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-K. The information provided below supplements, but does not form part of, CNX's financial statements. This discussion contains forwardlooking statements that are based on the views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from such forwardlooking 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 I. Item 1A. Risk Factors" and the section entitled "ForwardLooking Statements." CNX does not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
General
COVID-19 Update:
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 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-K are not necessarily indicative of future operating results.
While CNX did not incur significant disruptions to operations during the year
ended December 31, 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.
The full extent of the future impact of the COVID-19 pandemic on the Company's
operational and financial performance is currently uncertain and will depend on
many factors outside the Company's control, including, without limitation, the
timing, extent, trajectory and duration of the pandemic, the development and
availability of effective treatments and vaccines, the imposition of protective
public safety measures, and the impact of the pandemic on the global economy and
demand for consumer products. Refer to Part I, Item 1A of this Form 10-K under
the heading "Risk Factors," for more information.
2020 Highlights:
•Increased proved reserves to 9.5 Tcfe, 13.3% higher than 2019. •Total gas production of 511.1 Bcfe. •Shale production of 458.3 Bcfe. •Repurchased$43 million of CNX common stock on the open market. •OnSeptember 28, 2020 , CNX completed the acquisition of all of the outstanding common units ofCNX Midstream Partners LP ("CNXM") and CNXM became an indirect wholly-owned subsidiary (the "Merger") (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K). 2021 Outlook: •Our 2021 annual gas production is expected to be approximately 540-570 Bcfe. •Our 2021 E&P capital expenditures are expected to be approximately$430-$470 million . 44
-------------------------------------------------------------------------------- Results of Operations: Year EndedDecember 31, 2020 Compared with the Year EndedDecember 31, 2019 Net Loss Attributable to CNX Resources Shareholders CNX reported a net loss attributable toCNX Resources shareholders of$484 million , or a loss per diluted share of$2.43 , for the year endedDecember 31, 2020 , compared to a net loss attributable toCNX Resources shareholders of$81 million , or a loss per diluted share of$0.42 , for the year endedDecember 31, 2019 . For the Years Ended December 31, (Dollars in thousands) 2020 2019 Variance Net (Loss) Income$ (428,744) $ 31,948 $ (460,692) Less: Net Income Attributable to Noncontrolling Interests 55,031 112,678 (57,647) Net Loss Attributable to CNX Resources Shareholders$ (483,775) $ (80,730) $ (403,045) Included in the loss for the year endedDecember 31, 2020 was a$62 million non-cash impairment charge related to exploration and production properties specific to ourSouthwestern Pennsylvania (SWPA) CBM asset group, a$473 million non-cash impairment charge related to goodwill and an unrealized loss on commodity derivatives of$288 million . Included in the loss for the year endedDecember 31, 2019 was a$327 million non-cash impairment charge related to exploration and production properties and a$119 million non-cash impairment charge related to unproved properties and expirations, both were associated with the Company'sCentral Pennsylvania (CPA) acreage, offset, in part, by an unrealized gain on commodity derivative instruments of$306 million . Prior to the effective time of the Merger onSeptember 28, 2020 (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K), public unitholders held a 46.9% equity interest in CNXM and CNX owned the remaining 53.1% equity interest. The earnings of CNXM that were attributed to its common units held by the public prior to the Merger are reflected in Net Income Attributable to Noncontrolling Interest in the Consolidated Statements of Income. There were no changes in our ownership interest in CNXM during the year endedDecember 31, 2019 .
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 excluding hedge monetizations)
and average unit costs for production operations on a total Company basis:
For the Years Ended December 31,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Sales Volumes (Bcfe)* 511.1 539.1 (28.0)
Natural Gas, NGL and Oil Revenue
$ 1,364 $ 2.52 $ (467) $ (0.81) Gain on Commodity Derivative Instruments - Cash Settlement - Gas** 377 0.78 70 0.14 307 0.64 Total Revenue 1,274 2.49 1,434 2.66 (160) (0.17) Lease Operating Expense 40 0.08 65 0.12 (25) (0.04) Production, Ad Valorem, and Other Fees 24 0.04 27 0.05 (3) (0.01) Transportation, Gathering and Compression 286 0.56 331 0.61 (45) (0.05) Depreciation, Depletion and Amortization (DD&A) 492 0.96 506 0.94 (14) 0.02 Average Costs 842 1.64 929 1.72 (87) (0.08) Average Margin$ 432 $ 0.85 $ 505 $ 0.94 $ (73) $ (0.09) *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 hedge monetizations. 45
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The decrease in volumes in the period-to-period comparison was primarily due to
the strategic temporary shut-in of certain wells to take advantage of higher
prices later in the year and thereby optimize the overall value of the assets.
Twenty-two dry gas turn-in-lines from April and May were temporarily shut-in
through September and a portion of CNX's liquids-rich Shirley-Pennsboro
production was shut-in during May and June of 2020. 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.
•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 fewer production volumes in 2020. The lower
production volumes were the result of the strategic temporary shut-in of certain
wells as previously discussed.
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 before
income tax on a total company Mcfe equivalent and excluded from the previous
table.
For the Years Ended December 31,
2020 2019 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Company Sales Volumes (Bcfe)* 511.1 539.1 (28.0)
Total Other Revenue and Operating Income $ 82
$ 88
Depreciation, Depletion and Amortization $ 10
$ 2$ 0.00 $ 8$ 0.02 Exploration and Production Related Other Costs 15 0.03 44 0.08 (29)
(0.05)
Selling, General and Administrative Costs 109 0.21 144 0.27 (35) (0.06) Other Operating Expense 85 0.17 80 0.15 5 0.02 Total Selected Operating Costs and Expenses 219 0.43 270 0.50 (51) (0.07) Other Expense 24 0.05 3 0.01 21 0.04 Interest Expense 171 0.33 151 0.28 20 0.05 Total Selected Other Expense 195 0.38 154 0.29 41 0.09
Total Selected Costs and Expenses
* 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.
46--------------------------------------------------------------------------------
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 Years Ended
in thousands (unless noted) 2020 2019 Variance Percent Change
LIQUIDS
NGL:
Sales Volume (MMcfe) 28,062 32,571 (4,509) (13.8) % Sales Volume (Mbbls) 4,677 5,428 (751) (13.8) % Gross Price ($/Bbl)$ 13.74 $ 19.20 $ (5.46) (28.4) % Gross NGL Revenue$ 64,138 $ 104,139 $ (40,001) (38.4) % Oil/Condensate: Sales Volume (MMcfe) 1,584 1,223 361 29.5 % Sales Volume (Mbbls) 264 204 60 29.4 % Gross Price ($/Bbl)$ 35.91 $ 45.00 $ (9.09) (20.2) % Gross Oil/Condensate Revenue$ 9,475 $ 9,173 $ 302 3.3 %
GAS
Sales Volume (MMcf) 481,426 505,355 (23,929) (4.7) % Sales Price ($/Mcf)$ 1.71 $ 2.48 $ (0.77) (31.0) % Gross Gas Revenue$ 823,132 $ 1,251,013 $ (427,881) (34.2) % Hedging Impact ($/Mcf)$ 0.78 $ 0.14 $ 0.64 457.1 % Gain on Commodity Derivative Instruments - Cash Settlement*$ 377,219 $ 69,780 $ 307,439 440.6 %
*Excluding gains from hedge monetizations
The decrease in gross revenue was primarily the result of the$0.77 per Mcf decrease in general natural gas prices, when excluding the impact of hedging, in the markets in which CNX sells its natural gas and the 28.0 Bcfe decrease in sales volumes. The decrease in gross revenue was offset, in part, by the increase in the realized gain on commodity derivative instruments related to the Company's hedging program. 47
-------------------------------------------------------------------------------- SEGMENT ANALYSIS for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 : For the Year Ended Difference to Year Ended December 31, 2020 December 31, 2019 (in millions) Shale CBM Other Total Shale CBM Other Total Natural Gas, NGLs and Oil Revenue$ 781 $ 114 $ 2 $ 897 $ (418) $ (50) $ 1 $ (467) Gain (Loss) on Commodity Derivative Instruments 337 40 (204) 173 275 33 (511) (203) Purchased Gas Revenue - - 106 106 - - 12 12 Other Revenue and Operating Income 65 - 17 82 (9) - 3 (6) Total Revenue and Other Operating Income 1,183 154 (79) 1,258 (152) (17) (495) (664) Lease Operating Expense 26 14 - 40 (23) (2) - (25) Production, Ad Valorem, and Other Fees 19 5 - 24 (2) (2) 1 (3) Transportation, Gathering and Compression 248 39 (1) 286 (42) (1) (2) (45) Depreciation, Depletion and Amortization 416 70 16 502 (10) (3) 7 (6) Impairment of Exploration and Production Properties - - 62 62 - - (265) (265) Impairment ofUnproved Properties and Expirations - - - - - - (119) (119) Impairment of Goodwill - - 473 473 - - 473 473 Exploration and Production Related Other Costs - - 15 15 - - (29) (29) Purchased Gas Costs - - 101 101 - - 10 10 Other Operating Expense - - 85 85 - - 5 5 Selling, General and Administrative Costs - - 109 109 - - (35) (35) Total Operating Costs and Expenses 709 128 860 1,697 (77) (8) 46 (39) Other Expense - - 24 24 - - 21 21 Gain on Asset Sales and Abandonments, net - - (21) (21) - - 15 15 Gain on Debt Extinguishment - - (10) (10) - - (18) (18) Interest Expense - - 171 171 - - 20 20 Total Other Expenses - - 164 164 - - 38 38 Total Costs and Expenses 709 128 1,024 1,861 (77) (8) 84 (1) Earnings (Loss) Before Income Tax$ 474 $ 26 $ (1,103) $ (603) $ (75) $ (9)
$ (579) $ (663) 48
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SHALE SEGMENT
The Shale segment had earnings before income tax of$474 million for the year endedDecember 31, 2020 compared to earnings before income tax of$549 million for the year endedDecember 31, 2019 . For the Years Ended December 31, Percent 2020 2019 Variance Change Shale Gas Sales Volumes (Bcf) 428.7 449.6 (20.9) (4.6) % NGLs Sales Volumes (Bcfe)* 28.1 32.6 (4.5) (13.8) % Oil/Condensate Sales Volumes (Bcfe)* 1.5 1.2 0.3 25.0 % Total Shale Sales Volumes (Bcfe)* 458.3 483.4 (25.1) (5.2) % Average Sales Price - Gas (per Mcf)$ 1.65 $ 2.42 $ (0.77) (31.8) %
Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$ 0.79 $ 0.14 $ 0.65 464.3 % Average Sales Price - NGLs (per Mcfe)*$ 2.29 $ 3.20 $ (0.91) (28.4) % Average Sales Price - Oil/Condensate (per Mcfe)*$ 5.83 $ 7.47 $ (1.64) (22.0) % Total Average Shale Sales Price (per Mcfe)$ 2.44 $ 2.61 $ (0.17) (6.5) % Average Shale Lease Operating Expenses (per Mcfe) 0.06 0.10 (0.04) (40.0) %
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)
0.54 0.60 (0.06) (10.0) %
Average Shale Depreciation, Depletion and Amortization Costs (per Mcfe)
0.91 0.88 0.03 3.4 %
Total Average Shale Costs (per Mcfe) $ 1.55 $ 1.63 $ (0.08) (4.9) %
Average Margin for Shale (per Mcfe) $ 0.89 $ 0.98 $ (0.09) (9.2) %
*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 oil, NGLs, condensate, and
natural gas prices.
