Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2004

 

or

 

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

 

For the transition period from              to             

 

Commission File Number: 001-14901

 


 

CONSOL ENERGY INC.

(Exact name of registrant as specified in its charter)

 

Delaware   51-0337383

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

1800 Washington Road,

Pittsburgh, Pennsylvania 15241

(Address of principal executive offices, including zip code)

 

(412) 831-4000

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Class


 

Shares outstanding as of November 1, 2004


Common stock, $0.01 par value

  90,485,129

 



Table of Contents

TABLE OF CONTENTS

 

          Page

    

PART I

FINANCIAL INFORMATION

    

ITEM 1.

   CONDENSED FINANCIAL STATEMENTS     
     Consolidated Statements of Income for the three months and nine months ended September 30, 2004 and September 30, 2003    1
     Consolidated Balance Sheets at September 30, 2004 and December 31, 2003    2
     Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2004    3
     Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and September 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 6.

   EXHIBITS    66


Table of Contents

PART I

FINANCIAL INFORMATION

 

ITEM 1.    CONDENSED FINANCIAL STATEMENTS

 

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share data)

 

     Three Months Ended
September 30,


   

Nine Months Ended

September 30,


 
     2004

    2003

    2004

    2003

 

Sales—Outside

   $ 617,738     $ 511,571     $ 1,832,201     $ 1,529,366  

Sales—Related Parties

     —         —         —         1,369  

Freight—Outside

     21,232       27,329       82,439       84,937  

Freight—Related Parties

     —         —         —         562  

Other Income

     20,906       13,260       70,675       52,253  
    


 


 


 


Total Revenue and Other Income

     659,876       552,160       1,985,315       1,668,487  

Cost of Goods Sold and Other Operating Charges

     522,761       415,078       1,452,092       1,206,640  

Freight Expense

     21,232       27,329       82,439       85,499  

Selling, General and Administrative Expense

     18,191       20,218       54,051       56,691  

Depreciation, Depletion and Amortization

     63,015       61,116       184,210       184,115  

Interest Expense

     6,271       8,036       23,653       26,002  

Taxes Other Than Income

     46,772       38,783       143,293       124,345  

Export Sales Excise Tax Resolution

     —         —         —         (614 )
    


 


 


 


Total Costs

     678,242       570,560       1,939,738       1,682,678  
    


 


 


 


Earnings (Loss) Before Income Taxes

     (18,366 )     (18,400 )     45,577       (14,191 )

Income Tax Benefit

     (6,792 )     (12,505 )     (1,964 )     (22,244 )
    


 


 


 


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

     (11,574 )     (5,895 )     47,541       8,053  

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 (Loss)

   $ (11,574 )   $ (5,895 )   $ 130,914     $ 12,821  
    


 


 


 


Basic Earnings Per Share

   $ (0.13 )   $ (0.07 )   $ 1.45     $ 0.16  
    


 


 


 


Dilutive Earnings Per Share

   $ (0.13 )   $ (0.07 )   $ 1.44     $ 0.16  
    


 


 


 


Weighted Average Number of Common Shares Outstanding:

                                

Basic

     90,361,024       79,500,793       90,122,954       79,006,036  
    


 


 


 


Dilutive

     90,361,024       79,500,793       91,018,644       79,247,950  
    


 


 


 


Dividends Paid Per Share

   $ 0.14     $ 0.14     $ 0.42     $ 0.42  
    


 


 


 


 

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

 

1


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

   

(Unaudited)

SEPTEMBER 30,
2004


    DECEMBER 31,
2003


 
ASSETS                

Current Assets:

               

Cash and Cash Equivalents

  $ 12,629     $ 6,513  

Accounts and Notes Receivable:

               

Trade

    115,025       89,971  

Other Receivables

    64,982       91,401  

Inventories

    110,409       103,358  

Deferred Income Taxes

    136,392       125,938  

Recoverable Income Taxes

    24,418       20,257  

Prepaid Expenses

    37,221       33,402  
   


 


Total Current Assets

    501,076       470,840  

Property, Plant and Equipment:

               

Property, Plant and Equipment

    6,411,384       6,274,030  

Less—Accumulated Depreciation, Depletion and Amortization

    3,250,075       3,212,523  
   


 


Total Property, Plant and Equipment—Net

    3,161,309       3,061,507  

Other Assets:

               

Deferred Income Taxes

    350,379       409,090  

Investment in Affiliates

    46,539       84,878  

Restricted Cash

    —         190,918  

Other

    108,276       101,745  
   


 


Total Other Assets

    505,194       786,631  
   


 


TOTAL ASSETS

  $ 4,167,579     $ 4,318,978  
   


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                

Current Liabilities:

               

Accounts Payable

  $ 141,531     $ 134,772  

Short-Term Notes Payable

    45,000       68,760  

Current Portion of Long-Term Debt

    3,831       53,330  

Other Accrued Liabilities

    545,390       567,737  
   


 


Total Current Liabilities

    735,752       824,599  

Total Long-Term Debt

    424,652       441,912  

Deferred Credits and Other Liabilities:

               

Postretirement Benefits Other Than Pensions

    1,517,697       1,494,615  

Pneumoconiosis Benefits

    431,056       441,076  

Mine Closing

    306,481       312,208  

Workers’ Compensation

    135,056       255,785  

Deferred Revenue

    54,311       61,673  

Salary Retirement

    60,412       79,545  

Reclamation

    6,495       14,480  

Other

    110,582       102,448  
   


 


Total Deferred Credits and Other Liabilities

    2,622,090       2,761,830  

Stockholders’ Equity:

               

Common Stock, $.01 par value; 500,000,000 Shares Authorized, 91,267,558 Issued; and 90,443,462 Outstanding at September 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

    839,232       833,675  

Retained Earnings (Deficit)

    (332,402 )     (425,470 )

Other Comprehensive Loss

    (113,354 )     (102,601 )

Common Stock in Treasury, at Cost—824,096 Shares at September 30, 2004 and 1,405,658 Shares at December 31, 2003

    (9,304 )     (15,880 )
   


 


Total Stockholders’ Equity

    385,085       290,637  
   


 


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 4,167,579     $ 4,318,978  
   


 


 

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

 

2


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

 

     Common
Stock


   Capital in
Excess of
Par Value


   Retained
Earnings
(Deficit)


   

Other

Comprehensive
Income (Loss)


    Treasury
Stock


    Total
Stockholders’
Equity


 

Balance—December 31, 2003

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

  

  


 


 


 


(Unaudited)

                                              

Net Income

     —        —        130,914       —         —         130,914  

Treasury Rate Lock (Net of $39 tax)

     —        —        —         (61 )     —         (61 )

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

     —        —        —         807       —         807  

Gas Cash Flow Hedge (Net of $7,320 tax)

     —        —        —         (11,499 )     —         (11,499 )
    

  

  


 


 


 


Comprehensive Income (Loss)

