Quarterly Report
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, 2005

 

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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

 

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 October 26, 2005

Common stock, $0.01 par value

  92,425,887

 



Table of Contents

TABLE OF CONTENTS

 

          Page

     PART I     
     FINANCIAL INFORMATION     

ITEM 1.

   CONDENSED FINANCIAL STATEMENTS     
     Consolidated Statements of Income for the three and nine months ended September 30, 2005 and September 30, 2004    1
     Consolidated Balance Sheets at September 30, 2005 and December 31, 2004    2
     Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2005    3
     Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and September 30, 2004    4
     Notes to Consolidated Financial Statements    5

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    27

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    55

ITEM 4.

   CONTROLS AND PROCEDURES    57
     PART II     
     OTHER INFORMATION     

ITEM 6.

   EXHIBITS    58


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,


 
    2005

    2004

    2005

    2004

 

Sales—Outside

  $ 738,793     $ 568,389     $ 2,195,069     $ 1,766,782  

Sales—Purchased Gas

    88,288       49,349       157,545       65,419  

Sales—Related Party

    4,135       —         4,749       —    

Freight—Outside

    30,718       21,232       92,507       82,439  

Freight—Related Party

    468       —         468       —    

Other Income

    17,525       20,906       63,726       70,675  

Gain on Sale of 18.5% of CNX Gas

    327,326       —         327,326       —    
   


 


 


 


Total Revenue and Other Income

    1,207,253       659,876       2,841,390       1,985,315  

Cost of Goods Sold and Other Operating Charges (exclusive of depreciation, depletion and amortization shown below)

    549,454       473,009       1,616,071       1,386,123  

Purchased Gas Costs

    89,653       49,752       159,739       65,969  

Freight Expense

    31,186       21,232       92,975       82,439  

Selling, General and Administrative Expense

    24,090       18,191       59,276       54,051  

Depreciation, Depletion and Amortization

    64,100       63,015       194,259       184,210  

Interest Expense

    6,791       6,271       20,904       23,653  

Taxes Other Than Income

    54,365       46,772       170,178       143,293  
   


 


 


 


Total Costs

    819,639       678,242       2,313,402       1,939,738  
   


 


 


 


Earnings (Loss) Before Income Taxes, Minority Interest and Cumulative Effect of Change in Accounting Principle

    387,614       (18,366 )     527,988       45,577  

Income Taxes (Benefit)

    7,173       (6,792 )     31,261       (1,964 )
   


 


 


 


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

    380,441       (11,574 )     496,727       47,541  

Minority Interest

    (3,459 )     —         (3,459 )     —    

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

    —         —         —         83,373  
   


 


 


 


Net Income (Loss)

  $ 376,982     $ (11,574 )   $ 493,268     $ 130,914  
   


 


 


 


Basic Earnings (Loss) Per Share

  $ 4.09     $ (0.13 )   $ 5.39     $ 1.45  
   


 


 


 


Dilutive Earnings (Loss) Per Share

  $ 4.04     $ (0.13 )   $ 5.33     $ 1.44  
   


 


 


 


Weighted Average Number of Common Shares Outstanding:

                               

Basic

    92,112,770       90,361,024       91,501,949       90,122,954  
   


 


 


 


Dilutive

    93,392,289       90,361,024       92,483,178       91,018,644  
   


 


 


 


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,
2005


    DECEMBER 31,
2004


 
ASSETS                

Current Assets:

               

Cash and Cash Equivalents

  $ 353,215     $ 6,422  

Accounts and Notes Receivable:

               

Trade

    275,751       111,580  

Other Receivables

    39,774       30,251  

Inventories

    137,935       121,902  

Deferred Income Taxes

    172,885       145,890  

Recoverable Income Taxes

    —         14,614  

Prepaid Expenses

    53,794       39,510  
   


 


Total Current Assets

    1,033,354       470,169  

Property, Plant and Equipment:

               

Property, Plant and Equipment

    6,865,640       6,514,016  

Less—Accumulated Depreciation, Depletion and Amortization

    3,507,614       3,331,436  
   


 


Total Property, Plant and Equipment—Net

    3,358,026       3,182,580  

Other Assets:

               

Deferred Income Taxes

    366,533       355,008  

Investment in Affiliates

    53,458       47,684  

Other

    133,153       140,170  
   


 


Total Other Assets

    553,144       542,862  
   


 


TOTAL ASSETS

  $ 4,944,524     $ 4,195,611  
   


 


LIABILITIES AND STOCKHOLDERS’ EQUITY                

Current Liabilities:

               

Accounts Payable

  $ 179,762     $ 166,068  

Short-Term Notes Payable

    2,200       5,060  

Current Portion of Long-Term Debt

    3,909       3,885  

Accrued Income Taxes

    14,420       —    

Other Accrued Liabilities

    540,338       530,472  
   


 


Total Current Liabilities

    740,629       705,485  

Total Long-Term Debt

    425,646       425,760  

Deferred Credits and Other Liabilities:

               

Postretirement Benefits Other Than Pensions

    1,580,389       1,531,250  

Pneumoconiosis Benefits

    413,750       427,264  

Mine Closing

    358,005       305,152  

Workers’ Compensation

    136,020       140,318  

Deferred Revenue

    32,697       50,208  

Salary Retirement

    32,355       51,957  

Reclamation

    37,358       5,745  

Other

    176,571       83,451  
   


 


Total Deferred Credits and Other Liabilities

    2,767,145       2,595,345  

Minority Interest

    93,645       —    
   


 


Total Liabilities and Minority Interest

    4,027,065       3,726,590  

Stockholders’ Equity:

               

Common Stock, $.01 par value; 500,000,000 Shares Authorized, 92,405,258 Issued and Outstanding at September 30, 2005; 91,267,558 Issued and 90,642,939 Outstanding at December 31, 2004

    924       913  

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

    —         —    

Capital in Excess of Par Value

    880,321       846,644  

Retained Earnings (Deficit)

    177,460       (277,406 )

Other Comprehensive Loss

    (133,894 )     (89,193 )

Unearned Compensation on Restricted Stock Units

    (7,352 )     (4,883 )

Common Stock in Treasury, at Cost—0 Shares at September 30, 2005, 624,619 Shares at December 31, 2004

    —         (7,054 )
   


 


Total Stockholders’ Equity

    917,459       469,021  
   


 


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

  $ 4,944,524     $ 4,195,611  
   


 


 

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)


    Unearned
Compensation
on Restricted
Stock Units


    Treasury
Stock


    Total
Stockholders’
Equity


 

Balance—December 31, 2004

  $ 913   $ 846,644   $ (277,406 )   $ (89,193 )   $ (4,883 )   $ (7,054 )   $ 469,021  
   

 

 


 


 


 


 


(Unaudited)

                                                   

Net Income

    —       —       493,268       —         —         —         493,268  

Treasury Rate Lock (Net of $39 tax)

    —       —       —         (60 )     —         —         (60 )

Gas Cash Flow Hedge (Net of $27,906 tax)

    —       —       —         (44,641 )     —         —         (44,641 )
   

 

 


 


 


 


 


Comprehensive Income (Loss)

    —       —       493,268       (44,701 )     —         —         448,567  

Dividend Equivalents on Restricted Stock Units (1,814 units)

    —       177     —         —         (177 )     —         —    

Issuance of Restricted Stock Units under the Equity Incentive Plan (94,691 shares)

    —       4,211     —         —         (4,211 )     —         —    

Stock Options Exercised (1,762,319 shares)

    11     28,304     —         —         —         7,054       35,369  

Stock-Based Compensation from Accelerated Vesting

    —       735     —         —         —         —         735  

Common Stock Issued (4,946 shares)

    —       225     —         —         —         —         225  

Amortization of Restricted Stock Unit Grants

    —       —       —         —         1,919       —         1,919  

Dividends ($.42 per share)

    —       25     (38,402 )     —         —         —         (38,377 )
   

 

 


 


 


 


 


Balance—September 30, 2005

  $ 924   $ 880,321   $ 177,460     $ (133,894 )   $ (7,352 )   $ —       $ 917,459  
   

 

 


 


 


 


 


 

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,


 
     2005

    2004

 

Operating Activities:

                

Net Income

   $ 493,268     $ 130,914  

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

                

Cumulative Effect of Change in Accounting Principle, net of tax

     —         (83,373 )

Depreciation, Depletion and Amortization

     194,259       184,210  

Compensation from Restricted Stock Unit Grants

     2,654       715  

(Gain) Loss on the Sale of Assets

     (12,854 )     (38,869 )

(Gain) on Sale of 18.5% Interest in Gas Segment

     (327,326 )     —    

Change in Minority Interest

     3,459       —    

Amortization of Mineral Leases

     3,974       4,294  

Deferred Income Taxes

     (10,575 )     2,022  

Equity in (Earnings) Losses of Affiliates

     (1,952 )     3,951  

Changes in Operating Assets:

                

Accounts Receivable Securitization

     (125,000 )     (5,700 )

Accounts and Notes Receivable

     (47,808 )     12,815  

Inventories

     (10,320 )     (7,051 )

Prepaid Expenses

     (17,405 )     (3,820 )

Changes in Other Assets

     5,785       9,066  

Changes in Operating Liabilities:

                

Accounts Payable

     5,307       28,016  

Other Operating Liabilities

     37,711       (26,270 )

Changes in Other Liabilities

     (4,957 )     (14,880 )

Other

     2,149       (707 )
    


 


       (302,899 )     64,419  
    


 


Net Cash Provided by Operating Activities

     190,369       195,333  
    


 


Investing Activities:

                

Capital Expenditures

     (287,262 )     (299,094 )

Additions to Mineral Leases

     (7,826 )     (4,267 )

Net Investment in Equity Affiliates

     1,901       (2,792 )

Proceeds from Sales of 18.5% Interest in Gas Segment

     420,167       —    

Proceeds from Sales of Assets

     32,236       22,829  
    


 


Net Cash Provided by (Used in) Investing Activities

     159,216       (283,324 )
    


 


Financing Activities:

                

Payments on Miscellaneous Borrowings

     (284 )     (4,535 )

Proceeds from Short Term Borrowings

     2,200       —    

Proceeds from (Payments on) Revolver

     (1,700 )     (20,000 )

Payments on Long Term Notes

     —         (45,000 )

Dividends Paid

     (38,377 )     (37,811 )

Withdrawal from Restricted Cash

     —         190,918  

Stock Options Exercised

     35,369       10,535  
    


 


Net Cash (Used in) Provided by Financing Activities

     (2,792 )     94,107  
    


 


Net Increase in Cash and Cash Equivalents

     346,793       6,116  

Cash and Cash Equivalents at Beginning of Period

     6,422       6,513  
    


 


Cash and Cash Equivalents at End of Period

   $ 353,215     $ 12,629  
    


 


 

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, 2005

(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) considered necessary for a fair presentation have been included. Operating results for the three-month and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for future periods.

 

The balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all the notes required by generally accepted accounting principles for complete financial statements.

 

For further information, refer to the consolidated financial statements and related notes for the year ended December 31, 2004 included in CONSOL Energy’s Form 10-K.

 

Certain reclassifications of 2004 data have been made to conform to the nine months ended September 30, 2005 classifications.

 

CONSOL Energy restated first quarter 2004 net income by approximately $2,164, or $0.02 per share, to reflect the recognition of favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as of March 8, 2004 in accordance with authoritative accounting implementation guidance. The restatement reduced cost of goods sold by $2,347 and selling, general and administrative expenses by $82. Income tax expense was increased by $265 due to this adjustment.

 

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, and the assumed redemption of restricted stock units. The number of additional shares is calculated by assuming the outstanding stock options were exercised and the restricted stock units were converted into shares and the proceeds from such activity were used to acquire shares of common stock at the average market price during the reporting period. Options to purchase 689 shares of common stock were outstanding for the three and nine month period ended September 30, 2005, but were not included in the computation of dilutive 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 1,104,283 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 were antidilutive. Due to the net loss position for the three months ended September 30, 2004, no options to purchase shares were included in the computation of diluted earnings per share because the effect would be antidilutive.

 

5


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(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,


    2005

  2004

    2005

  2004

Earnings (Loss) before cumulative effect of change in accounting

  $ 376,982   $ (11,574 )   $ 493,268   $ 47,541

Cumulative effect of accounting change

    —       —         —       83,373
   

 


 

 

Net Income (Loss)

  $ 376,982   $ (11,574 )   $ 493,268   $ 130,914
   

 


 

 

Average shares of common stock outstanding:

                         

Basic

    92,112,770     90,361,024       91,501,949     90,122,954

Effect of stock options

    1,279,519     —         981,229     895,690
   

 


 

 

Diluted

    93,392,289     90,361,024       92,483,178     91,018,644
   

 


 

 

Earnings per share:

                         

Basic before cumulative effect

  $ 4.09   $ (0.13 )   $ 5.39   $ 0.53
   

 


 

 

Basic after cumulative effect

  $ 4.09   $ (0.13 )   $ 5.39   $ 1.45
   

 


 

 

Diluted before cumulative effect

  $ 4.04   $ (0.13 )   $ 5.33   $ 0.52
   

 


 

 

Diluted after cumulative effect

  $ 4.04   $ (0.13 )   $ 5.33   $ 1.44
   

 


 

 

 

NOTE 2—ACQUISITIONS AND DISPOSITIONS:

 

In July 2005, CONSOL Energy announced that it had created CNX Gas Corporation (CNX Gas), a wholly owned subsidiary of CONSOL Energy, to conduct its gas exploration and production activities. CONSOL Energy contributed or leased substantially all of the assets of its gas business, including all of CONSOL Energy’s rights to coalbed methane associated with 4.5 billion tons of coal reserves owned or controlled by CONSOL Energy as well as all of CONSOL Energy’s rights to conventional gas. CONSOL Energy entered into various agreements with CNX Gas that define various operating and service relationships between the two companies. In August 2005, CNX Gas sold 27.9 million shares in a private transaction. The shares were sold to qualified institutional, foreign and accredited investors in a private transaction exempt from registration under Rule 144A, Regulation S and Regulation D. CNX Gas received proceeds of $420,167, which it used to pay a special dividend to CONSOL Energy. Following the close of the transaction, CONSOL Energy holds approximately 122.9 million shares, or approximately 81.5 percent, of the outstanding shares of CNX Gas common stock (before issuance of any shares under CNX Gas’ 2.5 million shares equity incentive plan). The gain recognized on this transaction was $327,326.

 

In June 2005, CONSOL Energy completed a sale/lease-back transaction for its headquarters building and certain surrounding land located in Upper Saint Clair, Pennsylvania. Cash proceeds from the sale were $14,000 and resulted in a pretax gain of $8,304, which has been deferred and will be recognized over the initial lease term of 13 years. The lease agreement includes an option to extend the lease term for two five-year periods. The lease is accounted for as an operating lease. Annual rental payments are $1,176 and are payable in equal quarterly installments of $294. The agreement provides for a possible Consumer Price Index adjustment to the annual rental payments at the beginning of the fourth lease year and every four years thereafter.

 

In March 2005, CONSOL Energy through its subsidiary, CONSOL of West Virginia, LLC, acquired a 49% interest in Southern West Virginia Energy, LLC for a cash payment of $6,200. In addition, CONSOL Energy agreed to assume the perpetual care liability after certain bond release work is completed by Southern

 

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Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

West Virginia Energy, LLC. The discounted liability assumed by CONSOL Energy is estimated to be $10,159. Southern West Virginia Energy, LLC through its subsidiary will mine low sulfur bituminous coal. The acquisition was accounted for under the equity method of accounting through August 2005. As of September 1, 2005, after all agreements were substantially completed, the acquisition has been fully consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”.

 

In February 2004, CONSOL Energy sold the stock in its wholly owned subsidiary CNX Australia Pty Limited to certain affiliates of AMCI, Inc. for $27,500 ($11,000 of cash and $16,500 of Notes Receivable), the assumption of $21,190 of debt, and associated interest rate swaps and foreign currency hedges. 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 No. 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, with the exception of expense related to a modification due to acceleration of vesting, as all options granted under those plans had an exercise 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,


 
    2005

    2004

    2005

    2004

 

Net income (loss) as reported

  $ 376,982     $ (11,574 )   $ 493,268     $ 130,914  

Add: Stock-based compensation due to change in vesting period

    220       —         955       —    

Add: Stock-based compensation expense for restricted stock units

    857       429       1,919       715  

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

    (2,837 )     (1,708 )     (7,276 )     (4,116 )
   


 


 


 


Pro forma net income (loss)

  $ 375,222     $ (12,853 )   $ 488,866     $ 127,513  
   


 


 


 


Earnings per share:

                               

Basic—as reported

  $ 4.09     $ (0.13 )   $ 5.39     $ 1.45  
   


 


 


 


Basic—pro forma

  $ 4.07     $ (0.14 )   $ 5.34     $ 1.41  
   


 


 


 


Diluted—as reported

  $ 4.04     $ (0.13 )   $ 5.33     $ 1.44  
   


 


 


 


Diluted—pro forma

  $ 4.02     $ (0.14 )   $ 5.29     $ 1.40  
   


 


 


 


 

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.

