Form 10Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number: 001-14901

 


 

CONSOL ENERGY INC.

(Exact name of registrant as specified in its charter)

 

Delaware   51-0337383

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

1800 Washington Road,

Pittsburgh, Pennsylvania 15241

(Address of principal executive offices, including zip code)

 

(412) 831-4000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

Class


 

Shares outstanding as of July 29, 2004


Common stock, $0.01 par value

  90,320,233

 



Table of Contents

TABLE OF CONTENTS

 

          Page

    

PART I

FINANCIAL INFORMATION

    

ITEM 1.

   CONDENSED FINANCIAL STATEMENTS     
     Consolidated Statements of Income for the three months and six months ended June 30, 2004 and June 30, 2003    1
     Consolidated Balance Sheets at June 30, 2004 and December 31, 2003    2
     Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2004    3
     Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and
June 30, 2003
   4
     Notes to Consolidated Financial Statements    5

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    38

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    64

ITEM 4.

   CONTROLS AND PROCEDURES    65
    

PART II

OTHER INFORMATION

    

ITEM 4.

   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    66

ITEM 6.

   EXHIBITS AND REPORTS ON FORM 8-K    66


Table of Contents

PART I

FINANCIAL INFORMATION

 

ITEM 1.    CONDENSED FINANCIAL STATEMENTS

 

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

   2003

    2004

   2003

 

Sales—Outside

   $ 623,975    $ 511,235     $ 1,214,463    $ 1,017,795  

Sales—Related Parties

     —        —         —        1,369  

Freight—Outside

     29,768      25,580       61,207      57,608  

Freight—Related Parties

     —        —         —        562  

Other Income

     20,841      19,703       49,769      38,993  
    

  


 

  


Total Revenue and Other Income

     674,584      556,518       1,325,439      1,116,327  

Cost of Goods Sold and Other Operating Charges

     482,793      383,691       929,331      791,562  

Freight Expense

     29,768      25,580       61,207      58,170  

Selling, General and Administrative Expense

     17,263      19,389       35,860      36,473  

Depreciation, Depletion and Amortization

     61,725      62,293       121,195      122,999  

Interest Expense

     8,321      8,490       17,382      17,966  

Taxes Other Than Income

     48,488      42,420       96,521      85,562  

Export Sales Excise Tax Resolution

     —        (614 )     —        (614 )
    

  


 

  


Total Costs

     648,358      541,249       1,261,496      1,112,118  
    

  


 

  


Earnings Before Income Taxes

     26,226      15,269       63,943      4,209  

Income Tax Expense (Benefit)

     21      4,710       4,828      (9,739 )
    

  


 

  


Earnings Before Cumulative Effect of Change in Accounting Principle

     26,205      10,559       59,115      13,948  

Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation and Gas Well Closing Costs, net of Income Taxes of $3,035

     —        —         —        4,768  

Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080

     —        —         83,373      —    
    

  


 

  


Net Income

   $ 26,205    $ 10,559     $ 142,488    $ 18,716  
    

  


 

  


Basic Earnings Per Share

   $ 0.29    $ 0.13     $ 1.58    $ 0.24  
    

  


 

  


Dilutive Earnings Per Share

   $ 0.29    $ 0.13     $ 1.57    $ 0.24  
    

  


 

  


Weighted Average Number of

Common Shares Outstanding:

                              

Basic

     89,884,760      78,759,875       89,906,033      78,754,557  
    

  


 

  


Dilutive

     90,770,999      79,104,915       90,666,510      78,960,438  
    

  


 

  


Dividends Paid Per Share

   $ 0.14    $ 0.14     $ 0.28    $ 0.28  
    

  


 

  


 

The accompanying notes are an integral part of these financial statements.

 

1


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

     (Unaudited)        
     JUNE 30,
2004


    DECEMBER 31,
2003


 
ASSETS                 

Current Assets:

                

Cash and Cash Equivalents

   $ 60,128     $ 6,513  

Accounts and Notes Receivable:

                

Trade

     96,975       89,971  

Other Receivables

     77,775       91,401  

Inventories

     111,886       103,358  

Deferred Income Taxes

     136,746       125,938  

Recoverable Income Taxes

     12,566       20,257  

Prepaid Expenses

     66,715       33,402  
    


 


Total Current Assets

     562,791       470,840  

Property, Plant and Equipment:

                

Property, Plant and Equipment

     6,322,483       6,274,030  

Less—Accumulated Depreciation, Depletion and Amortization

     3,187,607       3,212,523  
    


 


Total Property, Plant and Equipment—Net

     3,134,876       3,061,507  

Other Assets:

                

Deferred Income Taxes

     344,768       409,090  

Investment in Affiliates

     46,914       84,878  

Restricted Cash

     918       190,918  

Other

     106,486       101,745  
    


 


Total Other Assets

     499,086       786,631  
    


 


TOTAL ASSETS

   $ 4,196,753     $ 4,318,978  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                 

Current Liabilities:

                

Accounts Payable

   $ 123,674     $ 134,772  

Short-Term Notes Payable

     —         68,760  

Current Portion of Long-Term Debt

     3,812       53,330  

Other Accrued Liabilities

     566,489       567,737  
    


 


Total Current Liabilities

     693,975       824,599  

Total Long-Term Debt

     424,974       441,912  

Deferred Credits and Other Liabilities:

                

Postretirement Benefits Other Than Pensions

     1,515,456       1,494,615  

Pneumoconiosis Benefits

     433,231       441,076  

Mine Closing

     313,771       312,208  

Workers’ Compensation

     126,864       255,785  

Deferred Revenue

     58,043       61,673  

Salary Retirement

     107,133       79,545  

Reclamation

     8,098       14,480  

Other

     109,217       102,448  
    


 


Total Deferred Credits and Other Liabilities

     2,671,813       2,761,830  

Stockholders’ Equity:

                

Common Stock, $.01 par value; 500,000,000 Shares Authorized, 91,267,558 Issued; and 90,213,689 Outstanding at June 30, 2004, and 89,861,900 Outstanding at December 31, 2003

     913       913  

Preferred Stock, 15,000,000 Shares Authorized; None Issued and Outstanding

     —         —    

Capital in Excess of Par Value

     836,839       833,675  

Retained Earnings (Deficit)

     (308,179 )     (425,470 )

Other Comprehensive Loss

     (111,678 )     (102,601 )

Common Stock in Treasury, at Cost—1,053,869 Shares at June 30, 2004 and 1,405,658 Shares at December 31, 2003

     (11,904 )     (15,880 )
    


 


Total Stockholders’ Equity

     405,991       290,637  
    


 


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 4,196,753     $ 4,318,978  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

2


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

 

     Common
Stock


  

Capital in
Excess

of Par
Value


   Retained
Earnings
(Deficit)


   

Other

Comprehensive
Income (Loss)


    Treasury
Stock


   

Total

Stockholders’
Equity


 

Balance—December 31, 2003

   $ 913    $ 833,675    $ (425,470 )   $ (102,601 )   $ (15,880 )   $ 290,637  
    

  

  


 


 


 


(Unaudited)

                                              

Net Income

     —        —        142,488       —         —         142,488  

Treasury Rate Lock (Net of $27 tax)

     —        —        —         (40 )     —         (40 )

Interest Rate Swap Contract (Net of ($514) tax)

     —        —        —         807       —         807  

Gas Cash Flow Hedge (Net of $6,332 tax)

     —        —        —         (9,844 )     —         (9,844 )
    

  

  


 


 


 


Comprehensive Income (Loss)

     —        —        142,488       (9,077 )     —         133,411  

Issuance of Restricted Stock Units under the Equity Incentive Plan (194,807 units)

     —        286      —         —         —         286  

Stock-Based Compensation

     —        848      —         —         —         848  

Treasury Stock Issued (351,789 shares)

     —        2,030      —         —         3,976       6,006  

Dividends ($.28 per share)

     —        —        (25,197 )     —         —         (25,197 )
    

  

  


 


 


 


Balance—June 30, 2004

   $ 913    $ 836,839    $ (308,179 )   $ (111,678 )   $ (11,904 )   $ 405,991  
    

  

  


 


 


 


 

 

The accompanying notes are an integral part of these financial statements.

 

3


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 

Operating Activities:

                

Net Income

   $ 142,488     $ 18,716  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

                

Cumulative Effect of Change in Accounting Principle, net of tax

     (83,373 )     (4,768 )

Depreciation, Depletion and Amortization

     121,195       122,999  

Compensation from Restricted Stock Unit Grants

     286       —    

Gain on the Sale of Assets

     (30,336 )     (17,403 )

Amortization of Mineral Leases

     3,501       1,424  

Deferred Income Taxes

     6,279       (15,638 )

Equity in Earnings of Affiliates

     3,395       5,077  

Changes in Operating Assets:

                

Accounts Receivable Securitization

     17,000       50,000  

Accounts and Notes Receivable

     (6,628 )     30,402  

Inventories

     (8,528 )     1,104  

Prepaid Expenses

     (33,314 )     (4,782 )

Changes in Other Assets

     4,856       3,601  

Changes in Operating Liabilities:

                

Accounts Payable

     10,159       (30,622 )

Other Operating Liabilities

     6,681       97,460  

Changes in Other Liabilities

     35,433       (15,053 )

Other

     (1,457 )     (3,415 )
    


 


       45,149       220,386  
    


 


Net Cash Provided by Operating Activities

     187,637       239,102  
    


 


Investing Activities:

                

Capital Expenditures

     (204,597 )     (110,720 )

Additions to Mineral Leases

     (3,387 )     (3,222 )

Investment in Equity Affiliates

     (2,611 )     (4,710 )

Proceeds from Sales of Assets

     20,102       80,735  
    


 


Net Cash Used in Investing Activities

     (190,493 )     (37,917 )
    


 


Financing Activities:

                

Payments on Commercial Paper

     —         (177,954 )

Payments on Miscellaneous Borrowings

     (4,338 )     (84 )

Payments on Revolver

     (65,000 )     —    

Payments on Long Term Notes

     (45,000 )     —    

Proceeds from Long Term Notes

     —         1,007  

Dividends Paid

     (25,174 )     (22,032 )

Withdrawal from Restricted Cash

     190,000       —    

Issuance of Treasury Stock

     5,983       328  
    


 


Net Cash Provided by (Used in) Financing Activities

     56,471       (198,735 )
    


 


Net Increase (Decrease) in Cash and Cash Equivalents

     53,615       2,450  

Cash and Cash Equivalents at Beginning of Period

     6,513       11,517  
    


 


Cash and Cash Equivalents at End of Period

   $ 60,128     $ 13,967  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

4


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(Dollars in thousands, except per share data)

 

NOTE 1—BASIS OF PRESENTATION:

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals, as well as the cumulative effect of changes in accounting for workers’ compensation and mine closing, reclamation and gas well closing) considered necessary for a fair presentation have been included. Operating results for the three-month period and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for future periods.