     —        —        130,914       (10,753 )     —         120,161  

Issuance of Restricted Stock Units under the Equity Incentive Plan (195,377 units)

     —        715      —         —         —         715  

Stock-Based Compensation

     —        848      —         —         —         848  

Treasury Stock Issued (581,562 shares)

     —        3,994      —         —         6,576       10,570  

Dividends ($.42 per share)

     —        —        (37,846 )     —         —         (37,846 )
    

  

  


 


 


 


Balance—September 30, 2004

   $ 913    $ 839,232    $ (332,402 )   $ (113,354 )   $ (9,304 )   $ 385,085  
    

  

  


 


 


 


 

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

 

3


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

   

Nine Months Ended

September 30,


 
    2004

    2003

 

Operating Activities:

               

Net Income (Loss)

  $ 130,914     $ 12,821  

Adjustments to Reconcile Net Income (Loss) 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

    184,210       184,115  

Compensation from Restricted Stock Unit Grants

    715       —    

Gain on the Sale of Assets

    (38,869 )     (19,002 )

Amortization of Mineral Leases

    4,294       3,760  

Deferred Income Taxes

    2,022       (8,849 )

Equity in Earnings of Affiliates

    3,951       4,561  

Changes in Operating Assets:

               

Accounts Receivable Securitization

    (5,700 )     115,900  

Accounts and Notes Receivable

    12,815       36,048  

Inventories

    (7,051 )     19,891  

Prepaid Expenses

    (3,820 )     (10,278 )

Changes in Other Assets

    9,066       5,842  

Changes in Operating Liabilities:

               

Accounts Payable

    28,016       (26,460 )

Other Operating Liabilities

    (26,270 )     125,190  

Changes in Other Liabilities

    (14,880 )     (116,300 )

Other

    (707 )     (5,502 )
   


 


      64,419       304,148  
   


 


Net Cash Provided by Operating Activities

    195,333       316,969  
   


 


Investing Activities:

               

Capital Expenditures

    (299,094 )     (186,266 )

Additions to Mineral Leases

    (4,267 )     (4,241 )

Investment in Equity Affiliates

    (2,792 )     (8,626 )

Proceeds from Sales of Assets

    22,829       85,583  
   


 


Net Cash Used in Investing Activities

    (283,324 )     (113,550 )
   


 


Financing Activities:

               

Payments on Commercial Paper

    —         (202,953 )

(Payments on) Proceeds from Miscellaneous Borrowings

    (4,535 )     130  

Payments on Revolver

    (20,000 )     —    

Payments on Long Term Notes

    (45,000 )     —    

Proceeds from Long Term Notes

    —         1,757  

Dividends Paid

    (37,811 )     (33,051 )

Proceeds from Issuance of Common Stock

            189,552  

Withdrawal from (Deposit to) Restricted Cash

    190,918       (918 )

Issuance of Treasury Stock

    10,535       665  
   


 


Net Cash Provided by (Used in) Financing Activities

    94,107       (44,818 )
   


 


Net (Decrease) Increase in Cash and Cash Equivalents

    6,116       158,601  

Cash and Cash Equivalents at Beginning of Period

    6,513       11,517  
   


 


Cash and Cash Equivalents at End of Period

  $ 12,629     $ 170,118  
   


 


 

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

 

4


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine-month period ended September 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 nine months ended September 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. 04-02, “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 1,104,283 shares of common stock were outstanding for the nine month period ended September 30, 2004, 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 1,730,205 shares of common stock were outstanding for the nine month period ended September 30, 2003, but were not included in the computation of diluted earnings per share because the options were antidilutive. Due to the net loss position for the three months ended September 30, 2004 and 2003, no options to purchase shares were included in the computation of diluted earnings per share because the effect would be antidilutive.

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 September 30,


   

For the

Nine Months

Ended September 30,


     2004

    2003

    2004

   2003

Earnings before cumulative effect of change in accounting

   $ (11,574 )   $ (5,895 )   $ 47,541    $ 8,053

Cumulative effect of accounting change

     —         —         83,373      4,768
    


 


 

  

Net Income (Loss)

   $ (11,574 )   $ (5,895 )   $ 130,914    $ 12,821
    


 


 

  

Average shares of common stock Outstanding:

                             

Basic

     90,361,024       79,500,793       90,122,954      79,006,036

Effect of stock options

     —         —         895,690      241,914
    


 


 

  

Diluted

     90,361,024       79,500,793       91,018,644      79,247,950

Earnings per share:

                             

Basic before cumulative effect

   $ (0.13 )   $ (0.07 )   $ 0.53    $ 0.10
    


 


 

  

Basic after cumulative effect

   $ (0.13 )   $ (0.07 )   $ 1.45    $ 0.16
    


 


 

  

Diluted before cumulative effect

   $ (0.13 )   $ (0.07 )   $ 0.52    $ 0.10
    


 


 

  

Diluted after cumulative effect

   $ (0.13 )   $ (0.07 )   $ 1.44    $ 0.16
    


 


 

  

 

NOTE 2—DISPOSITIONS:

 

In the nine months ended September 30, 2004, CONSOL Energy finalized working capital adjustment items and remaining liability transfers related to the sale of its Canadian coal assets and related port facilities. The sale was completed in February 2003. The finalization of these items resulted in CONSOL Energy making a cash payment to the buyer of $4,167 and recording a pre-tax gain of $3,561.

 

In February 2004, CONSOL Energy sold the stock of 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 credit facility debt and the associated interest rate swaps and foreign currency hedges that a subsidiary of CNX Australia Pty Limited had incurred in connection with the credit facility. CNX Australia Pty Limited, through its wholly owned subsidiary CONSOL Energy Australia Pty Limited, owned a 50% interest in the Glennies Creek Mine in New South Wales, Australia with its joint venture partner Maitland Main Collieries Pty Limited, an affiliate of AMCI, Inc. The sale resulted in a pre-tax gain of $14,374.

 

NOTE 3—STOCK-BASED COMPENSATION:

 

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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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
September 30,


    Nine Months Ended
September 30,


 
     2004

    2003

    2004

    2003

 

Net income (loss), as reported

   $ (11,574 )   $ (5,895 )   $ 130,914     $ 12,821  

Add: Stock-based compensation expense for restricted stock units

     429       —         715       —    

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

     (1,705 )     (1,002 )     (4,112 )     (2,506 )
    


 


 


 


Pro forma net income (loss)

   $ (12,850 )   $ (6,897 )   $ 127,517     $ 10,315  
    


 


 


 


Earnings per share:

                                

Basic—as reported

   $ (0.13 )   $ (0.07 )   $ 1.45     $ 0.16  
    


 


 


 


Basic—pro forma

   $ (0.14 )   $ (0.09 )   $ 1.41     $ 0.13  
    


 


 


 


Diluted—as reported

   $ (0.13 )   $ (0.07 )   $ 1.44     $ 0.16  
    


 


 


 


