Item 7. Management’s Discussion and Analysis
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Form 10-K. The information provided below supplements, but does not form part of, CNX's financial statements. This discussion contains forward‑looking statements that are based on the views and beliefs of management, as well as assumptions and estimates made by management. Actual results could differ materially from such forward‑looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact future operating performance or financial condition, please see “Part I. Item 1A. Risk Factors” and the section entitled “Forward‑Looking 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. More information regarding these considerations is located in Item 1A Risk Factors. 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 years ended December 31, 2021 or 2020 as a direct result of the COVID-19 pandemic, CNX is unable to predict the full extent of the future impact that the COVID-19 pandemic could have on the Company, including our financial position, operating results, liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties outside the Company’s control.
2021 Highlights:
• Increased proved developed reserves to 5.9 Tcfe, 13.5% higher than 2020.
• Total gas production of 590.2 Bcfe.
• Shale production of 540.4 Bcfe.
• Repurchased $241 million or 18.3 million shares of CNX common stock on the open market.
• Reduced Long-Term Debt by $187 million.
2022 Outlook:
• Our 2022 annual gas production is expected to be approximately 575-605 Bcfe.
• Our 2022 E&P capital expenditures are expected to be approximately $470-$500 million.
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Results of Operations:
The following discussion and analysis of our Results of Operations and Liquidity and Capital Resources includes a comparison of the year ended December 31, 2021 to the year ended December 31, 2020. A similar discussion and analysis that compares year ended December 31, 2020 to the fiscal year ended December 31, 2019 may be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Form 10-K for the year ended December 31, 2020, which is incorporated herein by reference.
Net Loss Attributable to CNX Resources Shareholders
CNX reported a net loss attributable to CNX Resources shareholders of $499 million, or a loss per diluted share of $2.31, for the year ended December 31, 2021, compared to a net loss attributable to CNX Resources shareholders of $484 million, or a loss per diluted share of $2.43, for the year ended December 31, 2020.
For the Years Ended December 31,
(Dollars in thousands) 2021 2020 Variance
Net Loss $ (498,643) $ (428,744) $ (69,899)
Less: Net Income Attributable to Noncontrolling Interests — 55,031 (55,031)
Net Loss Attributable to CNX Resources Shareholders $ (498,643) $ (483,775) $ (14,868)
Included in the loss for the year ended December 31, 2021 was an unrealized loss on commodity derivative instruments of $1,094 million. Included in the loss for the year ended December 31, 2020 was an unrealized loss on commodity derivative instruments of $288 million, a $62 million non-cash impairment charge related to exploration and production properties specific to our Southwestern Pennsylvania (SWPA) CBM asset group (See Note 8 - Property, Plant and Equipment in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K), and a $473 million non-cash impairment charge related to goodwill (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).
Prior to the effective time of the Merger on September 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 and following the Merger CNX owns 100% of the equity interests of CNXM. . 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 ended December 31, 2021.
Non-GAAP Financial Measures
CNX's management uses certain non-GAAP financial measures for planning, forecasting and evaluating business and financial performance, and believes that they are useful for investors in analyzing the company. Although these are not measures of performance calculated in accordance with generally accepted accounting principles (GAAP), management believes that these financial measures are useful to an investor in evaluating CNX because these metrics are widely used to evaluate a natural gas company’s operating performance. Sales of Natural Gas, NGL and Oil, including cash settlements excludes the impacts of changes in the fair value of commodity derivative instruments prior to settlement, which are often volatile, and only includes the impact of settled commodity derivative instruments. Sales of Natural Gas, NGL and Oil, including cash settlements also excludes purchased gas revenue and other revenue and operating income, which are not directly related to CNX’s natural gas producing activities. Natural Gas, NGL and Oil Production Costs excludes certain expenses that are not directly related to CNX’s natural gas producing activities and are managed outside our production operations (See Note 21 - Segment Information in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information). These expenses include, but are not limited to, interest expense, impairment of exploration and production properties, impairment of goodwill, other operating expense and other corporate expenses such as selling, general and administrative costs. We believe that Sales of Natural Gas, NGL and Oil, including cash settlements, Natural Gas, NGL and Oil Production Costs and Natural Gas, NGL and Oil Production Margin (which is derived by subtracting Natural Gas, NGL and Oil Production Costs from Sales of Natural Gas, NGL and Oil, including cash settlements) provide useful information to investors for evaluating period-to-period comparisons of earnings trends. These metrics should not be viewed as a substitute for measures of performance that are calculated in accordance with GAAP. In addition, because all companies do not calculate these measures identically, these measures may not be comparable to similarly titled measures of other companies.