The Shale segment had natural gas, NGLs and oil/condensate revenue of $781
million for the year ended December 31, 2020 compared to $1,199 million for the
year ended December 31, 2019 . The $418 million decrease was due primary to a
31.8% decrease in the average sales price for natural gas, a 5.2% decrease in
total Shale sales volumes, and a 28.4% decrease in the average sales price of
NGLs.
The decrease in volumes in the period-to-period comparison was primarily due to
the strategic temporary shut-in of certain wells to take advantage of higher
prices later in the year and thereby optimize the overall value of the assets.
Twenty-two dry gas turn-in-lines from April and May were temporarily shut-in
through September and a portion of CNX's liquids-rich Shirley-Pennsboro
production was shut-in during May and June of 2020. Normal production declines
also contributed to the decrease in total volumes.
The decrease in total average Shale sales price was primarily due to a $0.77 per
Mcf decrease in average gas sales price and a $0.91 per Mcfe decrease in the
average NGL sales price. These decreases were offset in part by a $0.65 per Mcf
increase in the realized gain on commodity derivative instruments. The notional
amounts associated with these financial hedges represented approximately 412.1
Bcf of the Company's produced Shale gas sales volumes for the year ended
December 31, 2020 at an average realized gain of $0.82 per Mcf hedged. For the
year ended December 31, 2019 , these financial hedges represented approximately
348.1 Bcf at an average realized gain of $0.18 per Mcf hedged.
Total operating costs and expenses for the Shale segment were $709 million for
the year ended December 31, 2020 compared to $786 million for the year ended
December 31, 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 $26 million for the year ended December 31,
2020 , compared to $49 million for the year ended December 31, 2019 . The decrease
in total dollars was primarily due to a decrease in water disposal costs in the
current period resulting from an increase in the reuse of produced water in well
completions activity. The decrease in unit costs was driven by the decrease in
total dollars.
49-------------------------------------------------------------------------------- •Shale transportation, gathering and compression costs were$248 million for the year endedDecember 31, 2020 compared to$290 million for the year endedDecember 31, 2019 . The decreases in total dollars and unit costs were primarily related to lower processing costs due to a drier production mix. Lower firm transportation costs from lower gas sales volumes also contributed to the decrease in total dollars. •Depreciation, depletion and amortization costs attributable to the Shale segment were$416 million for the year endedDecember 31, 2020 compared to$426 million for the year endedDecember 31, 2019 . The decrease is due to lower production volumes. These amounts each included depletion on a unit of production basis of$0.81 per Mcfe. 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$65 million for the year endedDecember 31, 2020 compared to$74 million for the year endedDecember 31, 2019 . The decrease in the period-to-period comparison was primarily due to a reduction in volumes transported due to temporary production curtailments by third-party producers that occurred early in the 2020 period.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of$26 million for the year endedDecember 31, 2020 compared to earnings before income tax of$35 million for the year endedDecember 31, 2019 . For the Years Ended December 31, Percent 2020 2019 Variance Change CBM Gas Sales Volumes (Bcf) 52.6 55.4 (2.8) (5.1) % Average Sales Price - Gas (per Mcf)$ 2.17 $ 2.96 $ (0.79) (26.7) %
Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf)
$ 0.76 $ 0.13 $ 0.63 484.6 % Total Average CBM Sales Price (per Mcf)$ 2.93 $ 3.09 $ (0.16) (5.2) % Average CBM Lease Operating Expenses (per Mcf) 0.27 0.29 (0.02) (6.9) %
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)
0.73 0.72 0.01 1.4 %
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.33 1.32 0.01 0.8 %
Total Average CBM Costs (per Mcf) $ 2.43 $ 2.45 $ (0.02) (0.8) %
Average Margin for CBM (per Mcf) $ 0.50 $ 0.64 $ (0.14) (21.9) %
The CBM segment had natural gas revenue of $114 million for the year ended
December 31, 2020 compared to $164 million for the year ended December 31, 2019 .
The $50 million decrease was due to a 5.1% decrease in total CBM sales volumes
and a 26.7% 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 $0.16 per Mcf due to a $0.79 per Mcf
decrease in average sales price for natural gas, offset in part by a $0.63 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 48.7 Bcf of the Company's produced CBM sales
volumes for the year ended December 31, 2020 at an average gain of $0.82 per Mcf
hedged. For the year ended December 31, 2019 , these financial hedges represented
approximately 40.9 Bcf at an average gain of $0.18 per Mcf hedged.
Total operating costs and expenses for the CBM segment were $128 million for the
year ended December 31, 2020 compared to $136 million for the year ended
December 31, 2019 . The decrease in total dollars was primarily due to decreases
in employee costs, electrical power expense and 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 $70 million for the year ended December 31, 2020 compared to $73 million
for the year ended December 31, 2019 . These amounts included depletion on a
50
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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, in part, to an impairment in the first quarter of 2020 related to
the Southwest Pennsylvania (SWPA) CBM asset group. 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 contractual settlement dates, exploration and production related other
costs, impairments, 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 Segment had a loss before income tax of $1,103 million for the year
ended December 31, 2020 compared to a loss before income tax of $524 million for
the year ended December 31, 2019 . The decrease in total dollars is discussed
below.
For the Years Ended
2020 2019 Variance Percent Change
Other Gas Sales Volumes (Bcf) 0.1 0.3 (0.2) (66.7) %
Oil/Condensate Sales Volumes (Bcfe)* 0.1 - 0.1 100.0 %
Total Other Sales Volumes (Bcfe)* 0.2 0.3 (0.1) (33.3) %
*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.
Gain or Loss on Commodity Derivative Instruments and Monetization
For the year endedDecember 31, 2020 , the Other segment recognized an unrealized loss on commodity derivative instruments of$288 million as well as cash settlements received of$84 million related to natural gas hedges and financial basis hedges that were partially monetized or terminated prior to their settlement date. For the year endedDecember 31, 2019 , the Other segment recognized an unrealized gain on commodity derivative instruments of$306 million as well as cash settlements received of$1 million . The unrealized gain or loss on commodity derivative instruments represents changes in the fair value of all the Company's existing commodity hedges on a mark-to-market basis. See Note 19 - Derivative Instruments in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information related to the cash settlements.
Purchased gas volumes represent volumes of natural 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$106 million for the year endedDecember 31, 2020 compared to$94 million for the year endedDecember 31, 2019 . Purchased gas costs were$101 million for the year endedDecember 31, 2020 compared to$91 million for the year endedDecember 31, 2019 . The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease in average sales price. For the Years Ended December 31, 2020 2019 Variance Percent Change Purchased Gas Sales Volumes (in Bcf) 66.6 40.6 26.0 64.0 % Average Sales Price (per Mcf)$ 1.59 $ 2.32 $ (0.73) (31.5) % Average Cost (per Mcf)$ 1.52 $ 2.23 $ (0.71) (31.8) % 51
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Other Operating Income
For the Years Ended December 31,
(in millions) 2020 2019 Variance Percent Change
Water Income $ 6 $ 2 $ 4 200.0 %
Excess Firm Transportation Income 12 10 2 20.0 %
Equity in (Loss) Earnings of Affiliates (1) 2 (3) (150.0) %
Total Other Operating Income $ 17 $ 14 $ 3 21.4 %
•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.
•Excess firm transportation 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 offset the unutilized firm transportation
and processing fees in total other operating expense.
Impairment of
During the year endedDecember 31, 2020 , CNX recognized certain indicators of impairments specific to our 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. During the year endedDecember 31, 2019 , CNX identified certain indicators of impairment specific to our CPA Marcellus asset group and determined that carrying value of that asset group was not recoverable. The fair value of the asset group was estimated by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, an impairment of$327 million was recognized within the CPA Marcellus proved properties and is included in Impairment ofExploration and Production Properties in the Consolidated Statements of Income. This impairment was related to 56 operated wells and approximately 51,000 acres within our CPA Marcellus proved properties inArmstrong ,Indiana ,Jefferson andWestmoreland counties. The majority of these properties were developed prior to 2013 and the last of these properties were developed in 2015.