Diluted—pro forma

   $ (0.14 )   $ (0.09 )   $ 1.40     $ 0.13  
    


 


 


 


 

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 195,377 restricted stock units were granted during the nine months ended September 30, 2004, vesting over a weighted average period of 3.56 years. Each restricted stock unit represents one share of common stock. 194,807 of the shares represented by the restricted stock units had a market value of $30.78 per share (based upon the closing share price) at date of grant and 570 of the shares represented by these restricted stock units had a market value of $35.12 per share (based upon the closing share price) at date of grant. Compensation expense will be recognized over the vesting period of the units.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 nine months ended September 30 are as follows:

 

    Pension Benefits

    Other Benefits

   

Three Months

Ended

September 30,


   

Nine Months

Ended

September 30,


   

Three Months

Ended

September 30,


 

Nine Months

Ended

September 30,


    2004

    2003

    2004

    2003

    2004

  2003

  2004

    2003

Service cost

  $ 5,166     $ 5,765     $ 15,499     $ 17,295     $ 2,978   $ 3,237   $ 9,153     $ 9,712

Interest cost

    7,054       7,059       21,161       21,178       31,383     33,568     97,228       100,703

Expected return on plan assets

    (4,016 )     (4,953 )     (12,049 )     (14,861 )     —       —       —         —  

Amortization costs

    6,024       4,620       18,073       13,859       6,542     7,870     23,362       23,610

Curtailment gain

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


 


 


 


 

 

 


 

Net periodic benefit cost

  $ 14,228     $ 12,491     $ 42,684     $ 37,471     $ 40,903   $ 44,675   $ 126,289     $ 134,025
   


 


 


 


 

 

 


 

 

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 September 30, 2004, $56,092 of contributions has been made. CONSOL Energy presently anticipates contributing an additional $1,322 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 nine months ended September 30, 2004 in accordance with FASB Staff Position No. FAS 106-2, “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 $21,625 for the three and nine months ended September 30, 2004, and a reduction of $182,256 to our December 31, 2003 estimated other postretirement benefit obligation.

 

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. For the nine months ended September 30, 2004, $93,876 of other post employment benefits has been paid.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 nine months ended September 30 are as follows:

 

     CWP

    Workers’ Compensation

    

Three Months
Ended

September 30,


   

Nine Months

Ended

September 30,


    Three Months
Ended
September 30,


   Nine Months
Ended
September 30,


     2004

    2003

    2004

    2003

    2004

   2004

Service cost

   $ 1,068     $ 1,012     $ 3,205     $ 3,037     $ 11,446    $ 34,338

Interest cost

     3,120       3,412       9,360       10,237       2,068      6,203

Expected return on plan assets

     —         (50 )     —         (150 )     —        —  

Amortization of actuarial gain

     (5,642 )     (6,112 )     (16,928 )     (18,338 )     —        —  

Legal and administrative costs

     675       525       2,025       1,575       609      1,826
    


 


 


 


 

  

Net periodic (benefit)cost

   $ (779 )   $ (1,213 )   $ (2,338 )   $ (3,639 )   $ 14,123    $ 42,367
    


 


 


 


 

  

 

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 nine months ended September 30, 2004, $8,778 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 nine months ended September 30, 2004, $38,406 of workers’ compensation benefits have been paid.

 

CONSOL Energy also has expensed $10,596 related to workers’ compensation for the nine months ended September 30, 2004 for various state administrative fees and surety 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% per annum, declining to 4.75% per annum in 2010. CONSOL Energy believes this change was preferable since it aligns the accounting with the Company’s accounting for its 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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 to workers’ compensation for the three and nine months ended September 30, 2003 was $14,740 and $39,881, respectively. Pro forma net income for the three and nine months ended September 30, 2003 would have been a loss of $8,337 and income of $5,680, respectively, had the change in accounting for workers’ compensation costs occurred at the beginning of 2003, assuming total workers’ compensation expense of $2,442 and $7,141, respectively, for those periods. Pro forma net income per basic common share and pro forma net income per diluted common share for the three months and nine months ended September 30, 2003 would have been a loss of $0.10 and income of $0.07, 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 nine months ended September 30, 2004 were $60 and $886, respectively. There were no other adjustments made to the restructuring liability in the three or nine months ended September 30, 2004. The restructuring liability was fully paid at September 30, 2004.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 Nine Months Ended

September 30,


 
    2004

    2003

 
    Amount

    Percent

    Amount

    Percent

 

Statutory U.S. federal income tax rate

  $ 15,952     35.0 %   $ (4,967 )   35.0 %

Excess tax depletion

    (12,257 )   (26.9 )%     (19,698 )   138.8 %

Effect from sale of foreign companies

    (5,319 )   (11.7 )%     —       —    

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

    (2,665 )   (5.9 )%     —       —    

Net Effect of state tax

    3,269     7.2 %     (585 )   4.1 %

Net Effect of foreign tax

    (1,188 )   (2.6 )%     2,943     (20.7 )%

Other

    244     0.6 %     63     (0.4 )%
   


 

 


 

Income Tax Benefit / Effective Rate

  $ (1,964 )   (4.3 )%   $ (22,244 )   156.8 %
   


 

 


 

 

The effective tax rate for the nine months ended September 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 CONSOL Energy’s wholly owned foreign companies. 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. The 2003 income tax benefit was determined using a discrete tax calculation for the nine months ended September 30, 2003. An annual effective rate was not applied to the nine-month results due to the sensitivity of the rate to small changes in forecasted income. 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 nine months ended September 30, 2004 and 2003, respectively. These adjustments are included in Net Effect of foreign tax and Effect from sale of foreign companies for nine months ended September 30, 2004 and Other for the nine months ended September 30, 2003.

 

NOTE 9—INVENTORIES:

 

The components of inventories consist of the following:

 

     September 30,
2004


   December 31,
2003


Coal

   $ 28,958    $ 28,362

Merchandise for resale

     24,771      21,407

Supplies

     56,680      53,589
    

  

Total Inventories

   $ 110,409    $ 103,358
    

  

 

 

NOTE 10—ACCOUNTS RECEIVABLE SECURITIZATION

 

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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 $583 and $1,822 for the three and nine months ended September 30, 2004, respectively. Costs associated with the receivables facility totaled $428 and $691 for the three and nine months ended September 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 September 30, 2004 and December 31, 2003, eligible accounts receivable totaled approximately $122,400 and $108,600, respectively. The subordinated retained interest at September 30, 2004 and December 31, 2003 was approximately $20,100 and $600, respectively. Accounts receivable totaling $102,300 and $108,000 were removed from the consolidated balance sheet at September 30, 2004 and December 31, 2003, respectively. CONSOL Energy reduced its accounts receivable securitization program utilization by $5,700 in the nine months ended September 30, 2004. This reduction is included in cash flows from operating activities in the consolidated statement of cash flows.