 

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all the footnotes required by generally accepted accounting principles for complete financial statements.

 

For further information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2003 included in CONSOL Energy Inc.’s (CONSOL Energy) Form 10-K.

 

Certain reclassifications of the prior year’s data have been made to conform to the six months ended June 30, 2004 classifications, with no effect on previously reported net income or stockholders’ equity. The reclassifications include classifying leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, as a component of property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets.”

 

Basic earnings per share are computed by dividing net earnings by the weighted average shares outstanding during the reporting period. Diluted earnings per share are computed similarly to basic earnings per share except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and that the proceeds from such exercises were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 1,120,553 shares and 1,124,553 shares of common stock were outstanding for the three and six month period ended June 30, 2004, respectively, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Options to purchase 1,089,393 shares and 1,729,780 shares of common stock were outstanding for the three and six month period ended June 30, 2003, respectively, but were not included in the computation of diluted earnings per share because the options were antidilutive.

 

5


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

The computations for basic and diluted earnings per share are as follows:

 

    

For the

Three Months

Ended June 30,


  

For the

Six Months

Ended June 30,


     2004

   2003

   2004

   2003

Earnings before cumulative effect of change in accounting

   $ 26,205    $ 10,559    $ 59,115    $ 13,948

Cumulative effect of accounting change

     —        —        83,373      4,768
    

  

  

  

Net Income

   $ 26,205    $ 10,559    $ 142,488    $ 18,716
    

  

  

  

Average shares of common stock Outstanding:

                           

Basic

     89,884,760      78,759,875      89,906,033      78,754,557

Effect of stock options

     886,239      345,040      760,477      205,881
    

  

  

  

Diluted

     90,770,999      79,104,915      90,666,510      78,960,438

Earnings per share:

                           

Basic before cumulative effect

   $ 0.29    $ 0.13    $ 0.66    $ 0.18
    

  

  

  

Basic after cumulative effect

   $ 0.29    $ 0.13    $ 1.58    $ 0.24
    

  

  

  

Diluted before cumulative effect

   $ 0.29    $ 0.13    $ 0.65    $ 0.18
    

  

  

  

Diluted after cumulative effect

   $ 0.29    $ 0.13    $ 1.57    $ 0.24
    

  

  

  

 

NOTE 2—DISPOSITIONS:

 

In June 2004, CONSOL Energy finalized working capital items and remaining liability transfers related to the sale of its Canadian coal assets and related port facilities. The initial sale was completed in February 2003. The finalization of these items resulted in CONSOL Energy making a cash payment of $4,167 and recording a pre-tax gain of $3,290.

 

In February 2004, CONSOL Energy sold the stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27,500 ($11,000 of cash and $16,500 of Notes Receivable). Certain affiliates of AMCI, Inc. also assumed $21,190 of debt and the associated interest rate swaps and foreign currency hedges that a subsidiary of CNX Australia Pty Limited had. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale resulted in a pre-tax gain of $14,374.

 

NOTE 3—STOCK-BASED COMPENSATION:

 

CONSOL Energy has implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure-an Amendment of SFAS 123” (SFAS No. 148). CONSOL Energy continues to measure compensation expense for its stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” as amended. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

price equal to the market value of the underlying common stock on the date of the grant. The following table illustrates the effect on net income and earnings per share if CONSOL Energy had applied the fair value recognition provisions of SFAS No. 123 and 148, to stock-based employee compensation:

 

    

Three Months Ended

June 30,


   

Six Months Ended

June 30,


 
     2004

    2003

    2004

    2003

 

Net income, as reported

   $ 26,205     $ 10,559     $ 142,488     $ 18,716  

Add: stock-based compensation expense for restricted stock units

     286       —         286       —    

Deduct: Total stock-based employee compensation expense determined under Black-Scholes option pricing model and stock-based compensation expense for restricted stock units

     (1,467 )     (876 )     (2,407 )     (1,503 )
    


 


 


 


Pro forma net income

   $ 25,024     $ 9,683     $ 140,367     $ 17,213  
    


 


 


 


Earnings per share:

                                

Basic—as reported

   $ 0.29     $ 0.13     $ 1.58     $ 0.24  
    


 


 


 


Basic—pro forma

   $ 0.28     $ 0.12     $ 1.56     $ 0.22  
    


 


 


 


Diluted—as reported

   $ 0.29     $ 0.13     $ 1.57     $ 0.24  
    


 


 


 


Diluted—pro forma

   $ 0.28     $ 0.12     $ 1.55     $ 0.22  
    


 


 


 


 

The pro forma adjustments in the current period are not necessarily indicative of future period pro forma adjustments as the assumptions used to determine fair value can vary significantly and the number of future shares to be issued under these plans is unknown.

 

Restricted Stock Unit Awards are grants that entitle the holder to receive shares of common stock as the award vests. A total of 194,807 restricted stock units were granted during the six months ended June 30, 2004, vesting over a weighted average period of 3.57 years. Each restricted stock unit represents one share of common stock. The shares represented by these restricted stock units had a market value of $30.78 per share (based upon the closing share price) at date of grant. Compensation expense will be recognized over the vesting period of the units.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

NOTE 4—COMPONENTS OF PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS NET PERIODIC BENEFIT COSTS:

 

Components of net periodic costs (benefits) for the three and six months ended June 30 are as follows:

 

     Pension Benefits

    Other Benefits

    

Three Months

Ended

June 30,


   

Six Months

Ended

June 30,


   

Three Months

Ended

June 30,


  

Six Months

Ended

June 30,


     2004

    2003

    2004

    2003

    2004

   2003

   2004

    2003

Service cost

   $ 5,166     $ 5,765     $ 10,333     $ 11,530     $ 2,978    $ 3,237    $ 6,175     $ 6,474

Interest cost

     7,054       7,059       14,108       14,119       31,383      33,568      65,845       67,136

Expected return on plan assets

     (4,016 )     (4,953 )     (8,033 )     (9,907 )     —        —        —         —  

Amortization costs

     6,024       4,620       12,048       9,239       6,542      7,870      16,820       15,740

Curtailment gain

     —         —         —         —         —        —        (3,454 )     —  
    


 


 


 


 

  

  


 

Net periodic benefit cost

   $ 14,228     $ 12,491     $ 28,456     $ 24,981     $ 40,903    $ 44,675    $ 85,386     $ 89,350
    


 


 


 


 

  

  


 

 

CONSOL Energy previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $57,414 to its pension plan in 2004. As of June 30, 2004, $849 of contributions has been made. CONSOL Energy presently anticipates contributing an additional $56,565 to fund its pension plan in 2004 for a total of $57,414.

 

CONSOL Energy has recognized the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) in the six months ended June 30, 2004 in accordance with FASB Staff Position No. FAS 106-b, “Accounting and Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” Implementation of the Act resulted in a reduction of our postretirement benefit costs of $9,553 and $12,072 for the three and six months ended June 30, 2004, and a reduction of our postretirement benefit obligation of $182,256.

 

As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the other post employment benefit plan in 2004. We intend to pay benefit claims as they become due. As of June 30, 2004, $60,314 of other post employment benefits has been paid.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

NOTE 5—COMPONENTS OF COAL WORKERS’ PNEUMOCONIOSIS (CWP) AND WORKERS’ COMPENSATION NET PERIODIC BENEFIT COSTS AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR WORKERS’ COMPENSATION:

 

Components of net periodic costs (benefits) for the three and six months ended June 30 are as follows:

 

     CWP

    Workers’ Compensation

    

Three Months
Ended

June 30,


   

Six Months

Ended

June 30,


   

Three Months
Ended

June 30,


   Six Months
Ended
June 30,


     2004

    2003

    2004

    2003

    2004

   2004

Service cost

   $ 1,068     $ 1,012     $ 2,137     $ 2,025     $ 11,446    $ 22,892

Interest cost

     3,120       3,412       6,240       6,824       2,068      4,135

Expected return on plan assets

     —         (50 )     —         (100 )     —        —  

Amortization of actuarial gain

     (5,642 )     (6,112 )     (11,285 )     (12,225 )     —        —  

Legal and administrative costs

     675       525       1,350       1,050       609      1,217
    


 


 


 


 

  

Net periodic (benefit)cost

   $ (779 )   $ (1,213 )   $ (1,558 )   $ (2,426 )   $ 14,123    $ 28,244
    


 


 


 


 

  

 

As previously disclosed in its financial statements for the year ended December 31, 2003, CONSOL Energy does not expect to contribute to the CWP plan in 2004. We intend to pay benefit claims as they become due. For the six months ended June 30, 2004, $6,353 of CWP benefits have been paid.

 

CONSOL Energy’s workers’ compensation liabilities are unfunded, and benefit claims are paid as they become due. For the six months ended June 30, 2004, $24,801 of workers’ compensation benefits have been paid.

 

CONSOL Energy also has expensed $6,145 for the six months ended June 30, 2004 for various state administrative fees and insurance bond premiums. The state administrative fees are paid to various states for the right to self-insure workers’ compensation claims.

 

Effective January 1, 2004, CONSOL Energy changed its method of accounting for workers’ compensation. Under the new method, the undiscounted liability is actuarially calculated based on claims filed and an estimate of claims incurred but not yet reported. Additionally, the workers’ compensation liability is recorded on a discounted basis, which has been actuarially determined using various assumptions, including a discount rate of 6% and a future health care trend rate of 10%, declining to 4.75% in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s accounting for other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with the Company’s industry peers, the majority of which record workers’ compensation liability on a discounted basis.

 

Effective January 1, 2004, as a result of the change, CONSOL Energy reduced its workers’ compensation liability by $136,453 and reduced its related deferred tax asset by $53,080. The cumulative effect adjustment recognized upon adoption was a gain of $83,373, net of a tax cost of approximately $53,080, and accordingly is reflected as a cumulative effect adjustment from a change in accounting. This cumulative effect adjustment is not included in the 2004 figures in the table above.

 

Prior to the change, CONSOL Energy recorded its workers’ compensation liability on an undiscounted basis. The liability represented the estimated liability for claims that had been filed with a third party administrator and an estimate representing an incurred but not reported claim liability. The total expense related

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

to workers compensation for the three and six months ended June 30, 2003 was $16,093 and $32,831, respectively. Pro forma net income for the three and six months ended June 30, 2003 would have been $8,675 and $14,017, respectively, had the change in accounting for workers’ compensation costs occurred at the beginning of 2003. Pro forma net income per basic common share and pro forma net income per diluted common share for the three months and six months ended June 30, 2003 would have been $0.11 and $0.18, respectively.