Impairment of
Capitalized costs of unproved oil and gas properties are evaluated periodically for indicators of potential impairment. Indicators of potential impairment include, but are not limited to, changes brought about by economic factors, commodity price outlooks, our geologists' evaluation of the property, favorable or unfavorable activity on the property being evaluated and/or adjacent properties, potential shifts in business strategy employed by management and historical experience. The likelihood of an impairment of unproved oil and gas properties increases as the expiration of a lease term approaches if drilling activity has not commenced. If it is determined that the Company does not intend to drill on the property prior to expiration or does not have the intent and ability to extend, renew, trade, or sell the lease prior to expiration, an impairment is recorded. Expense for lease expirations that were not previously impaired are recorded as the leases expire. No impairments related to unproved properties were recorded for the year-endedDecember 31, 2020 . For the year endedDecember 31, 2019 , CNX recorded an impairment related to unproved properties of$119 million that was included in Impairment ofUnproved Properties and Expirations in the Consolidated Statements of Income. These unproved properties are within CNX's CPA operating region and east of the acreage associated with the proved property impairment described above. Impairment ofGoodwill In connection with the Midstream Acquisition that occurred inJanuary 2018 , CNX recorded$796 million of goodwill. (See Note 4 - Acquisitions and Dispositions of the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). 52 --------------------------------------------------------------------------------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 Statements of Income. No such impairment occurred in the prior period. See Note 9 -Goodwill and Other Intangible Assets in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
Exploration and Production Related Other Costs
For the Years Ended December 31,
(in millions) 2020 2019 Variance Percent Change
Lease Expiration Costs $ 10 $ 31 $ (21) (67.7) %
Seismic Activity 1 8 (7) (87.5) %
Land Rentals 3 3 - - %
Other 1 2 (1) (50.0) %
Total Exploration and Production Related Other
Costs $ 15 $ 44 $ (29) (65.9) %
•Lease Expiration Costs relate to leases where the primary term expired or will
expire within the next 12 months. The $21 million decrease in the
period-to-period comparison is due to a decrease in the number of leases that
were allowed to expire in the year ended December 31, 2020 , or will expire
within the next 12 months, because they were no longer in the Company's future
drilling plan. Additionally, approximately $15 million of the $21 million
decrease is associated with leases which expired
•Seismic activity decreased in the period-to-period comparison due to additional
geophysical research in the prior period.
Selling, General and Administrative ("SG&A")
SG&A costs include costs such as overhead, including employee labor and benefit
costs, short-term incentive compensation, costs of maintaining our headquarters,
audit and other professional fees, and legal compliance expenses. SG&A costs
also include non-cash long-term equity-based compensation expense.
For
the Years Ended
(in millions) 2020 2019 Variance Percent Change
Long-Term Equity-Based Compensation (Non-Cash)
38$ (24) (63.2) % Salaries, Wages and Employee Benefits 31 40 (9) (22.5) % Short-Term Incentive Compensation 20 21 (1) (4.8) % Other 44 45 (1) (2.2) % Total SG&A$ 109 $ 144 $ (35) (24.3) % •Long-term equity-based compensation decreased$24 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 15 - Stock-Based Compensation in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •Salaries, wages and employee benefits decreased$9 million due to an overall reduction in employees and employee-related costs resulting from a reduction in staff. 53
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Other Operating Expense
For the Years Ended December 31,
(in millions) 2020 2019 Variance Percent Change
Unutilized Firm Transportation and Processing Fees
55 $ 15 27.3 %
Insurance Expense 3 4 (1) (25.0) %
Severance Expense - 1 (1) (100.0) %
Idle Equipment and Service Charges 10 12 (2) (16.7) %
Other 2 8 (6) (75.0) %
Total Other Operating Expense $ 85 $ 80 $ 5 6.3 %
•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.
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. The increase in the period-to-period comparison was
primarily due to an increase in previously acquired capacity that was not able
to be utilized during the current period to transport the Company's flowing
production or to process the Company's wet natural gas production. One
contributing factor was the strategic temporary shut-in of certain wells to take
advantage of higher prices later in the year and thereby optimize the overall
value of the assets. Twenty-two dry gas turn-in-lines from April and May were
temporarily shut-in through September and a portion of CNX's liquids-rich
Shirley-Pennsboro production was shut-in during May and June of 2020. Normal
production declines also contributed to the decrease in total volumes.
•Other decreased $6 million in the period-to-period comparison primarily due to
a tax refund that was received in the 2020 period.
Other Expense
For
the Years Ended
(in millions) 2020 2019 Variance Percent Change Other Income Right-of-Way Sales $ 3$ 9 $ (6) (66.7) % Royalty Income - 4 (4) (100.0) % Interest Income 2 2 - - % Other 8 4 4 100.0 % Total Other Income$ 13 $ 19 $ (6) (31.6) % Other Expense Merger Related Costs$ 11 $ -$ 11 100.0 % Professional Services 9 4 5 125.0 % Bank Fees 12 11 1 9.1 % Other Land Rental Expense 4 4 - - % Other Corporate Expense 1 3 (2) (66.7) % Total Other Expense$ 37 $ 22 $ 15 68.2 % Total Other Expense$ 24 $ 3 $ 21 700.0 % •Right-of-way sales relate to revenue generated from the sale of the Company's unutilized surface rights. The decrease of$6 million in the period-to-period comparison was due to a decrease in sales. •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 prices. 54 -------------------------------------------------------------------------------- •Other income increased$4 million in the period-to-period comparison primarily due to various items that occurred throughout both periods, none of which were individually material. •Merger-related costs consist of transaction costs directly attributable to the CNXM Merger (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K 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$5 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.
Gain on Asset Sales and Abandonments, net
A gain on asset sales of
Loss on Debt Extinguishment
A gain on debt extinguishment of$10 million was recognized in the year endedDecember 31, 2020 compared to a loss on debt extinguishment of$8 million in the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , CNX purchased the remaining$894 million of its 5.875% Senior Notes dueApril 2022 at an average price equal to 98.6% of the principal amount. During the year endedDecember 31, 2019 CNX purchased$400 million of its 5.875% Senior Notes dueApril 2022 at an average price equal to 101.5% of the principal amount. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Interest Expense
For the Years Ended December 31,
(in millions) 2020 2019 Variance Percent Change
Total Interest Expense $ 171 $ 151 $ 20 13.2 %
•The $20 million increase was primarily due to interest related to the addition,
in the current period, of $345 million of Convertible Senior Notes due 2026, the
$125 million Cardinal States Facility, the $50 million CSG Holdings Facility,
$500 million of senior notes due 2029, and $200 million of senior notes due
2027. The amortization of debt discount in connection with the Convertible
Senior Notes and realized and unrealized losses on interest rate swap agreements
during the year ended December 31, 2020 also contributed to the increase. These
increases were offset in part by the purchase of the remaining $894 million of
the 5.875% senior notes due in April 2022 during the year ended December 31,
2020 , as well as lower borrowings on the CNX credit facility. See Note 12 -
Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in
Item 8 of this Form 10-K for additional information.
Income Taxes
For the Years Ended December 31,
(in millions) 2020 2019 Variance Percent Change
(1,105.0) %
Income Tax (Benefit) Expense $ (174) $ 28 $ (202) (721.4) %
Effective Income Tax Rate 28.9 % 46.5 % (17.6) %
The effective income tax rate was 28.9% for the year ended December 31, 2020 ,
compared to 46.5% for the year ended December 31, 2019 . The effective rates for
the years ended December 31, 2020 and 2019 differs from the U.S. federal
statutory rate of 21% primarily due to the impact of state income taxes, equity
compensation and state valuation allowances, partially offset by the benefit
from non-controlling interest.
See Note 6 - Income Taxes in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
55
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Results of Operations: Year Ended December 31, 2019 Compared with the Year Ended
December 31, 2018
Net (Loss) Income Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to CNX Resources shareholders of $81
million , or a loss per diluted share of $0.42 , for the year ended December 31,
2019 , compared to net income attributable to CNX Resources shareholders of $797
million , or earnings per diluted share of $3.71 , for the year ended December 31,
2018 .
For the Years Ended December 31,
(Dollars in thousands) 2019 2018 Variance
Net Income $ 31,948 $ 883,111 $ (851,163)
Less: Net Income Attributable to Noncontrolling Interest 112,678 86,578 26,100
Net (Loss) Income Attributable to CNX Resources Shareholders
$ 796,533 $ (877,263) Included in the loss for the year endedDecember 31, 2019 was a$327 million non-cash impairment charge related to exploration and production properties and a$119 million non-cash impairment charge related to unproved properties and expirations, both of which were associated with the Company'sCentral Pennsylvania (CPA) acreage, offset, in part, by an unrealized gain on commodity derivative instruments of$306 million . Included in the earnings for the year endedDecember 31, 2018 was a$19 million non-cash impairment charge related to the other intangible asset - customer relationship in connection with the AEA with HG Energy and an unrealized gain on commodity derivative instruments of$40 million . (See Note 4 - Acquisitions and Dispositions of the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). As a result of the Midstream Acquisition (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information), CNX owns and controls 100% ofCNX Gathering , making CNXM a single-sponsor master limited partnership and thus the Company began consolidating CNXM onJanuary 3, 2018 . The resulting gain on remeasurement to fair value of the previously held equity interest inCNX 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 during the year endedDecember 31, 2019 . Prior to the acquisition, CNX accounted for its interests inCNX Gathering and CNXM as an equity-method investment.
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 Years Ended December 31,
2019 2018 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Sales Volumes (Bcfe)* 539.1 507.1 32.0
Natural Gas, NGL and Oil Revenue
$ 1,578 $ 3.12 $ (214) $ (0.60) Gain (Loss) on Commodity Derivative Instruments - Cash Settlement - Gas 70 0.14 (70) (0.15) 140 0.29 Total Revenue 1,434 2.66 1,508 2.97 (74) (0.31) Lease Operating Expense 65 0.12 95 0.19 (30) (0.07) Production, Ad Valorem and Other Fees 27 0.05 33 0.06 (6) (0.01) Transportation, Gathering and Compression 331 0.61 303 0.60 28 0.01 Depreciation, Depletion and Amortization (DD&A) 506 0.94 493 0.97 13 (0.03) Average Costs 929 1.72 924 1.82 5 (0.10) Average Margin$ 505 $ 0.94 $ 584 $ 1.15 $ (79) $ (0.21) *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. 56
-------------------------------------------------------------------------------- The 32.0 Bcfe increase in total sales volumes was primarily due to additional natural gas wells that were turned-in-line in the latter half of the 2018 period as well as throughout the 2019 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 2019 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. •Depreciation, Depletion and Amortization decreased on a per unit basis due to positive reserve revisions within the coreSWPA Shale development area, partially offset by negative reserve revisions withinCNX's Ohio Shale operations, as well as an increase in capital expenditures. •Transportation, gathering and compression expense increased on a per unit basis primarily due to new firm transportation contracts which began in the fourth quarter of 2018 and the first quarter of 2019. 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 Years Ended December 31, 2019 2018 Variance in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe Total Company Sales Volumes (Bcfe)* 539.1 507.1
32.0
Total Other Revenue and Operating Income $ 88
Depreciation, Depletion and Amortization $ 2
$ -$ 0.00 $ 2$ 0.00 Exploration and Production Related Other Costs 44 0.08 12 0.02 32
0.06
Selling, General and Administrative Costs 144 0.27 135 0.27 9 0.00 Other Operating Expense 80 0.15 72 0.14 8 0.01 Total Selected Operating Costs and Expenses 270 0.50 219 0.43 51 0.07 Other Expense (Income) 3 0.01 (15) (0.03) 18 0.04 Interest Expense 151 0.28 146 0.29 5 (0.01) Total Selected Other Expense 154 0.29 131 0.26 23 0.03
Total Selected Costs and Expenses
* 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.