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(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,


 
    2005

    2004

    2005

    2004

    2005

  2004

  2005

  2004

 

Service cost

  $ 5,539     $ 5,166     $ 16,618     $ 15,499     $ 3,175   $ 2,978   $ 9,526   $ 9,153  

Interest cost

    7,255       7,054       21,765       21,161       34,854     31,383     104,563     97,228  

Expected return on plan assets

    (5,114 )     (4,016 )     (15,342 )     (12,049 )     —       —       —       —    

Amortization costs

    4,905       6,024       14,714       18,073       9,760     6,542     29,279     23,362  

Curtailment gain

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


 


 


 


 

 

 

 


Net periodic (benefit) cost

  $ 12,585     $ 14,228     $ 37,755     $ 42,684     $ 47,789   $ 40,903   $ 143,368   $ 126,289  
   


 


 


 


 

 

 

 


 

For the three and nine months ended September 30, 2005, $70,013 and $70,290 of contributions have been made, respectively. CONSOL Energy presently does not anticipate contributing any additional funds to its pension plan in 2005.

 

CONSOL Energy restated first quarter 2004 net periodic benefit cost for its postretirement benefit plans by $2,520 to reflect the recognition of favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, as of March 8, 2004, in accordance with authoritative accounting implementation guidance.

 

CONSOL Energy does not expect to contribute to the other post employment benefit plan in 2005. We intend to pay benefit claims as they become due. For the three and nine months ended September 30, 2005, $34,055 and $97,166 of other post employment benefits have been paid, respectively.

 

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,


    2005

    2004

    2005

    2004

    2005

    2004

  2005

    2004

Service cost

  $ 948     $ 1,068     $ 2,845     $ 3,205     $ 7,162     $ 11,446   $ 21,486     $ 34,338

Interest cost

    2,991       3,120       8,972       9,360       2,110       2,068     6,327       6,203

Amortization of actuarial gain

    (5,652 )     (5,642 )     (16,957 )     (16,928 )     (872 )     —       (2,615 )     —  

Legal and administrative costs

    675       675       2,025       2,025       968       609     2,905       1,826
   


 


 


 


 


 

 


 

Net periodic (benefit) cost

  $ (1,038 )   $ (779 )   $ (3,115 )   $ (2,338 )   $ 9,368     $ 14,123   $ 28,103     $ 42,367
   


 


 


 


 


 

 


 

 

8


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

CONSOL Energy does not expect to contribute to the CWP plan in 2005. We intend to pay benefit claims as they become due. For the three and nine months ended September 30, 2005, $2,714 and $10,893 of CWP benefits have been paid, respectively.

 

CONSOL Energy does not expect to contribute to the workers’ compensation plan in 2005. We intend to pay benefit claims as they become due. For the three and nine months ended September 30, 2005, $13,330 and $42,179 of workers’ compensation benefits, state administrative fees and surety bond premiums have been paid, respectively.

 

CONSOL Energy also has expensed $4,834 and $15,339 related to workers’ compensation for the three and nine months ended September 30, 2005, respectively, 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, we recorded our liability on a discounted basis, which has been actuarially determined using various assumptions, including discount rate and future cost trends. CONSOL Energy believed this change was preferable since it aligns the accounting with our other long-term employee benefit obligations, which are recorded on a discounted basis. Additionally, it provides a better comparison with our industry peers, the majority of which record the workers’ compensation liability on a discounted basis.

 

As a result of the change, as of January 1, 2004, 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 amounts for 2004 in the table above.

 

NOTE 6—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,


 
     2005

    2004

 
     Amount

    Percent

    Amount

    Percent

 

Statutory U.S. federal income tax rate

   $ 184,796     35.0 %   $ 15,952     35.0 %

Effect of gain on sale of 18.5% of CNX Gas

     (114,564 )   (21.7 )     —       —    

Excess tax depletion

     (40,065 )   (7.6 )     (12,257 )   (26.9 )

Effect from sale of foreign companies

     —       —         (5,319 )   (11.7 )

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

     (7,425 )   (1.4 )     (2,665 )   (5.9 )

Net effect of state tax

     8,264     1.6       3,269     7.2  

Net effect of foreign tax

     102     —         (1,188 )   (2.6 )

Other

     153     —         244     0.6  
    


 

 


 

Income Tax Expense / Effective Rate

   $ 31,261     5.9 %   $ (1,964 )   (4.3 )%
    


 

 


 

 

9


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

The effective tax rate for the nine-month period ended September 30, 2005 was calculated using the annual effective rate projection on recurring earnings and a discrete tax calculation for the impact of the sale of 18.5% of CNX Gas. In August 2005, CNX Gas Corporation, a subsidiary of CONSOL Energy, sold 27.9 million shares in a private transaction. The shares were sold to qualified institutional, foreign and accredited investors in a private transaction exempt from registration under Rule 144A, Regulation S and Regulation D. CNX Gas received proceeds of $420,167, which it used to pay a special dividend to CONSOL Energy. The gain recognized on this transaction was $327,326. In accordance with Statement of Financial Accounting Standards Board Statement 109, “Accounting for Income Taxes”, no deferred tax has been provided on this sale as current tax law provides a means by which the excess of the reported amount of this investment over its tax basis can be recovered tax-free. Also, management has no current intention of entering into a transaction that would cause CNX Gas to leave the consolidated tax group.

 

The effective tax rate for the nine month period 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 our wholly owned subsidiary CNX Australia Pty Limited.

 

NOTE 7—INVENTORIES:

 

Inventory components consist of the following:

 

     September 30,
2005


   December 31,
2004


Coal

   $ 47,698    $ 42,962

Merchandise for resale

     20,093      20,585

Supplies

     70,144      58,355
    

  

Total Inventories

   $ 137,935    $ 121,902
    

  

 

NOTE 8—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 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 consistent with commercial paper rates, plus a charge for administrative services paid to the financial institutions. Costs associated with the receivables facility totaled $362 and $2,476 for the three and nine months ended September 30, 2005, respectively. Costs associated with the receivables facility totaled $583 and $1,822 for the three and nine months ended September 30, 2004, 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.

 

10


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

At September 30, 2005 and December 31, 2004, eligible accounts receivable totaled approximately $118,100 and $141,100, respectively. The subordinated retained interest at September 30, 2005 and December 31, 2004 was approximately $118,100 and $16,100, respectively. No accounts receivable were removed from the consolidated balance sheet at September 30, 2005 because CONSOL Energy retained the total eligible accounts receivable. Accounts receivable totaling $125,000 were removed from the consolidated balance sheet at December 31, 2004. CONSOL Energy’s $125,000 reduction in the accounts receivable securitization program for the nine months ended September 30, 2005 is reflected in cash flows from operating activities in the consolidated statement of cash flows. The $5,700 reduction in the accounts receivable securitization program, net of proceeds, for the nine months ended September 30, 2004 is also reflected in operating activities in the consolidated statement of cash flows.

 

The key economic assumptions used to measure the retained interest at the date of securitization for all such sales completed in 2005 were a discount rate of 3.91% and an estimated life for eligible accounts receivables of 32 days. At September 30, 2005, an increase in the discount rate or estimated life of 10% and 20% would have reduced the fair value of the retained interest by $41 and $82, 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 9—PROPERTY, PLANT AND EQUIPMENT:

 

The components of property, plant and equipment are as follows:

 

     September 30,
2005


   December 31,
2004


Plant & equipment

   $ 3,850,976    $ 3,583,138

Coal properties and surface lands

     1,055,602      1,045,370

Airshafts

     758,661      704,088

Mine development

     389,816      394,872

Leased Coal Lands

     458,604      439,998

Advance Mining Royalties

     351,981      346,550
    

  

Total Gross

     6,865,640      6,514,016

Less: Accumulated depreciation, depletion and amortization

     3,507,614      3,331,436
    

  

Total net property, plant and equipment

   $ 3,358,026    $ 3,182,580
    

  

 

NOTE 10—DEBT:

 

CONSOL Energy has a five-year, $750,000 revolving credit facility. The facility is secured by liens on substantially all of the assets of CONSOL Energy and its wholly-owned subsidiaries. The gas business guarantees and the gas business assets that were previously pledged as collateral security were released on August 8, 2005 in conjunction with the sale of 18.5 percent of CNX Gas. Subsequently, on October 21, 2005, as a result of entering into a new $200,000 credit agreement, CNX Gas and its subsidiaries have executed a Supplemental Indenture and are again guarantors of the 7.875% notes. We are exploring the feasibility of an amendment to the indenture to remove CNX Gas guarantees from these notes. Collateral is shared equally and ratably with the holders of CONSOL Energy’s 7.875% bonds that mature in 2012 and CONSOL Energy’s subsidiary’s 8.25% medium-term notes maturing in 2007. Fees and interest rate

 

11


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

spreads are based on a ratio of financial covenant debt to twelve month trailing earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), measured quarterly. Covenants in the facility limit our ability to dispose of assets, make investments, purchase or redeem CONSOL Energy common stock and merge with another corporation. The facility includes a leverage ratio covenant of not more than 3.25 to 1.00, measured quarterly. The leverage ratio was 0.09 to 1.00 at September 30, 2005. The facility also includes an interest coverage ratio of no less than 4.50 to 1.00, measured quarterly. The interest coverage ratio was 28.75 to 1.00 at September 30, 2005. There are no covenants in the amended facility restricting the level of annual capital expenditures.