 

NOTE 6—CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR MINE CLOSING, RECLAMATION AND GAS WELL CLOSING COSTS:

 

Effective January 1, 2003, CONSOL Energy adopted Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). As a result of this statement, CONSOL Energy recognized additional liabilities of $51,692 for asset retirement obligations associated with the costs of mine closing, reclamation and gas well closing. In addition, CONSOL Energy capitalized asset retirement costs by increasing the carrying amount of related long-lived assets, net of the associated accumulated depreciation, by $59,495.

 

The cumulative effect adjustment recognized upon adoption of this statement was a gain of $4,768, net of a tax cost of approximately $3,035.

 

NOTE 7—RESTRUCTURING COSTS:

 

In December 2003, CONSOL Energy reduced corporate overhead costs by eliminating approximately 100 selling, general and administrative and other positions within the Company. The restructuring of the corporate overhead was a result of developments in CONSOL Energy’s business, including operating fewer mines than have been operated in the past, the sale of non-core business assets and de-emphasizing coal exports. At that time, restructuring charges of $3,606 were recognized representing estimated severance costs related to the workforce reduction. At December 31, 2003, approximately 75%, or $2,720, of the employee termination benefits related to the program had been paid. The remaining restructuring obligation is recorded as Other Accrued Liabilities. Cash payments for the three and six months ended June 30, 2004 were $220 and $826, respectively. There were no other adjustments made to the restructuring liability in the three or six months ended June 30, 2004. The remaining restructuring liability at June 30, 2004 was $60 and is expected to be paid by December 31, 2004.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

NOTE 8—INCOME TAXES:

 

The following is a reconciliation stated in dollars and as a percentage of pretax income, of the U. S. statutory federal income tax rate to CONSOL Energy’s effective tax rate:

 

    

For the Six Months Ended

June 30,


 
     2004

    2003

 
     Amount

    Percent

    Amount

    Percent

 

Statutory U.S. federal income tax rate

   $ 22,380     35.0 %   $ 1,473     35.0 %

Excess tax depletion

     (11,915 )   (18.6 )%     (9,678 )   (229.9 )%

Effect from sale of Foreign Interest

     (5,396 )   (8.4 )%     —       —    

Effect of Medicare Prescription Drug, Improvement and Modernization Act of 2003

     (2,590 )   (4.0 )%     —       —    

Net Effect of state tax

     3,232     5.1 %     (773 )   (18.4 )%

Net Effect of foreign tax

     (1,411 )   (2.2 )%     864     20.5 %

Other

     528     0.7 %     (1,625 )   (38.6 )%
    


 

 


 

Income Tax (Benefit) Expense / Effective Rate

   $ 4,828     7.6 %   $ (9,739 )   (231.4 )%
    


 

 


 

 

The effective tax rate for the three and six months ended June 30, 2004 was calculated using the combination of an annual effective rate projection on recurring earnings and a discrete tax calculation for the impact of the sale of its wholly owned subsidiary CNX Australia Pty Limited. The effective rate is sensitive to changes in annual profitability, percentage depletion and the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. In addition, the provision for income taxes is adjusted at the time the tax returns are filed to reflect changes in previously estimated amounts. These adjustments decreased income tax expense by $3,011 and $1,128 for the three months ended June 30, 2004 and 2003, respectively. These adjustments are included in Net Effect of foreign tax and Effect from sale of foreign interest for the three and six months ended June 30, 2004 and Other for the three and six months ended June 30, 2003.

 

NOTE 9—INVENTORIES:

 

The components of inventories consist of the following:

 

    

June 30,

2004


  

December 31,

2003


Coal

   $ 26,363    $ 28,362

Merchandise for resale

     28,039      21,407

Supplies

     57,484      53,589
    

  

Total Inventories

   $ 111,886    $ 103,358
    

  

 

NOTE 10—ACCOUNTS RECEIVABLE SECURITIZATION

 

In April 2003, CONSOL Energy and certain of its U.S. subsidiaries entered into a trade accounts receivable facility with financial institutions for the sale on a continuous basis of eligible trade accounts receivable. CONSOL Energy formed CNX Funding Corporation, a wholly owned, special purpose, bankruptcy-remote subsidiary for the sole purpose of buying and selling eligible trade receivables generated by certain subsidiaries

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

of CONSOL Energy. Under the receivables facility, CONSOL Energy and certain subsidiaries, irrevocably and without recourse, sell all of their eligible trade accounts receivable to financial institutions and their affiliates, while maintaining a subordinated interest in a portion of the pool of trade receivables. CONSOL Energy will continue to service the sold trade receivables for the financial institutions for a fee based upon market rates for similar services.

 

The receivables facility allows CONSOL Energy to receive, on a revolving basis, up to $125,000. The cost of funds is based upon commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $721 and $1,239 for the three and six months ended June 30, 2004, respectively. Costs associated with the receivables facility totaled $263 for the three and six months ended June 30, 2003, respectively. These costs have been recorded as financing fees, which are included in Cost of Goods Sold and Other Operating Charges in the consolidated statements of income. No servicing asset or liability has been recorded. The receivables facility expires in 2006.

 

At June 30, 2004 and December 31, 2003, eligible accounts receivable totaled approximately $119,500 and $108,600, respectively. There was no subordinated retained interest at June 30, 2004. The subordinated retained interest approximated $600 at December 31, 2003. Accounts receivable totaling $125,000 and $108,000 were removed from the consolidated balance sheet at June 30, 2004 and December 31, 2003, respectively. In accordance with the facility agreement, the Company is able to receive proceeds based upon total eligible accounts receivable at the previous month-end. Proceeds at June 30, 2004, determined by eligible accounts receivable at May 31, 2004, exceeded the eligible accounts receivable at June 30, 2004. The $5,500 of proceeds not supported by accounts receivable at June 30, 2004 is included in the $125,000 of accounts receivable, which was removed from the consolidated balance sheet at June 30, 2004. The $2,900 and $17,000 of additional proceeds received in the three and six months ended June 30, 2004 and the $50,000 of proceeds received in three and six months ended June 30, 2003 is included in cash flows from operating activities in the consolidated statement of cash flows.

 

NOTE 11—PROPERTY, PLANT AND EQUIPMENT:

 

    

June 30,

2004


  

December 31,

2003


Coal properties and surface lands

   $ 1,451,499    $ 1,006,345

Mineral interests

     778,870      778,934

Plant and equipment

     3,031,032      3,487,219

Mine development

     411,238      363,912

Airshafts

     649,844      637,620
    

  

       6,322,483      6,274,030

Less Accumulated depreciation, depletion and amortization

     3,187,607      3,212,523
    

  

Net Property, Plant and Equipment

   $ 3,134,876    $ 3,061,507
    

  

 

Leased coal interest and advance mining royalties, previously reported separately on the balance sheet as intangible assets, are reflected as mineral interests within property, plant and equipment in accordance with Emerging Issues Task Force Issue No. 04-03, “Whether Mineral Rights Are Tangible or Intangible Assets”.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

NOTE 12—DEBT:

 

On June 30, 2004, CONSOL Energy completed a $600,000 senior secured credit facility to replace an existing facility of $266,750. The agreement consists of a five-year $400,000 revolving credit facility and a six-year $200,000 Tranche B credit-linked deposit facility. Borrowings under the facility are secured by nearly all of the assets of the Company. Collateral has been provided to the banks and is shared equally and ratably with the holders of CONSOL Energy’s 7.875% bonds maturing in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007.

 

Funds may be borrowed for periods of 1 to 180 days depending on the interest rate method chosen by CONSOL Energy. Interest is based, at our option, upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread, which is dependent on our credit rating. Borrowings under the facilities will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Previous cash collateralized letters of credit have been transferred to the Tranche B facility and the $190,000 of restricted cash has been released and used to pay down short-term debt.

 

The agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments and merge with another corporation. We are also required to maintain a ratio of financial covenant debt, as defined, to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) of not more than 3.0 to 1.0, measured quarterly. This ratio was 1.77 to 1.0 at June 30, 2004. In addition, we are required to maintain a ratio of twelve months trailing EBITDA to cash interest expense of no less than 4.5 to 1.0, measured quarterly. This ratio was 9.01 to 1.0 at June 30, 2004. The facility also has covenants restricting the level of annual capital expenditures to be made by CONSOL Energy. The capital expenditure limit is $450,000, $550,000 and $550,000 for the twelve months ended December 31, 2004, 2005 and 2006, respectively. For each fiscal year thereafter, the limit is $400,000. At June 30, 2004, the revolving credit facility had $26,573 of letters of credit outstanding, leaving $373,427 of capacity available for borrowings and the issuance of letters of credit. At June 30, 2004, the Tranche B credit-linked deposit facility had $200,000 of letters of credit outstanding and has reached the facility’s capacity.

 

NOTE 13—COMMITMENTS AND CONTINGENCIES:

 

CONSOL Energy has various purchase commitments for materials, supplies and items of permanent investment incidental to the ordinary conduct of business. Such commitments are not at prices in excess of current market values.

 

One of our subsidiaries, Fairmont Supply Company, which distributes industrial supplies, currently is named as a defendant in approximately 24,400 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, New Jersey and Mississippi. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time and, in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. To date, payments by Fairmont

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

with respect to asbestos cases have not been material. However, there cannot be any assurance that payments in the future with respect to pending or future asbestos cases will not be material to the financial position, results of operations or cash flows of CONSOL Energy.

 

CONSOL Energy is subject to various lawsuits and claims with respect to such matters as personal injury, wrongful death, damage to property, exposure to hazardous substances, governmental regulations including environmental remediation, employment and contract disputes, and other claims and actions arising out of the normal course of business. In the opinion of management, the ultimate liabilities resulting from such pending lawsuits and claims will not materially affect the financial position, results of operations or cash flows of CONSOL Energy. In 1991, CONSOL Energy was named a potentially responsible party related to the Buckeye Landfill Superfund Site and accordingly recognized an estimated liability for remediation of this site of which $2,703 remained as of March 31, 2004. In April 2004, CONSOL Energy entered into an Environmental Liability Transfer and Indemnity Agreement that transferred our liability related to the Buckeye Landfill Superfund Site to another party. The transaction resulted in the reversal of the remaining liability and the recognition of $1,438 of income.

 

In January 2003, Mine 84, near Washington, Pennsylvania experienced a fire along several hundred feet of the conveyor belt servicing the longwall section of the mine. The fire was extinguished approximately two weeks later. On January 20, 2003, the mine resumed production on a limited basis with continuous mining machines, while repairs continued on the belt entry. The fire caused damage to the roof support system, conveyor belt and steel framework on which the belt travels. Repairs took several weeks to complete and total estimated costs are approximately $7,000, net of expected insurance recovery of approximately $2,800. Costs incurred in the six months ended June 30, 2003 were $6,500 and are primarily reflected in cost of goods sold and other charges, and the expected insurance recovery for damages is reflected in other receivables. No payments for damages incurred have been received by CONSOL Energy to date. Longwall coal production, which accounts for the majority of coal normally produced at the mine, resumed on February 10, 2003.