57--------------------------------------------------------------------------------
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 Years Ended December 31,
in thousands (unless noted) 2019 2018 Variance Percent Change
LIQUIDS
NGL:
Sales Volume (MMcfe) 32,571 36,489 (3,918) (10.7) %
Sales Volume (Mbbls) 5,428 6,081 (653) (10.7) %
Gross Price ($/Bbl) $ 19.20 $ 27.30 $ (8.10) (29.7) %
Gross Revenue $ 104,139 $ 165,883 $ (61,744) (37.2) %
Oil/Condensate:
Sales Volume (MMcfe) 1,223 2,389 (1,166) (48.8) %
Sales Volume (Mbbls) 204 398 (194) (48.7) %
Gross Price ($/Bbl) $ 45.00 $ 51.72 $ (6.72) (13.0) %
Gross Revenue $ 9,173 $ 20,595 $ (11,422) (55.5) %
GAS
Sales Volume (MMcf) 505,355 468,226 37,129 7.9 %
Sales Price ($/Mcf) $ 2.48 $ 2.97 $ (0.49) (16.5) %
Gross Revenue $ 1,251,013 $ 1,391,459 $ (140,446) (10.1) %
Hedging Impact ($/Mcf) $ 0.14 $ (0.15) $ 0.29 193.3 %
Gain (Loss) on Commodity Derivative
Instruments - Cash Settlement $ 69,780 $ (69,720) $ 139,500 200.1 %
The decrease in gross revenue was primarily the result of the $0.49 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 $8.10 per Bbl decrease in
NGL prices. These decreases were offset, in-part, by the 32.0 Bcfe increase in
sales volumes and the increase in the realized gain on commodity derivative
instruments related to the Company's hedging program.
58
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SEGMENT ANALYSIS for the year ended December 31, 2019 compared to the year ended
December 31, 2018 :
For the Year Ended Difference to Year Ended
December 31, 2019 December 31, 2018
(in millions) Shale CBM Other Total Shale CBM Other Total
Natural Gas, NGLs and Oil Revenue $ 1,199 $ 164 $ 1 $ 1,364 $ (150) $ (49) $ (15) $ (214)
Gain on Commodity Derivative Instruments 62 7 307 376 122 16 268 406
Purchased Gas Revenue - - 94 94 - - 28 28
Other Revenue and Operating Income 74 - 14 88 (16) - (12) (28)
Total Revenue and Other Operating Income 1,335 171 416 1,922 (44) (33) 269 192
Lease Operating Expense 49 16 - 65 (22) (6) (2) (30)
Production, Ad Valorem and Other Fees 21 7 (1) 27 (4) - (2) (6)
Transportation, Gathering and Compression 290 40 1 331 39 (8) (3) 28
Depreciation, Depletion and Amortization 426 73 9 508 21 (4) (2) 15
Impairment of Exploration and Production
Properties - - 327 327 - - 327 327
Impairment of Unproved Properties and
Expirations - - 119 119 - - 119 119
Impairment of Other Intangible Assets - - - - - - (19) (19)
Exploration and Production Related Other
Costs - - 44 44 - - 32 32
Purchased Gas Costs - - 91 91 - - 26 26
Other Operating Expense - - 80 80 - - 8 8
Selling, General and Administrative Costs - - 144 144 - - 9 9
Total Operating Costs and Expenses 786 136 814 1,736 34 (18) 493 509
Other Expense - - 3 3 - - 18 18
Gain on Asset Sales and Abandonments, net - - (36) (36) - - 121 121
Gain on Previously Held Equity Interest - - - - - - 624 624
Loss on Debt Extinguishment - - 8 8 - - (46) (46)
Interest Expense - - 151 151 - - 5 5
Total Other Expenses - - 126 126 - - 722 722
Total Costs and Expenses 786 136 940 1,862 34 (18) 1,215 1,231
Earnings (Loss) Before Income Tax $ 549 $ 35 $ (524) $ 60 $ (78) $ (15) $ (946) $ (1,039)
59--------------------------------------------------------------------------------
SHALE SEGMENT
The Shale segment had earnings before income tax of$549 million for the year endedDecember 31, 2019 compared to earnings before income tax of$627 million for the year endedDecember 31, 2018 . For the Years Ended December 31, Percent 2019 2018 Variance Change Shale Gas Sales Volumes (Bcf) 449.6 403.2 46.4 11.5 % NGLs Sales Volumes (Bcfe)* 32.6 36.5 (3.9) (10.7) % Oil/Condensate Sales Volumes (Bcfe)* 1.2 2.2 (1.0) (45.5) % Total Shale Sales Volumes (Bcfe)* 483.4 441.9 41.5 9.4 % Average Sales Price - Gas (per Mcf)$ 2.42 $ 2.89 $ (0.47) (16.3) %
Gain (Loss) on Commodity Derivative Instruments -
$ 0.14 $ (0.15) $ 0.29 193.3 % Average Sales Price - NGLs (per Mcfe)*$ 3.20 $ 4.55 $ (1.35) (29.7) % Average Sales Price - Oil/Condensate (per Mcfe)*$ 7.47 $ 8.48 $ (1.01) (11.9) % Total Average Shale Sales Price (per Mcfe)$ 2.61 $ 2.92 $ (0.31) (10.6) % Average Shale Lease Operating Expenses (per Mcfe) 0.10 0.16 (0.06) (37.5) %
Average Shale Production, Ad Valorem and Other Fees (per Mcfe) 0.05
0.06 (0.01) (16.7) %
Average Shale Transportation, Gathering and Compression Costs (per Mcfe)
0.60 0.57 0.03 5.3 %
Average Shale Depreciation, Depletion and Amortization Costs (per Mcfe)
0.88 0.91 (0.03) (3.3) %
Total Average Shale Costs (per Mcfe) $ 1.63 $ 1.70 $ (0.07) (4.1) %
Average Margin for Shale (per Mcfe) $ 0.98 $ 1.22 $ (0.24) (19.7) %
*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 oil, NGLs, condensate, and
natural gas prices.
The Shale segment had natural gas, NGLs and oil/condensate revenue of $1,199
million for the year ended December 31, 2019 compared to $1,349 million for the
year ended December 31, 2018 . The $150 million decrease was due primarily to a
16.3% decrease in the average sales price for natural gas. This decrease was
offset in part by a 9.4% increase in total Shale sales volumes. The increase in
total Shale sales volumes was primarily due to additional wells being
turned-in-line throughout 2018 and 2019, partially offset by the sale of
substantially all of CNX's Ohio JV assets in the third quarter of 2018 (See Note
4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated
Financial Statements in Item 8 of this Form 10-K for additional information) as
well as normal production declines in the remaining dry Shale wells.
The decrease in total average Shale sales price was primarily due to a $0.47 per
Mcf decrease in average gas sales price. Additionally, there was a $0.10 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 Shale
production. The decreases were partially offset by a $0.29 per Mcf increase in
the realized gain (loss) on commodity derivative instruments. The notional
amounts associated with these financial hedges represented approximately 348.1
Bcf of the Company's produced Shale gas sales volumes for the year ended
December 31, 2019 at an average gain of $0.18 per Mcf hedged. For the year ended
December 31, 2018 , these financial hedges represented approximately 308.3 Bcf at
an average loss of $0.20 per Mcf hedged.
Total operating costs and expenses for the Shale segment were $786 million for
the year ended December 31, 2019 compared to $752 million for the year ended
December 31, 2018 . The increase in total dollars and decrease in unit costs for
the Shale segment were due to the following items:
•Shale lease operating expenses were $49 million for the year ended December 31,
2019 compared to $71 million for the year ended December 31, 2018 . The decrease
in total dollars was primarily due to a decrease in water disposal costs due to
an increase in reuse of produced water in well completions and a reduction in
employee costs. The decrease in unit costs was driven by the decrease in total
dollars.
