CNX RESOURCES CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-Q. The information provided below supplements, but does not form part of, CNX's financial statements. This discussion contains forward-looking statements that are based on the current views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from any such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact future operating performance or financial condition, please see "Part II. Item 1A. Risk Factors" and the section entitled "Forward-Looking Statements" and the "Risk Factors" contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which we filed with theSEC onFebruary 10, 2020 . CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. General CNX continues to monitor the current and potential impacts of the coronavirus COVID-19 ("COVID-19") pandemic on all aspects of our business and geographies, including how it has impacted, and may in the future, impact our operations, financial results, liquidity, contractors, customers, employees and vendors. The Company also continues to monitor a number of factors that may cause actual results of operations to differ from our historical results or current expectations. These factors include: the impact of the COVID-19 pandemic and the related global economic downturn, the historically low natural gas prices and the historically low natural gas liquids prices that began with the crude oil price war between theOrganization of Petroleum Exporting Countries ("OPEC")/Saudi Arabia andRussia in the first quarter of 2020. The natural gas liquids prices have rebounded in the third quarter. These and other factors could affect the Company's operations, earnings and cash flows for any period and could cause such results to not be comparable to those of the same period in previous years. The results presented in this Form 10-Q are not necessarily indicative of future operating results. While CNX did not incur significant disruptions to operations during the three or nine months endedSeptember 30, 2020 as a direct result of the COVID-19 pandemic, CNX is unable to predict the impact that the COVID-19 pandemic will have on us, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties. These uncertainties include the volatility and severity of the virus, the duration of the outbreak, the availability of a vaccine, governmental or other actions taken to combat the virus (which could include limitations on our operations or the operations of our customers and vendors), and the effect that the COVID-19 pandemic will have on the demand for natural gas and natural gas liquids. The continued health of our employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions is vital to our operations and cannot currently be predicted. Further, the continuing impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, CNX cannot predict the impact that COVID-19 will have on our customers, vendors and contractors; however, any material effect on these parties could adversely impact CNX. For instance, in the short term, CNX is starting to see a reduction in overall service and materials costs, due to oversupply of those services and costs, since industrial production has waned. However, if services providers to our industry are forced into bankruptcy or otherwise consolidate due to weakening economic conditions, demand could outpace supply in the long-term and cause these costs to increase. The situation surrounding COVID-19 remains fluid and unpredictable, and CNX is actively managing our response in collaboration with our contractors, customers, employees and vendors and assessing potential impacts to our financial position and operating results, as well as any adverse developments that could impact our business. CNX has also taken, and is continuing to take, proactive steps to manage any disruption in our business caused by COVID-19. For instance, even though our operations were not required to close, CNX was an early adopter in employing a work-from-home system, even before any government mandate on non-essential businesses was enacted. CNX increased its technology platform, infrastructure and security to allow for a work-from-home environment ahead of the actual need, and therefore, once the hypothetical became a reality, we believe CNX was ahead of many companies in this respect. CNX has also deployed additional safety protocols at our field sites in order to help keep our employees and contractors safe and to keep our operations running without material disruption. As the COVID-19 pandemic continues to unfold, CNX will continue to assess and update its protocols.
For further information regarding the impact of COVID-19 see Risk factors in Item 1A in our Quarterly Reports on Form 10-Q.
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--------------------------------------------------------------------------------Recent Business Developments:
OnSeptember 28, 2020 , we completed the acquisition of all of the outstanding common units ofCNX Midstream Partners LP ("CNXM") and CNXM became our indirect wholly-owned subsidiary (the "Merger") (See Note 13 - Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). In connection with the closing of the Merger, we issued 37.1 million shares of our common stock to acquire the 42.1 million common units of CNXM held by third-party CNXM investors at a fixed exchange ratio of 0.88 shares of CNX common stock for each CNXM common unit, for total implied consideration of$384.6 million . In conjunction with the Merger and to provide a greater level of transparency that is more in-line with how Management views CNX's operations, CNX has updated its segment reporting to now include a Shale segment which is made up of what was formerly the Marcellus, Utica and Midstream Segments (See Note 14 - Segments in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). CNX has recast its current and historical operating results into the new format.
Hedging Update:
Total hedged natural gas production in the 2020 fourth quarter is 124.0(1) Bcf. The annual gas hedge position is shown in the table below:
2020 2021
Volumes Hedged (Bcf), as of 10/8/20 448.8(1)(2) 459.1
1Net of purchased swaps.
2Includes actual settlements of 356.2 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.
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Results of Operations - Three Months Ended
Net (Loss) Income Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to
For the Three Months Ended September 30,
(Dollars in thousands) 2020 2019 Variance
Net (Loss) Income $ (188,793) $ 143,960 $ (332,753)
Less: Net Income Attributable to Noncontrolling Interest 15,905 28,422 (12,517)
Net (Loss) Income Attributable to CNX Resources Shareholders
Included in the loss for the three months endedSeptember 30, 2020 was an unrealized loss on commodity derivative instruments of$259 million . Included in the earnings for the three months endedSeptember 30, 2019 was an unrealized gain on commodity derivative instruments of$157 million .
Selected Operating Revenue and Other Cost Data
The following table presents sales volumes, revenue, costs, average sales prices (including the effects of settled derivatives) and average unit costs for production operations on a total Company basis:
For the Three Months Ended September 30,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Sales Volumes (Bcfe)* 115.7 128.3 (12.6)
-
Natural Gas, NGL and Oil Revenue $ 182 1.53 $ 265 2.04 $ (83) (0.51)
Gain on Commodity Derivative Instruments - Cash Settlement - Gas 90 0.83 57 0.47 33 0.36 Total Revenue 272 2.36 322 2.51 (50) (0.15) Lease Operating Expense 10 0.09 14 0.11 (4) (0.02) Production, Ad Valorem, and Other Fees 6 0.05 6 0.05 - - Transportation, Gathering and Compression 69 0.59 80 0.63 (11) (0.04) Depreciation, Depletion and Amortization (DD&A) 112 0.98 120 0.93 (8) 0.05 Average Costs 197 1.71 220 1.72 (23) (0.01) Average Margin $ 75 0.65$ 102 0.79$ (27) (0.14) *NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of NGL, condensate, and natural gas prices. The 12.6 Bcfe decrease in sales volumes when compared to the year-earlier quarter was primarily due to the temporary shut-in of new turn-in-line wells in 2020 due to low natural gas prices and normal production declines for legacy wells.
Changes in Average Costs per Mcfe were primarily related to the following items:
•Lease operating expense decreased on a per unit basis primarily due to a
decrease in water disposal costs in the period-to-period comparison due to an
increased reuse of produced water in well completions in the current period.