 

NOTE 11—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 26,264 asbestos claims in state courts in Pennsylvania, Ohio, West Virginia, Maryland, New Jersey, Michigan and Mississippi. Because a very small percentage of products manufactured by third parties and supplied by Fairmont in the past may have contained asbestos and many of the pending claims are part of mass complaints filed by hundreds of plaintiffs against a hundred or more defendants, it has been difficult for Fairmont to determine how many of the cases actually involve valid claims or plaintiffs who were actually exposed to asbestos-containing products supplied by Fairmont. In addition, while Fairmont may be entitled to indemnity or contribution in certain jurisdictions from manufacturers of identified products, the availability of such indemnity or contribution is unclear at this time and, in recent years, some of the manufacturers named as defendants in these actions have sought protection from these claims under bankruptcy laws. Fairmont has no insurance coverage with respect to these asbestos cases. To date, payments by Fairmont 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. CONSOL Energy was notified in November 2004 by the United States Environmental Protection Agency (EPA) that it is a potentially responsible party (PRP) under Superfund legislation with respect to the Ward Transformer site in Wake County, North Carolina. The EPA has also identified other PRPs. No agreement on an allocation of costs between the PRPs has been reached to date. The estimated total remediation cost for all responsible parties, based on preliminary information, is approximately $7,000 with CONSOL Energy’s portion estimated to be 40%-45% of total. Accordingly, a $3,000 liability is included in other accrued liabilities which was recorded in the nine months ended September 30, 2005. CONSOL Energy has made no payments to date related to the remediation of this site.

 

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.

 

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

 

12


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

and Rule 10b-5 promulgated under the Exchange Act and that during the period between January 24, 2002, and July 18, 2002, the defendants issued false and misleading 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. CONSOL Energy management believes these claims are without merit and, accordingly, has not accrued any liability associated with these claims.

 

As previously disclosed in CONSOL Energy’s 2004 Form 10-K, the Company expensed and paid approximately $28,000 to the Combined Fund for the plan year beginning October 1, 2003 related to a premium differential announced by the Social Security Administration for the past eleven plan years for beneficiaries assigned to CONSOL Energy. The premium differential is the difference between the lower premium rates determined by the National Coal Association v. Chater case and the higher premium rates determined by the Holland v. Barnhart case. Additionally, CONSOL Energy has expensed approximately $2 million related to the premium differential for the plan year beginning October 1, 2004. In August 2005, a court ruling determined that the UMWA Health and Retirement Funds were illegally charging the premium differential. CONSOL Energy was also assessed an unassigned beneficiary premium increase of approximately $6,000 for the plan years beginning October 1, 2002 and October 1, 2003. The Company believes the calculation of the unassigned beneficiary premium is not accurate and, therefore, has not paid this premium. CONSOL Energy has accrued an estimated liability related to this premium. The Combined Fund is protesting the court’s decision. If the courts rule in CONSOL Energy’s favor, the premium differential may be refunded to the Company and the unassigned beneficiary premium liability may be reduced. However, the legal process is lengthy and its outcome cannot be predicted with certainty. No estimates of refunds have been recorded and no amounts have been received from the UMWA Health and Retirement Funds to date.

 

On September 16, 2005, CONSOL Energy’s Buchanan Mine, located near Keen Mountain, Virginia, had an accident with its skip hoist, the device that lifts coal from underground to the surface, forcing the mine to suspend coal production. The braking mechanism on the hoist failed to hold a loaded skip at the surface before it could dump its load. The loaded skip fell approximately 1,600 feet back through the shaft to the bottom. Simultaneously, the empty skip was propelled upward to the surface as the loaded skip fell, causing the empty skip to strike the top of the hoist mechanism before also falling back to the shaft bottom. Expenses related to clean up of the damaged hoist for the quarter ended September 30, 2005 were $995. This accident is covered under our property and business interruption insurance policy, subject to certain deductibles. There can be no assurance that we will obtain any recovery from our insurance carrier.

 

In February 2005, CONSOL Energy’s Buchanan Mine, experienced a cave-in behind the longwall mining machinery and an ignition of methane gas that started a fire. The mine was evacuated safely and was sealed on February 16, 2005 in order to extinguish any fire by cutting off oxygen to the mine’s underground atmosphere. Costs related to the fire of approximately $1,570 and $38,428, net of recognized insurance recovery, have been incurred for the three and nine months ended September 30, 2005, respectively. Costs to CONSOL Energy are primarily reflected in Cost of Goods Sold and Other Charges and Depreciation, Depletion and Amortization on

 

13


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

the consolidated statement of income. Recognized insurance recovery for property damage and extinguishment costs are reflected in Other Receivables at September 30, 2005. The fire has been extinguished and the mine was restarted on June 16, 2005. This incident is also covered under our business interruption insurance policy, subject to certain deductibles. There can be no assurance that we will obtain any recovery for business interruption claims from our insurance carrier.

 

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. Recognized insurance recovery for damages of approximately $1,034 and $2,819 were reflected in Other Receivables at September 30, 2005 and December 31, 2004, respectively. CONSOL Energy received $1,785 of this receivable in the nine months ended September 30, 2005.

 

In the three months ended March 31, 2005, there was a settlement related to the Harmar Environmental Trust (the Trust). The Trust Settlement was due to the court’s decision to terminate a Trust Agreement among CONSOL Energy and other parties. The Trust was established in 1988 to provide funding for water treatment related to the now closed Harmar Mine. Other parties funded the trust. CONSOL Energy was responsible for completing water treatment activities, but all costs associated with these activities were funded by the Trust. Any excess funding upon completion of water treatment or a specified date in the future were to be distributed to the parties that originally funded the trust. In the decision, all previously funded, but unused, amounts remaining in the Trust were distributed. CONSOL Energy’s portion of the distributed funds, $15,000, was placed into an escrow account, pending provision of financial assurance supporting CONSOL Energy water treatment obligations. In the quarter ended June 30, 2005, CONSOL Energy provided the financial assurance for this obligation and the funds were released from escrow. CONSOL Energy is responsible for the on-going water treatment at this facility. CONSOL Energy recorded the funding and $8,517 for present value of the water treatment liability, resulting in $6,483 of income in the nine months ended September 30, 2005.

 

At September 30, 2005, 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.

 

     Total Amounts
Committed


   Less Than
1 Year


   1-3 Years

   3-5 Years

   Beyond
5 Years


Letters of Credit:

                                  

Employee-Related

   $ 288,995    $ 288,995    $ —      $ —      $ —  

Environmental

     30,202      30,202      —        —        —  

Other

     19,877      19,877      —        —        —  
    

  

  

  

  

Total Letters of Credit

   $ 339,074    $ 339,074    $ —      $ —      $ —  
    

  

  

  

  

Surety Bonds:

                                  

Employee-Related

   $ 247,278    $ 247,278    $ —      $ —      $ —  

Environmental

     264,978      254,941      10,004      —        33

Other

     7,979      7,520      459      —        —  
    

  

  

  

  

Total Surety Bonds

   $ 520,235    $ 509,739    $ 10,463    $ —      $ 33
    

  

  

  

  

Guarantees:

                                  

Coal

   $ 185,364    $ 39,972    $ 108,525    $ 29,937    $ 6,930

Gas

     396,562      123,697      94,197      83,063      95,605

Other

     85,516      23,290      42,471      17,963      1,792
    

  

  

  

  

Total Guarantees

   $ 667,442    $ 186,959    $ 245,193    $ 130,963    $ 104,327
    

  

  

  

  

Total Commitments

   $ 1,526,751    $ 1,035,772    $ 255,656    $ 130,963    $ 104,360
    

  

  

  

  

 

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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

Employee-related letters of credit and surety bonds have primarily been extended to support the United Mine Workers’ of America’s 1992 Benefit Plan and various state workers’ compensation self-insurance programs. Environmental letters of credit and surety bonds have primarily been extended to support various performance bonds related to reclamation and other environmental issues. Other letters of credit and surety bonds have been extended to support insurance policies, legal matters and various other items necessary in the normal course of business.

 

CONSOL Energy and certain of its subsidiaries have also provided guarantees for the delivery of specific quantities of coal and gas to various customers. These guarantees are several or joint and several. Other guarantees have also been provided to promise the full and timely payments to lessors of mining equipment and to support various other items necessary in the normal course of business.

 

NOTE 12—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.

 

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.