60-------------------------------------------------------------------------------- •Shale transportation, gathering and compression costs were$290 million for the year endedDecember 31, 2019 compared to$251 million for the year endedDecember 31, 2018 . The$39 million increase in total dollars and$0.03 per Mcfe increase in unit costs were both due to the overall increase in Shale volumes and the new firm transportation contracts which began in the fourth quarter of 2018 and first quarter of 2019. •Depreciation, depletion and amortization costs attributable to the Shale segment were$426 million for the year endedDecember 31, 2019 compared to$405 million for the year endedDecember 31, 2018 . These amounts included depletion on a unit of production basis of$0.81 per Mcfe and$0.83 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate was due to positive reserve revisions within the core SWPA development area, partially offset by an increase in the units of production depreciation, depletion and amortization rate due to negative reserve revisions within theOhio operations, an increase in capital expenditures and a higher depreciation, depletion and amortization rate on deep dry Shale wells compared to the lower capital cost 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.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$74 million for the year endedDecember 31, 2019 compared to$90 million for the year endedDecember 31, 2018 . The decrease in the period-to-period comparison was primarily due to a reduction in third-party volumes transported due to normal production declines.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of$35 million for the year endedDecember 31, 2019 compared to earnings before income tax of$50 million for the year endedDecember 31, 2018 . For the Years Ended December 31, Percent 2019 2018 Variance Change CBM Gas Sales Volumes (Bcf) 55.4 60.3 (4.9) (8.1) % Average Sales Price - Gas (per Mcf)$ 2.96 $ 3.53 $ (0.57) (16.1) %
Gain (Loss) on Commodity Derivative Instruments -
$ 0.13 $ (0.14) $ 0.27 192.9 % Total Average CBM Sales Price (per Mcf)$ 3.09 $ 3.39 $ (0.30) (8.8) % Average CBM Lease Operating Expenses (per Mcf) 0.29 0.37 (0.08) (21.6) %
Average CBM Production, Ad Valorem and Other Fees (per Mcf) 0.12
0.12 - - %
Average CBM Transportation, Gathering and Compression Costs (per Mcf)
0.72 0.79 (0.07) (8.9) %
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf)
1.32 1.28 0.04 3.1 %
Total Average CBM Costs (per Mcf) $ 2.45 $ 2.56 $ (0.11) (4.3) %
Average Margin for CBM (per Mcf) $ 0.64 $ 0.83 $ (0.19) (22.9) %
The CBM segment had natural gas revenue of $164 million for the year ended
December 31, 2019 compared to $213 million for the year ended December 31, 2018 .
The $49 million decrease was due to an 8.1% decrease in total CBM sales volumes
and the 16.1% 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 4 - Acquisitions and Dispositions in the Notes
to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for
additional information).
The total average CBM sales price decreased $0.30 per Mcf due to a $0.57 per Mcf
decrease in average gas sales price, offset in part by a $0.27 per Mcf increase
in the gain (loss) on commodity derivative instruments resulting from the
Company's hedging program. The notional amounts associated with these financial
hedges represented approximately 40.9 Bcf of the Company's produced CBM sales
volumes for the year ended December 31, 2019 at an average gain of $0.18 per Mcf
hedged. For the year ended December 31, 2018 , these financial hedges represented
approximately 44.8 Bcf at an average loss of $0.20 per Mcf hedged.
61
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Total operating costs and expenses for the CBM segment were $136 million for the
year ended December 31, 2019 compared to $154 million for the year ended
December 31, 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 $16 million for the year ended December 31,
2019 compared to $22 million for the year ended December 31, 2018 . The $6
million decrease was primarily due to reductions in contract 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 $40 million for the
year ended December 31, 2019 compared to $48 million for the year ended
December 31, 2018 . The $8 million decrease in total dollars as well as the $0.07
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 $73 million for the year ended December 31, 2019 compared to $77 million
for the year ended December 31, 2018 . These amounts each included depletion on a
unit of production basis of $0.70 per Mcfe. 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, 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 Segment had a loss before income tax of$524 million for the year endedDecember 31, 2019 compared to earnings before income tax of$422 million for the year endedDecember 31, 2018 . For the Years Ended December 31, Percent 2019 2018 Variance Change Other Gas Sales Volumes (Bcf) 0.3 4.7 (4.4) (93.6) % Oil/Condensate Sales Volumes (Bcfe)* - 0.2 (0.2) (100.0) % Total Other Sales Volumes (Bcfe)* 0.3 4.9 (4.6) (93.9) % *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. Other Gas sales volumes were primarily related to shallow oil and gas production. CNX sold substantially all of these assets onMarch 30, 2018 (See Note 4 - Acquisitions and Dispositions of the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). There was$1 million of natural gas and oil revenue related to theOther Gas segment for the year endedDecember 31, 2019 compared to$16 million for the year endedDecember 31, 2018 . Total operating costs and expenses related to these other gas sales volumes were$6 million for the year endedDecember 31, 2019 compared to$18 million for the year endedDecember 31, 2018 . The decrease in natural gas and oil revenue was due to the asset sale.
Gain or Loss on Commodity Derivative Instruments
The Other Segment recognized an unrealized gain on commodity derivative instruments of$306 million and cash settlements received of$1 million for the year endedDecember 31, 2019 . For the year endedDecember 31, 2018 , the Other Segment recognized an unrealized gain on commodity derivative instruments of$40 million and cash settlements paid of$1 million . The unrealized gain or loss on commodity derivative instruments represents changes in the fair value of all 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$94 million for the year endedDecember 31, 2019 compared to$66 million for the year endedDecember 31, 2018 . Purchased gas costs were$91 million for 62 -------------------------------------------------------------------------------- the year endedDecember 31, 2019 compared to$65 for the year endedDecember 31, 2018 . The period-to-period increase in purchased gas revenue was due to an increase in purchased gas sales volumes, offset in part by a decrease in average sales price. For the Years Ended December 31, 2019 2018 Variance Percent Change Purchased Gas Sales Volumes (in Bcf) 40.6 20.5 20.1 98.0 % Average Sales Price (per Mcf)$ 2.32 $ 3.23 $ (0.91) (28.2) % Average Cost (per Mcf)$ 2.23 $ 3.17 $ (0.94) (29.7) % Other Operating Income For the Years Ended December 31, (in millions) 2019 2018 Variance Percent Change Water Income$ 2 $ 11 $ (9) (81.8) % Equity in Earnings of Affiliates 2 5 (3) (60.0) % Excess Firm Transportation Income 10 10 - - % Total Other Operating Income$ 14 $ 26 $ (12) (46.2) %
•Water income decreased
Impairment ofExploration and Production Properties During the fourth quarter of 2019, CNX identified certain indicators of impairment specific to our CPA Marcellus asset group and determined that carrying value of that asset group was not recoverable. The fair value of the asset group was estimated by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. As a result, an impairment of$327 million was recognized within the CPA Marcellus proved properties and is included in Impairment ofExploration and Production Properties in the Consolidated Statements of Income. This impairment was related to 56 operated wells and approximately 51,000 acres within our CPA Marcellus proved properties inArmstrong ,Indiana ,Jefferson andWestmoreland counties. The majority of these properties were developed prior to 2013 and the last of these properties were developed in 2015. Impairment ofUnproved Properties and Expirations Capitalized costs of unproved oil and gas properties are evaluated periodically for indicators of potential impairment. Indicators of potential impairment include, but are not limited to, changes brought about by economic factors, commodity price outlooks, our geologists' evaluation of the property, favorable or unfavorable activity on the property being evaluated and/or adjacent properties, potential shifts in business strategy employed by management and historical experience. The likelihood of an impairment of unproved oil and gas properties increases as the expiration of a lease term approaches if drilling activity has not commenced. If it is determined that the Company does not intend to drill on the property prior to expiration or does not have the intent and ability to extend, renew, trade, or sell the lease prior to expiration, an impairment is recorded. Expense for lease expirations that were not previously impaired are recorded as the leases expire.
For the year ended
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.
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In connection with the AEA with HG Energy (See Note 4 - Acquisitions and
Dispositions in the Notes to the Audited Consolidated Financial Statements in
Item 8 of this Form 10-K for additional information) that occurred during the
year ended December 31, 2018 , CNX determined that the carrying value of the
other intangible asset - customer relationship 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
2019 period.
Exploration and Production Related Other Costs
For the Years Ended December 31,
(in millions) 2019 2018 Variance Percent Change
Lease Expiration Costs $ 31 $ 5 $ 26 520.0 %
Seismic Activity 8 - 8 100.0 %
Land Rentals 3 4 (1) (25.0) %
Other 2 3 (1) (33.3) %
Total Exploration and Production Related Other
Costs $ 44 $ 12 $ 32 266.7 %
•Lease Expiration Costs relate to leases where the primary term expired or will
expire within the next 12 months. The $26 million increase in the
period-to-period comparison is due to an increase in the number of leases that
were allowed to expire in the year ended December 31, 2019 , or will expire
within the next 12 months, because they were no longer in the Company's future
drilling plan. Additionally, approximately $15 million of the $26 million
increase is associated with leases which have ceased production.
•Seismic activity increased in the period-to-period comparison due to additional
geophysical research in the 2019 period.
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 Years Ended
(in millions) 2019 2018 Variance Percent Change
Long-Term Equity-Based Compensation (Non-Cash) $ 38 $
21 $ 17 81.0 %
Salaries, Wages and Employee Benefits 40 40 - - %
Short-Term Incentive Compensation 21 24 (3) (12.5) %
Other 45 50 (5) (10.0) %
Total SG&A $ 144 $ 135 $ 9 6.7 %
•Long-term equity-based compensation increased $17 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
year ended December 31, 2019 . The additional expense was a result of the
acceleration of vesting of certain pre-2019 restricted stock units and
performance share units held by certain employees related to the trigger of a
contractual change in control event. See Note 15 - Stock-Based Compensation in
the Notes to the Audited Consolidated Financial Statements in Item 8 of this
Form 10-K for additional information. The remaining variance was due to various
items that occurred throughout both periods, none of which were individually
material.
•Short-term incentive compensation decreased $3 million due to a reduction in
the number of employees and lower projected payouts in the 2019 period.
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Other Operating Expense
For the Years Ended
(in millions) 2019 2018 Variance Percent Change
Unutilized Firm Transportation and Processing Fees
42 $ 13 31.0 %
Idle Equipment and Service Charges 12 5 7 140.0 %
Insurance Expense 4 3 1 33.3 %
Severance Expense 1 1 - - %
Litigation Expense - 4 (4) (100.0) %
Water Expense - 6 (6) (100.0) %
Other 8 11 (3) (27.3) %
Total Other Operating Expense $ 80 $ 72 $ 8 11.1 %
•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 2019 period to
transport the Company's flowing production. In some instances, the Company may
have the opportunity to realize more favorable net pricing by strategically
choosing to sell natural gas into a market or to a customer that does not
require the use of the Company's own firm transportation capacity. Such sales
would increase unutilized firm transportation expense. The Company attempts to
minimize this expense by releasing (selling) unutilized firm transportation
capacity to other parties when possible and when beneficial. The revenue
received when this capacity is released (sold) is included in Gathering Income
in Total Other Operating Income above.