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Non-GAAP Financial Measures Reconciliation
For the Years Ended December 31,
(Dollars in millions) 2021 2020
Total Revenue and Other Operating Income $ 757 $ 1,258
Add (Deduct):
Purchased Gas Revenue (100) (106)
Loss on Commodity Derivative Instruments and Monetization 1,094 204
Other Revenue and Operating Income (106) (82)
Sales of Natural Gas, NGL and Oil, including Cash Settlements, a Non-GAAP Financial Measure
$ 1,645 $ 1,274
Total Operating Expense $ 1,235 $ 1,697
Add (Deduct):
Depreciation, Depletion and Amortization (DD&A) - Corporate (11) (10)
Exploration and Production Related Other Costs (21) (15)
Purchased Gas Costs (94) (101)
Impairment of Exploration and Production Properties — (62)
Impairment of Goodwill — (473)
Selling, General and Administrative Costs (113) (109)
Other Operating Expense (68) (85)
Natural Gas, NGL and Oil Production Costs, a Non-GAAP Financial Measure 1
$ 928 $ 842
1 Natural Gas, NGL and Oil production costs consists primarily of lease operating expense, production ad valorem and other fees, transportation, gathering and compression and production related depreciation, depletion and amortization.
Selected Natural Gas, NGL and Oil Production Financial Data
The following table presents a summary of our total sales volumes, sales of natural gas, NGL and oil including cash settlements, natural gas, NGL and oil production costs and natural gas, NGL and oil production margin related to our production operations on a total company basis (See Non-GAAP Financial Measures Reconciliation above for the reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP):
For the Years Ended December 31,
2021 2020 Variance
in Millions Per Mcfe in Millions Per Mcfe in Millions Per Mcfe
Total Sales Volumes (Bcfe)* 590.2 511.1 79.1
Natural Gas, NGL and Oil Revenue $ 2,184 $ 3.77 $ 897 $ 1.71 $ 1,287 $ 2.06
(Loss) Gain on Commodity Derivative Instruments - Cash Settlement - Gas** (539) (0.98) 377 0.78 (916) (1.76)
Sales of Natural Gas, NGL and Oil, including Cash Settlements, a Non-GAAP Financial Measure
1,645 2.79 1,274 2.49 371 0.30
Lease Operating Expense 46 0.08 40 0.08 6 —
Production, Ad Valorem, and Other Fees 34 0.06 24 0.04 10 0.02
Transportation, Gathering and Compression 344 0.58 286 0.56 58 0.02
Depreciation, Depletion and Amortization (DD&A) 504 0.85 492 0.96 12 (0.11)
Natural Gas, NGL and Oil Production Costs, a Non-GAAP Financial Measure
928 1.57 842 1.64 86 (0.07)
Natural Gas, NGL and Oil Production Margin, a Non-GAAP Financial Measure
$ 717 $ 1.22 $ 432 $ 0.85 $ 285 $ 0.37
*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.
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The 79.1 Bcfe increase in volumes in the period-to period comparison was primarily due to the turn-in-line of new wells throughout 2020 and 2021. Additionally, in 2020 the Company temporarily shut-in new turn-in-line wells as a result of low natural gas and NGL pricing. The increases were offset in part by normal production declines.
Changes in the average costs per Mcfe were primarily related to the following items:
• Production, ad valorem and other fees increased on a per unit basis as a result of increased realized prices on natural gas and natural gas liquids as well as the change in production mix by state as new wells were turned-in-line.
• Transportation, gathering and compression expense increased on a per unit basis primarily due to increased processing costs due to a wetter production mix, and increased firm transportation costs.
• Depreciation, depletion and amortization expense decreased on a per unit basis as a result of low cost reserve additions from development during the 2020 period in SWPA, the addition of proved undeveloped Shale wells in the Central Pennsylvania (CPA), and an impairment recognized in CBM in the 2020 period.
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) 2021 2020 Variance Percent Change
LIQUIDS
NGL:
Sales Volume (MMcfe) 35,858 28,062 7,796 27.8 %
Sales Volume (Mbbls) 5,976 4,677 1,299 27.8 %
Gross Price ($/Bbl) $ 33.90 $ 13.74 $ 20.16 146.7 %
Gross NGL Revenue $ 202,670 $ 64,138 $ 138,532 216.0 %
Oil/Condensate:
Sales Volume (MMcfe) 2,401 1,584 817 51.6 %
Sales Volume (Mbbls) 400 264 136 51.5 %
Gross Price ($/Bbl) $ 56.32 $ 35.91 $ 20.41 56.8 %
Gross Oil/Condensate Revenue $ 22,541 $ 9,475 $ 13,066 137.9 %
GAS
Sales Volume (MMcf) 551,989 481,426 70,563 14.7 %
Sales Price ($/Mcf) $ 3.55 $ 1.71 $ 1.84 107.6 %
Gross Gas Revenue $ 1,958,718 $ 823,132 $ 1,135,586 138.0 %
Hedging Impact ($/Mcf) $ (0.98) $ 0.78 $ (1.76) (225.6) %
(Loss) Gain on Commodity Derivative Instruments - Cash Settlement* $ (539,016) $ 377,219 $ (916,235) (242.9) %
*Excluding gains from hedge monetizations
The increase in gross revenue was primarily the result of the $1.84 per Mcf increase in natural gas prices, when excluding the impact of hedging, the 79.1 Bcfe increase in sales volumes and the $20.16 per Bbl increase in NGL prices. These increases were offset, in part, by the impact of the change in the realized (loss) gain on commodity derivative instruments related to the Company's hedging program.