 

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, 2005

    December 31, 2004

 
     Carrying
Amount


    Fair Value

    Carrying
Amount


    Fair Value

 

Cash and cash equivalents

   $ 353,215     $ 353,215     $ 6,422     $ 6,422  

Short-term notes payable

   $ (2,200 )   $ (2,200 )   $ (5,060 )   $ (5,060 )

Long-term debt

   $ (429,555 )   $ (456,322 )   $ (429,645 )   $ (466,072 )

 

NOTE 13—SEGMENT INFORMATION:

 

CONSOL Energy has two principal business units: Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to metal and coke producers. The Coal unit includes four reportable segments. These reportable segments are Northern Appalachian, Central Appalachian, Metallurgical and Other Coal. Each of these reportable segments includes a number of operating segments (mines). For the three and nine months ended September 30, 2005, the Northern Appalachian aggregated segment includes the following mines: Shoemaker, Blacksville #2, Robinson Run, McElroy, Loveridge, Bailey, Enlow Fork, Mine 84 and Mahoning Valley. For the three and nine months ended September 30, 2005, 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, 2005, the Metallurgical aggregated segment includes the following mines: Buchanan, Amonate, Miles Branch and V.P. #8. The Other Coal segment includes our purchased coal activities, idled mine cost, coal segment business units not

 

15


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

meeting aggregation criteria, as well as various other activities assigned to the coal segment but not allocated to each individual mine. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. CONSOL Energy’s All Other classification is made up of the Company’s terminal services, river and dock services, industrial supply services and other business activities, including rentals of buildings and flight operations. The 2004 segment information was reclassified to conform to the 2005 presentation. Gas royalty income, gas miscellaneous revenues and Buchanan Generation assets previously reported within Coal and All Other segments are now included in the gas segment. Additionally, the segment information presented has been restated to reflect the restated earnings before income taxes for the three months ended March 31, 2004 due to the favorable effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 as of March 8, 2004, in accordance with authoritative accounting implementation guidance.

 

Industry segment results for the three months ended September 30, 2005:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

  Other
Coal


    Total Coal

  Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 451,560   $ 57,256     $ 66,413   $ 44,297     $ 619,526   $ 85,542   $ 33,725     $ —       $ 738,793  

Sales—purchased gas

    —       —         —       —               88,288     —         —         88,288  

Sales—related parties

    —       —         —       4,135       4,135     —       —         —         4,135  

Freight—outside

    —       —         —       30,718       30,718     —       —         —         30,718  

Freight—related parties

    —       —         —       468       468                   —         468  

Intersegment transfers

    —       —         —       —         —       716     26,614       (27,330 )     —    
   

 


 

 


 

 

 


 


 


Total Sales and Freight

  $ 451,560   $ 57,256     $ 66,413   $ 79,618     $ 654,847   $ 174,546   $ 60,339     $ (27,330 )   $ 862,402  
   

 


 

 


 

 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 59,710   $ (1,106 )   $ 4,634   $ (27,218 )   $ 36,020   $ 42,439   $ (8,199 )   $ 317,354     $ 387,614 (A)
   

 


 

 


 

 

 


 


 


Segment asset

                              $ 3,081,583   $ 797,363   $ 169,673     $ 895,905     $ 4,944,524 (B)
                               

 

 


 


 


Depreciation, depletion and amortization

                              $ 52,080   $ 8,668   $ 3,352     $ —       $ 64,100  
                               

 

 


 


 


Capital Expenditures

                              $ 82,815   $ 33,520   $ 1,365     $ —       $ 117,700  
                               

 

 


 


 



(A) Includes equity in earnings (losses) of unconsolidated affiliates of $(551), $147 and $538 for Coal, Gas and All Other, respectively.
(B) Includes investments in unconsolidated equity affiliates of $49,850 and $3,608 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, 2004:

 

    Northern
Appalachian


    Central
Appalachian


    Metallurgical

    Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 343,245     $ 50,397     $ 62,603     $ 16,603     $ 472,848     $ 68,880   $ 26,661     $ —       $ 568,389  

Sales—purchased gas

    —         —         —         —         —         49,349     —         —         49,349  

Freight—outside

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

Intersegment transfers

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


 


 


 


 


 

 


 


 


Total Sales and Freight

  $ 343,245     $ 50,397     $ 62,603     $ 37,835     $ 494,080     $ 119,099   $ 50,578     $ (24,787 )   $ 638,970  
   


 


 


 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ (12,685 )   $ (2,388 )   $ (187 )   $ (21,551 )   $ (36,811 )   $ 30,301   $ (7,324 )   $ (4,532 )   $ (18,366 )(C)
   


 


 


 


 


 

 


 


 


Segment asset

                                  $ 2,723,165     $ 710,458   $ 206,563     $ 527,393     $ 4,167,579 (D)
                                   


 

 


 


 


Depreciation, depletion and amortization

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


 

 


 


 


Capital Expenditures

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


 

 


 


 



(C) Includes equity in earnings (losses) of unconsolidated affiliates of ($548) and ($8) for Gas and All Other, respectively.
(D) Includes investments in unconsolidated equity affiliates of $20,233 and $26,681 for Gas and All Other, respectively. Also, included in the Coal segment is $26,006 of receivables related to the Export Sales Excise Tax resolution.

 

16


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

Industry segment results for the nine months ended September 30, 2005:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

  Other
Coal


    Total Coal

  Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 1,379,770   $ 170,705     $ 188,905   $ 133,793     $ 1,873,173   $ 228,849   $ 93,047     $ —       $ 2,195,069  

Sales—purchased gas

    —       —         —       —         —       157,545     —         —         157,545  

Sales—related parties

    —       —         —       4,749       4,749     —       —         —         4,749  

Freight—outside

    —       —         —       92,507       92,507     —       —         —         92,507  

Freight—related parties

    —       —         —       468       468     —       —         —         468  

Intersegment transfers

    —       —         —       —         —       1,342     82,348       (83,690 )     —    
   

 


 

 


 

 

 


 


 


Total Sales and Freight

  $ 1,379,770   $ 170,705     $ 188,905   $ 231,517     $ 1,970,897   $ 387,736   $ 175,395     $ (83,690 )   $ 2,450,338  
   

 


 

 


 

 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 214,148   $ (4,889 )   $ 37,278   $ (95,228 )   $ 151,309   $ 113,561   $ (13,986 )   $ 277,104     $ 527,988 (E)
   

 


 

 


 

 

 


 


 


Segment asset

                              $ 3,081,583   $ 797,363   $ 169,673     $ 895,905     $ 4,944,524 (F)
                               

 

 


 


 


Depreciation, depletion and amortization

                              $ 158,231   $ 25,884   $ 10,144     $ —       $ 194,259  
                               

 

 


 


 


Capital Expenditures

                              $ 216,960   $ 66,834   $ 3,468     $ —       $ 287,262  
                               

 

 


 


 



(E) Includes equity in earnings (losses) of unconsolidated affiliates of $(1,758), $366 and $3,344 for Coal, Gas and All Other, respectively.
(F) Includes investments in unconsolidated equity affiliates of $49,850 and $3,608 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 nine months ended September 30, 2004:

 

    Northern
Appalachian


  Central
Appalachian


    Metallurgical

  Other
Coal


    Total Coal

    Gas

  All Other

    Corporate
Adjustments &
Eliminations


    Consolidated

 

Sales—outside

  $ 1,074,363   $ 163,021     $ 185,215   $ 61,823     $ 1,484,422     $ 206,457   $ 75,903     $ —       $ 1,766,782  

Sales—purchased gas

    —       —         —       —         —         65,419     —         —         65,419  

Freight—outside

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

Intersegment transfers

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

 


 

 


 


 

 


 


 


Total Sales and Freight

  $ 1,074,363   $ 163,021     $ 185,215   $ 144,098     $ 1,566,697     $ 274,530   $ 149,468     $ (76,055 )   $ 1,914,640  
   

 


 

 


 


 

 


 


 


Earnings (Loss) Before Income Taxes

  $ 59,925   $ (542 )   $ 1,658   $ (75,541 )   $ (14,500 )   $ 99,724   $ (2,219 )   $ (37,428 )   $ 45,577 (G)
   

 


 

 


 


 

 


 


 


Segment asset

                              $ 2,723,165     $ 710,458   $ 206,563     $ 527,393     $ 4,167,579 (H)
                               


 

 


 


 


Depreciation, depletion and amortization

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


 

 


 


 


Capital Expenditures

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


 

 


 


 



(G) Includes equity in earnings (losses) of unconsolidated affiliates of $(2,733), $(1,343) and $125 for Coal, Gas and All Other, respectively.
(H) Includes investments in unconsolidated equity affiliates of $45,928 and $611 for Other 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.