•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 $7 million in the period-to-period comparison was
primarily the result CNX terminating one of its drilling rig contracts 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 $6 million due to the associated costs related to the
sales of freshwater to third-parties for hydraulic fracturing during 2018 in
Total Other Operating Income above. There were nominal sales during 2019.
Other Expense (Income)
For the Years Ended December 31,
(in millions) 2019 2018 Variance Percent Change
Other Income
Royalty Income $ 4 $ 15 $ (11) (73.3) %
Right of Way Sales 9 14 (5) (35.7) %
Interest Income 2 - 2 100.0 %
Other 4 8 (4) (50.0) %
Total Other Income $ 19 $ 37 $ (18) (48.6) %
Other Expense
Bank Fees $ 11 $ 11 $ - - %
Professional Services 4 7 (3) (42.9) %
Other Land Rental Expense 4 4 - - %
Other Corporate Expense 3 - 3 100.0 %
Total Other Expense $ 22 $ 22 $ - - %
Total Other Expense (Income) $ 3 $ (15)$ 18 120.0 % 65
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Gain on Asset Sales and Abandonments, net
A gain on asset sales of$36 million related to non-core assets was recognized in the year endedDecember 31, 2019 compared to a gain of$157 million in the year endedDecember 31, 2018 , primarily due to the$131 million gain that was recognized related to the sale of substantially all of CNX's Ohio Utica JV assets as well as the sale of various other non-core assets in the 2018 period. See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Gain on Previously Held Equity Interest
CNX recognized a gain on previously held equity interest of$624 million in the year endedDecember 31, 2018 due to the Midstream Acquisition that occurred inJanuary 2018 . No such transactions occurred in the 2019 period. See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Loss on Debt Extinguishment
A loss on debt extinguishment of$8 million was recognized in the year endedDecember 31, 2019 compared to a loss on debt extinguishment of$54 million in the year endedDecember 31, 2018 . During the year endedDecember 31, 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. During the year endedDecember 31, 2018 , CNX purchased$411 million of its 5.875% senior notes due inApril 2022 at an average price equal to 103.5% of the principal amount and redeemed the$500 million 8.00% senior notes due inApril 2023 at a call price equal to 106.0% of the principal amount. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Interest Expense
For the Years Ended December 31,
(in millions) 2019 2018 Variance Percent Change
Total Interest Expense $ 151 $ 146 $ 5 3.4 %
•The $5 million increase was primarily due to additional borrowings on the CNX
and CNXM credit facilities as well as a completed private offering of $500
million of 7.25% senior notes due March 2027 during the year ended December 31,
2019 . These increases were partially offset by 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 $411 million purchase of the
outstanding 5.875% senior notes due in April 2022 during the year ended
December 31, 2018 . Additionally, the Company purchased $400 million of its
outstanding 5.875% senior notes due in April 2022 during the year ended
December 31, 2019 . See Note 12 - Long-Term Debt in the Notes to the Audited
Consolidated Financial Statements in Item 8 of this Form 10-K for additional
information.
Income Taxes
For the Years Ended December 31,
(in millions) 2019 2018 Variance Percent Change
Total Company Earnings Before Income Tax $ 60 $ 1,099 $ (1,039) (94.5) %
Income Tax Expense $ 28 $ 216 $ (188) (87.0) %
Effective Income Tax Rate 46.5 % 19.6 % 26.9 %
The effective income tax rate was 46.5% for the year ended December 31, 2019 ,
compared to 19.6% for the year ended December 31, 2018 . The effective rate for
the year ended December 31, 2019 differs from the U.S. federal statutory rate of
21% primarily due to state income taxes, equity compensation and state valuation
allowances partially offset by the benefit from non-controlling interest. During
the year ended December 31, 2018 , CNX obtained a controlling interest in CNX
Gathering LLC and, through CNX Gathering's ownership of the general partner,
control over CNXM. All of CNXM's income is included in the Company's pre-tax
income. However, the Company is not required to record income tax expense with
respect to the portions of CNXM's income allocated to the noncontrolling public
limited partners of CNXM, which reduces the Company's effective tax rate in
periods when the Company has consolidated pre-tax income and increases the
Company's effective tax rate in periods when the Company has consolidated
pre-tax loss. The effective rate for the year ended December 31, 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")
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carryback which resulted in the Company being able to utilize previously valued
tax attributes at a tax rate differential of 14%, noncontrolling interest, the
reversal of the alternative minimum tax ("AMT") credit sequestration valuation
allowance, and the release of certain state valuation allowances as a result of
a corporate reorganization during the year.
See Note 6 - Income Taxes in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make judgments, estimates and assumptions that affect reported amounts of assets and liabilities, revenues and expenses and related disclosure of contingent assets and liabilities in the Consolidated Financial Statements and at the date of the financial statements. See Note 1-Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for further discussion. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates on an on-going basis. Actual results could differ from those estimates upon subsequent resolution of identified matters. Management believes that the estimates utilized are reasonable. The following critical accounting policies are materially impacted by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.
Asset Retirement Obligations
Accounting for Asset Retirement Obligations requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. Asset retirement obligations primarily relate to the closure of gas wells and the reclamation of land upon exhaustion of gas reserves. Changes in the variables used to calculate the liabilities can have a significant effect on the gas well closing liability. The amounts of assets and liabilities recorded are dependent upon a number of variables, including the estimated future retirement costs, estimated proved reserves, assumptions involving profit margins, inflation rates and the assumed credit-adjusted risk-free interest rate. The Company believes that the accounting estimates related to asset retirement obligations are "critical accounting estimates" because the Company must assess the expected amount and timing of asset retirement obligations. In addition, the Company must determine the estimated present value of future liabilities. Future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions.
Income Taxes
Deferred tax assets and liabilities are recognized using enacted tax rates for the estimated future tax effects of temporary differences between the book and tax basis of recorded assets and liabilities. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax asset will not be realized. All available evidence, both positive and negative, must be considered in determining the need for a valuation allowance. AtDecember 31, 2020 , CNX had deferred tax liabilities in excess of deferred tax assets of approximately$343 million . AtDecember 31, 2020 , CNX had a valuation allowance of$123 million on deferred tax assets. CNX evaluates all tax positions taken on the state and federal tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, an evaluation of the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement is determined. A previously recognized tax position is reversed when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the probable amount that is more likely than not is based on judgment, historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of these estimates, that are not readily apparent from other sources, form the basis for recognizing an uncertain tax liability. Actual results could differ from those estimates upon subsequent resolution of identified matters. See Note 6 - Income Taxes in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information regarding the Company's uncertain tax liabilities.
The Company believes that accounting estimates related to income taxes are "critical accounting estimates" because the Company must assess the likelihood that deferred tax assets will be recovered from future taxable income and exercise
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judgment regarding the amount of financial statement benefit to record for
uncertain tax positions. When evaluating whether or not a valuation allowance
must be established on deferred tax assets, the Company exercises judgment in
determining whether it is more likely than not (a likelihood of more than 50%)
that some portion or all of the deferred tax assets will not be realized. The
Company considers all available evidence, both positive and negative, to
determine whether, based on the weight of the evidence, a valuation allowance is
needed, including carrybacks, tax planning strategies and reversal of deferred
tax assets and liabilities. In making the determination related to uncertain tax
positions, the Company considers the amounts and probabilities of the outcomes
that could be realized upon ultimate settlement of an uncertain tax position
using the facts, circumstances and information available at the reporting date
to establish the appropriate amount of financial statement benefit. To the
extent that an uncertain tax position or valuation allowance is established or
increased or decreased during a period, the Company must include an expense or
benefit within tax expense in the income statement. Future results of operations
for any particular quarterly or annual period could be materially affected by
changes in the Company's assumptions.
Natural Gas, NGL, Condensate and Oil Reserve ("Natural Gas Reserve") Values
Proved oil and gas reserves, as defined by SEC Regulation S-X Rule 4-10, are those quantities of oil and natural gas which, by analysis of geoscience 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. There are numerous uncertainties inherent in estimating quantities and values of economically recoverable natural gas reserves, including many factors beyond our control. As a result, estimates of economically recoverable natural gas reserves are by their nature uncertain. Information about our reserves consists of estimates based on engineering, economic and geological data assembled and analyzed by our staff. Our natural gas reserves are reviewed by independent experts each year. Some of the factors and assumptions which impact economically recoverable reserve estimates include: •geological conditions; •historical production from the area compared with production from other producing areas; •the assumed effects of regulations and taxes by governmental agencies; •assumptions governing future prices; and •future operating costs. Each of these factors may in fact vary considerably from the assumptions used in estimating reserves. For these reasons, estimates of the economically recoverable quantities of gas attributable to a particular group of properties, and classifications of these reserves based on risk of recovery and estimates of future net cash flows, may vary substantially. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and these variances may be material. See "Risk Factors" in Item 1A of this Form 10-K for a discussion of the uncertainties in estimating our reserves.
The Company believes that the accounting estimate related to oil and gas reserves is a "critical accounting estimate" because the Company must periodically reevaluate proved reserves along with estimates of future production rates, production costs and the estimated timing of development expenditures. Future results of operations and strength of the balance sheet for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions. See "Impairment of Long-lived Assets" below for additional information regarding the Company's oil and gas reserves.
