Consol Energy ends third quarter with $2.8 billion of liquidity, eliminates all short-term debt

By Paul Deckelman

New York, Oct. 27 - Consol Energy Inc. ended the third quarter with $2.8 billion of overall liquidity - and with all of its short-term debt paid off. The Canonsburg, Pa.-based coal and natural gas producer used its hefty cash flow and refinancing proceeds.

In fact, according to the company's chief financial officer, there is no debt coming due before 2017 - reason enough for William J. Lyons to declare on Thursday's conference call with analysts following the release of the results that "our balance sheet has never been stronger."

Short-term debt extinguished

As of the end of the quarter on Sept. 30, that balance sheet included long-term debt of $3.123 billion and $55.2 million of capital lease obligations, both down slightly from $3.128 billion of long-term debt and $57 million of capital lease obligations at the end of 2010.

However, during those nine months, the company completely eliminated $284 million of short-term notes payable as well as $200 million of borrowings under a securitization facility. Additionally, the current portion of its long-term debt declined to $20 million at Sept. 30 from $24 million at Dec. 31, 2010.

On March 2, the company priced a $250 million issue of 6 3/8% senior notes due 2021 in a quickly shopped deal, planning to use the proceeds to reduce its outstanding debt under its short-term credit facilities and accounts receivable securitization facility, with an ultimate goal of repaying its outstanding 7 7/8% senior notes due 2012. It ultimately redeemed all of the 2012 notes in early April.

Also in April, Consol and its bankers agreed to an amended and restated $1.5 billion senior secured credit facility, while subsidiary CNX Gas Corp. also amended and restated its senior secured credit agreement. While parent Consol's new revolver was the same size, CNX's new facility was increased to $1 billion from $700 million previously, and both facilities were extended out to 2016 from the 2014 maturity on the older credit agreements, which the companies had entered into in 2010.

Partnerships bring in cash

Besides those debt-market transactions, Lyons noted that the company had entered into "world-class partnerships" with other energy companies to develop its holdings in the Marcellus Shale and Utica Shale natural gas formations in the Northeastern United States - joint-venture deals that, in the words of Moody's Investors Service, "incorporate significant cash payments over the next several years, allow for the acceleration of drilling activity and producing wells and reduce Consol's otherwise substantive capital expenditure requirements." The ratings agency gave that assessment in August when it announced that it was considering Consol for an upgrade.

That followed the company's announcement that it agreed to sell, and jointly develop, a 50% interest in its 663,350 Marcellus Shale acres in Pennsylvania and West Virginia to Noble Energy, Inc., with Consol to receive aggregate payments of about $3.4 billion.

It followed that up in September with another deal, with Hess Corp., for the joint exploration and development of Consol's nearly 200,000 Utica Shale acres in Ohio, with aggregate consideration to Consol of about $593 million.

The Marcellus deal with Noble closed on Sept. 30, and the Utica deal with Hess closed on Oct. 21, meaning the positive financial effects are expected to begin showing up during the current fourth quarter.

Lyons said that "from my perspective, the partnerships helped us accelerate our active development and strengthen the balance sheet through debt repayment and reduced future capital requirements."

On a conference call following the announcement of the Noble deal, Lyons and Consol's chairman and chief executive officer, J. Brett Harvey, had told analysts and investors that the company could pay down debt, raise its stock dividend or buy back shares with its free cash flows above its capital requirements.

On Thursday, the CFO said that "we have initially chosen to retire our short-term debt and raise the dividend [by 25%], and we will revisit the share buyback option after finalizing our 2012 capital plan."

He said that bringing Noble and Hess aboard as partners in the development of those properties will reduce Consol's capital spending needs for its future drilling in those programs by about $2.6 million.

Harvey told an analyst on Thursday's call that Consol will devote its attention for the near future on the joint ventures, rather than look for acquisition opportunities.

"We're very focused on those JVs and the success of those JVs. We want these JV situations to come to our balance sheet, build a lot of free cash flow, and it puts us in a good position to make good decisions for our shareholders," he said.

Harvey added that "obviously, any M&A stuff would be looked at against internal projects - but we're not out hunting. We've got a lot on our plate, and we've executed a lot, and now we need to make it happen - our partners are important to us to get that done."

Consol sees strong liquidity

Lyons said that the $2.8 billion of total liquidity at the end of the quarter - which did not include the proceeds from the Hess deal, which closed after the end of the period - included $460 million of cash, leading him to opine that "certainly I feel comfortable with where we are right now."

According to the company's announcement of its results, the $460 million - like the overall $2.8 billion liquidity total - was split between parent Consol and unit CNX Gas. Consol had $1.5 billion of total liquidity, including $63.8 million of cash, $200 million available under its now-repaid accounts receivable securitization facility and $1.234 billion of availability under its $1.5 billion bank facility. It also had outstanding letters of credit of $265.2 million.

CNX Gas meantime had $1.338 billion of total liquidity, comprised of $408.7 million of cash and $929.8 million available on its $1 billion revolver, with outstanding letters of credit of $70.2 million.

For the quarter, Consol posted net income of $167 million, or 73 cents per diluted share, versus $75 million, or 33 cents per share, in the year-earlier third quarter. Revenue swelled to $1.4 billion - the most Consol has recorded for any third quarter.

Lyons said the company also had "outstanding" operating cash flows of $1.25 billion over the first nine months of the year.

All told, he said, Consol "had a very active and successful third quarter from an operational, financial and strategic perspective."

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