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SEGMENT ANALYSIS for the year ended December 31, 2021 compared to the year ended December 31, 2020:
For the Year Ended Difference to Year Ended
December 31, 2021 December 31, 2020
(in millions) Shale CBM Other Total Shale CBM Other Total
Natural Gas, NGLs and Oil Revenue $ 1,989 $ 194 $ 1 $ 2,184 $ 1,208 $ 80 $ (1) $ 1,287
Loss on Commodity Derivative Instruments (492) (47) (1,094) (1,633) (829) (87) (890) (1,806)
Purchased Gas Revenue — — 100 100 — — (6) (6)
Other Revenue and Operating Income 81 — 25 106 16 — 8 24
Total Revenue and Other Operating Income (Loss) 1,578 147 (968) 757 395 (7) (889) (501)
Lease Operating Expense 34 13 (1) 46 8 (1) (1) 6
Production, Ad Valorem, and Other Fees 27 7 — 34 8 2 — 10
Transportation, Gathering and Compression 303 40 1 344 55 1 2 58
Depreciation, Depletion and Amortization 440 58 17 515 24 (12) 1 13
Impairment of Exploration and Production Properties — — — — — — (62) (62)
Impairment of Goodwill — — — — — — (473) (473)
Exploration and Production Related Other Costs — — 21 21 — — 6 6
Purchased Gas Costs — — 94 94 — — (7) (7)
Selling, General and Administrative Costs — — 113 113 — — 4 4
Other Operating Expense — — 68 68 — — (17) (17)
Total Operating Costs and Expenses 804 118 313 1,235 95 (10) (547) (462)
Other Expense — — 16 16 — — (8) (8)
Gain on Asset Sales and Abandonments, net — — (42) (42) — — (21) (21)
Loss on Debt Extinguishment — — 34 34 — — 44 44
Interest Expense — — 151 151 — — (20) (20)
Total Other Expenses — — 159 159 — — (5) (5)
Total Costs and Expenses 804 118 472 1,394 95 (10) (552) (467)
Earnings (Loss) Before Income Tax $ 774 $ 29 $ (1,440) $ (637) $ 300 $ 3 $ (337) $ (34)
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SHALE SEGMENT
The Shale segment had earnings before income tax of $774 million for the year ended December 31, 2021 compared to earnings before income tax of $474 million for the year ended December 31, 2020.
For the Years Ended December 31,
2021 2020 Variance Percent
Change
Shale Gas Sales Volumes (Bcf) 502.2 428.7 73.5 17.1 %
NGLs Sales Volumes (Bcfe)* 35.8 28.1 7.7 27.4 %
Oil/Condensate Sales Volumes (Bcfe)* 2.4 1.5 0.9 60.0 %
Total Shale Sales Volumes (Bcfe)* 540.4 458.3 82.1 17.9 %
Average Sales Price - Gas (per Mcf) $ 3.51 $ 1.65 $ 1.86 112.7 %
(Loss) Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf) $ (0.98) $ 0.79 $ (1.77) (224.1) %
Average Sales Price - NGLs (per Mcfe)* $ 5.65 $ 2.29 $ 3.36 146.7 %
Average Sales Price - Oil/Condensate (per Mcfe)* $ 9.38 $ 5.83 $ 3.55 60.9 %
Total Average Shale Sales Price (per Mcfe) $ 2.77 $ 2.44 $ 0.33 13.5 %
Average Shale Lease Operating Expenses (per Mcfe) 0.06 0.06 — — %
Average Shale Production, Ad Valorem and Other Fees (per Mcfe) 0.05 0.04 0.01 25.0 %
Average Shale Transportation, Gathering and Compression Costs (per Mcfe) 0.56 0.54 0.02 3.7 %
Average Shale Depreciation, Depletion and Amortization Costs (per Mcfe) 0.82 0.91 (0.09) (9.9) %
Total Average Shale Production Costs (per Mcfe) $ 1.49 $ 1.55 $ (0.06) (3.9) %
Total Average Shale Production Margin (per Mcfe) $ 1.28 $ 0.89 $ 0.39 43.8 %
*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 $1,989 million for the year ended December 31, 2021 compared to $781 million for the year ended December 31, 2020. The $1,208 million increase was due primarily to a 17.9% increase in total Shale gas sales volumes, and a 13.5% increase in the total average Shale sales price.
The increase in total Shale gas sales volumes was primarily due to the turn-in-line of new wells throughout 2020 and 2021. The increase was also due to the temporary shut-in of new turn-in-line wells in 2020 due to low natural gas prices, offset in part by normal production declines.
The increase in total average Shale sales price was primarily due to a $1.86 per Mcf increase in average gas sales price and a $3.36 per Mcfe increase in the average NGL sales price. These increases were offset in part by a $1.77 per Mcf change in the realized (loss) gain on commodity derivative instruments. The notional amounts associated with these financial hedges represented approximately 429.4 Bcf of the Company's produced Shale gas sales volumes for the year ended December 31, 2021 at an average loss of $1.15 per Mcf hedged. For the year ended December 31, 2020, these financial hedges represented approximately 412.1 Bcf at an average gain of $0.82 per Mcf hedged.