Impairment of Long-lived Assets
The carrying values of the Company's proved oil and gas properties are reviewed for impairment whenever events or changes in circumstances indicate that a property's carrying amount may not be recoverable. Impairment tests require that the Company first compare future undiscounted cash flows by asset group to their respective carrying values. The Company groups its assets by geological and geographical characteristics. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the natural gas properties to their estimated fair values is required, which is determined based on discounted cash flow techniques using a market-specific weighted average cost of capital. For the year endedDecember 31, 2020 , an impairment of$62 million was included in Impairment ofExploration and Production Properties in the Consolidated Statements of Income. This impairment was related to ourSouthwest Pennsylvania (SWPA) coalbed methane (CBM) asset group. For the year endedDecember 31, 2019 , an impairment of$327 million was included in Impairment ofExploration and Production Properties in the Consolidated Statements of Income. This impairment was related to 56 operated wells and approximately 51,000 acres within our CPA Marcellus proved properties inArmstrong ,Indiana ,Jefferson andWestmoreland counties. See Note 1 - Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for more information. 68 --------------------------------------------------------------------------------
There were no other impairments related to proved properties in the years ended
CNX evaluates capitalized costs of unproved gas properties for recoverability on a prospective basis. Indicators of potential impairment include, but are not limited to, changes brought about by economic factors, commodity price outlooks, our geologists' evaluation of the property, favorable or unfavorable activity on the property being evaluated and/or adjacent properties, potential shifts in business strategy employed by management and historical experience. If it is determined that the properties will not yield proved reserves, the related costs are expensed in the period the determination is made. For the year endedDecember 31, 2019 , an impairment of$119 million was included in Impairment ofUnproved Properties and Expirations in the Consolidated Statements of Income. There were no other impairments related to unproved properties in the years endedDecember 31, 2020 , 2019 or 2018. The Company believes that the accounting estimates related to the impairment of long-lived assets are "critical accounting estimates" because the fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management's estimates of future financial results. In addition, the Company must determine the estimated undiscounted future cash flows as well as the impact of commodity price outlooks. The Company believes the estimates and assumptions used in estimating the fair value are reasonable and appropriate; however, different assumptions and estimates, such as different assumptions in projected revenues, future commodity prices or the weighted average costs of capital, could materially impact the calculated fair value and the resulting determinations about the impairment of long-lived assets which could materially impact the Company's results of operations and financial position. Additionally, future estimates may differ materially from current estimates and assumptions.
Impairment of
In connection with the Midstream Acquisition that closed onJanuary 3, 2018 , CNX recorded$796 million of goodwill. See Note 4 - Acquisitions and Dispositions for more information in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for more information.Goodwill is not amortized, but rather it is evaluated 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. We may assess goodwill for impairment by first performing a qualitative assessment, which considers specific factors, based on the weight of evidence, and the significance of all identified events and circumstances in the context of determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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, we perform a quantitative impairment test. From time to time, we may also bypass the qualitative assessment and proceed directly to the quantitative impairment test. Under the quantitative goodwill impairment test, the fair value of a reporting unit is compared to its carrying amount. If the quantitative goodwill impairment test indicates that the goodwill is impaired, an impairment loss is recorded, which is the difference between carrying value of the reporting unit and its fair value, with the impairment loss not to exceed the amount of goodwill recorded. The estimation of fair value of a reporting unit is determined using the income approach and/or the market approach as described below. The income approach is a quantitative evaluation to determine the fair value of the reporting unit. Under the income approach we determine the fair value based on estimated future cash flows discounted by an estimated weighted-average cost of capital plus a forecast risk, which reflects the overall level of inherent risk of the reporting unit and the rate of return a market participant would expect to earn. The inputs used for the income approach were significant unobservable inputs, or Level 3 inputs, as described in the accounting fair value hierarchy. CNX determined the fair value based on estimated future cash flows and earnings before deducting net interest expense (interest expense less interest income) and income taxes (EBITDA - a non-GAAP financial measure) and also included estimates for capital expenditures, discounted to present value using a risk-adjusted rate, which management feels reflects the overall level of inherent risk of the reporting unit. Cash flow projections were derived from board approved budgeted amounts, a seven-year operating forecast and an estimate of future cash flows. Subsequent cash flows were developed using growth or contraction rates that management believes are reasonably likely to occur. The market approach measures the fair value of a reporting unit through the analysis of recent transactions and/or financial multiples of comparable businesses. Consideration is given to the financial conditions and operating performance of the reporting unit being valued relative to those publicly-traded companies operating in the same or similar lines of business. The determination of the fair value requires us to make significant estimates and assumptions. These estimates and assumptions primarily include but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures. The estimates of future cash flows and 69 -------------------------------------------------------------------------------- EBITDA are subjective in nature and are subject to impacts from business risks as described in Part I. Item 1A. "Risk Factors" of this Form 10-K. The fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management's estimates of future financial results. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting unit, the amount of any goodwill impairment charge, or both. 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 Statements of Income. See Note 9 -Goodwill and Other Intangible Assets in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for more information. There were no other impairments related to goodwill in the years endedDecember 31, 2020 , 2019 or 2018. Any additional adverse changes in the future could reduce the underlying cash flows used to estimate fair values and could result in a decline in fair value that could trigger future impairment charges. The Company believes that the accounting estimates related to goodwill are "critical accounting estimates" because the fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management's estimates of future financial results. The fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management's estimates of future financial results as well as other assumptions such as movement in the Company's stock price, weighted-average cost of capital, terminal growth rates, changes in the business climate, unanticipated changes in the competitive environment, adverse legal or regulatory actions or developments, changes in capital structure, cost of debt, interest rates, capital expenditure levels, operating cash flows, or market capitalization and industry multiples. The Company believes the estimates and assumptions used in estimating the fair value are reasonable and appropriate; however, different assumptions and estimates could materially impact the calculated fair value and the resulting determinations about goodwill impairment which could materially impact the Company's results of operations and financial position. Additionally, future estimates may differ materially from current estimates and assumptions.
Impairment of Definite-lived Intangible Assets
Definite-lived intangible assets are amortized on a straight-line basis over their estimated economic lives and they are reviewed for impairment when indicators of impairment are present. Impairment tests require that the Company first compare future undiscounted cash flows to their respective carrying values. If the carrying amount exceeds the estimated undiscounted future cash flows, a reduction of the carrying amount of the asset to its estimated fair value is required. InMay 2018 , CNX determined that the carrying value of a portion of the customer relationship intangible assets that were acquired in connection with the Midstream acquisition exceeded their fair value in conjunction with the AEA with HG Energy (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for more information). As a result, CNX recognized an impairment on this intangible asset of$19 million , which is included in Impairment of Other Intangible Assets in the Consolidated Statements of Income for the year endedDecember 31, 2018 . There were no other impairments related to definite-lived intangible assets in the years endedDecember 31, 2020 , 2019 or 2018. The Company believes that the accounting estimates related to the impairment of definite-lived intangible assets are "critical accounting estimates" because the fair value estimation process requires considerable judgment and determining the fair value is sensitive to changes in assumptions impacting management's estimates of future financial results. The Company believes the estimates and assumptions used in estimating the fair value are reasonable and appropriate; however, different assumptions and estimates could materially impact the calculated fair value and the resulting determinations about the impairment of definite-lived intangible assets which could materially impact the Company's results of operations and financial position. Additionally, future estimates may differ materially from current estimates and assumptions.
Business Combinations
Accounting for the acquisition of a business requires the identifiable assets
and liabilities acquired to be recorded at fair value. The most significant
assumptions in a business combination include those used to estimate the fair
value of the oil and natural gas properties acquired. The fair value of proved
natural gas properties is determined using a risk-adjusted after-tax
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discounted cash flow analysis based upon significant assumptions including
commodity prices; projections of estimated quantities of reserves; projections
of future rates of production; timing and amount of future development and
operating costs; projected reserve recovery factors; and a weighted average cost
of capital.
The Company utilizes the guideline transaction method to estimate the fair value
of unproved properties acquired in a business combination which requires the
Company to use judgment in considering the value per undeveloped acre in recent
comparable transactions to estimate the value of unproved properties.
The estimated fair value of midstream facilities and equipment, generally
consisting of pipeline systems and compression stations, is estimated using the
cost approach, which incorporates assumptions about the replacement costs for
similar assets, the relative age of assets and any potential economic or
functional obsolescence.
The fair values of the intangible assets are estimated using the multi-period
excess earnings model which estimates revenues and cash flows derived from the
intangible asset and then deducts portions of the cash flow that can be
attributed to supporting assets otherwise recognized. The Company's intangible
assets are comprised of customer relationships.
The Company believes that the accounting estimates related to business
combinations are "critical accounting estimates" because the Company must, in
determining the fair value of assets acquired, make assumptions about future
commodity prices; projections of estimated quantities of reserves; projections
of future rates of production; projections regarding the timing and amount of
future development and operating costs; and projections of reserve recovery
factors, per acre values of undeveloped property, replacement cost of and future
cash flows from midstream assets, cash flow from customer relationships and
non-compete agreements and the pre and post modification value of stock based
awards. Different assumptions may result in materially different values for
these assets which would impact the Company's financial position and future
results of operations.
Convertible Senior Notes
CNX accounted for its Convertible Senior Notes dueMay 2026 as separate liability and equity components. The carrying amount of the liability component of the instrument was computed by estimating the fair value of a similar liability without the conversion option. The amount of the equity component was then calculated by deducting the fair value of the liability component from the principal amount of the instrument. The difference between the principal amount and the liability component represents a debt discount that is amortized to interest expense over the respective term of the Convertible Notes using the effective interest rate method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. Additionally, a detailed analysis of the terms of the convertible senior notes transactions was required to determine existence of any derivatives that may require separate mark-to-market accounting under applicable accounting guidance. The Company believes that the accounting estimates related to the Convertible Notes are "critical accounting estimates" because of the judgment required when determining the balance sheet classification of the elements of the Convertible Notes as well as the existence of any derivatives that may require separate presentation under the applicable accounting guidance. The Company believes the estimates and assumptions used in estimating the fair value are reasonable and appropriate; however, different assumptions and estimates could materially impact the calculated fair value and the resulting balance sheet classification. 71
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Liquidity and Capital Resources
CNX generally has satisfied its working capital requirements and funded its capital expenditures and debt service obligations with cash generated from operations and proceeds from borrowings. CNX currently believes that cash generated from operations, asset sales and the Company's borrowing capacity will be sufficient to meet the Company's working capital requirements, anticipated capital expenditures (other than major acquisitions), scheduled debt payments, anticipated dividend payments, if any, and to provide required letters of credit for the next fiscal year. Nevertheless, the ability of CNX to satisfy its working capital requirements, to service its debt obligations, to fund planned capital expenditures, or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the natural gas industry and other financial and business factors, including the current COVID 19 pandemic, some of which are beyond CNX's control. From time to time, CNX is required to post financial assurances to satisfy contractual and other requirements generated in the normal course of business. Some of these assurances are posted to comply with federal, state or other government agencies' statutes and regulations. CNX sometimes uses letters of credit to satisfy these requirements and these letters of credit reduce the Company's borrowing facility capacity.