 

17


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(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,


 
    2005

    2004

    2005

    2004

 

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

  $ 78,459     $ (6,510 )   $ 264,870     $ 85,224  

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

    (8,199 )     (7,324 )     (13,986 )     (2,219 )

Incentive compensation

    (1,515 )     4,883       (16,291 )     (10,464 )

Stock-based compensation

    (1,077 )     (429 )     (2,874 )     (715 )

Other post employee benefit curtailment gain

    —         —         —         3,454  

Gain on Sale of 18.5% of CNX Gas

    327,326       —         327,326       —    

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

    (7,380 )     (8,986 )     (31,057 )     (29,703 )
   


 


 


 


Earnings (Loss) Before Income Taxes

  $ 387,614     $ (18,366 )   $ 527,988     $ 45,577  
   


 


 


 


 

     September 30,

     2005

   2004

TotalAssets:

             

Segment assets for total reportable business segments

   $ 3,799,253    $ 3,433,623

Segment assets for all other businesses

     249,366      206,563

Items excluded from segment assets:

             

Cash and other investments

     354,042      13,169

Deferred tax assets

     539,418      486,771

Recoverable income taxes

     —        24,418

Intangible asset - overfunded pension plan

     248      468

Bond issuance costs

     2,197      2,567
    

  

Total Consolidated Assets

   $ 4,944,524    $ 4,167,579
    

  

 

NOTE 14—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. The gas business guarantees and the gas business assets that were previously pledged as collateral security were released on August 8, 2005 in conjunction with the sale of 18.5 percent of CNX Gas. Accordingly, prior year’s data has been restated to conform to the classifications effective at September 30, 2005. Subsequently, on October 21, 2005, as a result of entering into a new $200,000 credit agreement, CNX Gas and its subsidiaries have executed a Supplemental Indenture and are again guarantors of the 7.875% notes. We are exploring the feasibility of an amendment to the indenture to remove CNX Gas guarantees from these notes. 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.

 

18


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

These assets and liabilities are reflected as parent company or guarantor company amounts for purposes of this presentation.

 

Income statement for the Three Months ended September 30, 2005:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

  $ —       $ 620,907     $ 206,297     $ (123 )   $ 827,081  

Sales—Related Party

    —         5,708       —         (1,573 )     4,135  

Freight—Outside

    —         30,718       —         —         30,718  

Freight—Related Parties

    —         468       —         —         468  

Other Income (including equity earnings)

    425,785       7,616       9,946       (425,822 )     17,525  

Gain on Sale of 18.5% of CNX Gas

    —         327,326       —         —         327,326  
   


 


 


 


 


Total Revenue and Other Income

    425,785       992,743       216,243       (427,518 )     1,207,253  

Cost of Goods Sold and Other Operating Charges

    7,415       479,392       187,702       (35,402 )     639,107  

Intercompany Activity

    35       (423,328 )     (33,358 )     456,651       —    

Freight Expense

    —         31,186       —         —         31,186  

Selling, General and Administrative Expense

    —         22,587       1,503       —         24,090  

Depreciation, Depletion and Amortization

    1,435       53,228       9,434       3       64,100  

Interest Expense

    5,052       1,735       4       —         6,791  

Taxes Other Than Income

    1,072       48,996       4,297       —         54,365  
   


 


 


 


 


Total Costs

    15,009       213,796       169,582       421,252       819,639  
   


 


 


 


 


Earnings (Loss) Before Income Taxes and Minority Interest

    410,776       778,947       46,661       (848,770 )     387,614  

Income Tax Expense (Benefit)

    30,335       40,809       (63,971 )     —         7,173  
   


 


 


 


 


Earnings (Loss) Before Minority Interest

    380,441       738,138       110,632       (848,770 )     380,441  

Minority Interest

    (3,459 )     —         —         —         (3,459 )
   


 


 


 


 


Net Income (Loss)

  $ 376,982     $ 738,138     $ 110,632     $ (848,770 )   $ 376,982  
   


 


 


 


 


 

19


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

Balance sheet at September 30, 2005:

 

    Parent

  Guarantors

    Non-Guarantors

  Elimination

    Consolidated

Assets:

                                 

Current Assets:

                                 

Cash and Cash Equivalents

  $ 310,032   $ 268     $ 42,915   $ —       $ 353,215

Accounts and Notes Receivable:

                                 

Trade

    —       655       275,096     —         275,751

Other

    6,621     29,072       4,081     —         39,774

Inventories

    —       111,829       26,106     —         137,935

Deferred Income Taxes

    172,885     —         —       —         172,885

Prepaid Expenses

    11,882     32,107       9,805     —         53,794
   

 


 

 


 

Total Current Assets

    501,420     173,931       358,003     —         1,033,354

Property, Plant and Equipment:

                                 

Property, Plant and Equipment

    77,164     5,880,803       907,673     —         6,865,640

Less-Accumulated Depreciation, Depletion and Amortization

    39,702     3,293,097       174,815     —         3,507,614
   

 


 

 


 

Property, Plant and Equipment—Net

    37,462     2,587,706       732,858     —         3,358,026

Other Assets:

                                 

Deferred Income Taxes

    366,533     —         —       —         366,533

Investment in Affiliates

    2,062,564     262,462       49,835     (2,321,403 )     53,458

Other

    28,464     70,338       34,351     —         133,153
   

 


 

 


 

Total Other Assets

    2,457,561     332,800       84,186     (2,321,403 )     553,144
   

 


 

 


 

Total Assets

  $ 2,996,443   $ 3,094,437     $ 1,175,047   $ (2,321,403 )   $ 4,944,524
   

 


 

 


 

Liabilities and Stockholders’ Equity:

                                 

Current Liabilities:

                                 

Accounts Payable

  $ 144,986   $ (9,386 )   $ 44,162   $ —       $ 179,762

Accounts Payable (Recoverable)- Related Parties

    1,507,860     (1,558,499 )     50,639     —         —  

Short-Term Notes Payable

    —       —         2,200             2,200

Current Portion of Long-Term Debt

    —       3,780       129     —         3,909

Accrued Income Taxes

    14,420     —         —       —         14,420

Other Accrued Liabilities

    93,981     412,062       34,295     —         540,338
   

 


 

 


 

Total Current Liabilities

    1,761,247     (1,152,043 )     131,425     —         740,629

Long-Term Debt:

    248,675     175,983       988     —         425,646

Deferred Credits and Other Liabilities:

                                 

Postretirement Benefits Other Than Pensions

    —       1,577,084       3,305     —         1,580,389

Pneumoconiosis Benefits

    —       413,750       —       —         413,750

Mine Closing

    —       347,732       10,273     —         358,005

Workers’ Compensation

    60     135,960       —       —         136,020

Deferred Revenue

    —       32,697       —       —         32,697

Salary Retirement

    32,236     —         119     —         32,355

Reclamation

    —       6,584       30,774     —         37,358

Other

    36,766     32,545       107,260     —         176,571
   

 


 

 


 

Total Deferred Credits and Other Liabilities

    69,062     2,546,352       151,731     —         2,767,145

Minority Interest

    —       93,645       —       —         93,645

Stockholders’ Equity

    917,459     1,430,500       890,903     (2,321,403 )     917,459
   

 


 

 


 

Total Liabilities and Stockholders’ Equity

  $ 2,996,443   $ 3,094,437     $ 1,175,047   $ (2,321,403 )   $ 4,944,524
   

 


 

 


 

 

20


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(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

  $ —       $ 478,863     $ 138,875     $ —       $ 617,738  

Freight—Outside

    —         21,232       —         —         21,232  

Other Income (including equity earnings)

    (6,608 )     44,799       4,066       (21,351 )     20,906  
   


 


 


 


 


Total Revenue and Other Income

    (6,608 )     544,894       142,941       (21,351 )     659,876  

Cost of Goods Sold and Other Operating Charges

    (25 )     422,215       132,992       (32,421 )     522,761  

Intercompany Activity

    (73 )     (4,408 )     (28,767 )     33,248       —    

Freight Expense

    —         21,232       —         —         21,232  

Selling, General and Administrative Expense

    —         16,772       1,419       —         18,191  

Depreciation, Depletion and Amortization

    1,489       52,891       8,635       —         63,015  

Interest Expense

    4,756       1,502       13       —         6,271  

Taxes Other Than Income

    788       42,711       3,273       —         46,772  
   


 


 


 


 


Total Costs

    6,935       552,915       117,565       827       678,242  
   


 


 


 


 


Earnings (Loss) Before Income Taxes

    (13,543 )     (8,021 )     25,376       (22,178 )     (18,366 )

Income Tax Expense (Benefit)

    (1,969 )     (13,704 )     8,881       —         (6,792 )
   


 


 


 


 


Net Income (Loss)

  $ (11,574 )   $ 5,683     $ 16,495     $ (22,178 )   $ (11,574 )
   


 


 


 


 


 

21


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

Balance Sheet at December 31, 2004:

 