 

In February 2003, our Loveridge Mine experienced a fire near the bottom of the slope entry that is used to carry coal from the mine to the surface. The cost of extinguishing the fire was estimated to be approximately $20,000, net of expected insurance recovery of approximately $25,000. Costs to the Company are primarily reflected in the 2003 cost of goods sold and other charges, $7,650 of which is included in the six months ended June 30, 2003, and expected insurance recovery for damages is reflected in other receivables. Payments for damages of $13,000 have been received by CONSOL Energy through June 30, 2004. The remaining receivable is expected to be collected in the third quarter of 2004. In late December 2002, the mine began the process of developing a new underground area that would be mined with longwall mining equipment that was expected to be installed later in 2003. The fire delayed this installation until March of 2004.

 

CONSOL Energy has filed insurance claims related to the damage incurred by these fires including claims under its business interruption policy. The claims process is lengthy and its outcome cannot be predicted with certainty. No benefit for business interruption recovery have been recorded to date.

 

On October 21, 2003, a purported class action complaint was filed in the United States District Court for the Western District of Pennsylvania on behalf of Seth Moorhead against CONSOL Energy, J. Brett Harvey and William J. Lyons. On May 5, 2004, an amended complaint was filed after the court granted a motion by Gus A. Karozos to act as lead plaintiff. The amended complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002, and July 18, 2002, the defendants issued false and misleading

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

statements to the public that failed to disclose or misrepresented the following, among other things that: (a) CONSOL Energy utilized an aggressive approach regarding its spot market sales by reserving 20% of its production to that market, and that by increasing its exposure to the spot market, CONSOL Energy was subjecting itself to increased risk and uncertainty as the price and demand for coal could be volatile; (b) CONSOL Energy was experiencing difficulty selling the production that it had allocated to the spot market, and, nonetheless, CONSOL Energy maintained its production levels which caused its coal inventory to increase; (c) CONSOL Energy’s increasing coal inventory was causing its expenses to rise dramatically, thereby weakening the company’s financial condition; and (d) based on the foregoing, defendants’ positive statements regarding CONSOL Energy’s earnings and prospects were lacking in a reasonable basis at all times and therefore were materially false and misleading. The amended complaint asks the court to (1) award unspecified damages to plaintiff and the purported class members and (2) award reasonable costs and expenses incurred in connection with this action, including counsel fees and expert fees. One other purported class action complaint has been filed in the United States District Court for the Western District of Pennsylvania against CONSOL Energy and certain officers and directors. This complaint was filed on December 12, 2003 by William A. McMahen and the allegations are essentially the same as the Moorhead/Karozos complaint. None of the named defendants have been served with the McMahen complaint. CONSOL Energy management believes these claims are without merit, and, accordingly, the Company has not accrued any liability associated with these claims.

 

CONSOL Energy and certain of its subsidiaries have provided the following financial guarantees. CONSOL Energy Management believes that these guarantees will expire without being funded, and therefore, the commitments will not have a material adverse effect on financial condition. The fair values of all liabilities associated with these guarantees have been properly recorded and reported in the financial statements at June 30, 2004.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Guarantee


   Term

   Maximum
Payments


Workers’ Compensation Surety Bonds (a)

   Various    $ 306,244

Reclamation Surety Bonds (b)

   Various      259,482

Gas Sales Agreements (c)

   Various      130,213

1992 Benefit Plan (d)

   10/2002 -10/2004      127,009

Ohio Power Company (e)

   6/1993 -6/2006      68,039

Workers’ Compensation Letters of Credit (f)

   Various      42,423

Longwall Lease Agreements (g)

   Various      40,347

Ohio Valley Electric Corporation (h)

   5/2000 -12/2006      28,049

Ginger Hills Synfuels, LLC (i)

   1/2003 -12/2007      26,532

Gas Hedging Agreements (j)

   Various      25,164

Travelers Casualty & Surety Co. (k)

   1/2004-1/2005      19,214

Miscellaneous Surety Bonds (l)

   Various      12,082

Environmental Liabilities Letters of Credit (m)

   Various      10,855

Zurich American Insurance (n)

   11/2003 -11/2004      7,000

West Penn Power Company (o)

   7/1967 -12/2004      6,215

Duke Energy Corporation (p)

   2/2003 -12/2004      5,459

Bank of Novia Scotia (q)

   9/2003 -10/2004      5,000

W.V. Workers’ Compensation Division (r)

   4/2003 -4/2005      4,579

Commonwealth of Kentucky (s)

   6/2004 -6/2005      3,623

Key Corp Leasing (t)

   7/2001 -12/2011      2,950

Ontario Power Generation, Inc. (u)

   1/2004 -12/2006      2,673

Court Bonds (v)

   Various      2,527

Hooks Industrial (w)

   2/2004 -2/2005      1,800

Reliant Energy (x)

   12/2002 -12/2005      1,575

Travelers Casualty & Surety Co. (y)

   11/2003 -11/2004      1,500

Centimark Corp. (z)

   8/2000 -7/2008      1,252

W. Va. Department of Environmental Protection (aa)

   8/2003 -8/2008      918

Orion Power (bb)

   12/2003 -12/2006      800

U. S. Department of Labor (cc)

   6/2004 -6/2005      800

Marathon Ashland Petroleum LLC (dd)

   4/2004 -4/2005      750

Illinois Industrial Commission (ee)

   3/2004 -10/2004      656

Orion Power (ff)

   12/2002 -12/2005      635

Highmark Life & Casualty (gg)

   5/2003 -5/2005      500

Travelers Casualty & Surety Company (hh)

   4/2004 -4/2005      450

Lumbermens Mutual (ii)

   10/2003 -11/2004      253

Allegheny Energy Supply Co. (jj)

   3/2004 -3/2005      152

LABAR Co. (kk)

   4/1999 -3/2005      95

Henry Berdine (ll)

   4/2004 -4/2005      9
         

Total Guarantees

        $ 1,147,824
         


(a) CONSOL Energy and its subsidiaries, at various times throughout the year, have obtained surety bonds related to workers’ compensation obligations. These bonds are necessary because CONSOL Energy is self insured for workers’ compensation. The bonds will be called if CONSOL Energy or any of its subsidiaries fails to pay workers’ compensation claims.

 

(b) A number of CONSOL Energy subsidiaries have obtained surety bonds related to reclamation and subsidence obligations, which guarantee the performance of these obligations related to reclamation and subsidence.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

(c) Certain subsidiaries of CONSOL Energy have entered into gas sales agreements in which CONSOL Energy guarantees the delivery of a specific quantity of fixed price gas for the duration of the contract. These agreements include the following:

 

1. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement with CONOCO/Phillips Inc. that guarantees the physical delivery of CNX Gas Company LLC production through December 31, 2005. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this sales agreement, up to $60,000.

 

2. CONSOL Energy has an agreement with Dominion Field Services to guarantee any unpaid obligations of CNX Gas Company LLC and Greene Energy, subsidiaries of CONSOL Energy, pursuant to their gas sales agreements with Dominion Field Services. The maximum undiscounted future payments required pursuant to the agreement to be made by these subsidiaries at June 30, 2004 are as follows: (a) CNX Gas Company LLC—$36,000, and (b) Greene Energy—$3,000.

 

3. CONSOL Energy has an agreement with AEP Energy Services to unconditionally guarantee the full and prompt payment of all obligations, up to $15,000, of CNX Gas Company LLC, a subsidiary of CONSOL Energy, arising from AEP Energy Services’ purchase, sale or exchange of energy services or energy related commodities with respect to the sales agreement between CNX Gas Company LLC and AEP Energy Services.

 

4. CONSOL Energy guarantees the delivery of specific quantities of gas by CNX Gas Company LLC through May 7, 2022. If our subsidiary fails to deliver the volume specified in the contract, CONSOL Energy is obligated to pay a deficiency charge, for each day delivery is not made, equal to the undelivered volumes times the daily price of gas.

 

5. CNX Gas Company LLC, a subsidiary of CONSOL Energy, has an agreement dated June 30, 2004 with Baltimore Gas and Electric Company (BGE) that guarantees the prompt and complete payment of all obligations and amounts owed to BGE related to the purchase and/or sale of natural gas. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $3,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.

 

6. CONSOL Energy is the guarantor of the agreement dated May 26, 2004 between CNX Gas Company LLC and Equitable Energy, LLC, relating to the purchases and/or trades of natural gas and/or natural gas products, electric energy or capacity, financial derivatives or related contracts. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, up to $10,000. The guaranty will continue in force until thirty days prior written notice is given by CONSOL Energy.

 

7. CONSOL Energy is the guarantor of the agreement dated April 14, 2004 between CNX Gas Company LLC and Columbia Gas Transmission Corp., relating to the transportation of natural gas or other services rendered and to be rendered on present or future orders on credit from Columbia Gas Transmission Corp. CONSOL Energy has guaranteed any unpaid obligations of CNX Gas Company LLC related to this agreement, at an amount of $535.50 per month from May 2004-October 2004, or $3,213. The guaranty shall continue in full force and effect for a term of one year from the effective date, and year-to-year thereafter unless terminated at any time by CONSOL Energy by providing sixty days prior written notice to Columbia Gas Transmission Corp.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

(d) On October 15, 2002, a subsidiary of CONSOL Energy arranged for the issuance of a letter of credit for the benefit of the 1992 Benefit Plan. This letter of credit will be drawn upon if the subsidiary fails to pay the claims related to this plan. At June 30, 2004, this guarantee is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

 

(e) CONSOL Energy is the guarantor of the Coal Supply Agreement dated June 3, 1993 between several of its subsidiaries and Ohio Power Company. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

 

(f) CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s self-insurance program for workers’ compensation. Should CONSOL Energy, or any of these subsidiaries, fail to pay the workers’ compensation claims, the guarantee will draw on the letter of credit. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement. The individual guarantees are as follows: W.V. Workers’ Compensation Division $21,682; Illinois Industrial Commission $9,569; Old Republic Insurance $6,403; Commonwealth of Kentucky $1,819; Travelers Casualty & Surety Company $1,500; U.S. Department of Labor $1,350; Maryland Workers’ Compensation Commission $100.

 

(g) CONSOL Energy’s subsidiaries have entered into various longwall equipment leases. CONSOL Energy is the guarantor of these agreements and promises full and timely payment to the lessors if the subsidiaries should fail to perform the obligations of the agreements. The individual guarantees are as follows: LaSalle National Leasing Corp. $15,602; Orix Financial Services $14,027; U.S. Bancorp $10,718.