Total operating costs and expenses for the Shale segment were $804 million for the year ended December 31, 2021 compared to $709 million for the year ended December 31, 2020. 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 $34 million for the year ended December 31, 2021 compared to $26 million for the year ended December 31, 2020. The increase in total dollars was primarily related to an increase in production volumes.
• Shale production, ad valorem and other fees were $27 million for the year ended December 31, 2021 compared to $19 million for the year ended December 31, 2020. The increases in total dollars and unit costs were primarily due to increased realized prices on natural gas and natural gas liquids as well as the change in production mix by state as new wells were turned-in-line.
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• Shale transportation, gathering and compression costs were $303 million for the year ended December 31, 2021 compared to $248 million for the year ended December 31, 2020. The increase in total dollars was primarily related to the increase in total production volumes and increased processing costs due to a wetter production mix. The increase in unit costs was primarily due to increased processing costs due to a wetter production mix and an increase in firm transportation costs.
• Depreciation, depletion and amortization costs attributable to the Shale segment were $440 million for the year ended December 31, 2021 compared to $416 million for the year ended December 31, 2020. The increase in total dollars was due to the increase in production volumes. These amounts included depletion on a unit of production basis of $0.71 per Mcfe and $0.81 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate in the current period is primarily the result of low-cost reserve additions from development in 2020 in SWPA as well as the addition of proved undeveloped Shale reserves in CPA. 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 $81 million for the year ended December 31, 2021 compared to $65 million for the year ended December 31, 2020. The increase in the period-to-period comparison was primarily due to temporary production curtailments by third party customers that occurred in early 2020 due to low prices. Those curtailments were restored to full production in the latter half of 2020.
COALBED METHANE (CBM) SEGMENT
The CBM segment had earnings before income tax of $29 million for the year ended December 31, 2021 compared to earnings before income tax of $26 million for the year ended December 31, 2020.
For the Years Ended December 31,
2021 2020 Variance Percent
Change
CBM Gas Sales Volumes (Bcf) 49.5 52.6 (3.1) (5.9) %
Average Sales Price - Gas (per Mcf) $ 3.91 $ 2.17 $ 1.74 80.2 %
(Loss) Gain on Commodity Derivative Instruments - Cash Settlement - Gas (per Mcf) $ (0.93) $ 0.76 $ (1.69) (222.4) %
Total Average CBM Sales Price (per Mcf) $ 2.97 $ 2.93 $ 0.04 1.4 %
Average CBM Lease Operating Expenses (per Mcf) 0.26 0.27 (0.01) (3.7) %
Average CBM Production, Ad Valorem and Other Fees (per Mcf) 0.14 0.10 0.04 40.0 %
Average CBM Transportation, Gathering and Compression Costs (per Mcf) 0.80 0.73 0.07 9.6 %
Average CBM Depreciation, Depletion and Amortization Costs (per Mcf) 1.18 1.33 (0.15) (11.3) %
Total Average CBM Production Costs (per Mcf) $ 2.38 $ 2.43 $ (0.05) (2.1) %
Total Average CBM Production Margin (per Mcf) $ 0.59 $ 0.50 $ 0.09 18.0 %
The CBM segment had natural gas revenue of $194 million for the year ended December 31, 2021 compared to $114 million for the year ended December 31, 2020. The $80 million increase was primarily due to an 80.2% increase in the average sales price for natural gas in the current period. The natural gas price increases were partially offset by the 5.9% decrease in CBM gas sales volumes due to normal production declines.
The total average CBM sales price increased $0.04 per Mcf due to a $1.74 per Mcf increase in average gas sales price, offset in part by a $1.69 per Mcf change in the realized (loss) gain on commodity derivative instruments resulting from the Company's hedging program. The notional amounts associated with these financial hedges represented approximately 40.4 Bcf of the Company's produced CBM gas sales volumes for the year ended December 31, 2021 at an average loss of $1.15 per Mcf hedged. For the year ended December 31, 2020, these financial hedges represented approximately 48.7 Bcf at an average gain of $0.82 per Mcf hedged.
Total operating costs and expenses for the CBM segment were $118 million for the year ended December 31, 2021 compared to $128 million for the year ended December 31, 2020. The decrease in total dollars and unit costs for the CBM segment were due to the following items:
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• CBM lease operating expense was $13 million for the year ended December 31, 2021 compared to $14 million for the year ended December 31, 2020. The decreases in total dollars was primarily due to a decrease in water disposal costs.
• CBM transportation, gathering and compression costs were $40 million for the year ended December 31, 2021 compared to $39 million for the year ended December 31, 2020. The increases in total dollars and unit costs were primarily due to an increase in firm transportation expense.
• Depreciation, depletion and amortization costs attributable to the CBM segment were $58 million for the year ended December 31, 2021 compared to $70 million for the year ended December 31, 2020. These amounts included depletion on a unit of production basis of $0.66 per Mcfe and $0.68 per Mcfe, respectively. The decrease in the units of production depreciation, depletion and amortization rate was primarily due to an impairment in the 2020 period that reduced the carrying value of the underlying SWPA CBM asset group (See Note 8 - Property, Plant and Equipment in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. No such impairment occurred in the current period). The remaining depreciation, depletion and amortization costs were either recorded on a straight-line basis or related to asset retirement obligations.