    Parent

  Guarantors

    Non-Guarantors

    Elimination

    Consolidated

Assets:

                                   

Current Assets:

                                   

Cash and Cash Equivalents

  $ 1,692   $ 342     $ 4,388     $ —       $ 6,422

Accounts and Notes Receivable:

                                   

Trade

    —       —         111,580       —         111,580

Other

    3,826     22,023       4,402       —         30,251

Inventories

    146     99,001       22,755       —         121,902

Deferred Income Taxes

    145,890     —         —         —         145,890

Recoverable Income Taxes

    14,614     —         —         —         14,614

Prepaid Expenses

    6,963     25,913       6,634       —         39,510
   

 


 


 


 

Total Current Assets

    173,131     147,279       149,759       —         470,169

Property, Plant and Equipment:

                                   

Property, Plant and Equipment

    100,437     5,610,136       803,443       —         6,514,016

Less-Accumulated Depreciation, Depletion and Amortization

    53,164     3,129,612       148,660       —         3,331,436
   

 


 


 


 

Property, Plant and Equipment—Net

    47,273     2,480,524       654,783       —         3,182,580

Other Assets:

                                   

Deferred Income Taxes

    355,008     —         —         —         355,008

Investment in Affiliates

    1,589,362     521,570       19,000       (2,082,248 )     47,684

Other

    23,742     100,012       16,416       —         140,170
   

 


 


 


 

Total Other Assets

    1,968,112     621,582       35,416       (2,082,248 )     542,862
   

 


 


 


 

Total Assets

  $ 2,188,516   $ 3,249,385     $ 839,958     $ (2,082,248 )   $ 4,195,611
   

 


 


 


 

Liabilities and Stockholders’ Equity:

                                   

Current Liabilities:

                                   

Accounts Payable

  $ 100,045   $ 27,210     $ 38,813     $ —       $ 166,068

Accounts Payable (Recoverable)-Related Parties

    1,182,740     (1,395,280 )     212,540       —         —  

Short-Term Notes Payable

    1,700     3,360       —         —         5,060

Current Portion of Long-Term Debt

    —       3,757       128       —         3,885

Other Accrued Liabilities

    103,202     404,324       22,946       —         530,472
   

 


 


 


 

Total Current Liabilities

    1,387,687     (956,629 )     274,427       —         705,485

Long-Term Debt:

    248,520     176,252       988       —         425,760

Deferred Credits and Other Liabilities:

                                   

Postretirement Benefits Other Than Pensions

    —       1,531,250       —         —         1,531,250

Pneumoconiosis Benefits

    —       427,264       —         —         427,264

Mine Closing

    —       305,152       —         —         305,152

Workers’ Compensation

    51     140,271       (4 )     —         140,318

Deferred Revenue

    —       50,208       —         —         50,208

Salary Retirement

    51,943     14       —         —         51,957

Reclamation

    —       5,745       —         —         5,745

Other

    31,294     13,166       38,991       —         83,451
   

 


 


 


 

Total Deferred Credits and Other Liabilities

    83,288     2,473,070       38,987       —         2,595,345

Stockholders’ Equity

    469,021     1,556,692       525,556       (2,082,248 )     469,021
   

 


 


 


 

Total Liabilities and Stockholders’ Equity

  $ 2,188,516   $ 3,249,385     $ 839,958     $ (2,082,248 )   $ 4,195,611
   

 


 


 


 

 

22


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

Income Statement for the Nine Months Ended September 30, 2005:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

    Consolidated

 

Sales—Outside

  $ —       $ 1,888,216     $ 464,521     $ (123 )   $ 2,352,614  

Sales—Related Party

    —         6,322       —         (1,573 )     4,749  

Freight—Outside

    —         92,507       —         —         92,507  

Freight—Related Parties

    —         468       —         —         468  

Other Income (including equity earnings)

    567,866       104,370       21,742       (630,252 )     63,726  

Gain on Sale of 18.5% of CNX Gas

    —         327,326       —         —         327,326  
   


 


 


 


 


Total Revenue and Other Income

    567,866       2,419,209       486,263       (631,948 )     2,841,390  

Cost of Goods Sold and Other Operating Charges

    31,297       1,425,519       426,309       (107,315 )     1,775,810  

Intercompany Activity

    (1,143 )     (436,982 )     (97,980 )     536,105       —    

Freight Expense

    —         92,975       —         —         92,975  

Selling, General and Administrative Expense

    —         54,671       4,605       —         59,276  

Depreciation, Depletion and Amortization

    4,609       164,334       27,170       (1,854 )     194,259  

Interest Expense

    15,407       5,487       10       —         20,904  

Taxes Other Than Income

    3,492       155,254       11,432       —         170,178  
   


 


 


 


 


Total Costs

    53,662       1,461,258       371,546       426,936       2,313,402  
   


 


 


 


 


Earnings (Loss) Before Income Taxes and Minority Interest

    514,204       957,951       114,717       (1,058,884 )     527,988  

Income Tax Expense (Benefit)

    17,477       53,935       (40,151 )     —         31,261  
   


 


 


 


 


Earnings (Loss) Before Minority Interest

    496,727       904,016       154,868       (1,058,884 )     496,727  

Minority Interest

    (3,459 )     —         —         —         (3,459 )
   


 


 


 


 


Net Income (Loss)

  $ 493,268     $ 904,016     $ 154,868     $ (1,058,884 )   $ 493,268  
   


 


 


 


 


 

Cash Flow for the Nine Months Ended September 30, 2005:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

  Consolidated

 

Net Cash Provided by (Used in) Operating Activities

  $ 298,387     $ (212,137 )   $ 104,119     $ —     $ 190,369  
   


 


 


 

 


Cash Flows from Investing Activities:

                                     

Capital Expenditures

  $ (3,827 )   $ (213,788 )   $ (69,647 )   $ —     $ (287,262 )

Investment in Equity Affiliates

    —         46       1,855       —       1,901  

Proceeds from Sale of 18.5% Interest in Gas Segment

    —         420,167       —         —       420,167  

Other Investing Activities

    18,488       5,922       —         —       24,410  
   


 


 


 

 


Net Cash Provided by (Used in) Investing Activities

  $ 14,661     $ 212,347     $ (67,792 )   $ —     $ 159,216  
   


 


 


 

 


Cash Flows from Financing Activities:

                                     

(Payments on) Proceeds from Short-Term Debt

  $ (1,700 )   $ —       $ 2,200     $ —     $ 500  

Dividends Paid

    (38,377 )     —         —         —       (38,377 )

Other Financing Activities

    35,369       (284 )     —         —       35,085  
   


 


 


 

 


Net Cash (Used in) Provided by Financing Activities

  $ (4,708 )   $ (284 )   $ 2,200     $ —     $ (2,792 )
   


 


 


 

 


 

23


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CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(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

  $ —       $ 1,499,977     $ 332,224     $ —       $ 1,832,201  

Freight—Outside

    —         82,275       164       —         82,439  

Other Income (including equity earnings)

    164,761       141,046       9,722       (244,854 )     70,675  
   


 


 


 


 


Total Revenue and Other Income

    164,761       1,723,298       342,110       (244,854 )     1,985,315  

Cost of Goods Sold and Other Operating Charges

    18,376       1,233,938       298,866       (99,088 )     1,452,092  

Intercompany Activity

    (388 )     (17,912 )     (87,669 )     105,969       —    

Freight Expense

    —         82,275       164       —         82,439  

Selling, General and Administrative Expense

    —         49,494       4,557       —         54,051  

Depreciation, Depletion and Amortization

    4,595       156,518       24,951       (1,854 )     184,210  

Interest Expense

    17,843       5,708       102       —         23,653  

Taxes Other Than Income

    2,671       130,789       9,833       —         143,293  
   


 


 


 


 


Total Costs

    43,097       1,640,810       250,804       5,027       1,939,738  
   


 


 


 


 


Earnings (Loss) Before Income Taxes

    121,664       82,488       91,306       (249,881 )     45,577  

Income Tax Expense (Benefit)

    (9,250 )     (24,671 )     31,957       —         (1,964 )
   


 


 


 


 


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

    130,914       107,159       59,349       (249,881 )     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     $ 190,532     $ 59,349     $ (249,881 )   $ 130,914  
   


 


 


 


 


 

Cash Flow for the Nine Months Ended September 30, 2004:

 

    Parent

    Guarantors

    Non-Guarantors

    Elimination

  Consolidated

 

Net Cash (Used in) Provided by Operating Activities

  $ (142,613 )   $ 275,591     $ 62,355     $ —     $ 195,333  
   


 


 


 

 


Cash Flows from Investing Activities:

                                     

Capital Expenditures

  $ (7,688 )   $ (233,854 )   $ (57,552 )   $ —     $ (299,094 )

Investment in Equity Affiliates

    —         (414 )     (2,378 )     —       (2,792 )

Other Investing Activities

    11,000       7,291       271       —       18,562  
   


 


 


 

 


Net Cash Provided by (Used in) Investing Activities

  $ 3,312     $ (226,977 )   $ (59,659 )   $ —     $ (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

    190,000       918       —         —       190,918  

Other Financing Activities

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


 


 


 

 


Net Cash Provided by (Used in) Financing Activities

  $ 142,724     $ (48,617 )   $ —       $ —     $ 94,107  
   


 


 


 

 


 

24


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

NOTE 15—RECENT ACCOUNTING PRONOUNCEMENTS:

 

In June 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 154, Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. This Statement shall be effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. We do not expect this guidance to have a significant impact on CONSOL Energy.