•Transportation, gathering, and compression expense decreased on a per unit
basis primarily due to lower processing costs due to a drier production mix and
a decrease in firm transportation due to lower gas sales volumes.
•Depreciation, depletion and amortization expense increased on a per unit basis
as a result of fixed depreciation costs related to CNX's gathering
infrastructure being spread over a lower production base in 2020. The lower
production volumes was a result of temporary shut-ins due to lower natural gas
prices.
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The following table is a summary of total other revenue and operating income and
selected other expense line items that are included in the total (loss) earnings
before income tax on a total company Mcfe equivalent and excluded from the
previous table.
For the Three Months Ended September 30,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Company Sales Volumes (Bcfe)* 115.7 128.3 (12.6)
Total Other Revenue and Operating Income $ 21 0.18 $ 22 0.17 $ (1)
0.01
Depreciation, Depletion and Amortization 2 0.02 - 0.00 2
0.02
Exploration and Production Related Other Costs 2 0.02 6 0.05 (4)
(0.03)
Selling, General and Administrative Costs 23 0.20 24 0.19 (1) 0.01 Other Operating Expense 24 0.21 21 0.16 3 0.05 Total Selected Operating Costs and Expenses 51 0.45 51 0.40 - 0.05 Other Expense 2 0.02 3 0.02 (1) 0.00 Interest Expense 38 0.33 38 0.30 - 0.03 Total Selected Other Expense 40 0.35 41 0.32 (1) 0.03 Total Selected Costs and Expenses $ 91 0.80 $ 92 0.72 $ (1)
0.08
* NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of NGL, condensate, and natural gas prices.
Average Realized Price Reconciliation
The following table presents a breakout of liquids and natural gas sales information and settled derivative information to assist in the understanding of the Company's natural gas production and sales portfolio and information regarding settled commodity derivatives:
For the Three Months Ended September 30,
in thousands (unless noted) 2020 2019 Variance Percent Change
LIQUIDS
NGL:
Sales Volume (MMcfe) 6,885 8,019 (1,134) (14.1) % Sales Volume (Mbbls) 1,147 1,337 (190) (14.2) % Gross Price ($/Bbl)$ 13.14 $ 13.68 $ (0.54) (3.9) % Gross NGL Revenue$ 15,053 $ 18,305 $ (3,252) (17.8) % Oil/Condensate: Sales Volume (MMcfe) 624 77 547 710.4 % Sales Volume (Mbbls) 104 13 91 700.0 % Gross Price ($/Bbl)$ 39.50 $ 73.12 $ (33.62) (46.0) % Gross Oil/Condensate Revenue$ 4,106 $ 931 $ 3,175 341.0 %
GAS
Sales Volume (MMcf) 108,190 120,208 (12,018) (10.0) % Sales Price ($/Mcf) $ 1.51$ 2.04 $ (0.53) (26.0) % Gross Gas Revenue$ 163,054 $ 245,815 $ (82,761) (33.7) % Hedging Impact ($/Mcf) $ 0.83$ 0.47 $ 0.36 76.6 % Gain on Commodity Derivative Instruments - Cash Settlement$ 90,311 $ 57,041 $ 33,270 58.3 % 37
-------------------------------------------------------------------------------- The decrease in the gross revenue was primarily the result of the$0.53 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas and the 12.6 Bcfe decrease in sales volumes. The decrease in the gross revenue was offset, in-part, by the increase in the realized gain on commodity derivative instruments related to the Company's hedging program.
SEGMENT ANALYSIS for the three months ended
For the Three Months Ended Difference to Three Months Ended
September 30, 2020 September 30, 2019
(in millions) Shale CBM Other Total Shale CBM Other Total
Natural Gas, NGL and Oil Revenue $ 156 $ 26 $ - $ 182 $ (73) $ (10) $ - $ (83)
Gain (Loss) on Commodity
Derivative Instruments 80 11 (260) (169) 29 5 (417) (383)
Purchased Gas Revenue - - 32 32 - - 3 3
Other Revenue and Operating Income 17 - 4 21 (2) - 1 (1)
Total Revenue and Other Operating Income 253 37 (224) 66 (46) (5) (413) (464) Lease Operating Expense 7 4 (1) 10 (3) - (1) (4) Production, Ad Valorem, and Other Fees 5 1 - 6 - (1) 1 - Transportation, Gathering and Compression 60 10 (1) 69 (10) - (1) (11) Depreciation, Depletion and Amortization 94 16 4 114 (7) (1) 2 (6) Exploration and Production Related Other Costs - - 2 2 - - (4) (4) Purchased Gas Costs - - 32 32 - - 4 4 Selling, General and Administrative Costs - - 23 23 - - (1) (1) Other Operating Expense - - 24 24 - - 3 3 Total Operating Costs and Expenses 166 31 83 280 (20) (2) 3 (19) Other Expense - - 2 2 - - (1) (1) Gain on Asset Sales and Abandonments, net - - (4) (4) - - (1) (1) Interest Expense - - 38 38 - - - - Total Other Expense - - 36 36 - - (2) (2) Total Costs and Expenses 166 31 119 316 (20) (2) 1 (21) Earnings (Loss) Before Income Tax$ 87 $ 6 $ (343) $ (250) $ (26) $ (3) $ (414) $ (443) 38
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SHALE SEGMENT
The Shale segment had earnings before income tax of$87 million for the three months endedSeptember 30, 2020 compared to earnings before income tax of$113 million for the three months endedSeptember 30, 2019 .
For the Three Months Ended
Percent
2020 2019 Variance Change
Shale Gas Sales Volumes (Bcf) 95.2 106.0 (10.8) (10.2) %
NGL Sales Volumes (Bcfe)* 6.9 8.0 (1.1) (13.8) %
Oil/Condensate Sales Volumes (Bcfe)* 0.5 0.1 0.4 400.0 %
Total Shale Sales Volumes (Bcfe)* 102.6 114.1 (11.5) (10.1) %
Average Sales Price - Gas (per Mcf) $ 1.44 $ 1.98 $ (0.54) (27.3) %
Gain on Commodity Derivative Instruments - Cash
Settlement - Gas (per Mcf) $ 0.84 $ 0.48 $ 0.36 75.0 %
Average Sales Price - NGL (per Mcfe)* $ 2.18 $ 2.28 $ (0.10) (4.4) %
Average Sales Price - Oil/Condensate (per Mcfe)*
$ 12.76 $ (6.49) (50.9) % Total Average Shale Sales Price (per Mcfe)$ 2.30 $ 2.46 $ (0.16) (6.5) % Average Shale Lease Operating Expenses (per Mcfe) 0.07 0.09 (0.02) (22.2) %
Average Shale Production, Ad Valorem, and Other Fees (per Mcfe)
0.04 0.04 - - %
Average Shale Transportation, Gathering and Compression Costs (per Mcfe)
0.58 0.61 (0.03) (4.9) %
Average Shale Depreciation, Depletion and Amortization Costs (per Mcfe)
0.93 0.89 0.04 4.5 %
Total Average Shale Costs (per Mcfe) $ 1.62 $ 1.63 $ (0.01) (0.6) %
Average Margin for Shale (per Mcfe) $ 0.68 $ 0.83 $ (0.15) (18.1) %
* NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals
six Mcf based upon the approximate relative energy content of oil and natural
gas, which is not indicative of the relationship of NGL, oil, condensate, and
natural gas prices.