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 $1,440 million for the year ended December 31, 2021 compared to a loss before income tax of $1,103 million for the year ended December 31, 2020. The decrease in total dollars is discussed below.
For the Years Ended December 31,
2021 2020 Variance Percent Change
Other Gas Sales Volumes (Bcf) 0.3 0.1 0.2 200.0 %
Oil/Condensate Sales Volumes (Bcfe)* — 0.1 (0.1) (100.0) %
Total Other Sales Volumes (Bcfe)* 0.3 0.2 0.1 50.0 %
*Oil/Condensate is converted to Mcfe at the rate of one barrel equals six Mcf based upon the approximate relative energy content of oil and natural gas, which is not indicative of the relationship of oil and natural gas prices.
Loss on Commodity Derivative Instruments and Monetization
For the year ended December 31, 2021, the Other Segment recognized an unrealized loss on commodity derivative instruments of $1,094 million. For the year ended December 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 that were partially monetized prior to their settlement dates. The unrealized 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
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 revenue was $100 million for the year ended December 31, 2021 compared to $106 million for the year ended December 31, 2020. Purchased gas costs were $94 million for the year ended December 31, 2021 compared to $101 million for the year ended December 31, 2020. The period-to-period decrease in purchased gas revenue was due to a decrease in purchased gas sales volumes, offset in part by an increase in average sales price.
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For the Years Ended December 31,
2021 2020 Variance Percent Change
Purchased Gas Sales Volumes (in Bcf) 26.6 66.6 (40.0) (60.1) %
Purchased Gas Average Sales Price (per Mcf) $ 3.75 $ 1.59 $ 2.16 135.8 %
Purchased Gas Average Cost (per Mcf) $ 3.53 $ 1.52 $ 2.01 132.2 %
Other Operating Income
For the Years Ended December 31,
(in millions) 2021 2020 Variance Percent Change
Equity Income (Loss) from Affiliates $ 6 $ (1) $ 7 700.0 %
Water Income 7 6 1 16.7 %
Excess Firm Transportation Income 12 12 — — %
Total Other Operating Income $ 25 $ 17 $ 8 47.1 %
• Equity income (loss) from affiliates primarily represents CNX’s share of earnings from a 50% interest in a power plant located within CNX’s CBM field. Power generated from the facility is sold into wholesale electricity markets during times of peak energy consumption. Due to the plant consuming coal mine methane gas, the plant qualifies for Pennsylvania Tier I Renewable Energy Credits.
• 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 from released capacity helps offset the Unutilized Firm Transportation and Processing Fees in Total Other Operating Expense.
Impairment of Exploration and Production Properties
During the year ended December 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 of Exploration and Production Properties in the Consolidated Statements of Income for the year ended December 31, 2020. The impairment was related to an economic decision to temporarily idle certain wells and the related processing facility during the first quarter. See Note 8 - Property, Plant and Equipment in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for additional information. No such impairment occurred in the current period.
Impairment of Goodwill
In connection with the Midstream Acquisition that occurred in January 2018, CNX recorded $796 million of goodwill.
Goodwill is tested for impairment annually during the fourth quarter, or more frequently if recent events or prevailing conditions indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount using the qualitative assessment, a quantitative impairment test is performed. From time to time, CNX may also bypass the qualitative assessment and proceed directly to the quantitative impairment test.
In connection with CNX's assessment of goodwill in the first quarter of 2020 in relation to the deteriorating macroeconomic conditions, and the decline in the observable market value of CNXM securities both in relation to the COVID-19 pandemic and the overall decline in the MLP market space, CNX bypassed the qualitative assessment and performed a quantitative test that utilized a combination of the income and market approaches to estimate the fair value of the Midstream reporting unit. As a result of this assessment, CNX concluded that the carrying value exceed its estimated fair value, and as a result, an impairment of $473 million was included in Impairment of Goodwill in the Consolidated Statements of Income for the year ended December 31, 2020. 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 additional information. No such impairment occurred in the current period.
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Exploration and Production Related Other Costs
For the Years Ended December 31,
(in millions) 2021 2020 Variance Percent Change
Exploratory Well Costs $ 9 $ — $ 9 100.0 %
Land Rentals 3 3 — — %
Permitting Expense 1 2 (1) (50.0) %
Lease Expiration Costs 8 10 (2) (20.0) %
Total Exploration and Production Related Other Costs $ 21 $ 15 $ 6 40.0 %
• Exploratory well costs relate to the write off of an exploratory well that was still being evaluated at the end of 2020. During the year ended December 31, 2021, the Company determined it would be more economical to access the underlying reserves from a different location.
• Lease expiration costs relate to leases where the primary term expired or will expire within the next 12 months.