 

(h) CONSOL Energy is the guarantor of the Coal Supply Agreement dated May 22, 2000 between several of its subsidiaries and Ohio Valley Electric Corporation. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

 

(i) CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 15, 2003 between one of its subsidiaries and Ginger Hill Synfuels, LLC. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of its subsidiary with respect to this Coal Supply Agreement.

 

(j) CONSOL Energy has entered into various International Swap and Derivative Association (ISDA) Agreements. These agreements cover the gas derivative hedging activity of CNX Gas Company LLC. The individual agreements are as follows: Morgan Stanley Capital Group Inc. $18,836; Citibank ISDA Agreements $6,328.

 

(k) On January 8, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty & Surety Company. This letter of credit is to serve as collateral for certain surety bonds and will be drawn upon if CONSOL Energy fails to make the payments related to these bonds. At June 30, 2004 this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

 

(l) Several subsidiaries of CONSOL Energy have issued miscellaneous surety bonds, primarily water quality bonds and road bonds. CONSOL Energy guarantees the performance of these obligations by its subsidiaries.

 

(m)

CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s environmental liabilities. Should CONSOL Energy, or any of these subsidiaries, fail to perform the obligations related to these projects, the guarantee will draw on the letter of credit. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

 

Energy’s Senior Secured Loan Agreement. The individual guarantees are as follows: Pennsylvania Department of Protection $5,099; Pennsylvania Department of Transportation $5,000; Commonwealth of Kentucky $709; Commonwealth of Virginia $47.

 

(n) On November 19, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Zurich American Insurance Company. Zurich American processes and pays automobile claims and then bills CONSOL Energy, which is self-insured, for reimbursement. This letter of credit will be drawn upon if CONSOL Energy fails to reimburse Zurich American for these payments.

 

(o) CONSOL Energy is the guarantor of the Coal Supply Agreement dated July 3, 1967 between several of its subsidiaries and West Penn Power Company. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this agreement.

 

(p) CONSOL Energy is the guarantor of the Coal Supply Agreement dated February 1, 2003 between several of its subsidiaries and Duke Energy Corporation. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from this Coal Supply Agreement.

 

(q) A subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the Bank of Nova Scotia on September 16, 2003. This letter of credit serves as a guarantee of performance of certain reclamation obligations and will be drawn if CONSOL Energy’s subsidiary defaults on these obligations.

 

(r) On April 24, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit to West Virginia’s Workers’ Compensation Division in relation to workers’ compensation liabilities. This letter of credit is a result of the fact that CONSOL Energy and its subsidiaries are self-insured for these obligations. The letter of credit will be drawn upon if the subsidiary fails to pay the related workers’ compensation liabilities.

 

(s) On June 23, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the Commonwealth of Kentucky in relation to workers’ compensation liabilities. This letter of credit is a result of CONSOL Energy and its subsidiaries being self-insured for these liabilities. The letter of credit will be drawn upon if the subsidiary fails to pay the related workers’ compensation liabilities.

 

(t) A CONSOL Energy subsidiary entered into an agreement on July 1, 2001 with Key Corp. Leasing to lease open top coal hopper railcars. CONSOL Energy is the guarantor of this agreement and promises prompt and full payment to Key Corp. Leasing upon the failure of the subsidiary to satisfy the obligations of the agreement.

 

(u) CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 1, 2004 between one of its subsidiaries and Ontario Power Generation, Inc. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of its subsidiary arising from this agreement.

 

(v) Several subsidiaries of CONSOL Energy have issued court bonds related to court proceedings in which they are involved. These bonds would be called if any of the subsidiaries file bankruptcy while the proceedings still exist and are unresolved. The bonds will be released by the court when the proceedings conclude.

 

(w) On February 27, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Hooks Industrial. This letter of credit is related to pending litigation and will be drawn upon if the court does not rule in favor of the CONSOL Energy subsidiary.

 

(x) CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 17, 2002 between several of its subsidiaries and Reliant Energy Mid-Atlantic Power Holdings, LLC. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

(y) On November 3, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty and Surety Company. This letter of credit supports workers’ compensation liabilities, because CONSOL Energy and its subsidiaries are self-insured for these liabilities. This letter of credit will be drawn upon if CONSOL Energy fails to pay the related workers’ compensation claims.

 

(z) A subsidiary of CONSOL Energy entered into an agreement to lease office space from Centimark Corporation on August 1, 2000. In connection with this agreement, CONSOL Energy guarantees full and timely performance of all obligations of the subsidiary to Centimark, in relation to this lease agreement.

 

(aa) On August 11, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the West Virginia Department of Environmental Protection to guarantee payment if this subsidiary fails to pay these liabilities.

 

(bb) CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 22, 2003 between several of its subsidiaries and Orion Power MidWest, L.P. Under this agreement, CONSOL Energy guarantees the full and faithful performance of all obligations of these subsidiaries with respect to this agreement.

 

(cc) On June 23, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of the U. S. Department of Labor. This letter of credit is related to Longshore and Harborworkers workers’ compensation claims and will be drawn upon should the subsidiary fail to pay the claims.

 

(dd) On April 28, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Marathon Ashland Petroleum LLC. This letter of credit is to serve as collateral for a purchase agreement entered into between CONSOL Energy and Marathon Ashland Petroleum LLC. This letter of credit will be called upon should CONSOL Energy fail to perform its obligation.

 

(ee) On March 17, 2004, CONSOL Energy, in conjunction with several of its subsidiaries, obtained the issuance of a letter of credit to the Illinois Industrial Commission. This letter of credit is related to CONSOL Energy’s self-insurance program for workers’ compensation. Should CONSOL Energy, or any of these subsidiaries, fail to pay workers’ compensation claims, the Illinois Industrial Commission will draw on this letter of credit.

 

(ff) CONSOL Energy is the guarantor of the Coal Supply Agreement dated December 17, 2002 between several of its subsidiaries and Orion Power MidWest, LP. Under this agreement, CONSOL Energy guarantees the full and timely performance of all obligations of these subsidiaries with respect to this Coal Supply Agreement.

 

(gg) On May 1, 2003, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Highmark Life and Casualty to support medical payments under various CONSOL Energy medical benefit programs. CONSOL Energy and its subsidiaries are self-insured for obligations under these programs. Highmark processes and pays the medical claims under the CONSOL Energy medical benefits programs and then bills CONSOL Energy for reimbursement. The letter of credit will be drawn upon if CONSOL Energy or its subsidiary fails to reimburse Highmark for these payments. At June 30, 2004, this guaranty is backed by the Tranche B credit linked deposit facility, established as part of CONSOL Energy’s Senior Secured Loan Agreement.

 

(hh) On April 27, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Travelers Casualty and Surety Company. This letter of credit is to serve as 50% collateral for a Supersedeas bond for a warn notice lawsuit. This letter of credit will be called upon if the subsidiary fails to fulfill the obligations of the required court bond.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

(ii) On October 30, 2003, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Lumbermens Mutual. Lumbermens Mutual processes and pays all automobile claims and then bills CONSOL Energy, which is self-insured, for reimbursement. The letter of credit will be drawn upon if CONSOL Energy should fail to reimburse Lumbermens Mutual for these payments.

 

(jj) On March 3, 2004, CONSOL Energy obtained the issuance of a letter of credit for the benefit of Allegheny Energy Supply Co. This letter of credit is related to an expansion of the Buchanan Generation substation, which is a joint venture project between CONSOL Energy and Allegheny Energy Supply. Allegheny Energy Supply, which owns the substation, may be liable to American Electric Power for additional taxes because of the increase in the assessed asset value of the substation. This letter of credit represents CONSOL Energy’s 50% portion of any additional taxes due and will be drawn upon if Allegheny Energy Supply is forced to reimburse American Electric Power for these additional taxes.

 

(kk) On April 1, 1999, a subsidiary of CONSOL Energy entered into an agreement with Alaska Supply Chain Integrators (ASCI) to lease warehouse space from LABAR Co. CONSOL Energy guarantees prompt payment of all amounts due under the lease in the event of default by the subsidiary.

 

(ll) On April 2, 2004, a subsidiary of CONSOL Energy obtained the issuance of a letter of credit for the benefit of Henry Berdine. This letter of credit is related to a court order for reclamation work related to water loss. CONSOL Energy is the guarantor of this agreement and promises prompt and full payment to Henry Berdine upon the failure of the subsidiary to satisfy the obligations of the agreement.

 

NOTE 14—FAIR VALUE OF FINANCIAL INSTRUMENTS:

 

The following methods and assumptions were used to estimate the fair values of financial instruments:

 

Cash and cash equivalents: The carrying amount reported in the balance sheets for cash and cash equivalents approximates its fair value due to the short maturity of these instruments.

 

Restricted Cash: The carrying amount reported in the balance sheets for restricted cash approximates its fair value. Restricted cash is invested in highly liquid securities to support requirements of long-term letters of credit.

 

Short-term notes payable: The carrying amount reported in the balance sheets for short-term notes payable approximates its fair value due to the short-term maturity of these instruments.

 

Current and Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses, based on CONSOL Energy’s current incremental borrowing rates for similar types of borrowing arrangements.