The Shale segment had natural gas, NGL and oil revenue of $156 million for the
three months ended September 30, 2020 compared to $229 million for the three
months ended September 30, 2019 . The $73 million decrease was primarily due to a
27.3% decrease in the average sale price for natural gas and a 4.4% decrease in
the average sale price of NGLs, along with a 10.1% decrease in total Shale sales
volumes. The decrease in total Shale sales volumes was primarily due to the
temporary shut-in of new turn-in-line wells in 2020 due to low natural gas
prices.
The decrease in the total average Shale sales price was primarily due to a $0.54
per Mcf decrease in the average sales price for natural gas and a $0.10 per Mcfe
decrease in the average NGL sales price, offset in part by a $0.36 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 89.3 Bcf of the Company's produced
Shale gas sales volumes for the three months ended September 30, 2020 at an
average gain of $0.89 per Mcf hedged. For the three months ended September 30,
2019 , these financial hedges represented approximately 90.3 Bcf at an average
gain of $0.56 per Mcf hedged.
Total operating costs and expenses for the Shale segment were $166 million for
the three months ended September 30, 2020 compared to $186 million for the three
months ended September 30, 2019 . The decrease in total dollars and decrease in
unit costs for the Shale segment were due to the following items:
•Shale lease operating expenses were $7 million for the three months ended
September 30, 2020 compared to $10 million for the three months ended
September 30, 2019 . The decrease in total dollars and in unit costs was
primarily due to a decrease in water disposal costs in the current period due to
an increase in the reuse of produced water in well completions activity.
•Shale transportation, gathering and compression costs were $60 million for the
three months ended September 30, 2020 compared to $70 million for the three
months ended September 30, 2019 . The decreases in total dollars and unit costs
were primarily related to lower processing costs and a decrease in firm
transportation expense due to lower gas sales volumes.
•Depreciation, depletion and amortization costs attributable to the Shale
segment were $94 million for the three months ended September 30, 2020 compared
to $101 million for the three months ended September 30, 2019 . These amounts
included
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depletion on a unit of production basis of $0.81 per Mcfe and $0.82 per Mcfe,
respectively. The decrease in units of production depreciation, depletion and
amortization rate in the current period is the result of positive reserve
revisions within our core SWPA development area and lower cost reserves added in
our core SWPA development area from the 2019 development program partially
offset by an increase in the units of production depreciation, depletion and
amortization rate due to negative reserves revisions within our Ohio operations.
The remaining depreciation, depletion and amortization costs were either
recorded on a straight-line basis or related to asset retirement obligations.
Total Shale other revenue and operating income relates to natural gas gathering
services provided to third-parties. The Shale segment had other revenue and
operating income of $17 million for the three months ended September 30, 2020
compared to $19 million for the three months ended September 30, 2019 . The
decrease in the period-to-period comparison was primarily due to a reduction in
third-party volumes transported related to temporary production curtailments.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of
For
the Three Months Ended
Percent
2020 2019 Variance Change
CBM Gas Sales Volumes (Bcf) 13.0 14.1 (1.1) (7.8) %
Average Sales Price - Gas (per Mcf) $ 1.98 $ 2.52 $ (0.54) (21.4) %
Gain on Commodity Derivative Instruments - Cash
Settlement - Gas (per Mcf) $ 0.81 $ 0.43 $ 0.38 88.4 %
Total Average CBM Sales Price (per Mcf) $ 2.79 $ 2.95 $ (0.16) (5.4) %
Average CBM Lease Operating Expenses (per Mcf) 0.28 0.28 - - %
Average CBM Production, Ad Valorem, and Other Fees (per Mcf)
0.09 0.10 (0.01) (10.0) %
Average CBM Transportation, Gathering and Compression Costs (per Mcf)
0.76 0.71 0.05 7.0 %
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.21 1.24 (0.03) (2.4) %
Total Average CBM Costs (per Mcf) $ 2.34 $ 2.33 $ 0.01 0.4 %
Average Margin for CBM (per Mcf) $ 0.45 $ 0.62 $ (0.17) (27.4) %
The CBM segment had natural gas revenue of $26 million for the three months
ended September 30, 2020 compared to $36 million for the three months ended
September 30, 2019 . The $10 million decrease was due to the 7.8% decrease in
total CBM sales volumes and the 21.4% decrease in the average sales price for
natural gas. The decrease in CBM sales volumes was primarily due to normal
production declines.
The total average CBM sales price decreased $0.16 per Mcf due to a $0.54 per Mcf
decrease in average gas sales price, offset in part by a $0.38 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 11.8 Bcf of the Company's produced CBM sales volumes
for the three months ended September 30, 2020 at an average gain of $0.89 per
Mcf hedged. For the three months ended September 30, 2019 , these financial
hedges represented approximately 11.3 Bcf at an average gain of $0.53 per Mcf
hedged.
Total operating costs and expenses for the CBM segment were $31 million for the
three months ended September 30, 2020 compared to $33 million for the three
months ended September 30, 2019 . The decrease in total dollars and increase in
unit costs for the CBM segment was primarily due to the following:
•CBM transportation, gathering and compression costs remained consistent at $10
million for both the three months ended September 30, 2020 and 2019. The
increase in unit costs were primarily related to the 7.8% decrease in CBM sales
volumes.
•Depreciation, depletion and amortization costs attributable to the CBM segment
were $16 million for the three months ended September 30, 2020 compared to $17
million for the three months ended September 30, 2019 . These amounts included
depletion on a unit of production basis of $0.67 per Mcfe and $0.70 per Mcfe,
respectively. The decrease in the units of
40
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production depreciation, depletion and amortization rate was due to positive
reserve revisions. The remaining depreciation, depletion and amortization costs
were either recorded on a straight-line basis or related to asset retirement
obligations.
OTHER SEGMENT
The Other Segment includes nominal shallow oil and gas production which is not
significant to the Company. It also includes the Company's purchased gas
activities, unrealized gain or loss on commodity derivative instruments,
exploration and production related other costs, impairments of exploration and
production properties, as well as various other expenses that are managed
outside the Shale and CBM segments such as selling, general and administrative
(SG&A), interest expense and income taxes.
