expenditures due to the installation of new water pipelines. CNXM's capital expenditures increased due
to additional spend in order to support both CNX's and third-party customer development plans.
•
Proceeds from asset sales decreased $486 million primarily due to the 2018 sale of substantially all of the Ohio Utica Joint Venture Assets in the wet gas Utica Shale areas of Belmont, Guernsey, Harrison, and Noble counties along with the 2018 sale of our shallow oil and gas and CBM assets in Pennsylvania and West Virginia. See Note 5 - Acquisitions
58
and Dispositions
in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
•
In January 2018, CNX completed the Midstream Acquisition for a net payment of $299 million. See Note 5 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
Cash flows from financing activities changed in the period-to-period comparison primarily due to the following items:
•
During
the nine months ended September 30, 2019, CNX paid $406 million to repurchase $400 million of the senior notes due in 2022 at 101.5% of the principal amount. During the nine months ended September 30, 2018, CNX paid $530 million to repurchase all of the remaining senior notes due in 2023 at 106.0% of the principal amount as well as $405 million to repurchase $391 million of the senior notes due in 2022 at 103.8% of the principal amount. See Note 11 - 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 nine months ended September
30, 2019, CNX received proceeds of $500 million from the issuance of senior notes due in 2027. During the nine months ended September 30, 2018, CNX received proceeds of $394 million from the issuance of CNXM's senior notes due in 2026. See Note 11 - 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 nine months ended September 30, 2019, CNX repurchased $117 million of its common stock on the open market compared to $294 million in the nine months ended September 30, 2018.
•
In
the nine months ended September 30, 2019, there was $1 million of net proceeds from the CNX credit facility and $439 million of proceeds in the 2018 period.
•
In the nine months ended September 30, 2019, there were $162 million of net proceeds from the CNXM credit facility compared to $106 million of net payments during the nine months ended September 30, 2018.
•
In the
nine months ended September 30, 2019, there were $10 million in debt issuance and financing fees compared to $20 million during the nine months ended September 30, 2018.
•
In the nine months ended September 30, 2019, there were $47 million in distributions to CNXM unitholders, compared to $41 million during the nine months ended September 30, 2018.
The
following is a summary of the Company's significant contractual obligations at September 30, 2019 (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
$
7,670
$
2,185
$
485
$
—
$
10,340
Gas
Firm Transportation and Processing
244,865
486,838
412,475
1,113,008
2,257,186
Long-Term
Debt
—
895,415
859,200
895,187
2,649,802
Interest
on Long-Term Debt
147,753
297,695
173,943
129,626
749,017
Finance
Lease Obligations
7,203
8,881
519
—
16,603
Interest
on Finance Lease Obligations
933
498
94
—
1,525
Operating
Lease Obligations
65,061
88,077
7,574
26,863
187,575
Interest
on Operating Lease Obligations
7,714
7,400
3,326
5,171
23,611
Long-Term
Liabilities—Employee Related (a)
1,841
3,934
4,399
25,344
35,518
Other
Long-Term Liabilities (b)
207,067
7,625
8,325
18,173
241,190
Total
Contractual Obligations (c)
$
690,107
$
1,798,548
$
1,470,340
$
2,213,372
$
6,172,367
_________________________
(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.
59
Debt
At
September 30, 2019, CNX had total long-term debt of $2,650 million, excluding unamortized debt issuance costs. This long-term debt consisted of:
•
An aggregate principal amount of $895 million of 5.875% Senior Notes due in April 2022 plus $1 million of 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.
•
An aggregate principal amount of $613 million in outstanding borrowings under the CNX 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.
•
An aggregate principal amount of $400 million of 6.50% Senior Notes due in March 2026 issued by CNXM, less $5 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 $246 million in outstanding borrowings under the CNXM revolver. CNX is not a guarantor of CNXM's revolving credit facility.
Total Equity and Dividends
CNX had total equity of $5,222 million at September 30, 2019 compared to $5,082 million at December 31, 2018. 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 2.45 to 1.00 at September 30, 2019. 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 nine months ended September 30, 2019.
On October 16, 2019 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 $0.4001 per unit with respect to the third quarter of 2019. The distribution will be made on November 12, 2019 to unitholders of record as of the close of business on November 5, 2019. The distribution, which equates
to an annual rate of $1.6004 per unit, represents an increase of 3.5% over the prior quarter, and an increase of 15% over the distribution paid with respect to the third quarter of 2018.
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 September 30, 2019. Management believes these items will expire without being funded. See Note 13 - Commitments and Contingent 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.