 

The key economic assumptions used to measure the retained interest at the date of the securitization for all such sales completed in 2004 were a discount rate of 2.39% and an estimated life for eligible accounts receivable of 33 days. At September 30, 2004 an increase in the discount rate or estimated life of 10% and 20% would have reduced the fair value of the retained interest by $27 and $54, respectively. These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumption to the change in fair value may not be linear. Also, in this example, the effect of a variation in a particular assumption on the fair value of the subordinated retained interest is calculated without changing any other assumption. Changes in any one factor may result in changes in others.

 

NOTE 11—PROPERTY, PLANT AND EQUIPMENT:

 

 

     September 30,
2004


   December 31,
2003


Coal properties and surface lands

   $ 1,453,040    $ 1,006,345

Mineral Interests

     775,441      778,934

Plant & equipment

     3,113,299      3,487,219

Mine development

     401,293      363,912

Airshafts

     668,311      637,620
    

  

Total Gross

     6,411,384      6,274,030

Less: Accumulated depreciation, depletion and amortization

     3,250,075      3,212,523
    

  

Total net property, plant and equipment

   $ 3,161,309    $ 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. 04-02, “Whether Mineral Rights Are Tangible or Intangible Assets”.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 a previous facility of $266,750. The facility 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 under the revolving credit facility for periods of 1 to 180 days depending on the interest rate method chosen by CONSOL Energy. Interest is based, at its option, upon the Prime (Base) Rate or London Interbank Offered Rates (LIBOR) plus a spread, which is dependent on CONSOL Energy’s 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. Cash collateralized letters of credit issued before the senior credit facility have been reissued under the Tranche B facility and $190,000 of restricted cash that previously served as collateral for the issuance of the letters of credit was released. The released cash was used to pay down short-term debt.

 

The $600,000 senior credit facility agreement has various covenants, including covenants that limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock 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 1.83 to 1.0 at September 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 9.56 to 1.0 at September 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 September 30, 2004, the revolving credit facility had $45,000 of borrowings outstanding and $74,264 of letters of credit outstanding, leaving $280,736 of capacity available for borrowings and the issuance of letters of credit. At September 30, 2004, the Tranche B credit-linked deposit facility had $200,000 of letters of credit outstanding and CONSOL Energy has reached the Tranche B credit-linked deposit facility’s capacity for issuance of letters of credit.

 

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 24,600 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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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 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 nine months ended September 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. Longwall coal production, which accounts for the majority of coal normally produced at the mine, resumed on February 10, 2003.

 

CONSOL Energy has filed insurance claims related to the damage incurred by this fire including claims under its business interruption policy. The claims process is lengthy and its outcome cannot be predicted with certainty. To date, no payments with respect to the Mine 84 fire have been received. No benefit for business interruption recovery have been recorded to date.

 

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, $20,033 of which is included in the nine months ended September 30, 2003, and expected insurance recovery for damages was reflected in other receivables. Insurance payments for damages of $25,000 have been received by CONSOL Energy as of September 30, 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 2004.

 

On October 21, 2003, a 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. The 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

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

July 18, 2002, the defendants issued false and misleading statements to the public that failed to disclose or misrepresented the following, among other things that: (a) CONSOL 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 complaint asks the court to (1) award unspecified damages to plaintiff and (2) award plaintiff reasonable costs and expenses incurred in connection with this action, including counsel fees and expert fees. Two other class action complaints have purportedly been filed in the United States District Court for the Western District of Pennsylvania against CONSOL Energy and certain officers and directors. CONSOL Energy has not yet been served with either purported 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 September 30, 2004.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Guarantee


   Term

   Maximum
Payments


Reclamation Surety Bonds (a)

   Various    $ 264,688

Workers’ Compensation Surety Bonds (b)

   Various      186,678

1992 Benefit Plan Letter of Credit (c)

   10/2002 -10/2004      155,484

Gas Sales Agreements (d)

   Various      130,213

Ohio Power Company (e)

   6/1993 -6/2006      107,310

Longwall Lease Agreements (f)

   Various      85,601

Workers’ Compensation Letters of Credit (g)

   Various      76,998

Federal Black Lung Surety Bonds (h)

   Various      65,800

Ginger Hills Synfuels, LLC (i)

   1/2003 -12/2007      51,060

Ohio Valley Electric Corporation (j)

   5/2000 -12/2006      47,414

1992 Benefit Plan Surety Bond (k)

   8/1999 -8/2005      46,569

Gas Hedging Agreements (l)

   Various      27,396

Monongahela Power (m)

   3/1969 -12/2005      27,734

Travelers Casualty & Surety Co. (n)

   1/2004 -1/2005      19,214

West Penn Power Company (o)

   7/1967 -12/2004      11,900

Environmental Liabilities Letters of Credit (p)

   Various      10,855

Miscellaneous Surety Bonds (q)

   Various      9,210

Ontario Power Generation, Inc. (r)

   1/2005 -12/2006      7,275

Zurich American Insurance (s)

   11/2003 -11/2004      7,000

Duke Energy Corporation (t)

   2/2003 -12/2004      3,581

Key Corp Leasing (u)

   7/2001 -12/2011      2,851

Ontario Power Generation, Inc. (v)

   1/2004 -12/2006      2,794

The Cincinnati Gas & Electric Co. (w)

   1/2005 -12/2005      2,625

Court Bonds (x)

   Various      2,527

Ontario Power Generation, Inc. (y)

   10/2003 -12/2004      1,890

Hooks Industrial (z)

   2/2004 -2/2005      1,800

Reliant Energy (aa)

   12/2002 -12/2005      1,575

Centimark Corp. (bb)

   8/2000 -7/2008      1,176

Orion Power (cc)

   12/2003 -12/2006      800

Marathon Ashland Petroleum LLC (dd)

   4/2004 -4/2005      750

Ontario Power Generation, Inc. (ee)

   10/2003 -12/2004      666

Orion Power (ff)

   12/2002 -12/2005      635

Highmark Life & Casualty (gg)

   5/2003 -5/2005      500

Travelers Casualty & Surety Co. (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      63

Henry Berdine (ll)

   4/2004 -4/2005      9
         

Total Guarantees

        $ 1,361,297
         


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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

(b) 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.

 

(c) 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.

 

(d) 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 September 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 September 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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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, in an amount of $535 per month from May 2004-October 2004, or approximately $3,213. The guaranty shall continue in full force and effect until April 14, 2005, and year-to-year thereafter unless terminated at any time by CONSOL Energy.

 

(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’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: CG Commercial/GESF-F Inc. $24,234; PNC Leasing, LLC $22,371; LaSalle National Leasing Corp. $17,552; Orix Financial Services $12,257; U.S. Bancorp $9,187.