The Other segment had a loss before income tax of $343 million for the three
months ended September 30, 2020 compared to earnings before income tax of $71
million for the three months ended September 30, 2019 .
For the Three Months Ended
2020 2019 Variance Percent Change
Other Gas Sales Volumes (Bcf) - 0.1 (0.1) (100.0) %
Oil/Condensate Sales Volumes (Bcfe)* 0.1 - 0.1 100.0 %
* Oil/Condensate is converted to Mcfe at the rate of one barrel equals six Mcf
based upon the approximate relative energy content of oil and natural gas, which
is not indicative of the relationship of oil, condensate, and natural gas
prices.
Gain or Loss on Commodity Derivative Instruments and Monetization
For the three months endedSeptember 30, 2020 , theOther Gas segment recognized an unrealized loss on commodity derivative instruments of$259 million and cash settlements paid of$1 million . For the three months endedSeptember 30, 2019 , theOther Gas segment recognized an unrealized gain on commodity derivative instruments of$157 million . The unrealized loss/gain on commodity derivative instruments represents changes in the fair value of all of the Company's existing commodity hedges on a mark-to-market basis.
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$32 million for the three months endedSeptember 30, 2020 compared to$29 million for the three months endedSeptember 30, 2019 . Purchased gas costs were$32 million for the three months endedSeptember 30, 2020 compared to$28 million for the three months endedSeptember 30, 2019 . The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease in average sales price. For the Three
Months Ended
2020 2019 Variance Percent Change
Purchased Gas Sales Volumes (in Bcf) 20.7 13.6 7.1 52.2 %
Average Sales Price (per Mcf) $ 1.52 $ 2.14 $ (0.62) (29.0) %
Average Cost (per Mcf) $ 1.53 $ 2.02 $ (0.49) (24.3) %
Other Operating Income
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Gathering Income $ 3 $ 2 $ 1 50.0 %
Water Income 1 - 1 100.0 %
Equity in Earnings of Affiliates - 1 (1) (100.0) %
Total Other Operating Income $ 4 $ 3 $ 1 33.3 %
•Gathering income represents revenue from the sale of excess firm transportation
capacity to third-parties. The Company obtains firm pipeline transportation
capacity to enable gas production to flow uninterrupted as sales volumes
increase. In order to minimize this unutilized firm transportation expense, CNX
is able to release (sell) unutilized firm
41
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transportation capacity to other parties when possible and when beneficial. The
revenue (Gathering income) from released capacity helps offset the unutilized
firm transportation and processing fees in total other operating expense.
Exploration and Production Related Other Costs
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Seismic Activity $ - $ 5 $ (5) (100.0) %
Lease Expiration Costs 1 1 - - %
Land Rentals 1 - 1 100.0 %
Total Exploration and Production Related Other
Costs $ 2 $ 6 $ (4) (66.7) %
•Seismic activity decreased in the period-to-period comparison due to additional geophysical research in the prior period.
Selling, General and Administrative ("SG&A")
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) 2020 2019 Variance Percent Change
Salaries and Wages $ 8 $ 10 $ (2) (20.0) %
Long-Term Equity-Based Compensation
(Non-Cash) 2 2 - - %
Short-Term Incentive Compensation 3 2 1 50.0 %
Other 10 10 - - %
Total SG&A $ 23 $ 24 $ (1) (4.2) %
•Salaries and Wages decreased
Other Operating Expense
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Unutilized Firm Transportation and Processing
Fees $ 20 $ 15 $ 5 33.3 %
Idle Equipment and Service Charges 2 - 2 100.0 %
Insurance Expense 1 1 - - %
Other 1 5 (4) (80.0) %
Total Other Operating Expense $ 24 $ 21 $ 3 14.3 %
•Unutilized firm transportation and processing fees represent pipeline
transportation capacity obtained to enable gas production to flow uninterrupted
as sales volumes increase, as well as additional processing capacity for NGLs.
The increase of $5 million in the period-to-period comparison was primarily due
to previously acquired capacity which was not utilized during the current period
to transport the Company's flowing production or to process the Company's wet
natural gas production. The increase in unutilized capacity was primarily due to
the temporary shut-in of new turn-in-line wells in 2020 due to low natural gas
price. In some instances, the Company may have the opportunity to realize more
favorable net pricing by strategically choosing to sell natural gas into a
market or to a customer that does not require the use of the Company's own firm
transportation capacity. Such sales would result in an increase in unutilized
firm transportation expense. The Company attempts to minimize this expense by
releasing (selling) unutilized firm transportation capacity to other parties
when possible and when beneficial. The revenue received when this capacity is
released (sold) is included in Gathering Income in Other Revenue and Operating
Income above.
•Idle Equipment and Service Charges primarily relate to the temporary idling of
one 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
42
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completions process. The increase of $2 million in the period-to-period
comparison was primarily the result of CNX idling one of its drilling rigs in
the third-quarter.
•Other decreased $4 million in the period-to-period comparison primarily due to
a write-off of obsolete inventory in the 2019 period.
Other Expense
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Other Income
Interest Income $ 2 $ 1 $ 1 100.0 %
Other 6 - 6 100.0 %
Total Other Income $ 8 $ 1 $ 7 700.0 %
Other Expense
Professional Services $ 2 $ 1 $ 1 100.0 %
Merger Related Costs 5 - 5 100.0 %
Bank Fees 3 3 - - %
Total Other Expense $ 10 $ 4 $ 6 150.0 %
Total Other Expense $ 2 $ 3 $ (1) (33.3) %
•Other income increased $7 million in the period-to-period comparison primarily
due to the receipt of a severance tax refund related to a prior period in the
three months ended September 30, 2020 as well as additional interest income
related to the alternative minimum tax ("AMT") credit refund CNX received (See
Note 4- Income Taxes in the Notes to the Unaudited Consolidated Financial
Statements in Item 1 of this Form 10-Q for additional information).
•Merger-related costs consist of transaction costs directly attributable to the
CNXM Merger (See Note 13- Acquisitions and Dispositions in the Notes to the
Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for
additional information), including financial advisory, legal service and other
professional fees, which were recorded to Other Expense in the Consolidated
Statements of Income.
Gain on Asset Sales and Abandonments, net
A gain on asset sales of
Loss (Gain) Loss on Debt Extinguishment
A nominal loss on debt extinguishment was recognized in the three months endedSeptember 30, 2020 . See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. 43
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Interest Expense
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Total Interest Expense $ 38 $ 38 $ - - %
•Interest expense remained unchanged quarter over quarter. In 2020, the Company
purchased $531 million of the outstanding 5.875% senior notes due in April 2022
during the nine months ended September 30, 2020 and had lower average borrowings
under the CNX credit facility. These decreases were offset by the addition of
$345 million of convertible senior notes due 2026 (the "Convertible Notes")
during the three months ended June 30, 2020 and by the addition of the $125
million Cardinal States Facility and $50 million CSG Holdings Facility during
the three months ended March 31, 2020 . Realized and unrealized losses on
interest rate swap agreements also offset the decreases in interest expense
mentioned above.