 

Capital Leases: At June 30, 2004, the carrying amount of capital leases approximates its fair value due to the short-term nature of the remaining obligations. At December 31, 2003, the fair values of capital leases are estimated using discounted cash flow analyses, based on current incremental borrowing rates for similar types of borrowing arrangements.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

The carrying amounts and fair values of financial instruments, excluding derivative financial instruments disclosed in Item 3—Quantitative and Qualitative Disclosure About Market Risk, are as follows:

 

     June 30, 2004

    December 31, 2003

 
     Carrying
Amount


    Fair Value

    Carrying
Amount


    Fair Value

 

Cash and cash equivalents

   $ 60,128     $ 60,128     $ 6,513     $ 6,513  

Restricted cash

   $ 918     $ 918     $ 190,918     $ 190,918  

Short-term notes payable

   $ —       $ —       $ (68,760 )   $ (68,760 )

Long-term debt

   $ (428,766 )   $ (446,476 )   $ (490,504 )   $ (512,215 )

Capital Leases

   $ (20 )   $ (20 )   $ (4,738 )   $ (4,742 )

 

NOTE 15—SEGMENT INFORMATION:

 

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three and six months ended June 30, 2004, the Northern Appalachian aggregated segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork and Mine 84. For the three and six months ended June 30, 2004, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and six months ended June 30, 2004, the Metallurgical aggregated segment includes the following mines: Buchanan, Amonate and V.P. #8. The Other Coal segment includes the Company’s purchased coal activities, idled mine cost, coal segment business units not meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to individual mines. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other Classification is made up of the Company’s terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. The segment information presented for prior periods has been restated to be consistent with the information presented for the current period.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Industry segment results for the three months ended June 30, 2004:

 

    Northern
Appalachian


  Central
Appalachian


  Metallurgical

  Other
Coal


    Total Coal

  Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 370,037   $ 57,588   $ 66,494   $ 19,725     $ 513,844   $ 83,716   $ 26,415     $ —       $ 623,975  

Freight—outside

    —       —       —       29,745       29,745     —       23       —         29,768  

Intersegment transfers

    —       —       —       —         —       868     24,302       (25,170 )     —    
   

 

 

 


 

 

 


 


 


Total Sales and Freight

  $ 370,037   $ 57,588   $ 66,494   $ 49,470     $ 543,589   $ 84,584   $ 50,740     $ (25,170 )   $ 653,743  
   

 

 

 


 

 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 29,746   $ 1,304   $ 6,352   $ (22,043 )   $ 15,359   $ 32,125   $ (4,152 )   $ (17,106 )   $ 26,226 (A)
   

 

 

 


 

 

 


 


 


Segment assets

                            $ 2,754,490   $ 671,918   $ 211,555     $ 558,790     $ 4,196,753 (B)
                             

 

 


 


 


Depreciation, depletion and amortization

                            $ 50,221   $ 8,161   $ 3,343     $ —       $ 61,725  
                             

 

 


 


 


Capital Expenditures

                            $ 80,175   $ 19,723   $ 387     $ —       $ 100,285  
                             

 

 


 


 



(A) Includes equity in earnings (losses) of unconsolidated affiliates of $(105) and $(294) for Gas and All Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of $20,233 and $26,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

Industry segment results for the three months ended June 30, 2003:

 

    Northern
Appalachian


  Central
Appalachian


  Metallurgical

  Other
Coal


    Total Coal

  Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 306,754   $ 50,418   $ 62,022   $ 22,429     $ 441,623   $ 50,742   $ 18,870     $ —       $ 511,235  

Freight—outside

    —       —       —       25,555       25,555     —       25       —         25,580  

Intersegment transfers

    —       —       —       —         —       834     22,609       (23,443 )     —    
   

 

 

 


 

 

 


 


 


Total Sales and
Freight

  $ 306,754   $ 50,418   $ 62,022   $ 47,984     $ 467,178   $ 51,576   $ 41,504     $ (23,443 )   $ 536,815  
   

 

 

 


 

 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 36,329   $ 785   $ 5,180   $ (29,739 )   $ 12,555   $ 17,173   $ (5,060 )   $ (9,399 )   $ 15,269 (C)
   

 

 

 


 

 

 


 


 


Segment assets

                            $ 2,803,276   $ 609,898   $ 224,272     $ 563,577     $ 4,201,023 (D)
                             

 

 


 


 


Depreciation, depletion
and amortization

                            $ 49,790   $ 9,589   $ 2,914     $ —       $ 62,293  
                             

 

 


 


 


Capital Expenditures

                            $ 45,194   $ 18,240   $ 640     $ —       $ 64,074  
                             

 

 


 


 



(C) Includes equity in earnings (losses) of unconsolidated affiliates of $(3,940), $(328) and $(472) for Other Coal, Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $37,378, $15,767 and $28,428 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Industry segment results for the six months ended June 30, 2004:

 

    Northern
Appalachian


  Central
Appalachian


  Metallurgical

  Other
Coal


    Total Coal

  Gas

  All Other

  Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 731,119   $ 112,625   $ 122,612   $ 45,219     $ 1,011,575   $ 153,647   $ 49,241   $ —       $ 1,214,463  

Freight—outside

    —       —       —       61,043       61,043     —       164     —         61,207  

Intersegment transfers

    —       —       —       —         —       1,784     49,484     (51,268 )     —    
   

 

 

 


 

 

 

 


 


Total Sales and Freight

  $ 731,119   $ 112,625   $ 122,612   $ 106,262     $ 1,072,618   $ 155,431   $ 98,889   $ (51,268 )   $ 1,275,670  
   

 

 

 


 

 

 

 


 


Earnings (Loss) Before Income Taxes

  $ 78,097   $ 1,919   $ 1,947   $ (57,373 )   $ 24,590   $ 67,643   $ 4,320   $ (32,610 )   $ 63,943 (E)
   

 

 

 


 

 

 

 


 


Segment assets

                            $ 2,754,490   $ 671,918   $ 211,555   $ 558,790     $ 4,196,753 (F)
                             

 

 

 


 


Depreciation, depletion and amortization

                            $ 98,704   $ 15,801   $ 6,690   $ —       $ 121,195  
                             

 

 

 


 


Capital Expenditures

                            $ 168,080   $ 35,304   $ 1,213   $ —       $ 204,597  
                             

 

 

 


 



(E) Includes equity in earnings (losses) of unconsolidated affiliates of $(2,733), $(296) and $(366) for Other Coal, Gas and All Other, respectively.
(F) Includes investments in unconsolidated equity affiliates of $20,233 and $26,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Industry segment results for the six months ended June 30, 2003:

 

    Northern
Appalachian


  Central
Appalachian


  Metallurgical

  Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 603,740   $ 97,558   $ 120,885   $ 54,890     $ 877,073     $ 102,525   $ 38,197     $ —       $ 1,017,795  

Sales—related party

    —       1,267     102     —         1,369       —       —         —         1,369  

Freight—outside

    —       —       —       57,462       57,462       —       146       —         57,608  

Freight—related
party

    —       —       —       562       562       —       —         —         562  

Intersegment transfers

    —       —       —       —         —         1,785     46,842       (48,627 )     —    
   

 

 

 


 


 

 


 


 


Total Sales and
Freight

  $ 603,740   $ 98,825   $ 120,987   $ 112,914     $ 936,466     $ 104,310   $ 85,185     $ (48,627 )   $ 1,077,334  
   

 

 

 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 62,296   $ 1,719   $ 10,869   $ (74,928 )   $ (44 )   $ 33,257   $ (11,220 )   $ (17,784 )   $ 4,209 (G)
   

 

 

 


 


 

 


 


 


Segment assets

                            $ 2,803,221     $ 609,898   $ 224,272     $ 563,632     $ 4,201,023 (H)
                             


 

 


 


 


Depreciation, depletion
and amortization

                            $ 98,750     $ 18,623   $ 5,626     $ —       $ 122,999  
                             


 

 


 


 


Capital Expenditures

                            $ 82,747     $ 26,912   $ 1,061     $ —       $ 110,720  
                             


 

 


 


 



(G) Includes equity in earnings (losses) of unconsolidated affiliates of $(3,431), $(606) and $(1,040) for Other Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $37,378 $15,767 and $28,428 for Coal, Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Reconciliation of Segment Information to Consolidated Amounts:

 

Earnings (Loss) Before Income Taxes:

 

     For the Three Months
Ended June 30,


    For the Six Months
Ended June 30,


 
     2004

    2003

    2004

    2003

 

Segment earnings before income taxes for total reportable business segments

   $ 47,484     $ 29,728     $ 92,233     $ 33,213  

Segment earnings (loss) before income taxes for all other businesses

     (4,152 )     (5,060 )     4,320       (11,220 )

Incentive compensation

     (6,769 )     (4,101 )     (15,347 )     (4,093 )

Other post employee benefit curtailment gain

     —         —         3,454       —    

Interest income (expense), net and other non-operating activity

     (10,337 )     (5,298 )     (20,717 )     (13,691 )
    


 


 


 


Earnings (Loss) Before Income Taxes

   $ 26,226     $ 15,269     $ 63,943     $ 4,209  
    


 


 


 


 

     June 30,

     2004

   2003

Total Assets:

             

Segment assets for total reportable business segments

   $ 3,426,408    $ 3,413,119

Segment assets for all other businesses

     211,555      224,272

Items excluded from segment assets:

             

Cash and other investments

     60,665      14,291

Restricted Cash

     918      —  

Deferred tax assets

     481,514      531,681

Recoverable income taxes

     12,566      14,542

Intangible asset—overfunded pension plan

     468      55

Bond issuance costs

     2,659      3,063
    

  

Total Consolidated Assets

   $ 4,196,753    $ 4,201,023
    

  

 

NOTE 16—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

 

Effective September 30, 2003, CONSOL Energy executed Supplemental Indenture No. 2. This Supplemental Indenture revised the Guarantor Subsidiaries as defined in the First Supplemental Indenture to include additional subsidiaries as guarantors and remove one subsidiary as a guarantor. Accordingly, CONSOL Energy has revised prior year’s data to conform to the classifications effective at September 30, 2003.

 

The payment obligations under the $250,000 7.875 percent Notes due 2012 issued by CONSOL Energy in 2002 are fully and unconditionally guaranteed by several subsidiaries of CONSOL Energy. In accordance with positions established by the Securities and Exchange Commission, the following financial information sets forth separate financial information with respect to the parent, the guarantor subsidiaries and the non-guarantor subsidiaries. The principal elimination entries eliminate investments in subsidiaries and certain intercompany balances and transactions. CONSOL Energy, the parent, and a guarantor subsidiary manage several assets and liabilities of all of their subsidiaries. For example, these include deferred tax assets, cash and other post-employment liabilities. These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

 

26


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Three Months Ended June 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

Sales—Outside

   $ —       $ 603,843     $ 20,132     $ —       $ 623,975

Freight—Outside

     —         29,745       23       —         29,768

Other Income (including equity earnings)

     38,262       14,773       4,745       (36,939 )     20,841
    


 


 


 


 

Total Revenue and Other Income

     38,262       648,361       24,900       (36,939 )     674,584

Cost of Goods Sold and Other Operating Charges

     10,521       460,598       45,339       (33,665 )     482,793

Intercompany Activity

     (307 )     (12,034 )     (21,671 )     34,012       —  

Freight Expense

     —         29,745       23       —         29,768

Selling, General and Administrative Expense

     —         16,705       558       —         17,263

Depreciation, Depletion and Amortization

     1,535       59,934       256       —         61,725

Interest Expense

     6,391       1,930       —         —         8,321

Taxes Other Than Income

     867       47,246       375       —         48,488
    


 


 


 


 

Total Costs

     19,007       604,124       24,880       347       648,358
    


 


 


 


 

Earnings (Loss) Before Income Taxes

     19,255       44,237       20       (37,286 )     26,226

Income Tax Expense (Benefit)

     (6,950 )     6,964       7       —         21
    


 


 


 


 

Net Income (Loss)

   $ 26,205     $ 37,273     $ 13     $ (37,286 )   $ 26,205
    


 


 


 


 

 

27


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Balance Sheet for June 30, 2004:

 

     Parent

   Guarantors

    Non-Guarantors

   Elimination

    Consolidated

Assets:

                                    

Current Assets:

                                    

Cash and Cash Equivalents

   $ 56,172    $ 237     $ 3,719    $ —       $ 60,128

Accounts and Notes Receivable:

                                    

Trade

     —        521       96,454      —         96,975

Other

     5,191      69,759       2,825      —         77,775

Inventories

     173      82,959       28,754      —         111,886

Deferred Income Taxes

     136,746      —         —        —         136,746

Recoverable Income Taxes

     12,566      —         —        —         12,566

Prepaid Expenses

     9,638      56,531       546      —         66,715
    

  


 

  


 

Total Current Assets

     220,486      210,007       132,298      —         562,791

Property, Plant and Equipment:

                                    

Property, Plant and Equipment

     98,602      6,199,004       24,877      —         6,322,483

Less-Accumulated Depreciation, Depletion and Amortization

     49,905      3,118,021       19,681      —         3,187,607
    

  


 

  


 

Property, Plant and Equipment—Net

     48,697      3,080,983       5,196      —         3,134,876

Other Assets:

                                    

Deferred Income Taxes

     344,768      —         —        —         344,768

Investment in Affiliates

     1,536,616      28,783       —        (1,518,485 )     46,914

Restricted Cash

     —        918       —        —         918

Other

     24,895      81,523       68      —         106,486
    

  


 

  


 

Total Other Assets

     1,906,279      111,224       68      (1,518,485 )     499,086
    

  


 

  


 

Total Assets

   $ 2,175,462    $ 3,402,214     $ 137,562    $ (1,518,485 )   $ 4,196,753
    

  


 

  


 

Liabilities and Stockholders’ Equity:

                                    

Current Liabilities:

                                    

Accounts Payable

   $ 92,861    $ 15,988     $ 14,825    $ —       $ 123,674

Accounts Payable (Recoverable)-
Related Parties

     1,177,599      (1,273,786 )     96,187      —         —  

Current Portion of Long-Term Debt

     —        3,812       —        —         3,812

Other Accrued Liabilities

     84,970      476,556       4,963      —         566,489
    

  


 

  


 

Total Current Liabilities

     1,355,430      (777,430 )     115,975      —         693,975

Long-Term Debt:

     248,417      176,557       —        —         424,974

Deferred Credits and Other Liabilities:

                                    

Postretirement Benefits Other Than Pensions

     —        1,515,456       —        —         1,515,456

Pneumoconiosis Benefits

     —        433,231       —        —         433,231

Mine Closing

     —        313,771       —        —         313,771

Workers’ Compensation

     28      126,836       —        —         126,864

Deferred Revenue

     —        58,043       —        —         58,043

Salary Retirement

     107,119      14       —        —         107,133

Reclamation

     —        8,098       —        —         8,098

Other

     58,477      50,221       519      —         109,217
    

  


 

  


 

Total Deferred Credits and Other Liabilities

     165,624      2,505,670       519      —         2,671,813

Stockholders’ Equity

     405,991      1,497,417       21,068      (1,518,485 )     405,991
    

  


 

  


 

Total Liabilities and Stockholders’ Equity

   $ 2,175,462    $ 3,402,214     $ 137,562    $ (1,518,485 )   $ 4,196,753
    

  


 

  


 

 

28


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Three Months Ended June 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash (Used in) Provided by Operating Activities

   $ (48,570 )   $ 137,713     $ 2,945     $ —      $ 92,088  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (2,311 )   $ (97,974 )   $ —       $ —      $ (100,285 )

Investment in Equity Affiliates

     —         (447 )     (958 )     —        (1,405 )

Other Investing Activities

     —         5,689       —         —        5,689  
    


 


 


 

  


Net Cash Used in Investing Activities

   $ (2,311 )   $ (92,732 )   $ (958 )   $ —      $ (96,001 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Debt

   $ (100,000 )   $ —       $ —       $ —      $ (100,000 )

Payments on Long-Term Notes

     —         (45,000 )     —         —        (45,000 )

Dividends Paid

     (12,598 )     —         —         —        (12,598 )

Withdrawal from Restricted Cash

     190,000       —         —         —        190,000  

Other Financing Activities

     4,139       (126 )     —         —        4,013  
    


 


 


 

  


Net Cash Provided by (Used in) Financing Activities

   $ 81,541     $ (45,126 )   $ —       $ —      $ 36,415  
    


 


 


 

  


 

29


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Three Months Ended June 30, 2003:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

   $ —       $ 494,737     $ 16,498     $ —       $ 511,235  

Sales—Related Parties

     —         —         —         —         —    

Freight—Outside

     —         25,485       95       —         25,580  

Other Income (including equity earnings)

     20,049       13,584       1,899       (15,829 )     19,703  
    


 


 


 


 


Total Revenue and Other Income

     20,049       533,806       18,492       (15,829 )     556,518  

Cost of Goods Sold and Other Operating Charges

     6,398       369,373       47,165       (39,245 )     383,691  

Intercompany Activity

     41       (20,040 )     (19,756 )     39,755       —    

Freight Expense

     —         25,485       95       —         25,580  

Selling, General and Administrative Expense

     —         18,565       824       —         19,389  

Depreciation, Depletion and Amortization

     841       61,148       304       —         62,293  

Interest Expense

     4,286       3,980       224       —         8,490  

Taxes Other Than Income

     911       41,308       201       —         42,420  

Export Sales Excise Tax Resolution

     —         (614 )     —         —         (614 )
    


 


 


 


 


Total Costs

     12,477       499,205       29,057       510       541,249  
    


 


 


 


 


Earnings (Loss) Before Income Taxes

     7,572       34,601       (10,565 )     (16,339 )     15,269  

Income Tax Expense (Benefit)

     (2,987 )     11,395       (3,698 )     —         4,710  
    


 


 


 


 


Net Income (Loss)

   $ 10,559     $ 23,206     $ (6,867 )   $ (16,339 )   $ 10,559  
    


 


 


 


 


 

30


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Balance Sheet for December 31, 2003:

 

     Parent

   Guarantors

    Non-Guarantors

   Elimination

    Consolidated

Assets:

                                    

Current Assets:

                                    

Cash and Cash Equivalents

   $ 5,173    $ 347     $ 993    $ —       $ 6,513

Accounts and Notes Receivable:

                                    

Trade

     —        418       89,553      —         89,971

Other

     916      87,327       3,158      —         91,401

Inventories

     174      80,021       23,163      —         103,358

Deferred Income Taxes

     125,938      —         —        —         125,938

Recoverable Income Taxes

     20,257      —         —        —         20,257

Prepaid Expenses

     6,094      26,781       527      —         33,402
    

  


 

  


 

Total Current Assets

     158,552      194,894       117,394      —         470,840

Property, Plant and Equipment:

                                    

Property, Plant and Equipment

     98,208      6,151,180       24,642      —         6,274,030

Less-Accumulated Depreciation, Depletion and Amortization

     46,585      3,146,711       19,227      —         3,212,523
    

  


 

  


 

Property, Plant and Equipment—Net

     51,623      3,004,469       5,415      —         3,061,507

Other Assets:

                                    

Deferred Income Taxes

     409,090      —         —        —         409,090

Investment in Affiliates

     1,318,921      27,640       38,108      (1,299,791 )     84,878

Restricted Cash

     190,000      918       —        —         190,918

Other

     4,039      92,478       5,228      —         101,745
    

  


 

  


 

Total Other Assets

     1,922,050      121,036       43,336      (1,299,791 )     786,631
    

  


 

  


 

Total Assets

   $ 2,132,225    $ 3,320,399     $ 166,145    $ (1,299,791 )   $ 4,318,978
    

  


 

  


 

Liabilities and Stockholders’ Equity:

                                    

Current Liabilities:

                                    

Accounts Payable

   $ 82,458    $ 32,867     $ 19,447    $ —       $ 134,772

Accounts Payable (Recoverable)-
Related Parties

     1,246,783      (1,345,508 )     98,725      —         —  

Short-Term Notes Payable

     65,000      —         3,760      —         68,760

Current Portion of Long-Term Debt

     —        53,330       —        —         53,330

Other Accrued Liabilities

     55,789      508,821       3,127      —         567,737
    

  


 

  


 

Total Current Liabilities

     1,450,030      (750,490 )     125,059      —         824,599

Long-Term Debt:

     248,314      176,348       17,250      —         441,912

Deferred Credits and Other Liabilities:

                                    

Postretirement Benefits Other Than Pensions

     —        1,494,615       —        —         1,494,615

Pneumoconiosis Benefits

     —        441,076       —        —         441,076

Mine Closing

     —        312,208       —        —         312,208

Workers’ Compensation

     1,433      254,352       —        —         255,785

Deferred Revenue

     —        61,673       —        —         61,673

Salary Retirement

     79,453      92       —        —         79,545

Reclamation

     —        14,480       —        —         14,480

Other

     62,358      31,015       9,075      —         102,448
    

  


 

  


 

Total Deferred Credits and Other Liabilities

     143,244      2,609,511       9,075      —         2,761,830

Stockholders’ Equity

     290,637      1,285,030       14,761      (1,299,791 )     290,637
    

  


 

  


 

Total Liabilities and Stockholders’ Equity

   $ 2,132,225    $ 3,320,399     $ 166,145    $ (1,299,791 )   $ 4,318,978
    

  


 

  


 

 

31


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Three Months Ended June 30, 2003:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash Provided by Operating Activities

   $ 137,673     $ 57,733     $ 336     $ —      $ 195,742  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (2,728 )   $ (61,346 )   $ —       $ —      $ (64,074 )

Investment in Equity Affiliates

     —         (199 )     (3,680 )     —        (3,879 )

Other Investing Activities

     2       4,450       (1,152 )     —        3,300  
    


 


 


 

  


Net Cash Used in Investing Activities

   $ (2,726 )   $ (57,095 )   $ (4,832 )   $ —      $ (64,653 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Borrowings

   $ (125,673 )   $ —       $ —       $ —      $ (125,673 )

Dividends Paid

     (11,016 )     —         —         —        (11,016 )

Other Financing Activities

     328       (1,040 )     335       —        (377 )
    


 


 


 

  


Net Cash (Used in) Provided by Financing Activities

   $ (136,361 )   $ (1,040 )   $ 335     $ —      $ (137,066 )
    


 


 


 

  


 

32


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Six Months Ended June 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

Sales—Outside

   $ —       $ 1,174,761     $ 39,702     $ —       $ 1,214,463

Freight—Outside

     —         61,043       164       —         61,207

Other Income (including equity earnings)

     171,369       26,529       6,808       (154,937 )     49,769
    


 


 


 


 