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 December 31,
(in millions) 2021 2020 Variance Percent Change
Long-Term Equity-Based Compensation (Non-Cash) $ 17 $ 14 $ 3 21.4 %
Short-Term Incentive Compensation 20 20 — — %
Salaries, Wages and Employee Benefits 27 31 (4) (12.9) %
Other 49 44 5 11.4 %
Total SG&A $ 113 $ 109 $ 4 3.7 %
• Long-term equity-based compensation (non-cash) increased in the period-to-period comparison due to an increase in equity awards.
• Salaries, wages and employee benefits decreased in the period-to-period comparison primarily due to a decrease in employees.
• Other increased in the period-to-period comparison primarily due to an increase in legal and consulting professional services.
Other Operating Expense
For the Years Ended December 31,
(in millions) 2021 2020 Variance Percent Change
Unutilized Firm Transportation and Processing Fees $ 53 $ 70 $ (17) (24.3) %
Idle Equipment and Service Charges — 10 (10) (100.0) %
Insurance Expense 2 3 (1) (33.3) %
Water Expense 2 1 1 100.0 %
Litigation Settlements 10 — 10 100.0 %
Other 1 1 — — %
Total Other Operating Expense $ 68 $ 85 $ (17) (20.0) %
• 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
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possible and when beneficial. The revenue received when this capacity is released (sold) is included in Excess Firm Transportation Income in Total Other Operating Income. The decrease in unutilized firm transportation and processing fees in the period-to-period comparison was primarily due to an increase in utilization of firm transportation capacity in the current year due to production increases in 2021 compared to 2020.
• Idle equipment and service charges relate to temporary idling of certain 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 decrease in the period-to-period comparison was the result of two of CNX’s drilling rigs being idled in the prior period.
• CNX and its subsidiaries are subject to various lawsuits and claims in the normal course of business. CNX accrues the estimated loss for these lawsuits and claims as litigation settlements when the loss is probable and can be estimated. (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 information). The increase in the period-to-period comparison was the result of various items, none of which were individually material.
Other Expense
For the Years Ended December 31,
(in millions) 2021 2020 Variance Percent Change
Other Income
Interest Income $ — $ 2 $ (2) (100.0) %
Right-of-Way Sales 2 3 (1) (33.3) %
Other 7 8 (1) (12.5) %
Total Other Income $ 9 $ 13 $ (4) (30.8) %
Other Expense
Merger-Related Costs $ — $ 11 $ (11) (100.0) %
Professional Services 7 9 (2) (22.2) %
Bank Fees 12 12 — — %
Other Land Rental Expense 4 4 — — %
Other Corporate Expense 2 1 1 100.0 %
Total Other Expense $ 25 $ 37 $ (12) (32.4) %
Total Other Expense $ 16 $ 24 $ (8) (33.3) %
• Interest income decreased in the period-to-period comparison primarily due to the receipt of interest in the prior year in connection with a severance tax refund related to a prior period and additional interest income related to the alternative minimum tax credit refund CNX received in the prior year.
• Professional services decreased in the period-to-period comparison primarily due to the prior year containing fees related to the elimination of CNXM's incentive distribution rights (“IDRs”) prior to the CNXM Merger discussed below.
• Merger-related costs in the prior period consisted of transaction costs, including financial advisory, legal service and other professional fees 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), which were recorded to Other Expense in the Consolidated Statements of Income.
Gain on Asset Sales and Abandonments, net
A gain on asset sales of $42 million related to the sale of various non-core assets (primarily rights-of-way, surface acreage and other non-core oil and gas interests) was recognized in the year ended December 31, 2021 compared to a gain of $21 million in the year ended December 31, 2020.
Loss (Gain) on Debt Extinguishment
A loss on debt extinguishment of $34 million was recognized in the year ended December 31, 2021 compared to a gain on debt extinguishment of $10 million in the year ended December 31, 2020. During the year ended December 31, 2021, CNXM purchased all of the 6.50% Senior Notes due March 2026 and CNX repaid in full and terminated the Cardinal States
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Gathering Company LLC and CSG Holdings II LLC non-revolving credit facilities. During the year ended December 31, 2020, CNX purchased the remaining $894 million of its 5.875% Senior Notes due April 2022 at an average price equal to 98.6% 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) 2021 2020 Variance Percent Change
Total Interest Expense $ 151 $ 171 $ (20) (11.7) %
• The $20 million decrease was primarily due to the purchase of the remaining $894 million of the 5.875% Senior Notes due April 2022 during the year ended December 31, 2020 and the purchase of the $400 million 6.500% CNXM Senior Notes due March 2026 during the year ended December 31, 2021. Lower borrowings on the CNX Credit Facility and higher unrealized gains on interest rate swap agreements also contributed to the decrease. These decreases were offset in part by $400 million of 4.750% CNXM Senior Notes due 2030 issued in 2021, interest related to the addition in 2020 of $345 million of Convertible Notes due 2026, $500 million of 6.00% Senior Notes due 2029 issued in 2020, and an additional $200 million of 7.25% Senior Notes due 2027 issued in 2020. The amortization of debt discount in connection with the Convertible Notes also contributed to the offsetting increase. 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) 2021 2020 Variance Percent Change
Total Company Loss Before Income Tax $ (637) $ (603) $ (34) (5.6) %
Income Tax Benefit $ (138) $ (174) $ 36 20.7 %
Effective Income Tax Rate 21.7 % 28.9 % (7.2) %
The effective income tax rate was 21.7% for the year ended December 31, 2021 compared to 28.9% for the year ended December 31, 2020. The effective rate for the year ended December 31, 2021 differs from the U.S. federal statutory rate of 21% primarily due to federal tax credits, state income taxes, equity compensation and the increase in certain state valuation allowances as a result of higher-than-expected unrealized losses on commodity derivative instruments during the current period. The unrealized losses represents changes in the fair value of all the Company's existing commodity hedges on a mark-to-market basis. The effective rate for the year ended December 31, 2020 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.