Income Taxes
For the Three Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Total Company (Loss) Earnings Before Income Tax $ (250) $ 193 $ (443) (229.5) %
Income Tax (Benefit) Expense $ (61) $ 49 $ (110) (224.5) %
Effective Income Tax Rate 24.5 % 25.4 % (0.9) %
The effective income tax rate was 24.5% for the three months ended September 30,
2020 compared to 25.4% for the three months ended September 30, 2019 . The
effective rate for the three months ended September 30, 2020 and 2019 differs
from the U.S. Federal statutory rate of 21% primarily due to the impact of
noncontrolling interest, equity compensation and state income taxes.
See Note 4 - Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information.
44
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Results of Operations - Nine Months Ended
Net (Loss) Income Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to
For the Nine Months Ended September 30,
(Dollars in thousands) 2020 2019 Variance
Net (Loss) Income $ (624,502) $ 272,004 $ (896,506)
Less: Net Income Attributable to Noncontrolling Interest 55,031 81,325 (26,294)
Net (Loss) Income Attributable to CNX Resources Shareholders
Included in the loss for the nine months endedSeptember 30, 2020 was a$62 million non-cash impairment charge related to exploration and production properties, a$473 million non-cash impairment charge related to goodwill and an unrealized loss on commodity derivative instruments of$501 million . Included in the earnings for the nine months endedSeptember 30, 2019 was an unrealized gain on commodity derivative instruments of$214 million .
Selected Operating Revenue and Other Cost Data
The following table presents sales volumes, average sales prices (including the
effects of settled derivatives and excluding hedge monetizations) and average
costs on a total Company basis:
For the Nine Months Ended September 30,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions PerMcfe
Total Sales Volumes (Bcfe)* 364.6 395.8
(31.2)
Natural Gas, NGL and Oil Revenue$ 609 1.62$ 1,044 2.63$ (435)
(1.01)
Gain on Commodity Derivative Instruments - Cash Settlement - Gas ** 300 0.87 26 0.07 274 0.80 Total Revenue 909 2.49 1,070 2.70 (161) (0.21) Lease Operating Expense 31 0.08 53 0.13 (22) (0.05) Production, Ad Valorem, and Other Fees 17 0.04 20 0.05 (3)
(0.01)
Transportation, Gathering and Compression 212 0.58 244 0.62 (32)
(0.04)
Depreciation, Depletion and Amortization (DD&A) 350 0.97 373 0.94 (23) 0.03 Average Costs 610 1.67 690 1.74 (80) (0.07) Average Margin$ 299 0.82$ 380 0.96$ (81) (0.14) *NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of NGL, condensate, and natural gas prices. **Excluding$84 million gain from hedge monetization The 31.2 Bcfe decrease in volumes in the period-to period comparison was primarily due to the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of 2020 in response to low NGL prices. Additionally, four new pads of dry gas turn-in-lines from April and May were temporarily shut-in May through September due to low natural gas prices. Normal production declines also contributed to the decrease in total volumes.
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 as a result
of increased reuse of produced water in well completions in the current period.
•Transportation, gathering, and compression expense decreased on a per unit
basis primarily due to lower processing costs due to a drier production mix and
a decrease in firm transportation costs due to lower gas sales volumes.
45
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•Depreciation, depletion and amortization expense increased on a per unit basis
as a result of fixed depreciation costs related to CNX's gathering
infrastructure being spread over a lower production base in 2020. The lower
production volumes was a result of temporary shut-ins due to lower natural gas
prices.
The following table is a summary of total other revenue and operating income and
selected other expense line items that are included in the total (loss) earnings
before income tax on a total company Mcfe equivalent and excluded from the
previous table.
For the Nine Months Ended September 30,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Company Sales Volumes (Bcfe)* 364.6 395.8 (31.2)
Total Other Revenue and Operating Income $ 61 0.17 $ 65 0.16 $ (4)
0.01
Depreciation, Depletion and Amortization 7 0.02 2 0.01 5
0.01
Exploration and Production Related Other Costs 9 0.02 15 0.04 (6)
(0.02)
Selling, General and Administrative Costs 76 0.21 109 0.28 (33) (0.07) Other Operating Expense 71 0.19 61 0.15 10 0.04 Total Selected Operating Costs and Expenses 163 0.44 187 0.48 (24) (0.04) Other Expense 12 0.03 3 0.01 9 0.02 Interest Expense 133 0.36 114 0.29 19 0.07 Total Selected Other Expense 145 0.39 117 0.30 28 0.09 Total Selected Costs and Expenses $ 308 0.83$ 304 0.78 $ 4
0.05
* NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of NGL, condensate, and natural gas prices.
Average Realized Price Reconciliation
The following table presents a breakout of liquids and natural gas sales information and settled derivative information to assist in the understanding of the Company's natural gas production and sales portfolio and information regarding settled commodity derivatives:
For
the Nine Months Ended
in thousands (unless noted) 2020 2019 Variance Percent Change LIQUIDS NGL: Sales Volume (MMcfe) 19,927 22,556 (2,629) (11.7) % Sales Volume (Mbbls) 3,321 3,759 (438) (11.7) % Gross Price ($/Bbl)$ 12.24 $ 19.20 $ (6.96) (36.3) % Gross Revenue$ 40,691 $ 72,095 $ (31,404) (43.6) % Oil/Condensate: Sales Volume (MMcfe) 1,236 690 546 79.1 % Sales Volume (Mbbls) 206 115 91 79.1 % Gross Price ($/Bbl)$ 37.01 $ 45.16 $ (8.15) (18.0) % Gross Revenue$ 7,630 $ 5,193 $ 2,437 46.9 % GAS Sales Volume (MMcf) 343,403 372,524 (29,121) (7.8) % Sales Price ($/Mcf)$ 1.63 $ 2.59 $ (0.96) (37.1) % Gross Revenue$ 561,162 $ 966,574 $ (405,412) (41.9) % Hedging Impact ($/Mcf)$ 0.87 $ 0.07 $ 0.80 1,142.9 % Gain on Commodity Derivative Instruments - Cash Settlement*$ 299,730 $ 26,331 $ 273,399 1,038.3 % 46
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* Excluding gains from hedge monetizations
The decrease in gross revenue was primarily the result of the$0.96 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas, the 31.2 Bcfe decrease in sales volumes, and the$6.96 per Bbl. decrease in NGL prices. These decreases were offset, in-part, by the increase in the realized gain on commodity derivative instruments related to the Company's hedging program.