Total Revenue and Other Income

     171,369       1,262,333       46,674       (154,937 )     1,325,439

Cost of Goods Sold and Other Operating Charges

     18,401       888,053       89,544       (66,667 )     929,331

Intercompany Activity

     (315 )     (27,981 )     (44,425 )     72,721       —  

Freight Expense

     —         61,043       164       —         61,207

Selling, General and Administrative Expense

     —         35,023       837       —         35,860

Depreciation, Depletion and Amortization

     3,106       119,428       515       (1,854 )     121,195

Interest Expense

     13,087       4,213       82       —         17,382

Taxes Other Than Income

     1,883       93,868       770       —         96,521
    


 


 


 


 

Total Costs

     36,162       1,173,647       47,487       4,200       1,261,496
    


 


 


 


 

Earnings (Loss) Before Income Taxes

     135,207       88,686       (813 )     (159,137 )     63,943

Income Tax Expense (Benefit)

     (7,281 )     12,394       (285 )     —         4,828
    


 


 


 


 

Earnings (Loss) before Cumulative Effect of Change in Accounting Principle

     142,488       76,292       (528 )     (159,137 )     59,115

Cumulative Effect of Changes in Accounting for Workers’ Compensation Liability, net of Income Taxes of $53,080

     —         83,373       —         —         83,373
    


 


 


 


 

Net Income (Loss)

   $ 142,488     $ 159,665     $ (528 )   $ (159,137 )   $ 142,488
    


 


 


 


 

 

33


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash (Used in) Provided by Operating Activities

   $ (61,115 )   $ 243,911     $ 4,841     $ —      $ 187,637  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (4,695 )   $ (199,902 )   $ —       $ —      $ (204,597 )

Investment in Equity Affiliates

     —         (496 )     (2,115 )     —        (2,611 )

Other Investing Activities

     11,000       5,715       —         —        16,715  
    


 


 


 

  


Net Cash Provided by (Used in) Investing Activities

   $ 6,305     $ (194,683 )   $ (2,115 )   $ —      $ (190,493 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Debt

   $ (65,000 )   $ —       $ —       $ —      $ (65,000 )

Payments on Long-Term Notes

     —         (45,000 )     —         —        (45,000 )

Dividends Paid

     (25,174 )     —         —         —        (25,174 )

Withdrawal from Restricted Cash

     190,000       —         —         —        190,000  

Other Financing Activities

     5,983       (4,338 )     —         —        1,645  
    


 


 


 

  


Net Cash Provided by (Used in) Financing Activities

   $ 105,809     $ (49,338 )   $ —       $ —      $ 56,471  
    


 


 


 

  


 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Six Month Ended June 30, 2003:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

   $ —       $ 984,462     $ 33,333     $ —       $ 1,017,795  

Sales—Related Parties

     —         1,369       —         —         1,369  

Freight—Outside

     —         57,393       215       —         57,608  

Freight—Related Parties

     —         562       —         —         562  

Other Income (including equity earnings)

     36,407       17,294       15,852       (30,560 )     38,993  
    


 


 


 


 


Total Revenue and Other Income

     36,407       1,061,080       49,400       (30,560 )     1,116,327  

Cost of Goods Sold and Other Operating Charges

     10,427       773,734       86,309       (78,908 )     791,562  

Intercompany Activity

     278       (44,203 )     (41,299 )     85,224       —    

Freight Expense

     —         57,955       215       —         58,170  

Selling, General and Administrative Expense

     —         35,394       1,079       —         36,473  

Depreciation, Depletion and Amortization

     1,535       122,718       600       (1,854 )     122,999  

Interest Expense

     10,186       7,270       510       —         17,966  

Taxes Other Than Income

     2,134       82,714       714       —         85,562  

Export Sales Excise Tax Resolution

     —         (614 )     —         —         (614 )
    


 


 


 


 


Total Costs

     24,560       1,034,968       48,128       4,462       1,112,118  
    


 


 


 


 


Earnings (Loss) Before Income Taxes

     11,847       26,112       1,272       (35,022 )     4,209  

Income Tax Expense (Benefit)

     (6,869 )     (3,315 )     445       —         (9,739 )
    


 


 


 


 


Earnings (Loss) before Cumulative Effect of Change in Accounting Principle

     18,716       29,427       827       (35,022 )     13,948  

Cumulative Effect of Changes in Accounting for Mine Closing, Reclamation, and Gas Well Closing Costs, Net of Income Taxes of $3,035

     —         4,768       —         —         4,768  
    


 


 


 


 


Net Income (Loss)

   $ 18,716     $ 34,195     $ 827     $ (35,022 )   $ 18,716  
    


 


 


 


 


 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Six Months Ended June 30, 2003:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash Provided by (Used in) Operating Activities

   $ 205,173     $ 96,977     $ (63,048 )   $ —      $ 239,102  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (5,303 )   $ (105,417 )   $ —       $ —      $ (110,720 )

Investment in Equity Affiliates

     —         (214 )     (4,496 )     —        (4,710 )

Other Investing Activities

     3       9,160       68,350       —        77,513  
    


 


 


 

  


Net Cash (Used in) Provided by Investing Activities

   $ (5,300 )   $ (96,471 )   $ 63,854     $ —      $ (37,917 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Debt

   $ (177,954 )   $ —       $ —       $ —      $ (177,954 )

Proceeds from Long-Term Notes

     —         —         1,007       —        1,007  

Dividends Paid

     (22,032 )     —         —         —        (22,032 )

Other Financing Activities

     228       (1,937 )     1,953       —        244  
    


 


 


 

  


Net Cash (Used in) Provided by Financing Activities

   $ (199,758 )   $ (1,937 )   $ 2,960     $ —      $ (198,735 )
    


 


 


 

  


 

NOTE 17—RECENT ACCOUNTING PRONOUNCEMENTS:

 

In March 2004, the FASB issued Emerging Issues Task Force Issue No. 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets” (EITF 04-2). In this Issue, the Task Force reached the consensus that mineral rights are tangible assets. This consensus differs from the requirements of Statement of Financial Accounting Standards No. 141, “Business Combinations” and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” which classify mineral rights as intangible assets. Effective with the 2004 second quarter, CONSOL Energy has reclassified mineral rights as property, plant and equipment in accordance with EITF 04-2.

 

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As permitted by recently issued accounting guidance, CONSOL Energy has recognized the benefits of the Act as of March 8, 2004 by adjusting the three months ended March 31, 2004 net income by approximately $2,200. The benefits of the Act are also recognized as a reduction of other postemployment benefit costs in the three months ended June 30, 2004.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2004

(Dollars in thousands, except per share data)

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entities activities, is entitled to receive a majority of the variable interest entities residual returns, or both. The interpretation also requires disclosures about variable interest entities that the company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 applied immediately to variable interest entities created after January 31, 2003. Effective December 2003, the FASB elected to defer the effective date until the first fiscal year or interim period that begins after March 15, 2004 for variable interest entities in which an enterprise acquired before February 1, 2003. As of June 30, 2004, management believes that CONSOL Energy does not have any variable interest entities, therefore, there is no impact from the adoption of this standard.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

CONSOL Energy had net income of $26 million for the three months ended June 30, 2004 compared to $11 million for the three months ended June 30, 2003. Net income for the 2004 period improved from the 2003 period due to increased sales volumes and increased average sales prices for both coal and gas. The increase in sales volumes and average sales prices was offset, in part, by higher cost of goods sold attributable to higher sales volumes of coal and gas and to higher unit costs of tons of coal and gas produced. Higher cost per ton of coal produced was due to increased Combined Fund premiums and increased maintenance, labor and supply cost per unit. These increases in cost per ton of coal produced were offset, in part, by a reduction in other post-employment benefits due to the recognition of the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 in the 2004 period. Higher cost of gas produced was due to the purchase of firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline because of anticipated curtailments in the shipment capacity allocated to CONSOL Energy as a result of increased demand for pipeline use on the gas pipeline. CONSOL Energy purchased firm transportation capacity on the Columbia Gas Transmission Corporation’s interstate gas pipeline from the May 2004 through October 2004 period to assure pipeline capacity of our projected production. The increase in average cost per thousand cubic feet of gas sold was also attributable to higher royalty expense. Royalty expense increased primarily due to the increase in average sales price per thousand cubic feet in the 2004 period compared to the 2003 period.

 

Total coal sales for the three months ended June 30, 2004 were 17.3 million tons of which 16.7 million tons were produced by CONSOL Energy operations or sold from inventory of company produced coal. This compares with total coal sales of 16.0 million tons for the three months ended June 30, 2003, of which 15.4 million tons were produced by CONSOL Energy operations, by our equity affiliates or sold from inventory of company produced coal. The increase in tons sold was due primarily to increased production as a result of the reactivation of the Loveridge Mine and higher production at the Bailey Mine. These increases in production were offset, in part, by lower recovery ratios (portion of extracted coal versus rock) at Enlow Fork Mine and Buchanan Mine. Production increases were also offset, in part, due to Mine 84 encountering adverse geological conditions. Company produced inventory, including our portion of inventory at equity affiliates, was 1.0 million tons at June 30, 2004 and was 1.3 million tons at December 31, 2003. CONSOL Energy currently has obligations to deliver 99% of its projected 2004 production, subject to the right of customers to defer delivery.

 

Sales volumes of coalbed methane gas, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 10.0% to 13.6 billion cubic feet in the 2004 period compared with 12.4 billion cubic feet in the 2003 period. The increase in sales volumes is primarily due to higher production as a result of additional wells coming on line from the ongoing drilling program. Our average sales price for coalbed methane gas, including sales of equity affiliates, and including the effects of derivative transactions, increased 21.8% to $4.98 per thousand cubic feet in the 2004 period compared with $4.09 per thousand cubic feet in the 2003 period. Gas prices through the second quarter of 2004 were higher than levels during the second quarter of 2003 due to continued concerns about declining North American gas production, as well as increased oil prices and economic recovery increasing demand.

 

CONSOL Energy restated first quarter 2004 net income by approximately $2.2 million to reflect the recognition of the favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as of March 8, 2004 in accordance with recently issued accounting guidance.

 

In July 2004, CONSOL Energy announced that it expects to reactivate the Emery Mine in Utah during the third quarter of 2004. The mine, which has been idle since September 2003, is expected to produce about 0.2 million tons during the remainder of 2004. This production level will retain the federal coal leases that constitute a part of the mine’s reserves. CONSOL Energy is currently discussing sales contracts with potential customers.

 

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On June 30, 2004, CONSOL Energy completed a $600 million senior secured credit facility to replace the existing $267 million facility. The new facility consists of a five-year $400 million revolving credit facility and a six-year $200 million Tranche B credit-linked deposit facility. The revolving credit and Tranche B letter of credit facility will be used for general corporate purposes of CONSOL Energy and its subsidiaries, including working capital, capital expenditures and letter of credit needs. Cash collateralized letters of credit is