Edgar Filing: CONSOL ENERGY INC

Form 10Q

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

¨	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


		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

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.

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.

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.

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.

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.

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

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.

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.

CONSOL ENERGY INC. AND SUBSIDIARIES

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

CONSOL ENERGY INC. AND SUBSIDIARIES

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.

CONSOL ENERGY INC. AND SUBSIDIARIES

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

CONSOL ENERGY INC. AND SUBSIDIARIES

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”.

CONSOL ENERGY INC. AND SUBSIDIARIES

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

CONSOL ENERGY INC. AND SUBSIDIARIES

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

CONSOL ENERGY INC. AND SUBSIDIARIES

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.

CONSOL ENERGY INC. AND SUBSIDIARIES

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.

CONSOL ENERGY INC. AND SUBSIDIARIES

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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

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

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

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	)

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

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

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

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.

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.

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.

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