CNX continuously reviews its liquidity and capital resources. If market conditions were to change, for instance due to a significant decline in commodity prices or due to the uncertainty created by the COVID-19 pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced.
As ofDecember 31, 2020 , CNX was in compliance with all of its debt covenants. After considering the potential effect of a significant decline in commodity prices as well as the uncertainty created by the COVID-19 pandemic on its operations, CNX currently expects to remain in compliance with its debt covenants. In order to manage the market risk exposure of volatile natural gas prices in the future, CNX enters into various physical natural gas supply transactions with both gas marketers and end users for terms varying in length. CNX also enters into various financial natural gas swap transactions to manage the market risk exposure to in-basin and out-of-basin pricing. The fair value of these contracts was a net asset of$118 million atDecember 31, 2020 and a net asset of$406 million atDecember 31, 2019 . The Company has not experienced any issues of non-performance by derivative counterparties. CNX frequently evaluates potential acquisitions. CNX has funded acquisitions with cash generated from operations and a variety of other sources, depending on the size of the transaction, including debt and equity financing. There can be no assurance that additional capital resources, including debt and equity financing, will be available to CNX on terms which CNX finds acceptable, or at all. Cash Flows (in millions) For the Years Ended December 31, 2020 2019 Change Cash Provided by Operating Activities$ 795 $ 981 $ (186) Cash Used in Investing Activities$ (439) $ (1,147) $ 708 Cash (Used in) Provided by Financing Activities$ (351)
Cash provided by operating activities changed in the period-to-period comparison primarily due to the following items:
•Net income decreased$461 million in the period-to-period comparison. •Adjustments to reconcile net income to cash provided by operating activities primarily consisted of a$473 million impairment of goodwill, a$266 million decrease in impairment of exploration and production properties, a$119 million decrease in impairment of unproved properties and expirations, a$595 million net change in commodity derivative instruments, an$18 million increase in the gain on debt extinguishment, a$24 million decrease in stock based compensation,$197 million change in deferred income taxes, and various other changes in working capital.
Cash used in investing activities changed in the period-to-period comparison primarily due to the following items:
•Capital expenditures decreased$705 million in the period-to-period comparison primarily due to decreased expenditures in the Shale segment resulting from decreased drilling and completions activity. Gathering capital expenditures decreased due primarily to the substantial build out that was completed during 2019. 72 -------------------------------------------------------------------------------- •Proceeds from asset sales increased$3 million mainly due to increased surface sales and oil and natural gas assignment sales in the year endedDecember 31, 2020 .
Cash (used in) provided by financing activities changed in the period-to-period comparison primarily due to the following items:
•In the year endedDecember 31, 2020 , CNX paid$882 million to purchase$894 million of Senior Notes due in 2022 at 98.6% of the principal amount. In the year endedDecember 31, 2019 , CNX paid$406 million to purchase$400 million of the Senior Notes due in 2022 at 101.5% of the principal amount. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •In the year endedDecember 31, 2020 , there were$21 million of net payments on the CNXM Credit Facility compared to$228 million of net proceeds in the year endedDecember 31, 2019 . •In the year endedDecember 31, 2020 , there were$500 million of net payments on the CNX Credit Facility compared to$49 million of net proceeds in the year endedDecember 31, 2019 . •In the year endedDecember 31, 2020 , CNX received proceeds of$500 million from the issuance of Senior Notes due in 2029. •In the year endedDecember 31, 2020 , CNX received proceeds of$207 million from the issuance of Senior Notes due in 2027 at 103.5% of the principal amount. The new Senior Notes due in 2027 were offered as additional notes under an indenture pursuant to the$500 million Senior Notes due in 2027 that were issued in the year endedDecember 31, 2019 . See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •In the year endedDecember 31, 2020 , there were$159 million of net proceeds from the Cardinal States Facility and CSG Holdings Facility. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •In the year endedDecember 31, 2020 , CNX received proceeds of$335 million from the issuance of the Convertible Notes. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •In the year endedDecember 31, 2020 , CNX paid$36 million for capped call transactions related to the issuance of the Convertible Notes. See Note 12 - Long-Term Debt in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. •In the year endedDecember 31, 2020 , there were$42 million in distributions to CNXM noncontrolling interest holders compared to distributions of$64 million in the year endedDecember 31, 2019 . •In the years endedDecember 31, 2020 and 2019, CNX repurchased$37 million and$117 million , respectively, of its common stock on the open market. •Debt issuance and financing fees increased$15 million primarily due to the fees associated with the borrowings on the Cardinal States Facility and CSG Holdings Facility and the issuance of the Convertible Notes.
The following is a summary of the Company's significant contractual obligations
at
Payments due by Year
Less Than More Than
1 Year 1-3 Years 3-5 Years 5 Years Total
Purchase Order Firm Commitments $ 806 $
970 $ - $ -
252,886 430,312 390,693 985,201 2,059,092
Long-Term Debt 22,574 48,181 497,423 1,882,675 2,450,853
Interest on Long-Term Debt 122,251 262,415 240,083 202,118 826,867
Finance Lease Obligations 6,876 837 182 38 7,933
Interest on Finance Lease Obligations 262 52 11 1 326
Operating Lease Obligations 52,575 23,301 7,434 22,500 105,810
Interest on Operating Lease Obligations 3,615 3,744 2,823 3,496 13,678
Long-Term Liabilities-Employee Related (a) 1,992 4,169 4,436 35,129 45,726
Other Long-Term Liabilities (b) 201,684 10,000 10,000 64,713 286,397
Total Contractual Obligations (c) $ 665,521 $
783,981
_________________________
(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.
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(c)The table above does not include obligations to taxing authorities due to the
uncertainty surrounding the ultimate settlement of amounts and timing of these
obligations.
Debt
AtDecember 31, 2020 , CNX had total long-term debt of$2,451 million , including the current portion of long-term debt of$23 million and excluding unamortized debt issuance costs. This long-term debt consisted of: •An aggregate principal amount of$700 million of 7.25% Senior Notes dueMarch 2027 plus$7 million of unamortized bond premium. Interest on the notes is payableMarch 14 andSeptember 14 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner) orCSG Holdings III LLC . •An aggregate principal amount of$500 million of 6.00% Senior Notes dueJanuary 2029 . Interest on the notes is payableJanuary 15 andJuly 15 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner) orCSG Holdings III LLC . •An aggregate principal amount of$400 million of 6.50% Senior Notes dueMarch 2026 issued by CNXM, less$4 million of unamortized bond discount. Interest on the notes is payableMarch 15 andSeptember 15 of each year. Payment on the principal and interest on the notes is guaranteed by certain of CNXM's subsidiaries. CNX is not a guarantor of these notes. •An aggregate principal amount of$345 million of 2.25% Senior Notes dueMay 2026 , unless earlier redeemed, repurchased, or converted, less$108 million of unamortized bond discount and issuance costs. Interest on the notes is payableMay 1 andNovember 1 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner) orCSG Holdings III LLC . •An aggregate principal amount of$291 million in outstanding borrowings under the CNXM Credit Facility. CNX is not a guarantor of CNXM's Credit Facility. •An aggregate principal amount of$161 million in outstanding borrowings under the CNX Credit Facility. CNXM (or its subsidiaries or general partner) is not a guarantor of CNX's Credit Facility. •An aggregate principal amount of$115 million in outstanding borrowings under the Cardinal States Facility, less$1 million of unamortized discount. Interest and a portion of the obligation are paid quarterly. •An aggregate principal amount of$45 million in outstanding borrowings under the CSG Holdings Facility, less a nominal unamortized discount. Interest and a portion of the obligation are paid quarterly. Total Equity and Dividends CNX had total equity of$4,422 million atDecember 31, 2020 compared to$4,962 million atDecember 31, 2019 . See the Consolidated Statements of Stockholders' Equity in Item 8 of this Form 10-K for additional details. OnSeptember 28, 2020 , the Merger of CNXM was completed (See Note 4 - Acquisitions and Dispositions in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). CNX accounted for the change in our ownership interest in CNXM as an equity transaction which was reflected as a reduction of noncontrolling interest with corresponding increases to common stock and capital in excess of par value. 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 suspended its quarterly dividend inMarch 2016 to further reflect the Company's increased emphasis on growth at that time. 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. CNX's Credit Facility limits its 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 atDecember 31, 2020 . The Credit Facility does not permit dividend payments in the event of default. The indentures to the 7.25% Senior Notes dueMarch 2027 and the 6.00% Senior Notes dueJanuary 2029 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 under the year endedDecember 31, 2020 . 74
-------------------------------------------------------------------------------- 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 Audited 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 atDecember 31, 2020 . Management believes these items will expire without being funded. See Note 20 - Commitments and Contingent Liabilities in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional details of the various financial guarantees that have been issued by CNX. Recent Accounting Pronouncements InAugust 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 - Accounting for Convertible Instruments and Contracts in an Entity's Own Equity. This ASU simplifies an entity's accounting for convertible instruments by eliminating two of the three models in ASC 470-20 that require separate accounting for embedded conversion features, simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification, requires entities to use the if-converted method for all convertible instruments in the diluted EPS calculation and include the effect of potential share settlement (if the effect is more dilutive) for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards, requires new disclosures about events that occur during the reporting period and cause conversion contingencies to be met and about the fair value of an entity's convertible debt at the instrument level, among other things. The amendments in this ASU are effective for public entities for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years, and can be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 , including interim periods within those fiscal years. The Company is still evaluating the effect of adopting this guidance. InMarch 2020 , the FASB issued ASU 2020-04 - Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates (IBORs) and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. InJanuary 2021 , the FASB issued ASU 2021-01, which clarifies that certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments in these ASUs are effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The Company is still evaluating the effect of adopting this guidance. InMarch 2020 , the FASB issued ASU 2020-03 - Codification Improvements to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the CECL standard (see Note 1 - Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for more information). The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments in this ASU have different effective dates. The adoption of this guidance is not expected to have a material impact on the Company's financial statements. 75
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