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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 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 and developing 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 drilling;
•
challenges associated with strategic determinations, including the allocation of capital and other resources to strategic opportunities;
•
our development and exploration projects, as well as CNXM’s midstream system development, require substantial capital expenditures;
•
the
impact of potential, as well as any adopted environmental regulations including any relating to greenhouse gas emissions on our operating costs as well as on the market for natural gas and for our securities;
•
environmental regulations can increase costs and introduce uncertainty that could adversely impact the market for natural gas with potential short and long-term liabilities;
•
our operations are subject to operating risks that could increase our operating expenses and decrease our production levels which could
adversely affect our results of operation and our operations are also subject to hazards and any losses or liabilities we suffer from hazards, which occur in our operations may not be fully covered by our insurance policies;
•
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;
•
if natural gas prices decrease or drilling efforts are unsuccessful, we may be required to
record write-downs of our proved natural gas properties;
•
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, which could impair our profitability;
•
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;
•
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;
61
•
failure to find or acquire economically recoverable natural gas reserves to replace our current natural gas reserves;
•
risks associated with our debt;
•
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 and 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;
•
the
separation of CONSOL Energy could result in substantial tax liability; and
•
other factors discussed in the Company's 2018 Annual Report on Form 10-K under “Risk Factors,” as updated by any subsequent Forms 10-Q, which are on file at the Securities and Exchange Commission.
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. CNX uses fixed-price contracts, options and derivative commodity instruments 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.
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 2018 Annual Report on Form 10-K.
At September 30, 2019 and December 31,
2018, our open gas derivative instruments were in a net asset position with a fair value of $313 million and $99 million, respectively. A sensitivity analysis has been performed to determine the incremental effect on future earnings related to open derivative instruments at September 30, 2019 and December 31, 2018. A hypothetical 10 percent increase in future natural gas prices would have decreased the fair value by $411 million and $427 million at September 30,
2019 and December 31, 2018, respectively. A hypothetical 10 percent decrease in future natural gas prices would have increased the fair value by $428 million and $453 million at September 30, 2019 and December 31, 2018, respectively.
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CNX's interest expense is sensitive to changes in the general level
of interest rates in the United States. At September 30, 2019 and December 31, 2018, CNX had $1,798 million and $1,703 million, respectively, aggregate principal amount of debt outstanding under fixed-rate instruments, including unamortized debt issuance costs of $10 million and $9 million, respectively. At September 30, 2019 and December 31, 2018, CNX had $859 million
and $696 million, respectively, of debt outstanding under variable-rate instruments. CNX’s primary exposure to market risk for changes in interest rates relates to our Credit Facility, under which there were $613 million of borrowings at September 30, 2019 and $612 million at December 31, 2018, and CNXM's revolving credit facility, under which there were $246 million of borrowings at September 30, 2019 and $84 million at December 31,
2018. A hypothetical 100 basis-point increase in the average rate for CNX's and CNXM's revolving credit facilities would decrease pre-tax future earnings as of September 30, 2019 and December 31, 2018 by $9 million and $7 million, respectively, 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 October 9, 2019, 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
2019 Fixed Price Volumes
Hedged Bcf
N/A
N/A
N/A
115.8
115.8
Weighted
Average Hedge Price per Mcf
N/A
N/A
N/A
$
2.66
$
2.66
2020
Fixed Price Volumes
Hedged Bcf
121.3
123.6
126.4
121.5
489.6*
Weighted
Average Hedge Price per Mcf
$
2.68
$
2.49
$
2.49
$
2.52
$
2.54
2021
Fixed Price Volumes
Hedged Bcf
104.5
105.7
106.9
105.2
422.3
Weighted
Average Hedge Price per Mcf
$
2.40
$
2.40
$
2.40
$
2.39
$
2.40
2022
Fixed Price Volumes
Hedged Bcf
68.6
69.3
70.1
70.1
278.1
Weighted
Average Hedge Price per Mcf
$
2.45
$
2.45
$
2.45
$
2.43
$
2.44
2023
Fixed Price Volumes
Hedged Bcf
35.7
36.1
36.4
36.4
144.6
Weighted
Average Hedge Price per Mcf
$
2.28
$
2.28
$
2.28
$
2.28
$
2.28
2024
Fixed Price Volumes
Hedged Bcf
30.5
30.6
30.9
30.9
122.9
Weighted
Average Hedge Price per Mcf
$
2.45
$
2.45
$
2.45
$
2.45
$
2.45
*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.
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 September 30, 2019 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.
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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 13—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.
ITEM 1A. RISK FACTORS
CNX is subject to certain 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 2018 Annual Report on Form 10-K as filed with the SEC on February 7, 2019 ("2018 Form 10-K"). The risks described in the 2018 Form 10-K could materially and adversely affect CNX's business, financial condition, cash flows, and results of operations. There have been no material changes to the risks described in the 2018 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth repurchases of our common stock during the three months ended September 30, 2019:
ISSUER
PURCHASES OF EQUITY SECURITIES
(a)
(b)
(c)
(d)
Period
Total Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (000's omitted)
(1)
Includes shares withheld from employees to satisfy minimum tax withholding obligations associated with the vesting of restricted stock during the period.
(2) Shares repurchased as part of the Company’s current $750 million share repurchase program authorized by the Board of Directors on October 30, 2017 and subsequently amended from time to time (See Note 18 - Stock Repurchase in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for more information), which is not subject to an expiration date.
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.
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.