SEGMENT ANALYSIS for the nine months ended
For the Nine Months Ended Difference to the Nine Months Ended
September 30, 2020 September 30, 2019
Total
(in millions) Shale CBM Other Total E&P Shale CBM Other E&P
Natural Gas, NGL and Oil Revenue $ 529 $ 79 $ 1 $ 609 $ (389) $ (46) $ - $ (435)
Gain (Loss) on Commodity Derivative
Instruments 266 33 (416) (117) 242 30 (629) (357)
Purchased Gas Revenue - - 78 78 - - 14 14
Other Revenue and Operating Income 47 - 14 61 (9) - 5 (4)
Total Revenue and Other Operating Income 842 112 (323) 631 (156) (16) (610) (782)
Lease Operating Expense 19 11 1 31 (21) (2) 1 (22)
Production, Ad Valorem, and Other Fees 14 4 - 18 (1) (1) - (2)
Transportation, Gathering and Compression 183 29 - 212 (32) - - (32)
Depreciation, Depletion and Amortization 295 50 12 357 (22) (2) 6 (18)
Impairment of Exploration and Production
Properties - - 62 62 - - 62 62
Impairment of Goodwill - - 473 473 - - 473 473
Exploration and Production Related Other
Costs - - 9 9 - - (6) (6)
Purchased Gas Costs - - 77 77 - - 15 15
Other Operating Expense - - 71 71 - - 10 10
Selling, General and Administrative Costs - - 76 76 - - (33) (33)
Total Operating Costs and Expenses 511 94 781 1,386 (76) (5) 528 447
Other Expense - - 12 12 - - 9 9
Gain on Asset Sales and Abandonments, net - - (22) (22) - - (21) (21)
Gain on Debt Extinguishment - - (11) (11) - - (19) (19)
Interest Expense - - 133 133 - - 19 19
Total Other Expenses - - 112 112 - - (12) (12)
Total Costs and Expenses 511 94 893 1,498 $ (76) $ (5) $
516
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SHALE SEGMENT
The Shale segment had earnings before income tax of$331 million for the nine months endedSeptember 30, 2020 compared to earnings before income tax of$411 million for the nine months endedSeptember 30, 2019 . For the Nine Months Ended September 30, Percent 2020 2019 Variance Change Shale Gas Sales Volumes (Bcf) 304.0 330.6 (26.6) (8.0) % NGLs Sales Volumes (Bcfe)* 19.9 22.6 (2.7) (11.9) % Oil/Condensate Sales Volumes (Bcfe)* 1.2 0.6 0.6 100.0 % Total Shale Sales Volumes (Bcfe)* 325.1 353.8 (28.7) (8.1) % Average Sales Price - Gas (per Mcf)$ 1.58 $ 2.54 $ (0.96) (37.8) %
Gain on Commodity Derivative Instruments -
$ 0.88 $ 0.07 $ 0.81 1,157.1 % Average Sales Price - NGLs (per Mcfe)*$ 2.04 $ 3.20 $ (1.16) (36.3) % Average Sales Price - Oil/Condensate (per Mcfe)*$ 5.98 $ 7.50 $ (1.52) (20.3) % Total Average Shale Sales Price (per Mcfe)$ 2.45 $ 2.66 $ (0.21) (7.9) % Average Shale Lease Operating Expenses (per Mcfe) 0.06 0.11 (0.05) (45.5) %
Average Shale Production, Ad Valorem, and Other Fees (per Mcfe)
0.04 0.05 (0.01) (20.0) %
Average Shale Transportation, Gathering and Compression Costs (per Mcfe)
0.56 0.61 (0.05) (8.2) %
Average Shale Depreciation, Depletion and Amortization Costs (per Mcfe)
0.92 0.89 0.03 3.4 %
Total Average Shale Costs (per Mcfe) $ 1.58 $ 1.66 $ (0.08) (4.8) %
Average Margin for Shale (per Mcfe) $ 0.87 $ 1.00 $ (0.13) (13.0) %
* NGLs and Oil/Condensate are converted to Mcfe at the rate of one barrel equals
six Mcf based upon the approximate relative energy content of oil and natural
gas, which is not indicative of the relationship of NGL, oil, condensate, and
natural gas prices.
The Shale segment had natural gas, NGL and oil/condensate revenue of $529
million for the nine months ended September 30, 2020 compared to $918 million
for the nine months ended September 30, 2019 . The $389 million decrease was due
primarily to a 37.8% decrease in the average sales price for natural gas, an
8.1% decrease in total Shale sales volumes, and a 36.3% decrease in the average
sales price of NGLs.
The decrease in total Shale volumes was due to the temporary shut-in of a
portion of CNX's liquids-rich Shirley-Pennsboro production in May and June of
2020 in response to low NGL prices. Additionally, four new pads of dry gas
turn-in-lines from April and May were temporarily shut-in during May through
September due to low natural gas prices. Normal production declines also
contributed to the decrease in total Shale volumes.
The decrease in total average Shale sales price was primarily due to a $0.96 per
Mcf decrease in average gas sales price and a $1.16 per Mcfe decrease in the
average NGL sales price. These decreases were offset in part by a $0.81 per Mcf
increase in the realized gain on commodity derivative instruments. The notional
amounts associated with these financial hedges represented approximately 296.6
Bcf of the Company's produced Shale gas sales volumes for the nine months ended
September 30, 2020 at an average gain of $0.90 per Mcf hedged. For the nine
months ended September 30, 2019 , these financial hedges represented
approximately 246.5 Bcf at an average gain of $0.10 per Mcf hedged.
Total operating costs and expenses for the Shale segment were $511 million for
the nine months ended September 30, 2020 compared to $587 million for the nine
months ended September 30, 2019 . The decrease in total dollars and decrease in
unit costs for the Shale segment were due to the following items:
•Shale lease operating expense was
•Shale transportation, gathering and compression costs were
48
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were primarily related to lower processing costs due to a drier production mix.
Lower firm transportation costs from lower gas sales volumes contributed to the
decrease in total dollars.
•Depreciation, depletion and amortization costs attributable to the Shale
segment were $295 million for the nine months ended September 30, 2020 compared
to $317 million for the nine months ended September 30, 2019 . These amounts
included depletion on a unit of production basis of $0.81 per Mcfe and $0.82 per
Mcfe, respectively. The decrease in the units of production depreciation,
depletion and amortization rate in the current period is the result of positive
reserve revisions within our core SWPA development area and lower cost reserves
added in our core SWPA development area from the 2019 development program
partially offset by an increase in the units of production depreciation,
depletion and amortization rate due to negative reserves revisions within our
Ohio operations. The remaining depreciation, depletion and amortization costs
were either recorded on a straight-line basis or related to asset retirement
obligations.