 

(g) CONSOL Energy and its subsidiaries obtained the issuance of various letters of credit related to CONSOL Energy’s self-insurance program for workers’ compensation. If CONSOL Energy, or any of these subsidiaries, fails to pay the workers’ compensation claims, the beneficiary will draw on the letter of credit. At September 30, 2004, the individual guarantees are as follows: WestVirginia Workers’ Compensation Division $50,477; Illinois Industrial Commission $10,225; Old Republic Insurance $6,403; Commonwealth of Kentucky $5,443; Travelers Casualty & Surety Company $3,000; U.S. Department of Labor $2,150; Maryland Workers’ Compensation Commission $100.

 

(h) CONSOL Energy and its subsidiaries have obtained surety bonds related to coal workers’ pneumoconiosis (CWP). These bonds are necessary as a result of CONSOL Energy being self insured for coal workers’ pneumoconiosis, and will be called if CONSOL Energy or any of its subsidiaries fails to pay coal workers’ pneumoconiosis claims.

 

(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 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.

 

(k) On August 27, 1999, a subsidiary of CONSOL Energy obtained a surety bond related to the 1992 Benefit Plan obligations. This surety bond will be drawn upon if the subsidiary fails to pay the claims related to this plan.

 

(l) CONSOL Energy has entered into various swap agreements that cover the gas derivative hedging activity of CNX Gas Company LLC. The parties to the individual agreements are as follows: Morgan Stanley Capital Group Inc. $23,760; Citibank $3,636.

 

(m) CONSOL Energy is the guarantor of the Coal Supply Agreement dated March 1, 1969 between one of its subsidiaries and Monogahela Power. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

 

(n) 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

(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 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. 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.

 

(q) 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.

 

(r) CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 1, 2005 between several of its subsidiaries and Ontario Power Generation, Inc. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

 

(s) 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 insurance claims and then bills CONSOL Energy for reimbursement. This letter of credit will be drawn upon if CONSOL Energy fails to reimburse Zurich American for these payments.

 

(t) 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.

 

(u) 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.

 

(v) 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.

 

(w) CONSOL Energy is the guarantor of the Coal Supply Agreement dated January 1, 2005 between one of its subsidiaries and The Cincinnati Gas & Electric Co. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

 

(x) 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.

 

(y) CONSOL Energy is the guarantor of the Coal Supply Agreement dated October 1, 2003 between several of its subsidiaries and Ontario Power Generation, Inc. Under this agreement, CONSOL Energy guarantees full and timely performance of all obligations of its subsidiaries arising from the Coal Supply Agreement.

 

(z) 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

(aa) 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.

 

(bb) 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.

 

(cc) 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.

 

(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 if CONSOL Energy fails to perform its obligation.

 

(ee) CONSOL Energy is the guarantor of the Coal Supply Agreement dated October 1, 2003 between several of its subsidiaries and Ontario Power Generation, Inc. Under this agreement, CONSOL Energy guarantees the full and timely performance of all obligations of these subsidiaries with respect to this agreement.

 

(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 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 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.

 

(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 Act notice lawsuit. This letter of credit will be called upon if the subsidiary fails to fulfill the obligation of the required court bond.

 

(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 insurance claims and then bills CONSOL Energy, which is self-insured, for reimbursement. The letter of credit will be drawn upon if CONSOL Energy fails 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.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

(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 obligation and promises prompt and full payment to Henry Berdine if the subsidiary fails to satisfy the obligation.

 

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 December 31, 2003 balance sheet for restricted cash approximated its fair value. Restricted cash was 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 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. There were no outstanding balances owed under capital leases at September 30, 2004.

 

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:

 

     September 30, 2004

    December 31, 2003

 
     Carrying
Amount


    Fair Value

    Carrying
Amount


    Fair Value

 

Cash and cash equivalents

   $ 12,629     $ 12,629     $ 6,513     $ 6,513  

Restricted cash

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

Short-term notes payable

   $ (45,000 )   $ (45,000 )   $ (68,760 )   $ (68,760 )

Long-term debt

   $ (428,483 )   $ (464,437 )   $ (490,504 )   $ (512,215 )

Capital Leases

   $ —       $ —       $ (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

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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 nine months ended September 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 nine months ended September 30, 2004, the Central Appalachian aggregated segment includes the following mines: Jones Fork, Mill Creek and Wiley-Mill Creek. For the three and nine months ended September 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 segment includes terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. The segment information presented for prior periods has been restated to be consistent with the information presented for the current period.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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

 

    Northern
Appalachian


    Central
Appalachian


    Metallurgical

    Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 331,802     $ 50,397     $ 62,603     $ 28,046     $ 472,848     $ 118,229   $ 26,661     $ —       $ 617,738  

Freight—outside

    —         —         —         21,232       21,232       —       —         —         21,232  

Intersegment transfers

    —         —         —         —         —         870     23,917       (24,787 )     —    
   


 


 


 


 


 

 


 


 


Total Sales and Freight

  $ 331,802     $ 50,397     $ 62,603     $ 49,278     $ 494,080     $ 119,099   $ 50,578     $ (24,787 )   $ 638,970  
   


 


 


 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ (10,256 )   $ (2,387 )   $ (187 )   $ (22,088 )   $ (34,918 )   $ 28,731   $ (7,647 )   $ (4,532 )   $ (18,366 )(A)
   


 


 


 


 


 

 


 


 


Segment asset

                                  $ 2,748,904     $ 684,719   $ 206,563     $ 527,393     $ 4,167,579 (B)
                                   


 

 


 


 


Depreciation, depletion and amortization

                                  $ 51,307     $ 8,383   $ 3,325     $ —       $ 63,015  
                                   


 

 


 


 


Capital Expenditures

                                  $ 70,703     $ 22,248   $ 1,546     $ —       $ 94,497  
                                   


 

 


 


 



(A) Includes equity in earnings (losses) of unconsolidated affiliates of $(225) and $(331) for Gas and All Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of $20,189 and $26,350 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 September 30, 2003:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

    Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 295,809   $ 48,164     $ 67,551     $ 30,658     $ 442,182     $ 50,707   $ 18,682     $ —       $ 511,571  

Freight—outside

    —       —         —         27,329       27,329       —       —         —         27,329  

Intersegment transfers

    —       —         —         —         —         708     21,745       (22,453 )     —    
   

 


 


 


 


 

 


 


 


Total Sales and Freight

  $ 295,809   $ 48,164     $ 67,551     $ 57,987     $ 469,511     $ 51,415   $ 40,427     $ (22,453 )   $ 538,900  
   

 


 


 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 18,985   $ (1,881 )   $ (1,789 )   $ (39,897 )   $ (24,582 )   $ 17,215   $ (4,797 )   $ (6,236 )   $ (18,400 )(C)
   

 


 


 


 


 

 


 


 


Segment asset

                                $ 2,844,990     $ 534,995   $ 189,323     $ 732,030     $ 4,301,338 (D)
                                 


 

 


 


 


Depreciation, depletion and amortization

                                $ 48,498     $ 9,340   $ 3,278     $ —       $ 61,116  
                                 


 

 


 


 


Capital Expenditures

                                $ 58,106     $ 15,930   $ 1,510     $ —       $ 75,546  
                                 


 