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.
Liquidity and Capital Resources
Overview, Sources and Uses
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 current 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
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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 and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced.
As of December 31, 2021, CNX was in compliance with all of its debt covenants. After considering the potential effect of a significant decline in commodity prices, CNX currently expects to remain in compliance with its debt covenants.
CNX frequently evaluates potential acquisitions. CNX has historically 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.
Factors that may Impact our Liquidity
• The Company’s cash on hand and access to additional liquidity. As of December 31, 2021, cash and cash equivalents totaled $3.6 million.
• Accounts and notes receivable - trade as of December 31, 2021 and 2020 was $330.1 million and $145.9 million, respectively. Our accounts and notes receivable balance may fluctuate as of any balance sheet date depending on the prices we receive for our natural gas and NGLs and the volumes sold.
• Capital expenditures are expected to range between $470 million to $500 million for the year ended December 31, 2022, compared to capital expenditures of $465.9 million in fiscal year 2021. In addition, accelerated levels of inflation may lead to price increases beyond CNX’s control that could lead to CNX incurring an increase in costs in the future.
• Production volumes are expected to range between 575.0 Bcfe and 605.0 Bcfe for the year ended December 31, 2022, compared to production volumes of 590.2 Bcfe in fiscal year 2021.
• Prices for natural gas and NGLs are volatile, and an extended decline in the prices we receive for our natural gas and NGLs will adversely affect our financial condition and cash flows.
• 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 liability of $976 million at December 31, 2021 and a net asset of $118 million at December 31, 2020. The Company has not experienced any issues of non-performance by derivative counterparties. See Item 7A., “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of our commodity risk management.
Cash Flows (in millions)
For the Years Ended December 31,
2021 2020 Change
Cash Provided by Operating Activities $ 926 $ 795 $ 131
Cash Used in Investing Activities $ (421) $ (439) $ 18
Cash Used in Financing Activities $ (524) $ (351) $ (173)
Cash provided by operating activities changed in the period-to-period comparison primarily due to the following items:
• Net loss increased $70 million in the period-to-period comparison.
• Adjustments to reconcile net loss to cash provided by operating activities primarily consisted of a $473 million impairment of goodwill and a $62 million impairment of exploration and production properties in the prior year, an $805 million net change in commodity derivative instruments, a $20 million change in deferred income taxes, a $44 million change in gain/loss on debt extinguishment, as well as 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 $21 million in the period-to-period comparison primarily due to decreased expenditures in the Shale segment resulting from decreased drilling and completions activity as well as decreased midstream activity.
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• Proceeds from asset sales decreased $3 million mainly due to decreased sales of rights-of-way, surface acreage and other non-core oil and gas interests in the year ended December 31, 2021.
Cash used in financing activities changed in the period-to-period comparison primarily due to the following items:
• During the year ended December 31, 2021, CNXM paid $421 million to purchase $400 million of CNXM 6.50% Senior Notes due in March 2026 at 105.3% 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.
• During the year ended December 31, 2021, CNXM completed a private offering of $400 million aggregate principal amount of CNXM 4.75% Senior Notes due April 2030 at a price of 98.8% for cash proceeds of $395 million. 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 ended December 31, 2021, there were $106 million of net payments on the CNXM Credit Facility compared to $21 million of net payments during the year ended December 31, 2020.
• In the year ended December 31, 2021, there were $31 million of net proceeds on the CNX Credit Facility compared to $500 million of net payments during the year ended December 31, 2020.
• During the year ended December 31, 2021, there were $161 million of net payments on the Cardinal States Facility and CSG Holdings Facility compared to $159 million of net proceeds in the year ended December 31, 2020. 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.
• During the years ended December 31, 2021 and 2020, CNX repurchased $245 million and $37 million, respectively, of its common stock on the open market.
• During the year ended December 30, 2020, CNX paid $882 million to purchase $894 million of Senior Notes due in 2022 at 98.6% 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.
• During the year ended December 31, 2020, CNX received proceeds of $500 million from the issuance of its 6.00% Senior Notes due January 2029.
• During the year ended December 31, 2020, CNX completed a private offering of $200 million aggregate principal amount of its 7.25% Senior Notes due March 2027 at a price of 103.5% for cash proceeds of $207 million. 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.
• During the year ended December 31, 2020, CNX received proceeds of $335 million from the issuance of Convertible Notes due 2026. 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.
• During the year ended December 31, 2020, CNX paid $36 million for capped call transactions related to the issuance of the Convertible Notes as mentioned above. 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.