 

In June 2005, the FASB ratified a modification to the consensus reached by the Emerging Issues Task Force in EITF 04-06: “Accounting for Stripping Costs Incurred during Production in the Mining Industry.” The EITF clarified that stripping costs incurred during the production phase of a mine are variable production costs that should be included in the costs of the inventory produced during the period that the stripping costs are incurred. The Task Force noted that the consensus does not address the accounting for stripping costs incurred during the pre-production phase of a mine. In addition, the consensus in this Issue is effective for the first reporting period in fiscal years beginning after December 15, 2005. The effect of initially applying this consensus should be accounted for in a manner similar to a cumulative effect adjustment with any adjustment recognized in the opening balance of retained earnings in the year of adoption. We do not expect this guidance to have a significant impact on CONSOL Energy.

 

In April 2005, the FASB issued FSP No. FAS 19-1 “Accounting for Suspended Well Costs” (FSP 19-1). This position concluded that exploratory well costs should continue to be capitalized beyond twelve months when the well has found a sufficient quantity of reserves to justify its completion as a producing well, and the enterprise is making sufficient progress assessing the reserves and the economic and operating viability of the project. This guidance requires management to exercise more judgment than was previously required and also requires additional disclosure. Management does not believe this statement of position will have a significant effect on the financial statements.

 

In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143. This interpretation clarifies that the term, conditional asset retirement obligation, as used in FASB Statement No. 143, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Thus, the timing and/or method of settlement may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of a liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction, or development and/or through the normal operation of the asset. Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement

 

25


Table of Contents

CONSOL ENERGY INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2005

(Dollars in thousands, except per share data)

 

of the liability when sufficient information exists. SFAS No. 143 acknowledges that, in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. We do not expect this guidance to have a significant impact on CONSOL Energy.

 

On December 15, 2004, the FASB released its final revised standard entitled FASB Statement No. 123R, “Share-Based Payment” (SFAS No. 123R). This Statement requires that all public entities measure the cost of equity-based service awards based on the grant-date fair value. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period, which usually is the vesting period. Compensation cost is not recognized for equity instruments for which employees do not render the requisite service. In addition, the SEC Staff issued Staff Accounting Bulletin (SAB) 107 on SFAS No. 123R in March 2005. The SAB was issued to assist preparers by simplifying some of the implementation challenges of SFAS No. 123R while enhancing information that investors receive. This SAB provides guidance related to, among other relevant items, share-based payment transactions with non-employees, valuation methods, the classification of compensation expense, non-GAAP financial measures, first-time adoptions of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS No. 123R. SFAS No. 123R is to be effective for public companies as of the beginning of the first annual reporting period that begins after June 15, 2005. CONSOL Energy will implement SFAS No. 123R on January 1, 2006, as required. The expected impact of unvested stock options outstanding at September 30, 2005, under the modified prospective application, is approximately $5,300 of pre-tax expense for the year ended December 31, 2006.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs: An Amendment of ARB 43, Chapter 4” (SFAS No. 151). This statement amends the guidance in ARB No. 43 Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that “under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges.” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect this guidance to have a significant impact on CONSOL Energy.

 

In October 2004, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 04-10, “Applying Paragraph 19 of FASB Statement No. 131, ‘Disclosure about Segments of an Enterprise and Related Information,’ in Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” (EITF 04-10). FASB Statement No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. EITF 04-10 clarifies how an enterprise should evaluate the aggregation criteria in paragraph 17 of FAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated in accordance with paragraph 19 of FAS No. 131. In addition, the FASB Task Force has requested that the FASB staff propose a FASB Staff Position (FSP) to provide guidance in determining whether two or more operating segments have similar economic characteristics. The Task Force has agreed that since the two issues are interrelated, the effective date of EITF 04-10 should coincide with the future undetermined effective date of the anticipated FSP. We are currently evaluating the positions addressed in EITF 04-10, and foresee no significant changes in the reporting practices currently used to report segment information.

 

26


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

 

General

 

CONSOL Energy had net income of $377 million for the three months ended September 30, 2005 compared to a loss of $12 million for the three months ended September 30, 2004. Net income for the 2005 period was improved primarily due to the $327 million gain on sale of 18.5% of CNX Gas Corporation. In July 2005, CONSOL Energy announced that it created CNX Gas Corporation (CNX Gas), a wholly owned subsidiary of CONSOL Energy, to conduct its gas exploration and production activities. CONSOL Energy contributed or leased substantially all of the assets of its gas business, including all of CONSOL Energy’s rights to coalbed methane associated with 4.5 billion tons of coal reserves owned or controlled by CONSOL Energy as well as all of CONSOL Energy’s rights to conventional gas. In August 2005, CNX Gas sold 27.9 million shares in a private transaction. The shares were sold to qualified institutional, foreign and accredited investors in a private transaction exempt from registration under Rule 144A, Regulation S and Regulation D. CNX Gas received proceeds of $420.2 million, which it used to pay a special dividend to CONSOL Energy. The gain on this transaction was $327.3 million. In accordance with Statement of Financial Accounting Standards Board Statement 109, “Accounting for Income Taxes”, no deferred tax has been provided on this transaction as current tax law provides a means by which the excess of the reported amount of this investment over its tax basis can be recovered tax-free. Also, management has no current intention of entering into a transaction that would cause CNX Gas to leave the consolidated tax group. Improved net income was also due to higher sales volumes and higher average sales prices for coal and gas. This increase was offset, in part, by higher cost per units sold for both coal and gas. Higher coal unit costs were primarily due to higher contract mining fee costs, higher supply costs, higher labor cost, and higher other post employment benefits per unit sold. Higher gas unit costs were primarily attributable to increased royalty expense, changes in imbalance amounts, increased power costs and firm transportation costs. Net income for the three months ended September 30, 2005 included higher income taxes than the 2004 period due primarily to higher pre-tax earnings, excluding the impact of the gain on sale of 18.5% of CNX Gas stock.

 

Total coal sales for the three months ended September 30, 2005 were 17.4 million tons, including sales by consolidated variable interest entities and our portion of sales by equity affiliates, of which 16.9 million tons were produced by CONSOL Energy operations, or sold from inventory of company-produced coal. This compares with total coal sales of 15.7 million tons for the three months ended September 30, 2004, of which 15.1 million tons were produced by CONSOL Energy operations or sold from inventory of company-produced coal. Overall, production of 16.8 million tons, of which 0.2 million tons are from consolidated variable interest entities and our portion of equity affiliates, increased 1.6 million tons from the 2004 period. McElroy Mine production increased 0.9 million tons related to running two longwall mining units in the 2005 period compared to running one longwall mining unit in the 2004 period. Bailey Mine production increased 0.6 million tons due to improved productivity. Production also increased due to the reactivation of Emery Mine, which was idled in the 2004 period and the opening of the Miller Creek complex in October 2004. These increases in production were offset by a 0.3 million tons reduction at Buchanan Mine in the 2005 period. Buchanan Mine had an accident on September 16 with the mine’s skip hoist mechanism that lifts coal from the mine to the surface, causing coal production to be suspended. This accident is covered under our property and business interruption insurance policy, subject to certain deductibles. There can be no assurance that we will obtain any recovery from our insurance carrier. The Buchanan Mine is expected to resume production sometime in November 2005.

 

Sales volumes of coalbed methane gas, including a percentage of the sales of equity affiliates equal to our interest in these affiliates, increased 1.4% to 14.1 billion cubic feet in the three months ended September 30, 2005 compared with 13.9 billion cubic feet in the three months ended September 30, 2004. The increase in sales volumes is primarily due to an increase in production as a result of additional wells coming on line from the ongoing drilling program and results of the enhanced stimulation of existing frac wells (wells drilled into the coal seam). Our average sales price for coalbed methane gas, including sales of equity affiliates increased 23.1% to $6.08 per thousand cubic feet in the 2005 period compared with $4.94 per thousand cubic feet in the 2004 period.

 

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CONSOL Energy restated first quarter 2004 net income by approximately $2.2 million to reflect the recognition of favorable effects of the Medicare Prescription Drug, Improvement and Moderniz