 


 


 



(C) Includes equity in earnings (losses) of unconsolidated affiliates of $(792), $(217) and $1,525 for Other Coal, Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $39,599, $17,647 and $28,759 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Industry segment results for the nine months ended September 30, 2004:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

  Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 1,062,921   $ 163,021     $ 185,215   $ 73,265     $ 1,484,422     $ 271,876   $ 75,903     $ —       $ 1,832,201  

Freight—outside

    —       —         —       82,275       82,275       —       164       —         82,439  

Intersegment transfers

    —       —         —       —         —         2,654     73,401       (76,055 )     —    
   

 


 

 


 


 

 


 


 


Total Sales and Freight

  $ 1,062,921   $ 163,021     $ 185,215   $ 155,540     $ 1,566,697     $ 274,530   $ 149,468     $ (76,055 )   $ 1,914,640  
   

 


 

 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 67,211   $ (542 )   $ 1,658   $ (78,656 )   $ (10,329 )   $ 96,374   $ (3,040 )   $ (37,428 )   $ 45,577 (E)
   

 


 

 


 


 

 


 


 


Segment asset

                              $ 2,748,904     $ 684,719   $ 206,563     $ 527,393     $ 4,167,579 (F)
                               


 

 


 


 


Depreciation, depletion and amortization

                              $ 150,012     $ 24,183   $ 10,015     $ —       $ 184,210  
                               


 

 


 


 


Capital Expenditures

                              $ 238,783     $ 57,552   $ 2,759     $ —       $ 299,094  
                               


 

 


 


 



(E) Includes equity in earnings (losses) of unconsolidated affiliates of $(2,733), $(521) and $(697) for Other Coal, Gas and All Other, respectively.
(F) Includes investments in unconsolidated equity affiliates of $20,189 and $26,350 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Industry segment results for the nine months ended September 30, 2003:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

  Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 899,549   $ 145,721     $ 188,436   $ 85,549     $ 1,319,255     $ 153,232   $ 56,879     $ —       $ 1,529,366  

Sales—related party

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

Freight—outside

    —       —         —       84,791       84,791       —       146       —         84,937  

Freight—related party

    —       —         —       562       562       —       —         —         562  

Intersegment transfers

    —       —         —       —         —         2,493     68,611       (71,104 )     —    
   

 


 

 


 


 

 


 


 


Total Sales and Freight

  $ 899,549   $ 146,988     $ 188,538   $ 170,902     $ 1,405,977     $ 155,725   $ 125,636     $ (71,104 )   $ 1,616,234  
   

 


 

 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 81,281   $ (163 )   $ 9,080   $ (114,824 )   $ (24,626 )   $ 50,472   $ (16,017 )   $ (24,020 )   $ (14,191 )(G)
   

 


 

 


 


 

 


 


 


Segment asset

                              $ 2,844,990     $ 534,995   $ 189,323     $ 732,030     $ 4,301,338 (H)
                               


 

 


 


 


Depreciation, depletion and amortization

                              $ 147,248     $ 27,963   $ 8,904     $ —       $ 184,115  
                               


 

 


 


 


Capital Expenditures

                              $ 140,853     $ 42,842   $ 2,571     $ —       $ 186,266  
                               


 

 


 


 



(G) Includes equity in earnings (losses) of unconsolidated affiliates of $(4,223), $(823) and $485 for Other Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $39,599 $17,647 and $28,759 for Coal, Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 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 September 30,


    For the Nine Months
Ended September 30,


 
     2004

    2003

    2004

    2003

 

Segment earnings (loss) before income taxes for total reportable business segments

   $ (6,187 )   $ (7,367 )   $ 86,045     $ 25,846  

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

     (7,647 )     (4,797 )     (3,040 )     (16,017 )

Incentive compensation

     4,883       4,093       (10,464 )     —    

Compensation from restricted stock unit grants

     (429 )     —         (715 )     —    

Other post employee benefit curtailment gain

     —         —         3,454       —    

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

     (8,986 )     (10,329 )     (29,703 )     (24,020 )
    


 


 


 


Earnings (Loss) Before Income Taxes

   $ (18,366 )   $ (18,400 )   $ 45,577     $ (14,191 )
    


 


 


 


 

     September 30,

     2004

   2003

Total Assets:

             

Segment assets for total reportable business segments

   $ 3,433,623    $ 3,379,985

Segment assets for all other businesses

     206,563      189,323

Items excluded from segment assets:

             

Cash and other investments

     13,169      170,488

Restricted Cash

     —        918

Deferred tax assets

     486,771      522,466

Recoverable income taxes

     24,418      35,141

Intangible asset—overfunded pension plan

     468      55

Bond issuance costs

     2,567      2,962
    

  

Total Consolidated Assets

   $ 4,167,579    $ 4,301,338
    

  

 

NOTE 16—GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION:

 

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

 

26


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

   $ —       $ 597,093     $ 20,645     $ —       $ 617,738  

Freight—Outside

     —         21,232       —         —         21,232  

Other Income (including equity earnings)

     (6,608 )     14,968       4,757       7,789       20,906  
    


 


 


 


 


Total Revenue and Other Income

     (6,608 )     633,293       25,402       7,789       659,876  

Cost of Goods Sold and Other Operating Charges

     (25 )     506,221       48,986       (32,421 )     522,761  

Intercompany Activity

     (73 )     (11,551 )     (21,624 )     33,248       —    

Freight Expense

     —         21,232       —         —         21,232  

Selling, General and Administrative Expense

     —         17,942       249       —         18,191  

Depreciation, Depletion and Amortization

     1,489       61,274       252       —         63,015  

Interest Expense

     4,756       1,505       10       —         6,271  

Taxes Other Than Income

     788       45,589       395       —         46,772  
    


 


 


 


 


Total Costs

     6,935       642,212       28,268       827       678,242  
    


 


 


 


 


Earnings (Loss) Before Income Taxes

     (13,543 )     (8,919 )     (2,866 )     6,962       (18,366 )

Income Tax Expense (Benefit)

     (1,969 )     (3,820 )     (1,003 )     —         (6,792 )
    


 


 


 


 


Net Income (Loss)

   $ (11,574 )   $ (5,099 )   $ (1,863 )   $ 6,962     $ (11,574 )
    


 


 


 


 


 

27


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Balance Sheet at September 30, 2004:

 

    Parent

  Guarantors

    Non-Guarantors

  Elimination

    Consolidated

Assets:

                                 

Current Assets:

                                 

Cash and Cash Equivalents

  $ 8,596   $ 342     $ 3,691   $ —       $ 12,629

Accounts and Notes Receivable:

                                 

Trade

    —       513       114,512     —         115,025

Other

    4,115     57,597       3,270     —         64,982

Inventories

    206     84,831       25,372     —         110,409

Deferred Income Taxes

    136,392     —         —       —         136,392

Recoverable Income Taxes

    24,418     —         —       —         24,418

Prepaid Expenses

    13,596     23,123       502     —         37,221
   

 