Total Shale other revenue and operating income relates to natural gas gathering
services provided to third-parties. The Shale segment had other revenue and
operating income of $47 million for the nine months ended September 30, 2020
compared to $56 million for the nine months ended September 30, 2019 . The
decrease in the period-to-period comparison was primarily due to a reduction in
third-party volumes transported related to temporary production curtailments.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of $18 million for the nine
months ended September 30, 2020 compared to earnings before income tax of $29
million for the nine months ended September 30, 2019 .
For the Nine Months Ended September 30,
Percent
2020 2019 Variance Change
CBM Gas Sales Volumes (Bcf) 39.3 41.7 (2.4) (5.8) %
Average Sales Price - Gas (per Mcf) $ 2.02 $ 3.00 $ (0.98) (32.7) %
Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$ 0.84 $ 0.07 $ 0.77 1,100.0 % Total Average CBM Sales Price (per Mcf)$ 2.86 $ 3.07 $ (0.21) (6.8) % Average CBM Lease Operating Expenses (per Mcf) 0.29 0.30 (0.01) (3.3) % Average CBM Production, Ad Valorem, and Other Fees (per Mcf) 0.10 0.13 (0.03) (23.1) %
Average CBM Transportation, Gathering and Compression Costs (per Mcf)
0.74 0.70 0.04 5.7 %
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.25 1.24 0.01 0.8 %
Total Average CBM Costs (per Mcf) $ 2.38 $ 2.37 $ 0.01 0.4 %
Average Margin for CBM (per Mcf) $ 0.48 $ 0.70 $ (0.22) (31.4) %
The CBM segment had natural gas revenue of $79 million for the nine months ended
September 30, 2020 compared to $125 million for the nine months ended
September 30, 2019 . The $46 million decrease was due to the 5.8% decrease in
total CBM sales volumes and the 32.7% decrease in the average sales price for
natural gas in the current period. The decrease in CBM sales volumes was
primarily due to normal production declines.
The total average CBM sales price decreased $0.21 per Mcf due to a $0.98 per Mcf
decrease in average gas sales price, offset in part by a $0.77 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 37.0 Bcf of the Company's produced CBM sales volumes
for the nine months ended September 30, 2020 at an average gain of $0.90 per Mcf
hedged. For the nine months ended September 30, 2019 , these financial hedges
represented approximately 29.6 Bcf at an average gain of $0.10 per Mcf hedged.
Total operating costs and expenses for the CBM segment were $94 million for the
nine months ended September 30, 2020 compared to $99 million for the nine months
ended September 30, 2019 . The decrease in total dollars and increase in unit
costs for the CBM segment were due to the following items:
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•CBM lease operating expense was $11 million for the nine months ended
September 30, 2020 compared to $13 million for the nine months ended
September 30, 2019 . The decrease in total dollars was due to a decrease in water
disposal costs as well as a decrease in repairs and maintenance. The decrease in
unit costs was driven by the decrease in total dollars.
•Depreciation, depletion and amortization costs attributable to the CBM segment
were $50 million for the nine months ended September 30, 2020 compared to $52
million for the nine months ended September 30, 2019 . These amounts included
depletion on a unit of production basis of $0.68 per Mcfe and $0.70 per Mcfe,
respectively. The decrease in the units of production depreciation, depletion
and amortization rate was due to reduced production, offset in part by negative
reserve revisions. The remaining depreciation, depletion and amortization costs
were either recorded on a straight-line basis or related to asset retirement
obligations.
OTHER SEGMENT
The Other Segment includes nominal shallow oil and gas production which is not
significant to the Company. It also includes the Company's purchased gas
activities, unrealized gain or loss on commodity derivative instruments,
realized gain on commodity derivative instruments that were monetized prior to
their settlement dates, exploration and production related other costs,
impairments of exploration and production properties, as well as various other
expenses that are managed outside the Shale and CBM segments such as SG&A,
interest expense and income taxes.
The Other Gas segment had a loss before income tax of $1,216 million for the
nine months ended September 30, 2020 compared to a loss before income tax of $90
million for the nine months ended September 30, 2019 .
For the
Nine Months Ended
2020 2019 Variance Percent Change
Other Gas Sales Volumes (Bcf) 0.1 0.3 (0.2) (66.7) %
Gain or Loss on Commodity Derivative Instruments and Monetization
For the nine months endedSeptember 30, 2020 , theOther Gas segment recognized an unrealized loss on commodity derivative instruments of$501 million as well as cash settlements received of$85 million . For the nine months endedSeptember 30, 2019 , theOther Gas segment recognized an unrealized gain on commodity derivative instruments of$214 million as well as cash settlements paid of$1 million . The unrealized gain/loss on commodity derivative instruments represents changes in the fair value of all of the Company's existing commodity hedges on a mark-to-market basis. Included in cash settlements for the nine months endedSeptember 30, 2020 is$84 million related to natural gas hedges and financial basis hedges that were partially monetized or terminated prior to their settlement date. See Note 11 - Derivative Instruments in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information related to the cash settlements.
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$78 million for the nine months endedSeptember 30, 2020 compared to$64 million for the nine months endedSeptember 30, 2019 . Purchased gas costs were$77 million for the nine months endedSeptember 30, 2020 compared to$62 million for the nine months endedSeptember 30, 2019 . The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease in averages sales price. For the
Nine Months Ended
2020 2019 Variance Percent Change
Purchased Gas Sales Volumes (in Bcf) 48.2 26.9 21.3 79.2 %
Average Sales Price (per Mcf) $ 1.63 $ 2.39 $ (0.76) (31.8) %
Average Cost (per Mcf) $ 1.59 $ 2.33 $ (0.74) (31.8) %
50--------------------------------------------------------------------------------
Other Operating Income
For the Nine Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Water Income $ 5 $ 1 $ 4 400.0 %
Gathering Income 9 7 2 28.6 %
Equity in (Loss) Earnings of Affiliates (1) 1 (2) (200.0) %
Other 1 - 1 100.0 %
Total Other Operating Income $ 14 $ 9 $ 5 55.6 %
•Water income increased $4 million in the 2020 period due to increased revenue
for accepting deliveries of produced water from third-parties for reuse in the
Company's hydraulic fracturing and increased sales of freshwater to
third-parties for hydraulic fracturing.
•Gathering income represents revenue from the sale of excess firm transportation
capacity to third-parties. The Company obtains firm pipeline transportation
capacity to enable gas production to flow uninterrupted as sales volumes
increase. In order to minimize this unutilized firm transportation expense, CNX
is able to release (sell) unutilized firm transportation capacity to other
parties when possible and when beneficial. The revenue (Gathering income) from
released capacity helps offsets the unutilized firm transportation and
processing fees in total other operating expense.