• During the year ended December 31, 2020 there were $42 million of payments to CNXM noncontrolling interest holders compared to no payments during the year ended December 31, 2021 due to the Merger with CNXM. 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.
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Commitments and Significant Contractual Obligations
The following is a summary of the Company's significant contractual obligations at December 31, 2021 (in thousands):
Payments due by Year
Less Than
1 Year 1-3 Years 3-5 Years More Than
5 Years Total
Purchase Order Firm Commitments $ 777 $ 642 $ — $ — $ 1,419
Gas Firm Transportation and Processing 257,796 437,921 387,027 896,943 1,979,687
Long-Term Debt — — 630,716 1,600,801 2,231,517
Interest on Long-Term Debt 116,792 231,156 225,258 167,720 740,926
Finance Lease Obligations 555 883 333 2 1,773
Interest on Finance Lease Obligations 30 51 25 — 106
Operating Lease Obligations 23,460 9,395 9,116 24,591 66,562
Interest on Operating Lease Obligations 2,366 4,015 3,056 2,988 12,425
Long-Term Liabilities—Employee Related (a) 2,039 4,296 4,580 33,504 44,419
Other Long-Term Liabilities (b) 230,804 10,000 10,000 68,859 319,663
Total Contractual Obligations (c) $ 634,619 $ 698,359 $ 1,270,111 $ 2,795,408 $ 5,398,497
_________________________
(a) Employee related long-term liabilities include salaried retirement contributions and work-related injuries and illnesses.
(b) Other long-term liabilities include royalties and other long-term liability costs.
(c) The table above does not include obligations to taxing authorities due to the uncertainty surrounding the ultimate settlement of amounts and timing of these obligations.
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 at December 31, 2021. 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.
Debt
At December 31, 2021, CNX had total long-term debt of $2,232 million, excluding unamortized debt issuance costs. This long-term debt consisted of:
• An aggregate principal amount of $700 million of 7.25% Senior Notes due March 2027 plus $6 million of unamortized bond premium. Interest on the notes is payable March 14 and September 14 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner).
• An aggregate principal amount of $500 million of 6.00% Senior Notes due January 2029. Interest on the notes is payable January 15 and July 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).
• An aggregate principal amount of $400 million of 4.75% Senior Notes due April 2030 issued by CNXM, less $5 million of unamortized bond discount. Interest on the notes is payable April 15 and October 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% Convertible Senior Notes due May 2026, unless earlier redeemed, repurchased, or converted, less $91 million of unamortized bond discount and issuance costs. Interest on the notes is payable May 1 and November 1 of each year. Payment of the principal and interest on the notes is guaranteed by most of CNX's subsidiaries but does not include CNXM (or its subsidiaries or general partner).
• An aggregate principal amount of $192 million in outstanding borrowings under the CNX Credit Facility. Payment of the principal and interest on the CNX Credit Facility is guaranteed by most of CNX's subsidiaries but does not include
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CNXM (or its subsidiaries or general partner).
• An aggregate principal amount of $185 million in outstanding borrowings under the CNXM Credit Facility. Payment of the principal and interest on the CNXM Credit Facility is guaranteed by certain of CNXM's subsidiaries. CNX is not a guarantor of the CNXM Facility.
Total Equity and Dividends
CNX had total equity of $3,700 million at December 31, 2021 compared to $4,422 million at December 31, 2020. See the Consolidated Statements of Stockholders' Equity in Item 8 of this Form 10-K for additional details.
On September 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 has not paid dividends on its common stock since 2016. 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 20% of the aggregate commitments and there being no borrowing base deficiency. The Credit Facility does not permit such dividend payments when an event of default has occurred and is continuing. The indentures to the 7.25% Senior Notes due March 2027 and the 6.00% Senior Notes due January 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 in the year ended December 31, 2021.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the 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
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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. At December 31, 2021, prior to consideration of valuation allowances on deferred tax assets, CNX had deferred tax liabilities in excess of deferred tax assets of approximately $177 million. At December 31, 2021, CNX had a valuation allowance of $152 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 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
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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 ended December 31, 2020, an impairment of $62 million was included in Impairment of Exploration and Production Properties in the Consolidated Statements of Income. This impairment was related to our Southwest Pennsylvania (SWPA) coalbed methane (CBM) asset group. 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.
There were no other impairments related to proved properties in the years ended December 31, 2021 or 2020.
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. There were no impairments related to unproved properties in the years ended December 31, 2021 or 2020.
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 Goodwill
In connection with the Midstream Acquisition that closed on January 3, 2018, CNX recorded $796 million of goodwill. See Note 9 - Goodwill and Other Intangible Assets 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
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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 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 of Goodwill 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 ended December 31, 2021 or 2020. 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. There were no impairments related to definite-lived intangible assets in the years ended December 31, 2021 or 2020.
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
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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.
Convertible Senior Notes
CNX accounted for its Convertible Senior Notes due May 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.
Recent Accounting Pronouncements
See Note 1 - Significant Accounting Policies in the Notes to the Audited Consolidated Financial Statements in Item 8 of this Form 10-K for a summary of recent accounting pronouncements.
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