 

 


 

Total Current Assets

    187,323     166,406       147,347     —         501,076

Property, Plant and Equipment:

                                 

Property, Plant and Equipment

    99,430     6,286,871       25,083     —         6,411,384

Less-Accumulated Depreciation, Depletion and Amortization

    51,490     3,178,729       19,856     —         3,250,075
   

 


 

 


 

Property, Plant and Equipment—Net

    47,940     3,108,142       5,227     —         3,161,309

Other Assets:

                                 

Deferred Income Taxes

    350,379     —         —       —         350,379

Investment in Affiliates

    1,519,937     29,393       —       (1,502,791 )     46,539

Other

    24,550     83,684       42     —         108,276
   

 


 

 


 

Total Other Assets

    1,894,866     113,077       42     (1,502,791 )     505,194
   

 


 

 


 

Total Assets

  $ 2,130,129   $ 3,387,625     $ 152,616   $ (1,502,791 )   $ 4,167,579
   

 


 

 


 

Liabilities and Stockholders’ Equity:

                                 

Current Liabilities:

                                 

Accounts Payable

  $ 100,092   $ 23,383     $ 18,056   $ —       $ 141,531

Accounts Payable (Recoverable)-
Related Parties

    1,150,753     (1,262,261 )     111,508     —         —  

Short-Term Notes Payable

    45,000     —         —       —         45,000

Current Portion of Long-Term Debt

    —       3,831       —       —         3,831

Other Accrued Liabilities

    83,644     457,561       4,185     —         545,390
   

 


 

 


 

Total Current Liabilities

    1,379,489     (777,486 )     133,749     —         735,752

Long-Term Debt:

    248,468     176,184       —       —         424,652

Deferred Credits and Other Liabilities:

                                 

Postretirement Benefits Other Than Pensions

    —       1,517,697       —       —         1,517,697

Pneumoconiosis Benefits

    —       431,056       —       —         431,056

Mine Closing

    —       306,481       —       —         306,481

Workers’ Compensation

    40     135,016             —         135,056

Deferred Revenue

    —       54,311       —       —         54,311

Salary Retirement

    60,398     14       —       —         60,412

Reclamation

    —       6,495       —       —         6,495

Other

    56,649     53,384       549     —         110,582
   

 


 

 


 

Total Deferred Credits and Other Liabilities

    117,087     2,504,454       549     —         2,622,090

Stockholders’ Equity

    385,085     1,484,473       18,318     (1,502,791 )     385,085
   

 


 

 


 

Total Liabilities and Stockholders’ Equity

  $ 2,130,129   $ 3,387,625     $ 152,616   $ (1,502,791 )   $ 4,167,579
   

 


 

 


 

 

28


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Three Months Ended September 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash (Used in) Provided by Operating Activities

   $ (82,416 )   $ 90,240     $ (128 )   $ —      $ 7,696  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (2,993 )   $ (91,504 )   $ —       $ —      $ (94,497 )

Investment in Equity Affiliates

     —         (10 )     (171 )     —        (181 )

Other Investing Activities

     —         1,576       271       —        1,847  
    


 


 


 

  


Net Cash (Used in) Provided by Investing Activities

   $ (2,993 )   $ (89,938 )   $ 100     $ —      $ (92,831 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Debt

   $ 45,000     $ —       $ —       $ —      $ 45,000  

Payments on Long-Term Notes

     —         —         —         —        —    

Dividends Paid

     (12,637 )     —         —         —        (12,637 )

Withdrawal from Restricted Cash

     918       —         —         —        918  

Other Financing Activities

     4,552       (197 )     —         —        4,355  
    


 


 


 

  


Net Cash Provided by (Used in) Financing Activities

   $ 37,833     $ (197 )   $ —       $ —      $ 37,636  
    


 


 


 

  


 

29


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

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

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

   $ —       $ 495,727     $ 15,844     $ —       $ 511,571  

Freight—Outside

     —         27,329       —         —         27,329  

Other Income (including equity earnings)

     (1,039 )     7,608       2,894       3,797       13,260  
    


 


 


 


 


Total Revenue and Other Income

     (1,039 )     530,664       18,738       3,797       552,160  

Cost of Goods Sold and Other Operating Charges

     (810 )     420,593       25,942       (30,647 )     415,078  

Intercompany Activity

     (51 )     (12,271 )     (18,577 )     30,899       —    

Freight Expense

     —         27,329       —         —         27,329  

Selling, General and Administrative Expense

     —         19,489       729       —         20,218  

Depreciation, Depletion and Amortization

     1,257       59,592       267       —         61,116  

Interest Expense

     5,179       2,631       226       —         8,036  

Taxes Other Than Income

     945       37,438       400       —         38,783  
    


 


 


 


 


Total Costs

     6,520       554,801       8,987       252       570,560  
    


 


 


 


 


Earnings (Loss) Before Income Taxes

     (7,559 )     (24,137 )     9,751       3,545       (18,400 )

Income Tax Expense (Benefit)

     (1,664 )     (12,581 )     1,740       —         (12,505 )
    


 


 


 


 


Net Income (Loss)

   $ (5,895 )   $ (11,556 )   $ 8,011     $ 3,545     $ (5,895 )
    


 


 


 


 


 

30


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Balance Sheet at December 31, 2003:

 

    Parent

  Guarantors

    Non-Guarantors

  Elimination

    Consolidated

Assets:

                                 

Current Assets:

                                 

Cash and Cash Equivalents

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

Accounts and Notes Receivable:

                                 

Trade

    —       418       89,553     —         89,971

Other

    916     87,327       3,158     —         91,401

Inventories

    174     80,021       23,163     —         103,358

Deferred Income Taxes

    125,938     —         —       —         125,938

Recoverable Income Taxes

    20,257     —         —       —         20,257

Prepaid Expenses

    6,094     26,781       527     —         33,402
   

 


 

 


 

Total Current Assets

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

Property, Plant and Equipment:

                                 

Property, Plant and Equipment

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

Less-Accumulated Depreciation, Depletion and Amortization

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

 


 

 


 

Property, Plant and Equipment—Net

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

Other Assets:

                                 

Deferred Income Taxes

    409,090     —         —       —         409,090

Investment in Affiliates

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

Restricted Cash

    190,000     918       —       —         190,918

Other

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

 


 

 


 

Total Other Assets

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

 


 

 


 

Total Assets

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

 


 

 


 

Liabilities and Stockholders’ Equity:

                                 

Current Liabilities:

                                 

Accounts Payable

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

Accounts Payable (Recoverable)-
Related Parties

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

Short-Term Notes Payable

    65,000     —         3,760     —         68,760

Current Portion of Long-Term Debt

    —       53,330       —       —         53,330

Other Accrued Liabilities

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

 


 

 


 

Total Current Liabilities

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

Long-Term Debt:

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

Deferred Credits and Other Liabilities:

                                 

Postretirement Benefits Other Than Pensions

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

Pneumoconiosis Benefits

    —       441,076       —       —         441,076

Mine Closing

    —       312,208       —       —         312,208

Workers’ Compensation

    1,433     254,352       —       —         255,785

Deferred Revenue

    —       61,673       —       —         61,673

Salary Retirement

    79,453     92       —       —         79,545

Reclamation

    —       14,480       —       —         14,480

Other

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

 


 

 


 

Total Deferred Credits and Other Liabilities

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

Stockholders’ Equity

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

 


 

 


 

Total Liabilities and Stockholders’ Equity

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

 


 

 


 

 

31


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Three Months Ended September 30, 2003:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

   Consolidated

 

Net Cash Provided by Operating Activities

   $ 6,462     $ 68,856     $ 2,549     $ —      $ 77,867  
    


 


 


 

  


Cash Flows from Investing Activities:

                                       

Capital Expenditures

   $ (2,690 )   $ (72,856 )   $ —       $ —      $ (75,546 )

Investment in Equity Affiliates

     —         (37 )     (3,879 )     —        (3,916 )

Other Investing Activities

     —         3,829       —         —        3,829  
    


 


 


 

  


Net Cash Used in Investing Activities

   $ (2,690 )   $ (69,064 )   $ (3,879 )   $ —      $ (75,633 )
    


 


 


 

  


Cash Flows from Financing Activities:

                                       

Payments on Short-Term Borrowings

   $ (24,999 )   $ —       $ —       $ —      $ (24,999 )

Proceeds from Long-Term Notes

     —         —         750              750  

Dividends Paid

     (11,019 )     —         —         —        (11,019 )

Proceeds from Issuance of Common Stock

     189,552       —         —         —        189,552  

Deposit to Restricted Cash

     (918 )     —         —         —        (918 )

Other Financing Activities

     337       173       41       —        551  
    


 


 


 

  


Net Cash Provided by Financing Activities

   $ 152,953     $ 173     $ 791     $ —      $ 153,917  
    


 


 


 

  


 

32


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Nine Months Ended September 30, 2004:

 

     Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

   $ —       $ 1,771,854     $ 60,347     $ —       $ 1,832,201  

Freight—Outside

     —         82,275       164       —         82,439  

Other Income (including equity earnings)

     164,761       41,497       11,565       (147,148 )     70,675  
    


 


 


 


 


Total Revenue and Other Income

     164,761       1,895,626       72,076       (147,148 )     1,985,315  

Cost of Goods Sold and Other Operating Charges

     18,376       1,394,274       138,530       (99,088 )     1,452,092  

Intercompany Activity

     (388 )     (39,532 )     (66,049 )     105,969       —    

Freight Expense

     —         82,275       164       —         82,439  

Selling, General and Administrative Expense

     —         52,965       1,086       —         54,051  

Depreciation, Depletion and Amortization

     4,595       180,702       767       (1,854 )     184,210  

Interest Expense

     17,843       5,718       92       —         23,653  

Taxes Other Than Income

     2,671       139,457       1,165       —         143,293  
    


 


 


 


 


Total Costs

     43,097       1,815,859       75,755       5,027       1,939,738  
    


 


 


 


 


Earnings (Loss) Before Income Taxes

     121,664       79,767       (3,679 )     (152,175 )     45,577  

Income Tax Expense (Benefit)

     (9,250 )     8,574       (1,288 )     —         (1,964 )
    


 


 


 


 


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

     130,914       71,193       (2,391 )     (152,175 )     47,541  

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

     —         83,373       —         —         83,373  
    


 


 


 


 


Net Income (Loss)

   $ 130,914     $ 154,566     $ (2,391 )   $ (152,175 )   $ 130,914  
    


 


 


 


 


 

33


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Condensed Statement of Cash Flows

For the Nine Months Ended September 30, 2004:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

  Consolidated

 

Net Cash (Used in) Provided by Operating Activities

  $ (143,531 )   $ 334,151     $ 4,713     $ —     $ 195,333  
   


 


 


 

 


Cash Flows from Investing Activities:

                                     

Capital Expenditures

  $ (7,688 )   $ (291,406 )   $ —       $ —     $ (299,094 )

Investment in Equity Affiliates

    —         (506 )     (2,286 )     —       (2,792 )

Other Investing Activities

    11,000       7,291       271       —       18,562  
   


 


 


 

 


Net Cash Provided by (Used in) Investing Activities

  $ 3,312     $ (284,621 )   $ (2,015 )   $ —     $ (283,324 )
   


 


 


 

 


Cash Flows from Financing Activities:

                                     

Payments on Short-Term Debt

  $ (20,000 )   $ —       $ —       $ —     $ (20,000 )

Payments on Long-Term Notes

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

Dividends Paid

    (37,811 )     —         —         —       (37,811 )

Withdrawal from Restricted Cash

    190,918       —         —         —       190,918  

Other Financing Activities

    10,535       (4,535 )     —         —       6,000  
   


 


 


 

 


Net Cash Provided by (Used in) Financing Activities

  $ 143,642     $ (49,535 )   $ —       $ —     $ 94,107  
   


 


 


 

 


 

34


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2004

(Dollars in thousands, except per share data)

 

Income Statement for the Nine Months Ended September 30, 2003:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

  $ —       $ 1,480,189     $ 49,177     $ —       $ 1,529,366  

Sales—Related Parties

    —         1,369       —         —         1,369  

Freight—Outside

    —         84,722       215       —         84,937  

Freight—Related Parties

    —         562       —         —         562  

Other Income (including equity earnings)

    35,368       27,960       15,688       (26,763 )     52,253  
   


 


 


 


 


Total Revenue and Other Income

    35,368       1,594,802       65,080       (26,763 )     1,668,487  

Cost of Goods Sold and Other Operating Charges

    9,617       1,194,327       112,251       (109,555 )     1,206,640  

Intercompany Activity

    227       (56,474 )     (59,876 )     116,123       —    

Freight Expense

    —         85,284       215       —         85,499  

Selling, General and Administrative Expense

    —         54,883       1,808       —         56,691  

Depreciation, Depletion and Amortization

    2,792       182,310       867       (1,854 )     184,115  

Interest Expense

    15,365       9,901       736       —         26,002  

Taxes Other Than Income

    3,079       120,152       1,114       —         124,345  

Export Sales Excise Tax Resolution

    —         (614 )     —         —         (614 )
   


 


 


 


 


Total Costs

    31,080       1,589,769       57,115       4,714       1,682,678  
   


 


 


 


 


Earnings (Loss) Before Income Taxes

    4,288       5,033       7,965       (31,477 )     (14,191 )

Income Tax Expense (Benefit)

    (8,533 )     (16,499 )     2,788       —         (22,244 )
   


 


 


 


 


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

    12,821       21,532       5,177       (31,477 )     8,053  

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

    —         2,900       1,868       —         4,768