Impairment of
During the nine months endedSeptember 30, 2020 , CNX recognized certain indicators of impairments specific to ourSouthwest Pennsylvania (SWPA) CBM asset group and determined that the carrying value of that asset group was not recoverable. The fair value of the asset group was estimated by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, an impairment of$62 million was recognized and is included in Impairment ofExploration and Production Properties in the Consolidated Statements of Income. The impairment was related to an economic decision to temporarily idle certain wells and the related processing facility during the first quarter.
Impairment of
In connection with the CNX Midstream Acquisition that occurred in
Goodwill is tested for impairment annually during the fourth quarter, or more frequently if recent events or prevailing conditions indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount using the qualitative assessment, a quantitative impairment test is performed. From time to time, CNX may also bypass the qualitative assessment and proceed directly to the quantitative impairment test. In connection with CNX's assessment of goodwill in the first quarter of 2020 in relation to the deteriorating macroeconomic conditions, and the decline in the observable market value of CNXM securities both in relation to the COVID-19 pandemic and the overall decline in the MLP market space, CNX bypassed the qualitative assessment and performed a quantitative test that utilized a combination of the income and market approaches to estimate the fair value of the Midstream reporting unit. As a result of this assessment, CNX concluded that the carrying value exceed its estimated fair value, and as a result, an impairment of$473 million was included in Impairment ofGoodwill in the Consolidated Statement of Income. No such impairment occurred in the prior period. See Note 6 -Goodwill and Other Intangible Assets in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. 51
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Exploration and Production Related Other Costs
For the Nine Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Seismic Activity $ - $ 6 $ (6) (100.0) %
Land Rentals 2 2 - - %
Lease Expiration Costs 5 5 - - %
Permitting Expense 2 - 2 100.0 %
Other - 2 (2) (100.0) %
Total Exploration and Production Related Other
Costs $ 9 $ 15 $ (6) (40.0) %
•Seismic activity decreased in the period-to-period comparison due to additional geophysical research in the prior period.
Selling, General and Administrative ("SG&A")
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 Nine Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Long-Term Equity-Based Compensation
(Non-Cash) $ 12 $ 37 $ (25) (67.6) %
Salaries and Wages 23 31 (8) (25.8) %
Short-Term Incentive Compensation 7 9 (2) (22.2) %
Other 34 32 2 6.3 %
Total SG&A $ 76 $ 109 $ (33) (30.3) %
•Long-term equity-based compensation decreased $25 million in the
period-to-period comparison due to a change in control event that occurred in
the second quarter of 2019 and resulted in the acceleration of vesting of
certain restricted stock units and performance share units held by certain
employees. See Note 2 - Earnings Per Share in the Notes to the Unaudited
Consolidated Financial Statements in Item 1 of this Form 10-Q for additional
information.
•Salaries and Wages decreased $8 million due to an overall reduction in
employees and employee related costs resulting from a reduction in staff in the
2019 period.
Other Operating Expense
For the Nine Months Ended September 30,
(in millions) 2020 2019 Variance Percent Change
Unutilized Firm Transportation and Processing Fees $ 54 $ 43 $ 11 25.6 %
Water Expense 1 1 - - %
Insurance Expense 2 2 - - %
Idle Equipment and Service Charges 8 8 - - %
Severance Expense - 1 (1) (100.0) %
Other 6 6 - - %
Total Other Operating Expense $ 71 $ 61 $ 10 16.4 %
•Unutilized firm transportation and processing fees represent pipeline
transportation capacity obtained to enable gas production to flow uninterrupted
as sales volumes increase, as well as additional processing capacity for NGLs.
The increase of $11 million in the period-to-period comparison was primarily due
to previously acquired capacity which was not utilized during the current period
to transport the Company's flowing production or to process the Company's wet
natural gas production. The increase in unutilized capacity results in part from
the temporary shut-in of a portion of CNX's liquids-rich Shirley-Pennsboro
production in May and June of 2020 and due to the temporary shut-in of new
52
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turn-in-line wells due to low natural gas prices. In some instances, the Company
may have the opportunity to realize more favorable net pricing by strategically
choosing to sell natural gas into a market or to a customer that does not
require the use of the Company's own firm transportation capacity. Such sales
would result in an increase in unutilized firm transportation expense. The
Company attempts to minimize this expense by releasing (selling) unutilized firm
transportation capacity to other parties when possible and when beneficial. The
revenue received when this capacity is released (sold) is included in Gathering
Income in Total Revenue and Other Operating Income above.
Gain on Asset Sales and Abandonments, net
A gain on asset sales of$22 million related to the sale of various non-core assets was recognized in the nine months endedSeptember 30, 2020 compared to a gain of$1 million in the nine months endedSeptember 30, 2019 .
Loss (Gain) on Debt Extinguishment
A gain on debt extinguishment of$11 million was recognized in the nine months endedSeptember 30, 2020 compared to a loss on debt extinguishment of$8 million in the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , CNX purchased$531 million of its 5.875% Senior notes due inApril 2022 at an average price equal to 97.5% of the principal amount. During the nine months endedSeptember 30, 2019 CNX purchased$400 million of its 5.875% Senior notes due inApril 2022 at an average price equal to 101.5% of the principal amount. See Note 9 - Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information. Other Expense For
the Nine Months Ended
(in millions) 2020 2019 Variance Percent Change Other Income Royalty Income $ -$ 4 $ (4) (100.0) % Right of Way Sales 2 4 (2) (50.0) % Interest Income 2 2 - - % Other 7 2 5 250.0 % Total Other Income $ 11$ 12 $ (1) (8.3) % Other Expense Professional Services $ 6$ 2 $ 4 200.0 % Merger Related Costs 5 - 5 100.0 % Bank Fees 9 9 - - % Other Corporate Expense 3 4 (1) (25.0) % Total Other Expense $ 23$ 15 $ 8 53.3 % Total Other Expense $ 12$ 3 $ 9 (300.0) % •Royalty income is comprised of royalties CNX received on non-operated properties unrelated to natural gas. The decrease of$4 million in the period-to-period comparison was due to a reduction in third-party activity. •Other income increased$5 million in the period-to-period comparison primarily due to the receipt of a severance tax refund related to a prior period in the nine months endedSeptember 30, 2020 (See Note 4- Income Taxes in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information). •Merger-related costs consist of transaction costs directly attributable to the CNXM Merger (See Note 13- Acquisitions and Dispositions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q for additional information), including financial advisory, legal service and other professional fees, which were recorded to Other Expense in the Consolidated Statements of Income. •Professional services increased$4 million in the period-to-period comparison primarily due to fees related to an agreement to eliminate CNXM's incentive distribution rights, or IDRs, in January of 2020, prior to the Merger. 53
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